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BLKB > SEC Filings for BLKB > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for BLACKBAUD INC


7-May-2013

Quarterly Report


Item 2. Management's discussion and analysis of financial condition and results
of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under "Safe Harbor Cautionary Statement" at the beginning of this report and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Executive summary
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. As of March 31, 2013, we had over 28,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare, as well as international foreign affairs.
We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation are generally not essential to the functionality of our software products and are sold separately. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, and providing transaction processing services, benchmarking studies and data modeling services.

In January 2013, we announced that our President and Chief Executive Officer would resign from the Company at the end of 2013, or earlier if a successor is appointed. Our board of directors has a search underway for his replacement. We completed our acquisition of Convio in May 2012 for $335.7 million in consideration. We funded the acquisition through both cash on hand and borrowings under our amended credit facility. We have included the results of operations of Convio in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing 2013 to 2012. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business.
During the first quarter of 2013, we remained focused on:
executing on operational efficiencies and initiating investments in core back-office systems for future growth;

restructuring activities that included a realignment of our workforce, as well as the transition of our San Diego, California operations to our Austin, Texas location; and

continuing the shift in our offerings towards subscription-based pricing to meet the needs and preferences of our customers.

Overall, revenue in the first quarter of 2013 increased 22% compared to the same period in 2012. This increase was principally attributable to growth in our subscriptions revenue as a result of incremental revenue from Luminate Online, previously a Convio product, as well as the continued increase in demand for our subscription-based offerings as our business shifts towards subscription-based offerings. An increase in transaction fees associated with our payment processing services also contributed to the increase in subscription revenue. Services revenue also contributed to our revenue growth during the first quarter of 2013 primarily due to an increase in consulting and education services revenue. Consulting service revenue growth was driven by incremental revenue from Convio in addition to increases in revenue associated with implementation services of Blackbaud CRM arrangements. License revenue decreased in the first quarter of 2013 when compared to the same period in 2012 as a result of fewer sales of our Blackbaud CRM offering to large and/or strategic customers. The decrease in license revenue is also attributable to the shift in our business from perpetual licenses to subscription-based offerings.


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

Income from operations for the first quarter of 2013 decreased by $0.7 million when compared to the same period in 2012. The decrease was primarily attributable to (i) a $3.2 million increase in restructuring costs; (ii) a $2.8 million net increase in costs associated with our acquisition of Convio related to transaction and integration costs and amortization of acquired intangibles from business combinations; and (iii) our continued shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term. These decreases in income from operations were partially offset by improved operational efficiencies as we integrated the Convio operations and a $1.5 million decrease in costs related to strategic investments we made in the first quarter of 2012 for our business optimization efforts and the re-engineering of our accounting processes. We ended the first quarter of 2013 with cash and cash equivalents totaling $8.4 million and $211.0 million in outstanding borrowings on our credit facility. During the first three months of 2013, we generated $12.9 million in cash flow from operations, paid $5.5 million in dividends, used $6.3 million to purchase computer equipment and software and reduced our debt balance by $4.5 million. During the first quarter of 2013, we continued to experience growth in overall revenue primarily driven by the growing demand for our subscription-based offerings and synergies from combining Blackbaud and Convio offerings. However, we continue to believe the pace and impact of economic recovery on the nonprofit market remains uncertain. Notwithstanding these conditions, we plan to further increase our focus on subscription-based offerings as we execute on our key growth initiatives and strengthen our leadership position, while achieving our targeted level of profitability. In the near term, we anticipate there will continue to be a dilutive impact on our profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term. We also plan to continue to invest in our back-office processes, the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalability of our operations as we execute on our key growth initiatives.
Comparison of the three months ended March 31, 2013 and 2012 Results of operations
We completed the acquisition of Convio on May 4, 2012. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business.
We have included the results of operations of Convio in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing 2013 to 2012. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations due to the inclusion of Convio. Revenue
The table below compares revenue from our consolidated statements of comprehensive income for the three months ended March 31, 2013, with the same period in 2012.

                            Three months ended March 31,
(in millions)             2013                      2012      Change     % Change
License fees  $            3.0                    $  7.2     $  (4.2 )        (58 )%
Subscriptions             47.8                      28.1        19.7           70  %
Services                  28.8                      24.0         4.8           20  %
Maintenance               34.1                      33.5         0.6            2  %
Other                      1.9                       1.9           -            -  %
Total revenue $          115.6                    $ 94.7     $  20.9           22  %

The increase in revenue in the first quarter of 2013 compared to the same period in 2012 was primarily attributable to growth in our subscriptions revenue as a result of an increase in demand for our online fundraising offerings, including Luminate Online, previously a Convio product. The increase in demand for our subscription offerings was primarily driven by the ongoing


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

evolution of our product offerings from a license-based to subscription-based model as we continue to experience a shift in our emerging and mid-sized customers' buying preferences away from perpetual licenses towards hosted solutions. Also contributing to the growth in our subscription revenue was an increase in transaction fees associated with our payment processing services. The increase in maintenance revenue is attributable to maintaining high renewal rates, new maintenance contracts associated with new license agreements and increases in contracts with existing customers during the first quarter of 2013 when compared to the same period in 2012, partially offset by a reduction in revenue as a result of a change in presentation from gross to net revenue for certain third-party software arrangements that had a change in contractual terms. Services revenue grew during the first quarter of 2013 compared to the same period in 2012 principally as a result of the inclusion of Convio consulting services revenue. Also contributing to the growth in services revenue were increases in revenue associated with implementation services of Blackbaud CRM arrangements, as well as our education services. License revenue decreased in the first quarter of 2013 when compared to the same period in 2012 as a result of fewer sales of our Blackbaud CRM offering to large and/or strategic customers.

Operating results
License fees
                                 Three months ended March 31,
(in millions)                      2013                  2012      Change     % Change
License fees revenue      $         3.0         $         7.2     $  (4.2 )        (58 )%
Cost of license fees                0.7                   0.6         0.1           17  %
License fees gross profit $         2.3         $         6.6     $  (4.3 )        (65 )%
License fees gross margin            77 %                  92 %

We derive revenue from license fees from the sale of our software products under a perpetual license agreement. During the first quarter of 2013, revenue from license fees decreased as a result of fewer Blackbaud CRM sales when compared to the same period in 2012. Our larger perpetual license transactions have long sales cycles and their timing can result in significant period-to-period variations in revenue. We are increasingly experiencing a shift in our emerging and mid-sized customers' buying preferences away from solutions offered under perpetual license arrangements towards subscription-based hosted applications, while our large and/or strategic customers continue to be an area of growth, particularly as it relates to our Blackbaud CRM offering to the higher education vertical.
Cost of license fees is principally comprised of third-party software royalties, variable reseller commissions, amortization of software development costs and amortization of intangibles from business combinations. Cost of license fees in the first quarter of 2013 compared to the same period in 2012 remained relatively unchanged.
The decrease in license fees gross margin in the first three months of 2013 is the result of fewer sales of Blackbaud CRM when compared to the same period in 2012.

Subscriptions
                                    Three months ended March 31,
(in millions)                        2013                   2012      Change    % Change
Subscriptions revenue      $         47.8         $         28.1     $  19.7          70 %
Cost of subscriptions                20.4                   13.0         7.4          57 %
Subscriptions gross profit $         27.4         $         15.1     $  12.3          81 %
Subscriptions gross margin             57 %                   54 %

Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, as well as variable transaction fees associated with the use of our products to fundraise online. We continue to experience growth in our hosted applications business and are increasingly experiencing a shift in our emerging and mid-sized customers' buying preference away from perpetual licenses towards subscription-based offerings. We anticipate that there will continue to be a dilutive impact on our


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term.

The increase in subscriptions revenue during the first quarter of 2013 compared to the same period in 2012 is principally attributable to an increase in demand for our online fundraising offerings, including Luminate Online, previously a Convio product. Also contributing to the growth in subscriptions revenue was an increase in transaction fees associated with our payment processing services. Cost of subscriptions is primarily comprised of human resource costs, stock-based compensation expense, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. The increase in cost of subscriptions in the first quarter of 2013 compared to the same period in 2012 is principally attributable to increases in hosting costs, human resource costs and amortization of intangibles from business combinations.
Hosting costs and amortization of intangibles from business combinations increased by $1.6 million and $3.7 million, respectively, in the first quarter of 2013 compared to the same period in 2012 primarily as a result of incremental costs due to the inclusion of Convio. Human resource costs increased $0.8 million in the first quarter of 2013 compared to the same period in 2012 primarily as a result of an increase in headcount due to the inclusion of Convio.
The increase in subscriptions gross margin during the first quarter of 2013 compared to the same period in 2012 was primarily a result of the inclusion of Convio's subscription-based offerings which have historically yielded higher gross margins. Also contributing to the increase in subscriptions gross margin was an increase in transaction revenue associated with our payment processing services, which have also historically yielded higher gross margins than our other offerings.

Services
                               Three months ended March 31,
(in millions)                   2013                   2012      Change     % Change
Services revenue      $         28.8         $         24.0     $   4.8           20  %
Cost of services                25.4                   20.0         5.4           27  %
Services gross profit $          3.4         $          4.0     $  (0.6 )        (15 )%
Services gross margin             12 %                   17 %

We derive services revenue from consulting, installation, implementation, education and analytic services. Consulting, installation and implementation services involve converting data from a customer's existing system, assistance in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities. Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product enables organizations to more effectively target their fundraising activities. We recognize services revenue attributable to consulting services for implementation of our hosted applications and subscription offerings ratably over the period the customer benefits from those services. We also recognize the direct and incremental costs associated with consulting services revenue ratably over the same period. However, we continue to expense indirect costs in the period the implementation services are provided.
The increase in services revenue during the first quarter of 2013 compared to the same period in 2012 is principally attributable to increases in consulting and education services revenue. Consulting services revenue increased primarily due to the inclusion of Convio. Also contributing to the growth in consulting services revenue was an increase in the effective rate we charge our customers which was driven by a decrease in the investment we are making in early adopters of Blackbaud CRM. The rates we charge for our education services have remained relatively constant year over year, as such, the increase in revenue is the result of an increase in volume. The volume of education services revenue increased due to higher demand for subscription-based training.
Cost of services is principally comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, classroom rentals, costs incurred in providing customer training, data expense incurred to perform analytic services, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. The increase in cost of services in the first quarter of 2013 when compared to the same period in 2012 is primarily attributable to an increase


Table of Contents

Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)

in human resource costs. Human resource costs increased $3.5 million in the first quarter of 2013 compared to the same period in 2012 as a result of an increase in headcount. The increase in headcount was primarily attributable to the inclusion of additional resources from Convio. Also contributing to the increase in cost of services for the first quarter of 2013 when compared to the same period in 2012 was a $0.8 million increase in allocated depreciation and facilities and IT support costs, which was due to both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable.
The services gross margin decreased in the first quarter of 2013 compared to the same period in 2012 primarily due to the inclusion of Convio's services offerings which have historically yielded lower gross margins. The increases in headcount and allocated costs discussed above also contributed to the decrease in services gross margin.

Maintenance
                                  Three months ended March 31,
(in millions)                      2013                   2012       Change     % Change
Maintenance revenue      $         34.1         $         33.5     $    0.6            2  %
Cost of maintenance                 5.9                    6.0         (0.1 )         (2 )%
Maintenance gross profit $         28.2         $         27.5     $    0.7            3  %
Maintenance gross margin             83 %                   82 %

Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide customers with updates, enhancements and upgrades to our software products and online, telephone and email support. The increase in maintenance revenue in the first quarter of 2013 compared the same period in 2012 is principally comprised of (i) $2.7 million of maintenance from new customers associated with new license agreements and increases in contracts with existing customers and (ii) $1.0 million from maintenance contract inflationary rate adjustments, partially offset by
(iii) $2.5 million from maintenance contracts that were not renewed and reductions in contracts with existing customers and (iv) $0.6 million decrease in maintenance revenue attributable to a change in presentation from gross to net of revenue and costs for certain third-party software arrangements that had a change in contractual terms. The net revenue attributable to these third-party software arrangements has been included in "Other revenue" for 2013. Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. Cost of maintenance decreased during the first quarter of 2013 when compared to the same period in 2012 as a result of a decrease in proprietary software costs. The decrease in proprietary software costs is attributable to a change in presentation from gross to net of revenue and costs for certain third-party software arrangements that had a change in contractual terms.

Other revenue
                             Three months ended March 31,
(in millions)                  2013                  2012       Change     % Change
Other revenue         $         1.9         $         1.9     $      -            -  %
Cost of other revenue           1.2                   1.5         (0.3 )        (20 )%
Other gross profit    $         0.7         $         0.4     $    0.3           75  %
Other gross margin               37 %                  21 %

Other revenue includes the sale of business forms that are used in conjunction with our software products, reimbursement of travel-related expenses primarily incurred during the performance of services at customer locations, fees from user conferences and third-party software referral fees. Other revenue during the first quarter of 2013 compared to the same period in 2012 remained relatively unchanged.
Cost of other revenue includes human resource costs, costs of business forms, costs of user conferences, reimbursable expenses relating to the performance of services at customer locations, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. Cost of other revenue decreased during the first quarter of 2013


Table of Contents

                                Blackbaud, Inc.
Item 2. Management's discussion and analysis of financial condition and results
                           of operations (continued)


compared to the same period in 2012 primarily due to less reimbursable expenses
related to services provided at customer locations.
Other gross margin increased in the first quarter of 2013 when compared to the
same period in 2012 primarily due to the an increase in third-party software
fees.
Operating expenses
Sales and marketing
                                     Three months ended March 31,
(in millions)                         2013                   2012       Change    % Change
Sales and marketing expense $         24.4         $         20.4     $    4.0          20 %
% of revenue                            21 %                   22 %

Sales and marketing expense includes salaries and related human resource costs, stock-based compensation expense, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.

Sales and marketing expense increased in the first quarter of 2013 compared to the same period in 2012 primarily due to increases in human resource costs of $2.8 million. Human resource costs increased primarily due to the inclusion of additional headcount from Convio. Also contributing to the increase in sales and marketing expense was an increase of $0.6 in allocated depreciation facilities and IT support costs, which resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable.

Research and development
                                                  Three months ended March 31,
(in millions)                                      2013                   2012        Change     % Change
Research and development expense         $         16.4         $         13.3     $     3.1           23 %
% of revenue                                         14 %                   14 %

Research and development expense includes human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products, and allocated depreciation, facilities and IT support costs.

Research and development expense increased during the first quarter of 2013 compared to the same period in 2012 primarily due to increased human resource costs of $3.4 million. Human resource costs increased primarily due to the inclusion of additional headcount from Convio, partially offset by an increase of $0.8 million in the amount of software development costs that were capitalized. Contributing to the increase research and development expense was an increase of $0.8 in allocated depreciation, facilities and IT support costs, which resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable. The increases in human resource costs and allocated costs were partially offset by a $0.9 million decrease in third-party contractor . . .

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