BLACKBAUD INC - Quarter Report: 2017 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-50600
 | ||
Blackbaud, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 11-2617163 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer | ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Emerging growth company | ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
The number of shares of the registrant’s Common Stock outstanding as of October 23, 2017 was 48,089,595.
TABLE OF CONTENTS
Third Quarter 2017 Form 10-Q | | 1 |
 | CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | |
This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference, contains forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These "forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or any variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of future performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.
Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those summarized under “Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2016 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.
2 | | Third Quarter 2017 Form 10-Q |
| PART I. FINANCIAL INFORMATION | |
ITEM 1. FINANCIAL STATEMENTS
Blackbaud, Inc. Consolidated balance sheets (Unaudited) | ||||||
(dollars in thousands) | September 30, 2017 | December 31, 2016 | ||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 17,050 | $ | 16,902 | ||
Restricted cash due to customers | 139,095 | 353,771 | ||||
Accounts receivable, net of allowance of $4,540 and $3,291 at September 30, 2017 and December 31, 2016, respectively | 100,868 | 88,932 | ||||
Prepaid expenses and other current assets | 50,082 | 48,314 | ||||
Total current assets | 307,095 | 507,919 | ||||
Property and equipment, net | 43,903 | 50,269 | ||||
Software development costs, net | 48,618 | 37,582 | ||||
Goodwill | 472,776 | 438,240 | ||||
Intangible assets, net | 252,713 | 253,676 | ||||
Other assets | 21,889 | 22,524 | ||||
Total assets | $ | 1,146,994 | $ | 1,310,210 | ||
Liabilities and stockholders’ equity | ||||||
Current liabilities: | ||||||
Trade accounts payable | $ | 17,830 | $ | 23,274 | ||
Accrued expenses and other current liabilities | 45,650 | 54,196 | ||||
Due to customers | 139,095 | 353,771 | ||||
Debt, current portion | 8,576 | 4,375 | ||||
Deferred revenue, current portion | 277,008 | 244,500 | ||||
Total current liabilities | 488,159 | 680,116 | ||||
Debt, net of current portion | 329,380 | 338,018 | ||||
Deferred tax liability | 39,352 | 29,558 | ||||
Deferred revenue, net of current portion | 5,412 | 6,440 | ||||
Other liabilities | 7,799 | 8,533 | ||||
Total liabilities | 870,102 | 1,062,665 | ||||
Commitments and contingencies (see Note 10) | ||||||
Stockholders’ equity: | ||||||
Preferred stock; 20,000,000 shares authorized, none outstanding | — | — | ||||
Common stock, $0.001 par value; 180,000,000 shares authorized, 58,503,687 and 57,672,401 shares issued at September 30, 2017 and December 31, 2016, respectively | 59 | 58 | ||||
Additional paid-in capital | 341,476 | 310,452 | ||||
Treasury stock, at cost; 10,426,122 and 10,166,801 shares at September 30, 2017 and December 31, 2016, respectively | (234,329 | ) | (215,237 | ) | ||
Accumulated other comprehensive loss | (1,013 | ) | (457 | ) | ||
Retained earnings | 170,699 | 152,729 | ||||
Total stockholders’ equity | 276,892 | 247,545 | ||||
Total liabilities and stockholders’ equity | $ | 1,146,994 | $ | 1,310,210 | ||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||
Third Quarter 2017 Form 10-Q | | 3 |
Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited) | |||||||||||||
(dollars in thousands, except per share amounts) | Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Revenue | |||||||||||||
Subscriptions | $ | 127,492 | $ | 105,440 | $ | 370,923 | $ | 306,330 | |||||
Maintenance | 31,486 | 36,410 | 98,184 | 111,019 | |||||||||
Services and other | 36,535 | 41,213 | 102,222 | 115,161 | |||||||||
Total revenue | 195,513 | 183,063 | 571,329 | 532,510 | |||||||||
Cost of revenue | |||||||||||||
Cost of subscriptions | 58,045 | 51,943 | 170,336 | 153,772 | |||||||||
Cost of maintenance | 5,698 | 5,531 | 17,551 | 16,547 | |||||||||
Cost of services and other | 23,262 | 25,843 | 71,595 | 76,499 | |||||||||
Total cost of revenue | 87,005 | 83,317 | 259,482 | 246,818 | |||||||||
Gross profit | 108,508 | 99,746 | 311,847 | 285,692 | |||||||||
Operating expenses | |||||||||||||
Sales, marketing and customer success | 44,193 | 40,690 | 129,394 | 115,707 | |||||||||
Research and development | 22,071 | 22,510 | 67,647 | 67,973 | |||||||||
General and administrative | 23,545 | 22,319 | 67,350 | 62,089 | |||||||||
Amortization | 734 | 687 | 2,164 | 2,147 | |||||||||
Total operating expenses | 90,543 | 86,206 | 266,555 | 247,916 | |||||||||
Income from operations | 17,965 | 13,540 | 45,292 | 37,776 | |||||||||
Interest expense | (3,092 | ) | (2,641 | ) | (8,685 | ) | (8,037 | ) | |||||
Other income (expense), net | 468 | (15 | ) | 1,581 | (185 | ) | |||||||
Income before provision for income taxes | 15,341 | 10,884 | 38,188 | 29,554 | |||||||||
Income tax provision | 2,793 | 1,950 | 2,964 | 5,323 | |||||||||
Net income | $ | 12,548 | $ | 8,934 | $ | 35,224 | $ | 24,231 | |||||
Earnings per share | |||||||||||||
Basic | $ | 0.27 | $ | 0.19 | $ | 0.76 | $ | 0.53 | |||||
Diluted | $ | 0.26 | $ | 0.19 | $ | 0.74 | $ | 0.51 | |||||
Common shares and equivalents outstanding | |||||||||||||
Basic weighted average shares | 46,711,709 | 46,159,956 | 46,627,213 | 46,078,306 | |||||||||
Diluted weighted average shares | 47,846,997 | 47,394,106 | 47,679,103 | 47,268,469 | |||||||||
Dividends per share | $ | 0.12 | $ | 0.12 | $ | 0.36 | $ | 0.36 | |||||
Other comprehensive (loss) income | |||||||||||||
Foreign currency translation adjustment | (188 | ) | 289 | (467 | ) | 261 | |||||||
Unrealized (loss) gain on derivative instruments, net of tax | (267 | ) | 409 | (89 | ) | (378 | ) | ||||||
Total other comprehensive (loss) income | (455 | ) | 698 | (556 | ) | (117 | ) | ||||||
Comprehensive income | $ | 12,093 | $ | 9,632 | $ | 34,668 | $ | 24,114 | |||||
The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||
4 | | Third Quarter 2017 Form 10-Q |
Blackbaud, Inc. Consolidated statements of cash flows (Unaudited) | ||||||
Nine months ended September 30, | ||||||
(dollars in thousands) | 2017 | 2016 | ||||
Cash flows from operating activities | ||||||
Net income | $ | 35,224 | $ | 24,231 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 54,765 | 53,109 | ||||
Provision for doubtful accounts and sales returns | 7,246 | 3,139 | ||||
Stock-based compensation expense | 31,055 | 25,005 | ||||
Deferred taxes | (2,511 | ) | (225 | ) | ||
Amortization of deferred financing costs and discount | 650 | 718 | ||||
Other non-cash adjustments | 572 | (634 | ) | |||
Changes in operating assets and liabilities, net of acquisition and disposal of businesses: | ||||||
Accounts receivable | (17,169 | ) | (9,288 | ) | ||
Prepaid expenses and other assets | 596 | (934 | ) | |||
Trade accounts payable | (2,891 | ) | 267 | |||
Accrued expenses and other liabilities | (9,522 | ) | (12,837 | ) | ||
Restricted cash due to customers | 214,244 | 119,291 | ||||
Due to customers | (214,244 | ) | (119,291 | ) | ||
Deferred revenue | 25,370 | 17,593 | ||||
Net cash provided by operating activities | 123,385 | 100,144 | ||||
Cash flows from investing activities | ||||||
Purchase of property and equipment | (8,417 | ) | (15,459 | ) | ||
Capitalized software development costs | (20,605 | ) | (19,078 | ) | ||
Purchase of net assets of acquired companies, net of cash acquired | (49,729 | ) | (3,377 | ) | ||
Purchase of derivative instruments | (516 | ) | — | |||
Proceeds from settlement of derivative instruments | 1,030 | — | ||||
Net cash used in investing activities | (78,237 | ) | (37,914 | ) | ||
Cash flows from financing activities | ||||||
Proceeds from issuance of debt | 588,300 | 179,000 | ||||
Payments on debt | (594,144 | ) | (212,581 | ) | ||
Debt issuance costs | (3,085 | ) | — | |||
Employee taxes paid for withheld shares upon equity award settlement | (19,092 | ) | (10,497 | ) | ||
Proceeds from exercise of stock options | 14 | 10 | ||||
Dividend payments to stockholders | (17,299 | ) | (17,108 | ) | ||
Net cash used in financing activities | (45,306 | ) | (61,176 | ) | ||
Effect of exchange rate on cash and cash equivalents | 306 | 46 | ||||
Net increase in cash and cash equivalents | 148 | 1,100 | ||||
Cash and cash equivalents, beginning of period | 16,902 | 15,362 | ||||
Cash and cash equivalents, end of period | $ | 17,050 | $ | 16,462 | ||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||
Third Quarter 2017 Form 10-Q | | 5 |
Blackbaud, Inc. Consolidated statement of stockholders' equity (Unaudited) | ||||||||||||||||||||
(dollars in thousands) | Common stock | Additional paid-in capital | Treasury stock | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity | ||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at December 31, 2016 | 57,672,401 | $ | 58 | $ | 310,452 | $ | (215,237 | ) | $ | (457 | ) | $ | 152,729 | $ | 247,545 | |||||
Net income | — | — | — | — | — | 35,224 | 35,224 | |||||||||||||
Payment of dividends | — | — | — | — | — | (17,299 | ) | (17,299 | ) | |||||||||||
Exercise of stock options and stock appreciation rights and vesting of restricted stock units | 349,713 | — | 14 | — | — | — | 14 | |||||||||||||
Employee taxes paid for 259,321 withheld shares upon equity award settlement | — | — | — | (19,092 | ) | — | — | (19,092 | ) | |||||||||||
Stock-based compensation | — | — | 31,010 | — | — | 45 | 31,055 | |||||||||||||
Restricted stock grants | 549,589 | 1 | — | — | — | — | 1 | |||||||||||||
Restricted stock cancellations | (68,016 | ) | — | — | — | — | — | — | ||||||||||||
Other comprehensive loss | — | — | — | — | (556 | ) | — | (556 | ) | |||||||||||
Balance at September 30, 2017 | 58,503,687 | $ | 59 | $ | 341,476 | $ | (234,329 | ) | $ | (1,013 | ) | $ | 170,699 | $ | 276,892 | |||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||
6 | | Third Quarter 2017 Form 10-Q |
1. Organization |
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, foundations, corporations, education institutions, healthcare institutions and individual change agents—we connect and empower organizations to increase their impact through software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing, and analytics. Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina and have operations in the United States, Australia, Canada and the United Kingdom. As of September 30, 2017, we had approximately 35,000 customers.
2. Basis of Presentation |
Unaudited interim consolidated financial statements
The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("GAAP"). The consolidated balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, and other forms filed with the SEC from time to time.
Reclassifications
Due to the insignificance of our revenue from "license fees and other," we have combined that revenue with our "services" revenue beginning in 2017. In order to provide comparability between periods presented, "services" and "license fees and other" have been combined within "services and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period. Similarly, "cost of services" and "cost of license fees and other" have been combined within "cost of services and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period.
Basis of consolidation
The consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Recently adopted accounting pronouncements
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for all companies for annual and interim periods beginning after December 15, 2017, with early adoption permitted in any interim period for reporting periods for
Third Quarter 2017 Form 10-Q | | 7 |
which financial statements have not been issued. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. We early adopted ASU 2017-09 as of April 1, 2017. As this standard is prospective in nature, the impact to our financial statements will depend on the nature of our future award modifications.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business ("ASU 2017-01"), which provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted, and applied prospectively. We early adopted ASU 2017-01 as of July 1, 2017 and do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted, and applied prospectively. We early adopted ASU 2017-04 as of July 1, 2017 for use in our fourth quarter annual goodwill impairment testing and do not expect the standard to have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash ("ASU 2016-18"), which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. We are currently evaluating the impact of this standard on our consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 will require lessees to record most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current guidance. The updated guidance also eliminates certain real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Upon adoption, entities will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. We expect ASU 2016-02 will impact our consolidated financial statements and are currently evaluating the extent of the impact that implementation of this standard will have on adoption.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. ASU 2014-09 will be effective for us beginning in the first quarter of 2018 and we anticipate using the full retrospective transition method. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and related disclosures. As a result of our evaluation to date, we expect that ASU 2014-09 will generally result in the deferral of more costs to obtain a contract over a longer period using the expected period of benefit as compared with our current practice of using our average initial contract term. We also anticipate incremental disclosures, including, but not limited to, the opening and closing balances of contract assets and liabilities, revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period, and the aggregate amount of the transaction price allocated to remaining performance obligations at the end of each reporting period including when we expect to recognize that amount.
8 | | Third Quarter 2017 Form 10-Q |
3. Business Combinations |
AcademicWorks acquisition
On April 3, 2017, we acquired all of the outstanding shares of capital stock, including all voting equity interests, of AcademicWorks, Inc., a Texas corporation ("AcademicWorks"), pursuant to a stock purchase agreement. AcademicWorks is the market leader in scholarship management for higher education and K-12 institutions, foundations, and grant-making institutions. The acquisition extends our offerings for our higher education, K-12, and corporate and foundation customers. We acquired AcademicWorks for $52.1 million in cash, net of closing adjustments. We financed the acquisition through a draw down of a revolving credit loan under our then-existing credit facility. As a result of the acquisition, AcademicWorks has become a wholly-owned subsidiary of ours. The operating results of AcademicWorks have been included in our consolidated financial statements within our EMG and GMG reportable segments (as defined in Note 14 below) from the date of acquisition. During the three and nine months ended September 30, 2017, we incurred insignificant acquisition-related expenses associated with the acquisition of AcademicWorks, which were recorded in general and administrative expense.
The fair values assigned to the assets acquired and liabilities assumed in the table below are based on our best estimates and assumptions as of the reporting date and are considered preliminary pending finalization. The estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the acquisition date. The assets and liabilities, pending finalization, include the valuation of acquired finite-lived intangible assets as well as the assumed deferred revenue and deferred income tax balances.
(in thousands) | Purchase price allocation | ||
Net working capital, excluding deferred revenue | $ | 2,949 | |
Property and equipment | 290 | ||
Finite-lived intangible assets | 30,900 | ||
Deferred revenue | (3,950 | ) | |
Deferred tax liability | (12,350 | ) | |
Goodwill | 34,305 | ||
Total purchase price | $ | 52,144 | |
The estimated fair value of accounts receivable acquired approximates the contractual value of $1.0 million. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of AcademicWorks, with $20.6 million and $13.7 million assigned to our EMG and GMG reportable segments, respectively. None of the goodwill arising in the acquisition is deductible for income tax purposes.
The AcademicWorks acquisition resulted in the identification of the following identifiable finite-lived intangible assets:
Intangible assets acquired | Weighted average amortization period | |||
AcademicWorks | (in thousands) | (in years) | ||
Acquired technology | $ | 22,500 | 9 | |
Customer relationships | 8,000 | 15 | ||
Marketing assets | 320 | 2 | ||
Non-compete agreements | 80 | 3 | ||
Total intangible assets | $ | 30,900 | 10 | |
The estimated fair values of the finite-lived intangible assets were based on variations of the income approach, which estimates fair value based upon the present value of cash flows that the assets are expected to generate, and which included the relief-from-royalty method, incremental cash flow method, including the comparative (with and without) method and multi-period excess earnings method, depending on the intangible asset being valued. The method of amortization of
Third Quarter 2017 Form 10-Q | | 9 |
identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships and acquired technology are being amortized on an accelerated basis. Marketing assets and non-compete agreements are being amortized on a straight-line basis.
We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.
4. Goodwill and Other Intangible Assets |
The change in goodwill for each reportable segment (as defined in Note 14 below) during the nine months ended September 30, 2017, consisted of the following:
(dollars in thousands) | EMG | GMG | IMG | Total | ||||||||
Balance at December 31, 2016 | $ | 241,334 | $ | 192,238 | $ | 4,668 | $ | 438,240 | ||||
Additions related to current year business combination(1) | 20,583 | 13,722 | — | 34,305 | ||||||||
Adjustments related to prior year business combination(2) | (29 | ) | (58 | ) | (1 | ) | (88 | ) | ||||
Effect of foreign currency translation | — | — | 319 | 319 | ||||||||
Balance at September 30, 2017 | $ | 261,888 | $ | 205,902 | $ | 4,986 | $ | 472,776 | ||||
(1) | See Note 3 to these consolidated financial statements for details regarding our acquisition of AcademicWorks. |
(2) | The change in goodwill was related to a post-closing working capital adjustment associated with the prior year acquisition of Good+Geek, Inc. ("Attentive.ly"), as well as an immaterial measurement period adjustment. |
5. Earnings Per Share |
We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units.
10 | | Third Quarter 2017 Form 10-Q |
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | |||||||||
Numerator: | |||||||||||||
Net income | $ | 12,548 | $ | 8,934 | $ | 35,224 | $ | 24,231 | |||||
Denominator: | |||||||||||||
Weighted average common shares | 46,711,709 | 46,159,956 | 46,627,213 | 46,078,306 | |||||||||
Add effect of dilutive securities: | |||||||||||||
Stock-based awards | 1,135,288 | 1,234,150 | 1,051,890 | 1,190,163 | |||||||||
Weighted average common shares assuming dilution | 47,846,997 | 47,394,106 | 47,679,103 | 47,268,469 | |||||||||
Earnings per share: | |||||||||||||
Basic | $ | 0.27 | $ | 0.19 | $ | 0.76 | $ | 0.53 | |||||
Diluted | $ | 0.26 | $ | 0.19 | $ | 0.74 | $ | 0.51 | |||||
Anti-dilutive shares excluded from calculations of diluted earnings per share | 1,719 | 1,723 | 4,938 | 3,766 | |||||||||
6. Fair Value Measurements |
We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
• | Level 1 - Quoted prices for identical assets or liabilities in active markets; |
• | Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
• | Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
Third Quarter 2017 Form 10-Q | | 11 |
Recurring fair value measurements
Financial assets and liabilities measured at fair value on a recurring basis consisted of the following, as of the dates indicated below:
Fair value measurement using | |||||||||||||||
(dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||
Fair value as of September 30, 2017 | |||||||||||||||
Financial assets: | |||||||||||||||
Derivative instruments | $ | — | $ | 223 | $ | — | $ | 223 | |||||||
Total financial assets | $ | — | $ | 223 | $ | — | $ | 223 | |||||||
Fair value as of September 30, 2017 | |||||||||||||||
Financial liabilities: | |||||||||||||||
Derivative instruments | $ | — | $ | 369 | $ | — | $ | 369 | |||||||
Total financial liabilities | $ | — | $ | 369 | $ | — | $ | 369 | |||||||
Fair value as of December 31, 2016 | |||||||||||||||
Financial assets: | |||||||||||||||
Derivative instruments | $ | — | $ | 206 | $ | — | $ | 206 | |||||||
Total financial assets | $ | — | $ | 206 | $ | — | $ | 206 | |||||||
Fair value as of December 31, 2016 | |||||||||||||||
Financial liabilities: | |||||||||||||||
Derivative instruments | $ | — | $ | 163 | $ | — | $ | 163 | |||||||
Total financial liabilities | $ | — | $ | 163 | $ | — | $ | 163 | |||||||
Our derivative instruments within the scope of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. Our derivative instruments that are recorded at fair value include interest rate swaps, as well as foreign currency forward and option contracts.
The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy.
Our foreign currency forward and option contracts are valued using standard calculations/models that use as their basis readily observable market parameters including, foreign currency exchange rates, volatilities, and interest rates. Therefore, our foreign currency forward and option contracts are classified within Level 2 of the fair value hierarchy.
We believe the carrying amounts of our cash and cash equivalents, restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at September 30, 2017 and December 31, 2016, due to the immediate or short-term maturity of these instruments.
We believe the carrying amount of our debt approximates its fair value at September 30, 2017 and December 31, 2016, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.
We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the nine months ended September 30, 2017. Additionally, we did not hold any Level 3 assets or liabilities during the nine months ended September 30, 2017.
12 | | Third Quarter 2017 Form 10-Q |
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill, which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, are based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of the goodwill and intangible assets using a discounted cash flow approach, which contains significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.
There were no non-recurring fair value adjustments to intangible assets and goodwill during the nine months ended September 30, 2017, except for an insignificant business combination accounting adjustment to the initial fair value estimates of the Attentive.ly assets acquired and liabilities assumed at the acquisition date from updated information obtained during the measurement period. See Note 4 to these consolidated financial statements for additional details. The measurement period of a business combination may be up to one year from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
7. Consolidated Financial Statement Details |
Accrued expenses and other liabilities
(dollars in thousands) | September 30, 2017 | December 31, 2016 | ||||
Accrued bonuses | $ | 14,581 | $ | 19,217 | ||
Accrued commissions and salaries | 5,429 | 9,352 | ||||
Lease incentive obligations | 4,780 | 5,604 | ||||
Customer credit balances | 5,246 | 5,148 | ||||
Deferred rent liabilities | 4,400 | 4,110 | ||||
Taxes payable | 2,584 | 3,452 | ||||
Unrecognized tax benefit | 3,609 | 3,295 | ||||
Accrued subscriptions | 2,638 | 2,840 | ||||
Accrued vacation costs | 2,626 | 2,214 | ||||
Accrued health care costs | 2,479 | 1,495 | ||||
Other liabilities | 5,077 | 6,002 | ||||
Total accrued expenses and other liabilities | 53,449 | 62,729 | ||||
Less: Long-term portion | 7,799 | 8,533 | ||||
Accrued expenses and other current liabilities | $ | 45,650 | $ | 54,196 | ||
Other income (expense), net
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Components of Other Income (Expense), Net | |||||||||||||
Interest income | $ | 393 | $ | 224 | $ | 771 | $ | 463 | |||||
(Loss) gain on derivative instrument | (3 | ) | — | 472 | — | ||||||||
Loss on debt extinguishment | (137 | ) | — | (299 | ) | — | |||||||
Other income (expense), net | 215 | (239 | ) | 637 | (648 | ) | |||||||
Other income (expense), net | $ | 468 | $ | (15 | ) | $ | 1,581 | $ | (185 | ) | |||
Third Quarter 2017 Form 10-Q | | 13 |
8. Debt |
The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.
Debt balance at | Weighted average effective interest rate at | ||||||||||
(dollars in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||
Credit facility: | |||||||||||
Revolving credit loans | $ | 39,900 | $ | 180,900 | 3.38 | % | 2.36 | % | |||
Term loans | 298,125 | 162,969 | 2.64 | % | 2.62 | % | |||||
Other debt | 2,151 | — | 4.50 | % | — | % | |||||
Total debt | 340,176 | 343,869 | 2.74 | % | 2.48 | % | |||||
Less: Unamortized discount and debt issuance costs | 2,220 | 1,476 | |||||||||
Less: Debt, current portion | 8,576 | 4,375 | 2.74 | % | 2.50 | % | |||||
Debt, net of current portion | $ | 329,380 | $ | 338,018 | 2.74 | % | 2.48 | % | |||
Financing for AcademicWorks acquisition
As discussed in Note 3 to these consolidated financial statements, on April 3, 2017 we acquired AcademicWorks for $52.1 million in cash, net of closing adjustments. We financed the acquisition through a draw down of a revolving credit loan under the 2014 Credit Facility (defined below).
2017 refinancing
We were previously party to a $325.0 million five-year credit facility entered into during February 2014. The credit facility included: a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “2014 Revolving Facility”) and a term loan facility (the “2014 Term Loan”), together, (the “2014 Credit Facility”).
In June 2017, we entered into a five-year $700.0 million senior credit facility (the “2017 Credit Facility”). The 2017 Credit Facility includes a $400.0 million revolving credit facility (the “2017 Revolving Facility”) and a $300.0 million term loan facility (the “2017 Term Loan”). Upon closing we drew $300.0 million on a term loan and $110.0 million in revolving credit loans, which was used to repay all amounts outstanding under the 2014 Credit Facility, fees and expenses incurred in connection with the 2017 Credit Facility, and for other general corporate purposes.
Certain lenders of the 2014 Term Loan participated in the 2017 Term Loan and the change in the present value of our future cash flows to these lenders under the 2014 Term Loan and under the 2017 Term Loan was less than 10%. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2014 Term Loan did not participate in the 2017 Term Loan. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2014 Revolving Facility participated in the 2017 Revolving Facility and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2014 Revolving Facility did not participate in the 2017 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.
We recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of the 2014 Credit Facility considered to be extinguished. This loss was recognized in the consolidated statements of comprehensive income within other income (expense), net.
In connection with our entry into the 2017 Credit Facility, we paid $3.1 million in financing costs, of which $1.0 million was capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the 2014 Credit Facility and prior facilities, are being amortized into interest expense ratably over the term of the new facility. As of September 30, 2017, deferred financing costs totaling $1.3 million were included in other assets on our consolidated balance sheets. As of December 31, 2016, deferred financing costs included in other assets on our consolidated balance sheets were insignificant. We recorded aggregate financing costs of $1.8 million as a direct deduction from the carrying
14 | | Third Quarter 2017 Form 10-Q |
amount of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the 2017 Term Loan.
Summary of the 2017 Credit Facility
The 2017 Revolving Facility includes (i) a $50.0 million sublimit available for the issuance of standby letters of credit, (ii) a $50.0 million sublimit available for swingline loans, and (iii) a $100.0 million sublimit available for multicurrency borrowings.
The 2017 Credit Facility is secured by the stock and limited liability company interests of certain of our subsidiaries and any of our material domestic subsidiaries.
Amounts borrowed under the dollar tranche revolving credit loans and term loan under the 2017 Credit Facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate announced by Bank of America, N.A., (ii) the Federal Funds Rate plus 0.50% and (iii) the Eurocurrency Rate (which varies depending on the currency in which the loan is denominated) plus 1.00% (the “Base Rate”), in addition to a margin of 0.00% to 0.75%, or (b) Eurocurrency Rate plus a margin of 1.00% to 1.75%.
We also pay a quarterly commitment fee on the unused portion of the 2017 Revolving Facility from 0.15% to 0.25% per annum, depending on our net leverage ratio. At September 30, 2017, the commitment fee was 0.20%.
The term loan under the 2017 Credit Facility requires periodic principal payments. The balance of the term loan and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022. We evaluate the classification of our debt as current or non-current based on the required annual maturities of the 2017 Credit Facility.
The 2017 Credit Facility includes financial covenants related to the net leverage ratio and interest coverage ratio, as well as restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At September 30, 2017, we were in compliance with our debt covenants under the 2017 Credit Facility.
The 2017 Credit Facility also includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $200.0 million plus an amount, if any, such that the Net Leverage Ratio shall be no greater than 3.00 to 1.00.
Other debt
In September 2017, we entered into a two-year $2.2 million agreement to finance our purchase of software licenses and related services. The agreement is a non-interest bearing note requiring annual payments, with the first payment due in November 2017. Interest associated with the note is imputed at the rate we would incur for amounts borrowed under the 2017 Credit Facility.
As of September 30, 2017, the required annual maturities related to the 2017 Credit Facility and other debt were as follows:
Years ending December 31, (dollars in thousands) | Annual maturities | ||
2017 - remaining | $ | 2,950 | |
2018 | 8,576 | ||
2019 | 7,500 | ||
2020 | 7,500 | ||
2021 | 7,500 | ||
Thereafter | 306,150 | ||
Total required maturities | $ | 340,176 | |
Third Quarter 2017 Form 10-Q | | 15 |
9. Derivative Instruments |
Cash flow hedges
We generally use derivative instruments to manage our variable interest rate risk. In March 2014, we entered into an interest rate swap agreement (the "March 2014 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the swap agreement. The initial notional value of the March 2014 Swap Agreement was $125.0 million with an effective date beginning in March 2014. In March 2017, the notional value of the March 2014 Swap Agreement decreased to $75.0 million for the remaining term through February 2018. We designated the March 2014 Swap Agreement as a cash flow hedge at the inception of the contract.
In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the October 2015 Swap Agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 and maturing in February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.
In July 2017, we entered into an additional interest rate swap agreement (the "July 2017 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the swap agreement. The notional value of the July 2017 Swap Agreement was $150.0 million with an effective date beginning in July 2017 through July 2021. We designated the July 2017 Swap Agreement as a cash flow hedge at the inception of the contract.
Undesignated contracts
In June 2017, we entered into a foreign currency option contract to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving because the purchase price was denominated in British Pounds. The notional value of the instrument was £100.0 million with an effective date beginning in June 2017 and maturing in September 2017. We settled the foreign currency option contract in September 2017. We did not designate the foreign currency option contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative are recognized currently in earnings. The insignificant premium paid for this option and the $1.0 million in proceeds from the settlement are shown within cash flows from investing activities in our consolidated statements of cash flows.
As the closing date of our acquisition of JustGiving extended beyond the settlement date of the foreign currency option contract, we entered into a foreign currency forward contract in September 2017 with settlement in October 2017. The notional value of the instrument was £103.5 million. We did not designate the foreign currency forward contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative are recognized currently in earnings.
16 | | Third Quarter 2017 Form 10-Q |
The fair values of our derivative instruments were as follows as of:
Asset Derivatives | Liability Derivatives | ||||||||||||||
(dollars in thousands) | Balance sheet location | September 30, 2017 | December 31, 2016 | Balance sheet location | September 30, 2017 | December 31, 2016 | |||||||||
Derivative instruments designated as hedging instruments: | |||||||||||||||
Interest rate swaps, current portion | Prepaid expenses and other current assets | $ | 223 | $ | — | Accrued expenses and other current liabilities | $ | — | $ | — | |||||
Interest rate swaps, long-term portion | Other assets | — | 206 | Other liabilities | 328 | 163 | |||||||||
Total derivative instruments designated as hedging instruments | $ | 223 | $ | 206 | $ | 328 | $ | 163 | |||||||
Derivative instruments not designated as hedging instruments: | |||||||||||||||
Foreign currency forward contracts | Prepaid expenses and other current assets | $ | — | $ | — | Accrued expenses and other current liabilities | $ | 41 | $ | — | |||||
Total derivative instruments not designated as hedging instruments | $ | — | $ | — | $ | 41 | $ | — | |||||||
Total derivative instruments | $ | 223 | $ | 206 | $ | 369 | $ | 163 | |||||||
The effects of derivative instruments in cash flow hedging relationships were as follows:
Gain (loss) recognized in accumulated other comprehensive loss as of | Location of gain (loss) reclassified from accumulated other comprehensive loss into income | Gain (loss) reclassified from accumulated other comprehensive loss into income | |||||||||
(dollars in thousands) | September 30, 2017 | Three months ended September 30, 2017 | Nine months ended September 30, 2017 | ||||||||
Interest rate swaps | $ | (105 | ) | Interest expense | $ | (88 | ) | $ | (192 | ) | |
September 30, 2016 | Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||
Interest rate swaps | $ | (654 | ) | Interest expense | $ | (265 | ) | $ | (875 | ) | |
Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive income as of September 30, 2017 that is expected to be reclassified into earnings within the next twelve months is insignificant. There were no ineffective portions of our interest rate swap derivatives during the nine months ended September 30, 2017 and 2016. See Note 13 to these consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component.
Third Quarter 2017 Form 10-Q | | 17 |
We did not have any undesignated derivative instruments during 2016. The effects of undesignated derivative instruments during the three and nine months ended September 30, 2017 were as follows:
Location of gain (loss) recognized in income on derivative | Gain (loss) recognized in income | |||||||
(dollars in thousands) | Three months ended September 30, 2017 | Nine months ended September 30, 2017 | ||||||
Foreign currency option contracts | Other income (expense), net | $ | 38 | $ | 513 | |||
Foreign currency forward contracts | Other income (expense), net | $ | (41 | ) | $ | (41 | ) | |
Total (loss) gain(1) | $ | (3 | ) | $ | 472 | |||
(1) | The individual amounts for each year may not sum to total gain (loss) due to rounding. |
10. Commitments and Contingencies |
Leases
Total rent expense was $3.8 million and $3.1 million for the three months ended September 30, 2017 and 2016, respectively, and $11.9 million and $8.6 million for the nine months ended September 30, 2017 and 2016, respectively. The quarterly South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina, ended in the fourth quarter of 2016. These amounts were recorded as a reduction of rent expense upon receipt and were insignificant during the three months ended September 30, 2016 and $2.2 million during the nine months ended September 30, 2016.
Other commitments
The term loans under the 2017 Credit Facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022.
We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of September 30, 2017, the remaining aggregate minimum purchase commitment under these arrangements was approximately $51.9 million through 2021.
Solution and service indemnifications
In the ordinary course of business, we provide certain indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our solutions or services. If we determine that it is probable that a loss has been incurred related to solution or service indemnifications, any such loss that could be reasonably estimated would be recognized. We have not identified any losses and, accordingly, we have not recorded a liability related to these indemnifications.
Legal proceedings
We are subject to legal proceedings and claims that arise in the ordinary course of business. We make a provision for a loss contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined as of September 30, 2017, that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be negatively affected in any particular period by an unfavorable resolution of one or more of such proceedings, claims or investigations.
18 | | Third Quarter 2017 Form 10-Q |
11. Income Taxes |
Our income tax provision and effective income tax rates, including the effects of period-specific events, were:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Income tax provision | $ | 2,793 | $ | 1,950 | $ | 2,964 | $ | 5,323 | |||||
Effective income tax rate | 18.2 | % | 17.9 | % | 7.8 | % | 18.0 | % | |||||
Our effective income tax rate during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016. The decrease in our effective income tax rate during the nine months ended September 30, 2017, when compared to the same period in 2016, was primarily due to a $9.0 million discrete tax benefit to expense relating to stock-based compensation items, as compared to a $4.3 million discrete tax benefit for the same period in 2016. The increase in the discrete tax benefit for the nine months ended September 30, 2017, as compared to the same period in 2016, was attributable to an increase in the market price for shares of our common stock, as reported by the NASDAQ Stock Market LLC ("NASDAQ"), as well as an increase in the number of stock awards that vested and were exercised. Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.
12. Stock-based Compensation |
Stock-based compensation expense is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Included in cost of revenue: | |||||||||||||
Cost of subscriptions | $ | 331 | $ | 318 | $ | 963 | $ | 904 | |||||
Cost of maintenance | 103 | 137 | 294 | 391 | |||||||||
Cost of services and other | 500 | 461 | 1,418 | 1,308 | |||||||||
Total included in cost of revenue | 934 | 916 | 2,675 | 2,603 | |||||||||
Included in operating expenses: | |||||||||||||
Sales, marketing and customer success | 1,686 | 1,055 | 4,906 | 2,972 | |||||||||
Research and development | 2,093 | 1,674 | 5,877 | 4,874 | |||||||||
General and administrative | 6,213 | 5,173 | 17,597 | 14,556 | |||||||||
Total included in operating expenses | 9,992 | 7,902 | 28,380 | 22,402 | |||||||||
Total stock-based compensation expense | $ | 10,926 | $ | 8,818 | $ | 31,055 | $ | 25,005 | |||||
Third Quarter 2017 Form 10-Q | | 19 |
13. Stockholders' Equity |
Dividends
Our Board of Directors has adopted a dividend policy, which provides for the distribution to stockholders of a portion of cash generated by us that is in excess of operational needs and capital expenditures. The 2017 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.
In February 2017, our Board of Directors approved an annual dividend rate of $0.48 per share to be made in quarterly payments. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends. The following table provides information with respect to quarterly dividends of $0.12 per share paid on common stock during the nine months ended September 30, 2017.
Declaration Date | Dividend per Share | Record Date | Payable Date | |||
February 8, 2017 | $ | 0.12 | February 28 | March 15 | ||
May 1, 2017 | $ | 0.12 | May 26 | June 15 | ||
July 31, 2017 | $ | 0.12 | August 28 | September 15 | ||
On October 25, 2017, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable on December 15, 2017 to stockholders of record on November 28, 2017.
Changes in accumulated other comprehensive loss by component
The changes in accumulated other comprehensive loss by component, consisted of the following:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Accumulated other comprehensive loss, beginning of period | $ | (558 | ) | $ | (1,640 | ) | $ | (457 | ) | $ | (825 | ) | |
By component: | |||||||||||||
Gains and losses on cash flow hedges: | |||||||||||||
Accumulated other comprehensive income (loss) balance, beginning of period | $ | 203 | $ | (806 | ) | $ | 25 | $ | (19 | ) | |||
Other comprehensive (loss) income before reclassifications, net of tax effects of $209, $(161), $135 and $589 | (320 | ) | 248 | (205 | ) | (909 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense | 88 | 265 | 192 | 875 | |||||||||
Tax benefit included in provision for income taxes | (35 | ) | (104 | ) | (76 | ) | (344 | ) | |||||
Total amounts reclassified from accumulated other comprehensive loss | 53 | 161 | 116 | 531 | |||||||||
Net current-period other comprehensive (loss) income | (267 | ) | 409 | (89 | ) | (378 | ) | ||||||
Accumulated other comprehensive loss balance, end of period | $ | (64 | ) | $ | (397 | ) | $ | (64 | ) | $ | (397 | ) | |
Foreign currency translation adjustment: | |||||||||||||
Accumulated other comprehensive loss balance, beginning of period | $ | (761 | ) | $ | (834 | ) | $ | (482 | ) | $ | (806 | ) | |
Translation adjustments | (188 | ) | 289 | (467 | ) | 261 | |||||||
Accumulated other comprehensive loss balance, end of period | (949 | ) | (545 | ) | (949 | ) | (545 | ) | |||||
Accumulated other comprehensive loss, end of period | $ | (1,013 | ) | $ | (942 | ) | $ | (1,013 | ) | $ | (942 | ) | |
20 | | Third Quarter 2017 Form 10-Q |
14. Segment Information |
During the first quarter of 2017, we changed the names of our reportable segments. However, there was no change in the determination of our reportable segments or our reporting units at that time. As of September 30, 2017, our reportable segments were the General Markets Group ("GMG"), the Emerging Markets Group ("EMG"), and the International Markets Group ("IMG"). The following is a description of each reportable segment:
• | The GMG is generally focused on sales to all emerging and mid-sized prospects and customers in North America; |
• | The EMG is generally focused on sales to all large and/or strategic prospects and customers in North America; and |
• | The IMG is focused on marketing, sales, delivery and support to all prospects and customers outside of North America. |
Our chief operating decision maker is our chief executive officer ("CEO"). Currently, our CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, as adjusted, which excludes stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Segment operating income, as adjusted, includes direct, controllable costs related to the sale of our solutions and services, and our customer success program.
The CEO does not review any segment balance sheet information. Summarized reportable segment financial results, were as follows:
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
(dollars in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||
Revenue by segment: | |||||||||||||
GMG | $ | 102,838 | $ | 97,621 | $ | 296,954 | $ | 279,543 | |||||
EMG | 81,836 | 74,351 | 243,713 | 220,887 | |||||||||
IMG | 10,846 | 11,030 | 30,632 | 31,926 | |||||||||
Other(1) | (7 | ) | 61 | 30 | 154 | ||||||||
Total revenue | $ | 195,513 | $ | 183,063 | $ | 571,329 | $ | 532,510 | |||||
Segment operating income, as adjusted(2): | |||||||||||||
GMG | $ | 49,971 | $ | 46,540 | $ | 143,658 | $ | 134,408 | |||||
EMG | 44,375 | 38,696 | 130,887 | 113,186 | |||||||||
IMG | 2,888 | 1,064 | 7,084 | 3,126 | |||||||||
Other(1) | (58 | ) | (157 | ) | (113 | ) | (109 | ) | |||||
97,176 | 86,143 | 281,516 | 250,611 | ||||||||||
Less: | |||||||||||||
Corporate unallocated costs(3) | (57,575 | ) | (53,236 | ) | (173,102 | ) | (156,013 | ) | |||||
Stock-based compensation costs | (10,926 | ) | (8,818 | ) | (31,055 | ) | (25,005 | ) | |||||
Amortization expense | (10,710 | ) | (10,549 | ) | (32,067 | ) | (31,817 | ) | |||||
Interest expense | (3,092 | ) | (2,641 | ) | (8,685 | ) | (8,037 | ) | |||||
Other income (expense), net | 468 | (15 | ) | 1,581 | (185 | ) | |||||||
Income before provision for income taxes | $ | 15,341 | $ | 10,884 | $ | 38,188 | $ | 29,554 | |||||
(1) | Other includes revenue and the related costs from the sale of solutions and services not directly attributable to a reportable segment. |
(2) | Segment operating income, as adjusted, includes direct, controllable costs related to the sale of our solutions and service, and our customer success program. |
(3) | Corporate unallocated costs include research and development, depreciation expense, and certain corporate sales, marketing, general and administrative expenses. |
Third Quarter 2017 Form 10-Q | | 21 |
In light of the ongoing and anticipated increasing centralization of our operations, including without limitation marketing, customer support, customer success and professional services, we are evaluating whether changes may need to be made to our internal reporting structure to better support and assess the operations of our business going forward. If changes are made, we will assess the resulting effect on our reportable segments, operating segments and reporting units, if any.
15. Subsequent Events |
JustGiving acquisition
On October 2, 2017, Blackbaud Global Limited (“Blackbaud Global”), a United Kingdom limited liability company and wholly-owned subsidiary of ours, acquired the entire issued share capital, including all voting equity interests, of Giving Limited, a United Kingdom private limited company doing business as “JustGiving” for an aggregate purchase price of £95.0 million, or approximately $127.4 million, in cash, subject to certain adjustments set forth in the stock purchase agreement. JustGiving is a market leading social platform for giving, and the acquisition is expected to enhance our capabilities to serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we offer today. As a result of the acquisition, JustGiving has become a wholly-owned subsidiary of ours. We will include the operating results of JustGiving as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. During the three and nine months ended September 30, 2017, we incurred acquisition-related expenses associated with the acquisition of JustGiving of $0.7 million and $2.2 million, respectively, which are recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2017 acquisition date.
On October 2, 2017, we borrowed $138.7 million pursuant to a revolving credit loan under the 2017 Credit Facility to finance the acquisition of JustGiving. Following the borrowing, approximately $178.6 million was outstanding under the revolving credit loans with approximately $169.8 million of available borrowing capacity under the 2017 Credit Facility.
22 | | Third Quarter 2017 Form 10-Q |
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. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the consolidated financial statements and related notes which are primarily denominated in thousands of dollars.
Executive Summary |
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, foundations, corporations, education institutions, healthcare institutions and individual change agents—we connect and empower organizations to increase their impact through software, services, expertise, and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing, and analytics. Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina and have operations in the United States, Australia, Canada and the United Kingdom. As of September 30, 2017, we had approximately 35,000 customers.
Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud-based and hosted environments; (ii) providing transaction and payment processing services; (iii) providing professional services including implementation, training, consulting, analytic and other services; and (iv) providing software maintenance and support services.
During the third quarter of 2017, we continued to execute on our four-point growth strategy targeted to drive an extended period of quality enhancement, solution and service innovation and increasing operating efficiency and financial performance:
1. | Deliver Integrated and Open Solutions in the Cloud |
We continue to transition our business to predominantly serve customers through a subscription-based cloud delivery model, enabling lower cost of entry, greater scalability and lower total cost of ownership to our customers. We continue to optimize our portfolio of solutions and integrate powerful capabilities — such as built in data, analytics, artificial intelligence, payment processing and tailored user-specific experiences — to bring even greater value and performance to our customers.
The Blackbaud SKY™ cloud platform is allowing us to innovate at a more rapid pace, including delivering enhanced integrated analytics capabilities that surface directly in our customers’ software through SKY AI and SKY Analytics—components of our broader Intelligence for Good approach that combines AI, analytics, one of the industry’s most robust data sets and expertise to drive powerful insights for our customers. These embedded, cloud-delivered insights provide high impact, workflow-integrated intelligence that drives fundraising, advocacy, event participation and other purpose driven constituent interactions.
At our annual user conference, bbcon, we announced a joint-partnership with Microsoft to couple together Microsoft's horizontal solutions with our industry-leading vertical solutions. We now intend to fully power Blackbaud SKY in the Microsoft Azure environment, and we will become a Cloud Solution Provider Partner for the Microsoft platform.
Third Quarter 2017 Form 10-Q | | 23 |
2. | Drive Sales Effectiveness |
We continue to invest in a world-class sales organization to accelerate revenue growth and penetrate our large and expanding total addressable market ("TAM"), which is currently estimated to be over $7.0 billion. During the first three quarters of 2017, we created a new Senior Vice President of Global Sales position to lead this effort across the organization and we have focused on enabling our expanding sales teams with training, processes, and tools to improve effectiveness and drive revenue growth. The further development of our customer success program is allowing our sales teams to focus on closing sales rather than account management. The move to selling pre-integrated solution suites instead of individual point-solutions continues to be successful, and we have furthered our go-to-market shift with a concentrated sales focus by sub-vertical, including K-12 private schools, foundations, corporations, arts & cultural, higher education and healthcare.
3. | Expand TAM into Near Adjacencies through Acquisitions and Product Investments |
We continue to evaluate compelling opportunities to acquire companies, technologies and/or services. We are guided by our acquisition criteria for considering attractive assets that expand our TAM, provide entry into new and near adjacencies, accelerate our shift to the cloud, accelerate revenue growth, are accretive to margins and present synergistic opportunities.
During the third quarter, we launched Blackbaud Labs as a means to incubate new ideas and foster our strong culture of innovation and creativity within Blackbaud, with the sole focus of bringing new capabilities to market organically. We previously announced the promotion of our new Senior Vice President of Corporate Strategy and Business Development, who led the effort for many of our acquisitions, including AcademicWorks in April 2017 and, most recently, JustGiving.
AcademicWorks is the market leader in scholarship management for higher education and K-12 institutions, foundations, and grant-making institutions. Their cloud platform enables students to apply for all awards at an institution using one intuitive and streamlined process, while offering schools and awarding institutions a common platform for improved awarding, reporting, compliance, communication and stewardship of those awards. Additional details regarding our acquisition of AcademicWorks are provided in Note 3 to our consolidated financial statements in this report. During the third quarter, we focused on integrating AcademicWorks' solutions and operations as well as cross-selling.
In October 2017, we closed our acquisition of the United Kingdom-based online fundraising services provider JustGiving, whose online social giving platform has played a powerful role in the growth of peer-to-peer fundraising. The acquisition enhances our capability to serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we currently offer today through TeamRaiser and everydayhero, which are used by leading nonprofit organizations to connect their causes to the individuals who support them. JustGiving also adds personal crowdfunding to our portfolio, which is an offering we did not previously provide and a fast growing segment of charitable giving. Additional details regarding our acquisition of JustGiving are provided below and in Note 15 to our consolidated financial statements in this report.
Both AcademicWorks and JustGiving meet the acquisition criteria discussed above. We remain active in the evaluation of acquisition opportunities to broaden our portfolio, provide better integrated solutions for our customers, differentiate ourselves from the competition and improve our financial performance.
4. | Improve Operating Efficiency |
We are also focused on operational efficiency to deliver improved profitability. Our organizational model has evolved in recent years allowing us to gain efficiency and consistency in how we execute. We have centralized our operations, including marketing, product management, finance, customer support, customer success and professional services. In 2014, we set a long-term aspirational goal to improve operating margins annually, and increase our non-GAAP operating margins by at least 300 basis points on a constant currency basis from our 2014 baseline of 17.5%, by the end of 2017. Since setting that goal, we have improved margins annually, inclusive of heightened investments to drive future growth and in the midst of migrating our customer base to the cloud. We expect to deliver on our goal, and we see future opportunity ahead to further improve profitability through the infrastructure investments we have made in our back office for scale, focus on operational excellence, and achieving our productivity initiatives.
We have included the results of operations of AcademicWorks in our consolidated results of operations from the date of acquisition. We determined that the AcademicWorks acquisition was not a material business combination; therefore, revenue and earnings since the acquisition date are not required or presented.
24 | | Third Quarter 2017 Form 10-Q |
Total revenue | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Total revenue | $ | 195.5 | $ | 183.1 | 6.8 | % | $ | 571.3 | $ | 532.5 | 7.3 | % | |||||
The increases in total revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily driven by growth in subscriptions revenue as our business model continues to shift towards providing predominantly cloud-based subscription solutions. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for which we process payments. Services and other revenue as well as maintenance revenue declined during the three and nine months ended September 30, 2017 from our continued shift in focus towards selling cloud-based subscription solutions. In general, our NXT and other cloud-based solutions require less implementation services, which we expect to continue to negatively impact services and other revenue over time. In addition, we have also used promotions and discounts for our consulting services as incentives to accelerate the migration of our existing customer base from on-premises solutions toward our cloud-based subscriptions. In the near-term, the transition to subscription-based solutions also negatively impacts total revenue growth, as time-based revenue from subscription arrangements is deferred and recognized ratably over the subscription period, typically three years at contract inception, whereas on-premises license revenue from arrangements that include perpetual licenses is recognized up-front.
Income from operations | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Income from operations | $ | 18.0 | $ | 13.5 | 32.7 | % | $ | 45.3 | $ | 37.8 | 19.9 | % | |||||
Income from operations increased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016. The positive impact of growth in total revenue driven by subscriptions as discussed above was partially offset primarily by investments we are making in our sales organization and customer success program and, to a lesser extent, increases in stock based compensation expense of $2.1 million and $6.1 million, respectively, rent expense of $0.7 million and $3.3 million, respectively, and net increases in acquisition-related expenses and integration costs of $0.8 million and $2.8 million, respectively. An increase of $2.5 million in employee severance costs during the nine months ended September 30, 2017 also negatively impacted income from operations. The increase in rent expense was primarily driven by the end in the fourth quarter of 2016 of the South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts were recorded as a reduction of rent expense upon receipt. Also contributing to the increase in rent expense were new operating leases for equipment that we have historically purchased.
Customer retention
Subscription contracts are typically for a term of three years at contract inception with one to three year renewals thereafter. Over time, we anticipate a decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a cloud-based subscription delivery model. We also anticipate an increase in subscription contract renewals as we continue focusing on innovation, quality and the integration of our subscription solutions which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines subscription and maintenance customer contracts provides an accurate representation of our customers' overall behavior. For the year ended September 30, 2017, approximately 93% of our customers with recurring subscription or maintenance contracts were retained. This customer retention rate is relatively unchanged from our rate for the full year 2016.
Third Quarter 2017 Form 10-Q | | 25 |
Balance sheet and cash flow
At September 30, 2017, our cash and cash equivalents were $17.1 million and outstanding borrowings under the 2017 Credit Facility were $340.2 million. During the nine months ended September 30, 2017, we generated $123.4 million in cash flow from operations, reduced our net borrowings by $5.8 million, inclusive of the incremental borrowings needed to finance the acquisition of AcademicWorks, returned $17.3 million to stockholders by way of dividends and had aggregate cash outlays of $29.0 million for purchases of property and equipment and capitalized software development costs.
Recent development - JustGiving acquisition
On October 2, 2017, we acquired the entire issued share capital of JustGiving for an aggregate purchase price of £95.0 million, or approximately $127.4 million, in cash, subject to certain adjustments set forth in the stock purchase agreement. We financed the acquisition through borrowings under the 2017 Credit Facility. As a result of the acquisition, JustGiving has become a wholly-owned subsidiary of ours. We will include the operating results of JustGiving as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2017 acquisition date.
Results of Operations |
Comparison of the three and nine months ended September 30, 2017 and 2016
Revenue by segment | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
GMG | $ | 102.8 | $ | 97.6 | 5.3 | % | $ | 297.0 | $ | 279.5 | 6.2 | % | |||||
EMG | 81.8 | 74.4 | 10.1 | % | 243.7 | 220.9 | 10.3 | % | |||||||||
IMG | 10.8 | 11.0 | (1.7 | )% | 30.6 | 31.9 | (4.1 | )% | |||||||||
Total revenue(1) | $ | 195.5 | $ | 183.1 | 6.8 | % | $ | 571.3 | $ | 532.5 | 7.3 | % | |||||
(1) | The individual amounts for each year may not sum to total revenue due to rounding. |
GMG | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
GMG revenue | $ | 102.8 | $ | 97.6 | 5.3 | % | $ | 297.0 | $ | 279.5 | 6.2 | % | |||||
% of total revenue | 52.6 | % | 53.3 | % | 52.0 | % | 52.5 | % | |||||||||
The increases in GMG revenue during the three and nine months ended September 30, 2017 when compared to the same periods in 2016 were attributable to growth in subscriptions revenue, partially offset by declines in maintenance revenue and, to a lesser extent, services and other revenue. The growth in GMG subscriptions revenue was primarily due to increases in demand across our portfolio of cloud-based solutions. To a much lesser extent, GMG subscriptions revenue growth was also driven by increases in the number of customers and the volume of transactions for which we process payments. We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.
26 | | Third Quarter 2017 Form 10-Q |
EMG | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
EMG revenue | $ | 81.8 | $ | 74.4 | 10.1 | % | $ | 243.7 | $ | 220.9 | 10.3 | % | |||||
% of total revenue | 41.9 | % | 40.6 | % | 42.7 | % | 41.5 | % | |||||||||
The increases in EMG revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily attributable to growth in subscriptions revenue, partially offset by decreases in services and other revenue and, to a lesser extent, maintenance revenue. The growth in EMG subscriptions was driven primarily by increases in demand for our cloud-based solutions, as well as an increase in the number of customers and the volume of transactions for which we process payments. We are increasingly selling our Blackbaud CRM solution as a subscription offering, which has resulted in less license fees revenue during the three and nine months ended, September 30, 2017, when compared to the same periods in 2016. We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.
IMG | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
IMG revenue | $ | 10.8 | $ | 11.0 | (1.7 | )% | $ | 30.6 | $ | 31.9 | (4.1 | )% | |||||
% of total revenue | 5.5 | % | 6.0 | % | 5.4 | % | 6.0 | % | |||||||||
The decreases in IMG revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily related to reductions in services and other revenue and maintenance revenue, partially offset by increases in subscriptions revenue. The increases in IMG subscriptions revenue during the three and nine months ended September 30, 2017 were primarily due to increased demand for our cloud-based solutions and, to a much lesser extent, increases in the volume of transactions for which we process payments. The fluctuation in foreign currency exchange rates had an insignificant impact on IMG revenue during the three months ended September 30, 2017 and negatively impacted IMG revenue during the nine months ended September 30, 2017 by approximately $0.8 million. Further explanation of this impact is included below under the caption "Foreign Currency Exchange Rates". We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.
Third Quarter 2017 Form 10-Q | | 27 |
Operating results
Subscriptions | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Subscriptions revenue | $ | 127.5 | $ | 105.4 | 20.9 | % | $ | 370.9 | $ | 306.3 | 21.1 | % | |||||
Cost of subscriptions | 58.0 | 51.9 | 11.7 | % | 170.3 | 153.8 | 10.8 | % | |||||||||
Subscriptions gross profit(1) | $ | 69.4 | $ | 53.5 | 29.8 | % | $ | 200.6 | $ | 152.6 | 31.5 | % | |||||
Subscriptions gross margin | 54.5 | % | 50.7 | % | 54.1 | % | 49.8 | % | |||||||||
(1) | The individual amounts for each year may not sum to subscriptions gross profit due to rounding. |
Subscriptions revenue is comprised of revenue from charging for the use of our subscription-based software solutions, which includes providing access to cloud-based solutions and hosting services, access to certain data services and our online subscription training offerings, revenue from payment processing services, as well as variable transaction revenue associated with the use of our solutions.
We continue to experience growth in sales of our cloud-based solutions and hosting services as we meet the demand of our customers that increasingly prefer cloud-based subscription offerings, including existing customers that are migrating from on-premises solutions to our cloud-based solutions. In addition, we have experienced growth in our payment processing services from the continued shift to online giving, further integration of these services to our existing solution portfolio and the sale of these services to new and existing customers. Recurring subscriptions contracts are typically for a term of three years at contract inception with one to three year renewals thereafter. We intend to continue focusing on innovation, quality and integration of our subscription solutions, which we believe will drive subscriptions revenue growth.
Cost of subscriptions is primarily comprised of compensation costs for customer support and production IT personnel, third-party contractor expenses, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and services to our customers.
The increases in subscriptions revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to strong demand across our cloud-based solution portfolio, and, to a much lesser extent, increases in the number of customers and the volume of transactions for which we process payments.
The increases in cost of subscriptions during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to increases in transaction-based costs related to our payments services of $4.7 million and $12.4 million, respectively and increases in the cost of third-party technology embedded in certain of our subscription solutions of $1.5 million and $4.8 million. Partially offsetting the increase in cost of subscriptions during the nine months ended September 30, 2017 was a decrease in third-party contractor expenses of $1.5 million.
The increases in subscriptions gross margin for the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily the result of the positive economics of shifting customers to our next generation cloud-based solutions as growth in subscriptions revenue outpaced the growth in related costs. The results of AcademicWorks did not significantly impact our subscriptions gross margins for the three and nine months ended September 30, 2017.
28 | | Third Quarter 2017 Form 10-Q |
Maintenance | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Maintenance revenue | $ | 31.5 | $ | 36.4 | (13.5 | )% | $ | 98.2 | $ | 111.0 | (11.6 | )% | |||||
Cost of maintenance | 5.7 | 5.5 | 3.0 | % | 17.6 | 16.5 | 6.1 | % | |||||||||
Maintenance gross profit(1) | $ | 25.8 | $ | 30.9 | (16.5 | )% | $ | 80.6 | $ | 94.5 | (14.6 | )% | |||||
Maintenance gross margin | 81.9 | % | 84.8 | % | 82.1 | % | 85.1 | % | |||||||||
(1) | The individual amounts for each year may not sum to maintenance gross profit due to rounding. |
Maintenance revenue 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 certain upgrades to our software solutions and online, telephone and email support. Maintenance contracts are typically renewed on an annual basis.
Cost of maintenance is primarily comprised of compensation costs for customer support personnel, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs and other costs incurred in providing support and services to our customers.
The decreases in maintenance revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily comprised of (i) reductions in maintenance from contracts that were migrated to a cloud-based subscription or not renewed and reductions in contracts with existing customers of $9.2 million and $25.7 million, respectively; partially offset by (ii) incremental maintenance from new customers associated with new license contracts and increases in contracts with existing customers of $4.3 million and $12.1 million, respectively; and (iii) insignificant amounts of incremental maintenance from contractual inflationary rate adjustments.
Cost of maintenance during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016. Cost of maintenance increased during the nine months ended September 30, 2017, when compared to the same period in 2016, primarily as a result of an increase in compensation costs of $1.0 million, driven by a refinement in the method in which we allocate customer support costs between cost of maintenance and cost of subscriptions.
Maintenance gross margin decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to the increase in maintenance customer support costs combined with the decline in maintenance revenue as discussed above.
Third Quarter 2017 Form 10-Q | | 29 |
Services and other | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Services and other revenue | $ | 36.5 | $ | 41.2 | (11.4 | )% | $ | 102.2 | $ | 115.2 | (11.2 | )% | |||||
Cost of services and other | 23.3 | 25.8 | (10.0 | )% | 71.6 | 76.5 | (6.4 | )% | |||||||||
Services and other gross profit(1) | $ | 13.3 | $ | 15.4 | (13.6 | )% | $ | 30.6 | $ | 38.7 | (20.8 | )% | |||||
Services and other gross margin | 36.3 | % | 37.3 | % | 30.0 | % | 33.6 | % | |||||||||
(1) | The individual amounts for each year may not sum to services and other gross profit due to rounding. |
Services and other revenue includes consulting, implementation, training, analytic and installation services as well as revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees. Consulting, implementation and installation services involve converting data from a customer’s existing system, system configuration, process re-engineering and assistance in file set up. Analytic services are comprised of donor prospect research, sales of lists of potential donors, benchmarking studies and data modeling services. These analytic services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product is intended to enable organizations to more effectively target their fundraising activities.
Cost of services and other is primarily comprised of compensation costs for professional services and training personnel, third-party contractor expenses, costs incurred in providing customer training, data expense incurred to perform analytic services, third-party software royalties, variable reseller commissions, costs of user conferences, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.
Services and other revenue decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to decreases in consulting revenue and, to a lesser extent, declines in analytics revenue and license fees revenue. We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services, will continue to negatively impact services and other revenue over time. We have also used promotions and discounts for our consulting services as incentives to accelerate the migration of our existing customer base from on-premises solutions toward our cloud-based subscriptions. The maturation of our Blackbaud Enterprise CRM solution is lessening the extent of implementation services required for that solution. In addition, we are increasingly selling our Blackbaud CRM solution as a subscription offering, which has resulted in less license fees revenue.
Cost of services and other decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to decreases in compensation costs of $1.4 million and $2.5 million, respectively, which is in line with the ongoing shift in our go-to-market strategy as discussed above.
Services and other gross margin decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to the declines in consulting, analytics and license fees revenue coupled with the slightly more modest reductions in costs of services and other.
30 | | Third Quarter 2017 Form 10-Q |
Operating expenses
Sales, marketing and customer success | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Sales, marketing and customer success expense | $ | 44.2 | $ | 40.7 | 8.6 | % | $ | 129.4 | $ | 115.7 | 11.8 | % | |||||
% of total revenue | 22.6 | % | 22.2 | % | 22.6 | % | 21.7 | % | |||||||||
Sales, marketing, and customer success expense includes compensation costs, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.
We continue to make investments to drive sales effectiveness, which is a component of our four-point growth strategy to accelerate revenue growth. We are also investing in our customer success organization to drive customer loyalty, retention, and referrals. The increase in sales, marketing, and customer success expense in dollars and as a percentage of total revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to increases in compensation costs of $3.3 million and $10.5 million, respectively. Also contributing to the increase in sales, marketing and customer success expense for the nine months ended September 30, 2017 was an increase in commission expense of $1.8 million. Compensation costs increased primarily due to incremental headcount associated with the increase in direct sales, marketing, and customer success efforts of our growing operations. The increase in commission expense was primarily driven by a refinement in the period over which we recognize deferred commission to expense.
Research and development | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017(1) | 2016(1) | Change | 2017(2) | 2016(2) | Change | |||||||||||
Research and development expense | $ | 22.1 | $ | 22.5 | (2.0 | )% | $ | 67.6 | $ | 68.0 | (0.5 | )% | |||||
% of total revenue | 11.3 | % | 12.3 | % | 11.8 | % | 12.8 | % | |||||||||
(1) | Not included in research and development expense for the three months ended September 30, 2017 and 2016 were $7.0 million and $6.9 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those related to development of our next generation cloud-based solutions. Qualifying capitalized software development costs associated with our cloud-based solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years. |
(2) | Not included in research and development expense for the nine months ended September 30, 2017 and 2016 were $20.6 million and $18.9 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance. |
Research and development expense includes compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to developing new solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.
We continue to make investments to deliver integrated and open solutions in the cloud, which is a component of our four-point growth strategy to accelerate revenue growth. Research and development expense remained relatively unchanged during the three and nine months ended September 30, 2017, when compared to the same periods in 2016. During the nine months ended September 30, 2017, an increase in compensation costs of $1.4 million associated with our addition of specialized engineering resources to help drive our solution development efforts was offset primarily by an increase in the amount of software development costs that were capitalized of $1.7 million. As discussed above, the increases in the amounts capitalized were a result of incurring more qualifying costs associated with development activities that are required to be capitalized under the internal-use software guidance. We expect that the amount of software development costs capitalized will continue to increase modestly in the near-term as we make investments in innovation, quality and the integration of our solutions, which we believe will drive long-term revenue growth.
Research and development expense decreased as a percentage of total revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to productivity gains, which have allowed us to scale our business. The increases in the amounts of software development costs capitalized as discussed above also contributed to the decreases in research and development expense as a percentage of total revenue.
Third Quarter 2017 Form 10-Q | | 31 |
General and administrative | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
General and administrative expense | $ | 23.5 | $ | 22.3 | 5.5 | % | $ | 67.4 | $ | 62.1 | 8.5 | % | |||||
% of total revenue | 12.0 | % | 12.2 | % | 11.8 | % | 11.7 | % | |||||||||
General and administrative expense consists primarily of compensation costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.
The increases in general and administrative expense during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to increases in rent expense of $0.7 million and $3.3 million, respectively, and net increases in acquisition-related expenses and integration costs of $0.8 million and $2.8 million, respectively. An increase of $2.5 million in employee severance costs during the nine months ended September 30, 2017 also drove up general and administrative expense. The increases in rent expense were primarily driven by the end in the fourth quarter of 2016 of the South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts were recorded as a reduction of rent expense upon receipt. Also contributing to the increases in rent expense were new operating leases for equipment that we have historically purchased.
General and administrative expense as a percentage of total revenue remained relatively unchanged during the three and nine months ended September 30, 2017, when compared to the same periods in 2016.
Interest expense | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Interest expense | $ | 3.1 | $ | 2.6 | 17.1 | % | $ | 8.7 | $ | 8.0 | 8.1 | % | |||||
% of total revenue | 1.6 | % | 1.4 | % | 1.5 | % | 1.5 | % | |||||||||
Interest expense increased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to modest increases in our weighted average effective interest rates. Also contributing to the increase in interest expense during the nine months ended September 30, 2017 was the required immediate expense recognition for certain debt issuance costs when we refinanced our credit facility in June 2017. In the near term, we expect interest expense as well as interest expense as a percentage of revenue to increase as a result of our acquisition of JustGiving.
32 | | Third Quarter 2017 Form 10-Q |
Deferred revenue
The table below compares the components of deferred revenue from our consolidated balance sheets:
(dollars in millions) | Timing of recognition | September 30, 2017 | Change | December 31, 2016 | ||||||
Subscriptions | Over the period billed in advance, generally one year | $ | 179.9 | 24.4 | % | $ | 144.6 | |||
Maintenance | Over the period billed in advance, generally one year | 68.5 | (10.8 | )% | 76.8 | |||||
Services and other | As services are delivered | 34.0 | 15.2 | % | 29.5 | |||||
Total deferred revenue(1) | 282.4 | 12.5 | % | 250.9 | ||||||
Less: Long-term portion | 5.4 | (16.0 | )% | 6.4 | ||||||
Current portion(1) | $ | 277.0 | 13.3 | % | $ | 244.5 | ||||
(1) | The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding. |
To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. We generally invoice our subscription and maintenance customers in annual cycles 30 days prior to the end of the contract term. Deferred revenue from subscriptions increased during the nine months ended September 30, 2017, primarily due to an increase in subscription sales, as well as a seasonal increase in subscription customer contract renewals. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals in our second quarter as compared to our fourth quarter. The increase in deferred revenue from services and other during the nine months ended September 30, 2017 was primarily the result of an increase in training sales and related billings. A seasonal increase in advance registration billings associated with our bbcon user conference, which occurs each year in October, also contributed to the increase in deferred revenue from services and other. The decrease in deferred revenue attributable to maintenance during the nine months ended September 30, 2017 was primarily due to the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which do not require maintenance contracts.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements. Therefore, our deferred revenue after an acquisition will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".
Income tax provision | |||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
Income tax provision | $ | 2.8 | $ | 2.0 | 43.2 | % | $ | 3.0 | $ | 5.3 | (44.3 | )% | |||||
Effective income tax rate | 18.2 | % | 17.9 | % | 7.8 | % | 18.0 | % | |||||||||
Our effective income tax rate during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016. The decrease in our effective income tax rate during the nine months ended September 30, 2017, when compared to the same period in 2016, was primarily due to a $9.0 million discrete tax benefit to expense relating to stock-based compensation items, as compared to a $4.3 million discrete tax benefit for the same period in 2016. The increase in the discrete tax benefit for the nine months ended September 30, 2017, as compared to the same period in 2016, was attributable to an increase in the market price for shares of our common stock, as reported by NASDAQ, as well as an increase in the number of stock awards that vested and were exercised. Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.
Third Quarter 2017 Form 10-Q | | 33 |
Non-GAAP financial measures
The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share internally in analyzing our operational performance. Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.
The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
GAAP Revenue | $ | 195.5 | $ | 183.1 | 6.8 | % | $ | 571.3 | $ | 532.5 | 7.3 | % | |||||
Non-GAAP adjustments: | |||||||||||||||||
Add: Acquisition-related deferred revenue write-down | 0.3 | — | 100.0 | % | 0.7 | 3.6 | (80.8 | )% | |||||||||
Non-GAAP revenue(1) | $ | 195.9 | $ | 183.1 | 7.0 | % | $ | 572.0 | $ | 536.1 | 6.7 | % | |||||
GAAP gross profit | $ | 108.5 | $ | 99.7 | 8.8 | % | $ | 311.8 | $ | 285.7 | 9.2 | % | |||||
GAAP gross margin | 55.5 | % | 54.5 | % | 54.6 | % | 53.7 | % | |||||||||
Non-GAAP adjustments: | |||||||||||||||||
Add: Acquisition-related deferred revenue write-down | 0.3 | — | 100.0 | % | 0.7 | 3.6 | (80.8 | )% | |||||||||
Add: Stock-based compensation expense | 0.9 | 0.9 | 2.0 | % | 2.7 | 2.6 | 2.8 | % | |||||||||
Add: Amortization of intangibles from business combinations | 10.0 | 9.9 | 1.2 | % | 29.9 | 29.7 | 0.8 | % | |||||||||
Add: Employee severance | — | — | (100.0 | )% | 1.0 | 0.2 | 508.1 | % | |||||||||
Add: Acquisition-related integration costs | — | — | — | % | 0.1 | — | 100.0 | % | |||||||||
Subtotal(1) | 11.3 | 10.8 | 4.3 | % | 34.3 | 36.1 | (4.8 | )% | |||||||||
Non-GAAP gross profit(1) | $ | 119.8 | $ | 110.5 | 8.3 | % | $ | 346.2 | $ | 321.8 | 7.6 | % | |||||
Non-GAAP gross margin | 61.1 | % | 60.4 | % | 60.5 | % | 60.0 | % | |||||||||
(1) | The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding. |
34 | | Third Quarter 2017 Form 10-Q |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||
(dollars in millions, except per share amounts) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||
GAAP income from operations | $ | 18.0 | $ | 13.5 | 32.7 | % | $ | 45.3 | $ | 37.8 | 19.9 | % | |||||
GAAP operating margin | 9.2 | % | 7.4 | % | 7.9 | % | 7.1 | % | |||||||||
Non-GAAP adjustments: | |||||||||||||||||
Add: Acquisition-related deferred revenue write-down | 0.3 | — | 100.0 | % | 0.7 | 3.6 | (80.8 | )% | |||||||||
Add: Stock-based compensation expense | 10.9 | 8.8 | 23.9 | % | 31.1 | 25.0 | 24.2 | % | |||||||||
Add: Amortization of intangibles from business combinations | 10.7 | 10.5 | 1.5 | % | 32.1 | 31.8 | 0.8 | % | |||||||||
Add: Employee severance | 0.1 | 0.1 | 77.8 | % | 3.0 | 0.5 | 533.0 | % | |||||||||
Add: Acquisition-related integration costs | 0.4 | 0.9 | (58.2 | )% | 0.6 | 1.4 | (56.8 | )% | |||||||||
Add: Acquisition-related expenses | 1.5 | 0.2 | 899.3 | % | 3.9 | 0.3 | 1,353.2 | % | |||||||||
Subtotal(1) | 24.0 | 20.5 | 17.1 | % | 71.3 | 62.6 | 13.8 | % | |||||||||
Non-GAAP income from operations(1) | $ | 42.0 | $ | 34.0 | 23.3 | % | $ | 116.6 | $ | 100.4 | 16.1 | % | |||||
Non-GAAP operating margin | 21.4 | % | 18.6 | % | 20.4 | % | 18.7 | % | |||||||||
GAAP net income | $ | 12.5 | $ | 8.9 | 40.5 | % | $ | 35.2 | $ | 24.2 | 45.4 | % | |||||
Shares used in computing GAAP diluted earnings per share | 47,846,997 | 47,394,106 | 1.0 | % | 47,679,103 | 47,268,469 | 0.9 | % | |||||||||
GAAP diluted earnings per share | $ | 0.26 | $ | 0.19 | 36.8 | % | $ | 0.74 | $ | 0.51 | 45.1 | % | |||||
Non-GAAP adjustments: | |||||||||||||||||
Add: Total Non-GAAP adjustments affecting income from operations | 24.0 | 20.5 | 17.1 | % | 71.3 | 62.6 | 13.8 | % | |||||||||
Add (less): Loss (gain) on derivative instrument | — | — | 100.0 | % | (0.5 | ) | — | 100.0 | % | ||||||||
Add: Loss on debt extinguishment | 0.1 | — | 100.0 | % | 0.3 | — | 100.0 | % | |||||||||
Less: Tax impact related to Non-GAAP adjustments(2) | (9.8 | ) | (8.1 | ) | 21.6 | % | (32.0 | ) | (24.2 | ) | 32.4 | % | |||||
Non-GAAP net income(1) | $ | 26.9 | $ | 21.3 | 25.8 | % | $ | 74.3 | $ | 62.7 | 18.6 | % | |||||
Shares used in computing Non-GAAP diluted earnings per share | 47,846,997 | 47,394,106 | 1.0 | % | 47,679,103 | 47,268,469 | 0.9 | % | |||||||||
Non-GAAP diluted earnings per share | $ | 0.56 | $ | 0.45 | 24.4 | % | $ | 1.56 | $ | 1.33 | 17.3 | % | |||||
(1) | The individual amounts for each year may not sum to subtotal, non-GAAP income from operations or non-GAAP net income due to rounding. |
(2) | We apply a non-GAAP effective tax rate of 32.0% in our determination of non-GAAP net income, which represents the GAAP effective tax rate, excluding the discrete tax effect of stock-based compensation. |
The increases in non-GAAP income from operations during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to growth in subscriptions revenue, partially offset by investments we are making in our sales organization and customer success program and, to a lesser extent, increases in rent expense, which are discussed above.
Non-GAAP organic revenue growth
In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis, non-GAAP organic subscriptions revenue growth and non-GAAP organic recurring revenue growth, which we believe provides useful information for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and it includes the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate.
Third Quarter 2017 Form 10-Q | | 35 |
(dollars in millions) | Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
GAAP revenue | $ | 195.5 | $ | 183.1 | $ | 571.3 | $ | 532.5 | |||||
GAAP revenue growth | 6.8 | % | 7.3 | % | |||||||||
(Less) Add: Non-GAAP acquisition-related revenue (1) | (2.1 | ) | — | (4.0 | ) | 3.6 | |||||||
Total Non-GAAP adjustments | (2.1 | ) | — | (4.0 | ) | 3.6 | |||||||
Non-GAAP revenue | $ | 193.4 | $ | 183.1 | $ | 567.3 | $ | 536.1 | |||||
Non-GAAP organic revenue growth | 5.6 | % | 5.8 | % | |||||||||
Non-GAAP revenue (2) | $ | 193.4 | $ | 183.1 | $ | 567.3 | $ | 536.1 | |||||
Foreign currency impact on Non-GAAP organic revenue (3) | (0.5 | ) | — | 0.8 | — | ||||||||
Non-GAAP revenue on constant currency basis (3) | $ | 192.9 | $ | 183.1 | $ | 568.1 | $ | 536.1 | |||||
Non-GAAP organic revenue growth on constant currency basis | 5.4 | % | 6.0 | % | |||||||||
GAAP subscriptions revenue | $ | 127.5 | $ | 105.4 | $ | 370.9 | $ | 306.3 | |||||
GAAP subscriptions revenue growth | 20.9 | % | 21.1 | % | |||||||||
(Less) Add: Non-GAAP acquisition-related revenue (1) | (2.0 | ) | — | (3.7 | ) | 3.5 | |||||||
Total Non-GAAP adjustments | (2.0 | ) | — | (3.7 | ) | 3.5 | |||||||
Non-GAAP organic subscriptions revenue | $ | 125.5 | $ | 105.4 | $ | 367.2 | $ | 309.9 | |||||
Non-GAAP organic subscriptions revenue growth | 19.0 | % | 18.5 | % | |||||||||
GAAP subscriptions revenue | $ | 127.5 | $ | 105.4 | $ | 370.9 | $ | 306.3 | |||||
GAAP maintenance revenue | $ | 31.5 | $ | 36.4 | 98.2 | 111.0 | |||||||
GAAP recurring revenue | $ | 159.0 | $ | 141.9 | 469.1 | 417.3 | |||||||
GAAP recurring revenue growth | 12.1 | % | 12.4 | % | |||||||||
(Less) Add: Non-GAAP acquisition-related revenue (1) | (2.0 | ) | — | (3.7 | ) | 3.6 | |||||||
Total Non-GAAP adjustments | (2.0 | ) | — | (3.7 | ) | 3.6 | |||||||
Non-GAAP recurring revenue | $ | 157.0 | $ | 141.9 | $ | 465.4 | $ | 421.0 | |||||
Non-GAAP organic recurring revenue growth | 10.7 | % | 10.5 | % | |||||||||
(1) | Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies. |
(2) | Non-GAAP revenue for the prior year periods presented herein may not agree to non-GAAP revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated. |
(3) | To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Canadian Dollar, EURO, British Pound and Australian Dollar. |
Seasonality
Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our transaction revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. Our revenue from payment processing services has historically increased during the fourth quarter due to year-end giving. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the third and fourth quarters historically achieving the highest total revenues. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter, our cash flow from operations has been lowest in
36 | | Third Quarter 2017 Form 10-Q |
our first quarter, and due to the timing of customer contract renewals, many of which take place at or near the beginning of our third quarter, our cash flow from operations has been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are merit-based salary increases, which are generally effective in April each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors. Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards.
Liquidity and Capital Resources |
The following table presents selected financial information about our financial position:
(dollars in millions) | September 30, 2017 | Change | December 31, 2016 | ||||||
Cash and cash equivalents | $ | 17.1 | 0.9 | % | $ | 16.9 | |||
Property and equipment, net | 43.9 | (12.7 | )% | 50.3 | |||||
Software development costs, net | 48.6 | 29.4 | % | 37.6 | |||||
Total carrying value of debt | 338.0 | (1.3 | )% | 342.4 | |||||
Working capital | (181.1 | ) | (5.1 | )% | (172.2 | ) | |||
Working capital excluding deferred revenue | 95.9 | 32.7 | % | 72.3 | |||||
The following table presents selected financial information about our cash flows:
Nine months ended September 30, | |||||||||
(dollars in millions) | 2017 | Change | 2016 | ||||||
Net cash provided by operating activities | $ | 123.4 | 23.2 | % | $ | 100.1 | |||
Net cash used in investing activities | (78.2 | ) | 106.4 | % | (37.9 | ) | |||
Net cash used in financing activities | (45.3 | ) | (25.9 | )% | (61.2 | ) | |||
Our principal sources of liquidity are operating cash flow, funds available under the 2017 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription, maintenance and support arrangements and market acceptance of our solutions and services. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures, meet our debt obligations and pay dividends. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends and/or repurchase our common stock. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.
At September 30, 2017, our total cash and cash equivalents balance included approximately $7.5 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.
Operating cash flow
Net cash provided by operating activities of $123.4 million increased by $23.2 million during the nine months ended September 30, 2017, when compared to the same period in 2016, primarily due to an increase in net income adjusted for non-cash expenses, and an increase in cash flow from operations associated with working capital. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash
Third Quarter 2017 Form 10-Q | | 37 |
expenses such as depreciation, amortization, stock-based compensation, amortization of deferred financing costs and debt discount and adjustments to our provision for sales returns and allowances; and (ii) changes in our working capital.
Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. Cash flow from operations associated with working capital increased $1.6 million during the nine months ended September 30, 2017, when compared to the same period in 2016, primarily due to a decrease in bonus payments partially offset by an increase in cash taxes paid.
Investing cash flow
Net cash used in investing activities of $78.2 million increased by $40.3 million during the nine months ended September 30, 2017, when compared to the same period in 2016.
During the nine months ended September 30, 2017, we used net cash of $49.7 million for the acquisition of AcademicWorks compared to $3.4 million spent on investments in acquired companies during the same period in 2016. We used $20.6 million for software development costs, which was up $1.5 million from cash spent in the same period in 2016. The increase in cash outlays for software development costs was primarily driven by development activities related to our next generation cloud-based solutions, and development activities for Blackbaud SKY, our new modern cloud platform.
We also spent $8.4 million of cash for purchases of property and equipment during the nine months ended September 30, 2017, which was down $7.0 million from cash spent during the same period in 2016. The decrease in cash outlays for property and equipment was primarily driven by a shift toward leasing certain equipment that we have historically purchased. Cash outlays for operating leases are presented in operating cash flows.
Financing cash flow
During the nine months ended September 30, 2017, we had a net decrease in borrowings of $5.8 million, even with the incremental borrowings needed to finance our acquisition of AcademicWorks. We also paid $3.1 million in financing costs as a result of refinancing our credit facility.
We paid $19.1 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during the nine months ended September 30, 2017 compared to $10.5 million during the same period in 2016. The amount of taxes paid by us on the behalf of employees related to the settlement or exercise of equity awards varies from period to period based upon the timing of grants and vesting, employee exercise decisions, as well as the market price for shares of our common stock at the time of settlement. Due to a change in the timing of our annual equity award grants, most of our equity awards now vest in our first quarter. In addition, during the nine months ended September 30, 2017, we paid dividends of $17.3 million, which was relatively consistent with the comparable period of 2016.
2017 Credit Facility
As discussed above, in June 2017, we entered into the 2017 Credit Facility. Upon closing, we drew $300.0 million on a term loan and $110.0 million in revolving credit loans, which was used to repay all amounts outstanding under our previous credit facility and for other general corporate purposes.
We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. At September 30, 2017, our available borrowing capacity under the 2017 Credit Facility was $356.2 million. The 2017 Credit Facility matures in June 2022.
At September 30, 2017, the carrying amount of our debt under the 2017 Credit Facility was $335.8 million. Our average daily borrowings during the three and nine months ended September 30, 2017 were $355.4 million and $368.5 million, respectively.
The following is a summary of the financial covenants under our credit facility:
Financial Covenant | Requirement | Ratio as of September 30, 2017 |
Net Leverage Ratio | ≤ 3.50 to 1.00 | 1.79 to 1.00 |
Interest Coverage Ratio | ≥ 2.50 to 1.00 | 16.31 to 1.00 |
38 | | Third Quarter 2017 Form 10-Q |
Under the 2017 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2017 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2017 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At September 30, 2017, we were in compliance with our debt covenants under the 2017 Credit Facility.
Commitments and contingencies
As of September 30, 2017, we had contractual obligations with future minimum commitments as follows:
Payments due by period | |||||||||||||||
(in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
Recorded contractual obligations: | |||||||||||||||
Debt(1) | $ | 340.2 | $ | 8.6 | $ | 16.1 | $ | 315.5 | $ | — | |||||
Unrecorded contractual obligations: | |||||||||||||||
Operating leases(2) | 190.4 | 20.2 | 40.0 | 33.1 | 97.1 | ||||||||||
Interest payments on debt(3) | 41.9 | 8.9 | 18.7 | 14.3 | — | ||||||||||
Purchase obligations(4) | 51.9 | 21.3 | 30.6 | — | — | ||||||||||
Total contractual obligations | $ | 624.4 | $ | 59.0 | $ | 105.4 | $ | 362.9 | $ | 97.1 | |||||
(1) | Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2017 Credit Facility and our other debt at September 30, 2017 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Revolving Facility for the purposes of determining minimum commitment amounts. |
(2) | Our commitments related to operating leases have not been reduced by incentive payments and reimbursement of leasehold improvements. |
(3) | The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions described in (1) above. |
(4) | We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. |
The term loan under the 2017 Credit Facility and our other debt require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022.
The total liability for uncertain tax positions as of September 30, 2017 and December 31, 2016, was $3.4 million and $3.1 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of September 30, 2017 and December 31, 2016.
In February 2017, our Board of Directors approved our annual dividend rate of $0.48 per share to be made in quarterly payments. Dividends at this annual rate would aggregate to $23.0 million assuming 48.0 million shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2017 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.
On October 25, 2017, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable on December 15, 2017 to stockholders of record on November 28, 2017.
Off-Balance Sheet Arrangements |
As of September 30, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Third Quarter 2017 Form 10-Q | | 39 |
Foreign Currency Exchange Rates |
Approximately 10% of our total revenue for the nine months ended September 30, 2017 was generated from operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within other comprehensive loss as a component of stockholders’ equity, was a loss of $0.9 million and $0.5 million as of September 30, 2017 and December 31, 2016, respectively.
The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the nine months ended September 30, 2017, foreign translation resulted in an decrease in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the nine months ended September 30, 2017, the fluctuation in foreign currency exchange rates had insignificant impacts on our total revenue and our income from operations. For the nine months ended September 30, 2017, the fluctuation in foreign currency exchange rates decreased IMG revenue by approximately $0.8 million. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.
In June and September 2017, we entered into a foreign currency option contract and a foreign currency forward contract, respectively, to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving, because the purchase price was denominated in British Pounds. See Note 9 of our consolidated financial statements in this report for additional information about these derivative instruments.
Inflation |
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. In addition, if inflationary pressures impact the rate of giving to our customers, there could be adverse impacts to our business, financial condition and results of operations.
Critical Accounting Policies and Estimates |
There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2017 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Recently Issued Accounting Pronouncements |
For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 of our consolidated financial statements in this report.
40 | | Third Quarter 2017 Form 10-Q |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market rate sensitivity for interest rates and foreign currency exchange rates.
Interest Rate Risk |
Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage our variable rate interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments entered into for hedging purposes. Due to the nature of our debt, the materiality of the fair values of the derivative instruments and the highly liquid, short-term nature and level of our cash and cash equivalents as of September 30, 2017, we believe there is no material risk of exposure to changing interest rates for those positions. There were no significant changes in how we manage interest rate risk between December 31, 2016 and September 30, 2017.
Foreign Currency Risk |
For a discussion of our exposure to foreign currency exchange rate fluctuations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Foreign Currency Exchange Rates” in this report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures |
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.
Changes in Internal Control Over Financial Reporting |
No change in internal control over financial reporting occurred during the most recent fiscal quarter ended September 30, 2017 with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Third Quarter 2017 Form 10-Q | | 41 |
| PART II. OTHER INFORMATION | |
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item IA, "Risk factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities |
The following table provides information about shares of common stock acquired or repurchased during the three months ended September 30, 2017. All of these acquisitions were of common stock withheld by us to satisfy tax obligations of employees due upon exercise of stock appreciation rights and vesting of restricted stock awards and units. The level of acquisition activity varies from period to period based upon the timing of grants and vesting as well as employee exercise decisions.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs(1) | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) | |||||||||
Beginning balance, July 1, 2017 | $ | 50,000 | |||||||||||
July 1, 2017 through July 31, 2017 | — | $ | — | — | 50,000 | ||||||||
August 1, 2017 through August 31, 2017 | 24,710 | 86.24 | — | 50,000 | |||||||||
September 1, 2017 through September 30, 2017 | 3,644 | 87.00 | — | 50,000 | |||||||||
Total | 28,354 | $ | 86.34 | — | $ | 50,000 | |||||||
(1) | In August 2010, our Board of Directors approved a stock repurchase program that authorized us to purchase up to $50.0 million of our outstanding shares of common stock. We have not made any repurchases under the program to date, and the program does not have an expiration date. |
42 | | Third Quarter 2017 Form 10-Q |
ITEM 6. EXHIBITS
The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q:
Filed In | ||||||||||
Exhibit Number | Description of Document | Filed Herewith | Form | Exhibit Number | Filing Date | |||||
X | ||||||||||
X | ||||||||||
X | ||||||||||
X | ||||||||||
101.INS* | XBRL Instance Document. | X | ||||||||
101.SCH* | XBRL Taxonomy Extension Schema Document. | X | ||||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||
* Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to liability of that Section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.
Third Quarter 2017 Form 10-Q | | 43 |
| SIGNATURES | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
BLACKBAUD, INC. | |||
Date: | November 2, 2017 | By: | /s/ Michael P. Gianoni |
Michael P. Gianoni | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | November 2, 2017 | By: | /s/ Anthony W. Boor |
Anthony W. Boor | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
44 | | Third Quarter 2017 Form 10-Q |