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BLACKBAUD INC - 10-K - Management's discussion and analysis of financial condition and results of operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Item 1.A Risk Factors and our
consolidated financial statements and related notes included elsewhere in this
Annual Report on Form 10-K. This report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements reflect our current view with respect to future
events and financial performance and are subject to risks and uncertainties,
including those set forth under "Item 1.A. Risk Factors" and elsewhere in this
report, that could cause actual results to differ materially from historical or
anticipated results. Except as required by law, we do not intend, and undertake
no obligation to revise or update these forward-looking statements, or to update
the reasons actual results could differ materially from those anticipated in
these forward-looking statements, even if new information becomes available in
the future.
Executive summary
We provide on-premise and cloud-based software solutions and related services
designed specifically for nonprofit organizations. Our products and services
enable nonprofit organizations to increase donations, reduce fundraising costs,
improve communications with constituents, manage their finances and optimize
internal operations. As of December 31, 2012, we had more than 27,000 active
customers distributed across multiple verticals within the nonprofit market
including education, foundations, health and human services, religion, arts and
cultural, public and societal benefits, environment and animal welfare as well
as international foreign affairs.
We derive revenue from selling perpetual licenses or charging for the use of our
software products in a hosted environment and providing a broad offering of
services, including consulting, training, installation and implementation
services, as well as ongoing customer support and maintenance. Consulting,
training and implementation are generally not essential to the functionality of
our software products and are sold separately. Furthermore, we derive revenue
from providing hosting services, performing donor prospect research engagements,
selling lists of potential donors, and providing transaction processing
services, benchmarking studies and data modeling services.
We completed our acquisition of Convio in May 2012 for $335.7 million in
consideration. We funded the acquisition through both cash on hand and
borrowings under our amended credit facility. During 2012, we remained focused
on:
• integrating the Convio operations and managing expenses to enable us to
realize synergies while making investments for future growth of our
combined operations;
• making initial post-merger product roadmap decisions, which included the
decision to sunset the Convio Common Ground solution and our move to a
single event fundraising module; and
• continuing the shift in our offerings towards subscription-based pricing
to meet the needs and preferences of our customers.
Overall, revenue in 2012 increased 21% compared to 2011. When removing the
impact of revenue from acquired companies, revenue increased by 6% during 2012.
This increase was principally the result of continued growth in our
subscriptions revenue as a result of an increase in demand for our
subscription-based offerings as our business shifts towards hosted solutions as
well as an increase in transaction fees associated with our payment processing
services. Maintenance revenue also contributed to the increase in revenue from
maintaining high renewal rates, new maintenance contracts associated with new
license arrangements and existing client increases.
Income from operations for 2012 decreased by $31.5 million when compared to
2011. The decrease was attributable to: (i) a $23.1 million increase in costs
associated with our acquisition of Convio related to transaction costs,
integration and restructuring costs, amortization of acquired intangibles from
business combinations and stock-based compensation expense; (ii) a $4.3 million
increase in costs related to strategic investments we have made in our business
optimization efforts and the re-engineering of our accounting processes; and
(iii) an increase of $8.3 million in hosting costs due to incremental
investments to improve our hosting services and additional hosting capacity
required as a result of the growth in demand for our hosted applications and
other online services. Also contributing to the decrease in income from
operations was our continued shift from a license-based model with upfront
revenue recognition to a subscription-based model, which recognizes revenue
ratably over the agreement term. These decreases were partially offset by an
increase in gross margin from our payment processing operations.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
We ended 2012 with cash and cash equivalents totaling $13.5 million and $215.5
million in outstanding borrowings on our credit facility. During 2012, we used
$20.8 million of cash on hand and net borrowings of $259.6 million towards
acquiring Convio. Additionally, we generated $68.7 million in cash flow from
operations, paid $21.7 million in dividends and used $20.6 million to purchase
computer equipment and software.
During 2012, we continued to experience growth in overall revenue primarily
driven by the growing demand for our subscription-based offerings. However, we
continue to believe the pace and impact of economic recovery on the nonprofit
market remains uncertain. Additionally, we continue to experience a greater
level of caution by our existing and prospective customers in their expenditure
decisions. We expect that our operating environment will continue to be
challenging in the near term. Notwithstanding these conditions, we plan to
further increase our focus on subscription-based offerings as we execute on our
key growth initiatives and strengthen our leadership position, while achieving
our targeted level of profitability. In the near term, we expect there will
continue to be a dilutive impact on our profitability as we shift from a
license-based model with upfront revenue recognition to a subscription-based
model, which recognizes revenue ratably over the agreement term.
We also plan to continue to invest in our back-office processes, the
infrastructure that supports our subscription-based offerings and certain
product development initiatives to achieve optimal scalability of our operations
as we execute on our key growth initiatives.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Results of operations
During 2012, 2011 and 2010, we acquired companies that provided us with
strategic opportunities to expand our share of the nonprofit market through the
integration of complementary products and services to serve the changing needs
of our customers. The following are the companies we acquired and their
respective acquisition date:
• NOZA, Inc. - October 1, 2010;
• Public Interest Data, LLC, or PIDI - February 1, 2011;
• Everyday Hero Pty. Ltd., or EDH - October 6, 2011; and
• Convio, Inc., or Convio - May 4, 2012.
We have included the results of operations of acquired companies in our
consolidated results of operations from the date of their respective
acquisition, which impacts the comparability of our results of operations when
comparing 2012 to 2011 and 2011 to 2010. We have noted in the discussion below,
to the extent meaningful, the impact on the comparability of our consolidated
results of operations due to the inclusion of acquired companies for only a
partial year in the year of acquisition.
From the date of acquisition through December 31, 2012, Convio's total revenue
was $50.7 million. Because we have integrated a substantial amount of the Convio
operations, it is impracticable to determine the operating costs attributable
solely to the acquired business.
Comparison of the years ended December 31, 2012 and 2011
Revenue
The table below compares revenue from our consolidated statements of
comprehensive income for the years ended December 31, 2012 and 2011.
Year ended December 31,
(in millions) 2012 2011 Change % Change
License fees $ 20.6 $ 19.5 $ 1.1 6 %
Subscriptions 162.1 103.5 58.6 57 %
Services 119.6 108.8 10.8 10 %
Maintenance 136.1 130.6 5.5 4 %
Other 9.0 8.5 0.5 6 %
Total revenue $ 447.4 $ 370.9 $ 76.5 21 %
When removing the impact of revenue from acquired companies, revenue increased
by $21.9 million, or 6% in 2012. This increase in revenue was primarily
attributable to growth in our subscriptions revenue as a result of both an
increase in demand for an our online fundraising offerings as well as an
increase in transaction fees associated with our payment processing services.
The increase in demand for our subscription offerings was primarily driven by
the ongoing evolution of our product offerings from a license-based to
subscription-based model. Although we continue to experience a shift in our
emerging (first-time users) and mid-sized customers' buying preference away from
perpetual licenses towards hosted solutions, license revenue increased in 2012
when compared to 2011 as a result of an increase in sales of our Blackbaud CRM
offering to large and/or strategic customers. The increase in maintenance
revenue is attributable to maintaining high renewal rates, new maintenance
contracts associated with new license agreements and increases in contracts with
existing customers during 2012 when compared to 2011. Services revenue grew in
2012 principally as a result of increased demand for our education services.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Operating results
License fees
Year ended December 31,
(in millions) 2012 2011 Change % Change
License fees revenue $ 20.6 $ 19.5 $ 1.1 6 %
Cost of license fees 3.0 3.3 (0.3 ) (9 )%
License fees gross profit $ 17.6 $ 16.2 $ 1.4 9 %
License fees gross margin 85 % 83 %
We derive revenue from license fees from the sale of our software products,
under a perpetual license agreement. We are increasingly experiencing a shift in
our emerging and mid-sized customers' buying preference away from solutions
offered under perpetual license arrangements towards subscription-based hosted
applications, while our large and/or strategic customers continue to be an area
of growth, particularly as it relates to our Blackbaud CRM offering. Our larger
perpetual license transactions have long sales cycles, and their timing can
result in significant period-to-period variations. Revenue from license fees
increased in 2012 primarily due to a greater contribution of revenue from larger
Blackbaud CRM arrangements when compared to 2011.
Cost of license fees is principally comprised of third-party software royalties,
variable reseller commissions, amortization of software development costs and
amortization of intangibles from business combinations. The decrease in cost of
license fees in 2012 when compared to 2011 is principally attributable to a
decrease in third-party software royalties. Third-party software royalties
associated with our license-based products have decreased as the demand for our
perpetual license arrangements has decreased and subscription-based offerings
has increased.
The increase in license fees gross margin during 2012 is the result of fewer
sales of products that have third party software royalty costs associated with
them. Additionally, the increase in revenue from Blackbaud CRM arrangements
contributed to the increase in license fees gross margin during 2012.
Subscriptions
Year ended December 31,
(in millions) 2012 2011 Change % Change
Subscriptions revenue $ 162.1 $ 103.5 $ 58.6 57 %
Cost of subscriptions 68.8 42.5 26.3 62 %
Subscriptions gross profit $ 93.3 $ 61.0 $ 32.3 53 %
Subscriptions gross margin 58 % 59 %
Revenue from subscriptions is principally comprised of revenue from providing
access to hosted applications and hosting services, access to certain data
services and our online subscription training offerings, as well as variable
transaction fees associated with the use of our products to fundraise online. We
continue to experience growth in our hosted applications business and are
increasingly experiencing a shift in our emerging and mid-sized customers'
buying preference away from perpetual licenses towards subscription-based
offerings. There will continue to be a dilutive impact on our profitability as
we shift from a license-based model with upfront revenue recognition to a
subscription-based model, which recognizes revenue ratably over the agreement
term.
Included in subscriptions revenue for 2012 and 2011 is $45.6 million and $0.7
million of revenue attributable to acquired companies, respectively. Excluding
the revenue from acquired companies, the increase in subscriptions revenue of
$13.7 million, or 13%, is principally attributable to an increase in demand for
our online fundraising and data management offerings as well as an increase in
transaction fees associated with our payment processing services.
Cost of subscriptions is primarily comprised of human resource costs,
stock-based compensation expense, third-party royalty and data expenses, hosting
expenses, allocated depreciation, facilities and IT support costs, amortization
of intangibles from
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
business combinations and other costs incurred in providing support and services
to our customers. The increase in cost of subscriptions in 2012 is principally
attributable to increases in hosting costs, human resource costs and
amortization of intangibles from business combinations.
Hosting costs increased by $8.3 million during 2012 as a result of incremental
costs due to the inclusion of acquired companies. Additionally, hosting costs
increased due to incremental investments to improve our hosting services and
additional hosting capacity required as a result of the growth in demand for our
hosted applications and other online services. Human resource costs increased
$6.6 million during 2012. The increase in human resource costs is attributable
to additional headcount due to the inclusion of acquired companies and
additional resources needed to support the growth in demand for our
subscription-based offerings.
Amortization of intangibles from business combinations increased $8.6 million in
2012 primarily due to the amortization expense for the acquired Convio
intangible assets.
The decrease in subscriptions gross margin during 2012 compared to 2011 is
primarily due to investments we are making in our infrastructure, including
additional headcount, expanded facilities, improved operational processes and
computer equipment to support the growth in our subscription offerings.
Services
Year ended December 31,
(in millions) 2012 2011 Change % Change
Services revenue $ 119.6 $ 108.8 $ 10.8 10 %
Cost of services 97.2 79.1 18.1 23 %
Services gross profit $ 22.4 $ 29.7 $ (7.3 ) (25 )%
Services gross margin 19 % 27 %
We derive services revenue from consulting, installation, implementation,
education and analytic services. Consulting, installation and implementation
services involve converting data from a customer's existing system, assistance
in file set up and system configuration, and/or process re-engineering.
Education services involve customer training activities. Analytic services are
comprised of donor prospect research, selling lists of potential donors,
benchmarking studies and data modeling services. These services involve the
assessment of current and prospective donor information of the customer and are
performed using our proprietary analytical tools. The end product enables
organizations to more effectively target their fundraising activities. We
recognize services revenue attributable to consulting services for
implementation of our hosted applications and subscription offerings ratably
over the period the customer benefits from those services. We also recognize the
direct and incremental costs associated with consulting services revenue ratably
over the same period. However, we continue to expense indirect costs in the
period the implementation services are provided.
Included in services revenue in 2012 and 2011 is $9.8 million and $0.1 million
of revenue attributable to acquired companies, respectively. Excluding the
revenue from acquired companies, the increase in services revenue of $1.1
million, or 1%, is principally due to an increase in education services revenue
of $1.4 million, partially offset by a decrease in analytic services revenue of
$0.6 million. The rates we charge for our education service offerings have
remained relatively constant year over year and, as such, the increase in
revenue is the result of a change in volume. The increase in revenue from
education services is the result of higher demand for subscription-based
training. Consulting services revenue remained relatively unchanged in 2012
compared to 2011 primarily due to a greater portion of our service engagements
being with larger enterprise customers as our mid-market moves to
subscription-based offerings. These larger enterprise engagements can experience
volatility in utilization due to the complex nature of these engagements.
Cost of services is principally comprised of human resource costs, stock-based
compensation expense, third-party contractor expenses, classroom rentals, costs
incurred in providing customer training, data expense incurred to perform
analytic services, allocated depreciation, facilities and IT support costs and
amortization of intangibles from business combinations. The increase in cost of
services in 2012 is primarily attributable to an increase in human resource
costs. Human resource costs increased $12.7 million in 2012 as a result of an
increase in headcount. The increase in headcount was attributable to the
inclusion of additional resources from acquired companies.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
An increase in allocated depreciation, facilities and IT support costs also
contributed to the increase in cost of services in 2012 when compared to 2011
due to the inclusion of allocable costs from the Convio operations.
The services gross margin decreased in 2012 primarily as a result of the
increases in headcount and allocated costs discussed above.
Maintenance
Year ended December 31,
(in millions) 2012 2011 Change % Change
Maintenance revenue $ 136.1 $ 130.6 $ 5.5 4 %
Cost of maintenance 26.0 25.2 0.8 3 %
Maintenance gross profit $ 110.1 $ 105.4 $ 4.7 4 %
Maintenance gross margin 81 % 81 %
Revenue from maintenance is comprised of annual fees derived from maintenance
contracts associated with new software licenses and annual renewals of existing
maintenance contracts. These contracts provide customers with updates,
enhancements and upgrades to our software products and online, telephone and
email support. The increase in maintenance revenue in 2012 compared to 2011 is
principally comprised of (i) $12.7 million of maintenance from new customers
associated with new license agreements and increases in contracts with existing
customers and (ii) $4.1 million from maintenance contract inflationary rate
adjustments, partially offset by (iii) $11.3 million from maintenance contracts
that were not renewed and reductions in contracts with existing customers.
Cost of maintenance is primarily comprised of human resource costs, stock-based
compensation expense, third-party contractor expenses, third-party royalty
costs, allocated depreciation, facilities and IT support costs, amortization of
intangibles from business combinations and other costs incurred in providing
support and services to our customers. Cost of maintenance increased during 2012
when compared to 2011 primarily as a result of increases in allocated costs and
proprietary software costs. The increase in proprietary software costs is
attributable to increases in maintenance contracts with existing customers for
software products which include third-party royalty costs associated with the
maintenance revenue. Maintenance gross margin in 2012 remained relatively
unchanged when compared to 2011.
Other revenue
Year ended December 31,
(in millions) 2012 2011 Change % Change
Other revenue $ 9.0 $ 8.5 $ 0.5 6 %
Cost of other revenue 7.5 7.0 0.5 7 %
Other gross profit $ 1.5 $ 1.5 $ - - %
Other gross margin 17 % 18 %
Other revenue includes the sale of business forms that are used in conjunction
with our software products, reimbursement of travel-related expenses primarily
incurred during the performance of services at customer locations, fees from
user conferences and third-party software referral fees. Other revenue increased
in 2012 when compared to 2011 primarily due to an increase in fees from user
conferences. Additionally, an increase in revenue from reimbursement of
travel-related expenses associated with services revenue contributed to the
increase in other revenue during 2012.
Cost of other revenue includes human resource costs, costs of business forms,
costs of user conferences, reimbursable expenses relating to the performance of
services at customer locations, allocated depreciation, facilities and IT
support costs and amortization of intangibles from business combinations. Cost
of other revenue increased in 2012 primarily due to increases in reimbursable
expenses related to services provided at customer locations. Other gross margin
in 2012 remained relatively unchanged when compared to 2011.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Operating expenses
Sales and marketing
Year ended December 31,
(in millions) 2012 2011 Change % ChangeSales and marketing expense $ 95.2 $ 75.4 $ 19.8
26 %
% of revenue 21 % 20 %
Sales and marketing expense includes salaries and related human resource costs,
stock-based compensation expense, travel-related expenses, sales commissions,
advertising and marketing materials, public relations costs and allocated
depreciation, facilities and IT support costs.
Sales and marketing expense increased in 2012 primarily due to increases in
human resource costs and commission expense. Human resource costs increased
primarily due to the inclusion of additional headcount from acquired companies
as well as incremental headcount to support the increase in sales and marketing
efforts of our growing operations. The increase in commission expense is
principally due to an increased amount of commissionable revenue in 2012.
Research and development
Year ended December 31,
(in millions) 2012 2011 Change % Change
Research and development expense $ 64.7 $ 47.7 $ 17.0 36 %
% of revenue 14 % 13 %
Research and development expense includes human resource costs, stock-based
compensation expense, third-party contractor expenses, software development
tools and other expenses related to developing new products, upgrading and
enhancing existing products, and allocated depreciation, facilities and IT
support costs.
Research and development expense increased during 2012 primarily due to
increased human resource and third-party contractor costs. Human resource and
third-party contractor costs increased primarily due to the inclusion of
additional headcount from acquired companies as well as investments we continue
to make in our product development efforts, including our direct marketing
offerings. Additionally, research and development costs increased during 2012
due to an increase in allocated business costs.
General and administrative
Year ended December 31,
(in millions) 2012 2011 Change % Change
General and administrative expense $ 63.3 $ 36.9 $ 26.4 72 %
% of revenue 14 % 10 %
General and administrative expense consists primarily of human resource costs
for general corporate functions, including senior management, finance,
accounting, legal, human resources, corporate development, stock-based
compensation expense, third-party professional fees, insurance, allocated
depreciation, facilities and IT support costs, acquisition-related expense and
other administrative expenses.
General and administrative expense increased during 2012 primarily due to
increases in acquisition transaction costs, acquisition integration and
restructuring costs, acquisition-related stock-based compensation, professional
fees and human resource costs. The increase in costs associated with our
acquisition of Convio including transaction costs, acquisition integration and
restructuring costs and stock-based compensation expense was $13.2 million
during 2012. Professional fees increased $4.3 million during 2012 compared to
2011, primarily due to strategic investments we are making in our business
optimization efforts and the re-engineering of our accounting processes. The
remaining increase was primarily attributable to an
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
increase in human resource costs from additional headcount to support our
growing operations and increased skills and competencies of our support
resources.
Non-GAAP income from operations
The operating results analyzed below are presented on a non-GAAP basis in that
the results exclude the impact of (i) the writedown of Convio's deferred revenue
balance, (ii) stock-based compensation expense, (iii) amortization expense, (iv)
acquisition-related expenses, (v) acquisition integration and restructuring
costs, (vi) a write-off of prepaid proprietary software licenses, (vii) an
impairment of cost method investment, and (viii) a gain on sale of assets. We
believe that the exclusion of these amounts allows us and investors to better
understand our operating expenses and cash needs, particularly when evaluating
current performance against prior periods.
Year ended December 31,
(in millions) 2012 2011 Change % Change
GAAP income from operations $ 19.4 $ 50.9 $ (31.5 ) (62 )%
Non-GAAP adjustments:
Add: Convio deferred revenue writedown 5.6 - 5.6 100 %
Add: Stock-based compensation expense 19.2 14.9 4.3 29 %
Add: Amortization of intangibles from
business combinations 17.4 7.6 9.8 129 %
Add: Acquisition-related expenses 6.4 1.8 4.6 256 %
Add: Acquisition integration and
restructuring costs 6.9 - 6.9 100 %
Add: Write-off of prepaid proprietary
software licenses 0.4 - 0.4 100 %
Add: Impairment of cost method investment 0.2 1.8 (1.6 ) (89 )%
Less: Gain on sale of assets - (0.5 ) 0.5 (100 )%
Total Non-GAAP adjustments 56.1 25.6 30.5 119 %
Non-GAAP income from operations $ 75.5 $ 76.5 $ (1.0 ) (1 )%
Non-GAAP operating margin 17 % 21 %
The decrease in non-GAAP income from operations and non-GAAP operating margin
during 2012 was principally due to: (i) the continued shift from a license-based
model with upfront revenue recognition to a subscription-based model, which
recognizes revenue ratably over the agreement term; (ii) incremental investments
we are making in our product development efforts and as well as investments to
improve the performance of our hosting services; and (iii) strategic investments
we are making in our business optimization efforts and the re-engineering of our
accounting processes. Contributing to the decrease in 2012 is the growth of cost
of services exceeding the growth of our services revenue.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Comparison of the years ended December 31, 2011 and 2010
Revenue
The table below compares revenue from our consolidated statements of
comprehensive income for the years ended December 31, 2011, with the same period
in 2010.
Year ended December 31,
(in millions) 2011 2010 Change % Change
License fees $ 19.5 $ 23.7 $ (4.2 ) (18 )%
Subscriptions 103.5 83.9 19.6 23 %
Services 108.8 87.7 21.1 24 %
Maintenance 130.6 124.6 6.0 5 %
Other 8.5 6.7 1.8 27 %
Total revenue $ 370.9 $ 326.6 $ 44.3 14 %
Total revenue increased $44.3 million, or 14%, in 2011 compared to 2010. This
increase in revenue was primarily attributable to growth in our subscriptions
and services revenue. The increase in subscriptions revenue was primarily
attributable to an increase in demand for our hosted offerings, hosting
services, online fundraising and data management offerings. This increase was
driven by the ongoing evolution of our product offerings from a license-based to
subscription-based business model. Services revenue growth was primarily due to
an increase in demand for consulting services associated with our Blackbaud CRM
offering and online fundraising offerings.
The increase in maintenance revenue was attributable to new maintenance
contracts associated with new license agreements sold over the last twelve
months and increases in contracts with existing customers. These increases were
offset by a decrease in license fees which was principally attributable to a
smaller contribution in 2011 from Blackbaud CRM perpetual license arrangements
with upfront revenue recognition than in 2010. Additionally, we continued to
experience a shift in our customers' buying preference away from perpetual
licenses towards hosted solutions.
Operating results
License fees
Year ended December 31,
(in millions) 2011 2010 Change % Change
License fees revenue $ 19.5 $ 23.7 $ (4.2 ) (18 )%
Cost of license fees 3.3 3.0 0.3 10 %
License fees gross profit $ 16.2 $ 20.7 $ (4.5 ) (22 )%
License fees gross margin 83 % 87 %
Revenue from license fees during 2011 and 2010 was derived from the sale of our
software products, under a perpetual license agreement. During 2011, we
increasingly experienced a shift in our customers' buying preference away from
solutions offered under perpetual license arrangements towards
subscription-based hosted applications. In addition, we continued to experience
longer sales cycle times, delays and postponements of purchasing decisions and
overall caution exercised by existing and prospective customers as a result of
continued challenges posed by the weak economic environment. During 2011,
revenue from license fees to existing customers decreased by $0.9 million and
sales to new customers decreased by $3.3 million. The decrease in license fees
was largely the result of a smaller contribution in 2011 from Blackbaud CRM
sales with upfront revenue recognition when compared to 2010 due to credits
provided to certain Blackbaud CRM early adopters.
Cost of license fees was principally comprised of third-party software
royalties, variable reseller commissions, amortization of software development
costs and amortization of intangibles from business combinations. The increase
in cost of license fees in 2011 compared to 2010 was principally attributable to
an increase in reseller commissions. A greater portion of our software license
sales in 2011 were completed through our reseller channels when compared to
2010.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
The decrease in license fees gross margin in 2011 compared to 2010 was the
result of an increase in the sale of products that are sold through our reseller
channels.
Subscriptions
Year ended December 31,
(in millions) 2011 2010 Change % Change
Subscriptions revenue $ 103.5 $ 83.9 $ 19.6 23 %
Cost of subscriptions 42.5 31.2 11.3 36 %
Subscriptions gross profit $ 61.0 $ 52.7 $ 8.3 16 %
Subscriptions gross margin 59 % 63 %
Revenue from subscriptions for 2011 and 2010 was principally comprised of
revenue from providing access to hosted applications and hosting services,
access to certain data services and our online subscription training offerings,
and variable transaction fees associated with the use of our products to
fundraise online. Revenue from acquired companies contributed $6.2 million to
the growth in subscriptions revenue during 2011. The remaining increase in
subscriptions revenue during 2011 was principally attributable to the increase
in demand for online fundraising offerings, data management offerings and
hosting services. Additionally, revenue from our hosting services continued to
increase as the demand for these services continued to grow from both our
existing and new perpetual license customers. We continued to experience growth
in our hosted applications business and increasingly experienced a shift in our
customers' buying preference away from perpetual licenses towards subscription
based-offerings.
Cost of subscriptions for 2011 and 2010 was primarily comprised of human
resource costs, stock-based compensation expense, third-party royalty and data
expenses, hosting expenses, an allocation of depreciation, facilities and IT
support costs, amortization of intangibles from business combinations and other
costs incurred in providing support and services to our customers. The increase
in cost of subscriptions in 2011 when compared to 2010 was principally
attributable to an increase in headcount. The increase in headcount was due to
both the inclusion of acquired companies and the investments we were making in
our infrastructure to support the growth in our subscription offerings. Human
resource costs increased $6.9 million as a result of an increase in headcount,
of which $3.6 million related to our acquisition of PIDI in February 2011.
Hosting costs also increased by $2.8 million due to the increase in required
hosting capacity as a result of the increase in demand for hosting and other
online services.
The decrease in subscriptions gross margin 2011 compared to 2010 was due to an
increase in the investments we made in the infrastructure to support the growth
in our subscription offerings.
Services
Year ended December 31,
(in millions) 2011 2010 Change % Change
Services revenue $ 108.8 $ 87.7 $ 21.1 24 %
Cost of services 79.1 66.8 12.3 18 %
Services gross profit $ 29.7 $ 20.9 $ 8.8 42 %
Services gross margin 27 % 24 %
Services revenue for 2011 and 2010 consisted of consulting, installation,
implementation, education and analytic services. Consulting, installation and
implementation services involve converting data from a customer's existing
system, assistance in file set up and system configuration, and/or process
re-engineering. Education services involve customer training activities.
Analytic services are comprised of donor prospect research, selling lists of
potential donors, benchmarking studies and data modeling services. These
services involve the assessment of current and prospective donor information of
the customer and are performed using our proprietary analytical tools. The end
product enables organizations to more effectively target their fundraising
activities. We recognize services revenue attributable to consulting services
for implementation of our hosted applications and subscription offerings ratably
over the period the customer benefits from those services. We also recognize the
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
direct and incremental costs associated with consulting services revenue ratably
over the same period. However, we continue to expense indirect costs in the
period the implementation services are provided.
The increase in services revenue during 2011 when compared to 2010 was
principally attributable to an increase in consulting services revenue of $14.4
million, analytic services of $3.8 million and education services of
$2.9 million. Revenue from acquired companies represented $0.8 million of
consulting services and $1.9 million of analytic services revenue growth during
2011 compared to 2010. The increase in consulting services revenue was primarily
due to an increase in the demand for consulting, installation and implementation
services associated with our Blackbaud CRM offering and our internet based
fundraising offerings. This increase in consulting services revenue resulting
from an increase in volume was partially offset by an increase in our
investment, in the form of non-billable implementation hours, in early adopters
of our Blackbaud CRM offering and a reduction in the rates we charged as a
result of a higher level of discounts on the consulting services provided during
2011 compared to 2010. The rates we charged for our education and analytic
service offerings have remained relatively constant year over year and, as such,
the change in revenue was principally the result of an increase in the volume of
services provided.
Cost of services was principally comprised of human resource costs, stock-based
compensation expense, third-party contractor expenses, classroom rentals, other
costs incurred in providing consulting, installation and implementation services
and customer training, data expense incurred to perform analytic services, an
allocation of depreciation, facilities and IT support costs and amortization of
intangibles from business combinations.
The increase in cost of services in 2011 when compared to 2010 was primarily
attributable to an increase in human resource costs and third-party contractor
costs. The increase in human resource costs and third-party contractor costs was
principally attributable to the need for additional resource capacity to meet
the increasing consulting services demands of our customers and the additional
headcount from acquired companies.
The services gross margin increased in 2011 compared to 2010 primarily as a
result of an increase in demand for consulting services associated with our
Blackbaud CRM offering and a shift in the mix of consulting engagements to
higher margin projects.
Maintenance
Year ended December 31,
(in millions) 2011 2010 Change % Change
Maintenance revenue $ 130.6 $ 124.6 $ 6.0 5 %
Cost of maintenance 25.2 24.1 1.1 5 %
Maintenance gross profit $ 105.4 $ 100.5 $ 4.9 5 %
Maintenance gross margin 81 % 81 %
Revenue from maintenance for 2011 and 2010 was comprised of annual fees derived
from maintenance contracts associated with new software licenses and annual
renewals of existing maintenance contracts. These contracts provide customers
with updates, enhancements and upgrades to our software products and online,
telephone and email support. During 2011, the increase in maintenance revenue
was principally comprised of $11.3 million of maintenance from new customers
associated with new license agreements and increases in contracts with existing
customers and $3.8 million from maintenance contract inflationary rate
adjustments, offset by $9.1 million from maintenance contracts that were not
renewed.
Cost of maintenance for 2011 and 2010 was primarily comprised of human resource
costs, stock-based compensation expense, third-party contractor expenses,
third-party royalty costs, an allocation of depreciation, facilities and IT
support costs, amortization of intangibles from business combinations and other
costs incurred in providing support and services to our customers. The increase
in cost of maintenance in 2011 when compared to 2010 was principally
attributable to an increase in human resource costs of $1.5 million partially
offset by a $0.2 million decrease in third-party royalty costs and $0.2 million
decrease in amortization of intangibles from business combinations. Human
resource costs increased due to salary merit increases and an increase in
headcount associated with the continued growth in our customer support function
commensurate with maintenance revenue growth. Additionally, we continued to
experience a shift to higher skilled support resources that carry a higher cost
to meet the needs of our enterprise customers.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Other revenue
Year ended December 31,
(in millions) 2011 2010 Change % Change
Other revenue $ 8.5 $ 6.7 $ 1.8 27 %
Cost of other revenue 7.0 7.1 (0.1 ) (1 )%
Other gross profit $ 1.5 $ (0.4 ) $ 1.9 (475 )%
Other gross margin 18 % (6 )%
Other revenue for 2011 and 2010 included the sale of business forms that are
used in conjunction with our software products, reimbursement of travel-related
expenses, primarily incurred during the performance of services at customer
locations, fees from user conferences and third-party software referral fees.
Other revenue increased in 2011 when compared to 2010 primarily due to an
increase in revenue from third-party software referral fees and in reimbursement
of travel-related expenses associated with the growth in services revenue.
Cost of other revenue for 2011 and 2010 included human resource costs, costs of
business forms, costs of user conferences, reimbursable expenses relating to the
performance of services at customer locations, an allocation of depreciation,
facilities and IT support costs and amortization of intangibles from business
combinations. In total, cost of other revenue in 2011 when compared to 2010
decreased by $0.1 million due to a reduction in user conference expenses offset
by an increase in reimbursable expenses.
Other gross margin increased in 2011 when compared to 2010 due to an increase in
revenue from third-party software referral fees and a reduction in the cost of
user conferences.
Operating expenses
Sales and marketing
Year ended December 31,
(in millions) 2011 2010 Change % Change
Sales and marketing expense $ 75.4 $ 69.5 $ 5.9 8 %
% of revenue 20 % 21 %
Sales and marketing expense for 2011 and 2010 included salaries and related
human resource costs, stock-based compensation expense, travel-related expenses,
sales commissions, advertising and marketing materials, public relations and an
allocation of depreciation, facilities and IT support costs. During 2011, sales
and marketing expense increased by $5.9 million when compared to 2010 primarily
due to an increase of $3.6 million in human resource costs and $2.0 million in
commission expense. The increase in human resource costs was a result of
additional headcount to support the increase in selling and marketing efforts of
our growing operations. The increase in commission expense was principally
attributable to an increase in commissionable revenue in 2011. Additionally,
marketing programs increased by $0.3 million relating to the launch of our new
corporate branding and an increase in marketing costs associated with our new
packaged offerings.
As a percentage of revenue, sales and marketing expense in 2011 when compared to
2010 decreased principally as a result of our ability to leverage our sales
support and marketing resources as we standardized and simplified our packaged
offerings.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Research and development
Year ended December 31,
(in millions) 2011 2010 Change % Change
Research and development expense $ 47.7 $ 45.5 $ 2.2 5 %
% of revenue 13 % 14 %
Research and development expense for 2011 and 2010 included human resource
costs, stock-based compensation expense, third-party contractor expenses,
software development tools and other expenses related to developing new
products, upgrading and enhancing existing products, and an allocation of
depreciation, facilities and IT support costs. During 2011, human resource and
third-party costs increased by $3.0 million partially offset by an increase in
the amount of software development costs that were capitalized of $0.8 million.
Human resource and third-party contractor costs increased as we continued to
invest in our product development efforts. The increase in amount of costs that
are capitalized was primarily due to development efforts with our events
management solution.
Research and development costs as a percentage of revenue decreased in 2011 when
compared to 2010 principally due to the increase in the amount of development
costs that were capitalized in 2011 as compared to 2010.
General and administrative
Year ended December 31,
(in millions) 2011 2010 Change % Change
General and administrative expense $ 36.9 $ 32.6 $ 4.3 13 %
% of revenue 10 % 10 %
General and administrative expense for 2011 and 2010 consisted primarily of
human resource costs for general corporate functions, including senior
management, finance, accounting, legal, human resources, corporate development,
stock-based compensation expense, third-party professional fees, insurance, an
allocation of depreciation, facilities and IT support costs, acquisition related
expense and other administrative expenses. During 2011, general and
administrative expense increased primarily due to $1.3 million and $1.1 million
increases in stock-based compensation expense and human resource costs,
respectively, a $0.8 million increase in acquisition-related expenses, $0.5
million in third-party professional consulting fees and $0.3 million in
recruiting costs associated with hiring key executives in 2011.
Acquisition-related costs related primarily to the acquisition of PIDI, EDH and
the pending acquisition of Convio. Stock-based compensation increased due to a
change in the type of equity awards granted to certain executives to be
performance-based, for which expense is recognized on an accelerated basis.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Non-GAAP income from operations
The operating results analyzed below are presented on a non-GAAP basis in that
the results exclude the impact of stock-based compensation expense, amortization
expense, acquisition-related expenses, impairment of cost method investment and
gain on sale of assets. We believe that the exclusion of these costs allows us
and investors to better understand our operating expenses and cash needs,
particularly when evaluating current performance against prior periods.
Year ended December 31,
(in millions) 2011 2010 Change % Change
GAAP income from operations $ 50.9 $ 46.0 $ 4.9 11 %
Non-GAAP adjustments:
Add: Stock-based compensation expense 14.9 13.1 1.8 14 %
Add: Amortization of intangibles from
business combinations 7.6 7.1 0.5 7 %
Add: Acquisition-related expenses 1.8 1.0 0.8 80 %
Add: Impairment of cost method investment 1.8 - 1.8 100 %
Less: Gain on sale of assets (0.5 ) - (0.5 ) 100 %
Total Non-GAAP adjustments 25.6 21.2 4.4 21 %
Non-GAAP income from operations $ 76.5 $ 67.2 $ 9.3 14 %
Non-GAAP operating margin 21 % 21 %
The increase in non-GAAP income from operations was consistent with the overall
increase in revenue of 14% and was principally attributable to the growth in
gross profit in our subscriptions and services operations as discussed above,
partially offset by investments, in the form of non-billable implementation
hours, we made during 2011 in early adopters of our Blackbaud CRM offering.
Interest expense
Interest expense increased $5.7 million during 2012 when compared to 2011. This
increase in interest expense is directly related to the borrowings we incurred
to fund our acquisition of Convio in May 2012.
Income tax provision
The following is our effective tax rate for the years ended December 31:
2012 2011 2010
Effective tax rate 50.6 % 35.2 % 36.5 %
The effective rate in 2012 increased when compared to 2011 primarily due to a
decrease in pre-tax income, reduction in federal research and development
credits and nondeductible transaction costs associated with the Convio
acquisition. In January 2013, the federal research and development credit was
reinstated with retrospective application to the 2012 tax year. Our estimated
2012 tax credit will be recorded as a discrete benefit in the first quarter of
2013. The effective tax rate in 2011 decreased when compared to 2010 due to the
change in our valuation allowances. In 2011, we reversed $1.0 million of
valuation allowance for certain state net operating loss carryforwards in
connection with the completion of certain state tax planning strategies.
We record our deferred tax assets and liabilities at an amount based upon a U.S.
federal income tax rate of 35.0% and appropriate statutory tax rates of various
foreign, state and local jurisdictions in which we operate. If our tax rates
change in the future, we would adjust our deferred tax assets and liabilities to
an amount reflecting those income tax rates. Any change will affect the
provision for income taxes during the period that the determination is made.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
We file income tax returns in the U.S. for federal and various state
jurisdictions as well as in foreign jurisdictions including Canada, United
Kingdom, Australia and the Netherlands. We are generally subject to U.S. federal
income tax examination for calendar tax years ending 2009 through 2011 as well
as state and foreign income tax examinations for various years depending on
statute of limitations of those jurisdictions.
We have taken federal tax positions in certain taxing jurisdictions related for
which it is reasonably possible that the total amount of unrecognized tax
benefits may decrease within the next twelve months. The possible decrease could
result from the expiration of statutes of limitations. The reasonably possible
decrease approximates $0.9 million at December 31, 2012.
Liquidity and capital resources
At December 31, 2012, cash and cash equivalents totaled $13.5 million, compared
to $52.5 million at December 31, 2011. During 2012, we generated $68.7 million
of cash flow from operations and borrowed $315.0 million under our credit
facility. We used our cash flow from operations, borrowings under the credit
facility and cash on hand to fund the $280.4 million acquisition of Convio, pay
dividends of $21.7 million and purchase $20.6 million of computer software and
equipment. Additionally, we repaid $99.5 million of borrowings during 2012.
Our principal source of liquidity is our operating cash flow, which depends on
continued customer renewal of our maintenance, support and subscription
agreements and market acceptance of our products 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 12 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 or pay further
dividends and/or repurchase our common stock.
We have drawn on our credit facility from time to time to help us meet financial
needs, such as business acquisitions and purchases of common stock under our
repurchase program. In February 2012, we amended and restated our credit
facility to increase the available borrowing capacity to $325.0 million. The
amended credit facility matures in February 2017. We believe our credit facility
will provide us with sufficient flexibility to meet our future financial needs.
At December 31, 2012, we had $215.5 million of outstanding borrowings under our
credit facility. Our average daily borrowings were $244.9 million during the
period we had debt outstanding during 2012.
Following is a summary of the financial covenants as defined by credit facility:
Ratio as of December
Financial Covenant Requirement 31, 2012
Leverage Ratio < 3.00 to 1.00 2.31 to 1.00
Interest Coverage Ratio > 3.50 to 1.00 16.61 to 1.00
Maximum Capital Expenditures $40.0 million for the $22.6 million
fiscal year ended
December 31, 2012
Under our 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: (1) no
default or event of default shall have occurred and be continuing under the
credit facility, and (2) we must be in compliance with the leverage ratio set
forth in the credit agreement. At December 31, 2012, we were in compliance with
all debt covenants under our credit facility.
At December 31, 2012, our total cash and cash equivalents balance includes
approximately $4.7 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 12 months, if we need these funds, we would be required to accrue and pay
taxes to repatriate the funds. Our current plans anticipate repatriating
undistributed earnings in Canada. We currently do not anticipate a need to
repatriate our other cash held outside the U.S.
Operating cash flow
Net cash provided by operating activities of $68.7 million decreased by $16.8
million during 2012. Throughout both 2012 and 2011, our cash flows from
operations were derived principally from: (i) our earnings from on-going
operations prior to non-cash expenses such as depreciation, amortization and
stock-based compensation and adjustments to our provision for sales
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
returns and allowances; (ii) the tax benefit associated with our deferred tax
asset, which reduces our cash outlay for income tax expense; and (iii) changes
in our working capital.
Working capital changes as they impact the statement of cash flows are composed
of changes in accounts receivable, prepaid expenses and other assets, accounts
payable, accrued expenses and other liabilities and deferred revenue. Cash flow
from operations associated with working capital decreased $8.9 million in 2012
when compared to 2011. This net decrease is principally due to an increase in
the amount of cash paid for income taxes, fluctuations in the timing of vendor
payments, partially offset by a decrease in the amount of deferred commissions
and other deferred costs.
Investing cash flow
Net cash used in 2012 for investing activities was $302.5 million compared to
$41.7 million in 2011. The increase is due to the acquisition of Convio in May
2012. Additionally, we increased the amount spent on computer equipment and
software associated with the infrastructure that supports our subscription-based
offerings from $18.2 million in 2011 to $20.6 million in in 2012.
Financing cash flow
During 2012, we received proceeds from borrowings of $315.0 million under our
credit facility to fund the acquisition of Convio and made debt repayments of
$99.5 million. We paid dividends of $21.7 million which was relatively
consistent with the amount paid in 2011.
Commitments and contingencies
As of December 31, 2012, we had future minimum commitments as follows:
Payments due by period
More than 5
(in millions) Total Less than 1 year 1-2 years 3-5 years years
Operating leases $ 83.8 $ 10.3 $ 17.9 $ 14.7 $ 40.9
Debt and interest(1) 237.2 16.0 39.4 181.8 -
Total $ 321.0 $ 26.3 $ 57.3 $ 196.5 $ 40.9
(1) Included in the table above is $21.7 million of interest. 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 used in the above table.
The term loans under our 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 credit facility in February 2017. Our
commitments related to operating leases have not been reduced by the future
minimum lease commitments under sublease agreements, incentive payments and
reimbursement of leasehold improvements.
We utilize third-party relationships in conjunction with our products. The
contractual arrangements vary in length from one to three years. In certain
cases, these arrangements require a minimum annual purchase commitment. The
total remaining minimum purchase commitments under these arrangements at
December 31, 2012, were approximately $4.5 million through 2015. We incurred
expense under these arrangements of $1.3 million, $3.2 million and $1.7 million
for the years ended December 31, 2012, 2011 and 2010, respectively.
In February 2013, our Board of Directors approved our annual dividend rate of
$0.48 per share for 2013. Dividends at the annual rate would aggregate to $22.1
million assuming 46.0 million shares of common stock are outstanding. Our
ability to continue to declare and pay dividends quarterly this year and beyond
might be restricted by, among other things, the terms of our credit facility,
general economic conditions and our ability to generate adequate operating cash
flow.
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Off-balance sheet arrangements
We do not have any off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons.
Foreign currency exchange rates
Approximately 14% of our total net revenue for the year ended December 31, 2012
was derived 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 $1.2 million and $1.1 million at December 31, 2012 and December 31,
2011, respectively.
The vast majority of our contracts are entered into by our U.S., Canadian or
U.K. entities. The contracts entered into by the U.S. entity are almost always
denominated in U.S. dollars, contracts entered into by our Canadian subsidiary
are generally denominated in Canadian dollars, and contracts entered into by our
U.K., Australian and the Netherlands subsidiaries are generally denominated in
pounds sterling, 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. During 2012,
foreign translation resulted in a decrease in our revenues and expenses
denominated in non-U.S. currencies. Though we do not believe our exposure to
currency exchange rates has had a material impact on our consolidated results of
operations or financial position, we intend to continue to monitor such exposure
and take action as appropriate.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods. On an ongoing basis, we reconsider and
evaluate our estimates and assumptions, including those that impact revenue
recognition, long-lived and intangible assets and goodwill, stock-based
compensation, the provision for income taxes, capitalization of software
development costs, our allowance for sales returns and doubtful accounts,
deferred sales commissions, accounting for business combinations and loss
contingencies.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from any of our estimates under different assumptions or
conditions. We believe the critical accounting policies listed below affect
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue recognition
Our revenue is primarily generated from the following sources: (i) charging for
the use of our software products in a hosted environment; (ii) selling perpetual
licenses of our software products; (iii) providing professional services
including implementation, training, consulting, analytic, hosting and other
services; and (iv) providing software maintenance and support services.
We recognize revenue when all of the following conditions are met:
•Persuasive evidence of an arrangement exists;
•The product or services has been delivered;
•The fee is fixed or determinable; and
•Collection of the resulting receivable is probable.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Determining whether and when these criteria have been met can require
significant judgment and estimates. We deem acceptance of an agreement to be
evidence of an arrangement. Delivery for our products occurs when the product is
shipped or transmitted, and title and risk of loss have transferred to the
customers. Our typical agreements do not include customer acceptance provisions;
however, if acceptance provisions are provided, delivery is deemed to occur upon
acceptance. We consider the fee to be fixed or determinable unless the fee is
subject to refund or adjustment or is not payable within our standard payment
terms. Payment terms greater than 90 days are considered to be beyond our
customary payment terms. Collection is deemed probable if we expect that the
customer will be able to pay amounts under the arrangement as they become due.
If we determine that collection is not probable, we defer revenue recognition
until collection. Revenue is recognized net of sales returns and allowances.
Subscriptions
We provide hosting services to customers who have purchased perpetual rights to
certain of our software products (hosting services). Revenue from hosting
services, as well as data enrichment services, data management services and
online training programs is recognized ratably beginning on the activation date
over the term of the agreement, which generally ranges from one to three years.
Any related set-up fees are recognized ratably over the estimated period that
the customer benefits from the related hosting service.
We make certain of our software products available for use in hosted application
arrangements without licensing perpetual rights to the software (hosted
applications). Revenue from hosted applications is recognized ratably beginning
on the activation date over the term of the agreement, which generally ranges
from one to three years. Any revenue related to upfront activation, set-up or
implementation fees is recognized ratably over the estimated period that the
customer benefits from the related hosted application. Direct and incremental
costs relating to activation, set-up and implementation for hosted applications
are capitalized until the hosted application is deployed and in use, and then
expensed over the estimated period that the customer benefits from the related
hosted application.
For arrangements that have multiple elements and do not include software
licenses, we allocate arrangement consideration at the inception of the
arrangement to those elements that qualify as separate units of accounting. The
arrangement consideration is allocated to the separate units of accounting based
on relative selling price method in accordance with the selling price hierarchy,
which includes: (i) vendor specific objective evidence (VSOE) if available;
(ii) third-party evidence (TPE) if VSOE is not available; and (iii) best
estimate of selling price if neither VSOE nor TPE is available. In general, we
use VSOE to allocate the selling price to subscription and service deliverables.
Revenue from transaction processing fees is recognized when the amounts are
determined, reported and billed. Credit card fees directly associated with
processing donations for customers are included in subscriptions revenue, net of
related transaction costs.
License fees
We sell software licenses with maintenance, varying levels of professional
services and, in certain instances, with hosting services. We allocate revenue
to each of the elements in these arrangements using the residual method under
which we first allocate revenue to the undelivered elements, typically the
non-software license components, based on objective evidence of the fair value
of the various elements. We determine the fair value of the various elements
using different methods. Fair value for maintenance services associated with
software licenses is based upon renewal rates stated in the agreements with
customers, which vary according to the level of support service provided under
the maintenance program. Fair value of professional services and other products
and services is based on sales of these products and services to other customers
when sold on a stand-alone basis. Any remaining revenue is allocated to the
delivered elements which is normally the software license in the arrangement.
When a software license is sold with software customization services, generally
the services are to provide customer support for assistance in creating special
reports and other enhancements that will assist with efforts to improve
operational efficiency and/or to support business process improvements. These
services are not essential to the functionality of the software. However, when
software customization services are considered essential to the functionality of
the software, we recognize revenue for both the software license and the
services using the percentage-of-completion method.
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Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Services
We generally bill consulting, installation and implementation services based on
hourly rates plus reimbursable travel-related expenses. Revenue is recognized
for these services over the period the services are performed.
We recognize analytic services revenue from donor prospect research engagements,
the sale of lists of potential donors, benchmarking studies and data modeling
service engagements upon delivery. In arrangements where we provide customers
the right to updates to the lists during the contract period, revenue is
recognized ratably over the contract period.
We sell training at a fixed rate for each specific class at a per attendee price
or at a packaged price for several attendees, and recognize the related revenue
upon the customer attending and completing training. Additionally, we sell
fixed-rate programs, which permit customers to attend unlimited training over a
specified contract period, typically one year, subject to certain restrictions,
and revenue is recognized ratably over this contract period.
Maintenance
We recognize revenue from maintenance services ratably over the contract term,
typically one year. Maintenance contracts are at rates that vary according to
the level of the maintenance program and are generally renewable annually.
Maintenance contracts also include the right to unspecified product upgrades on
an if-and-when available basis. Certain support services are sold in prepaid
units of time and recognized as revenue upon their usage.
Deferred revenue
To the extent that our customers are billed for the above described services in
advance of delivery, we record such amounts in deferred revenue.
Valuation of long-lived and intangible assets and goodwill
We review identifiable intangible and other long-lived assets for impairment
when events change or circumstances indicate the carrying amount may not be
recoverable. Events or changes in circumstances that indicate the carrying
amount may not be recoverable include, but are not limited to, a significant
decrease in the market value of the business or asset acquired, a significant
adverse change in the extent or manner in which the business or asset acquired
is used or significant adverse change in the business climate. If such events or
changes in circumstances occur, we use the undiscounted cash flow method to
determine whether the asset is impaired. Cash flows would include the estimated
terminal value of the asset and exclude any interest charges. To the extent that
the carrying value of the asset exceeds the undiscounted cash flows over the
estimated remaining life of the asset, we measure the impairment using
discounted cash flows. The discount rate utilized would be based on our best
estimate of our risks and required investment returns at the time the impairment
assessment is made.
Goodwill is assigned to our five reporting units, which are defined as our four
operating segments (see Note 16 to our consolidated financial statements), and
Blackbaud Payment Services. We test goodwill for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. We first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount. Significant judgment is required in the assessment of
qualitative factors. To the extent the qualitative factors indicate that the
fair value is likely less than the carrying amount, we compare the fair value of
the reporting unit with its carrying amount.
We estimate fair value for each reporting unit based on projected future cash
flows discounted using our weighted average cost of capital. A number of
significant assumptions and estimates are involved in estimating the fair value
of each reporting unit, including revenue growth rates, operating margins,
capital spending, discount rate, and working capital changes. Additionally, we
make certain judgments and assumptions in allocating assets and liabilities to
determine the carrying values for each of our reporting units. We believe the
assumptions we use in estimating fair value of our reporting units are
reasonable, but are also unpredictable and inherently uncertain. Actual future
results may differ from those estimates.
If the carrying amount exceeds its fair value, impairment is indicated. If an
impairment is indicated, the impairment is measured as the excess of the
recorded goodwill over its fair value, which could materially adversely impact
our consolidated financial position and results of operations. The 2012 annual
impairment test of our goodwill indicated there was no impairment.
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Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Stock-based compensation
We measure stock-based compensation cost at the grant date based on the fair
value of the award and recognize it as expense over the requisite service
period, which is the vesting period. We determine the fair value of stock
options and stock appreciation rights using a Black-Scholes option pricing
model, which requires us to use significant judgment to make estimates regarding
the life of the award, volatility of our stock price, the risk-free interest
rate and the dividend yield of our stock over the life of the award. We
determine the fair value of awards that contain market conditions using a Monte
Carlo simulation model. Changes to these estimates would result in different
fair values of awards.
We estimate the number of awards that will be forfeited and recognize expense
only for those awards that ultimately vest. Significant judgment is required in
determining the adjustment to compensation expense for estimated forfeitures.
Compensation expense in a period could be impacted, favorably or unfavorably, by
differences between estimated and actual forfeitures.
Income taxes
We make estimates and judgments in accounting for income taxes. The calculation
of income tax provision requires estimates due to transactions, credits and
calculations where the ultimate tax determination is uncertain. Uncertainties
arise as a consequence of the actual source of taxable income between domestic
and foreign locations, the outcome of tax audits and the ultimate utilization of
tax credits. To the extent actual results differ from estimated amounts
recorded, such differences will impact the income tax provision in the period in
which the determination is made.
We make estimates in determining tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We record valuation allowances to reduce our
deferred tax assets to the amount expected to be realized. In assessing the
adequacy of a recorded valuation allowance significant judgment is required. We
consider all positive and negative evidence and a variety of factors including
the scheduled reversal of deferred tax liabilities, historical and projected
future taxable income, and prudent and feasible tax planning strategies. If we
determine there is less than a 50% likelihood that we will be able to use a
deferred tax asset in the future in excess of its net carrying value, then an
adjustment to the deferred tax asset valuation allowance is made to reduce
income tax expense, thereby increasing net income in the period such
determination was made.
We measure and recognize uncertain tax positions. To recognize such positions we
must first determine if it is more likely than not that the position will be
sustained on audit. We must then measure the benefit as the largest amount that
is more than 50% likely of being realized upon ultimate settlement. Significant
judgment is required in the identification and measurement of uncertain tax
positions.
Software Development Costs
The costs incurred in the preliminary stages of internal use software
development are expensed as incurred. Once an application has reached the
development stage, internal and external costs, if direct and incremental, are
capitalized until the software is substantially complete and ready for its
intended use. Judgment is required in determining when the development stage of
a product has been reached. Capitalization ceases upon completion of all
substantial testing. We also capitalize costs related to specific upgrades and
enhancements when it is probable the expenditures will result in additional
functionality. Capitalized costs are recorded as part of computer software
costs. Internal use software is amortized on a straight line basis over its
estimated useful life, generally three years.
Costs for the development of software to be sold are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Judgment is required in determining when technological feasibility of a product
is established. Technological feasibility is considered to be achieved when a
working model of the software product has been completed. Capitalized software
development costs include direct labor costs and fringe benefit costs attributed
to programmers, software engineers and quality control teams working on products
after they reach technological feasibility but before they are generally
available to customers for sale. Capitalized software development costs are
typically amortized over the estimated product life of generally three years, on
a straight-line basis.
50--------------------------------------------------------------------------------
Table of Contents
Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Sales returns and allowance for doubtful accounts
We provide customers a 30-day right of return and under certain circumstances we
provide service related credits to our customers. We maintain a reserve for
returns and credits which is estimated based on several factors including
historical experience, known credits yet to be issued, the aging of customer
accounts and the nature of service level commitments. A considerable amount of
judgment is required in assessing these factors. Provisions for sales returns
are charged against the related revenue items.
We maintain an allowance for doubtful accounts at an amount we estimate to be
sufficient to provide adequate protection against losses resulting from
extending credit to our customers. In judging the adequacy of the allowance for
doubtful accounts, we consider multiple factors including historical bad debt
experience, the general economic environment, the need for specific customer
reserves and the aging of our receivables. A considerable amount of judgment is
required in assessing these factors and if any receivables were to deteriorate,
an additional provision for doubtful accounts could be required. Any necessary
provision is reflected in general and administrative expense.
Deferred sales commissions
We pay sales commissions at the time contracts with customers are signed or
shortly thereafter, depending on the size and duration of the sales contract. To
the extent that these commissions relate to revenue not yet recognized, the
amounts are recorded as deferred sales commission costs. Subsequently, the
commissions are recognized as expense as the revenue is recognized.
Business combinations
We are required to allocate the purchase price of acquired companies to the
tangible and intangible assets acquired and liabilities assumed at the
acquisition date based upon their estimated fair values. Goodwill as of the
acquisition date represents the excess of the purchase consideration of an
acquired business over the fair value of the underlying net tangible and
intangible assets acquired and liabilities assumed. This allocation and
valuation require management to make significant estimates and assumptions,
especially with respect to long-lived and intangible assets.
Critical estimates in valuing intangible assets include but are not limited to
estimates about: future expected cash flows from customer contracts, proprietary
technology and non-compete agreements; the acquired company's brand awareness
and market position, assumptions about the period of time the brand will
continue to be; as well as expected costs to develop the in-process research and
development into commercially viable products and estimated cash flows from the
projects when completed, and discount rates. Our estimates of fair value are
based upon assumptions we believe to be reasonable, but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur.
Contingencies
We are subject to the possibility of various loss contingencies in the normal
course of business. We record an accrual for a contingency when it is both
probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Often these issues are subject to substantial
uncertainties and, therefore, the probability of loss and the estimation of
damages are difficult to ascertain. These assessments can involve a series of
complex judgments about future events and can rely heavily on estimates and
assumptions that have been deemed reasonable by us. Although we believe we have
substantial defenses in these matters, we could incur judgments or enter into
settlements of claims that could have a material adverse effect on our
consolidated financial position, results of operations or cash flows in any
particular period.
Recently adopted accounting pronouncements
Effective January 1, 2012, we adopted ASU 2011-05, Presentation of Comprehensive
Income, which (i) eliminates the option to present components of other
comprehensive income, or OCI, as part of the statement of changes in
stockholders' equity and (ii) requires the presentation of each component of net
income and each component of OCI either in a single continuous statement or in
two separate but consecutive statements. The adoption of ASU 2011-05 did not
have a material impact on our consolidated financial statements. We have
presented each component of net income and OCI in a single continuous statement.
Effective January 1, 2012, we adopted ASU 2011-04, Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
International Financial Reporting Standards, which amends ASC 820, Fair Value
51--------------------------------------------------------------------------------
Table of Contents
Blackbaud, Inc.Item 7. Management's discussion and analysis of financial condition and results
of operations (continued)
Measurement. ASU 2011-04 provides common requirements for measuring fair value
and for disclosing information about fair value measurements in accordance with
U.S. GAAP and International Financial Reporting Standards (IFRS) and improves
the comparability of fair value measurements presented and disclosed in
financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04
is effective for entities prospectively for interim and annual periods beginning
after December 15, 2011. The adoption of ASU 2011-04 did not have a material
impact on our consolidated financial statements.
Recently issued accounting pronouncements
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220)
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,
which requires an entity to provide information about the amounts reclassified
out of accumulated other comprehensive income by component. In addition, an
entity is required to present, either on the face of the statement where net
income is presented or in the notes, significant amounts reclassified out of
accumulated other comprehensive income by the respective line items of net
income but only if the amount reclassified is required under U.S. GAAP to be
reclassified to net income in its entirety in the same reporting period. For
other amounts that are not required under U.S. GAAP to be reclassified in their
entirety to net income, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those
amounts. ASU 2013-02 is effective prospectively for reporting periods beginning
after December 15, 2012. We do not anticipate any material impact from the
adoption of ASU 2013-02.
In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other
(Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which
simplifies how entities test indefinite-lived intangible assets for impairment.
ASU 2012-02 permits an entity to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is
impaired as a basis for determining whether it is necessary to perform the
quantitative impairment test currently required by ASC Topic 350-30 on general
intangibles other than goodwill. ASU 2012-02 is effective for annual and interim
impairment tests performed for fiscal years beginning after September 15, 2012.
Early adoption is permitted, provided that the entity has not yet issued its
financial statements. We do not anticipate any material impact from the adoption
of ASU 2012-02.
52--------------------------------------------------------------------------------
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