Blackbaud Inc (BLKB) 2014 Q1 法說會逐字稿

Greetings and welcome to Blackbaud's first-quarter 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host, Mr. Robert Weiner.

Thank you, Mr. Weiner. You may begin.

Good morning, everyone. Thank you for joining us today for Blackbaud's 2014 first-quarter conference call. Today we will review our first-quarter financial and operational results for 2014 and provide commentary on our progress toward achieving our goals for the full year of 2014.

Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO, and Tony Boor, Blackbaud's Senior Vice President and CFO. Mike and Tony will make prepared comments and then we will open up the call for your questions.

Please note that our comments today contain forward-looking statements. These statements are based solely on present information and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings including our most recent Annual Report on Form 10-K and the Risk Factors contained therein as well as our periodic reports under the Securities Act of 1934 for more information on these risks and uncertainties, and on the limitations that apply to our forward-looking statements.

Also please note that a webcast of today's call will be available on the Investor Relations section of our website.

During this call, we will be referring to both GAAP and non-GAAP financial measures. We believe that non-GAAP financial measures are more representative of how we internally measure the business. However, non-GAAP financial measures should not be considered in isolation from, or as a substitution for, GAAP measures. A reconciliation Of GAAP and non-GAAP results is available in the press release we issued last night which is available on our website at www.blackbaud.com.

Now, looking at the IR calendar. Our team will be presenting at the 2014 Jefferies Technology, Media and Telecom Conference on May 6th and hosting one-on-one investor meetings on May 7th at the conference in Miami. We will also be presenting at the Evercore Vertical Cloud Symposium in New York in June, as well as meeting with investors in Boston and the Mid-Atlantic region also in June. Please call our Investor Relations line if you are interested in meeting with management in one of these locations.

I am now pleased to turn the call over to Blackbaud's President and CEO, Mike Gianoni.

Thanks, Rob. Good morning, everyone. Thank you for joining our call today to report on our progress in the first quarter of 2014.

I would like to begin by saying we had a solid performance in the first quarter. Revenue was $127.6 million, an increase of 10.4% for the first quarter of 2013. Non-GAAP organic revenue growth was 6.9% over the first quarter of last year. Non-GAAP operating income was $19.9 million with non-GAAP net income of $11.1 million to non-GAAP diluted earnings per share of $0.24.

At the end of the quarter, the $32.6 million in cash had generated cash flow from operations of $13.3 million. This is a strong start to the year, driven by a better than expected performance in several business areas, including analytics, international, and payment solutions. Tony will provide more detail about our first-quarter financial performance a little later during this call.

I would like to talk about some of the things I have been focused on since I arrived in mid-January. I will provide a status report on where we are today, discuss some of our activities, and comment on our outlook for the balance of 2014. I feel more excited to be a part of Blackbaud then I was back when I last commented on our fourth-quarter call. I gained a greater understanding of and appreciation for our business and am impressed by the team of talented people we have here at the Company.

I am more excited because we are now clearly focused on creating momentum in our business, our culture, and our financial performance by seizing opportunities to improve our platform, focus on increased customer adoption and satisfaction through product innovation, product roadmap clarity, and integration and operating efficiencies but will also deliver increasing value to shareholders, employees, and business partners.

Over the last three months, I have been actively engaged in the business, submersing myself in our product portfolio, engineering, operations, and really all of the enterprise-wide management and functions. We have had separate strategy sessions with two distinct leadership teams.

First, our global management team, which are the top 50 of our senior leaders from all functional areas of the Company, and the second with our executive leadership team, comprised of our most senior leaders. These sessions were very energizing with our team highly engaged and thoughtful, producing a roadmap for improved performance which we are now implementing throughout the Company.

In the past three months, I visited many customers both in the US and abroad from small to large to hear what they have to say, get some feedback, get to know their businesses and thoughts about their direction and service needs, as well as trends in the infield marketplace. I conducted customer reviews to establish a presence and voice in some of our key operating markets.

Additionally, Tony, Rob and I have been out to meet with investors, both in personal meetings and conference sessions.

Overall, it has been a very productive beginning for me at Blackbaud. We are just getting started and I see many significant opportunities ahead of us. In 2014, you will hear about our four primary objectives. And I would like to spend a few minutes to update you on each of the four.

Number one, organic revenue growth. We achieved organic first-quarter revenue growth of 6.9% when compared to non-GAAP year-over-year revenue. We anticipate driving increased organic revenue growth by increasing our payment solutions at a higher rate than our base business, focusing on the trend of conversion to online and mobile solutions, also by integrating payments and analytics into our CRM and online platform on an enterprise large level. And lastly, incrementally investing more than $8 million this year, split between expansion of our salesforce and customer retention strategies for the overall Company.

Number two, product optimization, our key priority this year. We are focused on most prudently allocating our resources to highest growth, most profitable and strategic product solutions, and we are incrementally investing more than $2.4 million in 2014 to go into these proceedings.

We have some important milestone dates. Our Investor Day on September 12 in New York and [BB Con], our annual customer [settlement] on October 6th through 8th, which we are driving towards to provide greater clarity and updates in the areas I just mentioned.

Number three, transformation through reoccurring revenue company. Along with our product optimization efforts to accelerate [opportune] transformation from licensing-based revenue model to a recurring revenue cloud-based model, we also are transitioning our operations. We are incrementally investing to better operationalize the Company to enable cloud-based functionality.

While we have made significant progress transitioning to a predominantly reoccurring revenue model, which now represents nearly 74% of total revenue in the first quarter of this year, we are transitioning a product and customer support functions to a cloud environment as well.

And number four, increased operating efficiencies. We began investing the plan [five plus million] to drive future operating efficiencies that we talked about on our 2013 fourth-quarter call. We expect to gain operating leverage as this year progresses, which will be somewhat mitigated by the investments we are making. We expect a fairly even deployment of the incremental investments over the next two quarters with the incremental operating investments tailing off in our fourth quarter.

I would now like to wrap up my comments by highlighting what I mentioned from last quarter and I feel more strongly about this now than I did three months ago. We are very well-positioned to continue delivering market-leading customer solutions that best serve the evolving needs and multiple delivery channels used in the MPL marketplace. To increase our competitive advantages through product and service innovation and outstanding customer service, to continue improving our operating efficiency and increase our profitability, and to generate accelerating organic growth in our business by delivering a balanced approach to these objectives, guided by a rigorous process to evaluate capital allocation and returns.

These commitments are consistent, clear, and firmly in the focus of our team as we optimize the Company's performance. You will see us take actions that support our focus and that drive our growth and profitability. I remain confident in our abilities and our execution of these objectives to drive increasing value and returns for our shareholders.

I will now turn the call over to Tony to provide more detail about the first-quarter performance and I will return with a closing comment about our outlook for the balance of 2014. Tony?

Thanks, Mike. Good morning, everyone. Thank you for joining us today to review our 2014 first-quarter performance. We've had an active first quarter and expect the balance of 2014 to be very active as well. I can see the momentum building and it's exciting to be part of it.

As Mike said, we had a solid start to the year with the team driving growth and profitability at a rate slightly higher than previously expected. Our first-quarter performance puts the Company on track to achieve our 2014 financial goals. We will provide an update on our goals during the year if an update is warranted.

Now let's turn to the first-quarter performance.

We delivered revenue of $127.6 million, an increase of 10.4% over the first quarter of 2013. Our organic growth was 6.9% when compared to non-GAAP revenue for Q1 of last year. This organic growth was driven primarily by a higher than expected performance in several business areas including analytics, international, and payment solutions.

The growth in payments resulted from the continued shift in online giving, the integration of our solution into more of our platforms, and the implementation for more new clients. Our non-GAAP organic growth calculation is reflective of the gross presentation of our payments revenue during the current quarter on a GAAP basis and the first quarter of 2013 on a non-GAAP basis for comparability purposes since the payment solutions revenue included in our previously reported first-quarter 2013 results were presented on a net basis.

Also contributing to the increase in organic growth rate were increases in license and maintenance revenue. As Mike noted, our recurring revenue represented nearly 74% of total revenue in Q1. This compares favorably to 71% as reported in last year's first quarter which will be just under 72% on an apples to apples basis when you look at the payment solutions on a gross revenue basis for both periods.

As we stated on our fourth-quarter call, and I remind you today, we changed the presentation of our payment solutions revenue from recognition on a net basis to a gross basis beginning in our fourth quarter of 2013. We posted a workbook on our website detailing our reported results for 2013 and our non-GAAP results for the four quarters and the year ended December 31, 2013, as if we had presented these payments revenues and the costs on a gross presentation basis and on a net presentation basis.

Please refer to the workbook for more detail about the net to gross revenue presentation change, and to better understand our organic growth in 2014 as we believe it may assist with the evaluation of our performance in light of the change.

Turning to profitability. Non-GAAP gross margin was 55.3% which was below last year's first quarter, and reflected the change in revenue presentation from net to gross for our payment solutions. In addition to this accounting presentation change, our core gross margin was negatively impacted by the increased investments to support our subscription revenue base and to improve long-term operational efficiency.

Our gross margin would have been 58.1% if presented under the previous net recognition basis.

We generated non-GAAP operating income of $19.9 million, representing a non-GAAP operating margin of 15.6%. The operating margin in the first quarter was lower compared to the first quarter of the prior year, due to investments in our salesforce and customer retention personnel to drive organic growth as previously discussed, investments in personnel and hosting capabilities to support our subscription revenue base, and to prove long-term operational efficiency, and the impact from our net to gross revenue recognition change with produced operating margins by 78 basis points in the quarter. This may become more evident if the pace of growth and the payment solutions continue to outpace the growth in our overall business.

Additionally, it is worth mentioning that our Blackbaud Giving Index which attracts overall and online giving indicates a year-over-year uptick in both categories with an online giving increase upwards of 14% through February. This upward giving trend indicates opportunities for growth and new customers in an online transaction and payment processing. Rounding out the P&L, our non-GAAP diluted earnings per share were $0.24 for the quarter.

Now, let's look at the balance sheet and cash flow statements. In the first quarter, we generated $13.3 million in cash flow from operations. Our first quarter is historically our lowest quarter for cash generation. During the quarter we paid out $5.5 million in the form of a quarterly dividend and we mended and extended our debt agreement.

Let me pause and take a minute to comment on our new debt agreement. Our facility is $325 million in aggregate and is comprised of a $175 million senior secured Term A loan and a $150 million senior secured revolver with the capacity to expand the facility by an additional $200 million, subject to certain terms and conditions. This facility will mature in February of 2019. The new facility reflects our strategies to optimize our capital structure, combining our ongoing evaluation with favorable market conditions to secure a stronger facility that provides the Company with improved pricing, greater financial flexibility, reduced amortization, reduced covenant restrictions, and strives to balance the term and revolver debt with a more concentrated group of investors who know the Company well.

The issue was more than 60% oversubscribed. Our debt balance at the end of the first quarter of 2014 was $173.1 million which, when netted against cash on hand, resulted in a net debt balance of $140.6 million, virtually level with our net debt at the end of 2013.

With that, I would like to turn it back over to Mike before we take your questions for some final comments about our outlook for 2014.

Thanks, Tony. I would like to wrap up our prepared remarks by commenting about our outlook and goals for 2014. We expect revenue to be in the range of $535 million to $550 million, non-GAAP EBIT in the range of $92 million to $98 million or a 17.5% operating margin at the midpoint, non-GAAP diluted earnings per share of $1.16 to $1.24 and to generate approximately $100 million of cash flow from operations, this free cash flow remaining relatively flat compared to 2013 free cash flow of approximately $84 million.

Please remember that our goals include the full effect of the operating investment I noted earlier, which represents more than $17 million of incremental spend over the levels invested during 2013. Also included is an $11 million negative swing in estimated cash taxes for 2014. We expect to leverage our investments in 2014 to generate increased growth in 2015 and 2016, when we expect non-GAAP operating margins to steadily increase.

In summary, we are well-positioned and we expect to accelerate our growth while we generate strong free cash flow which includes incremental investments. We are on track to meet our financial goals for 2014 based on our first-quarter performance and we remain confident in our abilities to extend our market leadership in the future.

With that, Tony, Rob, and I are happy to take your questions.

(Operator Instructions). Tom Roderick, Stifel.

Good morning, gentlemen. Mike, let me start the first question and throw it to you. You bring a pretty unique set of expertise here with respect to the payments business and it is something you have talked about a bit more since you have been on board here. Can you help us understand how you think of the payments opportunity beyond just this whole net to gross change that positively impacted revenues for the short-time basis? How do you think about how you can grow that business? What you need to do to grow that business? And then maybe this is a Tony question, but what happens to gross margins as you do grow that side of the business?

Sure. Happy to do that. First, we are pretty pleased with our performance across the board. We happen to highlight payments. But specifically around payments I think we have an opportunity in a couple of areas. One is just to continue add net new clients every month. So we are scaling the payments business by adding existing clients or signing up for our payment services so that is sort of one area.

The second area is the shift in the industry to online. Online grew about 14% last year when the whole industry [internal] giving grew a little under 5% and we are positioned quite well in both those areas, specifically in online as well where we pick up payment transaction revenue.

So it is two things. It is adding more clients every month to the platform and it sort of trend of a shift to online and both of those are favorable for us.

And, Tom, maybe real quick on what happens to margins going forward as this continues to grow and if it outpaces our other lines of business. On a gross margin basis, I would expect that that would be a bit dilutive. I think the thing to note though is just the nature of the business when we are reporting it on a gross basis. Very strong business, very good financial contribution dynamics. It requires less sales and marketing R&D and G&A typically.

So you are going to have a lower gross margin profile as the shift in mix changes more towards payments and subscriptions. But I would expect that it contributes a comparable offering and margin at the end of the day.

Great. Thank you. Let me shift my next question to thinking about the goals and desires to achieve some accelerated topline growth. It is presumably well certainly too early to think about any positive impact from new product launches and things of that like, but relative to where you are starting to put your investments. I think you had a little over $3.5 million this quarter.

Maybe help us understand what that meant for fixed investments in sales and marketing versus new hires. And from the standpoint of productivity within the sales group, can you help us understand how general market versus enterprise fared this quarter and are you getting some better visibility in both pipeline and backlog there?

I will start on that, Tom. So we are -- we have ramped up investment, we will this year in a few areas as we mentioned on the call. And in fact on the last call. So sales expansion is one area. That is just net new expanded salesforce in the business. We think there are opportunities to do that, given the current product portfolio and we are executing on that.

We are also increasing headcount and capabilities around client retention. Our client retention is quite high, but as we move more and more into a cloud-based offering, we want to make sure that we maintain that high retention and I think we can.

We also have product investments happening in several products across the board. Those are driving future roadmaps in some of our key products and we will have more information as the year unfolds around some of the products we are quite well-known for and where we are doing with those products, I think, will resonate well with our clients. So, we feel pretty good about some of the initial decisions we have made in those areas. And I am referring to the product portfolio, but I think we will help drive future growth.

We are also -- so those [charities] I think will drive future growth and then just [naturally] sort of just from natural subscription growth as we have a higher percentage of our revenue in the subscription category, we start to gain a foothold in higher organic growth opportunities in that category as well which we feel pretty good about based on the first-quarter results.

And, then Tom, maybe just some numbers related to the investments. Thus far we have same a good return as expected on those investments in sales and marketing. So [CAC] ratios and pipeline build and so forth look pretty good thus far through Q1. So we are fairly happy with those investments.

And then the other place, obviously, in that 3.3, it is a fairly good chunk of spend is on the infrastructure investments and rolling out a CRM across the org, which we would expect should help us drive growth and efficiency both and gain some leverage in the future.

Great. Last one for me and then I will jump back in queue.

Tony, you had talked about $17 million in incremental spend. So under a quarter of that this quarter, in the $3.7 million that you highlighted, how should we think about how much more of that comes on in Q2? I want to make sure I have the thinking right for linearity of EPS and corresponding operating expenses as we go through the year.

Sure. As you know, we are not giving quarterly guidance this year and going forward so I can't give specifics there. I would tell you that we were fairly well on track with our expectations for the $3.3 million we spent. I would say slightly behind in the products area with some of the investments, the sales and marketing, I think we are right where we expected to be in the infrastructure, largely where we expected to be.

That said, Q1 is also a ramp-up period, i.e., hiring the personnel and training and getting them on board. So we wouldn't have had a full quarter of expense necessarily across all four of those initiatives. I think that is about the amount of granularity, unfortunately, Tom, I can give you at this time.

Okay. I will jump back in. But thank you guys, nice job.

Thanks, buddy.

Thanks.

Matthew Kempler, Sidoti & Company.

I wanted to revisit on the payments and analytics side. Could you touch on what percent of the Blackbaud's customer base is currently using these products? And then maybe highlight some of the key advantages here that we have to take share from incumbents?

Yes, Matt. So we don't break out the percentage of clients, but I can tell you that there is a long ramp-up opportunity for us to continue to grow that business across the current client base. And in fact, we are bundling that net new client deals as well. I think there is a long runway there. And we continue to increase the number of implemented clients per period as well. And so we are picking up a wider base which allows us to participate in more transactions as we implement more clients and grow that.

And then secondly, I will just reiterate the shift to online really sort of fuels that up a bit for us as well.

And I think the shift to data, right?

Yes. So, I think, in be analytics space we have got a pretty high focus on ramping up our cross-sell capabilities and cross-selling program with the analytics into the base now, not unlike payments. Several of those products have very compelling ROI for our clients that help them understand and run their business better. And there is a nice uptick in that and we have really increased our focus to bring those solutions to market in a more aggressive way from a cross-sell standpoint.

Okay. And I quickly want to hit on the margins. First the subscription margin, obviously some investment there and some change due to the payments business, but when do you think we turn the corner there to start growing that margin again? What is the long-term target?

Well, I think the first piece, Matt, will be when we get to a full year of comparative on the presentation change for the payments business so that is, by far, the largest impact or negative impact on subscription margins. So when we get to Q4 of 2014, you will have a full-year comparative then at that point going forward on a quarterly basis.

And then secondarily, I think as these -- some of the of the structure investments we are making is related to our cloud service offering and hosting environments, and we expect two things. One is to have additional capacity there as we shift more of our products to a hosted cloud type offering. And, secondarily, to be able to gain some efficiencies through those investments.

So I would expect you will see both some leverage gained as we add more subscription customers to that base of capacity and, secondarily, as we start to gain some efficiencies. So probably more so in the 2015 forward range than in this year.

Okay, and a long-term target range for a subscription margin?

Unfortunately, right at this point we are not giving any specific expectations on a line item level.

Okay.

I think that is something that will be a good discussion at our Investor Day.

Okay. And then also on the services side, so the service margin showed some weakness there. I know this is seasonally the weakest quarter, but I am wondering has your long-term goal of getting back towards the 30% margin range for services, is that changed at all. And are there any changes we are making in the business now to improve that and get us there?

So on the services margin first, what has caused the decline year over year, three main components there. One is Q1 last year we had the benefit of some pertained consulting revenues from the Convio acquisition that were released in Q1 of 2013 that was a positive from a revenue perspective.

Secondarily, as we have continued to shift our offerings to subscription within GMBU, a lot of the services are getting bundled into those subscription offerings and therefore getting ratable recognition, which is a slower recognition of the revenue. And so that is having a near-term negative impact on services margin, but should come back to us over the three-year life as those contracts stack themselves -- on top of themselves over three years. And we should see some good positive momentum then in future years.

And then lastly, ECBU this quarter, we had plenty of backlog, so we had an opportunity to drive more revenue and better margins. The problem was we had an issue with the mix of resources, so we didn't have the right mix of talent and skill sets across the resource base. And so, we were not able to deliver on all of the backlog that we would have expected and that had some negative impact which is a short-term issue, not a long-term issue.

Okay, thank you.

Mike, I don't know --

Yes, let me just add one point to Tony's first comment around the retained services from Convio that hit in the first quarter of 2013. Those revenues came because of how that worked with little or no cost. So the quarter-to-quarter comparison is a little challenge based on that one-time event as well.

Yes.

Okay, thank you.

(Operator Instructions). Peter Wahlstrom, Morningstar.

Good morning. Actually staying on the ECBU topic, certainly domestic enterprise in the medium-size businesses has been pretty strong alongside the economic [operation]. Is there a particular customer vertical that may have been behind this recent push or on the counter are there a couple of other areas that you haven't seen this sort of results that you have been looking for?

I wouldn't say that there's any -- there are any specific issues by vertical. In fact we have seen some in our largest verticals, in that ECBU business unit we see some nice upside opportunities in the long run. So I don't think that there's a specific vertical challenge here that we have experienced in Q1. So there are a couple of verticals where we think we can have some accelerated growth in the future.

Yes, and actually from a license revenue perspective, we pulled an incremental deal into the quarter that we [did have] originally anticipated closing 2Q. So I think overall from a financial performance, enterprise business unit performed at or above our expectations.

And, Peter, what was your follow-on question there?

It's -- we can -- I can take it off-line. One of the other items, Mike, from your strategy sessions, what was your overall impression of the competitive landscape? Certainly, the competition is a little bit more niche and isn't standing still. But maybe is this an opportunity for Blackbaud to pick up an acquisition coming out of some of these meetings or identify some additional white space?

Yes. I think our opportunity if we look at the competitive landscape, I think we are positioned -- uniquely positioned well, given the breadth of our products and the ability to not only cross-sell as I mentioned more aggressively cross-selling payments analytics, but to integrate and free integrate multiple solutions into our base platform.

So for example, a base platform might be one of our CRM products at a particular client segment integrated with analytics, integrated with online, integrated with payments and have sort of a multipoint solution that significantly differentiates us from the competition which is typically a single point solution. And I think we have got some nice upside heading down that path. So that would be a direction that we are taking in addition to aggressively cross-selling in the short run as well.

That's an example of one thing that was pretty clear coming out of those sessions.

That's helpful. And last, this may be tough to actually dissect, but considering that the online giving market grew roughly 14% last year, how do you compare your results in that arena, relative to that benchmark?

A bit faster than that. We can't get into the specifics at that level of granularity, but our online is our fastest current -- fastest growing component of the business. And I think we are doing well with the existing customers converging to online as well as Mike talked about earlier when he said in the prepared remarks that addition of new customers are back to base.

I think one of the keys to note today from that online and our payments and usage is we do not yet sell a standalone payments platform into the market. So all of these sales to customers are back to existing customer or new customers that are also buying a CRM or other solution to take advantage of the payments business.

So we would expect in the future hopefully to have a standalone solution that we could sell to net new customers that don't necessarily have to have one of our CRMs.

Okay, thank you very much.

At this time I will turn the floor back over to Mr. Gianoni for additional comments.

Okay. Thanks, operator. I would like to close our call today by saying we are a highly focused company. We are a very engaged team. We are committed to successful execution of our strategies. We look forward to reporting on our progress on these objectives in the future.

Thanks, everyone, for your participation.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.