Blackbaud Inc (BLKB) 2015 Q1 法說會逐字稿

Greetings, and welcome to Blackbaud's first-quarter 2015 earnings conference call. Today's conference is being recorded. I would now like to turn the conference over to Mr. Jagtar Narula, Blackbaud's Vice President of Investor Relations and Business Planning. Thank you, Mr. Narula. You may begin.

Good morning, everyone. Thanks for joining us today for Blackbaud's 2015 first-quarter conference call. Today, we will review our first-quarter financial and operational results for 2015 and provide commentary on our progress toward achieving our goal for the full year. Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO; and Tony Boor, Blackbaud's Executive 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 the limitations that apply to our forward-looking statements.

Also, please note that a webcast of today's call will be available in 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 a combination of both GAAP and non-GAAP measures are more representative of how we internally measure the business. In addition, we discuss non-GAAP organic revenue growth, which we believe provides a useful tool for evaluating the periodic growth of our business on a consistent basis. Non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP organic revenue growth reflects presentations of full year or stub period incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and it includes the current-period non-GAAP revenue attributable to those companies.

We believe this presentation provides a more comparable representation of our current business's organic revenue growth and revenue run rate. To determine non-GAAP organic revenue growth on a constant-currency basis for the first quarter, revenues from entities reporting in foreign currency were translated into US dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. Please note, non-GAAP financial measures should not he 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 I would like to highlight some upcoming investor events. Looking at the IR calendar, our team will be presenting at the following upcoming conferences -- the Robert W. Baird growth conference on May 5 in Chicago; the Jefferies global technology conference on May 13 in Miami; the B. Riley & Co. conference on May 13 in Hollywood; and the Evercore cloud symposium in New York on June 4. We will be hosting one-on-one meetings with management at these conferences, so please contact investor relations if you are interested in meeting with management at one of our upcoming events.

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

Thanks, Jagtar. Thank you, everyone, for joining our call today to report on our progress in the first quarter of 2015. I would like to start by mentioning that we have a new investor relations team here at Blackbaud. Rob Weiner, our former head of investor relations, decided to step down in March. Rob helped with the transition as we insourced our investor relations function and was instrumental in our recent investor outreach efforts, including organizing our Company's investor day last fall. I would like to thank him for his leadership, and we wish him well.

Jagtar Narula is now leading our investor relations effort and moves into this role after managing our corporate financial planning and analysis team. Jagtar brings a wealth of experience to the job, including positions in finance, corporate strategy and acquisitions with Xerox Corporation as well as private equity and invested banking experience. We believe his knowledge of the financials of the Company combined with his capital markets and strategy experience will prove useful to analysts and investors that are following and evaluating Blackbaud.

Now let's turn to the first-quarter results. We began 2015 with a solid first-quarter performance. Non-GAAP revenue was $150.5 million, an increase of 17.9% over the first quarter of 2014. Non-GAAP operating income was $26.5 million. Adjusted EBITDA was $32 million, with non-GAAP net income of $14.9 million and non-GAAP diluted earnings per share of $0.32. This is a strong start to the year.

Reoccurring revenue represented approximately 76% of total revenue, the highest share in Company history. We also expanded year-over-year non-GAAP margins, driven by a combination of return on investments we have made and a focus on expense control and efficiency. Tony will provide more detail about our first-quarter financial performance a little later during the call.

I would like to provide a Q1 update on the status of our five growth strategies as we outlined at our investor day last September as well as to comment on our outlook for the balance of 2015. Let's start with our five strategies.

The first of our five strategies is accelerating our organic revenue growth. We achieved non-GAAP organic revenue growth of 8.5% in Q1 of 2015 versus last year, or 9.7% when normalized for foreign currency. Our growth was fueled by strong reoccurring revenue growth. We are pleased with this revenue growth and believe we are seeing a positive impact in investments and innovation and quality are having on revenue. An example is the investment in our Enterprise black-box CRM platform, which released version 4.0 in November. We had sizable enterprise CRM deals closed in Q1 including the second-largest CRM deal in our history with the Memorial Sloan-Kettering Cancer Center and three new international clients.

Also in Q1, we launched the Blackbaud Partner Marketplace. This is the world's first online marketplace dedicated to the non-profit, charitable giving and education communities, and it features products for more than 30 vertical markets that extend and enhance Blackbaud's solutions. Now our more than 30,000 customers can benefit from the solutions of our rapidly growing network of partners. We believe the value this creates for our customers improves our retention and translates into higher reoccurring revenue over time.

Our second strategy is accelerating our move to the cloud. Last year, we announced our newest cloud-based solutions, Raiser's Edge NXT and Financial Edge NXT. We continue to be excited about these products, which are smart, all-inclusive, fully integrated and, of course, cloud-based, which is exactly what this market wants. This is evidenced by our sales through Q1.

To date, we have sold several hundred units of Raiser's Edge and Financial Edge NXT in advance of the general release later this year. We currently have over 30 customers live in a pre-release production environment through our early adopter program, which includes a diverse mix of local, national and international clients. This early adopter program allows us to ensure our operations are prepared for general availability, that we are delivering an integrated customer experience.

We are building Raiser's Edge NXT and Financial Edge NXT to enable a simple transition for our clients. Other than for a small set of customers with highly customized installation, that means no data conversion, no reimplementation, no loss of functionality. We are prepared to help our customers make the transition and have dedicated resources across the organization focused solely on migrations to the Edge NXT solution.

Our third strategy is expansion of our total addressable market, or TAM. Today, our TAM is over $5 billion and is expected to grow to approximately $6.5 billion over the next three years. We have been successful in our strategy to expand our TAM through tuck-ins and strategic acquisitions. A prime example is our most recent acquisition of MicroEdge that we made in the fourth quarter of 2014. In the past quarter, we held a successful integrated sales kickoff event in Charleston with the Blackbaud and legacy MicroEdge sales teams. MicroEdge is actively hiring sales talent to support the growth that we see in the foundation, grant management and corporate social responsibility space.

Our fourth strategy is to continue the optimization of our back-office infrastructure. This initiative is progressing well as we continue to streamline and mature our internal processes. We expect to continue to gain operational efficiencies through these efforts, which translate into improved scale, margins and quality.

Our final strategic area of focus is a three-year margin improvement plan. Our long-term aspirational goal calls for a non-GAAP operating margin of 20.5% to 23.5% by the time we exit 2017. This is a 300-basis-point to 600-basis-point improvement from our base line of approximately 17.5%, which was the midpoint of our original 2014 guidance. In the first quarter, we achieved a non-GAAP operating margin of 17.6%, which represents a 200-basis-point improvement over the same quarter in 2014. The operating margin improved in spite of the negative year-over-year impact we experienced due to currency and the NXT transition.

On a constant-currency basis, the non-GAAP operating margin was 17.8%, which represents a 220-basis-point improvement from last year. The improved margin in the first quarter demonstrates the good leverage received from our investments, although offset somewhat by the NXT transition and impacts of currency that I mentioned. We expect to continue to see operating leverage improvement across our business over time.

Before turning to our outlook for 2015, I want to provide a brief leadership update. As you may recall, in January Joe Moye made the decision to step down from his position as the President of our Enterprise Customer Business Unit and to leave Blackbaud for personal reasons. Joe did a tremendous job in this time with us and positioned ECBU for a strong future. Since then, Charlie Cumbaa, our Executive Vice President of Corporate and Product Strategy, has stepped in to lead ECBU on an interim basis.

I am pleased to announce that Brian Boroff will be joining us as the President of our Enterprise Customer Business Unit starting next week, on May 4. Brian brings to Blackbaud over 30 years of experience working with large enterprise customers. He was most recently at Infosys, but also held senior executive roles at Accenture, CSP, Microsoft and Apple.

I don't want to take too much time on our call because we'll issue a press release soon. But I will mention that at CSC he led their companywide cloud computing and software services business. He also spent 15 years in various software sales and service delivery leadership roles as a senior executive at Microsoft. In his last role there, Brian led the US services business unit, which was over $1.2 billion in revenue. Brian will be relocating to Charleston to join the team.

I'd like to also say thank you to Charlie for stepping in the last few months. Charlie will, of course, continue in his previous role heading up strategy, product management, our partnership program and business development. I'm sure he's happy to be back in just one full-time role.

Now turning to our 2015 full-year outlook, we are maintaining the 2015 guidance we discussed as part of our last earnings conference call. We expect total non-GAAP revenue of $625 million to $645 million, non-GAAP operating income of $112 million to $118 million, non-GAAP operating margin of 17.9% to 18.3%, and non-GAAP diluted earnings per share of $1.39 to $1.47. Cash flow from operations is expected to be $110 million to $120 million.

Overall, I am very pleased with our progress in the quarter. Our accelerated growth reflects the results of successful execution against our strategic plan and the increasing momentum of our business, while expanding margins illustrate the Company's focus on efficiency and cost management.

Now I will turn the call over to Tony to provide more detail about the first-quarter performance. Tony?

Thanks, Mike. Good morning, everyone. Thank you for joining us today to review our 2015 first-quarter performance. We had a solid first quarter and have strong momentum heading into the rest of the year.

Before we review the quarter's results, let me discuss three changes we made in our P&L and disclosures. First, we have changed our income statement to reflect the ongoing transition of the business to subscription. In 2014, subscription revenue represented approximately 47% of total revenues and is expected to continue to increase as a percentage of total revenues as we continue transitioning our products to cloud-based subscription offers. As a result, we have reordered the P&L from largest to smallest revenue stream to better align with our focus on subscriptions and recurring revenue.

Secondarily, we have combined the software and other revenue lines to reflect the decreasing importance of software revenue to our business. In 2014, software revenue represented less than 3% of total revenues and is expected to decline over time as the Company continues to transition customers to subscription.

Finally, with the continued integration of analytics into our solution portfolio, Mike no longer reviews the operating results separately from other business units when assessing results and making resource decisions. As a result, we no longer view target analytics as a separate reportable segment. And the revenues and associated costs for offerings historically provided by target analytics are now presented within each of our other reported business units based upon the business units servicing the end customer.

Now let's turn to the first-quarter performance. We delivered non-GAAP revenue of $150.5 million, an increase of 17.9% over the first quarter of 2014. Non-GAAP organic growth was 8.5% when compared to non-GAAP revenue for Q1 of last year. Our recurring revenue represented approximately 76% of total revenue in Q1. This compares favorably to approximately 74% as reported in last year's first quarter. We are pleased with this revenue growth, especially when considering the revenue impact of both currency and the transition we are making to the cloud-based Raiser's Edge NXT and Financial Edge NXT solutions.

Let me briefly address these topics. First, on currency, by applying the actual foreign currency exchange rate that we incurred in Q1 of 2014 to our Q1 2015 results, we estimate that revenues would have been approximately $1.7 million higher, resulting in organic growth rate of 9.7%. Our 2015 guidance, which Mike spoke about earlier, fully reflects the expected impact of foreign exchange rate to our business.

Now let me turn to the financial impact caused by the transition we are making to the cloud-based Raiser's Edge NXT and Financial Edge NXT solutions, which are transitioning from perpetual license-based offers to cloud-based subscription offers.

As discussed in our prior earnings call, we expect to go through this transition over the next 24 to 36 months, and we will be impacted financially in three primary ways. The first is ratable revenue recognition associated with the accounting treatment for cloud-based subscription offers. As discussed previously, less revenue is recognized upfront for cloud-based subscription offers versus the perpetual license model, or software revenue is recognized immediately upon delivery of the perpetual license.

The second financial impact is deferral of revenue associated with the Edge NXT solutions sold prior to general market release and the timing of when customers migrate to those solutions, which is expected to happen in the second half of 2015. Customers who currently purchase our Edge solutions are effectively buying a Raiser's Edge 7 or a Financial Edge 7 subscription as well as Raiser's Edge or Financial Edge NXT subscription. Based upon accounting guidance, the NXT subscriptions are allocated more value, and therefore a greater portion of the total contract value is deferred until the customer migrates to the NXT solutions. And ratable recognition of the revenue allocated to the NXT solution is recognized over the remaining contract term.

The third financial impact is an anticipated reduction in license revenue or the sales of user licenses and new modules to our existing Edge user base. This decline reflects the expected transition of Raiser's Edge and Financial Edge customers to Raiser's Edge and Financial Edge NXT and the pricing model, which includes a number of bundled components that were previously priced and sold separately.

Now let me turn to profitability. Our non-GAAP gross margin was 58.4%, which compares favorably to our non-GAAP gross margin from last year's first quarter. The improvement was driven by improved margins in subscription and services, somewhat offset by reduced maintenance margins. Moving down the income statement, we generated non-GAAP operating income of $26.5 million, representing a non-GAAP operating margin of 17.6%. Adjusted EBITDA margin was 21.3%.

Now let's look at the cash flow statement balance sheet. In the first quarter, we generated $4.2 million in cash flow from operations, which was down $9 million year over year. Our first quarter is historically our lowest quarter for cash generation. As reminder, we paid out bonus payments in Q1 to management employees based on last year's financial performance and bonus plans. These bonus payments were based on 2014 results and accrued for in 2014. However, last year the Company moved certain employees from quarterly bonus plans to annual plans, which impacts year-over-year comparisons of cash. It also helps a bit with longer-term retention.

Moving down the cash flow statement, we spent $5.7 million in CapEx, including capitalized software in the first quarter. Looking at cash from financing, we had net borrowings during the quarter of $5.1 million, and we paid out $5.6 million for our quarterly dividend. We ended the quarter with $272.5 million in net debt, which was a $6.7 million increase from the first quarter.

In summary, we executed well against our strategic plan. We continue to ramp performance as a result of our investments targeted towards sales and retention strategies as well as the expansion of our addressable markets. We continue to execute on our capital deployment strategy to maintain strong balance sheet, return capital to shareholders, and create growth and scalability. We remain focused and committed to achieving our 2015 financial guidance and continue to make progress towards achieving our long-term aspirational goals. I'm confident that we have the right focus and the right team in place to deliver on that strategy. While we are making progress, we have a lot of work to do to continue to create greater value for our employees, our customers, our shareholders, and we are up to the challenge.

With that, we'd like to open up the line for your questions.

(Operator Instructions) Matt Van Vliet, Stifel.

Matt Van Vliet on for Tom Roderick this morning. I guess first question on the strong organic growth here driven by subscription. Could you just give us a little more detail in terms of what's driving the majority of the subscription growth, how much of the NXT bundled sale is (technical difficulty) and what we should expect the next couple quarters into the launch?

Sure. Hi, Matt. It's Mike. First of all, the subscription growth, it is pretty spread out across the product portfolio. There's no product that is significantly overweighting others. So it's a nice spread across the product portfolio. And secondly, we are not seeing organic growth in NXT because we don't go live with clients until the back half of the year. So NXT go-lives will start to drive future organic growth. But what we are seeing in the first quarter is really across the portfolio of products.

And then, as we look down to cash flows, I know you mentioned that the shift to the annual bonus payment had a little bit of impact here in the quarter. But as we look out for the full year, what are the expectations now after the quarter maybe came in a little behind, but I think overall we're still expecting pretty strong cash flow growth?

Yes, Matt. This is Tony. Cash flows came in right in line with our expectations, largely, for the quarter. So on the year, as we said, we are sticking to the full-year guidance. So we would expect you will see a little different seasonality this year than you saw in previous years because of the change and when we pay off bonuses for some of our folks. But that was incorporated in our thoughts when we put the guidance together. So we still expect to see that 12% or so at midpoint improvement year-over-year on cash flow.

And then on the currency headwind, you mentioned I think it was $1.7 million in the quarter on the top line. How does that impact the full year? What was in the guidance to begin with? And has that changed at all as we've seen rates move against the accounting treatment here?

Yes; I think we benefited a bit because our guidance, when we gave that, was a bit later than I believe many companies that you guys covered did. Because, as you recall, we didn't give our guidance until our Q4 release. So we had already seen the majority of the strengthening of the US dollar against our currencies, anyways. And we had built into our guidance $8 million to $9 million worth of currency headwinds. Q1 came in right in line with expectations, so no surprises there.

Some of the strengthening -- the oil prices and the weakening of the US dollar will be interesting to watch because that may have a positive impact on revenues for us when we look at our Canadian dollar currencies. But we will have to wait and see. So right now we are sticking with that original thought of $8 million to $9 million on the full-year impact that was built into the guidance.

All right. And then last question -- on the payments business, we've obviously seen a nice uptick over, I guess, the last five quarters. Which I didn't think, non-coincidentally, is kind of around the time Mike joined the Company. What kind of trajectory do we expect to see moving forward as we start to lap maybe the greater focus and the more ingrained, built-in features of payments into the existing products?

Sure, yes. It's still a strong driver of growth for us. But I'll just reemphasize that the organic growth is sort of portfolio-wide from a subscription standpoint. So payment is in there, but it doesn't necessarily significantly overweight the entire product portfolio. So, although strong and I think it has a long runway unto itself, we feel the same about the rest of the subscription product portfolio as well.

And, Matt, one of the things we probably forgot to mention is we are seeing good traction from the WhippleHill and MicroEdge acquisitions. And those are largely all subscription offers. And so those have been accretive as well for the business. So that has been very positive.

All right. Great, guys. I will jump back in queue if I have any more questions.

Pete Wahlstrom, MorningStar Investment Research.

So quickly, year-over-year non-GAAP operating margins -- roughly 200-basis-points margin improvement. So when we take a step back and look at the next three years and the road map to get 300 to 600 basis points, are you arguably conservative? What else might you be doing internally which could cause a pause in the margin trajectory?

First, we feel positive about not only this year's guidance but our long-term aspirational goals that we released on investor day last fall. It's early days related to that. We continue to invest in the business. We talked a lot last year about internal investments around infrastructure and back-office and product. The back-office investments are largely behind us, but we continue to add investments in key areas from a product standpoint. So I think we are on track with our long-term goals. We feel pretty good about last year's results and the first quarter of this year lining up to those goals. And I think we are making progress against those.

So, all in all, I think we are investing in the right areas as far as internal infrastructure and our products. And I think we are starting to see that in subscription revenue growth.

Okay. And then certainly one of the five key focus areas is, as you mentioned, to expand the TAM. Oftentimes, that comes via acquisitions. So, given some of the Salesforce.com rumors from late yesterday and potential valuations increasing across the board, particularly in some of the cloud space or areas, how does that impact your approach or strategy when you are looking at having discussions with potential targets?

Sure. We do think that there's still interesting opportunities. The two acquisitions we made last year, WhippleHill and MicroEdge, have proved to be, to Tony's earlier comment, accretive. We are doing quite well in executing on those two acquisitions. I think that the news yesterday on Salesforce doesn't necessarily impact how we think about acquisitions because our world is quite different.

We are focused on interesting near-adjacencies that expand our TAM. And so just the definition of that would be tuck-ins that are like what we showed our hand with last year, with the two that we purchased. So I don't think that new changes that for us, and I do think that we have a large addressable TAM that is organically growing well. And I think that given the ability to execute well on acquisitions puts us in a good position to continue down that path.

Okay. And two final housekeeping items -- first, total subscription revenue is up a little more than 24%. Do you have the organic subscription growth rate in the quarter?

Yes. I think, Pete, that's -- and I can come back and check. That's 18%, I believe is what it is.

Okay. And last item for you is -- you mentioned moving the analytics into specific business units. Are the changes large enough to warrant restatement of historical segment financials, either from a revenue or a margin perspective?

No, they would not be. And it was -- it had been immaterial, so we weren't required to disclose it as a separate segment previously. And that's part of what drove it. It has become a smaller percentage of the total because of the growth in business elsewhere. And then we are going to treated more so going forward as another line of business or solution offering. And we will just record that as we would payments or any other product, just across whichever business unit happens to sell that.

And the other thing, Pete, that's key here is that because of this product integration that we have been pushing on, a lot of our analytics solutions over time more and more are deeply integrated in our solutions. I think the Raiser's Edge NXT is a great example of our customers' ability to purchase Raiser's Edge NXT and have analytics solutions show up in that. And that happens on the low end with eTapestry as well. And so it's deeply integrated, like online or payments. So it's becoming an integrated, value-added product and not really a standalone, if you will.

Okay. Thank you very much.

Hi, Pete, one more thing. I just had a chance -- the guys were digging on this -- non-GAAP organic subscription growth. Is that what you are asking earlier?

Yes. If you have got that, that would be great.

Yes. Non-GAAP organic subscription was 15.8% year over year.

15.8%? Thank you.

Sterling Auty, JPMorgan.

Curious in terms of -- you mentioned the customers that you already have live on NXT. Any sense of what your early experience was in terms of implementation and conversion time, whether they were brand-new installs or conversions from the legacy products? How long did it take to get up and running?

Yes. It was as non-impactful and as smooth as we anticipated. So it's fairly automated, Sterling, to move clients to be live, if you will, on the NXT platform, as we have built and anticipated. So client feedback has been very positive. And what we did is we've made sure we had a mix of different clients, too, both domestic and international and different types as well. So it's going well.

But in terms of -- is this like a several-week process, several-month, several-quarter? So just so we get an understanding of what goes live and we think about how the conversions for the rest of the base might go.

It's a little bit different by client. But I would say, on average, I would call it a very high-velocity implementation, which is what we have built.

Okay. And you mentioned another very large CRM win. Can you remind us how many total large CRM customers do you have? And are all of those live as well? So where are we in the process of those implementations?

Yes. We typically don't break that out as far as all the questions you just asked. But we will have to follow up with you on that. I can tell you, though, that it is accelerating. Our 4.0 release in the fall has gone over quite well. And the reason I included both mention of a client with Enterprise CRM and the fact that we've sold hundreds of NXTs is to just be clear that we see very positive results from a sale standpoint up and down the client size. So -- small, midmarket and enterprise, we see an acceleration in activity.

Okay. And then last question area would be on the WhippleHill side. Can you update us where you are with that asset, what you are seeing in terms of the competitive landscape? Because that is obviously a space that we've seen the vendors ebb and flow in terms of strength or fading. And I think you even have some competitors that have been exiting the market. Just curious where that one stands on the competitive landscape side.

Yes; I can tell you we are pretty jazzed up about our integration and our results. The interesting thing about what's happening now in that space for us is we are selling deals that are 5, 6 integrated solutions, where historically we sold maybe Raiser's Edge or Financial Edge. So we are selling these broader, more impactful integrated solutions because we pretty quickly integrated the WhippleHill solution set with Raiser's Edge. And so we are out in the marketplace selling all their modules and Raiser's Edge NXT, Financial Edge NXT as well. And it has given us a bit of a different, wider competitive moat to be able to cover those solution sets in that market. So we are pretty excited about the results and the momentum there.

Great. Thank you.

There are no further questions. I would like to turn the call back over to Blackbaud's CEO, Mike Gianoni, for closing remarks.

Thanks, operator. I would like to just close the call by saying that the first quarter this year was a very strong start for us. The performance of the business is really gaining momentum. We are on track to achieve our 2015 guidance and longer-term aspirational goals. Thanks, everyone.

That concludes today's conference. Again, we thank everyone for joining us.