Blackbaud(US:BLKB)2024-10-30 20:24PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for the period ending September 30, 2024, show improved net income and strong operating cash flow, despite a decrease in total assets and stockholders' equity due to share repurchases Condensed Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $34,633 | $31,251 | | Goodwill | $1,056,882 | $1,053,738 | | Total Assets | $2,600,974 | $2,912,279 | | Liabilities & Equity | | | | Total Debt (Current + Long-term) | $1,000,849 | $779,664 | | Total Liabilities | $2,056,647 | $2,103,574 | | Total Stockholders' Equity | $544,327 | $808,705 | - Total assets decreased from $2.91 billion at year-end 2023 to $2.60 billion, while total liabilities saw a smaller decrease. The reduction in stockholders' equity is largely attributable to a significant increase in treasury stock, which rose from $591.6 million to $922.5 million due to share repurchases7 Condensed Consolidated Statements of Comprehensive Income (Loss) Statement of Comprehensive Income Highlights (in thousands, except per share data) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $286,727 | $277,626 | $853,263 | $810,421 | | Recurring Revenue | $280,018 | $269,001 | $832,912 | $784,139 | | Gross Profit | $159,210 | $155,860 | $474,840 | $444,068 | | Income from Operations | $43,825 | $22,044 | $96,636 | $12,391 | | Net Income (Loss) | $20,542 | $9,017 | $47,592 | ($3,579) | | Diluted EPS | $0.40 | $0.17 | $0.91 | ($0.07) | - For the nine months ended Sep 30, 2024, the company reported a net income of $47.6 million, a significant turnaround from a net loss of $3.6 million in the same period of 2023. This improvement was driven by a 5.3% increase in total revenue and a substantial reduction in operating expenses as a percentage of revenue8 Condensed Consolidated Statements of Cash Flows Cash Flow Highlights for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $222,386 | $202,983 | | Net cash used in investing activities | ($56,325) | ($49,170) | | Net cash used in financing activities | ($435,117) | ($496,746) | | Net decrease in cash, cash equivalents and restricted cash | ($265,529) | ($343,244) | - Cash from operations increased by 9.6% to $222.4 million for the first nine months of 2024. Financing activities included proceeds from debt of $1.3 billion and payments on debt of $1.08 billion, largely related to the April 2024 refinancing. A significant use of cash was the purchase of treasury stock for $325.4 million9 Notes to Condensed Consolidated Financial Statements The notes provide details on significant corporate events such as the EVERFI divestiture, debt refinancing, expanded stock repurchase program, and ongoing costs from the 2020 security incident - On March 2, 2024, the company divested its U.K.-based creative services business, EVERFI Limited, recording a $1.6 million loss on the disposition20 - In April 2024, the company refinanced its debt, entering into a new $1.5 billion credit agreement consisting of a $700.0 million revolving facility and an $800.0 million term loan facility, extending the maturity to April 20293839 - The Board of Directors expanded the stock repurchase program to $800 million. In the first nine months of 2024, the company repurchased 3.76 million shares for $325.4 million, including an initial delivery from a $200 million Accelerated Share Repurchase (ASR) transaction939899 - As of September 30, 2024, the company had approximately $1.2 billion of revenue under contract expected to be recognized from remaining performance obligations, with about 55% to be recognized in the next 12 months101 - The company settled with the Attorney General of California regarding the 2020 Security Incident for $6.8 million in Q3 2024. This resolved the last remaining U.S. state attorney general investigation. Investigations by the FTC and 49 other states were previously settled848586 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion details the company's strong nine-month performance, attributing it to strategic initiatives, revenue growth, improved operating income, and significant capital returns, while exploring strategic alternatives for the EVERFI business Business Update and Strategy - The company is executing a five-point operating plan focused on product innovation, predictable growth initiatives, cost management, and cash flow generation109 - Strategic priorities include penetrating the market further, investing in innovation like generative AI, and maximizing shareholder value through disciplined capital returns, including an aggressive stock repurchase program110113 - The company is exploring a range of alternatives for its underperforming EVERFI business, including a potential divestiture, and has hired a strategic advisor to assist120 Results of Operations Revenue by Sector - Nine Months Ended Sep 30 (in millions) | Sector | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Social Sector | $751.8 | $696.8 | +7.9% | | Corporate Sector | $101.4 | $113.6 | -10.7% | | Total Revenue | $853.3 | $810.4 | +5.3% | - Total revenue for the nine months ended Sep 30, 2024 increased by $42.8 million, driven by growth in contractual recurring revenue ($31.2 million) and transactional recurring revenue ($17.6 million)117 - Income from operations for the nine months increased by $84.2 million, primarily due to decreases in stock-based compensation (-$19.2 million), Security Incident-related expenses (-$35.9 million), and commission expense (-$9.3 million)121 - Gross dollar retention was approximately 90% for the twelve months ended Sep 30, 2024. Excluding the underperforming EVERFI business, the rate was approximately 92%124 Liquidity and Capital Resources - Principal sources of liquidity are operating cash flow and funds available under the $1.5 billion 2024 Credit Facilities. As of Sep 30, 2024, available borrowing capacity was $547.6 million170191 - For the nine months ended Sep 30, 2024, the company generated $222.4 million in cash from operations, an increase of 9.6% YoY126170 - The stock repurchase program was expanded to $800 million. The company repurchased $325.4 million of its stock in the first nine months of 2024, funded by borrowings. The goal is to repurchase up to 10% of outstanding stock in 2024186189190 - The company is in compliance with all debt covenants, with a net leverage ratio of 2.42 to 1.00 (requirement: ≤ 3.75 to 1.00) and an interest coverage ratio of 8.37 to 1.00 (requirement: ≥ 2.50 to 1.00)192 Non-GAAP Financial Measures GAAP vs. Non-GAAP Performance - Nine Months Ended Sep 30 | Metric (in millions, except per share) | 2024 | 2023 | | :--- | :--- | :--- | | GAAP Net Income (Loss) | $47.6 | ($3.6) | | Non-GAAP Net Income | $156.3 | $151.5 | | GAAP Diluted EPS | $0.91 | ($0.07) | | Non-GAAP Diluted EPS | $3.00 | $2.83 | Non-GAAP Free Cash Flow - Nine Months Ended Sep 30 (in millions) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | GAAP net cash provided by operating activities | $222.4 | $203.0 | | Non-GAAP free cash flow | $172.3 | $154.1 | | Non-GAAP adjusted free cash flow | $187.4 | $177.2 | - Non-GAAP organic revenue growth for the nine months ended Sep 30, 2024 was 6.0% (5.7% on a constant currency basis)160 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from interest rate fluctuations on variable debt, managed with derivatives, and foreign currency exposure from international operations, partially hedged with forward contracts - The primary financial instrument with market risk is variable rate debt, exposing the company to changing interest rates (SOFR). This risk is managed through derivative instruments203204 - Approximately 16% of total revenue for the nine months ended Sep 30, 2024, was from outside the U.S., creating exposure to foreign currency fluctuations, primarily with the British Pound and Canadian Dollar. The company uses forward contracts to hedge some of this risk200201 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report205 - There were no changes in internal control over financial reporting during the third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, these controls206 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various legal proceedings, including ongoing matters related to the May 2020 Security Incident, with recent settlements resolving major U.S. governmental investigations - For a full discussion of legal proceedings, the report refers to Note 9 of the unaudited, condensed consolidated financial statements207 - The company is subject to ongoing legal proceedings, claims, and investigations related to the May 2020 Security Incident. This includes customer claims, class action lawsuits, and governmental investigations6769 Item 1A. Risk Factors The primary risk factor update highlights the continued adverse effects and unrecoverable costs of the 2020 Security Incident, which impact liquidity and operations despite resolved governmental investigations - The Security Incident continues to have adverse effects on business, operations, and financial condition, including significant expenses for legal fees, settlements, and enhanced cybersecurity measures209219 - In 2024, the company settled with the FTC (no fine) and the Attorney General of California ($6.8 million payment), resolving the last major U.S. governmental investigations into the incident213214 - Insurance coverage for the incident was exceeded in Q1 2022, meaning all subsequent costs, including the $12.8 million in net pre-tax expenses incurred in the first nine months of 2024, are borne by the company and could materially affect liquidity219220 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2024, the company repurchased 827,185 shares, with approximately $737.2 million remaining available under the authorized stock repurchase program Issuer Purchases of Equity Securities (Q3 2024) | Period | Total Shares Purchased | Avg. Price Paid ($) | Shares Purchased Under Plan | Approx. Value Remaining Under Plan ($) | | :--- | :--- | :--- | :--- | :--- | | Total Q3 2024 | 827,185 | $77.71 | 807,774 | $737,188,000 | Item 5. Other Information During Q3 2024, the CEO and CFO adopted Rule 10b5-1 trading plans for future sales of company securities, with no other non-Rule 10b5-1 arrangements adopted or terminated - CEO Michael P. Gianoni adopted a Rule 10b5-1 trading plan on August 14, 2024, to sell up to 59,206 securities over a twelve-month period224 - CFO Anthony W. Boor adopted a Rule 10b5-1 trading plan on August 21, 2024, to sell up to 10,000 securities over a six-month period224 Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley and Inline XBRL data files - The report includes required certifications from the Chief Executive Officer and Chief Financial Officer under the Sarbanes-Oxley Act226 - Interactive data files (Inline XBRL) are filed as exhibits 101 and 104226