Blackbaud(US:BLKB)2024-02-20 16:00Security Incident - The company incurred net pre-tax expenses of $53.4 million related to the Security Incident in 2023, including $22.4 million for ongoing legal fees and $31.0 million for settlements and recorded liabilities for loss contingencies [177]. - The company experienced net cash outlays of $78.0 million related to the Security Incident in 2023, which included a $3.0 million civil penalty paid in the first quarter and a $49.5 million civil penalty paid in the fourth quarter [177]. - The company has been subject to a Security Incident involving a ransomware attack that affected over 13,000 customers, leading to ongoing investigations and potential liabilities [172]. - The company agreed to a $3.0 million civil penalty as part of a settlement with the SEC related to the Security Incident [174]. - The company has agreed to pay a total of $49.5 million to 49 states and the District of Columbia as part of a settlement related to the Security Incident, which was fully accrued as a contingent liability as of June 30, 2023 [212]. - Approximately 260 specific requests for reimbursement of expenses related to the Security Incident have been received, with 82% (214 requests) fully resolved and closed [195]. - The company is currently a defendant in multiple lawsuits related to the Security Incident, including putative consumer class action cases in U.S. federal courts [198]. - The company has received notices of proposed claims from U.K. data subjects and is reviewing these claims [195]. - The company is subject to ongoing governmental investigations by various agencies, including the U.S. Federal Trade Commission and the California Attorney General [198]. - Future regulatory investigations or litigation settlements may impose additional compliance costs and operational modifications [200]. - The company expects net cash outlays of approximately $8.0 million to $13.0 million for ongoing legal fees related to the Security Incident in 2024 [331]. - Security Incident-related cash flows, net of insurance, contributed $78.0 million to non-GAAP adjusted free cash flow in 2023, up from $20.9 million in 2022 [351]. Financial Performance - Total revenue increased by $47.3 million during 2023, driven largely by growth in recurring revenue [281]. - Recurring revenue increased by $59.8 million, or 5.9%, primarily due to growth in contractual and transactional recurring revenue [287]. - Recurring gross margin increased by 190 basis points, indicating improved efficiency as recurring revenue growth outpaced cost increases [271]. - GAAP revenue for 2023 was $1,105.4 million, an increase of 4.0% from $1,058.1 million in 2022 [308]. - GAAP gross profit rose to $603.2 million, with a gross margin of 54.6%, up from 52.2% in the previous year [308]. - Non-GAAP income from operations increased to $294.1 million, resulting in a non-GAAP operating margin of 26.6%, compared to 19.1% in 2022 [308]. - Non-GAAP free cash flow for 2023 was $135.5 million, slightly up from $132.8 million in 2022 [351]. - Non-GAAP adjusted free cash flow increased to $213.5 million in 2023, compared to $153.7 million in 2022 [351]. - Non-GAAP adjusted free cash flow margin improved to 19.3% in 2023 from 14.5% in 2022 [351]. Operational Challenges - The company may face challenges in integrating acquisitions, such as the acquisition of EVERFI, Inc., which could disrupt operations and dilute shareholder value [186]. - The company is exposed to risks associated with third-party technologies, which could impact its ability to generate revenue and maintain proprietary technology [188]. - The company anticipates that future regulations related to public disclosure and data protection could impose significant compliance costs [179]. - The company recognizes subscription and maintenance revenue ratably over the contract term, which can affect future revenue and profitability [226]. - The decline in non-strategic one-time services revenue is expected to slow in 2024 compared to previous years [281]. - The company faces potential financial liability and reputational harm if it fails to effectively manage payment processing and data security [206]. Investments and Innovations - The company is incorporating generative AI technology into its products and services, which may expose it to operational, financial, and reputational risks due to the emerging regulatory environment [157][158]. - The company plans to accelerate cybersecurity investments in 2024, which may modestly impact profitability in the near term [264]. - New online donation capabilities are expected to be generally available in the first half of 2024, aimed at enhancing customer fundraising efforts [255]. - The Impact Edge solution, an AI-powered reporting tool, is in an early adopter program with a planned full rollout in the second half of 2024 [256]. - The company continues to focus on strategic investments in technology and market expansion initiatives to drive future growth [1]. Debt and Cash Management - The company incurred substantial indebtedness due to acquisitions, including the acquisition of EVERFI, which has increased interest payment obligations [227]. - Total carrying value of debt decreased to $779.7 million, down 9.2% from $859.0 million in 2022 [329]. - Cash and cash equivalents at the end of 2023 were $31.3 million, a slight decrease of 1.4% from $31.7 million in 2022 [329]. - The available borrowing capacity under the 2020 Credit Facility was $384.5 million as of December 31, 2023 [339]. - The company has entered into foreign currency forward contracts with notional values of $29.9 million CAD and £13.2 million for hedging purposes as of December 31, 2023 [319][320]. Cost Management - Transaction-based costs increased by $9.2 million due to higher transaction volumes and vendor rate increases [289]. - Amortization of software development costs rose by $5.6 million as a result of ongoing investments in innovation and security [289]. - Amortization of intangible assets from business combinations increased by $4.0 million, primarily due to the acquisition of EVERFI in December 2021 [289]. - Stock-based compensation costs increased by $2.8 million, influenced by company performance against 2023 goals and adjustments from 2022 performance-based equity awards [289]. - Compensation costs, excluding stock-based compensation, decreased by $8.7 million due to targeted workforce reductions [289]. - Hosting and data center costs decreased by $5.1 million as the company migrates its cloud infrastructure to leading public cloud service providers [289]. - Operating lease costs for 2023 were $8.8 million, a decrease from $9.5 million in 2022 [297]. - The present value of future lease payments as of December 31, 2023, is $46.8 million [299]. - Deferred revenue is recorded for amounts billed in advance of service delivery, with contracts generally for a term of three years [301].