ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the consolidated financial statements and related notes which are primarily denominated in thousands of dollars. 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 “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this report 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.
We are a leading provider of software and services for the global philanthropic community. We offer a full spectrum of cloud-based and on-premises software solutions, as well as a resource network that empowers and connects organizations of all sizes. Our portfolio of software and services support nonprofit fundraising and relationship management, digital marketing, advocacy, accounting, payments and analytics, as well as grant management, corporate social responsibility, and education. As of
March 31, 2016
, we had approximately
35,000
active customers including nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations and other charitable giving entities, and corporations.
Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud-based and hosted environments; (ii) providing software maintenance and support services; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; (iv) providing transaction and payment processing services; and (v) selling perpetual licenses of our software solutions. We have experienced growth in our payment processing services from the continued shift to online giving, further integration of these services to our existing solution portfolio and the sale of these services to new and existing customers.
Our long-term goals include accelerating organic revenue growth, expanding our operating margins and increasing our operating cash flow. During the
first
quarter of
2016
, we continued to execute on the following five growth strategies targeted to achieve those goals and to drive an extended period of quality enhancement, solution and service innovation, and increasing operating efficiency and financial performance:
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|
1.
|
Integrated and Open Solutions in the Cloud
|
We continue to transition our business to predominantly serve customers through a subscription-based cloud delivery model, enabling lower cost of entry, greater scalability and lower total cost of ownership to our customers. There is a concerted effort underway to optimize our portfolio of solutions and integrate powerful capabilities — such as built in data, analytics, payment processing and tailored user-specific experiences — to bring even greater value and performance to our customers. In 2015, we announced the general availability of Raiser's Edge NXT™, Financial Edge NXT™, and we introduced Blackbaud SKY™, which is our new, innovative cloud technology architecture for the global philanthropic community that now powers six of our next generation solutions including Raiser's Edge NXT and Financial Edge NXT.
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2.
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Drive Sales Effectiveness
|
We are making investments to increase the effectiveness of our sales organization, with a focus on enabling our expanding sales teams with the talent, processes, and tools to accelerate our revenue growth and improve effectiveness. Our customer success program separates account management from the sales organization, and is intended to drive customer loyalty and retention. In the
first
quarter of
2016
, we launched a value added reseller ("VAR") program.
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26
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First Quarter 2016 Form 10-Q
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3.
|
Expand TAM into Near Adjacencies with Acquisitions;
|
We will continue to evaluate compelling opportunities to expand our product portfolio and acquire companies, technologies and/or services. We will be guided by our acquisition criteria for considering attractive assets, which expand our total addressable market ("TAM"), provide entry into new and near adjacencies, accelerate our shift to the cloud, accelerate revenue growth, are accretive to margins and present synergistic opportunities.
We have largely completed the installations of best-in-breed back-office solutions to standardize operations utilizing scalable tools and systems. Our focus is now shifting towards optimizing those systems, as well as operational excellence and quality initiatives focused on streamlining processes to gain efficiency and scalability.
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5.
|
Execute our 3-Year Margin Improvement Plan
|
In 2014, we implemented a 3-year operating margin improvement plan designed to increase our operating effectiveness and efficiency and improve non-GAAP operating margins 300 to 600 basis points on a constant currency basis as measured against our 2014 baseline of 17.5%, by the time we exit 2017.
We plan to continue making investments in our solution portfolio, sales, and customer success organization to ensure we are well positioned to benefit from shifts in the market, including demand for our cloud-based subscription offerings, which we expect will drive higher long-term revenue growth. We also plan to continue making investments in our sales and marketing organization and the infrastructure that supports our cloud-based subscription offerings and certain solution development initiatives, including further expansion of our payment processing and analytics services. As we execute on our five key growth initiatives to accelerate organic revenue growth and strengthen our market leadership position, we also plan to focus on achieving scalability of our operations, and attaining our targeted level of profitability.
We completed our acquisition of Smart Tuition in
October 2015
. We have included the results of operations of Smart Tuition in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing the first quarter of 2016 and 2015. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations to prior year results due to the inclusion of Smart Tuition.
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Total revenue
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
(1)
|
|
2015
|
|
Change
|
|
Total revenue
|
$
|
169.3
|
|
$
|
147.0
|
|
15.2
|
%
|
|
|
(1)
|
Included in total revenue for the
three months ended
March 31, 2016
was
$9.2 million
attributable to the inclusion of Smart Tuition.
|
Excluding the impact of Smart Tuition as discussed above, the remaining $13.1 million increase in revenue during the
three months ended
March 31, 2016
was primarily driven by growth in subscriptions revenue as our business model continues to shift towards providing predominantly cloud-based subscription solutions. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for which we process payments. Services revenue contributed $1.1 million to the increase in total revenue during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to increases in both analytic and training services deliveries. Maintenance revenue as well as license fees and other revenue declined for the
three months ended
March 31, 2016
from the continued migration of our business model toward subscription-based solutions, including our Raiser's Edge NXT and Financial Edge NXT solutions. In the near-term, the transition to subscription-based solutions negatively impacts total revenue growth, as time-based license revenue from subscription arrangements is deferred and recognized ratably over the subscription period, whereas on-premises license revenue from arrangements that include perpetual licenses is recognized up-front. In addition, the fluctuation in foreign currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, negatively impacted our total revenue during the
three months ended
March 31, 2016
by
$1.5 million
. Further explanation of this impact is included below under the caption "Foreign Currency Exchange Rates".
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First Quarter 2016 Form 10-Q
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27
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Income from operations
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Income from operations
|
$
|
10.4
|
|
$
|
8.0
|
|
30.0
|
%
|
|
|
(1)
|
Included in income from operations for the
three months ended
March 31, 2016
was
$1.2 million
attributable to the inclusion of Smart Tuition.
|
Excluding the impact of Smart Tuition as discussed above, the remaining $1.2 million increase in income from operations during the three months ended
March 31, 2016
was primarily driven by growth in subscriptions revenue as discussed above, improvements in the utilization of consulting services personnel and a reduction in non-billable implementation service hours. Partially offsetting these favorable impacts to income from operations during the
three
months ended
March 31, 2016
were increases in stock-based compensation expense and amortization of intangible assets from business combinations of $2.8 million and $2.5 million, respectively. In addition, the fluctuation in foreign currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, negatively impacted our income from operations during the
three months ended
March 31, 2016
by
$0.8 million
. Further explanation of this impact is included below under the caption "Foreign Currency Exchange Rates".
Customer retention
Our subscription contracts are typically for a term of three years at contract inception with one year renewals thereafter. Over time, we anticipate a decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a cloud-based subscription delivery model. We also anticipate an increase in subscription contract renewals as we continue focusing on innovation, quality and the integration of our subscription solutions which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines subscription and maintenance customer contracts provides an accurate representation of our customers' overall behavior. For the
three months ended
March 31, 2016
, approximately
93%
of our customers with recurring subscription or maintenance contracts were retained.
Balance sheet and cash flow
At
March 31, 2016
, our cash and cash equivalents were
$12.1 million
and outstanding borrowings under the 2014 Credit Facility were
$424.4 million
. During the
three
months ended
March 31, 2016
, we generated
$0.1 million
in cash flow from operations, increased our net borrowings by
$14.1 million
, returned
$5.7 million
to stockholders by way of dividends and had cash outlays of
$13.6 million
for purchases of property and equipment and capitalized software development costs.
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28
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First Quarter 2016 Form 10-Q
|
Comparison of the
three months ended
March 31, 2016
and
2015
We have included the results of operations of Smart Tuition in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing the
three months ended
March 31, 2016
and
2015
. We have noted in the discussion below, to the extent meaningful and quantifiable, the impact on the comparability of our consolidated results of operations to prior year results due to the inclusion of Smart Tuition.
We acquired Smart Tuition on October 2, 2015. For the
three months ended
March 31, 2016
, Smart Tuition's total revenue and income from operations was
$9.2 million
and
$1.2 million
, respectively. See
Note 3
to our consolidated financial statements in this report for a summary of this acquisition.
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Revenue by segment
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
(1)
|
|
2015
|
|
Change
|
|
GMBU
|
$
|
88.0
|
|
$
|
69.9
|
|
25.9
|
%
|
ECBU
|
71.5
|
|
66.9
|
|
6.9
|
%
|
IBU
|
9.8
|
|
10.1
|
|
(3.0
|
)%
|
Total revenue
(2)
|
$
|
169.3
|
|
$
|
147.0
|
|
15.2
|
%
|
|
|
(1)
|
Included in GMBU revenue and total revenue for the
three months ended
March 31, 2016
was
$9.2 million
attributable to the inclusion of Smart Tuition.
|
|
|
(2)
|
The individual amounts for each year may not sum to total revenue due to rounding.
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|
First Quarter 2016 Form 10-Q
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29
|
|
|
|
|
|
|
|
|
|
|
GMBU
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
GMBU revenue
|
$
|
88.0
|
|
$
|
69.9
|
|
25.9
|
%
|
% of total revenue
|
52.0
|
%
|
47.6
|
%
|
|
|
|
(1)
|
Included in GMBU revenue for the
three months ended
March 31, 2016
was
$9.2 million
attributable to the inclusion of Smart Tuition.
|
Excluding the impact of Smart Tuition as discussed above, the remaining $8.9 million increase in GMBU revenue during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily attributable to growth in subscriptions revenue, partially offset by declines in maintenance revenue and license fee and other revenue. The growth in subscriptions revenue was primarily due to increases in demand across our portfolio of cloud-based solutions. GMBU subscriptions revenue also benefited from increases in the number of customers and the volume of transactions for which we process payments. Also contributing to overall growth in GMBU revenue during the
three months ended
March 31, 2016
was an increase in consulting services revenue related to our cloud-based solutions. The growth in subscriptions and services revenue were partially offset by decreases in maintenance revenue and license fee and other revenue during the
three months ended
March 31, 2016
from the continued migration of our business to subscription-based solutions.
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|
|
|
|
|
|
ECBU
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
ECBU revenue
|
$
|
71.5
|
|
$
|
66.9
|
|
6.9
|
%
|
% of total revenue
|
42.2
|
%
|
45.5
|
%
|
|
The increase in ECBU revenue during the three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily attributable to growth in subscriptions revenue, partially offset by decreases in consulting services revenue, maintenance revenue and revenue from license fees. The growth in subscriptions resulted primarily from an increase in the number of customers and the volume of transactions for which we process payments, as well as increases in demand for our cloud-based solutions including Gifts Online, Luminate Online and Raiser's Edge NXT. As discussed above, consulting services, maintenance revenue and license fees revenue decreased as a result of the continuing shift in our go-to-market strategy towards cloud-based solutions, which in general, require less implementation services.
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|
|
|
|
|
|
|
|
IBU
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
IBU revenue
|
$
|
9.8
|
|
$
|
10.1
|
|
(3.0
|
)%
|
% of total revenue
|
5.8
|
%
|
6.9
|
%
|
|
The decrease in IBU revenue during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily related to reductions in consulting services revenue and maintenance revenue, partially offset by an increase in subscriptions revenue. In the near term, we expect a continued reduction in IBU revenue related to Raiser's Edge license fees, consulting services and maintenance as our customers transition to our Raiser's Edge NXT solution. The increase in IBU subscriptions revenue during the
three months ended
March 31, 2016
was primarily due to an increase in demand for our Raiser's Edge NXT solution as well as an increase in the volume of transactions for which we process payments.
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|
30
|
|
First Quarter 2016 Form 10-Q
|
Operating results
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
(1)
|
|
2015
|
|
Change
|
|
Subscriptions revenue
|
$
|
96.9
|
|
$
|
72.5
|
|
33.7
|
%
|
Cost of subscriptions
|
49.7
|
|
36.2
|
|
37.3
|
%
|
Subscriptions gross profit
|
$
|
47.2
|
|
$
|
36.3
|
|
30.0
|
%
|
Subscriptions gross margin
|
48.7
|
%
|
50.1
|
%
|
|
|
|
(1)
|
Included in subscriptions revenue and cost of subscriptions for the
three months ended
March 31, 2016
was $9.0 million and $4.9 million, respectively, attributable to the inclusion of Smart Tuition.
|
Subscriptions revenue is comprised of revenue from charging for the use of our subscription-based software solutions, which includes providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, revenue from payment processing services as well as variable transaction revenue associated with the use of our solutions.
We continue to experience growth in sales of our hosted applications and hosting services as we meet the demand of our customers that increasingly prefer cloud-based subscription offerings, including existing customers that are migrating from on-premises solutions to our cloud-based solutions. In addition, we have experienced growth in our payment processing services from the continued shift to online giving, further integration of these services to our existing solution portfolio and the sale of these services to new and existing customers. Recurring subscriptions contracts are typically for a term of three years at contract inception with one year annual renewals thereafter. We intend to continue focusing on innovation, quality and integration of our subscription solutions which we believe will drive subscriptions revenue growth. We are also investing in our customer success organization to drive customer loyalty, retention, and referrals.
Cost of subscriptions is primarily comprised of compensation costs, third-party contractor expenses, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and services to our customers.
Excluding the incremental subscriptions revenue from Smart Tuition as discussed above, subscriptions revenue increased by $15.4 million during the
three months ended
March 31, 2016
, when compared to the same period in
2015
. The increase was primarily due to strong demand across our cloud-based solution portfolio. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for which we process payments.
The increase in cost of subscriptions during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was relatively consistent with the increase in revenue. The increase in cost of subscriptions was primarily due to a $4.5 million increase in transaction-based costs related to our payments services and those of Smart Tuition, a $2.0 million increase in amortization of intangible assets from business combinations, a $1.5 million increase in third-party contractor expenses, a $1.4 million increase in compensation costs, a $1.2 million increase in the cost of third-party technology embedded in certain of our subscription solutions and a $1.1 million increase in amortization of software development costs. The increases in compensation costs and amortization of intangible assets from business combinations were primarily due the inclusion of Smart Tuition. The increases in third-party contract costs and amortization of software development costs were from investments made on innovation, quality and the integration of our cloud-based solutions.
The decrease in subscriptions gross margin for the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily the result of a shift in the mix of subscriptions revenue generated from our payment processing services and those of Smart Tuition, both of which have historically yielded lower gross margins than our cloud-based solutions. Also contributing to the decrease in subscriptions gross margin was incremental amortization of intangible assets due to Smart Tuition and incremental software development costs from the investments discussed above.
|
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|
First Quarter 2016 Form 10-Q
|
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31
|
|
|
|
|
|
|
|
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|
|
Maintenance
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Maintenance revenue
|
$
|
37.2
|
|
$
|
38.9
|
|
(4.4
|
)%
|
Cost of maintenance
|
5.3
|
|
7.5
|
|
(29.3
|
)%
|
Maintenance gross profit
|
$
|
31.9
|
|
$
|
31.4
|
|
1.6
|
%
|
Maintenance gross margin
|
85.7
|
%
|
80.7
|
%
|
|
Maintenance revenue 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 certain upgrades to our software solutions and online, telephone and email support. Maintenance contracts are typically renewed on an annual basis.
Cost of maintenance is primarily comprised of compensation costs, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs and other costs incurred in providing support and services to our customers.
The decrease in maintenance revenue during the
three months ended
March 31, 2016
when compared to the same period in
2015
, was primarily related to a reduction in maintenance contracts associated with on-premises Raiser's Edge as customers migrated to our Raiser's Edge NXT cloud-based solution, partially offset by an increase in maintenance contracts associated with Blackbaud Enterprise CRM. The decrease was primarily comprised of (i) $5.4 million of reductions in maintenance from contracts that were migrated to a cloud-based subscription or not renewed and reductions in contracts with existing customers; partially offset by (ii) $3.2 million of incremental maintenance from new customers associated with new license contracts and increases in contracts with existing customers; and (iii) $0.5 million of incremental maintenance from contractual inflationary rate adjustments.
Cost of maintenance decreased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily as a result of a decrease in compensation costs of $2.0 million from a shift in support headcount from maintenance towards sales, marketing and customer success expense and a shift in the volume of customer support requests from maintenance towards subscriptions. Also contributing to the decrease in compensation costs were improvements in the efficiency of our customer support center.
Maintenance gross margins increased during the
three months ended
March 31, 2016
when compared to the same period in
2015
, primarily due to the shifts in compensation costs from maintenance as discussed above, as well as the improvements in the efficiency of our customer support center.
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32
|
|
First Quarter 2016 Form 10-Q
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
(1)
|
|
2015
|
|
Change
|
|
Services revenue
|
$
|
32.4
|
|
$
|
31.3
|
|
3.5
|
%
|
Cost of services
|
24.3
|
|
27.0
|
|
(10.0
|
)%
|
Services gross profit
|
$
|
8.1
|
|
$
|
4.3
|
|
88.4
|
%
|
Services gross margin
|
25.0
|
%
|
13.8
|
%
|
|
|
|
(1)
|
Included in services revenue and cost of services for the
three months ended
March 31, 2016
were insignificant amounts attributable to the inclusion of Smart Tuition.
|
We derive services revenue from consulting, implementation, education, analytic and installation services. Consulting, implementation and installation services involve converting data from a customer’s existing system, system configuration, process re-engineering and assistance in file set up. Education services involve customer training activities. Analytic services are comprised of donor prospect research, sales of lists of potential donors, benchmarking studies and data modeling services. These analytic services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product is intended to enable organizations to more effectively target their fundraising activities.
Cost of services is primarily comprised of compensation costs, 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 intangible assets from business combinations.
Services revenue increased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to increases in both analytic and training services deliveries.
We expect that the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services and little to no customization services when compared our traditional on-premises perpetual license arrangements, will negatively impact consulting services revenue growth over time. The maturation of our Blackbaud Enterprise CRM solution, our only remaining perpetual licensed-based offering, is lessening the extent of implementation services required.
The decrease in cost of services during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to a $2.0 million decrease in compensation costs related to a reduction in consulting services headcount from utilization improvements and a reduction in non-billable implementation service hours for our Blackbaud Enterprise CRM solution.
Services gross margin increased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to increased analytics and training revenue coupled with improvements in the utilization of consulting services personnel and a reduction in non-billable implementation hours.
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
33
|
|
|
|
|
|
|
|
|
|
|
License fees and other
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
License fees and other revenue
|
$
|
2.8
|
|
$
|
4.3
|
|
(34.9
|
)%
|
Cost of license fees and other
|
0.6
|
|
1.2
|
|
(50.0
|
)%
|
License fees and other gross profit
|
$
|
2.2
|
|
$
|
3.1
|
|
(29.0
|
)%
|
License fees and other gross margin
|
78.7
|
%
|
72.9
|
%
|
|
License fees and other revenue includes revenue from the sale of our software solutions under perpetual license arrangements, 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.
Cost of license fees and other is primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs, compensation 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 intangible assets from business combinations.
Revenue from license fees and other decreased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily as a result of the ongoing transition of our solution portfolio away from a perpetual license-based model toward a cloud-based subscription delivery model. In addition, our larger perpetual license transactions such as those for Blackbaud CRM can be of substantial value, which can result in period-to-period variations in revenue since the license fee revenue associated with these arrangements is generally recognized up front when the arrangements are entered into.
The decrease in cost of license fees and other during the
three
months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to less reimbursable expenses relating to the performance of services at customer locations.
License fees and other gross margin increased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to the less reimbursable expenses which carry no margin relative to the reduction in license fees revenue.
|
|
|
|
34
|
|
First Quarter 2016 Form 10-Q
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Sales, marketing, and customer success
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Sales, marketing and customer success expense
|
$
|
35.6
|
|
$
|
28.6
|
|
24.5
|
%
|
% of total revenue
|
21.0
|
%
|
19.4
|
%
|
|
Sales, marketing, and customer success expense includes compensation costs, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.
We are investing in sales, marketing, and customer success which is a component of our five point growth strategy to accelerate revenue growth. The increase in sales, marketing, and customer success expense in dollars and as a percentage of total revenue during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to increases in compensation costs and commissions expense of $4.1 million and $1.8 million, respectively. Compensation costs increased primarily due to incremental headcount to support the increase in direct sales, marketing, and customer success efforts of our growing operations. The expansion of our customer success program is targeted to ensure our customers are fully realizing the value of our solutions, which we believe will drive customer loyalty and retention and will also result in increased customer referrals. The increase in commission expense was primarily driven by an increase in commissionable revenue during the
three months ended
March 31, 2016
, when compared to the same period in
2015
. The inclusion of Smart Tuition also contributed to the increases in compensation costs and commissions expense.
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Research and development expense
|
$
|
22.8
|
|
$
|
21.3
|
|
7.0
|
%
|
% of total revenue
|
13.5
|
%
|
14.5
|
%
|
|
Research and development expense includes compensation costs, third-party contractor expenses, software development tools and other expenses related to developing new solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.
The increase in research and development expense during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to increases in compensation costs of $2.9 million. We have added engineering headcount to drive our solution development efforts. The inclusion of Smart Tuition contributed to the increase in compensation costs. Also contributing to the increase in research and development expense during the
three months ended
March 31, 2016
was an increase in third-party contractor expenses of $0.9 million to assist in our solution development efforts. Partially offsetting these increases during the
three months ended
March 31, 2016
was a $2.5 million increase in the amount of software development costs that were capitalized. The increase in amount capitalized was a result of incurring more qualifying costs associated with development activities that are required to be capitalized under the internal-use software guidance such as those related to development of our Raiser's Edge NXT, Financial Edge NXT and Luminate cloud-based solutions, as well as development costs associated with the solutions of acquired companies. We expect that the increase in the amount of software development costs capitalized will continue in the near-term as we make investments on innovation, quality and the integration of our solutions which we believe will drive revenue growth. Capitalized software development costs associated with our cloud-based solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life.
Research and development expense decreased as a percentage of revenue during the
three months ended
March 31, 2016
, when compared to the same periods in
2015
, primarily due to the increase in the amount of software development costs capitalized as discussed above.
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
35
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
General and administrative expense
|
$
|
19.8
|
|
$
|
16.8
|
|
17.9
|
%
|
% of total revenue
|
11.7
|
%
|
11.5
|
%
|
|
General and administrative expense consists primarily of compensation costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.
The increase in general and administrative expense during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to an increase in compensation costs of $2.7 million. Compensation costs increased primarily due to increases stock-based compensation expense, employee benefit costs and additional resources needed to support the growth of our business. The increase in stock-based compensation expense was primarily driven by an increase in the grant date fair value of our annual equity awards granted during the three months ended
March 31, 2016
when compared to the grant date fair value of our annual equity awards granted during the same period in
2015
.
General and administrative expense as a percentage of revenue remained relatively unchanged during the
three months ended
March 31, 2016
, when compared to the same period in
2015
.
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Interest expense
|
$
|
2.7
|
|
$
|
1.7
|
|
58.8
|
%
|
% of total revenue
|
1.6
|
%
|
1.1
|
%
|
|
Interest expense increased during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to an increase in our average daily borrowings related to our acquisition of Smart Tuition in October 2015.
|
|
|
|
36
|
|
First Quarter 2016 Form 10-Q
|
Deferred revenue
The table below compares the components of deferred revenue from our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Timing of recognition
|
March 31,
2016
|
|
Change
|
|
|
December 31,
2015
|
|
Subscriptions
|
Over the period billed in advance, generally one year
|
$
|
122.2
|
|
(0.2
|
)%
|
|
$
|
122.5
|
|
Maintenance
|
Over the period billed in advance, generally one year
|
78.2
|
|
(9.0
|
)%
|
|
85.9
|
|
Services
|
As services are delivered
|
27.9
|
|
(2.1
|
)%
|
|
28.5
|
|
License fees and other
|
Upon delivery of the solution or service
|
0.7
|
|
75.0
|
%
|
|
0.4
|
|
Total deferred revenue
(1)
|
|
229.0
|
|
(3.5
|
)%
|
|
237.3
|
|
Less: Long-term portion
|
|
6.6
|
|
(7.0
|
)%
|
|
7.1
|
|
Current portion
(1)
|
|
$
|
222.4
|
|
(3.4
|
)%
|
|
$
|
230.2
|
|
|
|
(1)
|
The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.
|
To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. We generally invoice our maintenance and subscription customers in annual cycles 30 days prior to the end of the contract term. The decreases in deferred revenue attributable to maintenance, services and license fees and other during the three months ended
March 31, 2016
were primarily due to the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which do not require maintenance contracts and, in general, require less implementation services than our traditional on-premises arrangements. Deferred revenue from subscriptions remained relatively unchanged primarily due to the timing of customer contract renewals, many of which take place at or near the beginning of our third quarter. As a result, our deferred revenue has historically been lower in our first and second quarters as compared to our third and fourth quarters.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements. Therefore, our deferred revenue after an acquisition will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The impact of acquisition-related deferred revenue write-downs largely impacted deferred revenue from subscriptions as of
March 31, 2016
and December 31, 2015. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
Income tax provision
|
$
|
2.7
|
|
$
|
1.8
|
|
50.0
|
%
|
Effective income tax rate
|
34.8
|
%
|
29.0
|
%
|
|
The increase in our effective income tax rate during the three months ended
March 31, 2016
, when compared to the same period in
2015
, was primarily due to a discrete tax benefit included in the
2015
period from the settlement of an IRS audit and the estimated impact to our annual 2016 effective tax rate from Section 162(m) nondeductible compensation. Partially offsetting the increase in our effective income tax rate during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, was the benefit of federal and state research tax credits that were permanently enacted into law December 2015 and an increase in the domestic production activities deduction.
Our effective income tax rate may fluctuate quarterly as a result of factors, including transactions entered into, changes in the geographic distribution of our earnings or losses, our assessment of certain tax contingencies, valuation allowances, and changes in tax law in jurisdictions where we conduct business.
We have deferred tax assets for federal, state, and international net operating loss carryforwards and state tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
37
|
state tax laws. A portion of the foreign and state net operating loss carryforwards and a portion of state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was
$2.3 million
at
March 31, 2016
and
December 31, 2015
. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
Non-GAAP financial measures
The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share internally in analyzing our operational performance. Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.
The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
2015
|
|
Change
|
|
GAAP Revenue
|
$
|
169.3
|
|
$
|
147.0
|
|
15.2
|
%
|
Non-GAAP adjustments:
|
|
|
|
Add: Acquisition-related deferred revenue write-down
|
1.8
|
|
3.5
|
|
(48.6
|
)%
|
Non-GAAP revenue
(1)
|
$
|
171.0
|
|
$
|
150.5
|
|
13.6
|
%
|
|
|
|
|
GAAP gross profit
|
$
|
89.3
|
|
$
|
75.2
|
|
18.8
|
%
|
GAAP gross margin
|
52.8
|
%
|
51.1
|
%
|
|
Non-GAAP adjustments:
|
|
|
|
Add: Acquisition-related deferred revenue write-down
|
1.8
|
|
3.5
|
|
(48.6
|
)%
|
Add: Stock-based compensation expense
|
0.9
|
|
0.9
|
|
—
|
%
|
Add: Amortization of intangibles from business combinations
|
9.9
|
|
7.6
|
|
30.3
|
%
|
Add: Employee severance
|
0.1
|
|
0.6
|
|
(83.3
|
)%
|
Subtotal
(1)
|
12.6
|
|
12.7
|
|
(0.8
|
)%
|
Non-GAAP gross profit
(1)
|
$
|
101.9
|
|
$
|
87.8
|
|
16.1
|
%
|
Non-GAAP gross margin
|
59.6
|
%
|
58.4
|
%
|
|
|
|
(1)
|
The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding.
|
|
|
|
|
38
|
|
First Quarter 2016 Form 10-Q
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions, except per share amounts)
|
2016
|
|
2015
|
|
Change
|
|
GAAP income from operations
|
$
|
10.4
|
|
$
|
8.0
|
|
30.0
|
%
|
GAAP operating margin
|
6.2
|
%
|
5.5
|
%
|
|
Non-GAAP adjustments:
|
|
|
|
Add: Acquisition-related deferred revenue write-down
|
1.8
|
|
3.5
|
|
(48.6
|
)%
|
Add: Stock-based compensation expense
|
7.9
|
|
5.1
|
|
54.9
|
%
|
Add: Amortization of intangibles from business combinations
|
10.6
|
|
8.1
|
|
30.9
|
%
|
Add: Employee severance
|
0.3
|
|
1.1
|
|
(72.7
|
)%
|
Add: Acquisition-related integration costs
|
0.4
|
|
0.5
|
|
(20.0
|
)%
|
Add: Acquisition-related expenses
|
0.1
|
|
0.1
|
|
—
|
%
|
Subtotal
(1)
|
21.1
|
|
18.4
|
|
14.7
|
%
|
Non-GAAP income from operations
(1)
|
$
|
31.6
|
|
$
|
26.5
|
|
19.2
|
%
|
Non-GAAP operating margin
|
18.5
|
%
|
17.6
|
%
|
|
|
|
|
|
GAAP net income
|
$
|
5.0
|
|
$
|
4.3
|
|
16.3
|
%
|
Shares used in computing GAAP diluted earnings per share
|
46,757,458
|
|
46,168,096
|
|
1.3
|
%
|
GAAP diluted earnings per share
|
$
|
0.11
|
|
$
|
0.09
|
|
22.2
|
%
|
Non-GAAP adjustments:
|
|
|
|
Add: Total Non-GAAP adjustments affecting loss from operations
|
21.1
|
|
18.4
|
|
14.7
|
%
|
Less: Tax impact related to Non-GAAP adjustments
|
(6.5
|
)
|
(7.8
|
)
|
(16.7
|
)%
|
Non-GAAP net income
(1)
|
$
|
19.6
|
|
$
|
14.9
|
|
31.5
|
%
|
|
|
|
|
Shares used in computing Non-GAAP diluted earnings per share
|
46,757,458
|
|
46,168,096
|
|
1.3
|
%
|
Non-GAAP diluted earnings per share
|
$
|
0.42
|
|
$
|
0.32
|
|
31.3
|
%
|
|
|
(1)
|
The individual amounts for each year may not sum to subtotal, non-GAAP income from operations or non-GAAP net income due to rounding.
|
The increases in non-GAAP income from operations and non-GAAP operating margins during the
three months ended
March 31, 2016
, when compared to the same period in
2015
, were primarily due to growth in subscriptions revenue, improvements in the utilization of consulting services personnel and a reduction in non-billable implementation service hours, partially offset by increases in transaction-based costs related to our payments services and compensation costs. The inclusion of Smart Tuition contributed to the increase in subscriptions revenue as well as the increases in costs related to our payment services and compensation costs.
Historically, for the purposes of determining non-GAAP net income, we have utilized a non-GAAP tax rate of 39.0% in our calculation of the tax impact related to non-GAAP adjustments. Beginning in 2016, we now apply a non-GAAP effective tax rate of 32.0% in our calculation of the tax impact on non-GAAP adjustments, which affects the tax impact related to non-GAAP adjustments, non-GAAP net income and non-GAAP diluted earnings per share measures. As announced at our 2015 Investor Day, we previously communicated that we would be adjusting this rate to 36.0% to better reflect our periodic effective tax rate calculated in accordance with GAAP and our then current expectations related to tax rate impacting legislation such as the domestic production activities deduction and certain credits which are recurring in nature. Subsequent to that Investor Day communication, the business research and development tax credit was permanently extended. The non-GAAP effective tax rate utilized will be reviewed annually to determine whether it remains appropriate in consideration of our financial results including our periodic effective tax rate calculated in accordance with GAAP, our operating environment and related tax legislation in effect and other factors deemed necessary. For the three months ended March 31, 2015, the tax impact related to non-GAAP adjustments is calculated under our historical non-GAAP effective tax rate of 39.0%.
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
39
|
Non-GAAP organic revenue growth
In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP organic recurring revenue growth, which we believe provides useful information for evaluating the periodic growth of our business on a consistent basis. Each of these measures of 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, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and it includes the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate. Unaudited calculations of non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP recurring revenue growth for the
first
quarter of
2016
, as well as unaudited reconciliations of those non-GAAP measures to their most directly comparable GAAP measures, are as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
Three months ended March 31,
|
|
2016
|
|
2015
|
|
GAAP revenue
|
$
|
169.3
|
|
$
|
147.0
|
|
GAAP revenue growth
|
15.1
|
%
|
|
Add: Non-GAAP acquisition-related revenue
(1)
|
1.8
|
|
12.3
|
|
Less: Revenue from divested businesses
(2)
|
—
|
|
(0.4
|
)
|
Total Non-GAAP adjustments
|
1.8
|
|
11.9
|
|
Non-GAAP revenue
|
$
|
171.0
|
|
$
|
158.9
|
|
Non-GAAP organic revenue growth
|
7.6
|
%
|
|
|
|
|
Non-GAAP revenue
(3)
|
$
|
171.0
|
|
$
|
158.9
|
|
Foreign currency impact on Non-GAAP organic revenue
(4)
|
1.5
|
|
—
|
|
Non-GAAP revenue on constant currency basis
(4)
|
$
|
172.6
|
|
$
|
158.9
|
|
Non-GAAP organic revenue growth on constant currency basis
|
8.6
|
%
|
|
|
|
|
GAAP subscriptions revenue
|
$
|
96.9
|
|
$
|
72.5
|
|
GAAP maintenance revenue
|
37.2
|
|
38.9
|
|
GAAP recurring revenue
|
134.0
|
|
111.4
|
|
GAAP recurring revenue growth
|
20.3
|
%
|
|
Add: Non-GAAP acquisition-related revenue
(1)
|
1.8
|
|
11.9
|
|
Less: Revenue from divested businesses
(2)
|
—
|
|
(0.2
|
)
|
Total Non-GAAP adjustments
|
1.8
|
|
11.7
|
|
Non-GAAP recurring revenue
|
$
|
135.8
|
|
$
|
123.1
|
|
Non-GAAP organic recurring revenue growth
|
10.3
|
%
|
|
|
|
(1)
|
Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies.
|
|
|
(2)
|
For businesses divested in the prior fiscal year, non-GAAP organic revenue growth excludes revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested business with the results of the combined company for the same period of time in both the prior and current periods.
|
|
|
(3)
|
Non-GAAP revenue for the prior year periods presented herein may not agree to non-GAAP revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated.
|
|
|
(4)
|
To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Canadian Dollar, EURO, British Pound and Australian Dollar.
|
|
|
|
|
40
|
|
First Quarter 2016 Form 10-Q
|
Seasonality
Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. In addition, our transaction revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. Our revenue from payment processing services has also historically increased during the fourth quarter due to year-end giving. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the third and fourth quarters historically achieving the highest total revenues. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter, our cash flow from operations has been lowest in our first quarter, and due to the timing of customer contract renewals, many of which take place at or near the beginning of our third quarter, our cash flow from operations has been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are merit-based salary increases, which are generally effective in April each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors.
|
|
Liquidity and Capital Resources
|
The following table presents selected financial information about our financial position:
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31,
2016
|
|
Change
|
|
|
December 31,
2015
|
|
Cash and cash equivalents
|
$
|
12.1
|
|
(21.4
|
)%
|
|
$
|
15.4
|
|
Property and equipment, net
|
54.5
|
|
3.4
|
%
|
|
52.7
|
|
Software development costs, net
|
23.0
|
|
17.3
|
%
|
|
19.6
|
|
Total carrying value of debt
|
422.4
|
|
3.5
|
%
|
|
408.1
|
|
Working capital
|
(143.7
|
)
|
(14.1
|
)%
|
|
(167.2
|
)
|
Working capital excluding deferred revenue
|
78.7
|
|
24.9
|
%
|
|
63.0
|
|
The following table presents selected financial information about our cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(dollars in millions)
|
2016
|
|
Change
|
|
|
2015
|
|
Net cash provided by operating activities
|
$
|
0.1
|
|
(97.6
|
)%
|
|
$
|
4.2
|
|
Net cash used in investing activities
|
(13.6
|
)
|
138.6
|
%
|
|
(5.7
|
)
|
Net cash provided by financing activities
|
9.5
|
|
9,400.0
|
%
|
|
0.1
|
|
Our principal sources of liquidity are operating cash flow, funds available under the 2014 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription, maintenance and support arrangements and market acceptance of our solutions 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 twelve 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 and pay further dividends and/or repurchase our common stock. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt issuances.
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
41
|
At
March 31, 2016
, our total cash and cash equivalents balance included approximately
$5.2 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 twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.
Operating cash flow
Net cash provided by operating activities of
$0.1 million
decreased by
$4.1 million
during the
three
months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to a decrease in cash flow from operations associated with working capital. Throughout both periods, 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, stock-based compensation, amortization of deferred financing costs and debt discount and adjustments to our provision for sales returns and allowances; and (ii) changes in our working capital.
Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. Cash flow from operations associated with working capital decreased
$11.4 million
during the
three
months ended
March 31, 2016
, when compared to the same period in
2015
, primarily due to:
|
|
•
|
an increase in current period bonus payments as a result of an increase in amounts accrued as of December 31, 2015 for over-performance against 2015 targets;
|
|
|
•
|
an increase in tax payments on behalf of employees for surrendered shares upon vesting of equity awards;
|
|
|
•
|
the timing of vendor payments; and to a lesser extent
|
|
|
•
|
a seasonal decrease in customer billings due to the timing of customer contract renewals.
|
Investing cash flow
Net cash used in investing activities of
$13.6 million
increased by
$8.0 million
during the
three
months ended
March 31, 2016
, when compared to the same period in
2015
. During the
three
months ended
March 31, 2016
, we had cash outlays of
$7.8 million
and
$5.8 million
for purchases of property and equipment and software development costs, respectively, which were up
$5.3 million
and
$2.7 million
, respectively, from cash spent during the same period in
2015
. The increase in cash outlays for property and equipment were primarily driven by investments in our information technology infrastructure, technology platforms and infrastructure used in the delivery of our solutions to customers, fluctuations in the timing of vendor payments, various facilities upgrades at a number of our U.S. and international locations, as well as incremental property and equipment costs from prior year business acquisitions. The increase in cash outlays for software development costs was primarily driven by development activities related to the Raiser's Edge NXT, Financial Edge NXT and Luminate cloud-based solutions, development activities for other solutions and the inclusion of software development costs related to solutions historically provided by Smart Tuition.
Financing cash flow
During the
three
months ended
March 31, 2016
, we had a net increase in borrowings of
$14.1 million
compared to a net increase in borrowings of
$5.1 million
during the same period in
2015
. Also during the
three
months ended
March 31, 2016
, we paid dividends of
$5.7 million
, which was relatively consistent with the amount paid in the comparable period of
2015
.
2014 Credit Facility
We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. At
March 31, 2016
, our available borrowing capacity under the 2014 Credit Facility was
$88.5 million
. We believe the 2014 Credit Facility will provide us with sufficient flexibility to meet our future financial needs. The 2014 Credit Facility matures in February 2019.
At
March 31, 2016
, the carrying amount of our debt under the 2014 Credit Facility was
$422.4 million
. Our average daily borrowings during the
three months ended
March 31, 2016
were
$408.0 million
.
|
|
|
|
42
|
|
First Quarter 2016 Form 10-Q
|
Following is a summary of the financial covenants under our credit facility:
|
|
|
|
Financial Covenant
|
Requirement
|
Ratio as of March 31, 2016
|
Net Leverage Ratio
|
≤ 3.50 to 1.00
|
2.77 to 1.00
|
Interest Coverage Ratio
|
≥ 2.50 to 1.00
|
16.41 to 1.00
|
Under the 2014 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: (i) no default or event of default shall have occurred and be continuing under the 2014 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2014 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At
March 31, 2016
, we were in compliance with all debt covenants under the 2014 Credit Facility.
Commitments and contingencies
As of
March 31, 2016
, we had contractual obligations with future minimum commitments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
(in millions)
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
Recorded contractual obligations:
|
|
|
|
|
|
Debt
(1)
|
$
|
424.4
|
|
$
|
4.4
|
|
$
|
420.0
|
|
$
|
—
|
|
$
|
—
|
|
Interest payments on debt
(2)
|
1.2
|
|
0.9
|
|
0.3
|
|
—
|
|
—
|
|
|
|
|
|
|
|
Unrecorded contractual obligations:
|
|
|
|
|
|
Operating leases
(3)
|
97.7
|
|
15.0
|
|
26.9
|
|
25.0
|
|
30.8
|
|
Interest payments on debt
(4)
|
26.0
|
|
8.9
|
|
17.1
|
|
—
|
|
—
|
|
Purchase obligations
(5)
|
15.5
|
|
7.7
|
|
5.7
|
|
2.1
|
|
|
Total contractual obligations
|
$
|
564.8
|
|
$
|
36.9
|
|
$
|
470.0
|
|
$
|
27.1
|
|
$
|
30.8
|
|
|
|
(1)
|
Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2014 Credit Facility at
March 31, 2016
will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2014 Revolving Facility for the purposes of determining minimum commitment amounts.
|
|
|
(2)
|
Represents interest payment obligations related to our interest rate swap agreements.
|
|
|
(3)
|
Our commitments related to operating leases have not been reduced by incentive payments and reimbursement of leasehold improvements.
|
|
|
(4)
|
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 described in (1) above.
|
|
|
(5)
|
We utilize third-party technology in conjunction with our solutions and services, with contractual obligations varying in length from
one
to
four
years. In certain cases, these arrangements require a minimum annual purchase commitment by us.
|
The term loan under the 2014 Credit Facility requires periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2014 Credit Facility in February 2019.
The total liability for uncertain tax positions as of
March 31, 2016
and
December 31, 2015
, was
$3.1 million
and
$3.0 million
, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of
March 31, 2016
and
December 31, 2015
.
In
February 2016
, our Board of Directors approved our annual dividend rate of
$0.48
per share to be made in quarterly payments. Dividends at this annual rate would aggregate to $22.6 million assuming
47.0 million
shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2014 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.
In
April 2016
, our Board of Directors declared a
second
quarter dividend of
$0.12
per share payable on
June 15, 2016
to stockholders of record on
May 27, 2016
.
|
|
|
|
First Quarter 2016 Form 10-Q
|
|
43
|
|
|
Off-Balance Sheet Arrangements
|
As of
March 31, 2016
, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
|
|
Foreign Currency Exchange Rates
|
Approximately
10%
of our total revenue for the
three
months ended
March 31, 2016
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
$0.4 million
and
$0.8 million
as of
March 31, 2016
and
December 31, 2015
, respectively.
The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish 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. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the
three
months ended
March 31, 2016
, foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the
three
months ended
March 31, 2016
, the fluctuation in foreign currency exchange rates reduced our total revenue and income from operations by
$1.5 million
and
$0.8 million
, respectively. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on total revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. In addition, if inflationary pressures impact the rate of giving to our customers, there could be adverse impacts to our business, financial condition and results of operations.
|
|
Critical Accounting Policies and Estimates
|
There have been no significant changes in our critical accounting policies and estimates during the
three
months ended
March 31, 2016
as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
.
|
|
|
|
44
|
|
First Quarter 2016 Form 10-Q
|
|
|
Recently Issued Accounting Pronouncements
|
For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see
Note 2
of our consolidated financial statements in this report.