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Blackbaud's Investments Cut Into Profitability in Q1

Matthew DiLallo, The Motley Fool

Blackbaud (NASDAQ: BLKB) is investing in its people and other resources this year to position its business for accelerated growth in the future. This additional spending on staffing weighed on margins during the first quarter, which cut into the cloud-based software provider's profitability. The company, however, is right on target with its strategy, which keeps it on track to achieve its full-year forecast.

Blackbaud results: The raw numbers

Metric

Q1 2019

Q1 2018

Year-Over-Year Change

Non-GAAP revenue

$216.5 million

$204.5 million

5.9%

Non-GAAP net income

$24.7 million

$31.9 million

(22.7%)

Adjusted EPS

$0.51

$0.66

(22.7%)

Data source: Blackbaud. EPS = earnings per share.

What happened with Blackbaud this quarter?

Higher spending weighed on profitability:

  • Total recurring revenue, which includes software subscriptions, increased 9.7% from the year-ago period to $198.8 million, accounting for 91.8% of total sales. That more than offset a 24% decline in revenue from one-time services and other sources due mainly to the company's continued move toward subscription-based recurring revenue.
  • Earnings, however, declined more than 20% compared to the year-ago period. Profitability was under pressure due to an uptick in expenses relating to sales, marketing, and customer success, which ballooned 22% to $55.5 million as a result of the hiring of additional account executives to help drive sales growth. Those higher costs weighed on margins, which fell from 21.1% in the year-ago period to 16.6% in 2019's first quarter.
  • The increase in costs cut into free cash flow, which was a negative $22.5 million during the quarter, a $21.4 million year-over-year decrease.
  • Blackbaud acquired YourCause, a market leader in enterprise philanthropy, corporate social responsibility, and employee engagement software, for $157 million during the quarter. YourCause will bolster Blackbaud's solutions for companies committed to social causes while adding new donors, volunteers, and advocates for the social-good organizations it serves.
One hundred dollar bills growing from the ground like plants.

Image source: Getty Images.

What management had to say

CFO Tony Boor commented on the quarter by stating:

We are in an investment year to better position the business for accelerated growth and long-term success, and we are tracking well to expectations. The sales account executives hired in the second half of 2018 are currently underway, ramping to targeted productivity; we are executing our workplace strategy; and we continue to rapidly innovate for our customers.

Blackbaud's game plan this year is to invest in its people and technology. While that's weighing on profitability in the near term, it should drive accelerated growth in the future. It's part of the company strategy to capture a greater share of the more than $10 billion in total addressable markets in which it operates.

Looking forward

The company's first-quarter results came in about as it expected. Because of that, Blackbaud's "full-year financial outlook is unchanged," according to Boor. That means the company's revenue should be in the range of $880 million to $910 million, about a 5% year-over-year increase from the midpoint. Meanwhile, earnings should come in between $2.11 to $2.28 per share, down about 15% at the midpoint. The company also expects to generate $124 million to $134 million in free cash flow this year, which would be about 13% below last year's level.

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Matthew DiLallo owns shares of Blackbaud. The Motley Fool recommends Blackbaud. The Motley Fool has a disclosure policy.