UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Fiscal Year ended December 31, 20132015 |
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[ ]¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from ___________________ to ___________________. |
Commission file number: 000-50600
Blackbaud, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | 11-2617163 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant's telephone number, including area code)
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| Securities Registered Pursuant to Section 12(b) of the Act: |
| Title of Each Class | Name of Each Exchange on which Registered |
| Common Stock, $0.001 Par Value | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) |
Securities Registered Pursuant to Section 12(g) of the Act: None |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ X ]þ NO [ ]¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ]¨ NO [X ]þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ]þ NO [ ]¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X]þ NO [ ]¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerate“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] |
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Large accelerated filer þ | Accelerated filer | ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]¨ NO [X]þ
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 28, 201330, 2015 (based on the closing sale price of $32.57$56.95 on that date) was approximately $1,086,346,945.$2,047,562,190. Common stock held by each officer and director and by each person known to the registrant who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant’s Common Stockcommon stock outstanding as of February 12, 20148, 2016 was 46,119,969.46,971,656.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 20142016 Annual Meeting of Stockholders currently scheduled to be held June 23, 201415, 2016 are incorporated by reference into Part III hereof. Such definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2013.2015.
BLACKBAUD, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART II | |
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PART III | |
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PART IV | |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the documents incorporated herein by reference, contains “forward-looking statements”forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements"forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. All1934, as amended. Forward-looking statements in this report not dealing with historicalconsist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, or current facts are forward-lookingour ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions and projections. Statements which include the wordsof our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “estimates”“aims,” “projects,” “estimates,” or the negative versionany variations of thosesuch words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of a future or forward-looking nature identifyperformance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.
Although we attempt to be accurate in making these forward-looking statements, future circumstances might differ from the assumptions on which such statements are based. In addition, other importantImportant factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those set forthsummarized under “Item 1A. Risk factors” and elsewhere in this report and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise publiclyany forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise.
PART II.
Item 1. Business
OverviewDescription of Business
We are thea leading global provider of software and related services designed specifically for nonprofit organizations. Our stated company purpose is to power the business of philanthropy from fundraising to outcomes. We strive to help our customers accomplish their missions and are guided by the following corporate values:
Our people make us great.
Customers are at the heart of everything we do.
We must be good stewards of our resources.
Innovation drives success.
Our actions are guided by honesty and integrity.
Service to others makes the world a better place.
global philanthropic community. Our customers use our productscloud-based and on-premises software solutions and related services to help increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize operations. We have focused solely on the nonprofit market sinceSince our incorporation as a New York corporation in 1982.1981, we have been dedicated to developing software and services that help this industry grow and operate more efficiently. Our solutions are designed to meet the needs of nonprofits, foundations and other charitable giving organizations, and academic institutions - from large, multi-national organizations to small, emerging entities. We reincorporated as a South Carolina corporation in 1991 and reincorporated as a Delaware corporation in 2004. With recent acquisitions, we have expanded our addressable market to include institutions involved with the entire spectrum of giving activities, such as nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations and other charitable giving entities and corporations. Using Blackbaud technology, these organizations raise, invest, manage and award more than $100 billion each year. At the end of 2013,2015, we had more than 29,000approximately 35,000 active customers spreadlocated in over 69 countries.60 countries using our solutions. Our customers come from nearly every segmentserve as a constant source of the nonprofit sector, including education, foundations, healthinspiration to us, and human services, faith-based, arts and cultural, public and societal benefits, environment and animal welfare, as well as international and foreign affairs.we are extremely proud to play a part in their success.
Nonprofit IndustryMarket Overview
The nonprofitphilanthropic industry is largesignificant and diverseour addressable market is substantial and growing
There were more than 1.6approximately 1.7 million U.S. nonprofit organizations registered with the Internal Revenue Service in 2012,2014, including nearlyapproximately 1.1 million charitable 501(c)(3) organizations - double the number of charitiesreported in 1992.2014. We estimate there are approximately anotherover 3 million charities internationally. According to Giving USA 2013, donations tointernationally outside the U.S. The nonprofit organizationsmarket represents the third largest workforce category in 2012 were $316.2 billion, amounting to 2.0% ofthe U.S. GDP, a 3.5% increase from 2011 donations of $305.5 billion. The compound annual growth rate of donations over the 10-year period from 2002 to 2012 was 3.1%, not adjusted for inflation. These nonprofitbehind retail and manufacturing. Nonprofit organizations also receive fees for services they provide, which are estimated at more than $1.0$1.5 trillion annually.annually with nonprofit expenses also amounting to more than $1.5 trillion. According to Giving USA 2015, donations to U.S. nonprofit organizations in 2014 were $358.4 billion, amounting to 2.1% of U.S. GDP, a 7.1% increase from 2013. The average annual rate of change in total giving dollars over the last 40 years was 6.8%.
Our estimated current total addressable market ("TAM") is $6.3 billion. This includes an expansion in 2015 from our acquisition of Smart, LLC ("Smart Tuition") into K-12 tuition and financial aid management; a new and near adjacency within the education market. The total market expansion created by our recent acquisitions of Smart Tuition, WhippleHill Communications, Inc. (“WhippleHill”) and MicroEdge Holdings, LLC (“MicroEdge”) is estimated to be in excess of $1.5 billion.
Traditional methods of fundraising are often costly and inefficient
Many nonprofits use manual methods or stand-alone software applications not specifically designed to manage fundraising. Such methods are often costly and inefficient because of the difficulties in effectively collecting, sharing, and using donation-related information. Furthermore, general purpose and Internet-related software applications frequently have limited functionality and do not efficiently integrate multiple databases. Based on our market research, nearly a quarter of every dollar donated is used for fundraising expenses alone. Some nonprofit organizations have developed proprietary software, but doing so is expensive, requiring on-site technical personnel for development, implementation and maintenance.
The nonprofit industry faces particular operational challenges
Nonprofit organizations must efficiently:
Solicit funds and build relationships with major donors;
Garner small cash contributions from numerous contributors;
Manage and develop complex relationships with large numbers of constituents;
Communicate their accomplishments and the importance of their mission online and offline;
Comply with complex accounting, tax and reporting requirements that differ from those for traditional businesses;
Solicit cash and in-kind contributions from businesses to help raise money or deliver products and services;
Provide a wide array of programs and services to individual constituents; and
Improve the data collection and information sharing capabilities of their employees, volunteers and donors by creating and providing distributed access to centralized databases.
Because of these challenges, we believe nonprofit organizations can benefit from software applications and services specifically designed to serve their particular needs.
Blackbaud SolutionsCorporations, grant making institutions and foundations also face unique challenges
We offer a broad suiteThe market segments addressed by our MicroEdge acquisition, which include corporations, grant making institutions and foundations, face their own unique challenges, including the need to:
Quantify and improve the impact of productstheir grants;
Cultivate better relationships with grantees;
Achieve better internal collaboration and servicesalignment with board members, reviewers, and other stakeholders;
Illustrate the impact of their corporate philanthropy efforts to the communities they serve;
Engage employees in meaningful volunteering, giving and other activities;
Ensure that address the fundraising needs and operational challenges facing nonprofit organizations. We provide our customers with cloud-based and on-premise software and related services that help them increase donations, reduce the overall costs of managing their businesses and build a strong sense of community while effectively managing communicationsphilanthropic efforts align with their constituents. We also offerbusiness initiatives;
Manage all of a suitefoundation's activities, including fundraising and accounting;
Expand the reach of analytical toolstheir fundraising efforts; and related services that enable nonprofit organizations to extract, aggregate
Cultivate new and analyze vast quantities of data to make better-informed operational decisions. In addition, we help our customers increase the returns on their technology investments by providing a broad range of consulting, training and professional services, maintenance and technical support as well as payment processing services.existing donors.
Our Strategy
Our objective is to maintain and extend our position as thea leading provider of software and related services designed specifically for nonprofit organizations,the global philanthropic community, supporting their missions from fundraising to outcomes. Our key strategies for achieving this objective are to:
Achieve worldwide constituent relationship management (“CRM”) leadership forDelight our CRM products
We offer a range of CRM products which we believe meet the needs of nonprofits of all sizes and across verticals within the nonprofit market. We intend to leverage our CRM portfolio to achieve worldwide leadership in nonprofit CRM by extending the penetration of our CRM product lines to larger, more complex nonprofit organizations, and expanding the reach of our CRM products designed for mid-sized and smaller nonprofits.
Grow our worldwide customer base
We intend to expand our industry-leading customer base and enhance our market position. We have established a strong market presence with more than 29,000 customers. We believe that the fragmented nature of the industry presents an opportunity for us to continue to increase our market penetration. We plan to achieve this by making use of our next generation solutions to continue transforming our business to cloud-based applications, which we expect will allow us to serve the entire mid-market customer segment. We also plan to streamline our sales efforts to the small market customer segment. Additionally, we intend to expand our direct sales efforts, especially with regard to national, enterprise and global account-focused sales teams.
We believe the United Kingdom, Canada, Australia and the Netherlands, as well as other international markets, represent growing market opportunities for our products and services. We believe the overall market of international nonprofit organizations is changing. Donations to international nonprofit organizations are becoming increasingly important in response to reductions in governmental funding. U.S.-based nonprofit organizations are growing their international activities and opening overseas locations. We believe the international marketplace is currently underserved, and we intend to increase our presence by expanding our sales and marketing efforts internationally. We plan to sell complementary products and services to our installed base of customers and we plan to offer new products tailored to international markets, including leveraging our market leading domestic analytics solutions to develop offerings tailored specifically to meet the needs of foreign and multi-national nonprofits.
Revolutionize the customer experience
We intend to make our customers' experience with us effective, efficient and satisfying from their initial interest in our productssolutions and services, through their decision to purchase, engage with customer support and utilize productsolution enhancements. We continue to focus on initiatives aimed at improving the consistency and quality of user experience across the offerings we provide to our customers. We continue to evolve the manner in which we package and sell our offerings to provide higherhigh quality and value combined with flexibility to meet the different needs of our existing and prospective customers. For example, we are increasing the number of our offeringscloud-based solutions sold under a subscription pricing model, which can make it easier for customers to purchase our solutions. In addition, we are continuing to integrate value-adding capabilities such as payment processing, analytics and business intelligence into our suite of solutions to better address our customers' needs with comprehensive offerings. We will continue to focus on providing the highest level of productsolution support, while continuing to enhanceenhancing our existing productssolutions and developing new productssolutions and services designed to help allow our customers to be more effectivelyeffective and achieve their missions.
Strategically pursue partnershipsExecute on our Five Point Growth Strategy
During 2014, we introduced and acquisitionsbegan executing on a five point growth strategy. In 2015, these strategies evolved to account for progress to date and future outlook and are as follows:
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| 1. | Integrated and Open Solutions in the Cloud |
We intend towill continue to selectively pursue acquisitions,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.
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| 2. | Drive Sales Effectiveness |
We are making investments to increase the effectiveness of our sales organization, to expand existing partnershipsour direct sales and customer success teams and to developintroduce indirect sales with the announcement of a value added reseller ("VAR") program, launching in the first quarter of 2016.
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| 3. | Expand TAM into Near Adjacencies with Acquisitions |
We will continue to evaluate compelling opportunities to acquire companies, technologies and/or services. We will be guided by our acquisition criteria for considering attractive assets, which expand our total addressable market, provide entry into new strategic partnershipsand near adjacencies, accelerate our shift to enter new marketsthe cloud, accelerate revenue growth, are accretive to margins and pursue significant untappedpresent synergistic opportunities.
We intendhave largely completed the installations of single best-in-breed back-office solutions to develop these alliances with companies that provide us with complementary technology, customersstandardize operations utilizing scalable tools and personnel with significant relevant experience,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 accessoperating effectiveness and efficiency and improve non-GAAP operating margins 300 to additional geographic600 basis points on a constant currency basis from our 2014 baseline of 17.5%, by the time we exit 2017.
Attract Top Talent and vertical markets.Actively Engage Employee Base
Our customer's passion is our purpose, and we have incredible customers whose missions make the world a better place for all of us. Driven by this purpose, our employees come to work every day knowing they can make a real difference with our customers, and thus the world. Collaboration, innovation and high standards are core to our culture and help enable the great work we do. We strive to hire the best employees and provide a workplace where their talents and potential are realized. Our employees' engagement is a focus of every leader at Blackbaud, and we continually work to understand what matters and to make our workplace better. We believe people with a passion for purpose can join our team and have completed significant acquisitions overa unique career experience. Our leaders are committed to our employees' personal and career development and continually work to improve the past fivetraining and tools provided to their teams.
Build our Reputation as an Industry Thought Leader
In our nearly 35 years bothof experience in the United Statesphilanthropic market, we have gained significant insight into the market and internationally,industry segments in which we operate. We produce a wide range of thought leadership materials, including blogs, monthly indices and white papers, which provide insights and guidance to the acquisition of Convio, Inc. (Convio) in May 2012. The acquisition of Convio provided us with expanded subscription and online offerings and has accelerated our evolution to a subscription-based revenue model.
philanthropic community. We are also currently involvedparticipate in a number of strategic relationships which allow usindustry forums where we exchange views and engage with industry and governmental leaders. Our annual user conference, bbcon™, is used in part as a forum to provideoffer thought leadership to our customers, as well as other market specific user conferences such as our annual K-12 conference. We intend to expand these activities and further build our reputation as a wider variety of offerings and provide customers with integrated solutions, further enhancingthought leader within the value of our proprietary technology. We believe that our size and history of leadership in the nonprofit sector make us an attractive acquirer or partner for others in the industry.
Our Operating Structure
The nonprofit market ismarkets we serve are very diverse, with organizations that range from small, local charities to large, multinational relief organizations. The needs of nonprofitsour customers can vary greatly according to their size and function. To better serve the wide variety of nonprofits in the market,our customers' unique and wide-ranging operations, we organize our operating structure into fourthree operating units: the General Markets Business Unit (the “GMBU”), the Enterprise Customer Business Unit or ECBU, the General Markets Business Unit, or GMBU,(the “ECBU”) and the International Business Unit or IBU, and Target Analytics.(the “IBU”).
Following is a description of each of our operating units, each of which is a reportable segment for financial accounting purposes:
The ECBU is focused on marketing, sales, delivery and support to large and/or strategic customers, specifically identified prospects and customers in North America.
The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America.
The ECBU is focused on marketing, sales, delivery and support to large and/or strategic prospects and customers in North America.
The IBU is focused on marketing, sales, delivery and support to all prospects and customers outside of North America.
Target Analytics is primarily focused on marketing, sales and delivery of analytic services to all prospects and customers in North America.
Each operating unit contains specialized sales, services, support, marketing and finance functions. We believe this structure allows us to be more responsive to the needs of fundamentally different customer segments and to focus on developing solutions appropriate for these unique markets while leveraging the infrastructure of our broader organization and shared
technology in a cost-effective manner. It also allows us to develop highly customized approaches to marketing and selling our productssolutions in the markets we serve.
Products and Services
We provide cloud-based and on-premise software solutions and related services to our customers. During 2013,2015, we generated revenue in fourthree reportable segments (the ECBU, the GMBU, the IBUECBU and Target Analytics)the IBU) and in four geographic regions (United States, Canada, Europe and Asia Pacific)Australia), as described in more detail in Note 16 of our consolidated financial statements. It is impracticable for us to identify our total assets by segment. Summarized below is our percentage of total revenue for each of our principal solution and service groups:
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| Subscriptions | 52.0 | % | | 46.7 | % | | 42.2 | % | |
| Maintenance | 24.1 | % | | 26.1 | % | | 27.5 | % | |
| Services | 20.8 | % | | 22.7 | % | | 25.1 | % | |
Solutions and Services
We offer a full spectrum of cloud-based and on-premises solutions as well as a resource network that empowers and connects organizations of all sizes. Blackbaud's 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 ("CSR"), and education. We offer the global philanthropic community a complete system to meet any need with the market-leading constituent relationship management ("CRM") system and online engagement platforms, backed by our analytic services that we are leveraging to make our software "smarter." In most cases, the core of our solution portfolio centers around a CRM system, which seamlessly integrates with other applications to help our customers conduct activities vital to advancing their missions, such as managing finances, analyzing prospects and market data, effectively communicating with current and prospective supporters and promoting their cause online and offline. Our broadsolutions can be combined with a range of consulting, training and professional services, maintenance and technical support as well as payment processing, analytic and business intelligence services. In addition, we offer solutions that stretch across the spectrum of giving activities, including CSR programs, grant management, employee involvement, foundation management and other philanthropic activities.
With the acquisition of Smart Tuition in October 2015, we expanded our suite of software, servicessolutions that help K-12 schools improve back-office processes, enhance communication with parents and analytical tools help nonprofit organizations manage the key aspectseliminate inefficiencies and now offer easy to use, anywhere-accessible solutions that support tuition and financial aid management. Smart Tuition's solution suite, which includes Smart Tuition, Smart Aid and Smart for Dioceses, serves thousands of their operations. By automating business processes, our products streamline operations for our customersschools and help to reduce theover 300,000 families.
overall costs of operating their organizations. We provide solutions and services in the following areas that address many of the technological and business process needs of our customers, including:customers:
Constituent relationship management;
Financial management and reporting;
Cost accounting information for projects and grants;
Integration of financial data and donor information in a centralized system;
Online fundraising;
Peer-to-peer fundraising;
Event, data and information management;
Student information systems for independent schools and small colleges;
Ticketing management;
General admissions management;Fundraising & Relationship Management;
Analytics & Business Intelligence;
Communication & Marketing;
Finance & Operations;
K-12 Private Schools;
Arts and prospect research;Cultural;
ConsultingCustomer Support and educational services;Maintenance;
Payment Processing;
Professional Services;
Training; and
Payment processing and related regulation compliance.CSR.
Software productsBlackbaud, Inc.
We provide our wide variety of solutions to nonprofit organizations in several ways. We offer our products as software-as-a-service (“SaaS”), on a perpetual license basis, or as “hosted” software offerings, which can be used individually to help organizations with specific functions, such as fundraising, constituent relationship management, financial management, website management and prospect research, or combined into a fully-integrated suite of tools to help them manage multiple areas of their operations.
Fundraising and Constituent Relationship Management
The Raiser's Edge
NXTThe Raiser's Edge became generally available in July 2015 and is the leading softwarecloud-based solution designed to manage a nonprofit organization's constituent relationship management and fundraising activity. It is used by more than 13,000 organizations worldwide and has won four consecutive Campbell Awards for User Satisfaction from 2009 through 2012. The Raiser's Edge enablesNXT is the first and only cloud fundraising and relationship management solution that is all-inclusive, fully integrated with data, analytics, payment processing and tailored user-specific experiences, and is built exclusively to serve the unique needs of nonprofit organizationsorganizations. Built on our modern Blackbaud SKY technology architecture, it is the most advanced technology available to cultivate lifelonghelp nonprofits build relationships with supporters, grow new revenue streams, and diversify fundraising methods. Constituent relationship management, online fundraising and email marketing are coupled with analytics, data enrichment tools and best practices, in a single solution.expand mission impact.
Blackbaud CRM
Blackbaud™, also known informally as Enterprise CRM, is a flexible, extensible, scalablecomprehensive, customizable fundraising and secure web-based CRMrelationship management solution. It is our lead offering for enterprise-level organizations with complexseeking a powerful, yet adaptable solution for fundraising, needsmarketing, and program management across all verticals,the engagement lifecycle, specializing in supporting sophisticated major giving, membership and high volume direct marketing programs. Blackbaud CRM helps organizations build deeper and more personalized relationships with constituents, build their brand through online engagement and multi-channel communication tools, and more effectively fundraise, leveraging campaign management, business intelligence and analytics. Blackbaud CRM can be sold as an integrated solution with our enterprise online solutions to enable multi-channel marketing, online engagement and event fundraising.
Luminate CRM
Luminate CRM™ is our preferred fundraising andSalesforce-based CRM offering for mid-tier cause and cure nonprofits and is sold as a single integrated solution with Luminate Online. Luminate CRM is built on the SalesForce.com SaaScloud computing application platform and offers nonprofits an extensible suite via the SalesForce App Exchange for consolidating information and business processes into one system. The core components of Luminate CRM are campaign management, constituent relations, business intelligence and analytics. When combined with Luminate Online, it provides best-in-class functionality to help nonprofits with online fundraising, peer-to-peer event fundraising, payment processing, email marketing, advocacy and website management.
eTapestry
eTapestry™ is a SaaSsimple, cloud-based donor management and fundraising solution built specifically for smaller, nonprofits.developing nonprofits in need of a solid cloud solution to support basic fundraising needs. It offers nonprofit organizations a cost-effective way to manage donors, process gifts, create reports, accept online donations and communicate with constituents. eTapestry was built to operate in a hosted environment and to be accessed online. This technology provides a system that is simple to maintain, efficient to operate and is intuitively easy to learn without extensive training.
Online Solutions
Luminate Online
Luminate Online, delivered as SaaS, helps our customers better understand their online supporters, make the right ask at the right time, and raise money online. It includes tools nonprofits need to build online fundraising campaigns as part of an organization's existing website or as a stand-alone fundraising site. Donation forms, gift processing, and tools for communicating through web pages and email give our customers the essentials for building sustainable donor relationships. Customers can also purchase additional modules including TeamRaiser, a leader within events management that allows nonprofits constituents to create personal or team fundraising web pages and send email donation appeals in support of events such as a walks, runs and rides.
Blackbaud NetCommunity
Blackbaud NetCommunityeverydayhero™ is an Internet marketing and communications tool that enables organizations that utilize the Raiser's Edge software to build interactive websites and manage email marketing campaigns. With Blackbaud NetCommunity, organizations can, among other things, establish online communities for social networking among constituents and also provide a platform for online giving, membership purchases and event registration. Because Blackbaud NetCommunity requires the Raiser's Edge database to operate, it can only be sold with Raiser's Edge or to existing Raiser's Edge customers. However, Blackbaud NetCommunity, in concert with The Raiser's Edge, provides a single source of up-to-date constituent information across an entire organization, regardless of how individual constituents interact and communicate with the organization.
Sphere eMarketing
Sphere eMarketing, delivered as SaaS, provides organizations with an integrated system of applications to manage e-marketing, communications, programs, services and online fundraising. Sphere eMarketing enables an organization's volunteers, members, donors and staff to share real-time data and information in an online community in order to better manage constituent relationships. Sphere eMarketing isinnovative, cloud-based crowdfundraising solution designed to help organizations manage sophisticated and targeted e-mail campaigns with efficiency and control. Comprehensive real-time reports are available to help organizations make strategic data-driven decisions for future marketing campaigns.
Everyday Hero
Everyday Hero is an event-driven web-based fundraising solution in Asia-Pacific and the UK. The Everyday Hero solution is focused on meetingmeet the peer-to-peer fundraising needs of nonprofits internationally.nonprofits' supporters. It is a leading donor acquisition tool, and helps nonprofits in Asia-Pacific and the UK connect with a younger, more online-focused generation of donors, a first step in helping nonprofits develop long-term relationships with their supporters. We currently plan to make Everyday Hero available to nonprofitsFounded in Australia, where it is a market leader, everydayhero is now sold throughout Europe and the U.S. beginning in 2014.
Online Express
Blackbaud Online Express is a simple, cloud-based online fundraising and marketing tool designed for smaller nonprofit organizations using The Raiser’s Edge. Launched in 2013, it provides nonprofitsWith recent integrations with easy-to-use features and functionalityfitness applications such as email marketing, donation forms, event registrations,Strava and dashboard metrics.
Financial Management
The Financial Edge
The Financial Edge is an accounting solution designedMapMyFitness, everydayhero continues to addressenhance the specific accounting, analytical and financial reporting needs of nonprofit organizations. It integrates with The Raiser's Edge to simplify gift entry processing and relate information from both systems in an informative manner to eliminate redundant tasks. The Financial Edge provides nonprofit organizations with the means to help manage fiscal and fiduciary responsibility, enabling them to be more accountable to their constituents.
School Management
The Education Edge
The Education Edge is a comprehensive student information management system designed principally to organize an independent school's admissions and registrar processes, including capturing detailed student information, creating class schedules, managing attendance and performance/grades records, producing demographic, statistic, and analytical reports and printing report cards and transcripts.
Blackbaud's Student Information System
Blackbaud's Student Information System is a complete software solution designed for small colleges and other institutions of higher education with a full-time enrollment of less than 5,000. The solution links student information across all campus offices and includes functionality designed specifically to organize the admissions and registrar's processes. Blackbaud's Student Information System helps significantly reduce time spent on data maintenance and creation of class schedules and allows institutions to communicate efficiently with prospects, students and alumni.
Ticketing
The Patron Edge
The Patron Edge is a comprehensive ticketing management solution specifically designed to help large or small performing arts organizations, museums, zoos and aquariums increase attendance and revenue. The Patron Edge can be integrated with The Raiser's Edge to allow for a complete profile view of patrons, donors or visitors. The Patron Edge offers a variety of ticketing methods and allows customers to save time and costs by streamlining ticketing, staffing, scheduling, event and membership management and other administrative tasks.
General Admissions Management
Altru
Altru is an arts and cultural solution suite provided to our customers as a SaaS offering. Altru helps general admissions arts and cultural organizations gain a clear, 360-degree view of their organization, operate more efficiently, engage and cultivate patrons and supporters, streamline external and internal communication efforts, and reduce IT costs. It contains tools for constituent and membership management, program sales, retail sales and ticketing, volunteer management, and events management. It also has sophisticated reporting functionality and tools to manage marketing, communications and fundraising.
Events Management
TeamRaiser
TeamRaiser is a complete online fundraising solution that allows nonprofits to tap into the personal networks of their strongest supporters and mobilize volunteers online. Organized around central fundraising events such as runs, walks or rides, it gives nonprofit constituents the ability to create fundraising web pages and send donation appeals via email to their family and friends.
Sphere Friends Asking Friends
Sphere Friends Asking Friends enables organizations to quickly and easily launch and manage online event fundraising websites. Sphere Friends Asking Friends facilitates growth in donations and participation levelslandscape by providing participants toolsmillions across the globe the chance to become fundraiserseasily integrate fitness and recruiters on behalf of nonprofit organizations. It also allows event participants to reach out to their Facebook® and Twitter® networks, expanding the fundraising and marketing potential of virtual events. It is used by organizations of all sizes and budgets to manage regional to national events.philanthropy.
Consulting and education servicesAnalytics & Business Intelligence
Our consultantsanalytics offerings provide conversion, implementation and customization services for each of our software products. These services include:
System implementation, including all aspects of installation and configuration, to ensure a smooth transition from the customer's legacy system and to create a more streamlined business workflow;
Management of the data conversion process to ensure data is a reliable and powerful source of information for an organization;
Business process analysis and application customization to ensure that the organization's system is properly aligned with an organization's processes and objectives;
Removal of duplicate records, database merging and enrichment, information cleansing and consolidation, and secure credit card transaction processing;
Database production activities, including direct marketing, business intelligence, cultivation and stewardship processes; and
Website design services, Internet strategy consulting and specialized services, such as email marketing and search engine optimization.
In addition, we apply our industry knowledge and experience, combined with expert knowledge of our products, to evaluate an organization's needs and consult on how to improve a business process. This work is performed by consultants who have extensive and relevant domain experience in all aspects of nonprofit management, accounting, project management and IT services. We believe that no other software company provides this broad a range of consulting and technology services and solutions dedicated to the nonprofit industry.
We provide a variety of classroom, onsite, distance-learning and self-paced training services to our customers relating to the use of our software products and application of best practices. Our software instructors have extensive training in the use of our software and present course material that is designed to include hands-on lab exercises, as well as course materials with examples and problems to solve.
Analytics services
Target Analytics provides comprehensive solutions for donor acquisition, prospect research, data enrichment, and performance management, enabling nonprofits to define effective campaign strategies and maximize fundraising results. Target Analytics offersThese services either integrate with or are already integrated into our software solutions to give our customers a comprehensive view of their supporters and the market and provide information essential to making well-informed operating decisions.
Our analytics offerings include subscription solutions and dataservices within the following areas:
Donor Acquisition - Target Analytics leveragesOur donor acquisition solutions leverage unique data assets to create acquisition mailing lists and predictive models that identify donor populations that meet the affinity, value and response criteria of our nonprofit clients.customers. Nonprofit organizations use our prospect lists to solicit gifts and other support.
Prospect Research - Nonprofit organizations use Target Analytics'Our prospect research solutions to develop major gift and personal fundraising cultivation strategies. Prospect research solutions include: custom data modeling that delivers critical information on a prospect's likelihood to make a gift to an organization; wealth screenings that deliver detailed wealth information and giving capacity data on prospects; and web-based prospect management software that combines public data with donor information from a nonprofit's database to build a complete view of prospects for targeting and securing gifts.
Data Enrichment - Target Analytics Data Enrichment ServicesOur data enrichment solutions enhance the quality of the data in our customers' databases. ServicesThese solutions include: identifying outdated address files in the database and making corrections based on the requirements and certifications of the United States Postal Service data, as well as appending data by using known fields in an organization's constituent records to search and identify key demographic and contact information.
Performance Management - Target Analytics createsOur performance management solutions create relevant and insightful reports that benchmark performance and illustrate key industry trends based on performance attributes provided by our nonprofit clients.customers. Nonprofit organizations use our performance and industry analysis reports to assess marketing and operational effectiveness and also to influence operational planning.
Communications & Marketing
Luminate Online™, delivered in the cloud, helps our customers better understand their online supporters, make the right ask at the right time, and raise money online. It includes tools to build online fundraising campaigns as part of an organization's existing website or as a stand-alone fundraising site. Donation forms, gift processing, and tools for communicating through web pages and email give our customers the essentials for building sustainable donor relationships. Customers can also purchase additional modules including TeamRaiser, a solution within events management that allows nonprofits' constituents to create personal or team fundraising web pages and send email donation appeals in support of events such as a walks, runs and rides.
Blackbaud Online Express™ is a simple, cloud-based fundraising and marketing tool designed for smaller nonprofit organizations using Raiser’s Edge. It provides nonprofits with easy-to-use features and functionality such as email marketing, donation forms, event registrations, and dashboard metrics.
Blackbaud NetCommunity™ is an online marketing and communications tool that enables organizations that utilize Raiser's Edge software to build interactive websites and manage email marketing campaigns. With Blackbaud NetCommunity, organizations can, among other things, establish online communities for social networking among constituents and also provide a platform for online giving, membership purchases and event registration. Because Blackbaud NetCommunity requires a Raiser's Edge database to operate, it can only be sold with Raiser's Edge or to existing Raiser's Edge customers.
Finance & Operations
Financial Edge NXT became generally available in September 2015 and is the first-of-its-kind cloud accounting solution for nonprofits that is intuitive, fully integrated, and built the way nonprofits need it on our modern Blackbaud SKY technology architecture. Financial Edge NXT is advanced technology with powerful reporting tools to help accounting teams drive transparency, stewardship, and compliance while enabling them to seamlessly manage transactions and eliminate manual processes. It seamlessly integrates with Raiser's Edge NXT to simplify gift entry processing and relates information from both systems in an informative manner to eliminate redundant tasks and manual processes. Financial Edge NXT provides nonprofit organizations with the means to help manage fiscal and fiduciary responsibility, enabling them to be more accountable to their constituents.
GIFTS Online™ is a cloud-based solution built with core functions that provide comprehensive grant making capabilities, but with many additional capabilities and features, such as visual dashboards. It has a modern user interface, is user friendly, and can be highly personalized.
FIMS™ is an on-premises, fully-integrated foundation management system that helps community foundations, faith-based organizations and education and scholarship programs manage grants, finances and donors in one centralized, comprehensive system. It features an open, customizable framework that helps community foundations manage everything from donors, gifts and investments to grants, grantees, funds and financials. We also offer FIMS as a fully hosted solution.
Blackbaud Outcomes™empowers funders and nonprofits to collaborate around their intended program outcomes and work together to achieve impact. The cloud-based software helps users define and measure their outcomes, allowing them to track the effectiveness of their programs, make informed decisions, better understand the impact of their social investments, and tell an impact story using ROI-focused results and a common outcomes measurement language.
K-12 Private Schools
onMessage™ is a content management system that gives schools the flexibility to build and edit webpages, with easy access to content types including photos, videos, downloads, text and more. It allows users to share material and contribute content across an entire school community.
onRecord™ makes it easy for schools to manage schedules, transcripts and GPAs. A new Student Information System that works directly with onCampus (LMS), onRecord simplifies the process of sharing student data and academic records securely.
onCampus™ is a learning management system that makes it easy to manage, connect, and share information with students, parents, and an entire school community. Developed with direct input from our customers, onCampus gives teachers the tools to meet the demands of a modern private school.
onBoard™ is an enrollment management system that simplifies a school’s admissions process. onBoard helps admissions teams and prospective families manage and track their progress, from inquiry and application through acceptance and enrollment.
Smart Tuition™ benefits schools by giving administrators better access to financial data and payment services, and by giving parents more ways to remit tuition payments. The solution helps ease the burden for administrative staff by offering invoicing, payment processing, customer service, enhanced communication with parents and later payer follow-up services.
Smart Aid™ offers schools the ability to accept online, customized applications for financial aid and to make better financial aid decisions with a proprietary Hobbies, Interest and Lifestyles ("HIL") profile. The HIL profile provides in-depth information on an applicant, delivering to the school a way to make more informed decisions on how they distribute financial aid awards.
Arts & Cultural
Altru™ is a cloud solution that helps arts and cultural organizations consolidate admissions, membership, fundraising, merchandise, marketing and more, giving users a comprehensive view of their supporters. By helping general admissions arts and cultural organizations gain a clear, 360-degree view of their organization, it enables them to operate more efficiently, engage and cultivate patrons and supporters, streamline external and internal communication efforts, and reduce IT costs. It contains tools for constituent and membership management, program sales, retail sales and ticketing, volunteer management, and events management. It also has sophisticated reporting functionality and tools to manage marketing, communications and fundraising.
Customer Support & Maintenance
Most of our customers that licensepurchase our software productssolutions also enroll in one of our support and maintenance andprograms. For many of our cloud-based subscription solutions, customer support programs. In eachis automatically included as part of the past five years, approximately 95% of our customers have renewed their maintenance plans.solution. Customers enrolled in the programs enjoy fast, reliable customer support, receive regular software updates, stay up-to-date with support newsletters and have unlimited, around-the-clock access to support resources, including our extensive knowledgebase and forums. Customers who enroll in upgraded support and maintenance plans receive enhanced benefits such as call support priority and dedicated support resources.
Payment processingProcessing
Our productssolutions provide our customers payment processing capabilities that enable their donors to make donations and purchase goods and services using numerous payment options, including credit card and automated clearing house (“ACH”) checking transactions, through secure online transactions. Blackbaud Merchant Services is a value-added service integrated with our solutions that makes credit card processing simple and secure. Customers are charged one rate for credit card transactions, with no extra fees, making Blackbaud Merchant Services a competitive option. The service also provides customers with a payment card industry (“PCI”) compliant process and streamlined bank reconciliation. As discussed above, we also provide our K-12 private school customers with student tuition payment processing services.
Professional Services
Our consultants provide data conversion, implementation and customization services for each of our software solutions. These services include:
System implementation;
Data conversion, business process analysis and application customization;
Database merging and enrichment, and secure credit card transaction processing;
Database production activities; and
Website design services.
In addition, we apply our industry knowledge and experience, combined with expert knowledge of our solutions, to evaluate an organization's needs and consult on how to improve a business process.
Training
We provide a variety of onsite, instructor-led online and on-demand training services to our customers relating to the use of our solutions and application of best practices. Our instructors have extensive training in the use of our solutions and present course material that is designed to include hands-on lab exercises, as well as course materials with examples and problems to solve.
Corporate Social Responsibility
AngelPoints™ is an integrated CSR solution that helps corporations mobilize the collective power of their employees to make a positive impact on their people, their company, and the world. AngelPoints contains modules that help companies manage employee volunteer and giving programs.
Customers
We have customers in every principal vertical market within the nonprofit industry. At the end of 2013,2015, we had more than 29,000approximately 35,000 active customers ranging from small, local charities, to healthcareincluding nonprofits, K-12 private and higher education institutions, healthcare organizations, to the largest national healthfoundations and human services organizations.other charitable giving entities, and corporations. Our largest single customer accounted for approximately 1% of our 20132015 consolidated revenue.
Sales and Marketing
The majority of our softwaresolutions and related services are sold through our direct sales force. Our direct sales force is complemented by a team of account development representatives responsible for sales lead generation and qualification. These sales and marketing professionals are located throughout the United States, the United Kingdom, the Netherlands, Canada, Australia and New Zealand. As of December 31, 2013,2015, we had 271376 direct sales employees. We plan to continue expanding our direct sales force in the Americas, Europe, Australia and AsiaNew Zealand as our operations grow internationally and market demand continues to recover from the current economic environment.increases.
We generally begin a customer relationship with the sale of one of our primary productssolutions or services, such as The Raiser's Edge NXT, Blackbaud CRM or Luminate, and then offer additional productssolutions and services to the customer as the organization's needs increase. As our business model evolves, we are increasingly beginning customer relationships with the sale of an integrated suite of cloud-based solutions.
We conduct marketing programs to create brand recognition and market awareness for our productssolutions and services. Our marketing efforts include participation at tradeshows, technical conferences and technology seminars, publication of technical and educational articles in industry journals and preparation of competitive analyses. Our customers and strategic partners provide references and recommendations that we often feature in our advertising and promotional activities.
We believe relationships with third parties can enhance our sales and marketing efforts. We have and will continue to establish additional relationships with companies that provide services to the nonprofit industry, such as consultants, educators, publishers, financial service providers, complementary technology providers and data providers. These companies promote or complement our nonprofit solutions and provide us access to new customers.
Corporate Philanthropy and Volunteerism
We believeBlackbaud operates under a fundamental belief that service to others makes the world would be better if good took over. The company is an active participant in the ecosystem of good, working to drive positive change both through what we do as a better placebusiness and champion this value throughhow we serve individually. We offer an array of philanthropy programs aimed at engaging our global corporate philanthropy and employee-volunteer programs. In addition to having employees select grant recipients for our endowment fund, we celebrate individual actsas agents of service through agood, including matching gifts, competitive grant programgrants that honorshonor excellent examples of volunteerism, employee-led grants committees, skills-based volunteerism initiatives, as well as science, technology, engineering and benefitsmathematics focused community programs. Blackbaud attracts people who are committed to service, with 84% saying our focus on nonprofits was a driver in their decision to join the organizations they serve.company and 81% actively serving as volunteers. More than 100 nonprofits have Blackbaud employees on their boards.
Competition
The market for software and related services in the nonprofit sector is highly competitive and highly fragmented. For certain areas of the market, entry barriers are low. However, we believe our experience and product depthfull spectrum of solutions makes us a strong competitor. We expect to continue to see new competitors as the market matures and as nonprofit organizations become more aware of the advantages and efficiencies attainable through the use of specialized software. A number of diversified software enterprises have made acquisitions or developed products for the market, including Ellucian, Abila (formerly Sage Nonprofit Solutions), FrontStream Payments, Bloomerang and Campus Management. Other companies that compete with us, such as Microsoft, Salesforce.com and Oracle, have greater marketing resources, revenue and market recognition than we do. They offer some products that are designed specifically for nonprofits, in addition to some of their products which have a degree of functionality for nonprofits that could be considered competitive. These larger companies could decide to focus more on the nonprofit sector with new, directly competitive products or through acquisitions of our current competitors.
We mainly face competition from four sources:
Software developers offering specialized products designed to address specific needs of nonprofit organizations, some of which are sold with subscription pricing;
Providers of traditional, less automated fundraising services, such as services that support traditional direct mail campaigns, special events fundraising, telemarketing and personal solicitations;
Custom-developed products created either internally or outsourced to custom service providers; and
Software developers offering general products not designed to address specific needs of nonprofit organizations.
We compete with several software developers that provide specialized products, such as on-demand software specifically designed for nonprofit use.organizations, charitable giving and educational organizations. In addition, we compete with custom-developed solutions created either internally by nonprofit organizations or outside by custom service providers. We believe that we compete successfully, because building efficient, highly functional custom solutions equal to ours requiresmay require technical resources that are beyond the capabilities of custom solution providers or require resources that might not be available within nonprofit organizations.organizations or might not be readily available to certain custom solution providers. In addition, the nonprofit organization's legacy database and software system may not have been designed to support the increasingly complex and advanced needs of today's growing community of nonprofit organizations.
We also compete with providers of traditional, less automated fundraising services,service providers, including parties providing services in support of traditional direct mail or email campaigns, special events fundraising, peer to peer, telemarketing and personal solicitations. Although there are numerous general software developers marketing products that have some application in the nonprofit market, these competitors have generally neglected to focus specifically on this market and typically lack the domain expertise to cost effectively build or implement integrated solutions for the market's needs. We believe we compete successfully against these traditional fundraising services,service providers, primarily because our productssolutions and services are more automated, more robust, more tailored to the needs of nonprofitsnonprofit organization and more efficient.
In the independent, family and community foundation markets, we encounter competition primarily from smaller companies with products that range from simple grantmaking solutions to custom developed platforms. The competition we face in the corporate giving/grantmaking and employee volunteering markets comes primarily from three sources: providers of end-to-end solutions that combine grant making and CSR functionality; providers of standalone CSR software; and providers of grants management software.
Larger companies that compete with us, such as Microsoft, Salesforce.com and Oracle, have greater marketing resources, revenue and market recognition than we do. They offer some products that are designed specifically for nonprofit organizations, in addition to some of their general products, which have a degree of functionality for nonprofit organizations that could be considered competitive. These larger companies could decide to focus more on the nonprofit sector with new, directly competitive products or through acquisitions of our current competitors.
Research and Development
We have made substantial investments in research and development and expect to continue to do so as a part of our strategy to introduce additional productsinnovative solutions and services. As of December 31, 2013,2015, we had 464617 employees working on research and development. Our research and development expenses for 2015, 2014 and 2013 2012were $84.6 million, $77.2 million and 2011$65.6 million, respectively, and our cash outlays for software development costs for 2015, 2014 and 2013 were $65.6$15.5 million,, $64.7 $8.5 million and $47.7$3.2 million,, respectively. We plan to continue significantly investing in the innovation of our portfolio of solutions and services.
Technology and Architecture
We have products,Our new cloud technology, SKY, combines software defined infrastructure, leading edge development processes, and a micro service oriented architecture to deliver our next generation solutions, the first of which were Raiser's Edge NXT and Financial Edge NXT. Another component of SKY, SKY API, gives customers, partners and other application developers access to industry-standard, open, Representational State Transfer (or REST) APIs and a comprehensive set of resources that enable them to customize, integrate or extend functionality of our solutions. Additionally SKY UX, our open source user experience framework, increases the reach of our solutions by enabling developers to create interfaces that look and feel like ours by using the same user experience foundation as our engineers.
Other solutions, such as Blackbaud CRM, that are built on the Microsoft.Net framework platform. These productssolutions are web-delivered applications utilizing a Service Oriented Architecturean architecture built on Internetinternet standards and protocols such as HTTP, XML and SOAP. This architecture is designed to support flexibleon-premises and hosted application deployment scenarios including on-premise, hosted applications, and SaaS.scenarios. The applications expose web service application programming interfaces so that functionality and business logic can be accessed programmatically from outside the context of an interactive user application.
Each of our Luminate products,solutions, including Luminate Online, Luminate CRM and TeamRaiser, are SaaScloud-based applications that are open and extensible and employ a multi-tenant architecture requiring only a web browser for clientcustomer access. Luminate Online and TeamRaiser share a common codebase and database, and are built on the Java runtime environment. Luminate CRM is built on the SalesForce.com platform.
Our version 7.x generation productssolutions (e.g. The Raiser's Edge and Blackbaud CRM)Edge) utilize a three-tier clientcustomer server architecture built on the Microsoft Component Object Model, or COM.
Regardless of productsolution choice, theour development strategies of our solutions are designed to be:
Flexible. Our component-based architecture is programmable and easily customized by our customers without requiring modification of the source code, ensuring that the technology can be extended to accommodate changing demands of our clientscustomers and the market.
Adaptable. The architecture of our applications allows us to easily add features and functionality or to integrate with third-party applications in order to adapt to our customers' needs or market demands.
Scalable. We combine a scalable architecture with the performance, capacity and load balancing of industry-standard web servers and databases used by our customers to ensure that the applications can scale to the needs of larger organizations.
We do and intend towill continue to license technologies from third parties that are integrated into certain of our products.solutions.
Intellectual Property and Other Proprietary Rights
To protect our intellectual property, we rely on a combination of patent, trademark, copyright, and trade secret laws in various jurisdictions, as well as employee and third-party nondisclosure agreements and confidentiality procedures. We have a number of registered trademarks, including “Blackbaud,” “The Raiser's“Raiser's Edge” “Blackbaud CRM” NXT” and “Luminate.” We have applied for additional trademarks. We currently have two active patents on our technology, and have a total of three pending patent applications.
Employees
As of December 31, 2013,2015, we had 2,6663,095 employees, none of which are represented by unions or are covered by collective bargaining agreements. We are not involved in any material disputes with any of our employees, and we believe that relations with our employees are satisfactory.
Seasonality
For a discussion of seasonal variations in our business, see “Management’s discussion and analysis of financial conditions and results of operations — Seasonality” in Item 7 in this report.
Financial Information about Geographic Areas
For information about revenues by geographic region and long-lived assets by geographic region, please see Note 16 to our consolidated financial statements in this report. For a description of risks attendant to our non-U.S. operations, please see “Risk factors - If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer” in Item 1A in this report.
Working Capital
For a discussion of our working capital practices, see “Management’s discussion and analysis of financial conditions and results of operations — Liquidity and capital resources” in Item 7 in this report.
Available Information
Our website address is www.blackbaud.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as is reasonably practicable after we electronically file such material is electronically filed with, or furnishedfurnish it to, the SEC, but other information on our website is not incorporated into this report. The SEC maintains an Internet site that contains these reports at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Executive Officers of the Registrant
The following table sets forth information concerning our executive officers as of February 15, 2014:
|
| | | | | |
| Name | | Age |
| | Title |
| Michael P. Gianoni | | 5355 |
| | President and Chief Executive Officer |
| Anthony W. Boor | | 5153 |
| | SeniorExecutive Vice President and Chief Financial Officer |
| Charles T. Cumbaa | | 6163 |
| | SeniorExecutive Vice President New Business Developmentof Corporate and Product Strategy |
Joseph D. MoyeKevin W. Mooney | | 5257 |
| | Executive Vice President Enterprise Customer Business Unit |
Kevin Mooney | | 55 |
| | and President, General Markets Business Unit |
Bradley J. HolmanBrian E. Boruff | | 5256 |
| | Executive Vice President Internationaland President, Enterprise Customer Business Unit |
| John J. Mistretta | | 5860 |
| | SeniorExecutive Vice President of Human Resources |
Michael P. Gianoni joined us as President and Chief Executive Officer in January 2014. Prior to joining us, he served as Executive Vice President and Group President, Financial Institutions at Fiserv, Inc., a global technology provider serving the financial services industry, from January 2010 to December 2013. He joined Fiserv as President of its Investment Services division in December 2007, where he was responsible for product, technology, sales, finance, operations and strategy.2007. Mr. Gianoni was Executive Vice President and General Manager of CheckFree Investment Services, which provided investment management solutions to financial services organizations, from June 2006 until December 2007 when CheckFree was acquired by Fiserv. From May 1994 to November 2005, he served as Senior Vice President of DST Systems Inc., a global provider of technology-based service solutions, where he led various divisions focused on developing new platforms while ensuring stronger operational controls.solutions. Mr. Gianoni is a member of the Board of Directors of Teradata Corporation, a publicly traded global big data analytics and marketing applications company. He holds an AS in electrical engineering from Waterbury State Technical College, a BS with a business concentration from Charter Oak State College, and an MBA and an honorary Doctorate, from the University of New Haven.
Anthony W. Boor joined us as Executive Vice President (which position was previously designated as Senior Vice PresidentPresident) and Chief Financial Officer in November 2011 and served as our interim President and Chief Executive Officer from August 2013 to January 2014. Prior to joining us, he served as an executive with Brightpoint, Inc., a global provider of device lifecycle services to the wireless industry, beginning in 1999, most recently as its Executive Vice President, Chief Financial Officer and Treasurer. He also served as the interim President of Europe, Middle East and Africa during Brightpoint's significant restructuring of that region. Mr. Boor served as Director of Business Operations for Brightpoint North America from August 1998 to July 1999. Prior to joining Brightpoint, Mr. Boor was employed in various financial positions with Macmillan Computer Publishing, Inc., a Viacom owned book publishing company specializing in computer hardware and software related topics, Day Dream Publishing, Inc., a publishing company specializing in calendars, posters and time management materials, Ernst & Young LLP, an accounting firm, Expo New Mexico, a state ownedstate-owned fair and expo grounds and live para-mutualpari-mutual horse racing venue, KPMG LLP, an accounting firm, and Ernst & Whinney LLP, an accounting firm. He holds a BS in Accounting from New Mexico State University.
Charles T. Cumbaa has served as our Executive Vice President (which position was previously designated as Senior Vice PresidentPresident) of New Business DevelopmentCorporate and Product Strategy since May 2012. He joined us in May 2001 and served as Senior Vice President of Products and Services until December 2009. He also served as our President, Enterprise Customer Business Unit from January 2010 to April 2012. Prior to joining us, Mr. Cumbaa was Executive Vice President with Intertech Information Management, a provider of informationdocument management solutions, from December 1998 until October 2000. From 1992 until 1998, he was President and Chief Executive Officer of Cognitech, Inc., a software company he founded. From 1984 to 1992 he was Executive Vice President of Sales and Services at Sales Technologies, a sales force automation company. Prior to that, he was employed by McKinsey & Company, a consulting firm. Mr. Cumbaa holds a BA from Mississippi State University and an MBA from Harvard Business School.
Joseph D. Moye has served as our President, Enterprise Customer Business Unit since October 2012. Before joining us, Mr. Moye was President and Chief Executive Officer for Capgemini Government Solutions, a provider of consulting and technology services to government agencies, from October 2009 to October 2012 where he led the company's expansion in the U.S. public sector marketplace. From October 2006 to September 2009, he was Vice President of Capgemini Group. From January 2000 to September 2005, he was President and Chief Executive Officer of Gazelle Consulting, Inc., a branded leader in business intelligence professional services. Gazelle was acquired by Adjoined Consulting in 2005 and Mr. Moye integrated his team, led the combined business intelligence practice of Adjoined and, ultimately Kanbay's practice after its acquisition of Adjoined, prior to Capgemini acquiring Kanbay. Before founding Gazelle Consulting, Mr. Moye held multiple leadership positions with Sequent Computer Systems, a provider of data center systems and solutions, and Unisys, a provider of IT services, software and technology, where he was responsible for leading business units and channels both domestically and internationally. Mr. Moye holds a BS in Business Administration from Florida State University.
Kevin W. Mooney has served as our Executive Vice President (which position was previously designated as Senior Vice President) and President, General Markets Business Unit since January 2010. He joined us in July 2008 as our Senior Vice President of Sales & Marketing and Chief Commercial Officer. Before joining Blackbaud, Mr. Mooney was a senior executive at Travelport GDS from August 2007 to May 2008. As Chief Commercial Officer of Travelport GDS, one of the world's largest providers of information services and transaction processing to the travel industry, Mr. Mooney was responsible for global sales, marketing, training, service and support activities. Prior to that he was Chief Financial Officer for Worldspan from March 2005 until it was acquired by Travelport in August 2007. Mr. Mooney has also held key executive positions in the telecommunications industry and he is a member of the Board of Directors of tw telecom inc.Level 3 Communications, Inc., a publicly traded global managed network services company. Mr. Mooney graduated from Seton Hall University and holds an MBA in Finance from Georgia State University.
Bradley J. HolmanBrian E. Boruff, joined us as our Executive Vice President of the Internationaland President, Enterprise Customer Business Unit joined us in November 2010.May 2015. Prior to joining Blackbaud,us, Mr. Holman served as PartnerBoruff was the Vice President of Products, Platforms and Chief Commercial OfficerSolutions at ATI Business Group,Infosys, a Jakarta-based company that provides outsourcingglobal provider of consulting technology and technicalnext-generation services, tofrom June 2013 until April 2015. From May 2011 until June 2013 he was a Managing Director of Accenture, a global management consulting and technology services company. From January 2009 until May 2011, Mr. Boruff was the aviationGlobal Vice President of Cloud Computing and travel sectors, from February 2010 to October 2010.Emerging Technologies at CSC, a global provider of information technology services and solutions. Prior to that, Mr. Boruff spent 15 years at Microsoft, a platform and productivity company, from June 2006 to February 2010, Mr. Holman served as President of Travelport's Asia Pacific operations, which provides information services and transaction processing to the travel industry. From July 2001 to May 2006, Mr. Holman1993 until September 2008 where he held various senior managementdomestic and international executive roles at Travelport, including Senior Vice President of airlineas well as client-facing software sales and services in Asia Pacific and Managing Director of operations in Europe, Middle East and Africa.roles. Mr. HolmanBoruff holds a BCom.BA in Computer Science and Biochemistry from the University of Western Australia.Tennessee.
John J. Mistretta, joined us as our Executive Vice President (which position was previously designated as Senior Vice PresidentPresident) of Human Resources joined us in August 2005. Prior to joining us, Mr. Mistretta was an Executive Vice President of Human Resources and Alternative Businesses at National Commerce Financial Corporation, a financial services company, from 1998 to 2005. Earlier in his career, Mr. Mistretta held various senior Human Resources positions over a thirteen yearthirteen-year period at the banking firm Citicorp. He also serves as a board member for YEScarolina, a local nonprofit dedicated to teaching youth the principles of entrepreneurship and free enterprise. Mr. Mistretta holds a MS in Counseling and a BA in Psychology from the State University of New York at Oswego.
Item 1A. Risk factors
Our business operations face a number of risks. These risks should be read and considered with other information provided in this report.
General economic factors, both domesticallyOur failure to compete successfully could cause our revenue or market share to decline.
Our market is fragmented, highly competitive and internationally,rapidly evolving and there are limited barriers to entry for some aspects of this market. We mainly face competition from four sources:
Software developers offering specialized products designed to address specific needs of nonprofit organizations;
Custom-developed products created either internally or outsourced to custom service providers;
Providers of traditional, less automated fundraising services, such as services that support traditional direct mail or email campaigns, special events fundraising, telemarketing and personal solicitations; and
Software developers offering general products not designed to address specific needs of organizations in the philanthropic community.
The companies we compete with and other potential competitors may have greater financial, technical and marketing resources and generate greater revenue and better name recognition than we do. Also, a large diversified software enterprise could decide to enter the market directly, including through acquisitions. Competitive pressures can adversely impact our business by limiting the prices we can charge our customers and making the adoption and renewal of our solutions more difficult.
Our competitors might also establish or strengthen cooperative relationships with resellers and third-party consulting firms or other parties with whom we have had relationships, thereby limiting our ability to promote our solutions. These competitive pressures could cause our revenue and market share to decline.
A substantial portion of our revenue is currently derived from Raiser's Edge, Raiser's Edge NXT, Luminate Online, Blackbaud CRM, Financial Edge and Financial Edge NXT, and a decline in sales or renewals of these or similar solutions and related services could harm our business.
We derive a substantial portion of our revenue from the sale of Raiser's Edge, Raiser's Edge NXT, Luminate Online, Blackbaud CRM, Financial Edge and Financial Edge NXT, and other solutions that help customers manage constituent relationships and related services, and we expect revenue from these solutions and related services to continue to account for a substantial portion of our total revenue for the foreseeable future. If renewal rates for these solutions are lower than expected for any reason, our operating results would be materially and adversely affected. In addition, we frequently sell these or similar solutions to new customers and then attempt to generate incremental revenue from the sale of additional solutions and services. If demand for Raiser's Edge, Raiser's Edge NXT, Luminate Online, Blackbaud CRM, Financial Edge, Financial Edge NXT or similar solutions declines significantly, our business would suffer.
We encounter lengthy sales cycles, which could have an adverse effect on the amount, timing and predictability of our revenue and sales.
Sales of our software solutions to our larger enterprise customers often require an extensive education and marketing effort. We could expend significant funds and management resources during the sales cycle and ultimately fail to close the sale. Historically, our software solution sales cycle averages approximately two months for sales to existing customers and from six to nine months for sales to new customers. Our sales cycle for all of our solutions and services is subject to significant risks and delays over which we have little or no control, including:
Our customers' budgetary constraints;
The impact of the macroeconomic environment on our customers; and
The timing and expiration of our customers' current arrangements for similar services.
We encounter long and complex implementation cycles, particularly for our largest customers, which could have an adverse effect on our profitability and the timing and predictability of our revenue.
The implementation of our solutions and services, particularly in our large CRM engagements, frequently involves complex configuration, business process reengineering and system interfaces and can extend for a year or more. Our Blackbaud CRM solution offerings are complex and we may experience unanticipated implementation challenges or complexities in these engagements. Further, these projects typically are heavily dependent on customer participation, communication and timely responsiveness throughout the implementation cycle. As the complexity of these engagements increases, our revenues and profitability could suffer from delays in project completion and having to perform unplanned incremental services at rates substantially below our normal hourly rates or make investments in the form of non-billable service hours or other concessions. In certain arrangements, our ability to recognize revenue may be delayed until acceptance of the implemented solution by the customer. If we are unsuccessful in implementing our solutions or if we experience delays, it could have a material adverse effect on our profitability and the timing and predictability of our revenue.
Because a significant portion of our revenue is recognized ratably over the terms of the contract, downturns in sales may not be immediately reflected in our revenue.
We recognize our maintenance and subscriptions revenue monthly over the term of the customer agreement. Most of our maintenance arrangements are for a one year term. Our subscription arrangements are typically either for a one year term or a three year term. As a result, much of the revenue we report in each quarter is attributable to arrangements entered into during previous quarters. Consequently, a decline in sales to new customers, renewals by existing customers or market acceptance of our solutions in any one quarter will not necessarily be fully reflected in the revenues in that quarter and will negatively affect our revenues and profitability in future quarters.
If our customers do not renew their annual maintenance and support arrangements or subscriptions for our solutions or if they do not renew them on terms that are favorable to us, our business might suffer.
Most of our maintenance arrangements are for a one-year term. Our subscription arrangements are typically either for a one year term or a three year term. As the end of the annual period approaches, we seek the renewal of the agreement with the customer. Historically, maintenance and subscriptions renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their maintenance and support arrangements or subscriptions with us on beneficial terms or at all, our business, operating results and financial performance.condition could be harmed. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solutions and services and their ability to continue their operations and spending levels.
General economic conditions, globally orWe might not generate increased business from our current customers, which could limit our revenue in the future.
Our ability to grow revenue is highly dependent on the success of our efforts to sell additional solutions and services to our existing customers. Many of our customers initially make a purchase of only one or morea limited number of our solutions or only for a single department within their organization. These customers might choose not to expand their use of or make additional purchases of our solutions and services. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or even decrease. In addition, as we deploy new applications and features for our existing solutions or introduce new solutions and services, our current customers could choose not to purchase these new offerings.
The offering of our solutions on a subscription basis and demand by our customers for these offerings are increasing. Our failure to manage this demand could lead to lower than expected revenues and profits.
In recent years, much of our revenue growth was derived from increased cloud-based subscription offerings. This business model depends heavily on achieving economies of scale because the marketsinitial upfront investment is costly and the associated revenue is recognized on a ratable basis, such as our Raiser's Edge NXT and Financial Edge NXT solutions, which became generally available in 2015. If we serve, might adversely affect our financial performance. Weakness in the financial and housing markets, inflation, higher levelsfail to achieve appropriate economies of unemployment, unavailability of consumer credit, higher consumer debt levels, volatility in credit, equity and foreign exchange markets, higher tax rates and other changes in tax laws, overall economic slowdown and other economic factors could adversely affect donationsscale or if we fail to nonprofits, reducing their revenue and, therefore, possibly theirmanage or anticipate demand for the productssubscription software pricing models, then we could encounter substantial capital expenditures, a reduction in profitability, a decrease in revenue growth and services we sell and lengthen our sales and payment cycles. Higher interest rates, inflation, higher costs of labor, insurance and healthcare, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United Statescould become less competitive. The additional investments required to meet customer demand could increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term.
Defects, delays or interruptions in our cloud-based solutions and hosting services could diminish demand for these services and subject us to substantial liability.
We currently utilize data center hosting facilities to provide cloud-based solutions to our subscription customers and hosting services to our on-premises license customers. Any damage to, or failure of, salesour data center systems generally could result in interruptions in service to our customers, notwithstanding any disaster recovery agreements that may currently be in place at these facilities. Because our cloud-based solutions and operating, selling, generalhosting service offerings are complex, and administrative expenseswe have incorporated a variety of new computer hardware and otherwise adversely affectsoftware systems at our operationsdata centers, our services might have errors or defects that users identify after they begin using our services. This could result in unanticipated downtime for our customers and operating results. These factors affectharm to our reputation and business. Internet-based services sometimes contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our web-based services and new errors might again be detected in the future. In addition, our customers might use our Internet-based offerings in unanticipated ways that cause a disruption in service for other customers attempting to access their data.
Because our customers use these services for important aspects of their businesses, any defects, delays or disruptions in service or other performance problems with our services could hurt our reputation and damage our customers' businesses. If that occurs, customers could elect to cancel their service, delay or withhold payment to us, not only our operations, but alsopurchase from us in the operations of suppliers from whom we purchasefuture or license products and services, a factor thatmake claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the costexpense and risk of litigation. Any of these could harm our business and reputation.
Material defects or errors in the software we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects in our software, and new errors in our existing software may be detected in the future.
After the release of our productssoftware, defects or errors may also be identified from time to time by our internal team and our customers. The costs incurred in correcting any material defects or errors in our software may be substantial and could harm our operating results. Furthermore, our customers may use our software together with solutions from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our solution development efforts, impact our reputation and cause significant customer relations problems.
Our failure to obtain licenses for third-party technologies could harm our business.
We expect to continue licensing technologies from third parties, including applications used in our research and development activities, technologies which are integrated into our solutions and solutions that we resell. We believe that the loss of any third-party technologies currently integrated into our solutions could have a material adverse effect on our business. Our inability in the future to obtain any third-party licenses on commercially reasonable terms, or at all, could delay future solution development until equivalent technology can be identified, licensed or developed and integrated. This inability in turn could harm our business and operating results. Our use of third-party technologies exposes us to increased risks including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs.
The market for software and services reducingfor nonprofit, charitable giving and educational organizations might not grow and these organizations might not continue to adopt our margins. These factors also affectsolutions and services.
Many nonprofit organizations have not traditionally used integrated and comprehensive software and services for their nonprofit-specific needs. We cannot be certain that the market for such solutions and services will continue to develop and grow or that nonprofit organizations will elect to adopt our solutions and services rather than continue to use traditional, less automated methods, attempt to develop software internally, rely upon legacy software systems, or use software solutions not specifically designed for the nonprofit market. Nonprofit organizations that have already invested substantial resources in other fundraising methods or other non-integrated software solutions might be reluctant to adopt our solutions and services to supplement or replace their existing systems or methods. In addition, the implementation of one or more of our core software solutions can involve significant time and capital commitments by our customers, whowhich they may reduce their purchasingbe unwilling or unable to make. If demand for and market acceptance of our solutions dueand services does not increase, we might not grow our business as we expect.
If we are unable, or our customers believe we are unable, to detect and prevent unauthorized use of payment card information and safeguard confidential donor data, we could be subject to financial liability, our reputation could be harmed and customers may be reluctant to use our solutions and services.
The rules of payment card associations in which we participate require that we comply with Payment Card Industry Data Security Standard ("PCI DSS") in order to preserve security of payment card data. Under PCI DSS, we are required to adopt and implement internal controls over the use, storage and security of payment card data to help prevent card fraud. Conforming our solutions and services to PCI DSS or other payment services related regulations or requirements imposed by payment networks or our customers or payment processing partners is expensive and time-consuming. However, failure
to comply may subject us to fines, penalties, damages and civil liability, may impair the security of payment card data in our possession, and may harm our reputation and our business prospects, including by limiting our ability to process transactions. All of our solutions are currently certified as compliant with the Payment Application Data Security Standard, which is a subset of the requirements for PCI DSS. However, currently some of our solutions are not fully compliant with PCI DSS.
If the security of our software is breached, we fail to securely collect, store and transmit customer information, or we fail to safeguard confidential donor data, we could be exposed to liability, litigation, penalties and remedial costs and our reputation and business could suffer.
Fundamental to the use of our solutions is the secure collection, storage and transmission of confidential donor and end user data and transaction data, including in our payment processing business. Despite, the network and application security, internal control measures, and physical security procedures we employ to safeguard our systems, we may still be vulnerable to a security breach, intrusion, loss or theft of confidential donor data and transaction data, which may harm our business, reputation and future financial results.
Despite our efforts to combat such threats, computer hackers may attempt to penetrate or bypass our data protection and other security measures and gain unauthorized access to our networks, systems and data or compromise the confidential data of our customers and their donors. Computer hackers may be able to develop and deploy computer viruses, worms, and other malicious software programs that could attack our solutions and services, exploit potential security vulnerabilities of our solutions and services, create system disruptions and cause shutdowns or denials of service. Data may also be accessed or modified improperly as a result of employee or supplier error or malfeasance and third parties may attempt to fraudulently induce employees or customers into disclosing confidential and sensitive information such as user names, passwords or other information in order to gain access to our data, our customers’ data or our IT systems. Also, computers, including those that use our software, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of or unauthorized access to data. These risks for us will increase as we continue to grow our cloud-based offerings and services, store and process increasingly large amounts of our customers’ confidential data, host or manage parts of our customers’ business in cloud-based IT environments and grow our payment processing business, especially in customer sectors involving particularly sensitive data such as health sciences, financial services and the government, or where personal information is transferred internationally. We also have an active acquisition program and have acquired a number of companies, solutions, services and technologies over the years. While we make significant efforts to address any IT security issues with respect to our acquisitions, we may still inherit such risks when we integrate these acquisitions within our business.
A compromise of our data security that results in customer or donor personal or payment card data being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity and could result in litigation against us or the imposition of penalties. We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach, including notification under data privacy laws and regulations and expenses related to remediating our information security systems. Even though we carry cyber-technology insurance policies that may provide insurance coverage under certain circumstances, we might suffer losses as a result of a security breach that exceed the coverage available under our insurance policies or for which we do not have coverage. A security breach and any efforts we make to address such breach could also result in a disruption of our operations, particularly our online sales operations.
Further, the existence of vulnerabilities, even if they do not result in a security breach, may harm client confidence and require substantial resources to address, and we may not be able to discover or remedy such security vulnerabilities before they are exploited, which may harm our business, reputation and future financial results.
Privacy and data protection concerns, including evolving government regulation in the area of consumer data privacy or data protection, could adversely affect our business and operating results.
The effectiveness of our software solutions relies on our customers' storage and use of data concerning their customers, including financial, personally identifying or other sensitive data. Our customers' collection and use of this data for donor profiling, data analytics or communications outreach might raise privacy and data protection concerns and negatively impact the demand for our solutions and services. For example, our custom modeling and analytical services, including ProspectPoint, WealthPoint and donorCentrics, rely heavily on processing and using of data we gather from customers
and various sources. Privacy and data protection laws could restrict or add regulatory and compliance processes to our ability to market and profit from those services.
Governments in some jurisdictions have enacted or are considering enacting consumer data privacy or data protection legislation, including laws and regulations applying to the solicitation, collection, transfer, processing and use of personal data. This legislation could reduce the demand for our software solutions if we fail to design or enhance our solutions to enable our customers to comply with the privacy and data protection measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer privacy or data protection legislation. For example, we must comply with applicable provisions of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and might be subject to similar provisions of the Gramm-Leach-Bliley Act and related regulations. Even technical violations of these laws may result in penalties that are assessed for each non-compliant transaction.
HIPAA (including the Health Information Technology for Economic and Clinical Health Act and associated United States Department of Health and Human Services regulations) permits our customers in the healthcare industry to use certain limited information for fundraising purposes and to disclose that limited subset of protected health information to their service providers (referred to as "business associates" under HIPAA) for fundraising if certain requirements are met. Except as specifically permitted under HIPAA, customers in the healthcare industry (i) may not reveal additional healthcare information for fundraising purposes unless they have specific written permission from the patient, and (ii) must provide their patients with the ability to opt out of fundraising activities.
Under HIPAA, business associates are required to protect the privacy and security of healthcare information received from a customer in the healthcare industry. We believe that we comply with those requirements where applicable. Further, we contractually require our healthcare industry customers to comply with their own obligations under HIPAA related to fundraising, but we do not monitor our customers for compliance as we believe monitoring is not legally required and would be cost prohibitive. The regulations and enforcement environment under HIPAA are continuing to evolve and could require additional compliance measures requiring further investment by us.
If our customers or we were found to be subject to and in violation of any privacy or data protection laws or regulations, our business may be materially and adversely impacted and we and/or our customers would likely have to change our business practices. In addition, these laws and regulations could impose significant costs on our customers and us and make it more difficult for donors to make online donations.
We are in the information technology business, and our solutions and services store, retrieve, transfer, manipulate and manage our customers’ information and data. The effectiveness of our software solutions relies on our customers’ storage and use of data concerning their donors, including financial, personally identifying and other sensitive data and our business uses similar systems that require us to store and use data with respect to our customers and personnel. Our collection and our customers’ collection and use of this data might raise privacy and data protection concerns and negatively impact our business or the demand for our solutions and services. If a breach of data security were to occur, or other violation of privacy or data protection laws and regulations were to be alleged, our business may be materially and adversely impacted and solutions may be perceived as less desirable, which would negatively affect our business and operating results.
If we fail to respond to technological changes and successfully introduce new and improved solutions, our competitive position may be harmed and our business may suffer.
The introduction of solutions encompassing new technologies can render existing solutions obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing solutions and develop and introduce in a timely manner or acquire new solutions that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. If we are unable to develop or acquire on a timely and cost-effective basis new software solutions or enhancements to existing solutions or if such new solutions or enhancements do not achieve market acceptance, our business, results of operations and financial condition may be materially adversely affected.
Because competition for highly qualified personnel is intense, we might not be able to attract and retain key personnel needed to support our planned growth.
To meet our objectives successfully, we must attract and retain highly qualified personnel with specialized skill sets. If we are unable to attract suitably qualified management, there could be a material adverse effectsimpact on our business. In addition, to execute our continuing growth plans, we need to increase the size and maintain the quality of our sales force, software development staff and our professional services organization. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. The pool of qualified personnel with experience working with or selling to nonprofit, charitable giving and educational organizations is limited overall and specifically in Charleston, South Carolina, where our principal office is located. Our ability to maintain and expand our sales, solution development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, nonprofit, charitable giving and educational organizations. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our solutions and services, we could experience a shortfall in revenue or earnings and not achieve our planned growth.
Further, in the past, we have used equity incentive programs as part of our overall employee compensation agreements to both attract and retain personnel. A decline in our stock price could negatively impact the value of these equity incentive and related compensation programs as retention and recruiting tools. We may need to create new or additional equity incentive programs and/or compensation packages to remain competitive, which could be dilutive to our existing stockholders and/or adversely affect our results of operations.
If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.
We currently have non-U.S. operations in Canada, the United Kingdom, Ireland, Australia and New Zealand, and we intend to expand further into international markets. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets. Our direct sales model requires us to attract, retain and manage qualified sales personnel capable of selling into markets outside the United States. In some cases, our costs of sales might increase if our customers require us to sell through local distributors.
If we are unable to grow our international operations in a cost-effective and timely manner, our business and operating results could be harmed. Doing business internationally involves additional risks that could harm our operating results, including, without limitation:
Differing technology standards;
Imposition of currency exchange controls;
Potentially adverse tax consequences;
Reduced protection for intellectual property rights in certain economic factors.countries;
Compliance with multiple conflicting and changing governmental laws and regulations;
Seasonal reductions in business activity specific to certain markets;
Restrictions on repatriation of earnings;
Differing labor regulations;
Differing accounting rules and practices;
Restrictive and varying privacy regulations in different countries, particularly in the European Union;
Restrictions on the export of technologies such as data security and encryption; and
Import and export restrictions and tariffs.
We expect that an increasing portion of our international revenues will be denominated in foreign currencies, subjecting us to fluctuations in foreign currency exchange rates. If we expand our international operations, exposures to gains and losses on foreign currency transactions may increase.
Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.
As part of our business strategy, we have made acquisitions in the past. The successful integration of acquired companies requires, among other things, coordination of various departments, including solution development, engineering, sales and marketing and finance, as well as integration in our system of internal controls. Acquisitions and investments involve numerous risks, including, without limitation:
Difficulties or delays in integrating operations, technologies, services, accounting and personnel;
Difficulties in supporting and transitioning customers of our acquired companies;
Diversion of financial and management resources from existing operations;
Risks of entering new sectors of the nonprofit, charitable giving and educational industries;
Potential loss of key employees; and
Inability to generate sufficient return on investment.
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders would be diluted which, in turn, could affect the market price of our stock. Moreover, we could finance any acquisition with debt, resulting in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions or investments properly, we might not achieve the anticipated benefits of any such acquisition and we may incur costs in excess of what we anticipate. Furthermore, if we incur additional debt to fund acquisitions and are unable to service our debt obligation we may have a greater risk of default under our credit facility.
The success of our acquisitions will depend in part on our ability to retain their engineering, sales, marketing, development and other personnel. It is possible that these employees might decide to terminate their employment. If key employees terminate their employment, the sales, marketing or development activities of acquired companies might be adversely affected, our management's attention might be diverted from successfully integrating the acquired operations to hiring suitable replacements and, as a result, our business might suffer.
We significantly increased our leverage in connection with acquisitionsacquisitions.
We incurred a substantial amount of indebtedness in connection with recent acquisitions. As a result of this indebtedness, our interest payment obligations have increased. The degree to which we are leveraged could have adverse effects on our business, including the following:
Requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, dividends and other general corporate purposes;
Limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
Restricting us from making additional strategic acquisitions or exploiting business opportunities;
Placing us at a competitive disadvantage compared to our competitors that have less debt;
Limiting our ability to borrow additional funds; and
Decreasing our ability to compete effectively or operate successfully under adverse economic and industry conditions.
If we incur additional debt, these risks willmay intensify. Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.
Our failure to compete successfully could cause our revenue or market share to decline.
Our market is fragmented, highly competitive and rapidly evolving and there are limited barriers to entry for some aspects of this market. We mainly face competition from four sources:
Software developers offering specialized products designed to address specific needs of nonprofit organizations, some of which are sold with subscription pricing;
Providers of traditional, less automated fundraising services, such as services that support traditional direct mail or email campaigns, special events fundraising, telemarketing and personal solicitations;
Custom-developed products created either internally or outsourced to custom service providers; and
Software developers offering general products not designed to address specific needs of nonprofit organizations.
The companies we compete with and other potential competitors may have greater financial, technical and marketing resources and generate greater revenue and better name recognition than we do. Companies such as Microsoft, Salesforce.com and Oracle offer some products that are designed specifically for nonprofit organizations, in addition to some of their products
whichOur balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets could negatively affect our operating results.
As of December 31, 2015, we had $436.4 million and $294.7 million of goodwill and intangible assets, respectively. On at least an annual basis, we assess whether there have been impairments in the carrying value of goodwill and intangible assets. If the carrying value of an asset is determined to be impaired, then it is written down to fair value by a degree of functionality for nonprofit organizationsnon-cash charge to operating earnings. Changes in circumstances that could indicate that the carrying value of goodwill or intangible assets may not be considered competitive. Also, if one or more ofrecoverable include declines in our competitorsstock price, market capitalization, cash flows and slower growth rates in our industry. We cannot accurately predict the likelihood or potential competitors were to mergeamount and timing of any impairment of goodwill or partner with oneother intangible assets. An impairment of our other competitors, the change in the competitive landscapea significant portion of goodwill or intangible assets could adverselymaterially and negatively affect our ability to compete effectively. For example, a large diversified software enterprise, such as Microsoft, Oracle or Salesforce.com, could decide to enter the market directly, including through acquisitions. Competitive pressures can adversely impact our business by limiting the prices we can charge our customersresults of operations and making the adoption and renewal of our solutions more difficult.
Our competitors might also establish or strengthen cooperative relationships with resellers and third-party consulting firms or other parties with whom we have had relationships, thereby limiting our ability to promote our products. These competitive pressures could cause our revenue and market share to decline.
A substantial portion of our revenue is currently derived from The Raiser's Edge, Luminate Online, Blackbaud CRM and The Financial Edge, and a decline in sales or renewals of these or similar products and related services could harm our business.
We derive a substantial portion of our revenue from the sale of The Raiser's Edge, Luminate Online, Blackbaud CRM and The Financial Edge, and other products that help customers manage constituent relationships and related services, and we expect revenue from these products and related services to continue to account for a substantial portion of our total revenue for the foreseeable future. For example, revenue from the sale of The Raiser's Edge and related services represented approximately 28%, 30% and 35% of our total revenue in 2013, 2012 and 2011, respectively. Because we often sell licenses to our products on a perpetual basis and deliver new versions and enhancements to customers who purchase annual maintenance and support, our future license, services and maintenance revenue are substantially dependent on sales to new customers. On the other hand, for our subscription products, we sell our software on an annual or multiyear basis and for annualized fees substantially lower than we would charge for a perpetual license for the same product, so that we depend on customer renewals for future revenues. If renewal rates for the products are lower than expected for any reason, our operating results would be materially and adversely affected. In addition, we frequently sell these or similar products to new customers and then attempt to generate incremental revenue from the sale of additional products and services. If demand for The Raiser's Edge, Luminate Online, Blackbaud CRM, The Financial Edge or similar products declines significantly, our business would suffer.
We encounter lengthy sales cycles which could have an adverse effect on the amount, timing and predictability of our revenue and sales.
Potential customers, particularly our larger enterprise clients, generally commit significant resources to an evaluation of available software and require us to expend substantial time, effort and money educating them as to the value of our software and services. Sales of our software products to these larger customers often require an extensive education and marketing effort. We could expend significant funds and management resources during the sales cycle and ultimately fail to close the sale. Historically, our software product sales cycle averages approximately two months for sales to existing customers and from six to nine months for sales to new customers. Our sales cycle for all of our products and services is subject to significant risks and delays over which we have little or no control, including:
Our customers' budgetary constraints;
The timing of our clients' budget cycles and approval processes;
The impact of the macroeconomic environment on our customers;
Our clients' willingness to replace their current methods or software solutions;
Our need to educate potential customers about the uses and benefits of our products and services; and
The timing and expiration of our clients' current license agreements or outsourcing agreements for similar services.financial condition.
If we are unsuccessful in closing sales after expending significant fundsnot able to manage our anticipated growth effectively, our operating costs may increase and management resources or if we experience delays as discussed above, it could have a material adverse effect on the amount, timing and predictability of our revenue.operating margins may decrease.
We encounter long and complex implementation cycles, particularly for our largest customers, which could have an adverse effect on our profitability and the timing and predictability of our revenue.
The implementation of our products and services, particularly in our large CRM engagements, frequently involves complex configuration, business process reengineering and system interfaces and can extend for a year or more. Our enterprise CRM product offerings are complex and we may not have historical experience with unanticipated implementation challenges or complexities that could arise in these engagements. Further, these projects typically are heavily dependent on customer
participation, communication and timely responsiveness throughout the implementation cycle. As the complexity of these engagements increases, our revenues and profitability could suffer from delays in project completion and having to perform unplanned incremental services at rates substantially below our normal hourly rates or make investments in the form of non-billable service hours or other concessions. If we are unsuccessful in implementing our products or if we experience delays, it could have a material adverse effect on our profitability and the timing and predictability of our revenue.
If our customers do not renew their annual maintenance and support agreements or subscriptions for our products or if they do not renew them on terms that are favorable to us, our business might suffer.
Most of our maintenance agreements and subscriptions are for a one year term. As the end of the annual period approaches, we seek the renewal of the agreement with the customer. Historically, maintenance and subscriptions renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their maintenance and support agreements or subscriptions with us on beneficial terms or at all, our business, operating results and financial condition could be harmed. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our products and services and their abilitywill need to continue their operations and spending levels.
We might not generate increased business from our current customers, which could limit our revenue in the future.
Our ability to grow revenue is highly dependent on the success of our effortsinfrastructure to sell additional productsaddress our acquisitions and services to our existing customers. Many of our customers initially make a purchase of only one or a limited number of our products or only for a single department within their organization. These customers might choose not to expand their use of or make additional purchases of our products and services. If we fail to generate additional business from our current customers, our revenue could grow at a slower rate or even decrease. In addition, as we deploy new applications and features for our existing products or introduce new products and services, our current customers could choose not to purchase these new offerings.
The offering of our products on a subscription basis is evolving and demand by our customers for these offerings is increasing.other potential market opportunities. Our failure to manage this evolution and demand could lead to lower than expected revenues and profits.
In recent years, much of our revenue growth was derived from increased subscription offerings, including SaaS. This business model depends heavily on achieving economies of scale because the initial upfront investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and demand for the subscription software pricing models, then our business and operating results could be adversely affected. The additional investments required to meet customer demand will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term.
Defects, delays or interruptions in our SaaS and hosting services could diminish demand for these services and subject us to substantial liability.
We currently utilize data center hosting facilities to provide SaaS and hosting services to our customers. Any damage to, or failure of, our data center systems generally could result in interruptions in service to our customers, notwithstanding any disaster recovery arrangements that may currently be in place at these facilities. Because our SaaS, Internet-based and hosting service offerings are complex, and we have incorporated a variety of new computer hardware and software systems at the data centers, our services might have errors or defects that users identify after they begin using our services. This could result in unanticipated downtime for our customers and harm to our reputation and our business. Internet-based services frequently contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our Internet-based services and new errors might again be detected in the future. In addition, our customers might use our Internet-based offerings in unanticipated ways that cause a disruption in service for other customers attempting to access their data.
Because our customers use these services for important aspects of their business, any defects, delays or disruptions in service or other performance problems with our services could hurt our reputation and damage our customers' businesses. If that occurs, customers could elect to cancel their service, or delay or withhold payment to us, we could lose future sales or customers might make claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. Any of these could harm our business and our reputation.
The market for software and services for nonprofit organizations might not grow and nonprofit organizations might not continue to adopt our products and services.
Many nonprofit organizations have not traditionally used integrated and comprehensive software and services for their nonprofit-specific needs. We cannot be certain that the market for such products and services will continue to develop and grow orplace, to the extent that nonprofit organizations will electwe are able to adopt our products and services rather than continue to use traditional, less automated methods, attempt to develop software internally, rely upon legacy software systems, or use software solutions not specifically designed for the nonprofit market. Nonprofit organizations that have already invested substantial resources in other fundraising methods or other non-integrated software solutions might be reluctant to adopt our products and services to supplement or replace their existing systems or methods. In addition, the implementation of one or more of our core software products can involve significant time and capital commitments by our customers, which they may be unwilling or unable to make. If demand for and market acceptance of our products and services does not increase, we might not grow our business as we expect.
Becausesustain such growth, a significant portion of our revenue is recognized ratably over the terms of the contract, downturns in sales may not be immediately reflected in our revenue.
We recognize our maintenance and subscriptions revenue monthly over the term of the customer agreement. The terms of the customer agreements typically range from 1-3 years. As a result, much of the revenue we report in each quarter is attributable to agreements entered into during previous quarters. Consequently, a decline in sales to new customers, renewals by existing customers or market acceptance of our products in any one quarter will not necessarily be fully reflected in the revenues in that quarter and will negatively affect our revenues and profitability in future quarters.
Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We dependstrain on our principal executive officesmanagement, administrative, operational and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks and natural disasters such as hurricanes and earthquakes, could disrupt one or more of these facilities and adversely affect our operations. In addition, our Charleston headquarters require a remediation effort to improve weather resistance. This remediation effort is the responsibility of the landlord, but delays in the remediation or disruption caused by the remediation effort could have an adverse effect on our operations. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.
If the security of our software is breached, we fail to securely collect, store and transmit customer information, or we fail to safeguard confidential donor data, our products and services might be perceived as not being secure and our reputation and business could suffer.
Fundamental to the use of our products is the secure collection, storage and transmission of confidential donor and end user information. The commercially available network and application security, internal control measures, and physical security procedures to safeguard our systems, may not be sufficient to prevent a security breach, intrusion, loss or theft of personal information will not occur, which may harm our business, customer reputation and future financial results. Any such breach may require us to expend significant resources to address, including notification under data privacy regulations.
Additionally, despite our efforts to combat such measures, computer hackers may attempt to penetrate or bypass our data protection and other security measures and gain unauthorized access to our networks, systems and data or compromise the confidential information of data of our customers. Computer hackers may be able to develop and deploy computer viruses, worms, and other malicious software programs that could attack our products and services, exploit potential security vulnerabilities of our products and services, create system disruptions and cause shutdowns or denials of service. Data may also be accessed or modified improperly as a result of employee or supplier error or malfeasance and third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data, our customers’ data or our IT systems. These risks for us will increase asinfrastructure. If we continue to grow our cloud-based offerings and services and store and process increasingly large amountsoperations, by way of our customers’ confidential information and data and hostadditional business combinations or manage parts of our customers’ business in cloud-based IT environments, especially in customer sectors involving particularly sensitive data such as health sciences, financial services and the government. We also have an active acquisition program and have acquired a number of companies, products, services and technologies over the years. While we make significant efforts to address any IT security issues with respect to our acquisitions, we may still inherit such risks when we integrate these acquisitions within our business.
A compromise of our software or other problems that results in customer or donor personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to our information security systems and could result in a disruption of our operations, particularly our online sales operations. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, andotherwise, we may not be ableeffective in enlarging our physical facilities and our systems and our procedures or controls may not be adequate to discoversupport such expansion or remedy such security vulnerabilities before they are exploited. Also, computers, including those that use our software, are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach.
Privacy and security concerns, including evolving government regulation in the area of consumer data privacy, could adversely affect our business and operating results.
The effectiveness of our software products relies on our customers' storage and use of data concerning their customers, including financial, personally identifying and other sensitive data. Our customers' collection and use of this data for donor profiling might raise privacy and security concerns and negatively impact the demand for our products and services. For example, our custom modeling and analytical services, including ProspectPoint, WealthPoint and donorCentrics, rely heavily on securing and making use of data we gather from various sources and privacy laws could jeopardize our ability to market and profit from those services. If a breach of customer data security were to occur, our products may be perceived as less desirable, which would negatively affect our business and operating results.
Governments in some jurisdictions have enacted or are considering enacting consumer data privacy legislation, including laws and regulations applying to the solicitation, collection, processing and use of consumer data. This legislation could reduce the demand for our software products if we fail to design or enhance our products to enable our customers to comply with the privacy and security measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer data privacy legislation. For example, we are subject to the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and might be subject to similar provisions of the Gramm-Leach-Bliley Act and related regulations. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. As part of the American Recovery and Reinvestment Act of 2009, Congress passed the Health Information Technology for Economic and Clinical Health Act, or HI-TECH Act. The HI-TECH Act expands the reach of data privacy and security requirements of HIPAA to service providers. HIPAA and associated United States Department of Health and Human Services regulations permit our customers in the healthcare industry to use certain demographic protected health information (such as name, email or physical address and dates of service) for fundraising purposes and to disclose that subset of protected health information to their service providers for fundraising. We may be included in this service provider group under the revised HIPAA regulations by virtue of our service provider relationship with our customers in the healthcare industry. In general, we seek to contractually prohibit our healthcare industry customers from using other types of health information of their clients for fundraising purposes that would be non-compliant with HIPAA, but we believe monitoring our healthcare customers' compliance with such prohibitions is not legally required of service providers and would be cost prohibitive. The law and regulations under HI-TECH are new and still subject to change or interpretation by legal authorities who could cause additional compliance burdens. If we or our customers were found to be subject to and in violation of any of these laws or other data privacy laws or regulations, our business could suffer and we and/or our customers would likely have to change our business practices. In addition, these laws and regulations could impose significant costs on us and our customers and make it more difficult for donors to make online donations.
We are in the information technology business, and our products and services store, retrieve, manipulate and manage our customers’ information and data. The effectiveness of our software products relies on our customers’ storage and use of data concerning their donors, including financial, personally identifying and other sensitive data and our business uses similar systems that require us to store and use data with respect to our customers and personnel. Our collection and our customers’ collection and use of this data might raise privacy and security concerns and negatively impact our business or the demand for our products and services. If a breach of data security were to occur, our business may be materially and adversely impacted and products may be perceived as less desirable, which would negatively affect our business and operating results.
If we are unable, or customers believe we are unable, to detect and prevent unauthorized use of credit cards and safeguard confidential donor data, we could be subject to financial liability, our reputation could be harmed and customers may be reluctant to use our products and services.
Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in a compromise or breach of the technology we use to protect sensitive transaction data. If any such compromise of our security,
or the security of our customers, were to occur, it could result in misappropriation of proprietary information or interruptions in operations and have an adverse impact on our reputation or the reputation of our customers. All of our products are currently certified as Payment Application Data Security Standard compliant. Currently some of our products are not fully compliant with Payment Card Industry Data Security Standard, or PCI DSS. This or other factors could make customers believe we are unable to detect and prevent unauthorized use of credit cards or confidential donor data, which could harm our business. Additionally, these factors could make issuing banks believe the transactions of our customers are compromised and refuse to process those transactions, which could harm the reputation of our products and our business.
Conforming our products and services to PCI DSS is expensive and time-consuming. Our failure to achieve or maintain compliance with PCI DSS could make customers believe we are unable to detect and prevent unauthorized use of credit cards and bank account numbers or protect confidential donor data and our reputation and business might be harmed.
Our operations process a significant volume and dollar value of transactions on a daily basis, especially in our payroll and payments businesses. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that funds may be misappropriated due to fraud. The systems supporting our business are comprised of multiple technology platforms that are difficult to scale.generally. If we are unable to effectively manage our systems and processes wegrowth, our operating costs may be unable to process customer data in an accurate, reliable and timely manner, which may harm our business. In our payments processing services business, if merchants for whom we process payment transactions are unable to pay refunds due to their customers in connection with disputed or fraudulent merchant transactions, we may be required to pay those amountsincrease and our paymentsoperating margins may exceed the amount of the customer reserves we have established to make such payments.decrease.
As a result of the evolution of our business model to meet customer demand, roughly two thirds of our revenue is now from subscriptions and services, which produces substantially lower gross margins than our traditional license and maintenance revenue. Continuation of this trend will dilute our overall gross margins.
Over the past several years we have evolved our business model toward subscription and service based delivery and away from the traditional software model of perpetual licenses with term-based maintenance. For example, in 2013 our subscription revenue exceeded our combined license and maintenance revenue for the first time, and together subscription and services revenue comprised approximately two thirds of our total revenue. These changes in our model have been driven by customer demand, and we believe have the long-term benefit of producing more predictable and recurring long-term revenue streams. However our subscription and services revenue generate substantially lower gross margins than our product license revenue. For example, in 2013, our subscriptions and services gross margins were 56% and 18%, respectively, whereas for the same period our license and maintenance revenue gross margins were 83% and 81%, respectively. We expect that over time the shift toward subscription and services revenue will continue. If we are unable to achieve economies of scale in our subscription business or increase efficiency in our services business, our overall margins will be adversely affected. Additionally, if nonprofits in general, and specifically our customers and prospects, desire to adopt our subscription offerings much more rapidly than we currently anticipate and we are unable to respond in a timely fashion, we could encounter significant adverse effects to our business, including substantial capital expenditures, reduction in profitability, decrease in revenue growth and/or we could become potentially less competitive, resulting in a loss of market share.
Certain of our services are contracted under fixed fee arrangements, which we base on estimates. If our estimated number of hours to perform engagement implementation services are less than our actual hours, our operating results would be adversely affected. Services revenue as a percentage of total revenue has varied significantly from quarter to quarter due to fluctuations in licensing revenue, economic changes, varying accounting treatments, changes in the average selling prices for our products and services, our customers' acceptance of our products and our sales force execution. In addition, the volume and profitability of services can depend in large part upon:
Competitive pricing pressure on the rates that we can charge for our services;
The complexity of the customers' information technology environment and the existence of multiple non-integrated legacy databases;
The resources directed by customers to their implementation projects;
The extent of software customization included in the implementation projects; and
The extent to which outside consulting organizations provide services directly to customers.
A decrease in the demand for services could adversely affect our profitability and operating results.
Our quarterly financial results fluctuate and might be difficult to forecast and, if our future results are below either any guidance we might issue or the expectations of public market analysts and investors, the price of our common stock might decline.
Our quarterly revenue and results of operations are difficult to forecast. We have experienced, and expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter.quarter-to-quarter. As a result, we believe that quarter-to-quarter comparisons of our revenue and operating results are not necessarily meaningful and that such comparisons might not be accurate indicators of future performance. The reasons for these fluctuations include but are not limited to:
Changes in general economic conditions and conditions in the markets we serve;
Costs related to acquisitions of technologies or businesses;
The growth rates of certain market segments in which we compete;
Market acceptance of new solutions we release or acquire;
The amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
Budget and spending decisions by our customers;
The size and timing of sales of our software, including the relatively long sales cycles associated with many of our larger software sales;
Budget and spending decisions by our customers;
The degree of judgment required to estimate large consulting service engagements;
Scheduling considerations by our customers as they impact the delivery of purchased services;
Varying accounting treatments based upon the facts and circumstances of each arrangement;
Utilization of our professional services personnel;
Market acceptance of new products we release or acquire;
Changes in general economic conditions and conditions in the markets we serve;
Costs related to acquisitions of technologies or businesses;
The growth rates of certain market segments in which we compete;
The amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
Changes in our pricing policies and terms of contracts, whether initiated by us or as a result of competition;
The rate of expansion and productivity of our sales force and the impact of reorganizations of our sales force;
Technical difficulties or interruptions in our service;
Changes in foreign currency exchange rates;
Changes in the effective tax rates due to changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, changes in federal, state or international tax laws and accounting principles, changes in judgment from the evaluation of new information that results in a recognition, derecognition or change in measurement of a tax position taken in a prior period, results of tax examinations by local and foreign taxing authorities;
Expenses related to significant, unusual or discrete events which are recorded in the period in which the events occur;
Regulatory compliance costs; and
Extraordinary expenses such as litigation or other dispute-related settlement payments.
Many of these factors are outside of our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results, changes in our deferred revenue and unbilled deferred revenue balances and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
Our operating expenses, which include sales and marketing, research and development and general and administrative expenses, are based on our expectations of future revenue and are, to a large extent, fixed in the short term. If revenue falls below our expectations in a quarter and we are not able to quickly reduce our operating expenses in response, our operating results for that quarter could be adversely affected. It is possible that in some future quarter our operating results may be below either any guidance we might issue or the expectations of public market analysts and investors and, as a result, the price of our common stock might fall.
If we fail to respond to technological changes to be competitive, our business could suffer.
The software industry is characterized by technological change, evolving industry standards in hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of
products encompassing new technologies can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. There is no assurance that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, there can be no assurance that the products, capabilities or technologies developed by others will not render our products or technologies obsolete or noncompetitive. In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser, we will need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We have made and continue to make significant working capital investments in accordance with evolving industry and customer requirements. These concentrations of working capital increase our risk of loss due to product or technology obsolescence. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products or if such new products or enhancements do not achieve market acceptance, our business, results of operations and financial condition may be materially adversely affected.
Because competition for highly qualified personnel is intense, we might not be able to attract and retain key personnel and personnel we need to support our planned growth.
To meet our objectives successfully, we must attract and retain highly qualified personnel with specialized skill sets. If we are unable to attract suitably qualified management, there could be a material adverse impact on our business. In addition, to execute our continuing growth plans, we need to increase the size and maintain the quality of our sales force, software development staff and our professional services organization. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. The pool of qualified personnel with experience working with or selling to nonprofit organizations is limited overall and specifically in Charleston, South Carolina, where our principal office is located. Our ability to maintain and expand our sales, product development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, nonprofit organizations. For these reasons, we have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition, it takes time for our new sales and services personnel to become productive, particularly with respect to obtaining and supporting major customer accounts. We might also engage additional third-party consultants as contractors, which could have a negative impact on our earnings. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our products and services, we could experience a shortfall in revenue or earnings and not achieve our planned growth.
Further, in the past, we have used equity incentive programs as part of our overall employee compensation arrangements to both attract and retain personnel. A decline in our stock price could negatively impact the value of these equity incentive and related compensation programs as retention and recruiting tools. We may need to create new or additional equity incentive programs and/or compensation packages to remain competitive, which could be dilutive to our existing stockholders and/or adversely affect our results of operations.
If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.
We currently have operations in Canada, United Kingdom, the Netherlands, Ireland, Australia and New Zealand, and we intend to expand further into international markets. We have limited experience in international operations and might not be able to compete effectively in international markets. Our international offices generated revenues of approximately $63.9 million, $61.0 million and $53.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Accordingly, international revenue increased 4.8% and 13.8% in 2013 and 2012, respectively. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets. Our direct sales model requires us to attract, retain and manage qualified sales personnel capable of selling into markets outside the United States. In some cases, our costs of sales might increase if our customers require us to sell through local distributors.
If we are unable to grow our international operations in a cost effective and timely manner, our business and operating results could be harmed. Doing business internationally involves additional risks that could harm our operating results, including:
Difficulties associated with and costs of staffing and managing international operations;
Differing technology standards;
Difficulties in collecting accounts receivable and longer collection periods;
Political and economic instability;
Imposition of currency exchange controls;
Potentially adverse tax consequences;
Reduced protection for intellectual property rights in certain countries;
Dependence on local vendors;
Protectionist laws and business practices that favor local competition;
Compliance with multiple conflicting and changing governmental laws and regulations;
Seasonal reductions in business activity specific to certain markets;
Longer sales cycles;
Restrictions on repatriation of earnings or new taxation thereon;
Differing labor regulations;
Differing accounting rules and practices;
Restrictive privacy regulations in different countries, particularly in the European Union;
Restrictions on the export of technologies such as data security and encryption;
Compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials; and
Import and export restrictions and tariffs.
We expect that an increasing portion of our international revenues will be denominated in foreign currencies, subjecting us to fluctuations in foreign currency exchange rates. If we expand our international operations, exposures to gains and losses on foreign currency transactions may increase.
Material defects or errors in the software we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects in our service, and new errors in our existing service may be detected in the future. Any defects that cause interruptions to the availability of our services could result in adverse impacts to our business, including:
A reduction in sales or delay in market acceptance of our services;
Sales credits or refunds to our customers;
Loss of existing customers and difficulty in attracting new customers;
Diversion of development resources;
Harm to our reputation; and
Increased warranty and insurance costs.
After the release of our services, defects or errors may also be identified from time to time by our internal team and by our customers. The costs incurred in correcting any material defects or errors in our services may be substantial and could harm our operating results. Furthermore, our customers may use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation and cause significant customer relations problems.
Our failure to obtain licenses for third-party technologies could harm our business.
We expect to continue licensing technologies from third parties, including applications used in our research and development activities, technologies which are integrated into our products and products that we resell. We believe that the loss of any third-party technologies currently integrated into our products could have a material adverse effect on our business. Our inability in
the future to obtain any third-party licenses on commercially reasonable terms, or at all, could delay future product development until equivalent technology can be identified, licensed or developed and integrated. This inability in turn would harm our business and operating results. Our use of third-party technologies exposes us to increased risks including, but not limited to, risks associated with the integration of new technology into our products, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs.
Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur significant costs, enter into royalty or licensing agreements or develop or license substitute technology.
We may in the future be subject to claims that our technologies in our products and services infringe upon the intellectual property or other proprietary rights of a third party. In addition, the vendors providing us with technology that we use in our own technology could become subject to similar infringement claims. Although we believe that our products and services do not infringe any intellectual property or other proprietary rights, we cannot be certain that our products and services do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by others. Any claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts, or obtain a license to continue to use the products and services that are the subject of the claim, and/or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms from the third party asserting any particular claim, or that we would be able to successfully develop alternative technology on a timely basis, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the products and services. In addition, we generally provide in our customer agreements for certain products and services that we will indemnify our customers against third-party infringement claims relating to technology we provide to those customers, which could obligate us to pay damages if the products and services were found to be infringing. Infringement claims asserted against us, our vendors or our customers may have a material adverse effect on our business, prospects, financial condition and results of operations.
Our solutions utilize open source software, which may subject us to litigation, require us to re-engineer our solutions, or otherwise divert resources away from our development efforts.
We use open source software in connection with certain of our solutions. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style” licenses, “BSD-style” licenses and other open source licenses. There is little legal precedent governing the interpretation of many of the terms of some of these licenses, and therefore the potential impact of these terms on our business is currently unable to be determined and may result in unanticipated obligations regarding our products and technologies. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to litigation by parties claiming ownership of open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their own software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.
We rely upon trademark, copyright, patent and trade secret laws to protect our proprietary rights, which might not provide us with adequate protection.
Our success and ability to compete depends to a significant degree upon the protection of our software and other proprietary technology rights. We might not be successful in protecting our proprietary technology and our proprietary rights might not provide us with a meaningful competitive advantage. To protect our core proprietary technology, we rely on a combination of patent, trademark, copyright and trade secret laws, as well as nondisclosure agreements, each of which affords only limited protection. We have no patent protection for The Raiser's Edge, which is one of our core products and responsible for a significant portion of our revenue. Any inability to protect our intellectual property rights could seriously harm our business, operating results and financial condition. It is possible that:
Any patents issued to us may not be timely or broad enough to protect our proprietary rights;
Any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents; and
Current and future competitors may independently develop similar technologies, duplicate our products or design around any of our patents.
In addition, the laws of some foreign countries do not protect our proprietary rights in our products to the same extent as do the laws of the United States. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our proprietary technology and information without authorization. Policing unauthorized use of our products is difficult, and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, and could result in substantial diversion of management attention and resources and materially harm our business, financial condition and results of operations.
Restrictions in our revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
Our credit facility contains restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock and enter into transactions with affiliates. There can be no assurance that we will be able to remain in compliance with the covenants to which we are subject in the future and, if we fail to do so, that we will be able to obtain waivers from our lenders or amend the covenants.
In the event of a default under our credit facility, we could be required to immediately repay all outstanding borrowings, which we might not be able to do. In addition, certain of our material domestic subsidiaries will be required to guarantee amounts borrowed under the credit facility, and we have pledged the shares of certain of our subsidiaries as collateral for our obligations under the credit facility. Any such default could have a material adverse effect on our ability to operate, including allowing lenders under the credit facility to enforce guarantees of our subsidiaries, if any, or exercise their rights with respect to the shares pledged as collateral.
Our business and financial performance could be negatively impacted by changes in tax laws or regulations.
WeOur customers and our customerswe are subject to a wide variety of tax laws and regulations in jurisdictions around the world. In response to recent economic challenges, we anticipate that many of the jurisdictions in which we and our customers do business will review tax and other revenue raising laws and regulations. New or revised income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to usour customers or our customers.us. Any changes to these existing tax laws could adversely affect our domestic and international business operations, and our business and financial performance. Additionally, these events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require usour customers or our customersus to pay fines and/or penalties and interest for past amounts deemed to be due. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our customers' and our compliance, operating and other costs, as well as the costs of our products. Further, these events could decrease the capital we have available to operate our business.solutions. Any or all of these events could adversely impact our business and financial performance.
We have recorded a significant deferred tax asset,assets, and we might never realize thetheir full value, of our deferred tax asset, which would result in a charge against our earnings.
In connection with the initial acquisition of our common stock as part of our recapitalization in 1999, we recorded approximately $107.0 million as a deferred tax asset. As of December 31, 2013,2015, we havehad deferred tax assets recognized of $60.1 million, of which $5.8 million relates to our 1999 recapitalization.
$55.4 million. Realization of our deferred tax assetassets is dependent upon our generating sufficient taxable income in future years to realize the tax benefit from that asset.those assets. Deferred tax assets are reviewed at least annually for realizability. A charge against our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. This could be caused by, among other things, deterioration in performance, loss of key contracts, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the productssolutions sold by our business and a variety of other factors. If a deferred tax asset was determined to be not realizable in a future period, the charge to earnings would be recognized as an expense in our results of operations in the period the determination is made. Additionally, if we are unable to utilize our deferred tax assets, our cash flow available to fund operations could be adversely effected.affected.
Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax asset.assets. Any future determination of impairment of a significant portion of our deferred tax assetassets would have an adverse effect on our financial condition and results of operations.
Our abilityClaims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to utilizeincur significant costs, enter into royalty or licensing agreements or develop or license substitute technology.
We may in the future be subject to claims that our net operating loss carryforwards may be limited.
Includedtechnologies in our deferred tax asset balance is $14.6 million related to federal net operating loss carryforwards at December 31, 2013. Our federal net operating loss carryforwards aresolutions and services infringe upon the intellectual property or other proprietary rights of a third party. In addition, the vendors providing us with technology that we use in our own technology could become subject to limitations on how much maysimilar infringement claims. Although we believe that our solutions and services do not infringe any intellectual property or other proprietary rights, we cannot be utilized on an annual basis. Thecertain that our solutions and services do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by others. Any claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts, or obtain a license to continue to use the solutions and services that are the subject of the claim, and/or otherwise restrict or prohibit our use of the net operating loss carryforwardstechnology. There can be no assurance that we would be able to obtain a license on commercially reasonable terms from the third party asserting any particular claim, or that we would be able to successfully develop alternative technology on a timely basis, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the solutions and services. In addition, we generally provide in our customer arrangements for certain solutions and services that we will indemnify our customers against third-party infringement claims relating to technology we provide to those customers, which could obligate us to pay damages if the solutions and services were found to be infringing. Infringement claims asserted against us, our vendors or our customers may have additional limitations resulting from certain future ownership changes or other factors set forth in the Internal Revenue Code. If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available net operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be available in future years prior to their expiration, which would have ana material adverse effect on our future cash flow,business, prospects, financial condition and results of operations.
Our solutions utilize open source software, which may subject us to litigation, require us to re-engineer our solutions, or otherwise divert resources away from our development efforts.
We might face challengesuse open source software in integrating acquisitionsconnection with certain of our solutions. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style” licenses, “BSD-style” licenses and as a result, might not realizeother open source licenses. There is little legal precedent governing the expected benefitsinterpretation of many of the terms of some of these acquisitions.
Welicenses, and therefore the potential impact of these terms on our business is currently unable to be determined and may result in unanticipated obligations regarding our solutions and technologies. From time to time, companies that incorporate open source software into their products have completed significant acquisitions overfaced claims challenging the past five yearsownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to litigation by parties claiming ownership of open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their own software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may undertake additional acquisitionsbe required to release proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the future. Managingevent re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.
We rely upon trademark, copyright, patent and integratingtrade secret laws to protect our proprietary rights, which might not provide us with adequate protection.
Our success and ability to compete depends to a significant degree upon the operations and personnelprotection of an acquired company can be a complex process. The integrationour proprietary technology rights. We might not be completed rapidly or achievesuccessful in protecting our proprietary technology and our proprietary rights might not provide us with a meaningful competitive advantage. To protect our core proprietary technology, we rely on a combination of patent, trademark, copyright and trade secret laws, as well as nondisclosure agreements, each of which affords only limited protection. We have no patent protection for Raiser's Edge, which is one of our core solutions and responsible for a significant portion of our revenue. Any inability to protect our intellectual property rights could seriously harm our business, operating results and financial condition.
In addition, the anticipated benefitslaws of some foreign countries do not protect our proprietary rights in our solutions to the same extent as do the laws of the acquisition. The successful integrationUnited States. Despite the measures taken by us, it may be possible for a third party to copy or otherwise obtain and use our proprietary technology and information without authorization. Policing unauthorized use of acquired companies will require, among other things, coordination of various departments, including product development, engineering, salesour solutions is difficult, and marketinglitigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and finance. Further, a successful integration of acquired companies internal control structure will be required. Theexpensive to prosecute or resolve, and could result in substantial diversion of themanagement attention of management and any difficulties encountered in this process could cause the disruption of, or a loss of momentum in, sales or product development. If we are unable to successfully integrate the operationsresources and personnel of our recently acquired companies, or if there is any significant delay in achieving integration, we will not realize the revenue growth, synergies and other anticipated benefits we expected andmaterially harm our business, financial condition and results of operations could be adversely affected.
If we are unable to retain key personnel of our acquisitions, our business may suffer.
The success of our acquisitions will depend in part on our ability to retain their engineering, sales, marketing, development and other personnel. It is possible that these employees might decide to terminate their employment. If key employees terminate their employment, the sales, marketing or development activities of acquired companies might be adversely affected, our management's attention might be diverted from successfully integrating the acquired operations and to hiring suitable replacements and, as a result, our business might suffer.
Future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources.
As part of our business strategy, we have made acquisitions in the past, and, we might acquire additional companies, services and technologies that we feel could complement or expand our business, augment our market coverage, enhance our technical capabilities, provide us with important customer contacts or otherwise offer growth opportunities. Acquisitions and investments involve numerous risks, including:
Difficulties in integrating operations, technologies, services, accounting and personnel;
Difficulties in supporting and transitioning customers of our acquired companies;
Diversion of financial and management resources from existing operations;
Risks of entering new sectors of the nonprofit industry;
Potential loss of key employees; and
Inability to generate sufficient return on investment.
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders would be diluted which, in turn, could affect the market price of our stock. Moreover, we could finance any acquisition with debt, resulting in higher leverage and interest costs. As a result, if we fail to evaluate and execute acquisitions or investments properly, we might not achieve the anticipated benefits of any such acquisition and we may incur costs in excess of what we anticipate. Furthermore, if we incur additional
debt to fund acquisitions and are unable to service our debt obligation we may have a greater risk of default under our credit facility.
If we are not able to manage our anticipated growth effectively, our operating costs may increase and our operating margins may decrease.
We will need to continue to grow our infrastructure to address our acquisitions and other potential market opportunities. Our growth will continue to place, to the extent that we are able to sustain such growth, a strain on our management, administrative, operational and financial infrastructure. If we continue to grow our operations, by way of additional business combinations or otherwise, we may not be effective in enlarging our physical facilities and our systems and our procedures or controls may not be adequate to support such expansion or our business generally. If we are unable to manage our growth, our operating costs may increase and our operating margins may decrease.operations.
Increasing and evolving government regulation could affect our business.
We are subject not only to numerous laws and regulations applicable to businesses generally but also toas well as laws and regulations directly applicable to electronic commerce and other regulations. Although there are currently few such laws and regulations, state,payment processing. State, federal and foreign governments may adopt new laws and regulations or modify existing laws and regulations applicable to our business. Any such new or modified legislation or regulation could dampen the growth and decrease the acceptance of the Internet and decrease its acceptance.online commerce. If such a decline occurs, companies may decide in the future not to use our productssolutions and services. Any new or modified laws or regulations in the following areas, among others, could negatively affect our business:
User privacy;
Payment processing;processing and related interchange rates;
The pricing and taxation of goods and services offered over the Internet;Merchant surcharge limits;
Taxation of foreign earnings;
The content of websites;
Copyrights; and
Consumer protection, including the potential application of “do not call” registry requirements on our customers and consumer backlash in general to direct marketing efforts of our customers;
The online distribution of specific material or content over the Internet; and
The characteristics and quality of products and services offered over the Internet.customers.
Pending and enacted legislation at the state and federal levels, including those related to fundraising activities and payment processing, may also restrict further our information gathering and disclosure practices, for example, by requiring us to comply with extensive and costly registration, reporting or disclosure requirements. Any substantial increase in government regulation affecting our business, or any failure to comply with existing regulations, could require substantial investments to achieve compliance, which could adversely affect our operating results and financial condition.
General economic factors, both domestically and internationally, might adversely affect our financial performance.
General economic conditions, globally or in one or more of the markets we serve, might adversely affect our financial performance. Weakness in the financial and housing markets, inflation, higher levels of unemployment, unavailability of consumer credit, higher consumer debt levels, volatility in credit, equity and foreign exchange markets, higher tax rates and other changes in tax laws, overall economic slowdowns and other economic factors could adversely affect donations to nonprofits, reducing their revenue and, therefore, possibly their demand for the solutions and services we sell and lengthen our sales and payment cycles. In addition, these adverse economic conditions could reduce charitable transactions executed through our payments platform, which would adversely affect our revenue and net income. Higher interest rates, inflation, higher costs of labor, insurance and healthcare, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United States could increase our cost of sales and operating, selling, general and administrative expenses and otherwise adversely affect our operations and operating results. These conditions could affect not only our operations, but also the operations of suppliers from whom we purchase or license solutions and services, which could result in an increase in the cost to us of our solutions and services, reducing our margins. These
factors also affect our customers who may reduce their purchasing of our solutions due to the adverse effects of certain economic factors.
Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We depend on our principal executive offices and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks, computer hacker attacks and natural disasters such as hurricanes and earthquakes, could disrupt one or more of these facilities and adversely affect our operations. Our principal executive offices are located in a coastal region that has experienced hurricanes in the past. Even though we carry business interruption insurance policies and typically have provisions in our commercial contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.
Item 1B. Unresolved staff comments
None.
Item 2. Properties
We lease our headquarters in Charleston, South Carolina which consists of approximately 220,000218,000 square feet. The lease on our Charleston headquarters expires in October 2024, and we have the option for two 5-year renewal periods. We also lease additional facilitiesoffice space in Charleston, South Carolina; Austin, Texas; Indianapolis, Indiana,Indiana; Cambridge, Massachusetts; Washington D.C.; San Diego and Emeryville, California; Overland Park, Kansas; Lincoln, Nebraska; Miami, Florida; Almere, the Netherlands;Bedford, New Hampshire; Edina, Minnesota; New York, New York; Middlesex, New Jersey; Glasgow, Scotland; Dublin, Ireland; London, England; East Brisbane, Australia; and Sydney, Australia. We believe that our properties are in good operating condition and adequately serve our current business operations for all of our business segments. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.
Item 3. Legal proceedings
From time to time we may become involved in litigation relating to claims arising from our ordinary course of business. We do not believe that there are any claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.
Item 4. Mine safety disclosures
Not applicable.
PART IIII.
Item 5. Market for registration's common equity, related stockholder matters and issuer purchases of equity securities
Our common stock beganis trading on the NASDAQ NationalStock Market LLC (“NASDAQ”) under the symbol “BLKB” on July 26, 2004. On July 1, 2006, our common stock began trading on NASDAQ’s newest market tier, the NASDAQ Global Select Market.“BLKB.” The following table sets forth, for the quarterly reporting periods indicated, the high and low salesmarket prices for shares of our common stock, as reported by NASDAQ, for the periods indicated.
Blackbaud quarterly high and low stock prices
dividend per share information.
| | | | High |
| | Low |
| Common Stock Market Prices | |
| Fiscal year ended December 31, 2013 | | | | |
| | | High |
| Low |
| Dividends Declared |
|
| Fiscal year ended December 31, 2015 | | |
| Fourth quarter | | $ | 67.54 |
| $ | 56.17 |
| $ | 0.12 |
|
| Third quarter | | 63.73 |
| 54.10 |
| 0.12 |
|
| Second quarter | | 59.67 |
| 47.39 |
| 0.12 |
|
| First quarter | $ | 30.84 |
| | $ | 22.85 |
| 47.45 |
| 42.00 |
| 0.12 |
|
| Fiscal year ended December 31, 2014 | | |
| Fourth quarter | | $ | 45.86 |
| $ | 37.38 |
| $ | 0.12 |
|
| Third quarter | | 40.99 |
| 33.62 |
| 0.12 |
|
| Second quarter | $ | 34.44 |
| | $ | 27.68 |
| 36.33 |
| 29.42 |
| 0.12 |
|
| Third quarter | $ | 40.00 |
| | $ | 32.54 |
| |
| Fourth quarter | $ | 42.23 |
| | $ | 33.88 |
| |
| Fiscal year ended December 31, 2012 | | | | |
| First quarter | $ | 34.00 |
| | $ | 22.63 |
| 38.84 |
| 29.99 |
| 0.12 |
|
| Second quarter | $ | 33.93 |
| | $ | 24.02 |
| |
| Third quarter | $ | 28.34 |
| | $ | 22.98 |
| |
| Fourth quarter | $ | 24.88 |
| | $ | 20.99 |
| |
As of February 12, 2014,8, 2016, there were approximately 156144 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, this number is not representative of the total number of stockholders represented by these stockholders of record. On February 12, 2014,8, 2016, the closing price of our common stock was $32.56.$51.50.
Stock performance graphPerformance Graph
The following performance graph shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act except as shall be expressly set forth by specific reference in such filing. The performance graph compares the performance of our common stock to the NASDAQ Composite Index and the NASDAQ Computer and Data Processing Index. The graph covers the most recent five-year period ending December 31, 2013.2015. The graph assumes that the value of the investment in our common stock and each index was $100.00 at December 31, 2008,2010, and that all dividends are reinvested.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 |
| Blackbaud, Inc. | $ | 100.00 |
| | $ | 108.97 |
| | $ | 91.50 |
| | $ | 153.20 |
| | $ | 178.39 |
| | $ | 274.57 |
|
| NASDAQ Composite Index | 100.00 |
| | 100.53 |
| | 116.92 |
| | 166.19 |
| | 188.78 |
| | 199.95 |
|
| NASDAQ Computer & Data Processing Index | 100.00 |
| | 100.83 |
| | 108.27 |
| | 165.81 |
| | 190.41 |
| | 224.42 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2008 |
| | 12/31/2009 |
| | 12/31/2010 |
| | 12/31/2011 |
| | 12/31/2012 |
| | 12/31/2013 |
|
| Blackbaud, Inc. | $ | 100.00 |
| | $ | 179.61 |
| | $ | 200.64 |
| | $ | 218.64 |
| | $ | 183.59 |
| | $ | 307.39 |
|
| NASDAQ Composite | $ | 100.00 |
| | $ | 144.88 |
| | $ | 170.58 |
| | $ | 171.30 |
| | $ | 199.99 |
| | $ | 283.39 |
|
| NASDAQ Computer & Data Processing | $ | 100.00 |
| | $ | 165.29 |
| | $ | 179.77 |
| | $ | 177.69 |
| | $ | 191.22 |
| | $ | 290.35 |
|
Common stock acquisitionsStock Acquisitions and repurchasesRepurchases
The following table provides information about shares of common stock acquired or repurchased during the three months ended December 31, 2013.2015. All of these acquisitions were of common stock withheld by us to satisfy minimum tax obligations of employees due upon exercise of stock appreciation rights and vesting of restricted stock awards and unitsunits. The level of acquisition activity varies from period to period based upon the timing of grants and vesting as well as employee exercise of stock appreciation rights.decisions.
|
| | | | | | | | | | | | | |
| Period | Total number of shares acquired or purchased |
| | Average price paid per share |
| | Total number of shares purchased as part of publicly announced plans or programs(1) |
| | Approximate dollar value of shares that may yet be purchased under the plan or programs (in thousands) |
|
| Beginning balance, October 1, 2013 | | | | | | | $ | 50,000 |
|
| October 1, 2013 through October 31, 2013 | 6,187 |
| | $ | 40.52 |
| | — |
| | $ | 50,000 |
|
| November 1, 2013 through November 30, 2013 | 141,615 |
| | $ | 35.56 |
| | — |
| | $ | 50,000 |
|
| December 1, 2013 through December 31, 2013 | 23 |
| | $ | 36.97 |
| | — |
| | $ | 50,000 |
|
| Total | 147,825 |
| | $ | 35.77 |
| | — |
| | $ | 50,000 |
|
|
| | | | | | | | | | | | | | |
| Period | | Total number of shares purchased |
| | Average price paid per share |
| | Total number of shares purchased as part of publicly announced plans or programs(1) |
| | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) |
|
| Beginning balance, October 1, 2015 | | | | | | | | $ | 50,000 |
|
| October 1, 2015 through October 31, 2015 | | 845 |
| | $ | 64.01 |
| | — |
| | 50,000 |
|
| November 1, 2015 through November 30, 2015 | | 105,920 |
| | 62.67 |
| | — |
| | 50,000 |
|
| December 1, 2015 through December 31, 2015 | | — |
| | — |
| | — |
| | 50,000 |
|
| Total | | 106,765 |
| | $ | 62.70 |
| | — |
| | $ | 50,000 |
|
| |
| (1) | In August 2010, our Board of Directors approved a stock repurchase program that authorized us to purchase up to $50.0 million of our outstanding shares of common stock. We have not made any repurchases under the program to date, and the program does not have an expiration date. |
Dividend policy and restrictionsPolicy
Our Board of Directors has adopted a dividend policy which reflects an intention to distribute to our stockholders a portion of the cash generated by our business that exceeds our operating needs and capital expenditures as regular quarterly dividends. This policy reflects our judgment that we can provide greater value to our stockholders by distributing to them a portion of the cash generated by our business.
In accordance with this dividend policy, we paid quarterly dividends at an annual rate of $0.48 per share in 20132015 and 2012,2014, resulting in an aggregate dividend paymentpayments to stockholders of $22.1$22.5 million and $21.7$22.1 million in 20132015 and 2012,2014, respectively. In February 2014,2016, our Board of Directors approved an annual dividend rate of $0.48 per share for 2014.2016. We declared a first quarter dividend of $0.12$0.12 per share payable on March 14, 2014,15, 2016, to stockholders of record on February 28, 2014,26, 2016, and currently intend to pay quarterly dividends at an annual rate of $0.48$0.48 per share of common stock for each of the remaining fiscal quarters in 2014. Dividends at this rate would total approximately $22.6 million in the aggregate on the common stock in 2014 (assuming 47.0 million shares of common stock are outstanding, net of treasury stock).2016.
Dividends on our common stock will not be cumulative. Consequently, if dividends on our common stock are not declared and/or paid at the targeted level, our stockholders will not be entitled to receive such payments in the future. We are not obligated to pay dividends, and as described more fully below, our stockholders might not receive any dividends as a result of the following factors:
Our credit facility limits the amount of dividends we are permitted to pay;
Our Board of Directors could decide to reduce dividends or not to pay dividends at all, at any time and for any reason;
The amount of dividends distributed is subject to state law restrictions;restrictions (as discussed below); and
We might not have enough cash to pay dividends due to changes to our operating earnings, working capital requirements and anticipated cash needs.
Assumptions and considerationsConsiderations
We estimate that the cash necessary to fund dividends on our common stock for 20142016 at an annual rate of $0.48$0.48 per share is approximately $22.6 million (assuming 47.0 million shares of common stock are outstanding, net of treasury stock).
We have a stock repurchase program that authorizes us to purchase up to $50.0 million of our outstanding shares of common stock. The program does not have an expiration date. The shares could be purchased in a self-tender for our stock, from time to time on the open market or in privately negotiated transactions depending upon market conditions and other factors, all in accordance with the requirements of applicable law. Any open market purchases under the
repurchase program will be made in compliance with Rule 10b-18 of the Securities Exchange Act of 1934 and all other applicable securities regulations. We might not purchase any shares of common stock and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, to cancel the stock repurchase program.
We believe that our cash on hand and the cash flows we expect to generate from operations will be sufficient to meet our liquidity requirements through 2014,2016, including dividends and purchases under our stock repurchase program. See “Management’s discussion and analysis of financial conditions and results of operations — Liquidity and capital resources” in Item 7 in this report.
If our assumptions as to operating expenses, working capital requirements and capital expenditures are too low or if unexpected cash needs arise that we are not able to fund with cash on hand or with borrowings under our credit facility, we would need to either reduce or eliminate dividends. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash available for future dividends and other purposes, which could negatively impact our stock price, financial condition, results of operations and ability to maintain or expand our business.
We have estimated our dividend only for 2014,2016, and we cannot assure our stockholders that during or following 20142016 we will pay dividends at the estimated levels, or at all.all except with regard to dividends previously declared by the Board of Directors but not yet paid. We are not required to pay dividends and our Board of Directors may modify or revoke our dividend policy at any time. Dividend payments are within the absolute discretion of our Board of Directors and will be dependent upon many factors and future developments that could differ materially from our current expectations. Indeed, overOver time, our capital and other cash needs, including unexpected cash needs, will invariably change and remain subject to uncertainties, which could impact the level of any dividends we pay in the future.
We believe that our dividend policy could limit, but not preclude, our ability to pursue growth as we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities that do not require material capital investments.opportunities. In order to pay dividends at the level currently anticipated under our dividend policy and to fund any substantial portion of our stock repurchase program, we expect that we could require financing or borrowings to fund any significant acquisitions or to pursue growth opportunities requiring capital expenditures significantly beyond our anticipated capital expenditure levels. Management will evaluate potential growth opportunities as they arise and, if our Board of Directors determines that it is in our best interest to use cash that would otherwise be available for distribution as dividends to pursue an acquisition opportunity, to materially increase capital spending or for some other purpose, the Board would be free to depart from or change our dividend policy at any time.
Restrictions on paymentPayment of dividendsDividends
Under Delaware law, we can only pay dividends either out of “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or out of current or the immediately preceding year’s earnings. As of December 31, 2013,2015, we had $11.9$15.4 million in cash and cash equivalents. In addition, we anticipate that we will have sufficient earnings in 20142016 to pay dividends at the level described above. Although we believe we will have sufficient surplus and earnings to pay dividends at the anticipated levels for 2014,2016, our Board of Directors will seek periodically to assure itself of this sufficiency before actually declaring any dividends.
We entered into an amended and restatedUnder our credit facility, in February 2012. The amended credit facility restrictswe also have restrictions on our ability to declare and pay dividends onand our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (1) no default or event of default shall have occurred and be continuing under the credit facility, and (2) we must be in compliance with aour pro forma net leverage ratio, as set forth in the credit agreement.agreement, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. See “Management’s discussion and analysis of financial conditions and results of operations — Liquidity and capital resources” in Item 7 in this report.
Item 6. Selected financial data
The selected financial data set forth below should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” in Item 7 in this report and our financial statements and the related notes included elsewhere in this report to fully understand factors, including our business acquisitions and dispositions as well as presentation of certain of our subscriptions revenues and costs on a gross basis effective October 2013, that may affect the comparability of the information presented below.
The following data, insofar as it relates to each of the years ended December 31, 2013, 20122015, 2014 and 2011,2013, has been derived from the audited annual financial statements, including the consolidated balance sheets at December 31, 20132015 and 2012,2014, and the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for the three years ended December 31, 2013, 20122015, 2014 and 20112013 and notes thereto appearing elsewhere herein.in Item 8 of this report. The following data, insofar as it relates to each of the years ended December 31, 20102012 and 2009,2011, and the consolidated balance sheets as of December 31, 2011, 20102013, 2012 and 20092011 are derived from audited financial statements not included in this report.
As described in Note 3 of the consolidated financial statements included in this annual report, our business acquisitions could affect the comparability of the information presented.
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands, except per share data) | 2013 |
| | 2012 |
| | 2011 |
| | 2010 |
| | 2009 |
|
| Consolidated statements of comprehensive income data: | | | | | | | | | |
| Revenue | | | | | | | | | |
| License fees | $ | 16,715 |
| | $ | 20,551 |
| | $ | 19,475 |
| | $ | 23,719 |
| | $ | 25,656 |
|
| Subscriptions | 212,656 |
| | 162,102 |
| | 103,544 |
| | 83,912 |
| | 73,194 |
|
| Services | 126,548 |
| | 119,626 |
| | 108,781 |
| | 87,663 |
| | 87,239 |
|
| Maintenance | 138,745 |
| | 136,101 |
| | 130,604 |
| | 124,559 |
| | 116,413 |
|
| Other revenue | 9,153 |
| | 9,039 |
| | 8,464 |
| | 6,712 |
| | 6,968 |
|
| Total revenue | 503,817 |
| | 447,419 |
| | 370,868 |
| | 326,565 |
| | 309,470 |
|
| Cost of revenue | | | | | | | | | |
| Cost of license fees | 2,763 |
| | 2,993 |
| | 3,345 |
| | 3,003 |
| | 3,697 |
|
Cost of subscriptions(1) | 93,649 |
| | 68,773 |
| | 42,536 |
| | 31,155 |
| | 28,158 |
|
Cost of services(1) | 104,005 |
| | 97,208 |
| | 79,086 |
| | 66,755 |
| | 61,585 |
|
Cost of maintenance(1) | 25,741 |
| | 26,001 |
| | 25,178 |
| | 24,123 |
| | 21,594 |
|
| Cost of other revenue | 6,505 |
| | 7,485 |
| | 7,049 |
| | 7,103 |
| | 6,098 |
|
| Total cost of revenue | 232,663 |
| | 202,460 |
| | 157,194 |
| | 132,139 |
| | 121,132 |
|
| Gross profit | 271,154 |
| | 244,959 |
| | 213,674 |
| | 194,426 |
| | 188,338 |
|
| Operating expenses | | | | | | | | | |
Sales and marketing(1) | 97,614 |
| | 95,218 |
| | 75,361 |
| | 69,469 |
| | 63,495 |
|
Research and development(1) | 65,645 |
| | 64,692 |
| | 47,672 |
| | 45,499 |
| | 45,520 |
|
General and administrative(1) | 50,320 |
| | 63,133 |
| | 36,933 |
| | 32,636 |
| | 33,383 |
|
| Restructuring | 3,494 |
| | 175 |
| | — |
| | — |
| | — |
|
| Amortization | 2,539 |
| | 2,106 |
| | 980 |
| | 798 |
| | 768 |
|
| Impairment of cost method investment | — |
| | 200 |
| | 1,800 |
| | — |
| | — |
|
| Total operating expenses | 219,612 |
| | 225,524 |
| | 162,746 |
| | 148,402 |
| | 143,166 |
|
| Income from operations | 51,542 |
| | 19,435 |
| | 50,928 |
| | 46,024 |
| | 45,172 |
|
| Interest income | 67 |
| | 146 |
| | 183 |
| | 84 |
| | 637 |
|
| Interest expense | (5,818 | ) | | (5,864 | ) | | (200 | ) | | (74 | ) | | (962 | ) |
| Other income (expense), net | (462 | ) | | (392 | ) | | 346 |
| | (98 | ) | | 220 |
|
| Income before provision for income taxes | 45,329 |
| | 13,325 |
| | 51,257 |
| | 45,936 |
| | 45,067 |
|
| Income tax provision | 14,857 |
| | 6,742 |
| | 18,037 |
| | 16,749 |
| | 17,547 |
|
| Net income | $ | 30,472 |
| | $ | 6,583 |
| | $ | 33,220 |
| | $ | 29,187 |
| | $ | 27,520 |
|
| Earnings per share | | | | | | | | | |
| Basic | $ | 0.68 |
| | $ | 0.15 |
| | $ | 0.76 |
| | $ | 0.68 |
| | $ | 0.64 |
|
| Diluted | $ | 0.67 |
| | $ | 0.15 |
| | $ | 0.75 |
| | $ | 0.67 |
| | $ | 0.63 |
|
| Common shares and equivalents outstanding | | | | | | | | | |
| Basic weighted average shares | 44,685 |
| | 44,146 |
| | 43,523 |
| | 43,145 |
| | 42,771 |
|
| Diluted weighted average shares | 45,421 |
| | 44,692 |
| | 44,149 |
| | 43,876 |
| | 43,600 |
|
| Dividends per share | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.44 |
| | $ | 0.40 |
|
| Summary of stock-based compensation: | | | | | | | | | |
| Cost of subscriptions | $ | 1,032 |
| | $ | 860 |
| | $ | 571 |
| | $ | 392 |
| | $ | 387 |
|
| Cost of services | 2,464 |
| | 2,786 |
| | 1,966 |
| | 1,742 |
| | 1,433 |
|
| Cost of maintenance | 545 |
| | 538 |
| | 741 |
| | 814 |
| | 750 |
|
| Total included in cost of revenue | 4,041 |
| | 4,184 |
| | 3,278 |
| | 2,948 |
| | 2,570 |
|
| Sales and marketing | 2,351 |
| | 2,527 |
| | 1,325 |
| | 1,366 |
| | 1,605 |
|
| Research and development | 3,731 |
| | 3,556 |
| | 3,039 |
| | 2,844 |
| | 2,944 |
|
| General and administrative | 6,787 |
| | 8,973 |
| | 7,242 |
| | 5,901 |
| | 5,291 |
|
| Total included in operating expenses | 12,869 |
| | 15,056 |
| | 11,606 |
| | 10,111 |
| | 9,840 |
|
| Total stock-based compensation | $ | 16,910 |
| | $ | 19,240 |
| | $ | 14,884 |
| | $ | 13,059 |
| | $ | 12,410 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year ending December 31, |
| (in thousands, except per share data) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| SUMMARY OF OPERATIONS | | | | | | | | | |
| Total revenue | $ | 637,940 |
| | $ | 564,421 |
| | $ | 503,817 |
| | $ | 447,419 |
| | $ | 370,868 |
|
| Total cost of revenue | 304,631 |
| | 273,438 |
| | 232,663 |
| | 202,460 |
| | 157,194 |
|
| Gross profit | 333,309 |
| | 290,983 |
| | 271,154 |
| | 244,959 |
| | 213,674 |
|
| Total operating expenses | 286,597 |
| | 244,619 |
| | 219,612 |
| | 225,524 |
| | 162,746 |
|
| Income from operations | 46,712 |
| | 46,364 |
| | 51,542 |
| | 19,435 |
| | 50,928 |
|
| Net income | 25,649 |
| | 28,290 |
| | 30,472 |
| | 6,583 |
| | 33,220 |
|
| PER SHARE DATA | | | | | | | | | |
| Basic net income | $ | 0.56 |
| | $ | 0.63 |
| | $ | 0.68 |
| | $ | 0.15 |
| | $ | 0.76 |
|
| Diluted net income | 0.55 |
| | 0.62 |
| | 0.67 |
| | 0.15 |
| | 0.75 |
|
| Cash dividends | 0.48 |
| | 0.48 |
| | 0.48 |
| | 0.48 |
| | 0.48 |
|
| BALANCE SHEET DATA | | | | | | | | | |
| Total assets | $ | 1,223,853 |
| | $ | 943,183 |
| | $ | 706,610 |
| | $ | 705,747 |
| | $ | 392,590 |
|
| Deferred revenue, including current portion | 237,335 |
| | 221,274 |
| | 190,574 |
| | 185,018 |
| | 163,437 |
|
| Total debt, including current portion | 408,604 |
| | 280,571 |
| | 152,908 |
| | 215,500 |
| | — |
|
| Total long-term liabilities | 446,967 |
| | 336,263 |
| | 188,384 |
| | 246,368 |
| | 12,547 |
|
|
| | |
(1)2015 Form 10-K | Includes stock-based compensation as set forth in tabular summary of stock-based compensation for all periods presented. | 31 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (in thousands) | | 2013 |
| | 2012 |
| | 2011 |
| | 2010 |
| | 2009 |
|
| Consolidated balance sheet data | | | | | | | | | | |
| Cash and cash equivalents | | $ | 11,889 |
| | $ | 13,491 |
| | $ | 52,520 |
| | $ | 28,004 |
| | $ | 22,769 |
|
| Deferred tax asset, including current portion | | 13,629 |
| | 15,799 |
| | 30,927 |
| | 47,478 |
| | 59,284 |
|
| Working (deficit) capital | | (126,913 | ) | | (97,947 | ) | | (52,093 | ) | | (57,056 | ) | | (74,458 | ) |
| Total assets | | 706,610 |
| | 705,747 |
| | 392,590 |
| | 323,806 |
| | 299,927 |
|
| Deferred revenue, including current portion | | 190,574 |
| | 185,018 |
| | 163,437 |
| | 150,661 |
| | 137,950 |
|
| Total long-term liabilities | | 188,384 |
| | 246,368 |
| | 12,547 |
| | 9,319 |
| | 7,891 |
|
| Common stock | | 56 |
| | 55 |
| | 54 |
| | 53 |
| | 52 |
|
| Additional paid-in capital | | 220,763 |
| | 203,638 |
| | 175,401 |
| | 158,372 |
| | 134,643 |
|
| Total stockholders’ equity | | $ | 161,544 |
| | $ | 147,684 |
| | $ | 140,002 |
| | $ | 116,469 |
| | $ | 110,293 |
|
Blackbaud, Inc.
Item 7. Management’sManagement'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 Item 1A Risk factors and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 “Item 1A. Risk factors” 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.
Executive summary
We provideare a leading provider of software and services for the global philanthropic community. We offer a full spectrum of cloud-based and on-premiseon-premises software solutions, as well as a resource network that empowers and related services designed specifically for nonprofit organizations.connects organizations of all sizes. Our productsportfolio of software and services enablesupport nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. We continue to make investments in our product portfoliorelationship management, digital marketing, advocacy, accounting, payments and go-to-market organization to ensure we are properly positioned to benefit from shifts in the market, including demand for our subscription-based offerings.analytics, as well as grant management, corporate social responsibility, and education. As of December 31, 2013,2015, we had more than 29,000approximately 35,000 active customers distributed across multiple verticals within the nonprofit market including nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations health and human services, religion, artsother charitable giving entities, and cultural, public and societal benefits, environment and animal welfare as well as international foreign affairs.corporations.
We derive revenue from charging subscription fees for the use of our SaaScloud-based solutions, selling perpetual software licenses and providing a broad offering of services, including consulting, training, installation and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation are generally not essential to the functionality of our software products and are sold separately. Furthermore, we derive revenue from providing hosting services, providing transaction and payment processing services and from providing analytic services including performing donor prospect research engagements, benchmarking studies, data modeling services and selling lists of potential donors, and providing transaction processing services, benchmarking studies and data modeling services.
We completed our acquisition of Convio in May 2012 for $335.7 million in consideration.donors. We have included the results of operations of Convio in our consolidated results of operations from the date of acquisition, which impacts the comparability of our statements of comprehensive income when comparing 2013 to 2012 and 2012 to 2011. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business for 2013.
Overall, revenue in 2013 increased $56.4 million or 13% when compared to 2012. This increase was primarily the result of the inclusion of Convio for the full year in 2013 compared to only eight months in 2012 as well asexperienced growth in demand for our online and hosted solutions, as our business continues to shift towards subscription-based offerings. An increase in the volume of transactions for which we process payments also contributed to the increase in subscription revenue as well as a change in presentation from net to gross for revenues and costs associated with certain of our payment processing services effective October 2013.
Income from operations for 2013 increased by $32.1 million or 165% when comparedthe continued shift to 2012. The increase in income from operations was primarily attributableonline giving, further integration of these services to a reduction in costs from improved operational efficiencies realized as we integrated Convio's operationsour existing solution portfolio and a reduction in acquisition related costs. Also contributingthe sale of these services to the increase was the inclusion of Convio's subscription-based offerings, which have historically yielded higher gross margins than our historical subscription-based offeringsnew and an increase in demand for our online fundraising offerings and our payment processing services, which have historically yielded higher gross margins than our other offerings. These favorable impacts on income from operations were partially offset by an increase in amortization of acquired intangibles.
At December 31, 2013, our cash and cash equivalents were $11.9 million and outstanding borrowings were $152.9 million. During 2013, we generated $107.2 million in cash flow from operations, paid $22.1 million in dividends, used $20.1 million to purchase computer equipment and software and reduced our debt balance by $62.6 million.existing customers.
During 2013,2014, we continuedintroduced and began executing on a five point growth strategy. In 2015, these strategies evolved to experience growth in overall revenue primarily driven by the inclusion of Convio's product offeringsaccount for progress to date and the growing demand for our subscription-based offerings. We plan to further increase our focus on subscription-based offeringsfuture outlook and are as we execute on our key growth initiatives and strengthen our leadership position, while achieving our targeted level of profitability. In the near term, we anticipate therefollows:
| |
| 1. | Integrated and Open Solutions in the Cloud |
We will 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.
| |
| 2. | Drive Sales Effectiveness |
We are making investments to increase the effectiveness of our sales organization, to expand our direct sales and customer success teams and to introduce indirect sales with the announcement of a value added reseller ("VAR") program, launching in 2016.
| |
| 3. | Expand TAM into Near Adjacencies with Acquisitions |
We will continue to evaluate compelling opportunities to acquire companies, technologies and/or services. We will be a dilutive impactguided by our acquisition criteria for considering attractive assets, which expand our total addressable market, 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 single best-in-breed back-office solutions to standardize operations utilizing scalable tools and systems. Our focus is now shifting towards operational excellence and quality initiatives focused on our profitability as we investstreamlining processes to gain efficiency and scalability.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
| |
| 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 from our 2014 baseline of 17.5%, by the time we exit 2017.
We plan to continue making investments in our productsolution portfolio and go-to-market organization to meetensure 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 plan to continue making investments in the infrastructure that supports these offerings as well as certain other solution development initiatives including further expansion of our payment processing and analytics services. As we execute on our five key growth initiatives to strengthen our market leadership position, we also plan to focus on achieving scalability of our operations, while attaining our targeted level of profitability.
We completed our acquisition of Smart Tuition in October 2015 for $187.8 million in cash, net of closing adjustments. Smart Tuition is a leading provider of payment software and services for private schools and parents. The acquisition of Smart Tuition further expanded our offerings in the K-12 technology sector. We drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of Smart Tuition. Additionally, we completed our acquisitions of WhippleHill and MicroEdge in June 2014 and October 2014, respectively. We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisition, which impacts the comparability of our results of operations when comparing 2015, 2014 and 2013. 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 acquired companies.
In May 2015, we completed the sale of Customer Technology B.V. ("RLC"), a formerly wholly-owned entity based in the Netherlands, as discussed in Note 18 of our consolidated financial statements in this report. The sale resulted in a loss of $2.0 million, which negatively impacted net income for 2015. We continue to sell and support many of our offerings to customers in the Netherlands either directly through our other foreign subsidiaries or through the use of partnerships, which we view as a better approach for serving that market.
|
| | | | | | | | | |
| Total revenue | | | | |
| | | | | |
| Years ended December 31, | | | | |
| (dollars in millions) | 2015(1) | Change | | 2014(2) |
| Total revenue | $ | 637.9 |
| 13.0 | % | | $ | 564.4 |
|
| |
| (1) | Included in total revenue for 2015 was$31.9 million and $8.5 million attributable to the inclusion of MicroEdge and Smart Tuition, respectively. WhippleHill also positively impacted total revenue for 2015. |
| |
| (2) | Included in total revenue for 2014 was$4.5 million and $5.8 million attributable to the inclusion of WhippleHill and MicroEdge, respectively. |
Excluding the impact of acquisitions noted above, our revenue growth during 2015 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. Excluding the impact of MicroEdge, maintenance revenue, as well as license fees and other revenue declined during 2015 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 2015 by approximately $9.6 million. Further explanation of this impact is included below under the caption "Foreign currency exchange rates".
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | |
| Income from operations | | | | |
| | |
| Years ended December 31, | | | | |
| (dollars in millions) | 2015 | Change | | 2014 |
| Income from operations | $ | 46.7 |
| 0.6 | % | | $ | 46.4 |
|
The modest increase in income from operations during 2015 was primarily driven by growth in subscriptions revenue discussed above, partially offset by increases in stock-based compensation, amortization of intangible assets from business combinations of $7.9 million and $6.1 million, respectively. In 2015, we also recorded charges for employee severance of $3.2 million related to the elimination of certain roles within the company. 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 2015 by approximately $3.7 million. Further explanation of this impact is included below under the caption "Foreign currency exchange rates".
Customer retention
Historically, we have disclosed a measure of retention for our license customers with maintenance contracts. Maintenance contracts are typically renewed on an annual basis. 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 with upfront revenue recognition, to a subscription-based model, with recognition of revenue occurring ratably over thecloud-based subscription term.
delivery model. We also plan toanticipate an increase in subscription contract renewals as we continue investing in our product, salesfocusing on innovation, quality and marketing organizations and our back-office processes, the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalabilityintegration 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 a better representation of our customers' overall behavior. For 2015, approximately 94% of our customers with recurring subscription or maintenance contracts were retained.
Balance sheet and cash flow
At December 31, 2015, our cash and cash equivalents were $15.4 million and outstanding borrowings under the 2014 Credit Facility were $410.2 million. During 2015, we generated $114.3 million in cash flow from operations, as we executemade repayments on our key growth initiatives.outstanding borrowings of $184.5 million, returned $22.5 million to stockholders by way of dividends and had cash outlays of $34.1 million for purchases of property and equipment and capitalized software development costs.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Results of operations
Comparison of 2015 to 2014 and 2014 to 2013
During 2013, 20122015, 2014 and 2011,2013, we acquired companies that provided us with strategic opportunities to expand our TAM and share of the nonprofitphilanthropic giving market through the integration of complementary productssolutions and services to serve the changing needs of our customers. The following are the companies we acquired and their respective acquisition date:
Public Interest Data, Inc., or PIDI – February 1, 2011;
Everyday Hero Pty. Ltd., or EDHSmart, LLC ("Smart Tuition") – October 6, 2011;2, 2015;
Convio,MicroEdge Holdings, LLC (“MicroEdge”) – October 1, 2014;
WhippleHill Communications, Inc., or Convio (“WhippleHill”) – May 4, 2012;June 16, 2014; and
MyCharity, Ltd. (“MyCharity”) – March 6, 20132013.
We have included the results of operations of acquired companies in our consolidated statementsresults of comprehensive incomeoperations from the date of their respective acquisition, which impacts the comparability of our results of operations when comparing 20132015 to 20122014 and 20122014 to 2011. Because we have integrated a substantial amount of these operations, it is impracticable to determine the operating costs attributable solely to the acquired businesses for 2013. We have noted in the discussion below, to the extent meaningful and quantifiable, the impact on the comparability of our consolidated statementsresults of comprehensive incomeoperations to prior year results due to the inclusion of acquired companies.
ComparisonSince we have integrated certain of WhippleHill's historical offerings into our suite of K-12 solutions and also because we are selling certain of WhippleHill's solutions instead of our historical offerings, it is impracticable to determine the years ended December 31, 2013amount of 2015 revenue attributable solely to this acquired company. In addition, because we have integrated the operations of MicroEdge and 2012
Revenue by segmentWhippleHill into ours, it is impracticable to determine amounts of operating costs attributable solely to these acquired companies for 2015. Similarly, since we have integrated MyCharity's solutions and operations into ours, it is impracticable to determine the amount of revenue and operating costs attributable solely to this acquired company. See Note 3 to our consolidated financial statements in this report for a summary of these acquisitions with the exception of MyCharity which is insignificant for disclosure.
The table below comparesAs a result of third-party contractual changes, certain of our subscriptions revenues and costs associated with our payment processing services are presented on a gross basis since October 2013, whereas comparable revenues and costs are presented on a net basis in the prior periods. As such, total revenue, total cost of revenue, subscriptions revenue and cost of subscriptions revenue for prior periods are not directly comparable, although gross profit, operating income and net income were unaffected by segmentthe prospective change. An analysis of our historical financial statements for the four quarters and year ended December 31, 2013 presented on a basis comparable to 2014 can be found at www.blackbaud.com/investorrelations, which is intended to assist with the same periodevaluation of our performance in 2012.light of the change in presentation.
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| ECBU | $ | 195.6 |
| | $ | 165.1 |
| | $ | 30.5 |
| | 18 | % |
| GMBU | 225.3 |
| | 203.2 |
| | 22.1 |
| | 11 | % |
| IBU | 41.5 |
| | 40.1 |
| | 1.4 |
| | 3 | % |
| Target Analytics | 39.8 |
| | 37.5 |
| | 2.3 |
| | 6 | % |
| Other | 1.6 |
| | 1.5 |
| | 0.1 |
| | 7 | % |
| Total revenue | $ | 503.8 |
| | $ | 447.4 |
| | $ | 56.4 |
| | 13 | % |
|
| | | | | | | | | | | | | | | |
| Revenue by segment | | | | | | |
| | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change |
| | 2014(3) | Change |
| | 2013 |
GMBU(1) | $ | 313.9 |
| 16.0 | % | | $ | 270.6 |
| 12.6 | % | | $ | 240.4 |
|
ECBU(2) | 279.9 |
| 14.2 | % | | 245.1 |
| 11.6 | % | | 219.7 |
|
| IBU | 42.0 |
| (10.8 | )% | | 47.1 |
| 11.9 | % | | 42.1 |
|
| Other | 2.1 |
| 31.3 | % | | 1.6 |
| — | % | | 1.6 |
|
Total revenue(4) | $ | 637.9 |
| 13.0 | % | | $ | 564.4 |
| 12.0 | % | | $ | 503.8 |
|
The increases in revenue for ECBU and GMBU during 2013 when compared to 2012 were primarily attributable to growth in subscriptions revenue as a result of the inclusion of Luminate Online, previously a Convio product, and an increase in the volume of transactions for which we process payments. Also contributing to the growth in ECBU revenue were increases in revenue from consulting services and our Blackbaud CRM hosting services. Also contributing to the growth in GMBU revenue was the continued increase in demand for our online and hosted solutions as our business shifts towards subscription-based offerings.
IBU revenue increased during 2013 when compared to 2012 primarily due to incremental subscriptions revenue. The growth in IBU subscriptions revenue was primarily attributable to an increase in variable transaction revenue associated with the use of our products to fundraise online. Also contributing to the increase in IBU subscriptions revenue was an increase in demand for our online and hosted fundraising solutions including Everyday Hero, the Raiser's Edge and eTapestry. | |
| (1) | Included in GMBU revenue for 2014 was $4.5 million attributable to the inclusion of WhippleHill. WhippleHill also positively impacted GMBU revenue and total revenue for 2015. Included in GMBU revenue for 2015 was $8.5 million attributable to the inclusion of Smart Tuition. |
| |
| (2) | Included in ECBU revenue and total revenue for 2015 and 2014 was$31.9 million and $5.8 million, respectively, attributable to the inclusion of MicroEdge. |
| |
| (3) | Included in ECBU, GMBU, IBU and total revenue for 2014 was $6.8 million, $13.2 million, $1.1 million and $21.1 million, respectively, attributable to the prospective change in presentation from net to gross for revenue and costs associated with certain payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. These amounts make comparability of 2014 to 2013 less meaningful, as we accounted for these payments on a net basis prior to October 2013. The revenue for 2015 and 2014 are presented on a comparable basis. |
| |
| (4) | The individual amounts for each year may not sum to total revenue due to rounding. |
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | | |
| GMBU | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014(2) | Change | | 2013 |
GMBU revenue(1) | $ | 313.9 |
| 16.0 | % | | $ | 270.6 |
| 12.6 | % | | $ | 240.4 |
|
| % of total revenue | 49.2 | % | | | 47.9 | % | | | 47.7 | % |
| |
| (1) | Included in GMBU revenue for 2014 was $4.5 million attributable to the inclusion of WhippleHill. WhippleHill also positively impacted GMBU revenue and total revenue for 2015. Included in GMBU revenue for 2015 was $8.5 million attributable to the inclusion of Smart Tuition. |
| |
| (2) | Included in GMBU revenue for 2014 was $13.2 million attributable to the prospective change in presentation from net to gross for revenue and costs associated with certain payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. These amounts make comparability of 2014 to 2013 less meaningful, as we accounted for these payments on a net basis prior to October 2013. The revenue for 2015 and 2014 are presented on a comparable basis. |
Target Analytics2015 vs. 2014
After removing the impact attributable to Smart Tuition as discussed above, the remaining $34.8 million increase in GMBU revenue during 2015 when compared to 2014 was primarily attributable to growth in subscriptions revenue, partially offset by declines in license fee and other revenue and maintenance 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. The contribution of revenue from WhippleHill added to GMBU's subscription revenue growth during 2015. Also contributing to overall growth in GMBU revenue during 2015 were modest increases in consulting services revenue as well as training services revenue. The growth in subscriptions and services revenue were partially offset by decreases in license fee and other revenue and maintenance revenue during 2015 from the continued migration of our business to subscription-based solutions.
2014 vs. 2013
After removing the impact attributable to the change in revenue presentation and acquisition of WhippleHill noted above, the remaining $12.5 million increase in revenue for GMBU during 2014 when compared to 20122013 was primarily the result ofattributable to growth in subscriptions revenue. The growth in subscriptions resulted from an increase in demand for our prospect research offerings.cloud-based and hosted fundraising offerings, increases in the number of customers and the volume of transactions for which we process payments, and an increase in usage-based transaction revenue. Also contributing to the growth in GMBU revenue was an increase in Target Analyticsmaintenance revenue was growthprimarily from new customer license arrangements and increases in our performance management and data enrichment portfolios, driven by improved sales execution.
Included in ECBU, GMBU and IBU revenue for 2013 is $3.3 million, $5.0 million and $0.2 million, respectively, attributable to a prospective change in presentation from net to gross for revenue and costs associatedcontracts with our payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013.
Operating results
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| License fees revenue | $ | 16.7 |
| | $ | 20.6 |
| | $ | (3.9 | ) | | (19 | )% |
| Cost of license fees | 2.8 |
| | 3.0 |
| | (0.2 | ) | | (7 | )% |
| License fees gross profit | $ | 13.9 |
| | $ | 17.6 |
| | $ | (3.7 | ) | | (21 | )% |
| License fees gross margin | 83 | % | | 85 | % | | | | |
We derive license fees revenue from the sale of our software products under a perpetual license agreement.
During 2013, revenue from license fees decreased primarily as a result of smaller contributions of revenue from our Raiser's Edge and Financial Edge offerings when compared to 2012. In addition, we continue to meet the demand of our emerging and mid-sized customers that increasingly prefer subscription-based hosted applications instead of solutions offered under traditional on-premise perpetual license arrangements. Also contributing to the decreases in revenue from license fees was a prospective change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013. The net revenue attributable to these third-party software arrangements has been included in "Other revenue" for 2013.
Cost of license fees is primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs and amortization of intangibles from business combinations. The decrease in cost of license fees during 2013 when compared to 2012 was primarily due to a decrease in third-party software royalties resulting from a prospective change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013.
The decrease in license fees gross margin during 2013 when compared to 2012 was primarily due to the decrease in license fees revenue combined with more sales of products that have third-party software royalty costs associated with them.existing customers.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | | |
| ECBU | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014(2) | Change | | 2013 |
ECBU revenue(1) | $ | 279.9 |
| 14.2 | % | | $ | 245.1 |
| 11.6 | % | | $ | 219.7 |
|
| % of total revenue | 43.9 | % | | | 43.4 | % | | | 43.6 | % |
| |
| (1) | Included in ECBU revenue for 2015 and 2014 was$31.9 million and $5.8 million, respectively, attributable to the inclusion of MicroEdge. |
| |
| (2) | Included in ECBU revenue for 2014 was $6.8 million attributable to the prospective change in presentation from net to gross for revenue and costs associated with certain payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. These amounts make comparability of 2014 to 2013 less meaningful, as we accounted for these payments on a net basis prior to October 2013. The revenue for 2015 and 2014 are presented on a comparable basis. |
2015 vs. 2014
After removing the impacts attributable to MicroEdge as discussed above, the remaining $8.7 million increase in ECBU revenue during 2015, when compared to 2014, was primarily attributable to growth in subscriptions revenue, partially offset by decreases in consulting services 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 hosting services associated with our Blackbaud CRM solution and our subscription-based analytic services. Also contributing to the overall growth in ECBU revenue was an increase in maintenance revenue related to new Blackbaud CRM customers. As discussed above, consulting services revenue and license fees and other 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.
2014 vs. 2013
After removing the impact attributable to the change in revenue presentation and acquisition of MicroEdge noted above, the remaining $12.8 million increase in revenue for ECBU during 2014 when compared to 2013 was primarily attributable to growth in subscriptions revenue. The growth in subscriptions resulted from an increase in demand for our cloud-based and hosted fundraising offerings, increases in the number of customers and the volume of transactions for which we process payments, and an increase in usage-based transaction revenue. Also contributing to the growth in ECBU revenue was an increase in maintenance revenue primarily related to new Blackbaud CRM customers.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Subscriptions revenue | $ | 212.7 |
| | $ | 162.1 |
| | $ | 50.6 |
| | 31 | % |
| Cost of subscriptions | 93.7 |
| | 68.8 |
| | 24.9 |
| | 36 | % |
| Subscriptions gross profit | $ | 119.0 |
| | $ | 93.3 |
| | $ | 25.7 |
| | 28 | % |
| Subscriptions gross margin | 56 | % | | 58 | % | | | | |
|
| | | | | | | | | | | | | | | |
| IBU | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014(1) | Change | | 2013 |
| IBU revenue | $ | 42.0 |
| (10.8 | )% | | $ | 47.1 |
| 11.9 | % | | $ | 42.1 |
|
| % of total revenue | 6.6 | % | | | 8.3 | % | | | 8.4 | % |
| |
| (1) | Included in IBU revenue for 2014 was $1.1 million attributable to the prospective change in presentation from net to gross for revenue and costs associated with certain payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. These amounts make comparability of 2014 to 2013 less meaningful, as we accounted for these payments on a net basis prior to October 2013. The revenue for 2015 and 2014 are presented on a comparable basis. |
2015 vs. 2014
RevenueThe decrease in IBU revenue during 2015, when compared to 2014, was primarily related to a reduction in perpetual license sales of our Raiser's Edge solution, which also caused IBU consulting services revenue and maintenance revenue to decrease. 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. Also contributing to the decrease in IBU revenue during 2015 was the sale of RLC in May 2015 as well as changes in exchange rates between foreign currencies and the U.S. dollar which affect the translation of its revenues into U.S. dollars for purposes of reporting consolidated financial results.
2014 vs. 2013
After removing the impact attributable to the change in revenue presentation noted above, the remaining $3.9 million increase in revenue for IBU during 2014 when compared to 2013 was primarily attributable to growth in subscriptions revenue. The growth in subscriptions resulted from an increase in usage-based transaction revenue, increases in the number of customers and the volume of transactions for which we process payments, and an increase in demand for our cloud-based and hosted fundraising offerings. Also contributing to the growth in IBU revenue was an increase in maintenance revenue primarily from new customer license arrangements and increases in contracts with existing customers.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Operating results
|
| | | | | | | | | | | | | | | |
| Subscriptions | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014(2) | Change | | 2013 |
Subscriptions revenue(1) | $ | 331.8 |
| 26.0 | % | | $ | 263.4 |
| 23.8 | % | | $ | 212.7 |
|
Cost of subscriptions(3) | 167.3 |
| 25.6 | % | | 133.2 |
| 42.3 | % | | 93.6 |
|
| Subscriptions gross profit | $ | 164.5 |
| 26.3 | % | | $ | 130.2 |
| 9.3 | % | | $ | 119.1 |
|
| Subscriptions gross margin | 49.6 | % | | | 49.4 | % | | | 56.0 | % |
| |
| (1) | Included in subscriptions revenue for 2015 was $18.2 million and $8.3 million attributable to the inclusion of MicroEdge and Smart Tuition, respectively. WhippleHill also positively impacted subscriptions revenue for 2015 when compared to 2014. Included in subscriptions revenue for 2014 was $3.0 million and $2.7 million attributable to the inclusion of MicroEdge and WhippleHill, respectively. |
| |
| (2) | Included in subscriptions revenue and cost of subscriptions for 2014 was $21.1 million attributable to the prospective change in presentation from net to gross for revenue and costs associated with certain payment processing services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. These amounts make comparability of 2014 to 2013 less meaningful, as we accounted for these payments on a net basis prior to October 2013. The revenue for 2015 and 2014 are presented on a comparable basis. |
| |
| (3) | Included in cost of subscriptions for 2014 was $1.2 million attributable to the inclusion of WhippleHill. The impact on cost of subscriptions in 2014 as a result of the inclusion of MicroEdge was not significant. |
Subscriptions revenue is primarily comprised of revenue from charging for the use of our subscription-based software products,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 revenue from variable transaction feesrevenue associated with the use of our products to fundraise online. solutions.
We continue to experience growth in sales of our hosted applications and hosting services as we meet the demand of our emerging and mid-sized customers that increasingly prefer subscription-based offerings.
The increase in subscriptions revenue was primarily attributablecloud-based subscription offerings, including existing customers that are migrating from on-premises solutions to the inclusion of Convio for the full year in 2013 compared to only eight months in 2012, and an increase in demand for our online fundraising offerings. Also contributing to thecloud-based solutions. In addition, we have experienced growth in subscriptions revenue was an increase in the volume of transactions for which we process payments as well as an $8.5 million increase attributable to a prospective change in presentation from net to gross for revenues and costs associated with certain of our payment processing services effective October 2013.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 subscription 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 the integration of our subscription solutions which we believe will drive subscriptions revenue growth.
Cost of subscriptions is primarily comprised of human resource costs, stock-based compensation expense, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of software development costs, amortization of intangibles 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.
2015 vs. 2014
Excluding the incremental subscriptions revenue from MicroEdge and Smart Tuition as discussed above, subscriptions increased by $44.9 million during 2015 when compared to 2014. The increase in recurring subscriptions revenue during 2015 when compared to 2014 was primarily due to strong demand across our solution portfolio including our cloud-based solutions, as well as from providing hosting services to customers who have purchased perpetual rights to certain of our software 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, as well as an increase in the volume of subscription-based analytic services provided. Also contributing to the increase in subscriptions revenue was the inclusion of WhippleHill for the full year in 2015.
The increase in cost of subscriptions during 20132015 when compared to 20122014 was relatively consistent with the increase in revenue. The increase in cost of subscriptions was primarily attributabledue to increasesan increase in transaction-based costs related to our payments services of $10.0 million, an increase in human resource costs of $7.0 million, an increase in amortization expense related to software development costs of $3.5 million, an increase in the cost of third-party technology embedded in certain of our subscription solutions of $3.4 million and an increase in amortization of intangiblesintangible assets from business combinations hosting costs,of $2.8 million. The increase in human resource costs was primarily due to an increase in subscription customer support headcount directly related to our growing base of subscription customers. The inclusion of Smart Tuition, MicroEdge and allocated depreciation, facilitiesWhippleHill also contributed to the increase in human resource costs during 2015.
Blackbaud, Inc.
Item 7. Management's discussion and IT support costs. The increase also included $8.5 millionanalysis of costs attributablefinancial condition and results of operations (continued)
Subscriptions gross margin remained relatively unchanged when comparing 2015 to a prospective2014.
2014 vs. 2013
Excluding the effects of the change in presentation from net to gross for revenues and costs associated with certain of our payment processing services effective October 2013.and the incremental subscriptions revenue from WhippleHill and MicroEdge as discussed above, the remaining $23.9 million increase in subscriptions revenue during 2014 when compared to 2013 was primarily due an increase in demand for our cloud-based 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, and an increase in usage-based transaction revenue.
AmortizationExcluding the effects of intangiblesthe change in presentation associated with certain of our payment processing services as discussed above, the $18.5 million increase in cost of subscriptions during 2014 when compared to 2013 was primarily due to an increase in human resource costs of $10.5 million, an increase in amortization of intangible assets from business combinations increased by $6.6of $1.7 million during 2013 when compared to 2012 primarily due to the acquisition of Convio and the inclusion of a full year of intangibles amortizationan increase in 2013 compared to only eight months in 2012.
Hosting costs, human resource costs and allocated depreciation, facilities and IT support costs increased by $3.2 million, $3.1 million and $2.8 million, respectively,of $3.3 million. Also contributing to the increase in cost of subscriptions during 2013 when compared2014 was an increase in transaction-based costs related to 2012. These increases wereour payments services. The increase in human resource costs was primarily due to an increase in subscription customer support directly related to our growing base of subscription customers. The increase in allocated costs was primarily a result of the inclusion of Convio and investments made to support anticipated growth in our subscription-based offerings.operations. The inclusion of WhippleHill and MicroEdge also contributed to the increases in human resource costs and allocated costs.
SubscriptionsThe decrease in subscriptions gross margin decreased during 20132014 when compared to 20122013 was primarily as a result of the cost increase from the prospective change in presentation from net to gross revenues and costs as discussed above, and non-cash amortization of intangible assets purchased. Excluding the effect of thewhich had no impact on gross profit. Absent this presentation change, in presentation,subscriptions gross margin was relatively unchanged from 2012.54% for 2014 compared to 56% in 2013. The remaining decrease in subscriptions gross margin for 2014 when compared to 2013 was primarily due to increases in human resource costs and allocated costs outpacing the growth in subscriptions revenue as we expand headcount to support projected future subscriptions growth.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | | |
| Maintenance | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
Maintenance revenue(1) | $ | 153.8 |
| 4.3 | % | | $ | 147.4 |
| 6.3 | % | | $ | 138.7 |
|
Cost of maintenance(2) | 27.1 |
| 6.7 | % | | 25.4 |
| (1.2 | )% | | 25.7 |
|
| Maintenance gross profit | $ | 126.7 |
| 3.9 | % | | $ | 122.0 |
| 8.0 | % | | $ | 113.0 |
|
| Maintenance gross margin | 82.4 | % | | | 82.7 | % | | | 81.4 | % |
| |
| (1) | Included in maintenance revenue for 2015 and 2014 was $11.0 million and $1.9 million, respectively, attributable to the inclusion of MicroEdge. |
| |
| (2) | Included in cost of maintenance for 2014 was $0.6 million attributable to the inclusion of MicroEdge. |
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 human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations, amortization of software development costs and other costs incurred in providing support and services to our customers.
2015 vs. 2014
After removing the incremental maintenance revenue from MicroEdge as discussed above, maintenance revenue decreased by $2.7 million during 2015 when compared to 2014. The decrease in maintenance revenue during 2015 when compared to 2014 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 CRM. The decrease was primarily comprised of (i) $11.2 million of reductions in maintenance from contracts that were not renewed and reductions in contracts with existing customers; partially offset by (ii) $5.7 million of incremental maintenance from new customers associated with new license contracts and increases in contracts with existing customers; and (iii) $2.8 million of incremental maintenance from contractual inflationary rate adjustments.
Cost of maintenance increased during 2015 when compared to 2014 primarily as a result of an increase in amortization of intangible assets from business combinations of $3.4 million. Partially offsetting the increase in cost of maintenance was a decrease in human resource costs primarily due to the shift in customer support headcount from maintenance towards subscriptions as customers migrate towards our cloud-based solution.
Maintenance gross margin remained relatively unchanged when comparing 2015 to 2014.
Services2014 vs. 2013
After removing the impact of MicroEdge, as discussed above, the remaining $6.8 million increase in maintenance revenue during 2014 when compared to 2013 was primarily comprised of (i) $10.4 million of incremental maintenance from new customer license arrangements and increases in contracts with existing customers; and (ii) approximately $4.2 million of incremental maintenance from contractual inflationary rate adjustments; partially offset by (iii) a $7.4 million reduction in maintenance from contracts that were not renewed and reductions in contracts with existing customers.
When removing the incremental costs attributable to MicroEdge discussed above, cost of maintenance during 2014 decreased by $0.9 million when compared to 2013 primarily as a result of a decrease in human resource costs. Human resource costs decreased primarily due to the shift in customer support headcount from maintenance towards subscriptions which is directly related to our growing base of subscription customers.
Maintenance gross margin increased during 2014 when compared to 2013 primarily due to the incremental maintenance revenue from new customers associated with new license arrangements and increases in contracts with existing customers combined with the decrease in human resource costs.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Services revenue | $ | 126.5 |
| | $ | 119.6 |
| | $ | 6.9 |
| | 6 | % |
| Cost of services | 104.0 |
| | 97.2 |
| | 6.8 |
| | 7 | % |
| Services gross profit | $ | 22.5 |
| | $ | 22.4 |
| | $ | 0.1 |
| | — | % |
| Services gross margin | 18 | % | | 19 | % | | | | |
|
| | | | | | | | | | | | | |
| Services | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
Services revenue(1) | $ | 133.0 |
| 3.6% | | $ | 128.4 |
| 1.5% | | $ | 126.5 |
|
Cost of services(2) | 102.8 |
| (3.5)% | | 106.5 |
| 2.4% | | 104.0 |
|
| Services gross profit | $ | 30.2 |
| 37.9% | | $ | 21.9 |
| (2.7)% | | $ | 22.5 |
|
| Services gross margin | 22.7 | % | | | 17.0 | % | | | 17.8 | % |
| |
| (1) | Included in services revenue for 2015 was $1.8 million attributable to the inclusion of MicroEdge. The impact on services revenue in 2015 as a result of the inclusion of Smart Tuition was not significant. Included in services revenue for 2014 was $1.6 million attributable to the inclusion of WhippleHill. The impact on services revenue in 2014 as a result of the inclusion of MicroEdge was not significant. |
| |
| (2) | Included in cost of services for 2014 was $2.5 million and $0.8 million attributable to the inclusion of WhippleHill and MicroEdge, respectively. |
We derive services revenue from consulting, installation, implementation, education, analytic and analyticinstallation services. Consulting, installationimplementation and implementationinstallation services involve converting data from a customer’s existing system, system configuration, process re-engineering and assistance in file set up and system configuration, and/or process re-engineering.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. We typically recognize services revenue upon delivery. We also recognize certain direct and incremental costs associated with consulting services revenue as that revenue is earned. We recognize revenue from upfront activation fees ratably over the estimated period the customer benefits from those upfront services. We continue to expense indirect costs in the period the services are provided.
The increase in services revenue during 2013 when compared to 2012 was attributable to increases in consulting, education and analytic services revenue of $4.1 million, $1.8 million and $1.0 million, respectively. Consulting services revenue increased primarily due to the inclusion of Convio for the full year in 2013 compared to only eight months in 2012. The volume of education services revenue increased due to higher demand for our subscription-based training. Analytic services revenue increased primarily due to an increase in demand for our prospect research offerings. Also contributing to the increase in analytic services revenue was growth in our performance management and data enrichment portfolios, driven by improved sales execution.
Cost of services is primarily comprised of human resource costs, stock-based compensation expense, 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 intangibles from business combinations. The
2015 vs. 2014
After the incremental services revenue from MicroEdge as discussed above, the remaining $2.8 million increase in cost of services revenue during 20132015 when compared to 20122014 was primarily attributable to increases in human resource costs, the recognition of deferred implementation service costs and allocated depreciation, facilities and IT support costs. Human resource costs increased $3.8 million primarily as a result of increasesan increase in accrued bonus costs, merit-based salary increases and employee health care costs. Our recognition of implementation service costs increased $2.2 million during 2013 when compared to 2012 due to a decrease in the amount of costs that are being deferred in connection with our shiftconsulting services revenue from traditional license and related service arrangements to subscription offerings. Allocated depreciation, facilities and IT support costs increased $0.8 million due to the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable.
Services gross margin decreased in 2013 when compared to 2012 primarily due to increases in human resource costs and allocated costs outpacing the growth of services revenue. Also contributing to the decrease in services gross margin was the inclusion of Convio's service offerings for a full year in 2013, which have historically yielded lower gross margins. Since our acquisition of Convio in May 2012, we have made significant progress integrating operations and realizing gross margin synergies from the combination. However, the impact on services gross margin is obscured by the inclusion of Convio operating resultsWhippleHill for the full year in 20132015. Also contributing to the growth in services revenue during 2015 when compared to only eight months2014 were increases in 2012.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.
Cost of services decreased during 2015, when compared to 2014 primarily due to a $3.2 million decrease in human resource costs related to a reduction in consulting services headcount.
Services gross margin increased during 2015 when compared to 2014 primarily due to improvements in the utilization of consulting services personnel.
2014 vs. 2013
After removing the incremental services revenue attributable to WhippleHill discussed above, services revenue remained relatively unchanged when comparing 2014 to 2013. The continuing shift in our go-to-market strategy towards cloud-based subscription offerings which, in general, require less implementation services than our traditional on-premises perpetual license arrangements has negatively impacted consulting services revenue growth.
After removing the incremental cost of services related to WhippleHill and MicroEdge discussed above, cost of services remained relatively unchanged when comparing 2014 to 2013.
After removing the impact of WhippleHill and MicroEdge discussed above, services gross margin remained relatively unchanged when comparing 2014 to 2013.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
Maintenance
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Maintenance revenue | $ | 138.7 |
| | $ | 136.1 |
| | $ | 2.6 |
| | 2 | % |
| Cost of maintenance | 25.7 |
| | 26.0 |
| | (0.3 | ) | | (1 | )% |
| Maintenance gross profit | $ | 113.0 |
| | $ | 110.1 |
| | $ | 2.9 |
| | 3 | % |
| Maintenance gross margin | 81 | % | | 81 | % | | | | |
Revenue from maintenance 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 upgrades to our software products and online, telephone and email support. Maintenance contracts are typically for a term of one year, and maintenance renewal rates in the periods reported did not vary materially compared to prior periods.
The increase in maintenance revenue during 2013 when compared to 2012 was primarily comprised of (i) $10.9 million of incremental maintenance from new customers associated with new license agreements and increases in contracts with existing customers; and (ii) approximately $4.2 million of incremental maintenance from contract inflationary rate adjustments; partially offset by (iii) a $8.4 million reduction in maintenance from contracts that were not renewed and reductions in contracts with existing customers; and (iv) $3.3 million decrease in maintenance revenue attributable to a prospective change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013. The net revenue attributable to these third-party software arrangements has been included in "Other revenue" for 2013.
Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. Cost of maintenance decreased during 2013 when compared to 2012 primarily due to a decrease in proprietary software costs, partially offset by increases in human resource costs and allocated depreciation, facilities and IT support costs. The decrease in proprietary software costs was primarily attributable to a prospective change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013. The increase in human resource costs was primarily due to merit-based salary increases and an increase in employee health care costs.
Maintenance gross margin in 2013 remained relatively unchanged when compared 2012.
Other revenue
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Other revenue | $ | 9.2 |
| | $ | 9.0 |
| | $ | 0.2 |
| | 2 | % |
| Cost of other revenue | 6.5 |
| | 7.5 |
| | (1.0 | ) | | (13 | )% |
| Other gross profit | $ | 2.7 |
| | $ | 1.5 |
| | $ | 1.2 |
| | 80 | % |
| Other gross margin | 29 | % | | 17 | % | | | | |
|
| | | | | | | | | | | | | | | |
| License fees and other | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| License fees and other revenue | $ | 19.4 |
| (23.0 | )% | | $ | 25.2 |
| (2.7 | )% | | $ | 25.9 |
|
| Cost of license fees and other | 7.4 |
| (10.8 | )% | | 8.3 |
| (10.8 | )% | | 9.3 |
|
| License fees and other gross profit | $ | 12.0 |
| (29.0 | )% | | $ | 16.9 |
| 1.8 | % | | $ | 16.6 |
|
| License fees and other gross margin | 61.8 | % | | | 67.2 | % | | | 64.2 | % |
OtherLicense 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, the sale of business forms that are used in conjunction with our software products and fees from user conferences.
Other revenue increased during 2013 when compared to 2012 primarily due to a $1.5 million increase in third-party software referral revenue upon the prospective change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013. During 2012, revenue from these arrangements was recorded on a gross basis to license fees, subscription and maintenance. The increase in third-party
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
software referral fees during 2013 when compared to 2012 was partially offset by a decrease in revenue from reimbursement of travel-related expenses associated with services revenue.fees.
Cost of license fees and other revenue includesis primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs, human resource 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 intangibles from business combinations. Cost of
2015 vs. 2014
Revenue from license fees and other revenue decreased during 20132015 when compared to 20122014 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.
The decrease in cost of license fees and other during 2015 when compared to 2014 was primarily due to fewer reimbursable expenses related to services provided at customer locations.
Other revenue gross margin increasedreductions in 2013third-party software royalties and reseller commissions, driven by the ongoing transition of our solution portfolio away from a perpetual license-based model toward a subscription-based delivery model. In addition, cost of license fees and other decreased as there was less amortization of software development costs in 2015 when compared to 20122014.
License fees and other gross margin decreased during 2015 when compared to 2014 primarily due to an increasethe ongoing transition of our solution portfolio away from a perpetual license-based model toward a subscription-based delivery model relative to the lesser changes in cost of license fees and other as some costs are more fixed in nature.
2014 vs. 2013
During 2014, revenue from license fees and other decreased primarily as a result of a continued shift in our customers’ buying preferences away from solutions offered under perpetual license arrangements towards subscription-based hosted applications.
The decrease in cost of license fees and other during 2014 when compared to 2013 was primarily due to a $0.6 million reduction in third-party software referral fees attributableroyalties as we sold fewer solutions with third-party software. Also contributing to the prospective changedecrease in presentation fromcost of license fees was a modest reduction in reseller commissions.
The increase in license fees gross margin during 2014 when compared to net for revenue and costs2013 was primarily due to less sales of solutions with third-party software royalties associated with certain third-party software arrangements that had changesthem relative to the decrease in contractual terms effective January 2013.license fees revenue.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Operating expenses
Sales and marketing
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Sales and marketing expense | $ | 97.6 |
| | $ | 95.2 |
| | $ | 2.4 |
| | 3 | % |
| % of revenue | 19 | % | | 21 | % | | | | |
|
| | | | | | | | | | | | | | | |
| Sales and marketing | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| Sales and marketing expense | $ | 123.6 |
| 15.1 | % | | $ | 107.4 |
| 10.0 | % | | $ | 97.6 |
|
| % of total revenue | 19.4 | % | | | 19.0 | % | | | 19.4 | % |
Sales and marketing expense includes human resource costs, stock-based compensation expense, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.
Sales and marketing expense increased during 2013 when compared to 2012 primarily due to a $1.1 million increase in sales commissions, a $0.9 million increase in allocated depreciation, facilities and IT support costs and a $0.8 million increase in human resource costs. The increase in sales commissions is primarily due to an increased amount of commissionable revenue from 2012 to 2013. The increase in allocated depreciation, facilities and IT support costs resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable. The increase in human resource costs was primarily due to increases in employee health care costs and accrued bonus costs, partially offset by a reduction in headcount in connection with the realignment of our workforce, which began in January 2013.2015 vs. 2014
Since the acquisition of Convio in May 2012, we have made significant progress integrating operations and realizing cost synergies from the combination, which is reflected in the improvements in salesSales and marketing expense as a percentage of revenue for 2012remained relatively unchanged when comparing 2015 to 2014.
The increase in sales and marketing expense during 2015 when compared to 2014 was primarily due to increases in human resource costs and commissions expense of $5.7 million and $4.9 million, respectively. To a lesser extent, increases in advertising and marketing materials costs of $1.9 million and IT support costs of $1.3 million also contributed to the increase in sales and marketing expense during 2015. Human resource costs increased primarily due to incremental headcount to support the increase in sales and marketing efforts of our growing operations. The increase in commission expense was primarily driven by an increase in commissionable revenue during 2015 when compared to 2014. The inclusion of Smart Tuition, MicroEdge and WhippleHill also contributed to the increase in sales and marketing expense.
2014 vs. 2013
Sales and marketing expense as a percentage of revenue remained relatively unchanged when comparing 2014 to 2013.
Research
Sales and developmentmarketing expense increased during 2014 when compared to 2013 primarily due to increases in human resource costs, commission expense and allocated depreciation, facilities and IT support costs of $3.8 million, $2.2 million and $1.7 million, respectively. Human resource costs increased primarily due to incremental headcount to support the increase in sales and marketing efforts of our growing operations. Commission expense increased driven primarily by an increase in commissionable revenue during the 2014 when compared to 2013. Allocated costs increased primarily as a result of investments made to support anticipated growth in operations. Included in the overall increase in sales and marketing expense during 2014 compared to 2013 was more than $3.1 million related to our 2014 incremental operating investments targeted to accelerate organic revenue growth. The inclusion of WhippleHill and MicroEdge also contributed to the increases in human resource costs and allocated costs.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| Research and development expense | $ | 65.6 |
| | $ | 64.7 |
| | $ | 0.9 |
| | 1 | % |
| % of revenue | 13 | % | | 14 | % | | | | |
|
| | | | | | | | | | | | | | | |
| Research and development | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| Research and development expense | $ | 84.6 |
| 9.6 | % | | $ | 77.2 |
| 17.7 | % | | $ | 65.6 |
|
| % of total revenue | 13.3 | % | | | 13.7 | % | | | 13.0 | % |
We have made substantial investments in research and development and expect to continue to do so as a part of our strategy to introduce additional products and services. Research and development expense includes human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and certain other expenses related to researching and developing new products,solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.
2015 vs. 2014
Research and development expense increasedas a percentage of revenue remained relatively unchanged when comparing 2015 to 2014.
The increase in research and development expense during 20132015 when compared to 20122014 was primarily due to a $1.5 millionincreases in human resource costs of $11.1 million. We have added engineering headcount to drive our solution development efforts. The inclusion of Smart Tuition, MicroEdge and WhippleHill contributed to the increase in human resource costs and a $1.7 millioncosts. Also contributing to the increase in research and development expense during 2015 were increases in stock-based compensation of $1.6 million and allocated depreciation, facilities and IT support costs partially offset byof $1.6 million. Partially offsetting these research and development expense increases during 2015 was a $2.0$7.2 million increase in the amount of software development costs that were capitalized. Human resourceThe increase in the 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 and Financial Edge NXT 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.
2014 vs. 2013
Research and development expense as a percentage of revenue increased during 2014 when compared to 2013 primarily due to the inclusionour 2014 incremental operating investments as we made investments to optimize our portfolio of additional headcount from Convio. The increasesolutions including enhancements to existing solutions, as well as new solution innovation.
Research and development expense increased during 2014 when compared to 2013 primarily due to increases in human resource costs, third-party contractor costs and allocated depreciation, facilities and IT support costs of $8.6 million, $4.2 million and $2.8 million, respectively. Partially offsetting these increases was a $5.1 million increase in the amount of software development costs that were capitalized from an increase in development activities that generate costs which qualify for capitalization as internal-use software. The inclusion of WhippleHill and MicroEdge also contributed to the increases in human resource costs and allocated costs. Included in the overall increase in research and development expense during 2014 compared to 2013 was more than $6.1 million related to our 2014 incremental operating investments as discussed above, which contributed to the increased third-party contractor costs.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
support costs resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable. We expect incremental research and development expense in 2014 as we continue to invest in product enhancement and new product innovation.
Since the acquisition of Convio in May 2012, we have made significant progress integrating operations and realizing cost synergies from the combination, which is reflected in the improvement in research and development expense as a percentage of revenue from 2012 to 2013.
General and administrative
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| General and administrative expense | $ | 50.3 |
| | $ | 63.1 |
| | $ | (12.8 | ) | | (20 | )% |
| % of revenue | 10 | % | | 14 | % | | | | |
|
| | | | | | | | | | | | | | | |
| General and administrative | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| General and administrative expense | $ | 76.1 |
| 30.5 | % | | $ | 58.3 |
| 15.9 | % | | $ | 50.3 |
|
| % of total revenue | 11.9 | % | | | 10.3 | % | | | 10.0 | % |
General and administrative expense consists primarily of human resource costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, stock-based compensation expense, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expense and other administrative expenses.
2015 vs. 2014
General and administrative expense decreasedincreased as a percentage of revenue during 20132015 when compared to 2012 primarily due to decreases in acquisition-related costs and stock-based compensation as well as an increase in the amount of costs allocated out of general and administrative expense including depreciation, IT support costs and certain facilities costs. These reductions in general and administrative expense were partially offset by increases in facilities costs, human resource costs and costs associated with the replacement of our CEO. Acquisition-related costs associated with our acquisition of Convio decreased $13.1 million during 2013 when compared to 2012. Stock-based compensation decreased $2.2 million during 2013 when compared to 2012 primarily due to the departure of employees in connection with the realignment of our workforce, which began in January 2013, and the departure of certain executive officers, including our CEO during 2013. Business costs allocated out of general and administrative expense increased $5.6 million during 2013 when compared to 20122014 primarily due to the inclusion of Convio's operations forMicroEdge, which historically had higher general and administrative expenses as a percentage of revenue. The growth in stock-based compensation discussed below also contributed to the full yearincrease in 2013general and administrative expense as a percentage of revenue.
The increase in general and administrative expense during 2015 when compared to only eight months in 2012. Facilities costs increased by $3.9 million2014 was primarily due to the inclusionincreases in human resource costs of Convio's operations for the full year$7.7 million, stock-based compensation expense of $5.6 million, infrastructure costs of $3.7 million and acquisition-related expenses and integration costs of $1.9 million. Partially offsetting these increases during 2015 was a decrease in 2013 compared to only eight months in 2012.other corporate costs of $4.9 million. Human resource costs increased $3.3 million during 2013 when compared to 2012 primarily due to additional resources needed to support the growth of our business. We also incurred $2.4 millionbusiness and from the inclusion of incrementalSmart Tuition, MicroEdge and WhippleHill personnel. The increases in infrastructure and acquisition-related expenses and integration costs were primarily due to our acquisitions of Smart Tuition and MicroEdge. The increase in stock-based compensation expense was primarily attributable to a change in timing of certain annual equity award grants, whereby annual grants that would have otherwise been made in 2013 were instead made during 20132014, as well as the impact of new equity award grants in the current year to certain senior management hires. There was no change in the timing of annual equity award grants in the current year when compared to 2012the prior year.
2014 vs. 2013
General and administrative expense as a percentage of revenue remained relatively unchanged during 2014 when compared to 2013.
General and administrative expense increased during 2014 when compared to 2013 primarily due to increases in human resource and facilities costs and acquisition-related costs of $9.1 million, $4.5 million, and $1.3 million, respectively. Partially offsetting these increases were decreases in third-party contractor fees and other corporate costs of $1.3 million and $6.9 million. Human resource costs increased primarily due to additional resources needed to support the growth of our business and the inclusion of WhippleHill and MicroEdge. The increases in facilities and acquisition-related expenses were due to our acquisitions of WhippleHill and MicroEdge. The decrease in third-party contractor fees was primarily attributable to one-time costs incurred during 2013 for the implementation of certain back-office systems as well as our CEO search. Included in the overall increase in general and administrative expense during 2014 compared to 2013 was more than $0.7 million related to our 2014 incremental operating investments targeted to optimize our back-office infrastructure.
Restructuring
Restructuring costs consist primarily of severance and termination benefits associated with severance providedthe realignment of our workforce in response to changes in the nonprofit industry and global economy, as well as the transition of most of our San Diego, California operations to our former CEOAustin, Texas location. We incurred $3.2 million in before-tax restructuring charges related to the realignment of our workforce during 2013. The amount we incurred in before-tax restructuring charges related to our San Diego office transition during 2013 was insignificant.
Blackbaud, Inc.
Item 7. Management's discussion and search costsanalysis of financial condition and results of operations (continued)
|
| | | | | | | | | | | | | | | |
| Interest expense | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| Interest expense | $ | 8.1 |
| 35.0 | % | | $ | 6.0 |
| 3.4 | % | | $ | 5.8 |
|
| % of total revenue | 1.3 | % | | | 1.1 | % | | | 1.2 | % |
2015 vs. 2014
Interest expense increased during 2015 when compared to 2014 primarily due to an increase in our average daily borrowings related to our acquisitions of Smart Tuition in October 2015 and MicroEdge in October 2014. In the near term, we expect interest expense, as well as interest expense as a percentage of revenue, to increase as a result of our acquisition of Smart Tuition.
2014 vs. 2013
Interest expense remained relatively unchanged when comparing 2014 to 2013. Our interest expense for 2014 and 2013 was directly related to the borrowings we incurred to fund our acquisitions of Convio, Inc. ("Convio"), WhippleHill and MicroEdge.
Deferred revenue
The table below compares the components of deferred revenue from our consolidated balance sheets:
|
| | | | | | | | | | | |
| (dollars in millions) | Timing of recognition | | December 31,
2015 |
| Change |
| | December 31,
2014 |
|
| Subscriptions | Over the period billed in advance, generally one year | | $ | 122.5 |
| 24.7 | % | | $ | 98.2 |
|
| Maintenance | Over the period billed in advance, generally one year | | 85.9 |
| (7.4 | )% | | 92.8 |
|
| Services | As services are delivered | | 28.5 |
| (3.4 | )% | | 29.5 |
|
| License fees and other | Upon delivery of the solution or service | | 0.4 |
| (50.0 | )% | | 0.8 |
|
Total deferred revenue(1) | | | 237.3 |
| 7.2 | % | | 221.3 |
|
| Less: Long-term portion | | | 7.1 |
| (21.1 | )% | | 9.0 |
|
Current portion(1) | | | $ | 230.2 |
| 8.4 | % | | $ | 212.3 |
|
| |
| (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 new CEO.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. Deferred revenue attributable to subscriptions increased during 2015 when compared to 2014 primarily as a result of the inclusion of Smart Tuition and an increase in subscription sales. The decreases in deferred revenue attributable to maintenance, services and license fees and other during 2015 was 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 license arrangements.
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.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Income tax provision
Our effective income tax rates, including the effects of period-specific events, were: |
| | | | | | |
| Years ended December 31, | | | |
| | 2015 | 2014 | 2013 |
| Effective tax rate | 30.6 | % | 27.9 | % | 32.8 | % |
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 tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable 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.
We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the United Kingdom, Australia, and Ireland. We are generally subject to U.S. federal income tax examination for calendar tax years ending 2012 through 2015, as well as state and foreign income tax examinations for various years depending on statute of limitations of those jurisdictions.
We have taken federal and state tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease at December 31, 2015 was insignificant.
The U.S. federal research and development credits, which had previously expired on December 31, 2011, were reinstated as part of the American Taxpayer Relief Act of 2012 enacted in January 2013. This legislation retroactively reinstated and extended the credits from the previous expiration date through December 31, 2013. The 2014 research and development credits were reinstated in December 2014 as part of the Tax Increase Prevention Act of 2014. The 2015 federal research & development credit was reinstated in December 2015 as part of the Protecting Americans from Tax Hikes Act of 2015.
We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
2015 vs. 2014
The increase in our effective income tax rate during 2015 when compared to 2014 was primarily due to a $0.8 million charge to expense from an increase in the state effective tax rate applied to deferred balances as a result of changes in state apportionment rules and a $0.7 million charge to expense as a result of the loss on the sale of RLC. This increase in our effective tax rate was partially offset by an increase in the benefit of the domestic production activities deduction and a reduction in the loss of a foreign subsidiary for which we have determined that a valuation allowance is appropriate.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $2.3 million and $2.8 million at December 31, 2015 and December 31, 2014, respectively.
2014 vs. 2013
The decrease in our effective tax rate during 2014 when compared to 2013 was primarily due to a benefit of $1.6 million from statute of limitations expiration and a benefit of $0.7 million from a reduction in the state income tax effective rate in the U.S. The decrease was partially offset by a discrete tax benefit for 2012 research and development tax credits recorded in 2013 of $1.9 million.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Non-GAAP financial measures
The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP revenue, non-GAAP income from operations and non-GAAP operating margin 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.
TableWe have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of Contentsdeferred 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.
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
Non-GAAPThe non-GAAP financial measures discussed below exclude the impact of (i) the write-down of Convio's deferred revenue balance; (ii) stock-based compensation expense; (iii) amortization of intangibles from business combinations; (iv) acquisition integration costs; (v) restructuring costs; (vi) CEO severance costs; (vii) employee severance costs; (viii) acquisition-related expenses; (ix) a write-off of proprietary software licenses; and (x) the impairment of a cost method investment,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.
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2013 |
| | 2012 |
| | Change |
| | % Change |
|
| GAAP revenue | $ | 503.8 |
| | $ | 447.4 |
| | $ | 56.4 |
| | 13 | % |
| Non-GAAP adjustments: | | | | | | | |
| Add: Convio deferred revenue write-down | 1.1 |
| | 5.6 |
| | (4.5 | ) | | (80 | )% |
| Non-GAAP revenue | $ | 504.9 |
| | $ | 453.0 |
| | $ | 51.9 |
| | 11 | % |
| | | | | | | | |
| GAAP income from operations | $ | 51.5 |
| | $ | 19.4 |
| | $ | 32.1 |
| | 165 | % |
| GAAP operating margin | 10 | % | | 4 | % | | | | |
| Non-GAAP adjustments: | | | | | | | |
| Add: Convio deferred revenue writedown | 1.1 |
| | 5.6 |
| | (4.5 | ) | | (80 | )% |
| Add: Stock-based compensation expense | 16.9 |
| | 19.2 |
| | (2.3 | ) | | (12 | )% |
| Add: Amortization of intangibles from business combinations | 24.6 |
| | 17.4 |
| | 7.2 |
| | 41 | % |
| Add: Acquisition integration costs | 1.8 |
| | 6.7 |
| | (4.9 | ) | | (73 | )% |
| Add: Restructuring costs | 3.5 |
| | 0.2 |
| | 3.3 |
| | 1,650 | % |
| Add: CEO severance | 1.3 |
| | — |
| | 1.3 |
| | 100 | % |
| Add: Employee severance | 0.6 |
| | — |
| | 0.6 |
| | 100 | % |
| Add: Acquisition-related expenses | — |
| | 6.4 |
| | (6.4 | ) | | (100 | )% |
| Add: Write-off of prepaid proprietary software licenses | — |
| | 0.4 |
| | (0.4 | ) | | (100 | )% |
| Add: Impairment of cost method investment | — |
| | 0.2 |
| | (0.2 | ) | | (100 | )% |
| Total Non-GAAP adjustments | 49.8 |
| | 56.1 |
| | (6.3 | ) | | (11 | )% |
| Non-GAAP income from operations | $ | 101.3 |
| | $ | 75.5 |
| | $ | 25.8 |
| | 34 | % |
| Non-GAAP operating margin | 20 | % | | 17 | % | | | | |
The increase inCalculations of these non-GAAP income from operations and non-GAAP operating margin during 2013 when compared to 2012 was primarily due to (i) the inclusion of Convio's subscription-based offerings which have historically yielded higher gross margins than our historical subscription-based offerings; (ii) an increase in demand for our online fundraising offerings and our payment processing services, which have also historically yielded higher gross margins than our other offerings; and (iii) cost synergies realized from our improved operational efficiencies as we integrated the Convio operations.
Restructuring
Restructuring costs consist primarily of severance and termination benefits associated with the realignment of our workforce in response to changes in the nonprofit industry and global economy,financial measures, as well as
the movereconciliations of
our San Diego, California operationsthese non-GAAP measures to
our Austin, Texas location. We incurred $3.2 million in before-tax restructuring charges related to the realignment of our workforce during 2013. We incurred $0.3 million and $0.2 million in before-tax restructuring charges related to our San Diego office transition during 2013 and 2012, respectively.their most directly comparable GAAP measures, are as follows:Interest expense |
| | | | | | | | | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| GAAP Revenue | $ | 637.9 |
| 13.0 | % | | $ | 564.4 |
| 12.0 | % | | $ | 503.8 |
|
| Non-GAAP adjustments: | | | | | | | |
| Add: Acquisition-related deferred revenue write-down | 9.4 |
| 51.6 | % | | 6.2 |
| 463.6 | % | | 1.1 |
|
Non-GAAP revenue(1) | $ | 647.3 |
| 13.4 | % | | $ | 570.7 |
| 13.0 | % | | $ | 504.9 |
|
| | | | | | | | |
| GAAP gross profit | $ | 333.3 |
| 14.5 | % | | $ | 291.0 |
| 7.3 | % | | $ | 271.2 |
|
| GAAP gross margin | 52.2 | % | | | 51.6 | % | | | 53.8 | % |
| Non-GAAP adjustments: | | | | | | | |
| Add: Acquisition-related deferred revenue write-down | 9.4 |
| 51.6 | % | | 6.2 |
| 463.6 | % | | 1.1 |
|
| Add: Stock-based compensation expense | 3.5 |
| (2.8 | )% | | 3.6 |
| (10.0 | )% | | 4.0 |
|
| Add: Amortization of intangibles from business combinations | 30.0 |
| 23.5 | % | | 24.3 |
| 10.0 | % | | 22.1 |
|
| Add: Employee severance | 1.5 |
| 100.0 | % | | — |
| — | % | | — |
|
| Add: Acquisition-related integration costs | — |
| — | % | | — |
| (100.0 | )% | | 0.8 |
|
Subtotal(1) | 44.3 |
| 29.5 | % | | 34.2 |
| 22.1 | % | | 28.0 |
|
Non-GAAP gross profit(1) | $ | 377.7 |
| 16.1 | % | | $ | 325.2 |
| 8.7 | % | | $ | 299.1 |
|
| Non-GAAP gross margin | 58.3 | % | | | 57.0 | % | | | 59.3 | % |
Interest expense remained relatively unchanged during 2013 when compared to 2012. Our interest expense is directly related to the borrowings we incurred to fund our acquisition of Convio in May 2012.
| |
| (1) | The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding. |
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
The table below compares the components of deferred revenue from our consolidated balance sheets: |
| | | | | | | | | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions, except per share amounts) | 2015 | Change | | 2014 | Change | | 2013 |
| GAAP income from operations | $ | 46.7 |
| 0.6 | % | | $ | 46.4 |
| (9.9 | )% | | $ | 51.5 |
|
| GAAP operating margin | 7.3 | % |
|
| | 8.2 | % |
|
| | 10.2 | % |
| Non-GAAP adjustments: | |
|
| | | | | |
| Add: Acquisition-related deferred revenue write-down | 9.4 |
| 51.6 | % | | 6.2 |
| 463.6 | % | | 1.1 |
|
| Add: Stock-based compensation expense | 25.2 |
| 45.7 | % | | 17.3 |
| 2.4 | % | | 16.9 |
|
| Add: Amortization of intangibles from business combinations | 32.2 |
| 23.4 | % | | 26.1 |
| 6.1 | % | | 24.6 |
|
| Add: Employee severance | 3.2 |
| 100.0 | % | | — |
| (100.0 | )% | | 0.6 |
|
| Add: Impairment of capitalized software development costs | 0.2 |
| (87.5 | )% | | 1.6 |
| 100.0 | % | | — |
|
| Add: Acquisition-related integration costs | 1.1 |
| 37.5 | % | | 0.8 |
| (55.6 | )% | | 1.8 |
|
| Add: Acquisition-related expenses | 3.9 |
| 69.6 | % | | 2.3 |
| 100.0 | % | | — |
|
| Add: CEO transition costs | — |
| (100.0 | )% | | 0.9 |
| (30.8 | )% | | 1.3 |
|
| Add: Restructuring costs | — |
| — | % | | — |
| (100.0 | )% | | 3.5 |
|
Subtotal(1) | 75.2 |
| 36.0 | % | | 55.3 |
| 11.3 | % | | 49.7 |
|
Non-GAAP income from operations(1) | $ | 122.0 |
| 20.0 | % | | $ | 101.7 |
| 0.4 | % | | $ | 101.3 |
|
| Non-GAAP operating margin | 18.8 | % |
|
| | 17.8 | % |
|
| | 20.1 | % |
| | | | | | | | |
| GAAP net income | $ | 25.6 |
| (9.5 | )% | | $ | 28.3 |
| (7.2 | )% | | $ | 30.5 |
|
| Shares used in computing GAAP diluted earnings per share | 46,498,704 |
| 1.5 | % | | 45,799,874 |
| 0.8 | % | | 45,421,140 |
|
| GAAP diluted earnings per share | $ | 0.55 |
| (11.3 | )% | | $ | 0.62 |
| (7.5 | )% | | $ | 0.67 |
|
| Non-GAAP adjustments: | | | | | | | |
| Add: Total Non-GAAP adjustments affecting loss from operations | 75.2 |
| 36.0 | % | | 55.3 |
| 11.3 | % | | 49.7 |
|
| Add: Loss on sale of business | 2.0 |
| 100.0 | % | | — |
| — | % | | — |
|
| Add: Loss on debt extinguishment and termination of derivative instruments | — |
| (100.0 | )% | | 1.0 |
| 100.0 | % | | — |
|
| Less: Tax impact related to Non-GAAP adjustments | (33.2 | ) | 26.2 | % | | (26.3 | ) | 18.5 | % | | (22.2 | ) |
Non-GAAP net income(1) | $ | 69.6 |
| 19.4 | % | | $ | 58.3 |
| 0.5 | % | | $ | 58.0 |
|
| | | | | | | | |
| Shares used in computing Non-GAAP diluted earnings per share | 46,498,704 |
| 1.5 | % | | 45,799,874 |
| 0.8 | % | | 45,421,140 |
|
| Non-GAAP diluted earnings per share | $ | 1.50 |
| 18.1 | % | | $ | 1.27 |
| (0.8 | )% | | $ | 1.28 |
|
| |
| (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. |
|
| | | | | | | | | | | | | | | | |
| (in millions) | Timing of recognition | | December 31,
2013 |
| | December 31,
2012 |
| | Change |
| | % Change |
|
| Maintenance | Over the term of the agreement, generally one year | | $ | 85.2 |
| | $ | 81.7 |
| | $ | 3.5 |
| | 4 | % |
| Subscriptions | Over the term of the agreement, generally one to three years | | 72.5 |
| | 65.9 |
| | 6.6 |
| | 10 | % |
| Services | As services are delivered | | 32.2 |
| | 36.9 |
| | (4.7 | ) | | (13 | )% |
| License fees and other | Upon delivery of the product or service | | 0.7 |
| | 0.5 |
| | 0.2 |
| | 40 | % |
| Total deferred revenue | | | 190.6 |
| | 185.0 |
| | 5.6 |
| | 3 | % |
| Less: Long-term portion | | | 9.1 |
| | 11.1 |
| | (2.0 | ) | | (18 | )% |
| Current portion | | | $ | 181.5 |
| | $ | 173.9 |
| | $ | 7.6 |
| | 4 | % |
To the extent that our customers are billed for our products and services in advance of delivery, we record such amounts in deferred revenue. Deferred revenue attributable to maintenance and subscriptions increased during 2013 primarily as a result of an increase in renewal billings. We generally invoice our maintenance and subscription customers in annual cycles. The decrease in deferred revenue from services during 2013 was mostly due to a decrease in upfront billings on consulting arrangements. The increase in deferred revenue from license fees and other was attributable to an increase in third-party software referral fees attributable to a change in presentation from gross to net for revenue and costs associated with certain third-party software arrangements that had changes in contractual terms effective January 2013.
Comparison of the years ended December 31, 2012 and 2011
Revenue
The table below compares revenue from our consolidated statements of comprehensive income for the years ended December 31, 2012 and 2011. |
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| License fees | $ | 20.6 |
| | $ | 19.5 |
| | $ | 1.1 |
| | 6 | % |
| Subscriptions | 162.1 |
| | 103.5 |
| | 58.6 |
| | 57 | % |
| Services | 119.6 |
| | 108.8 |
| | 10.8 |
| | 10 | % |
| Maintenance | 136.1 |
| | 130.6 |
| | 5.5 |
| | 4 | % |
| Other | 9.0 |
| | 8.5 |
| | 0.5 |
| | 6 | % |
| Total revenue | $ | 447.4 |
| | $ | 370.9 |
| | $ | 76.5 |
| | 21 | % |
When removing the impact of revenue from acquired companies, revenue increased by $21.9 million, or 6% in 2012. This increase in revenue was primarily attributable to growth in our subscriptions revenue as a result of both an increase in demand for an our online fundraising offerings as well as an increase in transaction fees associated with our payment processing services. The increase in demand for our subscription offerings was primarily driven by the ongoing evolution of our product offerings from a license-based to subscription-based model. Although we continued to experience a shift in our emerging (first-time users) and mid-sized customers’ buying preference away from perpetual licenses towards hosted solutions, license revenue increased in 2012 when compared to 2011 as a result of an increase in sales of our Blackbaud CRM offering to large and/or strategic customers. The increase in maintenance revenue is attributable to maintaining high renewal rates, new maintenance contracts associated with new license agreements and increases in contracts with existing customers during 2012 when compared to 2011. Services revenue grew in 2012 principally as a result of increased demand for our education services.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
OperatingAs announced at our 2015 Investor Day, beginning in 2016, we intend to update the non-GAAP tax rate we apply to the aggregate of the non-GAAP adjustments discussed above, which will impact the tax impact related to non-GAAP adjustments, non-GAAP net income and non-GAAP diluted earnings per share measures in future periods. 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. At 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. As a result, for the purposes of determining non-GAAP net income in 2016, we now intend to utilize a 32.0% non-GAAP tax rate in our calculation of the tax impact related to non-GAAP adjustments. The non-GAAP tax rate utilized in future periods 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. All measures of the tax impact related to non-GAAP adjustments, non-GAAP net income and non-GAAP diluted earnings per share included above are calculated under our historical methodology.
License fees2015 vs. 2014 |
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| License fees revenue | $ | 20.6 |
| | $ | 19.5 |
| | $ | 1.1 |
| | 6 | % |
| Cost of license fees | 3.0 |
| | 3.3 |
| | (0.3 | ) | | (9 | )% |
| License fees gross profit | $ | 17.6 |
| | $ | 16.2 |
| | $ | 1.4 |
| | 9 | % |
| License fees gross margin | 85 | % | | 83 | % | | | | |
RevenueThe increases in non-GAAP income from license fees increased in 2012operations and non-GAAP operating margins during 2015 when compared to 2014 were primarily due to a greater contribution of revenue from larger Blackbaud CRM arrangements when compared to 2011.
The decrease in cost of license fees in 2012 when compared to 2011 was principally attributable to a decrease in third-party software royalties. Third-party software royalties associated with our license-based products decreased as the demand for our perpetual license arrangements decreased and subscription-based offerings increased.
The increase in license fees gross margin during 2012 was the result of fewer sales of products that have third party software royalty costs associated with them. Additionally, the increase in revenue from Blackbaud CRM arrangements contributed to the increase in license fees gross margin during 2012.
Subscriptions
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Subscriptions revenue | $ | 162.1 |
| | $ | 103.5 |
| | $ | 58.6 |
| | 57 | % |
| Cost of subscriptions | 68.8 |
| | 42.5 |
| | 26.3 |
| | 62 | % |
| Subscriptions gross profit | $ | 93.3 |
| | $ | 61.0 |
| | $ | 32.3 |
| | 53 | % |
| Subscriptions gross margin | 58 | % | | 59 | % | | | | |
Includedgrowth in subscriptions revenue for 2012 and 2011 was $45.6 million and $0.7 million of revenue attributable to acquired companies, respectively. Excluding the incremental revenue from acquired companies as discussed above, partially offset by increases in human resource costs, transaction-based costs related to payments services and IT infrastructure costs. Also contributing to the increases in non-GAAP income from operations and non-GAAP operating margins were the realization of benefits from certain incremental investments made during 2014 that were targeted to drive the success of our five growth strategies including gains in efficiency and scalability. While we continue to invest in these strategies, the amount of certain investments has decreased in 2015 when compared to 2014.
2014 vs. 2013
The modest increase in subscriptionsnon-GAAP income from operations and the decrease in non-GAAP operating margin during 2014 when compared to 2013 were primarily due to the 2014 incremental operating investments targeted to drive the success of our then current five growth strategies. Also contributing to the decrease in non-GAAP operating margin during 2014 was a prospective change from net to gross presentation for revenue of $13.7 million, or 13%, was principally attributable to an increase in demand for our online fundraising and data management offerings as well as an increase in transaction feescosts associated with our payment processing services.
The increase in cost of subscriptions in 2012 was principally attributable to increases in hosting costs, human resource costs and amortization of intangibles from business combinations.
Hosting costs increased by $8.3 million during 2012services as a result of certain third-party arrangements that had changes in contractual terms effective October 2013. While this change in presentation affected our non-GAAP operating margin by approximately 1.0% during 2014, the dollar amount of non-GAAP income from operations was unaffected.
Non-GAAP organic revenue growth
In addition, we discuss non-GAAP organic revenue growth and non-GAAP organic revenue growth on a constant currency basis. We use these measures internally in analyzing our operational performance because we believe they provide useful information for evaluating the periodic growth of our business on a consistent basis. Non-GAAP organic revenue growth excludes incremental costs dueacquisition-related revenue attributable to companies acquired in the inclusioncurrent fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP organic revenue growth 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 current period non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired companies. Additionally, hosting costs increased duedeferred revenue to incremental investments to improve our hosting services and additional hosting capacityfair value as required as a resultby GAAP. In addition, non-GAAP organic revenue growth excludes prior period revenue associated with divested businesses in the current fiscal year. The exclusion of the growth in demand for our hosted applications and other online services. Human resource costs increased $6.6 million during 2012. The increase in human resource costsprior period revenue is attributable to additional headcount due topresent the inclusionresults of acquired companies and additional resources needed to support the growth in demand for our subscription-based offerings.
Amortizationdivested businesses within the results of intangibles from business combinations increased $8.6 million in 2012 primarily due to the amortization expensecombined company for the acquired Convio intangible assets.same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of its current business’ organic revenue growth and revenue run-rate.
The decrease in subscriptions gross margin during 2012 compared to 2011 was primarily due to investments we made in our infrastructure, including additional headcount, expanded facilities, improved operational processes and computer equipment to support the growth in our subscription offerings.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
Services2015
Calculations of non-GAAP organic revenue growth and non-GAAP organic revenue growth on a constant currency basis for the full year of 2015, as well as reconciliations of those non-GAAP measures to their most directly comparable GAAP measures, are as follows:
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Services revenue | $ | 119.6 |
| | $ | 108.8 |
| | $ | 10.8 |
| | 10 | % |
| Cost of services | 97.2 |
| | 79.1 |
| | 18.1 |
| | 23 | % |
| Services gross profit | $ | 22.4 |
| | $ | 29.7 |
| | $ | (7.3 | ) | | (25 | )% |
| Services gross margin | 19 | % | | 27 | % | | | | |
|
| | | | | | | | | |
| Years ended December 31, | | | | |
| (dollars in millions) | 2015 | Change | | 2014 |
| GAAP revenue | $ | 637.9 |
| 13.0 | % | | $ | 564.4 |
|
(Less) Add: Non-GAAP acquisition-related revenue (1) | (0.9 | ) | | | 37.4 |
|
Less: Revenue from divested businesses (2) | — |
| | | (1.3 | ) |
| Total Non-GAAP adjustments | (0.9 | ) | | | 36.2 |
|
Non-GAAP revenue (3) | $ | 637.1 |
| 6.1 | % | | $ | 600.6 |
|
Foreign currency impact on Non-GAAP revenue (4) | 9.6 |
| | | — |
|
Non-GAAP revenue on constant currency basis (4) | $ | 646.7 |
| 7.7 | % | | $ | 600.6 |
|
| |
| (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 current period non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies. |
| |
| (2) | For businesses divested in the current fiscal year, non-GAAP organic revenue growth excludes a portion of the prior year period revenue associated with businesses divested of in the current fiscal year. 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 will 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. |
IncludedNon-GAAP organic revenue growth and non-GAAP organic revenue growth on a constant currency basis during 2015 was primarily due to the growth in subscriptions revenue as well as contributions from our acquisitions of WhippleHill in June 2014 and MicroEdge in October 2014, each of which were accretive to our non-GAAP organic revenue growth rate. To a lesser extent, growth in services revenue in 2012also contributed to non-GAAP organic revenue growth and 2011 is $9.8 million and $0.1 million ofnon-GAAP organic revenue attributable to acquired companies, respectively. Excluding the revenue from acquired companies, the increase in services revenue of $1.1 million, or 1%, is principally due to an increase in education services revenue of $1.4 million, partially offset bygrowth on a decrease in analytic services revenue of $0.6 million. The rates we charged for our education service offerings remained relatively constant year over year and, as such, the increase in revenue was the result of a change in volume. The increase in revenue from education services was the result of higher demand for subscription-based training. Consulting services revenue remained relatively unchanged in 2012 compared to 2011 primarily due to a greater portion of our service engagements being with larger enterprise customers as our mid-market moves to subscription-based offerings. These larger enterprise engagements can experience volatility in utilization due to the complex nature of these engagements.currency basis.
The increase in cost of services in 2012 is primarily attributable to an increase in human resource costs. Human resource costs increased $12.7 million in 2012 as2014
As a result of an increase in headcount. The increase in headcount was attributable to the inclusion of additional resources from acquired companies.
An increase in allocated depreciation, facilitiesthird-party contractual changes, subscriptions revenues and IT support costs also contributed to the increase in cost of services in 2012 when compared to 2011 due to the inclusion of allocable costs from the Convio operations.
The services gross margin decreased in 2012 primarily as a result of the increases in headcount and allocated costs discussed above.
Maintenance
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Maintenance revenue | $ | 136.1 |
| | $ | 130.6 |
| | $ | 5.5 |
| | 4 | % |
| Cost of maintenance | 26.0 |
| | 25.2 |
| | 0.8 |
| | 3 | % |
| Maintenance gross profit | $ | 110.1 |
| | $ | 105.4 |
| | $ | 4.7 |
| | 4 | % |
| Maintenance gross margin | 81 | % | | 81 | % | | | | |
The increase in maintenance revenue in 2012 compared to 2011 was principally comprised of (i) $12.7 million of maintenance from new customers associated with new license agreements and increases in contracts with existing customers and (ii) $4.1 million from maintenance contract inflationary rate adjustments, partially offset by (iii) $11.3 million from maintenance contracts that were not renewed and reductions in contracts with existing customers.
Cost of maintenance increased during 2012 when compared to 2011 primarily as a result of increases in allocated costs and proprietary software costs. The increase in proprietary software costs was attributable to increases in maintenance contracts with existing customers for software products which include third-party royalty costs associated with certain of our payment processing services are presented on a gross basis since October 2013, whereas comparable revenues and costs are presented on a net basis in the maintenance revenue. Maintenanceprior periods. Therefore, in addition to above discussion of how we calculate non-GAAP organic growth for 2015, to calculate non-GAAP organic revenue growth for 2014, non-GAAP revenue for the first through third quarters of fiscal 2013 reflects presentation of revenue specifically associated with certain of our payment processing services, as if the change in presentation effective October 1, 2013 from a net basis to a gross margin in 2012 remained relatively unchanged when compared to 2011.basis, as previously reported, had instead occurred on January 1, 2013.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
OtherCalculations of non-GAAP organic revenue growth for the full year of 2014, as well as reconciliations of that non-GAAP measure to its most directly comparable GAAP measure, are as follows:
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Other revenue | $ | 9.0 |
| | $ | 8.5 |
| | $ | 0.5 |
| | 6 | % |
| Cost of other revenue | 7.5 |
| | 7.0 |
| | 0.5 |
| | 7 | % |
| Other gross profit | $ | 1.5 |
| | $ | 1.5 |
| | $ | — |
| | — | % |
| Other gross margin | 17 | % | | 18 | % | | | | |
|
| | | | | | | | | |
| Years ended December 31, | | | | |
| (dollars in millions) | 2014 | Change | | 2013 |
| GAAP revenue | $ | 564.4 |
| 12.0 | % | | $ | 503.8 |
|
Less: GAAP acquisition-related revenue(1) | (10.4 | ) | | | — |
|
Add: Payments revenue from net-to-gross presentation change(2) | — |
| | | 13.7 |
|
| Total Non-GAAP adjustments | (10.4 | ) | | | 13.7 |
|
| Non-GAAP revenue | $ | 554.0 |
| 7.1 | % | | $ | 517.5 |
|
| |
| (1) | The calculation excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. |
| |
| (2) | The calculation reflects gross presentation of revenues associated with certain payment processing services throughout 2013, as if the change in presentation was effective January 2013, instead of effective October 2013 as previously discussed. |
OtherNon-GAAP organic revenue increased in 2012 when compared to 2011 primarily due to an increase in fees from user conferences. Additionally, an increase in revenue from reimbursement of travel-related expenses associated with services revenue contributed to the increase in other revenuegrowth during 2012.
Cost of other revenue increased in 2012 primarily due to increases in reimbursable expenses related to services provided at customer locations. Other gross margin in 2012 remained relatively unchanged when compared to 2011.
Operating expenses
Sales and marketing
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Sales and marketing expense | $ | 95.2 |
| | $ | 75.4 |
| | $ | 19.8 |
| | 26 | % |
| % of revenue | 21 | % | | 20 | % | | | | |
Sales and marketing expense increased in 2012 primarily due to increases in human resource costs and commission expense. Human resource costs increased2014 was primarily due to the inclusion of additional headcount from acquired companies as well as incremental headcount to support the increasegrowth in salessubscriptions revenue and, marketing efforts of our growing operations. The increase in commission expense is principally due to an increased amount of commissionable revenue in 2012.
Research and development
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| Research and development expense | $ | 64.7 |
| | $ | 47.7 |
| | $ | 17.0 |
| | 36 | % |
| % of revenue | 14 | % | | 13 | % | | | | |
Research and development expense increased during 2012 primarily due to increased human resource and third-party contractor costs. Human resource and third-party contractor costs increased primarily due to the inclusion of additional headcount from acquired companies as well as investments we continue to make in our product development efforts, including our direct marketing offerings. Additionally, research and development costs increased during 2012 due to an increase in allocated business costs.
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
General and administrative
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| General and administrative expense | $ | 63.1 |
| | $ | 36.9 |
| | $ | 26.2 |
| | 71 | % |
| % of revenue | 14 | % | | 10 | % | | | | |
General and administrative expense increased during 2012 primarily due to increases in acquisition transaction costs, acquisition integration and restructuring costs, acquisition-related stock-based compensation, professional fees and human resource costs. The increase in costs associated with our acquisition of Convio including transaction costs, acquisition integration and restructuring costs and stock-based compensation expense was $13.2 million during 2012. Professional fees increased $4.3 million during 2012 compared to 2011, primarily due to strategic investments we are making in our business optimization efforts and the re-engineering of our accounting processes. The remaining increase was primarily attributable to an increase in human resource costs from additional headcount to support our growing operations and increased skills and competencies of our support resources.
Non-GAAP income from operations
Non-GAAP financial measures discussed below exclude the impact of (i) the write-down of Convio's deferred revenue balance; (ii) stock-based compensation expense; (iii) amortization expense; (iv) acquisition-related expenses; (v) acquisition integration and restructuring costs; (vi) a write-off of proprietary software licenses; (vii) an impairment of cost method investment; and (viii) a gain on sale of assets, 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.
|
| | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
| (in millions) | 2012 |
| | 2011 |
| | Change |
| | % Change |
|
| GAAP income from operations | $ | 19.4 |
| | $ | 50.9 |
| | $ | (31.5 | ) | | (62 | )% |
| | | | | | | | |
| Non-GAAP adjustments: | | | | | | | |
| Add: Convio deferred revenue writedown | 5.6 |
| | — |
| | 5.6 |
| | 100 | % |
| Add: Stock-based compensation expense | 19.2 |
| | 14.9 |
| | 4.3 |
| | 29 | % |
| Add: Amortization of intangibles from business combinations | 17.4 |
| | 7.6 |
| | 9.8 |
| | 129 | % |
| Add: Acquisition-related expenses | 6.4 |
| | 1.8 |
| | 4.6 |
| | 256 | % |
| Add: Acquisition integration and restructuring costs | 6.9 |
| | — |
| | 6.9 |
| | 100 | % |
| Add: Write-off of prepaid proprietary software licenses | 0.4 |
| | — |
| | 0.4 |
| | 100 | % |
| Add: Impairment of cost method investment | 0.2 |
| | 1.8 |
| | (1.6 | ) | | (89 | )% |
| Less: Gain on sale of assets | — |
| | (0.5 | ) | | 0.5 |
| | (100 | )% |
| Total Non-GAAP adjustments | 56.1 |
| | 25.6 |
| | 30.5 |
| | 119 | % |
| Non-GAAP income from operations | $ | 75.5 |
| | $ | 76.5 |
| | $ | (1.0 | ) | | (1 | )% |
| Non-GAAP operating margin | 17 | % | | 21 | % | | | | |
The decrease in non-GAAP income from operations and non-GAAP operating margin during 2012 was principally due to: (i) the continued shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term; (ii) incremental investments we madelesser extent, growth in our product development efforts and to improve the performance of our hosting services; and (iii) strategic investments we made in our business optimization efforts and the re-engineering of our accounting processes. Contributing to the decrease in 2012 is the growth of cost of services exceeding the growth of our servicesmaintenance revenue.
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
Interest expense
Interest expense increased $5.7 million during 2012 when compared to 2011. This increase in interest expense is directly related to the borrowings we incurred to fund our acquisition of Convio in May 2012.
Income tax provision
The following is our effective tax rate for the years ended December 31:
|
| | | | | | | | |
| | 2013 |
| | 2012 |
| | 2011 |
|
| Effective tax rate | 32.8 | % | | 50.6 | % | | 35.2 | % |
The decrease in the effective tax rate during 2013 when compared to 2012 was primarily due to an increase in the benefit from research and development credits and a decrease in nondeductible acquisition costs, partially offset by an increase in nondeductible compensation of certain executive officers and an increase in pretax income. The research and development credits were reinstated in January 2013 with retrospective application to the 2012 tax year. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate of 35.0% due primarily to research and development tax credits, which were partially offset by foreign loss jurisdictions where we have determined a valuation allowance is appropriate, as well as state taxes. 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.
The effective rate in 2012 increased when compared to 2011 primarily due to a decrease in pretax income, reduction in federal research and development credits and nondeductible transaction costs associated with the Convio acquisition.
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 state tax laws. The foreign net operating loss carryforwards, a portion of the 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.
We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, United Kingdom, Australia, the Netherlands and Ireland. We are generally subject to U.S. federal income tax examination for calendar tax years ending 2010 through 2013 as well as state and foreign income tax examinations for various years depending on statute of limitations of those jurisdictions.
We have taken federal and state tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease approximates $1.3 million at December 31, 2013, which would favorably affect the effective tax rate.
Seasonality
Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our revenue from professional services is typicallyhas 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 from transaction fees is typicallyhas 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 ishas 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, as well as 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 ishas been lowest in our first quarter, and due to the timing of clientcustomer budget cycles, our cash flow from operations ishas 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. This patternThese patterns may change, however, as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, acquisitions, new market opportunities, new productsolution introductions or other factors.
Liquidity and capital resources
The following table presents selected financial information about our financial position:
|
| | | | | | | | | |
| (dollars in millions) | December 31,
2015 |
| Change |
| | December 31,
2014 |
|
| Cash and cash equivalents | $ | 15.4 |
| 4.8 | % | | $ | 14.7 |
|
| Property and equipment, net | 52.7 |
| 5.6 | % | | 49.9 |
|
| Software development costs, net | 19.6 |
| 108.5 | % | | 9.4 |
|
| Total carrying value of debt | 408.6 |
| 45.6 | % | | 280.6 |
|
| Working capital | (167.2 | ) | 25.5 | % | | (133.2 | ) |
| Working capital excluding deferred revenue | 63.0 |
| (20.4 | )% | | 79.1 |
|
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
Liquidity and capital resourcesThe following table presents selected financial information about our cash flows:
At December 31, 2013, cash and cash equivalents totaled $11.9 million, compared to $13.5 million at December 31, 2012. The decrease in cash and cash equivalents during 2013 was principally attributable to cash generated from operations of $107.2 million, offset by a net reduction in debt of $62.6 million, payment of dividends of $22.1 million, the purchase of computer software and equipment of $20.1 million and software development costs that were capitalized of $3.2 million. |
| | | | | | | | | | | | | | | |
| | | | | | | | |
| Years ended December 31, | | | | | | | |
| (dollars in millions) | 2015 | Change | | 2014 | Change | | 2013 |
| Net cash provided by operating activities | $ | 114.3 |
| 11.7 | % | | $ | 102.3 |
| (4.6 | )% | | $ | 107.2 |
|
| Net cash used in investing activities | (222.7 | ) | 5.3 | % | | (211.4 | ) | 773.6 | % | | (24.2 | ) |
| Net cash provided by (used in) financing activities | 110.4 |
| (1.4 | )% | | 112.0 |
| (232.9 | )% | | (84.3 | ) |
Our principal sources of liquidity are operating cash flow, funds available under our credit facilitythe 2014 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription, maintenance and support and subscription agreementsarrangements and market acceptance of our productssolutions 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 orand 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.
At December 31, 2015, our total cash and cash equivalents balance included approximately $5.9 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
Throughout 2015, 2014 and 2013, 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, loss on sale of business, impairment of capitalized software development costs, loss on debt extinguishment and termination of derivative instruments, 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.
2015 vs. 2014
Cash flow from operations associated with working capital decreased $5.9 million during 2015 when compared to 2014, primarily due to:
an increase in current year bonus payments from a prior year change in the timing of payouts for certain bonus plans, from quarterly to annually, partially offset by an increase in amounts accrued for current year performance against current year targets;
a decrease in the growth rate of deferred revenue which was primarily attributable to the fair value of acquired deferred revenues and billing cycles of acquired companies, partially offset by
fluctuations in the timing of vendor payments; and
a reduction in cash taxes paid.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
2014 vs. 2013
Cash flow from operations associated with working capital increased $10.3 million in 2014 when compared to 2013. The net working capital increase was primarily due to:
a change in the timing of payouts for certain bonus plans, from quarterly to annually;
an increase in deferred revenue from growth in subscriptions;
increases in accrued commissions and salaries; and
fluctuations in the timing of vendor payments; which were partially offset by
an increase in prepaid taxes; and
increases in accounts receivable from growth in subscriptions.
Investing cash flow
During 2016, we expect capital expenditures between $45.0 million and $50.0 million, which includes purchases of property and equipment and estimated cash outlays for capitalized software development costs. Refer to the commitments and contingencies subsection below for future minimum commitments related to purchase obligations.
2015 vs. 2014
Net cash used in investing activities of $222.7 million increased by $11.3 million during 2015, when compared to 2014.
During 2015, we had cash outlays of $18.6 million and $15.5 million for purchases of property and equipment and software development costs, respectively, which were up $4.7 million and $6.9 million, respectively, from cash spent during 2014. 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 cloud-based solutions to customers, 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 our Raiser's Edge NXT and Financial Edge NXT cloud-based solutions, development activities for other solutions and the inclusion of software development costs related to solutions historically provided by companies acquired in 2014.
During 2015, we used $187.8 million of cash for the acquisition of Smart Tuition compared to $188.9 million used in 2014 for the acquisitions of WhippleHill and MicroEdge.
2014 vs. 2013
During 2014, we used net cash of $188.9 million for the acquisitions of WhippleHill and MicroEdge compared to $0.9 million spent on investments in acquired companies during 2013. Aggregate cash outlays for purchases of property and equipment and capitalized software development costs were $22.4 million during 2014, which was relatively unchanged from 2013.
Financing cash flow
2015 vs. 2014
During 2015, we had a net increase in borrowings of $127.8 million, which was primarily used to finance the acquisition of Smart Tuition. The excess tax benefit we received from the exercise and vesting of stock-based compensation awards decreased by $2.0 million when comparing 2015 and 2014. Cash outlays related to deferred financing fees decreased in 2015 as we refinanced our credit facility in 2014. Also during 2015, we paid dividends of $22.5 million, which was relatively consistent with the amount paid in 2014.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
2014 vs. 2013
During 2014, we had a net increase in debt of $129.5 million, which was primarily used to finance the acquisition of MicroEdge, and we received an excess tax benefit of $7.5 million from the exercise of stock-based compensation awards. Cash outlays related to deferred financing costs increased $3.0 million during 2014 when compared to 2013 as a result of refinancing our credit facility. Also during 2014, we paid dividends of $22.1 million, which was relatively consistent with the amount paid in 2013.
2014 Credit Facility
We have drawn on our five-year $325.0 million credit facility (the "2014 Credit Facility") from time to time to help us meet financial needs, such as financing for business acquisitions and payments to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock awards and our related acquisition of treasury stock.acquisitions. At December 31, 2013,2015, our available borrowing capacity under our credit facilitythe 2014 Credit Facility was $152.2$103.7 million. We believe our credit facilitythe 2014 Credit Facility will provide us with sufficient flexibility to meet our future financial needs. The credit facility2014 Credit Facility matures in February 2017.2019.
At December 31, 2013,2015, the carrying amountsamount of our total current liabilities exceededdebt under the carrying amounts of our total current assets primarily due to the use of cash provided by operating activities for investing and financing activities, including incremental payments made on outstanding borrowings.
At December 31, 2013, we had $152.9 million of outstanding borrowings under our credit facility.2014 Credit Facility was $408.6 million. Our average daily borrowings were $187.3$303.8 million during 2013.2015.
Following is a summary of the financial covenants as defined by credit facility:under the 2014 Credit Facility:
|
| | |
Financial covenantCovenant | Requirement | AsRatio as of December 31, 20132015 |
Net Leverage ratioRatio | < 2.75≤ 3.50 to 1.00 | 1.402.76 to 1.00 |
Interest coverage ratioCoverage Ratio | > 3.50≥ 2.50 to 1.00 | 20.1317.11 to 1.00 |
Maximum capital expenditures | $67.8 million for the fiscal year ended December 31, 2013 | $16.9 million |
Under our credit facility,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: (1)(i) no default or event of default shall have occurred and be continuing under the credit facility,2014 Credit Facility, and (2) we must be in compliance with the(ii) our pro forma net leverage ratio, as set forth in the credit agreement.agreement, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At December 31, 2013,2015, we were in compliance with all debt covenants under ourthe 2014 Credit Facility.
Financing for MicroEdge acquisition
We financed the acquisition of MicroEdge through cash on hand and borrowings under the 2014 Credit Facility. As previously disclosed, in February 2014, we entered into the 2014 Credit Facility in an aggregate principal amount of $325 million, with an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $200.0 million. On October 1, 2014, we exercised this option, and certain lenders agreed, to increase the revolving credit facility.commitments by $100.0 million (the "October 2014 Additional Revolving Credit Commitments") such that for the period commencing October 1, 2014 through July 17, 2015, the aggregate revolving credit commitments that were available was $250.0 million. The October 2014 Additional Revolving Credit Commitments have the same terms as the existing revolving credit commitments. On October 1, 2014, we drew down $140.0 million in revolving credit commitments under the 2014 Credit Facility to finance the acquisition of MicroEdge.
At December 31, 2013, our total cashFinancing for Smart Tuition acquisition
On July 17, 2015, we again exercised this option and cash equivalents balance includes approximately $5.9certain lenders agreed to increase the revolving credit commitments by an additional $100.0 million (the "July 2015 Additional Revolving Credit Commitments") such that for the period commencing July 17, 2015, the aggregate revolving credit commitments available were $350.0 million. The July 2015 Additional Revolving Credit Commitments have the same terms as the existing revolving credit commitments. On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition 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 12 months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. Our current plans anticipate repatriating undistributed earnings in Canada. We currently do not intend nor anticipate a need to repatriate our other cash held outside the U.S.
Operating cash flow
Net cash provided by operating activities of $107.2 million increased by $38.6 million during 2013 when compared to the prior year, primarily due to an increase in earnings as adjusted for non-cash transactions. Throughout both 2013 and 2012, 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 and stock-based compensation and adjustments to our provision for sales returns and allowances; (ii) the tax benefit associated with our deferred tax asset, which reduces our cash outlay for income tax expense; and (iii) changes in our working capital.Smart Tuition.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
Working capital changes as they impactEntry into interest rate swap agreement
In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions of our variable rate debt under the statement of cash flows 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 increased $2.6 million in 2013 when compared to 2012. The net increase was primarily due2014 Credit Facility to a decrease in our days sales outstanding that resulted in more cash collections on accounts receivable during 2013 when compared to 2012. The increase was partially offset by an increase in cash paid for employee bonuses due to a change in the timing of these payments.
Investing cash flow
During 2012, we used approximately $280.7 millionfixed rate for the acquisitionterm of Convio. Outsidethe October 2015 Swap Agreement. The notional value of this acquisition, cash usedthe October 2015 Swap Agreement was $75.0 million with an effective date beginning in investing activities was relatively unchanged year over year. During 2013, we spent $20.1 million on computer equipmentOctober 2015 and software associated withmaturing in February 2018. We designated the infrastructure that supports our subscription-based offerings compared to $20.6 million during 2012. The decrease in cash used for property and equipment was offset in 2013 by a $2.0 million increase in capitalized software development costs from investments in our subscription-based offerings.
Financing cash flow
During 2013, we had a net reduction in debt of $62.6 million primarily from payments made on outstanding borrowings compared to a net increase in debt of $215.5 million, used to fund the acquisition of Convio during 2012. Payment of deferred financing costs increased $1.7 million during 2012 when compared to 2011October 2015 Swap Agreement as a resultcash flow hedge at the inception of our amended and restated credit facility. Also during 2013, we paid dividends of $22.1 million, which was relatively consistent with the amounts paid in 2012 and 2011.contract.
Commitments and contingencies
As of December 31, 2013,2015, we had contractual obligations with future minimum commitments as follows: |
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| (in millions) | Total |
| | Less than 1 year |
| | 1-2 years |
| | 3-5 years |
| | More than 5 years |
|
Operating leases(1) | $ | 96.5 |
| | $ | 10.7 |
| | $ | 10.6 |
| | $ | 31.1 |
| | $ | 44.1 |
|
Debt and interest(2) | 161.2 |
| | 20.3 |
| | 17.7 |
| | 123.2 |
| | — |
|
Purchase obligations(3) | $ | 11.8 |
| | $ | 5.1 |
| | $ | 4.6 |
| | $ | 2.1 |
| | $ | — |
|
| Total | $ | 269.5 |
| | $ | 36.1 |
| | $ | 32.9 |
| | $ | 156.4 |
| | $ | 44.1 |
|
|
| | | | | | | | | | | | | | | |
| | Payments due by period |
| (dollars in millions) | Total |
| Less than 1 year |
| 1-3 years |
| 3-5 years |
| More than 5 years |
|
| Recorded contractual obligations: | | | | | |
Debt(1) | $ | 410.2 |
| $ | 4.4 |
| $ | 8.7 |
| $ | 397.1 |
| $ | — |
|
Interest payments on debt(2) | 0.7 |
| 0.7 |
| — |
| — |
| — |
|
| | | | | | |
| Unrecorded contractual obligations: | | | | | |
Operating leases(3) | 97.3 |
| 14.6 |
| 26.1 |
| 24.3 |
| 32.3 |
|
Interest payments on debt(4) | 27.7 |
| 8.8 |
| 17.6 |
| 1.3 |
| — |
|
Purchase obligations(5) | 19.0 |
| 7.8 |
| 9.1 |
| 2.1 |
| — |
|
| Total contractual obligations | $ | 554.9 |
| $ | 36.3 |
| $ | 61.5 |
| $ | 424.8 |
| $ | 32.3 |
|
| |
| (1) | Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2014 Credit Facility at December 31, 2015 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2014 Credit 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 the future minimum lease commitments under sublease agreements, incentive payments or theand reimbursement of leasehold improvements. |
| |
(2)(4) | Included in the table above is $8.3 million of interest. 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 useddescribed in the above table.(1) above. |
| |
(3)(5) | We utilize third-party technology in conjunction with our productssolutions and services, with contractual arrangements varying in length from one to threefive years. In certain cases, these arrangements require a minimum annual purchase commitment by us. |
The term loansloan under our credit facility requirethe 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 credit facility2014 Credit Facility in February 2017.2019.
The total liability for uncertain tax positions as of December 31, 20132015 and 2012,December 31, 2014, was $3.7$3.0 million and $3.8$3.6 million, respectively. As of December 31, 2013 and 2012, we haveOur accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of $0.6 millionDecember 31, 2015 and $0.7 million, respectively.December 31, 2014.
In February 2014,2016, our Board of Directors approved our annual dividend rate of $0.48$0.48 per share for 2014.to be made in quarterly payments. Dividends at thethis annual rate would aggregate to $22.6 million assuming 47.0 million shares of our 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
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
other things, the terms of our credit facility,the 2014 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.
In February 2016, our Board of Directors declared a first quarter dividend of $0.12 per share payable on March 15, 2016 to stockholders of record on February 26, 2016.
Off-balance sheet arrangements
As of December 31, 2013,2015, 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.
Blackbaud, Inc.
Item 7. Management's discussion and analysis of financial condition and results of operations (continued)
Foreign currency exchange rates
Approximately 13%11% of our total net revenue for the year ended December 31, 20132015 was derived from operations outside the United States.U.S. 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 $1.1$0.8 million and $1.2$0.9 million atas of December 31, 20132015 and December 31, 2012,2014, respectively.
The vast majority of our contracts are entered into by our U.S., Canadian or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars contracts entered into by our Canadian subsidiary are generally denominated inor Canadian dollars, and contracts entered into by our U.K., Australian Irish and the NetherlandsIrish subsidiaries are generally denominated in pounds sterling,Pounds Sterling, Australian dollars Euros 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 2013,2015, foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S. currencies. Though we do not believe ourhave exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, the impact has had agenerally not been material impact onto our consolidated results of operations or financial position, we intend toposition. During 2015, however, the fluctuation in foreign currency exchange rates reduced our total revenue and income from operations by approximately $9.6 million and $3.7 million, respectively. We will continue to monitormonitoring 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.
Inflation
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
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP)("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets andincluding goodwill, stock-based compensation, the provision for income taxes, capitalization of software development costs, our allowance for sales returns and doubtful accounts, deferred sales commissions, accounting for business combinations, and loss contingencies.among others.
We base our estimates on historical experience, current trends and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. We believe the criticalOur significant accounting policies listed below affect significant judgments and estimates usedare discussed in the preparationNote 2 of our consolidated financial statements.statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
Our revenue is primarily generated from the following sources: (i) charging for the use of our software products in a hosted environment; (ii) selling perpetual licenses of our software products; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; and (iv) providing software maintenance and support services. |
| | |
| Revenue Recognition | | |
| | |
| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
| | |
See Note 2 to our consolidated financial statements in this report for a complete discussion of our revenue recognition policies. We recognize revenue when all of the following conditions are met: (1) Persuasive evidence of an arrangement exists; (2) The solutions or services have been delivered; (3) The fee is fixed or determinable; and (4) Collection of the resulting receivable is probable. To the extent that our customers are billed for our solutions and services in advance of meeting each of the conditions above, we record such amounts in deferred revenue. | Our revenue recognition accounting methodology contains uncertainties because it requires management to make significant estimates and assumptions, and to apply judgment. For example, for arrangements that have multiple elements and include software licenses, we must exercise judgment and use estimates in order to (1) allocate the total price among the various elements we must deliver; (2) determine whether undelivered services are essential to the functionality of the delivered solutions and services; (3) determine whether vendor specific objective evidence ("VSOE") of fair value exists for each undelivered element; and (4) determine whether and when each element has been delivered. For arrangements that have multiple elements and do not include software licenses, we must exercise judgment and use estimates in order to (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of fair value if available, third-party evidence ("TPE") if VSOE is not available, and best estimate of selling price ("BESP") if neither VSOE nor TPE is available; and (3) allocate the total price among the various elements based on the relative selling price method. In addition, we exercise judgment in certain transactions when determining whether we should recognize revenue based on the gross amount billed to a customer (as a principle) or the net amount retained (as an agent). These judgments are based on the predominant weighting of factors identified in accounting guidance. | If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue or deferred revenue that we report in a particular period. |
We recognize revenue when all of the following conditions are met:
•Persuasive evidence of an arrangement exists;•The product or services have been delivered;
•The fee is fixed or determinable; and
•Collection of the resulting receivable is probable.
Determining whether and when these criteria have been met can require significant judgment and estimates. We deem acceptance of an agreement to be evidence of an arrangement. Delivery of our services occurs when the services have been performed. Delivery of our products occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical agreements do not include customer acceptance provisions; however, if acceptance provisions |
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| Business Combinations | | |
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| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
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We allocate the purchase price of an acquired business to its identifiable assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The excess of the purchase price over the amount allocated to the assets acquired and liabilities assumed, if any, is recorded as goodwill. We use available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of long-lived and identifiable intangible assets, and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date. | Our purchase price allocation methodology contains uncertainties because it requires management to make significant estimates and assumptions, and to apply judgment to estimate the fair value of assets acquired and liabilities assumed, especially with respect to long-lived and intangible assets. Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Critical estimates in valuing intangible assets include, but are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection. Revenue is recognized net of sales returns and allowances. We follow guidance provided in ASC 605-45, Principal Agent Considerations, which states that determining whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in the evaluation.
Subscriptions
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs, is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related hosting service. The estimated period of benefit is evaluated on an annual basis using historical customer retention information by product or service.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if VSOE is not available; and (iii) best estimate of selling price (BESP) if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
We offer certain payment processing services with the assistance of third-party vendors. When we are the primary obligor in a transaction, have latitude in establishing prices and are the party determining the service specifications or have several but not limited to, estimates about: future expected cash flows from customer contracts and relationships, proprietary technology and non-compete agreements; the acquired company's brand awareness and market position, the market awareness of the acquired company's branded technology solutions and services, assumptions about the period of time the brands will continue to be valuable; as well as expected costs to develop any in-process research and development into commercially viable solutions and estimated cash flows from the projects when completed, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
| If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations. See Note 3 to our consolidated financial statements in this report for information regarding our significant acquisitions. |
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
all of these indicators, we record the revenue on a gross basis. Otherwise, we record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and record the net amount as revenue.Revenue from transaction processing fees is recognized when the service is provided and the amounts are determinable. Revenue directly associated with processing donations for customers are included in subscriptions revenue. |
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| Income Taxes | | |
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| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
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We make estimates and judgments in accounting for income taxes. Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. We measure and recognize uncertain tax positions. To recognize uncertain tax positions we must first determine if it is more likely than not that the position will be sustained upon audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial reporting purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. | The calculation of our income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. Our effective income tax rate is also affected by changes in the geographic distribution of our earnings or losses, changes in tax law in jurisdictions where we conduct business. Significant judgment is required in the identification and measurement of uncertain tax positions. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. | Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made. |
License fees
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to each of the elements in these arrangements using the residual method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on objective evidence of the fair value of the various elements. We determine the fair value of the various elements using different methods. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which demonstrate a consistent relationship of maintenance pricing as a percentage of the contractual license fee. Fair value of professional services and other products and services is based on the average selling price of these same products and services to other customers when sold on a stand-alone basis. Any remaining revenue is allocated to the delivered elements which is normally the software license in the arrangement.When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other enhancements that will assist with efforts to improve operational efficiency and/or to support business process improvements. These services are generally not essential to the functionality of the software. However, when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services using the percentage-of-completion method.
Services
We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed.
We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.
We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training. Additionally, we sell fixed-rate programs, which permit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over the contract period.
Maintenance
We recognize revenue from maintenance services ratably over the contract term, typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.
Deferred revenue
To the extent that our customers are billed for the above-described services in advance of delivery, we record such amounts in deferred revenue.
Valuation of long-lived and intangible assets and goodwill
We review identifiable intangible and other long-lived assets for impairment when events change or circumstances indicate the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or significant adverse |
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| Long-lived and Intangible Assets including Goodwill | |
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| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
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We review our long-lived and identifiable intangible assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If such events or changes in circumstances occur, we use the undiscounted cash flow method to determine whether the asset is impaired. To the extent that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted cash flows. Goodwill is assigned to our three reporting units, which are defined as our three operating segments (see Note 7 to our consolidated financial statements in this report). We test goodwill for impairment annually during our fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. In general, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. To the extent the qualitative factors indicate that the fair value is likely less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount. We estimate fair value for each reporting unit based on projected future cash flows discounted using our weighted average cost of capital. If the carrying amount exceeds its fair value, impairment is indicated. If an impairment is indicated, the impairment loss is measured as the excess of the recorded goodwill over its fair value. | We review our long-lived and identifiable intangible assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If such events or changes in circumstances occur, we use the undiscounted cash flow method to determine whether the asset is impaired. To the extent that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted cash flows. Goodwill is assigned to our three reporting units, which are defined as our three operating segments (see Note 7 to our consolidated financial statements in this report). We test goodwill for impairment annually during our fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. In general, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. To the extent the qualitative factors indicate that the fair value is likely less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount. We estimate fair value for each reporting unit based on projected future cash flows discounted using our weighted average cost of capital. If the carrying amount exceeds its fair value, impairment is indicated. If an impairment is indicated, the impairment loss is measured as the excess of the recorded goodwill over its fair value. | We have not made any material changes in the accounting methodology we use to assess impairment loss during the years ended December 31, 2015, 2014 and 2013. During the year ended December 31, 2015, we recorded insignificant impairment charges against previously capitalized software development costs. During the year ended December 31, 2014, we recorded impairment charges of $1.6 million against certain previously capitalized software development costs. The charges reduced the carrying value of those costs to zero. The impairment charges resulted from obtaining software solutions through the acquisitions of Smart Tuition in 2015 and WhippleHill in 2014 and determining that it was no longer probable that certain computer software that was being developed would be placed into service. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to assess impairment losses. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations. |
Blackbaud, Inc.
Item 7. Management’sManagement's discussion and analysis of financial condition and results of operations (continued)
in the business climate. If such events or changes in circumstances occur, we use the undiscounted cash flow method to determine whether the asset is impaired. Cash flows would include the estimated terminal valueRecently issued accounting pronouncements
For a discussion of the asset and exclude any interest charges. To the extentimpact that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted cash flows. The discount rate utilized would be basedrecently issued accounting pronouncements are expected to have on our best estimate of our risks and required investment returns at the time the impairment assessment is made.
Goodwill is assigned to our five reporting units, which are defined as our four operating segments (see Note 16 to our consolidated financial statements) and our payment processing operations. We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Significant judgment is required in the assessment of qualitative factors including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. To the extent the qualitative factors indicate that the fair value is likely less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount.
We estimate fair value for each reporting unit based on projected future cash flows discounted using our weighted average cost of capital. A number of significant assumptions and estimates are involved in estimating the fair value of each reporting unit, including revenue growth rates, operating margins, capital spending, discount rate, and working capital changes. Additionally, we make certain judgments and assumptions in allocating assets and liabilities to determine the carrying values for each of our reporting units. We believe the assumptions we use in estimating fair value of our reporting units are reasonable, but are also unpredictable and inherently uncertain. Actual future results may differ from those estimates.
If the carrying amount exceeds its fair value, impairment is indicated. If an impairment is indicated, the impairment is measured as the excess of the recorded goodwill over its fair value, which could materially adversely impact our consolidated financial position and results of operations. The 2013 annual impairment test of our goodwill indicated there was no impairment.
Stock-based compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the requisite service period, which is the vesting period. We determine the fair value of stock options and stock appreciation rights using a Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of our stock over the life of the award. We determine the fair value of awards that contain market conditions using a Monte Carlo simulation model. Changes to these estimates would result in different fair values of awards.
We estimate the number of awards that will be forfeited and recognize expense only for those awards that we expect will ultimately vest. Significant judgment is required in determining the adjustment to compensation expense for estimated forfeitures. Compensation expense in a period could be impacted, favorably or unfavorably, by differences between estimated and actual forfeitures.
Income taxes
We make estimates and judgments in accounting for income taxes. The calculation of income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made.
We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax assetoperations when adopted in the future, see Note 2 of our consolidated financial statements in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to reduce income tax expense, thereby increasing net income in the period such determination was made.this report.
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
We measure and recognize uncertain tax positions. To recognize such positions we must first determine if it is more likely than not that the position will be sustained on audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Significant judgment is required in the identification and measurement of uncertain tax positions.
Software Development Costs
We incur certain costs associated with the development of internal-use software and software developed related to our cloud-based solutions, which are accounted for as internal-use software. The costs incurred in the preliminary stages of internal-use software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs for internal-use software are recorded as part of computer software costs within property and equipment. Capitalized costs for software developed for our cloud-based solutions are recorded to other assets. Internal-use software is amortized on a straight line basis over its estimated useful life, which is generally three years.
Although our development efforts are primarily focused on our cloud-based solutions, we also incur cost in connection with the development of certain of our software products licensed to customers on a perpetual basis, which are accounted for as costs of software to be sold, leased or otherwise marketed. Costs for the development of software to be sold are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Capitalized software development costs include direct labor costs and fringe benefit costs attributed to programmers, software engineers and quality control teams working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized software development costs are typically amortized over the estimated product life on a straight-line basis, which is generally three years.
Sales returns and allowance for doubtful accounts
We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns are charged against the related revenue items.
Accounts receivable are recorded at original invoice amounts less an allowance for doubtful accounts, an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, the need for specific customer reserves and the aging of our receivables. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for doubtful accounts could be required. Accounts are written off after all means of collection are exhausted and recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.
Deferred sales commissions
We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. To the extent that these commissions relate to revenue not yet recognized, the amounts are recorded as deferred sales commission costs. Subsequently, the commissions are recognized as expense as the revenue is recognized.
Business combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to, estimates about: future expected cash flows from customer contracts, proprietary technology and non-compete agreements; the acquired company's brand awareness and market position, assumptions about the period of time the brand will continue to be valuable; as well as expected costs to develop the
Blackbaud, Inc.
Item 7. Management’s discussion and analysis of financial condition and results of operations (continued)
in-process research and development into commercially viable products and estimated cash flows from the projects when completed, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.
Contingencies
We are subject to the possibility of various loss contingencies in the normal course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us. Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period.
Recently adopted accounting pronouncements
Effective January 1, 2013, we adopted ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires that entities provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements. We have presented the amounts reclassified out of accumulated other comprehensive income by component in Note 10 and Note 14 to our consolidated financial statements.
Effective January 1, 2013, we adopted ASU 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test currently required by ASC Topic 350-30 on general intangibles other than goodwill. The adoption of ASU 2012-02 did not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Under ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. We do not anticipate any material impact from the adoption of ASU 2013-11.
Item 7A. Quantitative and qualitative disclosures about market risk
We have market rate sensitivity for interest rates and foreign currency exchange rates.
Interest rate risk
Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage our variable rate interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments entered
into for hedging purposes. Due to the nature of our debt, the materiality of the fair values of the derivative instruments and the highly liquid, short-term nature and level of our cash and cash equivalents as of December 31, 2013,2015, we believe there is no material risk of exposure to changing interest rates for those positions. There were no significant changes in how we manage interest rate risk between December 31, 20122014 and December 31, 2013.2015.
Foreign currency risk
For a discussion of our exposure to foreign currency exchange rate fluctuations, see “Management’s discussion and analysis of financial conditionscondition and results of operations — Foreign currency exchange rates” in Item 7 this report.
Item 8. Financial statements and supplementary data
The information required by this Item is set forth in theBLACKBAUD, INC.
Index to consolidated financial statements and notes thereto beginning at page F-1 of this report.
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
None.
9A. Controls and procedures
Evaluation of disclosure controls and procedures
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.
Changes in internal control over financial reporting
No change in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013, based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (1992 framework). Based on this evaluation under the Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2013.
Attestation report of registered public accounting firm
The effectiveness of our internal control over financial reporting as of December 31, 2013, has been audited by our independent registered public accounting firm, as stated in their attestation report, which is included in this Annual Report on Form 10-K.
Item 9B. Other information
None.
PART III
Item 10. Directors, executive officers and corporate governance
The information required by Item 10 with respect to Directors and Executive Officers is incorporated by reference from the information under the captions “Election of Directors,” “Information Regarding Meetings of the Board and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics and Code of Ethics,” contained in Blackbaud’s Proxy Statement for the 2014 Annual Meeting of Stockholders expected to be held on June 23, 2014, except for the identification of executive officers of the Registrant which is set forth in Part I of this report.
Item 11. Executive compensation
The information required by Item 11 is incorporated by reference from the information under the caption “Executive Compensation and Other Matters,” “Compensation Discussion and Analysis” and “Summary Compensation Table” contained in Blackbaud’s Proxy Statement for the 2014 Annual Meeting of Stockholders expected to be held on June 23, 2014.
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters
The information required by Item 12 is incorporated by reference from information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in Blackbaud’s Proxy Statement for the 2014 Annual Meeting of Stockholders expected to be held on June 23, 2014.
Item 13. Certain relationships, related transactions and director independence
The information required by Item 13 is incorporated by reference from the information under the caption “Transactions with Related Persons,” and “Independence of Directors” contained in Blackbaud’s Proxy Statement for the 2014 Annual Meeting of Stockholders expected to be held on June 23, 2014.
Item 14. Principal accountant fees and services
The information required by Item 14 is incorporated by reference from the information under the caption “Audit Committee Report,” contained in Blackbaud’s Proxy Statement for the 2014 Annual Meeting of Stockholders expected to be held on June 23, 2014.
PART IV
Item 15. Exhibits and financial statement schedules
(a) The following documents are included as part of the Annual Report on Form 10-K.
The following statements are filed as part of this report:
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Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements thereto.
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| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| | | | | | | | | | | |
| 2.1 |
| | Agreement and Plan of Merger and Reincorporation dated April 6, 2004 | | S-1/A | | 4/6/2004 | | 2.1 |
| | |
| | | | | | | | | | | |
| 2.2 |
| | Stock Purchase Agreement dated January 16, 2007 by and among Target Software, Inc., Target Analysis Group, Inc., all of the stockholders of Target Software, Inc. and Target Analysis Group, Inc., Charles Longfield, as stockholder representative, and Blackbaud, Inc. | | 8-K | | 1/18/2007 | | 2.2 |
| | |
| | | | | | | | | | | |
| 2.3 |
| | Agreement and Plan of Merger dated as of May 29, 2008 by and among Blackbaud, Inc., Eucalyptus Acquisition Corporation and Kintera, Inc. | | 8-K | | 5/30/2008 | | 2.3 |
| | |
| 2.4 |
| | Share Purchase Agreement dated as of April 29, 2009 between RLC Group B.V., as the Seller, and Blackbaud, Inc., as the Purchaser | | 10-Q | | 8/7/2009 | | 10.42 |
| | |
| | | | | | | | | | | |
| 2.5 |
| * | Stock Purchase Agreement dated as of February 1, 2011 by and among Public Interest Data, Inc., all for the stockholders of Public Interest Data, Inc., Stephen W. Zautke, as stockholder representative and Blackbaud, Inc. | | 10-Q | | 5/10/2011 | | 2.3 |
| | |
| | | | | | | | | | | |
| 2.6 |
| | Agreement and Plan of Merger dated as of January 16, 2012 by and among Blackbaud, Inc., Caribou Acquisition Corporation and Convio, Inc. | | 8-K | | 1/17/2012 | | 2.4 |
| | |
| | | | | | | | | | | |
| 2.7 |
| | Stock Purchase Agreement dated as of October 6, 2011 by and among Everyday Hero Pty. Ltd., all of the stockholders of Everyday Hero Pty. Ltd., Nathan Betteridge as stockholder representative and Blackbaud Pacific Pty. Ltd. | | 10-K | | 2/29/2012 | | 2.7 |
| | |
| | | | | | | | | | | |
| 3.4 |
| | Amended and Restated Certificate of Incorporation of Blackbaud, Inc. | | DEF 14A | | 4/30/2009 | | | | |
| | | | | | | | | | | |
| 3.5 |
| | Amended and Restated Bylaws of Blackbaud, Inc. | | 8-K | | 3/22/2011 | | 3.4 |
| | |
|
| | | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| | | | | | | | | | | |
| 10.5 |
| | Trademark License and Promotional Agreement dated as of October 13, 1999 between Blackbaud, Inc. and Charleston Battery, Inc. | | S-1 | | 2/20/2004 | | 10.5 |
| | |
| | | | | | | | | | | |
| 10.6 |
| † | Blackbaud, Inc. 1999 Stock Option Plan, as amended | | S-1/A | | 4/6/2004 | | 10.6 |
| | |
| | | | | | | | | | | |
| 10.8 |
| † | Blackbaud, Inc. 2001 Stock Option Plan, as amended | | S-1/A | | 4/6/2004 | | 10.8 |
| | |
| | | | | | | | | | | |
| 10.20 |
| † | Blackbaud, Inc. 2004 Stock Plan, as amended, together with Form of Notice of Stock Option Grant and Stock Option Agreement | | 8-K | | 6/20/2006 | | 10.20 |
| | |
| | | | | | | | | | | |
| 10.26 |
| † | Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Blackbaud, Inc. 2004 Stock Plan | | 10-K | | 2/28/2007 | | 10.26 |
| | |
| | | | | | | | | | | |
| 10.27 |
| † | Form of Notice of Stock Appreciation Rights Grant and Stock Appreciation Rights Agreement under the Blackbaud, Inc. 2004 Stock Plan | | 10-K | | 2/28/2007 | | 10.27 |
| | |
| | | | | | | | | | | |
| 10.33 |
| † | Blackbaud, Inc. 2008 Equity Incentive Plan | | DEF 14A | | 4/29/2008 | | | | |
| | | | | | | | | | | |
| 10.34 |
| † | Form of Notice of Grant and Stock Option Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.34 |
| | |
| | | | | | | | | | | |
| 10.35 |
| † | Form of Notice of Grant and Restricted Stock Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.35 |
| | |
| | | | | | | | | | | |
| 10.36 |
| † | Form of Notice of Grant and Stock Appreciation Rights Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.36 |
| | |
| | | | | | | | | | | |
| 10.37 |
| †** | Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder | | 10-K/A | | 3/26/2008 | | 10.2 |
| | |
| | | | | | | | | | | |
| 10.38 |
| †** | Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder | | 10-K/A | | 3/26/2008 | | 10.3 |
| | |
| | | | | | | | | | | |
| 10.39 |
| † | Form of Retention Agreement | | 10-Q | | 11/10/2008 | | 10.37 |
| | |
| | | | | | | | | | | |
| 10.40 |
| † | Triple Net Lease Agreement dated as of October 1, 2008 between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC | | 8-K | | 12/11/2008 | | 10.37 |
| | |
| | | | | | | | | | | |
| 10.41 |
| † | Blackbaud, Inc. 2009 Equity Compensation Plan for Employees from Acquired Companies | | S-8 | | 7/2/2009 | | 10.41 |
| | |
| | | | | | | | | | | |
| 10.43 |
| † | Amended and Restated Employment and Noncompetition Agreement dated January 28, 2010 between Blackbaud, Inc. and Marc Chardon | | 8-K | | 2/1/2010 | | 10.43 |
| | |
| | | | | | | | | | | |
| 10.44 |
| | Credit Agreement dated as of June 17, 2011 by and among Blackbaud, Inc., as Borrower, the lenders referred to therein, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, with Wells Fargo Securities, LLC, J.P. Morgan Securities LLC, and SunTrust Robinson Humphrey, Inc. as Joint Lead Arrangers and Joint Book Managers | | 8-K | | 6/23/2011 | | 10.44 |
| | |
| | | | | | | | | | | |
| 10.45 |
| | Guaranty Agreement dated as of June 17, 2011, by certain subsidiaries of Blackbaud, Inc., as Guarantors, in favor of Wells Fargo Bank, National Association, as Administrative Agent | | 8-K | | 6/23/2011 | | 10.45 |
| | |
|
| | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| | | | | | | | | | | |
| 10.46 |
| | Pledge Agreement dated as of June 17, 2011 by Blackbaud, Inc. and certain subsidiaries of Blackbaud, Inc. in favor of Wells Fargo Bank, National Association, as Administrative Agent for the ratable benefit of itself and the lenders referred to therein | | 8-K | | 6/23/2011 | | 10.46 | | |
| | | | | | | | | | | |
| 10.47 |
| † | Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Tim Williams | | 10-Q | | 11/8/2011 | | 10.47 | | |
| | | | | | | | | | | |
| 10.48 |
| † | Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Louis Attanasi | | 10-Q | | 11/8/2011 | | 10.48 | | |
| | | | | | | | | | | |
| 10.49 |
| † | Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Charlie Cumbaa | | 10-Q | | 11/8/2011 | | 10.49 | | |
| | | | | | | | | | | |
| 10.50 |
| † | Employment Agreement dated June 25, 2008 between Blackbaud, Inc. and Kevin Mooney | | 10-Q | | 11/8/2011 | | 10.50 | | |
| | | | | | | | | | | |
| 10.51 |
| † | Amendment No. 1 to the Amended and Restated Employment and Noncompetition Agreement dated December 13, 2011 between Blackbaud, Inc. and Marc Chardon | | 8-K | | 12/16/2011 | | 10.51 | | |
| | | | | | | | | | | |
| 10.52 |
| | Form of Tender and Support Agreement by and among Blackbaud, Inc. and certain stockholders of Convio, Inc. | | 8-K | | 1/17/2012 | | 10.52 | | |
| | | | | | | | | | | |
| 10.53 |
| | Amended and Restated Credit Agreement dated as of February 9, 2012 by and among Blackbaud, Inc., as Borrower, the lenders referred to therein, JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and an Issuing Lender, SunTrust Bank, as Syndication Agent, and Bank of America, N.A. and Regions Bank, as Co-Documentation Agents, with J.P. Morgan Securities LLC and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Joint Bookrunners | | 8-K | | 2/15/2012 | | 10.53 | | |
| | | | | | | | | | | |
| 10.54 |
| | Amended and Restated Pledge Agreement dated as of February 9, 2012 by Blackbaud, Inc. in favor of JPMorgan Chase Bank, N.A., as Administrative Agent for the ratable benefit of itself and the lenders referred to therein | | 8-K | | 2/15/2012 | | 10.54 | | |
| | | | | | | | | | | |
| 10.55 |
| † | Employment Agreement dated November 14, 2011 between Blackbaud, Inc. and Anthony W. Boor | | 10-K | | 2/29/2012 | | 10.55 | | |
| | | | | | | | | | | |
| 10.56 |
| † | Services Agreement dated November 11, 2011 between Blackbaud, Inc. and Timothy V. Williams | | 10-K | | 2/29/2012 | | 10.56 | | |
| | | | | | | | | | | |
| 10.57 |
| † | Employment Agreement dated November 16, 2010 between Blackbaud, Inc. and Jana B. Eggers | | 10-K | | 2/29/2012 | | 10.57 | | |
| | | | | | | | | | | |
| 10.58 |
| | Guaranty Agreement dated as of May 4, 2012, by certain subsidiaries of Blackbaud, Inc., as Guarantors, in favor of JP Morgan Chase Bank, N.A., as Administrative Agent | | 8-K | | 5/7/2012 | | 10.58 | | |
| | | | | | | | | | | |
| 10.59 |
| †*** | Convio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of stock option agreements | | S-1/A | | 3/19/2010 | | 10.1 | | |
| | | | | | | | | | | |
| 10.60 |
| †*** | Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger) | | 8-K | | 2/28/2011 | | 10.1 | | |
| | | | | | | | | | | |
| 10.61 |
| †*** | Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement | | 8-K | | 2/28/2011 | | 10.2 | | |
| | | | | | | | | | | |
| 10.62 |
| †*** | Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements | | S-1 | | 1/22/2010 | | 10.2 | | |
|
| | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| | | | | | | | | | | |
| 10.63 |
| † | Blackbaud, Inc. 2008 Equity Incentive Plan, as amended | | 8-K | | 6/26/2012 | | 10.59 | | |
| | | | | | | | | | | |
| 10.64 |
| † | Amendment to the Blackbaud, Inc. 2008 Equity Incentive Plan | | 8-K | | 6/26/2012 | | 10.60 | | |
| | | | | | | | | | | |
| 10.65 |
| † | Form of Employment Agreement between Blackbaud, Inc. and each of Anthony W. Boor, Charles T. Cumbaa, Jana B. Eggers, Kevin W. Mooney and Joseph D. Moye | | 10-K | | 2/26/2013 | | 10.65 | | |
| | | | | | | | | | | |
| 10.66 |
| | Lease Amendment and Remediation Agreement entered into as of March 22, 2013, by and between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC. | | 8-K | | 3/28/2013 | | 10.66 | | |
| | | | | | | | | | | |
| 10.67 |
| † | Letter Agreement entered into as of January 24, 2013, by and between Blackbaud, Inc. and Marc. Chardon | | 10-Q | | 5/7/2013 | | 10.67 | | |
| | | | | | | | | | | |
| 10.68 |
| † | Form of Management Transition Retention Agreement between Blackbaud, Inc. and each of Anthony W. Boor, Charles T. Cumbaa, Jana B. Eggers, Kevin W. Mooney and Joseph D. Moye | | 10-Q | | 5/7/2013 | | 10.68 | | |
| | | | | | | | | | | |
| 10.69 |
| † | Management Transition Retention Agreement between Blackbaud, Inc. and Bradley J. Holman | | 10-Q | | 5/7/2013 | | 10.69 | | |
| | | | | | | | | | | |
| 10.70 |
| † | Letter Agreement dated October 23, 2013 between Blackbaud, Inc. and Anthony W. Boor | | 8-K | | 10/25/2013 | | 10.70 | | |
| | | | | | | | | | | |
| 10.71 |
| † | Offer Letter Agreement dated November 7, 2013 between Blackbaud, Inc. and Michael P. Gianoni | | 10-K | | 2/26/2014 | | 10.71 | | X |
| | | | | | | | | | | |
| 10.72 |
| † | Employment and Noncompetition Agreement dated November 8, 2013 between Blackbaud, Inc. and Michael P. Gianoni | | 10-K | | 2/26/2014 | | 10.72 | | X |
| | | | | | | | | | | |
| 21.1 |
| | Subsidiaries of Blackbaud, Inc | | | | | | | | X |
| | | | | | | | | | | |
| 23.1 |
| | Consent of Independent Registered Public Accounting Firm | | | | | | | | X |
| | | | | | | | | | | |
| 31.1 |
| | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | | | | | | | | | |
| 31.2 |
| | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | | | | | | | | | |
| 32.1 |
| | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | | | | | | | | | |
| 32.2 |
| | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| | | | | | | | | | |
| 101.INS |
| **** | XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
| 101.SCH |
| **** | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
| 101.CAL |
| **** | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.DEF |
| **** | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | | |
| 101.LAB |
| **** | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| 101.PRE |
| **** | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
|
| |
* | The registrant has applied for an extension of the confidential treatment it was previously granted with respect to portions of this exhibit. Those portions have been omitted from the exhibit and filed separately with the U.S. Securities and Exchange Commission. |
|
| |
** | The Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder (“Kintera 2000 Plan Documents”) and the Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder (“Kintera 2003 Plan Documents”) were filed by Kintera in its Form 10-K/A on March 26, 2008 as Exhibits 10.2 and 10.3, respectively. We assumed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents when we acquired Kintera in July 2008. We filed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents by incorporation by reference as exhibits 10.37 and 10.38, respectively, in our Form S-8 on August 4, 2008. |
|
| |
*** | The Convio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of stock option agreements thereunder (“Convio 2009 Original Plan Documents”) and the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements thereunder (“Convio 1999 Plan Documents”) were filed by Convio in its Forms S-1/A and S-1, filed March 19, 2010 and January 22, 2010 as exhibits 10.1 and 10.2, respectively. The Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger) and Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement were filed by Convio in its Form 8-K on February 28, 2011 as exhibits 10.1 and 10.2 (together with the Convio 2009 Original Plan Documents, the “Convio 2009 Plan Documents”). We assumed the Convio 2009 Plan Documents and Convio 1999 Plan Documents when we acquired Convio in May 2012. We filed the Convio 2009 Plan Documents and Convio 1999 Plan Documents by incorporation by reference as exhibits 10.59, 10.60, 10.61 and 10.62 in our Form S-8 on May 7, 2012. |
|
| |
**** | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability of that Section, and shall not be part of any registration statement or other document filed under the Securities Act of the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
|
| |
† | Indicates management contract or compensatory plan, contract or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | |
| | BLACKBAUD, INC. |
| | |
Signed: | February 26, 201462 | /S/ MICHAEL P. GIANONI  |
| | President and Chief Executive Officer |
| | (Principal Executive Officer)2015 Form 10-K |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and on the dates indicated.
|
| | | | | | |
| | | | | | |
| | | | | | |
| /S/ MICHAEL P. GIANONI
| | President, Chief Executive Officer and Director (Principal Executive Officer) | | Date: | February 26, 2014 |
| Michael P. Gianoni | | | | |
| | | | | | |
| /S/ ANTHONY W. BOOR
| | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | Date: | February 26, 2014 |
| Anthony W. Boor | | | | |
| | | | | | |
| /S/ ANDREW M. LEITCH
| | Chairman of the Board | | Date: | February 26, 2014 |
| Andrew M. Leitch | | | | |
| | | | | | |
| /S/ TIMOTHY CHOU
| | Director | | Date: | February 26, 2014 |
| Timothy Chou | | | | |
| | | | | | |
| /S/ GEORGE H. ELLIS
| | Director | | Date: | February 26, 2014 |
| George H. Ellis | | | | |
| | | | | | |
| /S/ DAVID G. GOLDEN
| | Director | | Date: | February 26, 2014 |
| David G. Golden | | | | |
| | | | | | |
| /S/ SARAH E. NASH
| | Director | | Date: | February 26, 2014 |
| Sarah E. Nash | | | | |
| | | | | | |
| /S/ JOYCE M. NELSON
| | Director | | Date: | February 26, 2014 |
| Joyce M. Nelson | | | | |
BLACKBAUD, INC.
Index to consolidated financial statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Blackbaud, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, statements of cash flows, and statements of stockholders'stockholders’ equity present fairly, in all material respects, the financial position of Blackbaud, Inc. and its subsidiaries at December 31, 20132015 and 2012,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20132015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2015, based on criteria established in the 1992 Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it classifies deferred tax assets and liabilities in 2015.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting in Item 9A, management has excluded Smart Tuition from its assessment of internal control over financial reporting as of December 31, 2015 because it was acquired by the Company in a purchase business combination during 2015. We have also excluded Smart Tuition from our audit of internal control over financial reporting. Smart Tuition is a wholly-owned subsidiary whose total assets and total revenues represent 5.5% and 1.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2015.
/S/ PRICEWATERHOUSECOOPERS LLP
Charlotte, North Carolina
February 26, 2014
24, 2016
Blackbaud, Inc.
Consolidated balance sheets
|
| | | | | | | |
| (in thousands, except share amounts) | December 31, 2013 |
| | December 31, 2012 |
|
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 11,889 |
| | $ | 13,491 |
|
| Donor restricted cash | 107,362 |
| | 68,177 |
|
| Accounts receivable, net of allowance of $5,613 and $8,546 at December 31, 2013 and 2012, respectively | 66,969 |
| | 75,692 |
|
| Prepaid expenses and other current assets | 30,115 |
| | 40,589 |
|
| Deferred tax asset, current portion | 13,434 |
| | 15,799 |
|
| Total current assets | 229,769 |
| | 213,748 |
|
| Property and equipment, net | 49,550 |
| | 49,063 |
|
| Goodwill | 264,599 |
| | 265,055 |
|
| Intangible assets, net | 143,441 |
| | 168,037 |
|
| Other assets | 19,251 |
| | 9,844 |
|
| Total assets | $ | 706,610 |
| | $ | 705,747 |
|
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Trade accounts payable | $ | 10,244 |
| | $ | 13,623 |
|
| Accrued expenses and other current liabilities | 40,443 |
| | 45,996 |
|
| Donations payable | 107,362 |
| | 68,177 |
|
| Debt, current portion | 17,158 |
| | 10,000 |
|
| Deferred revenue, current portion | 181,475 |
| | 173,899 |
|
| Total current liabilities | 356,682 |
| | 311,695 |
|
| Debt, net of current portion | 135,750 |
| | 205,500 |
|
| Deferred tax liability | 36,880 |
| | 24,468 |
|
| Deferred revenue, net of current portion | 9,099 |
| | 11,119 |
|
| Other liabilities | 6,655 |
| | 5,281 |
|
| Total liabilities | 545,066 |
| | 558,063 |
|
| Commitments and contingencies (see Note 11) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock; 20,000,000 shares authorized, none outstanding | — |
| | — |
|
| Common stock, $0.001 par value; 180,000,000 shares authorized, 55,699,817 and 54,859,604 shares issued at December 31, 2013 and 2012, respectively | 56 |
| | 55 |
|
| Additional paid-in capital | 220,763 |
| | 203,638 |
|
| Treasury stock, at cost; 9,573,102 and 9,209,371 shares at December 31, 2013 and 2012, respectively | (183,288 | ) | | (170,898 | ) |
| Accumulated other comprehensive loss | (1,385 | ) | | (1,973 | ) |
| Retained earnings | 125,398 |
| | 116,862 |
|
| Total stockholders’ equity | 161,544 |
| | 147,684 |
|
| Total liabilities and stockholders’ equity | $ | 706,610 |
| | $ | 705,747 |
|
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | |
| (in thousands, except share amounts) | December 31,
2015 |
| December 31,
2014 |
|
| Assets | | |
| Current assets: | | |
| Cash and cash equivalents | $ | 15,362 |
| $ | 14,735 |
|
| Restricted cash due to customers | 255,038 |
| 140,709 |
|
| Accounts receivable, net of allowance of $4,943 and $4,539 at December 31, 2015 and December 31, 2014, respectively | 80,046 |
| 77,523 |
|
| Prepaid expenses and other current assets | 48,666 |
| 40,392 |
|
| Deferred tax asset, current portion | — |
| 14,423 |
|
| Total current assets | 399,112 |
| 287,782 |
|
| Property and equipment, net | 52,651 |
| 49,896 |
|
| Software development costs, net | 19,551 |
| 9,420 |
|
| Goodwill | 436,449 |
| 349,008 |
|
| Intangible assets, net | 294,672 |
| 229,307 |
|
| Other assets | 21,418 |
| 17,770 |
|
| Total assets | $ | 1,223,853 |
| $ | 943,183 |
|
| Liabilities and stockholders’ equity | | |
| Current liabilities: | | |
| Trade accounts payable | $ | 19,208 |
| $ | 11,436 |
|
| Accrued expenses and other current liabilities | 57,461 |
| 52,201 |
|
| Due to customers | 255,038 |
| 140,709 |
|
| Debt, current portion | 4,375 |
| 4,375 |
|
| Deferred revenue, current portion | 230,216 |
| 212,283 |
|
| Total current liabilities | 566,298 |
| 421,004 |
|
| Debt, net of current portion | 404,229 |
| 276,196 |
|
| Deferred tax liability | 27,996 |
| 43,639 |
|
| Deferred revenue, net of current portion | 7,119 |
| 8,991 |
|
| Other liabilities | 7,623 |
| 7,437 |
|
| Total liabilities | 1,013,265 |
| 757,267 |
|
| Commitments and contingencies (see Note 11) |
|
|
| Stockholders’ equity: | | |
| Preferred stock; 20,000,000 shares authorized, none outstanding | — |
| — |
|
| Common stock, $0.001 par value; 180,000,000 shares authorized, 56,873,817 and 56,048,135 shares issued at December 31, 2015 and December 31, 2014, respectively | 57 |
| 56 |
|
| Additional paid-in capital | 276,340 |
| 245,674 |
|
| Treasury stock, at cost; 9,903,071 and 9,740,054 shares at December 31, 2015 and December 31, 2014, respectively | (199,861 | ) | (190,440 | ) |
| Accumulated other comprehensive loss | (825 | ) | (1,032 | ) |
| Retained earnings | 134,877 |
| 131,658 |
|
| Total stockholders’ equity | 210,588 |
| 185,916 |
|
| Total liabilities and stockholders’ equity | $ | 1,223,853 |
| $ | 943,183 |
|
| | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
Blackbaud, Inc.
Consolidated statements of comprehensive income
|
| | | | | | | | | | | |
| (in thousands, except share and per share amounts) | Years ended December 31, | |
| 2013 |
| | 2012 |
| | 2011 |
|
| Revenue | | | | | |
| License fees | $ | 16,715 |
| | $ | 20,551 |
| | $ | 19,475 |
|
| Subscriptions | 212,656 |
| | 162,102 |
| | 103,544 |
|
| Services | 126,548 |
| | 119,626 |
| | 108,781 |
|
| Maintenance | 138,745 |
| | 136,101 |
| | 130,604 |
|
| Other revenue | 9,153 |
| | 9,039 |
| | 8,464 |
|
| Total revenue | 503,817 |
| | 447,419 |
| | 370,868 |
|
| Cost of revenue | | | | | |
| Cost of license fees | 2,763 |
| | 2,993 |
| | 3,345 |
|
| Cost of subscriptions | 93,649 |
| | 68,773 |
| | 42,536 |
|
| Cost of services | 104,005 |
| | 97,208 |
| | 79,086 |
|
| Cost of maintenance | 25,741 |
| | 26,001 |
| | 25,178 |
|
| Cost of other revenue | 6,505 |
| | 7,485 |
| | 7,049 |
|
| Total cost of revenue | 232,663 |
| | 202,460 |
| | 157,194 |
|
| Gross profit | 271,154 |
| | 244,959 |
| | 213,674 |
|
| Operating expenses | | | | | |
| Sales and marketing | 97,614 |
| | 95,218 |
| | 75,361 |
|
| Research and development | 65,645 |
| | 64,692 |
| | 47,672 |
|
| General and administrative | 50,320 |
| | 63,133 |
| | 36,933 |
|
| Restructuring | 3,494 |
| | 175 |
| | — |
|
| Amortization | 2,539 |
| | 2,106 |
| | 980 |
|
| Impairment of cost method investment | — |
| | 200 |
| | 1,800 |
|
| Total operating expenses | 219,612 |
| | 225,524 |
| | 162,746 |
|
| Income from operations | 51,542 |
| | 19,435 |
| | 50,928 |
|
| Interest income | 67 |
| | 146 |
| | 183 |
|
| Interest expense | (5,818 | ) | | (5,864 | ) | | (200 | ) |
| Other (expense) income, net | (462 | ) | | (392 | ) | | 346 |
|
| Income before provision for income taxes | 45,329 |
| | 13,325 |
| | 51,257 |
|
| Income tax provision | 14,857 |
| | 6,742 |
| | 18,037 |
|
| Net income | $ | 30,472 |
| | $ | 6,583 |
| | $ | 33,220 |
|
| Earnings per share | | | | | |
| Basic | $ | 0.68 |
| | $ | 0.15 |
| | $ | 0.76 |
|
| Diluted | $ | 0.67 |
| | $ | 0.15 |
| | $ | 0.75 |
|
| Common shares and equivalents outstanding | | | | | |
| Basic weighted average shares | 44,684,812 |
| | 44,145,535 |
| | 43,522,563 |
|
| Diluted weighted average shares | 45,421,140 |
| | 44,691,845 |
| | 44,149,054 |
|
| Dividends per share | $ | 0.48 |
| | $ | 0.48 |
| | $ | 0.48 |
|
| | | | | | |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustment | 53 |
| | (34 | ) | | (336 | ) |
| Unrealized gain (loss) on derivative instruments, net of tax | 535 |
| | (791 | ) | | — |
|
| Total other comprehensive income (loss) | 588 |
| | (825 | ) | | (336 | ) |
| Comprehensive income | $ | 31,060 |
| | $ | 5,758 |
| | $ | 32,884 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | |
| (in thousands, except share and per share amounts) | Years ended December 31, | |
| 2015 |
| 2014 |
| 2013 |
|
| Revenue | | | |
| Subscriptions | $ | 331,759 |
| $ | 263,435 |
| $ | 212,656 |
|
| Maintenance | 153,801 |
| 147,418 |
| 138,745 |
|
| Services | 132,978 |
| 128,371 |
| 126,548 |
|
| License fees and other | 19,402 |
| 25,197 |
| 25,868 |
|
| Total revenue | 637,940 |
| 564,421 |
| 503,817 |
|
| Cost of revenue | | | |
| Cost of subscriptions | 167,341 |
| 133,221 |
| 93,649 |
|
| Cost of maintenance | 27,066 |
| 25,448 |
| 25,741 |
|
| Cost of services | 102,815 |
| 106,506 |
| 104,005 |
|
| Cost of license fees and other | 7,409 |
| 8,263 |
| 9,268 |
|
| Total cost of revenue | 304,631 |
| 273,438 |
| 232,663 |
|
| Gross profit | 333,309 |
| 290,983 |
| 271,154 |
|
| Operating expenses | | | |
| Sales and marketing | 123,646 |
| 107,360 |
| 97,614 |
|
| Research and development | 84,636 |
| 77,179 |
| 65,645 |
|
| General and administrative | 76,084 |
| 58,277 |
| 50,320 |
|
| Amortization | 2,231 |
| 1,803 |
| 2,539 |
|
| Restructuring | — |
| — |
| 3,494 |
|
| Total operating expenses | 286,597 |
| 244,619 |
| 219,612 |
|
| Income from operations | 46,712 |
| 46,364 |
| 51,542 |
|
| Interest expense | (8,073 | ) | (6,011 | ) | (5,818 | ) |
| Other expense, net | (1,687 | ) | (1,119 | ) | (395 | ) |
| Income before provision for income taxes | 36,952 |
| 39,234 |
| 45,329 |
|
| Income tax provision | 11,303 |
| 10,944 |
| 14,857 |
|
| Net income | $ | 25,649 |
| $ | 28,290 |
| $ | 30,472 |
|
| Earnings per share | | | |
| Basic | $ | 0.56 |
| $ | 0.63 |
| $ | 0.68 |
|
| Diluted | $ | 0.55 |
| $ | 0.62 |
| $ | 0.67 |
|
| Common shares and equivalents outstanding | | | |
| Basic weighted average shares | 45,623,854 |
| 45,215,138 |
| 44,684,812 |
|
| Diluted weighted average shares | 46,498,704 |
| 45,799,874 |
| 45,421,140 |
|
| Dividends per share | $ | 0.48 |
| $ | 0.48 |
| $ | 0.48 |
|
| Other comprehensive income | | | |
| Foreign currency translation adjustment | 62 |
| 261 |
| 53 |
|
| Unrealized gain on derivative instruments, net of tax | 145 |
| 92 |
| 535 |
|
| Total other comprehensive income | 207 |
| 353 |
| 588 |
|
| Comprehensive income | $ | 25,856 |
| $ | 28,643 |
| $ | 31,060 |
|
| | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
Blackbaud, Inc.
Consolidated statements of cash flows
|
| | | | | | | | | | | |
| | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
|
| Cash flows from operating activities | | | | | |
| Net income | $ | 30,472 |
| | $ | 6,583 |
| | $ | 33,220 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 43,164 |
| | 32,241 |
| | 16,995 |
|
| Provision for doubtful accounts and sales returns | 5,403 |
| | 9,591 |
| | 5,646 |
|
| Stock-based compensation expense | 16,910 |
| | 19,240 |
| | 14,884 |
|
| Excess tax benefits from stock-based compensation | — |
| | (81 | ) | | (932 | ) |
| Deferred taxes | 13,873 |
| | 7,585 |
| | 13,533 |
|
| Impairment of cost method investment | — |
| | 200 |
| | 1,800 |
|
| Gain on sale of assets | — |
| | — |
| | (549 | ) |
| Amortization of deferred financing costs | 613 |
| | 678 |
| | 164 |
|
| Other non-cash adjustments | 1,261 |
| | (293 | ) | | (1,042 | ) |
| Changes in operating assets and liabilities, net of acquisition of businesses: | | | | | |
| Accounts receivable | 3,161 |
| | (9,397 | ) | | (8,692 | ) |
| Prepaid expenses and other assets | 2,977 |
| | (8,817 | ) | | (2,915 | ) |
| Trade accounts payable | (218 | ) | | (1,363 | ) | | 1,714 |
|
| Accrued expenses and other liabilities | (17,055 | ) | | (388 | ) | | (1,056 | ) |
| Donor restricted cash | (39,801 | ) | | (27,990 | ) | | (22,862 | ) |
| Donations payable | 39,801 |
| | 27,990 |
| | 22,862 |
|
| Deferred revenue | 6,683 |
| | 12,912 |
| | 12,757 |
|
| Net cash provided by operating activities | 107,244 |
| | 68,691 |
| | 85,527 |
|
| Cash flows from investing activities | | | | | |
| Purchase of property and equipment | (20,086 | ) | | (20,557 | ) | | (18,215 | ) |
| Purchase of net assets of acquired companies, net of cash acquired | (876 | ) | | (280,687 | ) | | (23,385 | ) |
| Capitalized software development costs | (3,197 | ) | | (1,245 | ) | | (1,012 | ) |
| Proceeds from sale of assets | — |
| | — |
| | 874 |
|
| Net cash used in investing activities | (24,159 | ) | | (302,489 | ) | | (41,738 | ) |
| Cash flows from financing activities | | | | | |
| Proceeds from issuance of debt | 103,008 |
| | 315,000 |
| | — |
|
| Payments on debt | (165,600 | ) | | (99,500 | ) | | — |
|
| Payments of deferred financing costs | — |
| | (2,440 | ) | | (767 | ) |
| Proceeds from exercise of stock options | 385 |
| | 3,146 |
| | 2,041 |
|
| Excess tax benefits from stock-based compensation | — |
| | 81 |
| | 932 |
|
| Dividend payments to stockholders | (22,081 | ) | | (21,731 | ) | | (21,429 | ) |
| Payments on capital lease obligations | — |
| | — |
| | (40 | ) |
| Net cash (used in) provided by financing activities | (84,288 | ) | | 194,556 |
| | (19,263 | ) |
| Effect of exchange rate on cash and cash equivalents | (399 | ) | | 213 |
| | (10 | ) |
| Net (decrease) increase in cash and cash equivalents | (1,602 | ) | | (39,029 | ) | | 24,516 |
|
| Cash and cash equivalents, beginning of year | 13,491 |
| | 52,520 |
| | 28,004 |
|
| Cash and cash equivalents, end of year | $ | 11,889 |
| | $ | 13,491 |
| | $ | 52,520 |
|
| | | | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash (paid) received during the year for: | | | | | |
| Interest | $ | (5,108 | ) | | $ | (5,098 | ) | | $ | (2 | ) |
| Taxes, net of refunds | $ | 4,132 |
| | $ | (3,456 | ) | | $ | 4,601 |
|
| Purchase of equipment included in accounts payable | $ | (1,557 | ) | | $ | (4,641 | ) | | $ | (4,760 | ) |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | |
| | Years ended December 31, | |
| (in thousands) | 2015 |
| 2014 |
| 2013 |
|
| Cash flows from operating activities | | | |
| Net income | $ | 25,649 |
| $ | 28,290 |
| $ | 30,472 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 55,997 |
| 45,417 |
| 43,164 |
|
| Provision for doubtful accounts and sales returns | 6,825 |
| 5,248 |
| 5,403 |
|
| Stock-based compensation expense | 25,246 |
| 17,345 |
| 16,910 |
|
| Excess tax benefits from exercise and vesting of stock-based compensation | (5,466 | ) | (7,455 | ) | — |
|
| Deferred taxes | 3,165 |
| 3,050 |
| 13,873 |
|
| Loss on sale of business | 1,976 |
| — |
| — |
|
| Impairment of capitalized software development costs | 239 |
| 1,626 |
| — |
|
| Loss on debt extinguishment and termination of derivative instruments | — |
| 996 |
| — |
|
| Amortization of deferred financing costs and discount | 899 |
| 734 |
| 613 |
|
| Other non-cash adjustments | (197 | ) | 1,163 |
| 1,261 |
|
| Changes in operating assets and liabilities, net of acquisition and disposal of businesses: | | | |
| Accounts receivable | (7,593 | ) | (5,750 | ) | 3,161 |
|
| Prepaid expenses and other assets | (10,979 | ) | (8,464 | ) | 2,977 |
|
| Trade accounts payable | 6,133 |
| (948 | ) | (218 | ) |
| Accrued expenses and other liabilities | (166 | ) | 4,014 |
| (17,055 | ) |
| Restricted cash due to customers | (34,279 | ) | (33,510 | ) | (39,801 | ) |
| Due to customers | 34,279 |
| 33,510 |
| 39,801 |
|
| Deferred revenue | 12,612 |
| 17,011 |
| 6,683 |
|
| Net cash provided by operating activities | 114,340 |
| 102,277 |
| 107,244 |
|
| Cash flows from investing activities | | | |
| Purchase of property and equipment | (18,633 | ) | (13,911 | ) | (20,086 | ) |
| Capitalized software development costs | (15,481 | ) | (8,535 | ) | (3,197 | ) |
| Purchase of net assets of acquired companies, net of cash acquired | (188,072 | ) | (188,918 | ) | (876 | ) |
| Net cash used in sale of business | (521 | ) | — |
| — |
|
| Net cash used in investing activities | (222,707 | ) | (211,364 | ) | (24,159 | ) |
| Cash flows from financing activities | | | |
| Proceeds from issuance of debt | 312,300 |
| 365,100 |
| 103,008 |
|
| Payments on debt | (184,475 | ) | (235,589 | ) | (165,600 | ) |
| Debt issuance costs | (429 | ) | (3,003 | ) | — |
|
| Proceeds from exercise of stock options | 32 |
| 188 |
| 385 |
|
| Excess tax benefits from exercise and vesting of stock-based compensation | 5,466 |
| 7,455 |
| — |
|
| Dividend payments to stockholders | (22,508 | ) | (22,107 | ) | (22,081 | ) |
| Net cash provided by (used in) financing activities | 110,386 |
| 112,044 |
| (84,288 | ) |
| Effect of exchange rate on cash and cash equivalents | (1,392 | ) | (111 | ) | (399 | ) |
| Net increase (decrease) in cash and cash equivalents | 627 |
| 2,846 |
| (1,602 | ) |
| Cash and cash equivalents, beginning of year | 14,735 |
| 11,889 |
| 13,491 |
|
| Cash and cash equivalents, end of year | $ | 15,362 |
| $ | 14,735 |
| $ | 11,889 |
|
| | | | |
| Supplemental disclosure of cash flow information | | | |
| Cash (paid) received during the year for: | | | |
| Interest | (7,208 | ) | (4,894 | ) | (5,108 | ) |
| Taxes, net of refunds | (4,795 | ) | (9,581 | ) | 4,132 |
|
| Purchase of equipment and other assets included in accounts payable | (3,204 | ) | (3,300 | ) | (1,557 | ) |
| | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
Blackbaud, Inc.
Consolidated statements of stockholders' equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share amounts) | Common stock | | | Additional paid-in capital |
| | Treasury stock |
| | Accumulated other comprehensive loss |
| | Retained earnings |
| | Total stockholders' equity |
|
| Shares |
| | Amount |
| |
| Balance at December 31, 2010 | 53,316,280 |
| | $ | 53 |
| | $ | 158,372 |
| | $ | (161,186 | ) | | $ | (812 | ) | | $ | 120,042 |
| | $ | 116,469 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 33,220 |
| | 33,220 |
|
| Payment of dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (21,429 | ) | | (21,429 | ) |
| Exercise of stock options, stock appreciation rights and restricted stock units | 262,428 |
| | 1 |
| | 2,040 |
| | — |
| | — |
| | — |
| | 2,041 |
|
| Surrender of 176,942 shares upon restricted stock vesting and exercise of stock appreciation rights | — |
| | — |
| | — |
| | (5,040 | ) | | — |
| | — |
| | (5,040 | ) |
| Tax impact of exercise of equity-based compensation | — |
| | — |
| | 193 |
| | — |
| | — |
| | — |
| | 193 |
|
| Stock-based compensation | — |
| | — |
| | 14,796 |
| | — |
| | — |
| | 88 |
| | 14,884 |
|
| Restricted stock grants | 502,426 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock cancellations | (121,602 | ) | | — |
| | | | — |
| | — |
| | — |
| | — |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (336 | ) | | — |
| | (336 | ) |
| Balance at December 31, 2011 | 53,959,532 |
| | $ | 54 |
| | $ | 175,401 |
| | $ | (166,226 | ) | | $ | (1,148 | ) | | $ | 131,921 |
| | $ | 140,002 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 6,583 |
| | 6,583 |
|
| Payment of dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (21,731 | ) | | (21,731 | ) |
| Exercise of stock options, stock appreciation rights and restricted stock units | 355,180 |
| | — |
| | 3,146 |
| | — |
| | — |
| | — |
| | 3,146 |
|
| Surrender of 189,547 shares upon restricted stock vesting and exercise of stock appreciation rights | — |
| | — |
| | — |
| | (4,672 | ) | | — |
| | — |
| | (4,672 | ) |
| Tax impact of exercise of equity-based compensation | — |
| | — |
| | 81 |
| | — |
| | — |
| | — |
| | 81 |
|
| Stock-based compensation | — |
| | — |
| | 19,151 |
| | — |
| | — |
| | 89 |
| | 19,240 |
|
| Equity-based awards assumed in business combination | — |
| | — |
| | 5,859 |
| | — |
| | — |
| | — |
| | 5,859 |
|
| Restricted stock grants | 687,652 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Restricted stock cancellations | (142,760 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (825 | ) | | — |
| | (825 | ) |
| Balance at December 31, 2012 | 54,859,604 |
| | $ | 55 |
| | $ | 203,638 |
| | $ | (170,898 | ) | | $ | (1,973 | ) | | $ | 116,862 |
| | $ | 147,684 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 30,472 |
| | 30,472 |
|
| Payment of dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (22,081 | ) | | (22,081 | ) |
| Exercise of stock options, stock appreciation rights and restricted stock units | 609,500 |
| | — |
| | 385 |
| | — |
| | — |
| | — |
| | 385 |
|
| Surrender of 363,731 shares upon restricted stock vesting and exercise of stock appreciation rights | — |
| | — |
| | — |
| | (12,390 | ) | | — |
| | — |
| | (12,390 | ) |
| Tax impact of exercise of equity-based compensation | — |
| | — |
| | (25 | ) | | — |
| | — |
| | — |
| | (25 | ) |
| Stock-based compensation | — |
| | — |
| | 16,765 |
| | — |
| | — |
| | 145 |
| | 16,910 |
|
| Restricted stock grants | 458,462 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Restricted stock cancellations | (227,749 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 588 |
| | — |
| | 588 |
|
| Balance at December 31, 2013 | 55,699,817 |
| | $ | 56 |
| | $ | 220,763 |
| | $ | (183,288 | ) | | $ | (1,385 | ) | | $ | 125,398 |
| | $ | 161,544 |
|
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share amounts) | Common stock | | Additional paid-in capital |
| Treasury stock |
| Accumulated other comprehensive loss |
| Retained earnings |
| Total stockholders' equity |
|
| Shares |
| Amount |
|
| Balance at December 31, 2012 | 54,859,604 |
| $ | 55 |
| $ | 203,638 |
| $ | (170,898 | ) | $ | (1,973 | ) | $ | 116,862 |
| $ | 147,684 |
|
| Net income | — |
| — |
| — |
| — |
| — |
| 30,472 |
| 30,472 |
|
| Payment of dividends | — |
| — |
| — |
| — |
| — |
| (22,081 | ) | (22,081 | ) |
| Exercise of stock options and stock appreciation rights and vesting of restricted stock units | 609,500 |
| — |
| 385 |
| — |
| — |
| — |
| 385 |
|
| Surrender of 363,731 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights | — |
| — |
| — |
| (12,390 | ) | — |
| — |
| (12,390 | ) |
| Excess tax benefits from exercise and vesting of stock-based compensation | — |
| — |
| (25 | ) | — |
| — |
| — |
| (25 | ) |
| Stock-based compensation | — |
| — |
| 16,765 |
| — |
| — |
| 145 |
| 16,910 |
|
| Restricted stock grants | 458,462 |
| 1 |
| — |
| — |
| — |
| — |
| 1 |
|
| Restricted stock cancellations | (227,749 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 588 |
| — |
| 588 |
|
| Balance at December 31, 2013 | 55,699,817 |
| $ | 56 |
| $ | 220,763 |
| $ | (183,288 | ) | $ | (1,385 | ) | $ | 125,398 |
| $ | 161,544 |
|
| Net income | — |
| — |
| — |
| — |
| — |
| 28,290 |
| 28,290 |
|
| Payment of dividends | — |
| — |
| — |
| — |
| — |
| (22,107 | ) | (22,107 | ) |
Exercise of stock options and stock appreciation rights and vesting of restricted stock units
| 186,473 |
| — |
| 188 |
| — |
| — |
| — |
| 188 |
|
| Surrender of 166,952 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights | — |
| — |
| — |
| (7,152 | ) | — |
| — |
| (7,152 | ) |
| Excess tax benefits from exercise and vesting of stock-based compensation | — |
| — |
| 7,455 |
| — |
| — |
| — |
| 7,455 |
|
| Stock-based compensation | — |
| — |
| 17,268 |
| — |
| — |
| 77 |
| 17,345 |
|
| Restricted stock grants | 248,567 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| Restricted stock cancellations | (86,722 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 353 |
| — |
| 353 |
|
| Balance at December 31, 2014 | 56,048,135 |
| $ | 56 |
| $ | 245,674 |
| $ | (190,440 | ) | $ | (1,032 | ) | $ | 131,658 |
| $ | 185,916 |
|
| Net income | — |
| — |
| — |
| — |
| — |
| 25,649 |
| 25,649 |
|
| Payment of dividends | — |
| — |
| — |
| — |
| — |
| (22,508 | ) | (22,508 | ) |
Exercise of stock options and stock appreciation rights and vesting of restricted stock units
| 202,078 |
| — |
| 32 |
| — |
| — |
| — |
| 32 |
|
| Surrender of 163,017 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights | — |
| — |
| — |
| (9,421 | ) | — |
| — |
| (9,421 | ) |
| Excess tax benefits from exercise and vesting of stock-based compensation | — |
| — |
| 5,466 |
| — |
| — |
| — |
| 5,466 |
|
| Stock-based compensation | — |
| — |
| 25,168 |
| — |
| — |
| 78 |
| 25,246 |
|
| Restricted stock grants | 736,252 |
| 1 |
| — |
| — |
| — |
| — |
| 1 |
|
| Restricted stock cancellations | (112,648 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
| Other comprehensive income | — |
| — |
| — |
| — |
| 207 |
| — |
| 207 |
|
| Balance at December 31, 2015 | 56,873,817 |
| $ | 57 |
| $ | 276,340 |
| $ | (199,861 | ) | $ | (825 | ) | $ | 134,877 |
| $ | 210,588 |
|
| | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
Blackbaud, Inc.
Notes to consolidated financial statements
1. Organization
We provideare a leading provider of software and services for the global philanthropic community. We offer a full spectrum of cloud-based and on-premiseon-premises solutions, as well as a resource network that empowers and connects organizations of all sizes. Our portfolio of software solutions and related services designed specifically for nonprofit organizations. Our products and services enablesupport nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations.relationship management, digital marketing, advocacy, accounting, payments and analytics, as well as grant management, corporate social responsibility, and education. As of December 31, 2013,2015, we had more than 29,000approximately 35,000 active customers distributed across multiple verticals within the nonprofit market including nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations health and human services, religion, artsother charitable giving entities, and cultural, public and societal benefits, environment and animal welfare as well as international foreign affairs.corporations.
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP)(“GAAP”). In order to provide comparability between periods presented, amortization of software development costs and amortization of deferred financing costs have been broken out separately from other non-cash adjustments in the previously reported consolidated statements of cash flows to conform to the consolidated statement of cash flow presentation of the current period. After this change in presentation, amounts related to the amortization of software development costs are included in depreciation and amortization and amounts related to the amortization of deferred financing costs are presented separately within cash flows from operating activities. Similarly, restructuring costs have been broken out separately from general and administrative expense in the previously reported consolidated statements of comprehensive income to conform to the consolidated statement of comprehensive income presentation of the current period. After this change in presentation, restructuring costs are presented separately within operating expenses.
Basis of consolidation
The consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
In order to provide comparability between periods presented, "donor restricted cash" and "donations payable" have been renamed as "restricted cash due to customers" and "due to customers", respectively, in the previously reported consolidated balance sheets to conform to presentation of the current period.
In order to provide comparability between periods presented, "license fees" and "other revenue" have been combined within "license fees and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period. Similarly, "cost of license fees" and "cost of other revenue" have been combined within "cost of license fees and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period.
In order to provide comparability between periods presented, "interest income", "loss on sale of business", "loss on debt extinguishment and termination of derivative instruments" and "other income (expense), net" have been combined within "other expense, net" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period. See Note 8 to these consolidated financial statements for additional details.
In order to provide comparability between periods presented, capitalized software development costs have been presented separately as "software development costs, net" in the previously reported consolidated balance sheet to conform to presentation of the current period. Prior to separate presentation, substantially all of the net book value of capitalized software development costs had been recorded within "other assets".
Reclassifications were also made to prior period goodwill and segment disclosures to reflect changes in our reporting units and reportable segments. See Note 7 and Note 16 to these consolidated financial statements for additional discussion.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets andincluding goodwill, income taxes, business combinations, stock-based compensation, the provision for income taxes, capitalization of software development costs, our allowanceallowances for sales returns and doubtful accounts, deferred sales commissions and professional services costs, valuation of derivative instruments accounting for business combinations and loss contingencies. Changes in the
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.
Revenue recognition
Our revenue is primarily generated from the following sources: (i) charging for the use of our software productssolutions in acloud-based and hosted environment;environments; (ii) selling perpetual licenses of ourproviding software products;maintenance and support services; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; and (iv) providing transaction and payment processing services; and (v) selling perpetual licenses of our software maintenance and support services.solutions.
We recognize revenue when all of the following conditions are met:
•Persuasive evidence of an arrangement exists;
•The productssolutions or services have been delivered;
•The fee is fixed or determinable; and
•Collection of the resulting receivable is probable.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Determining whether and when these criteria have been met can require significant judgment and estimates. We deem acceptance of an agreementa contract to be evidence of an arrangement. Delivery of our services occurs when the services have been performed. Delivery of our productssolutions occurs when the productsolution is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical agreementsarrangements do not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection. Revenue is recognized net of actual and estimated sales returns and allowances.
We follow guidance provided in ASC 605-45, Principal Agent Considerations, which states that determining whether a company should recognize revenue based on the gross amount billed to a customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in the evaluation.
Subscriptions
We provide cloud-based subscription solutions to customers which are available for use in hosted application arrangements without licensing perpetual rights to the software (“hosted applications”). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the arrangement, which generally ranges from one to three years. Any revenue related to upfront activation or set-up fees is deferred and recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs related to upfront activation or set-up activities for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed ratably over the estimated period that the customer benefits from the related hosted application.
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services)solutions (“hosting services”). Revenue from hosting services, online training programs as well as subscription-based analytic services such as data enrichment services,and data management services, and online training programs, is recognized ratably beginning on the activation date over the term of the agreement,arrangement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related hosting service. The estimated period of benefit is evaluated on an annual basis using historical customer retention information by productsolution or service.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (VSOE)(“VSOE”) of fair value if available; (ii) third-partythird-
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
party evidence (TPE)(“TPE”) if VSOE is not available; and (iii) best estimate of selling price (BESP)(“BESP”) if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
We offer certain payment processing services with the assistance of third-party vendors. WhenIn general, when we are the primary obligorprincipal in a transaction have latitudebased on the predominant weighting of factors identified in establishing prices and are the party determining the service specifications or have several but not all of these indicators,ASC 605-45, we record the revenue and costrelated costs on a gross basis. Otherwise, we record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed to the customer and record the net amount as revenue.
Revenue from transaction processing services is recognized when the service is provided and the amounts are determinable. Revenue directly associated with processing donations for customers are included in subscriptions revenue.
Maintenance
We recognize revenue from maintenance services ratably over the term of the arrangement, generally one year at contract inception with annual renewals thereafter. Maintenance contracts are at rates that vary according to the level of the maintenance program associated with the software solution and are generally renewable annually. Maintenance contracts may also include the right to unspecified solution upgrades on an if-and-when available basis. Certain incremental support services are sold in prepaid units of time and recognized as revenue upon their usage.
Services
We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are delivered.
We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.
We sell fixed-rate programs, which permit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue in those cases is recognized ratably over the contract period. Additionally, we sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training.
License fees
We sell perpetual software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to each of the elements in these arrangements using the residual method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on VSOE of fair value of the various elements. We determine VSOE of fair value of the various elements using different methods. VSOE of fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreementsarrangements with customers, which demonstrate a consistent relationship of maintenance pricing as a percentage of the contractual license fee. VSOE of fair value of professional services and other productssolutions and services is based on the average selling price of these same productssolutions and
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
services to other customers when sold on a stand-alone basis. Any remaining revenue is allocated to the delivered elementselement, which is normally the software license in the arrangement. In general, revenue is recognized for software licenses upon delivery to our customers.
When a software license is sold with software customization services, generally the services are to provide the customer support for assistance in creating special reports and other enhancements that will assist with efforts to improve operational efficiency and/or help to support business process improvements. These services are generally not essential to the functionality of the software.software and the related revenues are recognized either as the services are delivered or upon completion. However, when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services using the percentage-of-completion method.
We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed.
We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide customers the right
Blackbaud, Inc.
Notes to updates to the lists during the contract period, revenue is recognized ratably over the contract period.consolidated financial statements (continued)
We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training. Additionally, we sell fixed-rate programs, which permit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over the contract period.
Maintenance
We recognize revenue from maintenance services ratably over the contract term, typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts may also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.
Deferred revenue
To the extent that our customers are billed for the above-describedabove described solutions and services in advance of delivery, we record such amounts in deferred revenue. For example, our subscription and maintenance customers are generally billed one year in advance.
Fair value measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the exchange price that would be received upon purchase ofto sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. An active market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - Quoted prices for identical assets or liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial assets'asset's or liabilities'liability's level within the fair value hierarchy are determined as of the end of a reporting period. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Financial liabilities measured at fair value on a recurring basis consisted of the following, as of: |
| | | | | | | | | | | | | | | | |
| | | Fair value measurement using | | | |
| (in thousands) | | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Fair value as of December 31, 2013 | | | | | | | | |
| Financial Liabilities: | | | | | | | | |
Derivative instruments(1) | | — |
| | 427 |
| | — |
| | 427 |
|
| Total financial liabilities | | $ | — |
| | $ | 427 |
| | $ | — |
| | $ | 427 |
|
| | | | | | | | | |
| Fair value as of December 31, 2012 | | | | | | | | |
| Financial liabilities: | | | | | | | | |
Derivative instruments(1) | | — |
| | 1,296 |
| | — |
| | 1,296 |
|
| Total financial liabilities | | $ | — |
| | $ | 1,296 |
| | $ | — |
| | $ | 1,296 |
|
| |
(1) | The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy. |
We believe the carrying amounts of our cash and cash equivalents, donor restricted cash, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and donations payable approximate their fair values at December 31, 2013 and 2012, due to the immediate or short-term maturity of these instruments.
Financial assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets, goodwill and our credit facility. Intangible assets and goodwill are recognized at fair value in the period in which an acquisition is completed, or when they are considered to be impaired. We believe the carrying amount of our credit facility approximates its fair value at December 31, 2013 and 2012, as the debt bears interest rates that approximate market. As LIBOR rates are observable at commonly quoted intervals, it is classified within Level 2 of the fair value hierarchy. There were no non-recurring fair value adjustments recorded during the years ended December 31, 2013 or 2012.
Derivative instruments
We use derivative instruments to manage interest rate risk. We view derivative instruments as risk management tools and do not use them for trading or speculative purposes. Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
We record all derivative instruments on our consolidated balance sheets at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized currently in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Ineffective portions of the changes in the fair value of cash flow hedges are recognized currently in earnings. See Note 10 of these consolidated financial statements for further discussion of our derivative instruments.
Reimbursable travel expense
We expense reimbursable travel costs as incurred and include them in cost of license fees and other revenue. The reimbursement of these costs by our customers is included in license fees and other revenue.
Sales taxes
We present sales taxes and other taxes collected from customers and remitted to governmental authorities on a net basis and, as such, exclude them from revenues.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Shipping and handling
We expense shipping and handling costs as incurred and include them in cost of license fees and other revenue. The reimbursement of these costs by our customers is included in license fees and other revenue.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Cash and cash equivalents
We consider all highly liquid investments purchased with a maturity of three months or less and cash items in transit to be cash equivalents.
Donor restrictedRestricted cash and donations payabledue to customers; Due to customers
Restricted cash due to customers consists of donationsmonies collected by us and payable to our customers, net of the associated transaction fees earned. Monies associated with donations payableamounts due to customers are segregated in a separate bank account and used exclusively for the payment of donations payable.amounts due to customers. This usage restriction is either legally or internally imposed and reflects our intention with regard to such deposits.
Concentration of credit risk
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, donor restricted cash due to customers and accounts receivable. Our cash and cash equivalents and donor restricted cash due to customers are placed with high credit-quality financial institutions. Our accounts receivable are derived from sales to customers who primarily operate in the nonprofit sector. With respect to accounts receivable, we perform ongoing evaluations of our customers and maintain an allowance for doubtful accounts based on historical experience and our expectations of future losses. As of and for the years ended December 31, 2013, 20122015, 2014 and 2011,2013, there were no significant concentrations with respect to our consolidated revenues or accounts receivable.
Property and equipment
We record property and equipment assets at cost and depreciate them over their estimated useful lives using the straight-line method. Property and equipment subject to capital leases are depreciated over the lesser of the term of the lease or the estimated useful life of the asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income.earnings. Repair and maintenance costs are expensed as incurred.
Construction-in-progress represents purchases of computer software and hardware associated with new internal system implementation projects which had not been placed in service at the respective balance sheet dates. We transferred these assets to the applicable property category on the date they are placed in service. There was no capitalized interest applicable to construction-in-progress for the years ended December 31, 20132015, 2014 and 2012.2013.
Business combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to, estimates about: future expected cash flows from customer contracts, proprietary technology and non-compete agreements; the acquired company's brand awareness and market position, assumptions about the period of time the brand will continue to be valuable; as well as expected costs to develop theany in-process research and development into commercially viable productssolutions and estimated cash flows from the projects when completed, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate,unpredictable, and unanticipated events and changes in circumstances may occur.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Goodwill
Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by us in a business combination. Goodwill is allocated to reporting units and tested annually for impairment. Our reporting units are our
Blackbaud, Inc.
Notes tothese consolidated financial statements (continued)
four reportable segments and our payment processing operations.statements. We will also test goodwill for impairment between annual impairment tests if indicators of potential impairment exist. WeThe quantitative impairment test is a two-step process that first compares the fair values of the reporting units with their respective carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a potential impairment is indicated, and we then perform the second step to determine the amount of any impairment loss by comparing the implied fair value of the affected reporting unit's goodwill with the carrying amount of its goodwill. If the carrying amount of the affected reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to that excess. In 2015, we performed the quantitative impairment test which indicated that the estimated fair values of the reporting units significantly exceeded their respective carrying values; therefore, the second step of the impairment test was not required to be performed.
In each of 2014 and 2013, we performed the optional qualitative assessment of the goodwill assigned to each of our reporting units. When a qualitative assessment is performed, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Significant judgment is required in the assessment of qualitative factors including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. To the extent the qualitative factors indicate that there is more than 50% likelihood that the fair value is less than the carrying amount, we compare the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, impairment is indicated and we will recognize an impairment loss in an amount equal to the difference. As a result of our 2014 and 2013 qualitative assessments of goodwill assigned to each of our reporting units, we concluded it was not more likely than not that the fair value of each reporting unit was less than its carrying value, respectively.
There was no impairment of goodwill during 2013, 20122015, 2014 or 2011.2013.
Intangible assets
We amortize finite-lived intangible assets over their estimated useful lives as follows.
|
| | | | | |
| | Basis of amortization | | Amortization period (in years) |
|
| Customer relationships | | Straight-line and accelerated(1) | | 4-15 |
4-17 |
| Marketing assets | | Straight-line | | 1-8 |
|
| Acquired software and technology | Straight-line and accelerated(2) | Straight-line | | 1-10 |
4-10 |
| Non-compete agreements | | Straight-line | | 1-5 |
2-5 |
| Database | | Straight-line | | 8 |
|
| |
| (1) | Certain of the customer relationships are amortized on an accelerated basis. |
| |
| (2) | Certain of the acquired software and technology assets are amortized on an accelerated basis. |
Indefinite-lived intangible assets consist of tradenames.trade names. We evaluate the estimated useful lives and the potential for impairment of finite and indefinite-lived intangible assets on an annual basis, or more frequently if events or circumstances indicate revised estimates of useful lives may be appropriate or that the carrying amount may not be recoverable. If the carrying amount is no longer recoverable based upon the undiscounted cash flows of the asset, the amount of impairment is the difference between the carrying amount and the fair value of the asset. Substantially all of our intangible assets were acquired in business combinations. There was no impairment of acquired intangible assets during 2013, 20122015, 2014 or 2011.2013.
Cost method investments consist of investments in privately held companies where we do not have the ability
Blackbaud, Inc.
Notes to exercise significant influence or have control over the investee. We record these investments at cost and periodically test them for other-than-temporary impairment. During the years ended December 31, 2012 and 2011, we determined that our cost method investment had other-than-temporary impairment based on the projected liquidity of the investment. We used the income approach to determine the fair value of the investment in determining the impairment. An impairment loss of $0.2 million and $1.8 million was recorded in income from operations for the years ended December 31, 2012 and 2011, respectively. There were no remaining cost method investments at December 31, 2013 and 2012.consolidated financial statements (continued)
Deferred financing costs
Deferred financing costs included in other assets represent the direct costs of entering into both our revolving credit facility in June 2011 and our amended and restated credit facility in February 2012.2014 and portions of the unamortized deferred financing costs from prior facilities. These costs are amortized over the term of the credit facility as interest expense using the effective interest method. The deferred financing fees are being amortized over the term of the credit facility.
Stock-based compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense over the requisite service period, which is the vesting period. We determine the fair value of stock options and stock appreciation rights using a Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of our stock over the life of the award. We determine the fair value of awards that contain market conditions using a Monte Carlo simulation model. Changes to these estimates would result in different fair values of awards.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
We estimate the number of awards that will be forfeited and recognize expense only for those awards that we expect will ultimately vest. Significant judgment is required in determining the adjustment to compensation expense for estimated forfeitures. Compensation expense in a period could be impacted, favorably or unfavorably, by differences between estimated and actual forfeitures. Income tax benefits resulting from the vesting and exercise of stock-based compensation awards are recognized in the period the unit or award is vested or option or right is exercised to the extent expense has been recognized.
Income taxes
We make estimates and judgments in accounting for income taxes. The calculation of the income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made.
We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to reduceincrease income tax expense, thereby increasingreducing net income in the period such determination was made.
We measure and recognize uncertain tax positions. To recognize such positions we must first determine if it is more likely than not that the position will be sustained onupon audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Significant judgment is required in the identification and measurement of uncertain tax positions.
Foreign currency
Net assets recorded in a foreign currency are translated at the exchange rate on the balance sheet date. Revenue and expense items are translated at theusing an average of monthly exchange rate for the year.rates. The resulting translation adjustments are recorded in accumulated other comprehensive income.
Gains and losses resulting from foreign currency transactions denominated in currency other than the functional currency are recorded at the approximate rate of exchange at the transaction date in other expense, net. For each ofthe year ended December 31, 2015, we recorded an insignificant net foreign currency gain. For the years ended December 31, 20132014 and 2012,2013, we recorded insignificant net foreign currency losseslosses.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Research and development
Research and development costs are expensed as incurred. These costs include human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and certain other expenses related to researching and developing new products,solutions, and allocated depreciation, facilities and IT support costs.
Software development costs
We incur certain costs associated with the development of internal-use software, and software developedwhich are primarily related to activities performed to develop our cloud-based solutions, which are accounted for as internal-use software. Thesolutions. Internal and external costs incurred in the preliminary stagesproject stage of internal-use software development are expensed as incurred. Once an applicationthe software being developed has reached the application development stage, qualifying internal costs including payroll and payroll-related costs of employees who are directly associated with and devote time to the software project as well as external direct costs if directof materials and incremental,services are capitalized untilcapitalized. Capitalization ceases at the point at which the developed software is substantially complete and ready for its intended use. Capitalization ceasesuse, which is typically upon completion of all substantial testing. We also capitalizeQualifying costs capitalized during the application development stage include those related to specific upgrades and enhancements when it is probable the expendituresthat those costs incurred will result in additional functionality. CapitalizedOverhead costs, for internal-use softwareincluding general and administrative costs, as well as maintenance, training and all other costs associated with post-implementation stage activities are recordedexpensed as part of computer softwareincurred. In addition, internal costs within propertythat cannot be reasonably separated between maintenance and equipment. Capitalizedrelatively minor upgrades and enhancements are expensed as incurred. Historically, we have also incurred and capitalized costs for software developed for our cloud-based solutions are recorded to other assets. Internal-use software is amortized on a straight line basis over its estimated useful life, which is generally three years.
Although our development efforts are primarily focused on our cloud-based solutions, we also incur cost in connection with the development of certain of our software productssolutions licensed to customers on a perpetual basis, which are accounted for as costs of
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
software to be sold, leased or otherwise marketed. Costs for the developmentmarketed; however, costs capitalized related to those solutions were insignificant as of software to be sold are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Capitalized software development costs include direct labor costsDecember 31, 2015 and fringe benefit costs attributed to programmers, software engineers and quality control teams working on products after they reach technological feasibility but before they are generally available to customers for sale. 2014.
Capitalized software development costs are typically amortized on a straight line basis over the software asset's estimated productuseful life, on a straight-line basis, which is generally three years.
Management evaluates We evaluate the useful lives of these assets on an annual basis and teststest for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. During the year ended December 31, 2015, we recorded insignificant impairment charges against previously capitalized software development costs. During the year ended December 31, 2014, we recorded impairment charges of $1.6 million against certain previously capitalized software development costs. The charges reduced the carrying value of the certain previously capitalized software development costs to zero and are reflected in research and development expense. The impairment charges resulted from obtaining software solutions through the acquisitions of Smart Tuition in 2015 and WhippleHill in 2014, respectively, and our determination that it was no longer probable that certain internal-use software that was previously being developed would be placed into service. There were no impairmentsimpairment charges during the yearsyear ended December 31, 2013, 2012 or 2011. At December 31, 2013 and 2012, software development costs, net of accumulated amortization, were $4.2 million and $2.0 million, respectively, and are included in other assets on the consolidated balance sheets. Amortization expense related to software development costs was $1.0 million, $0.4 million and $0.1 million for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in both cost of license fees and cost of subscriptions.2013.
Sales returns and allowance for doubtful accounts
We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns and credits are charged against the related revenue items.
Accounts receivable are recorded at original invoice amounts less an allowance for doubtful accounts, an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including historical bad debt experience, the general economic environment, the need for specific customer reserves and the aging of our receivables. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for doubtful accounts could be required. Accounts are written off after all means of collection are exhausted and recovery is considered remote. Provisions for doubtful accounts are recorded in general and administrative expense.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Below is a summary of the changes in our allowance for sales returns.
| | Years ended December 31, (in thousands) | | Balance at beginning of year |
| | Provision/adjustment |
| | Write-off |
| | Balance at end of year |
| Balance at beginning of year |
| Provision/adjustment |
| Write-off |
| Balance at end of year |
|
| 2015 | | $ | 4,185 |
| $ | 5,834 |
| $ | (5,588 | ) | $ | 4,431 |
|
| 2014 | | 5,158 |
| 4,407 |
| (5,380 | ) | 4,185 |
|
| 2013 | | $ | 7,730 |
| | $ | 4,132 |
| | $ | (6,704 | ) | | $ | 5,158 |
| 7,730 |
| 4,132 |
| (6,704 | ) | 5,158 |
|
| 2012 | | 3,652 |
| | 8,914 |
| | (4,836 | ) | | 7,730 |
| |
| 2011 | | 2,263 |
| | 5,619 |
| | (4,230 | ) | | 3,652 |
| |
Below is a summary of the changes in our allowance for doubtful accounts.
| | Years ended December 31, (in thousands) | | Balance at beginning of year |
| | Provision/adjustment |
| | Write-off |
| | Balance at end of year |
| Balance at beginning of year |
| Provision/adjustment |
| Write-off |
| Balance at end of year |
|
| 2015 | | $ | 354 |
| $ | 699 |
| $ | (541 | ) | $ | 512 |
|
| 2014 | | 455 |
| 777 |
| (878 | ) | 354 |
|
| 2013 | | $ | 816 |
| | $ | 775 |
| | $ | (1,136 | ) | | $ | 455 |
| 816 |
| 775 |
| (1,136 | ) | 455 |
|
| 2012 | | 261 |
| | 976 |
| | (421 | ) | | 816 |
| |
| 2011 | | 424 |
| | 27 |
| | (190 | ) | | 261 |
| |
Sales commissions
We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. To the extent that these commissions relate to revenue not yet recognized, the amounts are recorded as deferred sales commission costs. Subsequently, the commissions are recognized as sales and marketing expense as the revenue is recognized.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Below is a summary of the changes in our deferred sales commission costs included in prepaid expenses and other current assets.
| | Years ended December 31, (in thousands) | | Balance at beginning of year |
| | Additions |
| | Expense |
| | Balance at end of year |
| Balance at beginning of year |
| Additions |
| Expense |
| Balance at end of year |
|
| 2015 | | $ | 22,630 |
| $ | 55,934 |
| $ | (48,423 | ) | $ | 30,141 |
|
| 2014 | | 20,088 |
| 24,615 |
| (22,073 | ) | 22,630 |
|
| 2013 | | $ | 18,142 |
| | $ | 20,487 |
| | $ | (18,541 | ) | | $ | 20,088 |
| 18,142 |
| 20,487 |
| (18,541 | ) | 20,088 |
|
| 2012 | | 16,452 |
| | 19,693 |
| | (18,003 | ) | | 18,142 |
| |
| 2011 | | 11,548 |
| | 18,415 |
| | (13,511 | ) | | 16,452 |
| |
Advertising costs
We expense advertising costs as incurred, which was $1.1$2.3 million,, $1.2 $1.6 million and $1.1 million for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively.
Restructuring costs
Restructuring costs include charges for the costs of exit or disposal activities. The liability for costs associated with exit or disposal activities is measured initially at fair value and only recognized when the liability is incurred.
Impairment of long-lived assets
We review long-lived assets for impairment when events change or circumstances indicate the carrying amount may not be recoverable. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the business or asset acquired is used or significant adverse change in the business climate. If such events or changes in circumstances are present, the undiscounted cash flow method is used to determine whether the asset is impaired. No impairment of long-lived assets resultedoccurred in 2013, 20122015 or 2011.2014 except for the impairment of previously capitalized software development costs discussed above. No impairment of long-lived assets occurred in 2013.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Contingencies
We are subject to the possibility of various loss contingencies in the normal course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us. Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period.
Earnings per share
We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding.outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares then outstanding.outstanding during the period. Diluted earnings per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the "treasury“treasury stock method"method” except when the effect is not anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options settlement ofand stock appreciation rights and vesting of restricted stock awards and units.
Recently adopted accounting pronouncements
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-17, Income Taxes (Topic 740)-Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. As a result, each jurisdiction will now only have one net non-current deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction. ASU 2015-17 is effective for public business entities in fiscal years beginning after December 15, 2016; however, early adoption is permitted. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively to all periods presented. We early adopted ASU 2015-17, utilizing the prospective application as permitted, and therefore have not retrospectively adjusted prior period information.
Recently issued accounting pronouncements
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 requires for acquirers in business combinations to recognize adjustments to provisional amounts identified during measurement periods in the reporting periods in which adjusted amounts are determined. The update requires that acquirers record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, resulting from changes in provisional amounts, calculated as if the accounting had been completed at acquisition date. The update also requires separate income statement presentation or note disclosure of amounts recorded in current period earnings by line item that would have been recorded in previous reporting periods if the provisional amount adjustments had been recognized at the acquisition date (requirements to retrospectively account for those adjustments have been eliminated). The guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after its effective date, with earlier application permitted for financial statements that have not been issued. We will adopt ASU 2015-16 effective January 1, 2016 and apply this guidance where applicable in any future business combinations.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05). The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. ASU 2015-05 will be effective for the Company in fiscal year 2016. An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table sets forthafter the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | |
| | | Year ended December 31, | |
| (in thousands, except share and per share amounts) | | 2013 |
| | 2012 |
| | 2011 |
|
| Numerator: | | | | | | |
| Net income | | $ | 30,472 |
| | $ | 6,583 |
| | $ | 33,220 |
|
| Denominator: | | | | | | |
| Weighted average common shares | | 44,684,812 |
| | 44,145,535 |
| | 43,522,563 |
|
| Add effect of dilutive securities: | | | | | | |
| Employee stock-based compensation | | 736,328 |
| | 546,310 |
| | 626,491 |
|
| Weighted average common shares assuming dilution | | 45,421,140 |
| | 44,691,845 |
| | 44,149,054 |
|
| Earnings per share: | | | | | | |
| Basic | | $ | 0.68 |
| | $ | 0.15 |
| | $ | 0.76 |
|
| Diluted | | $ | 0.67 |
| | $ | 0.15 |
| | $ | 0.75 |
|
The following shares underlying stock-based awards were not included in diluted earnings per share because their inclusion would have been anti-dilutive:
|
| | | | | | | | | |
| | | Year ended December 31, | |
| | | 2013 |
| | 2012 |
| | 2011 |
|
| Shares excluded from calculations of diluted EPS | | 116,438 |
| | 434,050 |
| | 422,418 |
|
Recently adopted accounting pronouncements
Effectiveeffective date or (2) retrospectively. We will adopt ASU 2015-05 effective January 1, 2013, we adopted ASU 2013-02, Comprehensive Income (Topic 220), Reporting2016 on a prospective basis and do not expect that the implementation of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires that entities provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The adoption of ASU 2013-02 did notthis standard will have a material impact on our consolidated financial statements. We have
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 sets forth a requirement that debt issuance costs related to a recognized debt liability be presented in the amounts reclassified out of accumulated other comprehensive income by component in Note 10 and Note 14 to our consolidated financial statements.
Effective January 1, 2013, we adopted ASU 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impairedbalance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this update. ASU 2015-03 will be effective for the Company in fiscal year 2016. An entity should apply the new guidance on a retrospective basis, for determining whether itwherein the balance sheet of each individual period presented is necessaryadjusted to performreflect the quantitative impairment testperiod-specific effects of applying the new guidance. We are currently required by ASC Topic 350-30 on general intangibles other than goodwill. Theevaluating the impacts that implementation of this standard will have upon adoption but do not expect that the implementation of ASU 2012-02 did notthis standard will have a material impact on our consolidated financial statements.balance sheets.
Recently issued accounting pronouncements
In July 2013,May 2014, the FASB issued ASU 2013-11,2014-09, Income TaxesRevenue from Contracts with Customers (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists606). Under ASU 2013-11, an unrecognized tax benefit, or2014-09 outlines a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax assetsingle comprehensive model for a net operating loss carryforward or a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entityentities to use in accounting for revenue arising from contracts with customers and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presentedwill replace most existing revenue recognition guidance in the financial statements as a liability and should not be combined with deferred tax assets.GAAP when it becomes effective. ASU 2013-11 is2014-09 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016. An entity should apply ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized as an adjustment to the opening balance of retained earnings at the date of initial application. In July 2015, the FASB decided to delay the effective date of the new standard for one year. The new standard now requires application no later than annual reporting periods beginning after December 15, 2017, including interim reporting periods therein; however, public entities are permitted to elect to early adopt the new standard as of the original effective date. We expect the adoption of ASU 2014-09 will impact our consolidated financial statements. We are currently evaluating implementation methods and the extent of the impact that implementation of this standard will have upon adoption.
3. Business combinations
2015 Acquisitions
Smart Tuition
On October 2, 2015, we completed our acquisition of all of the outstanding equity, including all voting equity interests, of Smart, LLC (“Smart Tuition”). Smart Tuition is a leading provider of payment software and services for private schools and parents. The acquisition of Smart Tuition further expanded our offerings in the K-12 technology sector. We acquired Smart Tuition for $187.8 million in cash, net of closing adjustments. As a result of the acquisition, Smart Tuition has become a wholly-owned subsidiary of ours. We included the operating results of Smart Tuition as well as goodwill arising from the acquisition in our consolidated financial statements within GMBU from the date of acquisition. For the year ended December 31, 2015, Smart Tuition's total revenue and operating income included in our consolidated financial statements was $8.5 million and $0.9 million, respectively. During the year ended December 31, 2015, we incurred acquisition-related expenses associated with the acquisition of Smart Tuition of $3.7 million, which were recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2015 acquisition date.
On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of Smart Tuition. Following the draw down, approximately $261.0 million was outstanding under the revolving credit loans with approximately $85.0 million of capacity unutilized when including issued letters of credit. Following the closing of the Smart Tuition transaction on October 2, 2015, the principal amount outstanding on the term loan was approximately $168.0 million, resulting in a total amount outstanding on the revolving credit loans and term loan of approximately $429.0 million after the acquisition.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
interim periods within those years, beginning after December 15, 2013. Early adoptionThe preliminary purchase price allocation is permitted. We do not anticipate anybased upon a preliminary valuation of assets and liabilities and the estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the acquisition date. The assets and liabilities pending finalization include the valuation of acquired intangible assets, the assumed deferred revenue and deferred taxes. Differences between the preliminary and final valuation could have a material impact from the adoption of ASU 2013-11.
3. Business combinations
2012 Acquisitions
Convio
In May 2012, we completedon our acquisition of Convio, Inc. (Convio), for approximately $329.8 million in cash consideration and the assumption of unvested equity awards valued at approximately $5.9 million, for a total of $335.7 million. Convio was a leading provider of on-demand constituent engagement solutions that enabled nonprofit organizations to more effectively raise funds, advocate for change and cultivate relationships. The acquisition of Convio expands our subscription and online offerings and accelerates our evolution to a subscription-based revenue model. As a result of the acquisition, Convio has become a wholly-owned subsidiary of ours. Thefuture results of operations of Convio are included in our consolidatedand financial statements from the date of acquisition. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business. During the year ended December 31, 2012, we incurred $6.4 million of acquisition-related costs associated with the acquisition of Convio, which were recorded in general and administrative expense.
We financed the acquisition of Convio through cash on hand and borrowings of $312.0 million under our credit facility. In connection with closing the Convio acquisition, we designated Convio as a material domestic subsidiary under our credit facility. As a material domestic subsidiary, Convio guarantees amounts outstanding under the credit facility and pledges certain stock of its subsidiaries.
position. The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed: | | | (in thousands) | | |
| Net working capital, excluding deferred revenue | $ | 57,062 |
| $ | 550 |
|
| Property and equipment | 6,591 |
| 2,457 |
|
| Other long term assets | 75 |
| |
| Deferred revenue | (7,847 | ) | (6,500 | ) |
| Deferred tax liability | (33,181 | ) | |
| Intangible assets and liabilities | 139,650 |
| |
| Deferred tax asset | | 2,637 |
|
| Intangible assets | | 97,800 |
|
| Goodwill | 173,324 |
| 90,558 |
|
| | $ | 335,674 |
| |
Total purchase price(1) | | $ | 187,502 |
|
(1) The purchase price differs from the net cash outlay of $187.8 million due to certain insignificant acquisition-related expenses included therein.
The estimated fair value of accounts receivable acquired approximates the contractual value of $12.8 million.$3.0 million. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of Convio and the opportunities for expected synergies. NoneSmart Tuition, all of which was assigned to our GMBU reporting segment. Approximately $86.5 million of the goodwill arising in the acquisition is deductible for income tax purposes.
The Smart Tuition acquisition resulted in the identification of the following identifiable intangible assets: |
| | | | |
| | Intangible assets acquired |
| Weighted average amortization period |
| Smart Tuition | (in thousands) |
| (in years) |
| Customer relationships | $ | 72,300 |
| 17 |
| Marketing assets | 1,200 |
| 3 |
| Acquired technology | 22,100 |
| 7 |
| Non-compete agreements | 2,200 |
| 5 |
| Total intangible assets | $ | 97,800 |
| 14 |
The estimated amountfair values of goodwill assignedthe finite-lived intangible assets were based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate which included the Enterpriserelief-from-royalty method, incremental cash flow method including the with and without method and excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer Business Unitrelationships and the General Markets Business Unit reporting segments was $124.8 millionacquired technology are being amortized on an accelerated basis while marketing assets and $48.5 million, respectively.non-compete agreements are being amortized on a straight-line basis.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The acquisition resulted in the identification of the following identifiable intangible assets: |
| | | | | |
| | Intangible assets acquired |
| | Weighted average amortization period |
| | (in thousands) |
| | (in years) |
| Customer relationships | $ | 53,000 |
| | 15 |
| Marketing assets | 7,800 |
| | 7 |
| Acquired technology | 69,000 |
| | 8 |
| In-process research and development | 9,100 |
| | 7 |
| Non-compete agreements | 1,440 |
| | 2 |
| Unfavorable leasehold interests | (690 | ) | | 7 |
| | $ | 139,650 |
| | |
The fair value of the intangible assets was based on the income approach, cost approach, relief of royalty rate method and excess earnings methods. Customer relationships are amortized on an accelerated basis. Marketing assets, acquired technology and non-compete agreements are amortized on a straight-line basis. In-process research and development related to proprietary technology was placed into service subsequent to the time of acquisition and is amortized on a straight-line basis since the time of being placed into service over a weighted average amortization period of seven years.
The following unaudited pro forma condensed combined consolidated results of operations assume that the acquisition of ConvioSmart Tuition occurred on January 1, 2011.2014. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, 2011,2014, or of the results that may occur in the future. The unaudited pro forma information reflects adjustments for amortization of intangibles related to the fair value adjustments of the assets acquired, write-down of acquired deferred revenue to fair value, additional interest expense related to the financing of the transaction and the related tax effects of the adjustments.
| | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands, except per share amounts) | 2012 |
| | 2011 |
| 2015 |
| 2014 |
|
| Revenue | $ | 476,887 |
| | $ | 451,221 |
| $ | 666,131 |
| $ | 587,459 |
|
| Net income | $ | 116 |
| | $ | 27,697 |
| $ | 26,334 |
| $ | 17,952 |
|
| Basic earnings per share | $ | — |
| | $ | 0.64 |
| $ | 0.58 |
| $ | 0.40 |
|
| Diluted earnings per share | $ | — |
| | $ | 0.63 |
| $ | 0.57 |
| $ | 0.39 |
|
20112014 Acquisitions
DuringMicroEdge
On October 1, 2014, we completed our acquisition of all of the outstanding equity, including all voting equity interests of MicroEdge Holdings, LLC (“MicroEdge”). MicroEdge is a provider of software solutions that enable the worldwide giving community to organize, simplify and measure their acts of charitable giving. The acquisition of MicroEdge expanded our offerings in the philanthropic giving sector with its comprehensive solutions for grant-making, corporate social responsibility and foundation management. We acquired MicroEdge for an aggregate purchase price of $159.8 million in cash. As a result of the acquisition, MicroEdge has become a wholly-owned subsidiary of ours. The operating results of MicroEdge have been included in our consolidated financial statements from the date of acquisition within the ECBU. For the year ended December 31, 2011,2015, MicroEdge's total revenue was $31.9 million. Because we have integrated a substantial amount of MicroEdge's operations into ours, it is impracticable to determine the operating costs attributable solely to the acquired business. We financed the acquisition of MicroEdge through cash on hand and borrowings of $140.0 million under our existing credit facility.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:two entities |
| | | |
| (in thousands) | |
| Net working capital, excluding deferred revenue | $ | 9,442 |
|
| Property and equipment | 1,371 |
|
| Other long-term assets | 992 |
|
| Deferred revenue | (11,670 | ) |
| Deferred tax liability | (4,509 | ) |
| Intangible assets | 90,200 |
|
| Goodwill | 73,960 |
|
| Total purchase price | $ | 159,786 |
|
The estimated fair value of accounts receivable acquired approximates the contractual value of $6.3 million. The estimated goodwill recognized is attributable primarily to the opportunities for total considerationexpected synergies from combining operations and the assembled workforce of $24.2 million,MicroEdge, all of which was paidassigned to our ECBU reporting segment. Approximately $37.4 million of the goodwill arising in cash.the acquisition is deductible for income tax purposes. We finalized the purchase price allocation for MicroEdge, including the valuation of assets acquired and liabilities assumed, during the third quarter of 2015. During the nine months ended September 30, 2015, we recorded a measurement period adjustment to the estimated fair value of the deferred tax liability following the receipt of new information. The adjustment resulted in a decrease in
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
the deferred tax liability of $1.6 million, with the corresponding offset to goodwill. No historical financial information was retrospectively revised as the measurement period adjustment was not material.
The MicroEdge acquisition resulted in the identification of the following identifiable intangible assets: |
| | | | |
| | Intangible assets acquired |
| Weighted average amortization period |
| MicroEdge | (in thousands) |
| (in years) |
| Customer relationships | $ | 61,200 |
| 13 |
| Marketing assets | 2,500 |
| 7 |
| Marketing assets | 1,600 |
| Indefinite |
| Acquired technology | 24,300 |
| 7 |
| Non-compete agreements | 600 |
| 3 |
| Total intangible assets | $ | 90,200 |
| 11 |
The estimated fair values of the finite-lived intangible assets were based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate which included the relief-from-royalty method, incremental cash flow method including the with and without method and excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships and certain of the acquired technology are being amortized on an accelerated basis. Marketing assets, non-compete agreements and certain of the acquired technology are being amortized on a straight-line basis.
The following unaudited pro forma condensed combined consolidated results of operations assume that the acquisition of MicroEdge occurred on January 1, 2013. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, 2013, or of the results that may occur in the future. The unaudited pro forma information reflects adjustments for amortization of intangibles related to the fair value adjustments of the assets acquired, write-down of acquired entitiesdeferred revenue to fair value, additional interest expense related to the financing of the transaction and the related tax effects of the adjustments.
|
| | | | | | |
| | Years ended December 31, | |
| (in thousands, except per share amounts) | 2014 |
| 2013 |
|
| Revenue | $ | 592,930 |
| $ | 528,095 |
|
| Net income | $ | 26,944 |
| $ | 25,300 |
|
| Basic earnings per share | $ | 0.60 |
| $ | 0.57 |
|
| Diluted earnings per share | $ | 0.59 |
| $ | 0.56 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
WhippleHill
On June 16, 2014, we acquired all of the outstanding stock of WhippleHill Communications, Inc. (“WhippleHill”), a privately held company based in New Hampshire, for $35.0 million in cash. WhippleHill is a provider of cloud-based solutions designed exclusively to serve K-12 private schools. The acquisition of WhippleHill expanded our offerings in the K-12 technology sector. The operating results of WhippleHill have been included in our consolidated financial statements from the date of acquisition. Pro forma results ofBecause we have integrated WhippleHill's operations have not been presented becauseinto ours, including our historical K-12 solutions, it is impracticable to determine the effects of these business combinations, individuallyrevenue and inoperating costs attributable solely to the aggregate, were not material to our consolidated results of operations. acquired business.
We recorded the purchase price allocation based on the estimated fair value$22.2 million of thefinite-lived intangible assets, acquired and liabilities assumed. None$9.3 million of the goodwill arising from the acquisitions completed in 2011(all of which is deductible for income tax purposes.purposes) and $3.5 million of net tangible assets acquired and liabilities assumed associated with the WhippleHill acquisition based on our determination of estimated fair values. Included in net tangible assets acquired and liabilities assumed was $4.6 million of acquired accounts receivable, for which fair value was estimated to approximate the contractual value. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of WhippleHill, all of which was assigned to our GMBU reporting segment. We finalized the purchase price allocation for WhippleHill, including the valuation of assets acquired and liabilities assumed, during the second quarter of 2015.
The WhippleHill acquisition resulted in the identification of the following identifiable finite-lived intangible assets: |
| | | | |
| | Intangible assets acquired |
| Weighted average amortization period |
| WhippleHill | (in thousands) |
| (in years) |
| Customer relationships | $ | 11,300 |
| 11 |
| Acquired technology | 8,500 |
| 7 |
| Marketing assets | 2,300 |
| 9 |
| Non-compete agreements | 100 |
| 3 |
| Total intangible assets | $ | 22,200 |
| 9 |
The estimated fair values of the finite-lived intangible assets were based on variations of the income approach which estimates fair value based upon the present value of cash flows that the assets are expected to generate and which included the relief-from-royalty method, incremental cash flow method including the with and without method and excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships are being amortized on an accelerated basis. Acquired technology, trade names and non-compete agreements are being amortized on a straight-line basis.
We determined that the WhippleHill acquisition was a non-material business combination. As such, pro forma disclosures are not required and are not presented.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
4. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share:
|
| | | | | | | | | |
| Years ended December 31, | |
| (in thousands, except share and per share amounts) | 2015 |
| 2014 |
| 2013 |
|
| Numerator: | | | |
| Net income | $ | 25,649 |
| $ | 28,290 |
| $ | 30,472 |
|
| Denominator: | | | |
| Weighted average common shares | 45,623,854 |
| 45,215,138 |
| 44,684,812 |
|
| Add effect of dilutive securities: | | | |
| Stock-based compensation | 874,850 |
| 584,736 |
| 736,328 |
|
| Weighted average common shares assuming dilution | 46,498,704 |
| 45,799,874 |
| 45,421,140 |
|
| Earnings per share: | | | |
| Basic | $ | 0.56 |
| $ | 0.63 |
| $ | 0.68 |
|
| Diluted | $ | 0.55 |
| $ | 0.62 |
| $ | 0.67 |
|
The following shares underlying stock-based awards were not included in diluted earnings per share because their inclusion would have been anti-dilutive:
|
| | | | | | |
| Years ended December 31, | |
| 2015 |
| 2014 |
| 2013 |
|
| Shares excluded from calculations of diluted earnings per share | 18,554 |
| 23,159 |
| 116,438 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
5. Fair value measurements
Recurring fair value measurements
Financial assets and liabilities measured at fair value on a recurring basis consisted of the following, as of: |
| | | | | | | | | | | | | | | |
| | Fair value measurement using | | |
| (in thousands) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Fair value as of December 31, 2015 | | | | | | | |
| Financial assets: | | | | | | | |
Derivative instruments(1) | $ | — |
| | $ | 406 |
| | $ | — |
| | $ | 406 |
|
| Total financial assets | $ | — |
| | $ | 406 |
| | $ | — |
| | $ | 406 |
|
| | | | | | | | |
| Fair value as of December 31, 2015 | | | | | | | |
| Financial liabilities: | | | | | | | |
Derivative instruments(1) | $ | — |
| | $ | 438 |
| | $ | — |
| | $ | 438 |
|
| Total financial liabilities | $ | — |
| | $ | 438 |
| | $ | — |
| | $ | 438 |
|
| | | | | | | | |
| Fair value as of December 31, 2014 | | | | | | | |
| Financial liabilities: | | | | | | | |
Derivative instruments(1) | $ | — |
| | $ | 268 |
| | $ | — |
| | $ | 268 |
|
| Total financial liabilities | $ | — |
| | $ | 268 |
| | $ | — |
| | $ | 268 |
|
| |
| (1) | The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy. |
We believe the carrying amounts of our cash and cash equivalents, donor restricted cash, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and donations payable approximate their fair values at December 31, 2015 and December 31, 2014, due to the immediate or short-term maturity of these instruments.
We believe the carrying amount of our debt approximates its fair value at December 31, 2015 and December 31, 2014, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.
Non-recurring fair value measurements
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, were based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of the goodwill and intangible assets using a discounted cash flow approach, which contains significant unobservable inputs and therefore is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.
There were no non-recurring fair value adjustments to intangible assets and goodwill during 2015, 2014 and 2013 except for certain fair value measurements to reassign goodwill between reportable segments (as disclosed in Note 7 to these consolidated financial statements) as well as for certain business combination accounting adjustments to the initial fair value estimates of the assets acquired and liabilities assumed at the acquisition date (as disclosed in Note 3 to these consolidated financial statements) from updated estimates and assumptions during the measurement period. The measurement period may be up to one year from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
6. Property and equipment and software development costs
Property and equipment
Property and equipment consisted of the following, as of:
| | | | Estimated useful life (years) | | December 31, | | Estimated useful life (years) | December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| 2015 |
| 2014 |
|
| Equipment | 3 - 5 | | $ | 3,710 |
| | $ | 2,430 |
| 3 - 5 | $ | 3,868 |
| $ | 3,680 |
|
| Computer hardware | 3 - 5 | | 59,394 |
| | 56,969 |
| 3 - 5 | 77,668 |
| 67,145 |
|
Computer software | 3 - 5 | | 19,989 |
| | 17,540 |
| 3 - 5 | 26,457 |
| 23,550 |
|
| Construction in progress | - | | 93 |
| | 1,854 |
| - | 2,337 |
| 587 |
|
| Furniture and fixtures | 5 - 7 | | 6,987 |
| | 5,486 |
| 5 - 7 | 7,146 |
| 7,182 |
|
| Leasehold improvements | term of lease | | 11,375 |
| | 5,104 |
| Term of lease | 17,171 |
| 14,528 |
|
Total property and equipment | | 101,548 |
| | 89,383 |
| | 134,647 |
| 116,672 |
|
Less: accumulated depreciation | | (51,998 | ) | | (40,320 | ) | | (81,996 | ) | (66,776 | ) |
| Property and equipment, net of depreciation | | | $ | 49,550 |
| | $ | 49,063 |
| |
Property and equipment, net(1) | | | $ | 52,651 |
| $ | 49,896 |
|
| |
| (1) | In order to provide comparability between periods presented, certain capitalized software development costs and related accumulated amortization that were recorded in "property and equipment, net" have been recorded to "software development costs, net" in the previously reported consolidated balance sheet to conform to presentation of the current period. |
Depreciation expense was $17.5$18.5 million,, $14.5 $17.3 million, and $9.4$17.5 million for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively.
Property and equipment, net of depreciation, under capital leases at December 31, 20132015 and 20122014 was not material.significant.
5. Goodwill and other intangible assetsSoftware development costs
The change in goodwill for each reportable segment during the year ended December 31, 2013,Software development costs consisted of the following:following, as of:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | ECBU | | GMBU | | IBU | | Target Analytics | | Other | | Total |
| Balance at December 31, 2012 | $ | 148,322 |
| | $ | 75,149 |
| | $ | 6,311 |
| | $ | 33,177 |
| | $ | 2,096 |
| | $ | 265,055 |
|
| Additions related to business combinations | — |
| | — |
| | 344 |
| | — |
| | — |
| | 344 |
|
| Adjustments related to prior year business combinations | (494 | ) | | (193 | ) | | — |
| | — |
| | — |
| | (687 | ) |
| Effect of foreign currency translation | — |
| | — |
| | (113 | ) | | — |
| | — |
| | (113 | ) |
| Balance at December 31, 2013 | $ | 147,828 |
| | $ | 74,956 |
| | $ | 6,542 |
| | $ | 33,177 |
| | $ | 2,096 |
| | $ | 264,599 |
|
|
| | | | | | | |
| | Estimated useful life (years) | December 31, | |
| (in thousands) | 2015 |
| 2014 |
|
| Software development costs | 3 | $ | 28,767 |
| $ | 13,259 |
|
| Less: accumulated amortization | | (9,216 | ) | (3,839 | ) |
| Software development costs, net | | $ | 19,551 |
| $ | 9,420 |
|
We have no accumulated impairment losses as of December 31, 2013Amortization expense related to software development costs was $5.4 million, $2.0 million, and 2012. Additions to goodwill during$1.0 million for the yearyears ended December 31, 2015, 2014 and 2013, relatedrespectively, and is included in both cost of subscriptions, primarily, and to an immaterial acquisition. Decreases were the resulta lesser extent, cost of adjustments to the allocation of the purchase price for the entity we acquired during the year ended December 31, 2012.
license fees.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
7. Goodwill and other intangible assets
The change in goodwill for each reportable segment (as defined in Note 16) during 2015, consisted of the following:
|
| | | | | | | | | | | | |
| (in thousands) | ECBU | GMBU | IBU | Total |
| Balance at December 31, 2014 | $ | 242,075 |
| $ | 100,418 |
| $ | 6,515 |
| $ | 349,008 |
|
Additions related to business combinations(1) | — |
| 90,558 |
| 239 |
| 90,797 |
|
Adjustments related to prior year business combinations(2) | (1,581 | ) | — |
| — |
| (1,581 | ) |
Adjustments related to dispositions(3) | — |
| — |
| (1,153 | ) | (1,153 | ) |
Effect of foreign currency translation(4) | — |
| — |
| (622 | ) | (622 | ) |
| Balance at December 31, 2015 | $ | 240,494 |
| $ | 190,976 |
| $ | 4,979 |
| $ | 436,449 |
|
| |
| (1) | The goodwill allocated to GMBU was associated with our acquisition of Smart Tuition in October 2015 while the goodwill allocated to IBU was associated with an insignificant business combination. |
| |
| (2) | See Note 3 to these consolidated financial statements for details of the immaterial measurement period adjustment. |
| |
| (3) | See Note 18 to these consolidated financial statements for a summary of the disposition. |
| |
| (4) | Includes an insignificant reduction in goodwill related to the disposition discussed in (3) above. |
As a result of the change in our reportable segments, which became effective in March 2015, $33.2 million of goodwill that had been attributed to the former Target Analytics segment as of December 31, 2014 was reassigned. Of that amount $17.3 million, $15.6 million and $0.3 million was reassigned to ECBU, GMBU and IBU, respectively, based on their relative fair values. The reassignment of goodwill is reflected in the goodwill balances as of December 31, 2015 and December 31, 2014. In connection with the change in reportable segments, goodwill allocated to the ECBU, GMBU and IBU reporting units was reviewed under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance. Under the first step of the authoritative guidance for impairment testing, the fair value of the reporting units was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Based on the first step of the analysis, we determined the fair value of each reporting unit was significantly above its respective carrying amount. As such, we were not required to perform step two of the analysis for the purposes of determining the amount of any impairment loss and no impairment charge was recorded as a result of the interim period impairment test performed during the three months ended March 31, 2015.
As part of our annual goodwill impairment analysis, we determined that our former Other reporting segment should no longer be considered a stand-alone reporting unit. As a result of the change in our reporting units effective beginning in October 2015, $2.1 million of goodwill that had been attributed to the Other segment as of December 31, 2014 was reassigned. Of that amount $1.5 million, $0.6 million and an insignificant amount was reassigned to ECBU, GMBU and IBU, respectively, based on their relative fair values. The reassignment of goodwill is reflected in the goodwill balances as of December 31, 2015 and December 31, 2014.
During the year ended December 31, 2015, we derecognized $1.4 million of goodwill as a result of a disposition of a business as discussed in Note 18 to these consolidated financial statements. No derecognition of goodwill occurred during 2014 or 2013.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
We have recorded intangible assets acquired in various business combinations based on their fair values at the date of acquisition. The table below sets forth the balances of each class of intangible asset and related amortization as of:
| | | | | December 31, | | December 31, | |
| (in thousands) | | 2013 |
| | 2012 |
| 2015 |
| 2014 |
|
| Finite-lived gross carrying amount | | | | | |
| Customer relationships | | $ | 102,030 |
| | $ | 101,878 |
| $ | 247,462 |
| $ | 174,239 |
|
| Marketing assets | | 10,384 |
| | 10,296 |
| 16,187 |
| 15,158 |
|
| Acquired software and technology | | 94,144 |
| | 94,378 |
| 148,615 |
| 126,650 |
|
| Non-compete agreements | | 2,128 |
| | 3,979 |
| 3,402 |
| 1,158 |
|
| Database | | 4,275 |
| | 4,275 |
| 4,378 |
| 4,275 |
|
| Total finite-lived gross carrying amount | | 212,961 |
| | 214,806 |
| 420,044 |
| 321,480 |
|
| Accumulated amortization | | | | | |
| Customer relationships | | (33,442 | ) | | (24,994 | ) | (57,748 | ) | (43,671 | ) |
| Marketing assets | | (4,529 | ) | | (2,852 | ) | (7,753 | ) | (6,137 | ) |
| Acquired software and technology | | (27,671 | ) | | (14,787 | ) | (57,548 | ) | (40,801 | ) |
| Non-compete agreements | | (1,739 | ) | | (2,727 | ) | (864 | ) | (389 | ) |
| Database | | (3,332 | ) | | (2,798 | ) | (4,061 | ) | (3,867 | ) |
| Total accumulated amortization | | (70,713 | ) | | (48,158 | ) | (127,974 | ) | (94,865 | ) |
| Indefinite-lived gross carrying amount | | | | | |
| Marketing assets | | 1,193 |
| | 1,389 |
| 2,602 |
| 2,692 |
|
| Total intangible assets, net | | $ | 143,441 |
| | $ | 168,037 |
| |
| Intangible assets, net | | $ | 294,672 |
| $ | 229,307 |
|
Changes to the gross carrying amounts of intangible asset classes during 20132015 were related to an immaterial acquisition,our business acquisitions as described in Note 3 of these financial statements, the write-offdisposition of certain non-compete agreements that expireda business as described in Note 18 to these consolidated financial statements and the effect of foreign currency translation.
Amortization expense
Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes. contributes, except for marketing assets and non-compete agreements, for which the associated amortization expense is included in operating expenses.
The following table summarizes amortization expense:expense of our finite-lived intangible assets:
| | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| Included in cost of revenue: | | | | | | |
| Cost of license fees | $ | 421 |
| | $ | 485 |
| | $ | 635 |
| |
| Cost of subscriptions | 18,578 |
| | 11,969 |
| | 3,341 |
| $ | 23,075 |
| $ | 20,239 |
| $ | 18,578 |
|
| Cost of maintenance | | 4,162 |
| 772 |
| 457 |
|
| Cost of services | 2,528 |
| | 1,992 |
| | 1,572 |
| 2,382 |
| 2,910 |
| 2,528 |
|
| Cost of maintenance | 457 |
| | 722 |
| | 975 |
| |
| Cost of other revenue | 75 |
| | 75 |
| | 75 |
| |
| Cost of license fees and other | | 368 |
| 424 |
| 496 |
|
| Total included in cost of revenue | 22,059 |
| | 15,243 |
| | 6,598 |
| 29,987 |
| 24,345 |
| 22,059 |
|
| Included in operating expenses | 2,539 |
| | 2,106 |
| | 980 |
| 2,231 |
| 1,803 |
| 2,539 |
|
| Total | $ | 24,598 |
| | $ | 17,349 |
| | $ | 7,578 |
| |
| Total amortization of intangibles from business combinations | | $ | 32,218 |
| $ | 26,148 |
| $ | 24,598 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table outlines the estimated future amortization expense for each of the next five years for our finite-lived intangible assets as of December 31, 2013:2015:
| | | Year ended December 31, | Amortization expense (in thousands) |
| |
| 2014 | $ | 22,573 |
| |
| 2015 | 22,203 |
| |
| Year ending December 31, | | Amortization |
|
| (in thousands) | | expense |
|
| 2016 | 21,799 |
| $ | 42,154 |
|
| 2017 | 19,484 |
| 41,322 |
|
| 2018 | 18,123 |
| 39,684 |
|
| 2019 | | 36,478 |
|
| 2020 | | 27,699 |
|
| Total | $ | 104,182 |
| $ | 187,337 |
|
6. 8. Consolidated financial statement details
Prepaid expenses and other assets
Prepaid expenses and other assets consisted of the following as of:
| | | (in thousands) | December 31, 2013 |
| | December 31, 2012 |
| December 31,
2015 |
| December 31,
2014 |
|
| Deferred sales commissions | $ | 20,088 |
| | $ | 18,142 |
| $ | 30,141 |
| $ | 22,630 |
|
| Prepaid software maintenance | 6,875 |
| | 5,530 |
| 15,308 |
| 9,480 |
|
| Taxes, prepaid and receivable | 1,112 |
| | 7,398 |
| 9,121 |
| 8,991 |
|
| Deferred professional services costs | 7,445 |
| | 8,057 |
| 3,603 |
| 5,753 |
|
| Software development costs | 4,172 |
| | 1,994 |
| |
| Deferred tax asset | | 2,869 |
| 1,761 |
|
| Prepaid royalties | | 1,767 |
| 3,192 |
|
| Other assets | 9,674 |
| | 9,312 |
| 7,275 |
| 6,355 |
|
| Total prepaid expenses and other assets | 49,366 |
| | 50,433 |
| 70,084 |
| 58,162 |
|
| Less: Long-term portion | 19,251 |
| | 9,844 |
| 21,418 |
| 17,770 |
|
| Total prepaid expenses and other current assets | $ | 30,115 |
| | $ | 40,589 |
| |
| Prepaid expenses and other current assets | | $ | 48,666 |
| $ | 40,392 |
|
7. Accrued expenses and other liabilities
Accrued expenses and other liabilities consisted of the following as of: |
| | | | | | |
| (in thousands) | December 31,
2015 |
| December 31,
2014 |
|
| Accrued bonuses | $ | 24,591 |
| $ | 19,480 |
|
| Accrued commissions and salaries | 8,391 |
| 8,712 |
|
| Taxes payable | 3,923 |
| 4,285 |
|
| Deferred rent liabilities | 4,070 |
| 4,200 |
|
| Lease incentive obligations | 4,734 |
| 4,099 |
|
| Unrecognized tax benefit | 3,147 |
| 3,791 |
|
| Customer credit balances | 3,515 |
| 2,573 |
|
| Accrued vacation costs | 2,446 |
| 1,847 |
|
| Accrued health care costs | 2,356 |
| 2,707 |
|
| Other liabilities | 7,911 |
| 7,944 |
|
| Total accrued expenses and other liabilities | 65,084 |
| 59,638 |
|
| Less: Long-term portion | 7,623 |
| 7,437 |
|
| Accrued expenses and other current liabilities | $ | 57,461 |
| $ | 52,201 |
|
|
| | | | | | | |
| (in thousands) | December 31, 2013 |
| | December 31, 2012 |
|
| Taxes payable | $ | 5,430 |
| | $ | 7,607 |
|
| Accrued commissions and salaries | 7,127 |
| | 5,905 |
|
| Accrued bonuses | 9,258 |
| | 11,966 |
|
| Customer credit balances | 3,281 |
| | 4,577 |
|
| Accrued software and maintenance | 970 |
| | 3,875 |
|
| Unrecognized tax benefit | 3,698 |
| | 3,846 |
|
| Other liabilities | 17,334 |
| | 13,501 |
|
| Total accrued expenses and other liabilities | 47,098 |
| | 51,277 |
|
| Less: Long-term portion | 6,655 |
| | 5,281 |
|
| Total accrued expenses and other current liabilities | $ | 40,443 |
| | $ | 45,996 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
8. Deferred revenue
Deferred revenue consisted of the following as of:
| | | (in thousands) | December 31, 2013 |
| | December 31, 2012 |
| December 31,
2015 |
| December 31,
2014 |
|
| Subscriptions | | $ | 122,524 |
| $ | 98,225 |
|
| Maintenance | $ | 85,219 |
| | $ | 81,741 |
| 85,901 |
| 92,823 |
|
| Subscriptions | 72,480 |
| | 65,850 |
| |
| Services | 32,153 |
| | 36,904 |
| 28,517 |
| 29,457 |
|
| License fees and other | 722 |
| | 523 |
| 393 |
| 769 |
|
| Total deferred revenue | 190,574 |
| | 185,018 |
| 237,335 |
| 221,274 |
|
| Less: Deferred revenue, net of current portion | 9,099 |
| | 11,119 |
| |
| Less: Long-term portion | | 7,119 |
| 8,991 |
|
| Deferred revenue, current portion | $ | 181,475 |
| | $ | 173,899 |
| $ | 230,216 |
| $ | 212,283 |
|
Other expense, net
|
| | | | | | |
| (in thousands) | Years ended December 31, | |
| 2015 |
| 2014 |
| 2013 |
|
| Interest income | 155 |
| 59 |
| 67 |
|
| Loss on sale of business | (1,976 | ) | — |
| — |
|
Loss on debt extinguishment and termination of derivative instruments(1) | — |
| (996 | ) | — |
|
| Other income (expense), net | 134 |
| (182 | ) | (462 | ) |
| Other expense, net | (1,687 | ) | (1,119 | ) | (395 | ) |
| |
| (1) | See Notes 9 and 10 to these consolidated financial statements for details of the loss on debt extinguishment and termination of derivative instruments. |
9. Debt
The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.
|
| | | | | | | | | | | |
| | Debt balance at | | | Weighted average effective interest rate at | |
| (in thousands, except percentages) | December 31,
2015 |
| December 31,
2014 |
| | December 31,
2015 |
| December 31,
2014 |
|
| Credit facility: | | | | | |
| Revolving credit loans | $ | 242,900 |
| $ | 110,700 |
| | 2.15 | % | 1.56 | % |
| Term loans | 167,344 |
| 171,719 |
| | 2.51 | % | 2.03 | % |
| Total debt | 410,244 |
| 282,419 |
| | 2.30 | % | 1.85 | % |
| Less: Unamortized debt discount | 1,640 |
| 1,848 |
| | | |
| Less: Debt, current portion | 4,375 |
| 4,375 |
| | 2.11 | % | 1.39 | % |
| Debt, net of current portion | $ | 404,229 |
| $ | 276,196 |
| | 2.30 | % | 1.85 | % |
We were previously party to a $325.0 million five-year credit facility entered into during February 2012. The credit facility included: a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “2012 Revolving Facility”) and a delayed draw term loan (the “2012 Term Loan”) together, (the “2012 Credit facilityFacility”).
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
2014 refinancing
In February 2014, we entered into a five-year $325.0$325.0 million credit facility (the “2014 Credit Facility”) and drew $175.0 million on a term loan upon closing, which was used to repay all amounts outstanding under the 2012 Credit Facility.
The 2014 Credit Facility includes the following facilities: (i) a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “2014 Revolving Facility”) and (ii) a delayed draw term loan. loan facility (the “2014 Term Loan”).
Certain lenders of the 2012 Term Loan participated in the 2014 Term Loan and the change in the present value of our future cash flows to these lenders under the 2012 Term Loan and under the 2014 Term Loan was less than 10%. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2012 Term Loan did not participate in the 2014 Term Loan. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2012 Revolving Facility participated in the 2014 Revolving Facility and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2012 Revolving Facility did not participate in the 2014 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.
We recorded a $0.4 million loss on debt extinguishment related to the write-off of deferred financing costs for the portions of the 2012 Credit Facility considered to be extinguished. This loss was recognized in the consolidated statements of comprehensive income within loss on debt extinguishment and termination of derivative instruments.
In connection with our entry into the 2014 Credit Facility, we paid $2.5 million in financing costs, of which $1.1 million were capitalized and, together with a portion of the unamortized deferred financing costs from the 2012 Credit Facility and prior facilities, are being amortized into interest expense over the term of the new facility using the effective interest method. As of December 31, 2015 and December 31, 2014, deferred financing costs totaling $1.4 million and $1.7 million, respectively, were included in other assets on the consolidated balance sheet.
Summary of the 2014 Credit Facility
The 2014 Credit Facility is secured by the stock and limited liability company interests of certain of our subsidiaries are pledged as collateral for the credit facility whichand is guaranteed by our material domestic subsidiaries.
Amounts borrowed under the dollar tranche revolving credit loans and delayed draw term loansloan under the credit facility2014 Credit Facility bear interest at a rate per annum equal to, at our option, (a) Base Ratea base rate equal to the highest of (i) the prime rate, (ii) federal funds rate plus 0.50% and (iii) one month LIBOR plus 1%1.00% (the “Base Rate”), in addition to a margin of 0.25%0.00% to 1.25%0.50%, or (b) LIBOR rate plus a margin of 1.25%1.00% to 2.25%1.50%. Swingline loans bear interest at a rate per annum equal to the Base Rate plus a margin of 0.25% to 1.25% or such other rate agreed to between the Swingline lender and us. Designated currency tranche revolving credit loans bear interest at a rate per annum equal to the LIBOR rate for the applicable currency plus a margin of 1.25% to 2.25%. The exact amount of any margin depends on the nature of the loan and our leverage ratio.
We also pay a quarterly commitment fee on the unused portion of the revolving credit facility2014 Revolving Facility from 0.20%0.15% to 0.35%0.225% per annum, depending on our net leverage ratio. At December 31, 2013,2015, the commitment fee was 0.25%0.225%.
The term loansloan under our credit facility requirethe 2014 Credit Facility requires periodic principal payments. The balance of the term loansloan and any amounts drawn on the revolving credit loans are due upon maturity of the credit facility2014 Credit Facility in February 2017.2019. We evaluate the classification of our debt as current or non-current based on the required annual maturities of our credit facility.the 2014 Credit Facility.
The credit facility2014 Credit Facility includes financial covenants related to the consolidatednet leverage ratio and interest coverage ratio, as well as restrictions on the maximum amount of annual capital expenditures, our ability to incur obligations with other financial institutions, our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At December 31, 2013,2015, we were in compliance with allour debt covenants under the 2014 Credit Facility.
Financing for MicroEdge acquisition
The 2014 Credit Facility includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $200.0 million. On October 1, 2014, we exercised this option, and certain lenders agreed, to increase the revolving credit facility.commitments by $100.0 million (the "October 2014 Additional Revolving Credit Commitments") such that for the period commencing October 1, 2014, the aggregate revolving credit commitments available were $250.0 million. The October 2014 Additional Revolving Credit Commitments have the same terms as the existing revolving credit commitments.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
On October 1, 2014, we drew down $140.0 million in revolving credit commitments under the 2014 Credit Facility to finance the acquisition of MicroEdge.
Financing for Smart Tuition acquisition
On July 17, 2015, we again exercised this option and certain lenders agreed to increase the revolving credit commitments by an additional $100.0 million (the "July 2015 Additional Revolving Credit Commitments") such that for the period commencing July 17, 2015, the aggregate revolving credit commitments available were $350.0 million. The following table summarizes our debt balances andJuly 2015 Additional Revolving Credit Commitments have the related weighted average effective interest rates, which include our interest cost incurred andsame terms as the effectexisting revolving credit commitments.
On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of interest rate swap agreements.
|
| | | | | | | | | | | | | |
| | Debt balance at | | | Weighted average effective interest rate at | |
| (in thousands, except percentages) | December 31, 2013 |
| | December 31, 2012 |
| | December 31, 2013 |
| | December 31, 2012 |
|
| Credit facility: | | | | | | | |
| Revolving credit loans | $ | 70,408 |
| | $ | 123,000 |
| | 1.95 | % | | 2.68 | % |
| Term loans | 82,500 |
| | 92,500 |
| | 2.39 | % | | 3.14 | % |
| Total debt | 152,908 |
| | 215,500 |
| | 2.14 | % | | 2.88 | % |
| Less: Debt, current portion | 17,158 |
| | 10,000 |
| | 2.39 | % | | 3.14 | % |
| Debt, net of current portion | $ | 135,750 |
| | $ | 205,500 |
| | 2.11 | % | | 2.86 | % |
As of December 31, 2013,2015, the required annual maturities related to our credit facilitythe 2014 Credit Facility were as follows: |
| | | |
Year ending December 31,
(in thousands) | Annual maturities |
|
| 2014 | $ | 17,158 |
|
| 2015 | 15,000 |
|
| 2016 | 15,000 |
|
| 2017 | 105,750 |
|
| Total required maturities | $ | 152,908 |
|
Deferred financing costs
In February 2012, we amended and restated our credit facility to increase our borrowing capacity. In connection with our amended and restated credit facility, we paid $2.4 million of financing costs. These costs together with a portion of the unamortized financing costs from our previous credit facility are being amortized over the term of the new facility. As of December 31, 2013 and December 31, 2012, deferred financing costs totaling $1.9 million and $2.5 million, respectively, are included in other assets on the consolidated balance sheets. |
| | | |
Year ending December 31, (in thousands) | Annual maturities |
|
| 2016 | $ | 4,375 |
|
| 2017 | 4,375 |
|
| 2018 | 4,375 |
|
| 2019 | 397,119 |
|
| 2020 | — |
|
| Thereafter | — |
|
| Total required maturities | $ | 410,244 |
|
10. Derivative instruments
We use derivative instruments to manage our variable interest rate risk. We have In February 2014, in connection with the refinancing of our debt, we terminated the two interest rate swap agreements associated with the 2012 Credit Facility. As part of the settlement of our swap liabilities, we recorded a loss of $0.6 million, which was recognized in the consolidated statements of comprehensive income within loss on debt extinguishment and termination of derivative instruments.
In March 2014, we entered into a new interest rate swap agreement (the "March 2014 Swap Agreement"), which effectively convertconverts portions of our variable rate debt under our credit facilitythe 2014 Credit Facility to a fixed rate for the termsterm of the swap agreements.March 2014 Swap Agreement. The aggregateinitial notional value of the swap agreementsMarch 2014 Swap Agreement was $150.0$125.0 million with an effective datesdate beginning in May 2012March 2014. In March 2017, the notional value of the March 2014 Swap Agreement will decrease to $75.0 million for the remaining term through January 2017.February 2018. We designated the swap agreementsMarch 2014 Swap Agreement as a cash flow hedgeshedge at the inception of the contracts.contract.
The fair valuesIn October 2014, we entered into an additional interest rate swap agreement (the “October 2014 Swap Agreement”), which effectively converts portions of our derivative instruments werevariable rate debt under the 2014 Credit Facility to a fixed rate for the term of the October 2014 Swap Agreement. The initial notional value of the October 2014 Swap Agreement was $75.0 million with an effective date beginning in October 2014. In September 2015, the notional value of the October 2014 Swap Agreement decreased to $50.0 million for the remaining term through June 2016. We designated the October 2014 Swap Agreement as followsa cash flow hedge at the inception of the contract.
In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the October 2015 Swap Agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 and maturing in February 2018. We designated the October 2015 Swap Agreement as of:a cash flow hedge at the inception of the contract. |
| | | | | | | | | |
| | | | Liability fair value at | |
| (in thousands) | Balance sheet location | | December 31, 2013 |
| | December 31, 2012 |
|
| Derivative instruments designated as hedging instruments: | | | | | |
| Interest rate swaps, current portion | Accrued expenses and other current liabilities | | $ | 46 |
| | $ | — |
|
| Interest rate swaps, long-term portion | Other liabilities | | 381 |
| | 1,296 |
|
| Total derivative instruments designated as hedging instruments | | | $ | 427 |
| | $ | 1,296 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The fair values of our derivative instruments were as follows as of: |
| | | | | | | |
| (in thousands) | Balance sheet location | December 31,
2015 |
| December 31,
2014 |
|
| Derivative instruments designated as hedging instruments: | | | |
| Interest rate swap, long-term portion | Other assets | 406 |
| — |
|
| Total derivative instruments designated as hedging instruments | | $ | 406 |
| $ | — |
|
| | | | |
| | | December 31,
2015 |
| December 31,
2014 |
|
| Derivative instruments designated as hedging instruments: | | | |
| Interest rate swaps, current portion | Accrued expenses and
other current liabilities | $ | 2 |
| $ | — |
|
| Interest rate swaps, long-term portion | Other liabilities | 436 |
| 268 |
|
| Total derivative instruments designated as hedging instruments | | $ | 438 |
| $ | 268 |
|
The effects of derivative instruments in cash flow hedging relationships were as follows: | | | | Loss recognized in accumulated other comprehensive loss as of |
| | Location of loss reclassified from accumulated other comprehensive loss into income | | Amount reclassified from accumulated other comprehensive loss into income |
| Gain (loss) recognized in accumulated other comprehensive loss as of |
| Location of gain (loss) reclassified from accumulated other comprehensive loss into income | Gain (loss) reclassified from accumulated other comprehensive loss into income |
|
| | December 31, 2013 |
| | Year ended December 31, |
| December 31,
2015 |
| Year ended
December 31, |
|
| (in thousands) | | 2013 | Location of loss reclassified from accumulated other comprehensive loss into income |
| 2015 |
| Location of gain (loss) reclassified from accumulated other comprehensive loss into income |
| Interest rate swaps | $ | 427 |
| | Interest expense | | $ |
| $ | (31 | ) | Interest expense | $ | (1,569 |
| | | | | | | |
| | | | Year ended December 31, |
| December 31,
2014 |
| | Year ended
December 31, |
|
| | December 31, 2012 |
| | 2012 |
| | 2014 |
|
| Interest rate swaps | $ | 1,296 |
| | Interest expense | | $ | 466 |
| $ | (268 | ) | Interest expense | $ | (1,215 | ) |
| Interest rate swaps | | — |
| Loss on debt extinguishment and termination of derivative instruments | (587 | ) |
| Total | | $ | (268 | ) | | $ | (1,802 | ) |
| | | | | |
| | | December 31,
2013 |
| | Year ended
December 31, |
|
| | | | 2013 |
|
| Interest rate swaps | | $ | (427 | ) | Interest expense | $ | (794 | ) |
We recognizeOur policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit withinare reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive loss each reporting period based onas of December 31, 2015 that is expected to be reclassified into earnings within the change in fair valuenext twelve months is $0.7 million. There were no ineffective portions of our derivative instruments. The income tax benefit recognizedinterest rate swap derivatives during the years ended December 31, 2015, 2014 and 2013. See Note 14 to these consolidated financial statements for a summary of the changes in accumulated other comprehensive loss decreased $(0.3) million during the year ended December 31, 2013. The income tax benefit recognized in accumulated other comprehensive loss was $0.5 million for the year ended December 31, 2012.(loss) by component.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
11. Commitments and contingencies
Leases
We lease our headquarters facility under a 15-year15-year lease agreement which was entered into in October 2008,, and has two five-year renewal options. The current annual base rent of the lease is $4.0$5.0 million,, payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year.
With our acquisition of Convio, we assumedWe have a lease for office space in Austin, Texas which terminates on September 30, 2023, and has two five-year renewal options. Under the terms of the lease, we will increase our leased space by approximately 20,000 square feet on July 31, 2016. The current annual base rent of the lease is $2.2 million.$2.3 million. The base rent escalates annually between 2% and 4% based on the terms of the agreement include a rent holiday during the first year and base rent that escalates annually thereafter between 2% and 4%.agreement. The related rent expense is recorded on a straight-line basis over the length of the lease term. We haveAt December 31, 2015, we had a standby letter of credit of $2.0$2.0 million for a security deposit for this lease.
We have provisions in our leases that entitle us to aggregate remaining leasehold improvement allowances of $9.5 million.$4.9 million as of December 31, 2015. These amounts are being recorded as a reduction to rent expense ratably over the terms of the leases. RentThe reductions in rent expense was reduced related to these lease provisions by $0.6 million during the year ended December 31, 2013 and $0.3 million during each of the years ended December 31, 20122015, 2014 and 2011,2013, were $0.8 million, $0.7 million and $0.6 million, respectively. The leasehold improvement allowances have been included in the table of operating lease commitments below as a reduction in our lease commitments ratably over the then remaining terms of the leases. The timing of the reimbursements for the actual leasehold improvements may vary from the amounts reflected in the table below.
Additionally, we have subleased a portion of our facilities under various agreements extending through 2013. The reduction in rent expense related to these agreements during the year ending December 31, 2013 was not material to the consolidated statements of comprehensive income. Rent expense was reduced by $0.3 million and $0.4 million related to these agreements during the years ended December 31, 2012 and 2011, respectively.
We have also received, and expect to receive through 2016, quarterly South Carolina state incentive payments as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense upon receipt and were $2.4$2.3 million,, $2.2 $2.2 million and $2.3$2.4 million for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively.
Additionally, we lease various office space and equipment under operating leases. We also have various non-cancelable capital leases for computer equipment and furniture that are not significant.
Total rent expense was $9.0$10.3 million,, $7.6 $9.4 million and $4.7$9.0 million for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
As of December 31, 2013,2015, the future minimum lease commitments related to lease agreements, net of related sublease commitments and lease incentives, were as follows:
| | | Year ended December 31, | Operating |
| |
| Year ending December 31, | | Operating |
|
| (in thousands) | leases |
| leases |
|
| 2014 | $ | 10,027 |
| |
| 2015 | 9,872 |
| |
| 2016 | 9,570 |
| $ | 13,183 |
|
| 2017 | 9,616 |
| 11,711 |
|
| 2018 | 9,819 |
| 11,465 |
|
| 2019 | | 11,882 |
|
| 2020 | | 11,162 |
|
| Thereafter | 41,466 |
| 30,886 |
|
| Total minimum lease payments | $ | 90,370 |
| $ | 90,289 |
|
Other commitments
As discussed in Note 9 ofto these consolidated financial statements, the term loans under our credit facilitythe 2014 Credit Facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the credit facility2014 Credit Facility in February 2017.2019.
We utilize third-party technology in conjunction with our productssolutions and services, with contractual arrangements varying in length from one to threefive years. In certain cases, these arrangements require a minimum annual purchase commitment by us.commitment. As of December 31, 2013,2015, the remaining aggregate minimum purchase commitment under these arrangements was approximately $11.8$19.0 million through 2016. We incurred expense under these arrangements2018.
Legal contingencies
We are subjectBlackbaud, Inc.
Notes to legal proceedingsconsolidated financial statements (continued)
Solution and claims that arise inservice indemnifications
In the ordinary course of business. We record an accrual for a contingency whenbusiness, we provide certain indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our solutions or services. If we determine that it is both probable that a liabilityloss has been incurred and the amount of therelated to solution or service indemnifications, any such loss canthat could be reasonably estimated.estimated would be recognized. We dohave not believe the amount of potentialidentified any losses and, accordingly, we have not recorded a liability with respectrelated to these actions will have a material adverse effect upon our consolidated financial position, results of operations or cash flows.indemnifications.
Guarantees and indemnification obligations
We enter into agreements in the ordinary course of business with, among others, customers, creditors, vendors and service providers. Pursuant to certain of these agreements we have agreed to indemnify the other party for certain matters, such as property damage, personal injury, acts or omissions of ours, or our employees, agents or representatives, or third-party claims alleging that the activities of its contractual partner pursuant to the contract infringe a patent, trademark or copyright of such third party.
Legal contingencies
We assessare subject to legal proceedings and claims that arise in the fair valueordinary course of ourbusiness. We record an accrual for a contingency when it is both probable that a liability onhas been incurred and the above indemnities toamount of the loss can be immaterial based on historical experience and information known atreasonably estimated. As of December 31, 2013.2015, in our opinion, there was not at least a reasonable possibility that these actions arising in the ordinary course of business will have a material adverse effect upon our consolidated financial position, results of operations or cash flows and, therefore, no material loss contingencies were recorded.
12. Income taxes
Prior to October 13, 1999, we were organized as an S corporation under the Internal Revenue Code and, therefore, were not subject to federal income taxes. We historically made distributions to our stockholders to cover the stockholders' anticipated tax liability. In connection with our 1999 recapitalization, we converted our U.S. taxable status from an S corporation to a C corporation and, accordingly, since October 14, 1999, have been subject to federal and state income taxes. We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the United Kingdom, Australia the Netherlands and Ireland. We are generally subject to U.S. federal income tax examination for calendar tax years 20102012 through 20132015 as well as state and foreign income tax examinations for various years depending on statutes of limitations of those jurisdictions.
The following summarizes the components of income tax expense:
|
| | | | | | | | | |
| | Years ended December 31, | |
| (in thousands) | 2015 |
| 2014 |
| 2013 |
|
| Current taxes: | | | |
| U.S. Federal | $ | 5,890 |
| $ | 5,757 |
| $ | 78 |
|
| U.S. State and local | 2,215 |
| 2,158 |
| 1,127 |
|
| International | 33 |
| (21 | ) | (221 | ) |
| Total current taxes | 8,138 |
| 7,894 |
| 984 |
|
| Deferred taxes: | | | |
| U.S. Federal | 2,702 |
| 4,725 |
| 14,394 |
|
| U.S. State and local | 585 |
| (1,329 | ) | (694 | ) |
| International | (122 | ) | (346 | ) | 173 |
|
| Total deferred taxes | 3,165 |
| 3,050 |
| 13,873 |
|
| Total income tax provision | $ | 11,303 |
| $ | 10,944 |
| $ | 14,857 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following summarizes the components of income tax expense:
|
| | | | | | | | | | | |
| | Year ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
|
| Current taxes: | | | | | |
| U.S. Federal | $ | 78 |
| | $ | (1,764 | ) | | $ | 3,434 |
|
| U.S. State and local | 1,127 |
| | 410 |
| | 1,030 |
|
| International | (221 | ) | | 511 |
| | 40 |
|
| Total current taxes | 984 |
| | (843 | ) | | 4,504 |
|
| Deferred taxes: | | | | | |
| U.S. Federal | 14,394 |
| | 8,943 |
| | 11,943 |
|
| U.S. State and local | (694 | ) | | (796 | ) | | 1,536 |
|
| International | 173 |
| | (562 | ) | | 54 |
|
| Total deferred taxes | 13,873 |
| | 7,585 |
| | 13,533 |
|
| Total income tax provision | $ | 14,857 |
| | $ | 6,742 |
| | $ | 18,037 |
|
The following summarizes the components of income before provision for income taxes: | | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| U.S. | $ | 48,137 |
| | $ | 16,793 |
| | $ | 50,946 |
| $ | 37,523 |
| $ | 39,638 |
| $ | 48,137 |
|
| International | (2,808 | ) | | (3,468 | ) | | 311 |
| (571 | ) | (404 | ) | (2,808 | ) |
| Income before provision for income taxes | $ | 45,329 |
| | $ | 13,325 |
| | $ | 51,257 |
| $ | 36,952 |
| $ | 39,234 |
| $ | 45,329 |
|
A reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate our income tax provision is as follows:
| | | | Year ended December 31, | | Years ended December 31, | |
| | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % |
| Effect of: | | | | | | |
| State income taxes, net of federal benefit | 5.2 |
| | 8.3 |
| | 4.2 |
| 5.7 |
| 3.2 |
| 5.2 |
|
| Change in state income tax rate applied to deferred tax balances | (2.5 | ) | | (2.2 | ) | | 0.6 |
| 2.1 |
| (1.1 | ) | (2.5 | ) |
| Fixed assets | (1.0 | ) | | (7.6 | ) | | — |
| (0.1 | ) | (0.3 | ) | (1.0 | ) |
| Unrecognized tax benefit | 0.3 |
| | 2.9 |
| | (0.3 | ) | (1.1 | ) | (2.9 | ) | 0.3 |
|
| State credits, net of federal benefit | (2.9 | ) | | (1.7 | ) | | (2.2 | ) | 6.0 |
| (1.0 | ) | (2.9 | ) |
| Change in valuation reserve | 0.7 |
| | 4.1 |
| | 0.7 |
| (8.6 | ) | 1.3 |
| 0.7 |
|
| Federal credits generated | (5.1 | ) | | — |
| | (2.7 | ) | (6.1 | ) | (4.7 | ) | (5.1 | ) |
| Foreign tax rate | 0.6 |
| | 2.3 |
| | — |
| (0.7 | ) | (0.1 | ) | 0.6 |
|
| Acquisition costs | — |
| | 10.8 |
| | 0.6 |
| 0.1 |
| 0.6 |
| — |
|
| Foreign tax credits | (0.5 | ) | | (3.0 | ) | | — |
| |
| Section 162(m) limitation | 1.8 |
| | 0.1 |
| | (0.4 | ) | 0.1 |
| 0.4 |
| 1.8 |
|
| Loss from sale of foreign subsidiary | | 1.9 |
| — |
| — |
|
| Domestic production activities deduction | | (1.8 | ) | (1.2 | ) | — |
|
| Other | 1.2 |
| | 1.6 |
| | (0.3 | ) | (1.9 | ) | (1.3 | ) | 0.7 |
|
| Income tax provision effective rate | 32.8 | % | | 50.6 | % | | 35.2 | % | 30.6 | % | 27.9 | % | 32.8 | % |
A portion of our South Carolina credit carryforward expired in 2015 and this is reflected in the rate increase for state credits, net of federal benefit. This increase was offset by the release of the related state credit valuation reserve and additional state research credits generated in 2015, which are reflected in the rate decrease for change in valuation reserve.
We recorded net excess tax benefits attributable to stock option and stock appreciation right exercises and restricted stock vesting of $0.1$5.5 million and $0.2$7.5 million in stockholders’ equity during the years ended December 31, 20122015 and 2011,2014, respectively. We were unable to recognize additionalNo excess tax benefits offrom stock-based compensation deductions generatedwere recorded during 2013 and 2012 of $3.8 million and $0.6 million, respectively, because the deductions did not reduce income tax payable after considering our net operating loss carryforwards. Although not recognized for financial reporting purposes, these unrecognized tax benefits are available to reduce future taxable income.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The U.S. federal and state research and development tax credits, which had previously expired on December 31, 2011, were reinstated as part of the American Taxpayer Relief Act of 2012 enacted onin January 2, 2013. This legislation retroactively reinstated and extended the credits from the previous expiration date through December 31, 2013. The 2014 research and development credits were reinstated in December 2014 as part of the Tax Increase Prevention Act of 2014. The 2015 research and development credit was reinstated in December 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. The benefit of the federal and state credits that were included in tax expense were $3.0 million, $2.6 million, and $1.6 million for 2015, 2014 and 2013, respectively. The benefit of the federal and state credits for 2013 and 2012 has beenwas included in 2013 tax expense, representing a $1.8$1.6 million and $1.6$1.8 million benefit, respectively.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The significant components of our deferred tax assets and liabilities were as follows:
| | | | December 31, | | December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| 2015 |
| 2014 |
|
| Deferred tax assets relating to: | | | | |
| Federal, state and foreign net operating loss carryforwards | $ | 18,144 |
| | $ | 30,839 |
| |
| Federal and state and foreign net operating loss carryforwards | | $ | 13,913 |
| $ | 15,428 |
|
| Federal, state and foreign tax credits | 18,947 |
| | 15,438 |
| 10,464 |
| 14,792 |
|
| Intangible assets | 5,849 |
| | 13,706 |
| 449 |
| 562 |
|
| Effect of expensing nonqualified stock options and restricted stock | 3,818 |
| | 7,634 |
| |
| Stock-based compensation | | 7,848 |
| 4,072 |
|
| Accrued bonuses | 3,286 |
| | 4,361 |
| 9,335 |
| 7,177 |
|
| Deferred revenue | 3,850 |
| | 4,342 |
| 6,049 |
| 7,332 |
|
| Allowance for doubtful accounts | 1,938 |
| | 3,161 |
| 780 |
| 1,655 |
|
| Other | 4,286 |
| | 8,321 |
| 6,593 |
| 5,790 |
|
| Total deferred tax assets | 60,118 |
| | 87,802 |
| 55,431 |
| 56,808 |
|
| Deferred tax liabilities relating to: | | | | |
| Intangible assets | (55,018 | ) | | (65,882 | ) | (49,559 | ) | (54,794 | ) |
| Fixed assets | (11,557 | ) | | (12,643 | ) | (10,323 | ) | (10,715 | ) |
| Other | (5,752 | ) | | (7,318 | ) | (12,765 | ) | (7,593 | ) |
| Total deferred tax liabilities | (72,327 | ) | | (85,843 | ) | (72,647 | ) | (73,102 | ) |
| Valuation allowance | (11,042 | ) | | (10,651 | ) | (7,911 | ) | (11,161 | ) |
| Net deferred tax asset (liabilities) | $ | (23,251 | ) | | $ | (8,692 | ) | |
| Net deferred tax liability | | $ | (25,127 | ) | $ | (27,455 | ) |
As of December 31, 2013,2015, our federal, foreign and state net operating loss carryforwards for income tax purposes were approximately $41.8$29.3 million,, $3.1 $7.0 million and $52.6$42.2 million,, respectively. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. If not utilized, the federal net operating loss carryforwards will begin to expire in 20322028 and the state net operating loss carryforwards will expire over various periods beginning in 2014.2016. Our foreign net operating loss carryforwards have an unlimited carryforward period. Our federal and foreign tax credit carryforwards for income tax purposes were insignificant. Our state tax credit carryforwards for income tax purposes were approximately $9.9 million, net of federal benefit. If not utilized, the state tax credit carryforwards will begin to expire in 2016. A portion of the foreign and state net operating loss carryforwards and state credit carryforwards have a valuation reserve due to management's uncertainty regarding the future ability to use such carryforwards. Our federal, foreign and state tax credit carryforwards for income tax purposes were approximately $6.3 million, $0.5 million and $12.2 million, net of federal tax, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2022 and the state tax credit carryforwards will begin to expire in 2014. The state tax credits had a valuation reserve of approximately $8.5 million, net of federal tax, as of December 31, 2013.
The following table illustrates the change in our deferred tax asset valuation allowance:
| | | (in thousands) | Balance at beginning of year |
| | Acquisition related change |
| | Charges to expense |
| | Balance at end of year |
| Balance at beginning of year |
| Acquisition related change |
| Charges to expense |
| Balance at end of year |
|
| Year ended December 31, | |
| 2015 | | $ | 11,161 |
| $ | — |
| $ | (3,250 | ) | $ | 7,911 |
|
| 2014 | | 11,042 |
| — |
| 119 |
| 11,161 |
|
| 2013 | $ | 10,651 |
| | $ | 635 |
| | $ | (244 | ) | | $ | 11,042 |
| 10,651 |
| 635 |
| (244 | ) | 11,042 |
|
| 2012 | 10,079 |
| | 286 |
| | 286 |
| | 10,651 |
| |
| 2011 | 9,614 |
| | — |
| | 465 |
| | 10,079 |
| |
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table sets forth the change to our unrecognized tax benefit for the years ended December 31, 2013, 20122015, 2014 and 2011:2013:
| | | | December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| Balance at beginning of year | $ | 3,846 |
| | $ | 1,777 |
| | $ | 1,414 |
| $ | 3,564 |
| $ | 3,698 |
| $ | 3,846 |
|
| Increases from prior period positions | 1,254 |
| | 2,766 |
| | 87 |
| 129 |
| 195 |
| 1,254 |
|
| Decreases in prior year position | (813 | ) | | (93 | ) | | (9 | ) | |
| Decreases in prior year positions | | (651 | ) | (102 | ) | (813 | ) |
| Increases from current period positions | 224 |
| | — |
| | 285 |
| 257 |
| 1,046 |
| 224 |
|
| Settlements (payments) | | (274 | ) | — |
| — |
|
| Lapse of statute of limitations | (813 | ) | | (604 | ) | | — |
| (1 | ) | (1,273 | ) | (813 | ) |
| Balance at end of year | $ | 3,698 |
| | $ | 3,846 |
| | $ | 1,777 |
| $ | 3,024 |
| $ | 3,564 |
| $ | 3,698 |
|
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate was $3.7$2.3 million at December 31, 2013.2015. Certain prior period amounts relating to our 2014 acquisitions are covered under indemnification agreements and, therefore, we have recorded a corresponding indemnification asset. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The total amount of accrued interest and penalties included in the consolidated balance sheetssheet as of December 31, 20132015 and 2012December 31, 2014 was $0.6 million and $0.7 million, respectively.insignificant. The total amount of interest and penalties included in the consolidated statements of comprehensive income as aan increase or decrease in income tax expense for 20122015, 2014 and 2013 was $0.3 million. The total amount of interest and penalties included in the consolidated statement of comprehensive income as an increase in income tax expense for 2013 and 2011 was $0.2 million and $0.1 million, respectively.insignificant.
We have taken federal and state tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits might decrease within the next twelve months. This possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease approximates $1.3 millionat December 31, 2013.2015 was insignificant.
We concluded that a portion of the undistributed earnings of our foreign subsidiaries, as related solely to Canada, are not permanently reinvested and as a result we recorded a tax liability and applicable foreign tax credits for the effect of repatriating those foreign earnings. For the remaining undistributed earnings, which we do not consider to be significant, we concluded that these earnings would be permanently reinvested in the local jurisdictions and not repatriated to the United States. Accordingly, we have not provided for U.S. federal income taxes and foreign withholding taxes on those undistributed earnings of our foreign subsidiaries. It is not practicable to estimate the amount that might be payable if some or all of such earnings were to be remitted.
13. Stock-based compensation
Employee stock-based compensation plans
Under the Blackbaud, Inc. 2008 Equity Incentive Plan (2008(the “2008 Equity Plan)Plan”), we may grant incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other stock awards to eligible employees, directors and consultants. We maintain other stock-based compensation plans including the 2004 Stock Plan, under which no additional grants may be made, and the 2009 Equity Compensation Plan for Employees from Acquired Companies, under which we may grant shares of common stock to employees pursuant to employment contracts or other arrangements entered into in connection with past and future acquisitions.
In connection with the acquisition of Kintera in July 2008, we maintain the Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended (Kintera(the “Kintera 2003 Plan)Plan”), which we assumed upon the acquisition of Kintera. In connection with the acquisition of Convio in May 2012, we maintain the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (Convio(the “Convio 1999 Plan)Plan”) and Convio, Inc. 2009 Stock Incentive Plan, as amended (Convio(the “Convio 2009 Plan)Plan”), which we assumed upon the acquisition of Convio. Our Compensation Committee of the Board of Directors administers all of these plans and the stock-based awards are granted under terms determined by them.
The total number of authorized stock-based awards available under our plans was 5,723,0933,404,365 as of December 31, 2013.2015. We issue common stock from our pool of authorized stock upon exercise of stock options and stock appreciation rights, vesting of restricted stock units or upon granting of restricted stock.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Historically, we have issued four types of awards under these plans: stock options, restricted stock awards, restricted stock units, stock appreciation rights and stock appreciation rights.options. The following table sets forth the number of awards outstanding for each award type as of:
| | | Outstanding at December 31, | | Outstanding at December 31, | |
| Award type | 2013 |
| | 2012 |
| 2015 |
| 2014 |
|
| Stock options | 24,158 |
| | 60,775 |
| |
| Restricted stock awards | 1,015,934 |
| | 1,202,121 |
| 1,096,839 |
| 812,451 |
|
| Restricted stock units | 130,512 |
| | 389,913 |
| 396,198 |
| 274,733 |
|
| Stock appreciation rights | 1,292,996 |
| | 2,786,828 |
| 757,203 |
| 983,473 |
|
| Stock options | | 4,745 |
| 7,547 |
|
The majority of the stock-based awards granted under these plans have a 10-year contractual term. Stock appreciation rights (SARs)(“SARs”) have contractual lives of 7 years. Awards granted to our executive officers and certain members of management are subject to accelerated vesting upon a change in control as defined in the employees’ retention agreement.
Expense recognition
We recognize compensation expense associated with stock options and awards with performance or market based vesting conditions on an accelerated basis over the requisite service period of the individual grantees, which generally equals the vesting period. We recognize compensation expense associated with restricted stock awards and SARs on a straight-line basis over the requisite service period of the individual grantees, which generally equals the vesting period. Compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
Stock-based compensation expense is allocated to expense categoriescost of revenue and operating expenses on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense:
| | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| Included in cost of revenue: | | | | | | |
| Cost of subscriptions | $ | 1,032 |
| | $ | 860 |
| | $ | 571 |
| $ | 1,130 |
| $ | 687 |
| $ | 1,032 |
|
| Cost of maintenance | | 420 |
| 689 |
| 545 |
|
| Cost of services | 2,464 |
| | 2,786 |
| | 1,966 |
| 1,944 |
| 2,229 |
| 2,464 |
|
| Cost of maintenance | 545 |
| | 538 |
| | 741 |
| |
| Total included in cost of revenue | 4,041 |
| | 4,184 |
| | 3,278 |
| 3,494 |
| 3,605 |
| 4,041 |
|
| Included in operating expenses: | | | | | | |
| Sales and marketing | 2,351 |
| | 2,527 |
| | 1,325 |
| 2,979 |
| 2,147 |
| 2,351 |
|
| Research and development | 3,731 |
| | 3,556 |
| | 3,039 |
| 4,865 |
| 3,264 |
| 3,731 |
|
| General and administrative | 6,787 |
| | 8,973 |
| | 7,242 |
| 13,908 |
| 8,329 |
| 6,787 |
|
| Total included in operating expenses | 12,869 |
| | 15,056 |
| | 11,606 |
| 21,752 |
| 13,740 |
| 12,869 |
|
| Total | $ | 16,910 |
| | $ | 19,240 |
| | $ | 14,884 |
| |
| Total stock-based compensation expense | | $ | 25,246 |
| $ | 17,345 |
| $ | 16,910 |
|
The total amount of compensation cost related to non-vestedunvested awards not recognized was $34.5$48.5 million at December 31, 2013.2015. It is expected that this amount will be recognized over a weighted average period of 1.9 years .2.0 years.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Stock options
The following table summarizes the options outstanding under each of our stock-based compensation plans as of December 31, 2013.
|
| | | | | | |
| Plan | Date of adoption | | Options outstanding |
| | Range of exercise prices |
| 2004 Stock Plan | March 23, 2004 | | 11,213 |
| | $8.60-$13.05 |
| Kintera 2003 Plan | July 8, 2008 | (1) | 3,977 |
| | $10.59-$19.26 |
| Convio 1999 Plan | May 5, 2012 | (1) | 6,538 |
| | $9.10-$15.54 |
| Convio 2009 Plan | May 5, 2012 | (1) | 2,430 |
| | $15.62-$18.20 |
| Total | | | 24,158 |
| | |
| |
(1) | In connection with the acquisitions of Kintera and Convio, we assumed certain stock options issued and outstanding at the date of acquisition. |
The following table summarizes our outstanding stock options as of December 31, 2013, and changes during the year then ended:
|
| | | | | | | | | | | | |
| Options | Share options |
| | Weighted average exercise price |
| | Weighted average remaining contractual term (in years) | | Aggregate intrinsic value (in thousands) |
|
| Outstanding at January 1, 2013 | 60,775 |
| | $ | 11.09 |
| | | | |
| Exercised | (35,831 | ) | | 10.76 |
| | | | |
| Forfeited | (513 | ) | | 14.72 |
| | | | |
| Expired | (273 | ) | | 13.25 |
| | | | |
| Outstanding at December 31, 2013 | 24,158 |
| | $ | 11.49 |
| | 3.1 | | $ | 631 |
|
| Unvested and expected to vest at December 31, 2013 | 388 |
| | $ | 17.75 |
| | 6.3 | | $ | 8 |
|
| Vested and exercisable at December 31, 2013 | 23,738 |
| | $ | 11.38 |
| | 3.1 | | $ | 624 |
|
There have been no new stock option awards granted since 2005. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $0.8 million, $3.2 million and $3.1 million, respectively. The total fair value of options that vested during the years ended December 31, 2013, 2012 and 2011 was not material. All outstanding options granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.
Restricted stock awards
We have also granted shares of common stock subject to certain restrictions under the 2008 Equity Plan and the 2004 Stock Plan. Restricted stock awards granted to employees vest in equal annual installments generally over four years from the grant date.date subject to the recipient’s continued employment with us. Restricted stock awards granted to non-employee directors vest after one year from the date of grant or, if earlier, immediately prior to the next annual election of directors, provided the non-employee director is serving as a director at that time. The fair market value of the stock at the time of the grant is amortized on a straight-line basis to expense over the period of vesting. Recipients of restricted stock awards have the right to vote such shares and receive dividends.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table summarizes our unvested restricted stock awards as of December 31, 2013,2015, and changes during the year then ended:
| | | Restricted stock awards | Restricted stock awards |
| | Weighted average grant-date fair value |
| Restricted stock awards |
| Weighted average grant-date fair value |
| | Weighted average remaining contractual term (in years) | Aggregate intrinsic value(1) (in thousands) |
|
| Unvested at January 1, 2013 | 1,202,121 |
| | $ | 24.58 |
| |
| Unvested at January 1, 2015 | | 812,451 |
| $ | 32.28 |
| | |
| Granted | 458,462 |
| | 35.31 |
| 736,252 |
| 48.82 |
| | |
| Vested | (416,900 | ) | | 24.86 |
| (339,216 | ) | 31.39 |
| | |
| Forfeited | (227,749 | ) | | 24.55 |
| (112,648 | ) | 35.98 |
| | |
| Unvested at December 31, 2013 | 1,015,934 |
| | $ | 29.30 |
| |
| Unvested at December 31, 2015 | | 1,096,839 |
| $ | 43.28 |
| | 8.2 | $ | 72,238 |
|
| Unvested and expected to vest at December 31, 2015 | | 996,678 |
| $ | 43.60 |
| | 8.3 | $ | 65,641 |
|
| |
| (1) | The intrinsic value is calculated as the market value as of the end of the fiscal period. |
As of December 31, 2013, the number and intrinsic value of restricted stock awards expected to vest was 965,270 and $36.3 million, respectively. The total fair value of restricted stock awards that vested during the years ended December 31, 2015, 2014 and 2013 2012was $10.6 million, $10.5 million and 2011 was $10.4$10.4 million,, $9.6 million and $9.9 million, respectively. The weighted average grant-date fair value of restricted stock awards granted during the years ended December 31, 20122014 and 20112013 was $22.77$37.89 and $27.98,$35.31, respectively.
Restricted stock units
We have also granted restricted stock units subject to certain restrictions under the 2008 Equity Plan and assumed restricted stock units in connection with the Convio acquisition. Restricted stock units granted to employees vest in equal annual installments generally over three years from the grant date.date subject to the recipient’s continued employment with us. We have also granted restricted stock units for which vesting is subject to meeting certain performance and/or market conditions. Restricted stock units granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model. The fair market value of the stock at the time of the grant is amortized to expense on a straight-line basis over the period of vesting except for awards with market or performance conditions, which are amortized on an accelerated basis over the period of vesting. Income tax benefits resulting from the vesting
Blackbaud, Inc.
Notes to the extent expense has been recognized.consolidated financial statements (continued)
The following table summarizes our unvested restricted stock units as of December 31, 2013,2015, and changes during the year then ended:
| | | Restricted stock units | Restricted stock units |
| | Weighted average grant-date fair value |
| Restricted stock units |
| Weighted average grant-date fair value |
| | Weighted average remaining contractual term (in years) | Aggregate intrinsic value(1) (in thousands) |
|
| Unvested at January 1, 2013 | 389,913 |
| | $ | 27.55 |
| |
| Unvested at January 1, 2015 | | 274,733 |
| $ | 32.86 |
| | |
| Granted | 25,427 |
| | 35.70 |
| 269,418 |
| 45.15 |
| | |
| Forfeited | (64,863 | ) | | 27.69 |
| (42,079 | ) | 42.74 |
| | |
| Expired | (30,049 | ) | | 24.70 |
| |
| Vested | (189,916 | ) | | 28.13 |
| (105,874 | ) | 36.43 |
| | |
| Unvested at December 31, 2013 | 130,512 |
| | $ | 28.84 |
| |
| Unvested at December 31, 2015 | | 396,198 |
| $ | 40.51 |
| | 5.7 | $ | 26,094 |
|
| Unvested and expected to vest at December 31, 2015 | | 352,531 |
| $ | 40.59 |
| | 5.8 | $ | 23,218 |
|
| |
| (1) | The intrinsic value is calculated as the market value as of the end of the fiscal period. |
As of December 31, 2013, the number and intrinsicThe total fair value of restricted stock units expected to vestthat vested during the years ended December 31, 2015, 2014 and 2013 was 125,247$3.9 million, $1.4 million, and $4.7$5.4 million,, respectively. The weighted average grant date fair value of restricted stock units granted for the years ended December 31, 20122014 and 20112013 was $21.41$33.38 and $26.68,$35.70, respectively.
Stock appreciation rights
We have granted SARs under the 2008 Equity Plan and the 2004 Stock Plan to certain members of management. The SARs will be settled in stock at the time of exercise and vest in equal annual installments generally over four years from the date of grant subject to the recipient’s continued employment with us. The number of shares issued upon the exercise of the SARs is calculated as the difference between the share price of our stock on the date of exercise and the date of grant multiplied by the number of SARs divided by the share price on the exercise date.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
The following table summarizes our outstanding SARs as of December 31, 2013,2015, and changes during the year then ended:
|
| | | | | | | | | | | | |
| Stock appreciation rights | Stock appreciation rights |
| | Weighted average exercise price |
| | Weighted average remaining contractual term (in years) | | Aggregate intrinsic value (in thousands) |
|
| Outstanding at January 1, 2013 | 2,786,828 |
| | $ | 23.87 |
| | | | |
| Granted | 60,367 |
| | 28.47 |
| | | | |
| Exercised | (1,270,064 | ) | | 23.53 |
| | | | |
| Forfeited | (282,552 | ) | | 24.79 |
| | | | |
| Expired | (1,583 | ) | | $ | 26.17 |
| | | | |
| Outstanding at December 31, 2013 | 1,292,996 |
| | $ | 24.21 |
| | 5.0 | | $ | 17,375 |
|
| Unvested and expected to vest at December 31, 2013 | 844,760 |
| | $ | 24.21 |
| | 5.5 | | $ | 11,350 |
|
| Vested and exercisable at December 31, 2013 | 418,809 |
| | $ | 24.15 |
| | 3.8 | | $ | 5,653 |
|
|
| | | | | | | | | | |
| Stock appreciation rights | Stock appreciation rights |
| Weighted average exercise price |
| | Weighted average remaining contractual term (in years) | Aggregate intrinsic value(1) (in thousands) |
|
| Outstanding at January 1, 2015 | 983,473 |
| $ | 24.33 |
| | | |
| Exercised | (175,617 | ) | 25.09 |
| | | |
| Forfeited | (50,653 | ) | 22.59 |
| | | |
| Outstanding at December 31, 2015 | 757,203 |
| $ | 24.27 |
| | 3.2 | $ | 31,492 |
|
| Unvested and expected to vest at December 31, 2015 | 144,972 |
| $ | 23.14 |
| | 3.9 | $ | 6,193 |
|
| Vested and exercisable at December 31, 2015 | 594,621 |
| $ | 24.55 |
| | 3.0 | $ | 24,561 |
|
| |
| (1) | The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. |
There have been no new SARs granted since 2013. The total intrinsic value of SARs exercised during the yearyears ended December 31, 2015, 2014 and 2013 2012was $5.2 million, $5.0 million, and 2011 was $12.9$12.9 million,, $2.4 million and $2.2 million, respectively. The total fair value of SARs that vested during the yearyears ended December 31, 2015, 2014 and 2013 2012was $1.9 million, $2.5 million, and 2011 was $3.4$3.4 million,, $3.9 million and $3.6 million, respectively. The weighted average grant date fair value of SARs granted for the yearsyear ended December 31, 2013 2012 and 2011was $6.59, $6.36 and $8.10, respectively.$6.59. All outstanding SARs granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model. All SARs granted with a market condition had a fair market value assigned at the grant date based on the use of a Monte Carlo simulation model.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Significant assumptions used in the Black-Scholes option pricing model for SARs granted in 2013, 2012 and 2011 were as follows:
|
| | | | | | | | |
| Year ended December 31, | |
| | 2013 |
| | 2012 |
| | 2011 |
|
| Volatility | 32% to 35% |
| | 35% to 41% |
| | 41% to 42% |
|
| Dividend yield | 1.7% |
| | 1.7% |
| | 1.7% to 1.8% |
|
| Risk-free interest rate | 0.6% to 0.8% |
| | 0.5% to 0.6% |
| | 0.6% to 1.9% |
|
| Expected SAR life in years | 4 |
| | 4 |
| | 4 |
|
|
| | |
| Assumptions | 2013 |
|
| Volatility | 32% - 35% |
|
| Dividend yield | 1.7 | % |
| Risk-free interest rate | 0.6% - 0.8% |
|
| Expected SAR life in years | 4 |
|
The expected volatility assumption is based on the volatility derived from prices of our stock over a historical term consistent with the expected life of the SAR at the time of grant. The dividend yield is based on the adopted dividend policy in effect at the time of grant and the expectation of future dividends. The risk-free interest rate is based on a United States Treasury instrument with a term consistent with the expected life of the SAR at the time of grant. The expected life of the SAR represents the period that the award is expected to be outstanding based on historical experience. In determining the appropriate expected life of the SAR, we segregate our grantees into categories based upon employee levels that are expected to be indicative of similar award-related behavior.
Stock options
The following table summarizes the stock options outstanding under each of our stock-based compensation plans as of December 31, 2015.
|
| | | | | | |
| Plan | Date of adoption | | Options outstanding |
| | Range of exercise prices |
| Kintera 2003 Plan | July 8, 2008 | (1) | 2,314 |
| | $10.59 - $19.26 |
| Convio 1999 Plan | May 5, 2012 | (1) | 1,841 |
| | $9.10 - $12.55 |
| Convio 2009 Plan | May 5, 2012 | (1) | 590 |
| | $15.62 - $18.20 |
| Total | | | 4,745 |
| | |
| |
| (1) | In connection with the acquisitions of Kintera and Convio, we assumed certain stock options issued and outstanding at the date of acquisition. |
The following table summarizes our outstanding stock options as of December 31, 2015, and changes during the year then ended:
|
| | | | | | | | | | |
| Stock options | Stock options |
| Weighted average exercise price |
| | Weighted average remaining contractual term (in years) | Aggregate intrinsic value(1) (in thousands) |
|
| Outstanding at January 1, 2015 | 7,547 |
| $ | 11.49 |
| | | |
| Exercised | (2,802 | ) | 11.31 |
| | | |
| Outstanding at December 31, 2015 | 4,745 |
| $ | 11.60 |
| | 2.9 | $ | 257 |
|
| Vested and exercisable at December 31, 2015 | 4,745 |
| $ | 11.60 |
| | 2.9 | $ | 257 |
|
| |
| (1) | The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. |
There have been no new stock option awards granted since 2005. The total intrinsic value of stock options exercised during the years ended December 31, 2015 and 2014 was insignificant. The total intrinsic value of stock options exercised during the year ended December 31, 2013 was $0.8 million. The total fair value of stock options that vested during the years ended December 31, 2015, 2014 and 2013 was insignificant. All outstanding stock options granted had a fair market value assigned at the grant date based on the use of the Black-Scholes option pricing model.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
14. Stockholders’Stockholders' equity
Preferred stock
Our Board of Directors may fix the relative rights and preferences of each series of preferred stock in a resolution of the Board of Directors.
Dividends
Our Board of Directors has adopted a dividend policy, which provides for the distribution to stockholders a portion of cash generated by us that is in excess of operational needs and capital expenditures. Our credit facilityThe 2014 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.
The following table provides information with respect to quarterly dividends paid on common stock during the year ended December 31, 2013.2015. |
| | | | | |
| Declaration Date | Dividend per Share |
| Record Date | Payable Date |
| February 2013 | $ | 0.12 |
| February 28 | March 15 |
| May 2013 | $ | 0.12 |
| May 28 | June 14 |
| August 2013 | $ | 0.12 |
| August 28 | September 13 |
| November 2013 | $ | 0.12 |
| November 27 | December 13 |
|
| | | | | | |
| Declaration Date | Dividend per Share |
| Record Date | | Payable Date |
| February 2015 | $ | 0.12 |
| February 27 | | March 13 |
| April 2015 | $ | 0.12 |
| May 28 | | June 15 |
| July 2015 | $ | 0.12 |
| August 28 | | September 15 |
| October 2015 | $ | 0.12 |
| November 25 | | December 15 |
In February 2014,2016, our Board of Directors declared a first quarter dividend of $0.12$0.12 per share payable on March 14, 201415, 2016 to stockholders of record on February 28, 2014.26, 2016.
Stock repurchase program
We haveIn August 2010, our Board of Directors approved a stock repurchase program that authorizesauthorized us to purchase up to $50.0$50.0 million of our outstanding shares of common stock. The program does not have an expiration date. The shares can be purchased from time to time on the open market or in privately negotiated transactions depending upon market conditions and other factors. Under the 2014 Credit Facility, we also have restrictions on our ability to repurchase shares of our common stock.
We account for purchases of treasury stock under the cost method. The remaining amount available to purchase stock under the stock repurchase program was $50.0$50.0 million as of December 31, 2013.2015.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Changes in accumulated other comprehensive loss by component
The changes in accumulated other comprehensive loss by component, consisted of the following: |
| | | | | | | | | | | |
| (in thousands) | Gains and losses on cash flow hedges |
| | Foreign currency translation adjustment |
| | Total |
|
| Balance at December 31, 2012 | $ | (791 | ) | | $ | (1,182 | ) | | $ | (1,973 | ) |
| Other comprehensive (loss) income before reclassifications | (259 | ) | | 53 |
| | (206 | ) |
Amounts reclassified from accumulated other comprehensive loss to interest expense(1) | 794 |
| | — |
| | 794 |
|
| Net current-period other comprehensive income | 535 |
| | 53 |
| | 588 |
|
| Balance at December 31, 2013 | $ | (256 | ) | | $ | (1,129 | ) | | $ | (1,385 | ) |
|
| | | | | | | | | |
| | Years ended December 31, | |
| (in thousands) | 2015 |
| 2014 |
| 2013 |
|
| Accumulated other comprehensive loss, beginning of period | $ | (1,032 | ) | $ | (1,385 | ) | $ | (1,973 | ) |
| By component: | | | |
| Gains and losses on cash flow hedges: | | | |
| Accumulated other comprehensive (loss) income balance, beginning of period | $ | (164 | ) | $ | (256 | ) | $ | (791 | ) |
| Other comprehensive income (loss) before reclassifications, net of tax effects of $514, $644 and $(30) | (818 | ) | (999 | ) | 46 |
|
| Amounts reclassified from accumulated other comprehensive loss to interest expense | 1,569 |
| 1,215 |
| 794 |
|
| Amounts reclassified from accumulated other comprehensive loss to loss on debt extinguishment and termination of derivative instruments | — |
| 587 |
| — |
|
| Tax benefit included in provision for income taxes | (606 | ) | (711 | ) | (305 | ) |
| Total amounts reclassified from accumulated other comprehensive loss | 963 |
| 1,091 |
| 489 |
|
| Net current-period other comprehensive income (loss) | 145 |
| 92 |
| 535 |
|
| Accumulated other comprehensive loss balance, end of period | $ | (19 | ) | $ | (164 | ) | $ | (256 | ) |
| Foreign currency translation adjustment: | | | |
| Accumulated other comprehensive loss balance, beginning of period | $ | (868 | ) | $ | (1,129 | ) | $ | (1,182 | ) |
| Translation adjustments | 62 |
| 261 |
| 53 |
|
| Accumulated other comprehensive loss balance, end of period | (806 | ) | (868 | ) | (1,129 | ) |
| Accumulated other comprehensive loss, end of period | $ | (825 | ) | $ | (1,032 | ) | $ | (1,385 | ) |
| |
(1) | Included in the amount reclassified from accumulated other comprehensive loss during 2013 was an income tax benefit of $0.3 million. |
15. Employee profit-sharingDefined contribution plan
We have a defined contribution plan 401(k) profit-sharing plan (the 401K Plan) covering substantially all employees. Employees can contribute between 1% and 30% of their salaries in 2013, 20122015, 2014 and 2011,2013, and we match 50% of qualified employees’ contributions up to 6% of their salary. The 401K Plan also provides for additional employer contributions to be made at our discretion. Total matching contributions to the 401K Plan for the years ended December 31, 2013, 20122015, 2014 and 20112013 were $5.1$5.3 million,, $4.6 $5.6 million and $4.0$5.1 million,, respectively. There waswere no discretionary contributioncontributions by us to the 401K Plan in 2013, 20122015, 2014 and 2011.2013.
16. Segment information
AsIn March 2015, we implemented a new internal reporting structure in which Target Analytics is no longer being viewed as a stand-alone business unit, but rather as a suite of December 31, 2013, our reportable segments were as follows:solutions being sold by the General Markets Business Unit (the “GMBU”), the Enterprise Customer Business Unit or the ECBU, the General Markets Business Unit, or the GMBU,(the “ECBU”), and the International Business Unit (the “IBU”). As a result of the change in our internal reporting structure, which became effective in March 2015, the operating results of Target Analytics are no longer regularly reviewed by our chief operating decision maker ("CODM") to make decisions about resources to be allocated nor to assess performance, and, therefore, Target Analytics no longer meets the definition of an operating segment. In addition, Target Analytics did not meet any of the quantitative thresholds set forth in ASC 280, Segment Reporting, during the years ended December 31, 2014 and 2013 and had been previously disclosed for informational purposes. The change in reportable segments had no effect on our consolidated financial position, results of operations or IBU, and Target Analytics. Following is a description of each reportable segment:
The ECBU is focused on marketing, sales, delivery and support to large and/or strategic, specifically identified prospects and customers in North America;cash flows for the periods presented.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
As of December 31, 2015, our reportable segments were the GMBU, the ECBU, and the IBU. Following is a description of each reportable segment:
The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America;
The ECBU is focused on marketing, sales, delivery and support to all large and/or strategic prospects and customers in North America; and
The IBU is focused on marketing, sales, delivery and support to all prospects and customers outside of North America; and
Target Analytics is primarily focused on marketing, sales and delivery of analytics services to all prospects and customers in North America.
Our chief operating decision makerCODM is our chief executive officer or CEO.("CEO"). The CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, excluding stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Currently, the CEO believes that the exclusion of these costs allows for a better understanding of the operating performance of the operating units and management of other operating expenses and cash needs. The CEO does not review any segment balance sheet information.
We have recast our segment disclosures for 2012the years ended December 31, 2014 and 20112013 in order to present them on a consistent basis with our change in reportable segments in the current year. During 2013, we refined our methodology for allocating revenue and expenses to our reportable segments to provide further precision in those allocations. Summarized reportable segment financial results, were as follows:
| | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| Revenue by segment: | | | | | | |
| GMBU | | $ | 313,935 |
| $ | 270,637 |
| $ | 240,413 |
|
| ECBU | $ | 195,570 |
| | $ | 165,161 |
| | $ | 127,945 |
| 279,897 |
| 245,119 |
| 219,695 |
|
| GMBU | 225,352 |
| | 203,178 |
| | 171,999 |
| |
| IBU | 41,488 |
| | 40,068 |
| | 33,841 |
| 41,997 |
| 47,068 |
| 42,148 |
|
| Target Analytics | 39,845 |
| | 37,453 |
| | 35,769 |
| |
Other(1) | 1,562 |
| | 1,559 |
| | 1,314 |
| 2,111 |
| 1,597 |
| 1,561 |
|
| Total revenue | $ | 503,817 |
| | $ | 447,419 |
| | $ | 370,868 |
| $ | 637,940 |
| $ | 564,421 |
| $ | 503,817 |
|
Segment operating income(2): | | | | | | |
| GMBU | | $ | 156,876 |
| $ | 139,310 |
| $ | 137,962 |
|
| ECBU | $ | 103,443 |
| | $ | 74,419 |
| | $ | 53,141 |
| 137,162 |
| 121,285 |
| 111,745 |
|
| GMBU | 131,707 |
| | 121,985 |
| | 101,572 |
| |
| IBU | 8,082 |
| | 5,265 |
| | 6,922 |
| 5,404 |
| 4,291 |
| 8,760 |
|
| Target Analytics | 16,582 |
| | 17,619 |
| | 16,882 |
| |
Other(1) | 1,342 |
| | 1,485 |
| | 1,203 |
| (120 | ) | 1,585 |
| 1,642 |
|
| | 261,156 |
| | 220,773 |
| | 179,720 |
| 299,322 |
| 266,471 |
| 260,109 |
|
| Less: | | | | | | |
Corporate unallocated costs(3) | 168,106 |
| | 164,749 |
| | 106,330 |
| (195,146 | ) | (176,614 | ) | (167,059 | ) |
| Stock-based compensation costs | 16,910 |
| | 19,240 |
| | 14,884 |
| |
| Stock based compensation costs | | (25,246 | ) | (17,345 | ) | (16,910 | ) |
| Amortization expense | 24,598 |
| | 17,349 |
| | 7,578 |
| (32,218 | ) | (26,148 | ) | (24,598 | ) |
| Interest expense (income), net | 5,751 |
| | 5,718 |
| | 17 |
| |
| Other expense (income), net | 462 |
| | 392 |
| | (346 | ) | |
| Interest expense | | (8,073 | ) | (6,011 | ) | (5,818 | ) |
| Other expense, net | | (1,687 | ) | (1,119 | ) | (395 | ) |
| Income before provision for income taxes | $ | 45,329 |
| | $ | 13,325 |
| | $ | 51,257 |
| $ | 36,952 |
| $ | 39,234 |
| $ | 45,329 |
|
| |
| (1) | Other includes revenue and the related costs from the sale of productssolutions and services not directly attributable to an operatinga reportable segment. |
| |
| (2) | Segment operating income includes direct, controllable costs related to the sale of productssolutions and services by the reportable segment, except for IBU, which includes operating costs from our foreign locations such as sales, marketing, general, administrative, depreciation and facilities costs.segment. |
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
| |
| (3) | Corporate unallocated costs include research and development, depreciation expense, and certain corporate sales, marketing, general and administrative expenses. |
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Revenue by productsolution and service group for each of our reportable segments were as follows: | | | | Year ended December 31, | | Years ended December 31, | |
| (in thousands) | 2013 |
| | 2012 |
| | 2011 |
| 2015 |
| 2014 |
| 2013 |
|
| GMBU revenue: | | |
| Subscriptions | | 167,010 |
| 125,223 |
| 96,931 |
|
| Maintenance | | 83,974 |
| 86,840 |
| 85,028 |
|
| Services | | 56,294 |
| 48,814 |
| 47,769 |
|
| License fees and other | | 6,657 |
| 9,760 |
| 10,685 |
|
| Total GMBU revenue | | $ | 313,935 |
| $ | 270,637 |
| $ | 240,413 |
|
| | | |
| ECBU revenue: | | | | | | |
| License fees | $ | 7,374 |
| | $ | 7,888 |
| | $ | 6,741 |
| |
| Subscriptions | 97,392 |
| | 73,246 |
| | 45,572 |
| 147,719 |
| 121,484 |
| 102,992 |
|
| Maintenance | | 56,196 |
| 45,069 |
| 39,662 |
|
| Services | 48,471 |
| | 44,882 |
| | 39,662 |
| 66,741 |
| 67,756 |
| 66,754 |
|
| Maintenance | 39,503 |
| | 35,905 |
| | 32,759 |
| |
| Other | 2,830 |
| | 3,240 |
| | 3,211 |
| |
| License fees and other | | 9,241 |
| 10,810 |
| 10,287 |
|
| Total ECBU revenue | $ | 195,570 |
| | $ | 165,161 |
| | $ | 127,945 |
| $ | 279,897 |
| $ | 245,119 |
| $ | 219,695 |
|
| | | | | | | |
| GMBU revenue: | | | | | | |
| License fees | $ | 6,718 |
| | $ | 9,068 |
| | $ | 8,742 |
| |
| IBU revenue: | | |
| Subscriptions | 88,766 |
| | 65,482 |
| | 41,017 |
| 16,885 |
| 16,703 |
| 12,747 |
|
| Maintenance | | 13,631 |
| 15,509 |
| 14,055 |
|
| Services | 41,228 |
| | 39,036 |
| | 34,820 |
| 9,943 |
| 11,801 |
| 11,994 |
|
| Maintenance | 84,763 |
| | 86,026 |
| | 83,963 |
| |
| Other | 3,877 |
| | 3,566 |
| | 3,457 |
| |
| Total GMBU revenue | $ | 225,352 |
| | $ | 203,178 |
| | $ | 171,999 |
| |
| | | | | | | |
| IBU revenue: | | | | | | |
| License fees | $ | 2,510 |
| | $ | 3,476 |
| | $ | 3,830 |
| |
| Subscriptions | 12,743 |
| | 10,038 |
| | 4,575 |
| |
| Services | 11,337 |
| | 12,230 |
| | 11,472 |
| |
| Maintenance | 14,056 |
| | 13,673 |
| | 13,484 |
| |
| Other | 842 |
| | 651 |
| | 480 |
| |
| License fees and other | | 1,538 |
| 3,055 |
| 3,352 |
|
| Total IBU revenue | $ | 41,488 |
| | $ | 40,068 |
| | $ | 33,841 |
| $ | 41,997 |
| $ | 47,068 |
| $ | 42,148 |
|
| | | | | | | |
| Target Analytics revenue: | | | | | | |
| License fees | $ | 113 |
| | $ | 119 |
| | $ | 162 |
| |
| Other revenue: | | |
| Subscriptions | 13,755 |
| | 13,320 |
| | 12,292 |
| 145 |
| 25 |
| (14 | ) |
| Maintenance | | — |
| — |
| — |
|
| Services | 25,495 |
| | 23,452 |
| | 22,810 |
| — |
| — |
| 31 |
|
| Maintenance | 423 |
| | 497 |
| | 396 |
| |
| Other | 59 |
| | 65 |
| | 109 |
| |
| Total Target Analytics revenue | $ | 39,845 |
| | $ | 37,453 |
| | $ | 35,769 |
| |
| | | | | | | |
| Other revenue: | | | | | | |
| License fees | $ | — |
| | $ | — |
| | $ | — |
| |
| Subscriptions | — |
| | 16 |
| | 88 |
| |
| Services | 17 |
| | 26 |
| | 17 |
| |
| Maintenance | — |
| | — |
| | 2 |
| |
| Other | 1,545 |
| | 1,517 |
| | 1,207 |
| |
| License fees and other | | 1,966 |
| 1,572 |
| 1,544 |
|
| Total Other revenue | $ | 1,562 |
| | $ | 1,559 |
| | $ | 1,314 |
| $ | 2,111 |
| $ | 1,597 |
| $ | 1,561 |
|
| Total consolidated revenue | $ | 503,817 |
| | $ | 447,419 |
| | $ | 370,868 |
| $ | 637,940 |
| $ | 564,421 |
| $ | 503,817 |
|
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
We derive a portion of our revenue from our foreign operations. The following table presents revenue by geographic region based on country of invoice origin and identifiable, long-lived assets by geographic region based on the location of the assets.
| | | (in thousands) | United States |
| | Canada |
| | Europe |
| | Asia Pacific |
| | Total Foreign |
| | Total |
| United States |
| Canada |
| Europe |
| Australia |
| Total Foreign |
| Total |
|
| Revenue from external customers: | | | | | | | | | | | | | | | |
| 2015 | | $ | 570,519 |
| $ | 25,958 |
| $ | 23,970 |
| $ | 17,493 |
| $ | 67,421 |
| $ | 637,940 |
|
| 2014 | | 491,731 |
| 26,944 |
| 27,411 |
| 18,335 |
| 72,690 |
| 564,421 |
|
| 2013 | $ | 439,887 |
| | $ | 23,344 |
| | $ | 24,107 |
| | $ | 16,479 |
| | $ | 63,930 |
| | $ | 503,817 |
| 439,887 |
| 23,344 |
| 24,107 |
| 16,479 |
| 63,930 |
| 503,817 |
|
| 2012 | 386,376 |
| | 22,770 |
| | 23,022 |
| | 15,251 |
| | 61,043 |
| | 447,419 |
| |
| 2011 | 317,305 |
| | 21,725 |
| | 21,162 |
| | 10,676 |
| | 53,563 |
| | 370,868 |
| |
| Property and equipment: | | | | | | | | | | | | | | | |
| December 31, 2013 | $ | 47,367 |
| | $ | 72 |
| | $ | 1,694 |
| | $ | 417 |
| | $ | 2,183 |
| | $ | 49,550 |
| |
| December 31, 2012 | 47,826 |
| | 188 |
| | 810 |
| | 239 |
| | 1,237 |
| | 49,063 |
| |
| December 31, 2015 | | $ | 49,682 |
| $ | 58 |
| $ | 1,501 |
| $ | 1,410 |
| $ | 2,969 |
| $ | 52,651 |
|
| December 31, 2014 | | 47,419 |
| 34 |
| 1,869 |
| 574 |
| 2,477 |
| 49,896 |
|
It is impracticalimpracticable for us to identify our total assets by segment.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
17. Quarterly results (unaudited)
| | | (in thousands, except per share data) | December 31, 2013 |
| | September 30, 2013 |
| | June 30, 2013 |
| | March 31, 2013 |
| December 31,
2015 |
| September 30,
2015 |
| June 30,
2015 |
| March 31,
2015 |
|
| Total revenue | $ | 134,872 |
| | $ | 127,854 |
| | $ | 125,468 |
| | $ | 115,623 |
| $ | 175,877 |
| $ | 158,811 |
| $ | 156,259 |
| $ | 146,993 |
|
| Gross profit | 68,514 |
| | 71,740 |
| | 68,855 |
| | 62,045 |
| 90,661 |
| 84,638 |
| 82,829 |
| 75,181 |
|
| Income from operations | 14,622 |
| | 18,008 |
| | 14,318 |
| | 4,594 |
| 10,271 |
| 13,968 |
| 14,461 |
| 8,012 |
|
| Income before provision for income taxes | 13,287 |
| | 16,490 |
| | 12,532 |
| | 3,020 |
| 7,255 |
| 12,344 |
| 11,314 |
| 6,039 |
|
| Net income | 11,790 |
| | 9,393 |
| | 6,623 |
| | 2,666 |
| 6,411 |
| 7,911 |
| 7,042 |
| 4,285 |
|
| Earnings per share | | | | | | | | |
| Basic | $ | 0.26 |
| | $ | 0.21 |
| | $ | 0.15 |
| | $ | 0.06 |
| |
Basic(1) | | $ | 0.14 |
| $ | 0.17 |
| $ | 0.15 |
| $ | 0.09 |
|
| Diluted | $ | 0.26 |
| | $ | 0.21 |
| | $ | 0.15 |
| | $ | 0.06 |
| $ | 0.14 |
| $ | 0.17 |
| $ | 0.15 |
| $ | 0.09 |
|
| | | | | | | | |
| (in thousands, except per share data) | December 31, 2012 |
| | September 30, 2012 |
| | June 30, 2012 |
| | March 31, 2012 |
| December 31,
2014 |
| September 30,
2014 |
| June 30,
2014 |
| March 31,
2014 |
|
| Total revenue | $ | 120,051 |
| | $ | 122,472 |
| | $ | 110,190 |
| | $ | 94,706 |
| $ | 152,813 |
| $ | 144,598 |
| $ | 139,388 |
| $ | 127,622 |
|
| Gross profit | 64,299 |
| | 67,344 |
| | 59,685 |
| | 53,631 |
| 75,549 |
| 76,450 |
| 74,692 |
| 64,292 |
|
| Income (loss) from operations | 9,875 |
| | 6,185 |
| | (1,877 | ) | | 5,252 |
| |
| Income (loss) before provision for income taxes | 7,342 |
| | 4,629 |
| | (3,446 | ) | | 4,800 |
| |
| Net income (loss) | 3,270 |
| | 2,825 |
| | (2,271 | ) | | 2,759 |
| |
| Earnings (loss) per share | | | | | | | | |
| Income from operations | | 7,589 |
| 13,502 |
| 15,996 |
| 9,277 |
|
| Income before provision for income taxes | | 5,450 |
| 12,276 |
| 14,906 |
| 6,602 |
|
| Net income | | 4,816 |
| 10,380 |
| 9,280 |
| 3,814 |
|
| Earnings per share | | |
| Basic | $ | 0.07 |
| | $ | 0.06 |
| | $ | (0.05 | ) | | $ | 0.06 |
| $ | 0.11 |
| $ | 0.23 |
| $ | 0.21 |
| $ | 0.08 |
|
| Diluted | $ | 0.07 |
| | $ | 0.06 |
| | $ | (0.05 | ) | | $ | 0.06 |
| |
Diluted(1) | | $ | 0.10 |
| $ | 0.23 |
| $ | 0.20 |
| $ | 0.08 |
|
| |
| (1) | The individual amounts for each quarter may not sum to full year totals due to rounding. |
Included in the fourth quarter 2013 was $8.5 million of subscription revenue which was attributable to a prospective change in presentation from net to gross for revenues and costs associated with certain of our payment processing services effective October 2013. Earnings (loss) per common share are computed independently for each of the periods presented and, therefore, may not add up to the total for the year. The results of operations of acquired companies are included in the consolidated results of operations from the date of their respective acquisition as described in Note 3.3 of these consolidated financial statements. In addition, we completed the sale of a business in 2015 as discussed in Note 18 of these consolidated financial statements.
18. Disposition of business
On May 18, 2015, we completed the sale of RLC Customer Technology B.V. ("RLC"), a formerly wholly-owned entity based in the Netherlands, to a private software company by selling all of the issued and outstanding stock of RLC in exchange for $0.4 million in gross cash proceeds. We incurred an insignificant amount of legal costs associated with the disposition of this business. As part of the disposition, we derecognized $1.4 million of goodwill related to RLC. As a result of this disposition, we also recognized an insignificant foreign currency translation loss in our consolidated statement of comprehensive income. Overall, this transaction, including costs associated with the disposition and the recognition of an insignificant foreign currency translation gain, resulted in a $2.0 million loss, which was recorded in loss on sale of business in our consolidated statements of comprehensive income for the year ended December 31, 2015. The disposition of RLC did not qualify for reporting as a discontinued operation since the transaction did not represent a strategic shift in our operations.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
18.The following table presents the carrying amounts of RLC's assets and liabilities immediately preceding the disposition on May 18, 2015, which are excluded from our consolidated balance sheet as of December 31, 2015.
|
| | | |
| (in thousands) | |
| Cash and cash equivalents | $ | 952 |
|
| Accounts receivable, net of allowance | 132 |
|
| Prepaid expenses and other assets | 38 |
|
| Property and equipment, net | 31 |
|
| Deferred tax asset | 6 |
|
| Goodwill | 1,374 |
|
| Intangible assets, net | 289 |
|
| Total assets held-for-sale | $ | 2,822 |
|
| | |
| Trade accounts payable | $ | 82 |
|
| Accrued expenses and other liabilities | 181 |
|
| Deferred revenue | 490 |
|
| Deferred tax liability | 90 |
|
| Total liabilities held-for-sale | $ | 843 |
|
19. Restructuring
During 2012, in an effort to consolidate our operating locations, we decided not to renew our lease for office space in San Diego, CA, which matured on June 30, 2013. As a result, we initiated a plan to transition most of our operations based in San Diego, CA to our Austin, TX location, which we substantially completed in June 2013 when the lease matured.
ended. The following table summarizes ouramount we incurred in before-tax restructuring costs related to our San Diego office transition as of December 31, 2013: |
| | | | | | | | | | | |
| | Total costs expected to be incurred |
| | Costs incurred during the year ended |
| | Cumulative costs incurred as of |
|
| (in thousands) | | December 31, 2013 | |
| By component: | | | | | |
| Employee severance and retention costs | $ | 295 |
| | $ | 120 |
| | $ | 295 |
|
| Employee relocation costs | 187 |
| | 187 |
| | 187 |
|
| | 482 |
| | 307 |
| | 482 |
|
| By reportable segment: | | | | | |
| Other | $ | 482 |
| | $ | 307 |
| | $ | 482 |
|
The change in our liabilitycharges related to our San Diego office transition during the year ended December 31, 2013 consisted of the following: |
| | | | | | | | | | | | | | | |
| | Accrued at |
| | Increases for incurred costs |
| | Costs paid |
| | Accrued at |
|
| (in thousands) | December 31, 2012 |
| December 31, 2013 |
|
| Employee severance and retention costs | $ | 175 |
| | $ | 120 |
| | $ | (295 | ) | | $ | — |
|
| Employee relocation costs | — |
| | 187 |
| | (187 | ) | | — |
|
| | $ | 175 |
| | $ | 307 |
| | $ | (482 | ) | | $ | — |
|
In January 2013, we implemented a realignment of our workforce in response to changes in the nonprofit industry and global economy. The realignment included a reduction in workforce of approximately 135 positions andpositions. The cost associated with this realignment was substantially completedincurred during 2013.
The following table summarizes our We incurred $3.2 million in before-tax restructuring costscharges related to the reductionrealignment of our workforce during the year ended December 31, 2013.
Blackbaud, Inc.
Notes to consolidated financial statements (continued)
Item 9. Changes in workforceand disagreements with accountants on accounting and financial disclosure
None.
Item 9A. Controls and procedures
Evaluation of disclosure controls and procedures
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.
Changes in internal control over financial reporting
No change in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2015 with respect to our operations that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We have excluded Smart Tuition from our assessment of internal control over financial reporting as of December 31, 2013:2015, because it was acquired on October 2, 2015. Smart Tuition assets represented 5.5% of our total assets and 1.3% of our total revenue as of and for the year ended December 31, 2015.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015, based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation under the Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2015.
Attestation report of registered public accounting firm
The effectiveness of our internal control over financial reporting as of December 31, 2015, has been audited by our independent registered public accounting firm, as stated in their attestation report, which is included in Item 8 of this Annual Report on Form 10-K.
Item 9B. Other information
None.
PART III.
Item 10. Directors, executive officers and corporate governance
The information required by Item 10 with respect to Directors and Executive Officers is incorporated by reference from the information under the captions “Election of Directors,” “Information Regarding Meetings of the Board and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Code of Business Conduct and Ethics and Code of Ethics,” contained in Blackbaud’s Proxy Statement for the 2016 Annual Meeting of Stockholders expected to be held on June 15, 2016, except for the identification of executive officers of the Registrant which is set forth in Part I of this report.
Item 11. Executive compensation
The information required by Item 11 is incorporated by reference from the information under the captions "Director Compensation," “Executive Compensation,” “Compensation Discussion and Analysis” and “Summary Compensation Table” contained in Blackbaud’s Proxy Statement for the 2016 Annual Meeting of Stockholders expected to be held on June 15, 2016.
Item 12. Security ownership of certain beneficial owners and management and related stockholder matters
The information required by Item 12 is incorporated by reference from information under the captions “Stock Ownership” and “Equity Compensation Plan Information” contained in Blackbaud’s Proxy Statement for the 2016 Annual Meeting of Stockholders expected to be held on June 15, 2016.
Item 13. Certain relationships, related transactions and director independence
The information required by Item 13 is incorporated by reference from the information under the captions “Transactions with Related Persons,” and “Independence of Directors” contained in Blackbaud’s Proxy Statement for the 2016 Annual Meeting of Stockholders expected to be held on June 15, 2016.
Item 14. Principal accountant fees and services
The information required by Item 14 is incorporated by reference from the information under the caption “Audit Committee Report,” contained in Blackbaud’s Proxy Statement for the 2016 Annual Meeting of Stockholders expected to be held on June 15, 2016.
PART IV.
Item 15. Exhibits and financial statement schedules
(a) The following documents are included as part of the Annual Report on Form 10-K:
The following statements are filed as part of this report:
|
| | | | | | | | | | | |
| | Total costs expected to be incurred |
| | Costs incurred during the year ended |
| | Cumulative costs incurred as of |
|
| (in thousands) | December 31, 2013 | |
| By component: | | | | | |
| Employee severance costs | $ | 3,187 |
| | $ | 3,187 |
| | $ | 3,187 |
|
| By reportable segment: | | | | | |
| ECBU | $ | 828 |
| | $ | 828 |
| | $ | 828 |
|
| GMBU | 290 |
| | 290 |
| | 290 |
|
| Target Analytics | 136 |
| | 136 |
| | 136 |
|
| Other | 1,933 |
| | 1,933 |
| | 1,933 |
|
| | $ | 3,187 |
| | $ | 3,187 |
| | $ | 3,187 |
|
| |
| 2. | Financial statement schedules |
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements thereto.
The exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K:
The change in our liability |
| | | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number | | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| 2.1 |
| | Agreement and Plan of Merger and Reincorporation dated April 6, 2004 | | S-1/A | | 4/6/2004 | | 2.1 |
| | |
| 2.2 |
| | Stock Purchase Agreement dated January 16, 2007 by and among Target Software, Inc., Target Analysis Group, Inc., all of the stockholders of Target Software, Inc. and Target Analysis Group, Inc., Charles Longfield, as stockholder representative, and Blackbaud, Inc. | | 8-K | | 1/18/2007 | | 2.2 |
| | |
| 2.3 |
| | Agreement and Plan of Merger dated as of May 29, 2008 by and among Blackbaud, Inc., Eucalyptus Acquisition Corporation and Kintera, Inc. | | 8-K | | 5/30/2008 | | 2.3 |
| | |
| 2.4 |
| | Share Purchase Agreement dated as of April 29, 2009 between RLC Group B.V., as the Seller, and Blackbaud, Inc., as the Purchaser | | 10-Q | | 8/7/2009 | | 10.42 |
| | |
| 2.5 |
| * | Stock Purchase Agreement dated as of February 1, 2011 by and among Public Interest Data, Inc., all for the stockholders of Public Interest Data, Inc., Stephen W. Zautke, as stockholder representative and Blackbaud, Inc. | | 10-Q | | 5/10/2011 | | 2.3 |
| | |
| 2.6 |
| | Agreement and Plan of Merger dated as of January 16, 2012 by and among Blackbaud, Inc., Caribou Acquisition Corporation and Convio, Inc. | | 8-K | | 1/17/2012 | | 2.4 |
| | |
|
| | | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| 2.7 |
| | Stock Purchase Agreement dated as of October 6, 2011 by and among Everyday Hero Pty. Ltd., all of the stockholders of Everyday Hero Pty. Ltd., Nathan Betteridge as stockholder representative and Blackbaud Pacific Pty. Ltd. | | 10-K | | 2/29/2012 | | 2.7 |
| | |
| 2.8 |
| | Purchase Agreement, dated August 30, 2014, by and among MicroEdge Holdings, LLC, Blackbaud, Inc, direct and indirect holders of all of the outstanding equity interests of MicroEdge Holdings, LLC, and VFF I AIV I, L.P., as Sellers’ Representative. | | 8-K | | 10/2/2014 | | 10.76 |
| | |
| 2.9 |
| | Unit Purchase Agreement, dated as of August 10, 2015, by and between Smart Tuition Holdings, LLC and Blackbaud, Inc. | | 8-K | | 10/8/2015 | | 10.78 |
| | |
| 3.0 |
| | Amendment, Consent and Waiver, Agreement dated as of October 2, 2015, by and between Smart Tuition Holdings, LLC and Blackbaud, Inc. | | 8-K | | 10/8/2015 | | 10.79 |
| | |
| 3.4 |
| | Amended and Restated Certificate of Incorporation of Blackbaud, Inc. | | DEF 14A | | 4/30/2009 | | | | |
| 3.5 |
| | Amended and Restated Bylaws of Blackbaud, Inc. | | 8-K | | 3/22/2011 | | 3.4 |
| | |
| 10.6 |
| † | Blackbaud, Inc. 1999 Stock Option Plan, as amended | | S-1/A | | 4/6/2004 | | 10.6 |
| | |
| 10.8 |
| † | Blackbaud, Inc. 2001 Stock Option Plan, as amended | | S-1/A | | 4/6/2004 | | 10.8 |
| | |
| 10.20 |
| † | Blackbaud, Inc. 2004 Stock Plan, as amended, together with Form of Notice of Stock Option Grant and Stock Option Agreement | | 8-K | | 6/20/2006 | | 10.20 |
| | |
| 10.26 |
| † | Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Blackbaud, Inc. 2004 Stock Plan | | 10-K | | 2/28/2007 | | 10.26 |
| | |
| 10.27 |
| † | Form of Notice of Stock Appreciation Rights Grant and Stock Appreciation Rights Agreement under the Blackbaud, Inc. 2004 Stock Plan | | 10-K | | 2/28/2007 | | 10.27 |
| | |
| 10.33 |
| † | Blackbaud, Inc. 2008 Equity Incentive Plan | | DEF 14A | | 4/29/2008 | | | | |
| 10.34 |
| † | Form of Notice of Grant and Stock Option Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.34 |
| | |
| 10.35 |
| † | Form of Notice of Grant and Restricted Stock Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.35 |
| | |
| 10.36 |
| † | Form of Notice of Grant and Stock Appreciation Rights Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan | | S-8 | | 8/4/2008 | | 10.36 |
| | |
| 10.37 |
| †** | Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder | | 10-K/A | | 3/26/2008 | | 10.2 |
| | |
| 10.38 |
| †** | Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder | | 10-K/A | | 3/26/2008 | | 10.3 |
| | |
| 10.39 |
| † | Form of Retention Agreement | | 10-Q | | 11/10/2008 | | 10.37 |
| | |
| 10.40 |
| | Triple Net Lease Agreement dated as of October 1, 2008 between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC | | 8-K | | 12/11/2008 | | 10.37 |
| | |
| 10.41 |
| † | Blackbaud, Inc. 2009 Equity Compensation Plan for Employees from Acquired Companies | | S-8 | | 7/2/2009 | | 10.41 |
| | |
| 10.49 |
| † | Employment Agreement dated November 7, 2008 between Blackbaud, Inc. and Charlie Cumbaa | | 10-Q | | 11/8/2011 | | 10.49 |
| | |
|
| | | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| 10.50 |
| † | Employment Agreement dated June 25, 2008 between Blackbaud, Inc. and Kevin Mooney | | 10-Q | | 11/8/2011 | | 10.50 |
| | |
| 10.55 |
| † | Employment Agreement dated November 14, 2011 between Blackbaud, Inc. and Anthony W. Boor | | 10-K | | 2/29/2012 | | 10.55 |
| | |
| 10.59 |
| †*** | Convio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of stock option agreements | | S-1/A | | 3/19/2010 | | 10.1 |
| | |
| 10.60 |
| †*** | Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger) | | 8-K | | 2/28/2011 | | 10.1 |
| | |
| 10.61 |
| †*** | Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement | | 8-K | | 2/28/2011 | | 10.2 |
| | |
| 10.62 |
| †*** | Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements | | S-1 | | 1/22/2010 | | 10.2 |
| | |
| 10.63 |
| † | Blackbaud, Inc. 2008 Equity Incentive Plan, as amended | | 8-K | | 6/26/2012 | | 10.59 |
| | |
| 10.64 |
| † | Amendment to the Blackbaud, Inc. 2008 Equity Incentive Plan | | 8-K | | 6/26/2012 | | 10.60 |
| | |
| 10.65 |
| † | Form of Employment Agreement between Blackbaud, Inc. and each of Anthony W. Boor, Charles T. Cumbaa, Jana B. Eggers, Kevin W. Mooney and Joseph D. Moye | | 10-K | | 2/26/2013 | | 10.65 |
| | |
| 10.66 |
| | Lease Amendment and Remediation Agreement entered into as of March 22, 2013, by and between Blackbaud, Inc. and Duck Pond Creek-SPE, LLC. | | 8-K | | 3/28/2013 | | 10.66 |
| | |
| 10.68 |
| † | Form of Management Transition Retention Agreement between Blackbaud, Inc. and each of Anthony W. Boor, Charles T. Cumbaa, Jana B. Eggers, Kevin W. Mooney and Joseph D. Moye | | 10-Q | | 5/7/2013 | | 10.68 |
| | |
| 10.69 |
| † | Management Transition Retention Agreement between Blackbaud, Inc. and Bradley J. Holman | | 10-Q | | 5/7/2013 | | 10.69 |
| | |
| 10.70 |
| † | Letter Agreement dated October 23, 2013 between Blackbaud, Inc. and Anthony W. Boor | | 8-K | | 10/25/2013 | | 10.70 |
| | |
| 10.71 |
| † | Offer Letter Agreement dated November 7, 2013 between Blackbaud, Inc. and Michael P. Gianoni | | 10-K | | 2/26/2014 | | 10.71 |
| | |
| 10.72 |
| † | Employment and Noncompetition Agreement dated November 8, 2013 between Blackbaud, Inc. and Michael P. Gianoni | | 10-K | | 2/26/2014 | | 10.72 |
| | |
| 10.73 |
| | Credit Agreement, dated as of February 28, 2014, by and among Blackbaud, Inc., as Borrower, the lenders referred to therein, SunTrust Bank, as Administrative Agent, Swingline Lender and an Issuing Lender, Bank of America, N.A., as an Issuing Lender and Syndication Agent, and Regions Bank and Fifth Third Bank as Co-Documentation Agents with SunTrust Robinson Humphrey, Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and Fifth Third Bank, as Joint Lead Arrangers and Joint Bookrunners. | | 8-K | | 3/3/2014 | | 10.73 |
| | |
| 10.74 |
| | Pledge Agreement, dated as of February 28, 2014, by Blackbaud and Convio in favor of SunTrust Bank, as Administrative Agent, for the ratable benefit of itself and the secured parties referred to therein. | | 8-K | | 3/3/2014 | | 10.74 |
| | |
|
| | | | | | | | | | | | |
| | | | | Filed In |
| Exhibit Number |
| | Description of Document | | Registrant’s Form | | Dated | | Exhibit Number | | Filed Herewith |
| 10.75 |
| | Guaranty Agreement, dated as of February 28, 2014, by Convio in favor of SunTrust Bank, as Administrative Agent, for the ratable benefit of itself and the secured parties referred to therein. | | 8-K | | 3/3/2014 | | 10.75 |
| | |
| 10.77 |
| | Employment contract between Blackbaud, Inc. and Bradley J. Holman | | 10-Q | | 8/6/2015 | | 10.77 |
| | |
| 10.80 |
| † | Deed of Release dated October 29, 2015 by and between Bradley J. Holman and Blackbaud Pacific Pty Ltd. | | | | | | | | X |
| 10.81 |
| † | Amended and Restated Employment and Noncompetition Agreement dated December 9, 2015 between Blackbaud, Inc. and Michael P. Gianoni | | | | | | | | X |
| 21.1 |
| | Subsidiaries of Blackbaud, Inc. | | | | | | | | X |
| 23.1 |
| | Consent of Independent Registered Public Accounting Firm | | | | | | | | X |
| 31.1 |
| | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 31.2 |
| | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 32.1 |
| | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 32.2 |
| | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | X |
| 101.INS |
| **** | XBRL Instance Document | | | | | | | | X |
| 101.SCH |
| **** | XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| 101.CAL |
| **** | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| 101.DEF |
| **** | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| 101.LAB |
| **** | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| 101.PRE |
| **** | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
|
| |
| * | The registrant has applied for an extension of the confidential treatment it was previously granted with respect to portions of this exhibit. Those portions have been omitted from the exhibit and filed separately with the U.S. Securities and Exchange Commission. |
|
| |
| ** | The Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder (“Kintera 2000 Plan Documents”) and the Kintera, Inc. Amended and Restated 2003 Equity Incentive Plan, as amended, and form of Stock Option Agreement thereunder (“Kintera 2003 Plan Documents”) were filed by Kintera in its Form 10-K/A on March 26, 2008 as Exhibits 10.2 and 10.3, respectively. We assumed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents when we acquired Kintera in July 2008. We filed the Kintera 2000 Plan Documents and Kintera 2003 Plan Documents by incorporation by reference as exhibits 10.37 and 10.38, respectively, in our Form S-8 on August 4, 2008. |
|
| |
| *** | The Convio, Inc. 2009 Amended and Restated Stock Incentive Plan, as amended, and forms of stock option agreements thereunder (“Convio 2009 Original Plan Documents”) and the Convio, Inc. 1999 Stock Option/Stock Issuance Plan, as amended, and forms of stock option agreements thereunder (“Convio 1999 Plan Documents”) were filed by Convio in its Forms S-1/A and S-1, filed March 19, 2010 and January 25, 2010 as exhibits 10.1 and 10.2, respectively. The Convio, Inc. Form of Nonstatutory Stock Option Notice (Double Trigger) and Convio, Inc. Form of Restricted Stock Unit Notice (Double Trigger) and Agreement were filed by Convio in its Form 8-K on February 28, 2011 as exhibits 10.1 and 10.2 (together with the Convio 2009 Original Plan Documents, the “Convio 2009 Plan Documents”). We assumed the Convio 2009 Plan Documents and Convio 1999 Plan Documents when we acquired Convio in May 2012. We filed the Convio 2009 Plan Documents and Convio 1999 Plan Documents by incorporation by reference as exhibits 10.59, 10.60, 10.61 and 10.62 in our Form S-8 on May 7, 2012. |
|
| |
| **** | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability of that Section, and shall not be part of any registration statement or other document filed under the Securities Act of the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
|
| |
| † | Indicates management contract or compensatory plan, contract or arrangement. |
SIGNATURES
Pursuant to the reduction in workforce during 2013, consistedrequirements of Section 13 or 15(d) of the following:Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | | | | | | |
| | Accrued at |
| | Increases for incurred costs |
| | Costs paid |
| | Accrued at |
|
| (in thousands) | December 31, 2012 |
| December 31, 2013 |
|
| Employee severance costs | $ | — |
| | $ | 3,187 |
| | $ | (3,187 | ) | | $ | — |
|
|
| | |
| | |
| | Blackbaud, Inc. |
| | |
| Signed: | February 24, 2016 | /S/ MICHAEL P. GIANONI |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the Registrant and on the dates indicated.
|
| | | | | | |
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| /S/ MICHAEL P. GIANONI | | President, Chief Executive Officer and Director (Principal Executive Officer) | | Date: | February 24, 2016 |
| Michael P. Gianoni | | | | |
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| /S/ ANTHONY W. BOOR | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | | Date: | February 24, 2016 |
| Anthony W. Boor | | | | |
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| /S/ ANDREW M. LEITCH | | Chairman of the Board of Directors | | Date: | February 24, 2016 |
| Andrew M. Leitch | | | | |
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| /S/ TIMOTHY CHOU | | Director | | Date: | February 24, 2016 |
| Timothy Chou | | | | |
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| /S/ GEORGE H. ELLIS | | Director | | Date: | February 24, 2016 |
| George H. Ellis | | | | |
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| /S/ DAVID G. GOLDEN | | Director | | Date: | February 24, 2016 |
| David G. Golden | | | | |
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| /S/ SARAH E. NASH | | Director | | Date: | February 24, 2016 |
| Sarah E. Nash | | | | |
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| /S/ JOYCE M. NELSON | | Director | | Date: | February 24, 2016 |
| Joyce M. Nelson | | | | |
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| /S/ PETER J. KIGHT | | Director | | Date: | February 24, 2016 |
| Peter J. Kight | | | | |
