UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended December 31, 2009
or
¨ | 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)
Delaware | 11-2617163 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrants telephone number, including area code)
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES x 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
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 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 ¨ 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 registrants 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 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 ¨ |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
The aggregate market value of the registrants common stock held by non-affiliates of the registrant on June 30, 2009 (based on the closing sale price of $15.55 on that date), was approximately $588,267,650. 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 registrants common stock outstanding at February 12, 2010 was 44,551,083.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2010 Annual Meeting of Stockholders currently scheduled to be held June 23, 2010 are incorporated by reference into Part III hereof.
ANNUAL REPORT ON FORM 10-K
Table of Contents
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PART I |
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
27 | |||
PART II |
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Item 5. |
28 | |||
Item 6. |
33 | |||
Item 7. |
Managements discussion and analysis of financial condition and results of operations |
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Item 7A. |
58 | |||
Item 8. |
58 | |||
Item 9. |
Changes in and disagreements with accountants on accounting and financial disclosure |
58 | ||
Item 9A. |
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Item 9B. |
59 | |||
PART III |
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Item 10. |
60 | |||
Item 11. |
60 | |||
Item 12. |
Security ownership of certain beneficial owners and management and related stockholder matters |
60 | ||
Item 13. |
Certain relationships, related transactions and director independence |
60 | ||
Item 14. |
60 | |||
PART IV |
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Item 15. |
61 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements that may be deemed to be forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These 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 and Section 21E of the Securities Exchange Act of 1934. All statements in this report not dealing with historical results or current facts are forward-looking and are based on estimates, assumptions and projections. Statements which include the words believes, seeks, expects, may, should, intends, likely, targets, plans, anticipates, estimates or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements.
Although we attempt to be accurate in making these forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. In addition, other important factors that could cause results to differ materially include those set forth under Item 1A. Risk factors and elsewhere in this report and in our other SEC filings. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
Overview
We are the leading global provider of software and related services designed specifically for nonprofit organizations. Our mission is to make the world a better place by working with the nonprofit community to improve lives. We support our mission statement through 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. |
Our customers use our products and services to help increase donations, reduce fundraising costs, build online communities and improve communications with constituents, manage their finances and optimize operations. We have focused solely on the nonprofit market since our incorporation in 1982. At the end of 2009, we had approximately 22,000 customers spread over 55 countries. Our customers come from nearly every segment of the nonprofit sector, including education, foundations, health and human services, faith-based, arts and cultural, public and societal benefits, environment and animal welfare and international and foreign affairs.
Nonprofit Industry
The nonprofit industry is large and diverse
There were more than 1.7 million U.S. nonprofit organizations registered with the Internal Revenue Service in 2008, including 1.2 million charitable 501(c)(3) organizations and we estimate there are approximately another 2.0 million nonprofit organizations internationally. According to Giving USA 2009, donations to nonprofit
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organizations in the U.S. in 2008 were $307.7 billion, amounting to 2.2% of U.S. GDP. The compound annual growth rate of donations over the 40 year period from 1968 to 2008 was 7.2%, not adjusted for inflation. These organizations also receive fees for services they provide which are estimated at approximately $850 billion annually.
Johns Hopkins Universitys 2006 Nonprofit Employment Data Project, the most recent survey on nonprofit employment data, indicated that nonprofits employ nearly 10% of the work force in the United States and more if volunteers are included. Also according to this study, worldwide, nonprofit organizations accounted for $1.3 trillion in total annual expenditures.
Traditional methods of fundraising are often costly and inefficient
Many nonprofits use manual methods or stand-alone software applications not 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; |
| Comply with complex accounting, tax and reporting issues that differ from traditional businesses; |
| Solicit cash and in-kind contributions from businesses to help raise money or deliver products/services; |
| Provide a wide array of programs and services to individual constituents; and |
| Improve the data collection and sharing capabilities of their employees, volunteers and donors by creating and providing distributed access to centralized databases. |
In addition, as a result of the negative impact the recent economic environment has had on donations, we believe the nonprofit industry has an even greater need for operational efficiencies to maximize the services they can deliver. Because of these challenges, we believe nonprofit organizations can benefit from software applications specifically designed to serve their particular needs.
The Blackbaud Solutions
We offer a broad suite of products and services that address the fundraising needs and operational challenges facing nonprofit organizations by providing them with software and services that help them increase donations, reduce the overall costs of managing their businesses and build a strong sense of community while effectively managing communications with their constituents. We provide our solutions to nonprofit organizations in several ways. Today, we offer our products principally on a perpetual license basis. However, an increasing number of our products are offered on a software-as-a-service (SaaS), or as a hosted software offering and we expect this trend to continue in the future. We also offer a suite of analytical tools and related services that enable nonprofit organizations to extract, aggregate 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, as well as maintenance and technical support.
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Nonprofit organizations use our products and services to increase donations
Managing the fundraising process is a critical business function for nonprofits. Our fundraising and constituent relationship management solutions allow nonprofit organizations to establish, maintain, and develop their relationships with current and prospective donors and other constituents. Our fundraising products and services enable them to use a centralized database, as well as the Internet and an array of analytical tools, to facilitate and expand their fundraising efforts. In addition, we believe our products and services help nonprofit organizations increase donations by enabling them to:
| Solicit large numbers of potential donors; |
| Deliver personalized messages that drive constituent action; |
| Provide an easy-to-use system for sharing and using critical fundraising information; |
| Utilize our Internet-based offerings to receive online donations and support online volunteer and events management; and |
| Simplify and automate business processes. |
Nonprofit organizations use Blackbaud software, services and tools to improve operational effectiveness
Our comprehensive suite of software, services and analytical tools help nonprofit organizations manage the key aspects of their operations. By automating business processes, our products streamline operations for our customers and help to reduce the overall costs of operating their organizations. We provide solutions that address many of the technological and business process needs of our customers, including:
| 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; |
| Internet based fundraising; |
| Event, data and information management; |
| Student information systems for independent schools and small colleges; |
| Ticketing management; |
| Data analysis and reporting tools and services; |
| Online interactive communities for social networking and relationship management; |
| Management of complex volunteer networks; and |
| Results tracking for multiple campaigns. |
Our Strategy
Our objective is to maintain and extend our position as the leading provider of software and related services designed specifically for nonprofit organizations. Key elements for achieving this objective are to:
Grow our customer base
We intend to expand our industry-leading customer base and enhance our market position. We have established a strong market presence with approximately 22,000 customers. However, in a 2007 nonprofit market survey by Addison Whitney, only 30% of respondents were familiar with Blackbaud. We believe that the fragmented nature
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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 experience, the depth of our product capabilities, and our strong brand recognition. We also intend to expand our overall sales efforts, especially national accounts and enterprise-focused sales teams.
Maintain and expand existing customer relationships
We have historically had success selling maintenance renewals and additional products and services to existing customers. In each of the past five years, approximately 95% of our customers renewed their maintenance and support plans. We will continue to pursue opportunities to expand our existing customer base by increasing both the number of our products and services they use and the frequency with which they use them. To this end, we have dedicated sales teams that focus exclusively on selling products and services to existing customers.
Enable customers to effectively utilize the Internet as a comprehensive business tool
We will enhance our existing products and develop new products and services that will allow our customers to more fully utilize the Internet to effectively achieve their missions. Although online fundraising comprises a small percentage of all charitable contributions, our research indicates that online donations are growing as a percentage of total contributions. A study we conducted together with the ePhilanthropy Foundation found that online donations increased by 44% in 2008. We offer a variety of Internet applications and consulting services that allow nonprofits to use the Internet for online fundraising, e-marketing, alumni and membership directories, newsletters, event management and volunteer coordination.
Introduce additional products and services
We intend to use our expertise and experience in developing leading products for the nonprofit industry to introduce additional products and related services. We plan to build stronger relationships with existing customers and attract new customers. We believe that our existing proprietary software can form the foundation for an even wider range of products and services for nonprofit organizations. Our current products share over half of our proprietary software code and were developed using common standards and practices. We believe this shared code allows us to more cost effectively expedite the development and rollout of product offerings and updates. In addition, we are building our future product offerings on a common platform, which we anticipate will improve our ability to create new offerings efficiently and expeditiously.
Pursue strategic acquisitions and alliances
We intend to selectively pursue acquisitions and alliances in the future with companies that provide us with complementary technology, customers and personnel with significant relevant experience, as well as to increase our access to additional geographic and vertical markets. We have completed significant acquisitions over the past five years, including the acquisition of Target Software, Inc. and Target Analysis Group, Inc., or the Target Companies, in January 2007, eTapestry.com, or eTapestry, in August 2007, Kintera Inc., or Kintera, in July 2008 and RLC Customer Centric Technology B.V., or RLC, in April 2009. We are also currently involved in a number of strategic relationships. We believe that our size and our history of leadership in the nonprofit sector make us an attractive acquirer or partner for others in the industry.
Expand international presence
We believe the United Kingdom, Canada, and Australia as well as other international markets represent growing market opportunities for our products and services. As further discussed below, we recently established a separate business unit to serve the needs of our operations in international markets and expand our presence in these markets. The acquisition of RLC in April 2009 provided us a foundation to expand into the Netherlands and other Western European markets. We currently have offices in Almere, Netherlands; Glasgow, Scotland; London, England; Sydney, Australia; and Toronto, Canada. We believe the overall market of international nonprofit organizations is changing. Donations to nonprofit organizations are increasing in response to reductions
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in governmental funding of certain activities. 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 international presence by expanding our sales and marketing efforts. We plan to make use of our installed base of customers to sell complementary products and services, and we plan to develop and offer new products tailored to international markets.
Products and Services
We license software and provide various services to our customers. During 2009, we generated revenue in six reportable segments and in four geographic regions, as described in more detail in Note 14 of our consolidated financial statements. These revenue segments are license fees, maintenance fees, and subscription fees for our software products, consulting and education services, analytic services and others. Effective January 1, 2010, we reorganized our business into three operating units, which we believe will better align our organization around key customer groups. The three operating units are the General Markets Business Unit, the Enterprise Customer Business Unit and the International Business Unit.
Software products
We offer nonprofit organizations a wide variety of software products, which can be used individually to help organizations with specific functions, such as fundraising, 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 Raisers Edge
The Raisers Edge is the leading software application specifically designed to manage nonprofit organizations constituent relationship management activity. The Raisers Edge enables nonprofit organizations to communicate with their constituents, manage fundraising activities, expand their development efforts and make better informed decisions through powerful segmentation, analysis and reporting capabilities. The Raisers Edge is highly configurable, allowing a nonprofit organization to create numerous custom views of constituent records and automate a variety of business processes. Among other things, The Raisers Edge allows an organization to access extensive biographical and demographic information about donors and prospects, process gifts, monitor solicitation activity, analyze data and publish reports. The Raisers Edge improves operational efficiency and effectiveness by reducing overall mailing costs, offering faster data entry and gift processing, supporting major donor cultivation and using the Internet to send email appeals and accept online donations. The Raisers Edge also integrates with Microsoft® Office® to enable users to take advantage of additional functionality.
In addition to the standard functionality of The Raisers Edge, we have built a number of extended applications to address the specific needs of various market segments.
Blackbaud Enterprise CRM
Blackbaud Enterprise CRM (Enterprise CRM) is a flexible, customizable, scalable and secure Constituent Relationship Management (CRM) solution that addresses the unique needs of larger nonprofit organizations. Enterprise CRM helps large institutions build their brands, develop deeper and more personalized relationships with their constituencies and gain organizational efficiencies. Enterprise CRM brings together disparate information, such as annual and capital giving, gift planning, major giving, and alumni and parent systems, across multiple locations and within the departments and programs of a large organization. With a single system of record that can be securely and efficiently shared, larger organizations are able to turn their data into timely, actionable information that maximizes their fundraising efforts, synchronizes campaigns across departments and programs, and strengthens relationships with constituents.
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eTapestry
eTapestry is a SaaS donor management and fundraising solution built specifically for smaller nonprofits. It tracks donors, prospects or alumni while managing gifts, pledges, and payments. eTapestry has been built to be operated in a hosted environment and be accessed via the Internet. This technology provides a system that is simple to maintain, costs little to operate and is intuitively easy to learn without extensive training. It offers nonprofit organizations a cost-effective way to manage donors, process gifts, create reports, accept online donations and communicate with constituents.
Online Solutions
Blackbaud NetCommunity
Blackbaud NetCommunity is an Internet marketing and communications tool that enables organizations that utilize the Raisers Edge software to build interactive websites and manage email marketing campaigns. With Blackbaud NetCommunity, organizations can establish online communities for social networking among constituents and also provide a platform for online giving, membership purchases, event registration, and more. Because Blackbaud NetCommunity requires the Raisers Edge database to operate, it can only be sold with Raisers Edge or to existing Raisers Edge customers. However, Blackbaud NetCommunity, in concert with The Raisers Edge, does 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 software-as-a-service, provides organizations with an integrated system of applications to manage e-marketing, communications, programs, services and online fundraising. Sphere eMarketing enables an organizations volunteers, members, donors and staff to share real-time data and information in an online community to better manage constituent relationships. Sphere eMarketing is 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.
Additionally, Sphere Connect, the Sphere open platform technology, provides organizations a developer-friendly interface with well documented and supported APIs, and a cost-effective approach to custom application development and integration to meet unique technology and business needs.
BlackbaudNow
BlackbaudNow offers small organizations a fast and simple way to develop an online presence and begin accepting online donations. It allows organizations, with no upfront cost, to publish a simple website, accept donations, manage constituent relationships, run reports and send emails to supporters. A PayPal® Donate button is built into the product.
Financial Management
The Financial Edge
The Financial Edge is an accounting application designed to address the specific accounting, analytical and financial reporting needs of nonprofit organizations. It integrates with The Raisers Edge to simplify gift entry processing and relate information from both systems in an informative manner to eliminate redundant tasks. The Financial Edge improves the transparency and accountability of organizations by allowing them to track and report from multiple views, measure the effectiveness of programs and other initiatives, use budgets as monitoring and strategic planning tools and supervise cash flow. As a result, The Financial Edge provides
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nonprofit organizations with the means to help manage fiscal and fiduciary responsibility, enabling them to be more accountable to their constituents. In addition, The Financial Edge is designed specifically to meet governmental accounting and financial reporting requirements prescribed by the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB).
As with The Raisers Edge, we have built extended applications to address the specific functional needs of our customers such as Purchase Orders, WebPurchasing, Electronic Funds Transfer, Cash Management, Cash Receipts, Payroll, Fixed Assets, Student Billing, School Store Manager and Accounting Forms.
FundWare
FundWare is a fund accounting solution designed to provide nonprofit and/or government organizations with improved operational efficiencies, reporting flexibility and the ability to manage sophisticated fund allocations. It uses a configurable set of modules designed to provide functionality that meets an organizations specific needs. FundWare unites accounting, budgeting and reporting tools with a built-in audit trail and easy-to-prepare audit schedules. Users are able to easily produce GASB and FASB financial reports including indirect costs or complex revenue allocations. Further, users have the ability to conduct real-time budget monitoring, maintain budget modification histories, including comparisons between actual and revised budgets and prepare cross-fiscal year budgets. FundWare utilizes an Excel-based reporting tool that enables the use of current Excel spreadsheets and skills while linking to FundWares financial database, providing real-time information without the extra step of importing or exporting.
School Management
The Education Edge
The Education Edge is a comprehensive student information management system designed principally to organize an independent schools admissions and registrar processes, including capturing detailed student information, creating class schedules, managing attendance records and performance/grades, producing demographic, statistic, and analytical reports and printing report cards and transcripts. With The Education Edge, an organization can keep biographical and address information for students, parents, and constituents consistent across all of its Blackbaud software products. This integrated system allows an independent school to reduce data-entry time and ensure that information is current and accurate throughout the school.
Blackbauds Student Information System
Blackbauds 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 registrars processes. In addition, Blackbauds Student Information System can be combined with other applications to offer integration across back-office functions, providing one-time entry for biographical information, financial reliability, and audit trail functionality. This 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 boost attendance and increase revenue. The Patron Edge can be integrated with The Raisers 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.
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Direct Marketing
Blackbaud Direct Marketing
Blackbaud Direct Marketing allows nonprofit organizations to achieve integrated campaign planning by managing direct marketing campaigns with multiple types of media and channels. It delivers campaign management capabilities including planning and budgeting, predictive analysis and list segmentation, campaign execution and performance measurement, and reporting. The result is that nonprofit organizations can more easily manage their marketing campaigns while maximizing the return on investment of their direct marketing efforts. Nonprofit organizations can integrate Blackbaud Direct Marketing with Blackbaud Enterprise CRM or The Raisers Edge to combine fundraising functions with direct marketing campaigns.
Events Management
Sphere Events
The Sphere Friends Asking Friends software product enables organizations to quickly and easily launch and manage online event fundraising websites. Sphere Friends Asking Friends facilitates growth in donations and participation levels by providing participants tools to become fundraisers and recruiters on behalf of nonprofit organizations. It is used by organizations of all sizes and budgets to manage regional to national events.
Consulting and education services
Our consultants provide conversion and implementation 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 customers 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 organizations system is properly aligned with an organizations 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 organizations needs and provide business process improvement consulting. This work is performed by staff consultants who have extensive and relevant domain experience in all aspects of nonprofit management, accounting, project management and IT services. This experience and knowledge allows us to make recommendations and implement best practices to help our customers reach their goals. In addition, we offer software customization services to organizations that do not have the time or in-house resources to create customized solutions for our core products. We believe that no other software company provides as 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.
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Blackbaud OnDemand
The Blackbaud OnDemand hosting solution provides our customers with a convenient, affordable alternative to setting up and managing Blackbaud applications on their own. Our technical team will set up and manage on an ongoing basis the hosting of one or more Blackbaud systems on our secure servers and ensure that they are accessible and current on a 24/7 basis. All that is needed to connect is a web browser. We manage everything from initial data setup through network security configuration.
Analytics services
Target Analytics
Target Analytics was formed in early 2008 by combining Blackbauds prospect research division with the then newly acquired Target Analysis Group. We added to the offerings further in 2008 with the P!N wealth screening service which was added with the acquisition of Kintera. Target Analytics offers a comprehensive range of products and services for nonprofit organizations analytics needs. These include donor acquisition and development tools, prospect segmentation, wealth identification and collaborative peer benchmarking. Target Analytics offers software, solutions, and services such as:
Acquisition ListsTarget Analytics acquisition mailing lists are built using a proprietary cooperative database designed exclusively for nonprofit mailing lists and response modeling. The database was developed to help locate the best prospects for each organization and make acquisition efforts more productive.
WealthPointA database screening solution that delivers detailed wealth identification information on prospects. WealthPoint provides initial prospect qualification, assists with prospect cultivation and delivers information on financial capacity.
P!N ServiceA wealth profiling and screening service that enables nonprofits to more efficiently identify, profile, monitor and rank the wealth of prospects in their databases. Additionally, this service enables nonprofits to edit, analyze, prioritize and combine external data collected from a wide range of sources with its internal donor database.
ProspectPointA custom data modeling solution that delivers critical information on a prospects or donors likelihood to make a gift to an organization. It analyzes current and historical data from external sources and behavioral trends to identify an organizations best potential annual, planned and major giving prospects, as well as recommends appropriate ask amounts and gift types.
ResearchPointCombines public data with donor information from a nonprofits database of records to build a complete view of prospects, enabling it to better target and secure gifts. It also enables organizations to help uncover major and planned giving prospects within a nonprofits database.
donorCentricsA set of strategic analytic and benchmarking tools designed to drive fundraising at nonprofit organizations. These reports uncover strengths and weaknesses in fundraising programs, highlight opportunities for growth and facilitate strategy-sharing across organizations.
Data Enrichment ServicesServices that enrich the quality of the data in our customers databases. These include a service that finds outdated address files in the database and makes corrections based on the requirements and certifications of the United States Postal Service and a service that uses known fields in an organizations constituent records to search and find lost donors and prospects.
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Maintenance
Most of our customers enroll in one of our maintenance and support programs. In each of the past five years, more than 95% of our customers have renewed their maintenance plans. Customers enrolled in the plans 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 maintenance plans receive enhanced benefits.
Payment Processing
Our products 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 ACH checking transactions, through secure online transactions. Through our Sphere products, we provide payment processing services in which we collect funds on behalf of our customers for a processing fee.
Customers
We have customers in every principal vertical market within the nonprofit industry. At the end of 2009, we had approximately 22,000 customers that range from small, local charities to healthcare and higher education organizations to the largest national health and human services organizations. No one customer accounts for more than 2% of our annual revenue.
Sales and Marketing
The majority of our software and related services are sold through direct sales forces. 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 in Charleston, South Carolina, Cambridge, Massachusetts, near Indianapolis, Indiana and in San Diego, California. We also employ remote sales staff in metropolitan areas throughout the United States, the United Kingdom, Canada and Australia. As of December 31, 2009, we had approximately 233 direct sales employees. We plan to continue expanding our direct sales force in the Americas, Europe and Asia as market demand recovers from the current economic environment. During 2009, our sales force was divided into two main areas of responsibility:
| Selling products and services to existing customers; and |
| Acquiring new customers. |
In addition, a dedicated portion of our sales team is focused exclusively on large, enterprise-wide accounts. We have a group of sales engineers who support both new and existing customers in this market segment. In general, sales representatives are responsible for handling one product line in a designated geographic area. However, sales representatives for the K-12 independent schools market, small college market and the arts and cultural market are responsible for selling all of our software products.
We generally begin a customer relationship with the sale of one of our primary products, such as The Raisers Edge or Blackbaud Enterprise CRM, and then sell additional products and services to the customer as the organizations needs increase.
We conduct marketing programs to create brand recognition and market awareness for our products 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.
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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 believe that service to others makes the world a better place and champion this value through our global corporate philanthropy and employee-focused programs. In addition to having employees select grant recipients for our endowment fund, we celebrate individual acts of service through a competitive grant program that honors excellent examples of volunteerism and benefits the organizations they serve.
Competition
The market for software and related services in the nonprofit sector is competitive, although the competition is highly fragmented. For certain areas of the market, entry barriers are low. However, we believe our experience and product depth makes us a formidable 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 Sage and SunGard. Other companies, such as Microsoft, Salesforce.com and Oracle have greater marketing resources, revenue and market recognition than we do. They offer few 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 enter the market 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; |
| Custom-developed solutions; |
| Providers of traditional, less automated fundraising services; 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. In addition, we compete with custom-developed solutions created either internally by the nonprofit organization or outside by custom service providers. We believe that we compete successfully against these companies, as building a custom solution requires extensive financial and technical resources that may not be available or cost-effective for the nonprofit organization. In addition, the nonprofit organizations legacy database and software system may not have been designed to support the increasingly complex and advanced needs of todays growing community of nonprofit organizations.
We also compete with providers of traditional, less automated fundraising services, including parties providing services in support of traditional direct mail campaigns, special events fundraising, 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 markets needs. We believe we compete successfully against these traditional fundraising services, primarily because our products and services are more automated, more robust and more efficient.
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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 products and services. As of December 31, 2009, we had approximately 377 employees working on research and development. Our research and development expenses for the years ending on December 31, 2009, 2008, and 2007 were $45.7 million, $38.7 million and $28.5 million, respectively.
Technology and Architecture
We have products such as Blackbaud Enterprises CRM and Blackbaud Direct Marketing that are built on the Microsoft® .Net framework platform. These products are web-delivered applications utilizing a Service Oriented Architecture built on Internet standards and protocols such as HTTP, XML and SOAP. This architecture is designed to support flexible deployment scenarios including both on-premise, as well as hosted by Blackbaud in a SaaS model. 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. This allows our customers to extend and modify the functionality of our applications without requiring them to make any source code or data modifications themselves. This is important for customers who want to customize our applications by incorporating their own business logic into key areas of the applications. The end result is a robust customization platform through which the application can be modified and extended without requiring source code alteration.
Our version 7.x generation products utilize a three-tier client server architecture built on the Microsoft® Component Object Model (COM). The architecture of both our .Net and COM-based development models ensure our applications are:
| 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 clients 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 have and intend to continue to license technologies from third parties that are integrated into our products. We believe that the loss of any third-party technologies currently integrated into our products would not have a material adverse effect on our business, but this might change in the future. In addition, if we are unable to obtain licenses for third-party technology for future products, our product development could be delayed, which in turn could harm our business and operating results.
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 Raisers Edge and Blackbaud Enterprise CRM. We have applied for additional trademarks. We currently have six patents pending on our technology, including functionality in The Financial Edge, The Information Edge, and ProspectPoint.
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Employees
As of December 31, 2009, we had 1,956 employees, consisting of 436 in sales and marketing, 377 in research and development, 508 in consulting and professional services, 249 in customer support, 166 in subscriptions and 220 general and administrative personnel. None of our employees 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.
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 as soon as is reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an Internet site that contains these reports at www.sec.gov.
Executive Officers
The following table sets forth certain information concerning our executive officers as of February 25, 2010:
Name |
Age | |||
Marc E. Chardon |
54 | President and Chief Executive Officer | ||
Charles T. Cumbaa |
57 | President, Enterprise Customer Business Unit | ||
Kevin Mooney |
51 | President, General Markets Business Unit | ||
Timothy V. Williams |
60 | Chief Financial Officer, Senior Vice President, Treasurer and Assistant Secretary | ||
Louis J. Attanasi |
48 | Senior Vice President of Product Development | ||
Lee W. Gartley |
45 | Senior Vice President, President of Target Analytics | ||
Charles L. Longfield |
53 | Senior Vice President, Chief Scientist | ||
John J. Mistretta |
54 | Senior Vice President of Human Resources | ||
Heidi H. Strenck |
40 | Senior Vice President, Controller, Assistant Treasurer and Assistant Secretary | ||
Gerard J. Zink |
46 | Senior Vice President of General Markets Business Unit Customer Support |
Marc E. Chardon joined us in November 2005. Previously, Mr. Chardon served as Chief Financial Officer for the $11 billion Information Worker business group at Microsoft, where he was responsible for the core functions of long-term strategic financial planning and business performance management. He joined Microsoft in August 1998 as General Manager of Microsoft France. During his three-year leadership, the subsidiary remained one of the three most admired companies by French professionals and achieved increased customer satisfaction. Prior to joining Microsoft, Mr. Chardon was General Manager of Digital France. He joined Digital in 1984, and held a variety of international marketing and business roles within the company. In 1994, Mr. Chardon was named Director, Office of the President, with responsibility for Digitals corporate strategy development. Mr. Chardon is an American/French dual national. He is an economics honors graduate from Harvard University.
Charles T. Cumbaa has served as our President, Enterprise Customer Business Unit since January 2010. From, May 2001 to December 2009 he served as Senior Vice President of Products and Services. Prior to joining us, Mr. Cumbaa was an Executive Vice President with Intertech Information Management 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. Prior to that, he was employed by McKinsey & Company. Mr. Cumbaa holds a BA from Mississippi State University and an MBA from Harvard Business School.
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Kevin Mooney has served as our 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 worlds 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. Mr. Mooney graduated from Seton Hall University and holds an MBA in Finance from Georgia State University.
Timothy V. Williams has served as our Chief Financial Officer since January 2001. Mr. Williams is responsible for all of our financial reporting and controls, as well as human resources and legal. From January 1994 to January 2001 he served as Executive Vice President and CFO of Mynd, Inc. (now a subsidiary of Computer Sciences Corporation), a provider of software and services to the insurance industry. Prior to that, Mr. Williams worked at Holiday Inn Worldwide, most recently as Executive Vice President and Chief Financial Officer. Mr. Williams serves on the Board of Directors of PROS Holdings, Inc., a publicly traded software development company. Mr. Williams holds a BA from the University of Northern Iowa.
Louis J. Attanasi has served as our Senior Vice President of Product Development since January 2010. From January 2007 to January 2010, he served as our Senior Vice President of Products, initially serving in the capacity of Vice President of Products in 1996. From May 1986 to 1996, he served as a Software Engineer, Product Architect, and Product Development Manager. Prior to joining us, he taught mathematics at the State University of New York at Stony Brook and worked as a Software Engineer at Environmental Energy Corporation. Mr. Attanasi holds a BS in Mathematics from State University of New York at Stony Brook and an MS in Mathematics from the University of Charleston.
Lee W. Gartley joined us in January 2007 as a Senior Vice President as part of our acquisition of the Target Companies. Mr. Gartley remains President of, and responsible for the day-to-day operations of, Target Analytics. Prior to joining the Target Companies in 1998, Mr. Gartley was a senior marketer with Art Technology Group from 1996 until 1998 where he helped to launch an online commerce platform. From 1992 to 1996 he was a management consultant with Boston Consulting Group working with clients in a variety of industries to develop and implement sound strategy. Mr. Gartley holds a BA in Physics from Bowdoin College and an MBA from the Kellogg Graduate School of Management.
Charles L. Longfield has served as our Senior Vice President, Chief Scientist since January 2010. He joined us in January 2007 as our Chief Scientist as part of our acquisition of the Target Companies, both of which he founded and then led as Chief Executive Officer since the early 1990s. Mr. Longfield has extensive experience designing and implementing national as well as international constituency databases that address the fundraising information needs at many of the worlds largest nonprofit organizations. Mr. Longfield holds a BA in Mathematics and a M.Ed. from Harvard University and has over 30 years of experience helping nonprofits automate their fundraising operations.
John J. Mistretta, our Senior Vice President 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 from 1998 to 2005. Earlier in his career, Mr. Mistretta held various senior Human Resources positions over a thirteen year period at Citicorp. Mr. Mistretta holds a Masters of Science in Counseling and a BA in Psychology from the State University of New York at Oswego.
Heidi H. Strenck has served as our Senior Vice President and Controller since January 2007. From October 2002 until January 2007, Ms. Strenck served as our Vice President and Controller. Ms. Strenck joined us in September 1996 and held key management roles as Accounting Manager from 1996 until 1997 and as Controller until 2002. Prior to joining us, she served as a Senior Associate with Coopers & Lybrand and as Internal Auditor for The Raymond Corporation. Ms. Strenck holds a BA from Hartwick College.
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Gerard J. Zink has served as our Senior Vice President of General Markets Business Unit Customer Support since January 2010. From January 2007 until January 2010, Mr. Zink served as our Senior Vice President of Customer Support. From June 1996 until January 2007 he served as our Vice President of Customer Support. Mr. Zink is responsible for overall customer satisfaction, information technology and administrative services. He joined us in November 1987 and served as a Customer Support Analyst and Manager of Customer Support before assuming his current position.
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 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, higher tax rates and other changes in tax laws, overall economic slowdown and other economic factors could adversely affect donations to non-profits, reducing their revenue and therefore possibly their demand for the products and services we sell and lengthen our sales and payment cycles. During 2009, we experienced a decrease in demand for our products and services as difficult and uncertain economic conditions put pressure on the spending of many organizations in the nonprofit industry. 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 factors affect not only our operations, but also the operations of suppliers from whom we purchase or license products and services, a factor that could result in an increase in the cost to us of our products and services, reducing our margins.
A substantial portion of our revenue is derived from The Raisers Edge and Blackbaud Enterprise CRM, and a decline in sales or renewals of this or similar products and related services could harm our business.
We derive a substantial portion of our revenue from the sale of The Raisers Edge and Blackbaud Enterprise CRM, and other products that help customers manage constituent relationships and related services, and revenue from these products and related services is expected to continue to account for a substantial portion of our total revenue for the foreseeable future. For example, revenue from the sale of The Raisers Edge and related services represented approximately 38%, 45%, and 50% of our total revenue in 2009, 2008 and 2007, respectively. Revenue from the sale of Blackbaud Enterprise CRM and related services represented approximately 4%, 2%, and 1% of our total revenue in 2009, 2008 and 2007, respectively. Because we generally 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. In addition, we frequently sell The Raisers Edge 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 Raisers Edge, Blackbaud Enterprise CRM 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-wide 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
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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 and large enterprise-wide sales. Recently, we have experienced longer sales cycle times, delays and postponements of purchasing decisions by our current and prospective customers as a result of challenges posed upon nonprofit organizations by the weak economic environment. 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 macro economic 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. |
If we are unsuccessful in closing sales after expending significant funds 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.
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.
Our implementation cycle for large enterprise-wide sales can extend for a year or more, which can negatively impact the timing and predictability of our revenue. The implementation of our products and services, particularly in our large Enterprise CRM engagements, involve complex configuration, business process reengineering and system interfaces. Our Enterprise CRM product offering is relatively new 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 increase, our revenues and profitability could suffer from having to perform unplanned incremental services at rates substantially below our normal hourly rates and from delays in project completion. 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 pursue 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, our business, operating results and financial condition could be harmed.
We might not generate increased business from our current customers, which could limit our revenue in the future.
Our business model is highly dependent on the success of our efforts to increase sales 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
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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 Software-as-a-Service (SaaS) pricing model is evolving and demand by our customers for this model is increasing. Our failure to manage its evolution and demand could lead to lower than expected revenues and profits.
In recent years, much of our revenue growth has been 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 of the subscription software pricing models, then our business and operating results could be adversely affected.
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 or that nonprofit organizations will elect 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 generalized 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.
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. The term of the customer agreement is typically 12 months, although, it can extend to three 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.
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 business and reputation could suffer.
Fundamental to the use of our products is the secure collection, storage and transmission of confidential donor and end user information. Third parties may attempt to breach our security or that of our customers and their databases. We might be liable to our customers for any breach in such security and any breach could harm our customers, our business and our reputation. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business and operating results. Also, computers, including those that utilize 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.
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A compromise of our software or other problem 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.
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 these 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.
In 2009, data security and privacy have remained material concerns for both our customers and state legislatures. 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. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. 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 would 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.
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.
Additional PCI DSS standards go into effect next year. Conforming our products and services to PCI DSS is expensive and time-consuming. Our failure to 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.
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Our services and subscription revenue produces substantially lower gross margins than our license revenue, and changes in the relative mix of these and other sources of revenue could negatively affect our overall gross margins.
Our services revenue, which includes fees for consulting, implementation, training, data and technical services and analytics, was approximately 28%, 33% and 36% of our revenue for 2009, 2008 and 2007, respectively. Our services revenue has substantially lower gross margins than our product license revenue. An increase in the percentage of total revenue represented by services revenue would adversely affect our overall gross margins.
Certain of our services are contracted under fixed fee arrangements, which we base on estimates. If our estimated fees are less than our actual costs, 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, 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; and |
| the extent to which outside consulting organizations provide services directly to customers. |
For example, revenue from our training services, which represented 17%, 22% and 23% of our total services revenue during 2009, 2008 and 2007, respectively, has recently experienced a decrease in demand because existing and prospective customers have been experiencing budgetary constraints resulting from the challenges posed by the overall economic environment. The training services revenue typically has a higher gross margin than other services revenue. A continued decrease in the demand for training services could adversely affect our profitability and operating results.
Our subscription revenue, which includes fees for providing access to hosted applications, application hosting services and access to certain data services and our online subscription training offerings, has experienced the largest percentage revenue growth over the last three years. Subscription revenue was approximately 24%, 16% and 10% of our revenue for 2009, 2008 and 2007, respectively. Our subscription revenue has substantially lower gross margins than our product license revenue. An increase in the percentage of total revenue represented by subscription revenue could adversely affect our overall gross margins. 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 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.
Any erosion of our margins for our services and/or subscription revenue or any adverse changes in the mix of our license versus service and subscription revenue could adversely affect our operating results.
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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. 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:
| 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; |
| market acceptance of new products we release; |
| market acceptance of products we acquire; |
| the amount and timing of operating costs related to the expansion of our business, operations and infrastructure; |
| changes in our pricing policies or our competitors pricing policies; |
| seasonality in our revenue; |
| general economic conditions; and |
| costs related to acquisitions of technologies or businesses. |
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.
Our failure to compete successfully could cause our revenue or market share to decline.
Our market is fragmented, 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 integrated specialized products designed to address specific needs of nonprofit organizations; |
| 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. |
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. If one or more of our competitors or potential competitors were to merge or partner with one of our competitors, the change in the competitive landscape could adversely 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.
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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.
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. We cannot assure you 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. 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.
If we were found subject to or in violation of any laws or regulations governing privacy or electronic fund transfers, we could be subject to liability or forced to change our business practices.
It is possible that the payment processing component of our web-based software is subject to various governmental regulations. Any further legislation at the state and federal levels could also restrict further our information gathering and disclosure practices. Existing and potential future privacy laws might limit our ability to develop new products and services that make use of data we gather from various sources. For example, our custom modeling and analytical services, including ProspectPoint, WealthPoint, P!N 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. The provisions of these laws and related regulations are complicated, and we do not have extensive experience with these laws and related regulations. Even technical violations of these laws can result in penalties that are assessed for each non-compliant transaction. In addition, we might be subject to the privacy provisions of the Health Insurance Portability and Accountability Act of 1996 and the Gramm-Leach-Bliley Act and related regulations. If we or our customers were found to be subject to and in violation of any of these laws or other privacy laws or regulations, our business would 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.
Because competition for highly qualified personnel is intense, we might not be able to attract and retain the employees we need to support our planned growth.
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. To meet our objectives successfully, we must attract and retain highly qualified personnel with specialized skill sets focused on the nonprofit industry. 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. In particular,
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we plan to continue to increase the number of services personnel to attempt to meet the needs of our customers and potential new customers. In addition to hiring services personnel to meet our needs, 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 our products fail to perform properly due to undetected errors or similar problems, our business could suffer.
Complex software such as ours often contains undetected errors or bugs. Such errors are frequently found after introduction of new software or enhancements to existing software. We continually introduce or acquire the rights to new products and release new versions of our products. If we detect any errors before we ship a product, we might have to delay product shipment for an extended period of time while we address the problem. We might not discover software errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Therefore, it is possible that, despite testing by us, errors may occur in our software. These errors could result in:
| harm to our reputation; |
| lost sales; |
| delays in commercial release; |
| product liability claims; |
| delays in or loss of market acceptance of our products; |
| license terminations or renegotiations; and |
| unexpected expenses and diversion of resources to remedy errors. |
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. Although we believe that the loss of any third-party technologies currently integrated into our products would not have a material adverse effect on our business, this might change in the future. Our inability in the future to obtain any third-party licenses 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.
22
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 depend 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 currently do not have patents issued for any of our proprietary technology and we only recently filed patent applications relating to a number of such products. Moreover, we have no patent protection for The Raisers 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:
| our pending patent applications may not result in the issuance of patents; |
| 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, result in substantial diversion of management attention and resources, and materially harm our business, financial condition and 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, Netherlands and Australia, and we intend to expand further into international markets. We have limited experience in international operations and may not be able to compete effectively in international markets. Our international offices generated revenues of approximately $39.7 million, $40.3 million and $36.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. Accordingly, international revenue decreased 1.5% in 2009 and increased 11.3% in 2008. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and may 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; |
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| fluctuations in currency exchange rates; |
| 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; |
| differing labor regulations; |
| restrictive 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. |
Restrictions in our revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
At December 31, 2009 we had no borrowings under our revolving credit facility, however, we may draw on our revolving credit facility from time to time to help us meet our short-term financial needs. Our revolving 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 subsidiaries have guaranteed 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 the guarantees of our subsidiaries or exercise their rights with respect to the shares pledged as collateral.
We have recorded a significant deferred tax asset, and we might never realize the 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. Our deferred tax asset balance of $61.3 million, of which $35.9 million relates to our 1999 recapitalization, was approximately 20% of our total assets as of December 31, 2009.
Realization of our deferred tax asset is dependent upon our generating sufficient taxable income in future years to realize the tax benefit from that asset. 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
24
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 products 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.
Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax asset. Any future determination of impairment of a significant portion of our deferred tax asset would have an adverse effect on our financial condition and results of operations.
Our ability to utilize our net operating loss carryforwards may be limited.
Included in our deferred tax asset balance is $17.3 million related to federal net operating loss carryforwards, which is approximately 6% of our total assets at December 31, 2009. Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual basis. The use of the net operating loss carryforwards may have additional limitations resulting from certain future ownership changes or other factors under Section 382 of 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 an adverse affect our future cash flow, financial condition and results of operations.
We might not be able to implement our operating unit reorganization successfully.
Effective January 1, 2010, we reorganized our business into three operating units to better align our organization around key customer groups. The three operating units are the General Markets Business Unit, the Enterprise Customer Business Unit and the International Business Unit. The successful reorganization of these operating units will require, among other things, coordination of direct revenue-generating activities, including sales, professional services and customer support within each unit. The diversion of managements attention and any difficulties encountered in this process might negatively impact our ability to implement the reorganization and our goal to better align our operating structure with the different needs of the diverse types and sizes of organizations we serve and, ultimately, our ability to improve our competitive and financial performance in the future.
We might face challenges in integrating our recent acquisitions and, as a result, might not realize the expected benefits of these acquisitions.
In April 2009, we acquired RLC. During 2008, we acquired Kintera and during 2007 we acquired the Target Companies and eTapestry. Managing and integrating the operations and personnel of an acquired company can be a complex process. The integration might not be completed rapidly or achieve the anticipated benefits of the acquisition. The successful integration of the acquired companies will require, among other things, coordination of various departments, including product development, engineering, sales and marketing and finance. Further, a successful integration of the acquired companies internal control structure will be required. The diversion of the 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. The inability to successfully integrate the operations and personnel of our recently acquired companies, or any significant delay in achieving integration, could have a material adverse effect on our business and on the market price of our common stock.
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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 revenue to offset acquisition or investment costs. |
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.
Increasing government regulation could affect our business.
We are subject, not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce and other regulations. Although there are currently few such laws and regulations, state, federal and foreign governments may adopt laws and regulations applicable to our business. Any such legislation or regulation could dampen the growth of the Internet and decrease its acceptance. If such a decline occurs, companies may decide in the future not to use our products and services. Any new laws or regulations in the following areas could affect our business:
| user privacy; |
| the pricing and taxation of goods and services offered over the Internet; |
| the content of websites; |
| copyrights; |
| 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. |
Pending and enacted legislation at the state and federal levels, including those related to fundraising activities, 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.
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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 and natural disasters such as earthquakes and hurricanes, could disrupt 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.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
We lease our headquarters in Charleston, South Carolina which consists of approximately 230,000 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 facilities near Indianapolis, Indiana and in San Diego, California; Cambridge, Massachusetts; Almere, Netherlands; Glasgow, Scotland; London, England; 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.
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 affect on us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2009.
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PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the NASDAQ National Market under the symbol BLKB on July 26, 2004. On July 1, 2006, our common stock began trading on NASDAQs newest market tier, the NASDAQ Global Select Market. The following table sets forth the high and low prices for shares of our common stock, as reported by NASDAQ for the periods indicated. The prices are based on quotations between dealers, which do not reflect retail markup, mark-down or commissions.
Blackbaud quarterly high and low stock prices
High | Low | |||||
Fiscal year ended December 31, 2009 |
||||||
First quarter |
$ | 13.43 | $ | 9.15 | ||
Second quarter |
15.77 | 12.35 | ||||
Third quarter |
24.40 | 13.52 | ||||
Fourth quarter |
24.43 | 21.18 | ||||
Fiscal year ended December 31, 2008 |
||||||
First quarter |
$ | 27.75 | $ | 23.23 | ||
Second quarter |
25.72 | 20.68 | ||||
Third quarter |
22.69 | 17.86 | ||||
Fourth quarter |
18.70 | 10.77 |
As of February 12, 2010, there were 237 stockholders of record and approximately 15,000 beneficial owners of our common stock. On February 12, 2010, the closing price of our common stock was $22.17.
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Stock performance graph
The following performance graph compares the performance of our common stock to the Center for Research in Security Prices (CRSP) Total Market Return Index for the NASDAQ Stock Market and to a peer group industry index based on the standard industrial code for computer programming, data processing and other computer-related services. The graph covers the most recent five-year period ending December 31, 2009. The graph assumes that the value of the investment in our common stock and each index was $100 at December 31, 2004, and that all dividends are reinvested. We paid quarterly dividends at an annual rate of $0.40, $0.40, $0.34 and $0.28 per share for the years ending December 31, 2009, 2008, 2007 and 2006, respectively.
12/31/2004 | 12/30/2005 | 12/29/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | |||||||||||||
Blackbaud Common Stock |
$ | 100.00 | $ | 116.92 | $ | 177.93 | $ | 191.93 | $ | 92.42 | $ | 161.78 | ||||||
CRSP Total Market Return Index |
$ | 100.00 | $ | 102.13 | $ | 112.20 | $ | 121.67 | $ | 58.68 | $ | 84.28 | ||||||
Peer Group |
$ | 100.00 | $ | 103.39 | $ | 116.09 | $ | 141.85 | $ | 81.65 | $ | 133.45 |
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Issuer purchases of issuer securities
Period | Total number of shares purchased(1) |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Approximate (in thousands) | ||||||
Beginning balance, October 1, 2009 |
$ | 30,770 | ||||||||
October 1, 2009 through October 31, 2009 |
26,197 | $ | 22.22 | | $ | 30,770 | ||||
November 1, 2009 through November 30, 2009 |
114,697 | $ | 22.07 | | $ | 30,770 | ||||
December 1, 2009 through December 31, 2009 |
110 | $ | 23.63 | | $ | 30,770 | ||||
Total |
141,004 | $ | 22.10 | | $ | 30,770 |
(1) | During the period, there were no shares repurchased. The shares in the table represent shares withheld by us to satisfy the tax obligations of employees due upon vesting of restricted stock and exercise of stock appreciation rights during the period. |
Dividend policy and restrictions
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 $0.40 per share in 2009 and 2008, resulting in an aggregate dividend payment to stockholders of $17.7 million and $17.5 million in 2009 and 2008, respectively. In February 2010, our Board of Directors approved an annual dividend rate of $0.44 per share for 2010. We declared a first quarter dividend of $0.11 per share payable on March 15, 2010 to stockholders of record on February 26, 2010, and currently intend to pay quarterly dividends at an annual rate of $0.44 per share of common stock for each of the remaining fiscal quarters in 2010. Dividends at this rate would total approximately $19.4 million in the aggregate on the common stock in 2010 (assuming 44.0 million shares of common stock are outstanding, net of treasury stock).
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; 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 considerations
We estimate that the cash necessary to fund dividends on our common stock for 2010 at an annual rate of $0.44 per share is approximately $19.4 million (assuming 44.0 million shares of common stock are outstanding, net of treasury stock).
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In May 2008, our Board of Directors approved a new stock repurchase program that authorized us to purchase up to $40 million of our outstanding shares of common stock. The prior program was terminated at that date and the remaining balance that was authorized but not used under the prior stock repurchase program was included in the amount authorized under the new program. The new program does not have an expiration date. The shares could be purchased in conjunction with a public offering of 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. As of February 12, 2010, we had purchased 520,423 shares of common stock for $9.2 million pursuant to this program. 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 additional 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 2010, including dividends and purchases under our stock repurchase program. See Managements discussion and analysis of financial conditions and results of operationsLiquidity and capital resources 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 2010, and we cannot assure our stockholders that during or following such periods that we will pay dividends at the estimated levels, or at all. 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, over 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. 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 payment of dividends
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 years earnings. As of December 31, 2009, we had approximately $22.8 million in cash and cash equivalents. In addition, we anticipate that we will have sufficient earnings in 2010 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 2010, our Board of Directors will seek periodically to assure itself of this sufficiency before actually declaring any dividends.
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Our credit facility with Wachovia Bank, N.A. dated July 25, 2007 restricts our ability to declare and pay dividends on our common stock as follows:
| 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; (2) we must be in compliance with a leverage ratio set forth in the credit agreement and (3) we must have cash on hand (which includes any unused amounts under the credit facility) of at least $10.0 million; each after giving effect to the payment of dividends and/or the repurchase of shares. |
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with Managements discussion and analysis of financial condition and results of operations and our financial statements and the related notes included elsewhere in this report. The following data, insofar as it relates to each of the years ended December 31, 2009, 2008, and 2007, has been derived from the audited annual financial statements, including the consolidated balance sheets at December 31, 2009 and 2008 and the related consolidated statements of operations, cash flows and stockholders equity and comprehensive income for the three years ended December 31, 2009, 2008 and 2007 and notes thereto appearing elsewhere herein. The following data, insofar as it relates to each of the years ended December 31, 2006 and 2005 and the consolidated balance sheet as of December 31, 2007, 2006 and 2005 are derived from audited financial statements not included in this report.
As described in Note 2 of the consolidated financial statements included in this annual report, we made business acquisitions in 2008, 2007 and 2006, which could affect the comparability of the information presented.
Years ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Consolidated statements of operations data: |
||||||||||||||||||||
Revenue |
||||||||||||||||||||
License fees |
$ | 25,392 | $ | 35,932 | $ | 37,569 | $ | 32,500 | $ | 29,978 | ||||||||||
Services |
87,834 | 100,824 | 91,376 | 61,242 | 52,606 | |||||||||||||||
Maintenance |
116,476 | 107,304 | 94,602 | 80,893 | 71,163 | |||||||||||||||
Subscriptions |
72,898 | 49,705 | 25,389 | 10,605 | 6,965 | |||||||||||||||
Other revenue |
6,738 | 8,730 | 8,102 | 6,140 | 5,237 | |||||||||||||||
Total revenue |
309,338 | 302,495 | 257,038 | 191,380 | 165,949 | |||||||||||||||
Cost of revenue |
||||||||||||||||||||
Cost of license fees |
3,582 | 3,316 | 2,870 | 2,260 | 4,380 | |||||||||||||||
Cost of services(1) |
61,713 | 63,960 | 54,908 | 33,717 | 28,409 | |||||||||||||||
Cost of maintenance(1) |
21,364 | 20,185 | 17,119 | 13,225 | 10,926 | |||||||||||||||
Cost of subscriptions(1) |
28,183 | 20,587 | 10,306 | 2,360 | 1,472 | |||||||||||||||
Cost of other revenue |
6,098 | 8,368 | 7,274 | 5,709 | 4,943 | |||||||||||||||
Total cost of revenue |
120,940 | 116,416 | 92,477 | 57,271 | 50,130 | |||||||||||||||
Gross profit |
188,398 | 186,079 | 164,561 | 134,109 | 115,819 | |||||||||||||||
Operating expenses |
||||||||||||||||||||
Sales and marketing(1) |
62,796 | 65,185 | 56,994 | 41,405 | 33,491 | |||||||||||||||
Research and development(1) |
45,662 | 38,708 | 28,525 | 23,118 | 21,138 | |||||||||||||||
General and administrative(1) |
33,380 | 34,072 | 26,144 | 21,757 | 15,795 | |||||||||||||||
Amortization |
768 | 713 | 491 | 699 | 18 | |||||||||||||||
Total operating expenses |
142,606 | 138,678 | 112,154 | 86,979 | 70,442 | |||||||||||||||
Income from operations |
45,792 | 47,401 | 52,407 | 47,130 | 45,377 | |||||||||||||||
Interest income |
637 | 526 | 813 | 1,584 | 964 | |||||||||||||||
Interest expense |
(962 | ) | (1,526 | ) | (1,164 | ) | (48 | ) | (49 | ) | ||||||||||
Other income (expense), net |
220 | (194 | ) | (503 | ) | (238 | ) | 6 | ||||||||||||
Income before provision for income taxes |
45,687 | 46,207 | 51,553 | 48,428 | 46,298 | |||||||||||||||
Income tax provision |
17,240 | 16,329 | 19,829 | 18,275 | 13,211 | |||||||||||||||
Net income |
$ | 28,447 | $ | 29,878 | $ | 31,724 | $ | 30,153 | $ | 33,087 | ||||||||||
Earnings per share |
||||||||||||||||||||
Basic |
$ | 0.67 | $ | 0.70 | $ | 0.73 | $ | 0.70 | $ | 0.78 | ||||||||||
Diluted |
$ | 0.65 | $ | 0.68 | $ | 0.71 | $ | 0.68 | $ | 0.72 | ||||||||||
Common shares and equivalents outstanding |
||||||||||||||||||||
Basic weighted average shares |
42,771 | 42,959 | 43,619 | 43,320 | 42,559 | |||||||||||||||
Diluted weighted average shares |
43,600 | 43,959 | 44,595 | 44,668 | 46,210 | |||||||||||||||
Dividends per share |
$ | 0.40 | $ | 0.40 | $ | 0.34 | $ | 0.28 | $ | 0.20 |
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Years ended December 31, | ||||||||||||||||
(in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Summary of stock-based compensation (benefit): |
||||||||||||||||
Cost of services |
$ | 1,433 | $ | 1,442 | $ | 627 | $ | 531 | $ | 269 | ||||||
Cost of maintenance |
750 | 534 | 234 | 117 | 33 | |||||||||||
Cost of subscriptions |
387 | 283 | 274 | 19 | | |||||||||||
Total included in cost of revenue |
2,570 | 2,259 | 1,135 | 667 | 302 | |||||||||||
Sales and marketing |
1,605 | 1,607 | 831 | 813 | 217 | |||||||||||
Research and development |
2,944 | 2,396 | 1,219 | 746 | 139 | |||||||||||
General and administrative |
5,168 | 5,823 | 3,749 | 5,174 | (343 | ) | ||||||||||
Total included in operating expenses |
9,717 | 9,826 | 5,799 | 6,733 | 13 | |||||||||||
Total stock-based compensation |
$ | 12,287 | $ | 12,085 | $ | 6,934 | $ | 7,400 | $ | 315 | ||||||
(1) | Includes stock-based compensation as set forth in tabular summary of stock-based compensation (benefit) for all periods presented. We adopted SFAS 123(R) on January 1, 2006. |
December 31, | |||||||||||||||||||
(in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||
Consolidated balance sheet data: |
|||||||||||||||||||
Cash and cash equivalents |
$ | 22,769 | $ | 16,361 | $ | 14,775 | $ | 67,783 | $ | 22,683 | |||||||||
Deferred tax asset, including current portion |
61,298 | 71,620 | 53,972 | 67,620 | 80,052 | ||||||||||||||
Working capital (deficit) |
(70,485 | ) | (109,962 | ) | (46,977 | ) | 14,125 | (16,866 | ) | ||||||||||
Total assets |
304,229 | 313,886 | 237,694 | 195,009 | 148,463 | ||||||||||||||
Deferred revenue |
135,584 | 119,640 | 96,100 | 76,952 | 63,222 | ||||||||||||||
Total liabilities |
188,123 | 223,378 | 124,591 | 99,651 | 83,711 | ||||||||||||||
Common stock |
52 | 51 | 50 | 49 | 48 | ||||||||||||||
Additional paid-in capital |
134,726 | 116,846 | 105,687 | 88,409 | 73,583 | ||||||||||||||
Total stockholders equity |
$ | 116,106 | $ | 90,508 | $ | 113,103 | $ | 95,358 | $ | 64,752 |
34
Item 7. MANAGEMENTS 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 1.A Risk Factors and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements within the meaning of Section 21E of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under Cautionary statement included in this Managements discussion and analysis of financial condition and results of operations and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results.
Executive summary
We are the leading global provider of software and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage finances and optimize internal operations. We have focused solely on the nonprofit market since our incorporation in 1982 and have developed our suite of products and services based upon our extensive knowledge of the operating challenges facing nonprofit organizations. At the end of 2009, we had approximately 22,000 active customers. Our customers operate in multiple verticals within the nonprofit market, including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare and international foreign affairs.
We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation, 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, performing donor prospect research engagements, selling lists of potential donors, and providing benchmarking studies and data modeling services.
Revenue for 2009 increased 2% compared to 2008. The inclusion of Kintera, which we acquired in July 2008, resulted in an increase in revenue of $16.1 million for 2009. Excluding the impact of Kintera, revenue decreased by 3% for 2009 when compared to 2008. When removing the impact of foreign currency translation, revenue increased by 4% when comparing 2009 to 2008. Further, when removing the impact of foreign currency translation and the impact from Kintera, revenue decreased by 2% when comparing 2009 to 2008.
Our selling environment remained challenging during 2009 as difficult and uncertain economic conditions continued to put pressure on the spending of many organizations in the nonprofit industry. Revenues associated with our perpetual license offerings and related services decreased compared to 2008 as a result of these economic conditions and reduced market demand for these offerings. However, our recurring revenue, which is comprised of maintenance services and subscription offerings, continued to experience growth during 2009. Revenue from maintenance services and subscription offerings, which represented approximately 61% of our revenue on a combined basis, grew 21% in 2009 compared to 2008. Approximately half of this revenue growth is attributable to Kintera and the remaining growth is principally the result of our business increasingly evolving towards product sales on a subscription basis. We believe this trend will continue in the future.
In 2009, we focused on closely managing our operating expenses and achieving our targeted level of profitability. Income from operations for 2009 decreased by $1.6 million compared to 2008. During 2009, the decrease in income from operations is primarily attributable to an increase in stock based compensation expense, amortization expense associated with intangible assets from our recent acquisitions and research and development expense to support our continuing product investment.
35
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
We ended 2009 with cash and cash equivalents totaling $22.8 million and no outstanding borrowings on our credit facility. During 2009, we generated $86.8 million in cash flow from operations out of which we paid $59.0 million on our credit facility and $17.7 million in dividends. Additionally, cash flow from operations allowed us to fund the purchase of $5.5 million of property and equipment, and increase our cash and cash equivalents by $6.4 million.
We expect that our operating environment will remain challenging in 2010 as existing and prospective customers continue to exercise caution in expenditure decisions. Notwithstanding these conditions, we plan to continue to focus on expanding market share, selectively investing in our growth initiatives and strengthening our leadership position. As we have throughout 2009, we will also focus on controlling and, as necessary, reducing the costs and expenses of our operations to achieve our targeted level of profitability.
Consolidated statements of operations, percent of revenue
Years ended December 31, | |||||||||
2009 | 2008 | 2007 | |||||||
Revenue |
|||||||||
License fees |
8.2 | % | 11.9 | % | 14.6% | ||||
Services |
28.4 | 33.3 | 35.5 | ||||||
Maintenance |
37.7 | 35.5 | 36.8 | ||||||
Subscriptions |
23.5 | 16.4 | 9.9 | ||||||
Other revenue |
2.2 | 2.9 | 3.2 | ||||||
Total revenue |
100.0 | % | 100.0 | % | 100.0% | ||||
Cost of revenue |
|||||||||
Cost of license fees |
1.1 | 1.1 | 1.1 | ||||||
Cost of services |
20.0 | 21.1 | 21.4 | ||||||
Cost of maintenance |
6.9 | 6.7 | 6.7 | ||||||
Cost of subscriptions |
9.1 | 6.8 | 4.0 | ||||||
Cost of other revenue |
2.0 | 2.8 | 2.8 | ||||||
Total cost of revenue |
39.1 | 38.5 | 36.0 | ||||||
Gross profit |
60.9 | 61.5 | 64.0 | ||||||
Operating expenses |
|||||||||
Sales and marketing |
20.3 | 21.5 | 22.2 | ||||||
Research and development |
14.8 | 12.8 | 11.1 | ||||||
General and administrative |
10.8 | 11.3 | 10.2 | ||||||
Amortization |
0.2 | 0.2 | 0.2 | ||||||
Total operating expenses |
46.1 | 45.8 | 43.6 | ||||||
Income from operations |
14.8 | 15.7 | 20.4 | ||||||
Interest income |
0.2 | 0.2 | 0.3 | ||||||
Interest expense |
(0.3 | ) | (0.5 | ) | (0.5) | ||||
Other income (expense), net |
0.1 | (0.1 | ) | (0.2) | |||||
Income before provision for income taxes |
14.8 | 15.3 | 20.1 | ||||||
Income tax provision |
5.6 | 5.4 | 7.7 | ||||||
Net income |
9.2 | % | 9.9 | % | 12.3% | ||||
36
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Results of operations
Comparison of the years ended December 31, 2009, 2008 and 2007
On April 29, 2009, we acquired RLC Customer Centric Technology B.V. (RLC), a privately held limited company based in the Netherlands. The acquisition of RLC provides us with a foundation to expand into the Netherlands and other Western European markets.
During 2008 and 2007, we acquired companies that provided us with a strategic opportunity to expand our share of the nonprofit market with SaaS and subscription offerings, and through the integration of complimentary products and services to serve the changing needs of our customers. Following are the companies we acquired during 2008 and 2007 and their respective acquisition date:
| Target Software, Inc. and Target Analysis Group, Inc. (together referred to as the Target Companies)January 16, 2007; |
| eTapestry.com, Inc. (referred to as eTapestry)August 1, 2007; and |
| Kintera, Inc. (referred to as Kintera)July 8, 2008. |
The results of operations of the acquired companies are included in our consolidated results of operations from the dates of their respective acquisition as noted above, which impacts the comparability of our results of operations when comparing 2009 to 2008 and 2008 to 2007. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our results of operations due to the inclusion of the acquired companies for only a partial year in the year of acquisition and a full year in the subsequent year.
Revenue
The table below compares revenue from our statement of operations for the years ended December 31, 2009, 2008, and 2007.
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | ||||||||||||||||||||
License fees |
$ | 25.4 | $ | 35.9 | $ | 37.5 | $ | (10.5 | ) | (29 | )% | $ | (1.6 | ) | (4 | )% | |||||||||||
Services |
87.8 | 100.8 | 91.4 | (13.0 | ) | (13 | )% | 9.4 | 10 | % | |||||||||||||||||
Maintenance |
116.5 | 107.3 | 94.6 | 9.2 | 9 | % | 12.7 | 13 | % | ||||||||||||||||||
Subscriptions |
72.9 | 49.7 | 25.4 | 23.2 | 47 | % | 24.3 | 96 | % | ||||||||||||||||||
Other |
6.7 | 8.8 | 8.1 | (2.1 | ) | (24 | )% | 0.7 | 9 | % | |||||||||||||||||
Total revenue |
$ | 309.3 | $ | 302.5 | $ | 257.0 | $ | 6.8 | 2 | % | $ | 45.5 | 18 | % | |||||||||||||
Total revenue increased $6.8 million, or 2%, in 2009 compared to 2008. The increase in revenue is primarily due to growth in subscription revenue as a result of the acquisition of Kintera and an increase in demand for our hosting services and online data services. The growth in revenue from our subscription offerings is also a result of the ongoing evolution of our product offerings from license-based to subscription-based offerings. Maintenance revenue also increased due to additional revenue from new maintenance contracts associated with new license agreements and existing client increases. The increase in subscriptions and maintenance revenue was partially offset by decreases in license fees and services revenue. The decreases in license fees and services revenue are principally attributable to the delays and postponements of purchasing decisions by our existing and prospective customers resulting from the weak economic environment.
37
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Total revenue increased $45.5 million, or 18%, in 2008 compared to 2007. Approximately half, or $22.0 million, of the increase in total revenue was attributable to the inclusion of eTapestry and Kintera in our consolidated results of operations. The remaining increase in revenue for 2008, totaling $23.5 million and representing a 9% increase over 2007, was primarily attributable to growth in revenue from subscriptions and maintenance services. The increase in maintenance revenue is principally from new maintenance contracts with associated with new license agreements and existing client increases. Subscription revenue increased 35%, excluding the impact of our acquisitions, due to an increase in demand for our hosting and other online data services.
Segment results
Through December 31, 2009, we analyzed our business according to our six operating segments as identified in Note 14 of our consolidated financial statements, which are license fees, consulting and education services, analytic services, maintenance, subscriptions and other. The analyses provided below are presented on a non-GAAP basis before the inclusion of various allocable corporate costs such as depreciation, facilities and information technology (IT) support costs, stock-based compensation and amortization of intangibles arising from business combinations because, in managing our operations, we believe that the exclusion of these costs allows us to better understand and manage our operating expenses and cash needs. These excluded costs are analyzed separately following the segment results analysis.
License fees
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||||
License fee revenue |
$ | 25.4 | $ | 35.9 | $ | 37.5 | $ | (10.5 | ) | (29 | )% | $ | (1.6 | ) | (4 | )% | ||||||||||||||
Direct controllable cost of license fees |
3.2 | 3.1 | 2.7 | 0.1 | 3 | % | 0.4 | 15 | % | |||||||||||||||||||||
Segment income |
$ | 22.2 | $ | 32.8 | $ | 34.8 | $ | (10.6 | ) | (32 | )% | $ | (2.0 | ) | (6 | )% | ||||||||||||||
Segment margin % |
87 | % | 91 | % | 93 | % |
Revenue from license fees is derived from the sale of our software products, under a perpetual license agreement. The decrease in license fee revenue during 2009 when compared to 2008 and during 2008 when compared to 2007 is principally attributable to longer sales cycle times, delays and postponement of purchasing decisions and overall caution exercised by existing and prospective customers as a result of continued challenges posed by the weak economic environment. In addition, we are increasingly experiencing a shift in our customers buying preference away from perpetual license agreements towards subscription-based hosted applications.
During 2009, license fee revenue decreased by $10.5 million when compared to 2008. Sales from license fees to new customers decreased $4.2 million and sales to existing clients decreased by $6.3 million. Additionally, during 2009, revenue related to our Enterprise CRM offering grew by $3.7 million, which was offset by decreases in our other perpetual license product offerings of $14.2 million.
During 2008, sales from license fees to new customers decreased by $2.9 million when compared to 2007, offset by an increase to existing customers of $1.3 million.
Direct controllable cost of license fees is principally comprised of third-party software royalties and variable reseller commissions. The increase in cost of license fees for 2009 when compared to 2008 and 2008 when compared to 2007 is primarily attributable to a shift in the mix of license fee revenue toward products with higher third-party software royalty costs.
38
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Consulting and education services
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||||
Consulting and education services revenue |
$ | 65.3 | $ | 77.7 | $ | 73.2 | $ | (12.4 | ) | (16 | )% | $ | 4.5 | 6 | % | |||||||||||||||
Direct controllable cost of consulting and education services |
41.8 | 44.4 | 38.8 | (2.6 | ) | (6 | )% | 5.6 | 14 | % | ||||||||||||||||||||
Segment income |
$ | 23.5 | $ | 33.3 | $ | 34.4 | $ | (9.8 | ) | (29 | )% | $ | (1.1 | ) | (3 | )% | ||||||||||||||
Segment margin % |
36 | % | 43 | % | 47 | % |
Consulting and education services revenue consists of consulting, installation, implementation and education services. Consulting, installation and implementation services involve converting data from a customers existing system, assistance in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities.
During 2009, consulting and education services revenue decreased $12.4 million when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $0.6 million of an increase in consulting and education services revenue. Included in consulting and education services revenue in 2009 is $0.7 million of revenue attributable to RLC. The decrease in revenue is principally the result of decreased volume of consulting, installation and implementation services delivered for our core software products and decreased demand for training services as existing and prospective customers continue to experience budgetary constraints associated with the challenges posed by the overall economic environment. To a lesser extent, the decrease in revenue is attributable to a reduction in the rates we charge as a result of a higher level of discounts offered on our service offerings during 2009 compared to 2008. During 2009, these decreases of $17.0 million were partially offset by an increase of $4.6 million in consulting services associated with our Enterprise CRM product offering and our internet-based products.
During 2008, consulting and education services revenue increased by $4.5 million when compared to 2007, of which $1.9 million is attributable to Kintera and eTapestry. The rates charged for our service offerings remained relatively constant year over year and, as such, the increase in revenue in 2008 is principally the result of increased volume of services provided. The increase in volume of services provided is principally due to an increase in the demand in consulting services associated with our new Enterprise CRM product offerings and our internet based products.
Cost of consulting and education services is principally comprised of human resource costs, third-party contractor expenses, classroom rentals and other costs incurred in providing consulting, installation and implementation services and customer training.
During 2009, cost of consulting and education services decreased by $2.6 million. Human resource costs related to additional headcount attributable to Kintera and RLC increased cost of consulting and education services by $2.4 million. Excluding the impact of acquisitions, the remaining decrease in cost of consulting and education services of $5.0 million during 2009 is primarily due to a reduction in travel-related expenses, recruiting and other costs.
During 2008, cost of consulting and education services increased by $5.6 million, of which $2.2 million is attributable to the inclusion of human resource costs associated with Kintera and eTapestry. Excluding the impact of acquisitions, the remaining increase of $3.4 million is primarily attributable to human resource cost increases as a result of increased skills and competencies in our service professionals.
39
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
The decrease in segment margin from 2008 to 2009 is principally due to the decrease in demand for consulting and education services while the cost of consulting and education services decreased to a lesser extent. Cost of consulting and education services decreased at a lower rate than the associated revenue principally due to maintaining resource capacity for the increase in services associated with our Enterprise CRM product offerings and the expected increase in services when the economic environment improves.
The decrease in segment margin from 2007 to 2008 is primarily attributable to average billing rates for our consultants remaining relatively constant while consultants salaries and related human resource costs increased, and a change in the mix of the consulting and education services provided.
Analytic services
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | ||||||||||||||||||||||
Analytic services revenue |
$ | 22.5 | $ | 23.1 | $ | 18.2 | $ | (0.6 | ) | (3 | )% | $ | 4.9 | 27 | % | ||||||||||||||
Direct controllable cost of analytic services |
10.0 | 9.8 | 8.0 | 0.2 | 2 | % | 1.8 | 23 | % | ||||||||||||||||||||
Segment income |
$ | 12.5 | $ | 13.3 | $ | 10.2 | $ | (0.8 | ) | (6 | )% | $ | 3.1 | 30 | % | ||||||||||||||
Segment margin % |
56 | % | 58 | % | 56 | % |
Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of nonprofit organizations and are performed using our proprietary analytical tools. The end product enables organizations to more effectively target its fundraising activities.
During 2009, analytic services revenue decreased by $0.6 million when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $0.8 million of an increase in analytic services revenue. Excluding the impact of the acquisition of Kintera, analytic services revenue decreased $1.4 million in 2009 when compared to 2008. The rates charged for our analytic services have remained relatively constant year over year and, as such, the remaining decrease in analytic services revenue is principally the result of the decreased volume of services provided.
Revenue from analytic services increased $4.9 million in 2008 when compared to 2007. The rates charged for our analytic services have remained relatively constant year over year and, as such, the increase in revenue is principally the result of increased volume of services provided.
Cost of analytic services is primarily comprised of human resource costs and data expense incurred to perform analytic services. The increase in cost of analytic services for 2009 when compared to 2008 is primarily attributable to $0.8 million of human resource and other costs attributable to the inclusion of Kintera for a full year in 2009 compared to a partial year in 2008. Excluding the impact of the acquisition of Kintera, cost of analytic services for 2009 decreased by $0.6 million primarily due to a decrease in data expense.
During 2008, cost of analytic services increased when compared to 2007. The increase is attributable to additional human resources costs due to an increase in headcount. Headcount increased when comparing 2008 to 2007 to meet the increase in customer demand for our analytic services.
The decrease in analytic services margin in 2009 when compared to 2008 is primarily due to additional costs associated with the acquisition of Kintera.
40
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
The analytic services margin increase in 2008 when compared to 2007 is attributable to including and integrating the analytic services segment of the Target Companies, which has a different cost structure and a higher margin than the historical Blackbaud-only analytic services segment.
Maintenance
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||
Maintenance revenue |
$ | 116.5 | $ | 107.3 | $ | 94.6 | $ | 9.2 | 9 | % | $ | 12.7 | 13 | % | ||||||||||||||
Direct controllable cost of maintenance |
15.8 | 15.3 | 13.4 | 0.5 | 3 | % | 1.9 | 14 | % | |||||||||||||||||||
Segment income |
$ | 100.7 | $ | 92.0 | $ | 81.2 | $ | 8.7 | 9 | % | $ | 10.8 | 13 | % | ||||||||||||||
Segment margin % |
86 | % | 86 | % | 86 | % |
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.
During 2009, maintenance revenue increased $9.2 million when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $2.8 million of the increase in maintenance revenue. Included in maintenance revenue in 2009 is $0.6 million of revenue attributable to RLC. Excluding the impact of the acquisitions of Kintera and RLC, maintenance revenue increased $5.8 million in 2009 when compared to 2008. The increase is principally comprised of $7.3 million of maintenance with new customers associated with new license agreements and increases in contracts with existing customers and $4.0 million from maintenance contract inflationary rate adjustments, offset by $5.5 million from maintenance contracts that were not renewed.
During 2008, the increase in maintenance revenue includes $2.8 million of revenue attributable to Kintera. Excluding the impact of the acquisition of Kintera, maintenance revenue increased $9.9 million in 2008 when compared to 2007. The remaining increase is principally comprised of $11.0 million of maintenance with new customers associated with new license agreements and increases in contracts with existing customers and $2.8 million from maintenance contract inflationary rate adjustments, offset by $3.9 million of maintenance contracts that were not renewed.
Direct controllable cost of maintenance is primarily comprised of human resource costs, third-party contractor expenses, third-party royalty costs and data expenses, and other costs incurred in providing support and services to our customers. The increase in cost of maintenance in 2009 when compared to 2008 is the result of an increase in human resources costs primarily attributable to headcount associated with Kintera.
During 2008, the increase in cost of maintenance is principally the result of increases in human resources costs. The increase in human resource costs includes $0.2 million of costs attributable to Kintera. Additionally, third-party royalty costs increased by $0.4 million, primarily related to our ticketing solution The Patrons Edge.
The maintenance segment margin remained unchanged during 2009, 2008 and 2007.
41
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Subscriptions
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||
Subscriptions revenue |
$ | 72.9 | $ | 49.7 | $ | 25.4 | $ | 23.2 | 47 | % | $ | 24.3 | 96 | % | ||||||||||||||
Direct controllable cost of subscriptions |
22.3 | 15.7 | 7.8 | 6.6 | 42 | % | 7.9 | 101 | % | |||||||||||||||||||
Segment income |
$ | 50.6 | $ | 34.0 | $ | 17.6 | $ | 16.6 | 49 | % | $ | 16.4 | 93 | % | ||||||||||||||
Segment margin % |
69 | % | 68 | % | 69 | % |
Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings. In general, we are experiencing growth in our hosted applications business as a result of the eTapestry and Kintera acquisitions, which added experience in on-demand solutions and expanded our set of subscription services. Additionally, the growth in revenue in our subscription offerings is the result of the ongoing evolution of our product offerings from license-based to subscription-based offerings.
Subscriptions revenue increased $23.2 million during 2009 when compared to 2008. The inclusion of Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $11.7 million of the increase in subscriptions revenue. Excluding the impact of the acquisition of Kintera, growth in subscriptions revenue is primarily due to the continued increase in demand for hosted applications, hosting services and other online data services and we are experiencing a shift in our customers buying preference away from perpetual license agreements towards subscription-based hosted applications.
Subscriptions revenue increased $24.3 million during 2008 when compared to 2007. During 2008, included in subscription revenue is $11.3 million of revenue attributable to Kintera. The inclusion of eTapestry for a full year in 2008 compared to a partial year in 2007 accounted for $5.1 million of the increase in subscriptions revenue. The remaining $7.9 million increase is attributable to organic growth from increased demand for hosting services and other online data services.
Direct controllable cost of subscriptions is primarily comprised of human resource costs, third-party royalty and data expenses, hosting expenses, and other costs incurred in providing support and services to our customers. During 2009, cost of subscriptions increased by $6.6 million when compared to 2008. Additional headcount and increases in data expense, hosting and other costs attributable to Kintera represented $4.0 million of the increase in cost of subscriptions. Excluding the impact of the acquisition of Kintera, cost of subscriptions increased by $2.6 million in 2009 when compared to 2008. The remaining increase is principally due to an increase in data expense, hosting and human resource costs.
The increase in the cost of subscriptions in 2008 when compared to 2007 is principally due to an increase in data expense, hosting and other costs of $5.1 million, of which $2.1 million is attributable to Kintera. Additionally, human resource costs increased $2.8 million, of which $1.5 million is attributable to Kintera and eTapestry.
The subscriptions segment margin remained substantially unchanged during 2009, 2008 and 2007.
42
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Other revenue
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||||
Other revenue |
$ | 6.7 | $ | 8.8 | $ | 8.1 | $ | (2.1 | ) | (24 | )% | $ | 0.7 | 9 | % | |||||||||||||||
Direct controllable cost of other revenue |
6.0 | 8.3 | 7.2 | (2.3 | ) | (28 | )% | 1.1 | 15 | % | ||||||||||||||||||||
Segment income |
$ | 0.7 | $ | 0.5 | $ | 0.9 | $ | 0.2 | 40 | % | $ | (0.4 | ) | (44 | )% | |||||||||||||||
Segment margin % |
10 | % | 6 | % | 11 | % |
Other revenue includes the sale of business forms that are used in conjunction with our software products; reimbursement of travel-related expenses, primarily incurred in connection with the performance of services at customer locations; fees from user conferences; and sale of hardware in conjunction with The Patron Edge.
Other revenue decreased in 2009 when compared to 2008 primarily due to (i) a decrease in reimbursable travel-related costs from our services businesses as a result of reduced service engagements and (ii) a decrease in fees from user conferences as a result of fewer participants, both of which are attributable to the challenging economic environment. The increase in other revenue in 2008 when compared to 2007 is primarily to attributable increases in reimbursable travel and related expenses.
Direct controllable cost of other revenue includes human resource costs, costs of business forms, costs of user conferences and reimbursable expenses relating to the performance of services at customer locations.
The decrease in the cost of other revenue in 2009 when compared to 2008 is due to a decrease in reimbursable expenses related to providing services at customer locations and a decrease in the costs of user conferences. The increase in the cost of other revenue in 2008 when compared to 2007 is due to an increase in reimbursable travel expenses related to providing services at customer locations and costs associated with user conferences. Reimbursable expenses related to providing services at customer locations increased in 2008 compared to 2007 by $0.5 million and conference costs increased $0.6 million.
43
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
U.S. GAAP gross profit
Segment income does not include an allocation of corporate costs, stock-based compensation expense and amortization expense. The following schedule reconciles total segment income to gross profit as stated on the statement of operations:
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||||||
License fees |
$ | 22.2 | $ | 32.8 | $ | 34.8 | $ | (10.6 | ) | (32 | )% | $ | (2.0 | ) | (6 | )% | ||||||||||||||
Consulting and education services |
23.5 | 33.3 | 34.4 | (9.8 | ) | (29 | )% | (1.1 | ) | (3 | )% | |||||||||||||||||||
Analytic services |
12.5 | 13.3 | 10.2 | (0.8 | ) | (6 | )% | 3.1 | 30 | % | ||||||||||||||||||||
Maintenance |
100.7 | 92.0 | 81.2 | 8.7 | 9 | % | 10.8 | 13 | % | |||||||||||||||||||||
Subscriptions |
50.6 | 34.0 | 17.6 | 16.6 | 49 | % | 16.4 | 93 | % | |||||||||||||||||||||
Other |
0.7 | 0.5 | 0.9 | 0.2 | 40 | % | (0.4 | ) | (44 | )% | ||||||||||||||||||||
Total segment income |
$ | 210.2 | $ | 205.9 | $ | 179.1 | $ | 4.3 | 2 | % | $ | 26.8 | 15 | % | ||||||||||||||||
Less corporate costs not allocated to segment expenses: |
||||||||||||||||||||||||||||||
Stock-based compensation |
2.6 | 2.3 | 1.1 | 0.3 | 13 | % | 1.2 | 109 | % | |||||||||||||||||||||
Amortization of intangible assets acquired in business combinations |
6.3 | 5.3 | 2.9 | 1.0 | 19 | % | 2.4 | 83 | % | |||||||||||||||||||||
Corporate overhead costs |
12.9 | 12.2 | 10.5 | 0.7 | 6 | % | 1.7 | 16 | % | |||||||||||||||||||||
Gross profit as stated in statements of operations |
$ | 188.4 | $ | 186.1 | $ | 164.6 | $ | 2.3 | 1 | % | $ | 21.5 | 13 | % | ||||||||||||||||
Gross margin % |
61 | % | 62 | % | 64 | % |
Stock-based compensation expense and amortization expense are analyzed separately following the operating expenses section.
Corporate overhead costs
Allocated corporate overhead costs are comprised of depreciation, facilities and IT support costs. Corporate overhead costs included in gross profit were $12.9 million, $12.2 million and $10.5 million for 2009, 2008 and 2007, respectively. The increase in corporate overhead costs allocated to cost of revenue in 2009 when compared to 2008 is primarily attributable to the increase in depreciation expense of $0.3 million as a result of property and equipment purchases and $0.4 million of increased IT support costs.
The increase in corporate overhead costs in 2008 when compared to 2007 is primarily the result of an increase in depreciation of $0.7 million as a result of property and equipment purchases. Additionally, facilities expense increased $1.7 million primarily as a result of locations added in connection with the Kintera and eTapestry acquisitions and additional office space leased. IT support costs decreased $0.7 million due to reduced maintenance cost on internally used software.
Operating expenses
The operating expenses analyzed below are presented on a non-U.S. GAAP basis as they exclude stock-based compensation expense. We believe that the exclusion of these costs allows us to better understand and manage other operating expenses and cash needs. Stock-based compensation expense is analyzed, in total, in the section following the operating expense analysis.
44
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Sales and marketing
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | ||||||||||||||||
Sales and marketing expense excluding stock-based compensation |
$ | 61.2 | $ | 63.6 | $ | 56.2 | $ | (2.4) | (4)% | $ | 7.4 | 13% | |||||||||||
Add: Stock-based compensation expense |
1.6 | 1.6 | 0.8 | | 0 % | 0.8 | 100% | ||||||||||||||||
Sales and marketing expense |
$ | 62.8 | $ | 65.2 | $ | 57.0 | $ | (2.4) | (4)% | $ | 8.2 | 14% | |||||||||||
% of revenue (excluding stock-based compensation) |
20% | 21% | 22% |
Sales and marketing expense includes salaries and related human resource costs, travel-related expenses, sales commissions, advertising and marketing materials, public relations and an allocation of depreciation, facilities and IT support costs.
During 2009, sales and marketing expense decreased $2.4 million when compared to 2008. The inclusion of human resource and other costs attributable to Kintera for a full year in 2009 compared to a partial year in 2008 accounted for $2.8 million of an increase in sales and marketing expense. Excluding the sales and marketing expense increase attributable to Kintera, sales and marketing expense decreased $5.2 million. The decrease is primarily attributable to a reduction in travel-related expenses, corporate allocated costs and other sales and marketing related costs of $2.1 million. Additionally, commission expense decreased by $2.4 million due to lower commissionable revenue and human resource costs decreased by $0.7 million due to a reduction in headcount.
The increase in sales and marketing expense in 2008 compared to 2007 is principally due to increases in our sales force and the inclusion of sales and marketing costs of acquired companies. During 2008, human resource costs increased $5.9 million, of which $3.2 million is due to the inclusion of human resources associated with Kintera and eTapestry. Other increases include higher travel costs, allocated costs and other marketing related costs of $1.5 million.
As a percentage of revenue, sales and marketing expense in 2009 decreased when compared to 2008 principally due to the decrease in commission expense resulting from lower commissionable revenue during 2009. As a percentage of revenue, sales and marketing costs in 2008 decreased by one percentage point compared with 2007, principally due to a decrease in commission expense associated with the decline in license fees and our services.
Research and development
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||
Research and development expense excluding stock-based compensation |
$ | 42.7 | $ | 36.3 | $ | 27.3 | $ | 6.4 | 18% | $ | 9.0 | 33% | ||||||||||||||
Add: Stock-based compensation expense |
2.9 | 2.4 | 1.2 | 0.5 | 21% | 1.2 | 100% | |||||||||||||||||||
Research and development expense |
$ | 45.6 | $ | 38.7 | $ | 28.5 | $ | 6.9 | 18% | $ | 10.2 | 36% | ||||||||||||||
% of revenue (excluding stock-based compensation) |
14 | % | 12 | % | 11 | % |
45
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Research and development expenses include human resource costs, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products and an allocation of depreciation, facilities and IT support costs.
Research and development costs increased in 2009 when compared to 2008 principally due to an increase in headcount associated with increased investment in our products. During 2009, the increase in research and development costs is principally the result of an increase in human resource costs of $5.8 million, $3.2 million of which is attributable to inclusion of Kintera for a full year in 2009 compared to a partial year in 2008. Further increases of $0.6 million are attributable to higher allocated costs, partially offset by decreased travel and recruiting costs.
During 2008 when compared to 2007, the increase in research and development costs is primarily due to a $7.6 million increase in human resource costs resulting from an increase in headcount and increased investment in our products, of which $3.4 million is due to the inclusion of Kintera and eTapestry. Further increases of $1.1 million are attributable to higher allocated costs and $0.3 million higher travel and other costs.
Research and development expense as a percentage of revenue increased in 2009 when compared to 2008 and 2008 when compared to 2007 primarily due to an increased investment in our product initiatives.
General and administrative
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||
General and administrative expense excluding stock-based compensation |
$ | 28.2 | $ | 28.3 | $ | 22.4 | $ | (0.1) | (0)% | $ | 5.9 | 26% | ||||||||||||||
Add: Stock-based compensation expense |
5.2 | 5.8 | 3.8 | (0.6) | (10)% | 2.0 | 53% | |||||||||||||||||||
General and administrative expense |
$ | 33.4 | $ | 34.1 | $ | 26.2 | $ | (0.7) | (2)% | $ | 7.9 | 30% | ||||||||||||||
% of revenue (excluding stock-based compensation) |
9 | % | 9 | % | 9 | % |
General and administrative expense consists primarily of human resource costs for general corporate functions, including finance, accounting, legal, human resources, corporate development, third-party professional fees, insurance, an allocation of depreciation, facilities and IT support costs, and other administrative expenses.
During 2009, the decrease in general and administrative expense when compared to 2008 was primarily the result of closely managing our operating costs during 2009. Included in general and administrative expense during 2009 is an increase of $1.8 million in human resource costs and $0.3 million of other costs attributable to the inclusion of Kintera for a full year in 2009 compared to a partial year in 2008. Excluding these costs attributable to Kintera, general and administrative expense decreased by $2.2 million in 2009 when compared to 2008 primarily due to decreased travel-related costs, bad debt expense and professional fees.
During 2008, the increase in general and administrative expenses when compared to 2007 includes $3.7 million of additional human resource and other costs attributed to the inclusion of Kintera and eTapestry. The remaining increase was primarily driven by an increase in human resource costs of $1.2 million due to an increase in headcount and $1.0 million increase in bad debt expense and allocated costs.
As a percentage of revenue, general and administrative costs remained unchanged during 2009, 2008 and 2007.
46
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Stock-based compensation
We recognize compensation expense related to stock-based awards granted to employees. 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.
Our consolidated statements of operations for 2009, 2008, and 2007 include the amounts of stock-based compensation illustrated below:
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | ||||||||||||||||
Included in cost of revenue: |
|||||||||||||||||||||||
Cost of services |
$ | 1.4 | $ | 1.4 | $ | 0.6 | $ | | 0% | $ | 0.8 | 133% | |||||||||||
Cost of maintenance |
0.8 | 0.6 | 0.2 | 0.2 | 33% | 0.4 | 200% | ||||||||||||||||
Cost of subscriptions |
0.4 | 0.3 | 0.3 | 0.1 | 33% | | 0% | ||||||||||||||||
Total included in cost of revenue |
2.6 | 2.3 | 1.1 | 0.3 | 13% | 1.2 | 109% | ||||||||||||||||
Included in operating expenses: |
|||||||||||||||||||||||
Sales and marketing |
1.6 | 1.6 | 0.8 | | 0% | 0.8 | 100% | ||||||||||||||||
Research and development |
2.9 | 2.4 | 1.2 | 0.5 | 21% | 1.2 | 100% | ||||||||||||||||
General and administrative |
5.2 | 5.8 | 3.8 | (0.6) | (10)% | 2.0 | 53% | ||||||||||||||||
Total included in operating expenses |
9.7 | 9.8 | 5.8 | (0.1) | (1)% | 4.0 | 69% | ||||||||||||||||
Total |
$ | 12.3 | $ | 12.1 | $ | 6.9 | $ | 0.2 | 2% | $ | 5.2 | 75% | |||||||||||
Stock-based compensation is comprised of expense from common stock awards, stock options, restricted stock awards and stock appreciation rights. The table below summarizes the stock-based compensation by award type for 2009, 2008 and 2007.
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | |||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | ||||||||||||||||||||
Stock-based compensation from: |
|||||||||||||||||||||||||||
Common stock |
$ | 0.8 | $ | 1.4 | $ | | $ | (0.6 | ) | (43 | )% | $ | 1.4 | | % | ||||||||||||
Stock options |
0.3 | 1.5 | 2.4 | (1.2 | ) | (80 | )% | $ | (0.9 | ) | (38 | )% | |||||||||||||||
Restricted stock awards |
8.8 | 7.2 | 3.8 | 1.6 | 22 | % | $ | 3.4 | 89 | % | |||||||||||||||||
Stock appreciation rights |
2.4 | 2.0 | 0.7 | 0.4 | 20 | % | $ | 1.3 | 186 | % | |||||||||||||||||
Total stock-based compensation |
$ | 12.3 | $ | 12.1 | $ | 6.9 | $ | 0.2 | 2 | % | $ | 5.2 | 75 | % | |||||||||||||
During 2009 and 2008, we expensed $0.8 million and $1.4 million, respectively, related to compensation and incentive arrangements payable in common stock and associated with business acquisitions completed in 2008 and 2007. There were no similar arrangements payable in common stock in 2007. The decrease in compensation expense from stock options in 2009 compared to 2008 and 2008 compared to 2007 is the result of using the accelerated method for recognizing stock-based compensation expense associated with stock options, which results in the recognition of more expense in the earlier periods of vesting when compared with the straight-line method. We have not granted stock options since 2005 and all historical awards will be fully vested in 2010.
Stock-based compensation expense from restricted stock awards and stock appreciation rights increased in 2009 compared to 2008 and 2008 compared to 2007 due to the issuance of additional grants and rights in 2009 and 2008, offset by the partial vesting of grants issued in prior years.
47
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
The total amount of compensation costs related to non-vested awards not yet recognized was $29.3 million as of December 31, 2009. The compensation cost for unvested awards at December 31, 2009 will be recognized over a weighted average period of 1.9 years.
Amortization
We allocate amortization expense to cost of revenue based on the nature of the respective identifiable intangible asset and whether the asset is directly associated with a specific component of revenue. Amortization expense included in our consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007 is illustrated below:
Years ended December 31, | 2009 versus 2008 | 2008 versus 2007 | ||||||||||||||||||||||||
(in millions) | 2009 | 2008 | 2007 | Change | % Change | Change | % Change | |||||||||||||||||||
Included in cost of revenue: |
||||||||||||||||||||||||||
Cost of license fees |
$ | 0.4 | $ | 0.2 | $ | 0.1 | $ | 0.2 | 100 | % | $ | 0.1 | 100 | % | ||||||||||||
Cost of services |
1.3 | 1.4 | 1.2 | (0.1 | ) | (7 | )% | 0.2 | 17 | % | ||||||||||||||||
Cost of maintenance |
1.3 | 0.9 | 0.4 | 0.4 | 44 | % | 0.5 | 125 | % | |||||||||||||||||
Cost of subscriptions |
3.2 | 2.7 | 1.1 | 0.5 | 19 | % | 1.6 | 145 | % | |||||||||||||||||
Cost of other revenue |
0.1 | 0.1 | 0.1 | | 0 | % | | | % | |||||||||||||||||
Total included in cost of revenue |
6.3 | 5.3 | 2.9 | 1.0 | 19 | % | 2.4 | 83 | % | |||||||||||||||||
Included in operating expenses |
0.8 | 0.7 | 0.5 | 0.1 | 14 | % | 0.2 | 40 | % | |||||||||||||||||
Total |
$ | 7.1 | $ | 6.0 | $ | 3.4 | $ | 1.1 | 18 | % | $ | 2.6 | 76 | % | ||||||||||||
The increases in amortization expense for 2009 compared to 2008 and 2008 compared to 2007 are directly attributable to the acquisitions of the Target Companies, eTapestry and Kintera. Identifiable intangible assets of $16.9 million and $32.8 million were recorded during 2008 and 2007, respectively, related to the acquisition of these companies.
Interest expense
Interest expense decreased $0.6 million in 2009 when compared to 2008. The decrease is primarily related to the timing of payments and the duration of borrowings under our credit facility. Additionally, a decrease in our effective interest rate contributed to the decrease in interest expense.
Interest expense increased $0.4 million in 2008 when compared to 2007. The increase is primarily related to the timing and amount of borrowings under our credit facility, offset by a decrease in our effective interest rate. During 2008 and 2007, we utilized borrowings under our credit facility for short-term financial needs such as funding business acquisitions and share repurchases. However, in 2008 we carried outstanding debt for a longer period, as compared to 2007.
Income tax provision
We record income tax expense in our consolidated financial statements based on an estimated annual effective income tax rate. We had an effective tax rate of 37.7%, 35.3%, and 38.5% in 2009, 2008 and 2007, respectively. The effective tax rate in 2008 was lower when compared to 2009 because we generated a greater amount of federal and state income tax credits in 2008 that served to lower our effective tax rate for 2008. While we generated federal and state income tax credits in 2009, the amounts realized in 2008 were significantly higher.
48
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
We record our deferred tax assets and liabilities at an amount based upon a U.S. federal income tax rate of 35.0% and appropriate statutory tax rates of various foreign, state and local jurisdictions in which we operate. If our tax rates change in the future, we may adjust our deferred tax assets and liabilities to an amount reflecting those income tax rates. Any change will affect the provision for income taxes during the period that the determination is made.
The following table reconciles the amounts of unrecognized tax benefits for the years ended December 31:
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Balance at beginning of year |
$ | 346 | $ | 629 | $ | 642 | ||||||
Increases from prior period positions |
427 | | 13 | |||||||||
Decreases from prior period positions |
| | (12 | ) | ||||||||
Increases from current period positions |
485 | 23 | 8 | |||||||||
Lapse of statute of limitations |
(27 | ) | (306 | ) | | |||||||
Decreases relating to settlements with taxing authorities |
| | (22 | ) | ||||||||
Balance at end of year |
$ | 1,231 | $ | 346 | $ | 629 |
The amount of unrecognized tax benefits that, if recognized, would favorably affect our effective tax rate was $1.1 million at December 31, 2009. Tax expense for 2009 increased by $0.9 million for changes in liabilities, penalties and accrued interest related to uncertain tax positions. The total amount of interest and penalties included in the consolidated balance sheet as of December 31, 2009 and 2008 was $0.2 million. The total amount of interest and penalties included in the consolidated statement of operations for 2008 was $0.1 million; interest and penalties were immaterial in 2009.
We have taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may significantly decrease within the next twelve months. The possible decrease could result from the finalization of state income tax reviews and the expiration of statutes of limitations. The reasonably possible decrease is $0.3 million.
We file income tax returns in the U.S. federal and various state jurisdictions and foreign jurisdictions including Canada, United Kingdom, Australia and Netherlands. We are subject to U.S. federal income tax examination for calendar tax years ending 2005 through 2008.
Liquidity and capital resources
At December 31, 2009, cash and cash equivalents totaled $22.8 million, compared to $16.4 million at December 31, 2008. The $6.4 million increase in cash and cash equivalents during 2009 is principally the result of generating $86.8 million of cash from operations reduced by $59.0 million in debt repayments on our credit facility, $17.7 million in dividends paid to stockholders and $7.8 million used to purchase property, equipment and RLC.
Our principal source of liquidity is our operating cash flow, which depends on continued customer renewal of our maintenance, support and subscription agreements and market acceptance of our products 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 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 or pay further dividends and/or repurchase our common stock.
49
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
At December 31, 2009 we had no outstanding borrowings under our credit facility. We have drawn on our credit facility from time to time to help us meet short-term financial needs, such as business acquisitions and purchase of common stock under our repurchase program. Under this five-year credit facility, which matures in July 2012, we may elect not more than twice over the term of the agreement to increase the aggregate amount available of $75.0 million by up to $50.0 million. We exercised one of these options for an additional $15.0 million in June 2008. We believe our $90.0 million credit facility provides us with sufficient flexibility to meet our financial needs.
Operating cash flow
Net cash provided by operating activities of $86.8 million increased $26.5 million when compared to 2008 primarily due to a decrease in income tax payments of $13.6 million principally attributable to fluctuations in the timing of payments. Throughout both years, 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.
Working capital changes as they impact the statement of cash flows are composed of accounts receivable, other current assets, accounts payable, accrued expenses, accrued liabilities and deferred revenue. Net collections of accounts receivable and increases in deferred revenue represent a net increase in cash associated with working capital changes of $14.6 million and $9.2 million in 2009 and 2008, respectively. The year-over-year increase is principally due to the reduced billings related to slower sales growth when comparing 2009 to 2008. Changes in our balances of accounts payable, prepaid expenses, accrued liabilities and other current assets represent a net increase in cash associated with working capital changes of $2.4 million in 2009, compared to a net decrease of $12.9 million in 2008. The primary driver of this change is (i) a reduction in prepaid expenses principally attributable to the receipt of $4.5 million in income tax refunds and (ii) an increase in income taxes payable and other accrued liabilities principally attributable to fluctuations in the timing of payments.
Investing cash flow
Net cash used in 2009 for investing activities was $7.8 million compared to $56.0 million of net cash used in 2008. The decrease in cash used in investing activities is principally due to a decrease in net cash used for acquisitions. We invested $5.5 million in property and equipment in 2009 compared to $7.7 million in 2008. Vendor payments for $3.7 million of property and equipment purchases received in 2009 had not been made as of December 31, 2009 and, accordingly, have been reflected as non-cash activity in our consolidated statement of cash flow for 2009.
Financing cash flow
Net cash used in financing activities for 2009 was $73.2 million compared to $1.0 million in 2008. The increase in cash used in financing activities is primarily due to the larger amount of repayment of borrowings under our credit facility in 2009 compared to 2008. Additionally, in 2008, we borrowed funds, principally to acquire Kintera and repurchase our stock. We did not borrow any funds nor repurchase stock in 2009 and amounts used for acquisition was substantially less in 2009 compared to 2008.
50
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Commitments and contingencies
As of December 31, 2009, we had $1.3 million of outstanding debt and future minimum lease commitments of $66.6 million 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 |
$ | 66.4 | $ | 7.0 | $ | 12.3 | $ | 8.8 | $ | 38.3 | |||||
Capital leases |
0.2 | 0.2 | | | | ||||||||||
Debt and interest |
1.3 | 1.3 | | | | ||||||||||
Total |
$ | 67.9 | $ | 8.5 | $ | 12.3 | $ | 8.8 | $ | 38.3 |
Our commitments related to operating leases have not been reduced by the future minimum lease commitments under sublease agreements that expire in 2010 and 2011, incentive payments from the state of South Carolina resulting from the relocation of our headquarters, and reimbursement of leasehold improvements totaling $4.7 million.
Included in the table above is interest expense of $0.1 million. The actual interest expense recognized in our consolidated statements of operations will depend on the amount of debt and length of time the debt is outstanding, which could be different from our assumptions used in the table above.
As of December 31, 2009, we had accrued an estimate of $0.2 million related to contingent consideration in connection with the acquisition of RLC. Please refer to Note 2 in our notes to the consolidated financial statements for further information. We are unable to determine the actual amount, if any, for which this liability will be settled, and accordingly, we have not included this amount in the table above.
As of December 31, 2009, we have accrued $0.9 million of federal taxes, $0.3 million of state taxes and $0.2 million of interest and penalties related to uncertain tax positions taken in current and prior years. Please refer to Note 10 in our notes to the consolidated financial statements for further information. We are unable to determine the period in which these liabilities will be settled, and accordingly, we have not included these amounts in the table above.
We utilize third-party relationships in conjunction with our products. The contractual arrangements vary in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. The total minimum annual purchase commitments under these arrangements at December 31, 2009 are approximately $3.4 million through 2012, which is not included in the table above. We incurred expense under these arrangements of $2.4 million, $1.6 million and $0.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
In February 2010, our Board of Directors approved our annual dividend of $0.44 per share for 2010 and declared a first quarter dividend of $0.11 per share payable on March 15, 2010 to stockholders of record on February 26, 2010. Dividends at the annual rate would aggregate to $19.4 million assuming 44.0 million shares of common stock are outstanding, net of treasury stock. Our ability to continue to declare and pay dividends may be restricted by, among other things, the terms of our credit facility, general economic conditions and our ability to generate operating cash flow.
51
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Off-balance sheet arrangements
We do not believe we currently have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.
Foreign currency exchange rates
Approximately 12.8% of our total net revenue for the year ended December 31, 2009 was derived from operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded as a separate component of stockholders equity, was $0.7 million and $1.0 million at December 31, 2009 and 2008, 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 in Canadian dollars, and contracts entered into by our U.K., Australian and Netherlands subsidiaries are generally denominated in pounds sterling, Australian dollars and euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. During 2009, the foreign currency translation has resulted in a decrease in our reported revenues and expenses denominated in non-U.S. currencies when compared to 2008. Though we do not believe our increased exposure to currency exchange rates has had a material impact on our results of operations or financial position, we intend to continue to monitor our foreign currency exchange rate exposure and take action as appropriate.
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. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, our allowance for sales returns and doubtful accounts, valuation of long-lived and intangible assets and goodwill, stock-based compensation and provision for income taxes, valuation of deferred tax assets and liabilities and contingencies.
We base our estimates on historical experience 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 differ from any of our estimates under different assumptions or conditions. We believe the critical accounting policies listed below affect significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
Our revenue is primarily generated from the following sources: (1) selling perpetual licenses of our software products; (2) providing professional services including implementation, training, consulting, hosting and other services; (3) providing software maintenance and support services; and (4) charging for the use of our software products in a hosted environment.
52
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
License fees
We recognize revenue from the sale of perpetual software license rights when all of the following conditions are met:
| persuasive evidence of an arrangement exists; |
| the product has been delivered; |
| the fee is fixed or determinable; and |
| collection of the resulting receivable is probable. |
We deem acceptance of an agreement to be evidence of an arrangement. Delivery occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical license agreement does 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.
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to delivered components, normally the license component of the arrangement, using the residual value method based on objective evidence of the fair value of the undelivered elements, which is specific to us. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under the maintenance program. Fair value of professional services and other products and services is based on sales of these products and services to other customers when sold on a stand-alone basis. 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 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 on a percent-complete basis.
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. For service engagements of less than $10,000, we frequently contract for and bill based on a fixed fee plus reimbursable travel-related expenses. We recognize this revenue upon completion of the work 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.
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 revenue is recognized only upon the customer attending and completing training. Additionally, we sell a fixed-rate program, which permits customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over this contract period.
53
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
Maintenance
We recognize revenue from maintenance services ratably over the contract term, which is 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.
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 over the service period of the contract. Any related set-up fees are also recognized ratably over the service period of the contract.
We are increasingly making 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 over the subscription agreement, which generally ranges from one to three years. For contractual arrangements covering the use of hosted applications the stand alone value of the delivered items or the fair value of undelivered items in the arrangement have not been established. Such items include upfront activation, implementation and hosting of the solution. For these arrangements we treat the transaction as a single element and the revenue is deferred until the hosted application is deployed and in use, at which time revenue is recognized over the remaining term of the arrangement. Direct and incremental costs relating to activation and implementation are capitalized until the hosted application is deployed and in use, and then expensed over the remaining term of the arrangement.
Revenue from transaction processing fees is recognized when received. Credit card fees directly associated with processing donations for customers are included in subscription revenue, net of related transaction costs.
Deferred revenue
To the extent that our customers are billed or pay for the above described services in advance of delivery, such amounts are recorded in deferred revenue.
Sales returns and allowance for doubtful accounts
We provide customers a 30-day right of return and maintain a reserve for returns. We estimate the amount of this reserve based on historical experience. Provisions for sales returns are charged against the related revenue items.
We maintain an allowance for doubtful accounts at 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. Any necessary provision is reflected in general and administrative expense. 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.
54
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
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 change 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 value of the asset and exclude any interest charges. 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. The discount rate utilized would be based on our best estimate of our risks and required investment returns at the time the impairment assessment is made.
Goodwill is assigned to our reporting units, which are defined as the License Fees, Consulting and Education Services, Analytic Services, Maintenance and Subscriptions operating segments. We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the fair value of the reporting unit with its carrying amount. 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.
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. Even if our estimated fair value of the reporting units significantly declined, no impairment would be indicated. Actual future results may differ from those estimates.
Stock-based compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. We determine the fair value of the stock options and stock appreciation rights using an 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. 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 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 forfeiture estimates and actual forfeitures.
Provision for income tax and valuation of deferred tax assets
We account for income taxes using the asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or income tax returns. Using the enacted tax rates in effect for the year in which we expect the
55
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(Continued)
differences to reverse, we determine deferred tax assets and liabilities based on the differences between the financial reporting and the tax basis of an asset or liability. We record a valuation allowance when it is more likely than not that the deferred tax asset will not be realized.
Significant judgment is required in determining income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in a net deferred tax asset or liability that is included in our consolidated balance sheets. The final outcome of these matters for tax reporting purposes might be different than that which is reflected in our historical income tax provisions, benefits and accruals. Any difference could have a material effect on our income tax provision and net income in the period in which such a determination is made.
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. In addition, we were not subject to income tax in many of the states in which we operated as a result of our S corporation status. 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. Accordingly, since October 14, 1999 we have been subject to federal and state income taxes. Upon the conversion and in connection with the recapitalization, we recorded a one-time benefit of $107.0 million to establish a deferred tax asset.
We assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, we include an expense within the income tax provision in the consolidated statement of operations. Our valuation allowance of $8.0 million at December 31, 2009 is primarily associated with deferred tax assets for certain state income tax credits and net operating loss carryforwards that we have determined are not more-likely-than-not to be realized. The ability to utilize our net deferred tax asset is dependent on our ability to generate future taxable income. Based on current estimates of revenue and expenses, we expect future taxable income will be sufficient to realize the remaining deferred tax assets. Even if actual results are significantly below our current estimates, the recovery still remains likely and, except for the state tax credits and net operating loss carryforwards discussed above, no valuation allowance would be necessary.
Significant judgment is required in determining the provision for income taxes. To the extent that final results differ from estimated amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made and could have an impact on the deferred tax asset. Our deferred tax assets and liabilities are recorded at an amount based upon a U.S. federal income tax rate of 35.0% and appropriate statutory rates of various foreign, state and local jurisdictions in which we operate. If our tax rates change, we will adjust our deferred tax assets and liabilities to an amount reflecting those income tax rates. If such change is determined to be appropriate, it will affect the provision for income taxes during the period that the determination is made.
We recognize the tax impact from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Such tax impact recognized in the consolidated financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Significant judgment is required in the identification and measurement of uncertain tax positions.
56
Blackbaud, Inc.
Item 7. Managements discussion and analysis of financial condition and results of operations(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.
Recently issued accounting pronouncements
In October 2009, the FASB released Accounting Standards Update (ASU) 2009-13, which amends the existing criteria for separating consideration in multiple-deliverable arrangements. Arrangement that include perpetual software licenses are excluded from the scope of this ASU. ASU 2009-13 establishes a hierarchy for determining the selling price of a deliverable and requires the use of best estimate of the selling price when VSOE or third party evidence (TPE) of the selling price cannot be determined. As a result of the requirement to use the best estimate of the selling price when VSOE or TPE of the selling price cannot be determined, the residual method will no longer be permitted. ASU 2009-13 is applicable prospectively for revenue arrangements entered into or materially modified after the adoption date or retrospectively for all periods presented. We are required to adopt ASU 2009-13 on January 1, 2011. Early adoption is permitted. We are currently evaluating the impact of ASU 2009-13 on our consolidated financial statements.
Cautionary statement
We operate in a highly competitive environment that involves a number of risks, some of which are beyond our control. The following statement highlights some of these risks.
Statements contained in this Form 10-K that are not historical facts, are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained. Forward-looking statements involve known and unknown risks that could cause actual results to differ materially from expected results. Factors that could cause actual results to differ materially from our expectations expressed in the report include: general economic risk; uncertainty regarding increased business and renewals from existing customers; continued success in sales growth; lengthy sales and implementation cycles, particularly in larger organizations; risk associated with successful implementation of multiple integrated software products; technological changes that make our products and services less competitive; the ability to attract and retain key personnel; risks related to our dividend policy and stock repurchase program, including potential limitations on our ability to grow and the possibility that we might discontinue payment of dividends; risks relating to restrictions imposed by the credit facility; management of integration of recently acquired companies and other risks associated with acquisitions; risks associated with management of growth; and the other risk factors set forth from time to time in our SEC filings.
57
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature of our short-term investments and the lack of material debt, we have concluded at December 31, 2009 that we currently do not face material market risk exposure. Therefore, no quantitative tabular disclosures are required. For a discussion of our exposure to foreign currency exchange rate fluctuations, see the Foreign currency exchange rates section of Managements discussion and analysis of financial condition and results of operations in this report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the 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.
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 and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. 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, internal control over financial reporting.
Managements 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, 2009, based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2009.
58
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by our independent registered public accounting firm, as stated in their attestation report, which is included herein.
None.
59
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 Matters 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 Blackbauds Proxy Statement for the 2010 Annual Meeting of Stockholders expected to be held on June 23, 2010, 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 Blackbauds Proxy Statement for the 2010 Annual Meeting of Stockholders expected to be held on June 23, 2010.
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 Blackbauds Proxy Statement for the 2010 Annual Meeting of Stockholders expected to be held on June 23, 2010.
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 Blackbauds Proxy Statement for the 2010 Annual Meeting of Stockholders expected to be held on June 23, 2010.
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 Blackbauds Proxy Statement for the 2010 Annual Meeting of Stockholders expected to be held on June 23, 2010.
60
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial statements
The following statements are filed as part of this report:
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.
(b) Exhibits
Filed In | ||||||||||
Exhibit number | Description of Document | Registrants Form |
Dated | Exhibit Number |
Filed Herewith | |||||
2.1 |
Agreement and Plan of Merger and Reincorporation dated April 6, 2004 |
S-1 | 04/06/04 | 2.1 | ||||||
2.2 |
Stock Purchase Agreement among Target Software, Inc., Target Analysis Group, Inc., all of the Stockholders of Target Software Inc. and Target Analysis Group, Inc. and Blackbaud, Inc. |
8-K | 01/18/07 | 2.2 | ||||||
3.1 |
Certificate of Incorporation of Blackbaud, Inc. |
S-1 | 04/06/04 | 3.1 | ||||||
3.3 |
Amended and Restated By-laws of Blackbaud, Inc. |
8-K | 12/23/08 | 3.3 | ||||||
10.5 |
Trademark License and Promotional Agreement dated as of October 13, 1999 between Blackbaud, Inc. and Charleston Battery, Inc. |
S-1 | 02/20/04 | 10.5 | ||||||
10.6 |
Blackbaud, Inc. 1999 Stock Option Plan, as amended |
S-1 | 04/06/04 | 10.6 | ||||||
10.8 |
Blackbaud, Inc. 2001 Stock Option Plan, as amended |
S-1 | 04/06/04 | 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 | 06/20/06 | 10.20 | ||||||
10.26 |
Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Blackbaud, Inc. 2004 Stock Plan |
10-K | 02/28/07 | 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 | 02/28/07 | 10.27 |
61
Filed In | ||||||||||
Exhibit number | Description of Document | Registrants Form |
Dated | Exhibit Number |
Filed Herewith | |||||
10.28 | Amended and Restated Credit Agreement dated as of July 25, 2007 by and among Blackbaud, as Borrower, the Lenders, and Wachovia Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender, and Wachovia Capital Markets, LLC as Sole Lead Arranger and Sole Book Manager. |
8-K | 07/31/07 | 10.28 | ||||||
10.29 | Amended and Restated Guaranty Agreement dated as of July 25, 2007 by and among certain subsidiaries of Blackbaud, as Guarantors, in favor of Wachovia Bank, National Association, as Administrative Agent. |
8-K | 07/31/07 | 10.29 | ||||||
10.30 | Pledge Agreement dated as of July 25, 2007 by and among Blackbaud, its subsidiaries in favor of Wachovia Bank, National Association, as Administrative Agent for the ratable benefit of itself and the Lenders. |
8-K | 07/31/07 | 10.30 | ||||||
10.31 | Form of Tender and Support Agreement by and between Blackbaud, Inc. and certain stockholders of Kintera, Inc. |
8-K | 05/30/08 | 10.31 | ||||||
10.32 | First Amendment to Credit Agreement and Lender Addition and Acknowledgement Agreement dated as of June 23, 2008 |
8-K | 06/26/08 | 10.32 | ||||||
10.33 | Blackbaud, Inc. 2008 Equity Incentive Plan |
DEF 14A | 04/29/08 | |||||||
10.34 | Form of Notice of Grant and Stock Option Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan |
S-8 | 08/04/08 | 10.34 | ||||||
10.35 | Form of Notice of Grant and Restricted Stock Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan |
S-8 | 08/04/08 | 10.35 | ||||||
10.36 | Form of Notice of Grant and Stock Appreciation Rights Agreement under Blackbaud, Inc. 2008 Equity Incentive Plan |
S-8 | 08/04/08 | 10.36 | ||||||
10.37 | Kintera, Inc. 2000 Stock Option Plan, as amended, and form of Stock Option Agreement thereunder |
10-K/A* | 03/26/08 | 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* | 03/26/08 | 10.3 | ||||||
10.39 | Form of Retention Agreement |
10-Q | 11/05/08 | 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 | 12/11/08 | 10.37 |
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Filed In | ||||||||||
Exhibit number | Description of Document | Registrants Form |
Dated | Exhibit Number |
Filed Herewith | |||||
10.41 | Blackbaud, Inc. 2009 Equity Compensation Plan for Employees from Acquired Companies |
S-8 | 07/02/09 | 10.41 | ||||||
10.42 | Share Purchase Agreement between RLC Group B.V., as the Seller, and Blackbaud, Inc., as the Purchaser |
10-Q | 08/07/09 | 10.42 | ||||||
10.43 | Amended and Restated Employment and Noncompetition Agreement dated January 28, 2010 between Blackbaud, Inc. and Marc Chardon |
8-K** | 02/01/10 | 10.43 | ||||||
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 |
* | 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 registrant has received confidential treatment 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. |
63
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, 2010 | /S/ MARC E. CHARDON | |||
President and Chief 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.
/S/ MARC E. CHARDON Marc E. Chardon |
President, Chief Executive Officer |
Date: February 26, 2010 | ||
/S/ TIMOTHY V. WILLIAMS Timothy V. Williams |
Senior Vice President and Chief Financial Officer (Principal |
Date: February 26, 2010 | ||
/S/ ANDREW M. LEITCH Andrew M. Leitch |
Chairman of the Board |
Date: February 26, 2010 | ||
/S/ TIMOTHY CHOU Timothy Chou |
Director |
Date: February 26, 2010 | ||
/S/ GEORGE H. ELLIS George H. Ellis |
Director |
Date: February 26, 2010 | ||
/S/ JOHN P. MCCONNELL John P. McConnell |
Director |
Date: February 26, 2010 | ||
/S/ CAROLYN MILES Carolyn Miles |
Director |
Date: February 26, 2010 |
64
BLACKBAUD, INC.
Index to consolidated financial statements
F-1
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 operations, of cash flows and of stockholders equity and comprehensive income present fairly, in all material respects, the financial position of Blackbaud, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys 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 Managements Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Companys 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 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.
A companys 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 companys 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 companys 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
February 25, 2010
F-2
Consolidated balance sheets
December 31, | ||||||||
(in thousands, except share amounts) | 2009 | 2008 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,769 | $ | 16,361 | ||||
Donor restricted cash |
12,874 | 12,363 | ||||||
Accounts receivable, net of allowance of $3,559 and $2,777 at December 31, 2009 and December 31, 2008, respectively |
50,220 | 52,554 | ||||||
Prepaid expenses and other current assets |
18,155 | 17,281 | ||||||
Deferred tax asset, current portion |
5,728 | 6,858 | ||||||
Total current assets |
109,746 | 105,417 | ||||||
Property and equipment, net |
22,507 | 21,384 | ||||||
Deferred tax asset |
55,570 | 64,762 | ||||||
Goodwill |
73,919 | 73,615 | ||||||
Intangible assets, net |
42,019 | 48,171 | ||||||
Other assets |
468 | 537 | ||||||
Total assets |
$ | 304,229 | $ | 313,886 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 10,683 | $ | 7,023 | ||||
Accrued expenses and other current liabilities |
25,974 | 22,142 | ||||||
Donations payable |
12,874 | 12,363 | ||||||
Debt, current portion |
1,288 | 60,049 | ||||||
Deferred revenue |
129,412 | 113,802 | ||||||
Total current liabilities |
180,231 | 215,379 | ||||||
Long-term debt, net of current portion |
| 1,288 | ||||||
Deferred revenue, noncurrent |
6,172 | 5,838 | ||||||
Other noncurrent liabilities |
1,720 | 873 | ||||||
Total liabilities |
188,123 | 223,378 | ||||||
Commitments and contingencies (see Note 9) |
||||||||
Stockholders equity: |
||||||||
Preferred stock; 20,000,000 shares authorized, none outstanding |
| | ||||||
Common stock, $0.001 par value; 180,000,000 shares authorized, 52,214,606 and 51,269,081 shares issued at December 31, 2009 and December 31, 2008, respectively |
52 | 51 | ||||||
Additional paid-in capital |
134,726 | 116,846 | ||||||
Treasury stock, at cost; 7,677,341 and 7,494,466 shares at December 31, 2009 and December 31, 2008, respectively |
(134,382 | ) | (130,594 | ) | ||||
Accumulated other comprehensive loss |
(201 | ) | (899 | ) | ||||
Retained earnings |
115,911 | 105,104 | ||||||
Total stockholders equity |
116,106 | 90,508 | ||||||
Total liabilities and stockholders equity |
$ | 304,229 | $ | 313,886 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Consolidated statements of operations
Years ended December 31, | ||||||||||||
(in thousands, except share and per share amounts) | 2009 | 2008 | 2007 | |||||||||
Revenue |
||||||||||||
License fees |
$ | 25,392 | $ | 35,932 | $ | 37,569 | ||||||
Services |
87,834 | 100,824 | 91,376 | |||||||||
Maintenance |
116,476 | 107,304 | 94,602 | |||||||||
Subscriptions |
72,898 | 49,705 | 25,389 | |||||||||
Other revenue |
6,738 | 8,730 | 8,102 | |||||||||
Total revenue |
309,338 | 302,495 | 257,038 | |||||||||
Cost of revenue |
||||||||||||
Cost of license fees |
3,582 | 3,316 | 2,870 | |||||||||
Cost of services |
61,713 | 63,960 | 54,908 | |||||||||
Cost of maintenance |
21,364 | 20,185 | 17,119 | |||||||||
Cost of subscriptions |
28,183 | 20,587 | 10,306 | |||||||||
Cost of other revenue |
6,098 | 8,368 | 7,274 | |||||||||
Total cost of revenue |
120,940 | 116,416 | 92,477 | |||||||||
Gross profit |
188,398 | 186,079 | 164,561 | |||||||||
Operating expenses |
||||||||||||
Sales and marketing |
62,796 | 65,185 | 56,994 | |||||||||
Research and development |
45,662 | 38,708 | 28,525 | |||||||||
General and administrative |
33,380 | 34,072 | 26,144 | |||||||||
Amortization |
768 | 713 | 491 | |||||||||
Total operating expenses |
142,606 | 138,678 | 112,154 | |||||||||
Income from operations |
45,792 | 47,401 | 52,407 | |||||||||
Interest income |
637 | 526 | 813 | |||||||||
Interest expense |
(962 | ) | (1,526 | ) | (1,164 | ) | ||||||
Other income (expense), net |
220 | (194 | ) | (503 | ) | |||||||
Income before provision for income taxes |
45,687 | 46,207 | 51,553 | |||||||||
Income tax provision |
17,240 | 16,329 | 19,829 | |||||||||
Net income |
$ | 28,447 | $ | 29,878 | $ | 31,724 | ||||||
Earnings per share |
||||||||||||
Basic |
$ | 0.67 | $ | 0.70 | $ | 0.73 | ||||||
Diluted |
$ | 0.65 | $ | 0.68 | $ | 0.71 | ||||||
Common shares and equivalents outstanding |
||||||||||||
Basic weighted average shares |
42,771,173 | 42,958,947 | 43,619,158 | |||||||||
Diluted weighted average shares |
43,600,048 | 43,958,557 | 44,595,483 | |||||||||
Dividends per share |
$ | 0.40 | $ | 0.40 | $ | 0.34 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated statements of cash flows
Years ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 28,447 | $ | 29,878 | $ | 31,724 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
15,509 | 12,865 | 8,149 | |||||||||
Provision for doubtful accounts and sales returns |
3,458 | 4,179 | 2,661 | |||||||||
Stock-based compensation expense |
12,287 | 12,085 | 6,934 | |||||||||
Excess tax benefit on exercise of stock options |
(2,405 | ) | (1,497 | ) | (4,931 | ) | ||||||
Deferred taxes |
12,351 | 6,407 | 12,491 | |||||||||
Other non-cash adjustments |
116 | 110 | 65 | |||||||||
Changes in assets and liabilities, net of acquisition of businesses: |
||||||||||||
Accounts receivable |
1,375 | (10,193 | ) | (10,367 | ) | |||||||
Prepaid expenses and other assets |
2,122 | (5,635 | ) | (2,005 | ) | |||||||
Trade accounts payable |
(312 | ) | 614 | (830 | ) | |||||||
Accrued expenses and other current liabilities |
612 | (7,907 | ) | 6,079 | ||||||||
Donor restricted cash |
(511 | ) | (3,763 | ) | | |||||||
Donations payable |
511 | 3,763 | | |||||||||
Deferred revenue |
13,237 | 19,404 | 12,897 | |||||||||
Net cash provided by operating activities |
86,797 | 60,310 | 62,867 | |||||||||
Cash flows from investing activities |
||||||||||||
Purchase of property and equipment |
(5,534 | ) | (7,692 | ) | (8,123 | ) | ||||||
Purchase of net assets of acquired companies, net of cash acquired |
(2,258 | ) | (49,916 | ) | (84,405 | ) | ||||||
Proceeds from sale and maturity of marketable securities |
| 1,575 | | |||||||||
Net cash used in investing activities |
(7,792 | ) | (56,033 | ) | (92,528 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Proceeds from issuance of debt |
| 86,000 | 48,000 | |||||||||
Proceeds from exercise of stock options |
2,509 | 883 | 5,451 | |||||||||
Excess tax benefit on exercise of stock options |
2,405 | 1,497 | 4,931 | |||||||||
Payments on debt |
(60,049 | ) | (27,527 | ) | (49,934 | ) | ||||||
Payments of deferred financing fees |
| (47 | ) | (418 | ) | |||||||
Payments on capital lease obligations |
(384 | ) | (540 | ) | (477 | ) | ||||||
Purchase of treasury stock |
| (43,727 | ) | (15,857 | ) | |||||||
Dividend payments to stockholders |
(17,673 | ) | (17,497 | ) | (15,074 | ) | ||||||
Net cash used in financing activities |
(73,192 | ) | (958 | ) | (23,378 | ) | ||||||
Effect of exchange rate on cash and cash equivalents |
595 | (1,733 | ) | 31 | ||||||||
Net increase (decrease) in cash and cash equivalents |
6,408 | 1,586 | (53,008 | ) | ||||||||
Cash and cash equivalents, beginning of year |
16,361 | 14,775 | 67,783 | |||||||||
Cash and cash equivalents, end of year |
$ | 22,769 | $ | 16,361 | $ | 14,775 | ||||||
Supplemental disclosure of cash flow information |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 615 | $ | 1,375 | $ | 1,126 | ||||||
Taxes, net of refunds |
$ | (2,584 | ) | $ | 11,041 | $ | 5,607 | |||||
Purchase of equipment included in accounts payable |
$ | 3,699 | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Consolidated statements of stockholders equity and comprehensive income
Comprehensive income |
Common stock | Additional capital |
Treasury stock |
Accumulated income (loss) |
Retained earnings |
Total equity |
||||||||||||||||||||||||
(in thousands, except share amounts) | Shares | Amount | ||||||||||||||||||||||||||||
Balance at December 31, 2006 |
49,205,522 | $ | 49 | $ | 88,409 | $ | (69,630 | ) | $ | 232 | $ | 76,298 | $ | 95,358 | ||||||||||||||||
Net income |
$ | 31,724 | | | | | | 31,724 | 31,724 | |||||||||||||||||||||
Payment of dividends |
| & |