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Rapidly Growing Subscriptions Drove Blackbaud, Inc.'s Third-Quarter Results

Customers continue to flock to Blackbaud's (NASDAQ: BLKB) cloud-based software solutions. That drove solid revenue growth in the third quarter and will make future sales more predictable due to the subscription-based nature of these products. As a result, the company remains on track to achieve its full-year outlook as well as its long-term aspirational goals.

Blackbaud results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Non-GAAP revenue

$195.9 million

$183.1 million

6.8%

Non-GAAP net income

$26.9 million

$21.3 million

25.8%

Adjusted EPS

$0.56

$0.45

24.4%

Data source: Blackbaud. EPS = earnings per share.

Image source: Getty Images.

What happened with Blackbaud this quarter? 

Subscriptions continued growing at a brisk pace.

  • Subscription revenue jumped 19% to $127.8 million and now accounts for 65% of total revenue. That helped offset a decline in revenue from maintenance as well as services and "other" sources. Overall, recurring revenue now represents more than 81% of total sales.
  • Those higher sales, when combined with a 280-basis-point improvement in margins, fueled the big jump in earnings.
  • Blackbaud generated $59.1 million in non-GAAP free cash flow, which is up $17.5 million year over year.
  • The company completed its acquisition of JustGiving during the quarter, which is a U.K.-based online social giving platform for peer-to-peer fundraising.
  • After the quarter ended, Blackbaud and Microsoft (NASDAQ: MSFT) announced plans to strengthen their strategic partnership to digitally transform the nonprofit sector. Blackbaud plans to power its Blackbaud SKY with Microsoft's Azure cloud platform, which is part of a three-point collaboration commitment between the two companies to help accelerate the adoption of technology within the nonprofit sector.

What management had to say 

CFO Tony Boor commented on the third-quarter results, saying, "[W]e posted a very solid third quarter balancing accelerated growth in revenue with improved profitability." One of the drivers of that growth is the company's Blackbaud SKY platform, which CEO Mike Gianoni noted is "fueling our strong revenue growth." One reason customers are signing up at a brisk pace is that it "provides the industry's best cloud capabilities" by maximizing "customer outcomes through innovative new technology and industry expertise," according to Gianoni. That superior solution is winning new customers as well as helping retain existing ones. That's because the subscription-based service generates recurring revenue for the company by always providing customers with the latest version. That's yielding more predictable sales than the old model, where the company needed to, in a sense, resell its customers every time it upgraded its products.

Looking forward 

Boor noted in the earnings release that its "strong financial performance continues to position us well toward achieving our financial guidance and long-term aspirational goals." In fact, thanks to the recently closed acquisition of JustGiving, the company was able to increase its full-year projections. It now anticipates non-GAAP revenue between $785 million to $795 million and non-GAAP earnings between $2.12 to $2.20 per share, which at the midpoint represent increases of 8% and 13%, respectively, from 2016. Those numbers put the company on target to hit the aspirational goal it set a few years ago. 

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew DiLallo owns shares of Blackbaud. The Motley Fool recommends Blackbaud. The Motley Fool has a disclosure policy.