Also, in the aftermath of the lowered outlook, several firms downgraded the stock, including Raymond James and JMP Securities setting the stock at Market Perform and Stifel and Benchmark both cutting it to a Hold. In its note, Benchmark commented that last night's pre-announcement was BLKB's second consecutive guide down, indicating that a turnaround may not be on the immediate horizon.
To rewind, back on February 6, the company issued its 4Q17 results and provided its initial outlook for FY18. Specifically, it guided for EPS of $2.75-$2.88, well above the $2.47 consensus at that time, and revenue of $870-$890 mln, also slightly above the $874 mln consensus at the mid-point.
Fast forward to April 30: BLKB reported upside Q1 results as EPS came in at $0.66 vs. the $0.59 expectation on in-line revenue of $204.2 mln. Then, on July 30, it once again exceeded analysts’ bottom line expectations with Q2 EPS of $0.69 compared to the $0.67 consensus. But revenue was merely in-line again at $214.6 mln.
While the quarterly results looked decent, the problem was that BLBK was not lifting its FY18 guidance as it continued to beat expectations. In other words, its original FY18 EPS outlook of $2.75-$2.88 remained unchanged, even though it had outperformed analysts' bottom line expectations in both Q1 and Q2. That was a red flag and was likely a main reason why the stock plummeted after its Q2 report.
With the significant cut in guidance last night, those concerns that had arisen following its Q2 report are now confirmed. Specifically, the company is now forecasting EPS of $2.46-$2.52 and revenue of $844-$854 mln, representing fairly modest annual growth of 7-8%. As noted above, BLKB stated that there are three main reasons for the cut in guidance. They are as follows:
- Reduction in one-time services revenue, accounting for roughly half of the outlook cut. Over the past few years, BLKB has been transitioning to a subscription-based recurring revenue model. In contrast to bookings, which are fully accounted for at the time the contract is signed, revenue from subscriptions takes a while to flow through the business, as clients are booked periodically. During its conference call last night, management stated that the decline in one-time revenue was faster than it had anticipated. So some of the cut in guidance can arguably be understood as a "by design" reduction as BLKB continues to shift its business model. As of the end of Q2, recurring revenue stood at 90% of total revenue, an all-time high.
- Weaker than expected transaction revenue also accounted for nearly half of the guidance cut. Transactional revenue is the least predictable in its recurring revenue portfolio, and BLBK said that it has seen some recent shifts in consumer behavior that are impacting its transactional business. Namely, the company saw impacted from fewer one-time events, such as natural disasters, during 2018 as well as smaller average donation sizes to charities in the overall industry relative to its expectations. Also, BLKB noted that in its K-12 business, less tuition is being paid by credit card, and it is seeing more payments made on time, which is impacting follow-up fees.
- The last, and the least impactful headwind, is that it is has seen some drop-off in subscription revenue. This is partially due to the company sun-setting legacy products as it migrates clients to its Blackbaud SKY powered solutions. While this suite has much higher retention rates, the company has seen heightened attrition rates during this transition period.
To conclude, it is clear that BLKB is navigating through some challenging times right now as it continues its shift towards a subscription-based model and expires legacy products. But management remains confident, commenting last night that it has a substantial opportunity to both improve its productivity and bolster its sales force to further penetrate the market. And, in fact, it is undergoing a major initiative to more aggressively ramp its sales force. The hope is that these actions will help spark some growth just as the issues concerning its business model transition fade.