Blackbaud (NASDAQ:BLKB) had gotten off to a strong start in 2018, delivering fast-paced revenue and earnings growth through the first half of the year. However, the company's momentum slowed in the third quarter due to a trio of factors. While the maker of software for nonprofits has a plan to get back on track, 2018 won't be the banner year the company initially expected.

Blackbaud results: The raw numbers

Metric

Q3 2018

Q3 2017

Change (YOY)

Non-GAAP revenue

$210.1 million

$194.8 million

7.9%

Non-GAAP net income

$28.4 million

$27.2 million

4.4%

Adjusted EPS

$0.59

$0.57

3.5%

Data source: Blackbaud. EPS = earnings per share. YOY = year over year.

What happened with Blackbaud this quarter? 

Several issues weighed on results:

  • Total recurring revenue, which includes software subscriptions, increased 12.6% from last year's third quarter to $189.2 million, accounting for 90.1% of total sales. That more than offset a 22.4% drop in revenue from one-time services and other sources due mainly to the company's continued shift toward subscription-based recurring revenue.
  • While recurring revenue rose double digits, that increase wasn't as high as the company anticipated. That's due to less-than-expected transaction-based revenue as a result of a shift in consumer behavior in its U.K. market, a shift in the mix of payment methods within its tuition management business, and fewer major one-time events compared with 2017.
  • These factors, as well as a ramp-up in hiring, weighed on the company's margins, causing earnings to grow at a slower pace than revenue.
  • Free cash flow, meanwhile, decreased by $1.3 million versus the year-ago period to $57.8 million.
A man looking at a visualization of several electronic devises syncing in the cloud.

Image source: Getty Images.

What management had to say 

Blackbaud is working to reinvigorate growth by boosting both its sales force and product suite. CFO Tony Boor stated:

We've been executing a new and more aggressive program to ramp hiring for sales and sales support roles in the third quarter. There is a considerable opportunity for Blackbaud to better cover this large market and further improve our sales effectiveness. We're well under way in the hiring program with the expectation that we will begin to see material top-line return on these investments in late 2019 and more fully in 2020.

In addition to expanding its sales force to drive growth, CEO Mike Gianoni noted that "we are driving digital transformation in each of the industry segments we serve through the delivery of innovative new cloud software technology, which has expanded the addressable markets for Blackbaud." He pointed out that the company has recently introduced several new products, including Blackbaud Church Management and a cloud solution for higher education, to enable organizations in those fields to improve their efficiency.

The company also recently expanded its partnership with Microsoft (NASDAQ:MSFT). The companies are working together on an integrated cloud initiative for nonprofits to accelerate the innovation of cloud-based solutions to meet their specialized needs. Microsoft and Blackbaud recently introduced their first jointly developed solution, Nonprofit Resources Management, which addresses the needs of nonprofits focused on humanitarian aid and relief.

Looking forward 

While Blackbaud sees good things ahead, the company reduced its full-year guidance during the quarter. It now only sees revenue between $844 million and $854 million, which at the midpoint would be 7% higher than last year, down from its initial forecast for 11% revenue growth. Meanwhile, it now anticipates that adjusted earnings will be between $2.46 and $2.52 per share, which at the midpoint would be about 15% higher than last year, though that's well below the 30% growth the company initially expected. 

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Matthew DiLallo owns shares of Blackbaud and has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool recommends Blackbaud. The Motley Fool has a disclosure policy.