Blackbaud (NASDAQ:BLKB) continued to invest in hiring new sales representatives so it can reach more customers. This strategy is negatively affecting its near-term profitability, which was evident in the second quarter. However, the company believes its growth rate will reaccelerate as its new hires ramp their productivity.

Blackbaud results: The raw numbers

Metric

Q2 2019

Q2 2018

Change

Non-GAAP revenue

$226.4 million

$214.6 million

5.5%

Non-GAAP net income

$31.9 million

$33.0 million

(3.4%)

Adjusted EPS

$0.66

$0.69

(4.3%)

Data source: Blackbaud. EPS = earnings per share.

What happened with Blackbaud this quarter? 

Higher spending continues to cut into profitability:

  • Total recurring revenue, which includes software subscriptions, increased 8% from the year-ago period to $209.2 million, accounting for 92.4% of total sales. That more than offset an 18% decline in revenue from one-time services and other sources, which is a result of the company's continued shift toward subscription-based recurring revenue.
  • Earnings, however, declined by around 4% compared to last year's second quarter. That's because the company has been hiring more sales staff so it can grow at a faster rate. As a result of these new hires, sales, marketing, and customer success expenses rose 13% to $55 million. In addition to that, higher interest expenses also cut into earnings. That's the result of the new debt taken on to fund the acquisition of YourCause, which the company bought for $157 million during the first quarter.
  • Despite the rising costs, Blackbaud still generated $38 million in free cash flow during the period, which was $3.6 million less than it produced in the year-ago period.
Several people working around a table, their devices connected by cloud-based software

Image source: Getty Images.

What management had to say 

CFO Tony Boor commented on the quarter, stating:

Execution against our strategic plan drove solid results for the second quarter as we continue investing to further expand our selling footprint, drive cloud innovation for our customers, and ensure scalability in our business. We're pleased with the progress of the new sales hires added to date as they ramp to targeted productivity, and we expect to continue hiring as we look to grow our full year sales headcount at an accelerated rate relative to our historical average.

Blackbaud's primary focus this year is to expand its sales staff so it can reach more potential customers. That will enable the company to get the tailored cloud-based software solutions it has developed into the hands of its targeted markets. This sales ramp will also help it accelerate the adoption of some of its newer products.

For example, CEO Mike Gianoni noted that "soon we will be announcing general availability of Blackbaud Church Management, part of the Cloud Solution for Faith Communities." Meanwhile, the company has already started to "see strong market traction with our new Education Management portfolio, part of the Cloud Solution for Higher Education."

Looking forward 

The company's results so far this year have come in about as it expected. Because of that, Blackbaud has reaffirmed its full-year guidance. This forecast anticipates that revenue will be in the range of $880 million to $910 million, which is about a 5% year-over-year increase at the midpoint. Meanwhile, earnings should come in between $2.11 to $2.28 per share, which would be down about 15% at the midpoint due to the increased staffing costs. The company also expects to generate $124 million to $134 million in free cash flow this year, which would be about 13% less than 2018's level.