No Earnings Recession for Blackbaud

Despite ominous predictions for a second straight quarter of declining corporate profits, we foresee no earnings recession for Blackbaud Inc. (Nasdaq: BLKB). Yet another quarter of double-digit growth is likely in store for the go-to supplier of software for nonprofit organizations.

When Blackbaud reports third-quarter results in a few weeks, analysts expect earnings of $0.40 a share, a 14% gain from last year’s third quarter. Profits rose 17% in the second quarter of 2015.

Nonprofits flock to Blackbaud because the company is an expert operating exclusively in the nonprofit market for three decades. Today it offers a diverse, integrated software platform that supports crucial daily functions including fundraising, donation processing, financial reporting and website management. These functions are increasingly available online via the “cloud.”

Blackbaud currently has about 30,000 customers globally. Projected revenue for all of 2015, $646 million, represents a 14% gain from last year.

To aid growth, Blackbaud is wisely shifting to the subscription-based business formula that’s proving so lucrative for software makers. In the second quarter, subscription sales climbed 23% to $80 million, bringing subscriptions to more than half of total revenue ($156 million during the quarter) for the first time in company history.

This bodes well for the third quarter and beyond, as subscriptions generate reliable recurring revenue better than traditional licensing agreements. That’s because the latter typically involve less predictable one-time charges, whereas subscriptions generate fees on a schedule, like quarterly or monthly. At Blackbaud, second-quarter recurring revenue grew 3% from last year’s second quarter to 76% of the overall top line.

During the second-quarter earnings call, CEO Michael Gianoni also stressed efforts to capitalize on projected expansion of Blackbaud’s total addressable market (TAM), the amount of revenue the company could potentially earn if it controlled the entire market for its products:

Today, our TAM is over $5 billion and is expected to grow to approximately $6.5 billion over the next three years. As we discussed previously, our strategy is to expand our TAM through tuck-in and strategic acquisitions. We did this last year with the acquisitions of WhippleHill and MicroEdge, and we are focused on ramping integration and successful operational execution of these acquisitions.

Blackbaud trades for 39 times full-year 2015 profit estimates, which is pricey but still well below the historical average of 70 for the stock’s earnings multiple. So even though shares are already up nearly 40% year-to-date, they could still have plenty more pop in the quarters ahead.