Blackbaud: A Growth Company With A Competitive Advantage

Sep. 6.13 | About: Blackbaud, Inc. (BLKB)

Blackbaud Inc. (NASDAQ:BLKB) provides business software and services to the nonprofit sector. The company provides end-to-end solutions that are designed to improve effectiveness and efficiency. The company's products are competitive in the market, which is reflected in its 15% 10-year average revenue growth rate.

That said, I think Blackbaud Inc. has a competitive advantage because it specifically designs its products for the nonprofit sector. Competitors Sage, Microsoft (MSFT) and Oracle (NYSE:ORCL) don't focus on nonprofit firms. The company provides cloud computing services and mobile payment services, which also gives it a competitive advantage. Also, the nonprofit sector has a growth rate around the global GDP growth rate.

I like Blackbaud's competitive advantage is gained through its diverse and deep product portfolio. The financial performance should act as a tailwind to the valuations. I estimate the intrinsic value at $34.02. I consider this an investment-grade asset and my focus is on asset allocation, instead of stop loss levels.

Recent Developments

Blackbaud announced the use of Microsoft's Windows Azure cloud services to connect The Raisers Edge mobile app to on-premises instances of the company's flagship Raisers Edge donor management software. Users of Raisers Edge are now able to spend less time in front of the computer and more time engaged in face-to-face contact.

Anthony Boor, senior vice president and chief financial officer, has been named interim president and chief executive officer. Boor will also maintain his responsibilities as CFO. Boor now has more work than he can effectively handle.

Blackbaud released Blackbaud MobilePay, a mobile credit card processing application that is integrated with the company's payment processing services. MobilePay should help drive revenue growth going forward.

The company announced updates across its portfolio of nonprofit solutions and services.

Business Summary

Blackbaud is the leading global provider of software and related services designed specifically for nonprofit organizations - the company's purpose is to power the business of philanthropy from fundraising to outcomes. At the end of 2012, Blackbaud had more than 27,000 customers spread over 61 countries.

The company provides its solutions to nonprofit organizations in several ways, including on a perpetual license basis, a software-as-a-service basis, or a "hosted" software basis. The company provides a wide array of solutions that meet many of their customers needs.

Blackbaud is organized into four operating units: the Enterprise Customer Business Unit ("ECBU"), the General Markets Business Unit ("GMBU"), the International Business Unit ("IBU"), and Target Analytics.

The market for software-related services in the nonprofit sector is highly competitive and fragmented; certain areas of the market have low entry barriers. As the market matures and nonprofit organizations become more aware of the benefits of attaining specialized software, the market could become more competitive.

Blackbaud faces competition from small companies, such as Sage, and large enterprises, such as Microsoft, Salesforce.com (NYSE:CRM), and Oracle. None of these companies offer the tailored in-depth solutions that Blackbaud does - thus, Blackbaud has a competitive advantage in the nonprofit sector.

That competitive advantage is playing out in the revenue growth rate. The 10-year average revenue growth rate at the end of calendar 2012 was 15.6%. Revenue has increased every year since at least 2003.

For fiscal 2013, revenue should be about $500 million with an operating margin in the 13% to 17% range and a net income margin in the 8% to 12% range.

For fiscal 2014, I expect revenue of $575 million with the operating margin expanding to the 15% to 20% range, and the net income margin in the 9% to 14% range. The impact of the Convio acquisition won't depress margins as much in 2014 as growth in higher margin businesses offsets the impact of the Convio acquisition.

Blackbaud is a growth company that offers solutions to a market that is underserved by larger enterprises. The financial performance should act as a tailwind for the valuations.

Risks

  • Competition in the nonprofit sector increases and adversely impacts Blackbaud's results of operations.
  • The sustainable growth rate is materially lower than my estimate.
  • Revenue growth slows to well below the 15% level in the near term.
  • EPS in fiscal 2014 is materially below my estimate.

Valuations

I'm going to use multiple models to value the common equity shares of Blackbaud; I'll use discounted cash flow models and multiplier models. The average of the model's intrinsic value is the intrinsic value of the common equity shares. I'm assuming a sustainable growth rate of 6% and an adjusted required rate of return of 9%. The current share price is $36.77.

Using the discounted cash flow model, I estimate the intrinsic value at $17.33, which makes Blackbaud overvalued. My EPS forecast for next year is $1.57, my justified PE is 20 and Blackbaud is trading at 23 times forward earnings, which means the intrinsic value is $31.97.

I'll use the historic multiplier model valuations. The intrinsic value using the price/book ratio is $27.66, using the price/sales ratio is $31.36, using the price/cash flow ratio is $35.07. The average of those values is $31.36, which means Blackbaud is modestly overvalued. But, assuming the 15% 10-year average growth rate, the intrinsic value using this model is $36.07.

Given the fact that this is a younger growth company, I'm going to exclude the first valuation metric from the intrinsic value estimate. Thus, the intrinsic value of Blackbaud is $34.02. I think the $31.25 level and below is an accumulation zone.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.