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Blackbaud, Inc. (BLKB): Making Profits From Non-Profits With This Stock

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Blackbaud, Inc. (NASDAQ:BLKB)Picking the right stocks is all about picking the right industries with attractive barriers to entry. Niche market segments within the application software industry have proven to be great hunting grounds. Blackbaud, Inc. (NASDAQ:BLKB) is a leading provider of fund raising software and related services to non-profit organizations.

Defensible market position in market niche

The applications software market, unlike the systems software market dominated by Microsoft Corporation (NASDAQ:MSFT), is characterized by free cash flow generative companies boasting of strong market leadership in their specific niches. Examples of such companies include Adobe Systems Incorporated (NASDAQ:ADBE) in graphics design software and Intuit Inc. (NASDAQ:INTU) in small business accounting software.

Blackbaud, Inc. (NASDAQ:BLKB) sells its software and services to more than 28,000 customers in over 60 countries. I am positive on Blackbaud’s ability to defend and further expand its market position for a couple of reasons.

Firstly, Blackbaud benefits from customer captivity, as a result of high customers switching costs. Its clients typically assess the advantages and disadvantages of switching, and decide that the costs of switching in terms of time wasted in learning how to use a brand new system outweigh the benefits of switching in terms of more attractive pricing.

Secondly, non-profit organizations have specialized needs that cookie-cutter software solutions fall short of. For example, certain fund accounting reporting standards are unique to non-profits. Also, different indicators of operational performance are used vis-à-vis for-profits such as the number of volunteers and meals delivered.

Last but not least, managing costs for non-profit organizations is as important as that for profit organizations, if not more important. Non-profit organizations have to be accountable to their donors for every dollar that does not go straight to the beneficiaries. Choosing to use either manual methods or standardized software for fund raising purposes, typically results in higher cost inefficiencies, rather than savings.

Recurring and diversified revenue streams

Investors are usually concerned with lumpy one-off revenues derived on a project-by-project basis and concentration of revenues within certain units. Blackbaud, Inc. (NASDAQ:BLKB) puts these investor worries to sleep with its recurring and diversified revenue streams. It grew revenues by an impressive ten year compound annual growth rate of 15.6%, with its top line increasing in every single year in the past decade.

About two-thirds of Blackbaud’s revenues are recurring in nature, relating to subscription and maintenance agreements. In addition, no single industry represented more than a quarter of Blackbaud, Inc. (NASDAQ:BLKB)’s top line.

Growth drivers

Blackbaud delivered an excellent set of results for the first quarter with revenues and non-GAAP diluted earnings per share increasing 22% and 53% year-on-year to $115.6 million and $0.26, respectively. Going forward, there are multiple growth drivers for Blackbaud, Inc. (NASDAQ:BLKB).

Blackbaud has plenty of room for growth outside of the U.S.. Although it almost tripled its international revenues from $22 million in 2005 to $61 million in 2012, international operations still account for only about 14% of total revenues. It plans to grow organically by increasing its international direct sales force and inorganically through strategic acquisitions. Past acquisitions included the purchase of Everyday Hero, an event-driven web-based fundraising solution in Asia-Pacific and the U.K., in 2011.

Within the U.S., Blackbaud also sees potential cross-selling opportunities among its 19,000 mid-market customers. These customers typically use less than two of Blackbaud’s products and have a stronger demand for Blackbaud, Inc. (NASDAQ:BLKB)’s services because of their available capital budget and staff strength.

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