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By Peter Wahlstrom, CFA | 06-09-2015 01:00 PM

Blackbaud's Cloud Migration Makes for Sunny Forecast

The wide-moat technology company's high customer switching costs and transition to a cloud-based platform should combine for solid long-term cash flow growth.

Pete Wahlstrom: Today, we are here to highlight wide-moat Blackbaud (BLKB), a $2.5 billion market-cap company that provides software to the nonprofit industry. Think about Blackbaud as a [customer relationship management] tool for universities, colleges, museums, and charities used to track finances, donors, fundraising, and online payments.

Last month, we increased Blackbaud's economic moat to wide from narrow, as we had increased confidence in customer switching costs. Blackbaud operates very sticky business, with 75% recurring revenues. Combine this with the fact that they are rolling out a new integrated, cloud-based platform that will allow them to cross-sell applications and modules to over 30,000 customers. We like the company's position, and we see the potential for long-term cash flow growth.

When we look at valuation, the stock trades at about a 15% discount to our $61 fair value estimate--though we admit that the stock does not look cheap from a multiples perspective. Instead, we would encourage investors to be aware that margins and earnings are depressed this year, following infrastructure investments last year as well as the fact that they are switching to the cloud and the company doesn't have revenue related to the cloud just yet.

However, taking a step back, this is a profitable company that's been around for 30 years, offers a modest dividend, and we think has the potential for long-term growth.

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