Blackbaud, Inc. (NASDAQ:BLKB) Q3 2023 Earnings Call Transcript

Blackbaud, Inc. (NASDAQ:BLKB) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day, and welcome to Blackbaud’s Third Quarter 2023 Earnings Call. Today’s conference is being recorded. I’ll now turn the conference over to Kevin Mooney, Executive Vice President, Investor Relations. Please go ahead, sir.

Kevin Mooney: Good morning, everyone. Thank you for joining us on Blackbaud’s third quarter 2023 earnings call. Joining me on the call today are Mike Gianoni, Blackbaud’s President and CEO; and Tony Boor, Blackbaud’s Executive Vice President and CFO. Mike and Tony will make prepared comments, and then we will open the lineup for your questions. Please note that our comments today contain certain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for the full details of our financial performance, including GAAP results as well as full year guidance.

We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from as a substitution for GAAP measures. With that I will turn the call over to you Mike.

Michael Gianoni: Thank you for joining the call today. I’m pleased to share that Blackbaud produced very strong results in the third quarter. Our performance accelerated as we continued to execute on our five point operating plan to improve product innovation, accelerate bookings growth, optimize transactional revenue, modernized contract pricing, and improved cost management. You may recall that on last quarter’s call I suggested that our plan would deliver a one-two punch. First an improvement in profitability and second improved organic revenue growth. In the second quarter, the business delivered the first punch, much improved margins. This strong margin expansion continued in the third quarter with total cost, again, being below last year’s level.

We’re continuing to aggressively manage our cost and margin going forward. This quarter, we also delivered the second punch with improved organic revenue growth. For the quarter total organic revenue grew 6.6%. That’s more than twice the rate of growth in the second quarter and up almost 5 percentage points from a year ago. And our organic reoccurring revenue, which is our most strategic revenue line, comprising 97% of our total revenue grew even faster at 8.3%. The combination of accelerating revenues and lower costs drove improved margins and excellent cash flow for the third quarter. As a result of our execution on both the top and bottom line, we delivered on our commitment to become a Rule of 40 company with a result of 41.6%. We attained this North Star goal a few years before our initial expectation in a full quarter ahead of recent expectations, and that score is up a remarkable 14 points from the third quarter of last year.

Results like these take a coordinated effort across the entire company. I’d like to thank Blackbaud’s employees for their strong execution and commitment to delivering for our customers. In the quarter our team made continued progress across all five points of our plan. One aspect I’d like to discuss in greater detail on today’s call are the many new capabilities we’re driving through innovation. During the quarter, we continued to invest in new innovations that increase the value of our products and solve customer pain points. We’re investing for the intermediate and longer term or several exciting opportunities. For example, during the quarter, we placed a new optimized donation form into an early adopter program with customers across charity, education, and arts and cultural organizations.

Customers appreciated our investment in a system of engagement that’s designed to attain higher conversion rates with fewer clicks and therefore drive customer revenue. So it’s both more impactful and more efficient. We expect to make this generally available in the first half of next year. Also, we’re hoping to solve a large customer pain point with early introduction of a new product called Impact Edge starting in the corporate sector. This newly developed solution aggregates EVERFi’s educational impact data with employee volunteering and giving data from our YourCause platform. It provides a single view of a corporation’s social impact program and replaces labor intensive, manually produced reports into a standardized structure. With Impact Edge human resources and DE&I leaders are able to track and analyze performance of their programs in real time.

Current plans are to put this new solution into an early adopter program this year with a full rollout in the second half of 2024. And lastly, we continue to build on our intelligence for good strategy that we introduced last quarter that leverages the power of machine learning and artificial intelligence. For example, recently we introduced a new capability we call the story enhancer in JustGiving our consumer giving platform. This generative AI capability resulted in more engagement among early adopters and is expected to have positive downstream impact on our payments revenue. We’re enthusiastic about what these new features and products can do to make our customers more effective and efficient, increase the value of our offerings, and add to our growth going forward.

To illustrate how our products impact our customers, I’d like to share a few examples of recent customer wins. The Sarcoma Foundation of America was a new logo win for Blackbaud in the third quarter. They came to us with the goal of increasing awareness around the disease and raising funds for researchers and their advocacy efforts. They chose to replace two competitive products with Blackbaud’s Raiser’s Edge NXT donor management system, and Team Raiser for their peer-to-peer fundraising. Delaware County Christian School is K-12 independent school in Pennsylvania. They were running several disparate systems, one for academics, a second for advancement, and a third for the business office. This was a real pain point. There was no 360-degree view of students.

Revenue management was challenging and communication was fragmented across departments. As part of their strategic plan, the school was looking for an innovative education technology partner while enhancing school communication and fellowship. Blackbaud is providing a total school solution to enable their strategic vision. On the corporate impact side of the business EVERFi welcomed Cisco as a new partner. Cisco Systems is partnering with EVERFi to offer mental wellness and financial literacy education for K-12 students and adults across Selma, Alabama as a part of their broader CSR program efforts in the region. Additionally, EVERFi renewed and expanded their nine-year partnership with the National Hockey League and National Hockey League Players Association who sponsored the Future Goals Hockey Scholar Education course that leverages the game of hockey to teach STEM skills to students in grades four to seven.

The third quarter was also a period of very active customer outreach with several high touch events, for example, the Annual JustGiving Awards were held in London and received over 20,000 votes to celebrate 24 individuals that fundraise for causes on our peer-to-peer platform. In Charleston, several top non-profit CIOs convened at our digital innovation summit that cover topics ranging from AI to cybersecurity and our corporate impact team assembled some of its largest customers to its annual impact summit in Miami. Their leaders discuss why social impact is a business imperative and how to best drive impact to employee volunteering and giving. Finally, last week we held bbcon in Denver with smaller popups slated for Toronto, Sydney, and London.

This is our largest customer conference and this year we held the conference in hybrid format of virtual and in-person attendees. This had the dual benefit of expanding the tens of attendees while also enabling the personal comradery and interaction that our customers enjoy. Through these events, we reached the full spectrum of our customers from individuals to non-profits to corporations. In addition to strengthening our robust brand, this program of outreach affirms our position as the leading software company singularly focused on a social impact movement. With that, I’ll turn the call over to Tony for coverage of our financial results.

Anthony Boor: Thanks, Mike. As Mike mentioned, we had outstanding execution in the third quarter resulting in strong third quarter results in line with the increased guidance we communicated in May. We accelerated top line growth as envisioned, continue the tight focus on cost management, produce strong EBITDA and growing cash flow, and achieved our goal of becoming a Rule of 40 company one quarter ahead of plan. Let’s dive into the details. Total revenue for the quarter reached 278 million representing an organic growth rate of 6.6% over the third quarter of 2022. The third quarter marks the third consecutive quarter of increasing revenue growth rates. Notably, this growth is more than double the growth rate of the previous quarter.

During the quarter foreign exchange had a slight dampening effect as the British pound strengthened against the dollar such that the business grew 5.9% at constant currency. Non-Strategic one-time revenues have leveled out over the past three quarters and declined by 3 million year-over-year. As we’ve talked about in the past, this line item is mostly comprised of professional services that carry modest margins and are not a strategic focus of the company going forward. Recurring revenues grew faster in an organic rate of 8.3% or 7.5% at constant currency. As Mike noted earlier, recurring revenues constitute 97% of total company revenues. The excellent growth in recurring revenues is driven by both our contractual and transactional recurring revenue streams.

Contractual recurring revenue is generated from our software subscriptions and is at the core of what we do, accounting for about two thirds of total revenue. For the quarter we continued to see excellent results from modernizing our pricing model in the social sector. We also continued to extend contract terms. Last year the majority of contract renewals were for a one-year term, this year the vast majority have been for a three-year term and recall that there are embedded mid to high single-digit price escalations in years two and three of multi-year contracts. The power of this transformation is remarkable and is just now being felt in the business. There are three additional benefits of this modernization program. First, it provides a higher degree of revenue security.

Second, it dramatically increases revenue visibility and predictability, which aids planning. And third, it reduces the volume of internal work effort involved in the renewal process. And given that our retention metrics have held up or are slightly improved, we’re quite happy with the impact this program is generating. The remaining third of our revenues are transactional in nature and are composed of donation processing, consumer giving, and tuition processing for our K-12 school clients. These revenue streams are connected to and result from our software subscriptions. They have good value for our customers, eliminate their busy work, and create greater customer stickiness. All three saw good volume growth this quarter and like contractual recurring, we’ve had good success implementing price increases in this area of the business as well, although at more modest rates.

In summary, our revenue initiatives are progressing very well, and we are pleased by the top line performance during the quarter, which reflects progress against our 5-point plan. We’re keeping a very close eye on the macro environment but so far, we’ve not witnessed any additional impact on giving as we head into the fourth quarter, the largest giving season of the year. Therefore, we’re reiterating our full year 2023 revenue guidance of $1.095 billion to $1.125 billion. Now let’s turn to the bottom line, cost management has been a strength of ours this year, and the third quarter was no exception. During the quarter, we reduced total costs by $13 million or approximately 6% from a year ago. When you factor in accelerating revenue growth, which was $16 million during the quarter, you see the strength of the P&L management.

This performance demonstrates the scalability of our business. Our intention is to keep a tight hold on costs going forward, however, we will be adding a few positions throughout the company and will also be increasing our investment in the area of security. Our cost management should continue to produce results with some minor quarter-on-quarter fluctuations, owing to modest cost increases and a likely revenue mix shift to payments processing in the heavy giving season of the fourth quarter. Our adjusted EBITDA for the period came in at $97 million. That’s a $30 million improvement over last year’s third quarter and a 45% increase. The adjusted EBITDA margin was 35% compared to 25.6% last year. At constant currency, the EBITDA margin was 34.8%.

We remain on track to attain our full year EBITDA margin guidance of 30.5% to 31.5%. There’s a lot to be satisfied within this report, however, I’m most pleased with surpassing the Rule-40. This has been a North Star for us. Just one year ago, we set our sights on this goal as we launched our 5-point plan. We were then at 27.3% and suggested that we’d crossed 40 in 2025. Obviously, we made progress against this goal more quickly than anticipated. This quarter, Blackbaud became a Rule of 40 company, with a result of 41.6% or 40.7% at constant currency. That’s a more than 14-point improvement from the third quarter of last year, and it’s even a quarter earlier than we had expected as of last quarter’s earnings call. There could be some volatility on this number from quarter-to-quarter as certain costs are lumpy and as the fourth quarter’s heavy payment volume naturally comes at lower margins.

That said, we will not stop here and are working to make further improvements. Looking ahead to 2024, we expect to continue growing revenue and expanding margins to achieve Rule of 40 for the full year. We also had a very good quarter of adjusted free cash flow. The third quarter is typically our seasonally strongest quarter for cash flow production, and that held true this year. We generated adjusted free cash flow of $118 million in Q3, and that puts us on track to meet or exceed the high end of our increased guidance of $190 million to $210 million for the full year. We ended the quarter with $712 million of net debt and as we previously announced, we will be making aggregate payments of $49.5 million to 49 State Attorneys General and the District of Colombia during the fourth quarter in settlement of the security matter.

Even with these payments, we still expect to end this year at our previously announced goal of approximately two times debt to adjusted EBITDA. Additionally, given our strong cash flow, we expect to resume share repurchases this year under our existing $250 million board authorization. We’ll be giving longer-term guidance on our capital allocation and share repurchase plans when we announce our fourth quarter results in early 2024. Before we open the call for questions, let me summarize, Q3 was a very strong quarter for Blackbaud and represented an inflection point for revenue growth as we continue to deliver on our 5-point operating plan. Coupled with continued progress on cost management, we drove a dramatic improvement in adjusted EBITDA, which was up $30 million or 45%, and the adjusted EBITDA margin expanded to 35% from 25.6%.

We delivered on our vision to become a Rule of 40 company sooner than planned, and we generated a sizable amount of adjusted free cash flow, positioning us to maintain a strong balance sheet and return capital to our shareholders in the form of share repurchases. With that, operator, please open the lines for any questions the audience may have.

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Q&A Session

Operator: Thank you. [Operator Instructions]. We will now take our first question from Brian Peterson from Raymond James. Go ahead caller, your line is now open.

Brian Peterson: Thanks so much and congrats on the quarter. So Mike, just wanted to start off with the macro. I would love to understand what your customer conversations have been like over the course of the year? And you also have laid out some growth targets as well for 2024, I’d love to understand the visibility that you have into that figure and what kind of gives you that confidence in the high single-digit growth rate?

Michael Gianoni: Sure, Brian. Yes, we’ve had — like I said in my prepared remarks, there’s been a — this time of year, there’s a lot of customer interaction kind of aggregated together because we have bbcon and we’ve had other events in the last couple of months. So lots of customer interaction for me personally and for a lot of folks. All very positive. I mean, I think the bbcon, a lot of excitement for customers with all the product announcements, and we had a big marketplace set up with demos on new products and new capabilities. We put together couple of press releases in the last few weeks on product initiatives around generative AI and several products coming to market, a brand-new product called Impact Edge. So lots of excitement from our customers.

So I think all in all, that feedback is super positive. For me personally and for the rest of the company. Yes, from a growth standpoint, I think that was your second question. We’re really happy with the quarter we just announced. I think for me, on the growth side, the most exciting part is the organic reoccurring revenue, which is 97% of the total, grew 8.3% for the quarter, which is awesome. So that we really put in place a lot of initiatives related to top line growth going forward. We feel good about the quarter — this quarter, Q4 and next year. We do internally long-range forecast given the business is mostly a reoccurring business. So we’ve got pretty high confidence on the outlook on growth and margin going forward. And really excited that we hit the Rule of 40 this past quarter of Q3 and have that viewpoint going forward as well.

Brian Peterson: Well, it’s great to see the Rule of 40. And being out of bbcon too, you rolled out a lot the innovation out there. I’d love to understand, as you think about the pickup in innovation here, is that something that we’ll be able to drive pricing further than you guys have kind of already announced or is that something that’s going to be more embedded in what you guys are doing today, we’d just love to understand how we think about the innovation driving pricing over the long term? Thanks guys.

Michael Gianoni: Yes, sure. So it really is — the pricing that we’ve started and basically it’s a conversion of our customers to three-year contracts with new pricing. Those contracts assume in our cloud platforms continued innovation in those existing new contracts. And so this new innovation is just assumed in those contracts. So some of this innovation is — will not have new pricing. However, some of the things we announced like Impact Edge is a brand-new product. So obviously, new revenue from that. But also some of the other innovation, like the new donation forms creates the ability for our customers to drive their revenue and their donations, which downstream will impact organic revenue growth on a payments platform from us. So there’s organic revenue growth built in here from new products to driving transactions, not necessarily pricing in addition to what we’re doing in our existing pricing in three-year conversion model.