But if you look at just – I will give you an example, in the financial services space, banking in the U.S., the government requires those institutions to invest in the space. So, there is a regulation that requires a give back. In a lot of cases, they are choosing YourCause or EVERFI as that platform. So, that’s a regulated requirement, which is great for us. It is the biggest space that we are in financial services. So, it’s a big space, global customers, really solid team. I think we have got great opportunities. I mentioned – what I mentioned, News Corp and Fidelity in my prepared remarks, two recent larger expansions.
Parker Lane: Very interesting. Congrats on the quarter. Thank you.
Mike Gianoni: Yes. Thank you.
Tony Boor: Thanks.
Operator: Thank you. Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.
Matt VanVliet: Hi. Good morning. Thanks guys. Maybe just following-up on the last question, Tony. In the slide deck, it calls out that there are still two more data centers to wind down. Curious on a go-forward basis from here, given you have gotten through most of the DCs you are operating. How much benefit from here is true cost reduction as your favorable contracts with Azure and AWS roll through versus sort of offsetting future spending of continuing CapEx and reinvesting in those data centers? How should we think about that sort of impacting gross margins long-term?
Tony Boor: Yes, Matt, the CapEx, as you know, has been dropping off substantially as we have shutdown the data centers and moved to the cloud, continuation of that same story this year. As you saw in the earnings release on the guide, CapEx is going to be down. Cap software is relatively stable and growing, with all the spend that we are putting on innovation. So, we will see that up a little bit. But CapEx itself, through CapEx buying property and equipment will be down substantially. We are still spending money to move data centers. So, we have got some duplicative costs because we have got the cost of the cloud environments and the existing data centers and the cost to move and migrate. And there is still some engineering work that’s being done as well to prepare the products to move to the cloud out of the existing infrastructure.
So, there is still some duplicative costs that go away on that front. And then I do think we will be more efficient in the cloud over the long run, certainly when you would incorporate all the benefits of additional cyber opportunities within the cloud environments. And so we will continue to see some improvements there. We have still got some leases. We inherited a pretty big operating lease on the facility for EVERFI that we are still working to sublease and get out from under. So, we still got some of those costs, which we would hope would go away. So, there are a few of those kind of big movers. And then we are starting to look at use of AI internally as a company. We still have a lot of automation opportunities within the business. So, we still have other areas that we are pursuing that should drive some fairly substantial, I would say, cost savings overall over the next few years.
And then I think just leverage again, as we spoke about earlier, from the business, growing faster will certainly make it easier to gain scale. So, we would expect that we have got some opportunity on the profitability side going forward. And the nice thing is we are already up, as you have seen at the midpoint of guide, above at 22% adjusted free cash flow margin guide, which is tremendous. I think we were down in the 14% range in ‘22, and jumped up to 19% last year in ‘22 for this coming year, which is just tremendous. And I think that we would expect to see that improve kind of in line with profitability improving. The only area that we have had that’s taken us backwards is just our expectation of cash taxes, and that improvement to the 22.3% at the midpoint includes about $30 million of incremental cash taxes because our – as you saw, our book rate we are using is going up to 24.5%.
I spoke about that a bit in my prepared comments from ‘20. And that’s largely because we have got a great profitable business in the UK and the statutory rates there went from 19% to 25% last year. So, we will have a full year impact of those. And then we are just getting closer to the statutory rate for the U.S. Our Federal is about 21%, and state, I think is roughly 5%. And so we are getting close to the statutory rate in the U.S. as well, largely because our credits are relatively fixed and our income is going up so fast. So, we will have a little higher cash tax rate for book and cash taxes that’s hit in a bit on the free cash flow that’s built into that improved number as well, which is great.
Matt VanVliet: Alright. Very helpful. And then I guess, Mike, when you are looking at kind of the emphasis on new units, as you mentioned, trying to drive some new business there. Where do you feel like you stand from a sales capacity standpoint versus improving productivity and execution of the current reps, any ideas around headcount growth, or do you feel like you have the right team in place and it’s just about driving the right performance?
Mike Gianoni: Yes. I think we have the right team in place and the right leadership in place, too. We have hired some outside leaders in the last six months or so to lead up some of our teams. So, we don’t see a substantial increase in the headcount. We do see significant opportunity though in productivity or quota attainment by person.
Matt VanVliet: Okay. Wonderful. Thank you.
Mike Gianoni: You’re welcome.
Operator: Thank you. And our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.
Peter Burkly: Yes. Hi guys. This is Peter Burkly on for Kirk. Congrats on the strong ‘23. Tony, I appreciate the color just in terms of some of the incremental investments, in specifically areas like AI. Just curious in terms of the timing of those investments, would you expect those to ramp over the course of the year, or will the investments be fairly linear? Just trying to get a sense on how you see the shape of the EBITDA margin over the course of the year?
Tony Boor: Yes. Peter, they will ramp a little bit, although I would tell you, we accelerated some of those investments beginning in Q4. So, they actually already started ramping. That said, I do think we will see a bit more as we get into the year because some of those include hiring new staff, those that are outside consultants. And then we also have some investments in some new solutions, I think on the cyber front. So, we will be bringing new software solutions, etcetera, online and implementing. So, I think those costs will hit us a little more as we get into the year. So, expect that to build a bit across the year. And then some of those will start falling off as well as we get – there is a bit of a surge and an acceleration. So, as we get some things implemented and put in place, then some of those will start to drop off as well towards the back end of the year.
Peter Burkly: Very helpful. And Mike, maybe just a quick one for you as well. Just as you are thinking about adding some of those AI capabilities into the product set, would you expect most of this to be included in the new pricing structure, or do you see an opportunity to sort of leverage AI and create some new standalone offerings?
Mike Gianoni: Yes. It’s both. Actually, Peter, it’s a little bit of both. So, some of this new capability will just show up in products. For instance, last year, the first one we announced into production was a new set of AI capability in our JustGiving platform, already in production. We have new capabilities that are rolling out this week in Raiser’s Edge NXT and more coming across other platforms like CRM and Altru, for example. Some will be standalone new capabilities. So, we have some online donation capabilities with AI that are additive and new to the market that will go across several products. And then some are embedded like the JustGiving one I just mentioned. So, it’s a little bit of both.
Tony Boor: And Peter, I would just add on some of the new capabilities, like with online giving forms, it won’t be that you price separately, they will drive more revenue just because of the efficiency of giving that they drive and/or if we have a complete cover type model where we are just getting a higher amount of donation to us and to our customers. As we have spoken about before, it will be a big win-win on those things with the new donation forms as they roll out.
Mike Gianoni: Yes. So, some of those capabilities are pointed towards driving our customers’ revenue, which also rides on our payment system as well. So, it’s a win-win.
Peter Burkly: Great. Thanks guys.
Mike Gianoni: Yes. You’re welcome.
Operator: Thank you. And we have reached the end of the question-and-answer session. I will now turn the call back over to Mike Gianoni for closing comments.
Mike Gianoni: Thank you. Thank you for joining us this morning. To summarize, ‘23 was a year of substantial transformation for Blackbaud. Our five-point operating plan delivered four sequential quarters of accelerating financial performance. And we met or exceeded our financial guidance ranges across all metrics. Our strong cash generation enabled us to resume stock repurchases in the fourth quarter and going forward. We are focused on making prudent investments to grow the business organically and inorganically while returning excess capital to shareholders. I am incredibly proud of the results the team has produced and excited about the continued momentum we expect in 2024. Thank you everyone.
Operator: And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
