Blackbaud, Inc. (BLKB) Earnings Call Transcript & Summary

So thank you for joining us today here at the Barclays TMT Conference. With me today from Blackbaud is Mike Gianoni, CEO of Blackbaud; along with Steve Hufford and Alex Durkee from Investor Relations. They are also on board. So Mike, I wish you could do this in person. I'm dying for an excuse to go to Charleston. So maybe next time, but how are things in your end?

Good. Very good. Thank you.

Excellent. So we're not going to be taking questions from the line during this call. But if you do have questions, please e-mail me at [email protected], and we can get them into the Blackbaud management team. So Mike, those are newer to the story, and I cover this in my old shop, so we might get into -- needs a little bit today. But at a high level, would you mind just running through your business and how you help nonprofits through software with their fundraising efforts?

Sure, Ryan. We're a vertical software company. We have a pretty big product portfolio and we're focused on quite a few end markets, all nonprofit related. And so we serve markets like nonprofit traditional, what everyone would think of as a charity are nonprofit K-12 schools, faith-based institutions, performing art centers and we have a platform for companies as well that drives volunteering and matching gifts and online donations and also full financial or full systems that run all of the IT functions of schools.

Excellent. And one of the things I worked on last year when I was covering you guys, but I think it's interesting when people think nonprofits, they think like, Oh, small business or only a couple of people on nonprofit. I guess what are the kind of products that you serve? And how are they almost more like mid-market enterprises?

Yes. So the markets we serve, the customers we serve, I would describe them as sort of mid-tier to enterprise. And some of these are foundation of the largest universities in the world, foundations of the largest health care companies in the world. We also have a platform, as I said, for corporations. So we've got over 100 Fortune 500 customers on that particular platform called YourCause. The space alone in the U.S. is a $2 trillion annual revenue industry and it's the third largest employer of folks in the United States, third largest industry. So it's a massive industry.

Yes. And these are organizations that aren't just raising a couple of thousand or tens of thousands a year. The customers you service are -- they're raising hundreds of thousands to millions every year, right? Like what do you think about the average size?

Like billions, Ryan. Yes, the market in the -- just in the U.S., if we're a global company, the donation market in the U.S. is over $450 billion a year.

Yes. I think since you joined Blackbaud, one thing that I've always thought you did a great job of is kind of like help digitizing these fundraising efforts. Before we get to kind of like how the Internet has enabled fundraising for nonprofits. From your point of view, like how should we see the TAM? Like how are we still in the pretty early days for software moving to some of your end markets?

Yes, sure. Our TAM is about $10 billion in all the different markets we serve. We've got an investor presentation on our website in the Investors section of the website. And it's got details on the TAM by product type that we have addressable market, by vertical market as well. And our particular current penetration rates on all of those by product and by market. So big TAM. We're less than 10% of it, close to 10% of it in revenue right now. Big healthy market, the donation market has tracked U.S. GDP for over 40 years, very, very healthy market and it's digitizing. It actually went last year to 9% of the market being donations online to 13%. In 1 year, it jumped, which is a significant change because it took more than a decade just to get to 9% to be digital.

And that's what people always ask them like, how penetrated is this market? Like it seems like it's not as fast growing as some others. And I just dropped that stat alone. I said only 13% of all nonprofit donations are over the Internet, right? Or digital? So it's like if we're so early in the collection of donations, you can imagine where the software angle is as well. But look, that being said, you've seen some reacceleration in your current revenue growth in this most recent quarter and you're forecasting that for next year. I guess, can you help us, I guess, for investors who are newer, like rewind the clock to how last year went and now how you're leading into the strength in your most recent quarter.

Yes. Last year, it was -- we started the year a big question mark about what might happen given the pandemic in March of '20. We got pretty aggressive, meaning we became quite conservative. We stopped looking at and made deals, put that on pause for a while, made some other changes to get ready for sort of an unknown future last year and the year turned out actually quite well. We didn't grow near what we thought we would grow given our guidance in the beginning of the year. We pulled guidance like almost everybody else did. Well, we ended up growing about 2% on the top line significantly in margin last year. And the thing that was most important, I think, so we had a good year financially last year. The most important thing though is that our end markets proved very, very resilient. So we actually saw less institutions go out of business in '20 than in previous years. So some of them had to close their doors, folks like performing art centers or museums were closed for a while. But the markets that we serve are again, mid-tier to larger institutions, well, now they're all opening up. So schools switch to virtual, the students were home. So the administrators of schools were still able to run the school because we're a cloud software provider. So the administrators could run the schools, whether the kids were in the classroom or at home. We already integrated to video conferencing platforms like Zoom like we're using right now. And so our markets are quite resilient. They're very big. The company had a decent year last year given the pandemic. And with playing out this year and what we thought would play out was we had a fairly slow Q1 and Q2, and we're accelerating in the back half of this year. You can look at our Q3 results. So the upside is we won't have a slow beginning of next year because we're getting through the pandemic and our customers are open and operating and driving their business digitally. So.

Yes, that's why -- everyone was talking to Tony, I was saying I don't envy beat in your seat trying to guide during a pandemic when each quarter, you never know what the next quarter is going to be like in terms of when COVID is popping up. I mean I had to move my wedding 3 times over 2 years. So I can imagine how difficult to be trying to forecast. It's all working out, but we had a couple of weeks ago. So look, and that's kind of into my next question of live events are coming back, right? I know Q4 is really a big quarter for you and live events, right? That's mostly Q2. But I guess 3Q versus 3Q last year, is there any determination you can make of like we saw 20, 50 or like a good portion of events coming back? And then I guess, how are you feeling about that until like the next fiscal year?

Yes. So a lot of events are coming back. They've been scaling up the last 4 or 5 months, and they are. This quarter, the upside for next year is we'll have a full year effect of that. So we're seeing the benefits of that, for example, in our Q3 results. But again, so the market and the events will be open for the year. Next year and this year, we missed the higher season in Q1 and Q2, and that's why we didn't grow that much. But as we predicted, we would in the back half of this year. So a full year effect next year. And a lot of our customers too, also got pretty smart around how to run digital events and do things virtually. And they're not stopping that. So it's not binary where they're going to go back to just in-person events. They're mixing it now. So there they're working back in-person events where they need to in things like bike rides and runs and things like that for those kinds of events. But they're also still driving their business digitally as they did in the last 18 months as well, which is a nice mix for us and for our customers.

And some of your larger customers, have they told you like are they putting their foot in the ground like we're definitely going back to live events next year or like we're preparing to host these events and we'll see how it goes. Like do you feel like there's more build up into...

Yes, by far.

Because these are not like Weekend events. These are like galas and 5,000s and things that take substantial planning. So.

Yes. And some of them are hundreds or thousands of 5,000s a year for some customers or some are a big event. You see all the marathons around the world are back on, London Marathon went. So those are back on. So you could see evidence of all those. Also, in some of our platforms we work with our customers to set up events, months, and months before the event. So we're actually seeing the work being done. So it's not -- in addition to them telling us we're setting them up in our systems for 2, 3, 4, 5 months ahead as well. So we can see the activity come back.

Yes, I like that idea. Once you already have those like online events set up whatever they are, I mean, you're probably just going to repeat them in conjunction with whatever you're doing for your like in-person events. So as more events go online or just in general, as more transactions go over the Internet or digitized. Do you think that puts Blackbaud a better position in terms of like we can really help our customers as they move to adding payments over the Internet?

Sure. It's like any industry line. It's no different, right? So our customers want modern cloud solutions that are available, that are mobile first, that are intuitive, easy to use. And we saw some customers where we saw some institutions struggle who run not Blackbaud but legacy platforms that are not in the cloud that they had to host themselves, if you will, and they've -- some of them have come over to Blackbaud. So in general, it's no different than any industry. It's the move to going digital first, the move to having a reliable cloud partner to help drive the business. And the interesting thing about our solutions is we are core solutions. So we're not ancillary solutions, and we're not discretionary either. So all of our solutions, our customers have to use us or something else. It's not like they can decide, let's not use this because we drive all their revenue, or we drive running the operations every single day. So they're not discretionary. They have to use either us or something else.

Just so like the hiring story for SMBs, like it's very a difficult high environment or not for SMB is kind of allover at this point. Are you trying to -- are you seeing your customers want to get more out of their software or more willing to like make upgrades because it's difficult to hire new personnel?

We have really good ROI on our software. We've got a lot of cases we use. Our sales folks have templates to help folks think about what the ROI if they sign a contract with us, lots of case examples of customers in every vertical getting really great kind of short-term ROI. And that's either on the side of driving increased revenue or reducing operating costs, reducing the amount of people it takes to run the operation through a modern cloud solution. So it sorts of fits both of those sides of reducing human interaction around the business or digital online experience to drive revenue.

Excellent. And as we kind of trend out of this or move out of this pandemic and -- we talked about a lot in my work about how enterprise budgets are healthier. But from the nonprofit side, are you seeing their budgets get healthier, then kind of come back to bigger upgrades or bigger budget spend when they may have pulled back last year?

Yes. So some of them pull back in '20, and we see it very much being normalized now as well. And again, everybody got kind of an MBA in virtual in the last 18 months. And so the need for modern cloud platforms for the markets we serve is the same for any cloud software company in any vertical that you're -- now that you're covering or you're speaking to. So there's no difference there. And all the buyers are used to that, right? So our enterprise customers are truly enterprise customers. They buy Workday for HR or other enterprise solutions and they buy us for the specialty things that we do, given the fact that we're a vertical software provider for very specific things.

I like the way you phrased that. Yes, I feel like we all can add to our LinkedIn that we got an MBA from Zoom University, right, over the last 18 months. But look, you talked about you have some of the larger customers, but also like with that and you run into some larger competition. So I mean for those who are maybe newer to the market, on the high end, who would you compete with there? And then at the lower end because your customers kind of run the gamut who you frequently run into.

Yes. So we think of that in terms of the vertical markets we're in because the software companies we compete with are very different in each of our vertical markets. And so in the main, we compete with pretty small companies. $20 million to $50 million in revenue that have a single point solution. And so we'll see different ones in K-12. There's one called Finalsite in the K-12 space that we see. They're pretty much build websites and we see some others in K-12. In fundraising, there's lots of smaller solutions and fundraising. In enterprise, in a couple of verticals like large nonprofits, for example, we'll see partners of Salesforce. Occasionally, we see across all of our verticals, we see Salesforce less than 5% in our deals annually. But -- so in a couple of verticals in many verticals, folks like Salesforce don't exist, faith-based or performing art centers or K-12 private schools, foundations. So it's a mix of different software players. And we did name a lot of those in that Investor deck, which is on our website also.

Yes. For those investors who are newer to the Blackbaud story, I would definitely take a look at their Investor website. Also just their vlog, I think you guys do a good job of like thought leadership in the nonprofit space. There's a lot there about like historical fundraising patterns, at least I got a lot out of it. The one thing that I felt was interesting is you guys always give details around GivingTuesday and kind of the trends around that just because as we lapped GivingTuesday recently, anything to call out there on how maybe more digitized payments for this year or like the volumes there given the U.S.,...

Yes. It's following the trend I already mentioned very digital online. It was -- it's a big day for the industry. It was big this year. It's way up over 2019 as well. It's not a big revenue driver for us because it's a 1-day event, super important for our customers, though, and it went quite well. And it was a big day for the industry as it always is.

Yes. That's one of those nuances for people who may not cover the nonprofit industry full time is like that's a Black Friday, GivingTuesday for many of your customers. That's great. So I want to dive into your end markets. But before I get there, just as we trend towards the end of this year, we have seen like historically some correlations between how the stock market has done and how like giving has been. And at least in my software world, we've seen a little turbulence over the last few years, but -- sorry, the last few weeks, which feels like the last few years in software. But when it comes to -- like as we turn towards in this year, do you think any market impact could really affect things at this point?

It hasn't, Ryan. I mean I've mentioned before, donations, just in the U.S., over $450 billion a year, and it's really trucked U.S. GDP for over 40 years. And so even back in sort of '07 and '08, went down a couple of points, but we have such a small percentage of that, that even if it did go backwards for years and it never has, it wouldn't matter because it's such a big opportunity to go get from a digitization in payments processing standpoint, but it's healthy. It's been healthy. And of that, over $450 billion, over 70 -- about 70% is individuals and it's a low dollar amount. So it's very much kind of a retail, high transaction type environment.

So the one thing about it is like the total volume -- dollar volume of transactions. It doesn't exactly relate to your business, but the health of your customers, right? Okay. Perfect. That's a helpful discussion.

It represents opportunity for us to go get from a transaction processing standpoint. Payments, we have different payment platforms. It's about 25 or so percent of our revenue. Some of it is in this space of donations and a subset of it is in the space of tuition, in tuition processing for schools. But a lot of it is in this donation space.

I mean we love to hear about software companies going for new opportunities. So that works on my end. Well, the opportunity we kind of been tracking in the last couple of years to is the one in your faith-based market. Obviously, that potentially more impacted than some of the other industries during COVID. I guess, how are things going there? And any should -- anything that you can do to bolster this opportunity over the next couple of years?

Yes. They were also faith-based, a lot of it is in person. And so that was impacted during the pandemic. Again, a lot of them switched to digital, digital tithing, digital events. And so we made some really great product advancements related to that. And there's a lot for our portfolio in the faith-based market because there's a lot of K-12 schools, private schools in faith based. We've got a full K-12 portfolio. We have a portfolio for fundraising, for financials and so there's lots of cross-sell and new logo opportunities that we're focused on in faith based. And it's a massive market. That over $450 billion a year that I mentioned a couple of times, 1/3 of that is in the faith-based market, and that's just from the donation side.

And correct me if I'm wrong but are there a number of legacy providers in that market that don't have a software solution today.

Yes, there's a lot of legacy software providers in that space that have on-prem solutions, not cloud solutions. There?re some cloud providers in there as well. It's a pretty big mixed bag of vendors in that space. It's a massive space. There?re over 300,000 churches in the United States.

Yes. That's a large installed customer base. Also, like just when it comes to your own opportunities. I mean, you've averaged like a large acquisition every other year. I think with your own net leverage coming down at this point after a really strong margin opportunity last year, I guess, how do you think about the balance between share buybacks or additional M&A here?

Yes. I said earlier, we put a pause on M&A for the pandemic because it was a big question mark about what is going to happen. So we've taken a pause off, we're active. We're a natural buyer for lots of these institutions that are out there, founder-led, or PE-owned. And so we're pretty active and always looking at opportunities. Our debt to EBITDA is down to, I think, 17 now or so. So we're kind of that optimal levers. We've got a lot of capacity as well. And so we're active in the space. I've got a very senior executive that heads it up for us. So I would say that we're no longer in pause mode because of the pandemic because it's quite clear. Yes, we've got a pretty good view to the next couple of years and next year as well, which looks pretty good for us. So I'd say that we're back in the market if you will. We've always been active. But we, by design, didn't make any moves because of the pandemic in the last 18 months.

Yes, like we would talk about it a little difficult to forecast things going forward during the time period. Can you remind investors just what you look for M&A, right, like kind of growth accretive acquisitions, past margin accretive?

So we started, Ryan to talk about the Rule of 40 a bit with investors, used for valuing companies. And our goal is to keep improving in the next several years toward the Rule of 40. We made some great strides in the last 18 months. And if you look at Q3, I think we're at 35 or so roughly last quarter, which was a good quarter for us. So that's a part of our thinking. Mostly, it's around acceleration of the top line, so good organic growth. And when we look at M&A, it has to be a really good strategic fit, near adjacency for our customers, that makes our existing product portfolio even stickier when we integrate something, we can easily cross-sell into our vertical markets and something that's accretive to the company, mostly from a growth standpoint in the future. And we really take a look at models that go multiple years. We don't make an acquisition for kind of next year's revenue. Of course, it helps because you get the full year effect in year 1. But we look at what's the opportunity to drive organic growth in years 2 through 5, for example.

Yes. And that's a good point, like you want to acquire something that you can leverage your existing distribution and partner network support. I mean, would you mind just talking about your partner network, I think that's something that might be lost some people about how they've been working with Blackbaud for 20 years. They know it inside and out. And I guess how that's a barrier to entry versus some of your competitors?

Yes. And our partner network has been growing a lot, including last year. And it's in kind of 2 ways. One is partners that we go to market with but have integrated solutions. So there's a bunch of third-party Microsoft partners that are now Blackbaud partners using things like some of the Microsoft business intelligence tools that we go to market together with. There?re partners in the financial services space for our FE NXT, Financial NXT platform and also a big change for us in the last 18 months as we now have thousands and thousands of outside developers developing in our ecosystem, which is new for us. If you go back a couple of years, we probably had a few hundred outside developers. Now there's thousands of outside developers. We had a developer conference a couple of months ago that was very big and growing. I mean, so we've got developers that are either partners, software companies, resellers, customers, integration partners to a very big and growing developer environment, which is also really healthy for us from our growth and integration and customer retention standpoint.

That's really important for your nonprofit customers, right? Because if something breaks, right? They don't have a whole team of developers waiting to fix it, right? So they really rely on your partners to come through.

And also, Ryan, if you think about our enterprise customers, again, we're integrating to Oracle Financials or to Workday or to payroll systems or to banking systems. So our enterprise customers had a lot of solutions. They're not just Blackbaud. So we do our specific thing, but the -- again, they're buying -- their corporate financials might be SAP or Oracle, HR system might be Workday or Ultimate or one of those guys. And so we're living in that ecosystem. So having open APIs, having a big developer community helps us in that ecosystem for mid-tier and large customers or prospective customers.

I really appreciate that color. And Michael, I want to say thanks again for being here today. As we kind of wrap this up, we'd love to hear just what you're most excited about into next year for Blackbaud with live events coming back, budgets for nonprofit getting healthier, like what is kind of top of mind for you?

Yes. So the big thing for us, and we had an Investor Day at the end of Q1 this year, that's on the website, too. It kind of laid out a long-term view, and I'll translate that into '22, which is the markets are going to be open for the year, unlike this year, where we're sort of seeing it in the back half, we're going to have a full year effect next year. And we've got several pricing initiatives we're putting in place that takes some time to get put fully in place. We've got several pricing initiatives laid out in that Investor session that's on the website, too. And so we've never done that before as a company. So we've got pricing initiatives, markets opened up. Sales bookings are looking really well this year over last, and the cloud software company takes a little time to realize revenue post new contracts. So I'm really excited about having a good solid full year effect in '22 and forward.

Excellent. Well, Mike, I really appreciate the color today. It's always good to talk to you guys once again. And look, I'm going to hold you to that. We'll come up with a reason to get me down to Charleston and maybe we can do this in person but from the Barclays team -- I can think of worse things during the New York winter New York winter than going down to Charleston, right? So Mike, Steve, Alex, want to say thanks again for coming to the conference today.

Yes. Thanks, Ryan. Thanks for having us.

Thank you, guys.