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

All right. Good afternoon. I think we're going to get started. Yes. So my name is Doug Bruehl. I'm a software research associate. I'm happy to welcome CEO, Mike Gianoni, of Blackbaud. So we'll do about a 20-minute Q&A between us and then save the final 15 for any questions from the floor. So welcome, and thank you so much for being here.

For those not familiar with the Blackbaud story, can you give a brief overview of both the business and the platform?

Yes, sure. So we're a Nasdaq-listed company. It will be a little over $1 billion in revenue this year, all cloud, software platforms. Markets we serve are K-12 education market, higher ed, hospitals, foundations of hospitals. We have a couple of platforms for corporations as well and nonprofits.

Great. And then turning to financials, what are you guiding for this year in terms of revenue growth as well as your margin expectations?

Sure. So we'll be $1.085 billion midpoint of revenue guidance. That's a 17% year-over-year growth, includes a recent acquisition, mid-single digits organic growth year-over-year, non-GAAP EBITDA, around 24%, $170 million midpoint of guidance of free cash flow.

And then you recently acquired a company called EVERFI. Can you talk about what that does, how it integrates with your existing platform and then what that does to your expected TAM?

Sure. So first, it doubled our TAM to $20 billion. We already had a platform as an acquisition we made in 2019 called YourCause that we sell to companies of all sizes. We have hundreds of companies on that platform, over 100 Fortune 500 companies. And it's in the area of ESG. So the YourCause platform provides a cloud solution for employee matching gifts and volunteer management for corporations. So we have companies like Best Buy and Marriott and others that use it for employees. EVERFI, most recent acquisition also in the ESG space, cloud digital learning platform. So they provide what we call the missing learning layer to digital education platform, white labeled by our customers for education for K-12 students.

All right. So turning to the financials. You've stated your desire to become a Rule of 40 company in the long term. Do you have an estimate on when you'll achieve this?

Yes. So we're improving on our Rule of 40 every year. We started to talk about Rule of 40 about a year ago, just so investors can kind of put us in a category. Last year, Rule of 40, we were 28, we'll be 30-ish this year. Next year, we're targeting 33. Some of that's from increased organic growth and some from margin expansion.

And then what is driving the acceleration of your mid- and long-term growth and Rule of 40 targets?

Sure. So on the top line, there's a couple of things. First of all, our markets, customers opened up and kind of fully back. I'll give you a couple of examples. So in the nonprofit space, in-person events were put on hold or stopped during the pandemic. Those are coming back in a big way. One example is one of our market segments in that space are performing art centers and museums, which were closed during the pandemic. And our cloud platform runs their institution. So it does things like financials, membership management, fundraising and ticket sales. Not many ticket sales when you're closed during the pandemic. So that's coming back. We're starting to see all those institutions open now. We're also seeing more organic growth in our transaction business. About 1/3 of our revenue is transaction-type revenue, payments, tuition management, payments tied to ticket sales and performing art centers. So that's driving organic growth. EVERFI is accretive to organic growth, the recent acquisition. Our YourCause corporate platform, nicely accretive to organic growth. So we see our organic growth coming back pretty strongly. First quarter this year, organic growth was 6.6%. Last year, we're a little under 2%. But what happened last year, which we saw coming, the first half of the year was flattish and the second half of the year, we had some really good organic growth. So we're 3 quarters with really solid organic growth, kind of mid-single digit organic growth. So that's sort of the top of the P&L from a Rule of 40 standpoint. The bottom of the P&L, we see margin expansion in a couple of areas. One is EVERFI acquisition will start to get a lot more margin from that business than they had, because we're integrating them into our core platforms and our corporate systems, which we've made a lot of progress in Q1. Secondly, on margin, we have several areas that were driving pricing changes and price improvement. So there will be some acceleration in the top and the bottom line with those pricing initiatives. Also, we've had some duplicate costs in the company. We've been moving from our data centers, our colo data centers to Azure. And finally, after a while, a couple of years, this year, toward the back end of the year, we'll start to shut down some of our older data centers and take that cost out of the business. So there's a couple of areas we're driving improvement. Another big one has been the improvement in customer acquisition costs or CAC costs that really improve productivity there in the last 18 months. So those will drive sort of the bottom of the Rule of 40 with those others on the top of organic growth.

Great. And you briefly mentioned pricing. Can you walk us through some of the pricing initiatives that your teams are working on and when we can expect to see the benefit, both the revenue and to gross margins on that?

Sure. So there are several initiatives. One went into place June of last year. And that was a catch-up, if you will, to some competitive pricing. We have a payments processing platform. And a lot of the folks in that space like Stripe and PayPal and those guys had some price increases, and we were a little bit behind. So we implemented that June last year. So we'll get a full year effect of that this year, because that was half last year. Another area, we have a platform in the U.K. called JustGiving. It's an online donation and event platform. And we, about 4 years ago, started to test the model around a different payments model, that basically took the cost for our customers and passed it to the end consumer. And so we tested this for about 18 months, and then we took that entire business and flipped it to this new model. And basically, what it is, is it's a cost-covering donation model. So if you use JustGiving, which is used globally, and you're making a donation, it will ask you to cover the cost of the donation for the charity or the institution that you're providing a donation to. A lot of people click, yes. They pay for the donation. It could be 4%, 5%, 6%, 7% on top of your donation. The platform is then free to the end recipient of the donation and the cost of processing goes to the donor. So that was tested for about 18 months. We put it in about 2 years ago. It's been very, very successful, drove our revenues up, drove the cost to our customers down. It's been a big win-win. And so that's a model change. It wasn't a price increase, but a model change. We're now taking that model change to other platforms in the U.S., not JustGiving, but other online donation platforms in the U.S. So we have a couple of platforms we're implementing that model change to. We're in the back end of testing, going live pretty soon on a couple of platforms. So that will be a longer tail price increase. It's really a model change, but essentially, it's a revenue increase for us in our recurring revenue. And we think it's going to be very successful. If you think about the U.K., the U.K. are not a tipping culture. And this worked quite well in the U.K. So we think it's going to have a big upside in the U.S. And the donation volume in the U.S. is so significantly larger than the rest of the world. Annually in the U.S., annual donations are $470 billion, $470 billion every year. About 70% of that are kind of retail, small donations. 13% of that is online. During the pandemic, it went from 9% to 13% in about 12 months, took about a decade to get to 9%, so a pretty big jump on a very large number. And so our opportunity is to continue to monetize that through our payment system, peer-to-peer donation. And then this new pricing model, we think will help accelerate that. And then just in general, we're pretty aggressive on all of our platforms. We have 17 core products. They're all core system of record solutions. And so we're driving CPI and price increases there as well. So those are the channels of different prices initiatives that we have.

Great. And then on the topic of U.S. versus international markets, what does your revenue split look like between the U.S. versus the rest of world? And then what is a typical customer profile look like within different regions?

Sure. So international is about 17-roughly percent of our total revenue. Some pretty good growth engines there. One is the JustGiving platform, I just mentioned. JustGiving in the U.K., over 20 million users. It's used globally. It's the third largest online platform in the U.K. So I think -- I'm not so sure who's bigger. I think it's Facebook and Twitter, and that's about it. So it's a really big platform, big brand presence in the U.K., and that's a platform we put that new pricing model in a couple of years ago. So that's a growth driver overseas. We also have a pretty big footprint in higher education institutions in their foundations and then global charities across Europe, in Canada, and predominantly in Australia and New Zealand. And those are the key categories. In the U.S., we're more separated into vertical markets. So we have a K-12 business unit that's focused on private K-12 schools, higher ed, health care, nonprofits and faith-based. And we have a bigger product portfolio in the U.S. than we do internationally. So we're seeing growth in all of those verticals, because there's sort of a comeback post-pandemic growth we're seeing. We're seeing good transaction growth across those verticals. And then we have a corporations vertical with a YourCause and now EVERFI platform. YourCause and EVERFI, the end customer is the same buyer. It's for corporate ESG programs. And the ESG movement, as you all know, is a pretty big movement. I think it's here to stay. And I'm seeing a lot of public companies change the charter in their Governance Committee. So the Governance Committee has oversight into the company's ESG program. It's becoming a top topic for CEOs for a lot of reasons. Most CEOs want to associate their company, no matter what they do, to doing something good related to climate, sustainability, social good. So I think that movement is important tailwind for Blackbaud. It's important for CEOs for a lot of reasons. One, for all the good reasons, associate your company with something good, too. Employees want to see their companies doing that and prospective employees want to see that. And so we have cloud software solutions to help these CEOs achieve their ESG goals, 2 platforms, the YourCause platform and the EVERFI platform. So that's another growth driver for us as well.

Great. And then shifting to top line growth. We've seen mid- to high single-digit growth, pretty stable for the last couple of years. Are you happy at this level of growth?

Yes, we are. We stated our long-term goals, which is mid- to high single digits organic growth. Our total growth would be 17% this year, because of the EVERFI acquisition. And so we're comfortable mid- to high single digits going forward as we have been for the last several quarters and then more margin expansion going forward.

Great. Then to achieve your Rule of 40 targets that you've laid out, you're calling for considerable margin expansion over the next few years. What are going to be the key drivers or tools to achieve this?

Sure. So we're now a little over $1 billion in revenue, 95% reoccurring revenue. We had a part of our business, which is basically onetime services, which is Professional Services. It's hours consumed by customers for implementation. That's a pretty small part of our business. It's 5% now. It's starting to stabilize. So that's been a bit of a drag last couple of years on growth because it's been a shrinking part of our business by design. So that will help just by that flattening out. And then these other initiatives I mentioned around pricing, acquisition, EVERFI is very accretive to the top line from a gain growth standpoint. Our markets opening up, performing arts and museums opening up, in-person events coming back. Full year effect of those in the next couple of years, full year effect of pricing initiatives. We've really improved our CAC and our go-to-market channel, exiting some old data centers. We're carrying those costs still. So there's quite a few initiatives. We also, a year ago, I think we're probably first on the software industry to tell all of our employees that we're going to be remote first and remote permanently. So we've exited our real estate. So there's some margin improvement from getting out of our real estate. We've got a headquarters building in Charleston that we'll sublet a part of it, but we're remote first. And it's been a really fantastic add to our ability to attract talent and diversity. We hire 300 or 400 people a year. We have over 100,000 applicants. And we're a natural draw for folks in the software industry. So if people want a career in a cloud software company, that is solely focused on social good, which all of our cloud software solutions are, we're it. And so it attracts a lot of talent. And our ability to hire anywhere, which we've been doing now for a while, it's been a really big add for us. But those other reasons are driving the margin improvement in the business.

Great. And then speaking of hiring, we found that across our coverage, a lot of our companies are having trouble hiring in terms of quality developers as well as sales personnel. How are you approaching that issue that's affecting the entire sector?

Sure. We have no trouble hiring. We have 100,000 applicants for 300 jobs. The challenge is attrition. Attrition in the software industry is pretty high. Turnover is like 23% on average or a couple of points lower. But what's happened in the industry in the last 18 months, so our headwind only is around some cost going up in hiring, which is mostly in engineering. What's happened in the U.S., engineering compensation has normalized up to Silicon Valley. So you used to have differentials of engineers, if you live in the Midwest versus Silicon Valley. You'd have differentials in comp. That's kind of going away now, because people can live anywhere and work anywhere. So you could be in the Midwest and work for Silicon Valley or work for Blackbaud. So we don't have an issue hiring people, a little bit of pressure that we have to pay more. But the trade-off for us is our access to talent, because we hire anywhere.

Great. I think that makes sense. So we talked about growth at this point. We've talked about margins. A lot of software companies feel that there's a trade-off between the two, they'll sacrifice margins for growth, especially early stage. How do you sort of frame that issue?

Well, first of all, we're not early stage, and we're focused on the Rule of 40. So that, for us, means mid- to high single-digit organic growth and an improvement in EBITDA and margins. So it's both. It's not really a binary trade-off for us.

Got it. And then you've experienced some significant growth in transactional volumes as of late. What is driving this growth specifically?

So it's more and more adoption of online giving, predominantly mobile. It's opening up some of our end markets that were closed, performing art centers. It is -- we have another transaction platform for us is a tuition management platform. So there's more transactions and volume growing on the tuition management platform. So we have several revenue lines that make up about 1/3 of our revenue in the transaction space. JustGiving continues to perform quite well. So you have quite a few areas that are doing quite well in the transaction space.

Great. And then before we jump into the audience question portion of this, I want to ask you if there's anything that we haven't covered to this point that you want either current or potential investors to know about Blackbaud?

Yes. So for us, I think a big conversation is, it was the pandemic. Now it's economy, global economy, and Blackbaud is in a really good position. So we learned something during the pandemic that we didn't know, like a lot of companies in March of 2020, we pulled our guidance. We focused on generating more cash. We stopped our 401(k) match for a while. We just had to take a look at what was going to happen in the world. And 2 years after that, our markets are super resilient. Our marketplace, we're mostly in the mid to higher tiers. Here's an example. We have over 40,000 customers in the world. There's 1.6 million registered nonprofits in the United States. Most of them are really small. They're not our customers and are our target audience. We didn't see customers go out of business during the pandemic, very resilient, because they provide services that are critical. They're K-12 private schools, they're churches, they're foundations and hospitals, they're foundations and higher ed institutions. And we saw higher transaction processing for food-related needs during the pandemic. We see humanitarian needs for Ukraine. So we have very resilient customers, which has absolutely proven out during the pandemic. And I think it's one of the things that investors don't have a good insight to, because you don't study our end markets who we sell to. But the pandemic proved very, very resilient. So that's really important. So I believe that we are in a great spot. We're 95% reoccurring revenue. We're down to 17 core products. In the last 5 years, we exited 35 legacy products and moved the customers to our go-forward cloud platforms. We've got tailwinds on the whole ESG space. We have 2 cloud solutions for corporations to meet their ESG reporting goals around what their Governance Board is going to look for the CEOs. So I think we're in a really good spot in the long run, pretty resilient company. I think there's going to be a shift to value in the tech space. We're already there. We generate good margins and growing. So I think Blackbaud is positioned quite well going forward.

Great. So at this point, if anyone has any questions, feel free to raise your hand.

I'm relatively new to the story. Just had a quick question. It seems like there's a lot of different verticals under the same roof and a handful of different products. And I'm just curious as to why it makes sense to have or the synergies between having all these things under 1 roof?

Yes, sure. So we have several products that go across all the verticals, because there's some commonality. So we have some fundraising solutions that are sold in higher ed, health care, K-12 schools, nonprofits, same products. Same thing, transaction processing like payments. Same thing with our financial products. So we're in a lot of verticals. Some of them have common products. Others, we've expanded more widely in a particular vertical, K-12 is a good example. So for K-12 schools, we expanded into basically covering all the IT spend in the school. So we have a student information system, SIS system, student enrollment, tuition management, fundraising and financials. So we've expanded into a vertical and gone deeper into that vertical. We've done that in some of the others, but not as deep in K-12. And so we're in a lot of verticals. Some of them have a lot of common products as well. And the latest expansion is this EVERFI acquisition in the corporate ESG space.

I just wanted to ask a couple about EVERFI. Number one, I guess, what is the pricing model? Number two, what are like the unit economics for you guys in terms of, I guess, creating content, how that looks in terms of unit economics? And then three, what is the go-to-market? How does that look different for you guys, I guess, selling to corporations as opposed to nonprofits?

Sure. Yes. So EVERFI is -- the revenue and the customer contracts are SaaS reoccurring revenue ASP model. They actually have a track record of doing much larger deals than we do with the corporate space. So they have sort of mid-market to larger customers. There's 2 parts of that business. It's a financial services part and what we call the ESG part. Financial services part, so they've created this digital learning platform that's sponsored by banks and credit unions. There's this requirement from the government called the Community Reinvestment Act. And the Community Reinvestment Act requires financial institutions to give back to their community. And many of them have chosen EVERFI to do so. So EVERFI, here's how the model works. They'll go to a bank, and the bank will say, I do business in the Southeast. I'd like to provide free education to public school kids, K-12 on a digital platform around things like financial literacy, bullying, whatever the topics are. EVERFI creates the content, provides the cloud software solution. The bank is the paying customer. So the bank will sign a 3- or 4-year ASP deal. It's priced just like any SaaS product would be priced, based on a number of schools. So the bank might say, let's start in Georgia and Florida and provide this platform. We'll get pricing like that. And then sign a contract with a bank. And then the schools in Florida and Georgia, we will assign customer success people in the field to the schools to teach the administrators and the teachers how to use this platform. It's free to the schools. The bank is funding it and it's white labeled with the bank's logo. So the school is getting a give back from ABC Bank that does business in Georgia and Florida. So that's the pricing model and that's the delivery model in the financial services side. On the ESG side, we have corporations as customers, and they'll do the same where it's a sponsor model like that or we'll build custom content for corporations. So we have a lot of the large cloud software companies in Silicon Valley, they are customers. And we're building content for their employees or whatever, their Head of ESG or Corporate Social Responsibility wants to provide for their employees. So those are the 2 models. It's a direct sale to corporations just like YourCause. So we're showing up in the same place. So with YourCause, we show up with a cloud software platform for employee volunteering and matching gifts and EVERFI would sell to the same Head of Corporate Social Responsibility, or ESG, a digital education platform. And so we saw with the 2 coming together, there's a similar go-to-market. It's a direct to corporation sell, not a lot of overlap between the 2 companies' customers. So it's a cross-sell opportunity there. And then at Blackbaud, we have new channels for EVERFI. So there's another government requirement like the Community Reinvestment Act for banks. There's another one for foundations of hospitals. We have thousands of foundations of customers, where they have to have a giveback program to maintain their foundation charter. EVERFI has never sold there. So it's a new channel, right, for EVERFI. We have thousands of private K-12 schools, new channel for EVERFI. So we've got a cross-sell with YourCause, a go-to-market with YourCause and then a couple of new channels at Blackbaud that we can pull EVERFI into.

Can you tell a little bit about what happened to churn during the COVID pandemic? So you say 95% of revenue is recurring now, but what has happened to churn during the whole COVID pandemic? Has it been stable? And can you also talk about your ability to upsell, right? So if you have 95%, what is the upsell?

Yes. So during -- we were -- our growth was about a little less than 2% organic growth. And that was '20 and the first half of last year. And we saw the second half of last year opening up. For the second half of last year, we were mid-single-digit growth organically. And then the first quarter of this year, organic growth was 6.6% in the first quarter of this year. So we're seeing that organic growth come back on that 95% reoccurring revenue base. So that's what happened during COVID.

On the payment business side, what kind of GTV you're doing? And what kind of gross margins you're seeing in that business?

Yes. So that business, we have several payments revenue lines. I'll kind of walk through those. So one is a tuition management platform for schools. So if you send your child to a private school and you want to pay over 10 months, we're probably doing the processing for you. If you write 1 check, we're not. And so it's a payments system that schools use for parents to pay for private tuition, and we've got lots of schools on there, and we're expanding in faith-based schools and other schools with that. So that's one part of our transaction business. Another part is a payment processing platform. And you could think of it as like a PayPal, right? So it's integrated with our donation platforms, and it's for online donation processing for our customers. And it's priced like a PayPal or any other payments platform. So we get a couple of points on the volume, and that's how that works. We've got a really great competitive advantage, because it's integrated with our platforms. And so our customers can drive digital events and online fundraising, and have a payments processing platform, so they don't have to sort of move money to another processor like a PayPal or somebody else. It just goes right through the system and they get the donation money. So that's a platform that's organically growing for us as well. Then we have the JustGiving platform, I talked about, in the U.K., which is another online giving. If you're familiar with JustGiving, you could think of it sort of like GoFundMe, but it's only for donations. You can't create something for yourself like you can on GoFundMe. So it's for charities, schools, very big platform across Europe. So it's another transaction engine that's been growing for us. And that one has benefited from that model -- pricing model change we put in a couple of years ago. And then in the U.S., we also have online digital marketing, peer-to-peer fundraising platforms, that are integrated with payments as well. So lots of channels of different types of payments. It's all -- at the end of the day, it's all transaction, but there's different channels with different customers and integration with different platforms, but it's all transaction processing, which is about 1/3 of our revenue -- about 1/3 of the total revenue. Yes?

How do you see the margins in your space from the gross margin part of it.

Yes. So the gross margins are lower because we have fees we have to pay, because it's a payments platform. Yes. So that -- so our gross margins were in the high 50s. I think Q1 was about 58.5% gross margin. I'm looking at her, because she's on our IR team. 58.5% gross margin at the company level. And if you took the 1/3 of the revenue out, our gross margins would look like a stand-alone SaaS company. They go up a lot. They're lower, because of the transaction engines, because we have cost to the third rails we have to pay in that business.

Great. Did we have one over here as well?

Yes. What is the sort of blended take rate that you typically get? And is there room for that to increase? And then sort of on the same...

On the payments platform?

On the payments or just in general, if you're thinking about the total amount of donations or giving that goes to your platform. What's the typical take and how much room is there for that to expand? And then sort of on the same note, what is the sort of churn in the platform of customers? And how hard is it for them to switch to another provider?

Sure. Yes. So the -- again, there's a lot of engines. So the take rate on the tuition processing, it's not really a take rate, if you will. It's a processing fee, But on the payments platform, which you could equate to like a PayPal, our fees are like what the industry. It's a couple of points. It's like what PayPal would get, right? It's the same thing. The opportunity for expansion is massive. In the U.S., as I mentioned, $470 billion a year is the donation market in the U.S., it's tracked U.S. GDP for 45 years. 13% of that's online, 13%. And we're processing a small part of the 13%. And it's trending toward online and mobile. So there's a long runway to pick up transaction processing just in the U.S. We're picking it up in the U.K. and other places as well because it's such a big market. So it's a long runway there. So that's, I think, your first part of your question. Your second part is retention. If you look at our customer renewal and retention rates, they've gone way up in the last 6 months. So that's a really good bellwether for future organic growth, because that is on both the transaction side and the core software solutions side, the SaaS software solutions side. And one thing I'll mention, so 70% of our revenue is core SaaS software, 17 core products. Those are all system of record solutions. They're not discretionary. Customers can't just turn them off, because they run their company. They run a school. You can't choose not to have a student enrollment system or a student information system or a tuition, right? You can't just -- it's not discretionary. So all of our products are a system of record, which makes them super sticky. So in times of economic hardship in economies, if you stay in business, you must use our software or somebody like ours. They're not discretionary. So that makes our software -- our systems pretty sticky. On average, our customers -- I think customer life is something like 12 or 14 years on average.

Great. I think we have time for one more, quick one.

How much competition is there really against -- what's the competitive environment like? And how often do you just compete against homegrown systems like just people using XL as a system of record?

Yes. So our -- if you look at the vertical markets we're in, we have a lot of competitors and usually small software companies in each vertical market. So $10 million a year to $60 million a year software companies in each of the vertical markets that we're in. Yes, we see homegrown systems still. I talked to a customer last year, they were on an IBM System/36. You know what that is? So yes, there's still some homegrown stuff out there. So there's a lot of TAM for us. And the EVERFI acquisition doubled our TAM, which is interesting, too. Because our TAM was mostly in our traditional markets. And then we had YourCause in the corporate TAM and then EVERFI, which doubles our TAM. Now we've got the YourCause platform, there's two other competitors in the world that have a like YourCause. In EVERFI, there isn't one. There's no one that's done this. It is connected model of have banks be a sponsor, provide digital education to K-12 students, and show up in school, so you have kind of both ends and teach the administrators to use this digital platform. It's a pretty unique model for ESG. We don't know that there's a competitor in that space. But in the main, there's a lot of smaller founder-led software companies that we compete with.

Great. Well, thank you, everyone, for your questions. Mike, thank you for your time and for being here today. I certainly learned a lot and looking forward to seeing you continue to succeed.

Thank you. Thanks, everyone.