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

Great. So I think we'll get started. Mike, nice for you to join us here at the Nasdaq Investor Conference here in London.

Thank you very much.

We're going to talk about Blackbaud. So why don't we start right there, for those who are unfamiliar, can you just kind of run through a brief overview of the business and the platforms of Blackbaud?

Yes, sure. Happy to. Located in Charleston, South Carolina, that's where headquarters is. Cloud software company, solely focused on the philanthropic community and industry globally. So our customers are charities, foundations, foundations within universities, within hospitals, K-12 schools, and we have software platforms for companies as well that are philanthropic parts of their business.

Great. And so how big is the TAM? Like what does it look like for you in terms of your customers and your revenue opportunity for a company like Blackbaud?

Yes, sure. The TAM is big. It's a $20 billion global TAM. A couple of stats about just in the U.S. Annual giving in the U.S. is over $500 billion a year. There's about 1.6 million registered nonprofits in the U.S. We have a little over 40,000 customers globally.

So it sounds like the TAM actually is very large in terms of 40,000 versus 1.6 million.

Right. Now of the 1.6 million, many of them are small. So our addressable market is the mid-tier and larger institutions. I would put that as a few hundred thousand. It's big, yes.

But still, it's still huge. And so do events like GivingTuesday last week or other parts of the year, is this -- end of the year giving, is that a big time of the year for you? Is that...

Yes, it is. It's a big time of the year for charities globally, a big time of the year for us as well. About 1/3 of our revenue is transaction processing. We have 3 platforms in that 1/3 of our revenue. One of them is a consumer-facing one, pretty popular here called JustGiving. Another one is a donation processing platform. So those see volume increases typically in the fourth quarter. And GivingTuesday is a big deal for our customers and for us. We ring the bell on GivingTuesday. So it's a big event, starts the giving season for a lot of charities.

Yes. It's great to be able to remind everybody that after they -- hopefully, they haven't spent all their money on Black Friday and Cyber Monday and that they can actually give back on GivingTuesday. So in that segment, though, are there any kind of certain size of nonprofits that are more applicable or that you target? You talked to small, medium size, but...

Yes. For us, again, it's sort of mid-tier and larger size. If you think of a nonprofit, and we have multiple markets that we're in, but a charity, a nonprofit that raises maybe $1 million a year or more is an addressable market for us. But we're also servicing K-12 private schools as well. And we run the entire school. So we do the fundraising, tuition management and running the whole school, student enrollment, classroom scheduling, mobile app for parents. So we're an ERP in the K-12 space. And we also serve foundations within universities all over the world, foundations within hospitals and health care systems. And as I mentioned, we have platforms for companies as well. Many Fortune 500 companies are customers, and they use our platform for things like managing employee volunteering and global distribution of donations and matching gift programs.

That's fantastic. So I'm already 6 minutes in, and I'll jump to the question that's always on everyone's mind. Talking about all of that, how is AI fitting into that? Are you using that? Is that helping with some of the aspects of your business that you just described?

Yes, it sure is. So we've had embedded predictive analytics for 8 or 9 years in many of our solutions. And now we have AI. Over the last year, we've released AI capabilities embedded within our solutions several of them. And so it's a big part of what we're doing. And for us, we're a vertical software company. So we're not selling an AI toolkit. When our customers use our software with embedded AI, they just have a lot of capabilities. They can ask open-ended questions and get answers now within the software. And so if you might be -- I'll give you an example, like a major gift officer in a university and you're preparing to maybe make 40 phone calls and raise money and focus on 40 individuals. It took a lot of work to get prepared for that. You go in the database, you get prepared. It's a sales approach times 40. You can ask an open-ended question and get a lot of that work done for you. And then with using AI, a lot of the follow-up will be automated as well, automated letters, automated responses. So with AI, we're removing a lot of the administrative tasks that our users have to do the daily job. So it's embedded in many of our solutions today and more coming.

Yes, and can just drive better outcomes for your clients.

Yes. And outcomes are driving their revenue or donations or improving their operating performance by taking administrative tasks and costs out of the business.

So how does kind of the macro environment affect your business? I mean stock market is up across the indices, 25% this year. Is that helpful? Does the political changes that are going on in Europe and the U.S., does that have an effect? What should investors be thinking about in that regard?

So not much of an effect for Blackbaud. We're over 40 years old. We've seen a lot of political changes come and go. The market is a big market. Over $500 billion a year is donated just in the United States. And it has pretty much tracked U.S. GDP for over 40 years. So it went a little flat in '07 and '08. It grows 2%, 3% a year every single year, very big market. It doesn't really ebb and flow that much from a donation standpoint. And then again, we have customers that are schools, pretty steady, mostly private schools or foundations within universities.

So let's get into some of the performance this year. Can you give us a sense of what the key drivers were behind Blackbaud's performance in Q3 as well as year-to-date?

Sure, happy to. So if you look at year-to-date and just the last several years from a trajectory standpoint, we're growing about mid-single digits, which is pretty healthy for us. We've slowed down quite a bit during COVID. So mid-single digits year-to-date. EBITDA is up a lot the last couple of years. EBITDA a few years ago was in the low 20s. Q3 was 33%. Free cash flow was up a lot. Free cash flow margin is around 20%. Now we generated about $100 million last quarter in free cash flow. And if you look at our GAAP results, just last quarter, our GAAP operating income was $44 million and GAAP operating income a year ago was negative $22 million. So good GAAP results, operating income, free cash flow, mid-single-digit organic revenue growth on the top line.

So what are you doing with all the money? Are you -- philosophically, are you M&A? Are you share buybacks? Are you dividends? Like what's the philosophy of you and the management team, especially the Board?

Yes, sure. So in the last 10 years, we've made a lot of tuck-in acquisitions. We've sort of reframed the business. When I started, we were $500 million in revenue, 80 products, 3,000 employees. This year, we'll be about $1.1 billion in revenue, 18 products, 3,000 employees. So lots of efficiency. Capital use, this year, we went really big on buybacks. In the beginning of the year, we announced that we were going to buy back between 7% and 10% of the company. When we announced Q3 results, we had already purchased 8% of the company year-to-date. So buybacks -- I would put from a capital strategy standpoint, buybacks would be item 1 go forward; secondarily, tuck-in acquisitions. Debt-to-EBITDA is about 2.4 now. So we're not that leveraged. So we're in pretty good place go forward for buybacks and tuck-ins.

Got you. So let's jump back into performance this year. Are there any kind of notable customer wins or new partnerships that you want to talk about that have driven this great performance that you've demonstrated in 2024?

Yes, new logos are up nicely actually year-over-year. A few customer wins. So our YourCause platform that we sell to companies that does volunteer management and matching gifts, a nice win with GE, signed up for YourCause. We have about 16 million employees on YourCause. Of course, hundreds of customers and almost 100 Fortune 500 customers. So GE, great win. There's a university, Texas Southern in Texas, went live on our cloud fundraising platform and donations and revenue was up 400% in one of their big events. So really good results. And we track impact of our solutions, and we use those for our ROI kind of proof cases in our selling process, and there's a lot of them.

And do you use that data in your sales process to new clients and help the different clients understand where the money is coming from and where they should be targeting?

Yes. Think about the customer base, too, they need to prove that out to their boards as well, right? Where is the money coming in? What's the impact? Companies do that in their corporate CSR programs and foundations and nonprofits do that as well. So they need the data for their boards and for their potential future donors or future investments. So yes, it's quite common.

Good. Can you discuss the progress you've made in modernizing contract renewals and optimizing the transactional revenue, and how these initiatives have kind of contributed to your overall financial performance?

Yes, sure. So we had a plan to move our entire customer base to multiyear contracts. Historically, we were pretty much 1- or 2-year contracts. We put the plan on hold because COVID showed up. And so about 2 years ago, we put the plan in action and most of our customers are moving to 3-year contracts. And in these 3-year contracts, there's an annual price increase. If you look at us historically, if a customer was on a multiyear contract, there would be a price increase in year 1, in year 2 and 3 would be zero and zero. So now multiple year contracts, annual increases every year. By the end of this month, we would have gotten through about 65% of the addressable contracts in the last 2 years. And so that's been going really well. Customer retention is up, which is about 93%. On the transaction side, transactions are about 1/3 of our total revenue. We have 3 platforms. JustGiving is one, which is a consumer-facing platform. The donation management is the second. And then tuition management for schools is the third. And those grow through adding new customers and just volume and transaction growth. So the giving season matters in December for both -- for 2 of those platforms.

So can you -- let's talk about your financial performance in terms of your revenue guidance and your margin expectations for 2025 and beyond and elaborate on kind of the key drivers and the tools to achieve your margin expansion and obviously, the proverbial Rule of 40 targets that are in that?

Yes, sure. So we announced that we are moving toward Rule of 40 a couple of years ago and hit it a couple of quarters. We're pretty much there now. We haven't given '25 guidance yet. We'll do that when we do the earnings call in about February when we wrap up this year and talk about go forward. But this is how you can think of us. You can think of us as a mid-single-digit grower, organic grower, multiple of that on EBITDA growth, driving a lot of strong free cash flow, focus on buybacks and 98% reoccurring revenue business.

And when you are having that single-digit growth and you layer in the stock buybacks, so you're taking that up to low double digits?

Right. If you look at us in the last decade when we've been making acquisitions, in total, we've been a double-digit grower with M&A, but organically mid-single digits.

How about the demand environment? Can you give us an update on demand environment and the new business opportunities for the social sector as well as kind of insights into what the future pipeline looks like? We talked about what you've done so far, but -- and the general close a deal cycle. How long is that deal cycle?

Yes. It's not unique to us. The close of deal cycle is 6 to 8 months typically. The demand is really high. I mentioned new logos are up very, very strong year-over-year. Our sales teams in North America are separated by vertical market and then separated by land and expand and new logo. So for instance, in the K-12 or university or health care or nonprofit or arts and cultural, those are separate sales teams and they're separated from land and expand to new logos. The demand is great. The markets we serve want modern cloud software technologies. We have a lot of business cases around ROI and speed to ROI when customers go live on our solutions. So it's a great story. Customers' revenue goes -- always go up and margins improve and administrative tasks get automated. So a lot of good demand and a lot of innovation. So we had our annual customer conference in Seattle a couple of months ago called bbcon. And we announced what we call 6 waves of innovation. And these are things that are kind of divided between new products, expansion of existing products and new capabilities related to AI and analytics embedded within our solutions.

So curious as to that, when you talk about your salespeople, are they -- when they go in to sell, are they selling and -- are there flips from a competitor? Are they going in and talking to someone who's doing this stuff on Excel and has no ability to really do it well? How is that customer generation happening at the ground level?

A lot of it's flips from competitors and a lot of it is flips from competitors with very old products, very old solutions, not mobile first, bad user experiences. In a lot of cases, customers have point solutions, and we come in with an integrated suite. So like in K-12, we might replace 10 or 11 vendors with one integrated suite. And in some cases, their IT spend goes down. It just gets aggravated to us, accumulated to us. So mostly, there's a lot of old legacy platforms out in the marketplace.

I mean that was what was most curious to me is just there feels like there's a lot of things that are doing still almost like paper and pencil and that you're delivering a cloud solution, which can then so far accelerate their growth. And if you're able to do both, both the tuition management and all those things for K-12 as well as the giving platforms, that's pretty amazing on the integration way that you do that.

Integration matters, too, because for any size institution, but for the ones that we serve, typically don't have a large IT department. And if they're buying solutions from 10 vendors, they either have to pay someone or become the integrator. Ours are pre-integrated. And data matters. And so they can look at data across their institution. Think about a K-12 school, you have data in the tuition side, on the student side, on the donor side, which is a parent. And usually, those are separate islands, and we can bring all that together.

So let's talk about growth versus margin. How do you and the Board think about the trade-off between growth and margins? And what's kind of your long-term vision for achieving both of those objectives?

Yes, sure. So it's a balance for us because we've put the goal out there for Rule of 40 and then beyond. And so Rule of 40 is just a balance onto itself. And so we've made, I'd say, tremendous progress on both of those fronts. Our EBITDA a couple of years ago was 21% or 22% versus 33% last quarter, pretty big improvement. Free cash flow margin around 20%, pretty big improvement in the last 3 or 4 years. And so it's a balanced approach. We're not a business that one day is all of a sudden going to grow at 12% organically, given the markets that we serve and the type of businesses and customers that we serve. So we're focused again on mid-single digit with some potential upside there and improving EBITDA and cash flow every year. It's a compounding type business, 98% reoccurring revenue, pretty steady compounding type business.

And how -- I mean, recurring revenue and then you also talked about your 93% retention -- customer retention. I mean, how does that compare with the rest of the industry? I mean, obviously, you're doing a lot of flips from competitors. So you might -- that must see pretty amazing.

For our industry, it's really good. All of you know how it looks like for the software industry, but the numbers are pretty good. We're about $1.1 billion in revenue. And so when you can have a 98% reoccurring revenue and grow at 5% and you think about our competitive base is pretty much fairly small private software companies. Our mid-single-digit revenue growth could be larger than the annual revenue of most of our competitors. So it's a pretty good expansion in the space.

So one of the acquisitions you did do was EVERFI. Can you talk to us about the rationale behind the EVERFI acquisition, how it's been integrated so far into your existing platforms and its impact on your expected total addressable market?

Yes, sure. So EVERFI is an acquisition we made about 3 years ago. We made that acquisition, and it's in our corporate space. So for companies, we have several products, grant-making products at YourCause platform I mentioned, and we added EVERFI to that. Unfortunately, after we purchased it, the macro environment really went sideways for that business, and it has not performed well for us. And it will be 3 years in a month since we closed on that business. So it's a drag on the company. It's 7% of our revenue going backwards. A lot of macro has happened in that space. Two quarters ago, I mentioned that we were looking at strategic alternatives for that space. When we announced the third quarter, I mentioned we hired Goldman Sachs to work with us on those alternatives. And so that's underway, and I can't say much more about that. There'll be more news coming out about that. But it is a drag on the business at 7% of the company. We're getting at it.

Well, I'm sure you don't seem like a fellow who was going to let something like that continue to be a problem within the business.

That's correct.

Finally, I'd love to talk about your 5-point operating plan. Can you explain to the investors like -- can you give a little more detail around that and how each aspect contributes to the overall strategy and long-term goals that you're trying to achieve?

Yes. So we've put that together and announced it several years ago and have been executing on that. And it's both around driving the performance of the company, growth and margin performance and cash flow and innovation in summary and a focus on customers. And we've been executing on that for several years. So one example operationally is we've closed most of our data centers in the last several years. And the business now runs predominantly on AWS or Azure. And...

Did you own those data centers?

Yes, they were colos, but they were our cost centers. They were our data centers. And there's two left and they're very small. We've closed, I think, 5 or 6 in the last 2 years is one example. And so there's been a big focus on getting rid of the cost we didn't need in the business. In the last several years, we've consolidated a lot of our corporate IT systems down to a few corporate systems. We've gone in the last 8 years from over 100 systems in corporate IT to a handful, eliminated all the duplicate systems, got rid of data centers and so have driven operational scale in the business. That's how we went from $500 million of revenue to $1.1 billion with the same headcount after buying 12 companies. So we've got some scale out of this business so far. Another part of that plan is around innovation. So we're moving our customers to these 3-year contracts with annual price increases, and we feel like we have to earn that through a lot of innovation, and we are. There's lots of innovation. Those 6 ways of innovation we mentioned at the customer conference. So there's a lot of focus around the operating part of the business and then market expansion. And another one of those is related to capital allocation, which we talked about already.

Good. Probably have time for one question from the audience. We have one.

You said on the last call that EVERFI was -- I think your words was dilutive to earnings, not just margins. But I just wanted to imagine a case where that business has gone not 7% of revenue, but maybe earnings go up. You talked earlier in the year about a one-off investment in cyber, who knows if it's one-off. But is there a scenario where, okay, with EVERFI gone, this could be a 40% margin business?

Not instantly, but it's a goal. You asked 2 questions. The EVERFI question, it's going backwards, right? So if there was a scenario that wasn't part of the company, it would obviously help the company's organic position on the top and bottom line. That's sort of your first. The cyber was a different one. So we did have this year a -- so cyber cost for every company goes up every single year, given the environment of that. We did have a onetime increase this year to accelerate some programs forward, which we've pretty much accomplished. So our cyber investments, like everyone, will always go up, but we won't have a surge like we did this year.

EVERFI [Technical Difficulty].

Correct.

Mike, I know what excitement you have around this business. Can you share with the investors what truly gets you excited every day about working at Blackbaud?

Yes. It's a unique business. I've been in software for 40 years. My last 20 before Blackbaud was in financial services software. It's a unique business, and we get to serve unbelievable institutions that change the world, universities to charities and then help companies, help their employees volunteer and donate, which is a big part of the culture of companies of all sizes around the world. So it's a unique business. At the core, we're a cloud software company, but we serve a very interesting and unique and very large marketplace. It's a lot of fun.

Mike, thanks for joining us here at the Nasdaq Investor Conference. Mike is the CEO of Blackbaud. Thanks so very much for all of you joining us.

Thank you.