Blackbaud, Inc. ($BLKB)

Hello, everyone. My name is Zach Canter. I'm a Managing Director in the Technology Investment Banking Group at JPMorgan. And I'm very pleased to be joined this afternoon by Mike Cione, CEO of Blackbaud, the leading technology platform to the nonprofit and social impact sector.

To start, Mike, can you provide an overview of Blackbaud's business and social impact sector that you serve?

Yes, sure. We're cloud software business. We serve several different end markets, nonprofits, foundations, like community foundations, foundations within universities, within hospitals and hospital systems. We serve education market, K-12 schools. We also serve performing art centers, art and cultural institutions, museums. We have a platform for companies that we provide to large companies globally. -- for volunteering and matching gift processing. And in Europe, we have a consumer-facing platform called JustGiving. .

Great. How do you think about sizing up that market? How do you think about sort of the TAM around social impact and the not-for-profit industry that you guys serve?

Yes. We have the TAM peg at $10 billion in our IR deck. We kind of break it down by sector, and we also show our penetration in each of the sectors as we break it down. So it's -- it's basically the addressable serviceable market that we serve in those end markets that I just described. .

Great. Can you maybe go into a little bit more detail about sort of what are the most important products and solutions within the Blackbaud portfolio that your customers are focused on? .

Yes, sure. So we have fundraising platforms. for all those markets I described, except the company or corporate market. So fundraising platforms, we have a financial platform, a century a general ledger, accounts payable, counts receivable, fixed assets specifically built for the accounting nuances of nonprofits and foundations. We have a full ERP platform for K-12 schools. And so in those schools, we run the entirety of the school from student recruitment, student enrollment, classroom scheduling, food information system. We have a mobile app for the parents. We do tuition processing fundraising and financials for the schools. So we really cover a lot of what the schools do. We have a platform for performing art centers that does fundraising, membership management ticket sales, you all sell tickets. We have a platform for companies called orcas. We have a lot of Fortune 500 companies as customers. So that platform once implemented, will get integrated to the HRIS system and the payroll system. And it's used for all the employees that'll be registered on the platform. It's used for employees for coordinating volunteering with nonprofits either individually or within groups, could be virtual, volunteering or in-person amongst sale employees. It's also used for them to make donations to nonprofits all over the world. and for their corporate matching gift programs as well, and we distribute the funds to the end recipient nonprofits as well.

Could you talk a little bit about the competitive landscape for Blackbaud? Who do you typically see most often out there when you're selling products into the market?

Yes, sure. So all of those product sectors in those vertical markets our competition are small private -- usually founder-led software companies, and they're kind of single point solutions all that I described in that K-12 platform if a K-12 school doesn't use us, they probably have 5 or 10 separate vendors unintegrated. And that really is the whole of the marketplace, stand-alone private mostly founder-led software companies. .

And to what extent do you see horizontal solutions providers trying to sell into your market sales force?

Yes, we see them. So some of those small software companies build apps that go on top of sales force. -- or Microsoft Dynamics let so. And so we see them. So we compete with sort of the sales force and their ecosystem a little bit. but not in all of our markets. Most of our markets, we don't have a competitor like a sales force. So they're not in performing arts and K-12 schools, religious organizations. They're not in any of those the corporate market we're in. They don't have a platform there. We see them occasionally in higher ed. But mostly, they're in a different part of the higher ed institution. We're in the foundation because that's our specialty, and they're usually sort of somewhere else in the school.

How do you think about -- or how do you define, I think, the key competitive differentiators for Blackbaud? Like what are the factors that drive aside from breath because clearly, there's tremendous breadth across the social impact space. But what do you think are the key factors that drive customers to choose Blackbaud over other alternative solutions in the market?

Yes. So we've been in the space a long time, and we're a vertical software provider. So our solutions are very, very deep in the data needed for these solutions. And these are all system of records. So the data is not available to large language models because it's inside of our products. We enrich the data with our own data that we create, which are trends across the industry. And so we enrich the customers' data, very deep workflows, deeply integrated and purposely built, for the markets that we serve. And then because of our portfolio, when you have multiple solutions and they're integrated together, that also provides a different sort of competitive moat against the against the competition because most of the competition will have 1 of those platforms. For example, our fundraising solutions, we don't have a competitor that has a financial platform or that has a payments platform. They have one of those things, not all of them. And we curate them all together.

What are the benefits to a customer that uses sort of the integrated solution versus using multiple point solutions and trying to stitch them together?

Yes. Well, it automates a lot of their workflow. So if you have a fundraising solution, which is your revenue generation platform, integrated with financials and payments, you could do things like automated account reconciliation. If you don't have that from 1 vendor, it's manual. And then you have to make sure you can move the data between multiple vendors, right? So the fundraising platforms collecting your revenue, you have to get into your general ledger. -- and then you've got to reconcile with banks. And so it's not all connected together like our solutions are. And then what we've done is we've done things like create common data models that sit on top of those to the executives within our customer base, have dashboards that look across multiple departments in multiple systems of record to aggregate it into 1 if you have multiple vendors, you either build that yourself, which not profits typically don't do -- or you're the systems integrator the customer.

A moment ago, you mentioned large language models, which is a nice segue to everyone's favorite topic around AI. Can you talk a little bit about Blackbaud's AI strategy?

Yes, sure. So we've been building machine learning and predictive analytics in our solutions for over a decade. We have in the last 2 years, put a lot of AI capabilities in many of our solutions in the last 2 years. And we just came out with our first fully agentic product that's been in the market for 6 weeks. And it's a fully agentic fundraiser. So it raises money. . So from a system makeup standpoint, and I just did a position paper on this that got picked up by Forbes Digital yesterday and I'll give you kind of the summary of it. So because we're a system of record, first of all, again, the data is not available to a large language models. It's inside the system. It's the customers' data and the data we enrich. So that's sort of one layer of what I would describe as a moat. Another layer is all the contextual information and predictive analytics and things that we can do to make -- that make our systems of record as systems of intelligence. So they know the workflows. They know how our customers run and what the automation is, right? On top of that, there are specific workflows by job type, by role-based and by customer type side of the system. So you have all of that, which is proprietary with unique data and trends that we collect industry-wide in which we enrich each customer's database with. So that's all quite unique. And of course, we're using Anthropic Claude and Devon and other tools to advance our road maps and build new products as well. So we've become an AI development shop in the last 2 years also. So I think we're in a pretty good spot related to that. And then on top of that, we have transaction systems, too, that are embedded in our system of record. So think about like a donation processing system akin to like a PayPal, but it's ours, it's embedded inside of our system of record. So you've got all that transaction data, credit card data that's data from donors that are inside the systems of record. And then on top of that, in some cases, we've built a network effect. And so that platform that we sell to corporations that does donation processing, matching gifts and volunteering. Last summer, we connected that platform through our payments rails to our fundraising platforms. And it's unique in the world, and there's no company except Blackbaud that has all 3 of those pieces. There are folks we compete with that have one of those. So we connected all that. So today, using our platform for companies, it's called YourCause, it Fortune 500 companies. An employee makes a donation, the nonprofit gets the funds 24 to 48 hours later. The competition, 2 to 4 months later, do the funds arrives because it's all connected. -- on the nonprofit side, a prospective customer looking at Blackbaud for fundraising, we have to win on the merits of our software, but a value add as you join what we call the Blackbaud verified network. And so that nonprofit is not in a network connected to millions of employees in companies that become their volunteers and their donors, and they can get sort of posted on an employee internal system to promote their nonprofit. So it's a sort of a 2-sided you closed network.

Yes, that sounds really exciting. As it pertains to -- are you getting a lot of pull from your customers, they're saying, "Hey, Mike, we really like it if you could build out this type of functionality for us? Or is it more your product road map, what you're thinking that they might like to have good functionality. How are you sort of product road mapping on them?

Yes. It's a little bit of both. So a lot of times, a customer unless you're deep into the technology, you don't know what is the art of possible, right? So they can describe the business problem, but they can't describe how something like AI might address it. That's where we come in. but it's a pretty big mix. So we have customers from the animal shelter around the corner from your house. to the largest universities in the world and the largest hospital systems in the world. They're a little bit different related to their ability to describe their business problems, their understanding of technology. It's a little bit different. We do have in each of our sectors -- we have customer advisory groups that we collaborate with. So there's a group of them in K-12, universities, hospitals, large nonprofits. So that is an ongoing collaborative effort around the advancement of the road maps within our existing solutions, which we're pulling forward quite a bit because of the use of AI, which is awesome. -- but also around what business problems they have and how we might be able to solve those through new solutions, and we're launching new AI solutions. So we're using AI and we're building Agentic AI products.

Could you maybe talk a little bit about just sort of the overall market backdrop for nonprofits today? Where are they at? And the impact of sort of federal regulatory that overlay.

Yes. So it's -- I'll just talk about the U.S., but we're a global company. The U.S. market is a massive market. It's the third largest employer as a sector in the country. Donations crossed $600 billion a year in donations. It grew 6% in 2024. There's a report that comes out every June from giving USA that kind of breaks down the sector. So $600 billion for the last 45 years, it's pretty much tracked U.S. GDP. It went a little flat in '07 and '08, slowed down a little bit during coated, but massive -- as far as donations, there's about 1.8 million registered nonprofits in the U.S. Most of them are too small for us as an addressable market. We're sort of mid-tier and larger -- and so some of the dynamics that have changed in the last 18 months or so, less federal funding. But we're not in the funds flow of that. Blackbaud isn't. So if you look at a large nonprofit they might they might have 7 or 8 revenue lines. We're in the fund raising. Our software is on the fundraising, major gifts, events side of the business. The federal funds are inbound grants, -- and if those have been lessened or gone away, it frankly makes our platform a higher percentage of their revenue. So actually, we become more important to them. So it hasn't had an impact in a way that it has caused nonprofits to close, they might have had to pull back a little bit on their spend or their operations. But the sector is large, it's growing, it's resilient. The biggest test of the sector was COVID. You think about -- to our K-12 schools have thousands of K-12 schools, they shut down on a Friday on a Monday, the kids are in school at home. And they are using our platform to run the school and put the kids are in school. -- there's a lot of schools that weren't using our platform that couldn't run that way. They're out of business. Also, institutions like new seams and performing art centers and Zoos closed during COVID, right? And so we help them pivot to digital, online fundraising. We made some changes to membership management. And we didn't have any customers go out of business during COVID that was the ultimate test to the sector and they all survived. It's pretty amazing. -- remarkable because we were -- we didn't know what was going to happen, right?

Yes. You mentioned the focus on the customer demographic sort of market to large enterprise within the no-profit space. How do you think about the longer tail of smaller nonprofits?

There are tens of thousands that start up every year. And so they're really small maybe no employees, maybe one. To get big, it's pretty hard to do some of them emerge and get big. But again, like I said, our customers have been around for a really long time. It's a massive marketplace. They have a lot of needs because turnover is fairly high. Like if you're a fundraiser, 24 months is a turnover 24 months. So you can equate that to a salesperson and a software company, right? You hire a salesperson it takes 5, 6 months to kind of get going, got to build the pipeline, got to build relationships. And if you stay for several years, you can really do well. Well, fundraisers build relationships with donors and they turn a lot. So easy to use, mobile-first intuitive software with embedded AI is really important for the customers. Sure. Yes.

I think the Blackbaud's revenue mix today is roughly 85% U.S. remainders, rest of world. Correct. How do you think about opportunities to grow the business outside of the United States?

Yes. So it's interesting because like many software companies, you can't just go anywhere geographically because the regulatory environment is different. The regulatory environment for the types of institutions you sell to or the payments environment is completely different. And so we're predominantly in countries where there are nonprofits and foundations. Some of them don't have any of those, right? So we have opportunities to grow our footprint in areas like the K-12 space. Most of our customers are U.S.-based. There's an opportunity to grow more internationally with our K-12 platform, and we are the leading provider in K-12. And a lot of our schools do have some international arms, if you will. Also in the corporate expense, our cost platform is really going global. We had a big customer conference in Nashville for that platform. We had 300 companies there, over 100 or Fortune 500. We're having 1 of those in London in a month as well. And a lot of our customers are global customers. And that platform has done really well. In the last 6 or 8 months, we've closed new customers on that platform like Eli Lilly, Tyson Foods, PwC, Berkshire Hathaway, ServiceNow, the NASDAQ, and others on that platform, all new logos. So that has a big opportunity to go global. And we've been setting up the operation so that we can distribute the funds globally as well, which is important. There's a lot of big companies that have employees donating to global nonprofits, they can't get them money. And so we've got this global network. We've got over 100,000 certified nonprofits that are able to receive funds from us. and that grows all the time. So we kind of bring that network in addition to the software.

So is the major hurdle to penetrating the continental European markets, the money movement rails or just the markets themselves are less attractive? Or how do you think about that?

Yes, the markets are all different. So every country in Europe is a little bit different related to how many nonprofits, how many foundations, what's their role in society. in the market. We travel well with global universities because most of them have foundations, so that's a really good spot for us. We also have a platform that's very substantial in Europe called JustGiving and it's a consumer-facing platform. Over 20 million people use it a year, and it's the biggest platform over there for individuals creating events and then for major events like the London Marathon and other big events are on that platform.

Cool. Maybe we could shift gears a little bit and talk about Blackbaud's financial profile. Can you just walk us through sort of high level, how we should think about the financials of the business?

Yes. So we just announced our quarter and our year last year. We had a great year last year. We crossed the rule of 40 for the first time ever, which is our combined organic revenue growth and EBITDA. We laid out plans for the next several years around how we're going to get to 25%. So you can think about us in the next several years as mid-single-digit organic revenue growth with some potential upside because these new AI products that we're building and taking to market are not factored in. They're too new to factor in. So mid-single-digit organic revenue growth, high single-digit EBITDA growth, mid-double-digit EPS growth so 13% or higher EPS growth and really strong cash flow performance. Cash flow for us last year was $208 million, midpoint of guide this year is $285 million. So really good cash flow performance. Debt to EBITDA is about 2%.

Can you talk a little bit about the underlying drivers of your growth projections in the coming years?

Yes. So 1/3 of our revenue is transaction processing. We have 3 platforms that make up 1/3 of our revenue. That's donation processing. If you think about that as a couple of points of volume and donations, the just gating platform and then tuition management for schools. Those 3 combined a little over 1/3 of our revenue. They grow in the higher single digits organically. The rest of the business, 70% of the business is all cloud software contracts. Our customers have either 3-year or longer contracts. We just crossed over more than 20% of our customers have 4 year or longer contracts. So combined, those 2 major parts of the revenue lines, if you will, grow at sort of mid-single digits. Over the last decade, we've pretty much grown mid-single digits, slowed down a little bit during COVID, if you will. -- couple of years, we grew in total revenue double digits because we made some acquisitions. But if you normalize those out, pretty much mid-single digits, but we've come a really long way in margin, EBITDA and cash flow over the last 3 or 4 years.

So as a newly minted Rule of 40 company, how do you think about balancing organic revenue growth with continuing to drive margin expansion? How do you think about the trade off?

Yes, it's a healthy forced balance. I think that metric is a really healthy force balance. So I trade faster growth anytime. And so it's a balance. And we're in the new world of AI related to not just building new products, pulling road maps forward of our current solutions, which we are doing building new products, using building AI products that are built with AI and then the potential impact of AI on internal automation, I think, is a tremendous opportunity for Blackbaud and we're not even there yet. So the numbers I just described in the next couple of years don't have AI influence products on the top line and don't have AI influenced productivity. And we've come a long way in productivity. I've been with the company over a decade, we're triple our size after about a dozen acquisitions or triple our size and revenue, and we have about the same headcount, and we bought 12 companies. And so we've done a pretty good job from a productivity standpoint. None of that is yet AI influenced. I think it's a wonderful future opportunity.

So you mentioned that the AI products that you're now in market with are not currently factored into our growth expectations. How do you set a bar for yourself? How do you measure success? Or what would success look like with your AI products that you're...

Yes. So this year, we announced back in the fall at our customer conference, a new category of products that we've never had before, because we serve the social sector, we call them Agents for Good. I like the name. And we announced the first product in general availability 6 weeks ago, and it's a development agent. It's a fundraiser. Fully agenetic fundraiser that's embedded in our system of record. . So a measure of success would be that, that grows nicely, it's brand new, but also that we get to the fall and the end of the year where we've announced more products in early adopter and in general availability because we said we're going to have a catalog of many new fully agentic products. And so we're on the path to do that. You'll see some more announcements coming in the summer months and in the fall. -- products that we've never had before, the market's not seen before.

When you say fully genic fundraiser, can you just go into a little more detail, what does that mean exactly?

Yes. So I'll use an example. So one of the universities we're working with as 190,000 alumni. They have our software, they have a group of fundraisers that use our software to prepare to reach out to potential donors, right? And they can only get access or have enough scale to go after 7,000 or 8,000 of the 190,000. I just -- you can't hire enough people to go after that many folks, and you can't hire someone to be a fundraiser and raise $50 either across tens of thousands of people, but a full genetic development agent can do that. So then let's take that a step further. Imagine we're working together, and you're a fundraiser and there's a group of you and Omo boss. And I gave you 500 potential I love now, and you do your work on Blackbaud software, you get prepared, you start to build relationships and you're raising money right? My next hire is this development agent from Blackbaud. So it's in my system because I have the management screens. I get this agent, I give this agent 500 potential donors...

Is he a calling agent?

Yes. SMS, e-mail and a full Avatar. So we could look like you, me, if you're an animal shelter, it could be a talking dog, whatever the customer wants. And so it learns, it uses all our data in the system, uses our predictive analytics. It uses our wealth screening. -- does the profile work that you would do probably does it a little bit faster than you would do it. And then it starts to build relationships and reach out to potential donors. Now before it does that, I check its work. I check the e-mail, I check the SMS, text, I don't just let it go. I could just let it go. I have controls over it. and then it just goes to work. And it can do everything from generate a lead and if the potential donor is having a conversation where they might donate $5,000 -- and by the way, the donor knows it's an agent. The agent could say, "Well, I'd like for you to talk to you one of our NA passes it over to you and then it gets to a human or it can close the full transaction. And because it's using -- because it's inside of our system of record using our payments rails, the transactions closed. And so think about my university example, where you would never have a person call the 10,000 students that just graduated because they don't have any money, right? But an agent, but you know what happens is they wait 20 years and then they call you to try to get you to donate some money. Well, you've lost your affinity. But if you're living on campus for 4 years, and you just got out and you got a new job, our systems know all that about you. They know that you're on campus, you're a finance major, you played in the band, you stayed in dorm A, you went to the football games and you got a financial analyst job at Blackbaud. I can build that relationship with you as an agent, and you ask you to donate $5 a month. And the biggest thing that you want to do in fundraising is you want to get a sustainer donor, someone that donates all the time every single month, right? You can get a student to donate $5 a month and wait 15 years to ask for the $5,000. But you lose them, you lose the affinity. That model applies to animal shelters, religious organizations, performing art centers, so we're positioning this solution as get scale and drive revenue. And there's a big education going on related to that. Some of our customers are like, wait a second, that's my job. Some of them, the Boards are saying, you got to get AI solutions in this business. It's kind of all over the map. One of these has never been built, never been sold and never been used. And we're 5 months into this thing. But we think there's tremendous upside to products like that, and we'll have more products coming out like that.

How do you price a product like that to your customers?

Yes. So first of all, we have no seat-based pricing. -- seat-based pricing freaks people out because of AI. I get it. So all of our products, so 1/3 of our business is transactions, that's sort of the percentage of total transaction type model the cloud solutions are a fixed fee per year with annual increases. And this product is a particular fee. Think of it as $25,000 or $30,000 a year, that's the product cost. . The ROI is how much does it raise , right? We've thought about consumption models. We thought about percentage of donations raised models. We decided not -- we could flip to that anytime. We decided to come out with a pricing model that is like all of our other pricing models. And our customers want predictability. They don't want to sign up for a product that's cost $10,000 and all of a sudden, it's $100,000, right? They need to play in their year. And so this is the model we're out with. And we went from -- the 1 thing we did unique here, too, is we went from -- we went into the early adopter program in the fall. And the first time we've ever done this with a brand new product, is for the early adopters, we -- they had to sign a contract and pay for the product, even though they're an early adopter. And then we went through all that, and it went to general availability about 6 weeks ago.

So 6 weeks, it's a short period of time, but -- can you comment on what the receptivity has been liking so far from customers? .

Yes. It's interesting. So we're doing webinars with hundreds and hundreds of existing customers. We're signing up customers every week. It's great to see that it's not just 1 sector. We've got customers in higher ed, hospitals, K-12 schools and nonprofits, all signing up -- and they're all kind of coming up the journey of how does this work, how does it learn? How do I control it. And so we've got an outreach program and a handholding program. to get people accustomed to using a product like this, it's brand new for them -- so it's early days. .

Maybe shifting gears a little bit. Can you talk a little bit about Blackbaud's capital allocation strategy? -- how you think about investing in the business versus M&A versus returning cash to shareholders, buying back stock, et cetera?

Sure. Excuse me -- choked up. Not on the question. Yes, it's pretty straightforward, actually. So our top priority is share buyback, especially now. And we've been doing share by Max for a while, we've got bigger in doing more aggressive buybacks about 2 years ago. And the interesting thing is we're focused on net share reduction, not just stock-based comp coverage. And so we've had a pretty good net share reduction in the last couple of years. We've gone from about 52 million outstanding shares to about $47 million roughly. So it's an actual reduction. So that's the top priority. Secondly, there's opportunities for continued tuck-in M&A. Everyone's valuations have gone down even private companies. And so I think there's opportunities out there for kind of near adjacency, AI, aware, AI first tuck-in M&A. We've got 400 software companies in our partner program. Some of those might look like interesting opportunities. We just made investment that we announced about a month ago in a company that has a student information system for the administrative side of running universities. Our student information system is just in K-12. So we sell to universities. We sell tuition management, financials and fundraising in our K-12 platform is not applicable for university. So we invested in this start-up -- these guys have done this before. They built an SIS system for universities. We took an equity interest in it, not a big one. We have first wide refusal to buy the company if we want to. So that may end up in an acquisition or not, but it's a different go-to-market motion for us with a partner that we have an interest in now as well. So capital allocation is really pretty aggressive on buybacks, maybe some tuck-in M&A. We've reduced debt a little bit along the way in the last 18 months as well. Like I said, we're about 2.1 debt-to-EBITDA right now as well.

So on the topic of M&A, I think something which is sort of salient is the concept of build versus buy, given that the barriers to build stuff feel like they've come down with Claude and other agent tools. How do you think about building something organically versus looking to do a tuck-in acquisition to maybe fill in a prior account?

Yes. It really depends on the fit of the product and the relationship to our core system of record. So we can build a lot faster and integrate to our system of record. Our competitive advantage is to integrate to our system of record, right? Like put agent AI solutions in there, integrate payments in there, which we've done. And so we can go a lot faster with a deep integration. But if it's a category change, it's probably an acquisition. .

I'm mindful that we're at time. Is there anything that I missed that you'd like to cover here the short term we have?

Yes, I just think that in today's market, every software company is broad brush like everybody else and not all software companies are the same. And I think someone like Blackbaud that has a deep data moat in a contextual workflow logic moat and customers under contract with transaction engines, putting AI in that platform, I think it's a pretty protected environment. So...

Great. Thank you very much.