Blackbaud - Q3 2024

Transcript

Operator (participant)

Greetings, and welcome to the Blackbaud Q3 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Barth, head of investor relations. Thank you, sir. You may begin.

Tom Barth (Head of Investor Relations)

Good morning, everyone. Thank you for joining us on Blackbaud's Q3 2024 earnings call. Joining me on the call today are Mike Gianoni, Blackbaud's Chief Executive Officer, President and Vice Chairman, and Tony Boor, Blackbaud's Executive Vice President and Chief Financial Officer. Mike and Tony will make prepared remarks, and then we will open up the line for your questions. Please note that comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for full details on our financial performance, including GAAP results as well as full-year GAAP.

We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer to only non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. And with that, let me turn the call over to Mike.

Michael Gianoni (CEO)

Thank you, Tom. Good morning, everyone. I want to begin by addressing our revised guidance ranges for 2024. Our social sector, which is the majority of our revenue, continues to perform very well, and we feel we remain a strong investment for shareholders. We are lowering our annual revenue guidance due to the continued negative financial impact of EverFi. Without the negative performance of EverFi, our guidance for the year would remain unchanged. We are confident that our underlying business and our future opportunities remain strong. We've spoken in the past about improving EverFi's business performance and evaluating strategic options. While EverFi remains a small portion of our overall business, at roughly 7% of our revenue in the quarter, management is focused on achieving the best possible outcome.

We have recently right-sized the business to better align cost to revenues, and we've hired Goldman Sachs as our strategic advisor to assist us in evaluating other options. We plan to continue to update you as appropriate in this area. As you look across the other parts of our business, we believe Blackbaud, driven by our continued focus on execution of our five-point operating plan, is a compelling investment with multiple opportunities for strong shareholder returns. We continue to extend our position as the market leader in providing software to power social impact through our offerings of the most comprehensive set of purpose-built and mission-critical software and services, and we continue to accelerate the pace on an exciting list of innovative new solutions to penetrate even further into our rich market opportunity.

In September, we held our annual user conference, bbcon, in Seattle, with thousands of social impact professionals attending both in person and virtually. The enthusiasm and reception by our customers was clear and exciting. We announced six waves of innovation, including AI capabilities, new powerful partnerships with companies such as Constant Contact, new expanded navigation menus, new performance analytics, Payment Assist, deeper encryption, and richer connectivity, to name a few. We'll continue to invest aggressively in innovation and partner with our developer network to further enable our customers to raise more money while improving their operational efficiency, ultimately allowing them to spend more time executing on their charitable missions and less time on administrative tasks. We remain a natural choice for customers and new prospects alike.

Their success helps drive ours and is visible in our Q3 numbers, which include revenue in our social sector grew 6.6% despite a difficult FY23 comparison, and within social, contractual recurring revenue, the company's largest revenue line was up 6.8%. Our second-largest revenue line of social transactional recurring revenue grew 6.6%. Gross dollar retention, driven by the value our customers see using our solutions, was 90%, and excluding EverFi, approximately 92%. We beat out the competition to add prominent new logos and deepened our existing relationships with our list of over 40,000 customers. These included competitive wins in the higher education vertical to Dallas Baptist University, Davidson College, and the University of Nevada, Reno. These institutions valued our enviable end-to-end workflow, and recent enhancements will power their fundraising efforts. Our adjusted free cash flow remains very strong at nearly $100 million in Q3.

This strong performance gives us great confidence to fuel our aggressive stock repurchase program. Through October, the company has bought back approximately 8% of the common stock outstanding at the end of 2023, and our current plan is to buy as much as 10% of that balance by year-end 2024. Tony will cover more about financial results as well as capital allocation strategy, but I remain pleased with Blackbaud's multi-year trajectory as well as its prospects. Blackbaud's revenue, adjusted EBITDA margin, adjusted Free Cash Flow have improved significantly over the last couple of years and year to date. We feel that much of this success, driven by a proven operating plan and our mission to empower social impact in the hearts of our customers and employees, are driving very strong results. I'll come back after Tony in a few minutes with some closing thoughts, and then we'll take your questions.

Tony?

Anthony Boor (EVP and CFO)

Thanks, Mike. I'm pleased with our continued progress and remain excited about the opportunities in front of us. We remain committed to providing our shareholders an attractive financial model balanced between growth in revenues, earnings, cash flows, and a prudent and purposeful capital allocation strategy. Looking to our Q3 results, total revenue was $287 million, up 3.3% year over year and 4.3% on an organic basis. Our social sector, which represents the majority of Blackbaud's revenue at approximately 89% in the quarter, continues to perform very well with revenue growth of 6.6%. Our corporate sector decline, as Mike mentioned, was again negatively influenced by EverFi. Although it only represents 7% of total company revenue in the quarter, EverFi declined 26% year over year in the quarter. We expect headwinds at EverFi to continue in the near term, which is reflected in our revised guide.

As Mike said earlier, we're pursuing strategic alternatives for this business through the hiring of Goldman Sachs and have recently reduced EverFi's expense run rate to better align with a lower revenue outlook. Moving below the revenue line, our Q3 Adjusted EBITDA margin was 33.2%. We generated $98 million of adjusted free cash flow in Q3 and $187 million year to date, which is up from $177 million from the same timeframe in 2023, despite the negative impact of additional interest expense associated with our share repurchase program. Our robust free cash flow gives us confidence to continue investment in a number of critical areas like product innovation and stock repurchases. We recently completed our previously announced $200 million ASR program, and when combined with our other stock repurchases, the company's bought back approximately 8% of our common stock outstanding as of the end of 2023.

We plan to continue to be aggressive in Q4 repurchasing our stock, with our goal of buying back up to 10% of our outstanding common stock. Before I talk about our revised annual guidance, I'd like to highlight several items for you to think about, which may help in developing your models for the remainder of the year and for 2025. Regarding revenue, in addition to the continued anticipated softness at EverFi, we have not experienced any of the unusually large viral events like we did in 2023. So if you extract those events, our transactional business is growing nicely at more normalized rates. Second, our modernized approach to renewal contracts in the social sector continues to perform well.

By the end of 2024, approximately 65% of the eligible cohort will have gone through the shift to modernized contract terms and pricing, leaving approximately 25% in 2025 and the last 10% in 2026. The Q3 of 2024 represents the first quarter in which we lapped the renewal pricing uplift in a meaningful way, which is reflected in our social contractual recurring revenue growth rate of approximately 7% in the quarter compared to approximately 10% the past two quarters, and finally, while our modernized renewal contracts have price escalators in years two and three, the revenue is recognized on a straight-line basis, so for example, in a three-year contract, the total contract value is divided by 36 and recognized evenly over the full term.

Turning to guidance, we are revising our full-year guidance ranges, which takes into consideration that the core social sector continued to perform well. However, we continue to expect underperformance at EverFi. Therefore, we revised our full-year 2024 guidance as follows: revenue in the range of $1,150-$1,160 million. At the midpoint, our organic growth rate is 5.2%, up from 4.8% last year. At the same time, we are increasing our adjusted EBITDA margin guidance range slightly to 33%-34%, up from 32.2% last year. Non-GAAP earnings per share is expected to be between $3.98-$4.16, up slightly from $3.98 last year. This guidance does take into account the negative impact of EverFi underperformance as well as approximately $20 million in incremental interest expense associated with our share repurchase program.

Also of note, the full repurchase share count is not yet fully reflected in our diluted shares outstanding and will not be fully reflected until sometime in 2025. Lastly, our adjusted free cash flow is expected to be between $235 million and $245 million, a 12% increase over 2023 at the midpoint. We have a lot to be proud of as we work to close the year strong. We continue to execute on our operating plan, which is driving consistent revenue growth and enviable earnings and cash flow. We're especially pleased with the performance of our core social sector and have confidence in its ability to continue to produce highly profitable growth going forward. We also, as Mike discussed, are committed to removing the negative impact of EverFi, which will aid our financial numbers significantly. As always, we remain focused on providing enhanced value to our customers and our shareholders.

Let me turn it back over to Mike for a quick comment, and then we'll open up the line for your questions. Mike?

Michael Gianoni (CEO)

Thank you, Tony. We remain excited about the future in front of us. We'll provide specific fiscal year 2025 guidance in our February call, but I'd like to highlight why Blackbaud is a sound investment. Regarding organic revenue, you can expect mid-single-digit revenue growth with a call option for more, driven by visible and fully recurring revenue streams targeting both new logos and the expansion of our installed base empowered by innovation. Below the line, you can expect a strong focus on cost and employee productivity to improve EBITDA. Additionally, our very strong free cash flow will drive a purposeful capital allocation strategy. This includes a significant annual buyback program as well as prudent and effective M&A focused on tuck-ins to accelerate our R&D. With that, we can open the line for questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using your speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, as a reminder, please press star 1 to ask a question, and please limit yourself to one question plus a follow-up to allow us to facilitate as many questions as possible. We will now take our first question from Rob Oliver with Baird. Go ahead, caller. Your line is now open.

Robert Oliver (Analyst)

Great. Thank you. Good morning. I appreciate you taking the question. Tony, I appreciate your explanation on lapping some of the pricing on the social sector stuff, but I just wanted to dive in a little bit, totally get what's going on with EverFi and that that's weighing on the growth rate. But it does appear that the social sector full year for 2024 growth rate ticked down a little bit, at least in terms of your expectations relative to Q2.

So I know you guys are doing well there, but I just wanted to get a sense from you of what, if anything, changed relative to your expectations exiting Q2, whether that's willingness to accept price increases, any of those one-year contracts that perhaps were up for renewal, which you flagged about a year ago, which were ones you had a keen eye on, or anything else to call out there would be helpful? Thank you.

Anthony Boor (EVP and CFO)

Thanks, Rob. On the social side, everything's performing very well, especially on the contract initiative. Overall, the pricing has stuck. We've not seen heightened discounting on that front with those contract renewals. The mix, the percentage of folks that are choosing the multi-year contracts versus the one-year contracts is still running right in line with plan, kind of in the mid- to high 80% typically is what we're seeing for folks taking three-year contracts. We're seeing a small number of customers who, for regulatory purposes or other governing rules, can't do multi-year contracts. So we're working through that and how we will deal with those contracts going forward. And then on the churn piece of the one-year, as we spoke about, something we're keeping a close eye on, actually that churn rate is holding right in line with plan as well.

Keep in mind, it's a much smaller pool with the mid-80s shifting to a multi-year contract. We have a lot fewer one-year contracts. There is a slightly higher churn rate on those as we would expect, but in totality, our gross dollar retention is probably the best metric to look at on that front. In totality, gross dollar retention's right at about 90% for the total company. If we exclude EverFi, we're actually at 92%, which is up from where we were a couple of years ago on the social sector side. So feel really good on how we're doing on the retention front and also what we're getting on pricing on those contracts. I don't know that there's really anything on the contractual side that causes us to expect to have a slightly lower growth rate on the social sector business. It's really transactional related.

Last year, if you recall, we had really high growth because of viral events in Q3 and Q4. I think we ended up with a year at almost 11% on the social transactional growth rate. Our historical's kind of 6%-7%. We're running right at 6.5%-7% right now year to date, I believe. And so we're, I think, humming along pretty well on transactional. We just haven't seen the viral that we saw last year and really haven't had no meaningful viral yet this year and aren't planning for any for the remainder of the year, Rob.

Robert Oliver (Analyst)

Great. Awesome. Okay. Thanks. I appreciate it.

Anthony Boor (EVP and CFO)

Absolutely.

Operator (participant)

Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.

Brian Peterson (Analyst)

Hi, guys. Thanks for taking the question. So Tony, maybe following up on that, how do we think about maybe the long-term growth trajectory of the transactional business kind of absent any of these viral events, which we can't predict? I know Mike talked about mid-single-digit growth, but we'd love to understand how you're thinking about kind of the contractual recurring versus transactional as we look at that outlook.

Anthony Boor (EVP and CFO)

Yeah, Brian, thanks. The transactional side of the business, like I said, it's grown 6%-7%. That's kind of the norm for us for several years. I would expect that's a good kind of assumption to make for your models for the longer term. When we talk about having some call options for upside, I think that's where if we have some big viral events in a given period, would drive that growth rate up like we saw last year in Q3 and Q4. I think also with some of the newer transactional innovation that we're rolling out across the platform and the portfolio, we could have some higher growth rates in the future as those programs start to get some traction. But right now, I think somewhere in that 6%-7% rate is a good assumption to make modeling for transactions.

Hence, we're kind of saying mid-single-digit overall because I think once we've lapped the pricing initiative, the new contract initiative, we're seeing growth rates more in the 6.5%-7% rate on the contractual social. So I think that somewhere in that ballpark is probably a really good assumption for your models.

Michael Gianoni (CEO)

Hey, Brian, one add is one of the things we announced at BBCON in our product and innovation section was a new solution called Payment Assist, which is a brand new product in the transaction space for us, and we're essentially monetizing accounts payables for our customers and eliminating checks, which we've never done before. It's going to take a while for that to build, but it is a brand new product in the transaction space for us.

Anthony Boor (EVP and CFO)

Absolutely.

Michael Gianoni (CEO)

Yeah.

Brian Peterson (Analyst)

No, great color there, guys. And maybe just a follow-up on EverFi. I know you gave it a ton of detail there, but we'd love to understand with you guys right-sizing some of the costs there, how should we think about the margin profile of that business versus the core Blackbaud? It created dilutive in line. Just would love the perspective there. Thanks, guys.

Anthony Boor (EVP and CFO)

Yeah, Brian. It is, even with the right-sizing, it's still dilutive. We've done such a great job of getting our margins up, as you know. That business, because of the shortfall in revenue, even with right-sizing the cost structure, is still going to be dilutive on the bottom line and from a cash flow perspective. I would say we've seen some very positive signs here very recently on some new wins, and maybe Mike, you could talk about a couple of those. I do think that we saw some significant decline in that business over the last couple of years, but that does feel like we're starting to bottom out. I don't know that we're completely there yet, but Mike, maybe you mentioned a couple of the new wins that we've seen because we've seen some nice new appetite in the market on EverFi.

Michael Gianoni (CEO)

Yeah, Brian, just a reminder, EverFi is 7% of our business, just to make sure everyone understands that. And yeah, we took some pretty substantial cost out of it recently, so the run rate is a lot better go forward. And to Tony's point, over the last quarter, we've had some really nice EverFi renewals, new logo wins, a couple I'll mention, Truth Initiative Foundation, NASCAR, Guardian Life, Sterling Check, and there's many more too. Those are new logos or expansions in the last quarter. So I don't want folks to think it's all doom and gloom with EverFi. We are looking at alternatives with Goldman Sachs. I mentioned in my prepared remarks, we're pretty aggressive there. We are addressing the EverFi drag on the performance, but there are some upsides there related to the marketplace reception and some of these logos.

Brian Peterson (Analyst)

Appreciate the color. Thanks, guys.

Anthony Boor (EVP and CFO)

Cheers, Brian.

Operator (participant)

Our next question comes from Parker Lane with Stifel. Please proceed with your question.

J. Parker Lane (Analyst)

Yeah, hi guys. Thanks for taking the question this morning. Mike, maybe we could focus in on the six waves of innovation. I know you mentioned Payment Assist earlier, but what is resonating the most or what resonated the most at your conference with the customers that you spoke with? And how should we think about the benefit of this innovation? Is this going to be better growth retention in the business? Do you expect individual shots of upside across subscription and payments? How should we just think about the financial benefit to Blackbaud?

Michael Gianoni (CEO)

Yeah, sure. We announced a lot of things at BBCON. Details are on our website as well. From areas like embedded AI and solutions like Raiser's Edge NXT to better integration and interoperability, which allows us to sell more modules and cross-sell to existing customers, some future capabilities with Financial Edge NXT, Payment Assist is just one of them, better integration, partnership with Constant Contact. They're going to be a great marketing platform partner for us. We already have a lot of shared customers, so we announced that at the conference as well. All of these innovations are really just our kind of focus on continuing to earn the right, these contract renewals and getting new logos. The reception at BBCON was just outstanding.

Because it's recorded, we'll have thousands and thousands of more customers looking at all that information in addition to folks that actually attended at the conference in Seattle. Our engineering team and product teams are just doing a great job in driving innovation.

J. Parker Lane (Analyst)

Good to hear. And Tony, you mentioned the gross retention improvement's now sitting around 90%, 92% EverFi. Just wondering, as you look at the new pricing and contracting structure, clearly it's benefiting there. But what could that look like over the next few years? Is that the right way to think about the business, or could that perhaps even continue to be more of a tailwind going forward to the top line?

Anthony Boor (EVP and CFO)

I think, Park, where we're really seeing the benefit of pricing is on the net retention because of the uplift. We don't give net retention numbers publicly, but I can tell you our net retention has bumped up nicely with the new contract initiative. The gross, if you recall, we're looking at kind of where were those customers prior year, and then did they renew? We're not giving any credence to any of the uplift in the gross dollar retention. I do feel good. I think our initiatives that we've done over the last several years with customer success, the work we've done in the area of customer support, Mike was just speaking about all the innovation we're doing. I think that really speaks to the gross dollar retention. I'm kind of hopeful we'll stay in that.

Something north of 90% would be our intention as a company on the gross dollar.

J. Parker Lane (Analyst)

Understood. Thanks again, guys.

Operator (participant)

Our next question comes from Matt Van Vliet with BTIG. Please proceed with your question.

Matthew Van Vliet (Analyst)

Yeah, good morning. Thanks for taking the question. I guess first, on the EverFi side, just trying to understand, are you seeing just a number of kind of downsizes upon renewal and just a lack of new deals there? Or is there a meaningful amount of true logo churn going on there for decisions on their own, the customer side?

Michael Gianoni (CEO)

Yeah. Hey, Matt, it's a little bit of both in the last couple of years. The market pressed pause, I guess, in this space a little bit. We have a big footprint. I'll give you an example. In financial services, specifically in banking, and some of the regional banks pulled back. Silicon Valley Bank was a customer, for example. So there was some pullback a little bit in financial services and some shifts in program spend. So it's been a little bit on the renewal and expansion side and on the new booking side. But remember, EverFi's got thousands of customers. And in the three years, EverFi's been a part of Blackbaud. I've met hundreds of customers myself, and everyone is enamored with the product and solution. There's just been some macro pullback in the space, which has caused the business to have its struggle from a growth.

In fact, it's going backwards a bit. But it's not all doom and gloom. I just mentioned a bunch of logos. We've got Goldman Sachs on the case here to work with us. So we'll resolve this problem. We just took some cost out. We are focused on making sure it's not a drag on the company. Again, it's 7% of the total, but we're working on it, and I think we'll have some outcomes to announce, hopefully, in the next period of time.

Matthew Van Vliet (Analyst)

Then how has that impacted the YourCause and the foundation side of the business? How's that been progressing so far?

Michael Gianoni (CEO)

Yeah, YourCause is actually doing really well. EverFi has not impacted YourCause, and so we're doing really well on YourCause. A lot of great new logos there. It's organically growing, frankly, accretive to the rest of the social sector, so it's a part of corporate impact. Again, EverFi is 7% of the company. YourCause is doing really well. It's a very sticky platform. We've got over 16 million employees on the platform, so lots of Fortune 500 customers, good pipeline. YourCause is doing well.

Matthew Van Vliet (Analyst)

Thank you.

Michael Gianoni (CEO)

You're welcome.

Anthony Boor (EVP and CFO)

Thanks, Matt.

Operator (participant)

Our next question comes from Kirk Materne with Evercore. Please proceed with your question.

Kirk Materne (Analyst)

Yeah, thanks very much. Mike, I was just curious on the contractual recurring business, just bookings in that area, how are they looking, I guess, relative to plan? It seems like things are going along well. I was just wondering if you could add maybe a little bit more color there on just sort of net new relative to sort of the new pricing on the renewal side.

Michael Gianoni (CEO)

Yeah, we don't break out the micro of bookings, but net new logos are actually doing really well year over year. They're up nicely in the new logo side, and we've really shifted the teams more to new logos in the last 12 or 18 months. That shift of the older products like Raiser's Edge and Financial Edge to the cloud solutions is largely behind us now. We've only been selling cloud solutions for years, but we've had some customers on the older license-type products, and that's a really tiny part of what's left, so big shift to new logos, and that's going well. Sales productivity is up. I mentioned a bunch of higher-ed new logo wins in my prepared remarks, and we expect that to continue. The predominant softness in bookings is EverFi. I mentioned YourCause. Bookings are going pretty well also.

Kirk Materne (Analyst)

Okay, great. And then Tony, can you just remind us? Sorry, you might have mentioned this last quarter, but the divested, the non-recurring services business that was divested for EverFi, how big of a drag on sort of growth in the corporate side was that this quarter? Or how has it factored into the 12% down this year?

Anthony Boor (EVP and CFO)

We revised our guidance, Kirk, at the end of Q1 for that divestiture, and it was about $6 million of revenue that we took out for the year.

Kirk Materne (Analyst)

Okay. Okay. Thank you for the reminder. Appreciate it. Thank you all.

Michael Gianoni (CEO)

Absolutely. You're welcome.

Tom Barth (Head of Investor Relations)

Okay, everyone. I think that's the end of the questions. I want to thank everyone for joining us today. We'll be attending a number of investor events to include several investor conferences in November and December, which are now listed on our investor relations site. Of course, I'm always happy to speak to you directly, and we look forward to speaking with you soon, and have a nice day.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time.