Q1 2020 Earnings Call
[music].
Today's conference is being reported.
No trouble <unk>.
Please go ahead Sir.
[music] everyone. Thanks for joining us on Blackboards first quarter 2020 earnings call.
Joining me on the call today or might you know I mean, black box, President and CEO, Tony bore blackboards executive Vice President CFO.
Hi, good Tony will make prepared comments and then we will open the line for your questions.
Please note that our comments today.
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.
Other FCC filings for more information on those risks.
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.
Non-GAAP financial measures on this call.
Please note that non-GAAP financial measures should not be considered an isolation from where they substitution for GAAP measures.
A reconciliation of GAAP and non-GAAP results is available in the press release, we issued last night and a more detailed supplemental schedule is available in our presentation on our Investor Relations website.
Before I turn the call over to Mike I'll briefly cover our upcoming investor engagement activity, which is available on our Investor Relations website.
During the second quarter, our team will be virtual we attending the need of technology and media Conference Barents 2020, Global consumer technology, and services conference and Steve Kroft sector contracts with that I'll turn the call over to Mike.
Thanks Mark.
Good morning, everyone.
Thanks for joining our call today before turning to our results.
Well, maybe about how spouses partners family members are friends.
On the front lines of the Cobot 19 response.
So I want to take a minute to say thank you.
Well I thought it's been serving the socially good community for nearly four decades and the leadership role we serve in this market is especially critical in the current environment.
We continue to be inspired by the resilience innovation and determination demonstrated I still show good organizations around the world.
During these challenging times.
We've taken measures to ensure our own business continuity, all remaining critically focused on customers employees and shareholders.
This morning, I will share our actions taken related to Cook at 19 and outline our priorities as we continue to execute against our strategic initiatives and I'm sure. The long term success with the company.
I'll, then turn it over to Tony to cover the financials in more detail.
We are strong stark and 2020 against our financial plan.
The carpet 19 pandemic began to evolve we moved quickly to enact plans with our immediate priority being the welfare of our employees and continuing to be a strong partner for our customers.
In March we closed our offices worldwide. It made the shifts to a global remote workforce with no extra effort you.
You've heard me talk a lot about the transformational changes we've made in the business and that has created a scalable operating model that has been tested with his global crisis, and we haven't missed a beat operationally.
Our internal Archie and organization structure changes over the last several years.
Allowed us to Amelie go virtual and have all of our global employees working from home as if they continue to come into the office every day.
Customers didn't notice the difference that's a high level of support just continued to perform.
Our support teams immediately became an efficient mobile call center.
It's been impressive to achieve an uptick in our customer satisfaction with scores reaching into the high nineties.
Our implementation services teams had already largely shifted to a remote implementation model pre co. They are fully equipped to continue customer engagements uninterrupted.
In fact less than 10% scheduled project hours have been delayed thus far and just last month, we completed a successful virtual implementation.
Blackboard CRM enterprise offering with University of South Carolina, which is the most complex and labor intensive in the portfolio.
We spent the last several years reorganizing our business to focus on vertical go to market teams, but a centralized back office consisting of global centers of excellence and it's clear those changes are now paying off.
Many of our customer said that the chancellor postpone their planned in person fund raising events.
And our agile engineering teams have moved quickly to respond to these customers.
We've been Reprioritizing expediting product enhancements to support their changing needs examples ranged from pivoting to virtual fitness events to putting new livestream fund raising tools in the hands are both organizations and individuals.
In terms of our go to market efforts, we've been investing in sales and marketing to better address our large market opportunity.
As part of this effort, we've implemented software tools to enhance our digital footprint and drive efficiency.
The investments we've made enable us to quickly adapt to changing market conditions, including comparative opportunities.
Ability to ensure a business continuity for our customers performance scale and pivot to offer solution to the changing needs of our customers has become a new differentiator for black box and we've moved quickly to capitalize on these early opportunities by leveraging our enhanced go to market capabilities.
Well, there's disruption caused by this virus has caused some deal pipeline to push out to Q2 in the second half of 2020.
We've been able to showcase ourselves as the best long term partner for social good organizations, and we remain very well position as a leader in this market.
As part of our cost control measures, we've put a freeze on hiring across the company including sales.
Well I'm employees are committed to social good professionally and personally.
I'm incredibly proud of how our teams have risen to the challenge to help our customers. Our company should remain strong in the short term as we plan for long term success.
Turning to our customers the need for funding support in resource is significant I suppose you. Good organizations worked to pivot their models activate supporters and minimize disruptions to their services operations.
I encourage you to look at our recent press releases for example October 19 is impacting some of our customers and the role blackboard place in combating the challenges posed by the virus.
He still should get organizations have been thrown into into crisis mode.
We've seen they are pivoting to rely even more on technology and cloud solutions to run their operations.
I believe this crisis will be a catalyst for the industry to move even faster to purpose built cloud solutions.
Well near term disruption occurred starting in the back half of March in the weeks since the crisis change at the forefront several black thought customers creatively switch in person events to virtual fund raisers.
Established virtual voluntary options for employees increased matching get programs galvanized lobbying efforts for legislation and create an array of cobot 19 funds and grant opportunities.
K 12 schools swiftly moved classes online as they've been forced to shut their doors.
Religious organizations have provided online resources walk coordinating support.
Given the increased need for offerings.
Zoos aquariums and other cultural organizations, which have lost revenue from in person attendance on events.
Hi, contact for all to enjoy online well pivoting to drive more online fund raising.
We've seen over a thousand percent increase and online donations process for some food banks as they look to narrow the funding gap required to meet surges in demand.
And our financial staff are forced to work from home continues to be demand for our cloud financial solution fragile X NXT.
The industry has been undergoing a digital transformation.
In which we have done the global leader and that has accelerated in recent weeks.
Our move over the last several years to cloud solutions purpose built for vertical markets has proved to be the right strategy. As this crisis has highlighted how important modern scalable and secure cloud systems are not required standard.
In many cases blackboard technology is a critical component to helping our customers quickly mobilize and adapt to a more digital and virtual environment.
For example.
Private K 12 schools like Louisville High School open window School and River Oaks Baptist School have been able to quickly move to becoming a virtual school keeping students parents and teachers productive using our solutions.
After making a decision to transition their school online the head of school for River Oaks Baptist School said and I quote.
As we were preparing for the transition to distance learning we relied on the recommendation of our technology. So use at Blackrock solutions to Institute in asynchronous only classroom experience. It's the best decision we've ever made.
Not only does it give our families the flexibility needed during these challenging times, but simplifying the transition which is so key.
In fact, we're seeing more opportunities to use this technology in the classroom.
Which will extend well beyond the pandemic.
Because of our open architecture, our solutions, our integrated with the Central Ed check in video conferencing services and usage of Blackbaud learning management system has drastically increase compared to last year, but some features being used nearly 10 times more schools have moved to blackboard technology to support distance learning.
The business impact the virus continues to manifest itself in different ways across the broken markets that we serve.
We continue to closely follow market trends.
Including travel getting which can be crucial for many of our customers as they look to close funding gaps.
Mind, you the growth and giving in the U.S. has been closely correlated to U.S. GDP for decades, and the mix of giving continues to shift toward online donations.
For historical reference total charitable giving its approximately $300 billion in 2008 declined 8% 2009 before growing again in 2010. Since then it has grown to over 400 billion annually.
Also the number of registered non profits grew during the same time period.
Moving back to this year early trends showed a decline in donations process for our customers that tend to be postponed to cancel.
However in the weeks since the crisis began many have creatively pivoted to virtual fund raising and events and we see this in the data.
For example are just getting platform has seen a sharp increase in carpet 19 related campaigns with appeals raising tens of millions of dollars to support causes focused on combating this crisis.
That is a campaign in the UK trade support for the National Health Service staff and volunteers giant for coated 19 patients.
With an original goal at 1000 pounds. The campaign has raised over 30 million pounds for well over a million supporters across more than 80% of the countries in the world.
Our scalable platforms allow events like this to happen.
This is just wanted to many examples that make this market so resilient as communities.
Well anthropocene celebrities corporations, and others step up to support social good organizations and his time at the.
Another example is direct relief rely on black lot Luminate online and blackboard razor's edge actually.
During historic peak in donations and included high volume celebrity fundraisers direct relieves VP of partnerships and philanthropy told us we're deeply grateful to blackbaud for ensuring that our technology backbone for philanthropic efforts is robust and scalable.
I thought commitment ensures that the extraordinary generosity from individuals and institutions to help keep healthcare workers safe.
He is immediately put to use to help those who help others.
Long term, we believe the impact of covered 19 will significantly accelerate the existing secular trends toward adoption of modern cloud solutions in our market.
Overall blackboard remains highly committed to the success of our customers our company and the entire social economy. During these challenging times.
We quickly transitioned to our global workforce to remote operation with zero business disruption.
We have supported our employees as they continue to enable thousands of customers to quickly pivot their own operations and strategic efforts.
We've had webinars with thousands of customers, helping them more aggressively move to digital capabilities. Our teams launch new innovation in response to pandemic specific needs that arose we've given back to the entire so she good community to hundreds or free resources philanthropic gifts service on boards and more.
And we maintained our commitments to customers, including our very high standard of service and support.
This crisis has put a spotlight on the critical need to move to the cloud and to partner with the software provider like Blackrock, we're hearing has sort of market.
Lastly, we've acted quickly could take measures to ensure that we have the necessary and liquidity and financial flexibility to continue supporting our customers protect the welfare of employees and deliver increased value to our shareholders.
With that I'll turn the call over to Tony before we open it up for QNX Tony.
Thanks, Mike Good morning, everyone.
I'm going to briefly cover our key first quarter highlights then shift or early observations of the actions related to cope with 19 before opening up the line for your questions.
You can refer to yesterday's press release in the Investor materials posted to our web site for the full detail over Q1 performance.
Please note. We also issued a press release on April six outlining actions taken as of that date to bolster our liquidity increase related borrowing capacity and redeploy capital to reduce our debt load.
These actions had minimal impact on the first quarter, but will materially benefit profitability and free cash flow as we look at.
Turning to our results first quarter revenue increased 3.3% over Q1 or 2019 in recurring revenue grew 3% on an organic basis, we had a good start to the year over achieving our revenue plan through February though as Mike mentioned and as you all know the impacts related to cover night team began to manage.
Fast in mid March.
Given the recurring nature of our revenue the impacts of the pandemic to our Q1 revenue were minimal.
The quarter, we reclassified $4 million that would have historically been presented in recurring revenue to onetime services and other revenue.
We have a continual review process internally to evaluate the performance of our portfolio and that process drove the determination that these newly introduced services offerings are more onetime in nature based upon the typical contract right and related renewal rates.
This reclassification reduced our organic recurring revenue growth rate by approximately 220 basis points or 130 basis points. After normalizing 2019 for the change.
Moving to profitability, our first quarter gross margin was 58.4%, which is a 200 basis point decline versus 2019.
We generated operating income of $34 million, representing an operating margin of 15.2% and diluted earnings per share a 51 cents.
As you know we're underway in a multiyear effort to enhance our scalability by migrating our cloud infrastructure to leading public cloud service providers and we anticipate continued pressure on gross margins as we incurred a necessary cost to make the shift.
Our first quarter operating margins also reflect our heightened investments with a focus on optimizing our go to market model and driving cloud innovation.
To support future growth as business.
That brings me to the cash flow statement of balance sheet. Our Q1 free cash flow was negative $38 million in our mind you that we are typically a net borrower in the first quarter given the seasonality of our business.
As we discussed on the Q4 call we outperformed our financial plan in 2019, resulting in higher bonus accrual accrual that was paid out during the first quarter and this was the primary driver of the year over year decline in free cash flow.
We also continued making necessary innovation and infrastructure investments as for our cloud operations amounting to $3 million in Capex at $11 million for capitalized software development.
As part of our cost control measures, we will be carefully evaluating plan future capital expenditures during.
During the quarter, we also paid out $6 million and cash dividends to shareholders and ended with 506 million in net debt.
Our capital strategy calls for a debt to EBITDA ratio of less than 3.5 times and at the into Q1, we stood at 2.6 times with $151 million are borrowing capacity.
For the first quarter behind us.
There is now a great deal of uncertainty ahead in terms of how this covert 19 disruption will impact our market the economy in our company.
We acted quickly to preserve our strong balance sheet and ensure we have the financial flexibility needed to manage a wide array of outcomes that may result from this pandemic, we outlined actions taken which create over $300 million of additional annualized borrowing capacity.
First our board of directors has eliminated the payment of future quarterly cash dividends on blackboards common stock beginning with the second quarter of 2020.
Second we implemented several cost reduction measures, we suspended the company funded for on K match until the end of the year.
We put a temporary freeze on our hiring efforts, Mike announced he will forego orbit forego has paycheck for the foreseeable future.
We restricted non essential employee travel and put in place other operating cost reductions.
Third we converted certain cash compensation to equity based awards, we replaced employees 2020 cash merit increases with a onetime restricted stock correct.
And we replaced cash bonus plans for 2020 with a onetime performance stock prep.
And finally as part of these actions, we also announced an employee relief measure providing all worldwide employees that have a base salary equal to or less than 75000 us dollars with additional financial support in the form of a one time bonus of 1000 U.S. dollar.
In addition to the initial actions we've taken the date, we will continue to evaluate further action should they become necessary.
Given our inability to accurately predict the duration and magnitude of the potential impacts associated with Cowen 19, we're not providing financial guidance for 2020 at this time.
Predictability is particularly challenging from a revenue standpoint as there are three primary revenue areas with related business drivers that we continue to monitor closely.
First is contractual recurring revenue, which is roughly two thirds of our total company revenue.
As a reminder, our typical subscription contract term is three years billed annually upfront and we just started successfully shifting our customer base away from annual renewals and moving them onto a multiyear renewal contracts approximately half of our contracted recurring revenue comes up for renewal in 2020 with the seasonal high.
For renewals and collections falling in the third quarter, driven largely by mid year fiscal year ends and timing of the school year.
To date, our renewal rates are trending ahead of our pre cobot expectations, which is very positive and we're monitoring trends and accounts receivable aging of bad debt with no concerns thus far.
The second category as our transactional revenue, which is non contractual and less predictable, giving the susceptibility to certain drivers such as timing of a number of events and marketing campaigns as well as fluctuations in donation volumes and tuition heads.
As actual revenue represented approximately a quarter of our total revenue in 2019, we typically see seasonal highs in Q4 tied to year end given campaigns in Q2, when a large number of events are held.
The early disruptions caused by Coven 19 drove sharp initial declines in transactional volumes, though in recent weeks, we've seen a nice rebound in volume in the form of online events and campaigns, which has an encouraging sign as customers look for innovative innovative ways close on the gaps.
As Mike mentioned, our teams are hyper focused on helping customers successfully standup virtual campaigns and events and we think this could accelerate secular trends around online, giving over the long term.
The third category as bookings given the ratable revenue recognition model and the role of 78 as well as implementation periods. We expect any declines in our 2020 bookings performance well have a much greater impact in 2021 revenues than 2020.
Of the three categories bookings represents a small as potential impact on recurring revenue in 2020, although one time services tied to bookings would have a more immediate impact to revenue.
The first quarter is typically the seasonal low for bookings with the second and fourth quarters being seasonally higher and our bookings tend to be back end loaded within the quarters, given our quarterly quota plans.
Looking fell off sharply in the second half in March and we've seen a slowdown in pipeline build at this point, we're currently expecting a significant shortfall bookings versus plan on the here.
The magnitude of which will be heavily impacted by the depth and duration of this current crisis.
Looking ahead, we have enabled our teams to offer relief measures to help ease the financial burden for our customers and prospects with near term liquidity.
For example, we've allowed on a limited basis for a 60 day extension of payment turns on new sales, which will delay cash collections that we expect the impact to be largely offset in Q3.
We've also partner to offer zero present financing options for new sales on a case by case basis.
We've been modeling a wide array of possible scenarios utilizing simulation tools the obvious challenges predicting the duration of the pandemic in the magnitude of its ultimate impact on our business.
We are continuing to update the scenarios with a focus on refining our assumptions as more information becomes available we.
We have ran invented the company over the last over here shifting our revenue mix towards recurring revenue and expect that are significantly diversified customer base greatly improves our durability.
In summary, we had a solid Q1 and have acted quickly to hopefully ensure we have the liquidity and financial flexibility needed in response to the current global market conditions, while remaining critically focused on the success of our customers and the health and economic stability of our employees, we will continue to implement.
The necessary measures to ensure viability in the short term as we plan for long term success on behalf of all of our shareholders with that I'd like an open up the line for your questions.
Thank you, ladies and gentlemen, if you like to ask your question. Please signal by pressing star one on your telephone keypad. Please limit yourselves to one question and one follow up the return to the Q. If we're using a speaker phone. Please make sure. The mute function is turned off to allow your signal to reach our equipment.
Again as a reminder, please press star one Clifton.
He's with yourself to one question and one follow up to allow us to facilitate as many questions as possible.
Our first question today is coming from Tom Roderick from Stifel. Your line is now live.
And I can't Tony Thanks for taking my questions.
Great then all glad to hear you and your team are healthy and staying well down there.
First question, just sort of thinking about some of your comments, Mike relative to the structural components to your business and in particular, it seems like the events business would be the wine and for your customers that by necessity had to be turned off right away. So can you talk a little bit about how some of those pieces in the model breakout, particularly the impact of events.
And any signs from your customers as to when they can get does going or alternative methodologies of how they do that I'll start with that and then I'll ask a follow on thank you.
Yes, sure Tom morning.
Yes, it's really interesting what we've seen because we've seen scenarios that are pretty broad.
In the area that specifically to your question.
Physical events have been canceled or rescheduled.
Things like runs in locks and galleries and things like that are obviously not happening now we've had many customers.
Flipped to adding virtual events, using our systems and some with a lot of success as well in the main though the events are not happening in Q2.
We've had other customers have campaigns on platforms like just giving or.
You know use our luminate.
Platform for virtual events.
And it's been pretty interesting whats going on because this coded 19 is sort of put blackbaud in the same playing field is our customers, meaning you know everyone's working from home everyone's talking about working from home when it when it first started.
The amount of customer interaction has been significant.
The number of inbound calls from Webinars, we've had we've had thousands and thousands of customers on webinars to teach them how to do virtual.
Events so.
Event space I'd say that the physical events are sort of off for Q2.
There's been a bunch of I mean, physical events and off for Q2, a bunch of virtual events are ongoing.
A lot of other than rescheduled for summer and fall.
In other parts of our market you know like and just talk that like Arts and cultural institutions are basically closed right. Now there are also doing some virtual things as well.
So given all the different kinds of sub markets. We're in we're seeing very different things happening.
Yep understood. That's that's helpful context. Thank you.
One question just relative to the hiring freeze that youve put under way temporarily you guys have had a lot of.
Yes, I mean interest and getting into new markets, particularly higher Ed and faith based would love to hear your thoughts about what that hiring freeze sorted that some of the growth initiatives in those markets and then Tony I guess the context behind that question would be as we think about building our models, obviously withdrawn guidance for 2020, but perhaps you could.
Stopped for some directional evidence as to how we ought to think about when we at the low watermark in margins for the business as the market comes back you probably want to start reinvesting in growth again.
Sort of wise to think about margin being reasonably protected this year.
But but next year, you know as the ripple through Refracs from lower bookings. This year gets revenues and you reinvest could there be kind of a little bit of a double whammy were 2021 margins might be a little lower obviously, you're not adding this year. So I'm not asking for next year, but just some directional thoughts on how the model plays out would be great. Thank you.
Sure Tom.
So hiring freeze. It's just you know we did a lot of things to just make sure that weve showed up the business from a financial liquidity standpoint, and Tony can talk about those that we feel pretty good about all of that from a hiring freeze standpoint, yes related to bookings.
The big issue really the bookings is covered 90, not head count right. So.
Our existing teams and we've said it ramped up as you know last couple of years.
In some markets covered 19 is impacting bookings in some markets. It's it's less of an impact like for our financial platform financial edge NXT, because we move that to the cloud and really advanced platform. It's had a lot of interests from a bookings standpoint and from a success standpoint.
In some other markets like arts and cultural they're not even open right. So there's a bookings challenge there. So we felt it was prudent.
One of hiring freeze on and not add a bunch of headcount in sales where some of our teams are going to struggle anyway because of cobot 19, we're going to obviously revisit that as we get through this quarter next.
So we thought it was prudent to do that so the bookings impact is that cobot 19 related issue and how that's going to play out and the next quarter or too.
Much less than an impact as a hiring freeze and Tom.
That's the second part of that.
For 2020.
You will have an immediate impact we've already seen that some in.
Recurring revenue in Q1, even with the transaction business falling off in the second half of March the other side is where we've seen a big shortfall in bookings, but it's weighted much more towards onetime services and other.
And our recurring subscription business, which is great news the bad news on that front is that we'll hit revenue sooner and so for 20, I think those short call us shortfalls and onetime bookings.
We're seeing north of 50 plus percent shortfalls in those bookings to plan does will impact 2020 revenues.
It will probably accelerate.
That decline in one time that we've been seeing for the last several years, which I think it's good for the long term the positive on both of those things to 2020 is both of those are two lowest margin pieces of the business. So they have the least amount of impact in 2020 on our profitability. We set a target the actions you saw.
We took that we announced we're really about ensuring we don't have a debt issue that we don't have any concern.
Later in the year, regardless, whether this last one quarter to quarter three quarters from adapted covenant perspective, and so we've we've done the things we can do to control how we allocate capital and are very focused on the cost side of the business, we're targeting to generate.
An equal dollar of EBITDA in 2020, as what we had in our plan.
Regardless of what happens on the revenue side and we've proven before we can control our cost structure very effectively as you know 2021 is a bit of a wildcard were as Mike said, we're going to monitor what happens we'll have to see what shakes out were bookings how transactions rebound later in the year, but we will adjust our cost base to whatever that new.
Ormat has gone through 21, I think it's going to be very difficult. If this pandemic last very long for us to grow significantly in 21. So I would think we'll have a bigger focus on the cost side and profitability and cash flow side of the business in 21.
Because I think thats, the best way at least within our control to ensure we generate the best possible returns for shareholders.
Really helpful. Thank you gentlemen, appreciate it.
Yes.
Okay.
Thank you. My next question today is coming from Brian Peterson from Raymond James Your line is alive.
Brian perhaps reporters on mute, please pick up or headset.
I thought was on the thank you. Thank you for that sorry, working from home challenges. So.
Hi, gentlemen, thanks, Thanks for taking the question so Michael.
Starting with you I appreciate all the color.
If we're thinking about.
Working with some of your customers in this environment Im curious if I think about some of your customers that have upgraded to your cloud solutions are more modern products.
Had they been able to fair better in the current environment versus some customers that are older solutions any thoughts on maybe getting creative with some packaging in terms of migrating to more.
Modern solutions, the any thoughts on that.
You bet, that's absolutely the case we've had.
Customers that have talked to us that for example in our K 12 market that said thank goodness, we move to your platforms all of our K 12 customers basically, yes little effort or no effort went virtual.
And they're either choosing to be.
Secret answer synchronous virtual school.
Asynchronous meeting their pre recording lessen some having to kids.
Interact that way and synchronoss, meaning they are going live and weren't where energy were integrated with all of that.
Well the platforms resumes in the web access and all of that.
And so their label of leverage those.
And we've also had the opposite where we've had I know of a couple of stories where.
Schools decided not to make a change and wish they did.
Because all of our schools were able to basically use the same platforms. The same learning management system, the same scheduling and grading mobile.
And with the kids staying home, they're running the schools just like they were the kids were coming in we've heard the same stories and our with our financial edge NXT platform.
And across the board.
Our talked earlier with the earlier question about charity slipping from a physical event to a virtual event.
And I believe that this.
Pandemic and this scenario for all of our markets are going to drive a much higher interest for.
Charities in all the verticals that we serve to go to the club and to be able to integrate and operate in the cloud and be mobile first in cloud first.
Because it's proving its proven that it's needed.
In this scenario and they know that they need to go there. Eventually this is a catalyst for that so I think that it's going to drive more online getting and drive more.
Desire to go to purpose built systems on the cloud we're seeing it.
Understood. Thanks, Tony maybe just one clarification for you I know, we had to 4 million reclass.
From referring to one time any help on what that would have impacted 2019 in terms of revenue in the various components.
Or what that was potentially looking like for 2020, thanks guys.
Oh I don't know that we have anything that we've given publicly I've got handy, Brian we get circle back on that I think what we did state though is that that impact was about 220 basis points.
On the Q1 2020 versus Q1 2019 as stated.
If you normalize Q1, 2019 as well it took that variance down to about 130 basis points.
Thanks, a lot of those Brad this makes a lot of those retain services, we're talking about where things that were created in late 2018 and brought to the market. So that the volumes of those were much smaller in early 19 grew throughout 2019.
It's one of their is actually we're seeing a big decline in bookings right now currently as well.
Okay, so not a big impact on recurring okay. That's what I wanted to clear up thanks.
Yes.
Thank goodness question today is coming from Rob Oliver from Baird. Your line is valid.
Great. Thanks, Good morning, guys nice to talk to you I appreciate your time.
Hey, Tony.
First question. It when you guys put out the release talking about some of the changes you guys have made.
Internally.
I don't think you mentioned R&D and I just wanted to touch on that relative to some of the new initiatives. You guys have obviously been keenly focused over the past few years and currently in in adding functionality, adding new products you know platform writing the business and just curious if R&D was impacted and if not if there was that.
He reprioritization of any of the R&D spend and then I had a follow up related to that.
Yes, Hey, Rob it's Mike.
So from an R&D standpoint.
Not much has changed in.
During this pandemic, except interesting enough all of R&D is also working at home and the productivity has been really high which is great to see and we measure that and things like new features being released at what frequency and things like that that what has changed recently, though in the main nothing's really changed but.
We did pivot to is given.
All the interaction higher interaction with customers and the place the customers find themselves. We've put a lot of things in production specifically for coated 19 in many of our vertical market. So we put some things in the production a little bit different for K 12 schools Weve added some things for us.
Group remote management for example for churches.
And so we've added a lot a little things that customers asked for given they find themselves.
Looking at a virtual world.
Across many of our platforms, we've gone fast and put a lot of those into production quite quickly.
Across many of our platform. So thats been the biggest change in that in the short run is doing really.
Proactive in reactive to needs.
Adding some different things from a functionality standpoint across a lot of platforms to help our customers.
Great and thanks, Mike and then related to that you guys have outlined they know the for Tom's question earlier on higher added faith based those are the two areas that you guys have sort of outlined at the longer term growth drivers. It I think you guys were pretty explicit that they weren't going to be meaningful contributors. This year, so understanding that context just.
Wanted to get a sense for.
Your continued commitment to those.
Areas, how we might think about that but then more specifically kind of what you're hearing and seeing I mean higher Ed seems to be in a world of paid and uncertainty right now.
Conversely fate base.
Maybe remote timing, maybe nows the time for remote I think I would think it would be.
And so just curious about.
Some some of that and I know you guys are reliant on.
And your customers use events physical events that drive your business you guys. I think also were relying on some physical industry bench to build your brand in some of these new areas. So just wanted to understand how you're thinking about those those areas. Thanks. Thanks gentlemen.
Sure so.
I'll start with higher Ed one of the things that we have going for us is theres been a bunch of outside.
Studies related to ROI.
And I think one of our earlier press releases. This year, we talked about at higher Ed institution getting over a 270% ROI.
And reducing our operating cost and really driving revenue.
The implementation of our platform so.
Theres a really good payback.
For higher Ed in the foundation side. It moving ahead with Blackbaud and we've got a lot of case studies around that and interesting enough. Rob you also.
Our professional services teams really had been working remotely for awhile.
And our effective and we've been able to bring customers live even with our enterprise CRM platform.
[music].
So this coated pandemic didn't really impact our ability to have our professional services teams helped drive implementation. So I think we've got a really good presence there and a really good brand related to ROI.
And so I think that that will continue.
[music].
Over in the face marketplace, Yes, we've got a new mobile platform that helps them operate mobile.
I just mentioned that we made some new.
Implementations happened related to new functionality.
In the church market for virtual meetings and virtual events as well.
So yeah I think in both of those you know that Theres still that long term opportunity for us is really good ROI in the face market, there's a ton of legacy onsite.
On Prem platforms, and I think moved to the cloud there is going to be more important as I answered earlier as well.
Those institutions are seeing the need to be able to be mobile first and cloud first and I think that is going to accelerate.
Given the current situation.
Okay.
Hey, more questions.
Thank you. My next question is coming from Kirkwood turn from Evercore. Your line is now a lot.
Hi, Thanks, Thanks, very much and hope you all and families and friends are doing okay. During all the.
I guess the first ones for you, Mike obviously virtual events are going to become the norm changed for the next six to nine months.
How does that work with your customers just in terms of.
Is that just a feature that they're paying for already I really no. Let's start on a ties anything around any of that but I guess, how does that impact you. All I guess just from a product perspective or from a sales perspective is it a new opportunity or is it something that's just part and parcel the platform that you're going to help your clients are shifting that you're actually I'm just trying to understand.
Hi networks Regal.
Yes, it's both Curt because our existing platforms support virtual agents.
So you look at platforms like eliminate and our pay integrated with our payments platform already supports virtual event. So for existing customers. They can just utilize that we've added some features to help them lately, but they can just utilize that.
For folks that don't have that are either existing or prospective customers, it's a way to get too.
Being able to have a platform that's a scalable platform to create virtual events. So it's both existing customers can use it.
Their business for virtual events, which is on our transaction uses side of the business and then prospective customers that don't have a virtual events platform can move to those.
That form so we have other platforms like just getting as well, which is different but it's different than luminate, but it's also a.
Campaign based event.
For individuals that is another peer to peer type event that's available globally.
We have this big campaign run on it at recently.
We're in the UK.
That.
Drove a significant amount of.
Transaction and usage volume.
For a particular charity in the UK and.
It got donations from folks and something like 85% of all the countries in the world people donated to this campaign and it was virtual and went viral.
So the platforms basically are there for existing customers and for.
You know either existing customers that have it that had physical event second virtual.
Our existing customers to just drive more virtual events or for perspective customers, who have seen the fact that they can go to these platforms and have.
Virtual activities happen for them.
Okay. That's it that's helpful and Tony just on the on the services revenue that had to be reclassified you give us any sense on is there a lot more that that could come over depending on what renewal rates look like this year I'm just trying to get a sense on you feel comfortable that what's in that recurring bucket of that type of revenue.
If there's any lab down out.
Yes, you feel comfortable that we're not going at the kind of keep going through this because it would seem that unfortunately renewal rates might be coming down around services activity.
So the reclasses prospective so any revenue associated with a deferred.
That were out there will be coming through in the onetime services revenue line going forward. So there won't be any other reclasses from that perspective. Most of these just to give you an idea the nature of them are six to 12 month term contracts.
That we're moving and they build monthly so they look a bit different than what you'd expect on a typical software or.
Indication services or analytics kind of recurring contract. That's part of why we determined to move them and the renewal rates have been very low on those because they tend to look a lot more like a onetime type service and the nature of them.
Also looks that direction. So it's not that the renewal rates will be coming down on these they're already very low I think just could the underlying nature of the offer.
Got it that's really helpful. Thanks very much.
Thank you next question is coming from Risi jewelry up from D.A. Davidson. Your line is now lives.
Hey, guys that thanks for taking my questions I appreciate all the detailed commentary.
Just wanted to ask Tony you mentioned in the prepared remark about.
You've had this ongoing move.
How customers from from single year to multi year deals wanted to understand a with that low has there been any sort of discounting and then b.
In this environment, where were you talked about extension that payment terms of financing options are you seeing any changes on the duration saipem customers that are now, saying, what we want to go to shorter term deals just given the quality concerns and then I've got a follow up.
Okay I appreciate the.
Multi year deals typically will have a.
Discount built and because the price increases upfront for the entire three year is typically how they're structured so if you're and that's that's typical in that in the software space and so if you're going to sign a contract for a three year renewal were typically going to give you.
A slight discount which will make your costs lower than what it would be if you had an annual increase each year each of those three years.
We get that price increase upfront, which helps from a net present value to offset some of that discount impact. So overall I think it's a win for the customer in a win for us.
And we're typically building those multiyear contracts again, one year at a time in advance we've seen a good shift towards that most of our new contracts. Our three year initial terms and three year renewal terms historically were typically selling licensed product with an annual maintenance and so we are working to try and migrate.
Those older contracts from one year renewal to three year that have yet that will take some time to migrate the associated that moved to a new products that are will renegotiate with an to get to multiyear renewal terms and what the effect will be as ultimately we will have less dollars up for renewal in any given year.
Which is positive I think for customers and their activities and for us.
Extension, a payment terms, thus far we've not seen any material increase.
In accounts receivable aging or customers not paying us that would give us any alarm. We do anticipate that we'll have some increase bad debt. This year. Most anything that we have bad debt will really be that accounts receivable that was open when we went into the pandemic. What we would expect we may see which is why we're keeping a close eye on is that people may renew.
New at a lower rate, even more churn although to date, our retention rates have actually been better than we expected pre and post and so it's interesting right now renewal rates are doing very well, even compared to plan and so we're keeping a close on I think the real critical.
Time for us on a renewal front as over the next three to four months because we have a large portion of the business just with the seasonality comes up for renewal of the into Q2 in early Q3.
Timing around school years, and all of those other things over the years, how we built the business and so we'll be keeping a really close eye on how renewal rights to here at the into this next quarter and going into Q3 that will be that the point will really have a really good sense of how and if will be impacted to the negative at all with the up endemic yes, I'll just add to that as Mike that.
The products that we sell to our customer base.
They are their systems of record so they're not discretionary platforms. They run their core operations. So.
They just can't choose not to have a system like this.
Right. So that's a that's a key point all of our platforms our systems of record.
For our customers.
Got it that Thats helpful.
And then and then Ah Tony on the recurring gross margins fraud, and I know you've mentioned right that the migration Bancshares Bachelor weighing on margins here just in terms of timing at what point from and I know, there's a number of other factors and recurring gross margins.
But at what point does that one factor kind of plateau out and we start to see.
The benefit of migrating and start to see an uptake and the current gross margins. Thanks.
There is I think theres kind of three big.
Impacts on gross margin within recurring.
One of the largest is mix. So we'll have to keep an eye on things there of the transactional piece of the business has lower margin structure, obviously in the software side of things. It's a mix will always be an ongoing.
Impact on that one so if we just assume mix stays constant than the other two big drivers you mentioned, our move to third party cloud like Azure.
Is a big one in a duplicate costs, we have between our Colo datacenters and the new and then the cost to move and migrate all of those platforms. Over then the other one we don't want to forget about as software amortization and so with all the innovation that we've done in the fact that we're building out these two new.
Verticals with higher Ed as we spoke about earlier in fate, there's quite a bit of incremental innovation that innovation is getting capitalize and then it gets amortized over five to seven years on average typically the amount of that amortization is now ramping.
Now that we've kind of plateaued on the amount were capitalize it it's going to take another couple of years for the amortization to kind of flatten out so thats, an increasing cost as well I think that those two things that increase in amortization will start to plateau and flatten out over the next couple of years. So I think that helps from a margin compression.
Perspective start go back the other direction, assuming we continue to grow the business.
We just pandemic and then the move to third party cloud is a multi year transition, although we will start to see.
Incremental stair steps improvements in those costs.
Each year over the next several years.
It won't be overnight, but as we.
Either in the life product in turn off gear and networks for migrate entire populations to the new cloud turnoff, they'll gear and the data centers and the networks can get out of some of the old.
Infrastructure and supporting applications within the products from the legacy products that will turn off license and maintenance costs for those when you think about the old Ari NFI legacy products et cetera.
So what you'll see us incremental stairstep improvements in Cogs coming over the next several years as we migrate through this.
Alright, great Thats helpful. Thank you.
Thank you next question is coming from Ron Ryan Macdonald from Needham and company. Your line is alive.
Thanks, Good morning, Mike and Tony Thanks for taking my questions. My first one you in that I've got a follow up for Tony I'm like just curious to see what you're seeing if at all an impact from the care that I'm. Obviously as that was passed we saw some additional funding for K through 12 schools for higher Ed and as well some in.
Incentives around charitable giving from a tax perspective, obviously, the environment tough out there, but but any any sort of pockets of stability that you're seeing as a result of that.
Okay.
No I know that our customers are taking advantage of that so how that translates to.
Anything that we see sort of hard to make their connection.
So I don't I don't.
No that theres any connection on blackbaud related to that but we.
We've been.
We've been really outreaching to the customers in a way that weve never done before and so what's interesting about this and it's not related to your question on cares.
To answer that but we've had a unique opportunity to be quite different as far as that level of outreach that we've had in the last six weeks, which has been incredible tens of thousands of customers and.
I think that creates a bit of a different brand footprint for us, which is pretty exciting going forward, but related to cares I know that customers taking advantage of that across a lot different markets and Ryan as Tony I think.
Two things one we're making sure we.
In form our customer base.
About the cares act right to make sure. They go look at that for opportunities. If there if they're getting the financial difficulties. So thats one of the pieces were making sure we do make sure there informed about the opportunity second.
The deferral of the employer. So security taxes is something we personally are taking advantage of so that will create some incremental cash flow for us this year.
So that someone doing we'll have to pay that back over 21 and 22.
As how thats.
I think on the giving side, we've talked about tax breaks for folks. It's too early to tell I think that's something we'll see later in the year. Thanks, so much uncertainty in the market and unemployment is up et cetera, really hard to see what will happen with overall, giving measure.
Got it thanks, and then Tony just a quick follow up for you.
In terms of capital allocation, obviously, I understand the cooling of the dividend, but you've got about a $50 million share repurchase authorization available for a number of years does the pulling of the dividend change your viewpoint on on how you execute or whether you choose to execute on that thank you.
Yes, the dividend doesn't really have any impact on that Ryan the.
Focusing would really be on what's the.
Optimal use of our available capital and right now because of the uncertainties.
There were all dealing with.
The best use of capital right now would be to reduce our debt.
And increase our liquidity so that we have as much flexibility as possible.
To do whatever we need to do.
And so that's very similar to what Mike and I lived with different companies in 2008 2009.
When you run into one of these major crises.
It's the flexibility on that side of the of the business in the capital structure is the most important thing do that's our big focus for 2021 as I spoke about earlier will become more of how do we adjust.
Our capital allocation strategy, and our cost structure to whatever the new norm is going to be.
Going into 21, so thats kind of our focus right now.
Got it thanks very much.
Thank you next question today is coming from Matt Van Vliet from BTG. Your line is that alive.
Hi, guys. Thanks for taking my question, hopefully, everyone staying safe and healthy.
There.
I guess do you in a little a little deeper on some of the questions that have already been eyes, but are you guys, taking a more targeted approach in certain verticals, obviously things like arts and cultural you've talked about the doors are completely shuttered and and while they're trying to offer virtual events and outreach, it's not quite the same as other areas where its.
Moreover, recurring giving element that can shift online.
But I guess the question specifically is there anything in their contracts from a subscription standpoint that might reduce their their current oh.
Based on certain activities not occurring doors, not open or or in conjunction with that are you offerings. Some deferral of some of that the hard.
I guess contractual subscription sees that you might regained in the back half as a way to sort of target certain customers to help them manage the crisis.
No we are not proactively doing that.
So we do have arts and cultural is a combination of.
Contracted.
SAS.
Platform and transaction and usage. So the transaction uses obviously is.
Quite low right now, although there's some virtual things going on.
But the contracted is the same.
And we're dealing with that on a case by case spaces. So yes in some cases were working with our customers to help them through that but it's a case by case basis, because we find our customers and all various different scenarios at this point.
Great. Thanks for taking my question guys.
Okay. Thanks, Matt. Thanks, Matt. Thank you we reset of our question answer session I have to turn the floor back over to make pretty further closing comments. Thanks, operator, I'll just close by saying we've acted quickly to assess and react to the potential impacts of cobot 19, our business.
I'm incredibly proud of our employees and their dedication for serving our great customers.
We took initial measures to ensure that we have the necessary liquidity and financial flexibility to continue to protect the welfare of our employees support our customers at very high standard and deliver increased value to our shareholders, Tony and I look forward to updating you on our progress on the next earnings call. Thanks, everyone for your participation today.
Thank you that does conclude today's teleconference. You may disconnect your lines as time and have a wonderful day, we thank you for your participation.