Q2 2020 Blackbaud Inc Earnings Call
[music].
Operator assistance during the conference. Please press Star zero, our new telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Mr., Mark Furlong Senior director corporate Finance and Investor Relations for Blackboard. Thank you you may begin.
Good morning, everyone. Thanks for joining us on block bought second quarter 2020 earnings call.
Joining me on the call today or might you know any blackboards, president and CEO and Tony bore Blackbaud executive Vice President and CFO.
Well I can Tony will make prepared comments and then we'll open up the watch your questions.
Please note that our 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 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.
Otherwise specified we will refer only to non-GAAP measures on this call.
Please note that non-GAAP financial measures should not be considered in isolation from whereas a substitution for GAAP measures reconciliation of GAAP and non-GAAP results is available in the press release, we issued last night.
And a more detailed supplemental schedule is now.
Available on our Investor 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 third quarter, our team will be virtually attending the Oppenheimer 20, Threerd annual technology Internet Communications conference.
Canaccord Genuity 40, S. annual growth conference.
We will also be participating and virtual meetings hosted by D.A. Davidson and Raymond James.
I'll turn the call over to Mike.
Thanks, Mark good morning, everyone. Thanks for joining our call today.
Good night gene panned out again, we moved quickly to respond and I could plans to ensure business how.
Well I prioritizing the welfare of our employees and continuing to be a strong partner for our customers.
Incredibly proud of our employees and their dedication to serving our customers.
Very high standard during these uncertain times, our second quarter results reflect strong execution against these plans for the heightened focus on driving profitability and cash flow given the duration the magnitude of the pandemic remains uncertain.
Revenue for the quarter fell short of our original plan.
It exceeded our initial scenario planning from the start of the pandemic.
Our customers globally continue to demonstrate the often underappreciated resilience of this market during these challenging times.
We are proud to support their efforts through reliable Ali if there's a sector technology and we believe having cloud software in place to support the missions social good organizations has never been more critical.
This morning, I will share a few updates related to our business and our market before turning it over to tell me to cover the financials in more detail.
The transformational changes we've made in the business over the last several years.
Allowed us to immediately switch to a virtual work environment in March and supported our global employees ability to effectively work from home.
Our physical officers across the world closed we've experienced the new way of working and I've been impressed by our ability to operate so effectively as a remote workforce.
As we think your head in anticipation of our offices reopening.
There are reevaluating elements of our workforce strategy based on the lessons learned over the past few months.
We are firmly committed to building on our strong culture by creating employee experience agent programs as further developing a truck the best talent and promote a diverse inclusive environment.
In fact, blackboards workplace culture, just received two national recognitions being named to Forbes list, a best employers for women and soft companies best workplaces for innovators lest we.
We could you actually make progress in Crazy Board inclusive diversity programs that are focused on education awareness recruitment apartment community involvement financial support we also recognize an hour than ever the topic of equality strong unified voice a black box.
This is one of the reasons I'm excited where in the process of hiring.
Diversity inclusion reporting directly to our chief people Officer Mackie Driscoll.
You'll remember joined US earlier. This year. This is the next step on our journey turning to our customers.
You have talked to the virus continues to manifest itself in different ways across the broker markets that we serve.
During this difficult time, our solutions are supporting <unk> profits.
Higher education, and healthcare institutions around the world the software technology needed to effectively fundraise and manage other core functions within their operations.
We're proud to power fundraisers that directly thought to critical research essentially equipment, including potential vaccine breakthroughs low cost that are later production and methods to treat the virus and slow it spread.
As the current environment continues to shape the landscape dedication.
We've been on the front line supporting private K 12 schools throughout the pandemic.
Quickly moving day to day activities online the planning for the future of the classroom.
Evidence earlier this month at our annual Tech Conference for K 12, private school leaders, which took place in a completely remote environment. This year and what's made free for all two attacked.
We welcomed over 5000 registrations with thousands being first time attendees, that's a new record for us a build categories as we typically have around 600 in attendance.
The timeliness of our competency based education Billy's with all this play during the conference. That's the most attended sessions focused on Blackbaud learning management system like competency based education best practices that schools plan for distance learning and hybrid education models for the fall.
Although registration is now open for our large did that de because 2020, which will also be virtual no admission fee. There will be held October 68, Reimagine global format.
In an effort to learn how the current environment has impacted churches, we partnered with an independent research group to conduct a survey of over 500 churches ranging in size from under 100, it's more than 5000 in pre pandemic attendance of the church a survey two thirds of churches indicated that giving hasn't come.
<unk> for stayed the same during the pandemic.
More than 80% reported having adequate cash reserves set aside preparation for a crisis.
Zoos museums and other cordial cultural organizations continue to be challenged with loss revenue.
Person attendance and events.
Although some of these organizations are beginning to opened their doors, having made investments updated policies and procedures to promote the health and safety of their visitors.
Black dog plays a critical role in solving these challenges often serving as a core system of record as these organizations for like even more technology. The cloud solutions to run their operations the need for our systems Toronto core operations. He is a key driver of our 92% customer retention rate.
And renewal rates, which continue to trend above our original plan for the year.
During the quarter many in person that shifted online.
Not to be postponed or even cancelled and social good organizations are being forced to employ new strategies to maintain momentum.
Current supporters.
Capturing the attention of potential do daughters.
We've been there to help that make the shift our solutions are already equipped with features there lend themselves to this current environment and we have quickly acted upon customer feedback to enhancements and new functionality serve our customers. So they can continue to focus on emissions. During this time for example, we don't do it.
Gration between peer to peer fundraising donor management solutions simplifying the process of raising donations and acquiring new supporters suit that dynamic friendly virtual events and peer to peer campaigns, we simplified donation forms to expedite fund raising allowing organizations so quickly and easily.
Great campaigns, which is critical to the current environment.
We also added new financial management capabilities further easing the transition so working from home solutions that support collaboration inefficient cash flow management and financial operations from club.
This ties back to our continued execution against our four point growth strategy and our focus on delighting our customers to innovative cloud solutions.
We're also increasing our focus on driving sales effectiveness and the current environment.
Yeah. That's since we've made to enhance our digital footprint are enabling us to be more prescriptive cost effective than our marketing efforts and to quickly adapt to changing market conditions and over the longer term. We believe the impact of cobot 19 will accelerate the existing trends driving adoption modern cloud solutions in our market.
We also introduced new pricing and financing offers based on the changing needs of our customers. Despite our optimism over the long term the uncertainty of today's environment is crane short term challenge, our ability to build and pipeline and bookings are falling short the budget expectations.
Which we expect to put pressure on near term revenues as a result, we've got shifting investments toward digital marketing aimed at lead generation and putting greater emphasis on selling solutions, but the highest lifetime value.
Also you have enabled our sales managers to backfill sales positions with a focus on 2021 bucket.
Overall, I'm pleased with our execution to the second quarter as we all adapt to the current BARDA.
Could you answer prioritized well being of our employees that you think about the future of work at Black dog continuing to build on our strong customer centric culture.
Our customers a once more proving the resilience of our market and finding creative ways to ensure that continued to deliver on their missions.
This crisis will be a catalyst for the industry to move even faster towards modern purpose built cloud solutions, and we remain very well position.
As a leader in this market and the best long term partner well socially good organizations.
Our strategy since I came to block, but has relied on a balanced approach to growth and profitability. The pandemic has created short term uncertainty in our revenue outlook.
Early impacts on pipeline, the bookings will likely limit our ability to drive near term revenue growth at our originally planned levels.
Therefore inline with our strategy, we made a pivot to greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable.
The results of the quarter are a clear indicator of our ability to do this.
We see long term opportunity to drive similar results as in Q2 and drive up the underlying economics of the business.
With that I'll turn the call over to its already before we open it up for QNX Tony.
Thanks, Mike Good morning, everyone a.
Briefly cover or second quarter highlights and underlying trends 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 of our Q2 performance.
Turning to our results second quarter revenue increased 2.5% over Q2, 2019, and recurring revenue grew 3.4% on an organic basis.
Contracted recurring revenue, which is roughly two thirds of our total company revenue remains healthy although fell short of our original plan.
As Mike mentioned, the current environment will likely put pressure on near term revenue growth.
Renewal rates have trended ahead of our expectation through July which is our seasonal high from a renewals perspective.
Bookings performed slightly better than our initial scenario planning.
At this point, we're currently expecting a significant shortfall versus our original plan for the year and we continue to see challenges building pipeline that historical rates.
While this will create some drag on second half revenue growth, our 2020 booking softness will have a much greater impact on next year's revenue.
Therefore, we've rebalanced our go to market investments with a focus on 2021.
I'll also note that consistent with last quarter, we reclassified approximately $4 million that would have historically been presented in recurring revenue to onetime services and other revenue.
This reclassification reduced organic recurring revenue growth rate by approximately 200 basis points or 120 basis points. After normalizing 2019 for the change.
For more detail. Please refer to the supplemental schedule included in our Investor presentation available on our Investor Relations website.
Moving to earnings our second quarter gross margin was 60.4% we generated operating income of $54 million, representing an operating margin of 23.5% and diluted earnings per share of 85 cents.
As you know we took early actions to meaningfully reduce costs bolster our liquidity and increase related borrowing capacity. The actions taken generated a significant cost reduction for the quarter. Although some of these actions are temporary and will likely reverse heading into next year. However, we expect an elevated margin profile.
Going forward.
For example, we expect to reinstate our form 10-K match program for our employees in 2021.
Given the importance of the initiative. We also continued making investments related to our shift of cloud infrastructure to third party cloud service providers.
Our performance in the quarter clearly shows the resiliency, we have and what is possible from a profitability perspective over the long term.
Now, let's turn to the cash flow statement and balance sheet. Our Q2 free cash flow increased 27% over Q2, 2000 $19 million to $48 million, representing a free cash flow margin of 20.8%.
Again, we acted quickly to preserve our strong balance sheet and we believe the actions taken to ensure we have financial flexibility needed to manage a wide array of outcomes that may result from this pandemic.
We ended the quarter with $458 million a net debt.
Our capital strategy calls for a debt to EBITDA ratio of less than 3.5 times and that the into Q2, we stood at 2.2 times with a 191 million of borrowing capacity.
We continue making necessary innovation and infrastructure investments to support our cloud operations amounting to 3 million in Capex in 11 nine for capitalized software development for the quarter.
Also in June we entered into an agreement to purchase our Charleston headquarters building and the adjacent land, which we currently leased the transaction will generate significant cost savings will determine the lease and gives us additional flexibility as we think I had to our planned phase two building.
We expect the transaction to close during the second half of 2020 with an upfront cash outlay of approximately $13 million.
In summary, we executed very well in the second quarter, while remaining critically focus on the success of our customers and the health an economic stability of our employees. We continue to model a wide array of possible scenarios refining our assumptions as more information becomes available, but the challenge is still predicting the duration of magnitude it depends.
And the ultimate impact on our business the results in a quarter or clear reflection of our stability of the stability of our customer base. The under appreciated resiliency of the market, we serve and our ability to scale profitability and cash flow.
As Mike and I've said, all along this is a balanced story and despite the uncertainties of current environment, we're firmly committed to creating value for our shareholders why continuing to execute against our four point growth strategy.
With that I'd like to open up the line for your questions.
Thank you at this time of the conducting a question answer session if you'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question can you.
You mean for start to if we'd like to remove your question from the Kim for participants using speaker equipment, you may be necessary to pick up your handset before pressing the star.
Our first question comes from the line of Tom Roderick with Stifel. Please proceed with your question.
Hi, guys. Thank you for taking my questions I appreciate it.
Mike Let me just the first one here you I think this is a really interesting and important pivot in the business model at a time, where the end markets are challenged.
I'd love to hear a little bit more about where you're finding extra ways to sort of taking cost out of the business and then it's probably a good discussion for fourq for all of you in the light here, but.
How long can you take those costs out of the mall in other words when growth starts to come back.
Any will come back travel will come back. So there's some discretionary cost that stayed down for right now, but we'll come back at some point just take us through in a little bit more detailed you don't mines in the structural changes that you think about the philosophical and.
Giving us some more margin while revenue growth is impaired because at the end markets where that comes from and then what sort of growth initiatives have to be put on the back burner for that to happen.
Sure Tom Thanks.
So a couple of things related to that.
We're driving more productivity in many parts of the business. So in areas like sales for example.
We've actually increased investments and things like our digital capabilities, so driving leads and.
Driving better productivity.
Per sales rep in team through digital platforms is something we started about a year ago in a bigger way and weve pretty significantly increased our spend there this year, which is to drive more sales productivity I.E. more bookings per person.
Although this environment is a bit challenged as you mentioned right now related to that.
Our revenue came in in the quarter lower than our original plan into beginning in the year, but higher than our.
Early plan.
And the beginning of the pandemic markets are pretty resilient.
Also from a cost standpoint.
We have for the for the first time. This year, we havent had to have a organizational change I've talked about there's quite a bit where we've set up the scaled what we call centers of excellence. So one group for engineering, one for professional services one calls.
Center.
Yes every function in the company and that scalable. So we can actually grow the business without having to significantly scale the cost in those areas related to people.
We've also done a fantastic job in the last five years.
Our internal IP groups by automating the company and eliminating hundreds of little pockets of systems to common systems. It allowed us to go remote.
With a two day notice and not Miss a beat operationally, but the key thing is it allows us to scale the business from our margin standpoint, as well because we're all operating on common systems, just a handful of common system. So there's quite a few areas, where we now can drive scalability.
And some of our cost will come back Tony mentioned in the prepared remarks.
We shut off before when K Max out come back January 1st It was a few other things that will come back but in the main.
This result in Q2 is a representative example of the future.
Great. That's really got thank you and then Mike would you take just a second to address some of the recent media reports regarding the ransomware attack that benefit it impacted the company back in the spring. It seems as though was an issue that was sort of put to bed back in may I understand the communication, but customers are going out right now so I guess a question.
Runs around it would just be number one are you confident that the issue is entirely in the review mirror number two Howard customer is reacting to your communication and should we worry about any any impact from lingering churn associated with that issue and then number three are there any.
Down the road financial charges that we need to be aware for or is this all been sort of taking care of buttoned up inside of the numbers that we can say.
Sure happy to do that I just related to that I just wanted to start off for any customers that might be listening on the call.
Because I know they do and they also listen to the once recorded.
I've been talking to a lot of customers I'd like to just apologize on behalf of Blackbaud for the incident over the last five years, we've made significant investments to build a not cyber security practice significant and we follow industry best practices, we conduct ongoing risk assessments and.
Simulations, we aggressively tests security of our solutions and our infrastructure, including with several third party experts that come in which is the best practice and during the quarter, we discovered and stopped at sophisticated attempted ransomware attack.
Like a lot of companies, we get millions of intrusion attempt a month.
Unfortunately, one got in to a subset of our customers in a subset of our backup environment.
And based on that nature the incident in our research, including with several third party experts and in investigation folks, including law enforcement that we work with with no reason to believe that any day that went beyond the cyber criminal or will be disseminated or made available publicly.
So the isn't did not reach a majority of our host environments and it did impact a subset of our customers who were quickly notified a couple of weeks ago. The goal of the.
This.
Any cybercriminal.
To get control other companies production environment, and we were able to detect and eradicate and stop that so that never happened. So it's unfortunate, but we did not have a service disruption.
Because of this and we're working with all of our customers that were involved here to help them to help them through this.
So.
My level of confidence here related to this one particular area is we did.
Remediate this area, we tested it we had outside firms test it and we're pretty confident that is one area has been shored up if you will it's unfortunate that has happened because this obviously wasn't discovered by us or the outside firms we work with over the last several years.
And I think we're in a good spot related to the amount of investment.
Expertise, we have the folks have hard from outside the company that has significant backgrounds in space.
And the outside companies that we work with our tops in their fields. So it's a big focus of ours.
And it's unfortunate happened but.
We remain quite diligent and driving as part of the business hard and Tom just follow up on your other to thus far our renewal rates as we talked about in the prepared comments are doing very well so through July.
Which you know Q2 in the key to first part of Q3, our biggest seasonality from renewals renewal rates are running ahead of our original budget.
Which is great news, we originally thought and some of the early scenarios that we might see increased churn because.
Potential business failures et cetera, with the pandemic, but we've actually continue to run ahead of our original plan.
And to the cost you'll see when the Q comes out.
We currently don't anticipate any kind of material financial impact for the company, we do have insurance coverage.
Come into play here as well, but currently and in this Q, you'll see we did not record a charge.
As we currently do not anticipate anything material to hit our financials.
Thank you, ladies and gentlemen, and the interest of time, we'd like to ask you to each keep to one question and one follow up.
Our next question comes from the line Rob with Baird. Please proceed with your question.
Great. Thank you guys for taking my question and good morning.
A follow up Ah Tony to your comment.
Oh around.
The renewal environment.
Obviously really meaningful renewals in this quarter and in the second half.
And just wanted to get if I could a little bit more color on what you're hearing from customers.
And.
So what gives you confidence that that renewal.
Opportunity continue to run ahead of plan as it had been through July.
Particularly in a in an environment, that's lower touch for for your Salesforce and then I just had one quick follow up.
Thanks, Rob.
You know were effectively seven months for the year already the biggest chunk of renewals for us by far due to seasonality is really June and July timeframe, you see that a bit in accounts receivable balances right and deferred balances into Q2 as well those are our significant higher than you normally see throughout the year because of.
That surge in the renewal timing a lot of that fiscal year ends were nonprofits schools et cetera, just the buying patterns, there and so yes being through July and knowing that both gross and net dollar renewals are ahead of budget is a really good indication that our products are.
As stickier stickier than we originally thought even inclusive of the impacts of the pandemic I think we talked about last call bit yes, I think the market is appreciating more now the importance of cloud base.
Modern technology stacks.
It's proving invaluable to private K 12 schools and higher at another places.
So we feel really good about it the rest of the year, it's hard to say, where we have some incremental bad debt. Yes, we increased you'll see that in the financials increased our bad debt accruals slightly.
In the quarter in anticipation of some increased default, which has to be expected I think in these economic times, but nothing that's out of line with what we expected.
Original scenarios, we've not really seen a huge indication of folks wanting to take advantage of extended payment terms. We also develop some financing options with third parties were offering. So we're doing a lot of stuff to try and help customers, where we can to ensure their longevity.
Thus far have been pretty pleased with what we've seen for volumes across all of those I feel really good about the trends on the on Oprah Hey, Rob It's Mike just to add a little to that so one point to just reiterate is the renewals. The higher peak is Q2 in July and the renewals are higher than our original.
Budget.
In the beginning of year, which is really good news and the other thing I'll mention is.
Our systems are predominantly systems of record our solutions and they're not discretionary.
And so that makes them quite important to the core operations our customers. We're seeing some good results there.
Thanks, Mike that's helpful. Yet actually my follow up with touching on that so as we've spoken with some of your go to follow up on Tom Roderick question on them on the malware attack you know as we spoken with some of your.
Customers, particularly in the K through 12.
You know area, where you guys really dominate.
What's been coming back to us is that.
These guys are absolutely sticking essential to our process and you know, particularly at the time of remote learning and your your interaction with go classroom and stuff. It keeps coming up is very important.
I'm just wondering it sounds as if and I can't recall, if I read this end to end up in the press or in your posting on to your customers about the attack, but I believe it happened in one of your Colo facilities and since what we're hearing from your customers is hey. These guys are you know a SaaS platform. It is essential to us.
It should this you know went up a lot of obviously you guys had been running just kind of dual cost structure around multitenant infrastructure to service as well as Colo could this served to accelerate your move off of Colo and it would seem that at this time you know your customers would likely be via open to that thank you very much.
Yes, Rob we're going to we're going to put a higher emphasis on that we've been pushing that pretty hard anyway, and it's complex right. It's not just pick up and move it's changed some of the older infrastructure to new so it's an engineering effort not just a operations effort to migrate customers.
But we will continue on that it's important and we've got a good partnership.
With Microsoft on their as your platform.
And with Amazon Mws in that regard so still a big focus of ours for sure.
Thank you.
You bet.
Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.
Hi, gentlemen, thanks for taking the questions. So I think there was in the prepared remarks, there was a comment on focusing on on products and in end markets that at the highest long term value I hope I'm not perfect phrasing that incorrectly, but maybe help us on.
What some of those products are markets are and if there was any effort to kind of consolidate some of the product portfolio. As you think about next several years here, what I call it looks like going forward.
Sure Brian.
It's the core products that you're familiar with.
So we are just driving those.
As much as weekend.
They are quite resilient from a renewal standpoint, as I mentioned their system of record.
What's happened with this entire pandemic situation.
For all of our vertical markets that we serve is the customers that are blocked by customers were up and operating.
Many of the ones that Werent, if they had on premise systems had a hard time and so the need for cloud solutions.
Has been really highlighted.
Which is a positive I think for our markets, we serve and for Blackbaud.
So thats really positive so what's the core products that you're familiar with your second part of your question, we have been pretty aggressively.
Sunsetting solutions over the years as you know we've completed I think 24 and the last five years, we continue to do that we announced we've got product called everyday hero those customers can move over to just giving that's underway in so we do continue to do that in.
Some of our smaller older solutions to move customers to the more modern platforms. It's a small part of the business.
From a financial standpoint, but it helps focus our engineering teams to on all the go forward platform. So I would think of that is just normal course of operations that we've been doing for years now.
Understood and obviously you guys give a lot of color on the health of the business with renewals in bookings and things like that I guess Im just curious.
You'd be able to parse out the bookings in terms of expansion with existing customers versus maybe net new logos.
Yes, I can see how look you have a lot of different offerings, you've had good let's sell more into the base given the current pandemic, but maybe new logos are hurting harder to get it is that maybe what's playing out I'm just kind of curious on what you're seeing from a bookings.
Brian Yeah, we don't break those out separately as you know but.
Yes, theres some pressure on on pipeline building and bookings as we talked about which has no surprise.
But also the deals in the quarter, we closed both existing customers and new logos, yes, we close some really nice deals in a quarter.
So we're pretty happy about that it's not at our current are originally planned.
Numbers.
Which is a challenge, but yes some of our markets are in a different place than others right. So it depends on the type of vertical market.
Some are doing quite fine and surviving well some are struggling a little bit more based on the type of institution. So it's kind of a mixed story related to both recurring revenue and then in the bookings.
But we're we're holding our own and closing some nice deals throughout the quarter and continuing to build pipeline not the levels of originally planned but continuing to build pipeline.
Thank you. Our next question comes from the line.
Jewelry.
Please proceed with your question.
Hey, guys. Thanks, so much or for taking my questions.
One of the start maybe a little bit philosophically as we think about well cost saving measures that you're implementing and that takes the pandemic.
It's kind of sense when when it comes.
So kind of snapping back investments now how do you how do you think about that and in other words, how do you I suppose.
The potential.
Not by dialing back or not increasing your investments in increasing your hiring at right time, and having that show up as kind of future.
Dragged on a new bookings lets say next year heading out of the pandemic and thats not a follow up.
Sure as Mike.
So.
If you look at our second quarter results.
It's a representative of what we're going to look like.
In the future.
We're not going up wild swings if you will.
We are hiring in sales as we speak so we are back filling open positions.
Where needed with an eye toward bookings in the last half of the year and mostly 2021.
Bookings and revenue. So we started in the beginning of the corridor in the beginning of the pandemic with the hiring freeze to tenet get a sense of where we were going to end up we had small workforce reduction Unfortunately, the beginning of the quarter.
Well that filling sales head count right now.
So we're we're focused on you know the model that you've seen in Q2 is that sort of a representative example of what we're going to look like.
In I'd caution you on we still have uncertainty in some of our markets right because because there are uncertain. So it's a it's a mix but.
We're going to look a lot like Q2, I think going forward.
With some uncertainty related to bookings.
And revenue given the the markets are uncertain.
Alright, great that's helpful.
And then tell you wanted to ask about that recurring gross margin a line I know, there's obviously, a tenant moving components and whatnot, but.
But.
Still looks like it was down about 130 basis points year over year can you maybe tell us what's what's going on there any any mix answer or other factors or should be aware of and then how should we in general to think about that line long pole. Thanks.
Yeah regime.
I think said to cap on Mike's comment to just as we look ahead, we feel pretty comfortable with the resiliency in the overall business and the margin structure and you've seen how quickly pit we pivoted our guide for the year in investments, we made had us running at more about a 16%.
Non-GAAP EBIT, we were very quickly through these fairly aggressive actions to drive 23.5% and that's inclusive of some charges increased bad debt one of the things that you're seeing on the gross margin side. That's inclusive in there that we had a four plus million dollar charge for end of support products back.
To the earlier discussion this morning on shrieking the portfolio and consolidating we continue to do that we've done that for years, and we took a little over $4 million charge up and cost of goods related in the support on some products and so thats what was the biggest driver within their along with the normal.
Other incremental costs, we've got to trying to move to the third party cloud increased amortization of capitalized software some of those normal things input.
Near term pressure on gross margins that we will continue for a bit and then I think to mikes comments in the prior discussion.
If theres a lot of uncertainty of what giving will look like in Q3 in Q4 and when this pandemic will end in so.
We're not at this point comfortable and what the topline we'll look at and so we've taken these cost actions to focus a.
A bit more on profitability and free cash flows we feel really comfortable that we could do 20% plus kind of non-GAAP EBIT margins, even if we see some additional downturn on the revenue side. So I think the models in good shape, we feel good about actions we've taken on the longer term, but again to make sure on your question.
All of that Delta you're seeing on the gross margin client could really be isolated larger to this that four plus nine no charge we took.
Thank you. Our next question comes from the line.
Thank you. Please proceed with your question.
Hi, guys. Good morning, Thanks for taking my question I.
I guess wanted to look at a couple different verticals that you've made a lot of investments over the past couple of years and that are sort of hot topics now one being the the CSR corporate social responsibility market where.
Obviously.
Companies are focused on the employee experience right now and whether that means enabling work from home or anywhere but also supporting.
The social movement and other elements and People's lives curious, what you're seeing from a demand perspective from a week the large corporate customers that you've started to engage with has there been an uptick in both interest in sort of your cross platform in a lot of what's your offering.
As well as supporting other peer to peer pipe.
Got Smith with corporate matching and things of that nature.
Sure Mike.
Yeah. The year Cod acquisition is 18 months old now and it's going Super well.
It's a great space to be in and that's a fantastic platform. There's lots of interest its an expanding market and companies of all sizes are interested in.
Moving their workforce toward giving and volunteering and having a modern platform to help them do that including matching gifts. So.
Acquisition has gone really well, there's a lot of interest business is growing nicely.
It's a great fit for us.
So we're really excited 18 months in on the year caused platform and the level of interest and that the bookings and win rates there we're doing great.
Great and then following up on onshore.
Occasion, as well, obviously a lot of uncertainty in terms of.
Well well kids feedback on campus whats that's going to look like you know some have gone fully virtual someone talked about opening backed up.
How how has that impacted that being a relatively new vertical for you with with a more expensive products that beyond just fund raising.
Are you seeing more interested in having a wrap around solution for both you know sort of in class student management and overall fund raising maybe talk about what are the bookings are pipeline development have Ben.
Around that given that youve sort of been investing.
Around there's the build out of more vertical teams, but certainly a lot of ER unknowns to be had there.
Sure Yeah, we've had a vertical team there for several years now.
It's not a new market for US right, there's some new products that we brought to market.
But the what's interesting about that is art solutions support higher Ed institutions, whether they have students on campus or virtual so our platform support both environments and for high Red institutions, Yes, The foundation in fundraising.
I think is becoming even more important for them. So theres a big focus on.
Foundations and fund raising.
In higher education institutions, the new platform, we brought to market just fairly recently.
Last year last part of last year.
It's focused on specific.
Hi, I read institution types and not all and Thats. What was designed is to start in the specific smaller university market and it's still early days on that we have customers' lives, we keep selling that platform.
And so it's still early days, because it's fairly new and we're continuing to add capabilities with.
Input from our early adopter.
Customers. So that's a big market for us on the on the foundation side and I personally believe that the the fund raising side of this is going to be even more important for pirate institutions, and we're positioned really well there.
From the booking standpoint, thats, a little bit mixed.
Universities are quite busy.
Trying to wrap up or they did wrap up the spring semester than thinking about you know, if they're opening or not and how.
In the fall.
So a lot of them are making decisions that are kind of mixed you know part students show up a couple of days, we the other days theyre going to be remote and sort of stagger.
We cheap.
During the marketplace related to that but how they open doesn't impact.
Our relations or our revenue right because they could again they can have students on campus or not and they need cloud solutions.
Same with our key 12 customers gone away.
Thank you. Our next question comes from the line of Kirk.
Core ISI. Please proceed with your question.
Yes, thanks very much.
One maybe for Mike and then a follow up for Tony I guess, just Mike when you're talking to customers. These days is it a REIT reprioritization of the budget or is the budget in general under served scrutiny given the macroeconomic conditions I'm. Just wondering do you feel like you're getting pushed down the priority less because of schools have to.
Spend more on remote learnings technologies, maybe outside what you all do.
Security things like that I was just kind of curious how do you frame that and I assume it's maybe a little bit different auto vertical by vertical basis.
Yes, seven different by vertical but everyone is talking about needing cloud solutions for school specifically.
Yeah, we are the remote learning for K 12 schools for example, they all flipped to virtual and they're using the same blackbaud solutions. The only difference is were integrated to Google platforms or presume because they needed. The video component we were already integrated to those platforms, but the core solution.
On the school all the mobile solutions the parents use that solutions for classroom scheduling and attendance and learning management and tuition management that they use when the kids are in the building is the same platform. They use when the kids are home, which is our platform. So we are.
The cloud remote platform for schools and.
Black line customers as I mentioned, they want virtual without missing a beat.
And that is that story for all of our verticals.
Really cool thing happened is a lot of our verticals came to us when they all at remote and for some like for.
Nonprofits, we reacted quite quickly and we had webinars with thousands and thousands of customers. We put together a three part webinars called the resilient nonprofit and basically showed them how to run virtual events with the same blackbaud solutions that they use all the time when the event.
Yes were physical events, because our solution support belt.
And we had customers in the Webinars talking about success stories on virtual events.
The other thing that happened is customers by vertical came through as quickly and asked for new capabilities and in every case in a week or two we discovered what they needed we built it we tested it put into production and.
And these are things like membership changes for museums too.
Faith based institutions asking for capabilities for small group gatherings.
And it goes on and on and on so Weve quickly.
From an engineering standpoint put new capabilities into our solutions to help them, but all of our solutions because they're in the cloud and they can run the operations virtually really facilitated all our customers to go remote go virtual they didnt have to change or.
Looking at other vendors because our again our solutions do both whether the.
And the end folks students are consistent with our showing up or not.
Okay, and then maybe just.
Nothing, but I guess, where is your math, but you feel like you're gaining share of the budget, even though the budget as a whole is coming under pressure is that a fairway sort of thinking about it.
Yes, Theres no I mean that budget wise the solutions, we provide your system of record. So you know the our end customers have to have a solution like ours or from someone that we compete with right it's not discretionary.
So it's a court system that they run their institution on and for for fund raising its for driving revenue for our solutions like Church management education, and performing Arts. It's the course solution that runs the operation and the revenue side.
Okay. That's helpful and then maybe Jeff Tony when we think about the bottom line outperformance this quarter I know some of these things are onetime in nature.
How do you think about sort of some of the learnings you picked up over the last six months being maybe maybe a little bit more permanent in terms of driving a higher level of operating leverage you over the long term I know you guys are trying to create the right balance here between growth and leveraging the model but its.
There are opportunities on the real estate front on the you know just.
Anything you could think of I mean, maybe on the sales and marketing front doing more virtually you. How are you sort of thinking about that I guess at least anecdotally right now.
Yes weaker we still have a lot of opportunities across the business that some of those we've been working on for some period of time now Mike spoke to the efforts to really improve the productivity in sales and marketing, we're still not where we want to be on that front. We've spent a lot of time over the last three years reorganizing and change top brands and all that.
Things were very disruptive and we really help this year was going to be that year that we saw.
Real productivity improvements start to show up within sales and then pandemic hit us. So that will continue to be a big focus we think theres big opportunities on that front over the next few years. The facility optimization efforts that we started a couple of years ago will pay big dividends going forward, we think theres other opportunities.
We're going to be purchasing our headquarters building, we think thats, a great opportunity to improve profitability cash flow over.
Over the coming years versus the leasing option, especially in today's very low interest rates gives us a lot more flexibility as well, there's still a lot opportunity within our workforce, which has a big piece of our cost structure and then ultimately to get to the third party crowded out of those redundant costs as amortization of cap software plateaus, yes, there are several key.
The drivers on the profitability front the gives us comfort as I said, a little earlier in the call that we think wouldn't do 20% plus non-GAAP EBIT margins, which would be 24% plus EBITDA margins, even with the revenue difficulties that we may have to deal with the middle of the pandemic, which would bode.
Well I think as revenue start to rebound coming out of this whenever that is later next year or going into 2022.
So I feel really good that we can sustain a heightened profitability level.
We previously just couple of years go before we made some of these heightened investments in sales marketing, we're running at 20 and 21% non-GAAP EBIT. So thats clear that we can do that we believe we have upside from there on the long term.
Thank you. Our next question comes from the line of March about with benchmark. Please proceed with your question.
Hi, Thank you for taking my question just one question Mike for you in your prepared remarks, you mentioned that you're offering some new pricing options to suit the changing needs of customers. Just wondering if you could just going a little bit more detail on those pricing options.
Yeah, we do that.
Often when we look at customers have different sizes.
It's nothing new for US, we just look at different bundles and what makes sense by.
Vertical market, what's new for US, though is we have more financing options. So we partnered with some we connected with third parties.
To create some financing options because of this pandemic to help our customers finance our solutions in new ways.
Which has been quite helpful and quite well received by our sales teams and our customers.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Ryan Macdonald with Needham and company. Please proceed with your question.
Yes, good morning, Mike and Tony Mike You mentioned in the early in the prepared remarks in regards to faith based communities that Dennis survey that a number so about the same or increased giving during this time and then an even greater amount, we're able to have sufficient funds to kind of go through this rough period I'd love to know how that's translating into.
You sort of bookings and ability to start projects, particularly for the faith based community solution and.
Undergo that digital transformation at this time.
Yes, sure we continue to do well in that space and.
We've had a footprint in there and the fundraising side for a while and we now have a.
Research management.
Got form that we brought to market last fall.
And we continue to sign customers and go live with customers the value prop doesn't really change during the pandemic for these faith based institutions when they go live with us.
They are consolidating a dozen or so systems in the one and so those are really good ROI, there's a simplification of their operations, there's better reporting for them.
We continue to drive more and more capabilities in that platform 'cause it's up a high velocity platform meeting, we can put new capabilities into production in a very high frequency and so we're live with customers. Many customers, we keep getting feedback from the user groups and the.
The system is just ever improving and so we remain very bullish and excited about this market in our ability to drive success for the customers and for black on in this space.
Excellent and just a quick follow up for you Tony can you give an update on on what RPL was during the quarter and perhaps percent of that which was current.
Yes, it's not something that I have handy with me I'd have to it we circle back with you on that one at site right.
Yeah, I always think lot.
Thank you ladies.
Ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Dan on for any final comments. Thank you operator, I'll, just close by saying I'm incredibly proud of our employees and their dedication for serving our customers at a very high standard during these pretty uncertain times.
We continue to showcase ourselves as the best long term partner for our customers.
I believe this is further elevating our status as a leader in the market and positioning us for long term success. The pandemic has created some interesting challenges.
For all of US ensue, our balanced strategy, we're committed to driving value for our shareholders.
Tony I look forward to updating you on our progress on the next earnings call. Thanks, everyone.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.