Q3 2020 Blackbaud Inc Earnings Call

October 30, 2020

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Good day and welcome some black <unk> third quarter 2020 earnings call. Today's conference is being recorded I would now like the conference over to Mark Furlong Senior director of Finance. Please go ahead Sir.

Good morning, everyone. Thanks for joining us on Blackballed third quarter 2020 earnings call. Joining me on the call today or might you know any black box, president and CEO and Tony bore Blackbaud Executive Vice President.

And CFO Michael.

Mike and Tony will make prepared comments and then we will open up the line for your questions.

Please note that our comments today contain forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Please refer to our most recent form 10-K, and other SEC filings for more information on those risks, 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 only to non-GAAP financial measures on this call.

Please note that non-GAAP financial measures should not be considered in isolation from or as a 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 fourth quarter, our team will be virtually attending the Stifel 2020, virtual Midwest one on one growth conference benchmarks of virtual Technology conference on the 10th annual Needham Virtual SaaS one on one conference.

The Stephens investment conference 2020, and the Raymond James Technology Conference.

We will also be participating in virtual meetings hosted by Baird with that I'll hand, the call over to Mike.

Thanks Mark.

Good morning, everyone and thanks for joining our call today.

Our third quarter results clearly show that we are pivoting more towards profitability and earnings growth with a keen focus also towards improving our revenue growth rate coming out of this pandemic. This.

This morning, I'll share a few brief updates from the quarter before turning it over to Tony to cover the financials in more detail.

First I want to start by saying, thank you to our employees.

For their dedication to serving our customers and a very high standard and the tremendous job they've done in 2020 adapting to the new work environment.

I'm incredibly proud of how we have stepped up to support the unique needs of our customers as we all navigate these new challenges, it's really a testament to the people and culture of Blackbaud and our unmatched commitment to the social good sector.

I would also like to provide a brief update related to our recent security incident, it's unfortunate the cyber attack happened and again on behalf of Blackrock I'd like to apologize to our customers involved in this incident.

These types of cyber threats are on the rise and over the last several years Blackbaud has invested significantly in terms of dollars and human resources to enhance our cyber security program in preparation for an attack like this.

Our top priority supporting our customers.

Being diligent in our efforts to help them through this and ensure they have the information they need.

Through our forensics investigation, we were able to understand exactly how this occurred and we've remediated the vulnerability, which was tied to one of our early generation products. We are incorporating lessons learned from this incident to continue improving our cyber security program and further harden our.

Permits while being transparent with our customers on our progress.

Ill remind you the majority of our customers and the majority of our private cloud environment or not part of this incident and it did not involve solutions and our public cloud environments as can be expected to security incident and resulted in a number of legal claims and regulatory inquiries, we carry insurance policy.

These that we believe will provide coverage for a significant portion of current and expected future losses and expenses related to the security incident.

Although this is inherently difficult to predict.

Turning to the quarter each.

Each of our vertical markets continued to contend with the unique challenges posed by this pandemic, but one universal theme is the need to employ new strategies to advance their missions with a more digital first mindset and were hearing this in the market as organizations plant begin to plan for the future be underpinned.

Nick.

Digital transformation has shifted from a long term strategy to a daily reality as organizations across the market have adopted to new and distributed ways of working we believe this shift will play a powerful role in our long term opportunity as new customers seek market leading sales.

Offer solutions for their organizations existing customers consider expanding the blackbird solutions in their tech stack.

Uncertainty and complexity of today's environment has created some short term challenges for these organizations and as a result impacted our team's ability to build new pipeline and elongated sales cycles, which are resulting in booking falling short of budget for the quarter and year to date, we expect a short.

Paul to put pressure on both 2020, and 2021 revenues and as I've said before we believe the challenges on markets face today will be a catalyst for driving digital transformation across the socially good sector and having cloud software in place to support the missions of these organizations.

Has never been more critical.

It is clear socially good organizations agree as evidenced by the record setting attendance at our annual user conference BB Con earlier this month.

Reimagine virtual format enabled us to significantly expand the reach of the event as we welcomed over 38000 registrations for over 70 countries.

That's equivalent to well over a decade of our historic levels and by far the greatest number of prospective customers, we've ever hosted which shows a significant interest in blackbaud and our cloud solutions can help solve the challenges and opportunities. So it's a good organizations face today.

The resolving theme throughout the conference was the resiliency of the associated community and we've received high marks for the interactive and engaging experience, we're able to bring to our customers.

Since the pandemic started we've been agile as an organization with a relentless focus on driving value and outcomes for our customers and enabling them to quickly pivot their own operations and strategic efforts.

In addition to the immense number of resources, we provide to the market at no cost. We have also been reprioritizing and expediting product enhancements to support our customers' changing needs.

For example, during BD Con, we highlighted a variety of innovations across our verticals and help customers adopt during COVID-19, such as fitness tracking integration and blackboards peer to peer fund raising portfolio.

A new virtual prayer wall, then enables congregants and faith organizations to share and respond to prayer requests online text messaging capabilities for scholarship directors and higher education institutions to ensure no funds were going on utilized.

Any expansion of the global capabilities of your cause CSR connect making it easier for companies to bring employees across geographies together in support of causes around the world.

These are just a few of the many product announcements made during the quarter.

As you know the first of our four growth strategies is delight customers with innovative cloud solutions and our commitment to innovation also extends outside the walls of black fun as we recognize the unique needs associated organizations across the markets we serve.

Blackbaud Sky platform is powering an unprecedented level of innovation fueled by our engineers and enabling a growing developer community and our partner network with the tools to extend and enhance customer's black cloud solutions.

Many black line products are built with opening Cpis allowed for seamless integration with software from other providers, making it easier than ever for our customers to meet their organizations unique needs.

Now in addition to the option to create a custom solution. We recently released the Blackrock marketplace offering curated third party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact by enhancing their best of breed Blackrock solutions with specialized capabilities.

Like connecting the bidders and a fund raising auction texting volunteers of an upcoming event.

Tracking branded merchandise purchased in an online store are automating outreach to donors eligible for a matching gifts.

Also building on our partnership with Microsoft We recently released a Microsoft power platform certified connector, enabling non developers social good organizations to integrate data and improve workflows between blackboards razor's edge NXT and hundreds of other applications.

And we announced a robust integration of eliminate online team razor with salesforce, enabling organizations leveraging sales force as their CRM to drive truly multichannel campaigns and leverage the best in class fundraising and engagement functionality within the limiting online and team.

Laser platform.

In addition to openness and our products. We're also committed to building a more inclusive tech community focused on social good.

Last year, we announced the social good startup challenge in partnership with 1 million by $1 million initiator, We've announced we've expanded this initiative into the black, but social good startup program our year long accelerator designed to support innovative start ups with the potential to impact.

The ecosystem of good.

And alignment with our commitment to diversity in the Tech community.

We will be focusing our January 2021 cohort on diverse founders black.

Blackrock steadfast in our commitment to innovation to enable with the success of our customers, which is why we're accelerating investments in areas like R&D security and the shift to third party cloud service providers and delivering rapid innovation is just one way we're positioning the company to be stronger post pandemic.

We've also been taking the lessons learned over the past 12 months and reevaluating elements of our workforce strategy as we define the future of work a black box in anticipation of our offices reopening.

We have a culture built on creating employee experiences and programs at further develop and attract the best talent and promote a diverse and inclusive environment.

For us this means adjusting our workforce strategy to provide more flexibility for employees to work remotely.

We've proven we can operate effectively as a remote workforce and this change enhances the positive employee experience. We want every employee to have black on it.

It also expands our access to a larger and more diverse talent pool empowers our leaders to make decisions based on skills and business need rather than location and it creates efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative work spaces.

Within our offices.

We're also applying a digital first mindset to how we operate both in support of our employees and our customers. This includes the investments we've made in digital marketing to enhance our digital footprint and enable us to be more prescriptive and cost effective and our marketing efforts.

We've seen some solid early proof points, such as our investment in market, leading conversational AI software, allowing us to engage with customers on their time, enabling us to qualify leads 24 by seven without adding headcount ultimately increasing lead generation and accelerating sales cycles.

Given the early success, we expanded this functionality globally in Q3.

We believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market and this is just one example of how we continue to put a heightened focused on lead generation and driving sales effectiveness as we look ahead to 2021 bookings.

We've had a singular focus on the social good sector for nearly 40 years, and we remain very well positioned as a leader in this market and the best long term partner for social good organizations I'm excited about the changes, we're making to enhance the future of work at Blackrock from employees, while delivering unmatched innovation.

Our customers are resilient and continue to find creative ways to ensure they can continue to deliver on their missions. The challenges posed to our customers. During the pandemic have create a short term uncertainty and our revenue outlook and will limit our ability to drive near term revenue growth as such.

We've made a pivot to place greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable over the long term, we see an opportunity to drive meaningful earnings growth as we execute our balanced strategy with a sharper focus on profitability with that I'll turn the call over to Tom.

Before we open it up for queuing Tony.

Thanks, Mike Good morning, everyone I'll briefly cover our key third quarter highlights and underlying trends before opening up the line for your questions.

You can refer to yesterday's press release and.

And investor materials posted to our website for the full detail our Q3 performance.

Turning to our results as we said the current environment is putting pressure on near term revenue growth and third quarter revenue declined 2.9% versus Q3 of 2019 with recurring revenue declining 2.6% on an organic basis.

This was largely in line with our latest planning scenarios. The decline in recurring revenue was primarily driven by lower transactional revenue in the quarter as customers continued to be challenged with pandemic related declines in admissions and in person events that have had to be shifted online postponed or altogether cancelled.

While we've seen encouraging signs of customers offsetting the temporary losses in volume tied to these activities with online events and campaigns transactional revenue remains at least our least predictable revenue source given uncertainty around length and durations of the pandemic our contracted recurring revenue performed well as renewals continue to.

Trend ahead of our original plan with over three quarters of 2020 now behind US looking ahead, we expect the shortfall in pipeline and bookings will put pressure on our fourth quarter and more so on full year 2021 revenue.

Consistent with Q1 and Q2 of this year, we reclassified approximately $4 million of retained and managed services that would have historically been presented in recurring revenue to one time services and other revenue.

This reclassification reduced our organic recurring revenue growth rate by approximately 200 basis points or 140 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 third quarter gross margin was 60.1% we generated operating income of $48 million, representing an operating margin of 22.4% and diluted earnings per share of 73 cents similar to last quarter. Our early actions in response to the pandemic generated a significant.

Good cost reduction for the quarter.

While not all of these actions will repeat next year. The third quarter is indicative of our ability to elevate our margin profile inclusive of near term pressure on revenues and critical investments in the business related areas like engineering security and our shift of cloud infrastructure to third party cloud service providers.

Many of you are familiar with the rule of 40, we're confident in our ability to deliver a sustainable 20 plus percent operating margin going forward and we believe we have ample room to improve on the rule 40 through the combination of growth and long term opportunity to scale profitability much more significantly.

Now, let's turn to the cash flow statement balance sheet.

Our Q3 free cash flow was $41 million, representing a free cash flow margin of 19.2% during the quarter. We completed the purchase of our Charleston headquarters building, an adjacent land, which we currently lease the upfront cash outlay of the transaction was approximately $16 million, which reduced our third quarter free.

Cash flow margin by roughly 740 basis points.

This is part of our newly expanded real estate strategy focused on optimizing our footprint for the future of work at Blackbaud, including New exit plan for certain office leases around the globe.

These early lease terminations will generate significant cost savings going forward and will give us additional flexibility as we evolve our workforce strategy.

We expect the majority of these lease terminations that closed during the fourth quarter with a onetime cash outlay of between 20 and $25 million we.

We ended the quarter with $478 million in net debt our capital strategy strategy calls for a debt to EBITDA ratio of less than 3.5 times and at the end of Q3, we stood at 2.0 times with $230 million of borrowing capacity.

Our current debt is scheduled to mature in June of 2022, and we are currently in the process of amending expanding and extending our debt facility to provide us additional capacity and flexibility for the future.

In summary, our customers continue to navigate the challenges caused by the pandemic, which will put pressure on our ability to drive near term revenue growth in 2020 and 2021. Despite the uncertainty in today's environment. We believe we have a significant opportunity in front of us and we are well positioned to continue making the critical investments necessary to.

Ensure the long term success of the business the third quarter reflects our ability to manage a wide array of possible outcomes that could result from the pandemic, while remaining committed to driving increased shareholder value through profitability and earnings growth.

With that I'd like to open up the line for your questions.

Thank you, ladies and gentlemen, we will now.

A question came signal by pressing star one on your telephone keypad, if they're using a speaker sound. Please check your mute sense is turned off to allow your seeing Jeremy.

So again as a reminder, please press star one to ask a question. Please limit yourself to one question plus a follow up sell assets similar to as many questions as possible you will now take our first question from Tom Roderick of Stifel. Your line is now open.

Hi, everybody. Thanks for thanks for taking my questions morning. So.

Mike Let me ask your first question is just around the transactional side of the business I mean, we look back at last quarter, and you put up a pretty nice upside to the quarter relative to a tough time I think the post mortem on it was.

Transactional business delivered particularly well.

That can be that can kind of swing both ways and I wanted to dive in a little bit you can give us a sense as to how much of that business on the payments transactional site is being driven by events versus other other it started giving endeavors.

And then from the perspective of what you can do to gain some visibility in that process or even just that that need the outstanding question of when do we start seeing events coming back how.

How do you sort of think about the outlook of that piece and the transactional business.

Yes sure Tom.

Couple of things here so.

In in Q2, we talked about when transactional and sort of consumption business. We have a couple of the revenue lines there sort of usage payment transactions in Q2, we saw some ships. So we saw some customer tied to drop some customer types go up.

Based on what was happening in the world.

And that drove some pretty decent results in Q2 Q3.

It's interesting on that and that's a great question because Q3 is the summertime right lots of events in the summer time lot of our nonprofit customers do gal.

Gallows run run bikes no.

All of those kind of things and we feel good.

Those didnt happen much in the summertime right.

So that was under pressure for Q3 and that was why that.

That revenue didn't do all that great in Q3, the good thing about that though is those customers are still customers those customers don't need to be re implemented maybe can you just aren't having agreements and we will drive revenue from that.

So they were in contact with all those customers are planning on firing up events again, it's kind of hard to tell the macro where that's going to come back in.

What level, it's going to come back.

Some have rescheduled a little bit for Q4, but not in the main loans. So it's kind of hard to tell so for us.

His future good upside there because all those customers are current customers none of them are.

Risk retention retention remains high but really it's just activity you know in the summer months around those actual events coming back. So we saw some weakness in the third quarter related to that yeah.

I'm certain we're all we're all excited for all those events come back Hey, Thank you for that and then I'll, let either you or Tony take Thats whoever wants to but thinking about that commitment to an operating margin level that that's higher than we've seen historically it sounds like maybe you're happy to come at higher than 20% that's great.

I'm.

Curious, how you think about the investment as it relates to sales and marketing and.

Maybe not as much new product, but how you get into some of the newer markets you are pushing into before the pandemic hit faith based in high rents have been sort of particularly hard hit during this timeframe. How do you think about the resources you want to put into that and what you get out of those resources over the next 12 to 18 months by equity earnings in those two markets.

Sure I'll take that so.

A couple of things there are some moving parts here and we're actually increasing investment in R&D.

In several areas.

That will drive further innovation. So we're doing that at the same time, we're increasing margin intercompany sales and marketing wise, we've seen some really good returns on our digital investments. So we've really ramped up.

Digital investments across the company and actually have learned a lot since March with all of our folks working at home. So all of our folks are selling.

Yes.

Webex and teams online remote we're.

We're doing demos that way on we've really ramped up our investment in digital on lead generation, which is great.

Lead.

Cost per lead is a heck of a lot less that way, we've really scaled up our investments in systems and people who are experts at that and soon a good return I mentioned in my prepared remarks, we put some new tools and conversational AI tools, which is sort of that 24 by seven weighed to qualify leads through.

Fuel software tool so really good.

Scalability, so we're looking to drive better scale that way.

And keep driving you know a good level of our expected bookings. Although obviously this year is tough on top on bookings because because.

There's a coded so our digital investments are really prove it out in my prepared remarks, Tom I talked about your Bbten I just was fantastic 38000, registrations, which is like 10 years ago.

I'd cards, and a huge percentage of that is.

Prospects as well.

The other thing that I'd like to just mentioned.

Kind of tied to your your question around Tony's comment on.

The more margin and long term so we're going to have an investor day on that.

We're going to schedule quite sure when we will have an investor day, and we will once again have a.

Long term aspiration goals.

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Which is in the community has been asking for that a lot. So we're going to do that again as we make this shift to profitability. So we can talk about what that might look like on a longer term basis.

Great.

I appreciate the comments that you had talked already but one follow up on the transaction, we want to make sure we covered off on.

Since we pulled guidance, it's hard for me to discuss.

The models that are out there and how those compare to our internal expectations I'd tell you the transactional revenue.

And actually run a hot to our original plan for the year through Q2.

Fell a little short to our original plan in Q3, but still exceeded our scenario forecasts in Q3, so theres a little bit a disconnect maybe where you guys in that market expectations were versus what we were expecting internally so transactions held up really well and to mikes point, yes, it's really about.

Summer when all those runs and walks and rides and galas.

We're not able to happen because of the social.

Social distancing and all of the other stuff we are dealing with the pandemic and then the other thing I'd note also that we need to keep in mind is services has continued to be come in short of plan for the entire year I think thats to fall I think one it's tough to get resources rounded up with our customers you have to do the work with the pandemic impacts.

Then secondarily it just our continuing trend of moving to the cloud there is just less need for customization and those kind of services that we have done historically, so that trend kind of continues that we've seen for the last couple of years.

Yes, great great detail. Thank you Tony Thank you Mike appreciate it.

Welcome.

Thank you and our next question comes from Ryan Peterson of Raymond James Your line is now open.

Hi, gentlemen, good morning, and thanks for taking the question. So one of the follow up on Tom's last question, then and it sounds like there's a lot of efficiencies gained through some of the digital marketing motions in the digital motions that you guys have put in place I'm just curious how should investors think about the return to growth as maybe some of these macro trends normalize it.

With the sales capacity in these marketing motions, obviously, we don't have a crystal ball and with the macro will be but but I just kind of wonder if wanted to understand conceptually, how we should be thinking about growth in the investments that you're making when that macro stabilized.

Yes, I can might start.

Okay, and then just last one was that yes sure. Thanks, Brian. So we we serve a lot of different types of customers and they are in different situations within.

Right. So you know the educational institutions are all up and running and so we're seeing that.

The norm.

Normalcy transactions and things we have there yet the bookings slowed down there because they all scramble to figure out what to do and how to open with coconut right. If some of them are remote summer combo remote go to go to class.

That's getting behind them now because it kind of built some operating muscle in the last two months running running the schools and then some others like the big non prompts we just talk about where they are they have little or no events, they're planning when those are going to be and we're not sure what the macro what that's going to look like.

For a while on the event side so.

So on the one hand, you know we are I believe positioned well because they all remain customers and our retention is high and they will have events again, it's a primary revenue driver some of them have switched to going more digital than having digital events with some pretty good success.

In the name, but it's you know we co that again still kind of hard to predict that sector.

Of our business.

Going forward.

Lastly, I'll say again, you know lending margin up and getting more scale in sales lower cost.

Through digital means and driving margin up and hiring more engineers and driving more innovation, which we're pretty excited about.

And Brian maybe I'll tag on there to mikes from a timing perspective.

As Mike spoke about we we've talked with Tom that the transactional side should bounce back very very quickly right. So assuming next year in the summer were allowed to have the runs in the walks in the right in the heart balls and all of those galas et cetera, we would expect that transactional revenue did come back almost overnight with those events.

It's been a loud so I think that comes down to where we as a society and do we have vaccines and those things that are really drive that that the other piece of it as you are aware that has a little longer tail, we're seeing some softness in bookings and pipeline because the pandemic and that's obviously going to hurt us through 21 just.

The ratable revenue recognition.

Those bookings and so we're we're seeing a little bit impact this year, but it's going to be more.

Visible next year, because we have a full year, what the revenue impact from those bookings shortfalls I think that lag assuming the market comes back some.

Sometime next year six to 12 months kind of lag before we work our way through that so I would say if we get back to normal sometime in the first part of next year I hope.

By early 22, we kind of have rebounded and see that.

That resurgent of growth overall transactions much quicker with a little more delay just on the ratable Rev. Rec on on the subs.

Yes.

No Brad like Brian I'd, just add one more thing Tony said this in his prepared remarks.

And we're really focused on this which is that combination of driving up the up the ladder on the little 40. So the combination of you know.

Both top and bottom line of the PNM, which we're we're planning on being pretty aggressive in driving that going forward.

Great. That's a lot of comments great color there and just a question I was getting from investors yesterday I don't know if you have any comments to this but just as we think about your transactional business. I know you had some kind of a you smart tuition, there's some exposure in higher Ed, but I'm curious if we were to overlay your transactional business kind of it within a certain end markets.

What are the top two or three or anything in terms of exposure relative to the customer base any color you can add there.

Yes, sure. So the good smart tuition and that sort of education sector is doing just fine and again the pressure is what we just talked about it's all these events in the summer and that really didnt happen.

His AMR is on the downside putting pressure, it's really all that type of activity a gala.

A walk a ride that really didn't happen in the summer because of the required social distancing.

Yes, and your brother thing I'd mention is online, giving spiked because of the pandemic. So.

It forced people that moved to online, giving you think about like timing for the faith based market surged dramatically.

People were still giving to their churches, but they couldn't do that in person passing the basket and so in several areas. We actually saw a fairly significant ramp in transactional giving the place to Mike's point, we really Q3 and again I'll just read or it was anticipated in our part because of the you will not be a host those events like usage revenue related to two.

Razor.

As a big shortfall in the quarter, because we didnt have the runs and walks in the rides and et cetera, and the marathons. So that one again I expect will bounce back very quickly once things open up again.

I also saw note someplace and commentary from one of the sell side folks that I remember, who it was but had mentioned they were surprised on our gross margin was higher.

Being the shortfall on in the quarter was from transactions when it keep in mind that some of these transactional related.

Offers have quite high gross margins payments right true credit card processing has a dilutive lower gross margin, but things like tuition some of the justgiving models usage related team raise or some of those things just how they're part of the pricing contract are actually really good gross margin.

Pieces of the business. So we shouldn't think of transactions mall as being dilutive. So I think that's important for folks keep in mind that lots of some of those were good margins has a pretty significant impact on on operating margin as well.

That's a good point, yeah, and also Brian I, just want to add something to Tony mentioned, one of our platforms, which is luminary online your team razor, which is really kind of our big platform that drives a lot of these usage and payments, we're expanding the footprint we announced a.

Robust integration with that platform with Salesforce platform. So we're expanding that across the board a lot of customers that make decisions to go with us and sales force for different reasons, and so weve integrated platform, there, which is provide a future opening two more.

Usage in payments you know in those kind of scenarios as well.

No.

And maybe just as a follow up on that Mike I know in the sales force question comes up with investors I know you've answered in the past with this integration.

How do you feel like that impacts your flexibility to work with customers and in different ways.

I think that opens up a lot since a couple of things that I'd like to provide because if we get off the sales force question a lot.

So you know in the in the World of software we typically.

Now what looks like competitors, sometimes integrate like we just did eliminate by the way we also announced.

Some robust integration, we razor's edge NXT and sales force in our enterprise CRM fund raising platform and sales force as well in addition, illuminating reserve.

Couple of data points on sales force because we get asked this a lot and we've kind of realize we haven't provided probably enough granularity. So just a couple of things we went back and looked several years and our win rates with again sales force has not changed and they are basically the same when rates again.

Our other competitors, there's no difference.

In the second really interesting data point, because we've been saying is that the macro but not provide the data we see sales force in about 5% of our total opportunities.

Five.

Well, it's a little different by vertical right.

Right like markets room. So you know, we always would say we don't see anything all the verticals and kind of explain eight based or this or not one but if you look at all of our deals we see him in about 5%.

Just to be clear did you provide more information now.

[music].

Great that's great color I'll cede the floor. Thanks gentlemen.

Okay. Thanks Bye.

Thank you and our next question comes from Rob Oliver of Baird. Your line is now open.

Great. Thank you guys good morning.

Mike My questions for you and then I had a very quick follow up for Tony Bob Mike Mike. Just curious you know we're a few years into the Microsoft partnership and I was wondering if you could provide us with a bit of an update on that I know you guys have said in the past that you know that there have been a few big deals here and there that maybe wouldn't have come your way without me.

Microsoft You know, particularly at this time that that that's likely a channel like lot very active that you guys could put a lien on during the pandemic. So just curious now a few years into the partnership what kind of momentum. If any you are seeing in the Microsoft channel and they may be.

I'd love to hear some customer examples, but maybe that's something that we could get at the upcoming investor event.

Yes sure.

Happy to provide customer examples Bob.

We're partnering with them, mostly on enterprise type deals in places like health care and higher Ed and it's been a good relationship. We're partnered with their executives that run those business units also partnering in their non profit business unit as well and it's gone quite well in that relationship has matured from.

Non Microsoft nonprofit business unit sales, all you need to hire read into health care as well and so we're we've made more contacts and more collaborative selling has happened there. The other thing is we're pushing our product roadmap for further as well. So we've done some really great integrations with raise that Gen X T Officethree hundred 65.

For example.

And again, we've got that relationship as you are on the Azure side as we continue to move from our our Colo data centers Azure. So.

Well I think it's gone pretty well and the relationships are solid.

And it's really.

You know the way that the models were too as far as compensation is complementary because their teams are really compensated on azure consumption and we're moving our products to azure and so there.

They're based plans and sent them to partner with us in the marketplace to pull his name to get as your consumption, which is where were going anyway. So it really looks quite low.

Great. Thanks, Mike appreciate that color.

He just for you just just on on the on the data breach, but you've got a couple of.

Got a cost here that you guys are going to face it certainly remediation costs and you know that that that's something I think we can ballpark based on other examples but you got to reap remediation costs and then you've got.

Liability.

Actually ensure it just sounds like insurance is going to cover much but not all of that so just curious how you're thinking of that night and I would assume that you know as you guys get set up for 21 that that's something you'd be factoring in but just wanted to maybe get a little bit more color on both of those costs. Thank you, yes, absolutely right so that I.

I would say watch our SEC filings, because there'll be a lot more disclosure in those obviously on the topic.

We have good insurance in place our insurers are working with us very closely the key there is coordinating with them and make sure. We're clear on what they're covering are not going to cover right now and you'll see this in the Q. When it comes out we have not recorded anything.

Cheerio from a liability perspective.

We currently don't anticipate that we have.

Material amount that needs to be a crude that's not going to be covered by insurance on a net basis. So you'll see some things in there where we'll have some receivables and liabilities will book, but on a net basis right now nothing material to the company that said, we're obviously spending a lot of our time and utilizing a lot of our internal resources.

On that front.

Yeah.

The Big thing I think that you will see probably in our numbers is just our continued investment in our cyber security.

Resources internally right continuing we got.

Really good team in place we have done a great job obviously, we.

These guys in the midst of their efforts.

They weren't able to take over our system. So I think that was great, but it's still going to be painful to work through.

There'll be plenty of disclosure on the topic in the financials and we will certainly build any estimated costs, we would incur into the 21 plan at this point again, we believe insurances will cover the majority of it other than our own internal resources and time.

Great. Thanks, Tony that you might have a good day guys. Thank you.

Thanks.

Thank you and our next question comes from Chris Man of Evercore ISI. Your line is now open.

Okay. Thanks, very much and thanks for taking the questions. Mike I was wondering if you could just characterize where you think the conversations with clients are today around sort of the non transactional side of your business, meaning your clients still just trying to sort of.

Stabilize and start to make sure. They can function period or are they starting to think ahead to where they need to be a year or two from now I'm just kind of guy I really its budgets are tight they might not want to do anything but I'm just kind of curious if at least the tone of the conversations is perhaps change today versus say six months ago.

Yes, it's changed many of our verticals there they're looking forward.

They realize you know how important digital cloud platforms are to them because they've had to use you know even some different things in Brazil, even genes and things that they maybe habit.

So they're all they're looking forward the caveat to that is you know some of them are not so like in our arts and cultural business.

Some of those institutions are open and doing pretty well.

So mostly in like the performing arts centers have an open yet.

So you know there they're in a different spot.

But I would say that the macros are across the board there looking forward thinking about.

Okay were you know what seven eight months into this global thing, it's going to be around for a while we're operating.

We have to continue to drive our business forward and thinking about the future. So those conversations have shifted that way our bookings are still pretty far off of what we planned right but.

Your your question was on conversation so they have shifted that way in the mean for sure but not in all the markets.

Okay. That's helpful and then I guess, even thinking about your business going forward how much of your sort of sales efforts can be shifted more virtually longer term and does it matter between say expansion business versus net new business, meaning I assume.

I always want to have face to face if you can but you know is there.

Can you create more efficiencies against doing more sales virtually after this <unk>.

And kind of how I assume thats also factoring into your confidence around margins. So just wonder if you could expand on that thanks, Yeah. Your debt Yeah, I again, I think we like a lot of comfort we've learned a lot since March you see as being Super aggressive on our real estate right plans, we rolled out new.

Workforce policies already that are post closing work horse policies, which is a lot more remote.

Environments across all the job types in the company in it it's going to drive efficiencies cost efficiencies, it's going to help us with access to skills and diversity. If you remove zip codes from job types.

And digital related to sales and I would say that when you go back two years, we were behind the game in investment and digitally enabled sales we did a great job.

With internal on T. platforms.

For usage for sales, but not digitally driving leads.

And we started that you know over a year ago brought in some experts put in a bunch of platforms.

And it's proven itself out so all of our teams have been selling virtually since March right. All of them are doing demos, you know no one's going to see folks face to face whether existing or prospects and although its you know our bookings are down because of Colgate, it's actually operationally working quite well so.

I think it's going to continue you know I I don't know that we're I predict that we're not going to go back and go back to what we used to be a black box there and lot of software companies I don't think so I think there's a ton of opportunity. The other thing for US is to is you know a lot of our deals are an SMB model.

Which is very very online and.

Frankly, we didnt treat it that way enough in the past, where you know we incurred too much cost.

SMB model, where it could have been more digital frankly in the past we've learned we could do SMB digitally.

Because we started to invest in it like I said over a year ago.

Cobot fortunate and we learned that we could do it digitally in Scotland.

For the SMB, which is most of our deals sort of SMB type deal. So lots of good learnings here since March that will drive scalability in sales and marketing opportunity for us both on the top and bottom line I think in the long run.

Yes.

That's great. Thanks, Mike. Thank you guys you're welcome welcome.

Thank you and our next question comes from the line Mcwilliams at Stephens incorporated your line is now open.

Thanks for taking the question just one from me today as we're in this involving market environment and you're turning towards your leverage target any changes to your acquisition criteria here and given the difficulties in some of your end markets have you seen additional target opportunities proactively reach out to you Mike.

Yeah, I can take that first long and thanks for the question, Yes, we remain pretty connected to the activities that are going on.

You know there are some lower valuations you know up there because of the smaller companies that are under some pressure.

Our strategy hasn't changed in the long run.

You know in the short run as you as we keep saying quite a bit we really pivoted toward driving toward the rules 40 and profitability, which is more controllable.

And I think a really good model for us.

So the strategy hasn't changed the recent activity, we keep looking at things, but we're also driving profitable.

Profitability.

As well so I think there will remain.

Opportunities related to that.

It was yes, I'm sorry, Ryan was there a second part of your question.

As well.

No you hit on the bulk of it right on Okay Yep.

Yep Yep Yep.

Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Mike Kennedy for any closing remarks.

Great. Thank you operator I'll just.

Close by saying that I'm proud of our execution across the board in the quarter.

The pandemic has created some near term challenges, but I believe we have a significant long term opportunity fund enough and we're uniquely positioned to elevate our status as a leader in this marketplace and I think we've done some of that with things like DB town recently, we're currently finalizing or 21 budget in response.

During our long term plans, which again puts a greater focus on profitability in the whole of 40 model and we plan to share more early in 21 as I mentioned, we'll have an analyst day and will also provide long term operational goals analyst day as well until you know thank you.

For participating today and in today's meeting the call. So thanks, everyone.

Have a good rest of your day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day and welcome some black <unk> third quarter 2020 earnings call. Today's conference is being recorded I would now like to turn the conference over to Mark Furlong Senior director of Finance. Please go ahead Sir.

Good morning, everyone. Thanks for joining us on Black Friday third quarter 2020 earnings call. Joining me on the call today or might you know any black box, president and CEO and Tony for Black Friday Executive Vice President.

CFO.

Mike and Tony will make prepared comments and then we will open up the line for your questions.

Please note that our comments today contain forward looking statements are 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.

Good luck.

Otherwise specified we will refer only to non-GAAP financial measures on this call.

Please note that non-GAAP financial measures should not be considered in isolation from or as a substitution for GAAP measures.

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 fourth quarter, our team will be virtually attending the Stifel 2020, or virtual Midwest. One on one growth conference benchmarks of virtual technology conference on the 10th annual Needham Virtual SAS one on one conference.

The Stephens investment conference 2020, and the Raymond James Technology Conference.

We will also be participating in virtual meetings hosted by Baird with that I'll hand, the call over to Mike. Thanks.

Thanks Mark.

Good morning, everyone and thanks for joining our call today.

Our third quarter results clearly show that we are pivoting more towards profitability and earnings growth.

With a keen focus also towards improving our revenue growth rate coming out of this pandemic.

This morning, I'll share a few brief updates from the quarter before turning it over to Tony to cover the financials in more detail.

First I want to start by saying, thank you to our employees.

For their dedication to serving our customers at a very high standard.

The tremendous job they've done in 2020 adapting to the new work environment.

I'm incredibly proud of how we have stepped up to support the unique needs of our customers as we all navigate these new challenges, it's really a testament to the people and culture up Blackbaud and our unmatched commitment to the social good sector.

I would also like to provide a brief update related to our recent security incident, it's unfortunate the cyber attack happened and again on behalf of Blackbaud I'd like to apologize to our customers involved in this incident.

Our top priority supporting our customers and being diligent in our efforts to help them through this and im sure. They have the information they need.

Through our forensics investigation, we were able to understand exactly how this occurred and we've remediated the vulnerability, which was tied to one of our early generation products.

We are incorporating lessons learnt from this incident to continue improving our cyber security program and further harden our environments, while being transparent with our customers on our progress.

I remind you the majority of our customers and the majority of our private cloud environment or not part of this incident and it did not involve solutions and our public cloud environments as can be expected to security has resulted in a number of legal claims and regulatory inquiries, we carry insurance policy.

Yes that we believe will provide coverage for a significant portion of current and expected future losses and expenses related to the security incident.

No this is inherently difficult to predict.

For the quarter.

Pandemic.

Digital transformation has shifted from a long term strategy to a daily reality as organizations across the market have adopted the new and distributed ways of working we believe this shift will play a powerful role in our long term opportunity as new customers seek market leading software.

Solutions for their organizations.

Justin customers consider expanding the black cloud solutions in their tech stack.

The uncertainty and complexity of today's environment has created some short term challenges for these organizations and as a result impacted our team's ability to build new pipeline.

Any long dated sales cycles, which are resulting in booking falling short of budget for the quarter and year to date.

We expect a shortfall to put pressure on both 2020 2021 revenues and as I've said before we believe the challenges our markets face today will be a catalyst for driving digital transformation across the socially good sector and having cloud software in place to support the missions. These organs.

Patients has never been more critical.

It is clear socially good organizations agree as evidenced by the record setting attendance at our annual user conference BB Con earlier this month the.

Reimagine virtual format enabled us to significantly expand the reach of the event as we welcomed over 38000 registrations proper 70 countries.

That's equivalent to well over a decade of our historic levels and by far the greatest number of prospective customers, we've ever hosted which shows the significant interest in Blackrock and our cloud solutions can help solve the challenges and opportunities. So it's a good organizations face today.

Resolving thing throughout the conference was the resiliency of the social good community and we've received high marks for the interactive and engaging experience, we're able to bring to our customers.

In addition to the immense number of resources, we provide to the market at no cost. We have also been reprioritizing and expediting product enhancements.

For our customers changing needs for.

For example, during PV Con, we highlighted a variety of innovations across our verticals that help customers adopt during COVID-19, such as fitness tracking integration and black large peer to peer fund raising portfolio.

A new virtual prayer wall that enables congregants and faced organizations to share and respond to prayer requests online.

Text messaging capabilities for scholarship directors at higher education institutions to ensure no funds were going on utilized and the expansion of a global capabilities of your cause CSR connect making it easier for companies to bring employees across geographies together in support of causes around the world.

[music].

These are just a few of the many product announcements made during the quarter.

As you know the first of our four growth strategies as delight customers with innovative cloud solutions.

Commitment to innovation also extends outside the walls of Blackrock as you recognize the unique needs of social great organizations across the markets we serve.

Our block blood Sky platform as part of an unprecedented level of innovation fueled by our engineers and enabling a growing developer community and our partner network with the tools to extend and enhance.

Customers Black cloud solutions.

Many black what products are built with opening.

Allow for seamless integration with software from other providers, making it easier than ever for our customers to meet their organizations unique needs.

Now in addition to the option to create a custom solution. We recently released the Blackhawk marketplace offering curated third party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact by enhancing their best of breed black thoughts solutions the specialized capabilities.

Like conducting the vendors and a fundraising auction texting volunteers about an upcoming event.

Tracking branded merchandise purchased online store are automating outreach to donors eligible for a matching gifts.

And we announced a robust integration of eliminate online team razor with salesforce, enabling organizations leveraging sales force as their CRM to drive truly multi channel campaigns and leverage the best in class fundraising and engagement functionality within aluminum online and team.

Laser platform.

In addition to openness and our products. We're also committed to building a more inclusive tech community focused on social good.

Last year, we announced the social good startup challenge in partnership with 1 million by $1 million and this year, we've announced we've expanded this initiative into the Blackbird social good startup program, our year long accelerator designed to support innovative startups with the potential to impact.

The ecosystem of good.

And alignment with our commitment to diversity and the tech community.

We will be focusing our January 2021 cohort on diverse founders black.

Black been steadfast in our commitment to innovation and even with the success of our customers, which is why we're accelerating investments in areas like R&D security and the shift to third party cloud service providers and delivering rapid innovation is just one way we're positioning the company to be stronger post pandemic.

We've also been changing the lessons learned over the past 12 months and reevaluating elements of our workforce strategy as we define the future of work a black box in anticipation of our offices reopening.

We have a culture built on creating employee experiences and programs that further develop and attract the best talent and promote a diverse and inclusive environment.

For us this means adjusting our workforce strategy to provide more flexibility our employees to work remotely.

We've proven we can operate effectively as a remote workforce and this change enhances the positive employee experience. We want every employee to have black box.

Also expands our access to a larger and more diverse talent pool empowers our leaders to make decisions based on skills and business need rather than location and it creates efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative work spaces.

Within our offices.

We've seen some solid early proof points, such as our investment in market, leading conversational AI software.

I must to engage with customers on their time, enabling us to qualify leads 24 by seven without adding head count ultimately increasing lead generation accelerating sales cycles.

Given the early success, we expanded this functionality globally in Q3.

We believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market and this is just one example of how we continue to put heightened focused on lead generation and driving sales effectiveness as we look ahead to 2021 bookings.

We've had a singular focus on the social good sector for nearly 40 years, and we remain very well positioned as a leader in this market and the best long term partner for social good organizations I am excited about the changes, we're making to enhance the future of work at Blackrock for employees, while delivering unmatched innovation.

Our customers are resilient and continue to find creative ways to ensure they can continue to deliver on their missions. The challenges posed to our customers. During the pandemic have created a short term uncertainty and our revenue outlook and will limit our ability to drive near term revenue growth as such.

We've made a pivot to place greater emphasis on delivering shareholder value through increased profitability cash flow, which are more controllable over the long term.

An opportunity to drive meaningful earnings growth as we execute our balanced strategy with a sharper focus on profitability with that I will turn the call over to Tony.

Where we open it up for QNX Tony.

Thanks, Mike Good morning, everyone.

Briefly cover our key third quarter highlights and underlying trends before opening up the line for your questions.

You can refer to yesterday's press release and.

And investor materials posted to our website for the full detail our Q3 performance.

Trend ahead of our original plan with over three quarters of 2020 now behind US looking ahead, we expect the shortfall on pipeline and bookings will put pressure on our fourth quarter and more so on full year 2021 revenue.

This reclassification reduced our organic recurring revenue growth rate by approximately 200 basis points or 140 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 third quarter gross margin was 60.1%.

We generated operating income of $48 million, representing an operating margin of 22.4% and diluted earnings per share of 73 cents similar to last quarter. Our early actions in response to the pandemic generated a significant cost reduction for the quarter.

Many of you are familiar with the rule affording we're confident in our ability to deliver sustainable 20, plus percent operating margin going forward and we believe we have ample room to improve on the rule 40 through the combination of growth and long term opportunity to scale profitability much more significantly.

Now, let's turn to the cash flow statement balance sheet our.

Our Q3 free cash flow was $41 million, representing a free cash flow margin of 19.2% during the quarter. We completed the purchase of our Charleston headquarters building in adjacent land, which we currently lease the upfront cash outlay of the transaction was approximately $16 million, which reduced our third quarter free.

Cash flow margin by roughly 740 basis points.

This is part of our newly expanded real estate strategy focused on optimizing our footprint for the future of work at Blackbaud, including new exit plans for certain office leases around the globe. These.

These early lease terminations will generate significant cost savings going forward and will give us additional flexibility as we evolve our workforce strategy.

We expect the majority of these lease terminations are closed during the fourth quarter with a onetime cash outlay of between 20 and $25 million.

We ended the quarter with $478 million net debt our capital strategy strategy calls for a debt to EBITDA ratio of less than 3.5 times and at the end of Q3, we stood at 2.0 times with 230 million of borrowing capacity.

In summary, our customers continue to navigate the challenges caused by the pandemic, which will put pressure on our ability to drive near term revenue growth in 2020 and 2021. Despite the uncertainty of today's environment. We believe we have a significant opportunity in front of us and we are well positioned to continue making the critical investments necessary to.

Sure. The long term success of the business the third quarter reflects our ability to manage a wide array of possible outcomes that could result from the pandemic, while remaining committed to driving increased shareholder value through profitability and earnings growth.

With that I'd like to open up the line for your questions.

Thank you, ladies and gentlemen, we will now.

Ask the question. Please signal by pressing star one on your telephone keypad, if you're using your speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again as a reminder, please press star one to ask a question. Please limit yourself to one question plus a follow up sell out the facility as many questions as.

Possible you will now take our first question from Tom Roderick of Stifel. Your line is now open.

Hi, everybody. Thanks for thanks for taking my questions. Good morning. So.

Mike Let me ask the first question just around the transactional side of the business I mean, we look back at last quarter, and you put up a pretty nice upside to the quarter relative to a tough time I think the post mortem on it was.

Transactional business delivered particularly well.

That can be that can kind of swing both ways and I wanted to dive in a little bit. If you can give us a sense as to how much of that business on the payments transactional site is being driven by events versus other other it started giving endeavors.

And then from the perspective of.

What you can do to gain some visibility in that process or even just that these the outstanding question of when do we start seeing events coming back.

How do you sort of think about the outlook of that piece of the transactional business.

Yes sure John.

Couple of things here so.

In Q2, we talked about that transactional and sort of consumption business. We have a couple of the revenue lines there sort of usage payment transactions in Q2, we saw some ships. So we saw some customer tied to drop some customer types go up.

Based on what was happening in the world.

And that drove some pretty decent results in Q2 in Q3.

It's interesting on that and that's a great question because Q3 is the summertime right lots of events in the summer time lot of our nonprofit customers do gal.

Gallows run run fights no.

All of those kind of things and we feel good.

Those didnt happen much in the summertime alright.

So that was under pressure for Q3 and that was why that revenue Didnt do all that great. In Q3. The good thing about that though is most customers are still customers those customers don't need to be re implemented we just need to start having a variance and we will drive revenue from that.

So they were in contact with all those customers. They are planning on firing up events again, it's kind of hard to tell the macro where that's going to come back in.

What level, it's going to come back.

So I'm not rescheduled a little bit for Q4, but not in the mean.

So it's kind of hard to tell so for us.

Future good upside there because all those customers are current customers none of them are.

Scar Retentions retention remains high but really it's just activity.

In the summer months around those actual events coming back. So we saw some weakness in the third quarter related to that now.

Certain ROE, let's say for all those events come back Hey, Thank you for that and then.

Ill, let either you or Tony take Thats, whoever wants to but thinking about that.

Then to an operating margin level that that's higher than we've seen historically it sounds like you're happy to come at higher than 20% that's great.

Im curious how you think about the investments as it relates to sales and marketing and.

Maybe not as much new product, but how you get into some of the newer markets you are pushing into before the pandemic had faith based in higher Ed have been sort of particularly hard assets. During this timeframe. How do you think about the resources you want to put into that and what you get out of those resources over the next 12 to 18 months bye.

In those two markets.

Ill take that.

So a couple of things there is some moving parts there were actually increasing investment in R&D.

In several areas.

That will drive further innovation. So we're doing that at the same time, we're increasing margins in the company's sales and marketing wise, we've seen some really good returns on our digital investments. So we've really ramped up digital investments across the company and actually have learned a lot since March.

With all of our folks working at home so all of our folks are selling.

Well thats and teams online remote work.

We're doing demos that way.

Really ramped up our investment in digital.

Lead generation, which is great.

No lead.

Cost per lead is a heck of a lot less that way it was really scaled up.

Investments in systems and people who are experts at that seemed a good return I mentioned in my prepared remarks, we put some new tools and conversational AI tools, which is sort of that 24 by seven way to qualify leads to.

Through a software tool so really good.

Scalability, so we're looking to drive better scale that way.

And keep driving.

A good level of our expected bookings, although obviously this year is tough on top on bookings because.

As a co. Good so our digital investments are really proven out in my prepared remarks, Tom I talked about MPV Con Hi, Jim.

It was fantastic 38000, registrations, which is like 10 years ago.

I'd cards, and a huge percentage of that is.

Prospects as well.

The other thing I'd like to just mentioned.

Kind of tied to your your question around Tony's comment on.

Furthermore, margin and long term, so we're going to have an investor day.

We're going to schedule quite sure when we will have an investor day, and we will once again have.

Long term aspiration goals.

Which is that the.

Community has been asking for that a lot. So we're going to do that again as we make this shift to profitability. So we could talk about what that might look like on a longer term basis.

Great.

I appreciate the comments guidance.

One follow up on the transaction, we want to make sure we covered off on.

Since we put guidance, it's hard for me to discuss.

The models that are out there and how those compare to our internal expectations I'd tell you that transactional revenue.

And actually run a hot to our original plan for the year through Q2.

Fell a little short to our original plan in Q3, but still exceeded our scenario forecasts in Q3, so theres a little bit a disconnect maybe where you guys in the end market expectations were versus what we were expecting internally. So transactions held up really well add to Mike's point, yes, it's really about.

Summer when all those runs and walks and rides and galas.

We're not able to happen because of the social.

Social distancing in all of the other stuff, we're dealing with the pandemic and then the other thing I'd note also that when you keep in mind is services has continued to be come in short of plan for the entire year and I think thats twofold, I think Juan it's tough to get resources rounded up with our customers.

Do the work with the pandemic impacts and then secondarily. Its just our continued trend of moving to the cloud. There is just less need for customization and those kind of services that we have done historically, so that trend kind of continues that we've seen for the last couple of years.

Yes, great great detail. Thank you Tony Thank you Mike appreciate it.

Yes.

Thank you and our next question comes from Ryan Peterson of Raymond James Your line is now open.

Hi, gentlemen, good morning, and thanks for taking the question. So I wanted to follow up on Tom's last question, then and it sounds like there's a lot of efficiencies gained through some of the digital marketing motions and the digital motions that you guys have put in place I'm just curious how should investors think about.

The return to growth as maybe some of these macro trends normalize it with the sales capacity in these marketing motions, obviously, when I had a crystal ball and with the macro will be but I just kind of 100 wanted to understand conceptually, how we should be thinking about growth in the investments that you're making when that macro stabilizes.

Yes, I can start.

Okay and on Japan.

Yes sure Thanks, Brian.

So we serve a lot of different types of customers and they are in different situations within kogan right. So.

The educational institutions are all up and running and so we're seeing.

Good.

Normalcy transactions and things we have there, yes, the bookings slowed down there because they all scramble to figure out what to do and how to open with pills that right. If some of them are remote summer combo remote go to go to class.

Thats getting behind them now because it kind of built some operating muscle in the last two months running running the schools and then some others like the big nonprofits, we just talk about where they are they have little or no events, they're planning when those are going to be and we're not sure about the macro what thats going to look like.

For a while on the event side.

So on the one hand, we are I believe positioned well because they all remain customers in our Retentions high and they will have events again, because the primary revenue driver some of them have switched to going more digital than having digital events.

With some pretty good success.

In the main but its we co that again still kind of hard to predict that sector.

Of our business.

Going forward.

Lastly, I'll say again.

Having margin up and getting more scale in sales lower cost.

Through digital means and driving margin up and hiring more engineers and driving more innovation, which we're pretty excited about.

And Brian maybe I'll tag on there to mikes from a timing perspective.

As Mike spoke about when we talked with Tom that the transactional side should bounce back very very quickly right. So assuming next year in the summer were allowed to have the runs in the walks in the rides in the heart balls and all of those galas et cetera, we'd expect that transactional revenue to come back almost overnight with those events.

Speaking aloud. So I think that comes down to where are we as a society and do we have vaccines and those things that will really drive that that the other pieces. As you are aware that has a little longer tail, we're seeing some softness in bookings and pipeline because the pandemic and that's obviously going to hurt us through 21, Jeff.

The ratable revenue recognition.

Those bookings and so we're we're seeing a little bit impact this year, but it's going to be more.

Visible next year, because one of the full year, what the revenue impact from those bookings shortfalls I think that lag I assume the market comes back sometime next year six to 12 months kind of lag before we work our way through that so I would say, yes, if we get back to normal sometime in the first part of next year I hope.

Yes by early 2002, we kind of have rebounded and see that.

That resurgent of growth overall transactions much quicker with a little more delay just on the ratable Rev. Rec on on the subs.

Yes.

Gregg Brian I'd, just add one more thing Tony said this in his prepared remarks.

And we're really focused on this which is that combination of driving up the ladder on the little of 40, So the combination of.

Both top and bottom line to the TNL, which we're we're planning on.

Pretty aggressive in driving that going forward.

Great. That's a lot of comments great color there and just a question I was getting from investors yesterday I don't know if you had any comments to this but just as we think about your transactional business. I know you have some kind of smart tuition, there's some exposure in higher Ed, but I'm curious if we were to overlay your transactional business kind of within certain end markets.

What are the top two or three or anything in terms of exposure relative to the customer base any color you can either.

Yes, sure so the smart tuition in the education sector is doing just fine.

And again the pressure is what we just talked about it's all these events in the summer and that really didnt happen.

His AMR as on the downside putting pressure, it's really all that type of activity gala.

A walk a ride that really didnt happen in the summer because of the required social distancing.

Yes, and your brother thing I'd mention is online, giving spiked because of the pandemic. So.

If forced people moved to online, giving you think about like timing for the faith based market surged dramatically.

People are still giving to their churches, but they couldn't do that in person passing the basket and so in several areas. We actually saw a fairly significant ramp in transactional giving the place to Mike's point, we really Q3 and again I'll just reiterate it was anticipated in our part because you will not be a host those events like usage revenue related to teach.

Razor.

The big shortfall in the quarter, because we didnt have the runs and walks in the rides and et cetera. The marathons. So that one again I expect will bounce back very quickly once things open up again.

I also saw no someplace and commentary from one of the sell side folks that I remember, who it was but had mentioned they were surprised on our gross margin wasn't higher.

Being the shortfall in the quarter was from transactions when you keep in mind that some of these transactional related.

Pieces of the business. So we shouldnt think of transactions, Paul as being dilutive. So I think thats important for folks keep in mind that lots of some of those were good margins has a pretty significant impact on on operating margin as well.

That's a good point, yes, and also Brian I, just want to add jump the Tony mentioned, one of our platforms, which is luminate online your team razor, which is really kind of our big platform that drives a lot of data usage and payments, we're expanding the footprint we announced a.

Robust integration with that platform with Salesforce platform. So we're expanding that.

Across the board a lot of customers that make decisions to go with us and sales force for different reasons, and so weve integrated platform, there, which is provide a future opening two more.

Usage and payments in those kind of scenarios as well.

No.

And maybe just a follow up on that Mike I know in sales force question comes up with investors I know you've answered in the past with this integration.

How do you feel like that impacts your flexibility to work with customers in different ways.

I think that opens up a lot.

Things that I'd like to provide because if we get off the sales force question a lot.

And so.

Well the software typically.

Ill.

What looks like competitors, sometimes integrate like we just did eliminate by the way we also announced.

Some robust integration, we razor's edge NXT and sales force in our enterprise CRM fund raising platform and sales force as well in addition, illuminating raise or.

Couple of data points on sales force because we get asked this a lot and we've kind of realize we haven't provided probably enough granularity, but just a couple of things. We went back and looked several years and our win rates with again sales force has not changed and they are basically the same win rates against.

Our other competitors, there's no difference.

In the second really interesting data point, because we've been saying is that the macro but not provided data we see sales force in about 5% of our total opportunities.

Five.

That's a little different by vertical right.

Right right markets room. So we always would say, we don't see them on all the verticals and kind of explain.

Based on this or not one but if you look at all of our deals.

We see him in about 5% just.

Just to be clear did you provide more information.

Great that's great color I'll cede the floor. Thanks gentlemen.

Okay. Thanks.

Thank you and our next question comes from Rob Oliver of Baird. Your line is now open.

Great. Thank you guys good morning.

Mike My question for you and then I had a very quick follow up for Tony Mike. Mike. Just curious you know we're a few years into the Microsoft partnership and I was wondering if you could provide us with a bit of an update on that I know you guys have said in the past that there've been a few big deals here and there that.

Maybe wouldn't have come your way without Microsoft, particularly at this time that that that's likely a channel deal makes a lot very active that you guys could put a lien on during the pandemic. So just curious now a few years into the partnership what kind of momentum. If any you are seeing in the Microsoft Channel and then maybe.

I'd love to hear some customer examples, but maybe that's something that we could get at the upcoming investor event.

Yes sure.

Happy to provide customer examples Bob.

And it's gone quite well in that relationship has matured from the non Microsoft nonprofit business unit sales.

It's a higher Ed into health care as well and so we're we've made more contacts and more collaborative selling has happened there. The other thing is we're pushing our product roadmap for further as well. So we've done some really great integrations with Rosetta genomics T. Officethree hundred 65 for example.

And again, we've got that relationship as you are on the Azure side as we continue to move from our our Colo Datacenters as you are so I.

I think it's gone pretty well.

And the relationships are solid.

And it's really.

The way that the models were too as far as compensation, it's complementary because their teams are really compensated on as youre consumption and we're moving our products to azure in sales there, they're based plans and sent them to partner with us in the marketplace to pull his name to get.

As your consumption, which is where were going anyway. So it really works quite well.

Great. Thanks, Mike appreciate that color Tony just for you just just on.

On the on the data breach you've got.

Cost here that you guys are going to face it certainly remediation costs and.

That that's something I think we can ballpark based on other examples, but you've got re remediation costs and then you've got.

Liability.

Ex insurance it sounds like insurance is going to cover much but not all of that so just curious how you're thinking of that night and I would assume that as you guys get set up for 21 that that's something you'd be factoring in but just wanted to maybe get a little bit more color on both of those costs. Thank you, yes, absolutely Rob.

I would say watch our SEC filings, because there'll be a lot more disclosure in those obviously on the topic.

Cheerio from a liability perspective.

Currently don't anticipate that we have material amount that needs to be accrued that's not going to be covered by insurance on a net basis. So you'll see some things in there where we'll have some receivables and liabilities will be.

But on a net basis right now nothing material to the company that said, we're obviously spending a lot of our time and utilizing a lot of our internal resources on that front.

Yes.

The Big thing I think that you will see probably in our numbers is just our continued investment.

In our cyber security.

Resources internally right continuing we've got a really good team in place we've done a great job obviously, we.

Caught these guys in the midst of their efforts they.

They weren't able to take over our systems. So I think that was great, but it's still going to be painful to work through but there'll be plenty of disclosure on the topic in the financials and we will certainly build any estimated costs, we would incur into the 21 client at this point again, we believe insurances will cover the majority of it other than our.

Internal resources and time.

Great. Thanks, Tony Thanks, Mike have a good day guys. Thank you.

Thanks.

Thank you and our next question comes from Chris Man of Evercore ISI. Your line is now open.

Stabilize and start make sure they can function period or are they starting to think ahead to where they need to be a year or two from now I'm just kind of I realize budgets are tight they might not want to do anything but I'm just kind of curious if at least the tone of the conversations is perhaps change today versus say six months ago.

Yes, it's changed many of our verticals.

They're looking forward.

They realize.

How important digital.

Cloud platforms are to them.

Because they've had to use even some different things Sam disease in jeans and things that they may be happen.

So there are there looking forward the caveat to that is you know some of them are not so much in our arts and cultural business.

Some of those institutions are open and doing pretty well.

Mostly in like the performing Arts honors Havent opened yet so.

So they're they're in a different spot.

What I would say that the macro.

Across the board the looking forward thinking about.

Okay, we're in our work.

Seven eight months into this global thing, it's going to be around for a while we're operating.

We have to continue to drive our business forward and thinking about the future. So those conversations have shifted that way.

Our bookings are still pretty far off of what the plans right but.

Your your question was on conversation so they have shifted that way.

In the mean for sure but not in all the markets.

Okay Thats helpful. And then I guess, even thinking about your business going forward how.

How much of your sales efforts can be shifted more virtually longer term and does it matter between say expansion business versus net new business, meaning I assume you always want to have face to face and he can but is.

Is there can.

Can you create more efficiencies I guess doing more sales virtually after this.

And kind of how I assume thats also factoring into your confidence around margins. So I just wonder if you could expand on that thanks, Yeah. You bet, Yes, again, I think we like a lot of companies. We've learned a lot since March you see as being Super aggressive on our real estate right.

Lands.

We rolled out new workforce policies already that are post closing work horse policies, which is a lot more remote.

Environments across all the job types in the company and unit, it's going to drive efficiencies cost efficiencies, it's going to help us with access to skills and diversity. If you remove zip codes from John types.

And digital related to sales and I would say that.

When you go back two years, we were behind the game in investment.

Digitally enabled sales we did a great job with.

With internal IP platforms.

For usage for sales, but not digitally driving leads.

When we started that well over a year ago brought in some experts put in a bunch of platforms.

And it's proven itself out so all of our teams have been selling virtually since March right all of them are doing demos.

No one's going to see folks face to face whether existing or prospects and although it's our bookings are down because of Colgate, it's actually operationally working quite well.

So I think it's going to continue.

I don't know that we're I predict that we're not going to go back and go back to what we used to be blackbaud around lot of software companies I don't think so I think there's a ton of opportunity the other thing.

Two is you know a lot of our deals are an SMB model.

Which is very very online and.

Frankly, we didnt treat it that way enough in the past where.

We incurred too much cost in an SMB model, where could have been more digital frankly in the past we've learned we could do SMB digitally.

Because we started to invest in it like I said over a year ago.

Cobot fortunate and we learned that we could do it digitally in Scotland.

That's great. Thanks, Mike. Thank you guys you are welcome.

Yes.

Thank you and our next question comes from the line Mcwilliams of Stephens incorporated your line is now open.

Thanks.

Yes, I can take that first of all and thanks for the question.

We remain pretty connected to the activities that are going on.

You know there are some lower valuations.

There because of the smaller companies that are under some pressure.

Our strategy hasn't changed in the long run.

Now in the short run as you guys, we keep saying quite a bit we really pivoted toward driving toward the rule of 40.

<unk> ability, which is more controllable.

I think a really good model for us.

So the strategy hasn't changed the recent activity, we keep looking at things.

But we're also driving.

For the ability as well so I think there will remain opportunities.

Opportunities related to that.

It was yes, I'm sorry, Ryan was there a second part of your question as.

As well.

No you hit on the.

Right, Okay. Thanks Yep.

Yes.

Thank you and ladies and gentlemen, this does conclude our question answer session I would now like to turn the call back over to Mike Genone for any closing remarks.

Thank you operator, I'll just close.

Close by saying that I'm proud of our execution across the board in the quarter.

The pandemic has created some near term challenges.

I believe we have a significant long term opportunity in front of us and we're uniquely positioned to elevate our status as a leader in this market place on I think we've done some of that with things like BB talent.

We're currently finalizing our 21 budget and refreshing our long term plans.

Which again, putting greater focus on profitability in the whole little 40 model and we plan to share more early in 21 as I mentioned, we will have an analyst day and will also provide long term operational goals analyst day as well.

Tony and I. Thank you.

For participating today during today's meeting the call. So thanks, everyone.

Good revenue again, thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2020 Blackbaud Inc Earnings Call

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