Q4 2020 Blackbaud Inc Earnings Call
Good day, and welcome to Blackboard fourth quarter and full year 2020 earnings call. Today's conference is being recorded now I'll turn the conference over to Mark Furlong. Please go ahead Sir.
Good morning, everyone.
Thanks for joining us on Blackhawk's fourth quarter and full year 2020 earnings call. Joining me on the call today are Mike Giovanni Black box, President and CEO, and Tony Boor, Blackboard as executive Vice President and CFO.
Mike and Tony will make prepared comments and then we will open up the lines for your questions. Please.
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 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 on.
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 on 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. Please note blackboard will host a virtual investor session on March 25th and we invited members of the investment community to register for the event by visiting our Investor Relations website.
I'll also mention that during the first quarter of 2021, our team will be virtually attending Raymond James.
<unk> 40, <unk> annual institutional Investor Conference with that I will turn the call over to Mike.
Thanks, Mark good morning, everyone.
Thanks for joining our call today.
Q4 was a very solid quarter and a strong finish to what has been a unique year to say the least.
As we discussed during our December event, where we outlined our long term goals and strategic outlook, our pivot to place a greater emphasis on profitability positions us for significant improvement on the rule of 40, as we exit the pandemic, including a return to a sustainable revenue growth rate.
In the mid single digits or greater.
Our results are solid early indicator that over time. The rule of 40 is within our reach we achieved 30 on the rule of 40 for the fourth quarter and we were within 10 basis points of the rule of 40 in the month of December as our organic revenue growth rate strength in towards the on.
On the quarter.
Without a doubt this past year has tested industry and underscores the resiliency of our customers in our market as they serve such a critical role in solving the challenges we face as a <unk>.
2020, but a spotlight on the need for digital capabilities, a social good organizations were forced to quickly pivot their own operations to ensure they continue to deliver on their missions in this environment.
For example, while the shift to online and virtual fundraising has been reshaping the landscape in this market for many years that shift has rapidly accelerated in 2020, we saw over 20% year over year growth in online, giving with more than a quarter of donations made on them.
Cool device.
And end of year, giving grew nearly 30% year over year.
For more than two decades less than 10% of giving has been done online, but this grew to 13% last year and now mirrors, the digital adoption experience and online retail sales.
This is a significant milestone for online given the current environment is not just causing a shift to a digital first mindset within our customer base, but also a shift in how donors students employees and others.
Back to engage with social good organizations going forward.
This is an acceleration of our long term transformation that we believe will drive significant demand for cloud software solutions in the upcoming quarters and years.
Looking ahead, the progress being made did you shouldn't COVID-19 vaccines bodes well for the return on an in person events. This year.
Increasingly bullish on the outlook for our market our customers and our company as we move through 2021.
Like to make a point to say, thank you to our employees for stepping up in a big way this year to support each other our customers our communities and blackboard.
We know that nine out of 10 employees say black Bob's mission and the customers. We serve what was important to their decision to join the company Inc.
Perhaps more than ever that unmatched commitment to the social good community was on display in 2020.
We've given back to the entire social good community through hundreds of free resources philanthropic gifts service on boards and more looking back at the last year I'm incredibly proud of our achievements as a company.
After a solid start to the year in 2020, we shifted quickly in response to the pandemic and took early action to ensure our business continuity, while remaining hyper focused on protecting the welfare of employees supporting our customers and delivering increased value to our shareholders.
After transitioning our global workforce to remote operation and a matter of days.
Without business disruption.
We recognized our employees would need our support is all of our personal and professional license began to overlap.
We provided additional financial support to all employees, earning less than $75000.
Launched the Blackboard after school program to support employees globally, who are balancing work and childcare offered a one time technology stipend to support home office needs.
Increased professional development training opportunities.
Introduced many more resources focused on maintaining physical mental and social wellbeing, while working in a virtual environment.
We suspended our company funded 401 K match program as part of our cash conservation measures in response to the pandemic, we've been able to fully reinstate that program and our strong finish to the year enable us to fund a discretionary match for participating employees late in the fourth quarter.
Our people are central to our success and we have an unwavering commitment to build on our strong culture by creating employee experiences programs that further develop and attract the best talent as well as promote a diverse and inclusive environment in.
In 2020, we hired ahead of diversity and inclusion recognizing that now more than ever the topic of the quality needs a strong unified voice a black box.
Generally seek diverse talent to join and lead our company as well as serve on our board of directors and this is not new for us.
We have strong gender diversity within our company with approximately half of our employees being female but we recognize we can always do better blackboard supports greater diversity in the tech industry as a whole and we will continue to push from progress because with more inclusion we can drive greater social good and financial results.
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I believe when our leadership in workforce reflects the diversity of our customers and their communities and enhances the way we connect.
Taking a step back we know the investment community increasingly values, ESG and social impact and it's clear to me blackboard as a tremendous opportunity to build on its already strong reputation as a leader in sustainability and social responsibility.
We've created a formal program committed to advancing our ESG efforts beginning with the adoption of SaaS be standards and participating in the UN global compact a blockbuster driving social impact isn't a side project, it's our business.
All of our software solutions enable social impact.
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Possible to provide exceptional products.
Jerry shareholder value and do good in the world.
Keeping mission aligned we built not just a successful business model, but on innovation engine. That's played a role in driving advances on social issues of every time.
Turning to our customers.
We've been agile as an organization with a relentless focus on driving value on outcomes, our deep expertise in each of our vertical markets positioned us to respond quickly to the unique challenges facing our customers as a result of the pandemic.
We announced free universal access to our entire E learning curriculum.
Trade webinars with thousands of customers attending.
Introduced new pricing and financing offers based on the changing needs of our customers.
Launched new innovation, helping them more aggressively move to digital capabilities.
We were quick to expedite product enhancements to support our customers' changing needs.
A few of these innovations include fitness tracking integration and black box peer to peer fundraising portfolio are.
Our new virtual prayer wall, but enables congregate and phased organizations to share and respond to prayer requests on line.
Text messaging capabilities for scholarship directors and higher education institutions to ensure no funds were going on utilized.
The expansion of the global capabilities of your cars, making it easier for companies to bring employees across geographies together in support of causes around the world.
This industry has been undergoing a digital transformation in which we have been the global leader and that has accelerated as the pandemic has highlighted how modern scalable and secure cloud systems on our required standard.
In 2020, we showed volume we continue to be the trusted leader in this space customers around the world leveraging our solutions to effectively fund rates for COVID-19 research and essential equipment.
Including vaccine development low cost on a later production and metrics to treat the virus and slow it spread food.
Food banks rely on our solutions to manage the rapid influx of donations needed to keep up with massive surges in demand.
In fact, we processed over 350% more online donations for these customers in 2020 than in 2019.
Just giving powered the largest individual led online crowd fundraising campaign in history.
And Jerry giving Tuesday in Q4, our platforms process record setting levels of transactions and enable over 138 million emails to be delivered in a single day, our scalable platforms enable events like this to happen.
We also recently updated the blackboard marketplace offering curated third party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact on enhancing their best of breed blackboard solutions with specialized capabilities.
A few partner solution. Examples include connecting the bidders on a fundraising auction texting volunteers are on an upcoming event.
<unk> branded merchandise purchased in an online store are automating outreach to donors eligible for a matching gifts and on a number of apps listed in the blackboard marketplace nearly doubled in 2020 progressing our strategy to build a robust partner ecosystem.
We are steadfast in our commitment to innovation to enable the success of our customers, which is why we're accelerating investments in areas like R&D security customer success and the shift to third party cloud service providers.
Okay.
While we're well underway in our efforts centered around delighting, our customers with industry, leading cloud solutions.
Also further optimizing our go to market model and driving operational scale and efficiency on.
All while enhancing the future of work have blockbuster for employees and delivering increased value for our shareholders.
We've taken lessons learned throughout 2020, and reevaluating elements of our go to market strategy with a digital first mindset.
And we have a significant opportunity to leverage the investments into digital to reduce our customer acquisition costs.
And increase our sales velocity ultimately driving a more scalable and cost effective go to market model we.
We've also adjusted our own workforce strategy to provide more flexibility for our employees to work remotely going forward.
This not only enhances the positive employee experience, we want everyone to have a black box, but also expands our access to a larger and more diverse talent pool.
Hiring our leaders to make decisions based on skills and business need rather than location.
This created an opportunity within our real estate strategy as we completed the optimization of our footprint right sizing and exiting certain offices around the world.
With existing offices, we shifted towards more collaborative workspaces for when we return.
Looking ahead to 2021 and the next several years very optimistic about the opportunity in front of us.
The market has once again proven to be more resilient than many expected and we continue to believe the durability of our customer base significantly underestimated.
In 2020, our renewal rates trended ahead of plan for the year, our customer retention rate increased from 92% to 93%.
And despite the challenges faced last year, our customer account increased it remains above 45000 customers on.
On occasionally been asked.
How many of our customers go out of business each year.
Dress that by saying it is an immaterial amount and significantly less than 1% in terms of both revenue and customer accounts. In fact, we saw fewer customers closed their doors in 2020 compared to 2019.
And we expect the resiliency of our customers to continue into 2021 as the vaccine rollout continues we believe physical events will start to come back.
Already hearing from customers that they are planning for this to happen. This year as you know we have near term variability in our revenue outlook driven mostly by the subset of our transactional revenues tied to events.
In a somewhat tougher selling environment, we have high confidence in our ability to drive meaningful acceleration in our financial performance post pandemic.
On a sustainable organic growth rate in the mid single digits or greater.
Our view is this is not fully reflected in our valuation and therefore under our recently expanded share repurchase program. We purchased approximately one 2 million shares of our common stock outstanding and the months of December and January we made great progress last year moving toward the rule of 40.
We are already underway executing against the strategic plan that will move us further toward our long term aspirational goal of achieving the rule of 40.
We have a lot to be excited about as a company in 2021.
With that I'll turn the call over to Tony before we open it up for Q&A Tony.
Thanks, Mike Good morning, everyone today I'll cover our results for Q4, the full year and our outlook for 2021 before opening up the line for your questions.
You can refer to todays press release, and the Investor materials posted to our website for the full detail on our Q4 and full year 2020 financial performance.
Turning to our results fourth quarter revenue increased one 9% versus Q4 of 2019 with recurring revenue growth of four 3% on an organic basis inclusive of a very strong finish to the quarter already.
I'll reiterate mikes comment that our customer base is healthy overall with our customer retention improving to 93% for the year.
Our renewal rates exceeded our pre pandemic expectations for the year, we had a greater mix of our customers opt in for longer renewal term periods.
And we ended the year with better than expected accounts receivable agents.
All of which are positive indications of the health and resiliency of our industry and customer base payments.
Payments transaction volumes exceeded our expectations and were the primary driver of revenue growth for the quarter.
<unk> revenue grew $14 million year over year in the fourth quarter. This strong performance also highlights on often underappreciated resiliency of our market as expected the shortfalls in bookings that began at the start of the pandemic put pressure on our contractual recurring revenue growth in the fourth quarter.
On a full year basis contractual revenue grew year over year.
There is no question that the current environment has put a greater emphasis on investing in digital and cloud based solutions and we are optimistic that this will materialize and improving pipeline and bookings as we progress through 2021, we were pleased to see a solid start with January bookings coming in ahead of plan, though it's Earl.
Early in January is a seasonally low month for bookings on.
On a full year basis, our revenue grew to $913 million, despite lower usage based transactional revenue and bookings due to the pandemic and the continued decline in onetime services and other revenue.
Onetime services and other revenue declined approximately 22% after normalizing for the reclassification of retained in managed services and this decline was amplified in the fourth quarter due in part to our pivot to offer our annual user conference at no cost in 2020.
Despite the challenges faced this year, our full year revenue was only about 3% below the midpoint of our original guidance heading into the year. I'll also remind you that for the full year, we reclassified approximately $17 million of retained and managed services that would have historically been presented and recurring.
Revenue to onetime 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 change for more details. Please refer to the supplemental schedule included in our investor presentation of <unk>.
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Moving to earnings our fourth quarter gross margin was 57, 1%, we generated adjusted EBITDA of $69 million.
Representing an adjusted EBITDA margin of 28, 4% and diluted earnings per share of <unk> 85.
As you know our actions in response to the pandemic improved our liquidity and generated significant cost reductions, which substantially elevated our profitability for the quarter and the full year and allowed us to continue making critical investments in the business related to areas like digital marketing engineering security customer success.
And our continued shift to a cloud infrastructure to third party cloud service providers.
For the full year, we generated adjusted EBITDA of $242 million up $53 1 million, representing an adjusted EBITDA margin of 26, 5% full.
Full year diluted earnings per share was $2 94.
An increase of <unk> 70 per share and 25% above the high end of our original guidance coming into the year.
Again, not all of the cost actions taken in 2020 will repeat this year or continue into the future.
For example, we have fully reinstated our company funded 401k match program for 2021, and we will return to cash base Merit and promotional salary increases for eligible employees that said, we have high confidence on our ability to operate in an increasing margin profile going forward given the progress made this year.
On additional plans, we have for the coming years.
The evolution of our go to market strategy with a digital first mindset has substantially reduced our go forward cost base in sales and marketing and we've largely completed one major initiative last year, when we revisited our real estate strategy with a focus on optimizing our footprint for the future of work on Blackboard, Inc.
<unk> the purchase of our global headquarters building and exiting certain office leases around the globe.
As a result, we enter 2021, having roughly halved our real estate footprint. This drove $23 million in one time expense in 2020, but we estimate this will generate approximately $14 million and run rate cost savings going forward. It.
It will also give us additional flexibility as we evolve our workforce strategy with our heightened focus on operational efficiency and in light of our flexible work force strategy going forward. We also revisit elements of our tax planning strategy and wrote off certain tax assets, resulting in an increase in our effective tax rate for the fourth quarter that will not repeat in 2020.
What.
That brings me to the cash flow statement and balance sheet, our Q4 free cash flow was $25 million and our full year free cash flow was $76 million.
Representing a net full year free cash flow margin of eight 3%.
The real estate actions I, just mentioned resulted in fourth quarter and full year cash outlays of approximately 20, and $39 million, respectively, which reduced our full year free cash flow margin by roughly 430 basis points and we do not expect this to repeat in 2021.
We ended the quarter with 404 $495 million net debt our capital strategy calls for a debt to EBITDA ratio of less than 4.0 times and at the end of Q4, we stood at one eight times, which is our targeted optimal leverage ratio and we had $429 million of borrowing capacity in 2020.
We eliminated our dividend as a cash conservation measure. However, we will continue to deploy our capital in close alignment with our capital strategy, which includes the option for opportunistic share repurchases as Mike mentioned now the months through the months of December and January we repurchased one 2 million shares of common stock.
<unk> for $69 million.
As of January 31, we had approximately $180 million remaining and available under the current share repurchase authorization.
Now, let's turn to 2021.
From a revenue perspective, we are encouraged by the strong finish to 2020 and the durability of our recurring revenue streams. The obvious challenge continues to be accurately predicting the duration and magnitude of the pandemic and the ultimate impact on our revenues, particularly transactional revenue.
On one hand, we can see potential upside from an acceleration of key trends like the shift to online, giving that could very well be sustainable but on the other hand, it's hard to be certain win in person events will return as.
This heightened level of variability in transactional revenue it makes it difficult for us to put out definitive guidance ranges like we've done in the past, but I do want to provide some insights on our best estimates for 2021 in the form of three scenarios.
The first and most likely scenario based on our modeling suggests that we will generate roughly $900 million in total revenue.
Our base assumptions for 2021 start with the continued decline in onetime services and other revenue, which we expected to decline, 15% to $20 million year over year.
To some extent the 2020 shortfall on bookings will drive less implementation services revenue in 'twenty, one, but overall the strategic mix shift we've been driving for years and it continues to be a positive move for us over the long run.
Moving to recurring revenue, we anticipate our contractual recurring revenue representing roughly two thirds of total revenue will be modestly above 2020 levels are.
Our customer base is stable with customer retention, increasing in 2020% to 93% and renewal rates that were ahead of our plan for the year.
The shortfall on bookings performance last year, we will have a greater impact on 2021, but there is no question. The current environment has put a greater emphasis on investing in digital and cloud solutions.
We don't yet have perfect line of sight into when this will materialize, an increasing pipeline and bookings we expect to see a pickup in activity in the second half of the year and we've been making enhancements on our go to market necessary to capture this growth opportunity.
Transactional revenue, which is roughly a quarter on total revenue is the most difficult to predict given the current variability on underlying drivers such as timing of number of in person events and marketing campaigns as well as fluctuations in donation volumes in tuition payments at <unk>.
As we've said we're encouraged to see progress with the vaccine rollout in that transactional revenue tied to in person events is expected to recover quickly as soon as customers are able to hold the Vince again on.
Our current plan assumes we began to see this recovery in the second half of 2021.
We estimate that this will be somewhat offset by a modest year over year decline in payments revenue as we normalize from the over performance. We saw on Q2 and Q4 of 2020.
That said, we anticipate total transaction revenue for the year to be roughly flat compared to 2020.
Though again, we saw a substantial increase in the percent of giving done online and it's possible. This becomes the new normal is organizations have had to adopt more digital capabilities.
We've also evaluated a heavily derisked and conservative scenario I'll emphasize upfront. We view this scenario is very unlikely, but we're sharing this to be transparent in this scenario. We've incorporated the impact of another full year shortfall in bookings and assumed our retention rates and renewal rates.
Decelerate, which would ultimately cause a decline in contractual recurring revenue. We've also factored in the transactional revenue impact of no in person events again in 2021 and substantial declines in payments revenue well below 2020 levels.
This were the case and again, we view this as unlikely our best estimate of $900 million on total revenue could be high by $10 million to $30 million, depending on what you assume for transactional revenue performance.
This brings me to our upside scenario, which accounts for potential acceleration in transactional revenue and bookings performance.
We continue to see elevated levels of payment volume similar to what we saw in late 2020, and we see an accelerated recovery and transactional revenue with events coming back then we could see substantial upside to our estimate for transactional revenue to.
To a lesser extent given the ratable nature of our revenue. If we are able to generate increased pipeline and bookings earlier in 2021, we could see upside to the full year contractual recurring revenue at one time services revenue, we estimate $10 million to $20 million of revenue upside in this scenario.
Summarizing revenue for 2021, the most likely scenario based on our modeling suggests we will generate roughly $900 million on total revenue, we anticipate a 15% to $20 million decline in onetime services and other revenue, which is driving a year over year decline in total revenue.
Recurring revenue, which is the core of our business is expected to grow modestly in 2021, and we are optimistic that this will set us up for acceleration in revenue growth post pandemic.
Shifting to profitability and cash flow, we continue to progress on initiatives like the migration of our cloud infrastructure to third party cloud service providers, which we expect to result in future gross margin improvement as we are able to reduce our own colo footprint and the associated duplication costs.
On the enhancements, we're making on our go to market will significantly reduce the payback period for our customer acquisition costs, while increasing sales velocity and I do not expect our sales and marketing our customer success expense to return to pre pandemic levels.
As I mentioned earlier, our work to optimize our real estate footprint will generate approximately $14 million of annual cost savings going forward.
Our most likely scenario costs are on adjusted EBITDA margin of roughly 25%.
And this is inclusive of several cost actions taken in 2020 that will not repeat in 2021.
While revenue remains somewhat variable on the near term.
We're confident in our ability to manage costs and ultimately profitability across these revenue scenario.
Our pivot to place a greater emphasis on profitability positions us to significantly improve on rule of 40, and post pandemic environment and gives us heightened confidence in our expected future free cash flow generation.
The near term variability in transactional revenue and bookings makes it difficult to be precise in our free cash flow estimates for 2021, I'll remind you. Our typical contract is three years in term billed annually upfront and variability in bookings during the year, we will have a more immediate impact on 2021 cash flow.
Our capitalized software development costs have largely leveled off and we're expecting less capital expenditures in 2021, given the purchase of our headquarters drove a substantial increase in capex in 2020.
With that said, we anticipate generating at least $100 million on free cash flow in 2021.
We will also continue executing against our capital deployment strategy, which calls for ensuring access to adequate levels of capital to grow the business through a balance through balance sheet management rigorous oversight on investments in our business, including acquisitions and identifying and efficiently returning excess capital to shareholders include.
On the option for additional share repurchases.
In summary, 2020 was an exceptional year, but the resiliency of our customer base dedication of our employees and our patents in place greater emphasis on liquidity and profit drove solid results for the year there.
There are significant opportunities in front of us to continue to strengthen the business and elevate our financial profile and we are well positioned to drive towards our long term aspirational goal to achieve the rule of 40 with mid to high single digit organic revenue growth.
We believe that steady execution against this financial framework paired with our updated capital deployment strategy will drive shareholder value in 2021 and years to come.
With that I'd like to open the line for your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
Speaker phone. Please make sure your mute function is turned off to allow your signal to reach our.
Again as a reminder, please press star one to ask a question please limit.
One question.
Follow up to allow us to facilitate as many questions as possible.
Our first question comes from the line of Tom Roderick with Stifel. Please proceed with your question.
Happy new year, and thanks for taking my questions. Tony Let me start with you I. Appreciate all the case 123 framework here for some scenario analysis and Thats really helpful.
The question if I just think about the base case versus cases, two and three tell.
Tell me a little bit more about how you plan to manage the expense structure.
And when you would sort of adjusted net expense structure, particularly from a go to market and head count standpoint should.
Should be should the environment start to diverge from the base case scenario at what point would you look to pair back on expenses or on the contrary what are the signs youre looking for lets say, we can green light from more go to market expenses and start thinking about it more on a growth mode.
Yes, Thanks, Tom can talk to it.
I think.
One big thing.
To remind everyone of is that we're going to see we anticipate we will see another big decline in onetime services and other this year and hopefully somewhere in the 'twenty two 'twenty three time frame, we bottom out on that front, but as we stated in the prepared comments, we expect that to be down 15% to $20 million. That's the really the only anticipated drag we.
Half on growth for 'twenty one.
And contractual recurring revenue to be up modestly.
On that.
Piece of the business, which was two thirds of revenue is.
Much more easily forecasted right, we've seen really positive trends and renewal rates even through the pandemic. They exceeded our plan last year, we had really nice performance in January.
Kick off the year, although generated the small months from a seasonality perspective bookings were better than planned and better than prior year pipeline coverage has improved.
Good for Q1 payments performance, although below last January when we didn't have the pandemic was better than plan consumer and just giving was above plan and above last year team razor usage came in.
Below last year's significant EBITDA, that's because we still don't have mass participation events and we had.
Rescheduling of a major event that happened in January last year, it's going to happen later this year.
Renewal rates came in ahead of plan on ahead of prior year for January and collections came in slightly ahead of plan. So we're off to a really good start it looks like for January which bodes well to kind of.
These three different scenarios that we're probably on track for that most likely case or better.
What we will do really on the expense side as much what we do.
Did in 2020 and with the onset of the pandemic as we pulled back on timing of investments and we're making those a bit later than we normally would waiting to ensure that we're seeing positive results in advance of so in other words waiting to see that the results are there before we.
Incremental investments, we believe the kind of baseline of the cost structure is in good shape. If we saw that that downside scenario was looking more realistic or potential I think that we would pare back on some of the investments that we're already making some of those are.
<unk> head count, especially on the area of Rd, or investing more heavily to accelerate getting out of our Colo data centers into third party cloud environments, we're accelerating fairly heavily our investments to complete the work on <unk> and then we're also investing more heavily.
Harden, our environments and our products just because of that.
The current environment, we live in like what we saw with Fireeye on solar winds.
Threat actors are just getting more and more aggressive and so we're making some heavier investments there as well on I would just suggest we could pull back on some of that hiring it we can't hire those folks in one month, so that will take time, but we feel really good just way. We started January that are kind of most likely case is looking pretty strong thus far although it's early.
Right, Mike just a quick one for you I look at the slide 24, and if my math is right your payments business. It actually grew into debt low teens on the growth rates. So a tremendous job by you guys on that front congratulations on finishing the year strong there I'd love to hear strategically what else do you think he can do to grow that team is busy.
On its beyond just what was obviously a great volume year in a big shift to digital or they're on their other ways that you can strategically grow that beyond just volume of new customers and what I mean by that is are there different payment types. You can start working towards are there different additional payment partners.
Different responsibilities you could take on just talk a little bit strategically about how you might be able to grow that.
And in light of these the normalized year.
Yes.
Thanks.
First what happened last year was.
The adoption of online.
Was the big impact online, giving as stayed under 10% for a long time at 1% to 13% last year, which is equal to like retail in the U S. Now.
So it grew quite a bit and thats across the board.
In all of our verticals. So there is a higher adoption for virtual.
And for integrated payments and we think that can continue.
Still haven't fully penetrated or even our own customer base never mind. The market. We're very small part of the overall market related to the giving market.
And we haven't penetrated our full base either we also on the last couple of years, we made a massive shift in our pricing model and the Justgiving platform, that's proven to be a big win win for us and our customers.
And so I think theres more opportunities on pricing models as well.
As we look at our various.
Payment platforms going forward.
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 my question and congrats on the strong fourth quarter numbers. So I wanted to follow up on the online giving component Mike So the.
13% on line I was just wanted to clarify is that a blackboard specific number or is that more of an industry number and I guess longer term, where do you think that should go should that be $25 30, 50, I guess you would think it would go up over time I'm, just curious how to think about that longer term framework.
Yes, that's an industry number.
Non of Blackboard number.
On.
It's hard to say, where it's going to go.
It's like looking at our retail industry, if you will and the growth there of online, which popped up a lot last year because of the pandemic, but.
There was also a very large growth in giving on mobile devices as well and so we think thats a trend thats going to continue to grow and accelerate.
On what happened last year or two as all of our customers sort of figured out how to live in a virtual world in different ways.
It was giving some of it was running they're running their institution on like a school and so just the use of cloud solutions and digital tools, all tied to payments and giving.
There was in every vertical market, we serve there was cash.
On the Master class on education, and how to run their business last year on our platforms.
And I think some of it's just going to continue going forward because some of it drove best practices. We have a lot of customers that drove a lot more virtual events are online, giving that may continue in that way going forward, which will help them from a scalability standpoint, which will also drive.
The payments.
Transaction business going forward. So I think it's a big big opportunity is a big bump up last year.
But I think that the adoption of that and the learnings that happened.
To be very sticky from an education standpoint, and our customers are now skilled at.
Focusing on payments and virtual and using.
Cloud solution to drive their business.
Brian This is Tony I might add.
Couple of things one that increase in online giving.
Is just an opportunity for us to garner more revenue from the existing customer base right right. So more as given on line, we can monetize that versus a software subscription et cetera. So that's upside the other two key points is our largest tam opportunity is still on payments to my point, we don't have.
All of our products payments enabled we have opportunities to go after the market exclusively.
Exclusively and separate from our product set and then also one of the things that I think folks wrestle with is volatility of our transaction business versus retention.
Our payments business is very very sticky.
But it does have more volatility just because of the nature of transactional, giving right and seasonality et cetera. So.
<unk>.
Correlate volatility in the volumes with retention because those payments customers are typically <unk>.
Actually better retention, because they have a software product and payments. They typically have higher retention than our software only customer. So I think that's a really important note to make in a lot of folks continue to wrestle with our gross margins because the mix of payments I'll remind everyone that the payments business. Although it has a lower gross margin because of gross accounting treatment is.
Accretive to our operating margin and you saw that in the performance in Q4, especially in December where we came in at nearly 40 on a rule of 40 because of the growth in payments and the positive impact it had on profitability.
Right now we definitely saw that come through in the fourth quarter numbers and maybe just one follow up from me I, just I wanted to kind of dig into the retention in the renewal dynamic a bit obviously that was a positive development. This year I'm curious as we think about 2021, how big of a year is that the renewals.
Obviously, the retention from a logo perspective, it's been pretty good but how do you think about the idea of maybe I'd say downgrading usage, if people were struggling versus potentially upgrading usage because you can offer more more of a sweet versus your competition I guess I'm just curious for customers that are staying on are you seeing them buy more products or are they.
Downgrading, a little bit how do we think about that.
Yeah, we're seeing really positive trends like I said, even in the month of January it's early on.
We exceeded our plan in January which was.
And expected improvement in retention, whether that's gross and our net so we expect to see improvement in retention.
Over the coming years, they've got a big focus on that so we're really pushing to improve both growth and net dollar retention as well as customer change I think the reversion of our historical trend, where you've seen a decline in just customer retention is very positive as well I think in the middle of a pandemic. We went from 92% to 93 speaks worlds about the resiliency.
I think of our markets on our customer base and the things we're doing as a business that I think we have to keep that in mind.
Yes.
Mike anything you'd add on that I'll, just add to that just remember that the systems that we provide are basically systems of record. So no one really downgrades to your question because.
Because.
It's binary you either abuse the system to drive revenue or you do something else right. So our systems drive revenue they operate schools.
They drive operating margin.
They drive tuition in schools do lots of things that are mission critical.
For our customers. So they are not optional.
On their system of records that drive the institutions and probably the last point I think you were alluding to is as we move our base to longer term contracts, we will have a smaller percentage of contracts up for renewal each year and that's pretty common practice as you know on the software industry.
All new contracts with largely three years or longer with three year renewals, although we still have a lot of those.
Old legacy contracts that we're working to migrate to multiyear contracts. So I would also expect to have a lower percentage of our total base up for renewal each year going forward.
Yeah.
Thank you. Our next question comes from the line of Ryan Macwilliams with Stephens Inc. Please proceed with your question.
Thanks for taking the question now that things are a little more settled in your back to your optimal leverage target. How do you think about capital allocation between buybacks and M&A going forward and any verticals in particular that are interesting from an M&A perspective.
Yes. This is Mike.
We've got a higher authorization on the buyback.
As you know and executed on that in December.
In January.
So it's still an option to continue that program.
Secondly, we are still active in that.
In the world of M&A.
There's a lot of activity, there's a lot of companies, we look at and don't pursue for various reasons I still think there's opportunities out there to execute on that we've got a lot of capacity with the new facility that we we did last fall.
And so there is no strategy change related to how we think about M&A and expanding our footprint in the verticals that we serve.
Those come up across multiple vertical markets that we serve it's not really one single market.
We think in terms of.
We expand our footprint in a vertical that we're in.
Or provide kind of ancillary services to the same Bob.
In the verticals that we serve so I still think there's lots of opportunity there and we remain interested in.
And M&A, yes, and I'd just add if you recall, we took advantage of this.
Great market opportunity and expanded and extended our debt facilities. So we increase the size.
Extremely low rates, we were able to lock in somewhere in that 2% range and so we have plenty of capacity as well actually quite a bit more capacity, we had and as Mike said, we expanded the stock buyback authorization for that same reason to make sure. It more closely match. The current size of the business because we had not done anything on that front since I came here.
I think 10 years ago.
Appreciate the color.
Then just sticking with the verticals across nonprofit health care education larger businesses is there any area that you are seeing better green shoots of growth as we move into 'twenty 'twenty, one and Conversely, maybe which areas are taking a little longer to get back on track.
Yes, they are a little different because of the pandemic and the situations they find themselves in so for example.
Performing arts centers are largely closed.
Yet other institutions like.
In the arts and cultural World like museums, or partially open now and.
So.
Figured out on a managed being partially opened.
Some of our other verticals schools.
Schools are open and whether their students are remote.
Going in to the classroom.
They remain open and.
They are in a different shape on a performing arts center, so it's been different by vertical.
Some of them have been they've remained aggressively buying more cloud solutions some of them have slowed down because they had to focus on their core operations of their business. So it's a mix.
We also see lots of opportunities in our <unk> platform.
The world is driving.
Corporate social responsibility and ESG initiatives, and we have a platform for that and your costs. So we see lots of opportunity there as well and frankly that really hasnt slowed down.
Because of the pandemic and so it's a bit of a mix on our verticals that.
We closed the year, well and to Tony's point and a good start from a booking standpoint in January.
Yes, it's mixed by vertical but.
Pretty good start to the year.
There's lots of opportunities there.
To increasingly improve the business as we get into.
Yes vaccine distribution and.
More verticals.
On booking more deals with us and in person events coming back I think it will just build over the course of this year.
Thank you. Our next question comes from the line of Rob Oliver with Baird. Please proceed with your question.
Great. Good morning, guys. Thank you very much for taking my question, Tony just wanted to.
Maybe double down a little bit on some of your comments on.
I'll Echo what others have said really appreciate that.
Upside downside scenarios on the detailed there that you guys provided.
It struck me you said debt bookings.
Bookings in January were not only better than expected, but better than prior year, but then you guys also said debt.
Don't really have any visibility on on you know.
On bookings will turn so I'm just curious.
How to reconcile those comments and then maybe if you can just I know January is a lighter month, but maybe if you could provide a little bit more color on what youre seeing in January and if.
And some of the other.
Its verticals, we've certainly seen.
Some acceleration of digital transformation and just wondering whether whether that's perhaps what youre seeing or was it simply pent up demand and I had one follow up.
Yes, Rob.
It's interesting when we look at our plan this year.
Your comment on expectations for bookings.
We had done a lot of work on our go to market over the last several years walking into 'twenty.
And we had very high expectations for last year that we were going to see significant improvement in sales productivity and in total bookings we plan to have as you know.
A much larger percentage of our <unk>.
Our sales reps to be fully productive because we had had a lot of turnover over the prior couple of years as we were transitioning our models to the Hunter farmer and changing comp plans on all of those things. So we expected a significant improvement in productivity at an <unk> level and had more total aes as well as company. So 2020 was actually a.
Very significant expectation for bookings increase that unfortunately was unwound because of the pandemic on that unforeseen circumstances.
Heading into 'twenty one.
We're expecting that some of the incremental investments, we made last year and continue to make in new tools and approaches.
On new AI capabilities more digital marketing more lead Gen efforts, those kind of things will help but we still have what we think is going to be a bit of a soft bookings environment for some period of time at least in the first half of the year as Mike said until <unk>.
All of our prospects and customers get more comfortable that they are coming out of the pandemic and net.
He was in museums and all of the related things are going to be on open back up and then get back to some sense of normality and so we still expect to have some softness on the bookings front first part of the year.
January was good across the board on almost all fronts.
Pipeline looks good for the quarter, which bodes well for bookings like I said bookings came in ahead of plan retention renewal rates were ahead of plan payments perform well consumer just giving performed well. So we feel good that we're on good footing, starting the year, which is very nice place to be.
That said, there's still quite a bit on uncertainty about the duration and depth of how we will be impacted for the next few months at least until the vaccine gets out there and we get some herd immunity and things open back up.
Thanks, Tony that's helpful. Mike I had one follow up for you you know over the past couple of years and you just got asked about M&A, but maybe I'll ask a different way.
As you look at some of these newer verticals, where you guys.
Planted a lot of seeds like base higher Ed and others.
Obviously the pandemic is.
Change the focus but just curious how you think about those going forward and if some of those seats that you have planted.
<unk> two <unk>.
Started to grow at all or what you see there thanks guys.
Yes sure.
This does fees are growing.
It's early days.
Some of those areas.
Excuse me.
Those verticals are strong verticals for us the two you mentioned.
So we continue to invest in our product portfolio in fact, we've increased investment in R&D.
Starting last year and into this year, because we're going to keep driving innovation and we think there's more opportunity to just go faster.
The things like data center, and public cloud transition and innovation in the product portfolio combined with like I said before still interested and active in M&A and I think theres opportunities that continue.
In that space so thanks.
Thanks.
Thank you. Our next question comes from the line of Matt Van Vliet with BTG. Please proceed with your question.
Yeah, Hi, guys. Good morning, Thanks for taking the question maybe a quick follow up on that last one.
Mike as you look at Church management, and the higher Ed space I think two of the kind of sub verticals that you've really invested in aggressively over the last couple of years.
Just wanted to hear more about the bookings trends and really kind of the expectations for 'twenty, one and those two areas.
Yeah.
Mostly remain kind of operational in some capacity and a lot of ways. They had to add virtual capabilities that maybe they didn't have before.
Maybe just walk us through kind of those two in particular that.
What the plans are and kind of where you're investing incrementally to drive more growth.
Yes, sure so, yes, higher Ed and churches saw a bit of a different world last year.
Higher Ed kept operating with students being remote.
Churches really had to pump the brakes on having people in attendance.
And higher Ed.
Traditionally is more sophisticated because they probably have a CIO and staff.
Have large enterprise systems and churches are in the main small institutions with not a lot of resources and so I think it was more difficult than it was more difficult for churches to sort of go digital if you will because they werent necessarily just set up that way being a small institution.
Compared to a university.
So that's sort of one set of color on the two different markets.
Our progress in churches was pretty good last year on might say, we did really well in our traditional systems like fund raising and financial platforms in the church space.
<unk> management is still a growing platform for us.
And you get a lot of these smaller institutions like churches are even like I said.
Smaller performing art centers are smaller non profits.
They had to solely focus on.
Their operations early in the pandemic not necessarily signing up for new software solutions right and they focused on that and they are coming out of that now they have all done pretty well focused on that we saw the online component of churches really take off.
Online, giving took off in churches.
A lot of it was new for them they had to get trained and get efficient. There. So that really took off so it's been a mix. It's a difference again between those two kind of verticals. When you look at those two we have lots of different verticals.
Some are.
Thousands and thousands of small institutions like churches as hundreds of thousands of small institutions.
In some of our bigger like large non profits or hospitals or higher Ed bigger institutions with big it staffs.
Fair to differently their focus was different during.
During the pandemic, but frankly, they've all figured out.
So we think Theres a long run good opportunity for us in both of those verticals, you mentioned and kind of just across the board.
Great, Thanks, and Tony on on.
The margin and free cash flow side appreciate all the detail here, especially on the scenarios.
As you think about kind of incremental investments on a go forward basis.
Has the dynamic changed of what maybe the hurdle rate is in terms of driving topline growth versus potentially weighing on margins is there more focus on on making sure. It's kind of a an accretive element the margins before you invest on the topline.
As you have a little more focus on that holistic rule of 40, just kind of curious how the mindset has changed a little bit in what looks to be still a slower end market growth for the short term.
Yes, I think Matt certainly this year when we're still in the midst of the pandemic. There are certainly more focus on the profitability.
Frankly, because we have more control over that and so there is certainly I am keeping a keen eye on on driving that because I can't I don't have as much assurance that investments for growth will drive the right kind of returns because a bit of that is still out of our control due to the pandemic and related impacts going forward.
I think.
Our strategy still holds we've always talked about a balance approach if we see that we can.
Get adequate returns I don't think our hurdle rate has changed from that perspective, but we can see we can get adequate returns from investments for growth. We will certainly pursue those as you know.
<unk> drives typically a higher valuation in the market for our shareholders and so as always we're planning to keep a balance focus there between both growth and profitability.
That's why I like the rule of 40 right. Both sides of that are impactful on the rule of 40 itself.
So if I can drive a point of growth and a point of margin on that growth.
Double positive impact to the rule of 40 itself. So I think in the pandemic to answer your question. It's a little more focus on profit because we have more control I think post pandemic. We go back a bit more to where we were which is kind of both growth and profitability, but I think we have the ability to do both.
Thank you. Our next question comes from the line of Ryan Macdonald with Needham <unk> Company. Please proceed with your question.
Yes, good morning, gentlemen, thanks for squeezing me in here on the.
I'm on payments momentum I'm curious as we looked at the shift to E. Commerce. This year, we saw that acceleration results in a number of retailers and brands really accelerate their adoption of additional.
Channels to sell on online are you seeing at all on some of the conversations youre, having with existing customers a similar dynamic building momentum.
Adopting online payments from them.
They have lagged in the past at all.
Yes. This is Mike yes, absolutely Ryan that's why the market one.
On giving went from under 10% to 13% at the market level in one year.
Yes, we're definitely seeing that and I would equate that to the retail space.
Yes, Ryan I would add when you think about like the churches, because they couldnt have folks who aren't able to go to mass or to church <unk>.
Had to shift so many churches, especially as volumes were still kind of pass on the basket checks and cash they had to go to online timing. So there is a significant increase in the faith based space.
Move on line for tithing another giving.
A lot of the big nonprofit.
It would have the typical galas and advanced because it couldnt have those live that had to move to virtual and so that by definition moving to online versus checks and cash at the event.
A lot of folks have gone to virtual auctions as part of their events, our fund raising efforts as well, which moved those online. So theres certainly been a shift as Mike said.
And I think thats going to continue at least from some of the work on doing with nonprofits I'd expect that to be a continued thing going forward.
Excellent and just one quick follow up on the in person events.
Debt to come back around midyear are you actually starting to see your customers, putting those big events are planning those big events in the calendar obviously, they take a few months debt sort of marketing brand, but are you seeing.
Arrive in the calendar now.
Yes, a bit more confidence that debt those in person events or at least on scheduled to return mid year. Thanks, Yeah. Ryan. This is Mike Yes, we are yes. They are all planning for that.
Back half of this year, so thats a good time.
Some on the first half may still be having there Vince has been on their fiscal year, but doing them virtually.
I know, though even.
One personally as a marathon like the Atlanta Marathon is actually being scheduled I think it's late this month or early next.
And while Theyre doing is theyre changing the setup of debt and you'd have to register for a time slot instead of starting people on big packs theyre going to start them in more contained groups when.
When you're going to have to have a mask on it until you start the race and so people are getting creative and we're seeing all of those come back on London Marathon scheduled for late this year. So yes very positive on that front.
Thank you. Our next question comes from the line on Richie Deloria with D. A Davidson. Please proceed with your question.
Hey, Mike and Tony Thanks for taking my questions nice to see some resilience.
Wanted to start by following up on on the <unk>.
ESG steering committee debt that was announced last week can you give us a sense for ultimately what sort of goals that you want to get out of this.
Outside of obviously, making the stock more on chocolate.
Expenses, given the record inflows, we've seen in the ESG funds.
Are there are there other areas you see this going is that something that maybe could help your efforts on the CSR side of the equation for example on that I've got a follow up.
Yes sure Mike.
On this.
Last night, we made it's just a natural fit for blackboard, we've had such a big CSR focus over the years.
So announcing something with ESG.
Having this be a formal program with a working group, which is underway. It's just been a natural extension to kind of who we are and what we do.
We're looking at following this ads b standards that are out there.
Doing some other things that are going to be right in line with <unk>.
ESG. So it's a really good fit for us it's not just for shareholders for our employees and kind of who we on the company.
Easy natural extension for us to.
Go on this way and it is a great way to aggregate a lot of things that are already underway at the company.
Sure.
Alright, Great and then Mike I wanted to go back to a comment that you may day in the prepared remarks, which is that.
And it seems like you saw a decent acceleration on the business on.
December on I know Thats.
Obviously, a seasonally strong month, but can you just a little bit of color on what you saw in December was it payment saw an acceleration.
Or or other things that would be helpful. Thanks.
Yes sure it was predominantly payments when we've always said that the business is very scalable.
Because we have a situation with payments and.
Frankly with events to where because of our customer retention is even up.
We just need things like payments and events to happen the customers are already sold and implemented so theyre kind of sitting there and.
And activity will drive organic revenue growth, we saw that in Q4.
And in December.
And it was predominantly payments, yes the.
The other thing that happened was we also I think perform well from a margin standpoint, I mentioned in my prepared remarks, we pretty much had a rule of 40 in the month of December.
Which is very strong for us and it was really driven a lot by organic growth and some pretty good margin results. So.
It really I think proves the scalability of the company.
In that regard.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. <unk> for any final comments.
Great. Thank you. Thanks, operator, I will just close by saying we have a lot to be excited about heading into this year. Our market is once again proving its resiliency I believe we are uniquely positioned to elevate our status as a leader in this market.
We believe that steady execution against the rule of 40 financial framework and our continued commitment to disciplined capital deployment will generate substantial shareholder value.
Thank you everyone. We look forward to providing a more comprehensive update on our initiatives to accelerate long term performance at our investor session in March thanks.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.