Q3 2021 Blackbaud Inc Earnings Call
Good day and welcome to Blackball, its third quarter 2021 earnings call Today's conference is being recorded.
I'll now turn the conference over to Steve Hoffman Director of Investor Relations of Blackwood. Please go ahead Sir.
Good morning, everyone. Thanks for joining us on Blackhawks third quarter 2021 earnings call. Joining me on the call today are Mike <unk> Black was president and CEO and Tony Boor, <unk> Executive Vice President and CFO.
Mike and Tony will make prepared comments and then we will open up the line 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 unless otherwise specified we will refer only to non-GAAP financial measures on this call. Please.
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 investor engagement activities for the quarter during the fourth quarter. Our team will be participating in the credit Suisse 20, <unk> annual Technology Conference Raymond James Technology Investors Conference and Barclays Global Technology Media and Telecommunications Conference. We will also be holding virtual.
Investor meetings hosted by Stifel on November 10th and Baird on December 14th with that I'll turn the call over to you Mike.
Thank you Steve Good morning, everyone. Thank you for joining our call today.
Third quarter results reflected a fantastic quarter of execution for blackboard exceeding even our own expectations on our much improved market backdrop, we achieved near double digit recurring revenue growth, which represents roughly 95% of our total revenue <unk>.
Top line growth drove a roughly roughly 10 points improvement on the rule of 40% over the year.
And we're on pace to potentially have our best free cash flow year in the company's history.
I firmly believe we're at an inflection point for.
Our market and our company as the shift to a digital first world continues to accelerate.
We've seen this shift as we have successfully transitioned to remote first company, where we are building a connected engaged culture, regardless of where people are located and we've seen this in our customers as they are meeting and exceeding new expectations with online grant applications.
<unk> based fundraising tools virtual walks runs and rides timed entry capabilities for admissions, even virtual prayer walls for faith based organizations.
Just to name a few as I've mentioned before the percentage of giving done online grew by 40% in 2020 with roughly a quarter of that giving taking place on mobile devices.
We believe these trends are here to stay.
And we are transforming and accelerating how people and organizations connect by combining our end to end commitment to driving outcomes for our customers with a technology plus services to increase velocity performance and scale.
And we're just getting started as division reset for the Sky platform is becoming a reality also last month tens of thousands of customers and prospects joined us virtually at our annual conference <unk> begun to witness how the latest innovations from blackboard can help them drive more impact while maximizing their.
Time and resources.
Turning to the remainder of the year, we're again raising our outlook for full year 2021, we have high confidence we will exceed the $920 million high end of our upside revenue scenario for 2021 laid out on our Q4 2020 call earlier this year and we.
Expect to see further acceleration in our full year reoccurring revenue growth rate in 2022.
We're also raising our best estimate for profitability and free cash flow.
And we continue to believe blackboard is undervalued, thus we executed on our share buyback program again in the third quarter, we continued to execute on our four point strategy in Egypt progressing well.
Today I'm going to provide an update primarily on our recent innovation efforts.
As usual following my comments I will turn the call over to Tony to cover the financials in more detail.
A big part of our strategy is to delight customers with innovative cloud solutions to drive more impact.
Over the past year I've seen the innovation and determination of both our experienced experts and incredible new leaders, who have joined our engineering product and customer success teams.
I am, especially excited that over 50% of our newest team members come from backgrounds, where historically underrepresented in tech.
We believe that by building a diverse team that reflects our customers and communities will have deeper and more representative insight drive's impact throughout everything we do.
We're not just helping our customers digitally transform the old ways of working we're creating tools that offer breakthrough improvements and reinvent the way they accomplish outcomes and track results for.
For instance.
We recently released an entirely new experience for Black box grant, making and we've since converted every existing grants customer. So the new platform. A great example of the vision, we have for our entire portfolio.
Another example is a major recent release and financial edge NXT.
Where we're transforming the entire accounts receivable experience.
This provides a modern experience and a new streamlined workflows and controls in areas, such as invoice creation billing and receiving payments as well as holistic relationship management across vendors customers and sponsors.
And in 2022, we plan to release, a new wave of data intelligence capabilities.
Extending our success in this area by bringing together the industry's most robust database, a philanthropic giving with artificial intelligence to drive unmatched insights for our customers.
We're also committed to giving customers the flexibility to benefit not just from black box innovation, but the innovation happening outside of our walls as well.
Our developer community is growing rapidly with more tools than ever to create new capabilities or extend black box solutions.
We now have over 5500, non blackboard developers registered in our ecosystem.
And we've seen substantial growth in the black box marketplace, where over 6400 organizations have found a curated app to help them work smarter.
I'm excited about the use cases, we're seeing in the market such as in App that integrates shopify with raisers edge NXT or a new API integrating your costs with workday, enabling our customers to easily connect employee data into the <unk> platform for more effective employee engagement.
We're also enabling non developers with low code or no code tools, such as our Microsoft power platform connector to build automated workflows with our api's without having to be a season developer.
We also continued to innovate is online gift become a greater share of our customers' total donations.
At <unk>, the team announced that giving checkout with our complete cover model is now available in the U S with additional markets to follow after seeing strong success in the U K.
You can think of giving checkout is an easy to add simple to use donation button that can be used by any nonprofit organization.
Giving checkout differentiates itself from others with the complete cover model, where there are no processing fees for the organization instead donors choose at checkout, if they want to cover the processing fees.
We've tested this extensively with great success in the U K without just giving platform and it's a real win win for blackboard and our customers.
I'll summarize by reiterating that I believe we are at an inflection point for our market and our company with significant growth opportunities ahead.
Were raising our estimates across the board for full year 2021, and we expect recurring revenue growth to accelerate and full year 2020 to our investments in the Sky platform continued to deliver results.
We're focused on fueling future growth through additional investments in innovation customer success security and cloud infrastructure and a higher velocity go to market motion.
Our market has once again proven to be resilient and innovative in the face of a challenging pandemic environment and we continue to strengthen our leadership position as the best long term partner for our customers.
Blackrock is well positioned to capture the organic and inorganic growth opportunities in front of us, while driving meaningful acceleration and financial performance.
Overall, we had a very strong quarter and we're well positioned to carry this momentum through the end of the year and into 2022.
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 Q3, and our latest outlook for the full year before opening up the line for questions.
Refer to yesterday's press release, and the Investor materials posted to our website for the full details of our Q3 2021 financial performance.
You've heard us say on previous calls that we expected an acceleration of revenue performance in the second half of 'twenty, one Q3, not only delivered but exceeded those expectations.
<unk> revenue grew nine 2% on an organic basis and this should serve as a proof point for what is achievable as we execute against the 10 growth drivers laid out our investor session earlier this year.
Strong transactional revenue performance was a key driver of overall revenue growth and benefited from larger in person events, returning and a higher percentage of online, giving compared to historical levels. A trend. We believe has staying power as.
As an example of the success, we're seeing here just giving had one of their best revenue month ever.
Our contractual recurring revenue, which is the core of our business grew $3 million in Q3, we've seen year over year improvement in sales productivity per rep and overall.
Our bookings with some of our early pricing initiatives starting to take hold.
So we continue to see strong trends in renewals with our customer retention rate increasing in the quarter to 93%.
Onetime services and other revenue declined $2 million, which was approximately a 200 basis point drag on total revenue growth.
Again, we expect this drag to bottom as soon as 2022, which should result in a lift on total revenue growth.
For the second quarter in a row the trends we're seeing in the business are leading us to raise our best estimates for the full year and we now expect to exceed the top end of our upside scenario laid out at the beginning of the year, which was $920 million.
Moving to earnings our third quarter gross margin was 59% we generated adjusted EBITDA of $62 million.
Representing an adjusted EBITDA margin of 27%.
Diluted earnings per share of <unk> 78.
We laid the foundation for considerable margin expansion going forward and through three quarters of 'twenty. One we had an adjusted EBITDA margin of 27, 3% inclusive of our investments in areas like innovation customer success security and cloud infrastructure and a higher velocity sales motion.
Our best estimate for full year, adjusted EBIT margin of roughly 25% included certain investments being back half loaded while we're making good progress here. Some of these investments are likely to push into early 'twenty, two particularly in areas, where we're increasing head count.
We continue to do a great job attracting top talent.
But in a competitive labor market.
The rate at which we're adding head count is less than we had planned our prior investments in the people and tools needed to create a best in class candidate experience are paying off and we've increased our recruiting capacity as we look to accelerate hiring.
Given our revenue over performance in Q3 and anticipated timing of investments. We now expect to achieve an adjusted EBITDA margin of at least 26% for the full year 'twenty one.
That brings me to the cash flow statement and balance sheet, our free cash flow was $58 million for the third quarter, a year on year increase of $16 million, representing a free cash flow margin of 25%.
Through three quarters, we generated approximately $132 million of free cash flow and our current plan has us on pace for one of the best years ever in terms of free cash flow generation.
Our latest modeling suggests we're likely to generate at least $150 million of free cash flow inclusive of the heightened investments planned for Q4.
I'll also note that we completed $40 million of opportunistic share repurchases during the quarter, we still feel that the valuation today does not fully reflect where we're heading as a company.
As of September <unk> September 30, we had approximately $111 million remaining and available under our current share repurchase authorization.
We ended the quarter with $500 million and net debt our capital strategy calls for a debt to EBITDA ratio of less than three five times and at the end of Q3, we stood at one seven times and we had $425 million of borrowing capacity.
As we look forward, we're actively evaluating acquisition opportunities and we plan to continue opportunistically executing on share repurchases when our internal estimates determined the company shares are undervalued by the market.
To summarize our outlook for 'twenty, one from a revenue perspective with three quarters behind US we have high confidence that we will exceed the high end of previous modeling of $920 million for the full year 2021 revenue.
And that we may prove and that that may prove to be conservative depending on our fourth quarter transactional revenue performance.
Our full year recurring revenue growth is on pace to accelerate year over year and looking ahead to 'twenty two our plans call for further acceleration in our recurring revenue growth rate.
Shifting to profitability, we expect to achieve an adjusted EBITDA margin of at least 26% for full year 'twenty, one inclusive of the ramped investments I spoke to earlier some of which will carry into 2022.
And our strong performance year to date combined combined with our outlook for the fourth quarter suggests we should generate at least $150 million of free cash flow I'll remind you we could see some variability here depending on Q4 transactional revenue performance as fourth quarter tends to be our seasonal high for payments revenue.
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 sheet management.
Curious oversight of investments in the business, including acquisitions, and identifying and efficiently returning excess capital to shareholders, including the option for additional share repurchases.
In summary, during the third quarter, we saw nearly double digit recurring revenue growth, representing roughly 95% of total revenue.
We achieved a roughly 10 point improvement on the rule of 40 year over year and we're on pace to potentially have the best free cash flow year in the company's history with.
We've raised our outlook for the full year 'twenty, one and have increased confidence in our ability to accelerate financial performance in 'twenty, two and the years to come we have greater visibility to our near term performance and why nobody truly knows how long the pandemic will last we are increasingly confident in the resilience of our business.
Our market and our ability to accelerate our financial performance, we're aiming to achieve the rule of 40 as a company and accelerating growth combined with our margin expansion initiatives has us well positioned to accomplish that goal and our proven capital strategy inclusive of M&A and our share repurchase program provides us with ample.
Optionality to allocate capital in a way that maximizes value for our shareholders over the long term.
With that I'd like to open up 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.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
As a reminder, please press star one to ask a question. Please limit yourself to one question plus a follow up to allow us to facilitate as many questions as possible.
We will now take our first question from Parker Lane with Stifel.
Yes.
Hey, guys. Thanks for taking my question.
Mike I was hoping you could talk a little bit about.
The pickup in sales productivity across the business are there any particular areas that you'd point to that you would say have been inc.
Incrementally positive relative to your commentary last quarter or is it mostly a balanced performance are you seeing productivity improve across the board.
Yes, Thanks Parker for your question.
We're seeing it across the board.
Gotten better at sort of more prescribed prop.
Products for our kind of SMB marketplace, we've seen improved productivity there.
And in all of our verticals I look at the deals that we've closed.
In the quarter and year to date, and we're seeing good performance across the different vertical markets and internationally.
Canada is really cruising well and we're doing well in specific in the UK. So we've seen productivity improvements across the board on a year over year basis.
Got it and then in terms of hiring you mentioned that youre, increasing your recruiting capacity a little bit behind in the plan.
Where are we seeing those investments is that most of the sales and marketing focus or get it veteran area, where you're looking to accelerate R&D investments, maybe hiring there as well and how soon do you think about.
The mix of employees, who are looking to bring on here as you enter 2022.
Yes, it's a couple of areas. So you can see in the R&D line, we're investing more there big focus there on infrastructure security and innovation.
We're adding more in sales.
And a customer success. So those are the three big areas.
That we've been adding head count.
This year in the last 18 months.
Got it I appreciate the feedback and great quarter. Thanks.
Thanks.
Your next question comes from the line of Rob Oliver with Baird.
Hi, good morning, guys.
Mike.
A question for you just on.
Calling out the inflection in the market.
It's pretty exciting I just wanted to check.
Dive into that a little bit more.
In terms of.
What youre seeing in.
In particular, that's driving that inflection is it.
Kind of a post COVID-19 normalization or return to in person events.
And then.
Following up on that are we back.
Do you think the levels.
We saw pre Covid in terms of the potential for fundraising and fund raising events and some capital budgets coming back to your customers and then I just had a quick follow up thanks.
Sure Yeah. So we're seeing we've been saying for a long time that the back half of this year, we thought we'd see a return to growth in the third quarter proves that so yes, we're seeing a return to events, we're seeing all of our markets.
Basically sort of the NBA and digital and so theyre actually mixing in person events and digital as opposed to just digital.
These last year.
We're seeing some of our markets open now that we're closed before we're also seeing a significant shift to digital first and digital only from a fundraising standpoint grew a lot last year online fundraising grew at 40% or so year over year last year and Thats here to stay so we're seeing all of that mix.
And the pandemic showed folks they need.
Solid cloud partner to help them when they are in the facility or not so it's a mix of a lot of things its transactions.
We are seeing coming back its bookings in general great year over year growth and productivity.
So we're seeing that across the board.
And Rob This is Tony I'll, just add I think capacity wise at least what I've seen from the nonprofits I'm <unk>.
Involved with and just some of the events I've gone to capacity is not all the way back yet so there's still some constraints from the pandemic of how many folks are able to participate in the gala or folks in the museums and zoos and all those other things and then the secondary piece of that is we missed a lot of the seasonal high for events.
Earlier, this year, where things were still a bit tighter from the pandemic and so I think we have some upside next year.
As we kind of come out of this and in that spring and summer event schedule, we should see better participation than what we saw in the first two quarters of this year, yes. Another add there too is we talked about this quite a bit and we had our investor day earlier in the year, we're implementing several initiatives around pricing that we kind of.
Outlined in that presentation.
And.
Those take a little while to come to fruition. So some are implemented some are coming so theres good upside there going forward as well.
That's really helpful color guys. Thanks.
My follow Up's brief but.
Essentially open ended but Mike you guys.
Talked about the pace of R&D spending or Tony you talked about it.
Definitely that impressive.
With the products.
And being out of the user conference last month.
Giving search AI, just Mike briefly would be curious.
Kind of what you're most excited about when you look at that kind of pace of innovation, which you guys have kind of clearly dialed up the not the nos.
Rob on a little bit here in.
I'd be curious to hear which ones you're most excited about thanks guys.
Yes, there's quite a few to your point.
We're really getting some awesome leverage of.
Multi use engineering platform that we built which we called Sky and it's an engineering system, that's touching a lot of products and we're using it across all of our verticals in one way or another and so it's driving accelerated innovation I'd say the biggest thing that we just completed loans are black.
<unk> grants management platform that has been completely transformed in the new engineering system, and we literally have moved 100% of our grants customers to this platform in this last quarter and now it's a great. Modern go forward platform as well so that's sort of one of the.
Things I would highlight is our latest completed.
Innovations.
Thanks, again, guys I appreciate it.
Thanks, Rob.
The next question comes from the line of Brian Peterson with Raymond James.
Hi, gentlemen, thanks for taking the question. So I mean, it's pretty clear in your commentary that the environment the backdrop and the execution is getting better I'm. Just curious could you parse that out a little bit in terms of what's happening with.
With net new opportunities versus the customer base, just curious to get any color on how that splits looking.
Yeah, we're signing a lot of new logos.
In community colleges and.
Nonprofits around the world.
Or are your cards corporate platform is really growing well.
Coming much more global in its footprint.
And that when the pandemic started we sort of hunker down for a while but kept recruiting and have been recruiting folks.
Not close to a blackboard office, you recall a year ago.
We got out of some of our real estate around the world.
It's just been a fantastic transition for us and it's been going well for over a year or access to talent and diversity is like it's never been.
We're not a big company, but we hire a few hundred folks a year and we now get over 100000 applicants for those jobs and people are excited about.
Looking at Blackboard from a career standpoint, because we are sort of the perfect combination of public cloud software company that serves the market instead of customers that people care a lot about.
And so we've been really doing well from a talent and diversity hiring standpoint for well over a year now and Brian I'll just follow up I think that the.
Difficult side on the personnel piece of the business is actually attrition just in this crazy market dynamic we have right now and we've seen attrition tick up I think every company has.
So it's not been the hiring thats been the problem, but the attrition has been a bit higher than what we've historically seen and then obviously inflation is hitting us and there are certainly some inflation on the cost of personnel as well, but we're all happened to deal with.
Got it thanks, guys congrats on a great quarter.
Thank you.
Our next question is from the line of Kirk <unk> with Evercore ISI. Please proceed with your question.
Hey, guys. This is the idea here a scam you haven't heard me churn.
My question.
Two questions first.
I know you guys kind of talked about this before but you mentioned sales productivity and getting better on the contractual or recurring side of the business.
Theyre more room for productivity and improve there and how do you thinking about the balance of adding capacity versus further adding further productivity improvements when looking ahead to calendar year 'twenty two.
Yes, we are doing both so yes, there is room for improved productivity and sales.
We've seen a really nice year over year growth, but there's plenty of room for more productivity, there's no doubt about that.
And secondly, we are adding to capacity.
In a couple of sales areas as well so that continues I think the other area. We're spending some additional dollars on the digital marketing side.
To drive more lead Gen work and take some of that off salespeople. So that we can increase their kind of sales velocity as well, which will increase their productivity. Yes. We've also built a really efficient centralized sales hiring model.
Literally takes us a couple of weeks.
Hire and onboard.
Higher new sales executives, which is great so really high velocity model.
I appreciate that and then just a quick follow up.
On the payments side was there anything unusual from a seasonality standpoint in <unk>.
<unk> around like one time events and how should we think about the payments growth heading into the holiday season.
I think Mike.
Mike mentioned earlier, we saw a sharp increase like we've never seen last year in online donation volume.
Historically run at.
Total donations somewhere sub 10% was dominated online that jumped up to 13% last year. We think that's here to stay so that's one benefit and then frankly just year over year because of the impact of the pandemic in 'twenty and a lack of events et cetera last year Q3 was an easier compare.
From an online donation perspective, and so part of Q3. This year's impact is really just starting to get back somewhere closer to normal and then I think as we were answering one of Rob's earlier questions. I think there is still upside next year as events come back more fully and as capacity continues to increase backup.
To more normal levels coming out of this pandemic hopefully, we'll see some increased volumes and I think thats part of where we expect we said in our prepared comments, we expect to see continued acceleration in overall revenue growth in 'twenty two versus this year.
Awesome. Thank you guys.
You bet.
Next question is coming from the line of Rachel Friedman.
Please proceed with your question.
Hi, This is Rachel on for Matt Van Vliet, Thanks for taking my question.
Can you tell us on that debt capacity constraints that you expect to see coming off in 2020.
So.
Do you foresee some more revenues per customer with a more hybrid approach of <unk>.
<unk> hybrid events.
More incrementals digital events through the year or are you expecting to see a return of in person events.
The main events for customers.
Yes, I'll take that start Rachel thanks.
We are seeing an increase in revenue per customer.
Because of the events coming back and events happening that didn't happen.
Also seeing higher bookings.
As well in our sales performance. So we're seeing that both have that also again the industry is shifting more online which drives transaction growth for us as.
As well if you recall last year online fundraising went from 9% to 13% of total in one year and it took a decade and a half or more to get to 9%.
Big jump and Thats not going backwards. So there is that shift in the dynamics of online and mobile.
And then also more revenue per customer.
And then higher IRR and bookings.
Yes, Rachel this is Tony I'll jump in there we don't monetize.
All dollars that run through one of our customers' systems necessary to things to Mike's point that are transactional in nature.
Typically have a variable pricing model and so we will get.
Some benefit from increased online transaction volumes, certainly I think the other thing to keep in mind for next year and we've just started implementing some of these we still have some that have not yet begun to some of the pricing initiatives as well.
By bringing the UK success model with Justgiving.
And complete cover to the U S will increase revenue per customer as well. So we've got several pricing opportunities that we went through in the investor session earlier. This year that will also help drive increased volume per customer were hopeful going forward.
That's great and then just on the return to in person cooling in the fall.
Impact transaction revenues during the quarter and can you just speak to how that K 12 market is performing overall.
Yeah. So the K 12 market is performing well bookings are pretty good.
<unk>.
Our systems were so vital in the last 18 months.
Because all of our customers, we're able to operate regardless of if the students were in class or not so the administrators in the schools had the advantage of having mobile access to our platform to run their schools, regardless of student locations. So super positive we've seen a return in <unk>.
Our tuition management platform.
In the last six months.
Our schools haven't had an issue.
In class or not so.
They've all had a good start to the quarter.
Lot of good innovation happening on our platforms there.
In fact, we've got a user group here at headquarters this week and the K 12 schools that we run these user groups a lot we get their feedback.
And talk about innovative things that we're doing and things that they'd like to see some very good close relationship that we have with those schools. So yes. The K 12 market is solid for us.
Thanks, I'll hop back in queue.
Okay.
Thank you at this time I will turn the floor back to management for closing remarks.
Alright, great. Thank you everyone I will just close by saying that third quarter was an excellent example of what we're after is a company.
We achieved near double digit reoccurring revenue growth driving roughly a 10 point improvement on a rule of 40 year over year.
We're on pace to potentially have our best free cash flow year in the company's history.
As we've said over the course of this year, we have multiple levers with which to accelerate revenue growth and margin are starting to take hold.
First the pandemic recovery with event driven transactional revenue and bookings returning second a few pricing model and price catch up opportunities and third we're actively looking at M&A opportunities.
Yes.
Our outlook for the business, we believe the steady execution against the rule of 40 financial framework and our.
<unk> commitment to disciplined capital deployment will generate substantial shareholder value. Thank.
Thank you everyone.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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