Q2 2024 Blackbaud Inc Earnings Call
Good day and welcome to the Blackboard, Inc. Second quarter 2024 earnings Conference call. Today's conference is being recorded are there till the conference over to Tom Barth head of Investor Relations. Please go ahead Sir.
Good morning, everyone. Thank you for joining us on Blackboard second quarter 2024 earnings call I'm, Tom Barth head of Investor Relations here at Blackboard I'm very excited to have recently joined the blackboard team I likely know a lot of you I look forward to working with all of you.
Joining me on the call today is Mike genome E Blackboard, CEO, President and Vice Chairman and Tony Boor, Blackboard as executive Vice President and CFO, Mike and Tony will make prepared remarks, and then we will open up the line for your questions.
Please note that our comments today contain forward looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected please refer to our most recent Form 10-K and other SEC forms for more information on those risks.
The discussion today will focus on non-GAAP results. Please refer to our press release and the Investor materials posted to our website for the full details on our financial performance, including GAAP results as well as full year guidance.
We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business.
Otherwise specified we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures and with that I'll turn the call over to you Mike.
Thank you John and good morning, everyone.
Before I talk about our second quarter I'd like to highlight how far our company has come in these past several years by executing on our five point operating plan, we've extended our position as the world's leading provider of software to power social impact through product innovation to better serve a very specific.
Terrific needs of nonprofit customers.
Accessories implemented key revenue initiatives to enhance the predictability of our growth all while maintaining key attention to cost management and cash flow.
As a result of this work we've accelerated our revenue growth significantly improved our adjusted EBITDA margin driven sustained double digit non-GAAP EPS growth and generated significant free cash flow, which we have used to fuel a material stock repurchase program that was real.
<unk> expanded and replenished to $800 million. Our progress is also evident in our strong second quarter results.
Organic revenue growth for the quarter was approximately 7% significantly accelerating from the two 8% growth in the second quarter of 2023.
Total revenue growth was strong growing 8%, excluding the negative revenue growth impact of ever fine.
Our adjusted EBITDA margin was 36% up nearly 300 basis points year over year.
Our non-GAAP earnings per share was $1 eight up 10% year over year, which does not yet reflect the full benefit of the $200 million ASR.
I hope piece of which we'll settle later this year, but does reflect a higher tax rate.
These results are a direct result of our continued focus and execution against our strategy and operating plan, we have detailed in previous quarters and it highlights the leverage and strength of our technology franchise and financial model.
While our record of performance is exciting we're just getting started the company is approaching another inflection point in addition to improving our operations and go to market capabilities. We have successfully addressed and close the book on many of the challenges the company faced over the past few years.
Allowing us to now focus primarily on the tremendous growth and value creation opportunities ahead in the near mid and long term.
We believe blackboard as a compelling investment with multiple opportunities for strong shareholder returns.
First as an industry leader with the most comprehensive set of purpose built and mission critical software and services, we have an inherent ability to penetrate even further into a rich market opportunity.
The leverage of our financial model allows us to continue to aggressively invest in innovation, which provides great value for our customers and enhances our ability to attract new customers.
Third we generate strong cash flows and are committed to disciplined value maximizing capital returns. We believe that at current valuations blackball, it's undervalued and we plan to be aggressive and the repurchase of our stock to improve shareholder value.
Tony: I'd like to comment on the first two drivers and Tony will speak to the third as well as dive into our results and guidance.
We have a rich market opportunity in front of us strengthened by our innovation.
Tony: U S charitable giving in 2023 was over $500 billion of which roughly 100 billion is donated granted and invested through a blackboard platforms globally.
Social sector, we continue to primarily focus on mid size and enterprise nonprofits and as market leader, we continue to see great opportunities to land, new logos as well expand our offerings to our existing customers.
Speaker Change: And we appreciate that our customers have choices to for decades, we have enjoyed being the market leader with strong brand recognition and unmatched breadth and depth of our product capabilities, but we're not relying on the success of our past.
We continue to invest aggressively in innovation and partnering with our developer network through Apis to produce continuous product enhancements throughout our portfolio, including generative AI capabilities, which in turn enable our customers to raise more money, while increasing operational efficiency.
Ultimately, allowing them to spend more time executing on their charitable missions and less time on administrative tasks.
Speaker Change: We're a natural choice for customers and new prospects alike.
Alternative for our customers is a disjointed competitive landscape, where we believe no company offers the combined breadth and depth of our capabilities.
These include smaller disparate point solutions that address only single aspects of the complex comprehensive technology needs of a nonprofit or larger horizontal software companies that lacked depth of nonprofit specific functionality and offered with car complex expensive customers.
Speaker Change: Asian, and potentially additional vendors to meet customer needs.
Moving to our business results, our social sector is our largest revenue segment, representing 88% of total revenue in the quarter. The social sector is performing extremely well.
Social sector revenue grew eight 5% year over year in the second quarter, a dramatic acceleration compared to the 2% growth rate in the second quarter of 2023.
Also sector has proven to be very resilient as demonstrated through the last several downturns and the COVID-19 pandemic.
And we have great confidence in our long term trajectory of this business.
And our corporate sector performance has been impacted by every Fi, which despite being only 8% of total company revenues has been a drag on growth.
Speaker Change: Everybody has unique and valuable assets, including a comprehensive catalog of content, great customer relationships and a deep talent pool. However, everybody has faced a number of external challenges as you know.
While we have taken decisive actions, including changes to corporate sector in leadership and.
Divestiture of nonrecurring components of the business.
So I continues to be a drag on black box overall strong performance.
Accordingly.
Speaker Change: We are actively considering a range of strategic alternatives forever Fi one of which includes a potential divestiture of the business. This work is in early stages and every <unk> remains well positioned to support its customers.
We'll continue to update you as progress is made on this initiative.
Speaker Change: Before turning to Tony.
I want to reinforce the meaningful progress we've made over these past several years to bolster our foundation for success. Our operating plan continues to drive top and bottom line growth as well as strong cash flows we remain committed to repurchasing as much as 10% of our outstanding shares in 2024.
Our near mid and long term future is bright.
I'll come back after Tony in a few minutes with some closing thoughts and then we'll take your questions Tony.
Tony: Thanks, Mike.
Tony: I'm very pleased with our continued progress and remain excited about the road in front of us.
Tony: Execution on our strategy and operating plan is visible in our positive top and bottom line financial results.
Looking to the second quarter results.
Tony: Revenue was $287 million up 6% year over year, and almost 7% on an organic basis.
Tony: Our social sector, which represents the lion's share of Black box revenue at 88% continues to perform particularly well with revenue growth of eight 5% within the social sector contractual recurring revenue grew nine 5% year over year, while our transactional recurring revenue and the social sector.
It was up eight 2%.
The corporate sector, which represented approximately 12% of total revenue in the quarter declined nine 2% and continues to be weighed down by underperformance at Evercore.
Mike: Recall ever buy only represents 8% of the company's total revenues and our results reflect the divestiture of ever Fi U K that was completed in March of this year, we expect headwinds at <unk> to continue and as Mike said earlier, we're pursuing strategic alternatives for this business.
Moving to below the revenue line. We're also pleased with the outcome of our continued cost management initiatives that drove a 290 basis point year over year improvement in our second quarter adjusted EBITA margin of 35, 7%.
Speaker Change: We over achieved on our rule of 40 golf for the quarter with the result of 42, 4% and are well on our way to our rule of 40 goal for the full year 2004.
Speaker Change: We generated $36 million of adjusted free cash flow in the second quarter taken together with a strong adjusted free cash flow generation in the first quarter of $53 million. Our first half adjusted free cash flow is up approximately 50% compared to the first half of 2023.
Our robust free cash flow and gives us confidence to continue investment in a number of critical areas like product innovation and stock repurchases. In addition to our previously announced ASR, we plan to be aggressive in repurchasing our stock at the current valuations.
Speaker Change: As recently announced the board of Directors has reauthorized expanded and replenished the company's existing stock repurchase program raising the total capacity from 500 million to $800 million available for repurchases of the company's common stock.
We believe there is no better use of capital than investing back into the business through product innovation and returning capital to shareholders around these valuation levels.
Speaker Change: Before I talk about annual guidance I'd like to highlight several items for you to think about which may help in developing your views for the remainder of the year and into 2025 regarding rabbit.
In addition to the continued anticipated headwinds than ever Phi we cannot predict whether there will be any viral charitable giving events in 2020 for like the ones. We benefited from in 'twenty three and if there arent. This creates a more difficult compare for the second half of 'twenty four.
Second as a reminder, our modernized approach to contract renewals is expected to generate sustained revenue growth for the business. In summary, we are moving our customers to a standard three year contract, which is new for us and we're following the industry norms by implementing annual price escalators within those.
Multi year contracts, which is also new for us.
Refer to our investor deck for additional information on this program.
Speaker Change: Additionally, here some bottom line items.
Speaker Change: During each third quarter the company implemented its annual employee wide merit increase which causes margins and cash dipped slightly we plan to continue to maintain tight controls on costs and head count, but there may be quarter to quarter fluctuations with the timing of attrition and hiring as we continue to invest in the business.
Next our business has some degree of seasonality with our second and fourth quarters typically outperforming the first and third quarters as far as quarterly pacing as I mentioned earlier, our third quarter is expected to be a difficult compare over Q3 of 2023 due to the increased levels of viral charitable giving events last year.
Of course, we could see some of these events reoccur.
Lastly, regarding our accelerated stock repurchase or ASR. This program had an initial delivery of two 1 million shares in March and we currently expect an incremental delivery of more than 500000 additional shares at settlement later this year.
Turning to guidance, we are reiterating our full year guidance ranges across all metrics.
Core social sector continues to perform well and is tracking to plan.
Due to underperformance at ever Phi We currently anticipate being towards the low end of our revenue guidance range at the same time, we anticipate being at the high end of our adjusted EBITDA margin guidance range due to our strong profitability performance year to date and continued focus on cost management.
Speaker Change: We have a lot to be proud of in the first half of 'twenty four we continue to execute on our operating plan to drive strong top and bottom line results and cash flows, we're especially pleased with the performance of our core social sector and have confidence in its ability to produce profitable growth going forward.
We remain focused on providing enhanced value to our customers and our shareholders. We also as Mike discussed are committed to removing the negative impact of <unk>, which we believe will accrue value to the benefit of our shareholders. Let me turn it back to Mike for a quick comment and then we'll open up the lines for questions.
<unk> revenue growth and margins have improved dramatically over the last couple of years, including this quarter, we feel that much of this success, including high single digit revenue growth in our core social sector, expanding EBIT margin and strong free cash flow seems to be undervalued by the investment community.
Therefore, we will continue to aggressively invest in the repurchase of our shares.
Proven operating plan is driving tremendous results and we believe black box near mid and long term future is bright. Thank you and we look forward to your questions operator.
Speaker Change: Thank you, ladies and gentlemen, if you would like to ask a question. Please take note by pressing star one on your telephone keypad if.
If youre using a speaker phone. Please make sure your mute function is turned off and allow your signal to reach our equipment.
Again as a reminder, please press star one to ask a question.
Get yourself to one question plus a follow up to allow us to facilitate as many questions as possible.
Our first question is coming from Brian Peterson of Raymond James. Please go ahead.
Thanks, guys for taking my question, So Mike I'd love to get an update on how the bookings environment looks on the social side, how does the health of that business look at it as we're thinking about the lower end of the growth outlook for the year is that solely related to what's going on with ever by just just wanted to get an update on the health of the social side of the business.
Mike: Yeah sure Brian bookings are doing fine on the social side of the business, which is pretty much the whole company minus ever five new logos are good up product sales productivity is up.
Speaker Change: And the revenue drag is.
Totally related to <unk>.
I'll just point out just.
<unk> said this in the prepared remarks, but Q.
Q2, the social sector is about 90% of the company last year's Q2 grew at 2%. This year eight 5% massive improvement in the business and we've got plans for every <unk> as I've mentioned.
Speaker Change: To improve the business, including a potential sale.
Speaker Change: Maybe you could follow up on that.
Speaker Change: Understand ever fly or even looking at the corporate segment in general how could we think about the margin profile of that business relative to the social side anything you can share there Tony.
Speaker Change: Yeah.
Yes.
<unk> business with first one thing Brian wanted to clarify on the on the revenue outlook. The other upside for us for the back half is if we see some charitable viral events as you guys recall and we've talked about in prior comments. We added we'll have a tough compare this year, we had a really good Q3 and Q4 last year. There were several very large charitable viral events or deaths.
Our forecast right now would not incorporate any of those but that would provide some upside if we see some of those from an <unk> overall profitability contribution. It is very dilutive on both the growth front and on the EBITDA front.
So there is there's a lot of work for us to do on that and we've got quite a few different plans in place as Mike stated, we have made management changes already and we will keep you guys updated as we make progress on those efforts.
Speaker Change: [laughter].
Pam: Thanks Pam.
Thank you. The next question is coming from Rob Oliver of Baird. Please go ahead.
Yeah.
Robert Cooney Oliver: Alright. Thank you guys good morning, and I apologize for any background noise.
My first question is for you just in light of the announcement regarding <unk> and the potential strategic alternative consideration I was wondering if you could just talk to your general view about the corporate sector. The corporate part of the business.
Is that still an important part of the business for Blackboard why do you need to be in it.
Speaker Change: At all and talk about <unk>.
And whether you should remain there and then I just had a question a follow up for Tony as well.
Yeah sure Rod the corporate sector include several platforms predominantly ever find in your cars. Your cards business is doing really well, it's actually accretive to the company's growth.
Tony: The drag part of it is ever Fi.
Your college is a very large global footprint, that's connected to global nonprofits.
And connects us to corporations that donate to nonprofit so it is a part of our ecosystem and again that platform is doing really well growing nicely and expanding.
Internationally.
So I do think it's an important sector. It is connected to the nonprofit sector through companies.
On that.
Your cost side and again, we said this a few times <unk>, 8% of the company rest of the company is doing really well.
Yeah.
Great. Okay. Thank you I appreciate that and then Tony I. Just you know you talked about migrating your customers towards three year renewals three year contract on the social side of the business.
Speaker Change: And it does seem like that's been going well you can certainly see it in the growth rate I'd be curious I know there was a cohort and I've asked you. This question before there was a cohort of customers that took one year renewals and not three and you did call out some potential for concern that we need to get through that cohort where are we in that cole.
Speaker Change: Now if you can give us an update that would be great. Thank you.
Yeah, Rob Thanks for the question, we as you know started this program.
Speaker Change: Late Q1 of last year. So we have come up on a good chunk of those initial contracts where customers may have chosen to one year versus a multiyear agreement. That's what we're keeping an eye on the good news is is that our renewal rates have fared very well overall, our gross dollar retention number which.
We now disclose publicly you can see here.
Speaker Change: Steady at 90% for the company has pulled down a little bit <unk>, but overall, we held constant at 90% gross dollar renewal year over year, which is very positive considering all the efforts on the contractual front.
Speaker Change: Yes, Hey, Rob I'll, just add I think just for clarification. So yeah, there's programs going on for a while now as part of the business.
It includes moving customers to three year contracts for your question also includes annual price escalators, which we've never had before and these will continue we need three year contracts renew we will also have annual price escalators and call. It years four five and six if you will the program doesn't end after the initial three years continues.
Okay.
Great. Thank you guys.
Rob: Thanks, Rob.
Thank you. The next question is coming from Matt Vanvliet of BTG. Please go ahead.
Matthew David VanVliet: Yes. Good morning, Thanks for taking my question I guess as you've gotten through a lot of the summer here and headed into the beginning of the next school year I'm wondering if you could just give us a little bit of color on how the K through 12 business is doing.
And in particular any areas of that portfolio that seem to be outperforming.
Speaker Change: Yeah. Thanks, Matt K 12 is doing really well.
We've got some very good leaders in there.
Sales in product and engineering.
Great market presence, we made an equity investment in a partner company to help with that portfolio that we announced a little while back.
Which is K.
K 12.
Site marketing and admissions.
Set of capabilities. This is additive to our platform. So we're doing really well there.
The platform that runs the schools to fundraising financials and the tuition management.
We're having a great year and lots of <unk>.
Growth opportunities.
Okay and then just following up on the do you ever find a headwind here.
Speaker Change: Could you at least try to quantify how much of the forward outlook being at the lower end is due to ongoing maybe churn or at least down cells customers versus an underperformance on new bookings I'm, just curious on sort of where you're feeling brunt of it today.
Yeah sure thing again, it's 8% of the company to be clear.
It's predominantly in bookings and the revenue drag on the company is ever Fi.
The rest of the business.
Speaker Change: 90% or so in Q2, just grew eight 5%.
Yeah.
Alright, thank you.
Welcome Beth.
Speaker Change: Thank you. The next question is coming from Parker Lane of Stifel. Please go ahead.
Hey, Thanks, guys I appreciate you taking the questions Mike mentioned the company, reaching another inflection point as a result of you putting a lot of the challenges of recent years in the rearview mirror can you just sort of rehash, what some of those challenges. The most notable challenges were and how it sets the company up for sustainable growth going forward.
Yeah.
Speaker Change: Yeah, you bet. So we put in this five point operating plan, which was queued up to go.
And then Covid showed up so we tabled it for awhile.
And we've executed a lot of parts of that plan. We've closed data centers, we've implemented new list prices, we've implemented a new contract renewal program.
We're driving a lot of innovation. So all of that is coming to fruition. That's why the base company grew from two to eight 5%. This past quarter. The other things that are predominantly behind US now we've got a security incident. Many years ago, we had some some legal issues with that and those are pretty much all behind us now.
Announced settlement with California for example, and in fact yesterday, we concluded a class action matter, which is now over as well.
So that's also behind us so those things are a distraction for management and.
Speaker Change: We have those behind us so lots of good things happening related to.
If you look at things like just free cash flow. This year year to date, we're up 50% year over year free cash flow.
Speaker Change: The EBITDA is about 36% in the quarter.
Mentioned revenue growth a couple of times so.
Speaker Change: All the key metrics are really coming together well from a growth standpoint and margin expansion.
Yeah very helpful and then Tony on the viral charitable giving I understand you have a very tough comp can you just talk about the visibility you have into those campaigns I know they kind of are related to specific events that are typically unforeseeable. So how do you consider that in your guidance for the balance of the year.
Yes, we currently Parker would not include any charitable viral events in our forecast and so that's the comment I made earlier on one of the earlier questions was if we do see some of those in the second half that would provide some upside on the on the revenue guidance from where we currently think we may be towards.
Speaker Change: Low end due to amplify the visibility is tough as you can imagine because a lot of those are kind of just surprises and they could be weather related or.
Speaker Change: Unfortunate things like wars in.
But theres a lot of other types of.
Speaker Change: Charitable viral events races, and walks and things that may come up that we have a little more visibility into particularly the ones that really drives things like last year were unforeseen again events and we will just have to wait and see what the second half brings we didn't have anything meaningful in the first half at all.
Speaker Change: Alright. Thanks again, guys wait we've made though is that those represent some upside for the second half of this year not downside there is some upside yes.
The drag in revenue again as everybody.
Mike: Got it thanks, Mike.
Mark: Thanks Mark.
Thank you. The next question is coming from Kirk <unk> of Evercore ISI. Please go ahead.
Kirk: Oh, yeah. Thanks. Thanks, guys. Appreciate the time, Mike or Tony can you just talk about sort of the.
The new contract cycle for you all I mean, I think there was supposed to be roughly 30%. This year end and then the balances in the next couple of years I guess, how is that going or any clients coming to you than wind does serve renew earlier talk about sort of shifting or a different contract terms earlier, just give us an update on that.
Speaker Change: Yes, it's going well.
Some slides on this in the IR deck to try to explain it it's going well, it's just a core part of the company now.
We'll be done with about 65% of those available by the end of this year and the program is going as planned.
Speaker Change: <unk> been no changes pretty much the bell.
Speaker Change: Both of the customers are signing up for three year contracts and as we get through this we have significantly less in last one year contracts will have some small amount of customers remaining on one year contracts because they are mandated to have only a one year contract, which is fine but in the main will be a pretty much a three year contract company.
Speaker Change: That renews about 30% to 35% of them every year. So in 18 months or so we'll start to cycle again, we'll renew those for three year contracts with annual price escalators. So all in all it's going really well.
Speaker Change: Okay, Great and then Tony sorry, if you touched upon this I jumped out a little bit late but on the divestiture of <unk> nonrecurring business. The U K I assume that's a very small part of the drag I think the bigger part of the drag incorporate as just softer bookings and retention is that is that the way to think about it.
Speaker Change: Correct, Yeah that was a single millions of dollars business that we divested of in the U K and in our organic numbers would adjust for that.
Speaker Change: Okay, that's great I appreciate it thanks guys.
Speaker Change: You're welcome. Thank you at this time I would like to turn the floor back over to Mr. Barnes for closing comments.
Mr. Barnes: Thank you Dana and thank you everyone for joining us today in August and September we will be attending a number of investor events include several investor conferences, which are now listed on our Investor Relations site. We look forward to speaking with you soon and have a nice day.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines log off the webcast at this time and enjoy the rest of your day.
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Okay.
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