Q3 2024 Blackbaud Inc Earnings Call
Speaker Change: Greetings and welcome to the Black Art Third Quarter 2024 earnings conference call. At this time, all participants are an Alisson only mode. It briefs question and answer session. We'll follow the formal presentation. If anyone should require operator assistance during the conference, please press our zero on your telephone keypad.
Speaker Change: As a reminder, this comes into being recorded. It is now my pleasure to introduce your host Tom Barth, as an investor relations. Thank you, sir. You may be in. Good morning, everyone. Thank you for joining us on Black Lives third quarter, 2020, for earnings call.
Tom Barth: Joining me on the call today are Mike Gianoni, Blackwood's Chief Executive Officer, President and Vice Chairman, Antonio Boor, Blackwood's Executive Vice President and Chief Financial Officer. Mike and Tony will make prepared remarks and then we will open up the line for your questions.
Tom Barth: Please note that comments today contain forward-looking statements subject to risk and uncertainties that could cause actual results to differ materially from those projected.
Tom Barth: Please refer to our most recent Form 10K and other SEC filings for more information on those risks.
Tom Barth: The discussion today will focus on non-gap results. Please refer to our press release and the investor materials posted to our website for full details on our financial performance, including gap results, as well as fully your gap.
Tom Barth: We believe that a combination of both gaps and non-gap measures are more representative of how we internally measure our business.
Tom Barth: Unless otherwise specified, we will refer to only 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.
Speaker Change: And with that, let me turn the call over to Mike.
Mike Gianoni: Thank you, Tom. Good morning, everyone. I want to begin by addressing our revised guidance ranges for 2024. Our social sector, which is the majority of our revenue, continues to perform very well, and we feel we remain a strong investment for shareholders.
Mike Gianoni: We are lowering our annual revenue guidance due to the continued negative financial impact of EverFi.
Mike Gianoni: Without the negative performance of EverFi, our guidance for the year would remain unchanged.
Mike Gianoni: We are confident that our underlying business and our future opportunities remain strong.
Mike Gianoni: We've spoken in the past about improving EverFi's business performance and evaluating strategic options.
Mike Gianoni: While EverFi remains a small portion of our overall business, at roughly 7% of our revenue in the quarter, management is focused on achieving the best possible outcome.
Mike Gianoni: We have recently right-sized the business to better align cost to revenues, and we've hired Goldman Sachs as our strategic advisor to assist us in evaluating other options.
Mike Gianoni: We plan to continue to update you as appropriate in this area.
Mike Gianoni: As you look across the other parts of our business,
Mike Gianoni: We believe Blackbaud, driven by our continued focus on execution of our five-point operating plan, is a compelling investment with multiple opportunities for strong shareholder returns.
Mike Gianoni: We continue to extend our position as the market leader in providing software to power social impact through our offerings of the most comprehensive set of purpose-built and mission-critical software and services.
Mike Gianoni: And we continue to accelerate the pace on an exciting list of innovative new solutions to penetrate even further into our rich market opportunity.
Mike Gianoni: In September, we held our annual user conference, BBCon, in Seattle with thousands of social impact professionals attending both in person and virtually.
Mike Gianoni: The enthusiasm and reception by our customers was clear and exciting.
Mike Gianoni: We announced six waves of innovation, including AI capabilities, new powerful partnerships with companies such as Constant Contact,
Mike Gianoni: New expanded navigation menus, new performance analytics, payment assist, deeper encryption, and richer connectivity, to name a few.
Mike Gianoni: We'll continue to invest aggressively in innovation and partner with our developer network to further enable our customers to raise more money while improving their operational efficiency.
Mike Gianoni: ultimately allowing them to spend more time executing on their charitable missions and less time on administrative tasks.
Mike Gianoni: We remain a natural choice for customers and new prospects alike. Their success helps drive ours and is visible in our third quarter numbers.
Mike Gianoni: which include revenue in our social sector grew 6.6% despite a difficult FY 23 comparison.
Mike Gianoni: And within social, contractual reoccurring revenue, the company's largest revenue line was up 6.8%.
Mike Gianoni: Our second largest revenue line of social transactional reoccurring revenue grew 6.6%.
Mike Gianoni: Gross dollar retention, driven by the value our customers see using our solutions, was 90%. And excluding EverFi, approximately 92%.
Mike Gianoni: We beat out the competition to add prominent new logos and deepened our existing relationships with our list of over 40,000 customers.
Mike Gianoni: These included competitive wins in the higher education vertical to Dallas Baptist University, Davidson College, and the University of Nevada, Reno.
Mike Gianoni: These institutions valued our enviable end-to-end workflow and recent enhancements will power their fundraising efforts.
Mike Gianoni: Our adjusted free cash flow remains very strong at nearly $100 million in the third quarter.
Mike Gianoni: This strong performance gives us great confidence to fuel our aggressive stock repurchase program.
Mike Gianoni: Through October, the company has bought back approximately 8% of the common stock outstanding at the end of 2023, and our current plan is to buy as much as 10% of that balance by year end 2024.
Speaker Change: Tony will cover more about financial results as well as capital allocation strategy.
Speaker Change: But I remain pleased with Blackbaud's multi-year trajectory, as well as its prospects. Blackbaud's revenue, adjusted EBITDA margin, adjusted free cash flow, have improved significantly over the last couple of years, and year to date.
Speaker Change: We feel that much of this success, driven by a proven operating plan and our mission to empower social impact in the hearts of our customers and employees, are driving very strong results.
Speaker Change: 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. I'm pleased with our continued progress and remain excited about the opportunities in front of us.
Tony: We remain committed to providing our shareholders an attractive financial model balanced between growth and revenues, earnings, cash flows, and a prudent and purposeful capital allocation strategy.
Tony: Looking to our third quarter results, total revenue was $287 million, up 3.3% year over year, and 4.3% on an organic basis.
Tony: Our social sector, which represents the majority of Blackbaud's revenue at approximately 89% in the quarter, continues to perform very well with revenue growth of 6.6%.
Speaker Change: Our corporate sector decline, as Mike mentioned, was again negatively influenced by EverFi. Although it only represents 7% of total company revenue in the quarter, EverFi declined 26% year-over-year in the quarter.
Speaker Change: We expect headwinds at EverFi to continue in the near term, which is reflected in our revised guide. And as Mike said earlier, we're pursuing strategic alternatives for this business through the hiring of Goldman Sachs and have recently reduced EverFi's expense run rate to better align with the lower revenue outlook.
Speaker Change: Moving below the revenue line, our third quarter adjusted EBITDA margin was 33.2%.
Speaker Change: We generated $98 million of adjusted free cash flow in the third quarter.
Speaker Change: and $187 million year-to-date, which is up from $177 million from the same time frame in 2023, despite the negative impact of additional interest expense associated with our share repurchase program.
Speaker Change: Our robust free cash flow gives us confidence to continue investment in a number of critical areas like product innovation and stock repurchases.
Speaker Change: We recently completed our previously announced $200 million ASR program, and when combined with our other stock repurchases, the company has bought back approximately 8% of our common stock outstanding as of the end of 2023.
Speaker Change: We plan to continue to be aggressive in the fourth quarter repurchasing our stock with our goal of buying back up to 10% of our outstanding common stock.
Speaker Change: Before I talk about a revised annual guidance, I'd like to highlight several items for you to think about, which may help in developing your models for the remainder of the year and for 2025.
Speaker Change: regarding revenue.
Speaker Change: In addition to the continued anticipated softness of EverFi, we have not experienced any of the unusually large viral events like we did in 2023.
Speaker Change: So if you extract those events, our transactional business is growing nicely at more normalized rates.
Speaker Change: Second, our modernized approach to renewal contracts in the social sector continues to perform well.
Speaker Change: By the end of 2024, approximately 65% of the eligible cohort will have gone through the shift to modernized contract terms and pricing.
Speaker Change: leaving approximately 25% in 2025 and the last 10% in 2026.
Speaker Change: The third quarter of 24 represents the first quarter in which we lapped the renewal pricing uplift in a meaningful way, which is reflected in our social contractual recurring revenue growth rate of approximately 7% in the quarter, compared to approximately 10% the past two quarters.
Speaker Change: And finally, while our modernized renewal contracts have price escalators in years 2 and 3, the revenue is recognized on a straight line basis. So for example,
Speaker Change: In a three-year contract, the total contract value is divided by 36 and recognized evenly over the full term.
Speaker Change: Turn to guidance.
Speaker Change: We are revising our full year guidance ranges, which takes into consideration that the core social sector continues to perform well. However, we continue to expect underperformance at EverFi.
Speaker Change: Therefore, we revised our full year 2024 guidance as follows.
Speaker Change: Revenue in the range of $1,150,000,000 to $1,160,000,000. At the midpoint, our organic growth rate is 5.2%, up from 4.8% last year.
Speaker Change: At the same time we are increasing our adjusted EBITDA margin guidance range slightly to 33% to 34% up from 32.2% last year.
Speaker Change: Non-GAAP earnings per share is expected to be between $3.98 and $4.16, up slightly from $3.98 last year.
Speaker Change: This guidance does take into account the negative impact of EverFi underperformance, as well as approximately $20 million in incremental interest expense associated with our share repurchase program.
Speaker Change: Also of note the
Speaker Change: The full repurchase share count is not yet fully reflected in our diluted shares outstanding and will not be fully reflected until sometime in 2025.
Speaker Change: Lastly, our adjusted free cash flow is expected to be between $235 million and $245 million, a 12% increase over 2023 at the midpoint.
Speaker Change: We have a lot to be proud of as we work to close the year strong. We continue to execute on our operating plan, which is driving consistent revenue growth and enviable earnings and cash flow.
Speaker Change: We're especially pleased with the performance of our core social sector and have confidence in its ability to continue to produce highly profitable growth going forward. We also, as Mike discussed, are committed to removing the negative impact of EverFi, which will aid our financial numbers significantly.
Speaker Change: As always, we remain focused on providing enhanced value to our customers and our shareholders.
Speaker Change: Let me turn it back over to Mike for a quick comment and then we'll open up the line for your questions. Mike? Thank you, Tony. We remain excited about the future in front of us. We'll provide specific fiscal year 2025 guidance in our February call, but I'd like to highlight why Blackbaud is a sound investment.
Speaker Change: Regarding organic revenue, you can expect mid-single-digit revenue growth with a call option for more, driven by visible and full reoccurring revenue streams targeting both new logos and expansion of our installed base empowered by innovation.
Speaker Change: Below the line, you can expect a strong focus on cost and employee productivity to improve EBITDA. Additionally, our very strong free cash flow will drive a purposeful capital allocation strategy.
Speaker Change: This includes a significant annual buyback program, as well as prudent and effective M&A focused on tuck-ins to accelerate our R&D. With that, we can open the line for questions. Operator?
Speaker Change: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using your speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Again, as a reminder, please press star 1 to ask a question, and please limit yourself to one question plus a follow-up to allow us to facilitate as many questions as possible.
Speaker Change: We will now take our first question from Rob Oliver with Baird. Go ahead, caller. Your line is now open.
Rob Oliver: Great. Thank you. Good morning. I appreciate you taking the question. Tony, I appreciate your explanation on lapping some of the pricing on the social sector stuff, but I just wanted to dive in a little bit, totally get, you know, what's going on with EverFi and that that's weighing on the growth rate. But it does appear that the social sector full year for 24 growth rate ticked down a little bit, at least in terms of your expectations relative to Q2. So, you know, I know you guys are doing well there. But, you know, I just wanted to get a sense from you of what, if anything, changed relative to your expectations exiting Q2. You know, whether that's, you know, willingness to accept the price increases, you know, any of those one-year contracts that perhaps were up for renewal, which you flagged about a year ago, which were ones you had a keen eye on, or anything else.
Rob Oliver: Anything else to call out there would be helpful. Thank you.
Speaker Change: Thanks Rob.
Speaker Change: On the social side, everything is performing very well, especially on the contract initiative.
Speaker Change: Overall, the pricing has stuck. We've not seen heightened discounting on that front with those contract renewals.
Speaker Change: The mix, the percentage of folks that are choosing the multi-year contracts versus the one-year contracts is still running right in line with plan, kind of in the mid to high 80% typically.
Speaker Change: is what we're seeing for folks taking three-year contracts. We're seeing a small number of customers who, for regulatory purposes or...
Speaker Change: Other governing rules can't do multi-year contracts, so we're working through that.
Speaker Change: How we will deal with those contracts going forward. And then on the churn piece of the one year, as we spoke about, something we're keeping a close eye on, actually that churn rate is holding right in line with plan as well.
Speaker Change: Keep in mind it's a much smaller pool with, you know, the mid-80s shifting to a multi-year contract. We have a lot fewer one-year contracts.
Speaker Change: There is a slightly higher churn rate on those as we would expect, but in totality...
Speaker Change: Our gross dollar retention is probably the best metric to look at on that front. In totality, gross dollar retention is right at about 90% for the total company. If we exclude EverFi, we're actually at 92%, which is up from where we were a couple of years ago on the social sector side. So feel really good.
Speaker Change: to expect to have a slightly lower growth rate on the social sector business. It's really transactional related.
Speaker Change: Last year, if you recall, we had really high growth because of viral events in Q3 and Q4.
Speaker Change: I think we ended up in a year at almost 11% on the social transactional growth rate. Our historical is kind of 6-7%. We're running right at 6.5-7% right now year-to-date, I believe.
Speaker Change: Humming along pretty well on Transactional. We just haven't seen the buy roll that we saw last year And really haven't had no meaningful buy roll yet this year and aren't planning for any for the remainder of the year off
Speaker Change: Great. Awesome. Okay. Thanks. I appreciate it.
Speaker Change: Absolutely.
Speaker Change: and more. I'm Anthony Barth. I'll see you next time.
Speaker Change: Our next question comes from Bryan Peterson with Raymond Jean. Please proceed with your question.
Bryan Peterson: Hi guys, thanks for taking the question. So Tony, maybe following up on that, how do we think about maybe the long-term growth trajectory of the transactional business kind of absent any of these vital events which we can't predict? I know Mike talked about mid-single-digit growth, but we would love to understand how you're thinking about kind of the contractual recurring versus transactional as we look at that outlook.
Speaker Change: The transactional side of the business, like I said, it's grown 6 to 7 percent. That's kind of the norm for us for several years. I would expect that's a good...
Speaker Change: I think that's where if we have some big viral events in a given period.
Speaker Change: would drive that growth rate up like we saw last year in Q3 and Q4.
Speaker Change: I think also with some of the newer transactional...
Speaker Change: Innovation that we're rolling out
Speaker Change: across the platform and the portfolio. We could have some higher growth rates in the future as those programs start to get some traction. But right now, I think somewhere in that 6% to 7% rate is a good assumption to make for modeling for transactions. Hence, we're kind of saying mid-single-digit overall because I think once we've left the pricing initiative, the new contract initiative, we're seeing growth rates more in the 6.5% to 7% rate on the contractual social.
Speaker Change: So I think that somewhere in that ballpark is probably a really good assumption for your models. Hey Brian, one add is one of the things we announced at EVCon in our product and innovation section was a new solution called Payment Assist.
Speaker Change: which is a brand new product in the transaction space for us and we're essentially monetizing accounts payables.
Speaker Change: for our customers in eliminating checks, which we've never done before. It's going to take a while for that to build, but it is a brand new product in the transaction space for us.
Speaker Change: Absolutely.
Speaker Change: I've got a great color there guys. Maybe just to follow up on Everfly, I know you've given a ton of detail there, but we'd love to understand, with you guys right-sizing some of the costs there, how should we think about the margin profile of that business?
Speaker Change: versus the core black bod, accretive, dilutive, inline, just love the perspective there. Thanks guys.
Speaker Change: Yeah, it is, even with the right sizing, it's still dilutive. We've done such a great job of getting our margins up, as you know, that business, because of the shortfall in revenue, even with right sizing, the cost structures are still going to be dilutive on the bottom line and from a cash flow perspective.
Speaker Change: I would say we've seen some very positive signs here very recently on some new wins.
Speaker Change: and maybe Mike, you can talk about a couple of those. I do think that...
Speaker Change: We saw some significant decline in that business over the last couple of years, but that does feel like we're starting to bottom out.
Speaker Change: I don't know that we're completely there yet, but Mike, maybe you mention a couple of the new wins that we've seen because we've seen some nice new appetite in the market on EverFi. Yeah, Brian, just a reminder, EverFi is 7% of our business.
Mike Gianoni: just to make sure everyone understands that. And yeah, we took some pretty substantial cost out of it recently. So the run rate is a lot better go forward. And to Tony's point, over the last quarter, we've had some really nice EverFi renewals.
Mike Gianoni: New logo wins.
Mike Gianoni: A couple I'll mention, Truth Initiative Foundation, NASCAR, Guardian Life, Sterling Cech.
Mike Gianoni: And there's many more, too.
Mike Gianoni: Those are new logos or expansions in the last quarter. So, I don't want folks to think it's all doom and gloom with EverFi. You know, we are looking at alternatives with Goldman Sachs. I mentioned in my.
Mike Gianoni: prepared remarks. We're pretty aggressive there. We are addressing the EverFi drag on that performance.
Mike Gianoni: but there are some upsides there related to, you know, the marketplace reception in some of these logos.
Speaker Change: Thank you.
Speaker Change: Appreciate the color. Thanks guys. Church bread.
Speaker Change: http://TheBusinessProfessor.com
Speaker Change: Our next question comes from Parker Lane with Stiefel. Please proceed with your question.
Parker Lane: Yeah, hi guys, thanks for taking the question this morning. Mike, maybe we could focus in on the six waves of innovation. I know you mentioned payments assist earlier, but, you know, what is resonating the most, or what resonated the most at your conference with the customers that you spoke with? And how should we think about the benefit of this innovation? Is this going to be, you know, better gross retention in the business? Do you expect...
Parker Lane: individual shoots of upside across subscription and payments. How should we just think about the financial benefits of Black Button?
Mike Gianoni: Yeah, sure. We announced a lot of things in BBCon. Details are on our website as well.
Mike Gianoni: You know from areas like embedded AI and solutions like Razor's Edge NXT to better integration and interoperability
Mike Gianoni: which allows us to sell more modules and cross-sell to existing customers.
Mike Gianoni: Some future capabilities with Financial Edge, NXT, Payment Assist is just one of them.
Mike Gianoni: better integration, partnership with Constant Contact. So you know they're going to be a great marketing partner, marketing platform partner for us.
Mike Gianoni: We already have a lot of shared customers, so we announced that at the conference as well. So, you know, all of these innovations are really just, you know, our kind of focus on continuing to earn the right...
Mike Gianoni: These contract renewals
Mike Gianoni: and getting new logos.
Mike Gianoni: Their reception at BBCon was just outstanding and because it's recorded we'll have thousands and thousands of more customers, you know, looking at all that information in addition to folks that actually attended at the conference in Seattle. So our engineering team and product teams are just doing a great job in driving innovation.
Rob Oliver: Good to hear. And Tony, you mentioned the gross retention improvements now sitting around 90%.
Speaker Change: 92x EverFi. Just wondering as you look at the new pricing and contracting structure, clearly it's benefiting there, but what could that look like over the next few years? Is that the right way to think about the business or could that perhaps even continue to be more of a tailwind going forward to the top line?
Speaker Change: Credence to the any of the uplift in the gross dollar retention, so I do feel good. I think
Speaker Change: our initiatives that we've done over the last several years with customer success, the work we've done in the area of customer support. Mike was just speaking about all the innovation we're doing. I think that really speaks to the gross dollar retention. And I'm kind of hopeful we'll stay in that. Something north of 90% would be our intention as a company on the gross dollar.
Speaker Change: Understood. Thanks again, guys.
Speaker Change: Our next question comes from Matt Van Villet with BTIG. Please proceed with your question.
Speaker Change: Yeah, good morning. Thanks for taking the question. I guess, first, on the EverFi side, just trying to understand, are you seeing just a number of kind of downsizes upon renewal and just a lack of new deals there, or is there a meaningful amount of true logo churn going on there for decisions on their own, the customer side?
Speaker Change: Yeah, hey, Matt, it's a little bit of both in the last couple of years.
Speaker Change: Press pause, I guess, in this space a little bit. We have a big footprint, I'll give you an example, in financial services, specifically in banking.
Speaker Change: and, you know, some of the regional banks pulled back.
Speaker Change: in program spend. So it's been a little bit on the...
Speaker Change: Renewal and Expansion side and on the New Booking side. But remember, EverFi's got thousands of customers.
Speaker Change: And, you know, in the three years EverFi's been a part of BlackBud, I've met hundreds of customers myself, and everyone is enamored with the product and solution. There's just been some macro pullback in the space.
Speaker Change: which has caused the business to, you know, have it struggle, you know, from a growth. In fact, it's going backwards a bit, but, you know, it's not all doom and gloom. I just mentioned a bunch of logos.
Speaker Change: You know, we've got Goldman Sachs on the case here to work with us. So, you know, we'll resolve this problem. We just took some costs out
Speaker Change: You know, we are focused on making sure it's not a drag on the company. Again, it's 7% of the total. But, you know, we're working on it, and I think we'll have some outcomes to announce, you know, hopefully in the next, you know, period of time.
Speaker Change: And then, how has that impacted the Your Cause and the foundation side of the business? How's that been progressing so far?
Speaker Change: Yeah, Your Cause is actually doing really well. EverFi is not impacted Your Cause, and so we're doing really well on Your Cause. A lot of great new logos there. It's organically growing.
Speaker Change: frankly accretive to the rest of the social sector.
Speaker Change: So, you know, it's a part of corporate impact. Again, EverFi is 7% of the company. Your Cause is doing really well. It's a very sticky platform. We've got, you know, over 16 million employees on the platform.
Speaker Change: So lots of Fortune 500 customers, good pipeline, your cause is doing well.
Speaker Change: Thank you.
Speaker Change: You're welcome.
Speaker Change: Our next question comes from Kirk Maturin with Evercore. Please proceed with your question.
Kirk Maturin: Mike, I was just curious, on the contractual recurring business,
Kirk Maturin: Just bookings in that area, how are they looking, I guess, relative to plan? It seems like things are going along well. I was just wondering if you could add maybe a little bit more color there and just sort of net new relative to sort of the new pricing on the renewal side.
Speaker Change: Yeah, we don't break out the micro of bookings but, you know, new logos are actually doing really well year over year. They're up nicely in the new logo side. And we've really shifted the teams more to new logos.
Speaker Change: you know, in the last 12 or 18 years.
Speaker Change: That shift of the older products like in Razor's Edge and Financial Edge to the cloud solutions is largely behind us now. We've only been selling cloud solutions for years.
Speaker Change: But we've had some customers on the older, you know, licensed type products, and that's a really tiny part of what's left.
Speaker Change: So big shift to, you know, to new logos and that's going well, sales productivity is up. I mentioned a bunch of higher ed new logo wins, you know, in my prepared remarks and we expect that to continue.
Speaker Change: The predominant softness in bookings is Everfi. I mentioned your cards, bookings are going pretty well also.
Speaker Change: Great. And then Tony, can you just remind us, sorry you might have mentioned this last quarter, but the divested, you know, the non-recurring services business that was divested for EverFi, how big of a drag on sort of growth in the corporate side was that this quarter or how is it factored into the 12% down this year?
Speaker Change: When we revised our guidance at the end of Q1 for that divestiture and it was about $6 million of revenue that we took out for the year.
Speaker Change: Thank you for the reminder. Appreciate it. Thank you all.
Speaker Change: Okay, everyone. I think that's the end of the questions. I want to thank everyone for joining us today.
Speaker Change: We will be attending a number of investor events to include several investor conferences in November and December, which are now listed on our investor relations site. Of course, I'm always happy to speak to you directly, and we look forward to speaking with you soon, and have a nice day.
Speaker Change: http://TheBusinessProfessor.com
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