Blackbaud Inc

NASDAQ:BLKB

Earnings Call Analysis

Blackbaud's Financial Growth Amid EVERFI Challenges

In the third quarter, Blackbaud reported revenue of $287 million, a 3.3% year-over-year increase, driven largely by a 6.6% growth in its core social sector. However, the EVERFI segment continued to decline, dropping 26%, which negatively impacted overall performance. The company revised its 2024 revenue guidance to $1.150 billion to $1.160 billion, reflecting a 5.2% organic growth rate. Adjusted EBITDA margins are forecasted at 33% to 34%. Notably, Blackbaud is aggressively repurchasing stock, aiming to acquire up to 10% of its common stock by year-end, while also expecting adjusted free cash flow to rise 12% to between $235 million and $245 million.

Navigating Current Challenges and Opportunities

Blackbaud continues to demonstrate resilience amidst challenges, particularly from the EVERFI segment, which accounts for approximately 7% of total revenue. Despite the headwinds, the company is focused on strategic alternatives for EVERFI, including potential divestitures, to minimize its impact on overall performance. The emphasis is on exploring new revenue streams while maintaining a healthy operational model.

Solid Growth in the Social Sector

The Social sector remains the cornerstone of Blackbaud’s revenue, representing about 89% of total revenue. In the third quarter, this sector experienced a 6.6% growth, showcasing strong demand and customer retention. The gross dollar retention rate has remained impressive at about 90%, improving to approximately 92% when excluding EVERFI. This reflects Blackbaud's ability to maintain client relationships and customer satisfaction even amidst market fluctuations.

Revised Financial Guidance for 2024

For 2024, Blackbaud has revised its revenue guidance to a range of $1.150 billion to $1.160 billion, corresponding to an organic growth rate of 5.2%, up from 4.8% in the previous year, indicating an optimistic outlook. Adjusted EBITDA margins are also expected to rise slightly to between 33% and 34%, compared to 32.2% in 2023. Non-GAAP earnings per share are projected to range from $3.98 to $4.16, underscoring a slight increase from the previous year.

Strong Cash Flow and Shareholder Returns

Blackbaud reported adjusted free cash flow of $98 million for the third quarter, yielding a year-to-date total of $187 million, up from $177 million in 2023. This robust cash generation supports an aggressive stock repurchase strategy, with plans to buy back up to 10% of outstanding shares by the end of 2024. This move reflects a commitment to returning value to shareholders, while also maintaining funds for innovation and operational improvements.

Innovation and Competitive Positioning

During the recent annual user conference (bbcon), Blackbaud unveiled six waves of innovations, emphasizing AI capabilities and new partnerships. The development of new products, like the Payment Assistant designed to enhance transaction processing, signifies Blackbaud's commitment to improving efficiencies for its clients, helping non-profits and organizations raise funds more effectively. This continued investment in technology is expected to drive future growth by enhancing Blackbaud’s competitive edge.

Outlook for Future Performance

Moving forward, Blackbaud anticipates mid-single-digit revenue growth, potentially bolstered by improvements in the transactional business that typically operates at a growth rate of 6% to 7%. Future product innovations could lead to upside beyond initial conservative estimates, suggesting that investors should stay tuned for developments that could positively influence growth trajectories. The management’s focus on both customer retention and affirmative market developments signals a strong future for Blackbaud.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Blackbaud Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Barth, Head of Investor Relations. Thank you, sir. You may begin.

[Tom Barth, executive]

Good morning, everyone. Thank you for joining us on Blackbaud's Third Quarter 2024 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's Chief Executive Officer, President and Vice Chairman; and Tony Boor, Blackbaud'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.

Please note that 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.

The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for 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. 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.

And with that, let me turn the call over to Mike.

[Michael Gianoni, executive]

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. We are lowering our annual revenue guidance due to the continued negative financial impact of EVERFI.

Without the negative performance of EVERFI, our guidance for the year would remain unchanged. We are confident that our underlying business and our future opportunities remain strong.

We've spoken in the past about improving EVERFI's business performance and evaluating strategic options. 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.

We have recently rightsized the business to better align cost to revenues, and we've hired Goldman Sachs as our strategic adviser to assist us in evaluating other options. We plan to continue to update you as appropriate in this area.

As you look across the other parts of our business, we believe Blackbaud, driven by our continued focus on execution of our 5-point operating plan, is a compelling investment, with multiple opportunities for strong shareholder returns.

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, and we continue to accelerate the pace on an exciting list of innovative new solutions to penetrate even further into our rich market opportunity.

In September, we held our annual user conference, bbcon, in Seattle, with thousands of social impact professionals attending both in-person and virtually. The enthusiasm and reception by our customers was clear and exciting.

We announced 6 waves of innovation, including AI capabilities, new powerful partnerships with companies such as Constant Contact, new expanded navigation menus, new performance analytics, payment assist, deeper encryption and richer connectivity, to name a few.

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, ultimately, allowing them to spend more time executing on their [ charitable ] missions and less time on administrative tasks.

We remain a natural choice for customers and new prospects alike. Their success helps drive ours and is visible in our third quarter numbers, which include revenue in our social sector, grew 6.6% despite the difficult FY '23 comparison.

And within social, contractual reoccurring revenue, the company's largest revenue line, was up 6.8%. Our second largest revenue line of social transactional reoccurring revenue grew 6.6%. Gross dollar retention, driven by the value our customers see using our solutions, was [ 90% ] and excluding EVERFI, approximately 92%.

We beat out the competition to add prominent new logos and deepened our existing relationships with our list of over 40,000 customers. These included competitive wins in the higher education vertical to Dallas Baptist University, Davidson College and the University of Nevada, Reno. These institutions valued our enviable end-to-end workflow, and recent enhancements will power their fundraising efforts.

Our adjusted free cash flow remains very strong at nearly $100 million in the third quarter. This strong performance gives us great confidence to fuel our aggressive stock repurchase program.

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. Tony will cover more about financial results as well as capital allocation strategy, but I remain pleased with Blackbaud's multiyear 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. 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.

I'll come back after Tony in a few minutes with some closing thoughts, and then we'll take your questions. Tony?

[Anthony Boor, executive]

Thanks, Mike. I'm pleased with our continued progress and remain excited about the opportunities in front of us. We remain committed to providing our shareholders an attractive financial model, balanced between growth in revenues, earnings, cash flows; and the prudent and purposeful capital allocation strategy.

Looking to our third quarter results, total revenue was $287 million, up 3.3% year-over-year and 4.3% on an organic basis. 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%.

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. 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.

Moving below the revenue line, our third quarter adjusted EBITDA margin was 33.2%, we generated $98 million of adjusted free cash flow in the third quarter 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.

Our robust free cash flow gives us confidence to continue investment in a number of critical areas like product innovation and stock repurchases. 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 '23. 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.

Before I talk about our 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.

Regarding revenue, in addition to the continued anticipated softness at EVERFI, we have not experienced any of the unusually large viral events like we did in 2023. So if you extract those events, our transactional business is growing nicely at more normalized rates.

Second, our modernized approach to renewal contracts in the social sector continues to perform well. By the end of 2024, approximately 65% of the eligible cohort, we have -- will have gone through the shift to modernize contract terms and pricing, leaving approximately 25% in 2025 and the last 10% in 2026.

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% in the past 2 quarters.

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, in a 3-year contract, the total contract value is divided by 36 and recognized evenly over the full term.

Turning to guidance, we are revising our-full year guidance ranges, which takes into consideration that the core social sector continued to perform well. However, we continue to expect underperformance at EVERFI.

Therefore, we revised our full year 2024 guidance as follows: revenue in the range of $1.150 billion to $1.160 billion. At the midpoint, our organic growth rate is 5.2%, up from 4.8% last year. At the same time, we are increasing our adjusted EBITDA margin guidance range slightly to 33% to 34%, up from 32.2% last year. Non-GAAP earnings per share is expected to be between $3.98 and $4.16, up slightly from $3.98 last year.

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. Also of note, 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.

Lastly, our adjusted free cash flow is expected to be between $235 million and $245 million, a 12% increase over 2023 at the midpoint.

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. 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. As always, we remain focused on providing enhanced value to our customers and our shareholders.

Let me turn it back over to Mike for a quick comment, and then we'll open the line for your questions. Mike?

[Michael Gianoni, executive]

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.

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.

Below the line, you can expect a strong focus on cost, employee productivity to improve EBITDA. Additionally, our very strong free cash flow will drive a purposeful capital allocation strategy. 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?

[Operator]

[Operator Instructions] We will now take our first question from Rob Oliver with Baird.

[Robert Oliver, analyst]

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 what's going on with EVERFI that, that's weighing on the growth rate, but it does appear that the social sector, a full year for '24 growth rate ticked down a little bit, at least in terms of your expectations relative to Q2.

So I know you guys are doing well there, but I just want to get a sense from you of what, if anything, changed relative to your expectations exiting Q2, whether that's willingness to accept price increases, any of those 1-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 to call out there would be helpful.

[Anthony Boor, executive]

Thanks, Rob. On the social side, everything is performing very well, especially on the contract initiative. Overall, the pricing has stuck. We've not seen heightened discounting on that front with those contract renewals. The mix, the percentage of folks that are choosing the multiyear contracts versus the 1-year contract is still running right in line with plan. Kind of in the mid- to high 80% typically is what we're seeing from folks taking 3-year contracts.

We're seeing a small number of customers who, for regulatory purposes or other governing rules, can't do multiyear contracts. So we're working through that and how we'll deal with those contracts going forward.

And then on the churn piece of the 1 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. Keep in mind, it's a much smaller pool with the [ mid-80s ] shifting to a multiyear contract. We have a lot fewer 1-year contracts.

There is a slightly higher churn rate on those as we would expect. But in totality, 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 on how we're doing on the retention front and also what we're getting on pricing on those contracts. I don't know if there's really anything on the contractual side that causes us to expect to have a slightly lower growth rate on the social sector business. It's really transactional related.

Last year, if you recall, we had really high growth because of viral events in Q3 and Q4. I think we ended up the year at almost 11% on the social transactional growth rate. Our historical is kind of 6% to 7%. We're running right at 6.5%, 7% right now year-to-date, I believe.

And so we're -- I think coming along pretty well on transactional. We just haven't seen the viral that we saw last year and really haven't had no meaningful viral yet this year and aren't planning for any for the remainder of the year, Rob.

[Operator]

Our next question comes from Brian Peterson with Raymond James.

[Brian Peterson, analyst]

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 viral events, which we can't predict? I know Mike talked about mid-single-digit growth. But I would love to understand, how you're thinking about kind of the contractual recurring versus transactional as we look at that outlook?

[Anthony Boor, executive]

Yes, Brian, thanks. The transactional side of the business, like I said, is it's grown 6% to 7%. That's kind of the norm for us for several years. I would expect that's a good kind of assumption to make for your models for the longer term. When we talk about having some call options for upside, I think that's where if we have some big viral events in a given period, would drive that growth rate up, like we saw last year in Q3 and Q4.

I think also with some of the newer transactional innovation that we're rolling out 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 modeling for transactions.

Hence, we're kind of saying mid-single digit overall because I think once we've lapped the pricing initiative, the new contract initiative, we're seeing growth rates more in the 6.5% to 7% rate on the contractual social. So I think that somewhere in that ballpark is probably a really good assumption for your models.

[Michael Gianoni, executive]

Brian, I want to add is one of the things we announced at bbcon in our product and innovation section was a new solution called Payment [ Assistant ], which is a brand-new product in the transaction space for us, and we're essentially monetizing accounts payables for our customers and 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.

[Anthony Boor, executive]

Absolutely.

[Michael Gianoni, executive]

Yes.

[Brian Peterson, analyst]

No, great color there, guys. And maybe just a follow-up on EVERFI, I know you've given a ton of detail there, but would love to understand with you guys rightsizing some of the costs there, how should we think about the margin profile of that business versus the core Blackbaud? Accretive, dilutive in line, just would love the perspective there.

[Anthony Boor, executive]

Yes, Brian, it is, even with the rightsizing, still dilutive. We've done such a great job of getting our margins up, as you know. That business, because of the shortness, the shortfall in revenue, even with rightsizing the cost structure, still going to be dilutive on the bottom line and from a cash flow perspective.

I would say we've seen some very positive signs here very recently on some new wins. And maybe, Mike, you can talk about a couple of those? I do think that 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. I don't know that we're completely there yet, but Mike, maybe you mentioned a couple of the new wins that we've seen because we've seen some nice new appetite in the market on EVERFI.

[Michael Gianoni, executive]

Yes, Brian, just a reminder, EVERFI's 7% of our business, just to make sure everyone understands that. And yes, 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 got some really nice EVERFI renewals, new logo wins.

A couple I'll mention, Truth Initiative Foundation, NASCAR, Guardian Life, Sterling Check. And then there's many more, too. 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.

We are looking at alternatives with Goldman Sachs. I mentioned in my prepared remarks, we're pretty aggressive there. We are addressing the EVERFI drag on that performance, but there are some upsides there related to the marketplace reception in some of these logos.

[Operator]

Our next question comes from Parker Lane with Stifel.

[J. Lane, analyst]

Mike, if you could focus in on the 6 waves of innovation, I know you mentioned the Payments [ Assistant ] earlier, but 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 better growth retention in the business? Do you expect individual shoots of upside across subscription and payments? How should we just think about the financial benefit to Blackbaud?

[Michael Gianoni, executive]

Yes, sure. We announced a lot of things in bbcon, details are on our website as well. So from areas like embedded AI and solutions like Raiser's Edge NXT to better integration and interoperability, which allows us to sell more modules and cross-sell to existing customers, some future capabilities with Financial Edge NXT, Payment Assistant is just one of them, better integration; partnership with Constant Contact. So they're going to be a great marketing partner -- marketing platform partner for us. .

We already have a lot of shared customers, so we announced that at the conference as well. So all of these innovations are really just our kind of focus on continuing to earn the [ right ] -- these contract renewals and getting new logos.

And so the reception at bbcon was just outstanding. And because it's recorded, we'll have thousands and thousands of more customers looking at all that information in addition to folks that actually attended in the -- at the conference in Seattle. So our engineering team and product teams are just doing a great job in driving innovation.

[J. Lane, analyst]

Good to hear. And Tony, you mentioned the gross retention improvement now sitting around 90%, 92% ex-EVERFI. Just wondering, as you look at the new pricing and contracting structure, clearly 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?

[Anthony Boor, executive]

Well, I think, Parker, where we're really seeing the benefit of the pricing is on the net retention because of the uplift. And we don't give net retention numbers publicly, but I can tell you our net retention has bumped up nicely with the new contract initiative. The growth, if you recall, we're looking at kind of where were those customers prior year and then they were new, we're not giving any credence to any of the uplift in the gross dollar retention.

So I do feel good. I think 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.

[Operator]

Our next question comes from Matt VanVliet with BTIG.

[Matthew VanVliet, analyst]

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?

[Michael Gianoni, executive]

Yes. Matt, it's a little bit of both in the last couple of years. The market pressed 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, and some of the regional banks pulled back. Silicon Valley Bank was a customer, for example. So there's some pullback a little bit in financial services and some shifts in program spend.

So it's been a little bit on the renewal and expansion side and on the new bookings side. But remember, EVERFI has got thousands of customers. And in the 3 years, EVERFI has been a part of Blackbaud. I've met hundreds of customers myself, and everyone is enamored with a product and solution.

There's just been some macro pullback in the space, which is a called -- caused the business to have a struggle from a growth. And in fact, it's going backwards a bit. But it's not all doom and gloom. I just mentioned a bunch of logos. We've got Goldman Sachs on the case here to work with us. So we'll resolve this problem. We just took some cost out.

We are focused on making sure it's not a drag on the company. Again, it's 7% of the total, but we're working on it, and I think we'll have some outcomes to announce hopefully in the next period of time.

[Matthew VanVliet, analyst]

And then, how has that impacted YourCause and the foundation side of the business? How has that been progressing so far?

[Michael Gianoni, executive]

Yes. YourCause is actually doing really well. EVERFI has not impacted YourCause. And so we're doing really well on YourCause. A lot of great new logos there. It's organically growing, frankly, accretive to the rest of the social sector. So it's a part of the corporate impact.

Again, EVERFI is 7% of the company. YourCause is doing really well. It's a very sticky platform. We've got over 16 million employees on the platform. So lots of Fortune 500 customers, good pipeline, YourCause is doing well.

[Operator]

Our next question comes from Kirk Materne with Evercore.

[S. Kirk Materne, analyst]

Mike, I was just curious on the contractual recurring business, 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 on just sort of net new relative to sort of the new pricing on the renewal side?

[Michael Gianoni, executive]

Yes. We don't break out the micro of bookings, but net 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 in the last 12 or 18 months.

That shift of the older products like in Raiser's Edge and Financial Edge to the cloud solutions is largely behind us now. We've only been selling cloud solutions for years, but we've had some customers on the older license-type products, and that's a really tiny part of what's left.

So a big shift to new logos, and that's going well. Sales productivity is up. I mentioned a bunch of higher ed new logo wins in my prepared remarks, and we expect that to continue. The predominant softness in bookings is EVERFI. I mentioned YourCause, bookings are going pretty well also.

[S. Kirk Materne, analyst]

Great. And then, Tony, can you just remind us -- sorry, you might have mentioned this last quarter, but the divested -- the nonrecurring 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?

[Anthony Boor, executive]

When we revised our guidance, Kirk, at the end of Q1 for that divestiture, and it was about $6 million of revenue that we took out for the year.

[Tom Barth, executive]

Okay, everyone. I think that's the end of the questions. I want to thank everyone for joining us today. 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.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.