Blackbaud, Inc.

Good day, and welcome to Blackbaud's third quarter 2020 earnings call. Today's conference is being recorded. I would now like to turn the conference over to Mark Furlong, Senior Director of Finance. Please go ahead, sir.

Good morning, everyone.

Thanks for joining us on Blackbaud's third quarter 2020 earnings call. Joining me on the call today are Mike Giannone, Blackbaud's President and CEO, and Tony Bohr, Blackbaud's Executive Vice President and CFO. Mike and Tony will make prepared comments, 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 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 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 upcoming investor engagement activity, which is available on our investor relations website. During the fourth quarter, our team will be virtually attending the Stifel 2020 Virtual Midwest One-on-One Growth Conference, Benchmarks Virtual Technology Conference, the 10th Annual Needham Virtual SaaS One-on-One Conference, the Stevens Investment Conference 2020, and the Raymond James Technology Conference. We will also be participating in virtual meetings hosted by Baird. With that, I'll hand the call over to Mike.

Thanks, Mark. Good morning, everyone, and thanks for joining our call today. Our third quarter results clearly show that we are pivoting more towards profitability and earnings growth with a keen focus also towards improving our revenue growth rate coming out of this pandemic. This morning, I'll share a few brief updates from the quarter before turning it over to Tony to cover the financials in more detail. First, I want to start by saying thank you to our employees for their dedication to serving our customers at a very high standard and the tremendous job they've done in 2020 adopting to the new work environment. I'm incredibly proud of how we have stepped up to support the unique needs of our customers as we all navigate these new challenges. It's really a testament to the people and culture of Blackbaud and our unmatched commitment to the social good sector. I would also like to provide a brief update related to our recent security incident. It's unfortunate the cyber attack happened. And again, on behalf of Blackbaud, I'd like to apologize to our customers involved in this incident. These types of cyber threats are on the rise. And over the last several years, Blackbaud has invested significantly in terms of dollars and human resources to enhance our cybersecurity program in preparation for an attack like this. Our top priority is supporting our customers and being diligent in our efforts to help them through this and ensure they have the information they need. Through our forensics investigation, we were able to understand exactly how this occurred, and we've remediated the vulnerability which was tied to one of our early generation products. We are incorporating lessons learned from this incident to continue improving our cybersecurity program and further harden our environments while being transparent with our customers on our progress. I'll remind you the majority of our customers and the majority of our private cloud environment were not part of this incident, and it did not involve solutions in our public cloud environments. As can be expected, the security incident resulted in a number of legal claims and regulatory inquiries. We carry insurance policies that we believe will provide coverage for a significant portion of current and expected future losses and expenses related to the security incident, although this is inherently difficult to predict. Turning to the quarter, each of our vertical markets continue to contend with the unique challenges posed by this pandemic. But one universal theme is the need to employ new strategies to advance their missions with a more digital-first mindset. And we're hearing this in the market as organizations begin to plan for the future beyond the pandemic. Digital transformation has shifted from a long-term strategy to a daily reality, as organizations across the market have adopted to new and distributed ways of working. We believe this shift will play a powerful role in our long-term opportunity as new customers seek market-leading software solutions for their organizations, and existing customers consider expanding the BlackBaud solutions in their tech stack. The uncertainty and complexity of today's environment has created some short-term challenges for these organizations, and as a result, impacted our team's ability to build new pipeline and elongated sales cycles, which are resulting in bookings falling short of budget for the quarter and year to date. We expect this shortfall to put pressure on both 2020 and 2021 revenues. And as I've said before, we believe the challenges our markets face today will be a catalyst for driving digital transformation across the social goods sector and having cloud software in place to support the missions of these organizations has never been more critical. It is clear socially good organizations agree as evidenced by the record-setting attendance at our annual user conference, BBCon, earlier this month. The reimagined virtual format enabled us to significantly expand the reach of the event as we welcomed over 38,000 registrants from over 70 countries. That's equivalent to well over a decade of our historic levels, and by far the greatest number of prospective customers we've ever hosted, which shows a significant interest in Blackbaud and how our cloud solutions can help solve the challenges and opportunities social good organizations face today. The resounding theme throughout the conference was the resiliency of the social good community, and we've received high marks for the interactive and engaging experience we're able to bring to our customers. Since the pandemic started, we've been agile as an organization with a relentless focus on driving value and outcomes for our customers and enabling them to quickly pivot their own operations and strategic efforts. In addition to the immense number of resources we provide to the market at no cost, we've also been reprioritizing and expediting product enhancements to support our customers' changing needs. For example, during BBCon, We highlighted a variety of innovations across our verticals that help customers adopt during COVID-19, such as fitness tracking integration in Blackbaud's peer-to-peer fundraising portfolio, a new virtual prayer wall that enables congregants at faith organizations to share and respond to prayer requests online, text messaging capabilities for scholarship directors at higher education institutions to ensure no funds were going unutilized, and the expansion of the global capabilities of your cause, CSR Connect, making it easier for companies to bring employees across geographies together in support of causes around the world. These are just a few of the many product announcements made during the quarter. As you know, the first of our four growth strategies is to delight customers with innovative cloud solutions And our commitment to innovation also extends outside the walls of Blackbaud as we recognize the unique needs of social good organizations across the markets we serve. Our Blackbaud Sky platform is powering an unprecedented level of innovation fueled by our engineers and enabling a growing developer community and our partner network with the tools to extend and enhance customers' Blackbaud solutions. Many Blackbaud products are built with open APIs, allowing for seamless integration with software from other providers, making it easier than ever for our customers to meet their organization's unique needs. Now, in addition to the option to create a custom solution, we recently released the Blackbaud Marketplace, offering curated third-party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact by enhancing their best-of-breed Blackbaud solutions with specialized capabilities, like connecting the bidders at a fundraising auction, texting volunteers about an upcoming event, tracking branded merchandise purchased in an online store, or automating outreach to donors eligible for a matching gift. Also, building on our partnership with Microsoft, we recently released a Microsoft Power Platform Certified Connector enabling non-developers at social good organizations to integrate data and improve workflows between Blackbaud's Razor's Edge NXT and hundreds of other applications. And we announced a robust integration of Luminate Online and Team Razor with Salesforce, enabling organizations leveraging Salesforce as their CRM to drive truly multi-channel campaigns and leverage the best-in-class fundraising and engagement functionality within the Luminate Online and Team Razor platform. In addition to openness in our products, we're also committed to building a more inclusive tech community focused on social good. Last year, we announced the Social Good Startup Challenge in partnership with One Million by One Million. And this year, we've announced we've expanded this initiative into the Blackbaud Social Good Startup Program, a year-long accelerator designed to support innovative startups with the potential to impact the ecosystem of good. And in alignment with our commitment to diversity in the tech community, we will be focusing our January 2021 cohort on diverse founders. BlackBot is steadfast in our commitment to innovation to enable the success of our customers, which is why we're accelerating investments in areas like R&D, security, and the shift to third-party cloud service providers. and delivering rapid innovation is just one way we're positioning the company to be stronger post-pandemic. We've also been taking the lessons learned over the past several months and reevaluating elements of our workforce strategy as we define the future of work at Blackbaud in anticipation of our offices reopening. We have a culture built on creating employee experiences and programs that further develop and attract the best talent and promote a diverse an inclusive environment. For us, this means adjusting our workforce strategy to provide more flexibility for employees to work remotely. We've proven we can operate effectively as a remote workforce, and this change enhances the positive employee experience we want every employee to have at Blackbaud. It also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it creates efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices. We're also applying a digital-first mindset to how we operate both in support of our employees and our customers. This includes the investments we've made in digital marketing to enhance our digital footprint and enable us to be more prescriptive and cost-effective in our marketing efforts. We've seen some solid early proof points, such as our investment in market-leading conversational AI software, allowing us to engage with customers on their time, enabling us to qualify leads 24 by 7 without any headcount, ultimately increasing lead generation and accelerating sales cycles. Given the early success, we expanded this functionality globally in Q3. We believe the impact of COVID-19 will accelerate the existing trends, driving adoption of modern cloud solutions in our market. And this is just one example of how we continue to put a heightened focus on lead generation and driving sales effectiveness as we look ahead to 2021 bookings. We've had a singular focus on the social good sector for nearly 40 years, and we remain very well positioned as a leader in this market and the best long-term partner for social good organizations. I'm excited about the changes we're making to enhance the future of work at Blackbaud from employees while delivering unmatched innovation. Our customers are resilient and continue to find creative ways to ensure they can continue to deliver on their missions. The challenges posed to our customers during the pandemic have created a short-term uncertainty in our revenue outlook and will limit our ability to drive near-term revenue growth. We've made a pivot to place greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable. Over the long term, we see an opportunity to drive meaningful earnings growth as we execute our balanced strategy with a sharper focus on profitability. With that, I'll turn the call over to Tony before we open it up for Q&A. Tony?

Thanks, Mike. Good morning, everyone. I'll briefly cover our key third quarter highlights and underlying trends before opening up the line for your questions. You can refer to yesterday's press release and the investor materials posted to our website for the full detail of our Q3 performance. Turning to our results, as we said, the current environment is putting pressure on near-term revenue growth and third quarter revenue declined 2.9% versus Q3 of 2019, with recurring revenue declining 2.6% on an organic basis. This was largely in line with our latest planning scenarios. The decline in recurring revenue was primarily driven by lower transactional revenue in the quarter as customers continue to be challenged with pandemic-related declines in admissions and in-person events that have had to be shifted online, postponed, or altogether canceled. While we've seen encouraging signs of customers offsetting the temporary losses in volume tied to these activities with online events and campaigns, Transactional revenue remains at least our least predictable revenue source given uncertainty around length and durations of the pandemic. Our contracted recurring revenue performed well as renewals continued to trend ahead of our original plan with over three quarters of 2020 now behind us. Looking ahead, we expect the shortfall in pipeline and bookings will put pressure on our fourth quarter and more so on full year 2021 revenue. Consistent with Q1 and Q2 of this year, we reclassified approximately $4 million of retained and managed services that would have historically been presented in recurring revenue to one-time services and other revenue. This reclassification reduced our organic recurring revenue growth rate by approximately 200 basis points or 140 basis points after normalizing 2019 for the change. For more detail, please refer to the supplemental schedule included in our investor presentation available on our investor relations website. Moving to earnings, our third quarter gross margin was 60.1 percent. We generated operating income of $48 million, representing an operating margin of 22.4 percent, and diluted earnings per share of 73 cents. Similar to last quarter, our early actions in response to the pandemic generated a significant cost reduction for the quarter. While not all of these actions will repeat next year, The third quarter is indicative of our ability to elevate our margin profile, inclusive of near-term pressure on revenues and critical investments in the business related to areas like engineering and security and our shift of cloud infrastructure to third-party cloud service providers. Many of you are familiar with the Rule of Forty. We're confident in our ability to deliver a sustainable 20-plus percent operating margin going forward, and we believe we have ample room to improve on the Rule of Forty through the combination of growth and long-term opportunity to scale profitability much more significantly. Now let's turn to the cash flow statement balance sheet. Our Q3 free cash flow was $41 million, representing a free cash flow margin of 19.2%. During the quarter, we completed the purchase of our Charleston headquarters building and adjacent land, which we currently lease. The upfront cash outlay of the transaction was approximately $16 million, which reduced our third quarter free cash flow margin by roughly 740 basis points. This is part of our newly expanded real estate strategy focused on optimizing our footprint for the future of work at Blackbaud, including new exit plans for certain office leases around the globe. These early lease terminations will generate significant cost savings going forward and will give us additional flexibility as we evolve our workforce strategies. We expect the majority of these lease terminations to close during the fourth quarter with a one-time cash outlay of between $20 and $25 million. We ended the quarter with $478 million in net debt. Our capital strategy calls for a debt to EBITDA ratio of less than 3.5 times, and at the end of Q3, we stood at 2.0 times with $230 million of borrowing capacity. Our current debt is scheduled to mature in June of 2022, and we are currently in the process of amending, expanding, and extending our debt facility to provide us additional capacity and flexibility for the future. In summary, our customers continue to navigate the challenges caused by the pandemic, which will put pressure on our ability to drive near-term revenue growth in 2020 and 2021. Despite the uncertainty of today's environment, we believe we have a significant opportunity in front of us, and we are well positioned to continue making the critical investments necessary to ensure the long-term success of the business. The third quarter reflects our ability to manage a wide array of possible outcomes that could result from the pandemic while remaining committed to driving increased shareholder value through profitability and earnings growth. With that, I'd like to open up the line for your questions.

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're using your speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. 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. We will now take our first question from Tom Roderick of Stiefel. Your line is now open.

Hey, everybody. Thanks for taking my questions this morning. So, Mike, let me ask you the first question just around the transactional side of the business. I mean, we look back at last quarter and you put up a pretty nice, you know, upside to the quarter relative to a tough time. I think the postmortem on it was the transactional business delivered particularly well. But that can be, you know, that can kind of swing both ways. And I wanted to dive in a little bit and see if you could give us a sense as to how much of that business on the payments transactional side is being driven by events and versus, you know, other sort of giving endeavors. And then, you know, from the perspective of what you can do to gain some visibility in that process or even just the outstanding question of when do we start seeing events coming back, how do you sort of think about the outlook of that piece of the transactional business?

Yep, sure, Tom. A couple things here. So, you know, in Q2, we talked about, the transactional and sort of consumption business. We have a couple of revenue lines there, sort of usage and payment transactions. And in Q2, we saw some shifts. So we saw some customer types drop, some customer types go up based on what was happening in the world. And that drove some pretty decent results in Q2. Q3 is interesting on that. And it's a great question because Q3 is the summertime, right? Lots of events in the summertime, right? A lot of our nonprofit customers do, you know, galas, run bikes, you know, all of those kind of things. And with COVID, those didn't happen much in the summertime, right? So that was under pressure for Q3, and that was why, you know, that revenue didn't do all that great in Q3. The good thing about that, though, is those customers are still customers, right? Those customers don't need to be re-implemented anymore. They just need to start having events, and we will drive revenue from that. So we're in contact with all those customers. They're planning on firing up events again. It's kind of hard to tell at the macro where that's going to come back and at what level it's going to come back. Some have rescheduled a little bit for Q4, but not in the main. So it's kind of hard to tell. So for us, there's future good upside there because all those customers are current customers. None of them are at risk. Our retention remains high. But really, it's just activity, you know, in the summer months around those actual events coming back. So we saw some weakness in the third quarter related to that.

I'm certain we're all excited for all those events to come back. So thank you for that. And then, you know, I'll let either you or Tony take this, whoever wants to. But thinking about that you know, commitment to an operating margin level that's higher than we've seen historically. It sounds like you're happy to commit higher than 20%. That's great. I'm curious how you think about the investments as it relates to sales and marketing, and maybe not as much new product, but you know, how you get into some of the newer markets you were pushing into before the pandemic hit faith based and higher ed have been sort of particularly hard hit during this timeframe. How do you think about the resources you want to put into that and what you get out of those resources over the next 12 to 18 months by putting them into those two markets?

Sure, I'll take that. So a couple things there, just some moving parts there. We're actually increasing investment in R&D in several areas that will drive further innovation. So we're doing that at the same time. We're increasing margin in the company. Sales and marketing companies, we've seen some really good returns on our digital investments. So we've really ramped up digital investments across the company and actually have learned a lot since March with all of our folks working at home. So all of our folks are selling, you know, via WebEx and Teams online remote. We're doing demos that way. We've really ramped up our investment in digital technology. um, lead generation, uh, which is great. So the, you know, um, lead, um, cost per lead is a heck of a lot less that way. We've really scaled up our investments in systems and, and people who are experts at that and seen a good return. I mentioned in my prepared remarks, we put some new tools in like conversational AI tools, which is sort of a 24 by seven way to qualify leads, you know, through a software tool. So really good, um, So we're looking to drive better scale that way and keep driving, you know, a good level of our expected bookings, although obviously this year is tough on bookings because of COVID. So our digital investments are really proven out. In my prepared remarks, Tom, I talked about just BBCon. It just was fantastic. 38,000 registrants, which is like 10 years of BBCons, and a huge percentage of that is you know, uh, prospects as well. Um, the other thing that I'd like to just mention, um, kind of tied to your, your question around Tony's comment on, you know, driving more margin and, and longterm. So we're going to have an investor day, um, that we're going to schedule, not quite sure when we'll have an investor day and we will once again have a longterm aspirational goals. Um, which has been, you know, the community has been asking for that a lot. So we're going to do that again as we make this shift to profitability so we can talk about what that might look like on a longer-term basis.

Great. Really helpful. I appreciate the comments. Go ahead, Tom.

One follow-up on the transaction I want to make sure we covered off on. You know, since we pulled guidance, it's hard for me to discuss, you know, the models that are out there and how those compare to our internal expectations. But I'll tell you the transactional revenue had actually run hot to our original plan for the year through Q2, fell a little short to our original plan in Q3, but still exceeded our scenario forecasts in Q3. So there's a little bit of disconnect maybe where you guys and the market expectations were versus what we were expecting internally. So transactions held up really well, and to Mike's point, You know, it's really about summer when all those runs and walks and rides and galas, you know, were not able to happen because of the, you know, social distancing and all of the other stuff we're dealing with with the pandemic. And then the other thing I'd note also that we need to keep in mind is services has continued to be coming short of plan for the entire year. I think that's twofold. I think, one, it's tough to get resources rounded up with our customers. you know, to do the work with the pandemic impacts. And then secondarily, it's just our continued trend of moving to the cloud. There's just less need for, you know, customization and those kind of services that we've done historically. So that trend kind of continues that we've seen for the last couple of years.

Yeah, great details. Thank you, Tony. Thank you, Mike. Appreciate it. You're welcome.

Thank you. And our next question comes from Brian Peterson of Raymond James. Your line is now open.

Hi, gentlemen. Good morning, and thanks for taking the question. So I wanted to follow up on Tom's last question, and it sounds like there's a lot of efficiencies gained through some of the digital marketing motions and the digital motions that you guys have put in place. I'm just curious, how should investors think about the return to growth as maybe some of these macro trends normalize? With the sales capacity and these marketing motions, obviously we don't have a crystal ball on what the macro will be, but I just kind of wanted to understand conceptually how we should be thinking about growth and the investments that you're making when that macro city applies.

Yeah, I could start with that. Yeah, sure. Thanks, Brian. So, you know, we, we serve a lot of different types of customers and they're in different situations within COVID. Right. So, you know, the educational institutions are all up and running. And so we're seeing that, you know, the, the, normalcy of transactions and things we have there, yet the bookings slowed down there because they all scrambled to figure out what to do and how to open with COVID, right? If some of them are remote, some are combo remote, go to class. That's getting behind them now because it kind of built some operating muscle in the last two months running the schools. And then some others, like the big non-profits we just talked about, where they have little or no events, they're planning when those are going to be. And we're not sure at the macro what that's going to look like for a while on the event side. So on the one hand, you know, we are, I believe positioned well because they all remain customers and our retention's high and they will have events again because it's a primary revenue driver. Some of them have switched to going more digital. They're having digital events with some pretty good success. Um, But with COVID, again, it's still kind of hard to predict that sector of our business going forward. And lastly, I'll say, again, driving margin up and getting more scale in sales, lower cost through digital means, and driving margin up and hiring more engineers and driving more innovation, which we're pretty excited about.

And Brian, maybe I'll tag on there to Mike's, you know, from a timing perspective, as Mike spoke about when we talked with Tom, that the transactional side should bounce back very, very quickly, right? So assuming next year in the summer we're allowed to have you know, the runs and the walks and the rides and the heart balls and all of those galas, et cetera, we'd expect that transactional revenue to come back, you know, almost overnight with those events being allowed. So I think that comes down to where are we as a society and do we have vaccines and those things that will really drive that. The other piece, as you're aware, that has a little longer tail, you know, we're seeing some softness in bookings and pipeline and because of the pandemic. And that's obviously going to hurt us through 21, just with the radical revenue recognition on those bookings. And so we're seeing a little bit of impact this year, but it's going to be more visible next year because we'll have a full year worth of revenue impact from those bookings shortfalls. I think that lag, assume the market comes back sometime next year, you know, six to 12 months kind of lag before we work our way through that. So I would say, yeah, You know, if we get back to normal sometime in the first part of next year, I'd hope, you know, by early 22, we kind of have rebounded and see, you know, that resurgent of growth overall. Transactions much quicker with a little more delay just on the radical rev on the subs.

Yeah, the last thing I'll just add, Brian, I'll just add one more thing. Tony said this in his prepared remarks, and we're really focused on this, which is that combination of driving up the ladder on the rule of 40. So a combination of both top and bottom line of the P&L, which we're planning on being pretty aggressive in driving that going forward.

Great. That's a lot of comments. Great color there. And just a question I was getting from investors yesterday. I don't know if you had any comments to this, but just as we think about your transactional business, I know you have some kind of smart tuition there, so there's some exposure in higher ed, but I'm curious. If we were to overlay your transactional business kind of within certain in-markets, what are the top two or three or anything in terms of exposure relative to the customer base? Any color you can add there?

Yeah, sure. So the smart tuition and the sort of education sector is doing just fine. And, again, the pressure is what we just talked about. It's all these events in the summer, and that really didn't happen, is on the downside putting pressure. It's really all that type of activity, a gala event, you know, a walk, a ride that really didn't happen in the summer because of the required social distancing.

Yeah, and another thing I'd mention is online giving spiked because of the pandemic. So, you know, it forced people to move to online giving. You think about like tithing for the faith-based market surged dramatically. People were still giving to their churches, but they couldn't do that in person, you know, passing the basket. And so, in several areas, we actually saw a fairly significant ramp in transactional giving. The place, to Mike's point, we really, Q3, and again, I'll just reiterate, it was anticipated in our part because of the, you know, not being able to host those events, like usage revenue related to team raiser, you know, it was a big shortfall in the quarter because we didn't have the runs and the walks and the rides and et cetera and the marathons. So that one, again, I expect will bounce back very quickly, you know, once things open up again. I also saw a note someplace in commentary from one of the sell-side folks, I don't remember who it was, but had mentioned they were surprised on our gross margin that it wasn't higher being the shortfall in the quarter was from transactions. We need to keep in mind that Some of these transactional-related offers have quite high gross margins. Payments, right, true credit card processing has a dilutive, lower gross margin, but things like tuition, some of the JustGiving models, usage-related team raises, some of those things, just how they're part of the pricing construct, are actually really good gross margin pieces of the business, so we shouldn't think of transactions all as being dilutive, so I think that's important. for folks to keep in mind that loss of some of those with good margins has a pretty significant impact on operating margin as well.

That's a good point.

Yeah, and also, Brian, I just want to add something. Tony mentioned one of our platforms, which is Luminate Online or Team Razor, which is really kind of our big platform that drives a lot of this usage and payments. We're expanding the footprint. We announced a – pretty robust integration with that platform with Salesforce platform. So we're expanding that across the board. We have a lot of customers that make decisions to go with us and Salesforce for different reasons. And so we've integrated that platform there, which provides a future opening to more usage and payments in those kind of scenarios as well.

And maybe just a follow-up on that. Mike, I know the Salesforce question comes up with investors. I know you've answered it in the past with this integration. How do you feel like that impacts your flexibility to work with customers in different ways?

I think that opens up a lot. A couple of things that I'd like to provide, because we get asked the Salesforce question a lot. And so, you know, in the world of software, typically, you know, what looks like competitors sometimes integrate, like we just did with Illuminate. By the way, we also announced some robust integration with Razor's Edge NXT in Salesforce and our enterprise CRM fundraising platform with Salesforce as well, in addition to Illuminate and Team Razor. A couple of data points on Salesforce, because we get asked this a lot, and we've kind of realized we haven't provided probably enough granularity. So just a couple things. We went back and looked several years, and our win rates against Salesforce were have not changed, and they're basically the same win rates against our other competitors. There's no difference. And the second really interesting, I think, data point, because we've been saying this at the macro but not provided data, we see Salesforce in about 5% of our total opportunities. Five. That's a little different by vertical, right, by markets run. You know, we always would say we don't see them in all the verticals and kind of explain faith-based or this or that one. But if you look at all of our deals, you know, we see them in about 5%, just to be clear, just to provide more information there.

Great. That's great color. I'll see the floor. Thanks, gentlemen. Okay. Thanks, Mike.

Thank you. And our next question comes from Rob Oliver of Bayard. Your line is now open.

Great. Thank you, guys. Good morning. Mike, my question's for you, and then I had a very quick follow-up for Tony. Mike, just curious, you know, we're a few years into the Microsoft partnership, and I was wondering if you could provide us with a bit of an update on that. I know you guys have said in the past that, you know, that there have been a few big deals here and there that, you know, maybe wouldn't have come your way without Microsoft. You know, particularly at this time, that's likely a channel, you know, Microsoft's very active, that you guys couldn't could lean on, you know, during the pandemic. So just curious now, a few years into the partnership, you know, what kind of momentum, if any, you're seeing in the Microsoft channel? And then maybe, you know, I'd love to hear some customer examples, but maybe that's something that we could get at the upcoming investor event.

Yeah, sure. Happy to provide customer examples, Rob. So we're partnering with them mostly on enterprise-type deals, in places like healthcare and higher ed. And it's been a good relationship. We're partnered with their executives that run those business units, also partnered in their nonprofit business unit as well. And it's gone quite well. The relationship has matured from the Microsoft nonprofit business unit to higher ed and to healthcare as well. And so we've made more contacts and more collaborative selling opportunities has happened there. The other thing is we're pushing our product roadmap further as well. So we've done some really great integrations with Raiders Edge NXT and Office 365, for example. Um, and again, we've got the relationship at the Azure on the Azure side as we continue to move from our, our colo data centers to Azure. So, um, I think it's gone pretty well. Um, and the relationships are solid. Um, and it's really, um, You know, the way that the models work, too, as far as compensation is complementary because their teams are really compensated on Azure consumption. And we're moving our products to Azure. And so their base plans and sent them to partner with us in the marketplace to pull us in to get Azure consumption, which is where we're going anyway. So it really works quite well.

Great. Thanks, Mike. Appreciate that, caller. Tony, just for you, just on the data breach, you've got a couple set of costs here that you guys are going to face. It's certainly remediation costs, and that's something I think we can ballpark based on other examples. But you've got remediation costs, and then you've got liability, ex-insurance. It sounds like insurance is going to cover much, but not all of that. So just curious how you're thinking of that. And I would assume that, you know, as you guys get set up for 21, that's something you'd be factoring in. But just wanted to maybe get a little bit more color on both of those costs. Thank you.

Yeah, absolutely, Rob. So I would say watch our SEC filings because there will be a lot more disclosure in those, obviously, on the topic. We have good insurance in place. Our insurers are working with us very closely. The key there is coordinating with them and make sure we're clear on what they're covering or not going to cover. Right now, and you'll see this in the queue when it comes out, we have not recorded anything material from a liability perspective yet. We currently don't anticipate that we have a material amount that needs to be accrued that's not going to be covered by insurance on a net basis. So you'll see some things in there where we'll have some receivables and liabilities we'll book. But on a net basis right now, nothing material to the company. That said, we're obviously spending a lot of our time and utilizing a lot of our internal resources on that front. You know, The big thing, I think, that you'll see probably in our numbers is just our continued investment in our cybersecurity resources internally, right? Continuing, we've got, you know, a really good team in place. We've done a great job. Obviously, we, you know, caught these guys in the midst of their efforts. They weren't able to take over our system, so I think that was great, but it's still going to be painful to work through. But there'll be plenty of disclosure on the topic in the financials, and we will certainly you know, build any estimated costs we would incur into the 21 plan. At this point, again, we believe insurance is going to cover the majority of it other than our, you know, our internal resources and time.

Great. Thanks, Tony. Thanks, Mike. Have a good day, guys. Thank you. Yep, thanks.

Thank you. And our next question comes from Kirk Madden of Evercore ISI. Your line is now open.

Okay. Thanks very much, and thanks for taking the questions. Mike, I was wondering if you could just characterize where you think the conversations with clients are today around sort of the non-transactional side of your business, meaning are clients still just trying to sort of stabilize and sort of make sure they can function, period, or are they starting to think ahead to where they need to be a year or two from now? I realize budgets are tight. They might not want to do anything, but I'm just kind of curious how if at least the tone of the conversations has perhaps changed today versus, say, six months ago?

Yeah, it's changed. Many of our verticals, they're looking forward. They realize how important digital cloud platforms are to them because they've had to use even some different things, the Zooms and Teams and things that they maybe haven't. So they're looking forward. The caveat to that is, you know, some of them are not. So like in our arts and cultural business, you know, some of those institutions are open and doing pretty well. Some, mostly in like the performing arts centers, haven't opened yet. So, you know, they're in a different spot. But I would say at the macro, across the board, they're looking forward, thinking about you know, okay, we're, you know, we're eight, seven, eight months into this COVID thing, it's going to be around for a while we're operating, you know, we have to continue to drive our business forward and think about the future. So those conversations have shifted that way. Our bookings are still pretty far off of what we planned, right. But your question was on conversation. So they have shifted that way. In the main for sure, but not in all the markets.

Okay, that's helpful. And then I guess even thinking about your business going forward, how much of your sales efforts can be shifted more virtually longer term? And does it matter between, say, expansion business versus net new business? Meaning, I assume you'll always want to have face-to-face if you can, but can you create more efficiencies, I guess, doing more sales virtually after this? And kind of how I assume that's also factoring into your confidence around margins. So I just wanted to expand on that. Thanks.

Yeah, you bet. Yeah, again, I think we've, like a lot of companies, we've learned a lot since March. You know, you see us being super aggressive on our real estate, right, plans. We rolled out new workforce policies already that are post-COVID workforce policies, which is a lot more remote planning. across all the job types in the company. It's going to drive cost efficiencies. It's going to help us with access to skills and diversity if you remove zip codes from job types, and digital related to sales. I would say that you go back two years, we were behind the game in investment in digitally enabled sales. We did a great job with internal IT platforms for usage for sales, but not digitally driving weeds. And we started that over a year ago, brought in some experts, put in a bunch of platforms, and it's proven itself out. So all of our teams have been selling virtually since March, right? All of them are doing demos. No one's going to see folks face-to-face, whether existing or prospects. And although it's, you know, our bookings are down because of COVID, it's actually operationally working quite well. So I think it's going to continue. You know, I don't know that we're, I predict that we're not going to go back to what we used to be at Blackbaud or in a lot of, you know, software companies. I don't think so. I think there's a ton of opportunity. The other thing for us too is, you know, a lot of our deals are an SMB model, which is very, very online. And, Frankly, we didn't treat it that way enough in the past where we incurred too much cost in an SMB model where it could have been more digital, frankly, in the past. We've learned we could do SMB digitally because we started to invest in it, like I said, over a year ago. COVID forced it, and we've learned that we could do it digitally and scale it. for the SMB, which is most of our deals are sort of SMB-type deals. So lots of good learnings here since March that will drive scalability in sales and marketing. It's an opportunity for us, both on the top and bottom line, I think, in the long run.

That's great. Thanks, Mike. Thank you, guys. You're welcome. You're welcome.

Thank you. And our next question comes from Ryan McWilliams of Stevens Incorporated. Your line is now open.

Thanks for taking the question, just one for me today. As we're in this evolving market environment and you're turning towards your leverage target, any changes to your acquisition criteria here? And given the difficulties in some of your end markets, have you seen additional target opportunities to proactively reach out to you? Thanks.

Yeah, I can take that first, Ryan, thanks for the question. Yeah, we remain pretty connected to the activities that are going on. There are some lower valuations out there because of the smaller companies that are under some pressure. Our strategy hasn't changed in the long run. In the short run, as we keep saying quite a bit, we really pivoted toward driving toward the rule of 40 and profitability, which is more controllable and I think a really good model for us. So the strategy hasn't changed. the recent activity, we keep looking at things that were also driving, you know, profitability as well. So I think there will remain opportunities related to that. And was there a, I'm sorry, Ryan, was there a second part of your question as well?

No, you hit on the bulk of it. Okay. Thanks. Yep. You bet. Yep.

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mike Giannone for any closing remarks.

Great. Thank you, operator. I'll just close by saying that I'm proud of our execution across the board in a quarter. The pandemic has created some near-term challenges, but I believe we have a significant long-term opportunity in front of us, and we're uniquely positioned to elevate our status as a leader in this marketplace And I think we've done some of that with things like BBCon recently. We're currently finalizing our 21 budget and refreshing our long-term plans, which, again, puts a greater focus on profitability and the whole Rule of 40 model. And we plan to share more early in 21. As I mentioned, we'll have an analyst day, and we'll also provide long-term aspirational goals at the analyst day as well. And Tony and I thank you very, for participating today and in today's meeting on the call. So thanks, everyone. Have a good rest of your day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.