Blackbaud, Inc.

Good day and welcome to Blackbaud's Q3 2022 earnings call. Today's conference is being recorded. I'll now turn the conference over to Steve Hufford. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's third quarter 2022 earnings call. Joining me on the call today are Mike Giannotti, Blackbaud's president and CEO, and Tony Boer, Blackbaud's executive vice president 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 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. With that, I'll turn the call over to you, Mike.

Thanks, Steve. Good morning, everyone, and thank you for joining us on the call today. I'll open the call by saying we had a very strong quarter. We now expect to meet or exceed our financial guidance for the year, which increases our 28% Rule of 40 performance expectation to roughly 29% on a constant currency basis. And next year, we anticipate a step-level acceleration in Rule of 40 performance into the mid-30s, based on actions we've already taken and initiatives in place to drive both growth and profitability. Turning to the quarter, we had total revenue growth of 13%, and our organic reoccurring revenue at constant currency continues to trend consistently in the mid-single digits, growing 5% in the quarter. Year-to-date, our organic revenue growth at constant currency also stands at roughly 5%. and our adjusted EBITDA margin was roughly 25 percent of constant currency. Combined, we've achieved 30 percent on Rule of 40 through the first three quarters of the year, which leaves us very well positioned with only one quarter to go in the year. We remain confident in the resilience of our end markets, underpinned by some recent wins, continued strength in customer renewals, and several pricing initiatives underway, which I will touch on shortly. We're expecting to meet or exceed our financial guidance for the year and carry that momentum into 2023, which Tony will cover in more detail. Next year, we're targeting the mid-30s on Rule 40 of constant currency through a combination of mid-single-digit organic revenue growth and an adjusted EBITDA margin approaching 29%. On the top line, The underlying trends in the business suggest mid-single-digit organic revenue growth as a solid baseline. We're also layering in several multi-year pricing initiatives, which are already underway and should provide additional revenue durability. Into continued advancements in our product innovation, sales productivity, and customer success programs provide further upside into the high single digits as we approach 2025. Although pricing has a double benefit on Rule 40, as much of the revenue upside falls through to profit as well. Turning to profitability, we have very high visibility into step-level margin expansion in 2023, including the more intensified focus on pricing initiatives, the continued scaling of our infrastructure costs, as well as actions to rebalance our workforce and reduce overhead. We've taken several prudent steps this year to better align our workforce to strategic priorities, including the elimination of open positions, as well as the difficult decision to reduce our workforce last week. And given these actions have already been executed in 2022, we've significantly reduced the run rate of our operating structure entering 2023, which we expect to add several points of margin improvement on a go-forward basis. So while we intend to provide a full year 2023 financial guidance on our Q4 call in February as is our normal practice. The key point here is that we have high visibility towards accelerated Rule of 40 performance next year based on a combination of actions taken and initiatives in place that are well within our control to manage. And the multi-year nature of these initiatives provides future upside towards achieving Rule of 40 by the end of 2025. To provide some further context on pricing, it wasn't until recently that we institutionalized price management at Blackbaud. We now have a dedicated team and steering committee with executive sponsorship, and we are seeing the impact of early pricing initiatives taking effect. Most recently, we announced the general availability of complete cover and donor cover for Razor's Edge NXT and eTapestry customers in the US and Canada. As a reminder, donor cover is widely available in the market and gives supporters a simple yes or no option to cover costs for their specific online transaction. And complete cover is the new pricing model that is unique to BlackBot in that we cover the organization's cost of processing and supporters can choose at checkout to contribute toward enabling and processing the transaction. This pricing model is very successful in our JustGiving business and something we have been testing here in the U.S. for a while now. These new offerings drive both increased revenue growth for us and reduce costs for our customers. Also, our customers are already seeing the benefit. One customer, Manchester University in Indiana, has raised thousands in additional fundraising dollars after adopting complete cover, which means more financial assistance for their students. It's a fantastic model change for our customers. What's important to take away from our price management efforts is that it's new to our model, multi-year in nature, benefits both growth and profit, and we have several initiatives at play. Some simply catch us up to competitive pricing and practices, while others are model changes that drive greater revenue for both Blackbaud and for our customers, which is a win-win. And we expect to see a high level of adoption. Now, shifting to a few recent operational highlights. We continue to make strides in delighting our customers with innovative cloud solutions. Two weeks ago, we hosted our annual conference, BBCon, that was again offered virtually and free to thousands of customers and prospective customers that attended. We also held our product update briefings that covered recent product updates and future roadmaps. During the conference, we shared how our purpose-built solutions bring together the capabilities essential to our customers in managing their data, making their teams more productive, motivating their audience to act, and ultimately driving outcomes. For example, the National Parks Foundation is connecting data across the organization to create insights and visualizations that are available at a moment's notice without manual intervention. Or the University of North Carolina at Chapel Hill, where the implementation of Blackbaud CRM provided new levels of transparency and allowed them to focus in on key metrics in established growth plans, resulting in annual fundraising going from less than $300 million a year to nearly $800 million in their last fiscal year, a two and a half fold increase. I'm excited about the outcomes we're driving for our customers and their supporters. We also continue helping our corporate customers create impact through our EverFi platform. In September, we announced our partnership with the Center for Audit Quality on a new accounting education initiative for high school students to attract greater diversity and representation in the profession. We also renewed our partnership with the NFL on their national school sponsorship of the character playbook course powered by EverFi. To date, over 12,000 schools have activated the course, and we've reached over 1.5 million students. And HCA Healthcare expanded their partnership with EverFi to extend their sponsorship of the EverFi Understanding Mental Wellness course across California, North Carolina, and Virginia high schools. These are all substantial enterprise-sized ARR deals for us. Shifting to recent acquisitions and divestitures, we acquired Kilter in August, which was not material to our near-term financials, but is a big deal for many of our customers. Kilter is an intuitive, gamified, activity-based engagement app, and we will initially leverage Kilter with Blackbaud TeamRaiser to serve nonprofits by expanding the way they can engage with their supporters to prepare for their existing fundraising walks, runs, and rides, and to create totally new types of engagement opportunities that aren't tied to a specific date or place. Kilter will also provide a unique solution with your cause CSR Connect platform for companies as employers take a more active role in supporting their employees' health and wellness pursuits across remote and distributed workforces. We also divested our FIMS and Donor Central NXT products to our channel partner, MPact, in the quarter, which are fairly immaterial products for us and simply the result of our continued efforts around portfolio optimization. Lastly, before I turn the call to Tony, I'd like to briefly remind you of our view on Blackbaud's positioning against a few macro factors. First, we continue to stay focused on our people and culture, and we clearly remain a sought-out destination for employment, having recently been named to Quartz's ranking of the best companies for remote workers in 2022. We eliminated some of our exposure to rising interest rates when we refinanced our debt in 2020 and took advantage of a low interest rate environment. On the topic of inflation, in a potential recession, our company and our market have proven to be resilient in past downturns, including the pandemic. This was the ultimate test for us and our customers. From a currency perspective, our exposure is limited given the size of our international footprint and we have some hedging in place. Our strong year-to-date results and outlook clearly demonstrate the durability of our revenue and scalability in our operating model in the current macro environment. In summary, We had a very solid third quarter and expect to meet or modestly exceed our guidance for the full year. We're positioned to achieve a rule of 40 in the mid-30s at constant currency next year, which is a step-level improvement over our 2022 expectation of roughly 29%. And we remain confident in our outlook with plans to place, to deliver significant enhanced shareholder value. With that, I'll turn the call over to Tony before we open it up for Q&A. Tony?