Blackbaud, Inc.

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

Good morning, everyone. Thank you for joining us on Blackbaud's fourth quarter and full year 2022 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. With that, I'll turn the call over to you, Mike.

Thank you, Steve. Good morning, everyone. Thank you for joining us on the call today. I would like to take a brief moment to mention that Steve has taken an internal opportunity to further advance his career at Blackbaud and is transitioning to another role in the company. Congratulations, Steve. Thank you for leading our IR program over the last several years. Moving forward, Kevin Mooney, our Executive Vice President of Corporate Strategy and Development, and his team of Alex Durkee and Jeff Klein will take over the leadership of our investor relations program. My remarks today will focus on three key areas. I'll start with a review of the numerous steps we took throughout the year to improve company performance. Next, I'll give a brief overview of fourth quarter and full year 2022 results versus our guidance. And then I'll end with our 2023 outlook before turning the call over to Tony to provide additional detail. 2022 was a year of substantial progress for our company. We proactively took steps to better position the company, manage it efficiently and effectively in a weakened economy, and drive profitability, cash flow, and improvement on Rule 40. On the revenue front, we institutionalized our pricing approach. We increased transaction fees where warranted, set subscription prices based on contract term lengths, and embedded escalators in our two- and three-year contract renewals. We improved our renewal and retention processes by establishing a dedicated team and remaining focused on customer success. In the fourth quarter, we signed several new and existing enterprise customers to six- and seven-figure ARR contracts, including the company's largest deal in 2022 closed by the EverFi team. We were also active on the cost side of the business. We tightly managed our largest expense, which is people costs. We selectively replaced attrition, closed open requisitions, and had a workforce reduction late last year. As a result, we ended the year with fewer employees than we had at the end of 2021. We also maintained our lower run rate on rent expense as well as travel costs. Further, we renegotiated some of our largest vendor contracts such as Microsoft Azure and AWS, and simultaneously reduced our footprint by closing four data centers last year. In short, we examined every cost driver in the business with a critical eye, which took a lot of cost out of our company. We have a strong internal focus at every level of the company to generate significant value and drive substantial improvement on the Rule of 40. Now, let's turn to our financial results. We saw a strong December in overall fourth quarter bookings performance with year-over-year improvement in our social sector. In the fourth quarter, we had total revenue growth of 11%, and our organic revenue grew approximately 2% at constant currency. One-time revenue was roughly one point of drag on organic growth in the quarter. Adjusted EBITDA grew 12% when they adjusted EBITDA margin at constant currency of 25%. Taken together, rule of 40 in constant currency was approximately 27 percent for the quarter. For the full year, our financial performance met or exceeded our guidance ranges we gave on our Q2 call last year. We achieved a significant milestone in 2022. Revenue surpassed the $1 billion mark for the first time in our history, reaching $1.58 billion, a 14 percent increase year over year. Organic revenue grew 4 percent at constant currency. Our renewals continued to improve throughout the year as we shifted towards multi-year contract terms. And our transactional business was a meaningful contributor to growth for the full year. Adjusted EBITDA margin at constant currency came in at 25 percent and exceeded the top end of our full-year guidance range. And rule of 40 of 29 percent for the year at constant currency increased by two points over 2021. The business generated strong adjusted free cash flow of $154 million, which exceeded the high end of our full-year guidance range and enabled debt repayment ahead of schedule. During the year, we also made improvements to our corporate governance by formalizing our policy on board member tenure. Most recently, Yogesh Gupta and Rupal Hollenbeck joined our board of directors in December. replacing Tim Cho and Joyce Nelson, who retired. In a little over a year, four of our seven independent directors have been newly appointed. This not only provides diverse new business perspectives, but has also added important skills in cybersecurity, enterprise software, digital transformation, and global operations. I couldn't be more pleased and appreciative of the board that we have. Turning to 2023, I'll start by reminding you that the end markets we serve are large and resilient. The U.S. nonprofit space alone, total annual giving is $485 billion. There are over 1.4 million registered nonprofits, and it's the third largest employment sector in the U.S. And in the corporate market, we have greatly expanded our footprint with our EverFi acquisition. And it's clear that this market is sustainable through choppy economic orders. In fact, Terrible giving in the United States has comprised about 2 percent of total GDP for more than 40 years, and it's only fluctuated modestly downward in one of the past five recessions. That said, we remain laser-focused on improving operating performance and driving efficiencies in the company. With that, we are reducing our workforce, starting with notifications today in the U.S., following the planned action at the beginning of the fourth quarter to reduce overhead and rebalance our workforce. We experienced a slowdown in voluntary attrition relative to expectations, leading to a further reduction in force to achieve our original plan. We did not come to this decision lightly, as we know it affects valued employees. We're taking the necessary steps to work more efficiently and effectively as a company. It's important to note that while we are eliminating positions in some areas, we'll continue to hire in other areas. Most of these reductions are in areas of the business that are not customer facing or in sales. And when combined with the cost actions we took in Q4, we expect our total headcount will be reduced by approximately 14% since Q3 2022. From a revenue perspective, our sales teams are fully staffed. We're starting to see less attrition and we have strong pipeline coverage as we head into 2023. Our customer success and renewals teams are operating well, and we expect stable to slightly improved retention rates, accompanied by the continued shift to multi-year contract terms. And while it's still early days on the pricing initiatives, we expect to see improving performance with each successive quarter as contracts are renewed throughout the year. Additionally, these pricing initiatives have a double benefit to Rule 40, with much of the revenue upside falling through to profit. Turning to profitability, we have high visibility into step-level margin expansion in 2023. The actions we've taken throughout 2022 and early this year are driving scale and efficiencies in the business. Our company is well positioned for substantial and sustainable margin improvement over the next several years. While Tony will cover the 2023 financial guidance in more detail, I'll provide the highlights. At the midpoint of a full-year financial guidance ranges, we anticipate organic revenue growth at constant currency of 4%, consistent with last year. We expect adjusted EBITDA margin of 30%, which is a five-point increase versus 2022. And consistent with our focus on optimizing the business, we expect Rule of 40 at constant currency to expand from 29% last year to 34 percent this year as we march towards attaining 40 percent. Further, we expect adjusted free cash flow of $180 million. Our capital allocation strategy continues to call for deleveraging in the near term as we gain more visibility on cost related to the security incident in 2020. We're targeting a leverage ratio approximately two times, significantly less than where we ended 2022 at 3.2 times. Collectively, We expect financial performance to improve with each successive quarter starting with meaningful improvement in the second quarter as our pricing and cost initiatives take hold. In summary, we had a strong execution in 2022. We're focused on continuing improvements across the business in 2023 as we progress along our Rule of 40 journey. We're confident in our outlook with plans in place to achieve substantial performance acceleration throughout the year and deliver significant enhanced shareholder value. With that, I'll turn the call over to Tony.