Blackbaud, Inc.

Good day and welcome to Blackbaud's first quarter 2023 earnings call. Today's conference is being recorded. I'll now turn the call over to Kevin Mooney. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's first quarter 2023 earnings call. Joining me on the call today are Mike Giannone, Blackbaud's president and CEO, and Tony Boer, Blackbaud's executive vice president and CFO. Mike and Tony will make prepared comments, and then we'll 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 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 form or as a substitution for GAAP measures. A reconciliation of GAAP and non-GAAP results is available in the press release we issued this morning, 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 mention that on today's call, we'll be sharing incremental commentary to provide more detail behind the key initiatives of our operating plan. I encourage you to review our presentation on our IR website that contains these additional details as well. Also, notice of our 2023 annual meeting of stockholders and proxy statement were filed on April 25th, and our annual meeting materials were posted to our investor relations website that same day. And during the second quarter, our team will be virtually attending the Needham 18th Annual Technology and Media Conference on May 18th, the Evercore Diamonds in the Rough Conference on May 31st, the Stiefel Cross-Sector Insight Conference on June 6th, the Baird Global Consumer Technology and Services Conference on June 7th, and the Bank of America Technology Conference on June 7th. Additionally, we'll be participating in investor meetings with Raymond James on June 1st. With that, I'll turn the call over to you, Mike.

Thanks, Kevin. Good morning, everyone. Thank you for joining us on the call today. We're pleased to report strong first quarter results and improved outlook that underscore the strength and potential of our operating plan. Results of our plan are just beginning to bear fruit, with performance expected to further accelerate with each successive quarter of 2023 and beyond. I'd like to spend time today reflecting on the actions we've taken, the momentum in our business, and the continued upside we see over the near, mid, and long term. Our improved outlook from the beginning of the year stems from better than expected performance on a few key factors. I'll touch on these in more detail momentarily, but our increased level of confidence in our operating plan is driven by strong Q1 bookings, that were ahead of expectations, continued strength in transactional revenue despite a challenge micro, renewal rates remaining strong as we started implementing our new contractual pricing approach, and meaningful margin improvement beginning to flow through as cost actions take full effect. Taken together, our performance on these factors supports raising guidance across all metrics, which we will discuss further in a bit. Let's now review our first quarter results. We reported revenues of $262 million, which is up 3.4% year-over-year on an organic constant currency basis, and double our fourth quarter 2022 organic revenue growth, demonstrating strong sequential progress. Non-GAAP adjusted EBITDA was $71 million. It represented an adjusted EBITDA margin of 27.5% at constant currency, which is up five points from Q1 2022. Taken together, Rule 40 at constant currency was 31% for the quarter, a three-point increase year over year. Importantly, the quarter reflects only a modest impact from the initiatives we have underway to drive revenue growth and cost savings, with significant upside still to come. I'd like to spend a few minutes discussing those initiatives, how we arrived at them, and why they give us confidence in our trajectory. As we saw a return to normalcy following the pandemic, we took a comprehensive look at the business, examining every revenue stream and cost center to determine how best to improve both the top and bottom line. Following this review last summer, we developed and began to execute a five-point plan that focuses on, first, product innovation, second, bookings growth and acceleration, third, transactional revenue optimization and expansion, fourth, modernized approach to pricing and multi-year customer contracts, and fifth, keen attention on cost management. Q1 results show early indications of the plan's success. I'd like to touch on each of these five key drivers, the metrics that we're monitoring, and the impact we expect each to have. I'll then discuss why the trends we saw in Q1 give us confidence to raise our 2023 guidance, as well as what we are anticipating in 2024 and beyond. Starting with product innovation and delivery, we support our customers by replacing their aging, mission-critical systems of record and adding advanced digital services. We continuously seek ways to add substantial value for our customers and their constituents by investing in both organic innovation and ecosystem enablement through partnerships and acquisitions. These new capabilities and partnerships strengthen our offers and create new opportunities for our customers to deliver on their missions. For example, with the availability of Sky API endpoints for Blackbaud CRM, and BlackBot Altru, we're enabling customers to leverage applications in the BlackBot marketplace to seamlessly integrate complementary point solutions with our partners. CRM customers can now easily activate the double the donation solution, a BlackBot partner, to drive matching gift funding automation from donors without extra operational lift. We've also focused on expanding strategic partnerships to unlock even more value for our customers with partners like Amabase and SwipeTracks XTrueLink. We recently announced an expanded partnership with Amabase to provide a modern solution for advancement teams to unlock higher education and K-12 school alumni engagement and better fundraising by creating integrations that enable secure movement of constituent gift and event data between systems without friction. Additionally, we have partnered with SwipeTrack Solutions to create a seamless and secure integration between Blackbaud Altru and Blackbaud Merchant Services to modernize the patron digital experience and back office operations and arts and cultural organizations. With most organizations getting back to pre-pandemic levels of visitors, we are able to provide our customers with critical technology to keep lines moving and provide guests and members with a fast and easy way to enter their locations. We also recently announced a new feature for general availability with Blackbaud team raiser, Goodmove. Goodmove leverages Kilter, which we acquired last year, and helps charitable organizations raise more with mobile-first gamified activity tracking and peer-to-peer fundraising. For example, Goodmove will help the nonprofit Carry the Load expand the reach and impact of hundreds of thousands of volunteers who have walked millions of miles to honor and remember military service members and first responders. These innovations and partnerships will strengthen our customer value proposition and drive product stickiness and bookings growth. Turning to our second point, sales bookings. We drove strong bookings performance in the first quarter up significantly versus last year. led by our team in the corporate sector, who more than doubled their bookings over Q1 2022. As a reminder, our corporate sector consists of our Your Cause and EverFi solutions. We had a strong pipeline heading into the year, and our sales teams delivered. We signed several notable large enterprise contracts in the period, including Microsoft, Guardian, Accenture, Asia Wild, and University of the Pacific, to name a few. This speaks to the resilience of our end markets we serve and the focus we have placed on driving further improvements in sales productivity. And productivity per sales rep has improved over 30% year over year. Needless to say, there can be volatility quarter to quarter in bookings. However, the strong start to the year with the most in-year revenue impact positions us well. transactional revenue, which is about a third of our total revenue, has proven to be resilient so far in 2023, following the softness and average donation size we experienced in Q4. The rate changes that we announced on Blackbaud Merchant Services in the U.S. in late 2022 began to take effect this quarter and added durability, contributing to the 7% growth rate, despite a tough compare. Blackbaud Tuition Management and JustGiving continue to perform well against plan. As we look ahead, our teams are hard at work to drive innovation across our payment solutions that are a win-win for both our customers and Blackbaud. We have recently introduced our two fee cover models, and we are also looking at ways to optimize our payment solutions to drive a better donor experience. And we're excited to share more on what the team is working on in the coming months. The fourth area I'd like to discuss is our modernized approach to pricing on renewals of our contractual software subscriptions. We've been talking about this a lot lately, and I want to ensure that the powerful compounding effect of our pricing changes is fully appreciated. Let me start by saying that we deeply value the relationships we have with our customers, many of whom have been with us for decades. Our solutions add considerable value for our customers and raise billions of dollars annually to fuel social impact. And we continue to innovate on our suite of products to generate incremental value. Following the implementation of our five-point plan last summer, we put in place an updated pricing policy that directly reflects the value we provide to customers, is in line with the broader market, and reflects the inflationary pressures that all businesses are facing. In November of last year, we started notifying customers with a March 2023 contract renewal that we'd be making two important contract changes. First, we'd be offering a three-year contract renewal terms as our standard, replacing one-year renewal terms. This process was already being implemented outside of the pricing changes. Second, we'd be implementing a more material rate increase on the one-year option versus the three-year option. And third, the three-year option includes annual rate increases that will compound. For context, our three-year options did not historically include annual compounding rate increases. You can think of the rate increase for year one of both the one-year and three-year renewals as catch-up in nature, with the subsequent annual rate increases in years two and three as above inflation. Through April, we have already renewed over 25% of the customers that are up for renewal in our 2023 cohort. In terms of our process, we notify customers about five months in advance of their renewal expiration date, and we require contract changes 45 days ahead of that renewal date. So we have very good visibility into the coming months. In fact, we have largely completed the contract renewals through mid-June and have notified customers of their rate increase through the end of September and are now working into October. The closed day-to-day management of renewals, the mix of three-year and one-year contracts, and the impact of pricing is progressing very well. What's even more impactful is the compounding effect of these rate increases over time as we layer in future contract renewals and annual rate increases. Let me explain. Over 50 percent of our expected 2023 revenue at the midpoint will renew in a little over three years, and approximately 35 percent of that renewable base will renew in this year. These contracts are renewing every day and create revenue growth that we expect to accelerate with each successive quarter this year. So, in 2023, we'll receive only a portion of the rate increase. That sets up an even more impactful situation in 2024, 2025, and beyond as we begin to see the full year impact of the rate increases compound annually. A little over 30% of renewal base is up for renewal in 2024 and more than 20% in 2025. The adoption of three-year renewals as a standard will have an added benefit of higher retention which provides greater revenue assurance and predictability. Looking even further ahead, the cycle starts fresh in 2026, as the 2023 signed contracts will begin to renew. This is a sustainable and meaningful revenue growth stream for us, and it comes with minimal cost increases, so it's margin rich. We have included an illustrated example of this in our updated investor presentation that was posted earlier this morning to our IR website for everyone to fully appreciate this compounding effect. The last driver I'd like to discuss today is our keen attention to cost. As we have already reported, we closed four data centers last year and we plan on closing more this year. This effort was a few years in the making. We renegotiated key vendor contracts, including Microsoft Azure, and AWS and made a difficult decision to further reduce our staff in the first quarter. Because we have organized to achieve much better scale efficiencies, we now have reduced our headcount by 14% since Q3 2022. Our goal is to run the business at about this headcount for the foreseeable future, such that our revenue growth will have much greater fall through to drive margin acceleration. Also, the competitive dynamics are shifting a bit in our favor. Just this past quarter, two very large enterprise companies, in an effort to reduce costs and focus on their core markets, discontinued their point solutions that were targeted to nonprofits. In the first quarter, we began to see the impacts of our initiatives targeting these priority areas, which strengthened our overall confidence for the year and underscored the strength and potential of our operating plan. To recap quickly, sales bookings are going very well. Our transaction revenue is growing nicely. Our contractual renewal rate increase program is really exciting for retention and growth. And lastly, our focus on significant cost reductions already completed is driving much higher margin opportunity. Seeing these initiatives progress even faster than anticipated across these areas supports raising guidance across all metrics. For the full year at midpoint, we now anticipate organic revenue growth at constant currency of approximately 5.5 percent, adjusted EBITDA margin at constant currency of 31 percent, and a rule of 40 at constant currency of approximately 36.5 percent, up nearly 7.5 points versus 2022. And with the acceleration plan for each sequential quarter, we expect to exit this year at organic revenue growth rate in the high single digits and Rule of 40 performance to cross the 40 percent line in the fourth quarter this year, which is well ahead of our prior target of 2025. And looking ahead to 2024, we expect to continue growing revenue and expanding margin to achieve Rule of 40 for the full year. With that, I'll turn the call over to Tony.