Blackbaud, Inc.

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

Good morning, everyone. Thank you for joining us on Blackboard's second quarter 2023 earnings call. Joining me on the call today are Mike Giannone, Blackboard's president and CEO, and Tony Bohr, Blackboard's executive vice president and CFO. Mike and Tony will make prepared comments and then we'll open the line for your questions. Please note that our comments today contain certain forward-looking statements subject to risk 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 the full details of 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 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. Before I turn the call over to Mike, I'll briefly mention that our investor relations team will be participating in investor meetings with Stifel in New York City on August 14th and attending the Three-Part Advisors Midwest Ideas Conference in Chicago on August 23rd. With that, I'll turn the call over to you, Mike.

Thank you for joining our call. I'm pleased to share that we're making measurable progress on the five-point operating plan we introduced in May. With this plan, We essentially have a one-two punch. The first is the margin expansion that we began to realize in the second quarter. And the second punch is a new layer of revenue driven by our modernized approach to renewal pricing that will accelerate revenue growth in the second half and will have good margin flow through. Accordingly, we're confident in the delivery of our increased financial guidance for the year. That strong operational execution produced solid financial results in the quarter. As expected, the cost actions completed in previous quarters drove a substantial increase in adjusted EBITDA. Additionally, our modernized approach to renewal pricing and multi-year customer contracts continues to perform very well. Recall that our heaviest months for renewals are June, July, and December. June and July are now completed and we will begin to see revenue build in the second half and subsequently in future years. From a numbers perspective, we reported total revenue of $271 million, which was up 3.2 percent year-over-year on an organic constant currency basis. Reoccurring revenue is now 97 percent of total revenue and grew faster at 4.8 percent on a constant currency basis. Adjusted EBITDA at constant currency was 89 million, which was up a very meaningful 17 million, or 24 percent, over the second quarter of last year. That represented an adjusted EBITDA margin of 32.9 percent at constant currency, which was an increase of 5.9 percentage points above the second quarter of 2022. Taking things together, rule of 40 at constant currency was just over 36 percent for the quarter, just over a four percentage point increase year over year and five points higher sequentially. And we had another good quarter for cash flow production with adjusted free cash flow of 44 million. Now turning to our operating plan, which focuses on five key drivers. One, product innovation and delivery that provides more value to our customers with continuous improvements sourced from internal development in a vibrant ecosystem. Two, bookings growth and acceleration that results from improving sales channel efficiency. Three, transactional revenue optimization and expansion. Four, a modernized approach to pricing and multi-year customer contracts that reflect the value of the services we provide. With 97 percent of our revenue recurring, This is secure and predictable revenue. And five, keen attention on cost management. I'm excited about the significant progress we're making in each of these areas. I'll provide an update on product delivery and innovation, as well as our modernized pricing initiative. I'll also share examples about the enthusiasm we're seeing from our customers, which is driving numerous new wins and cross-selling success. Then Tony will cover the upside being realized from bookings, transactional revenues, and cost management, as well as a deeper review of the second quarter financial results. Product is core at BlackBot, and we strive to bring increased value to our customers through their software subscriptions with improved and innovative capabilities. For example, we recently released a new next generation donation form in Raises Edge NXT with a goal of increasing the conversion rate in donations our customers raise. We match the new donation form with Prospect Insights, which utilizes AI to identify and qualify candidates for major gifts. It's still early days. However, the results are promising. Many customers are raising more money, and that fuels the delivery of their missions and revenue growth for us. I'd like to drill into this example a bit more illustrate the power of our suite. We think it's unmatched in our space and it's a strong competitive differentiator. After using our next generation donation form and Prospect Insights, donations can be processed via our credit card processing service Blackbaud Merchant Services. Those donations then get recorded in our fund accounting system Financial Edge NXT and are logged into Razor's Edge NXT and our donor management system of record. All of this is enabled seamlessly and automatically. This has great value for our customers, as it not only maximizes their fundraising, but also minimizes their back office and administrative workloads. A great example of this is Martlets, a UK-based hospice provider. With their previous technology solution, donation processing required five to six distinct steps. Now donation batches are processed with a single click. That includes sending each donor an automatically generated thank you message. In their own words, quote, Blackbaud frees up time for our team to love our supporters more. And that enables their scarce human resources to spend more time on their mission and with donors. Another example of the power of this suite is a win this past quarter with Grace School in Houston, Texas. After a recent strategic planning meeting, this private space-based K-8 school realized their data was disconnected and had limited decision making. They wanted a connected system, not just for convenience, but because they see the power in the outcomes that connected data can drive. Our solution included five major components for managing the life cycle of the student, from enrollment to learning management, student information, fundraising, and financial management. We also have a number of new product innovations that are underway. In early June, we announced additions to our Intelligence for Good products week. That announcement outlined initiatives and investments that we plan to implement over the next several quarters to make artificial intelligence more accessible, powerful, and responsible across the social impact sector. Much has been said of AI lately, but AI is not new to us. For years, Blackbaud has been using AI-enabled capabilities in our analytics offerings. That said, we're expanding our strategy into next-generation and generative AI technology that addresses specific challenges related to fundraising, stewardship, corporate impact, and education needs. we'll be rolling out an extensive new set of capabilities across our product portfolio. For example, AI for peer-to-peer fundraisers, AI for donor stewardship, and AI for corporate impact. And these are only a few of the capabilities we have planned. In July, we announced our newest cohort of participants in our Socially Good Startup program. This program, which was launched in 2020, is designed to help new companies with creative solutions launch successfully. This year's cohort is focused on using generative AI to increase impact for nonprofits and companies. This cohort includes 10 startups that provide AI solutions for grant writing, purpose-built marketing, prospect outreach and strategy, major gift administration, and content creation, to name just a few. Also, at the beginning of June, We hosted our annual developers conference with nearly 10,000 third-party developers registered and almost 4,000 customers using a third-party app. Our developer community is an important component of our ecosystem. And looking more broadly at our ecosystem beyond software development and AI, we're also focusing more energy on our partner network through the Blackbaud marketplace. This is a great way to extend our joint capabilities leverage our extensive customer base and distribution, and enter into revenue share agreements. Last but not least, we recently announced that we made a small but strategic investment in Momentum, a leading AI-focused Blackbaud partner and graduate of our Socially Good Startup program. Our investment in Momentum allows us to accelerate product delivery and embed AI capabilities in solutions like RE-NXT to optimize fundraising, and stewardship processes. So as you can see, there's plenty underway on the product side of our business. We look forward to sharing more about these exciting developments during our product update briefings in October, at our BPCON user conference, and during future quarterly earnings calls. I'd now like to spend a bit of time updating you on the progress we've made on our initiative to modernize our pricing and contract terms. The effort is maturing nicely and is well on its way. We have already renewed customer contracts dated through mid-September, have notified customers with December 2023 contract renewals, and in some cases are already working larger strategic accounts with renewal dates into the first half of 2024. The vast majority of customers are opting for the three-year contract option. It is higher than we expected when we launched the program late last year. And obviously, it improves future revenue security and predictability. The pricing aspect of the program is performing equally well. For software subscriptions we renewed in the second quarter, the first year subscription price increase is up from what we experienced in the first quarter. These multi-year contracts include annual price escalations. Please keep in mind as we reported on our last call that our heaviest months for renewals are June, July, and December. So while the June and July renewals are now completed and the December renewals are largely notified, the revenue impact has yet to be recognized in a meaningful way. Before I turn the call over to Tony, I'd like to spend some time talking about the commitment we make every day to our employees and our customers. We're committed to strengthening the impact we make through the way we operate our business, setting the very highest standards. We continue to be the leader in helping individual change makers, universities, schools, nonprofits, charities, and companies around the world drive impact for their causes. To give you a sense of the impact our business has, over $100 billion are donated, granted, or invested through our systems every year. 60,000 teachers reached 3.4 million students with critical skills learning through EverFi's learning modules. 900,000 individual change makers were enabled on JustGiving that benefited 23,000 charities. And employees on our Your Cause platform volunteered a remarkable 12 million hours last year alone. It's that kind of impact that drives our employees and our company. And most importantly, none of this could be achievable without our exceptional team members who deliver impact every day for our customers. I personally want to thank them for the hard work, the dedication, and the passion they bring to the job every day. It's their efforts that enable the strong execution on the operating plan that we've reviewed with you today. With that, I'll turn the call over to Tony.