Blackbaud, Inc. (NASDAQ:BLKB) Q4 2023 Earnings Call Transcript
Blackbaud, Inc. (NASDAQ:BLKB) Q4 2023 Earnings Call Transcript February 13, 2024
Blackbaud, Inc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to Blackbaud’s Q4 Full Year 2023 Earnings Call. Today’s conference is being recorded. I will now turn the conference over to Kevin Mooney. Please go ahead, sir.
Kevin Mooney: Good morning, everyone. Thank you for joining us on Blackbaud’s fourth quarter and full year 2023 earnings call. Joining me on the call today are Mike Gianoni, Blackbaud’s CEO, President and Vice Chairman and Tony Boor, 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 certain 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. 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 on 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 substitute for GAAP measures. With that, I will turn the call over to you, Mike.
Mike Gianoni: Thank you, Kevin. Thank you everyone for joining our call today. I’d like to start today’s comments by offering a few perspectives on 2023, then I’ll comment on our product evolution, share a few customer wins, and then conclude with an update on our capital allocation and stock repurchase plans before turning the call over to Tony. The fourth quarter concluded a year of substantial transformation for Blackbaud. Approximately 1.5 years ago, we implemented our five-point operating plan, which began producing results in the second quarter of last year, continued through year end and has put our company on a clear trajectory of improving financial performance. In the second quarter, our cost management initiatives drove significant adjusted EBITDA margin expansion as expenses declined year-over-year.
Then in the third quarter, our revenue growth rate accelerated as our modernized pricing program gained traction and we achieved the Rule of 40 ahead of plan. And today, I am pleased to report that our company’s adjusted free cash flow grew substantially and enabled the company to begin returning cash to shareholders in the form of an active stock repurchase program. So, 2023 has been a transformational year for the company. To put that transformation into perspective, we entered the year in our social sector with only about a third of opportunities renewing on multiyear contracts and we exited the year with three quarters of opportunities renewing on multiyear contracts. We entered the year with none of our customers on our modernized contract pricing and we exited the year with approximately 35% of our eligible customers on modernized contract pricing.
We entered the year with organic revenue growth of less than 1% and we exited the year with fourth quarter organic revenue growth of over 7%. We entered the year with EBITDA margins of under 25% and we exited the year with fourth quarter adjusted EBITDA margins of over 33%. And we entered the year with a Rule of 40 score of 25% and we exited the year with a fourth quarter Rule of 40 score of 41%. That’s transformational performance. I am pleased with the results the team has produced. I am excited about the continued momentum we expect in 2024, as you will hear today. For the full year 2023, Blackbaud produced revenue of $1,105 million, adjusted EBITDA of $356 million, non-GAAP diluted earnings per share of $3.98, adjusted free cash flow of $214 million, and a Rule of 40 score of 37%.
All of these measures are substantially better than 2022’s performance and meet or exceed the increased guidance ranges we released in Q1 2023. Tony will share greater detail on our financial results in his comments. Now turning to product. During the fourth quarter, we continued to focus on delivering more value to our customers through product innovation. For example, we increased the power of social impact based fundraising with the announcement of an early adopter program for new optimized online giving capabilities. These new capabilities enable native integration with products across Blackbaud’s portfolio and in early testing are raising considerably more funds for our customers. It will be generally available for U.S. Raiser’s Edge NXT users this week, with availability coming soon for Blackbaud CRM and all true customers.
Also in the fourth quarter, we announced the availability of our Good Move mobile application for all team Raiser peer-to-peer events. This enables a streamlined experience for participants, while expanding participation to virtual as well as in-person events. And as part of Blackbaud’s intelligence for good strategy, our investment in artificial intelligence continued with the launch of Prospect Insights Pro, an intuitive guided experience to deliver AI-driven insights in support of planned and major gift fundraising. So, plenty of progress on the product innovation front. Customers are utilizing this technology to further their mission and improve their operations. And this is shown by our wins from this last quarter. For example, the American Parkinson’s Disease Association selected Blackbaud to consolidate its direct marketing and CRM functions from multiple vendor solutions.
The Blackbaud unified solution, which includes partner capabilities, will help APDA continue to surpass their fundraising goals and support their mission to help everyone living with Parkinson’s disease to live life to the fullest. Also during the fourth quarter, Salvation Army Western territory sought to modernize and improve manages consistent data to increase fundraising and enhance engagement. The organization chose Blackbaud’s BBCRM over two very large competitors owing to our singular focus on non-profits. And the Rockford Christian School in Illinois purchased our total school solution. The school was driven by a strong desire to better inform business decisions as well as optimize the parent, student and teacher experience as it plans for growth over the next 5 years.
This competitive win replaced several disparate legacy systems and includes a comprehensive suite of student enrollment, student information, tuition management and financial management. On the corporate impact side of the business, News Corp selected YourCause to power their corporate giving and volunteering programs in the communities they serve across the globe. And Fidelity Investments expanded its collaboration with EVERFI by sponsoring a new high school financial education program, featuring a first of its kind investing simulation, aligned to Fidelity’s commitment to financial literacy and providing the next generation with access to meaningful financial education. So in summation, we are bringing mission-critical solutions to our customers that we are continually involving to have greater impact and value.
Our customers recognize the value of our solutions as shown by the increase in multiyear contract renewals and the adoption of our modernized contract pricing. Now I’d like to provide an update on our expanded stock repurchase program. This is an important development in our transformation and is predicated on our strong and growing cash generation. On January 22, we disclosed that in December and January of this year, we were actively buying shares in the open market, investing approximately $41 million to acquire almost 500,000 shares. Given the upside we see in the business and continued strong performance expected in 2024, we believe these repurchases are a good investment for our shareholders. We also announced that our Board increased our go-forward, repurchased authorization to $500 million, doubling the previous $250 million authorization.
That gives us a lot of headroom for future stock repurchases. At a minimum, we plan to buyback the dilution from an annual stock-based compensation. Historically, we have taken an opportunistic approach to capital allocation and we expect that to continue. Value-creating M&A will also remain a capital allocation priority. To the extent that investments and acquisitions are available that strengthen our business, enable growth and create shareholder value, we will deploy cash to do so. Of course, such opportunities are hard to predict. We remain focused on making prudent investments to grow the business, both organically and inorganically, while returning excess capital to shareholders. So, the books closed on what was an outstanding year for Blackbaud.
Let me turn the call over to Tony, who will share more details on the financials and why we are enthusiastic about 2024. Tony?
Tony Boor: Thanks, Mike and thank you all for attending our call today. I’ll start my comments today with our fourth quarter financial results and what’s driving the significant improvement the company has been delivering. Then I will briefly cover the full year 2023 before turning to our financial guidance for ‘24 and conclude with a discussion of our capital allocation strategy. Turning first to our fourth quarter financial results. We had another quarter of improving performance. Results for the quarter were strong and demonstrate the impact of our five-point operating plan is having on the business. Specifically, our modernized pricing initiatives continued to produce price increases at renewal, gross dollar retention rates were within the range of expectation and transactional revenues were seasonally strong from both a giving and pricing perspective.
As a result, contractual recurring revenues grew 6.4%, transactional recurring revenues grew 12.5%, and total recurring revenue grew 8.4%. Non-strategic one-time revenues declined by $2 million and represented about 1 point of drag on total revenue growth. For the quarter, total revenues reached $295 million, which was an organic growth rate of 7.4%. That’s the fourth consecutive quarter of posting an increased growth rate. Cost management has been a key focus. The cost actions we have taken, from headcount reductions to data center closings, vendor renegotiation and virtual workforce environment, all contributed to an expense base that was lower than last year. With $20 million of revenue growth and $11 million of cost reductions, our adjusted EBITDA grew by $31 million or 46% to $99 million for the quarter.
That’s excellent flow-through and leverage. In terms of margin, the adjusted EBITDA margin of 33.6% was almost 9 percentage points higher than Q4 of last year. Earnings per share was $1.14 in the quarter, and the business produced a Rule of 40 score of 41%, so really solid performance. The full year financials tell much the same story of improving top line growth, coupled with cost-cutting measures, which dramatically improved profitability and cash flow. A year ago, when we offered initial financial guidance, I said that in 2023, we expect financial performance to improve with each successive quarter, starting with meaningful improvement in the second quarter and that all held true. We met or exceeded our financial guidance ranges across all metrics for ‘23.
Full year revenues were up 4.8% on an organic basis to $1,105 million. Adjusted EBITDA of $356 million was up $94 million or 36% and was evenly distributed between revenue growth of $47 million and cost reductions of $47 million. Our ability to lower cost while growing revenue speaks to the power of our five-point operating plan. Earnings per share increased to $3.98 compared to $2.69 last year. Adjusted free cash flow came in at $214 million, up from $154 million last year, representing an adjusted free cash flow margin of 19.3%. And as Mike noted, this strong cash flow enabled us to return capital to shareholders through the repurchase of almost 500,000 shares through January. Now let’s spend a few minutes on our financial guidance for ‘24.
To set the table, we foresee a continuation of what we started 1.5 years ago with our five point operating plan, driving improvement across the business. We’re continuing to invest in our products and expect to continue delivering capabilities that our customers value. Our modernized approach to renewal pricing and contract terms is well established and will be managed closely. We have a proven track record of tight cost management, and will drive the business to maximize profitable growth and cash generation. Starting with revenue. We see revenue in the range of $1,170 million to $1,200 million. At the midpoint, our organic revenue growth will expand to 7.2%, up from 4.8% last year, an increase of 240 basis points. Importantly, we believe the decline in non-strategic one-time revenues will slow in ‘24 compared to the last few years, with a drag to total organic revenue growth of about 0.5%.
We’ve assumed a relatively stable foreign exchange rate environment for guidance purposes. Shifting to profitability. We will keep tight hold on costs and maintain head count close to our current levels, realizing there will be quarter-to-quarter fluctuations with the timing of attrition and hiring. And at the same time, we’re making investments in the business in areas of innovation, artificial intelligence, product road maps and cybersecurity. Accordingly, we are guiding that costs will grow at a slower rate than revenues. And as a result, adjusted EBITDA margin is expected to be in the range of 32.5% to 33.5% with a midpoint of 33%. The combination of higher growth and better margin is expected to result in a Rule of 40 score of 40.2% at the midpoint of guidance for the full year, a more than 3-point improvement year-over-year.
Also recall that our business has a degree of seasonality, with the second and fourth quarters typically outperforming in the first and third quarters. Earnings per share is expected to be between $4.12 and $4.38, with a midpoint of $4.25. We factored into our projection a higher non-GAAP annualized effective income tax rate of 24.5%, a 450 basis point increase from the 20% rate used in 2023. The increase reflects greater profitability in the business as well as an increase in UK corporate tax rate. Additionally, we have a sharp focus on driving adjusted free cash flow and returning capital to our shareholders. For the year, we are guiding to adjusted free cash flow of $254 million to $274 million. The $264 million midpoint represents a 22.3% adjusted free cash flow margin and a significant improvement of 300 basis points over 2023, despite approximately $30 million in additional cash taxes expected this year, and additional investments in product and cybersecurity.
Our last but certainly not least, a few thoughts on capital allocation. This past year, we turned the quarter, and for the first time ever, generated more than $200 million of adjusted free cash flow. This enabled us to make approximately $50 million in security incident settlement payments, repurchased approximately $19 million in shares in December, while at the same time, reducing our debt to adjusted EBITDA ratio to approximately 2x. Looking to the future, the company believes adjusted free cash flow will continue to grow and anticipate offsetting dilution from share-based compensation. Beyond that, the company has tremendous optionality to dynamically allocate capital to its highest use based on market conditions, including synergistic M&A, additional stock repurchases or repayment of debt.
The availability of acquisitions, the performance of our share price and the interest rate environment will help inform our capital allocation decisions. Before we open the lines for your questions, let me summarize. The fourth quarter demonstrated continued progress against our five point operating plan that has transformed our financial results. This past year, the company accelerated revenue growth, reduced costs, expanded profitability and started returning capital to shareholders. We have a plan for 2024, and we expect we will continue those trends, improve financial performance and we will continue enhancing value for our shareholders. With that, we can open up line for questions.
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