Anthony W. Boor Blackbaud, Inc. - Executive VP of Finance & Administration and CFO
Michael P. Gianoni Blackbaud, Inc. - President, CEO & Director
Steve Hufford Blackbaud, Inc. - Director of IR
C O N F E R E N C E C A L L P A R T I C I P A N T S
Brian Christopher Peterson Raymond James & Associates, Inc., Research Division - Senior Research Associate Jeffrey Parker Lane Stifel, Nicolaus & Company, Incorporated, Research Division - Associate
Koji Ikeda BofA Securities, Research Division - Research Analyst
Mark William Schappel The Benchmark Company, LLC, Research Division - Director of Research & Senior Equity Research Analyst Matthew David VanVliet BTIG, LLC, Research Division - VP & Application Software Analyst
Robert Cooney Oliver Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
Stewart Kirk Materne Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst
P R E S E N T A T I O N
Good day, and welcome to Blackbaud's Second Quarter 2021 Earnings Call. Today's conference is being recorded. I'll now turn the conference over to Steve Hufford, Director of Investor Relations at Blackbaud. Please go ahead, sir.
Steve Hufford - Blackbaud, Inc. - Director of IR
Good morning, everyone. Thanks for joining us on Blackbaud's Second Quarter 2021 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO; 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 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 the Investor Relations website.
Before I turn the call over to Mike, I'll remind you that a recording of our investor session held in March, and the full presentation are available on our Investor Relations website. I'll also mention that during the third quarter, our team will be virtually attending the Oppenheimer 24th Annual Technology Internet and Communications Conference, and Jefferies Virtual Software Conference, and we will be participating in virtual non-deal roadshows with investors, both domestically and abroad. If you're interested in connecting at one of these events, please email firstname.lastname@example.org. With that, I'll turn the call over to you, Mike.
Michael P. Gianoni - Blackbaud, Inc. - President, CEO & Director
Thank you, Steve. Good morning, everyone. Thank you for joining our call today. Blackbaud had another strong quarter as our markets progress toward a post-pandemic recovery and the shift to a digital-first world continues to accelerate. We have so much to be excited about as a company. And given our strong performance through the first half, we're well positioned for success as we look ahead to the second half of this year and to the next several years.
Tony will cover the financials in more detail shortly, but the trends through the first half combined with our latest financial outlook suggests we could exceed our best estimate revenue scenario laid out on our Q4 earnings call with our upside scenarios continuing to look more likely.
You've heard me say in the past, the events that have taken place over the last year and a half will be catalysts for the industry to adopt digital capabilities and move even faster towards modern purpose-built cloud solutions. With the first half behind us, I believe we're seeing this take hold and I'm increasingly bullish on the outlook for our market, our customers and our company as we move through 2021.
We continue to believe Blackbaud's stock is undervalued given our outlook and thus, we continued our share buyback program in the second quarter. The impact of the pandemic manifested itself in different ways across the broker markets we serve, but we're now seeing encouraging signs of recovery across the board.
In fact, 2020 was the highest year of U.S. Charitable Giving on record, growing to over $470 billion according to Giving USA. In addition to record levels of Giving overall, the percentage of Giving done online grew by 40% year-over-year, and the total industry went from 9% to 13%. This is a trend we believe is here to stay. We're also beginning to see the return of physical events for our customers with more organizations planning for in-person events during the second half of 2021.
A great example is our arts and cultural vertical where zoos, museums and other cultural organizations were challenged with lost revenue from the absence of in-person attendance and events last year, but we can see in the data the admissions and associated payments volume are now on the rise.
And in our K-12 vertical, schools are planning for the upcoming school year having navigated from virtual to hybrid and now in-person learning and fundraising. Last month, we again virtually hosted thousands of registrants at our annual tech conference for K-12 private schools. The event featured innovation updates and deep dives around the Blackbaud education management platform as well as best practice and thought leadership sessions across all areas of school management.
We remain very well positioned as a leader in the K-12 market and overall as the best long-term partner for social good organizations across all the markets we serve.
Turning to the quarter, I'll provide a few updates in the context of our four point strategy. I'll start with our strategy to delight customers with innovative cloud solutions. Since the pandemic began last year, we've been quick to reprioritize and expedite product enhancements to support our customers' changing needs as they adopt to operate more digitally.
For example, I mentioned we're seeing arts and cultural organizations begin to open the doors. As they reopen, maintaining high standards for the safety and security of their patrons as a top priority. So just a few weeks ago, we announced the general availability of Payment Terminal. This solution allows organizations to receive secure, contactless chip and tap payments for tickets and donations to Blackbaud Altru and Blackbaud Merchant Services. Not only does this minimize staff handling of credit cards during point-of-sale, but it enables them to process payments 3x faster than with a magnetic swipe device and protects their constituents and organization from credit card fraud with EMV certified card readers that offer end-to-end encryption.
During the second quarter, we also announced general availability of Blackbaud Peer to Peer Fundraising powered by JustGiving in Australia, New Zealand and Canada. JustGiving has already proven to be a game changer for organizations across the globe, looking to raise more funds digitally, and we're thrilled to bring this turnkey solution to even more organizations with no subscription fees or sub costs.
We have a unique approach with JustGiving pricing structure away from a fixed platform fee to a voluntary contribution model, a true win-win for us and our customers. We've made tremendous progress globalizing our products in recent years and JustGiving is yet another example of this.
Additionally, YourCause is poised for globalization as we look to capture a tremendous international opportunity with forthcoming market launches in Canada, the U.K. and Australia. The return of mass participation events alongside the market launch investments we made in the U.S., Canada and Australia, plus further pricing innovation have us optimistic that we'll see strong sustained growth in our international markets in the short, medium and long-term.
And as I said before, our ability to drive innovation is no longer just about Blackbaud's engineering efforts as we continue to build out our partner programs. Just last month, we hosted our annual Developers' Conference, where attendance was up 50% year-over-year, and our investments in support for open APIs resonated with customers and partners alike.
Our vision is to power a community of developers and partners who are passionate about social good to create amazing new capabilities that evolve as the needs of their organizations evolve, and we're just beginning to scratch the surface of what's possible here.
Next, I'll cover our strategy focused on employees, culture and ESG initiatives. This year marks Blackbaud's 40th anniversary. And since day 1, our focus has been on building a better world. We just capped off a month-long celebration with our employees, some of whom have been around to watch our business grow from just one product to providing purpose-built solutions the entire social good industry.
And as we reflect on this milestone, we remain steadfast in our commitment to enable our customers to drive more social good to support our communities, both inside and outside of work; and to celebrate our people to which we all are success. Our company is made up of employees from all over the world who come from diverse backgrounds and experiences, and we're thrilled to celebrate these differences and unique contributions to honoring celebrations and observances that reflect equality, justice and further promote a higher purpose to help good take over. In June alone, we honored Pride Month and Juneteenth. Our strong corporate culture enables us to retain and attract top talent around the globe, which is even more critical in today's environment. And we're building on this strength with recent hires and the creation of new roles focused on establishing new pipelines of talent, including outreach to diverse campus programs, HBCUs and national diverse organizations.
In Q2, we also furthered our efforts to create a best-in-class candidate employee experience with the launch of our new careers site. This enables us to lift our social presence and visibility, create personalized experiences for candidates via AI, reduce the time to apply by half and accept applications start to finish all from a mobile device. It also enables us to leverage data analytics to better understand the talent marketplace and inform future investments. This is a big step, especially when combined with our workforce strategy, both key parts of our internal digital first approach.
This brings me to our strategy to lead with world-class teams and operations. As I've said, this expands upon our previous strategy to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40.
In support of our strategy during the second quarter, we merged our Enterprise Market Group and General Market Group to create one U.S. market group reporting to Kevin Gregoire, who many of you heard from an investor session in March. We did this to better align our resources towards customer retention and growth. We have a strong executive team. We're all incredibly capable leaders delivering on our mission and executing on our strategy.
As part of this recent change, Kevin Mooney, who previously led our General Markets Group, is now focusing on M&A as Executive Vice President, Strategy and Business Development.
Which brings me to our strategy to expand our total addressable market by acquiring, building and partnering into near adjacent markets and expanding within our existing markets. We have a strong historical track record of driving inorganic revenue growth through M&A, with last year being an exception given our primary focus was on our employees, our customers and preserving liquidity during the pandemic. We are now actively evaluating opportunities as acquisitions remain an important element of our growth strategy going forward. I'll remind you that with the combination of organic growth and M&A, we have a history of double-digit revenue growth.
I'll summarize by reiterating that I continue to be bullish about the opportunity ahead of us. The market is showing signs of strength, and organizations are planning for post-pandemic recovery. We continue to make investments in key areas like digital marketing, innovation, security and customer success as we look to extend our leadership position.
We have our sights set on a substantial opportunity ahead of us to drive meaningful acceleration in financial performance in the context of the Rule of 40. Blackbaud is well positioned to capture the organic and inorganic growth opportunities in front of us. Overall, we had a solid first half, and I'm excited about the coming quarters and the next several years.
With that, I'll turn the call over to Tony before we open it up for Q&A. Tony?
Anthony W. Boor - Blackbaud, Inc. - Executive VP of Finance & Administration and CFO
Thanks, Mike. Good morning, everyone. Today, I'll cover our results for Q2 and our latest outlook for the full year before opening up the line for your questions. You can refer to yesterday's press release and the investor materials posted to our website for the full detail of our Q2 2021 financial performance.
We had another solid quarter of execution, which has us well positioned heading into the second half of the year. Second quarter recurring revenue growth was roughly flat year-over-year, inclusive of the tough compare in our payments business, which was expected given the elevated volumes we saw at the onset of the pandemic. Our contractual recurring revenue, which is the core of our business, grew $3 million during the quarter and the trends we're seeing in bookings and renewals bode well for continued growth in the second half. One-time services and other revenue declined $3 million, which was approximately a 100 basis point drag on total revenue growth. Again, we expect this drag to bottom as soon as 2022, which should result in a lift on total revenue growth in the future. And as I said on our last call, macro-level drivers, coupled with pent-up demand and increased levels of online giving create opportunities for us to achieve low to mid-single-digit revenue growth as early as 2022.
Moving to earnings, our second quarter gross margin was 59.1%. We generated adjusted EBITDA of $66 million, representing an adjusted EBITDA margin of 28.7% and diluted earnings per share of $0.82. As you know, last year, we evolved our go-to-market strategy with a digital-first mindset, which was substantially -- which has substantially reduced our go-forward cost base in sales and marketing. I'm really pleased with the progress being made to enhance sales productivity and we remain committed to further improving our CAC payback and increasing sales velocity.
We are also continuing to make critical investments in the business related to areas like digital marketing, engineering, security, customer success and our continued shift of cloud infrastructure to third-party cloud service providers. I'll reiterate that our current plans call for the level of investment to increase in the second half, and thus our estimate of roughly 25% adjusted EBITDA margin holds as our best estimate for the full year 2021.
That brings me to the cash flow statement and balance sheet. Our Q2 free cash flow was $57 million, an increase of $8 million year-over-year and representing a free cash flow margin of approximately 25%. As Mike pointed out, the market and our customers are showing signs of recovery. And as just one example of this, we had our best cash collection month ever as a company in the month of June.
We put that strong cash performance to use and completed $30 million of opportunistic share repurchases during the quarter. We still feel that the valuation today does not fully reflect where we're heading as a company. We ended the quarter with $517 million in net debt. Our capital strategy calls for a debt-to-EBITDA ratio of less than 3.5x. And at the end of Q2, we stood at 1.8x, which is our targeted optimal leverage ratio. And we had $410 million of borrowing capacity. As of June 30, we had approximately $150 million remaining and available under our current share repurchase authorization. As we look forward, we plan to continue opportunistically executing on share repurchases when our internal estimates determined that the company's shares are undervalued by the market. Moving to our outlook for 2021, from a revenue perspective, we're encouraged by our first half performance and the durability of our recurring revenue streams. With two quarters now behind us, we have greater visibility into our second half performance. However, accurately predicting the duration magnitude, the pandemic remains a challenge. And in particular, the heightened level of variability in transactional revenue makes it difficult for us to put out definitive guidance ranges like we've done in the past.
That said, I'll again provide our latest perspective on our best estimates for 2021 in relation to the scenarios we laid out on our Q4 call. Our first half performance, combined with our latest modeling gives us additional confidence we could exceed the best estimate of $900 million in revenue