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BLKB.OQ - Q2 2022 Blackbaud Inc Earnings Call

EVENT DATE/TIME: AUGUST 03, 2022 / 12:00PM GMT

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AUGUST 03, 2022 / 12:00PM, BLKB.OQ - Q2 2022 Blackbaud Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

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

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 Tanika Mehra Bank Of America - Equity Research Analyst

P R E S E N T A T I O N

Operator

Good day, and welcome to Blackbaud's Q2 2022 Earnings Call. Today's conference is being recorded.

I'll now turn the conference over to Steve Hufford. Please go ahead, sir.

Steve Hufford - Blackbaud, Inc. - Director of IR

Good morning, everyone. Thank you for joining us on Blackbaud's second quarter 2022 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 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.

Before I turn the call over to Mike, I'll briefly mention that during the third quarter, our team will be attending the Oppenheimer Technology, Internet & Communications Conference on August 10, and the Midwest IDEAS Conference on August 25. In addition, we will be participating in virtual investor meetings hosted by Baird on August 16. As a reminder, we're also available at ir@blackbaud.com, if you'd like to connect during the quarter.

With that, I'll turn the call over to you, Mike.

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AUGUST 03, 2022 / 12:00PM, BLKB.OQ - Q2 2022 Blackbaud Inc Earnings Call

Michael P. Gianoni - Blackbaud, Inc. - President, CEO & Director

Thank you, Steve. Good morning, everyone. Thank you for joining us on the call today.

Before I turn to the business and operational highlights for the quarter, I'd like to briefly address the current economic landscape and our view on Blackbaud's positioning against 5 macro factors and how this impacts the outlook for the second half of the year.

First, we remain focused on attracting, hiring and retaining top talent. We've enhanced our capabilities to attract and hire in a competitive environment, and we clearly remain a sought-out destination. We consistently have over 100,000 applicants for a few hundred job openings. Given the macro environment, we have cut back our hiring plans and have reduced staff in our one-time services revenue area.

Second, Blackbaud has no downside exposure to the conflict in Ukraine. Humanitarian organizations are leveraging our digital technology to engage supporters and raise funds for those affected by the conflict.

Third, in terms of the rising interest rate environment, I'll remind you that we took the prudent step to refinance our debt in 2020 and took advantage of the low interest rate environment to hedge some of our exposure to rising interest rates.

Fourth, on the topic of inflation and entering a technical recession, we look back at the impact on our markets and company in past recessions and the impact has been minimal. For example, Blackbaud's revenue continued to grow through the 2008 to 2010 timeframe at a time when our reoccurring revenue was a much smaller percentage of total revenue.

Today, we stand at roughly 95% recurring revenue on a much larger base. And looking at the broader market, there has been little long-term impact to philanthropy during past recessions. The big test of resiliency for our company and our end markets was the pandemic, and both fared pretty well. We remain consistent in our approach to running the business with a long-term mindset and thoughtful execution of our strategy with a track record of balancing sustainable growth and strong profitability.

And fifth, from a currency perspective, our exposure is limited given the size of our international footprint. However, we are revising our forward outlook and guidance slightly to account for the impact that we expect in the second half of the year, which Tony will cover in more detail.

Now on to our business results. We had a strong second quarter to close out the first half of the year, which paced ahead of our internal plan. In Q2, we achieved 32% on a Rule of 40 at constant currency, which paced above the midpoint of our original full year guidance expectation of roughly 30% for the full year.

We had total revenue growth of 15%, inclusive of EVERFI, and our organic recurring revenue grew 5%, which was largely driven by the continued growth in our transactional revenues and contractual recurring revenues. Through the first half of the year, our organic recurring revenue growth stands at 6%, and our adjusted EBITDA margin was 24.5% year-to-date, which sits at the high end of our original full year guidance range of 24% to 24.5%. In short, the business performed extremely well in the first half of the year.

Now shifting to our operating performance. We're executing a strategy focused on driving significant improvements as we progress on our journey to achieving Rule of 40. To start, we recently announced a series of strategic organizational updates to streamline our business operations and become even more customer centric.

I appointed Kevin Gregoire into the new role of EVP and Chief Operating Officer, he now oversee functions spanning from products and technology to customer success and retention. Bringing these functions under one leader will ensure consistency in our approach to the customer experience.

In support of this, we also named Chris Singh as the company's first Chief Customer Officer to serve in a central position focused on delivering a best-in-class experience for our customers.

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AUGUST 03, 2022 / 12:00PM, BLKB.OQ - Q2 2022 Blackbaud Inc Earnings Call

Next, David Benjamin was appointed to the new role of EVP and Chief Commercial Officer, overseeing the company's global sales efforts in addition to his responsibilities for the International Markets Group and JustGiving. This change will further streamline and simplify our go-to-market efforts to maximize our outcomes as a global company.

Also Tom Davidson, who, as a reminder, is the founder and CEO of EVERFI, will now have executive responsibility for our YourCause business in addition to EVERFI to align our YourCause and EVERFI offerings, and continue our investment in being the partner of choice for corporations focused on social responsibility and impact.

Finally, I'd like to take a moment to highlight our recent appointment of Deneen DeFiore to Blackbaud's Board of Directors. Deneen, who is currently Vice President and Global Chief Information Security Officer for United Airlines, brings over 20 years of experience in tech and cybersecurity and will be a great addition to our Board. All really great leadership changes for the company.

Also in the second quarter, we exited our first colo data center, with more scheduled to close in the coming quarters. This shift to third-party cloud infrastructure enables us to deliver secure, stable, modernized and affordable solutions to our customers while reducing our operating costs. We still have a lot of work to do, but we continue to make significant progress as we accelerate our move to third-party cloud data center environments.

Lastly, I'm inspired by the innovations our teams are driving as we've seen the SKY platform become a reality. We are transforming and accelerating how our customers connect with their users and donors by offering breakthrough improvements to accomplish outcomes and track results.

In June, we announced the launch of Prospect Insights, a new software tool within Raiser's Edge NXT that automates in-app intelligence related to major giving likelihood and capacity, and then prescribes actions related to portfolio management and solicitation. For growing organizations that need to prioritize major giving prospects, Prospect Insight offers multidimensional fundraising insights and actions within their existing software.

Also in June, we held our annual developer conference, highlighting the low-code movement and accessible technology. Nearly 90% of attendees left the conference feeling that Blackbaud empowers customers to improve usage and experience with Blackbaud solutions. With more than 7,200 third-party SKY developers now registered in our program, an increase of over 40% year-over-year, we are enabling even more customers, partners and consultants to take advantage of efficiencies in low-code or no-code technologies.

Another way we are expanding our ecosystem of goods is through our Social Good Startup Program, which supports early-stage software companies, focused on solving problems that matter to the social good community. Since launching in 2019, we have supported 33 start-ups. And just last month, we welcomed an additional six companies to our July 2022 cohort. We're excited to start working with these founders to design a unique plan that addresses their goals for growth and provides curated access to Blackbaud resources to continue their innovation efforts.

And within the last 2 weeks, we hosted both Blackbaud's K-12 conference, which brought together thousands of experts and peers in the private school sector for engaging sessions with outcomes-based content, as well as EVERFI's LearnOn Conference which brought together more than 7,000 K-12 educators, largely from the public sector, to collaborate on innovative education strategies grounded in whole-child learning.

And lastly, as we continue to advance our position as a leader in a rapidly evolving ESG and corporate social responsibility spaces, EVERFI continues to be at the forefront. For example, EVERFI is the founding partner of the Fortune Impact initiative, which will be held in Atlanta later this year, bringing together senior ESG leaders from the Fortune 1000 as they look to advance their ESG and CSR efforts.

In summary, we've had an outstanding first half of the year and are taking a prudent approach to outlook for the second half of 2022. We are uniquely positioned as a market leader in our space. We continue to monitor the macro environment and remain confident in our core business as well as our ability to execute on incremental program initiatives already underway as we look to balance operating discipline with strategic investments to drive sustainable growth. Looking to the rest of the year, aside from unfavorable to movement in foreign exchange rates, our revenue and profitability outlook would fall within our original guidance ranges. Our operational execution is sound, and we're confident in Blackbaud's positioning to drive accelerated growth and meaningful margin expansion over the next several years.

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AUGUST 03, 2022 / 12:00PM, BLKB.OQ - Q2 2022 Blackbaud Inc Earnings Call

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 the second quarter and review our outlook for full year 2020 before opening up the line for questions. Please refer to yesterday's press release and the investor materials posted to our website for the full details of our Q2 2022 financial performance.

We had another strong quarter that positions us well as we head into the back half of '22. Second quarter total revenue was $265 million, representing total revenue growth of 15% versus the prior year quarter. Organic revenue growth in the quarter was 5% when adjusted for foreign currency impacts of $2.9 million, driven by continued strength in recurring revenues.

Healthy improvements in renewal rates and sales productivity per rep continue to be bright spots with more opportunity ahead as we execute on our multiyear initiatives. Our payments business once again delivered strong growth on increasing volumes and some of the pricing initiatives underway, along with the continued mix shift towards online donations, should provide a multiyear tailwind for payments revenue.

One-time services and other revenue was roughly a 90 basis point drag on our total revenue growth in the quarter. Based on our latest projections, we no longer expect the drag from one-time services and other revenue to bottom in 2022, and it's possible it could decline further as we introduce the optionality to shift a more significant mix of professional services work to partners. Also, EVERFI contributed total revenue of roughly $27 million in the quarter and $54 million for the first half.

Moving to earnings. Our second quarter gross margin was 59%, we've generated adjusted EBITDA of $71 million, representing an adjusted EBITDA margin of 26.6% and diluted earnings per share of $0.75. Our first half adjusted, EBITDA margin of 24.5% and is at the high end of our original expectation of 24% to 24.5% and this reflects our continued progress on key growth and margin drivers like pricing initiatives, shift to third-party cloud infrastructure, go-to-market efficiencies and EVERFI integration and cost synergies that will drive significant margin expansion going forward. While we have adjusted our full year outlook, we have high confidence and a proven track record of being able to manage costs and drive operational scale in the business.

That brings me to the cash flow statement and balance sheet. Our adjusted free cash flow was $44 million in the second quarter and represented an adjusted free cash flow margin of approximately 17%. We ended the quarter with $911 million in net debt with an additional $245 million of borrowing capacity. Through Q2, we've reduced our debt-to-EBITDA ratio to 3.4x, and we remain focused on rapidly deleveraging through the remainder of '22. Given the current global market environment, it's important to reiterate that the steps we took to refinance our debt and take advantage of the low interest rate environment at the beginning of the pandemic in 2020, leave us in a strong balance sheet management position with financial flexibility. Our exposure to rising interest rates is somewhat insulated with roughly 50% of our debt hedged at very low fixed rates through the end of 2024.

With the first half behind us, we've updated our full year financial guidance primarily to account for the evolving macroeconomic conditions such as unfavorable foreign exchange movement as well as other unforeseen items like the continued drag on total revenue from our mix shift away from one-time services revenue and also updated sales projections for EVERFI.

Starting with revenue. We've slightly reduced our revenue guidance range by approximately 2% to $1.050 billion to $1.070 billion. Roughly half of this is attributed to unfavorable movement in FX rates, with the vast majority associated with the decline in British Pound, which represents nearly 2/3 of our international revenue. The remainder of the reduced range can largely tied to the continued drag in one-time services revenue, which is a positive mix shift for us over the long-term. We now expect our overall one-time services and other revenue to be roughly flat for the full year, which represents a continued decline in our core one-time services revenue when normalizing for roughly $15 million of incremental one-time revenue expected from our acquisition of EVERFI. Lastly, to a much lesser extent, our latest projections suggest some softness in our bookings plan for EVERFI, which has minimal impact on our full year 2022 revenues given ratable revenue recognition and offsetting strength in the rest of the business. We are intently focused on closing the EVERFI bookings gap as we look ahead to 2023. Given the typical seasonality of JustGiving in our services business, we expect a slight sequential quarterly decline in total revenue in the third quarter before picking up again in the fourth quarter.

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Blackbaud Inc. published this content on 04 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 August 2022 15:47:12 UTC.