Blackbaud : Q1 2021 Blackbaud, Inc. Earnings Conference Call - Transcript

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BLKB.OQ - Q1 2021 Blackbaud Inc Earnings Call

EVENT DATE/TIME: APRIL 29, 2021 / 12:00PM GMT

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APRIL 29, 2021 / 12:00PM, BLKB.OQ - Q1 2021 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

Mark William Schappel The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst Matthew David VanVliet BTIG, LLC, Research Division - VP & Application Software Analyst

Ryan Michael MacDonald Needham & Company, LLC, Research Division - Senior Analyst

Ryan Patrick MacWilliams Stephens Inc., Research Division - Research Analyst

Koji Ikeda Bank of America Merrill Lynch - Analyst

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

Operator

Good day, and welcome to Blackbaud's Q1 2021 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. Thanks for joining us on Blackbaud's First 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 our Investor Relations website.

Before I turn the call over to Mike, if you didn't get a chance to attend our virtual investor session in March, please note that a recording of the event and the full presentation are available on our Investor Relations website. I'll also mention that during the second quarter, our team will be virtually attending the Needham 16th Annual Technology Conference, Baird's 2021 Global Consumer Technology & Services Conference and the Stifel Cross-Sector Insight Conference. We will also be participating in virtual investor meetings during the quarter hosted by The Benchmark Company and BTIG.

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

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APRIL 29, 2021 / 12:00PM, BLKB.OQ - Q1 2021 Blackbaud Inc Earnings Call

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

Thanks, Steve. Good morning, everyone, and thank you for joining our call today. Following a strong finish to 2020, we posted solid financial results for the first quarter, and our optimism continues to build around the coming quarters and years. The progress being made to distribute COVID vaccines is encouraging for our market, our customers and our company.

Our first quarter performance, combined with the improving macro environment, had us well positioned for a strong and successful year ahead. In fact, our latest financial outlook suggests the upside scenarios we laid out in our Q4 earnings call are looking more likely, which Tony will cover in more detail shortly.

Before I share a few highlights from the quarter, I would like to thank those of you who are were to attend our virtual investor session in March. I know I speak for the entire executive team when I say we appreciated the engagement and dialogue with the investment community. If you haven't had a chance to watch it, there were 4 clear takeaways from the event. First, Blackbaud is a leader in a large, resilient and growing global market. Our current adjustable market is over $10 billion, and that TAM has more than doubled in my 7-year tenure at Blackbaud through acquisitions, internal product builds and steady market growth. Over the same time frame, our ability to drive organic growth and make strategic acquisitions has resulted in us nearly doubling our total revenue. There's no question we have plenty of room to grow and expand both organically and with future acquisitions.

Which brings me to the second takeaway. We have multiple levers with which to accelerate revenue growth. This includes several programs already underway as well as macro-level drivers tied to the pandemic, which will abate and return quickly once the world returns to normalcy. We have a higher degree of confidence in increasing visibility into our growth reacceleration.

The third takeaway is our revenue growth and scalability will drive margin expansion, and not only do we gain scale through growth, but we're driving several strategic initiatives focused on delivering margin expansion over the next several years. And fourth, we are rapidly innovating for our customers and are well positioned as a market leader to capture the accelerated digital shift within our industry. Blackbaud is truly a one-of-a-kind company with a unique opportunity ahead.

Turning to the first quarter, I'll provide a few updates in the context of our 4-point growth strategy. As a reminder, while our strategy is unchanged, we recently modified the 4 points to elevate a specific strategy focused on employees, culture and ESG initiatives. This isn't new for us. It's something that's been in our DNA for a long time, and it's a big advantage as we look to attract and retain top talent. You'll find this evident in our 2020 Social Responsibility Report, which was released last week, and demonstrates how our company responded to the unique challenges the pandemic created for our employees, customers and communities.

We also expanded this year's report to include voluntary ESG reporting disclosures that align with the Sustainability Accounting Standards Board and Global Reporting Initiative. To highlight one of the many reasons I'm incredibly proud of this report, I'll note our company is comprised of 46% female employees and 54% male employees, which positions us as a leader in our industry. We are fully committed to continuing to create a diverse and inclusive environment at all levels of the organization.

Recently, our Chief Marketing Officer, Catherine LaCour, was named one of the Top 50 Most Powerful Women in Technology by DiversityFirst and the National Diversity Council. This is a tremendous award honoring female leaders who have become champions for diversity in the technology industry as well as inspirations in their communities. Also, with many of our employees living near our headquarters in Charleston, we're proud to have been awarded the Diversity Champion award by the Charleston Metro Chamber of Commerce, which honors a company who is committed to creating a more diverse, equitable and inclusive workplace and community.

That brings me to another recently revised point in our strategy, which is to lead with world-class teams and operations. This expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance, as measured by the Rule of 40. We have a strong executive team who are all incredible leaders, delivering on our mission and executing on our strategy. And we have tremendous talent across the company at every level aligned with these goals as well.

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APRIL 29, 2021 / 12:00PM, BLKB.OQ - Q1 2021 Blackbaud Inc Earnings Call

Our people are just one reason I'm excited about the opportunity in front of us as we continue to drive the business forward, which is a good segue to our next strategy to delight customers with innovative cloud solutions. As we've said, 2020 required unprecedented speed and scale to support our customers, and we were quick to reprioritize expedite product enhancements to support our customers' changing needs as they scrambled to operate digitally. We've carried that momentum into 2021.

For example, we upgraded virtually all of our Blackbaud Grantmaking customers to a new SKY UX version in just 1 month's time. This is a big deal for our customers, and it enables them to alleviate their IT burden, improves data security with multifactor authentication and provides freedom and flexibility to access advanced grantmaking technology anywhere via any browser on any device. With more veteran grantmakers using mobile technology and a younger generation of grantmakers emerging in the philanthropic community, providing convenient access to grants data and grants management tools will continue to be critical for success.

Blackbaud plays a crucial role in accelerating our market's move to the cloud. In higher education, for example, with the COVID-19 pandemic, accelerating the need for powerful cloud-based systems that allow for easy collaboration, Blackbaud CRM has been the trusted solution for a growing number of institutions to support their overall advancement needs. Institutions, including Baylor University, Clemson University, University of Houston, University of Louisville, University of Saskatchewan, University of South Carolina and West Virginia University Foundation have recently gone live on or selected Blackbaud CRM in Microsoft Azure.

In fact, a recent third-party study found that institutions using Blackbaud CRM were able to raise more money at a faster rate, with a 63 percentage point increase in funds raised compared to non-Blackbaud CRM institutions. I could go on, but these are just a couple of examples of how we're delighting customers through our innovative cloud solutions.

With that, I'll turn to our strategy to expand our total addressable market by acquiring, building and partnering into near-adjacent markets and expanding within our existing markets. This strategy is unchanged and has been a very successful strategy that we've been executing for years. With a combination of organic growth and M&A, we have a proven history of double-digit revenue growth. We continue to evaluate opportunities for M&A, and through our innovation on the SKY platform, we've created additional optionality to build and partner as well. I'm particularly excited about the momentum we're seeing with Blackbaud Marketplace, where we've seen an over 150% increase in apps available in the Marketplace. In fact, 1 out of 4 Blackbaud customers have extended their solutions with a SKY application.

I'll summarize by saying I continue to be bullish about the opportunity ahead of us. Our market has shown its resiliency. And as the vaccine rollout continues, organizations are planning for post-pandemic recovery, which is expected to include more budget dollars for software investments. As part of our planning, we recently conducted a market study with the help of a third-party firm, and they found that even during the pandemic, organizations were anticipating an increase in their annual software spend over the next few years.

Blackbaud is well positioned to capture this growth opportunity. We're accelerating investments in key areas like digital marketing, engineering, security and customer success as we look to extend our leadership position. And we have our sight set on a substantial opportunity ahead of us to drive meaningful acceleration in financial performance in the context of the Rule of 40. Overall, we had a solid start to the year, and I'm increasingly optimistic about what's to come in 2021 and over 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, and good morning, everyone. Today, I'll cover our results for Q1 and our current 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 on our Q1 2021 financial performance. We continue to witness resiliency in our markets. First quarter recurring revenue grew roughly 1% on an organic basis despite the tough compare to Q1 of last year, which was largely pre-pandemic. This was driven primarily by continued strength in online payments, particularly in the U.K.

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APRIL 29, 2021 / 12:00PM, BLKB.OQ - Q1 2021 Blackbaud Inc Earnings Call

We also incurred a favorable foreign currency impact for the quarter. Our contractual recurring revenue remains healthy, with customer retention holding at 93%, and year-to-date renewals tracking in line with 2020 performance. As expected, the shortfalls in bookings that began at the start of the pandemic are putting pressure on our contractual recurring revenue growth in the near term.

That said, we're optimistic this pressure will abate as we progress through '21. We had a solid bookings performance in the first quarter, which came in ahead of plan and Q1 2020, and we're seeing a healthy pipeline heading into Q2. Onetime services and other revenue declined $6 million, which was approximately a 300 basis point drag on total revenue growth. As we noted in our March investor session, onetime services and other revenue has decreased with a 4-year negative CAGR of 18%, from 2016 through 2020, which has been a material drag on overall growth, but positive for the long term. We expect this drag to bottom in '22, which should result in a lift of a couple of points on total revenue growth in the future.

Turning back to '21. As Mike mentioned, we're gaining confidence that we could see upside to our best estimate for the year based upon the solid start to the year, and thus, our downside scenario is looking very unlikely. Looking ahead, macro-level drivers, coupled with pent-up demand and increased level of online giving, create opportunities for us to achieve low to mid-single-digit revenue growth as early as 2022.

Moving to earnings. Our first quarter gross margin was 59.4%. We generated adjusted EBITDA of $57 million, representing an adjusted EBITDA margin of 26.1% and diluted earnings per share of $0.68. The evolution of our go-to-market strategy with a digital-first mindset has substantially reduced our go-forward cost base in sales and marketing. The first quarter was a solid indicator of our ability to drive bookings performance while reducing customer acquisition costs, and we remain committed to further improving our CAC payback period 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. Our current plans calls for the level of investment to increase in the coming quarters, and thus, our estimate of roughly 25% adjusted EBITDA margins holds as our best estimate for the full year '21.

That brings me to the cash flow statement and balance sheet. Our Q1 free cash flow was $17 million, an increase of $55.6 million year-over-year and representing a free cash flow margin of 7.9%. I'll remind you, historically, we have typically been a net borrower in the first quarter prior to switching more of our compensation plans to be equity-based. We ended up the quarter with $523 million in net debt. Our capital strategy calls for a debt-to-EBITDA ratio of less than 3.5x. And at the end of Q1, we stood at 1.8x, which is our targeted optimal leverage ratio, and we had $406 million of borrowing capacity.

In the first quarter, we repurchased approximately 466,000 shares of our common stock for $28 million. And as of March 31, we had approximately $181 million remaining and available under our current share repurchase authorization. As we look forward, we plan to opportunistically execute on share repurchases when our internal estimates determine that the company shares are undervalued by the market. Future share repurchases could also be used to offset dilution related to our equity compensation programs. As a reminder, our recent share repurchases offset roughly 3 years of dilution related to our decision to shift our company bonus plans from cash to equity.

To summarize our outlook for 2021, from a revenue perspective, we're encouraged by the solid start to the year and the durability of our recurring revenue streams. As we've said previously, the obvious challenge continues to be to accurately predict the duration and magnitude of the pandemic and the ultimate impact on our revenues. 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. But I do want to provide current perspective on our best estimates for 2021 and the scenarios we laid out on our Q4 call.

Our latest modeling gives us additional confidence in our best estimate and suggests our upside scenarios are looking more likely. This is inclusive of an anticipated $15 million to $20 million decline in onetime services and other revenue. Contractual recurring revenue, which is the core of our business, is expected to grow modestly in 2021, and we're optimistic that will set up for an acceleration in revenue growth post-pandemic.

After a solid Q1 bookings performance, we expect to see a pickup in bookings in the second half of the year, and we're encouraged to see progress with the vaccine rollout, which bodes well for a quick recovery in the transactional revenue tied to in-person events. The trends we're seeing to start the year, combined with favorable foreign exchange rates, significantly reduces the likelihood of our downside revenue scenario.

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