Blackbaud, Inc. Price & Performance (BLKB)

Good morning, everyone. Thank you for joining us on Blackbaud's fourth quarter and full year twenty twenty four Joining me on the call today are Mike Gianone, Blackbaud's CEO President and Vice Chairman Tony Borr, Blackbaud's Executive Vice President and Chief Financial Officer. Mike and Tony will make prepared remarks and then we will open up your 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 ks and other SEC filings for more information on those risks. Discussion today will focus on non GAAP results. Please refer to our press release and the investor materials for 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 [indiscernible] or as a substitute for GAAP measures.

And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. Before I dive into our results, I want to quickly touch on Everfy. We closed the divestiture of Everfy business on December 31. As you know EverFi was dilutive to both our revenue growth and profitability in 2024. We're pleased to advance into the new year with this deal closed and looking forward to focusing on what we do best, Heading into 2025, we are concentrating on our core Blackbaud business and our financial guidance and go forward results Turning to the rest of the business.

I want to express how pleased I am with the progress Blackbaud has made over the past five years and highlight some key achievements from the past year. 2024, we extended our position as the market leader providing the most comprehensive suite of purpose built and mission critical software and services to the social impact sector. We continue to invest aggressively in innovation and partner with our extensive developer network to help our customers raise more money while enhancing and streamlining their operations. Our solutions allow customers to spend more time focusing on what matters to them, making a concrete difference through their vital social impact work Our market leading innovation is a competitive differentiator and continues to drive sales. In 2024, we saw significant improvement in new logo wins. While also deepening our existing relationships with our list of approximately 40,000 customers. Last quarter, I highlighted several wins in the higher ed vertical in this quarter, I'll give you more in the K-twelve education vertical, including Notre Dame High School, American Heritage Schools, San Diego Jewish Academy, These institutions like those in higher ed and our other verticals, valued our end to end workflow and innovation. We continue to be very focused on new logo growth across all of our industry verticals and are supporting this initiative through enhancements in sales and marketing programs.

Let me spend a minute on some of our key AI initiatives. Blackbaud's Intelligence for Good program integrates several machine learning and AI capabilities that help our customers streamline workflows, enhance efficiency and achieve better outcomes. The machine learning features that focus on better prospecting by over 5,000 Razer's Edge NXT customers. We've introduced generative AI features across multiple products. Mainly for composing outreach communication. But in the current quarter, we will be releasing Blackbaud Blackbaud provides contextual responses to questions and drives actions. Copilot is an industry leading innovation that only we could deliver. Thanks to our access to years of social good centric benchmark data, And like the rest of the software industry, we have started experimentation with Agentic AI and the prospects across social, corporate and education sectors are encouraging. We're also leveraging AI to transform the way we work. Cultivating opportunities that allow us to improve efficiencies. We continue to identify, experiment and scale a range of successful solutions across marketing, customer success, and engineering to be an active innovator through applied AI. So when our customers or our own employees ask me if AI can help them, it's not a question of can, it does.

Now turning to our 2024 financial results. For the full year 2024, Blackbaud produced revenue of $100,000,001,155,000,000 dollars and adjusted EBITDA margin of nearly 34%. Non GAAP diluted earnings per share of $4.07 and a Rule of 40 score of approximately 39%. Revenues in our social sector grew 7% despite a strong FY 2023 comparison. Within social, the company's largest revenue line, was up 8%. Our second largest revenue line of social transactional recurring revenue grew 6%.

We driven by the value our customers see using our solutions, was approximately 92% excluding Aerify. Our adjusted free cash flow remained extremely strong at approximately $245,000,000 or 21% of revenue up from 19% in 2023.

Our strong adjusted free cash flow gives us great confidence in continuing to invest in innovation, as well as fuel our ongoing stock repurchase program. For 2024, the company bought back 10% of the common stock outstanding if you include the net share settlement on employee stock comp, the figure rises to 11%. 2025, we intend to continue to aggressively repurchase between 3% to 5% of our outstanding shares. Our 2024 results are a reflection of our successful work in solidifying Blackbaud's attractive financial model over the past five years. Our revenue Margins cash flows at Rule of 40 have improved significantly since 2020. I'd like to spend a minute outlining that success for you. Our organic growth rate in 2020 was 1.2%, In 2024, it was 5.2%. Our EBITDA margin in 2020 was twenty six point five percent twenty twenty four it was 33.7%. Our adjusted free cash flow margin in 2020 was 8.3%. In 2024, it was 21.2% And Rule of 40 in 2020 was 27.7% in 2024, was 38.9%. Of a proven operating plan continuous product innovation, refinement of our go to market programs, a focus on efficiencies and effectiveness and a steadfast dedication for not only powering social impact, but centering it in all we do with both our customers and employees.

Blackbaud's Blackbaud trajectory will also be built on these tenants. And we combined with our future opportunities We see a clear path to becoming a Rule of 45 company by 02/1930. Let me conclude with why Blackbaud continues to be a sound investment choice that we believe should create substantial shareholder value. Regarding organic revenue, you can expect mid single digit organic revenue growth [indiscernible] driven by visible and full reoccurring revenue streams targeting both new logos and the expansion of our installed base empowered by innovation. You can continue to expect a strong focus on cost employee productivity to improve EBITDA. Additionally, our very strong free cash flow will drive a purposeful capital allocation strategy in 2025 and beyond between 35% of common stock outstanding in 2025. We look forward to our continued journey and offering our shareholders increasing value in the coming years as we make progress against our Rule of 45 ambition by 02/1930. As always, we thank our employees around the world for their commitment and dedication to make Blackbaud such a great company. With that, let me turn the call over to Tony.

Thanks, Mike.

I'm also pleased with our 24 results and our financial progression of these last five years.

I'm excited about the opportunities in front of us.

We remain committed to providing investors an attractive financial model balance between growth in revenues, earnings and cash flows, along with a prudent and purposeful capital allocation strategy. Mike walked through our 24 full year results.

Which tells a strong story of improving top line growth and dramatically improved profit But to reiterate, full year 2024 organic revenues were up 5.2% to $1,155,000,000 dollars adjusted EBITDA of $389,000,000 was up $32,000,000 with approximately 1.5% improvement to margin. EverFi was approximately a two percentage point drag on total revenue growth for the year.

Our ability to grow revenue and EBITDA margin speaks to the power of our Five Point Operating Plan. Which positively impacted earnings per share and adjusted free cash flows. Non GAAP EPS increased to $4.07 compared to $3.98 last year. Adjusted free cash flow was $245,000,000 up from $214,000,000 last year representing an adjusted free cash flow margin of 21.2% compared to 19.3% in 2023. This increase is despite the negative impact of approximately 20,000,000 in additional interest expense associated with our share repurchase program in 2024.

And approximately $25,000,000 increase in cash taxes due to improved profitability and a correspondingly higher cash tax rate. Our robust free cash flow gives us confidence to continue investment in a number of critical areas like product innovation and stock repurchases. We bought back 10% of the common stock outstanding as of end of 'twenty four And if you include the net share settlement on employee stock off, the figure rises to 11%.

Before I provide 2025 guidance, I want to set the table on several factors that will influence our numbers and help you set your models for both the year and quarters appropriately. In 2025, we expect to continue to invest in our products and deliver capabilities that our customers value. And we plan to refine our go to market capabilities to ensure we maximize new logo acquisition and expansion within our vast customer base. As Mike mentioned, we completed the sale of EverFi on 12/31/2024. EverFi contributed $85,500,000 to '24 revenues, will be excluded from our go forward financial results and our 2025 financial we will no longer report corporate sector revenue separately in 2025 and beyond. YourCause revenue will be included with the rest of our products in a single revenue line. Regarding costs associated with EverFi divestiture, In February of twenty twenty five, we made a one time cash release payment of $28,000,000 in Connect with the release of our lease for office space in Washington D. C, which was acquired as part of the acquisition of EverFi in December of twenty twenty one. The remaining cost of the lease would have been $42,000,000 and we expect it to provide a $3,000,000 to $3,500,000 improvement to adjusted EBITDA on an annualized basis going forward.

There was approximately $14,000,000 of GAAP incurred in 2024. And lastly, the company finalized the non cash impairment charge related to the MFI asset group.

The pre tax charge was $390,000,000 and within the range we previously announced. Additionally, Everify sale and impairment resulted a tax benefit of approximately $110,000,000 partially offset by tax valuation allowance charge of $47,000,000 Additional details will be included in our 10 ks. Thinking about revenue seasonality, recall fourth quarter is typically our highest revenue quarter, while the first quarter is our lowest due to timing and charitable giving and events throughout the year. Turning to profitability, Q1 tends to be our lowest quarter for a profitability standpoint. Due to the timing of expenses related to employee benefits and employee stock award vesting. Our annual merit increases for employee compensation going effect on July 1 every year So Q3 tends to have higher compensation related costs compared to Q2.

Additionally, we anticipate $2,000,000 to $3,000,000 negative impact to revenue and adjusted EBITDA for the year due to currency. Moving now to guidance. Our 2025 financial guidance assumes no material changes, good or bad, in the current macroeconomic landscape. So for the year, we are projecting revenue in the range of $1,000,000,001.01 $5,000,000,000 to $1,125,000,000 dollars representing organic growth of 4.2% to 5.1% as reported or 4.5% to 5.4% on a constant currency basis. The midpoint of this range is approximately two percentage points less than our 24 growth rate excluding EverFi and can primarily be explained by two factors. First, we discussed on last quarter's call the third quarter of twenty twenty four represented the first period which we lapped the renewal pricing uplift in a meaningful way which drove lower growth rates in the third and fourth quarters of 'twenty four. This trend will continue on a full year basis in 'twenty five as we continue to lap prior renewal cohorts. Remember, while the renewal contracts have price escalators in years two and three, the revenue is recognized on a straight line basis. So for example, in a three year contract, the total contract value is divided by 36 and recognized evenly over the full term.

And to a lesser extent, we expect some modest softness in bookings near term as we have transitioned our sales efforts from migrations, which are now largely complete to focus on net new logos as well as cross sales.

As Mike mentioned, we saw some early success with this initiative in as new logo growth was up significantly in 2024.

And lastly, are not currently incorporating any anticipated viral giving in our guide. Which is a change from past years. Shifting to profitability, we will continue to focus on margin expansion opportunities while at the same time making investments in the business in areas of innovation, artificial intelligence, product roadmaps, cybersecurity and India based TekTel.

Therefore, we anticipate EBITDA margins of approximately 34.9% to 35.9% and with the overall revenue in spin configuration I just outlined, expect 2025 non GAAP EPS in the range of $4.16 to $4.35 or up 2% to 7% as reported year over year. The combination of higher growth and better margin is expected to result in a rule of 40 constant currency of 40.4% at the midpoint of guidance for the full year which is 170 basis point improvement year over year.

Continue to have a sharp focus on driving adjusted free cash flow returning capital to our shareholders.

For the year, we're guiding to adjusted free cash flow of $185,000,000 to $195,000,000 The guidance range is inclusive of several one time investments that will provide long term benefits to the company and shareholders. Including the $28,000,000 cash release payment associated to Washington D. C. Office lease that I mentioned earlier.

And a one time investment for a new office location in India that will provide access to high quality and cost effective talent. Additionally, we expect to incur approximately $11,000,000 of incremental interest expense year over year comprised of roughly $30,000,000 in interest for our 2024 and planned 2025 stock repurchases offset by the pay down of debt using discretionary cash. And finally, we expect an approximately $15,000,000 decline year over year due to other factors including the timing of certain working capital items and divestiture related costs. You can find more details on Slide 24 of our investor deck. Underlying these guidance ranges have made the following assumptions. Non GAAP annualized effective tax rate is expected to be approximately 24.5% unchanged from last year. Interest expense for the year is expected to be approximately $65,000,000 to 69,000,000 compared to $56,000,000 in 2024.

Fully diluted shares for the year are expected to be approximately $48,500,000 to $49,500,000 Capital expenditures for the year are expected to be approximately $55,000,000 to $65,000,000 including $50,000,000 to $60,000,000 of capitalized software development Looking to 2026 and beyond, we believe adjusted free cash flow will continue to grow in repurchasing shares to offset dilution from share based compensation.

Beyond that, company has tremendous optionality to dynamically out allocate capital to its highest use based on market conditions, including additional stock repurchases, synergistic M and A, or repayment of debt. The performance of our stock, the interest rate environment and availability of acquisitions will help inform our capital allocation decisions going forward. We have a lot to be proud of and a lot more to look forward to as Blackbaud moves into 2025 and beyond with a goal of becoming a Rule of 45 company by 02/1930.

As such, remain focused on providing enhanced value to our customers and our shareholders.

Operator, let's open up the line for questions. [indiscernible] We ask that analysts limit themselves to one question and a follow-up so that others may also We will now take our first question from Brian Peterson with Raymond James. Please go ahead, sir.

Hi, gentlemen. Thanks for taking the question. So, I appreciate all the commentary here. I know you guys mentioned maybe pivoting some of the good market resources away from the migrations and towards net new. So if we think about where you guys have the biggest opportunity or maybe end markets where you think you can make the most progress in 2025, What does that look like? And what does that TAM or opportunity look like beyond the 40,000 Hey, Brian, it's Mike. Thanks for the question. We started this a while ago last year It really ramped up to have a bigger focus on net new logos because the migrations from some of a few of our platforms to the new cloud solutions are largely behind us now. Which is good news. And our new logo production last year grew quite nice in the back half of the year. Just to be clear, we expect bookings to go up this year in total over last year It's just that we're more focused on new logos And of course, we're still focused on back to base cross selling as well. We do a lot of land and expand I mentioned in my prepared remarks a couple of K-twelve large wins.

We're doing well across the board in K-twelve, arts and cultural, nonprofit, YourCause business, great opportunities in pipeline and new logos there. As well. So again, we started to shift a while ago because we've been working on migrations for several years and we saw the tail of that, if you will, It's going well. We're pleased with the new logo results last year and look forward to it this year. Great. I appreciate the commentary, Mike. And Tony, I know you mentioned that you weren't assuming any kind of viral giving into 2025 guide. If we look back historically, what is the mix of kind of viral giving versus what you'd say is more, I guess, recurring? And have you seen any giving that's, I'd say, viral associated with some of the events in California this year?

Thanks guys.

Yes Brian, good question. Thank you. Viral, as you've seen in the numbers, can be very volatile. In '23, we had a extremely high year from a viral perspective. Q3 and Q4, especially that year made for a really tough compare for the '24 year, I think we're up 13.2% in Q4 of twenty three largely on the payments and transaction side of business, largely because of viral events. Last year, we really saw next to no viral events come through our our channels and systems. And so we've had a big quip saw year over year and hence a really tough compare that we saw for transactions in Q4 of 'twenty four. They can run from as we saw last year, next to nothing. So I could say you could be as low as zero to as high as something that's in the $10,000,000 to $15,000,000 a year kind of range is what we've seen in my tenure here. So a lot of volatility. And then for the wildfires, we did see a little bit that's incorporated into our guide, but it was south of $1,000,000 of impact. [indiscernible] Our next question comes from Rob Oliver with Baird. Please proceed with your question.

Great. Thank you. Good morning.

My first one was Mike and Tony, as you guys contemplated the guidance for 2025, I'd be curious just to hear your view on what you're hearing from your customer base relative to some of the potential impact around, changing in federal dollar allocation. I know many of your customers, whether they be foundations, hospitals, universities are recipients of federal grants. Would you just be curious to know how they're thinking about that and how you guys are thinking about that potential impact in your guidance for this year? And then I had one follow-up.

Yes, sure, Rob. Yes, we're hearing about that a little bit. We don't see any impact yet for us. Just to be clear, we're not involved in that funding system at all. Our platforms are for driving donations through individual donors, if you will. We're not involved in that workflow of cash, if you will. So for us, our customers will likely need what we focus on best, which is to drive more of their revenue through donations using our platforms, But it's early days there. But we haven't seen much of that yet in the marketplace. Such a wide variety of customers too. Some are not involved in those fundings and some are more so than others. Like K-twelve schools versus some of the foundations, for example.

Got it.

Okay.

Helpful. And then, Tony, if you can just walk through, I know and you guys had kind of slide on this as well, but on that free cash flow guide, definitely weaker than we expected.

And I understand that there are a lot of moving parts with EverFi and you walked through some of the cost initiatives But if you could just help maybe rank order some of those impacts on the free cash flow for us and some of the decisions around the spending that would be helpful.

Yes, happy to, Rob. And like I said, there's a new slide in the deck that you can look that will provide the same information for everybody. But we're going from a year of 2.45% midpoint of the guide on free cash flows $190,000,000 for 2025.

We have $28,000,000 hit this year for one time for the buyout of [indiscernible] That we acquired as part of Everfy going on four years ago now. So paid $28,000,000 for a lease release on that facility. The remaining leases, I said in my prepared comments, would have cost us $42,000,000 So a nice pickup from that perspective over the next few years and then the annualized savings on that we believe is about $3,000,000 to $3,500,000 a year that will come out of the P and L and cash flow going forward. Then we have a new India location. We've had hundreds of engineers in India for several years.

But those have typically been through third party contractors and we're just going to bring those folks in house as actual employees. India is a great opportunity for talent getting really tough to find good trained, educated talent around the world. India is one of the few countries that has an excess. And so we're going to be investing more fully in India over the next couple of years because of the scarcity of talent. That's about a $5,000,000 usage Interest expense is the other big one Rob. As you know, we bought back about 11% of our stock last year.

That was an incremental $20,000,000 of interest. Obviously, and that related interest expense and then we expect about another because we are planning on buying back 3% to 5% as we said in the prepared comments. Of our stock again this year. So the gross amount of interest impact is $30,000,000 to $31,000,000 overall. Now we have had some obviously some good free cash flow generation and paid down debt.

To offset that. So the net impact I think year on year is about 11 And then we have some working capital changes because of big vendor payments and timing There was some of the EverFi divestiture costs that walk through the free cash flow this year and then a few other ancillary puts and takes. But those are the big nuts. The $28,000,000 for the lease buyout, the India investment, and then largely the interest expense and a little bit of working capital.

Our next question comes from Parker Lane with Stifel. Please proceed with your question.

Hi guys. Thanks for taking the question. Looking at the rule of 45 sort of target here for 02/1930, Can you just talk about how you intend to achieve that particularly in the bottom line? Is that going to be relatively bound balanced mix of cost savings across a number of different initiatives or is there some low hanging fruit that can help you get there a little faster?

Yes, I'll start with that Parker, it's Mike. It's sort of a mix there too. Still have a couple of data centers to get behind us. We've closed most of them over the years.

That will help We believe that with the mid single digit revenue growth more of that will convert We're getting more scale out of the business. By far than we ever have A quick example in my decade here, when I started, we were $500,000,000 in revenue, which 3,000 employees and now we're $1,100,000,000 with 2,600 employees. So we're getting a lot more scale out of the business. We expect that to continue in the future. Also there will be some labor arbitrage with the India effort that Tony mentioned as well. Which is going to take a little time to really come online. So we've got a lot of opportunities and driving the top line at mid single digits and just really focused on the operations of the business. As I mentioned in my prepared remarks, we've got a lot of really interesting things going on internally with AI driving productivity across sales and engineering, and other areas. So we've got several initiatives underway. Parker, that's going to drive that. So we feel pretty confident around all of those because we've gotten some some pretty good results. When we started the big push on Rule of 40, we did a huge jump in EBITDA I think in eighteen months, we went up like 10 points roughly.

So I think there's great opportunity here to keep driving that forward and get to the rule of 45. And Parker, I'd just add, a couple of things. One, we don't expect this to be linear in getting to that Rule 45 Some of the things Mike talked about like the getting out of the data center the cloud migration, we'll get out of Citrix costs and a bunch of other things as we turn off those old versions of VARI and FE etcetera. Some of those things will be a little later staged.

And we'll have some kind of stair step impacts throughout that march towards that rule of 45 over the next few years. Got it. Appreciate the feedback guys.

Thanks. Sure.

Our next question comes from Kirk Materne with Evercore. Please proceed Yes. Hi, guys. Mike, maybe just to start with you. Obviously, you guys have a great sort of treasure trove of data within this industry. I was just kind of wondering how that's sort of impacting your development opportunities around AI? What you think you could bring to bear with AI for some of your customers. Can you just jump into that a little bit maybe how that factors into your growth opportunity or your incremental cross sell expansion opportunity with your existing customers?

Yes, great question. We have a ton going on there, lots of exciting things. With machine learning and AI we've got embedded AI now, and I said this in my prepared remarks, in our Razer's Edge NXT, product that over 5,000 customers have adopted that And it's still early days. With that, and it's driving some step level changes that we measure that our customers are achieving related to conversion rates, increased donations by donor, revenue insights, We also are moving to a more advanced stages with what we're calling Blackbaud Co pilot which is sort of the next generation, if you will, It's in one of our products now. Called Blackbaud Impact Edge and it's coming out in Razer's Edge Gen X and Financial edge NXG soon customers to interact with their data with natural language questions. Which I think is going to be a game changer for them to be able to really improve their business and drive revenue It's also going to do things like simplify fund accounting, by combining automation and personalization So these things are coming out as we speak Many others have been introduced over the last year or so [indiscernible] the current AI capabilities are in the base products.

And we have these advanced capabilities coming out. So we are looking at new opportunities to monetize advanced AI in our solutions Those are not out yet. Pricing, but working on those. So that's something that will come in the future. Great. Thanks, Mike.

Sure.

There are no further questions at at this time. So I'd now like to turn the floor back over to Tom Barth for closing comments.

Thank you, Maria. Thank you everyone for joining us today. We will be attending a number of investor events in February and March to include several comp We hope to see you then and to speaking with you very soon. Thank you and have a nice day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.