Good day and welcome to Blackbaud's Third Quarter 2020 Earnings Call. Today's conference is being recorded. I would now like to turn the conference over to Mark Furlong, Senior Director of Finance. Please go ahead, sir.

Good morning everyone. Thanks for joining us on Blackbaud's third quarter 2020 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 Web site. Before I turn the call over to Mike, I'll briefly cover our upcoming investor engagement activity, which is available on our Investor Relations website. During the fourth quarter, our team will be virtually attending the Stifel 2 2020 Virtual Midwest one-on-one Growth Conference, Benchmark's Virtual Technology Conference; The 10th Annual Needham Virtual SaaS one-on-one Conference; The Stephens Investment Conference 2020 and the Raymond James Technology Conference. We will also be participating in virtual meetings hosted by Baird. With that, I'll hand the call over to Mike.

Thanks Mark. Good morning everyone and thanks for joining our call today. Our third quarter results, clearly show that we are pivoting more toward profitability and earnings growth with a keen focus also toward improving our revenue growth rate, coming out of this pandemic. This morning I'll share a few brief updates from the quarter, before turning it over to Tony to cover the financials in more detail. First, I want to start by saying thank you to our employees for their dedication to serving our customers in a very high standard and the tremendous job they've done in 2020, adopting to the new work environment. I'm incredibly proud of how we have stepped up to support the unique needs of our customers, as we all navigate these new challenges, it's really a testament to the people and culture at Blackbaud and our unmatched commitment to the social good sector. I would also like to provide a brief update related to our recent security incident, it's unfortunate the cyber attack happened, and again on behalf of Blackbaud I'd like to apologize to our customers involved in this incident. These types of cyber threats are on the rise, and over the last several years Blackbaud has invested significantly in terms of dollars, and human resources to enhance our cyber security program and preparation for an attack like this. Our top priority is supporting our customers and being diligent in our efforts to help them through this and ensure they have the information they need. Through our forensics investigation, we were able to understand exactly how this occurred and we've remediated the vulnerability which was tied to one of our early generation products. We are incorporating lessons learned from this incident to continue improving on our cyber security program and further harden…

Thanks Mike. Good morning everyone. I'll briefly cover our key third quarter highlights and underlying trends before opening up the line for your questions. You can refer to yesterday's press release and the investor materials posted on our website for the full detail our Q3 performance. Turning to our results, as we said, the current environment is putting pressure on near-term revenue growth and third quarter revenue declined 2.9% versus Q3 of 2019 with recurring revenue declining 2.6% on an organic basis. This was largely in line with our latest planning scenarios. The decline in recurring revenue was primarily driven by lower transactional revenue in the quarter as customers continue to be challenged with pandemic related declines and in missions and in-person events that have had to be shifted online, postponed or altogether canceled. While we've seen encouraging signs of customers offsetting the temporary losses in volume, tied to these activities with online events and campaigns, transactional revenue remains at least our least predictable revenue source given the uncertainty around length and durations of the pandemic. Our contracted recurring revenue performed well as renewals continued to trend ahead of our original plan with over three quarters of 2020 now behind us. Looking ahead, we expect the shortfall on pipeline and bookings will put pressure on our fourth quarter and more so on full-year 2021 revenue. Consistent with Q1 and Q2 of this year, we reclassified approximately $4 million of retained and managed services that would have historically been presented in recurring revenue to one-time services and other revenue. This reclassification reduced our organic recurring revenue growth rate by approximately 200 basis points or 140 basis points after normalizing 2019 for the change. For more detail, please refer to the supplemental schedule included in our investor presentation available on our Investor…

Thank you [Operator Instructions]. We will now take our first question from Tom Roderick of Stifel. Your line is now open.

So Mike, let me ask you the first question just around the transactional side of the business. I mean, we look back at last quarter and you put up a pretty nice upside to the quarter, relative to a tough time I think the postmortem on it was the transactional business delivered particularly well, but that could be -- that can kind of swing both ways, and I wanted to dive in a little bit and see if you can give us a sense as to how much of that business on the payments transactional side is being driven by events versus other sort of giving endeavors, and then from the perspective of what you can do to gain some visibility in that process or even just the outstanding question of when do we start seeing events coming back. How do you sort of think about the outlook of that piece of the transactional business?

Yes. Sure Tom. Couple of things there. So in Q2 we talked about the transactional and sort of consumption business. We have a couple of revenue lines there, sort of usage and payment transactions. In Q2 we saw some shifts, so we saw some customer types drop, some customer types go up, based on what was happening in the world and that drove some pretty decent results in Q2. Q3, it's interesting on that and it's a great question because Q3 is the summer time, right -- lots of events in the summer time. Like, a lot of our non-profit customers do galas, run fights, all of those kind of things and with COVID those didn't happen much in the summer time, right so that was under pressure for Q3 and that was why that revenue didn't do all that great in Q3. The good thing about that though is those customers are still customers right. Those customers don't need to be reimplemented, they just need to start having events and we will drive revenue from that. So, they were in contact with all those customers, they are planning on firing up events again, it's kind of hard to tell at the macro where that's going to come back, and at what level it's going to come back. Some have rescheduled a little bit for Q4, but not in the main -- so it's kind of hard to tell. So, for us there is future good upside there because all those customers are current customers -- none of them are at risk. Our retention remains high, but really it's just activity in the summer months around those actual events coming back, so we saw some weakness in the third quarter related to that.

I'm certain we're all excited for all those events come back, so thank you for that. And then, I'll let either you or Tony take this, whoever wants to, but thinking about that commitment to an operating margin level, that's higher than we've seen historically -- it sounds like you're happy to commit higher than 20% that's great. Curious how you think about the investments as it relates to sales and marketing and maybe not as much new product, but how you get into some of the newer markets you are pushing into before the pandemic hit -- faith-based and higher ed have been sort of particularly hard hit during this timeframe. How do you think about the resources you want to put into that and what you get out of those resources over the next 12 months to 18 months by putting them into those two markets.

So a couple of things here, the moving parts there, we're actually increasing investments in R&D in several areas that will drive further innovation, so we're doing that at the same time we're increasing margin in the company. Sales and marketing-wise, we've seen some really good returns on our digital investments, so we've really ramped up digital investments across the company and then actually have learned a lot since March with all of our folks working at home. So all of our folks are selling via web action teams, online, remote we're doing demos that way. We've really ramped up our investment in digital lead generation which is great so the lead cost per lead is a heck of a lot less that way we've really scaled up our investments in systems and people who are experts at that and seeing a good return. I mentioned in my prepared remarks, we've put some new tools in, that conversational AI tools, which is sort of a 24x7 way to qualify leads through a software tool, so really good scalability. So, we're looking to drive better scale that way and if keep driving a good level of our expected bookings, although obviously this year's tough on bookings because of COVID. So, our digital investments are really proven out. In my prepared remarks Tom, I talked about just BBCON right just was fantastic 38,000 registrants which is like 10 years of BBCON and a huge percentage of that is prospects as well. The other thing I'd like to just mention is kind of tied to your question around Tony's comment on driving more margin and long term. So, we're going to have an Investor Day that we're going to schedule, not quite sure when. We'll have an Investor Day, and we will once again have long-term aspirational goals which is the community has been asking for that a lot, so we're going to do that again as we make this shift to profitability so we can talk about what that might look like on a longer-term basis.

Great. Very helpful, appreciate the comments. Go ahead Tony.

One follow-up on the transaction, I want to make sure we covered off on. Since we pulled guidance, it's hard for me to discuss the models that are out there and have us compare to our internal expectations, but I'd tell you the transactional revenue had actually run hot to our original plan for the year through Q2 -- fell a little short to our original plan in Q3, but still exceeded our scenario forecasts in Q3. So there's a little bit of disconnect maybe where you guys in the market expectations were versus what we were expecting internally, so transactions held up really well, and to Mike's point, it's really about summer when all of those runs and walks and rides and galas were not able to happen because of the social distancing and all of the other stuff we're dealing with the pandemic. And then the other thing I'd note also that, we need to keep in mind is, services has continued to be -- come in short of plan for the entire year and I think that's two-fold, I think, one it's tough to get resources rounded up with our customers to do the work with the pandemic impact and then secondarily, just our continued trend of moving to the cloud -- there's just less need for customization and those kind of services that we have done historically, so that trend kind of continues that we've seen for the last couple of years.

Thank you. And our next question comes from Brian Peterson of Raymond James. Your line is now open.

Good morning, and thanks for taking the question. So wanted to follow up on Tom's last question and it sounds like there's a lot of efficiencies gained through some of the digital marketing motions and the digital motions that you guys have put in place. I'm just curious how should investors think about the return to growth as maybe some of these macro trends normalize? With the sales capacity and these marketing motions, obviously, we don't have a crystal ball and what the macro will be, but I just kind of wanted to understand conceptually how we should be thinking about growth and the investments that you're making when that macro stabilizes?

Yes, sure, thanks Brian. So we serve a lot of different types of customers and they're in different situations within COVID, right. So, the educational institutions are all up and running and so we're seeing the normalcy of transactions and things we have there, yet the bookings slowed down there because they all scrambled to figure out what to do and how to open with COVID, right. If some of them are remote -- some are combo, remote, go to class that's getting behind them now because it kind of built some operating muscle in the last two months running the schools. And then some others like the big mom pops we just talked about where they have little or no events, they're planning when those are going to be and we're not sure at the macro what that's going to look like for a while on the event side. So, on the one hand we are I believe positioned well because they all remain customers and our retention is high and they will have events again because it's a primary revenue driver. Some of them have switched to going more digital by having digital events with some pretty good success in the main, but with COVID again, it's still kind of hard to predict that sector of our business going forward. And lastly, I'll say again, driving margin up and getting more scale in sales, lower cost through digital means and driving margin up and hiring more engineers and driving more innovation, which we're pretty excited about.

And Brian, maybe I'll tag on there to Mike's from a timing perspective as Mike spoke about and we've talked with Tom the transactional side should bounce back very, very quickly, right. So assuming next year and the summer we're allowed to have the runs and the walks and the rides and the heart balls and all of those galas etc, we'd expect that transaction revenue to come back almost overnight with those events being allowed. So, I think that comes down to where are we as a society and do we have vaccines and those things that will really drive that. The other piece as you are aware that has a little longer-tail. We're seeing some softness in bookings and pipeline, because of the pandemic and that's always going to hurt us through 2021 just with the ratable revenue recognition on those bookings. And so we're seeing a little bit of impact this year, but it's going to be more visible next year because we have a full year worth of revenue impact from those bookings shortfalls. I think that lag assuming the market comes back sometime next year six month to 12 months kind of lag before we work our way through that. So, I would say if we get back to normal sometime in the first part of next year I'd hope by early 2022 we'd kind of have rebounded and see that resurgence of growth overall. Transactions much quicker with a little more delay just on the rabble rev rec on the subs.

The last thing I'll just add Brian -- I'd just add one more thing, Tony said this in these prepared remarks, and we're really focused on this, which is that combination of driving up the ladder on the Rule of 40. So, a combination of both top and bottom line of the P&L, which we're planning on being pretty aggressive in driving that going forward.

Great. That's a lot of comments, great color there. And just a question I was getting from investors yesterday, I don't know if you had any comments to this, but just as we think about your transactional business, I know you have some kind of Smart Tuitions there, some exposure in higher ed but I'm curious if we were to overlay your transactional business kind of within certain end markets, what are the top two or three or anything in terms of exposure, relative to the customer base? Any color you can add there?

So the Smart Tuition and the sort of education sector is doing just fine and again, the pressure is what we just talked about, it's all of these events in the summer and that really didn't happen is on the downside, putting pressure. It's really all that type of activity, a gala, a walk, a ride that really didn't happen in the summer because of the required social distancing.

And Brian the other thing I'd mention is online giving spike because of the pandemic, so it forced people to move to online as you think about timing for the faith-based market surge dramatically; people were still giving to their churches, but they couldn't do that in person passing the basket. And so in several areas, we actually saw a fairly significant ramp in transactional giving. To Mike's point, we really -- Q3 and again I'd just reiterate it was anticipated in our part because of the -- not being able to host those events. Like usage revenue related to TeamRaiser was a big shortfall in the quarter because we didn't have the runs and walks and the rides and etc and the marathons. So that one again I expect will bounce back very quickly once things open up again. I also saw some place in commentary from one of the sell-side folks -- I don't remember who it was, but I'd mentioned they were surprised on our gross margin and it wasn't higher being the shortfall in the quarter was from transactions. We need to keep in mind that some of these transactional related offers have quite high gross margins -- payments right. True credit card processing has a dilutive lower gross margin, but things like tuition, some of the JustGiving models usage related TeamRaiser some of those things just how they're part of the pricing contract are actually really good gross margin pieces of the business. So, we shouldn't think of transactions all as being dilutive, so I think that's important for folks to keep in mind that loss of some of those were good margins has a pretty significant impact on operating margin as well.

That's a good point.

And also Brian, I just want to add something; Tony mentioned, one of our platforms, which is Luminate Online or a TeamRaiser which is really kind of our big platform that drives a lot of this usage and payments. We're expanding the footprint, we announced a pretty robust integration with that platform with Salesforce platform. So we're expanding that across the board -- a lot of customers that make decisions to go with us and Salesforce for different reasons and so, we've integrated that platform there which provides a future opening to more usage and payments in those kind of scenarios as well.

And maybe just a follow-up on that Mike, I know the Salesforce question comes up with investors. I know you've answered in the past with this integration. How do you feel like that impacts your flexibility to work with customers in different ways?

I think that opens up a lot. Just a couple of things I'd like to provide because we get asked the Salesforce question a lot, and so in the world of software, typically what looks like competitors sometimes integrate like we just did with the Luminate. By the way, we also announced some robust integration with Raiser's Edge NXT and Salesforce and our enterprise CRM fundraising platform with Salesforce as well in addition to Luminate and TeamRaiser. Couple of data points on Salesforce because we get asked this a lot and we've kind of realized we haven't provided probably enough granularity, so just a couple of things. We went back and looked several years and our win rates with against Salesforce have not changed and they're are basically the same win rates against our other competitors, there's no difference. And the second really interesting I think data point, because we've been saying this at the macro, but not provide the data we see Salesforce in about 5% of our total opportunities 5% and it's a little different by vertical, right by markets we're in. So, we always would say we don't see it in all of the verticals and kind of explain faith-based or this or that one. But, if you look at all of our deals, we see them and about 5% just to be clear just to provide more information there.

Thank you. And our next question comes from Rob Oliver, Baird. Your line is now open.

My questions for you and then I had a very quick follow-up for Tony. Mike, just curious, you know we're a few years into the Microsoft partnership and I was wondering if you could provide us with a bit of an update on that. I know you guys have said in the past that there have been a few big deals here and there that maybe wouldn't have come your way without Microsoft, particularly at this time that, that's likely a channel makes us very active that you guys could lean on during the pandemic. So, just curious now a few years into the partnership what kind of momentum, if any, you're seeing in the Microsoft channel, and they maybe -- love to hear some customer examples, but maybe that's something that we could get at the upcoming investor event.

Yes, sure, happy to provide customer examples Rob. So we're partnering with them, mostly on enterprise type deals in places like healthcare and higher ed and it's been a good relationship. We're partnered with their executives that run those business units, also partnered in their non-profits business unit as well and it's going quite well. The relationship has matured from the non-Microsoft non-profit business unit into higher ed and into healthcare as well and so we've made more contacts and more collaborative selling has happened there. The other thing is we're pushing our product road map further there as well, so we've done some really great integrations with Raiser's Edge NXT and Office 365 for example, and again we've got relationship at the Azure -- on the Azure side as we continue to move from our co-lo datacenters to Azure, so I think it's gone pretty well and the relationships are solid, and it's really the way that the models were too, as far as compensation it's complementary because their teams are really compensated on Azure consumption, and we're moving our products to Azure, and so their base plans and set them to partner with us in the marketplace to pull us in is to get good Azure consumption, which is where we're going anyway, so it really works quite well.

Tony just for you, just on the data breach you've got a couple of set of cost here that you guys are going to face certainly remediation costs and that's something I think we can ballpark based on other examples, but you got remediation costs and then you've got liability ex-insure, it sounds like insurance is going to cover much, but not all of that. So, just curious how you're thinking of that and I would assume that as you guys get set up for 21 that, that's something you'd be factoring in, but just wanted to maybe get a little bit more color on both of those costs. Thank you.

So I would say watch our SEC filings because there will be a lot more disclosure in those obviously on the topic. We have good insurance in place -- our insurers are working with us very closely the key there is coordinating with them and make sure we're clear on what they're covering or not going to cover. Right now -- and you'll see this in the Q when it comes out, we have not recorded anything material from a liability perspective. We currently don't anticipate that we have material amount that needs to be accrued that's not going to be covered by insurance on a net basis. So, you'll see some things in there where we'll have some receivables and liabilities will book, but on a net basis right now nothing material to the company. That said, we're obviously spending a lot of our time and utilizing a lot of our internal resources on that front. The big thing, I think that you'll see probably in our numbers is just our continued investment in our cyber security resources internally, right. Continuing -- we've got a really good team in place, we've done a great job. Obviously, we got these guys in the midst of their efforts -- they weren't able to take over our systems, but I think that was great, but it's still going to be painful to work through, but there'll be plenty of disclosure on the topic in the financials and we will certainly build any estimated cost we would incur into the 2021 plan. At this point, again we believe insurance is going to cover the majority of it, other than our internal resources and time.

Thank you. And our next question comes from Kirk Materne of Evercore ISI. Your line is now open.

Mike, I was wondering if you could just characterize where you think the conversations with clients are today around sort of the non-transactional side of your business? Meaning, are clients still just trying to sort of stabilize and sort of make sure they can function period or are they starting to think ahead to where they need to be a year or two from now? Really budgets are tight, they might not want to do anything, but I'm just kind of curious if at least the tone of the conversations is perhaps changed today versus say six months ago?

Yeah, it's changed. Many of our verticals -- they're looking forward, they realize how important digital cloud platforms are to them because they've had to use even some different things, the Zooms and Jeans and things that they maybe have so they're looking forward. The caveat to that is some of them are not, so in our arts and cultural business some of those institutions are open and doing pretty well, mostly in like the performing arts centers haven't opened yet, so they're in a different spot. But I would say at the macro, across the board they're looking forward, thinking about, okay, we're seven months, eight months into this COVID thing, it's going to be around for a while. We have to continue to drive our business forward and think about the future. So, those conversations have shifted that way. Our bookings are still pretty far off of what we planned, right but your question was on conversation, so they have shifted that way in the mean for sure, but not in all the markets.

And then, I guess even thinking about your business going forward, how much of your sort of sales efforts can be shifted more virtually longer term and does it matter between, say expansion business versus net new business, meaning -- I assume you always want to have face to face, if you can but, is there -- can you create more efficiencies I guess, doing more sales virtually after this and kind of how I assume that's also factoring into your confidence around margins. So, I just wonder if you could expand on that? Thanks.

Again, I think we like a lot of companies -- we've learned a lot since March, you see us being super aggressive on our real estate plans. We rolled our new workforce policies already that are post COVID workforce policies, which is a lot more remote environments across all the job types in the company, it's going to drive cost efficiencies, it's going to help us with access to skills and diversity. If you remove zip codes from job types and digital related to sales. I would say that you go back two years we are behind the game in investment and digitally enabled sales, we did a great job with internal IT platforms for usage for sales, but not digitally driving leads and we started that over a year ago, brought in some experts, put in a bunch of platforms and it's proven itself out. So all of our teams have been selling virtually since March all right. All of them are doing demos, no one's going to see folks face to face, whether existing or prospects. And although our bookings are down because of COVID, it's actually operationally working quite well, so I think it's going to continue. I don't know that we're -- I predict that we're not going to go back to what we used to be -- that Blackbaud, they're in a lot of software companies. I don't think so, I think there is a ton of opportunity. The other thing for us too is a lot of our deals are in SMB model, which is very, very online and frankly, we didn't treat it that way enough in the past where we incurred too much cost in an SMB model where it could have been more digital, frankly in the past. We've learned, we could do SMB digitally because we started to invest in it, like I said, over a year ago -- COVID forced it, and we've learned that we could do it digitally and scale it for the SMB, most of our deals are sort of SMB type deal. So, lots of good learnings here since March that will drive scalability in sales and marketing -- there's opportunity for us, both on the top and bottom line I think in the long run.

Thank you. And our next question comes from Ryan MacWilliams of Stephens Incorporated. Your line is now open.

Thanks for taking the question, just one for me today. As we're in this involving market environment and you're turning toward your leverage target, any changes to your acquisition criteria here? And given the difficulties in some of your end markets, have you seen additional target opportunities proactively reach out to you? Thanks.

We remain pretty connected to the activities that are going on. There are some lower valuations out there because of the smaller companies that are under some pressure. Our strategy hasn't changed in the short run as we keep saying quite a bit, we've really pivoted toward the Rule of 40 and profitability, which is more controllable and I think, a really good model for us. So, the strategy hasn't changed. The recent activity -- we keep looking at things, but we're also driving profitability as well. So, I think there will remain opportunities related to that and was there a second part of your question as well?

No, you hit on the bulk of it is. Appreciate your time, thanks.

Okay. You bet.

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mike Gianoni for any closing remarks.

Great. Thank you operator, I'll just close by saying that I'm proud of our execution across the board in the quarter. The pandemic has created some near-term challenges, but I believe we have a significant long-term opportunity in front of us, and we're uniquely positioned to elevate our status as a leader in this marketplace and I think we've done some of that with things like BBCON recently. We're currently finalizing our 2021 budget and refreshing our long-term plans, which again puts a greater focus on profitability and the whole Rule of 40 model, and we plan to share more early in 2021. As I mentioned, we'll have an Analyst Day and will also provide long-term aspirational goals at the Analyst Day as well, and Tony and I thank you for participating today and in today's meeting and the call. So, thanks everyone. Have a good rest of your day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.