Good day, and welcome to Blackbaud's First Quarter 2023 Earnings Conference Call. Today's conference is being recorded. I'll now turn the call over to Kevin Muni. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's first quarter and full year 2023 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 this morning 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 mentioned that on today's call, we'll be sharing incremental commentary to provide more detail behind the key initiatives of our operating plan. I encourage you to review our presentation on our IR website that contains these additional details as well. Also, notice of our 2023 annual meeting of stockholders and proxy statement were filed on April 25. And our annual meeting materials were posted to our Investor Relations website that same day. And during the second quarter, our team will be virtually attending the Needham 18th Annual Technology and Media Conference on May 18. The Evercore Diamonds in the Rough Conference on May 31. The Stifel Cross Sector Insight Conference on June 6, The Baird Global Consumer Technology & services Conference on June 7, and the Bank of America Technology Conference on June 7. Additionally, we'll be participating in investor meetings with Raymond James on June 1. With that, I'll turn the call over to you Mike.

Thanks Kevin. Good morning, everyone. Thank you for joining us on the call today. We're pleased to report strong first quarter results and improved outlook and underscore the strength and potential of our operating plan. Results of our plan are just beginning to bear fruit, with performance expected to further accelerate with each successive quarter of 2023 and beyond. I like to spend time today reflecting on the actions we've taken, the momentum in our business and the continued upside we see over the near, mid and long term. Our improved outlook from the beginning of the year stems from better than expected performance on a few key factors. I'll touch on these in more detail momentarily. But our increased level of confidence in our operating plan is driven by strong Q1 bookings that were ahead of expectations, continued strength in transactional revenue despite a challenge macro renewal rates remaining strong as we started implementing our new contractual pricing approach and meaningful margin improvement beginning to flow through as costs actions take full effect. Taken together our performance on these factors supports raising guidance across all metrics which we will discuss further in a bit. Let's now review our first quarter results. We reported revenues of $262 million, which is up 3.4% year-over-year on an organic constant currency basis and double our fourth quarter 2022 organic revenue growth demonstrating strong sequential progress. Non-GAAP adjusted EBITDA was $71 million. It represented an adjusted EBITDA margin of 27.5% at constant currency, which is up five points from Q1, 2022. Taking together Rule of 40 a constant currency was 31% for the quarter, a three point increase year-over-year. Importantly, the quarter reflects only a modest impact from the initiatives we have underway to drive revenue growth and cost savings with significant upside still…

Thanks Mike. Good morning, everyone. Today I'll cover our results for the first quarter of 2023 as well as our updated outlook and guidance for 2023 before opening up the line for questions. Please refer to today's press release and the investor materials posted to our website for the full details of our Q1 financial performance. In the first quarter, we reported total revenue of $262 million adjusted EBITDA of $71 million, adjusted EBITDA margin of 27.2% and Rule of 40 of 29.5%. Revenue of $262 million represented organic growth of 2.3% and when adjusted for $3 million of negative foreign exchange impacts, organic growth at constant currency was 3.4%. As I mentioned last quarter, we had a strong pipeline heading into Q1 and our sales teams delivered. Bookings in the quarter were well ahead of plan and increased significantly year-over-year. This speaks to the resiliency of the in markets we serve and proves our focus on driving further improvements in sales productivity is paying off. On last quarter's call we introduced our contractual renewal price increase. In Q1 our effective rate increase on renewal contracts was in the low double digits which is a blended rate reflecting two months of our old pricing with one month of our new renewal pricing model since our rate increases began with March renewals. We've seen higher adoption of the three year option versus the one year option relative to our plan. I'll share more on what that looks like for the full year shortly. Lastly, transactional revenue grew 7% year-over-year supported by the rate change that took effect at the beginning of this year as well as elevated volumes associated with a few events. And as a reminder, this is 7% growth over a tough compare. If you'll recall, we experienced elevated…

Thank you. [Operator Instructions] The first question today is coming from Brian Peterson of Raymond James. Please go ahead.

Hey, gentlemen, congrats on the really strong start to the year. So Mike or Tony I don't know who wants to take this. But it's great to see the success that you've had and the bookings in the pricing initiatives. You just don't typically raise the outlook in the first quarter of the year, and you're pointing to an acceleration. So if we think about what's driving that acceleration from a stack rank perspective, I'd love for you guys to unpack that a bit.

Yes. Sure Brian, thanks. There's some new things here that we're seeing that we haven't seen before. Predominantly in the contract renewing process which I mentioned in my prepared remark. So for example, we're pretty much through with Q2 as of today, almost through with June. We've already notified customers out to early October of this year. So we notify customers about five months ahead. And they have 45 days to talk to us about any changes. And we haven't had this before. So we can see many months in the future closed, renewed contracts. And with most customers signing up for three year renewals, which we haven't had before and very different pricing in those contracts much higher in year one and then price uplift in year two and three which we have not had before, we have a very good view to the future of that new and substantial revenue line, which predominantly falls to the bottom line as well. So that is the biggest thing that we have I'd say that's new, that has a very good future look many months ahead into growth. So that's why we raised guidance. And that's why we said we're crossing Rule of 40 in Q4 this year, with high single digit organic growth. Now combined that with really strong bookings, year-to-date in a really strong pipeline as well and we had a price increase in our payments platform at the end of the year, last year, which came into effect in January of this year. So when you combine all of those very good use of the future, on this quarter-by-quarter sequential growth and for 2024 as well.

Great, that sounds like a lot of visibility there, Mike and maybe just following up. I know you guys mentioned the really strong corporate bookings this quarter. I know it's a choppy environment overall, if you look at software broadly, but any more color on what's driving the shrink there? Thanks, guys.

Yes, good start to the year in our corporate impact group I think that's your question that's EVERFI and YourCause. Yes we got slow year last year with EVERFI and they came out of the gate really strong. This year they doubled their bookings in the first quarter year-over-year. I mentioned some of the customers closed and my prepared remarks like Microsoft, Guardian, and Accenture, regulatory pipeline there as well, Tom and Jean are really driving that. It's come back really strong. Really good marketplace. There are a lot of enterprise customers that were upselling and new logos as well.

Good to hear. Thanks, Mike.

You are welcome.

Thank you. The next question is coming from Rob Oliver of Baird. Please go ahead.

Great, thanks. Good morning, guys. Mike, first questions for you. So you mentioned some of the initial positive impacts your vendor consolidation, which is a theme clearly running through our sector with a lot of our platform companies. Can you talk a little bit of maybe give us some examples? It sounds like you guys have kind of a double benefit here because on the one hand people looking to cut costs and maybe look towards platform vendors like you and the other as you guys have pointed out you also have a lot of business up for renewal over the next year. So can you talk a little about sort of plan of attack around, maybe taking advantage of getting more products into people's hands as you guys renew these contracts. And then I just had a quick follow up for Tony.

Yes, sure. So we do have a lot of cross sell efforts to existing customers underway, in addition to new logos, but a lot of cross sell efforts in the corporate sector we put the last July, we put the YourCause and EVERFI business together under Tom Davidson, not a lot of shared customers there. So good, open, cross sell opportunities in our corporate impact sector. We remain focused on that and the rest of the company as well under Dave Benjamin's leadership. So there is a lot of opportunity there. There is some of the mentioned, I mentioned in my prepared remarks Rob that some of the very large enterprise players in our space have walked away from some of their solutions. So that creates new enterprise opportunities for us as well given this space is our sole focus. So lots of opportunity there. And then back to what I just said earlier on the contract renewal program that we put in place about a year ago planning and started to notify customers last November, is something brand new for us that will continue to repeat every single year because, I will give you a quick example this year, we're going to renew about 35% of those customers next year, 30%, the year after, 25% and in 2026, the remaining 10%, but also in 2026, renew the 2023 customers. So, this compounding effect, we tried to make this apparent in our several new slides in IR deck. So there's some graphs in there that show the compounding nature of this new initiative. So super powerful for us from a top line and bottom line growth standpoint, and it's increased retention. So customer retention is up as well.

Okay, great. Thanks. That's really helpful, Mike, appreciate that. And then Tony, my follow up is for you. Obviously very strong start to the year on the commercial side of the business really great to see EVERFI straightened out and YourCause doing well. Because we haven't had a normal kind of year yet really, in that business because we had the pandemic and then you guys bought EVERFI and then there was the hiccup there. Can you just remind us what the normal linearity would be for that business? And Mike, in his prepared remarks said, hey it was a great quarter, but uncertain. Can you just help us with that linearity? Thank you.

Yes. From a seasonality perspective, Rob, is that what you're getting that on that?

Yes. Exactly. Exactly. Like is it more typically, back end loaded is this is the key ones a sign of good, good, sign, but somewhat anomalous from a timing perspective. That's what I'm trying to understand.

Yes last year, if you recall, right after we completed that transaction, at the end of the prior year, we had quite a bit of turnover and attrition in the ranks for the go to market. So our big effort last year was getting those sales and go to market teams re-staffed and trained and ramped. We're seeing the benefits of that we saw some of that to finish the year. So they finished the very end of last year strong and as you've seen here, a very good start to the year and good pipeline. I think the tough thing on the especially on the EVERFI side and a bit on YourCause is those are lumpier enterprise size deals. And so I think from a seasonality perspective, I don't expect there to be a lot of seasonality necessarily from quarter-to-quarter. There will be a little bit more, because a lot of that training is done into the into the school systems. So maybe a little bit more of that in advance of a new school year. But I think what we're going to see on that one is because they can be such large deals, just a bit of that typical lumpiness that you used to see maybe in a license kind of business. Now, most of these are also sub. So they'll spread over time. But that bookings will come in a bit chunky compared to what we'd see on the regular side of the business and maybe a little more seasonality mid year versus end of year.

Okay, helpful. Thanks, Tony. Appreciate it.

You bet. Thanks, Rob.

Thank you. The next question is coming from Parker Lane of Stifel. Please go ahead.

Good. Hi, guys. Thanks for taking the question and congrats on the good quarter. Mike somewhat of a timing question here. When you're talking about getting in front of some of these renewals towards the back end of the year, I think you referenced October. In the event that some of these customers decide to go with a three year renewal will the effect of that come into the model at that point in October? Are you actually pulling forward these renewals on sort of a coterminous basis?

No. So let me just explain how this is working. And again, there's some slides in the IR deck they kind of have some graphics that explain this. So we notify customers five months ahead. So, for example, our Q1 results we just announced, only March has the new price increases in it because we started to notify customers last November. So every month go forward. Now March forward, every month, well have the new price increases. Most of our customers are opting for the three year contract renewal. And in years past, most were on one year contract. So we're really flipping the whole subscription business and the entire company to three year contracts. So that's number one. Number two, because we notified five months ahead, and we asked for 45 days notice if they want to have any discussions related to the contract, we have very good visibility into the future. So as of today, our entire Q2 is almost complete, signed contracts. We have two weeks left of June to complete as of today. So that means we have a pretty high percentage of July complete, some August complete, and we're speaking with customers that are September and October renewals. So this is very different than what you might think of where typically you have a backward view to your previous quarter and things like this. We have a forward view that's almost a quarter ahead to know how many contracts are already closed and at what rate. And Tony talked about the rates in these contracts. And so the three year contract, Tony mentioned year one, that the rate increases in the high teens and then subsequently years two and three have rate increases. We've never had rate increases in years two and three before. So it's zero. So very good visibility into this program many months ahead. Does it help?

Yes. It definitely does. Thanks for the color there. Appreciate it.

Okay. You are welcome.

Thank you. The next question is coming from Kirk Materne of Evercore ISI. Please go ahead.

Yes, thanks. I'll add my congrats on a really good start to the year. Mike, can you just talked about the transactional business, obviously, that there's but the volume side of it and the pricing side of it? I guess, how are you thinking about that, or what's embedded in the outlook for that side of the business that perhaps there is a little bit more seasonality. Can you just talk about what you're sort of thinking about for that business over the next few quarters.

Sure. I'll remind you in the transaction that is about a third of our revenue and there's three main platforms in there. So one platform is Blackbaud Merchant Services. That is our donation processing platform. So very volume driven, based on donations, number of donations and dollars per donation drives out that platform which is one of the three platforms. We implemented a price increase on that platform at the end of the year last year. So that just started in January. So we only have a first quarter financial benefit of that one platform. That platform does grow over the years over the quarters. And we usually see higher seasonality in the fourth quarter because of holiday get in. And so that platform in the first quarter did well. New price increase in the volume did well. The second part of our transactions is a tuition management system. And that's growing very, very well also. We do tuition processing for our private school customers. And that volume has been really strong and growing quite well. The third part of our transaction is our JustGiving platform, which is doing extremely well. It's a global platform. In some large campaigns we have individuals from over 100 countries that donate on that platform for particular campaigns. That's going really really well also. So those are the three components. And we feel really good about the first quarter and the trajectory of those for the rest of the year and going forward. So when we combine that with these subscription renewals that I just spend a lot of time on and with bookings. And that's why we raised guidance. That's why we're saying high single digits, Q4 going forward and a '24 and cross the Rule of 40. This year and Q4 as opposed to our previous guide, which is the year 2025. So big changes.

Yes. And thanks for the additional slides, I'm looking at them as we speak on renewals. Tony, if I get that's one sort of wonky accounting question for you around the renewals. Are there termination? Or do these have termination for convenience in them? I guess the reason I asked that is, I believe if you're doing three year deals you sort of recognize year two and year three. You average it out if it's not terminated, if there's not a termination for convenience clause. Can you just walk through that a little bit just it doesn't matter as much until you get to the end of the cycle, but it was just kind of curious how that plays into the numbers?

Yes, Kirk, the vast majority of our contracts do not have termination for convenience clauses. We did inherit a handful of those over the years with some of the acquisitions. And our typical processes as those come up for renewal, the legal team will try and renegotiate them to our standard Blackbaud terms and conditions, which historically have never included a termination for convenience. We do have a handful, like I said, I think that we inherited like on EVERFI and YourCause, etc.

Okay, cool. We take the rest of that offline. It's boring to talk about on a public call. So thanks guys. Congrats.

Thanks. Bye.

Thank you. The next question is coming from Matt VanVliet of BTIG. Please go ahead.

Good morning, guys. Thanks for taking the question. I guess when we look towards the end of the year, and talking about high single digit organic revenue growth rate, can you maybe just help us think about maybe the three or four key drivers there between the price increases being a big part of that, upsell, cross-sell kind of as you continue to make progress there and focus on that, and then maybe what net new bookings are looking like or at least baked into that where we can see maybe a little more volatility and what high single digits ultimately looks like?

Sure. I will take that, Matt, Mike. So it's all the components that we've been we've been talking about. So first of all, strong bookings, across the board Blackbaud products and corporate impact to platforms there. And that's cross sell and new logo. So our end markets are quite resilient. They're fully open post pandemic. And so we're seeing a really healthy buying environment and I mentioned a couple of big enterprise companies have taken their focus off the space, which is helpful for us in the long run. A second, I just talked about the transaction business doing really well all three components of that doing well. One of the components Blackbaud Merchant Services with a price increase in volumes, doing well, putting the tuition platform and just giving. And then lastly, the contract renewal process, which I spent a lot of time on now, which is new for us, which is pretty significant. And Tony, walk you through kind of what that looks like, think of most of the customers signing up for three year contracts. Our retention is higher. Year one, price increases in the high teens. Year two, high single digits. Year three high single digits, and that renews after that. And so we're going to do about third of those this year. So this all rolls forward in all of those categories. The last thing I'll mention too, is we've spent a lot of time getting scale and efficiencies out of the business. In the last year, we had a 14% reduction in headcount closed four data centers, optimized all of our real estate, renegotiated our contracts with Microsoft Azure, Amazon AWS, which are big contracts. So we have lower annual cost there and we're going to about maintain our current headcount. So these initiatives are going to flow through to the bottom line. If you look at the new guide we just gave, for example, we moved up revenue $50 million. We also moved up adjusted EBITDA at $50 million also. So nice fall through there in the new guide and we're just getting started on the fall through with these contract renewals. And of course, we moved up adjusted free cash flow by $20 million at the midpoint, as well. So it's all of those things that bring us to the new guide and talking about crossing rule 40, a couple of years ahead of the original plan in Q4 this year and high single digit organic growth Q4 and go forward.

All right, great. Thank you. And then, Tony, you mentioned a nice big step up in sales productivity. I was wondering if you could just help with a few of the mechanics there? How much of the reduction in headcount maybe impacted sales reps or the broader go to market team? And then what sort of mechanically or strategically from an operational standpoint has gone into place to help the remaining sales team drive that productivity that you talked about? Thank you.

Absolutely. The go-to-market team was affected very minimally in the reductions. That team as you know we've done a lot of work with that, that group over the past several years, largely coming into the pandemic, outside of EVERFI we were in really good shape and starting to see nice improvement in productivity then pandemic hit us. And so I think, really, what you're seeing now is just the fruits of our labor over several years. Mr. [indiscernible] here did a lot of that work, but it just paid dividends. And so all the things that we've done in our hiring or changes in organizational structure, we've put in a lot of new technologies and approaches, etc. And this is not the end. This is just the beginning. And so we still expect to see significant additional improvement in sales productivity over the next couple of years. We're not anywhere near where we'd like to be on a CAC payback and return on CAC perspective overall, although we've made tremendous progress over the last few years. So I'd say most of that is really just everything come into fruition on all the hard work we did for several years leading into the pandemic. And we're seeing the benefit of that now that the economy's going to rebound. And that coming out. The other side of it would be on the corporate side, EVERFI, YourCause Tom and team are doing a great job on that front. We just had a lot of disruption last year in that team. And then he had the economy impacted the corporate sector as well. And we've rebounded. We've got the team re staffed and ramped. And just like things are looking very positive on the corporate sector also.

Yes. I'll just add that what some were, we also reorganized sales. So we had about a half a dozen groups running sales, and they were rolling up into several different areas. So we combined the Blackbaud global sales teams under Dave Benjamin. So David runs all of global sales. In addition to Tom, Davidson, and Tom, as you know, is the CEO and founder of EVERFI, Tom runs the global business for the combination of EVERFI and YourCause which we're selling to corporations. And so we have a much more streamlined, single leadership, global selling organization, as of last summer that we haven't had before too. So it's driving a lot more efficiency, common practices and better go-to-market. And we're seeing that all those changes for last summer, really come to fruition this year.

All right. Great. Thank you.

You're welcome.

Thanks Matt.

Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Gianoni for closing comments.

Thanks everyone who joined our call today. In summary, we're laser focused on operating the business to drive strong results for our company, our customers and our shareholders. We're committed to providing our customers with innovative, mission critical solutions to advance their causes and fuel social impact. Coming out of the pandemic last summer, we thoughtfully began implementing a five point operating plan in creating durable, significant and long lasting improvements. This plan strengthens product innovation delivery, drive bookings growth, optimizes and expands transactional revenue, modernizes our contractual pricing and strengthens cost management. We're just now starting to see the benefits of this plan in our financials, as evidenced by strong first quarter performance and increased guidance. We expect to see further improvement each sequential quarter and by the fourth quarter of this year to achieve organic revenue growth in the high single digits, as well as Rule of 40 that's well ahead of our prior target of the year 2025. And looking ahead to 2024, we expect to continue growing revenue and expanding margin to achieve Rule of 40 for the full year. I'm incredibly proud of our employees, the progress our team has made. I'm confident that we'll build on our progress and drive strong, sustainable growth that will create value for our shareholders. Thank you everyone.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.