Blackbaud (BLKB) CFO On Fundraising & Engagement Solutions

Welcome back to Morning Trade Live, keeping an eye on the market as we lost a little of that early bid, but we're still higher and we're continuing to focus on software companies around earnings this season. Up next, the chief financial officer of Blackbaud joins us. We had a discussion with the CEO of the software business focused on social impact, ESG, companies, education, nonprofits, etcetera. Tony Boor joins us, the CFO. BLKB is the ticker. As a reminder, Tony, thanks for being here this morning.

Great to be here. Good to see you.

Appreciate that. Your stock is up 20% since your earnings at the end of October. We've been talking about the sector as a whole. The market seems to be getting more favorable responses to the cloud group. What sets you guys apart with your very distinct customer base?

Yeah, I think Mike was on it in Q2 and gave you a little insight. We've been in the nonprofit social impact space for 40 plus years. We have 40,000 plus nonprofit and corporate customers under contract, about 1.1 billion this year in revenue. We make critical software solutions and analytic services for the nonprofit space, ESG, social impact corporations from a CSR perspective. And we found that even through the pandemic, when times have been tough, these nonprofit orgs have needed our solutions even more. So we've got a really sticky customer base. We believe the value we add has created tremendous value with our nonprofits and helped them survive in turbulent economic times over the last few years.

Yeah, in particular, there were moments where it looked like the economy maybe was heading towards a big rollover. We've managed to kind of skate through and thread the needle still, but how did that change pricing dynamics or contract commitments? If you look at those stats in your business versus maybe a couple of years ago during Covid when there was a lot of liquidity out there and it seemed like spending at any cost was okay, what do those contracts look like? Have they changed at all over the last few years?

Well, we implemented a new pricing strategy just recently. It actually went into effect late last year, but really at heart in March of this year. And we've actually been moving our customer base away from what has historically been annual contracts to multi-year contracts, which align more with where the overall software industry has gone. Most of the vendor agreements I'm signing now as CFO for Blackbaud are three to five to seven year agreements. We've started shifting from those single year agreements to three year agreements, and it's been very successful. We've had to increase our prices this year. Inflation, all of us are paying more for things, so we've seen a fairly significant price increase. It's actually held really well. We've seen renewal rates actually improve. They're running ahead of plan. The mix of contracts that we're shifting our customers from these one year to multi-year contracts is actually running ahead of plan as well. The vast majority of customers are shifting to these three year multiyear agreements, which is really positive for us, for our outlook, for predictability and certainty of that revenue in the future.

Okay. And Tony, what right now is the main factor, I guess, that remains uncertain or what's the unknown that determines customers' commitment right now? Is that just the inflation background, dynamics from a macro perspective, or is there less money flowing through the nonprofit channels? Are people giving less? Can you give us a sense on what that outlook looks like?

Absolutely. Giving was down slightly last year. During the pandemic, interestingly, for-profit orgs really struggled because they were shut down wholly. You couldn't have people in museums and zoos, etcetera. So you had certain nonprofit orgs that were really struggling. Surprisingly, they found ways to survive. Their supporters and donors came out in droves and continued to donate money to help those orgs stay open. So we had fewer than we thought might go out of business during the pandemic. Then you had surges in giving to food banks and other type orgs that were helping those folks in need during those difficult times. And that actually caused a surge in overall giving in the US. So we saw overall giving exceed 500 billion for the first time ever. We were down just a little bit overall in the US last year. Still tremendous opportunity for us and our customers. I think the key on our side, what we see, is we have good diversity. We sell into such a broad set of customers. We've been doing this for 40 plus years, as I said, and we have a broad portfolio. We're selling into higher ed institutions, private K-12 schools, normal charities and nonprofits, plus corporations, for-profit businesses, Fortune 500 for corporate social responsibility. That diversification really helps. And then our systems are systems of record. They need these solutions to be successful, to raise money, to do their financials, grantmaking, et cetera. Because they are core critical systems, we didn't see a real negative impact. They couldn't afford, in other words, to be without our solutions. So we fared really well through the tough economic cycles.

One of the things that really stood out to me in our conversation with Mike was that almost the entirety of your revenue is annual recurring revenue, which is what investors prefer in software companies. A lot of these software companies are constantly in an effort to shift their revenue streams over to recurring revenue. The consistency also seems like it makes its way to the bottom line in a sector where there's a lot of unprofitability. You guys are GAAP profitable, you're even more profitable on the adjusted basis. It seems like you've been comfortably profitable for a very long time. The growth side, maybe not quite as bullish as some of the super highly disruptive stuff in tech, but it's consistent as well. So tell me about that. What kind of expectations for top line do you guys have?

Yeah, you hit that one right on the head. We're 97% recurring revenue now. We've had a little bit of drag against our growth for the last several years as we've strategically focused on getting out of the one-time services businesses as we move more to SaaS offering. Obviously you need less customization services. That's been a big focus over the 12 years I've been here. We've seen that services line shrink. It's been about a point and a half to two point drag on our overall growth for the last several years. We see that bottoming out sometime here in the next year. So that'll be a growth driver for us. We've been historically running in kind of low single digit growth rate. We've done a lot of things from a strategic perspective on the growth front, a lot of initiatives that have helped that accelerate. You saw this year when you spoke to Mike and then our Q3 earnings, we saw a nice improvement in growth in the low single digits, kind of mid-single digits is where we're guiding for the year. For 24, we're guiding to high single digit. I do think we have the opportunity in the future to potentially crack into that low double digit if things line up well and our efforts on the strategic front continue to perform well. One of the key drivers that will be an indicator of how well we do this year in the nonprofits is how giving goes for the end of the year. About 36% of all giving in the US happens in the fourth quarter, with 20% of all the giving landing in the month of December. We just had Giving Tuesday this week. We rang the bell at Nasdaq closing bell on Monday to kick off Giving Tuesday, which we were a co-founder of. So that's a big one. We're keeping our eye on that transactional revenue and how it trends out here through the rest of the year, which is a big piece of the total year of giving.

That's great info. Appreciate that, because it seems like right now if people are giving as much as they're spending, you guys might be in pretty good shape. It seems like good timing from the charitable side given the surprising strength of the economy and what we saw for the post-Thanksgiving retail indications. Tony, thanks for the analysis and the outlook on the company. We appreciate the details.

Appreciate it. Great talking to you.

Likewise. Tony Boor, CFO at Blackbaud. BLKB having a good year, pretty close to breakout potential on the charts, too. So we'll be keeping an eye on it.