Investment research report for BLKB

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description:

Blackbaud, Inc. (BLKB) is a leading provider of cloud software solutions for the social good sector, serving nonprofit organizations, educational institutions, healthcare organizations, and corporations focused on environmental, social, and governance (ESG) initiatives. The company’s solutions cover areas such as fundraising, marketing, financial management, grant management, and data analytics.

Key Insights:

1. Resilient Business Model and Growth Opportunities:

  • Blackbaud operates in resilient end markets, with a high percentage of recurring revenue (around 97%) providing stability and predictability.
  • The acquisition of EVERFI has significantly expanded the company’s addressable market, particularly in the rapidly growing corporate ESG and social responsibility space.
  • Continued innovation in areas like generative AI, mobile experiences, and solution connectivity positions Blackbaud as a market leader and drives customer value.

2. Operational Improvements and Financial Performance:

  • Blackbaud has executed well on its 5-point operating plan, driving significant improvements in revenue growth, profitability, and cash flow generation.
  • Initiatives like pricing optimization, cost management, and sales productivity enhancements have contributed to margin expansion and improved financial metrics.
  • The company is on track to achieve its “Rule of 40” targets, balancing growth and profitability.

3. Challenges and Risk Factors:

  • The ongoing impact of the 2020 security incident continues to negatively affect profitability and cash flow, with significant legal costs and loss contingencies.
  • Macroeconomic factors, labor market challenges, and competitive pressures in the software industry could pose risks to future performance.
  • Successful integration of the EVERFI acquisition and execution on growth initiatives will be critical for realizing the full potential of the expanded market opportunity.

4. Capital Allocation and Shareholder Value Creation:

  • Blackbaud is focused on deleveraging its balance sheet while pursuing strategic acquisitions and returning capital to shareholders through share buybacks.
  • The company’s disciplined capital allocation approach, combined with its operational improvements and growth initiatives, supports long-term value creation for shareholders.

Overall, Blackbaud’s resilient business model, successful transformation, innovation focus, and disciplined capital allocation make it an attractive long-term investment opportunity. However, investors should carefully consider the potential risks and challenges highlighted in the earnings calls and financial statements.

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Valuation Analysis

PE ratio

  • Low: -582.9623629608512
  • Base: 496.9940870384247
  • High: 1576.9505370377005

PB ratio

  • Low: 3.5826945106550347
  • Base: 8.156497465344682
  • High: 12.730300420034329

FCF Growth

  • Low: -15.47%
  • Med: 1.06%
  • High: 7.37%

Value forecast by FCF

  • Low: 13.55
  • Med: 30.00
  • High: 43.21

The price of BLKB today is $76.97.

Price target for 18 months from now

  • Low: 67.46
  • Med: 69.92
  • High: 71.91

Price target for 4 years from now

  • Low: 51.60
  • Med: 58.18
  • High: 63.47

Price target for 10 years from now

  • Low: 13.55
  • Med: 30.00
  • High: 43.21

The net present value multiplier discounted at 10.22% gives the value of the stock as:
– Low: 0.18
– Med: 0.39
– High: 0.56

The upside/downside ratio is 0.09, and our rating is Strong Sell.

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Industry and Competitors Analysis

BLKB (Blackbaud, Inc.) operates in the software application industry, providing cloud software solutions for various sectors such as higher education, K-12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, and companies. Its solutions cover areas like fundraising and relationship management, marketing and engagement, financial management, grant and award management, organizational and program management, social responsibility, and data analytics.

Key Competitors

Some of BLKB’s key competitors in the software application industry include:

  1. ENV (Envestnet, Inc.): Provides wealth management software and services, including portfolio management, data analytics, and digital advice capabilities.

  2. MODN (Model N, Inc.): Offers cloud revenue management solutions for life sciences and high-tech companies, covering areas like pricing management, contract management, and channel management.

  3. PRGS (Progress Software Corporation): Develops and markets business application software products, including application development tools, content management, business rules management, and data connectivity solutions.

  4. ENFN (Enfusion, Inc.): Provides a cloud-based investment management platform for portfolio management, order and execution management, accounting, and analytics.

  5. ETWO (E2open Parent Holdings, Inc.): Offers a cloud-based supply chain management platform for various industries, including technology, consumer goods, and manufacturing.

  6. CVT (Cvent Holding Corp.): Provides a cloud-based enterprise event marketing, management, and hospitality platform for the meetings and events industry.

  7. AZPN (Aspen Technology, Inc.): Develops and markets enterprise asset performance management, asset performance monitoring, and asset optimization solutions for various industries.

  8. BSY (Bentley Systems, Incorporated): Offers infrastructure engineering software solutions for design integration, project delivery, and asset and network performance management.

  9. TYL (Tyler Technologies, Inc.): Provides integrated information management solutions and services for the public sector, including financial management, judicial solutions, public safety software, and data and insights solutions.

  10. SSNC (SS&C Technologies Holdings, Inc.): Offers software products and software-enabled services for financial services and healthcare industries, including portfolio management, trading, accounting, and compliance solutions.

Based on the financial metrics provided, BLKB appears to have a moderate market capitalization and revenue compared to some of its larger competitors like SSNC, AZPN, and TYL. However, its profitability ratios, such as gross profit ratio and EBITDA ratio, are generally in line with or better than some of its peers, suggesting a relatively competitive positioning in the industry.

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Chart of Competitors

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Financial Analysis

Financial Strength

Blackbaud has maintained a relatively stable revenue growth rate around 3-7% annually in recent years, indicating a steady core business. However, profitability metrics like return on equity and assets have been volatile, ranging from negative to low single-digits, suggesting potential inefficiencies. The company carries a moderate debt load with debt/equity ratios around 1-1.5x, which is manageable but could limit financial flexibility.

Growth Potential

Revenue growth has been modest in the 3-7% range annually, implying the company may be reaching maturity in its current markets. The 3-year revenue growth per share has been in the 6-23% range, indicating some growth runway remains. Analyst estimates project revenue growth of 4-14% over the next 2-3 years, signaling continued but decelerating topline expansion.

Competitive Advantage

As a leading cloud software provider for the non-profit sector, Blackbaud likely benefits from specialized domain expertise and customer stickiness. However, the modest growth rates suggest the company may face increasing competition or market saturation challenges.

Management Quality

Profitability metrics have been uneven, which could indicate inconsistent operational execution by management. The company has maintained a relatively stable capital structure, suggesting prudent financial management.

Shareholder Friendliness

Blackbaud does not currently pay dividends, focusing instead on reinvesting cash flows. Share buybacks have been limited, though the lack of dilution suggests a degree of shareholder-friendliness.

Valuation

The forward P/E ratio based on analyst estimates is around 20-25x, which appears reasonable for a software company with modest growth expectations. However, the price/free cash flow ratio is quite high, suggesting the market may be pricing in overly optimistic expectations.

In summary, Blackbaud appears to be a financially stable company operating in a niche market, but with relatively modest growth prospects. Its competitive advantages are unclear, and operational execution has been inconsistent. The valuation seems reasonable based on earnings but may be stretched on cash flow metrics. Investors would need to closely monitor the company’s ability to reignite growth and improve profitability to justify the current valuation levels.

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Chart of Key Per Share Metrics

"Chart of Key Per Share Metrics"

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Chart of Absolute Metrics

"Chart of Absolute Metrics"

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Earnings Call Multi-Year Analysis

Successful Transformation and Execution

Blackbaud has executed well on its 5-point operating plan, driving significant improvements in revenue growth, profitability, and cash flow generation. The company has transformed its financial performance through initiatives like pricing optimization, cost management, and product innovation.

Resilient Business Model

Blackbaud’s focus on mission-critical software solutions for non-profits, education, healthcare, and corporate social responsibility has proven resilient during economic downturns. The high recurring revenue model provides stability and predictability.

Innovation and Product Leadership

Blackbaud continues to invest in product innovation, particularly in areas like generative AI, mobile experiences, and solution connectivity. This innovation helps drive customer value and positions the company as a market leader.

Expanding Addressable Market

The acquisition of EVERFI has significantly expanded Blackbaud’s addressable market, particularly in the corporate ESG and social responsibility space. This represents a large growth opportunity for the company.

Margin Expansion and Profitability

Through pricing initiatives, cost optimization, and operational improvements, Blackbaud has driven substantial margin expansion and is on track to achieve its Rule of 40 targets, balancing growth and profitability.

Capital Allocation Discipline

Blackbaud is focused on deleveraging its balance sheet, while also pursuing strategic acquisitions and returning capital to shareholders through share buybacks. This disciplined capital allocation approach supports long-term value creation.

Cautious Monitoring of External Factors

While confident in its resilience, Blackbaud is closely monitoring potential impacts from macroeconomic factors, labor market challenges, and legal costs related to past security incidents.

Overall, the key insights suggest that Blackbaud’s successful transformation, resilient business model, innovation focus, market expansion, and disciplined capital allocation make it an attractive long-term investment opportunity. However, investors should also consider the potential risks and challenges highlighted in the earnings calls.

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Financial Statements Multi Year

Revenue Growth

Blackbaud is seeing strong revenue growth, driven primarily by increases in recurring revenue from its cloud solutions and subscription offerings. Recurring revenue now makes up around 97% of total revenue.

Customer Retention

The company has maintained a high gross dollar retention rate of around 90%, indicating it is successfully retaining and expanding its existing customer base.

Profitability Challenges

While revenue is growing, profitability has been impacted by significant costs related to the 2020 Security Incident, including legal fees, loss contingencies, and remediation expenses. These costs are expected to continue impacting earnings in the near-term.

Strategic Initiatives

Blackbaud is focused on key initiatives like product innovation, optimizing pricing/contracts, bookings growth, and cost management, which should drive improved financial performance over the long run.

Acquisitions

The EVERFI acquisition expanded Blackbaud’s market opportunities but also increased leverage. Successful integration will be important.

Balance Sheet

The company has a relatively strong balance sheet and liquidity position, aided by the recent debt refinancing which provided financial flexibility. However, cash flow is being impacted by Security Incident costs.

Share Repurchases

Blackbaud resumed share buybacks in late 2023 after pausing them, signaling confidence in the long-term outlook.

In summary, while dealing with near-term headwinds from the Security Incident, Blackbaud’s recurring revenue growth, strategic initiatives, and efforts to improve profitability could drive compelling long-term value for investors willing to weather the current challenges.

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Insider Trading Analysis

Long-Term Patterns

The CEO (Gianoni Michael P) and CFO (Olson Jon W) have been consistently selling shares over the past few years, indicating they may be less bullish on the long-term prospects of the company. Other key executives like the COO (BOOR ANTHONY W) and Chief Revenue Officer (Gregoire Kevin P.) have also been selling shares, though to a lesser extent. Insider selling has been a consistent trend, with multiple large transactions occurring each year. This could signal that insiders believe the stock is overvalued.

Short-Term Implications

The high volume of insider selling, especially by the CEO and CFO, may concern short-term investors and put downward pressure on the stock price in the near-term. Investors should closely monitor any further insider selling activity, as it could be an early warning sign of potential issues or a lack of confidence in the company’s future performance.

Overall, the long-term pattern of consistent insider selling, particularly by the CEO and CFO, may be a red flag for long-term investors. Short-term investors should also be cautious, as this activity could lead to near-term stock price volatility. Careful analysis of the company’s fundamentals and future prospects, beyond just insider trading, would be prudent for both long-term and short-term investors.

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Management Compensation Benchmark Analysis

Executive Compensation at Blackbaud, Inc. (BLKB)

Based on the information provided, it appears that the executive compensation at Blackbaud, Inc. (BLKB) is not fully aligned with creating long-term shareholder value:

  1. Low variable compensation: For the executives at BLKB, the base salary portion of total compensation is very high, ranging from around 9% to 20% on average. This indicates that a large portion of their total compensation is fixed rather than variable and tied to performance.

  2. Lack of incentive-based pay: The executives at BLKB receive little to no bonus or incentive plan compensation, which are typically used to align executive pay with company performance and shareholder interests.

  3. High stock-based compensation: A significant portion of the executives’ total compensation comes from stock awards. While this can help align their interests with shareholders, the lack of other performance-based pay components suggests the stock awards may not be fully tied to long-term value creation.

Comparison to Other Companies

In comparison, the executive compensation structures at other companies like Envestnet, Inc. (ENV), Model N, Inc. (MODN), and Progress Software Corporation (PRGS) appear to have a better balance between fixed and variable pay, with a higher percentage of total compensation coming from bonuses, incentive plans, and performance-based equity awards. This suggests that these companies may have compensation practices that are more closely aligned with long-term shareholder value creation.

Implications for Investors

Overall, the key insights for a long-term investor in BLKB would be to closely monitor the company’s executive compensation practices and advocate for changes that would better incentivize the leadership team to drive sustainable, long-term growth and shareholder returns.

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Proxy Statement Analysis

Executive Compensation Structure

The following analysis is based on the latest proxy statement of BLKB. Based on the information provided, this appears to be Blackbaud’s proxy statement filed with the SEC. As a long-term investor, some key things I would look for in assessing the alignment of executive compensation with long-term shareholder value creation include:

  • The overall compensation structure and balance between fixed pay (salary) and variable/at-risk pay (annual/long-term incentives)
  • The specific performance metrics used for incentive payouts and whether they are aligned with strategic priorities and value drivers
  • Vesting schedules and holding requirements for equity awards to ensure long-term focus
  • Clawback policies to recover compensation in cases of misconduct
  • Any significant changes to the compensation program year-over-year
  • The company’s stock price performance and total shareholder return relative to peers

The goal is to evaluate whether the compensation design properly incentivizes executives to focus on sustainable long-term growth and value creation for shareholders. Reviewing the details in the proxy statement can provide helpful insights into this alignment.

Equity Compensation and Ownership

[Provide analysis of the company’s equity compensation plans, executive stock ownership guidelines, and any other relevant information from the proxy statement related to aligning executive interests with shareholders.]

Shareholder Engagement and Say-on-Pay

[Discuss the company’s shareholder engagement efforts, the results of the latest say-on-pay vote, and any feedback or concerns expressed by shareholders regarding executive compensation.]

Conclusion

[Summarize the key takeaways from the proxy statement analysis and provide an overall assessment of the alignment between executive compensation and long-term shareholder value creation.]

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News Analysis

Positive Factors

  • Strong revenue and earnings growth in recent quarters, beating analyst estimates
  • Expanding product offerings and innovations like AI/generative AI solutions for social impact sector
  • Strategic acquisitions and investments to drive future growth (e.g. EVERFI, Kilter)
  • Increasing adoption of cloud solutions by customers across verticals like higher ed, nonprofits
  • Recognized as a top employer and innovator by several publications
  • Initiatives around corporate social responsibility and diversity & inclusion

Potential Concerns

  • Impact of COVID-19 pandemic on customers/end-markets initially led to guidance withdrawal
  • $49.5 million settlement with states related to 2020 security incident
  • Debt load and capital allocation decisions will be watched closely
  • Competitive pressures in the nonprofit software space

Overall, the company seems to be executing well operationally, but some one-time issues like the security breach settlement could weigh on sentiment in the near-term. A long-term investor would likely focus on Blackbaud’s ability to sustain robust growth by penetrating existing and new markets with innovative social good software solutions.

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Technical Indicators Analysis

Next Week Trading

The recent price action and technical indicators suggest a neutral to slightly bearish outlook for the next week. The 20-day TEMA is below the current price, indicating a potential downward trend. The RSI is in the neutral range, not signaling overbought or oversold conditions. The ADX is below 25, suggesting a lack of a strong trend. Traders may want to be cautious and look for opportunities to take profits or enter short positions if the price continues to decline.

Resistance and Support Levels

The 50-day SMA at around $75.78 and the 200-day SMA at around $74.94 could act as key support levels. The recent high around $80 could provide resistance if the price attempts to move higher.

Short-Term Investor

The mixed signals from the technical indicators suggest a cautious approach for short-term investors. The price has been volatile, and the lack of a clear trend makes it challenging to identify reliable entry and exit points. Short-term investors may want to consider taking a wait-and-see approach or using tight stop-loss orders to manage risk.

Long-Term Investor

For long-term investors, the overall technical picture appears relatively stable. The 200-day SMA is above the current price, and the long-term trend remains positive. However, the recent price volatility and the potential for a short-term downward trend may warrant a closer monitoring of the stock’s performance. Long-term investors could consider holding their positions or adding to them on any significant dips, as the company’s fundamentals may still support a positive long-term outlook.

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Chart of Valuation History

"Chart of Valuation History"

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Total Revenue Increase

Total revenue increased by $473 million in 2023, driven primarily by growth in recurring revenue. Recurring revenue grew by 59%, with strong performance in transactional recurring revenue (+$305 million) and contractual recurring revenue (+$293 million).

Income from Operations Increase

Income from operations increased by $732 million in 2023, driven by the increase in revenue as well as decreases in compensation costs, third-party contractor costs, hosting and data center costs, and Security Incident-related expenses. This was partially offset by increases in stock-based compensation and transaction-based costs.

Gross Dollar Retention Rate

Gross dollar retention rate was approximately 90% in 2023, slightly lower than 2022 primarily due to the inclusion of the EVERFI acquisition, but still indicating strong customer retention.

Cash Flow and Borrowings

The company generated $1.996 billion in cash flow from operations in 2023 and had a net decrease in borrowings of $814 million. However, the company also had $641 million in cash outlays related to the Security Incident.

Stock Repurchases

The company resumed stock repurchases in Q4 2023, repurchasing $188 million of shares. In January 2024, the Board of Directors expanded the repurchase program to $5 billion.

Security Incident Expenses

The company continues to face significant expenses and cash outlays related to the 2020 Security Incident, with $534 million in net pre-tax expenses and $780 million in net cash outlays in 2023. The company expects ongoing legal fees related to the incident to be $50-$100 million in 2024.

Operational Initiatives

The company made progress on key operational initiatives in 2023 including product innovation, bookings growth, transactional revenue optimization, pricing and multi-year contract changes, and cost management, which are expected to drive continued revenue growth and profitability.

In summary, Blackbaud delivered strong financial performance in 2023, with robust revenue growth, improved profitability, and continued customer retention, despite the ongoing impact of the Security Incident. The company is focused on executing its strategic initiatives to drive further growth and shareholder value.

Financial Statements Annual 2023 Q2

Total Revenue Increase

Total revenue increased by $130.4 million (14.1%) in 2022, driven primarily by a $130.9 million (14.9%) increase in recurring revenue. This was due to a $107.7 million increase in contractual recurring revenue, including $962 million from the EVERFI acquisition, and a $23.2 million increase in transactional recurring revenue.

Income from Operations Decrease

Income from operations decreased by $53.4 million (214.4%) in 2022, primarily due to a $75.7 million increase in compensation costs, a $53.9 million increase in Security Incident-related expenses, a $26.9 million increase in third-party contractor and hosting costs, and a $14.4 million increase in amortization of intangible assets from the EVERFI acquisition.

Security Incident Liabilities

The company recorded approximately $230 million in aggregate liabilities for loss contingencies related to the Security Incident as of December 31, 2022. Total costs related to the Security Incident have exceeded the company’s insurance coverage, and the company expects it to continue negatively impacting GAAP profitability and cash flow.

Gross Dollar Retention Rate

The company’s gross dollar retention rate was approximately 91% in 2022, relatively unchanged from 2021, as the company continues investing in innovation to increase gross dollar retention over the long-term.

Cash Flow from Operations

The company generated $203.9 million in cash flow from operations in 2022, a decrease of $97.8 million (45.8%) compared to 2021, primarily due to a $74.9 million decrease in net income adjusted for non-cash expenses.

Workforce Reduction

The company reduced its workforce by approximately 14% since Q3 2022 through targeted reductions, which it expects will significantly reduce pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.

In summary, the company saw strong revenue growth, particularly in recurring revenue, but profitability was negatively impacted by the Security Incident and related expenses. The company is taking actions to streamline operations and reduce costs while continuing to invest in innovation and its cloud solutions.

Financial Statements Annual 2022 Q2

Total Revenue

Total Revenue:
– Increased by $145 million or 16% in 2021 compared to 2020, driven by growth in recurring revenue.
– Recurring revenue, which makes up 95% of total revenue, grew by $301 million or 35% in 2021.
– The increase in recurring revenue was primarily due to a $200 million increase in transactional revenue and a $101 million increase in contractual recurring revenue.

Profitability

Profitability:
– Income from operations decreased by $123 million or 33% in 2021 compared to 2020.
– The decrease was primarily due to a $331 million increase in stock-based compensation expense, a $96 million increase in transaction-based costs, and a $69 million increase in third-party contractor costs.
– These increases were partially offset by a $112 million decrease in real estate activity costs and a $92 million decrease in rent expense.

Customer Retention

Customer Retention:
– Customer retention rate for recurring revenue contracts remained stable at approximately 93% in 2021 and 2020.

Balance Sheet and Cash Flow

Balance Sheet and Cash Flow:
– Cash and cash equivalents were $551 million at the end of 2021.
– Net debt increased by $801 million to $956 million, primarily due to the acquisition of EVERFI.
– Operating cash flow increased by $657 million to $2,137 million in 2021.
– Free cash flow increased by $854 million to $1,615 million in 2021.

EVERFI Acquisition

EVERFI Acquisition:
– Blackbaud acquired EVERFI, an industry leader in global social impact technology, for $7,438 million on December 31, 2021.
– The acquisition expanded Blackbaud’s total addressable market and strengthened its position in the ESG and CSR spaces.

Security Incident

Security Incident:
– Blackbaud continues to incur significant expenses related to the 2020 security incident, with total costs exceeding the insurance coverage limit in the first quarter of 2022.
– For 2022, Blackbaud expects net cash outlays of $25 million to $35 million for ongoing legal fees related to the security incident.

Overall, Blackbaud saw strong revenue growth, particularly in its recurring revenue streams, but profitability was impacted by increased costs, including significant stock-based compensation expense. The acquisition of EVERFI expanded the company’s market opportunity, while the ongoing security incident continues to be a financial and operational challenge.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Total Revenue Increase

Total revenue increased by $175 million during the three months ended March 31, 2024 compared to the same period in 2023, driven by growth in recurring revenue, particularly contractual recurring revenue related to the impact of the company’s modernized contract and pricing initiatives in the Social Sector, as well as growth in transactional recurring revenue.

Income from Operations Increase

Income from operations increased by $207 million during the three months ended March 31, 2024 compared to the same period in 2023, driven by the increase in total revenue, a decrease in Security Incident-related expenses, a decrease in employee severance costs, a decrease in commission expense, and a decrease in corporate costs, partially offset by increases in stock-based compensation, advertising, amortization, acquisition/disposition costs, and transaction-based and hosting/data center costs.

Gross Dollar Retention

Gross dollar retention, a key metric for analyzing the company’s success in retaining and expanding its existing subscription agreements, was approximately 89% for the twelve months ended March 31, 2024, slightly lower than the full year 2023 rate primarily due to the performance of the EVERFI business, but excluding EVERFI, the gross dollar retention rate was slightly higher than the full year 2023.

Increased Leverage and Debt Refinancing

The company significantly increased its leverage in connection with the acquisition of EVERFI, with the carrying amount of debt under the 2020 Credit Facility at $9,817 million as of March 31, 2024. The company may need to incur additional debt to fund costs related to the Security Incident, which could adversely impact its business and financial performance. The company refinanced its debt in April 2024, entering into a new $15 billion credit facility with improved terms and extended maturity, providing additional financial flexibility.

Security Incident Impact

The Security Incident continues to negatively impact the company’s GAAP profitability and cash flow, with the company incurring $103 million in net pre-tax expenses related to the incident in the first quarter of 2024, including $33 million for ongoing legal fees and $70 million in additional accruals for loss contingencies. The company expects $50-$100 million in pre-tax expenses and $80-$130 million in cash outlays for ongoing legal fees related to the Security Incident in 2024.

In summary, the company delivered strong revenue and profitability growth, but continues to face challenges from the Security Incident, which has significantly impacted its financial performance and leverage. The debt refinancing provides some relief, but the ongoing costs and liabilities related to the Security Incident remain a key risk factor.

Financial Statements Quarterly 2024 Q1

Total Revenue and Recurring Revenue Growth

Total revenue increased significantly, up 6.2% and 3.5% year-over-year for the three and nine months ended September 30, 2023, respectively. This was driven by strong growth in recurring revenue, which increased 7.9% and 5.0% year-over-year for the same periods.

Recurring Revenue Dominance

Recurring revenue now makes up about 97% of total revenue, as Blackbaud continues to shift its business model towards subscription-based cloud solutions and away from one-time services.

Gross Margin Improvement

Gross margin improved, with recurring gross margin increasing 230 and 160 basis points for the three and nine months ended September 30, 2023, respectively, as the increase in recurring revenue outpaced the changes in cost of recurring revenue.

Operating Income Growth

Operating income increased significantly, up $29.1 million and $25.3 million for the three and nine months ended September 30, 2023, respectively. This was driven by the increase in revenue, decreases in compensation and other costs, and lower Security Incident-related expenses.

Customer Retention

The company’s gross dollar retention rate remained relatively consistent at around 90% for the twelve months ended September 30, 2023, indicating strong customer retention.

Strategic Investments

Blackbaud continues to make investments in product innovation, digital marketing, cybersecurity, and cloud infrastructure, which are expected to drive future growth but also impact near-term profitability.

Security Incident Impact

The Security Incident continues to have a significant financial impact, with the company accruing an additional $300 million in loss contingencies during the nine months ended September 30, 2023. However, the company expects a significant decrease in Security Incident-related expenses in 2024.

Balance Sheet and Liquidity

Blackbaud’s balance sheet and liquidity remain strong, with $311 million in cash and a net leverage ratio of 2.11x as of September 30, 2023. The company expects to resume stock repurchases in the fourth quarter of 2023.

Conclusion

Overall, Blackbaud is demonstrating solid operational and financial performance, with strong recurring revenue growth and improving profitability, despite the ongoing impact of the Security Incident. The company’s strategic initiatives around product innovation, pricing, and cost management appear to be gaining traction.

Financial Statements Quarterly 2023 Q4

Total Revenue and Recurring Revenue

Total revenue increased by $61 million (23%) and $107 million (21%) during the three and six months ended June 30, 2023 respectively, driven by growth in recurring revenue. Recurring revenue increased by $99 million (39%) and $180 million (36%) during the same periods, primarily due to increases in transactional recurring revenue and contractual recurring revenue.

Income from Operations

Income from operations increased by $0.2 million (4%) during the three months ended June 30, 2023 but decreased by $37 million (63%) during the six months ended June 30, 2023. The increase in the quarter was driven by decreases in compensation and other costs, partially offset by higher Security Incident-related expenses. The decrease for the six-month period was primarily due to higher Security Incident-related expenses, stock-based compensation, and transaction-based costs.

Gross Dollar Retention

Gross dollar retention, a key metric for analyzing customer retention and expansion, was approximately 90% for the twelve months ended June 30, 2023, relatively consistent with the full year 2022.

Cash from Operations

The company generated $750 million in cash from operations during the six months ended June 30, 2023, a decrease of $68 million (8%) compared to the same period in 2022, primarily due to a decrease in net income adjusted for non-cash expenses, partially offset by an increase in cash flow from working capital changes.

Security Incident Liabilities and Expenses

As of June 30, 2023, the company has recorded approximately $500 million in aggregate liabilities for loss contingencies related to the 2020 Security Incident. For the full year 2023, the company expects net pretax expense of $200-$300 million and net cash outlays of $250-$350 million for ongoing legal fees related to the Security Incident.

Sublease and Impairment Charges

On July 31, 2023, the company entered into a sublease for a portion of its Washington DC office location, which it had previously closed. As a result, the company expects to incur $60-$80 million in pretax costs in the third quarter of 2023 for non-cash impairment charges against certain operating lease right-of-use assets and property and equipment assets.

Financial Statements Quarterly 2023 Q3

Total Revenue Increase

Total revenue increased by $46 million (18% year-over-year) driven by growth in recurring revenue, particularly transactional recurring revenue which increased $50 million. This was partially offset by a decrease in one-time services and other revenue.

Loss from Operations Increase

Loss from operations increased by $40 million, primarily due to a $106 million increase in Security Incident-related expenses, a $21 million increase in stock-based compensation, a $21 million increase in transaction-based costs, and a $19 million increase in third-party software costs. These were partially offset by decreases in compensation costs, hosting/data center costs, and third-party contractor costs.

Gross Dollar Retention Rate

Gross dollar retention rate remained relatively unchanged at around 90%, indicating Blackbaud is retaining a high percentage of its existing customer base.

Cash Flow

The company generated $218 million in cash from operations, but had $153 million in net cash used for investing activities, primarily for software/content development and property/equipment purchases.

Security Incident Financial Impact

Blackbaud expects the financial impact of the Security Incident to continue, with an estimated $200-$300 million in net pretax expense and $250-$350 million in net cash outlays for 2023 related to ongoing legal fees and loss contingencies.

Company Initiatives

The company is focused on initiatives to drive product innovation, bookings growth, transactional revenue optimization, modernized pricing/contract structures, and cost management, which are expected to improve financial performance in 2023.

In summary, Blackbaud saw revenue growth but increased costs, particularly related to the Security Incident, which negatively impacted profitability. The company is taking actions to improve its financial position going forward.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

Key insights for a long-term investor:

  1. Execution on the 5-point operating plan has transformed Blackbaud’s financial performance, with 25% adjusted EBITDA growth, 28% non-GAAP EPS growth, and 240% adjusted free cash flow growth in the past year.

  2. The company is focused on driving innovation, particularly in generative AI and solution connectivity, to improve fundraising outcomes and reduce administrative burden for customers. This is being done at no additional cost to customers.

  3. Blackbaud is the clear market leader in the social impact software market and is well-positioned to achieve the Rule of 40 for the full year 2024, a more than 300 basis point improvement over 2023.

  4. The divestiture of the non-strategic EVERFI creative agency services business in the U.K. demonstrates Blackbaud’s focus on driving profitable growth and shareholder value through portfolio optimization.

  5. Blackbaud is actively returning capital to shareholders through a substantial stock repurchase program, having bought back nearly 3 million shares (5.5% of outstanding stock) in the first quarter.

  6. While the corporate sector, specifically EVERFI, has faced macro headwinds, the company is working on an operating improvement plan to ensure EVERFI contributes to shareholder value.

  7. Analyst questions suggest a focus on the performance and outlook for the EVERFI business, as well as the impact of generative AI investments on Blackbaud’s cost structure.

Overall, Blackbaud appears to be executing well on its strategic initiatives, driving innovation, and optimizing its portfolio to deliver long-term profitable growth and shareholder value.

Earnings Call Analysis 2024 Q1

Transformation and Operational Improvement

Blackbaud has undergone a substantial transformation over the past 1.5 years, implementing a 5-point operating plan that has significantly improved its financial performance. This includes accelerating revenue growth, reducing costs, expanding profitability, and starting to return capital to shareholders.

Pricing Optimization

Blackbaud’s modernized pricing program, which went live in March 2022, has been very successful. The company moved from 1-year to 3-year contracts for about 35% of its customer base in 2023 and expects to reach 65% by the end of 2024. This has improved retention rates and revenue visibility.

Product Innovation

Blackbaud continues to invest in product innovation, including new capabilities around social impact fundraising, mobile experiences, and AI-driven insights. These innovations are helping customers drive more value and impact.

Strong Customer Wins

Blackbaud highlighted several notable customer wins across its higher education, K-12, healthcare, and corporate impact segments, demonstrating the strength of its solutions.

Capital Allocation

Blackbaud’s strong cash flow generation has enabled it to resume stock repurchases, with a new $500 million authorization. The company plans to balance investments in the business, M&A, and returning capital to shareholders.

Guidance and Outlook

Blackbaud provided strong guidance for 2024, including 7.2% organic revenue growth at the midpoint and a Rule of 40 score of 40.2%. This suggests continued momentum and operational improvements.

Overall, the call indicates Blackbaud has successfully executed on its transformation plan and is well-positioned for continued growth and profitability. The focus on pricing optimization, product innovation, and prudent capital allocation are positive signs for long-term investors.

Earnings Call Analysis 2023 Q4

Execution on 5-point Plan

Blackbaud has been successfully executing on its 5-point plan to improve product innovation, accelerate bookings growth, optimize transactional revenue, modernize contract pricing, and improve cost management. This has driven strong financial results.

Accelerating Organic Revenue Growth

Blackbaud’s organic revenue growth accelerated to 6.6% in Q3, more than double the prior quarter’s growth rate. This was driven by 8.3% growth in organic recurring revenue, which makes up 97% of total revenue.

Modernized Pricing Model

Blackbaud has been transitioning customers to 3-year contracts with embedded mid-to-high single-digit price escalations. This provides higher revenue visibility and security.

Disciplined Cost Management

Blackbaud has reduced total costs by 6% year-over-year, demonstrating the scalability of the business model. This, combined with accelerating revenue growth, has driven significant margin expansion.

Achieving Rule of 40 Goal

Blackbaud achieved its “Rule of 40” goal (combined revenue growth and EBITDA margin) of 41.6% a full quarter earlier than expected, a 14-point improvement from the prior year.

Strong Cash Flow Generation

Blackbaud generated $118 million in adjusted free cash flow in Q3, putting it on track to meet or exceed the high end of its full-year guidance.

Continued Innovation Pipeline

Blackbaud is investing in new product innovations like the optimized donation form, Impact Edge, and AI-powered features to drive customer value and revenue growth.

Overall, the call highlights Blackbaud’s strong execution, financial discipline, and focus on innovation – all of which should benefit long-term investors. The company’s transition to a recurring revenue model with modernized pricing provides greater visibility and predictability.

Earnings Call Analysis 2023 Q3

Pricing and Renewal Initiatives

Blackbaud has implemented a modernized approach to renewal pricing and multi-year customer contracts, which is performing well. The majority of customers are opting for the 3-year contract option, improving revenue security and predictability. The pricing increases on renewed contracts are higher than expected, and will start to have a meaningful impact on revenue in the second half of 2023 and beyond.

Product Innovation and Ecosystem

Blackbaud is continuously innovating its products to provide more value to customers, such as the new donation form and prospect insights in Raiser’s Edge NXT. The company is expanding its AI capabilities across the product portfolio to address challenges in fundraising, stewardship, corporate impact, and education. Blackbaud is focused on growing its partner ecosystem, including third-party developers and startups, to extend its capabilities and reach.

Cost Management and Margin Expansion

The cost actions taken in previous quarters have started to drive a substantial increase in adjusted EBITDA margins. Blackbaud is committed to maintaining tight cost control going forward, with a focus on managing headcount and other expenses. The combination of pricing initiatives and cost management is expected to drive significant margin expansion and achieve the company’s Rule of 40 target.

Bookings and Transactional Revenue

Blackbaud has signed several notable enterprise-level contracts, demonstrating continued demand for its solutions. Transactional revenue, including tuition management, JustGiving, and Blackbaud Merchant Services, performed well in the quarter and is a key driver of the business.

Cash Flow and Capital Allocation

Blackbaud generated strong adjusted free cash flow in the quarter, which it plans to use to pay down debt and reach its target leverage ratio. As the company’s debt profile improves, it may consider opportunities for strategic acquisitions or capital return to shareholders in the future.

Overall, the key insights suggest that Blackbaud is making solid progress on its operational plan, with a focus on pricing, innovation, cost management, and cash flow generation. The long-term investor should closely monitor the company’s execution on these initiatives and the resulting impact on financial performance and shareholder value creation.

Earnings Call Analysis 2023 Q2

Pricing and Renewal Initiatives

Blackbaud has implemented a new pricing model for contract renewals, offering 3-year terms with annual rate increases instead of 1-year terms. This new pricing model is expected to have a compounding effect on revenue growth over the next few years as more contracts renew at the higher rates. The company has already renewed over 25% of the 2023 renewal cohort, with the majority opting for the 3-year term. The effective rate increase on renewals was in the low double digits in Q1, expected to step up to high teens in Q2 and hold steady. This pricing initiative is a sustainable and margin-rich revenue growth stream for the company.

Bookings and Sales Productivity

Bookings in Q1 were well ahead of plan, with the corporate sector (EVERFI and YourCause) more than doubling year-over-year. The company has reorganized its sales teams under a single global leadership, which has improved sales productivity by over 30% year-over-year. The strong bookings performance and improved sales productivity demonstrate the resilience of the end markets Blackbaud serves.

Transactional Revenue

Transactional revenue, which is about a third of total revenue, grew 7% year-over-year in Q1, supported by the rate changes on Blackbaud Merchant Services and strong performance in Blackbaud Tuition Management and JustGiving. The company is focused on driving innovation across its payment solutions to optimize the donor experience and drive further growth in this revenue stream.

Cost Management

Blackbaud has aggressively managed its cost structure, including closing data centers, renegotiating vendor contracts, and reducing headcount by 14% since Q3 2022. These cost actions have already started to flow through to the bottom line, with adjusted EBITDA margin improving by 5 percentage points year-over-year in Q1. The company plans to maintain the current headcount level, allowing revenue growth to have a greater impact on margin expansion.

Guidance Raise

Blackbaud has raised its guidance across all key metrics, including revenue, adjusted EBITDA margin, and adjusted free cash flow. The improved outlook is driven by the strong performance in bookings, transactional revenue, and the impact of the pricing initiatives, as well as the cost management actions. The company expects to exit 2023 with organic revenue growth in the high single digits and cross the 40% Rule of 40 threshold, well ahead of its previous target of 2025.

Overall, the key insights suggest that Blackbaud has a well-defined operating plan that is starting to bear fruit, with significant potential for continued growth and margin expansion in the coming years. The pricing initiatives, sales productivity improvements, and cost management actions appear to be the primary drivers of the company’s improved outlook.

Earnings Call Analysis 2023 Q1

Pricing Initiatives

Blackbaud has implemented pricing increases on both transactional and contractual revenue. These initiatives are expected to ramp up significantly in the second half of 2023 and provide a full-year benefit in 2024. The company is confident these pricing actions will stick as they have seen improved renewal rates.

Cost Optimization

Blackbaud has taken several steps to optimize costs, including workforce reductions, renegotiating vendor contracts, and closing data centers. These actions are expected to drive substantial margin expansion, with adjusted EBITDA margin targeted to reach 30% in 2023, a 5-point improvement.

Resilient End Markets

The non-profit and corporate social responsibility markets that Blackbaud serves have historically been resilient through economic downturns. While the company saw some softness in transactional revenue in Q4, the overall outlook for these markets remains positive.

EVERFI Integration

The EVERFI acquisition faced some initial challenges, but the company has now integrated the business and is seeing improved sales execution and pipeline. The largest EVERFI deal in 2022 was a multi-million dollar ARR contract.

Cautious Analyst Tone

Analysts probed for more details on the pricing initiatives, transactional revenue trends, and the impact of the workforce reduction. This suggests they want to understand the sustainability and execution of the company’s turnaround efforts.

Overall, Blackbaud appears to be making progress on its operational improvements, but analysts will likely continue to closely monitor the company’s ability to deliver on its guidance and long-term Rule of 40 target.

Earnings Call Analysis 2022 Q4

Resilient business model

Blackbaud has proven to be a resilient business, performing well even during past economic downturns like the 2008 financial crisis and the COVID-19 pandemic. Its high recurring revenue (95%) and mission-critical software solutions for customers make it less susceptible to macroeconomic challenges.

Pricing initiatives driving growth and profitability

Blackbaud is implementing multi-year pricing initiatives that are expected to provide a step-change in revenue growth and profitability in 2023 and beyond. These initiatives include new pricing models like “Complete Cover” that benefit both Blackbaud and its customers.

Operational efficiency improvements

The company has taken actions to reduce its cost structure, including workforce reductions and eliminating open positions. This is expected to drive significant margin expansion, with adjusted EBITDA margin approaching 29% in 2023.

Accelerating Rule of 40 performance

Blackbaud is targeting a Rule of 40 performance in the mid-30s in 2023, a substantial improvement from the ~29% expected in 2022. This is driven by the combination of mid-single-digit organic revenue growth and the margin expansion initiatives.

Cautious on EVERFI

While the core Blackbaud business is performing well, the EVERFI segment has seen lighter-than-expected bookings, partly due to sales turnover and the impact of the digital currency market. The company is taking steps to improve EVERFI’s performance.

Deleveraging and capital allocation

With improving cash flow, Blackbaud is focused on rapidly deleveraging its balance sheet. It also has flexibility to pursue acquisitions, continue share buybacks, and invest in the business as it reduces debt levels.

Overall, the key insights point to Blackbaud’s resilience, operational improvements, and visibility into accelerating financial performance, which should be attractive for long-term investors. However, the company’s ability to fully execute on its EVERFI segment remains a potential risk factor.

Earnings Call Analysis 2022 Q3

Resilient end markets

Blackbaud’s end markets, such as non-profits, healthcare, and education, have proven to be resilient even during past recessions. The company did not see significant impact on its customers during the pandemic, which was a major test of resilience.

High recurring revenue

Blackbaud now has around 95% recurring revenue, up from a much smaller percentage in past recessions. This provides more stability and predictability to the business.

Prudent financial management

Blackbaud took steps in 2020 to refinance its debt and hedge against rising interest rates, putting it in a strong financial position to weather the current macro environment.

Operational improvements

The company is streamlining its operations, consolidating data centers, and enhancing its customer-centric approach through new leadership roles. This should drive efficiency and scalability.

Innovation and ecosystem expansion

Blackbaud is investing in product innovation, such as the SKY platform, and expanding its ecosystem through initiatives like the Social Good Startup Program. This positions it to stay competitive.

Caution on EVERFI

While EVERFI is a growth opportunity, the company noted some softness in bookings, which could impact 2023 performance. This bears watching as an integration and execution risk.

Analyst questions imply

Analysts are probing for signs of macro sensitivity, especially around giving and one-time services revenue. The company’s responses suggest confidence in the resilience of its end markets and business model.

Overall, Blackbaud appears to be taking a prudent, long-term approach to managing the business through the current environment while continuing to invest in strategic initiatives. The high recurring revenue and resilient end markets are key positives for a long-term investor.

Earnings Call Analysis 2022 Q2

Blackbaud Executing Well Against Plan

Blackbaud is executing well against its plan, with strong performance in Q1 2022 that exceeded internal expectations across revenue growth, profitability, and cash flow. This gives the company confidence in achieving its full-year 2022 guidance.

Expanded Addressable Market with EVERFI Acquisition

The acquisition of EVERFI has significantly expanded Blackbaud’s addressable market, with over 50% now in the corporate sector focused on ESG and corporate social responsibility. This is a large growth opportunity that Blackbaud is well-positioned to capitalize on.

Healthy Demand Across End Markets

Blackbaud is seeing healthy demand across its end markets, with a return to in-person events and continued strength in online/digital giving. The company is innovating to provide customers more payment options and donation channels.

Balanced Approach to Growth and Profitability

Blackbaud is focused on driving sustainable mid-to-high single digit organic revenue growth while also expanding margins, targeting a Rule of 40 metric of around 35% in the next few years. This balanced approach should drive significant value.

Resilience in the Macro Environment

The company is closely monitoring the macro environment but has not seen a material impact on customer buying behavior so far. Blackbaud’s mission-critical solutions and diversified customer base appear to provide resilience.

Evaluating M&A Opportunities in Corporate ESG/CSR

Blackbaud is actively evaluating M&A opportunities, particularly in the corporate ESG/CSR space, to further enhance its capabilities and market position. The company has a track record of successful integration and deleveraging.

Overall, Blackbaud appears to be executing well on its strategic priorities, with a balanced approach to growth and profitability that should drive long-term value for shareholders. The EVERFI acquisition and corporate ESG/CSR opportunity represent significant potential upside.

Earnings Call Analysis 2022 Q1

Acceleration in growth and profitability

Blackbaud is seeing an acceleration in organic revenue growth, with guidance for mid-single-digit organic growth in 2022, several years ahead of their original timeline. The company is also seeing significant margin expansion, with the Rule of 40 metric expected to improve by ~250 bps in 2022. This acceleration is driven by a combination of factors, including improved sales productivity, pricing initiatives, and the return of in-person events.

Acquisition of EVERFI

The acquisition of EVERFI doubles Blackbaud’s total addressable market to $20 billion, with over 50% now in the corporate sector. EVERFI is expected to be immediately accretive to Blackbaud’s revenue growth and profitability, with potential for further synergies. The combination of Blackbaud and EVERFI strengthens the company’s position in the rapidly growing ESG and corporate social responsibility space.

Execution on strategic initiatives

Blackbaud has been successfully executing on the 10 growth drivers outlined at their investor day in 2021, including pricing initiatives, sales productivity improvements, and the shift to third-party cloud infrastructure. The company’s focus on innovation, customer success, and building a robust ecosystem of partners and developers is paying off in the form of strong customer wins and revenue growth.

Cautious tone on external factors

While Blackbaud is optimistic about its growth prospects, the management team is monitoring the potential impact of the pandemic, inflation, and the labor market on the business. The company is also transparent about the ongoing legal costs related to the previously disclosed security incident, which could impact free cash flow in the near term.

Overall, the key insights suggest that Blackbaud is executing well on its strategic plan and is well-positioned to capitalize on the growth opportunities in its markets. The acquisition of EVERFI and the company’s focus on innovation and customer success are particularly noteworthy for long-term investors.

Earnings Call Analysis 2021 Q4

Inflection point for the market and company

The shift to a digital-first world is accelerating, with trends like increased online giving and virtual events here to stay. Blackbaud is well-positioned to capture this opportunity and drive growth.

Strong financial performance

Recurring revenue grew nearly 10% organically, representing 95% of total revenue. There was a significant improvement in the “Rule of 40” metric, indicating balanced growth and profitability. The company is on pace for potentially the best free cash flow year in its history.

Raised outlook and accelerating growth

The company is confident of exceeding the previous $920 million revenue guidance for 2021. It expects further acceleration in recurring revenue growth in 2022 and has raised its profitability outlook, with adjusted EBITDA margin expected to be at least 26% for 2021.

Innovation and product development

Blackbaud has made significant investments in R&D, customer success, security, and cloud infrastructure. It is launching new experiences and capabilities across the product portfolio, including Blackbaud Grantmaking and Financial Edge NXT. The company is also expanding the developer ecosystem and enabling low-code/no-code tools for customers.

Capital allocation and M&A

The company is executing on a share buyback program, indicating it believes the stock is undervalued. Blackbaud is also actively evaluating acquisition opportunities to drive inorganic growth. The company is maintaining a disciplined capital deployment strategy, balancing investments in the business and returning capital to shareholders.

Overall, the key insights suggest Blackbaud is at an inflection point, with strong financial performance, a positive outlook, and a focus on innovation and strategic capital allocation – all of which could be attractive for a long-term investor. However, the call also highlights some potential risks, such as labor market challenges and the ongoing impact of the pandemic, which should be considered.

Earnings Call Analysis 2021 Q3

Blackbaud’s Earnings Call Insights for Long-term Investors

Blackbaud is seeing signs of recovery across its end markets, with events and in-person activities starting to return. This is a positive indicator for the company’s transactional revenue streams.

The company continues to invest in digital capabilities, innovation, security, and customer success – areas that should position Blackbaud well for the post-pandemic environment and accelerate its growth.

Blackbaud is focused on improving sales productivity and efficiency, with investments in digital marketing and streamlining the sales process. This suggests the company is taking steps to drive better financial performance.

M&A remains an important part of Blackbaud’s growth strategy, and the company is actively evaluating opportunities. This could provide additional inorganic growth avenues.

The company is confident it can achieve low to mid-single digit revenue growth as early as 2022, driven by the recovery in its end markets and the benefits of its strategic initiatives.

Blackbaud is committed to improving its Rule of 40 financial framework, balancing growth and profitability. This suggests a focus on driving sustainable long-term performance.

The analyst questions imply a focus on the company’s ability to execute on its strategic priorities, manage costs, and capitalize on the recovery in its end markets. Blackbaud’s responses suggest confidence in its ability to deliver on these fronts.

Overall, the call indicates Blackbaud is well-positioned to navigate the post-pandemic environment and drive long-term value for shareholders through a combination of organic and inorganic growth initiatives.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.