Good day and welcome to Blackbaud’s Q4 Full Year 2023 Earnings Call. Today’s conference is being recorded. I will now turn the conference over to Kevin Mooney. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud’s fourth quarter and full year 2023 earnings call. Joining me on the call today are Mike Gianoni, Blackbaud’s CEO, President and Vice Chairman 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 certain 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. The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for the full details on our financial performance, including GAAP results as well as full year guidance. We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. With that, I will turn the call over to you, Mike.

Thank you, Kevin. Thank you everyone for joining our call today. I’d like to start today’s comments by offering a few perspectives on 2023, then I’ll comment on our product evolution, share a few customer wins, and then conclude with an update on our capital allocation and stock repurchase plans before turning the call over to Tony. The fourth quarter concluded a year of substantial transformation for Blackbaud. Approximately 1.5 years ago, we implemented our five-point operating plan, which began producing results in the second quarter of last year, continued through year end and has put our company on a clear trajectory of improving financial performance. In the second quarter, our cost management initiatives drove significant adjusted EBITDA margin expansion as expenses declined year-over-year. Then in the third quarter, our revenue growth rate accelerated as our modernized pricing program gained traction and we achieved the Rule of 40 ahead of plan. And today, I am pleased to report that our company’s adjusted free cash flow grew substantially and enabled the company to begin returning cash to shareholders in the form of an active stock repurchase program. So, 2023 has been a transformational year for the company. To put that transformation into perspective, we entered the year in our social sector with only about a third of opportunities renewing on multiyear contracts and we exited the year with three quarters of opportunities renewing on multiyear contracts. We entered the year with none of our customers on our modernized contract pricing and we exited the year with approximately 35% of our eligible customers on modernized contract pricing. We entered the year with organic revenue growth of less than 1% and we exited the year with fourth quarter organic revenue growth of over 7%. We entered the year with EBITDA margins of under…

Thanks, Mike and thank you all for attending our call today. I’ll start my comments today with our fourth quarter financial results and what’s driving the significant improvement the company has been delivering. Then I will briefly cover the full year 2023 before turning to our financial guidance for ‘24 and conclude with a discussion of our capital allocation strategy. Turning first to our fourth quarter financial results. We had another quarter of improving performance. Results for the quarter were strong and demonstrate the impact of our five-point operating plan is having on the business. Specifically, our modernized pricing initiatives continued to produce price increases at renewal, gross dollar retention rates were within the range of expectation and transactional revenues were seasonally strong from both a giving and pricing perspective. As a result, contractual recurring revenues grew 6.4%, transactional recurring revenues grew 12.5%, and total recurring revenue grew 8.4%. Non-strategic one-time revenues declined by $2 million and represented about 1 point of drag on total revenue growth. For the quarter, total revenues reached $295 million, which was an organic growth rate of 7.4%. That’s the fourth consecutive quarter of posting an increased growth rate. Cost management has been a key focus. The cost actions we have taken, from headcount reductions to data center closings, vendor renegotiation and virtual workforce environment, all contributed to an expense base that was lower than last year. With $20 million of revenue growth and $11 million of cost reductions, our adjusted EBITDA grew by $31 million or 46% to $99 million for the quarter. That’s excellent flow-through and leverage. In terms of margin, the adjusted EBITDA margin of 33.6% was almost 9 percentage points higher than Q4 of last year. Earnings per share was $1.14 in the quarter, and the business produced a Rule of…

Thank you. [Operator Instructions] We will now take our first question from Rob Oliver with Baird. Please proceed with your question.

Hi, good morning, guys. Thanks for taking my questions. Mike, I had one for you and then, Tony, a follow-up for you. So Mike, as we enter year 2 of the – sort of a new price optimization regime for you, guys, it appears to be going quite well. I was just curious if you could share your thoughts relative to – as we get to kind of the second half of this renewal motion on pricing, how you guys are thinking about the contribution of price to the top line relative to other things like cross-sell, upsell, new product sales? I know you knew, you cited some wins for EVERFI. Just want to get a sense for how should we – should think about expansions and new customers in addition to just price? And then kind of a follow-up for Tony.

Yes. Sure, Rob. Thanks for the question. The program is going really well. It kicked off a while ago, but went live March last year, and the volume grew as we got through the year and got through about 35% last year of the total retention rates are up because most folks are taking the 3-year contract options. So we’re basically moving the company from historically 1 to 3-year contracts, which is really great for retention go forward. And so we’re in the second year and we will renew about 30% more roughly this year, coming out of the year at about 65% of the total at the end of this year. So it’s a multiyear program, going really well, focused a lot on innovation because we need to keep earning our clients’ rights to sign 3-year contracts with new products. And I talked a little bit about that in my prepared remarks. Sales bookings, going pretty well. We closed the year fairly strong. We had a good start to the year. Pipeline is good. The corporate impact sector, I mentioned a couple of clients that we closed. I’d say that’s a little bit softer than the rest of the business, but lots of interest there, too. We don’t see anybody really pulling back on investments there. I don’t know if you noticed it, but the NFL chose to run two ads during the Super Bowl on what’s called the Character Playbook that runs on our EVERFI platform. And as you might guess, we’re getting a lot of interesting inbounds from that. So all in all, we had a really good year last year. And coming in at 4.8% growth is the highest in, what, 6 years in our organic growth and then a guide, midpoint of 7.2% up to 8.6% on the high end. I think we’re set up really well for ‘24 also.

Great. Thanks Mike. Appreciate that. And then Tony, just a question on the EBITDA margins, just what are some of the priorities for you as sources of spend are for this year? You guys continue to do a really strong job on the margin side. It was a little bit below what we’ve thought you guys were going to do for ‘24, but still solid. So I just wanted to get a sense for kind of where perhaps that spending or divergence between that and our thoughts relative to what you guys are going to be spending on, what that might be? Thanks.

Yes, Rob, thanks for that question. EBITDA margins have improved dramatically. As we’ve seen, we finished the year really strong, did great last year. ‘24, we’re currently expecting that we will manage the business for the year somewhere close to the same head count where we ended, which is down about 600, I think, from our high – for our peak. So we’re kind of planning on running the business in that same head count. Obviously, you’re going to have some merit increase and cost of living increases, those kind of things that we have to deal with, even with that lower headcount. The biggest thing really Mike alluded to it, and we talked about it a little bit in the prepared comments, we’ve got a bit of incremental investment in innovation on the R&D side of the business, some security, cybersecurity-related investments as well that are driving a little bit of incremental costs. Overall, costs are still growing slower than revenue, which is a key focus for us. But this year, with the couple of those incremental investments, we’re not seeing quite as much leverage on the EBITDA front as we would expect going forward longer-term.

Sure.

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hi, gentlemen. Thanks for taking the question. So I wanted to follow-up on some of the pricing initiatives. Obviously, that’s gone pretty well. It looks like you have 30% of the base coming up for renewal in 2024. Any lessons learned in 2023 that helps you attack that? And then how should we think about anything in that base in terms of timing or customer exposure or products that we should be paying attention to?

Yes. I think we learned a lot last year. We didn’t really need to make many adjustments though. I think we just got better at communicating. We notify customers 5 months ahead, right? So we’re already out almost in June of this year now. So we saw retention rates go up. Most customers are signing for the 3-year contract. We’ve got our heads down on just driving more innovation because we feel like we need to continue to earn the right to have a price increase and have 3-year contracts. So we’re really focused on a lot of innovation. Tony just mentioned that. But program is going really well. We did, like I said, did 35% of the base last year starting in March. We will do another 30% this year. And so we’re starting to get sort of full year effect this year of last year’s, and the partial year effect of this year’s this year, because most of the larger volumes are sort of June, July and then toward the fourth quarter. So it takes kind of a next year to really pick up on that uptick in volume. But program is going really well. It’s good to see retention rates increase with this program.

That’s good to hear. And maybe a follow-up to Rob’s question on the net new side, it sounds like the pipeline and some of the opportunities you mentioned there are pretty strong. I’m curious, how is the pricing and kind of the multiyear contract looking on the net new side? Anything that’s changed competitively that you’re seeing out there in the market? Thanks, guys.

Yes. We moved our list prices up a bit as well. Some of the products, we haven’t done that in a while. And we’re faring pretty well there. We’ve made a tweak in our sales comp plan to drive more units. So we’re focused on units. That’s new logo and cross-sell. We still have our teams focused in that way in the vertical markets that we’re in. So they are – like historically, they are signed by vertical market and assigned to cross-sell to existing or go get new logos. That hasn’t changed, but we made a tweak to the plan to just keep focusing on adding new units across the board. So, no major changes there.

Thanks, Mike.

You are welcome.

Thank you. Our next question comes from the line of Parker Lane with Stifel. Please proceed with your question.

Yes, Mike. Hi, Tony. Thanks for taking the questions here. Tony, I was wondering if you could talk about leverage a little bit more in the business. If we look at your adjusted EBITDA and free cash flow guide, I know you referenced that you’re going to have head count relatively stable at the end of this year relative to where it started. What other opportunities are there to drive efficiencies across the different cost lines of the business?

Thanks, Parker. That’s a good question. I would expect we will continue to see us gain scale and leverage just from the higher growth rate that we’re driving on the top side. It’s a lot easier to drive more profitability when you’re growing in that high single-digits than the low single digits. You eat up most of that lower growth improvement and profitability just in the normal merit and other increases that we see year-on-year. So as we grow faster, it will certainly be easier to scale and gain leverage in the business. You know, we hold our headcount. Our investments are going to be up a bit this year, that’s why we are not seeing quite as much leverage. But some of that’s kind of one-time in nature. We are accelerating some of the investments on the cyber front to get some things completed a little bit more quickly than what was originally planned. And so that’s pulled a little bit of an expense into the year. And then we are putting a good chunk of money into AI and innovation. We talked a lot about at bbcon, and we have had quite a few press releases, there is a lot of good news on the innovation front coming as well. So, I think we are up a little bit higher than what we would typically expect to be this year on some of the spin, hence not seen as much leverage. But I would think going forward you would see us continue to generate additional leverage in the business year-on-year-on-year.

Got it. Very helpful. And then Mike, on the corporate impact space, I think you mentioned that was a little bit softer, but didn’t necessarily see people pulling back, can you go into the dynamics of that market, in particular at a little bit deeper? And how do you feel about the structure of the team you have got centered around the corporate opportunity right now?

Yes, sure. Tom Davidson heads up that Corporate Impact team for us. He is the CEO and Founder of EVERFI. And so we combine that with a few other products, they have five products now they take to that corporate market, which is great because there is cross-sell opportunities there, so it’s a solid team. The market is a very large market. What’s interesting about that side of the business is there is optionality for contracts substantially larger than the historic Blackbaud cloud software side. Some of these contracts can be several million a year in ARR because they are big companies and big footprint. And we have got an amazing presence in that market. I mentioned the NFL decided to run two ads during the Super Bowl on a platform that’s built on EVERFI, which is amazing. And there is many Fortune 500 companies that are customers or prospective customers. We put together a partnership with Fortune a little over a year ago. They started a whole focus around this corporate impact space, and we were a founding partner with them and have met with several hundred Fortune 500 global heads of corporate social responsibility. So, EVERFI definitely punches above its weight, if you will, as far as presence. I haven’t met a customer that wasn’t enamored with EVERFI. Now the downside is, it is a discretionary spend, and so the programs are subject to that occasionally. But it’s a solid platform with an unbelievable brand and a lot of really interesting relationships. So, that market is not really pulling back. The company is – there is a lot in the news about CSR and ESG programs and things like that. But if you look at just – I will give you an example, in the financial services space, banking in the U.S., the government requires those institutions to invest in the space. So, there is a regulation that requires a give back. In a lot of cases, they are choosing YourCause or EVERFI as that platform. So, that’s a regulated requirement, which is great for us. It is the biggest space that we are in financial services. So, it’s a big space, global customers, really solid team. I think we have got great opportunities. I mentioned – what I mentioned, News Corp and Fidelity in my prepared remarks, two recent larger expansions.

Very interesting. Congrats on the quarter. Thank you.

Yes. Thank you.

Thanks.

Thank you. Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Hi. Good morning. Thanks guys. Maybe just following-up on the last question, Tony. In the slide deck, it calls out that there are still two more data centers to wind down. Curious on a go-forward basis from here, given you have gotten through most of the DCs you are operating. How much benefit from here is true cost reduction as your favorable contracts with Azure and AWS roll through versus sort of offsetting future spending of continuing CapEx and reinvesting in those data centers? How should we think about that sort of impacting gross margins long-term?

Yes, Matt, the CapEx, as you know, has been dropping off substantially as we have shutdown the data centers and moved to the cloud, continuation of that same story this year. As you saw in the earnings release on the guide, CapEx is going to be down. Cap software is relatively stable and growing, with all the spend that we are putting on innovation. So, we will see that up a little bit. But CapEx itself, through CapEx buying property and equipment will be down substantially. We are still spending money to move data centers. So, we have got some duplicative costs because we have got the cost of the cloud environments and the existing data centers and the cost to move and migrate. And there is still some engineering work that’s being done as well to prepare the products to move to the cloud out of the existing infrastructure. So, there is still some duplicative costs that go away on that front. And then I do think we will be more efficient in the cloud over the long run, certainly when you would incorporate all the benefits of additional cyber opportunities within the cloud environments. And so we will continue to see some improvements there. We have still got some leases. We inherited a pretty big operating lease on the facility for EVERFI that we are still working to sublease and get out from under. So, we still got some of those costs, which we would hope would go away. So, there are a few of those kind of big movers. And then we are starting to look at use of AI internally as a company. We still have a lot of automation opportunities within the business. So, we still have other areas that we are pursuing that should…

Alright. Very helpful. And then I guess, Mike, when you are looking at kind of the emphasis on new units, as you mentioned, trying to drive some new business there. Where do you feel like you stand from a sales capacity standpoint versus improving productivity and execution of the current reps, any ideas around headcount growth, or do you feel like you have the right team in place and it’s just about driving the right performance?

Yes. I think we have the right team in place and the right leadership in place, too. We have hired some outside leaders in the last six months or so to lead up some of our teams. So, we don’t see a substantial increase in the headcount. We do see significant opportunity though in productivity or quota attainment by person.

Okay. Wonderful. Thank you.

You’re welcome.

Thank you. And our next question comes from the line of Kirk Materne with Evercore ISI. Please proceed with your question.

Yes. Hi guys. This is Peter Burkly on for Kirk. Congrats on the strong ‘23. Tony, I appreciate the color just in terms of some of the incremental investments, in specifically areas like AI. Just curious in terms of the timing of those investments, would you expect those to ramp over the course of the year, or will the investments be fairly linear? Just trying to get a sense on how you see the shape of the EBITDA margin over the course of the year?

Yes. Peter, they will ramp a little bit, although I would tell you, we accelerated some of those investments beginning in Q4. So, they actually already started ramping. That said, I do think we will see a bit more as we get into the year because some of those include hiring new staff, those that are outside consultants. And then we also have some investments in some new solutions, I think on the cyber front. So, we will be bringing new software solutions, etcetera, online and implementing. So, I think those costs will hit us a little more as we get into the year. So, expect that to build a bit across the year. And then some of those will start falling off as well as we get – there is a bit of a surge and an acceleration. So, as we get some things implemented and put in place, then some of those will start to drop off as well towards the back end of the year.

Very helpful. And Mike, maybe just a quick one for you as well. Just as you are thinking about adding some of those AI capabilities into the product set, would you expect most of this to be included in the new pricing structure, or do you see an opportunity to sort of leverage AI and create some new standalone offerings?

Yes. It’s both. Actually, Peter, it’s a little bit of both. So, some of this new capability will just show up in products. For instance, last year, the first one we announced into production was a new set of AI capability in our JustGiving platform, already in production. We have new capabilities that are rolling out this week in Raiser’s Edge NXT and more coming across other platforms like CRM and Altru, for example. Some will be standalone new capabilities. So, we have some online donation capabilities with AI that are additive and new to the market that will go across several products. And then some are embedded like the JustGiving one I just mentioned. So, it’s a little bit of both.

And Peter, I would just add on some of the new capabilities, like with online giving forms, it won’t be that you price separately, they will drive more revenue just because of the efficiency of giving that they drive and/or if we have a complete cover type model where we are just getting a higher amount of donation to us and to our customers. As we have spoken about before, it will be a big win-win on those things with the new donation forms as they roll out.

Yes. So, some of those capabilities are pointed towards driving our customers’ revenue, which also rides on our payment system as well. So, it’s a win-win.

Great. Thanks guys.

Yes. You’re welcome.

Thank you. And we have reached the end of the question-and-answer session. I will now turn the call back over to Mike Gianoni for closing comments.

Thank you. Thank you for joining us this morning. To summarize, ‘23 was a year of substantial transformation for Blackbaud. Our five-point operating plan delivered four sequential quarters of accelerating financial performance. And we met or exceeded our financial guidance ranges across all metrics. Our strong cash generation enabled us to resume stock repurchases in the fourth quarter and going forward. We are focused on making prudent investments to grow the business organically and inorganically while returning excess capital to shareholders. I am incredibly proud of the results the team has produced and excited about the continued momentum we expect in 2024. Thank you everyone.

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.