Company Overview

Blackbaud, Inc. is the leading software provider exclusively dedicated to powering social impact. Serving the nonprofit and education sectors, companies committed to social responsibility, and individual changemakers, Blackbaud's essential software is built to accelerate impact in fundraising, nonprofit financial management, digital giving, grantmaking, corporate social responsibility, and education management. With operations in the United States, Australia, Canada, Costa Rica, India, and the United Kingdom, Blackbaud supports users in over 100 countries.

History

Blackbaud's history dates back to 1981 when it was founded as a software company focused on serving nonprofits, churches, and educational institutions. The company quickly established itself as a pioneer in the nonprofit software space, developing solutions like The Raiser's Edge for fundraising and donor management. As Blackbaud grew, it expanded its product portfolio to address the evolving needs of its customers, adding financial management, education administration, and other capabilities. A significant milestone in the company's history was its initial public offering in 2004, which provided resources to further invest in product innovation and fuel growth. In the following years, Blackbaud executed a series of strategic acquisitions to broaden its offerings and reach, integrating companies like Kintera and Convio. In 2020, Blackbaud faced a significant challenge when it was the target of a ransomware attack that impacted a subset of customer data. The company worked diligently to investigate the incident, enhance its cybersecurity measures, and address the legal and regulatory implications. Despite this disruption, Blackbaud remained focused on supporting its customers and continued to innovate its product suite. Throughout its history, Blackbaud has maintained its dedication to the social good community, providing essential software and services to help its customers maximize their impact.

Financials

Today, Blackbaud's financial profile is characterized by strong recurring revenue, impressive profitability, and healthy cash flow generation. In the fiscal year 2023, the company generated $1.11 billion in total revenue, with recurring revenue accounting for 90% of the top line. Blackbaud's gross profit margin stood at 54.8%, while its adjusted EBITDA margin was 15.1%. The company's operating cash flow reached $199.63 million, and it produced $135.51 million in free cash flow.

For the third quarter of 2024, Blackbaud reported revenue of $286.73 million, up 3.3% year-over-year. Net income for the quarter was $20.54 million, with operating cash flow of $103.95 million and free cash flow of $131.23 million. The increase in revenue was driven largely by growth in recurring revenue, primarily related to increases in contractual recurring revenue due to the impact of Blackbaud's 3-year contract renewal initiative and pricing within the Social Sector, as well as the performance of their cloud solutions. This was partially offset by decreases in revenue from EVERFI and maintenance revenue.

Blackbaud operates in one reportable segment focused on providing cloud-based and on-premises software and services to customers in the nonprofit, education, and corporate social responsibility sectors. The company's revenue is primarily generated through recurring subscription and transaction-based fees, with one-time services and other revenue making up a smaller portion.

Recurring revenue increased by $11.0 million, or 4.1%, and $48.8 million, or 6.2%, during the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. This was driven primarily by increases in both contractual recurring revenue and transactional recurring revenue. The increases in transactional recurring revenue were primarily due to positive results related to pricing initiatives implemented in the past twelve months and increases in volume for Blackbaud's Tuition Management and JustGiving solutions.

One-time services and other revenue decreased by $1.9 million, or 22.2%, and $5.9 million, or 22.6%, during the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. This was primarily driven by decreases in one-time consulting revenue, which was impacted by the sale of EVERFI Limited.

Cost of recurring revenue increased by $8.5 million, or 7.5%, and $19.1 million, or 5.6%, during the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. This was driven primarily by increases in hosting and data center costs, amortization of intangible assets, third-party software costs, and third-party contractor costs related to enhancements to Blackbaud's cybersecurity program.

Liquidity

As of September 30, 2024, Blackbaud had a debt-to-equity ratio of 0.1084, cash of $34.63 million, and an available credit line of $547.6 million under its 2024 Credit Facilities. The company's current ratio and quick ratio both stood at 0.6813. These figures indicate a prudent approach to leverage and a solid liquidity position.

Growth Strategy

The company's growth strategy is underpinned by its focus on innovation, customer success, and strategic acquisitions. Blackbaud continues to invest heavily in product development, with research and development expenses accounting for 14.0% of its total revenue in the latest fiscal year. This commitment to innovation has enabled the company to introduce a steady stream of new solutions and enhancements, helping its customers drive greater social impact.

Customer Base

Blackbaud's customer base is highly diverse, spanning the nonprofit, education, and corporate social responsibility sectors. The company serves over 40,000 customers, including many of the world's leading charitable organizations, universities, and purpose-driven businesses. Blackbaud's solutions are mission-critical for its customers, fostering strong retention and loyalty.

Recent Performance

In terms of recent financial performance, Blackbaud's third quarter of 2024 results were mixed. The company reported revenue of $286.7 million, up 3.3% year-over-year but missing the consensus estimate by 2.4%. Adjusted earnings per share came in at $0.99, falling short of the $1.05 expected by analysts. The underperformance was largely attributed to challenges within the company's EVERFI business, which represents approximately 7% of Blackbaud's total revenue.

Security Incident

In July 2020, Blackbaud informed customers that it had discovered and stopped a ransomware attack in May 2020, where a cybercriminal removed a copy of a subset of data from Blackbaud's self-hosted environment. The company believes no data went beyond the cybercriminal, has been misused, or has been disseminated or otherwise made publicly available.

As a result of the Security Incident, Blackbaud is subject to various legal proceedings, claims, and investigations. The company has incurred significant expenses related to the incident, including payments to third-party service providers and consultants, legal fees, settlement of government investigations, and accruals for certain loss contingencies. Blackbaud's insurance coverage was exhausted in the first quarter of 2022, so the company is responsible for all remaining expenses and losses.

For the nine months ended September 30, 2024, the company incurred net pre-tax expenses of $12.8 million related to the incident, including $6.0 million for ongoing legal fees and $6.8 million for additional loss contingency accruals. Blackbaud expects pre-tax expenses of $5-10 million and cash outlays of $8-13 million for ongoing legal fees in full-year 2024.

Outlook

Despite the near-term headwinds, Blackbaud management remains confident in the long-term prospects of the business. The company is revising its full year 2024 guidance ranges due to the continued negative financial impact of EVERFI. For the full year 2024, Blackbaud expects:

- Revenue in the range of $1.15 billion to $1.16 billion, representing organic growth of 5.2% at the midpoint, up from 4.8% last year. - Adjusted EBITDA margin between 33% and 34%, an improvement from 32.2% in the prior year. - Non-GAAP earnings per share between $3.98 and $4.16, up slightly from $3.98 in the previous year. - Adjusted free cash flow between $235 million and $245 million, a 12% increase over 2023 at the midpoint.

Blackbaud plans to provide specific fiscal year 2025 guidance in their February call.

Conclusion

Blackbaud's strong market position, innovative product portfolio, and robust financial profile make it a compelling investment opportunity in the social impact software space. The company's ability to navigate industry challenges and maintain its leadership status, coupled with its promising long-term outlook, position it well to deliver consistent shareholder returns. While the company faces ongoing challenges related to the 2020 security incident and its EVERFI business, Blackbaud's core Social Sector business continues to perform well, driving organic growth and improved profitability. The company's focus on recurring revenue streams and ongoing investments in cloud infrastructure and cybersecurity initiatives demonstrate its commitment to long-term success in the evolving social impact software landscape.