BLKB - NASDAQ

Good day, and welcome to Blackbaud's Third Quarter 2025 Earnings Call. Today's conference is being recorded. I will now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Thank you for joining us on Blackbaud's Third Quarter 2025 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and CFO. Mike and Chad will make prepared remarks, and then we will open up the line for your questions. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. 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 to only 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. And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. I'm pleased to say that Q3 was another quarter of very strong results across revenue, EBITDA, EPS and cash flow. Blackbaud generated revenue of $281 million, which is 5.2% organic growth year-over-year and adjusted EBITDA margin of 35.4% up more than 200 basis points year-over-year, non-GAAP diluted earnings per share of $1.10, up 11% year-over-year and particularly strong free cash flow of $125 million. These results continue to demonstrate the power of our people, the importance of our product offerings to our customers and our widening moat as the market leader, providing the most comprehensive suite of purpose-built and mission-critical software for the social impact sector. Our solutions drive revenue and enhance employee efficiency, allowing our customers to spend more time focusing on what matters to them, making concrete improvements in the world through their vital social impact work. And our end markets continue to demonstrate the resiliency. Annual charitable giving in the United States alone is nearing $600 billion, up more than 6% year-over-year. Recent technological advancements have amplified the value we can create for our customers and are changing the way we help them fundraise. AI is quickly becoming a fundraising standard with predictive analytics and personalization now essential for donor growth. Digital-first has become the de facto method of donor engagement with hybrid events, influencers and peer-to-peer fundraising requiring online and off-line solutions. And corporate giving is at an all-time high, making it the fastest-growing nonprofit revenue source over the last 5 years. Blackbaud sits squarely at the forefront of all these market trends. We continue to focus on 3 specific areas: acquiring new logos, driving innovation and as a result, strengthening our customer relationships through selling additional solutions and renewals. On top of these, we achieved higher profitability through operational discipline and efficiencies that continue to yield positive results. In regard to signing new logos, over the past year, I've highlighted a number of significant wins across many of our verticals. Additionally, we continue to see meaningful cross-sell wins. Here are a few examples of why Blackbaud was the right choice for their organizations. St. Mary's College of California is recognized as one of the top 5 universities on the West Coast and was a major new logo win. They have been using another legacy system and after a detailed review of the power and capabilities of Raiser's Edge NXT, they signed a multiyear agreement to meet their fundraising goals. Additionally, Concordia College based in Minnesota was a large cross-sell for us. They signed a 5-year agreement to purchase Raiser's Edge NXT, along with our added analytics capabilities to produce more robust data-driven fundraising campaigns. Concordia's advancement and research team selected us because no other company can provide the depth and capabilities around data to better engage with existing and new donors. Our second primary focus is our relentless pursuit of innovation where we continue to advance the industry standard. Last quarter, I discussed how our Raiser's Edge NXT transformation was in full effect with hundreds of updates in the last quarter alone, along with other key developments and partnerships driving deeper product differentiation and abilities for our customers. This quarter, we continue to deliver even greater innovation. This was showcased in early October at bbcon 2025, our annual customer event. With over 2,000 people in attendance and many more virtually, we began the conference by outlining all of last year's 6 waves of innovation and how we've delivered on those commitments. We then unveiled what's coming next, powerful sector-specific AI capabilities fueled by our unmatched data embedded directly within Blackbaud solutions. Among the 70-plus planned or available AI enhancements are predictive AI that's helping customers identify billions of dollars in untapped giving potential, generative AI-powered acknowledgments that are speeding and enhancing communication with supporters and the ability to chat with Blackbaud AI as a coach and assistant that will unify insights across business offices. At bbcon, we also launched our new agentic AI suite, Agents for Good, to help social impact organizations expand their teams with virtual team members and achieve more at scale. This suite of agents from Blackbaud will turn agentic AI into active teammates that autonomously execute complex high-value work under the oversight of a human manager, freeing up teams across fundraising, finance, corporate impact and more. The first Agent for Good, a development agent natively embedded within the trusted Blackbaud environment will enable teams to identify and steward donors they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past. A number of early adopter customers highlighted their use of our new development agent to crowded rooms at bbcon. They discussed the great potential for agentic AI in the social impact sector to help customers unlock new levels of effectiveness and deeper connections across critical fundraising operations. The customer reaction to these announcements was positive and energetic. We frequently had standing room-only crowds for our demos and Q&A sessions. We know our customers prioritize value, ease of use and proven outcomes. And we know that the social impact sector as a whole requires solutions that will harness the power of these new technologies to drive their success. Our AI solutions will deliver on both of these fronts. We continue to emphasize our operational rigor to drive increased profitability and strong cash flows, and our Q3 and year-to-date results are a strong testament to that discipline. Additionally, Chad will discuss some investments we've made to support future profitable growth as well as some cash benefits related to tax changes in the One Big Beautiful Bill. Let me conclude by offering what you can expect from Blackbaud in the future. We believe Blackbaud is a sound investment choice that has the potential to create substantial shareholder value, a belief that is supported by our strong 2025 year-to-date performance. As a reminder, the framework we're targeting going forward includes mid-single-digit plus organic revenue growth, EBITDA growth in excess of revenue growth, double-digit diluted EPS growth and driving very strong free cash flow to empower a purposeful capital allocation strategy. Our near-term capital allocation priority remains stock repurchase, especially at current valuations. We expect to remain an active purchaser of Blackbaud stock in the fourth quarter and beyond. We are increasing our stock repurchase target from 5% to 5.2% to 7% for 2025. Chad will provide more of the specifics on our plans across these metrics in his guidance section. But we look forward to continuing this journey and offering our shareholders increasing value in the coming years. With that, let me turn the call over to Chad.

Thank you, Mike, and good morning, everyone. Blackbaud continues to be well positioned for long-term success, delivering consistent growth and enviable profitability. As Mike outlined, Blackbaud executed well in the third quarter, a strong follow-on to our Q1 and Q2 performance. We remain committed to providing investors an attractive financial model balanced between growth in revenues, earnings and cash flows, along with a prudent and purposeful capital allocation strategy. Mike walked through the high-level Q3 results, which tell a story of consistent mid-single-digit top line growth, improved profitability and strong free cash flow. But to reiterate, Q3 organic revenues were up 5.2% to $281 million, a result of solid contractual recurring revenue growth and continued strength in our transactional recurring revenue lines. Adjusted EBITDA of $100 million was up nearly $5 million with a 220 basis point improvement to margin. Improved revenue and EBITDA margin speaks to the power of the company's 5-point operating plan, which continues to positively impact earnings per share. Non-GAAP diluted EPS increased to $1.10 compared to $0.99 last year, an 11% increase year-over-year. Adjusted free cash flow was $125 million, up from $98 million last year, representing adjusted free cash flow growth of 28% year-over-year. Our strong free cash flow generation gives us confidence to continue significant investment in a number of critical areas like product innovation, stock repurchase and debt repayment. In the third quarter, we repurchased approximately 460,000 shares, bringing our year-to-date total through the third quarter to nearly 2 million shares. Including net share settlement of employee stock compensation, this represents approximately 5.2% of the company's common stock outstanding as of December 31, 2024. This buyback activity continues to demonstrate our strong belief in the value of Blackbaud and as Mike mentioned, we expect to be an active purchaser of Blackbaud stock in the fourth quarter and into 2026. Additionally, leverage decreased to 2.4x in the third quarter compared to 2.7x last quarter and 2.9x in Q1. Before I move to guidance for the remainder of 2025, there are several housekeeping items that I wanted to highlight that may influence our numbers and help you set your models for both the year and upcoming quarters appropriately. Thinking about revenue seasonality, our transactional revenue can create fluctuations from quarter-to-quarter with Q4 typically being our highest revenue dollar quarter. Our annual merit increases for employee compensation went into effect on July 1, so Q3 and Q4 tend to have higher compensation-related costs compared to Q1 and Q2. We continue to analyze the implications of the July tax law changes and believe it will meaningfully reduce cash taxes for the company through 2027. We have updated our 2025 free cash flow guidance to include the anticipated cash tax benefit for this year, and we'll share more on the estimated benefit to 2026 free cash flow when we provide formal guidance in February. We made a number of meaningful incremental investments in the third quarter tied to product innovation and future growth drivers, including accelerated investment in the development of our agentic AI offerings. We estimate these incremental investments will total approximately $7 million between the third and fourth quarters and are contemplated in our full year 2025 guidance. Finally, the company identified a prior period noncash error related to the year-end 2024 calculation of the valuation allowance in accounting for income taxes. The correction of this, along with other immaterial prior period errors resulted in immaterial impacts to our previously filed financial statements. Further information can be found in our earnings press release and in our 10-Q once it's filed. Moving now to guidance for the remainder of 2025. Our guidance for the year assumes no material changes, positive or negative in the current macroeconomic landscape. We are reiterating our guidance across all metrics for 2025 with the exception of increased free cash flow, as I noted previously. Regarding revenue, we are projecting revenue in the range of $1.120 billion to $1.130 billion, representing organic growth at the midpoint of approximately 5% on a constant currency basis. Shifting to profitability. We continue to focus on margin expansion opportunities while at the same time, making investment in the business in key areas like innovation, artificial intelligence and cybersecurity. Therefore, we anticipate EBITDA margins of approximately 35.4% to 36.2%. As a reminder, EVERFI's contribution to our 2024 EBITDA was approximately $10 million to $15 million. After adjusting for the estimated impact of the EVERFI divestiture, the midpoint of our EBITDA margin range implies approximately 7% growth in adjusted EBITDA dollars year-over-year. With the overall revenue and spend configuration I just outlined, we expect 2025 non-GAAP diluted EPS in the range of $4.30 to $4.50. After adjusting for the estimated impact of EVERFI divestiture, the midpoint of our 2025 non-GAAP diluted EPS range implies an approximately 11% growth rate year-over-year. The combination of higher growth and better margin is expected to result in a Rule of 40 at constant currency of 40.5% at the midpoint of guidance for the full year. We continue to focus sharply on driving adjusted free cash flow and returning capital to our shareholders. For the year, we're increasing our adjusted free cash flow guidance to $195 million to $205 million. This increase is directly tied to the anticipated 2025 cash tax savings related to the One Big Beautiful Bill Act and net of the incremental innovation investments mentioned earlier. And as we discussed earlier this year, there are approximately $60 million of onetime items in working capital fluctuations negatively impacting our 2025 free cash flow outlook that we do not expect to repeat in 2026. You can find more details on Slide 24 of our investor deck. Moving to our capital allocation strategy. We continue to prioritize stock repurchase. In fact, since the fourth quarter of 2023, we have reduced our common stock outstanding by 10%. We estimate that we will end 2025 with a weighted average diluted share count between 48.5 million and 49.5 million shares. And to help you with your modeling, when you combine the nearly 2 million shares repurchased year-to-date with the planned future repurchases for Q4 2025 and 2026, we anticipate a preliminary range of 46.5 million to 47.5 million weighted average diluted shares for next year. Regarding longer-term plans, we expect to continue to repurchase shares annually beyond 2026 as well as evaluate debt repayment and tuck-in M&A. We have a lot to be proud of and a lot more to look forward to in Q4 2025 and beyond. As such, we remain focused on providing enhanced value to our customers and shareholders. At this time, I'll ask the operator let's open up the line for questions. Operator?

[Operator Instructions] Our first question is from Brian Peterson with Raymond James.

Congrats on the quarter. So Mike, I just wanted to follow up on some of the customer feedback post bbcon. I know there's a lot of buzz on AI and agenetic functionality. How do you think about the adoption of agentic AI in the nonprofit space? And as we're thinking about your monetization potential over the next few years, what do we think that could mean to revenue growth?

Yes. Sure, Brian, thanks. A lot of our bbcon main stage and breakouts was all about AI. We talked about 70 or so capabilities and products that we've announced, and they're going across the whole product portfolio. So there's a lot of excitement there. We've already released several in our solutions. We have not yet monetize those. Some that we announced, we are going to be cross-selling those in this quarter. So brand-new products like the Development Agent. For example, we have a solution called Prospect Insights and from an adoption standpoint, to your question, about 40% of our customers on that platform adopted it pretty quickly. So there's adoption happening with these capabilities. We're also building the appropriate infrastructure for -- and multi-agent environment. We announced a catalog that we called Agents for Good and the first product is the Development Agent. So there will be multiple new agentic AI solutions that will all be monetized and upsold to the existing customer base and prospective new customers.

Our next question is from Rob Oliver with Baird.

A question, Mike, it's for you. You called out some of the new logo wins and cross-sells. I wanted to focus on the new logo wins since that's been one of key tenets for you guys for growth over the next couple of years. Some nice logos. So I was wondering if you could provide any color for us on those, particularly around contract size, anything you're seeing on that ACV size? And then you said multiyear engagements, are these coming in at kind of the standard 3 years as well? And then when we might -- and recognizing you guys have a lot of customers at 40,000, but that number really hasn't moved in a few years. So when would we expect to see that these new logo -- this new logo push start to kind of move up that customer count? And then I had a quick follow-up for Chad.

Yes. Sure, Rob. Yes, we've got a big focus on new logos. I tend to talk about them on these calls every quarter and name a few. We're doing quite well with larger ARR deals actually. We're seeing the average ARR go up in the last couple of years. We're positioned really well for the mid-tier and enterprise-size customers. Given all the focus on innovation, we're actually adding more capabilities, which gives us an opportunity to drive more ARR with customers, especially when we combine multiple solutions in a single cell, if you will, the minimum is 3 years. We don't do contracts less than 3 years anymore. We started that a couple of years ago with the renewal program, which is also going really well. By the way, we'll be through 90% of that by the end of this year. That's just a normal course of business for us now, and we're still getting our price increases with those renewals that we talked about before. So doing really well, mid-tier and up. ARR is going up. We're doing more deals with multiple modules, if you will. One of the customers I mentioned, I think it was Concordia, signed a 4-year deal on that cross-sell. So we have, I think, about 20% or more of our customers that are 4 years and longer on their contract length now, Rob, as well. So the customer base is accepted quite well, multiyear contracts and we started it several years ago. So we're really pleased with that.

Okay. Great. Appreciate that color. And then, Chad, you mentioned the tax restatement, we'll run through that. I appreciate you calling that out. There was also some revenue reclassification. So I just wanted to have you walk through what that was? I saw the note in the release, but also kind of the rationale for why to reclass revenue now historically, it would be helpful.

Great. Thanks, Rob. So just to reiterate, the revision was related to an immaterial noncash error related to the year-end 2024, and that was related to the calculation of the valuation allowance accounting for income taxes. And it's a technical matter related to a limitation on net operating losses associated with deferred tax liabilities than associated with goodwill. So rather complex. The correction of the error increased our income tax provision by the amount that we talked about. The corresponding decrease in '24 was in net income. So the correction of the error along with the other immaterial prior period errors was corrected. The decision to adjust the other immaterial errors kind of best practice, if you will. So whenever you're going through a revision, again, kind of best practice to address those that are considered to be an error. So we adjusted those. For reference, the adjusting amounts related to revenue is somewhere south of $100,000. So immaterial. At the same time, we do take it very seriously and it has been contemplated in all of our guidance as well.

Our next question is from Kirk Materne with Evercore ISI.

Mike, maybe just going back to the first question a little bit on the agents. When do you think monetization of those could start for you? I assume it's sometime in '26. But relatedly, if someone is on Raiser's Edge already and their data is in Raiser's Edge, will their ability to get ROI from those agents be pretty quick, meaning if you -- once you're up and running with it, can you get value out of that pretty much immediately? Or is there data remediation work necessary on the back end?

Yes. So we are starting to sell those this quarter. So we'll get some modest revenue. We'll get some bookings and modest revenue next year, but it will ramp up. And again, that's the first agent. We have plans for many agents. That Development Agent, the ROI is pretty clear. It's a fundraising agent. So it's pretty easy to take a look at the subscription cost to that related to revenue or donations raised. So yes, we anticipate that to be a pretty quick ROI for our customers, and we already have early adopter customers using the solution and some of those folks were nice enough to get on stage and speak at bbcon a couple of weeks ago. So we expect to have a catalog of these agents across our different platforms. That's the first one out on Raiser Edge NXT that will be coming out on our enterprise CRM platform as well. We're very excited about it, and so are our customers. And it's a great opportunity for customers to be able to reach donors and drive new revenue for themselves where they don't have the capacity today to do that. I'll give you a quick example. Think of a university that might have 200,000 alumni and a handful of fundraisers that maybe can go after several thousand alumni. So there might be 180,000 untouched alumni. This is an opportunity to drive revenue from sources that are sitting there, but they just don't have the scale and capacity to go after that revenue. This will augment their staff and be able to do that and get new revenue lines for them. So the ROI will be quite clear. And this first agent, the pricing model is a typical multiyear SaaS subscription model.

Okay. And then, Chad, maybe somewhat just relatedly, just gross margins as you sell more agents, is there anything to consider on that front? I realize it's really, really small right now from a revenue perspective, so the mix won't really move. But just how should we think about that conceptually?

Yes. So I would say that you would have noted within our free cash flow raise for the quarter. So we raised the cash flow guidance by $5 million across the range. That was contributed to the tax legislation, net of incremental investment in innovation and AI. So we're being calculated in regards to the investments. It's still early days relative to what the gross margins will be, but we expect that the gross margin impacts will be favorable. And it's also important to say the opportunity relative to company EBITDA margins will also likely be positively influenced by AI-related investments as well, Kirk. So feeling good on that front.

Yes, Kurt, I'll just add since it's a gross margin question. I think we have a long runway to improve gross margins. Not just tied to new products, but just tied to some of our internal initiatives to remove some legacy software that we run the company on in our data centers. We've got a couple of small data centers yet to be closed, which we're working on. We've got -- our build-out of our India office is helpful in that regard. And we have many, many initiatives across the company using AI to run the company. So as a software company, we're both a consumer and a creator of AI. So as a consumer, we have a lot of solutions across pretty much every department that we're using, and we've yet to realize measurable productivity improvements from the use of those AI solutions, but we will. And I think there's great productivity and scale opportunity with those going forward.

[Operator Instructions] Our next question is from Parker Lane with Stifel.

This is Matthew Kikkert on for Parker. To start, I'm curious, after transactional revenue outperformance now continued, what structural drivers are giving you confidence in a higher growth rate for this revenue stream going forward? And to that point, were there any viral giving events in 3Q or that are expected in 4Q?

Yes. Matthew, thanks. This is Mike. So we're doing really well across all 3 of our transaction platforms. We're winning new business, we're adding volume. There were no viral events in the quarter. So we had a really good quarter on the transaction platforms, and it's all 3 of them, and they're a little bit different. Two are in Fundraising, one is kind of consumer, JustGiving; the other is donation processing embedded in our Fundraising solutions. And the last one is Tuition Management in our K-12 space. All 3 of them are doing well. We're expanding the footprint of those. We're cross-selling those. And just the fundamentals are doing really well there without having viral events. So we feel pretty good about the performance of those in the quarter and year-to-date and the trajectory of those going forward.

Okay. Great. And then secondly, as you continue to move towards Rule of 45, what are the primary margin expansion levers from here? And how much and when would you expect the Indian office investment to show ROI?

Yes. So I think you're going to -- what you can expect from us is sort of our year-to-date results going forward. We're going to keep driving the business to be mid-single-digit plus, higher EBITDA, double-digit EPS. I mentioned earlier, we've got some cost takeout opportunities in infrastructure that we're working on. We've done a good job with that in the last several years. There's more to go there. We're going to have an impact on productivity using AI in the company to run the business. We're coming out with new solutions. This agentic AI development agent I just talked about will be a great add to revenue and bookings in the future. We're doubling down on share repurchase. If you go back 2 years, we repurchased 16% of our outstanding shares. That nets out at about 10% after stock-based comp. That's a big priority for us as well. So I think all those things together make up the profile of the business that also includes a march toward a Rule of 45.

Okay. I think that's it for our questions today. Thank you, everyone, for joining us. We will be attending a number of investor events in November and December around the globe, actually, to include several investor conferences, which are listed on our Events page on our Investor Relations site. We hope to see you and/or speaking with you soon. From all of us here at Blackbaud, we wish you good health and a great day. Thank you.