Software as a service giant Blackbaud’s stock price was down slightly in midday trading Thursday at $70.80 after jumping 10.5% to $72.31 the previous day. The gain followed a reported 6.2% increase in total revenue for the third quarter of 2023 powered by net income of $9 million.
The $278 million in total revenue for the quarter represented organic growth of 8.3%. When adjusted for the slight foreign exchange impact of a strengthening British pound, organic growth at constant currency was 5.9%.
On an earnings call with investors, Blackbaud President and CEO Mike Gianoni and Executive Vice President and CFO Tony Boor reiterated the firm’s previous financial guidance for the year. Gianoni said this is based on Blackbaud’s 5-point operating plan to improve product innovation, accelerate bookings growth, optimize transactional revenue, modernize contract pricing, and improve cost management.
“I suggested that our plan would deliver a one-two punch — first, an improvement in profitability and second, improved organic revenue growth,” Gianoni said. “In the second quarter, the business delivered the first punch, much improved margins… This quarter, we also delivered the second punch with improved organic revenue growth.”
Doing so enabled the company to cross the threshold to its goal of achieving Rule of 40 performance this year, with a third-quarter result of 41.6%. The Rule of 40 is a principle that a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are considered to be generating profit at a rate that’s sustainable while companies below 40% might face cash flow or liquidity issues.
The company is hitting its targets via a combination of cost reductions, including layoffs earlier this year, and new product rollouts, official said during the call. Current products in the pipeline include streamlined donation software designed to enable higher conversion rates with fewer clicks and another new product called Impact Edge designed to integrate features of Blackbaud’s EVERFI education management software with its YourCause volunteer and giving data platform. “Leading Edge provides a single view of a corporation’s social impact program and replaces labor-intensive, manually produced reports into a standardized structure,” Gianoni said. “Current plans are to put this new solution into an early adopter program this year with a full rollout in the second half of 2024.”
The company’s strategy also includes strengthening contractual and transactional recurring revenue streams by incentivizing customers to move from one-year to three-year subscription renewals that have price increases embedded in years two and three. With recurring revenue constituting 97% of total revenue, doing so “provides a higher degree of revenue security; second, it dramatically increases revenue visibility and predictability, which aids planning; and third, it reduces the volume of internal work effort involved in the renewal process,” said Boor.
The financial projections for the remainder of this year come against the backdrop of lingering costs from Blackbaud’s May 2020 data breach that recently resulted in the company agreeing to a settlement requiring it to pay $49.5 million to 49 states and the District of Columbia. Blackbaud spent $4.1 million during the quarter on costs related to the data breach. Company officials said they expect to incur legal costs of $25 million to $35 million this year stemming from the data breach but anticipate a significant decrease in those costs for 2024.
Among the datapoints for the third quarter were:
- GAAP (generally accepted accounting principles) total revenue was $277.6 million, up 6.2%, with $269 million in GAAP recurring revenue, up 7.9%.
- Non-GAAP organic recurring revenue increased 8.3%.
- GAAP income from operations was $22.0 million with GAAP operating margin of 7.9%, an increase of 1,060 basis points.
- Non-GAAP income from operations was $79.6 million with non-GAAP operating margin of 28.7%, an increase of 960 basis points.
- GAAP net income was $9 million with GAAP diluted earnings per share of $0.17, up $0.37 per share.
- Non-GAAP net income was $60.5 million, with non-GAAP diluted earnings per share of $1.12, up $0.43 per share.
- Non-GAAP adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $97.1 million, up $30.2 million, with non-GAAP adjusted EBITDA margin of 35%, an increase of 940 basis points.
- GAAP net cash provided by operating activities was $128 million, an increase of $20 million.
- Non-GAAP free cash flow was $110.6 million, an increase of $21.2 million, with non-GAAP free cash flow margin of 39.8%, an increase of 560 basis points.
- Non-GAAP adjusted free cash flow was $117.9 million, an increase of $24.1 million, with non-GAAP adjusted free cash flow margin of 42.5%, an increase of 660 basis points
