Blackbaud Inc Q3 FY2020 Earnings Call

Good morning everyone. Thanks for joining us on Blackbaud's third quarter 2020 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's President and CEO, 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 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. 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 substitution for GAAP measures. A reconciliation of GAAP and non-GAAP results is available in the press release we issued last night, and a more detailed supplemental schedule is available in our presentation on our Investor Relations website. Before I turn the call over to Mike, I'll briefly cover our upcoming investor engagement activity, which is available on our Investor Relations website. During the fourth quarter, our team will be virtually attending the Stifel 2020 Virtual Midwest one-on-one Growth Conference, Benchmark's Virtual Technology Conference; The 10th Annual Needham Virtual SaaS one-on-one Conference; The Stephens Investment Conference 2020 and the Raymond James Technology Conference. We will also be participating in virtual meetings hosted by Baird. With that, I'll hand the call over to Mike.

Thanks Mark. Good morning everyone and thanks for joining our call today. Our third quarter results clearly show that we are pivoting more toward profitability and earnings growth with a keen focus also toward improving our revenue growth rate coming out of this pandemic. This morning I'll share a few brief updates from the quarter before turning it over to Tony to cover the financials in more detail. First, I want to start by saying thank you to our employees for their dedication to serving our customers at a very high standard and the tremendous job they've done in 2020, adapting to the new work environment. I'm incredibly proud of how we have stepped up to support the unique needs of our customers as we all navigate these new challenges. It's really a testament to the people and culture at Blackbaud and our unmatched commitment to the social good sector. I would also like to provide a brief update related to our recent security incident. It's unfortunate the cyber attack happened and again on behalf of Blackbaud, I'd like to apologize to our customers involved in this incident. These types of cyber threats are on the rise, and over the last several years, Blackbaud has invested significantly in terms of dollars and human resources to enhance our cyber security program and prepare for an attack like this. Our top priority is supporting our customers and being diligent in our efforts to help them through this and ensure they have the information they need. Through our forensics investigation, we were able to understand exactly how this occurred and we've remediated the vulnerability which was tied to one of our early generation products. We are incorporating lessons learned from this incident to continue improving on our cyber security program and further harden our environments, while being transparent with our customers on our progress. I'll remind you that the majority of our customers and the majority of our private cloud environment were not part of this incident, and it did not involve solutions in our public cloud environments. As can be expected, the security incident resulted in a number of legal claims and regulatory inquiries. We carry insurance policies that we believe will provide coverage for a significant portion of current and expected future losses and expenses related to the security incident, although this is inherently difficult to predict. Turning to the quarter; each of our vertical markets continued to contend with the unique challenges posed by this pandemic, but one universal theme is the need to employ new strategies to advance their missions with a more digital-first mindset. We're hearing this in the market as organizations begin to plan for the future beyond the pandemic. Digital transformation has shifted from a long-term strategy to a daily reality, as organizations across the market have adapted to new and distributed ways of working. We believe this shift will play a powerful role in our long-term opportunity as new customers seek market-leading software solutions for their organizations, and existing customers consider expanding the Blackbaud solutions in their tech stack. The uncertainty and complexity of today's environment has created some short-term challenges for these organizations and as a result, impacted our team's ability to build new pipeline and elongated sales cycles, which are resulting in bookings falling short of budget for the quarter and year-to-date. We expect the shortfall to put pressure on both 2020 and 2021 revenues and as I've said before, we believe the challenges our markets face today will be a catalyst for driving digital transformation across the social good sector. It has never been more critical to have cloud software in place to support the missions of these organizations. It is clear social good organizations agree, as evidenced by the record-setting attendance at our Annual User Conference BBCON earlier this month. The re-imagined virtual format enabled us to significantly expand the reach of the event as we welcomed over 38,000 registrants from 70 countries. That's equivalent to well over a decade of our historic levels and by far the greatest number of prospective customers we've ever hosted, which shows a significant interest in Blackbaud and how our cloud solutions can help solve the challenges and opportunities social good organizations face today. The resounding theme throughout the conference was the resiliency of the social good community and we've received high marks for the interactive and engaging experience we're able to bring to our customers. Since the pandemic started, we've been agile as an organization with a relentless focus on driving value and outcomes for our customers and enabling them to quickly pivot their own operations and strategic efforts. In addition to the immense number of resources we provide to the market at no cost, we've also been reprioritizing and expediting product enhancements to support our customers' changing needs; for example, during BBCON, we highlighted a variety of innovations across our verticals that help customers adapt during COVID-19. These include fitness tracking integration and Blackbaud's peer-to-peer fundraising portfolio, the new Virtual Prayer Wall that enables congregates and faith organizations to share and respond to prayer requests online, text messaging capabilities for scholarship directors and higher education institutions to ensure no funds were going unutilized, and the expansion of global capabilities of YourCause CSRconnect, making it easier for companies to bring employees across geographies together in support of causes around the world. These are just a few of the many product announcements made during the quarter. As you know, the first of our four growth strategies is delighting customers with innovative cloud solutions, and our commitment to innovation also extends outside the walls of Blackbaud as we recognize the unique needs of social good organizations across the markets we serve. Our Blackbaud SKY platform is powering an unprecedented level of innovation, fueled by our engineers and enabling a growing developer community and our partner network with the tools to extend and enhance customers' Blackbaud solutions. Many Blackbaud products are built with open APIs allowing for seamless integration with software from other providers, making it easier than ever for our customers to meet their organization's unique needs. Now, in addition to the option to create a custom solution, we recently released the Blackbaud Marketplace offering curated third-party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact by enhancing their best-of-breed Blackbaud solutions with specialized capabilities. This includes connecting to bidders at a fundraising auction, texting volunteers about an upcoming event, tracking branded merchandise purchased in an online store, or automating outreach to donors eligible for a matching gift. Also, building on our partnership with Microsoft, we recently released a Microsoft Power Platform Certified Connector, enabling non-developers and social good organizations to integrate data and improve workflows between Blackbaud's Raiser's Edge NXT and hundreds of other applications. We also announced a robust integration of Luminate Online and TeamRaiser with Salesforce, enabling organizations leveraging Salesforce as their CRM to drive truly multi-channel campaigns and leverage best-in-class fundraising and engagement functionality within the Luminate Online and TeamRaiser platform. In addition to openness in our product, we're also committed to building a more inclusive tech community focused on social good. Last year, we announced the social good startup challenge in partnership with One Million by One Million. This year, we've expanded this initiative into the Blackbaud social good startup program, a year-long accelerator designed to support innovative start-ups with the potential to impact the ecosystem of good, and in alignment with our commitment to diversity in the tech community, we will be focusing our January 2021 cohort on diverse founders. Blackbaud is steadfast in our commitment to innovation to enable the success of our customers, which is why we're accelerating investments in areas like R&D, security, and the shift to third-party cloud service providers. Delivering rapid innovation is just one way we're positioning the company to be stronger post-pandemic. We've also been taking the lessons learned over the past several months and reevaluating elements of our workforce strategy as we define the future of work at Blackbaud, in anticipation of our offices reopening. We have a culture built on creating employee experiences and programs that further develop and attract the best talent while promoting a diverse and inclusive environment. For us, this means adjusting our workforce strategy to provide more flexibility for employees to work remotely. We've proven we can operate effectively as a remote workforce and this change enhances the positive employee experience we want every employee to have at Blackbaud. It also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it creates efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices. We're also applying a digital-first mindset to how we operate, both in support of our employees and our customers. This includes the investments we've made in digital marketing to enhance our digital footprint and enable us to be more prescriptive and cost-effective in our marketing efforts. We've seen some solid early proof points, such as our investment in market-leading conversational AI software allowing us to engage with customers on their time, enabling us to qualify leads 24/7 without any headcount, ultimately increasing lead generation and accelerating sales cycles. Given the early success, we expanded this functionality globally in Q3. We believe the impact of COVID-19 will accelerate the existing trends driving the adoption of modern cloud solutions in our market, and this is just one example of how we continue to put a heightened focus on lead generation and driving sales effectiveness as we look ahead to 2021 bookings. We've had a singular focus on the social good sector for nearly 40 years and we remain very well positioned as a leader in this market and the best long-term partner for social good organizations. I'm excited about the changes we're making to enhance the future of work at Blackbaud for our employees while delivering unmatched innovation. Our customers are resilient and continue to find creative ways to ensure they can continue to deliver on their missions. The challenges posed to our customers during the pandemic have created a short-term uncertainty in our revenue outlook and will limit our ability to drive near-term revenue growth. As such, we've made a pivot to place greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable. Over the long term, we see an opportunity to drive meaningful earnings growth as we execute our balanced strategy with a sharper focus on profitability. With that, I'll turn the call over to Tony before we open it up for Q&A.

Thanks Mike. Good morning everyone. I'll briefly cover our key third quarter highlights and underlying trends before opening up the line for your questions. You can refer to yesterday's press release and the investor materials posted on our website for the full detail of our Q3 performance. Turning to our results, as we said, the current environment is putting pressure on near-term revenue growth and third quarter revenue declined 2.9% versus Q3 of 2019, with recurring revenue declining 2.6% on an organic basis. This was largely in line with our latest planning scenarios. The decline in recurring revenue was primarily driven by lower transactional revenue in the quarter as customers continue to be challenged with pandemic-related declines in missions and in-person events that had to be shifted online, postponed, or altogether canceled. While we've seen encouraging signs of customers offsetting the temporary losses in volume tied to these activities with online events and campaigns, transactional revenue remains our least predictable revenue source given the uncertainty around the length and duration of the pandemic. Our contracted recurring revenue performed well as renewals continued to trend ahead of our original plan with over three quarters of 2020 now behind us. Looking ahead, we expect the shortfall on pipeline and bookings will put pressure on our fourth quarter and more so on full-year 2021 revenue. Consistent with Q1 and Q2 of this year, we reclassified approximately $4 million of retained and managed services that would have historically been presented in recurring revenue to one-time services and other revenue. This reclassification reduced our organic recurring revenue growth rate by approximately 200 basis points or 140 basis points after normalizing 2019 for the change. For more detail, please refer to the supplemental schedule included in our investor presentation available on our Investor Relations website. Moving to earnings, our third quarter gross margin was 60.1%. We generated operating income of $48 million, representing an operating margin of 22.4% and diluted earnings per share of $0.73. Similar to last quarter, our early actions in response to the pandemic generated a significant cost reduction for the quarter. While not all of these actions will repeat next year, the third quarter is indicative of our ability to elevate our margin profile, inclusive of near-term pressure on revenues and critical investments in the business related to areas like engineering, security, and our shift of cloud infrastructure to third-party cloud service providers. Many of you are familiar with the Rule of 40. We're confident in our ability to deliver a sustainable 20% plus operating margin going forward and we believe we have ample room to improve on the Rule of 40 through a combination of growth and a long-term opportunity to scale profitability much more significantly. Now, let's turn to the cash flow statement and balance sheet. Our Q3 free cash flow was $41 million representing a free cash flow margin of 19.2%. During the quarter, we completed the purchase of our Charleston headquarters building and adjacent land, which we currently lease. The upfront cash outlay of the transaction was approximately $16 million, which reduced our third quarter free cash flow margin by roughly 740 basis points. This is part of our newly expanded real estate strategy focused on optimizing our footprint for the future of work at Blackbaud including new exit plans for certain office leases around the globe. These early lease terminations will generate significant cost savings going forward and will give us additional flexibility as we evolve our workforce strategy. We expect the majority of these lease terminations to close during the fourth quarter with a one-time cash outlay of between $20 million and $25 million. We ended the quarter with $478 million in net debt. Our capital strategy calls for a debt-to-EBITDA ratio of less than 3.5 times and at the end of Q3, we stood at 2.0 times with $230 million of borrowing capacity. Our current debt is scheduled to mature in June of 2022 and we are currently in the process of amending, expanding, and extending our debt facility to provide us additional capacity and flexibility for the future. In summary, our customers continue to navigate the challenges caused by the pandemic, which will put pressure on our ability to drive near-term revenue growth in 2020 and 2021. Despite the uncertainty of today's environment, we believe we have a significant opportunity in front of us and we are well positioned to continue making the critical investments necessary to ensure the long-term success of the business. The third quarter reflects our ability to manage a wide array of possible outcomes that could result from the pandemic, while remaining committed to driving increased shareholder value through profitability and earnings growth. With that, I'd like to open up the line for your questions.

Thank you. We will now take our first question from Tom Roderick of Stifel. Your line is now open.

So Mike, let me ask you the first question around the transactional side of the business. I mean, we look back at last quarter and you put up a pretty nice upside to the quarter, relative to a tough time I think the postmortem on it was the transactional business delivered particularly well, but that can swing both ways, and I wanted to dive in a little bit and see if you can give us a sense as to how much of that business on the payments transactional side is being driven by events versus other sort of giving endeavors, and then from the perspective of what you can do to gain some visibility in that process or even just the outstanding question of when do we start seeing events coming back. How do you sort of think about the outlook of that piece of the transactional business?

Sure, Tom. In the second quarter, we discussed our transactional and consumption business, which includes revenue from usage and payment transactions. During Q2, we observed some shifts in customer types due to global events, which influenced our results positively. Looking at the third quarter, it's notable because it's summer, a period filled with events. Many of our non-profit clients typically host galas and various activities during this time, but those were significantly impacted by COVID, leading to lower revenue in Q3. The positive aspect is that these customers remain with us; they don't require re-implementation, just need to resume their events for us to generate revenue. We're in touch with them, and they're planning to start events again. However, it's challenging to gauge the overall market outlook for when and to what extent these activities will resume. Some have tentatively rescheduled for Q4, but it's not widespread yet. Thus, we see potential future growth, as our current customers are not at risk, and our retention rates are high. The primary factor affecting our Q3 performance was the lack of events during the summer months.

I believe everyone is looking forward to the return of those events, so thank you for that. I'll leave it to either you or Tony to address this. Regarding your commitment to achieving an operating margin level that exceeds historical figures, it’s impressive that you're willing to aim for higher than 20%. I'm interested in your thoughts on the investments relating to sales and marketing, particularly in new markets you're entering, such as faith-based sectors and higher education, which have faced significant challenges during this period. How do you plan to allocate resources to these areas, and what outcomes do you anticipate from those investments over the next 12 to 18 months?

So a couple of things here, the moving parts there, we're actually increasing investments in R&D in several areas that will drive further innovation, so we're doing that at the same time we're increasing margin in the company. Sales and marketing-wise, we've seen some really good returns on our digital investments, so we've really ramped up digital investments across the company and then actually have learned a lot since March with all of our folks working at home. So all of our folks are selling via web action teams, online, remote we're doing demos that way. We've really ramped up our investment in digital lead generation which is great, so the lead cost per lead is a heck of a lot less that way we've scaled up our investments in systems and people who are experts at that and seeing a good return. I mentioned in my prepared remarks, we've put some new tools in, that conversational AI tools, which is sort of a 24/7 way to qualify leads through a software tool, so really good scalability. So, we're looking to drive better scale that way and if we keep driving a good level of our expected bookings, although obviously this year's tough on bookings because of COVID. So, our digital investments are really proven out. In my prepared remarks Tom, I talked about just BBCON right just was fantastic 38,000 registrants which is like 10 years of BBCON and a huge percentage of that is prospects as well. The other thing I'd like to just mention is kind of tied to your question around Tony's comment on driving more margin long term. So, we're going to have an Investor Day that we're going to schedule, not quite sure when. We'll have an Investor Day, and we will once again have long-term aspirational goals which the community has been asking for that a lot, so we're going to do that again as we make this shift to profitability so we can talk about what that might look like on a longer-term basis.

One follow-up on the transaction that I want to ensure we addressed is that since we withdrew guidance, it's challenging for me to discuss the models in comparison to our internal expectations. However, I can tell you that transactional revenue actually performed better than our original plan for the year through the second quarter. It fell slightly short of our original plan in the third quarter but still exceeded our scenario forecasts for that quarter. There seems to be a bit of a disconnect between market expectations and our internal projections, as transactions performed quite well. To Mike's point, the summer was particularly impacted because many events, such as runs, walks, and galas, could not occur due to social distancing and other pandemic-related challenges. Additionally, I want to highlight that services have consistently underperformed against our plans for the entire year. This is due to two factors: first, it has been difficult to mobilize resources with our customers because of the pandemic’s impact, and second, our ongoing transition to the cloud has reduced the need for customization and the types of services we have historically provided, which continues the trend we've observed over the last couple of years.

Thank you. And our next question comes from Brian Peterson of Raymond James. Your line is now open.

Good morning, and thanks for taking the question. So wanted to follow up on Tom's last question and it sounds like there's a lot of efficiencies gained through some of the digital marketing motions and the digital motions that you guys have put in place. I'm just curious how should investors think about the return to growth as maybe some of these macro trends normalize? With the sales capacity and these marketing motions, obviously, we don't have a crystal ball and what the macro will be, but I just kind of wanted to understand conceptually how we should be thinking about growth and the investments that you're making when that macro stabilizes?

Thank you, Brian. We serve a variety of customers who are in different situations due to COVID. Educational institutions are operating normally, and we're seeing typical transaction activity, but bookings have slowed as they adjusted to the pandemic. Some institutions are fully remote, while others have a mix of remote and in-person classes. They have been adapting their operations over the past couple of months. Other customers, like small businesses, have fewer events planned, and it's uncertain what that will look like in the near future. However, we believe we are well positioned since these customers remain loyal, and our retention rates are high. Events will resume, as they are a key source of revenue. Many have shifted to digital events and found some success, but the ongoing impacts of COVID make it challenging to predict future performance in that area. Lastly, we are focused on improving margins and scaling sales through digital channels, while also hiring more engineers to drive innovation, which we are excited about.

And Brian, maybe I'll tag on there to Mike's from a timing perspective as Mike spoke about and we've talked with Tom the transactional side should bounce back very, very quickly, right. Assuming next year and the summer we're allowed to have the runs and the walks and the rides and the galas etc., we'd expect that transaction revenue to come back almost overnight with those events being allowed. So, I think that comes down to where we are as a society and whether we have vaccines and those things that will really drive that. The other piece, as you are aware, has a little longer-tail. We're seeing some softness in bookings and pipeline because of the pandemic and that's always going to hurt us through 2021 just with the ratable revenue recognition on those bookings. And so we're seeing a little bit of impact this year, but it's going to be more visible next year because we have a full year worth of revenue impact from those bookings shortfalls. I think that lag, assuming the market comes back sometime next year, has a six month to 12 month kind of lag before we work our way through that. So, I would say if we get back to normal sometime in the first part of next year, I'd hope by early 2022 we'd kind of have rebounded and see that resurgence of growth overall. Transactions would come back much quicker, with a little more delay just on the revenue recognition on the subscriptions.

The last thing I'll add is that we are really focused on the combination of driving up the ladder on the Rule of 40. This means we are committed to improving both the top and bottom lines of the P&L, and we plan to be quite aggressive in pursuing that going forward.

Great. That's a lot of comments, great color there. And just a question I was getting from investors yesterday, I don't know if you had any comments on this, but just as we think about your transactional business, I know you have some kind of Smart Tuitions there, some exposure in higher ed but I'm curious if we were to overlay your transactional business kind of within certain end markets, what are the top two or three or anything in terms of exposure, relative to the customer base? Any color you can add there?

So the Smart Tuition and the sort of education sector is doing just fine and again, the pressure is what we just talked about, it's all of these events in the summer and that really didn't happen on the downside, putting pressure. It's really all that type of activity, a gala, a walk, a ride that really didn't happen in the summer because of the required social distancing.

Brian, I want to highlight that online giving saw a significant increase due to the pandemic, as many people shifted to digital platforms. This change was particularly noticeable in the faith-based market, where individuals continued to contribute to their churches even without traditional in-person methods. In several regions, we experienced a notable rise in transactional giving. As Mike mentioned, we anticipated these challenges in Q3, primarily because we were unable to host key events. The expected revenue from TeamRaiser also fell short due to the cancellation of runs, walks, rides, and marathons, but I believe it will recover quickly once events resume. I also came across a comment from a sell-side analyst who expressed surprise at our gross margin not being higher, given the transaction shortfall in the quarter. It's important to remember that some transactional offers have high gross margins, while credit card processing can lower margins. However, offerings like tuition and certain JustGiving models, as well as usage-related TeamRaiser, are actually favorable in terms of margin. Therefore, we shouldn't view all transactions as detrimental, as the loss of some higher-margin transactions significantly affects our operating margin as well.

That's a good point.

I also want to add that one of our main platforms, Luminate Online or TeamRaiser, drives a significant amount of usage and payments. We are expanding its capabilities and have announced a strong integration with Salesforce. This expansion will attract many customers who choose us and Salesforce for various reasons. The integration opens up opportunities for increased usage and payments in these scenarios.

And maybe just a follow-up on that Mike, I know the Salesforce question comes up with investors. I know you've answered in the past with this integration. How do you feel like that impacts your flexibility to work with customers in different ways?

I think that opens up a lot. Just a couple of things I'd like to provide because we get asked the Salesforce question a lot, and so in the world of software, typically what looks like competitors sometimes integrate like we just did with the Luminate. By the way, we also announced some robust integration with Raiser's Edge NXT and Salesforce, enabling organizations leveraging Salesforce as their CRM to drive truly multi-channel campaigns leveraging best-in-class fundraising and engagement functionality. A couple of data points on Salesforce because we get asked this a lot and we've kind of realized we haven't provided probably enough granularity, so just a couple of things. We went back and looked several years and our win rates against Salesforce have not changed and they're basically the same win rates against our other competitors, there's no difference. And the second really interesting, I think data point, because we've been saying this at the macro, but not provided the data we see Salesforce in about 5% of our total opportunities, 5% and it's a little different by vertical, right by the markets we're in. So, we always would say we don't see it in all of the verticals and kind of explain faith-based or this or that one. But, if you look at all of our deals, we see them in about 5% just to be clear just to provide more information there.

Thank you. And our next question comes from Rob Oliver, Baird. Your line is now open.

My questions are directed to you, and I have a quick follow-up for Tony. Mike, I'm curious about the Microsoft partnership as we are a few years in. Can you provide us with an update? In the past, you've mentioned that there have been significant deals that may not have occurred without Microsoft, particularly during the pandemic when that channel has been very active. Now that we have some years behind us, what kind of momentum, if any, are you seeing in the Microsoft channel? I would love to hear some examples of customers, but perhaps we can discuss that at the upcoming investor event.

Yes, I would be happy to share customer examples. We are collaborating primarily on enterprise deals in sectors like healthcare and higher education, and the partnership has been positive. We are working closely with their executives in these business units, as well as their non-profit division, and things are progressing well. Our relationship has developed from the non-profit sector into higher education and healthcare, resulting in more connections and collaborative sales efforts. Additionally, we are advancing our product roadmap in these areas, having made significant integrations with Raiser's Edge NXT and Office 365, for instance. We are also engaged with Azure as we transition our operations from our co-location data centers to Azure, and overall, the relationship is strong. The compensation model is complementary since their teams benefit from Azure usage and we are moving our products onto Azure. Their incentive to partner with us in the marketplace encourages Azure consumption, aligning well with our direction.

I recommend that you monitor our SEC filings as there will be more detailed information available regarding this matter. We have solid insurance coverage in place, and our insurers are collaborating closely with us. The key aspect is coordinating with them and ensuring clarity on what is covered and what is not. Currently, as will be detailed in our quarterly report, we have not recorded any material liabilities. We do not expect that there will be any significant amounts that need to be accrued which won't be covered by insurance on a net basis. There will be some receivables and liabilities recorded, but at this moment, nothing material to the company. However, we are dedicating a considerable amount of time and internal resources to this issue. A significant aspect you will notice in our numbers is our ongoing investment in our internal cybersecurity resources. We have a strong team in place that has done an excellent job. Although the situation is challenging, we successfully prevented a takeover of our systems, which is positive. There will be ample disclosure on this matter in the financial statements, and we will include any estimated costs we anticipate incurring in the 2021 plan. At this stage, we believe that insurance will cover most costs, except for our internal resources and time.

Thank you. And our next question comes from Kirk Materne of Evercore ISI. Your line is now open.

Mike, I was wondering if you could just characterize where you think the conversations with clients are today around sort of the non-transactional side of your business? Meaning, are clients still just trying to sort of stabilize and sort of make sure they can function period or are they starting to think ahead to where they need to be a year or two from now? Really budgets are tight, they might not want to do anything, but I'm just kind of curious if at least the tone of the conversations is perhaps changed today versus say six months ago?

Yes, there has been a change. Many of our verticals are looking ahead and recognizing the significance of digital cloud platforms, as they have had to utilize various tools like Zoom and others. However, there are still some that are not in the same position, particularly in our arts and cultural sector where some institutions are operational and performing well, but the performing arts centers have yet to open, placing them in a different situation. Overall, across the board, there is a forward-looking mindset as we navigate through this ongoing COVID situation. They acknowledge that it will be a long-term reality, and they need to continue pushing their businesses forward while considering the future. The conversations have predominantly shifted in that direction, though our bookings remain considerably lower than what we had anticipated. Nonetheless, the tone of discussions has indeed changed, though not uniformly across all markets.

Considering your business moving forward, to what extent can your sales efforts be transitioned to a virtual format in the long term? Does this differ between expansion and new business? I assume there's still a preference for face-to-face interactions when possible, but can you achieve greater efficiencies through virtual sales post-pandemic? I also wonder how this impacts your confidence regarding profit margins. Could you elaborate on this? Thank you.

We have learned a lot since March and are being very aggressive with our real estate plans. We've implemented new workforce policies that promote remote work across all job types, which will lead to cost efficiencies and enhance our access to skills and diversity by removing geographical constraints from various roles. Two years ago, we were lagging in investing in digitally enabled sales, despite having developed strong internal IT platforms. Over the past year, we have made significant strides by bringing in experts and introducing numerous platforms, which have been effective. All our teams have been selling virtually since March, conducting demos without face-to-face interactions. Although our bookings have declined due to COVID, our operations are running smoothly, and I anticipate this trend will continue. I do not expect us to revert to our previous ways, as there are numerous opportunities ahead. Most of our deals now fall within the small and medium-sized business model, which operates heavily online. In the past, we did not capitalize on the digital potential of the SMB model, leading to unnecessary costs. However, we have recognized the potential for digital scalability in this area since our investments began over a year ago due to COVID. There are many valuable lessons learned since March that will enhance our sales and marketing scalability, providing opportunities for growth on both the revenue and profit sides in the long term.

Thank you. And our next question comes from Ryan MacWilliams of Stephens Incorporated. Your line is now open.

Thanks for taking the question, just one for me today. As we're in this evolving market environment and you're turning toward your leverage target, any changes to your acquisition criteria here? And given the difficulties in some of your end markets, have you seen additional target opportunities proactively reach out to you? Thanks.

We are staying closely connected to ongoing activities. There are some lower valuations due to pressure on smaller companies. Our strategy remains the same in the short term; we've focused on the Rule of 40 and profitability, which are more manageable and a good model for us. So, our strategy hasn't changed. While we continue to evaluate options, we are also focused on enhancing profitability. I believe there will be ongoing opportunities related to that.

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Mike Gianoni for any closing remarks.

Great. Thank you operator, I'll just close by saying that I'm proud of our execution across the board in the quarter. The pandemic has created some near-term challenges, but I believe we have a significant long-term opportunity in front of us, and we're uniquely positioned to elevate our status as a leader in this marketplace and I think we've done some of that with things like BBCON recently. We're currently finalizing our 2021 budget and refreshing our long-term plans, which again puts a greater focus on profitability and the whole Rule of 40 model, and we plan to share more early in 2021. As I mentioned, we'll have an Analyst Day and will also provide long-term aspirational goals at the Analyst Day as well, and Tony and I thank you for participating today and in today's meeting and the call. So, thanks everyone. Have a good rest of your day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.