Earnings Call Transcript - BLKB Q1 2026

Operator, Operator

Good day, and welcome to Blackbaud's First Quarter 2026 Earnings Call. Today's conference is being recorded. I'll now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Tom Barth, Head of Investor Relations

Good morning, everyone. Thank you for joining us on Blackbaud's First Quarter 2026 Earnings Call. Joining me today on the call is Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and Chief Financial Officer. 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. Today's discussion will focus on non-GAAP results. Please refer to our press release and investor materials posted to our website for full details on our financial performance, including GAAP results, full year guidance and long-term aspirational goals. We believe that a combination of GAAP and non-GAAP measures provides a more representative view of how we 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. We've also provided a slide presentation with supplemental data and additional highlights and financial metrics. The earnings release, supplemental tables and presentation are available in the Investor Relations section of our website on blackbaud.com. And with that, let me turn the call over to you, Mike.

Michael Gianoni, CEO, President and Vice Chairman

Thank you, Tom. Good morning, everyone. We appreciate you joining today. We delivered solid execution against our operating plan to start 2026 with a continued focus on efficiency and a strong pace of product innovation. AI enablement remains key to our success, both in terms of the capabilities we're delivering to customers and in the way Blackbaud is operating. We continue to invest aggressively in innovation to produce meaningful product enhancements throughout our portfolio, including generative and agentic AI capabilities. Our products enable our customers to dramatically improve engagement levels, raise more money and lead their organizations while increasing operational efficiency, ultimately allowing them to spend more time executing on their missions and less time on administrative tasks. No company can better help our customers deliver on their meaningful missions than Blackbaud. Blackbaud brings nearly 45 years of specialized domain expertise, serving as a system of record for our customers with deeply embedded workflows purpose-built for the social impact sector. Further, we have invested and continue to invest heavily in cybersecurity and AI governance to help ensure that our customers' data remains secure and that our AI solutions use data responsibly. Many organizations in our vertical markets have limited IT resources and face turnover and staffing shortages. We win because our solutions are intuitive, require fewer complex customizations and integrations and translate advances like AI into practical outcomes customers can trust, building confidence that is supporting longer contract terms at renewal. As I mentioned last quarter, over 20% of our customers are on four-year or longer contract terms. This quarter, we continue to see a nice mix of new customer logo wins and selling additional solutions to our existing customers. Some examples of new logos were competitive displacements across many of our verticals. This includes several private K-12 schools that purchased our total school solution, a performing arts center that moved to Financial Edge NXT and Advisory+ to unlock potential donors and meet their expansive goals, a well-known veterans organization that replaced a fragmented, siloed fundraising environment with our end-to-end solution, allowing a better view of their donors and improving collaboration across the fundraising team, and a U.K.-based nonprofit buying Raiser's Edge NXT as part of a wider digital transformation project and now benefiting from our AI innovation and solutions. To be clear, we are all in on AI and are confident that AI strengthens our ability to deliver differentiated solutions and drive future growth as well as improving how we run Blackbaud. While in the first quarter, our first agentic AI offering, the Fundraising Development Agent, launched into general availability ahead of schedule, we're still in the early stages of broader commercialization, which we view as potential upside over time as we make guidance and investment decisions. Our engineering teams are using leading generative AI tools, such as Microsoft GitHub Copilot, Anthropic Claude and other approved solutions to accelerate development, reduce time to remediate software issues and increase throughput on new product delivery. We're also expanding generative AI features across our portfolio, including Blackbaud AI Chat, which provides contextual answers and can initiate actions within workflows. Blackbaud AI Chat is differentiated because it's embedded within our systems of record, leveraging customer permissioned data, Blackbaud-specific data and years of social good benchmarks within a governed environment. Our competitive differentiation is clear. We have a data moat, one of the most robust sets of philanthropic and social impact data processed and secured in real time, combined with decades of domain expertise. Native integrations across systems of record, engagement, financial accounting and intelligence further strengthen that advantage. These AI capabilities are seeing strong adoption momentum. Usage of AI-powered workflows has expanded meaningfully over the past several quarters and more than half of our Raiser's Edge NXT customers use machine learning-enabled donor prospecting, generating nearly 30 billion predictions annually and creating a feedback loop that improves outcomes across our customer base. These capabilities are powered by an extensive and diverse set of data sources, including Blackbaud Institute survey and benchmarking data, licensed data sets from leading providers, identity resolution capabilities and specialized philanthropic data sets, such as Blackbaud Giving Search. Our applied intelligence layer aggregates behavioral signals across the ecosystem to feed predictive analytics and advanced AI models, supported by strong governance, cybersecurity and a focus on data integrity. We have embedded new agentic AI solutions in our products that can operate with appropriate access to customer permissioned data and workflows. Agents For Good is a new product category for Blackbaud. As I mentioned earlier, in Q1 we launched our first Agent For Good solution, the Blackbaud Fundraising Development Agent, which is an agentic virtual team member that can proactively take on complex tasks, workflows and initiatives while operating within strong governance and oversight by power users. This agent, natively embedded within the trusted Blackbaud environment, enables teams to identify and steward donors that they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past. This fundraising development agent is a new revenue line and a significant accomplishment for Blackbaud. To frame this a bit, the pricing model is an annual subscription fee similar to the majority of our products. It's still early, but we expect the price will be in the tens of thousands per year, and we expect to cross-sell subscriptions to thousands of existing customers in addition to new logo sales. Applicable donations raised by the development agent would be processed through Blackbaud Integrated Payments platform, driving additional transactional revenue. This new development agent is already producing results for our early adopter customers and is now commercially available with several new customers in Q1. Additionally, we have run a number of webinars and sales events for our existing customers where attendance was oversubscribed and the reception was enthusiastic. We couldn't be more pleased. This development agent is the first of many agents we plan to introduce across our product portfolio as part of our Agents For Good initiative. To reiterate, we believe this agentic AI solution embedded within our system of record provides a competitive advantage to Blackbaud. Our agents leverage our proprietary and customer-specific data within existing workflows, underpinned by a strong AI governance and cybersecurity framework. Additionally, we offer our solutions through a multiyear subscription model and do not utilize seat-based pricing. Now turning to how we use AI internally, we continue to identify, experiment and scale solutions across engineering, sales and marketing, customer success and the back office to improve speed and operational efficiency. For example, we're using AI to write code, better qualify inbound interest, support sales development and improve customer support workflows, helping teams focus more time on high-value interactions. While our record of past performance is compelling, we're just getting started. In addition to improving our operations, go-to-market capabilities and increased pace of innovation, we have successfully addressed many of the challenges the company faced over the past few years, allowing us to focus on the value-creation opportunities ahead in the near, mid and long term. Last quarter, I walked through our longer-term aspirations. As a reminder, from 2026 through 2030, we are targeting double-digit annual EPS growth driven by the following: organic total revenue growth of 4% to 6% annually with potential upside based on viral events and new product launches, such as our Agents For Good catalog; adjusted EBITDA growth of 6% to 8% annually while expanding our adjusted EBITDA margin to 40% plus. Slide 24 in our investor deck provides more detail on the planned initiatives to drive continued margin expansion, most of which are already underway. We expect this improvement in EBITDA to translate to strong free cash flow growth. The $285 million midpoint of our 2026 cash flow guidance range represents a 25% CAGR since 2020. These strong cash flows drive a purposeful capital allocation strategy with consistent stock repurchases as a core tenet. We expect to deploy 50% plus of our cumulative free cash flow generated between 2026 and 2030 towards stock repurchases and continue to reduce our common stock outstanding. This is a continuation of our significant stock repurchase program over the last couple of years in which we reduced common stock outstanding by approximately 14% since Q4 2023. Based upon the planned growth across revenue, EBITDA and cash flow as well as our aggressive repurchase of our shares, our goal is non-GAAP EPS CAGR of 13% plus between 2026 and 2030. We're off to a good start in 2026 in that regard, with expected non-GAAP EPS growth of 17% at the midpoint of our 2026 guide, and we're confident in our ability to deliver double-digit EPS growth in '27 and beyond. To conclude, we believe Blackbaud is a compelling investment with multiple opportunities for strong shareholder returns. From an operating, financial and strategic perspective, we are pleased to be carrying momentum into the years ahead. We look forward to our continued journey. I would like to congratulate the entire Blackbaud team for a good start here in 2026, and as always, thank them for their job well done. Thank you. I'd now like to turn it over to Chad to walk through Q1 results and our guide for the remainder of 2026. Chad?

Chad Anderson, Executive Vice President and Chief Financial Officer

Thanks, Mike, and good morning, everyone. I'll walk through our first quarter 2026 financial performance and then discuss our full year 2026 outlook. In Q1, we continued to balance cost management with growth opportunities and innovation. As we do each quarter, we were focused on durable subscription-led performance, prudent expectations around transactional revenue and steady progress on profitability and cash flow. Our Q1 performance reflected continued demand for our mission-critical solutions and growth in transactional revenue volumes. As always, transactional revenue can be variable quarter-to-quarter, and our guidance philosophy assumes performance that is consistent with historical patterns and does not include any assumption for viral giving events. Q1 organic revenues grew 4.2% to $281 million. Non-GAAP adjusted EBITDA of $99 million was up $7 million with an approximately 1 percentage point improvement to adjusted EBITDA margin. The mid-single-digit organic revenue growth and improved EBITDA margin speaks to the power of our operating focus, which positively impacted earnings per share. Non-GAAP EPS increased to $1.14, up 20% compared to $0.95 last year, and our free cash flow was up nearly $50 million year-over-year to $37 million in the quarter. Our strong expected free cash flow for the year gives us confidence to continue investment in a number of critical areas like go-to-market initiatives, product innovation and share repurchases. In Q1, including the net share settlement of employee stock compensation, we bought back approximately 4.5% of our shares outstanding at the end of 2025 and continue to demonstrate a strong commitment to our belief in the value of Blackbaud. It was a solid start to the year. Now moving on to our 2026 outlook. Based on our first quarter performance and our current view of the operating environment, we are reaffirming the full year guidance ranges and assumptions we provided in February, including significant earnings and cash flow improvements. The detail on these ranges can be found in our earnings release and investor presentation on the website. As a reminder, we expect 2026 quarterly financial performance, including revenue growth and profitability, to be heavily weighted to the back half of the year and particularly the fourth quarter. Looking to 2026 and beyond, we believe free cash flow will grow significantly, and we anticipate utilizing at least 50% of our cumulative free cash flow from 2026 to 2030 for share repurchases. Beyond that, the company has tremendous optionality for dynamically allocating capital to its highest and best use based on market conditions, including additional stock repurchases, repayment of debt or synergistic tuck-in M&A. We have a lot to be proud of: executing well through recessions, financial crisis, COVID and the shift to the cloud through a commitment to providing meaningful solutions to our customers and strong execution of our operating plan. On our journey to becoming a Rule of 45 company, we remain committed to providing investors with an attractive financial model balanced between growth of revenues, earnings and cash flows, along with prudent and purposeful capital allocation strategy, and always, we remain focused on providing enhanced value to our customers and our shareholders. Thank you all. Mike and I would be happy to take your questions. Operator?

Operator, Operator

We will now take our first question from Brian Peterson with Raymond James.

Brian Peterson, Analyst, Raymond James

Congrats on the strong quarter. So Mike, maybe starting with you. I know you made the comment on AI in thousands of customers on Agents For Good. Was that comment specifically about 2026 adoption or is that a little bit longer term? And as you've had these webinars and early adopter customers, are there any cohorts, whether that's by end market or by the products they use, that you think would be the first to lean into the agentic functionality?

Michael Gianoni, CEO, President and Vice Chairman

Yes, Brian, thanks for the questions. As I mentioned, we announced general availability of our first fully agentic product, the Development Agent. Importantly, we announced a new category of products that will be introduced throughout this year and beyond. That's the first one; there will be more coming. It was in early adopter mode in the back half of last year and the first part of this year, and it went to general availability in March. That is targeted to thousands of existing Blackbaud customers. That's the target, and we're ramping up sales. It went to availability about six weeks ago. We've had hundreds of customers on webinars who are very interested and excited about this new product. It provides scale that they can't get to today. It's a new category for us and for our customers, a great start achieving our planned numbers, and it's product one in a category of many to come.

Chad Anderson, Executive Vice President and Chief Financial Officer

Mike, since we're on the topic of AI, I just want to take a moment on how we're continuing to invest in AI. As I mentioned during the call, we're reaffirming our guidance for the year. However, just to ensure you model quarterly spreads correctly, we expect adjusted EBITDA dollars to decline slightly year-over-year in the second quarter due to planned AI investments for customer-facing products as well as for internal operations.

Michael Gianoni, CEO, President and Vice Chairman

Yes. Just to expand on that a little bit: our quarters are not linear historically. We're always weighted to the tail end of the year with giving and holiday giving. Full year guidance is unchanged. We're investing in AI and are partnered with Anthropic and investing in their tools. We're really happy with our first quarter results and the guide for the year.

Operator, Operator

Our next questions come from the line of Rob Oliver with Baird.

Robert Oliver, Analyst, Baird

My question, Mike and Chad, is you called out some nice new logo wins in the quarter. You have talked in the last year or two about new logo motion being an important part of your go-to-market. Can you help us put some precision on that? Can you quantify, for example, as you look at new bookings, what percentage is new logos? How does that change relative to before you started to focus on new logos? Any context around the new logo wins and progress would be helpful.

Michael Gianoni, CEO, President and Vice Chairman

Yes, Rob, thanks. Our sales teams are organized into vertical market teams focused on specific markets—K-12, nonprofits, higher education, etc.—and they're further separated into back-to-base sales and new logo sales in each market. We have strong motion in both back-to-base and new logos. The new Development Agent is predominantly targeted to back-to-base because it's embedded inside our system of record products like Raiser's Edge NXT. However, we expect these capabilities to drive new logos because new customers will want to buy the system of record to get access to the agentic AI solution that's embedded inside it. We're seeing a nice set of wins across verticals in new logos and even enterprise deals. One deal closed in Q1 is one of the largest in our history; it was a five-year enterprise deal with a large nonprofit that bought a broad set of products across the portfolio. K-12 and nonprofits are strong, and YourCause continues to attract Fortune 500 customers. We have a flywheel effect for new logos and stickiness for existing customers. Additionally, we have the Blackbaud Verified Network—a network effect connecting YourCause customers to our nonprofit customers. For example, a customer buying Raiser's Edge NXT can be connected to hundreds of YourCause customers and millions of employees and can promote themselves within the network. It's a connected network effect only available at Blackbaud, and it's getting attention from new logos as well.

Operator, Operator

The next questions are from the line of Parker Lane with Stifel.

Tom Roderick, Analyst, Stifel

When you look at the investments you plan to make around the AI opportunity, you mentioned adjusted EBITDA dollars might be a bit lower year-over-year as a result of that investment. How much of that is coming in the form of R&D and sales and marketing and other OpEx items versus potential impacts to gross margins as customers take on more consumption elements as part of these agents?

Michael Gianoni, CEO, President and Vice Chairman

We see opportunities to improve gross margins year-over-year; you can see that in our first quarter results. Some of that improvement comes from the continued closure of two legacy data centers and moving away from legacy software infrastructure from vendors we won't need in the future. Many AI investments are for new product builds like the Agents For Good category, and we'll be announcing more products throughout the year in early adopter or general availability. We also have many investments in tools and engineering. There's a tremendous opportunity for AI enhancements in engineering. We've built agents that use tools like Anthropic Claude for code generation and internal processes for user stories, acceptance criteria and code scaffolding, reducing workloads from days to hours. We're building engineering agents to scale engineering productivity, which has a big flywheel effect. We also have AI assistants for anomaly detection, governance and integration—many AI innovations in productivity for engineering and new external products.

Operator, Operator

Our next question is from the line of Kirk Materne with Evercore ISI.

Peter Burkly, Analyst, Evercore ISI

Mike, I was wondering, can you talk through some of the thought process on the pricing structure around the agents and the subscription model? Obviously, it's all about the value delivered to your customers. How are you making sure they start seeing value out of the box to get them excited and create a reference flywheel as well?

Michael Gianoni, CEO, President and Vice Chairman

We're evaluating all pricing models available for these new AI products. For the first product, the Development Agent, the pricing is similar to our other products: an annual subscription fee in a multiyear contract. It's not usage-based yet, and we do not use seat-based pricing. More than one-third of our revenue is transaction-based now, which is effectively outcomes-based because it's a percentage of a transaction. For AI products, the first one is an annual subscription fee, and we'll consider usage and other models for future products depending on fit. What's exciting is that the addressable market expands because these solutions can be purchased outside of traditional IT budgets. Customers have budgets for hiring fundraisers and for other functions; we can address total spend outside IT budgets. That expands the addressable market for us.

Operator, Operator

At this time, I'll hand the floor back to management for any further remarks.

Tom Barth, Head of Investor Relations

Okay. Well, thank you, everyone, for joining us today. We will be attending a number of investor events in May and June, including several investor conferences, which are listed on our IR website. We hope to see you then or speak with you very soon and wish you continued success. Have a great day.

Operator, Operator

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.