everyone hopefully everyone got a chance to have a bite of lunch uh i'm rob oliver i follow software here at baird um and a managing director in the in the technology research team uh and it's my pleasure to have the management of blackboard here um to my left chad anderson who is uh the cfo and jeff klein who is uh director of corporate strategy and development uh thank you guys both for joining me appreciate it um blackboard is a company we've followed for many many years it's a vertical software leader in i don't think you can call it a niche market it's actually a really really big market it's just niche relative to investors but you guys really dominate it and that's the not-for-profit space so today the kind of goal of the meeting here uh you have a stock that's incredibly inexpensive from our view we recently upgraded it um my goal is to have everyone leave the room with a better understanding of of the moats around your business both you know current and then with ai um what you guys are doing to drive the really strong margin and growth profile that you have uh and um and set it up for future inquiry in the room so let's just start uh maybe chad with a little overview you've been at the company even though you've only been cfo maybe a little over a year you've been in the company a long time so maybe
an overview the um i was a week into the job this time last year um so thank thank you for having us back. The company and those of you that aren't familiar, so we're a cloud software company, right? We serve several in markets. You know, Rob mentioned the non-profit space, but that, you know, it's a variety. You know, non-profits come in different, like, shapes and sizes. You can think about foundations, community foundations, the foundations of universities and hospitals hospital systems are all like within the hemisphere of you know our client base we've been doing what we do like you said for 45 years now over that time we've been able to capture and develop you know domain expertise not only within kind of how nonprofits operate but also the solutions that we provide to them. So in the core, there's a fundraising solution. We'll talk a little bit more about that, as well as kind of a very point-specific financial solution to aid with kind of fund-related accounting designed for nonprofits. We have embedded analytics, embedded payments platform, as well as kind of, again, like these years of domain expertise with deep workflows to be able to help the nonprofits do what they do. So from the highest level, if you kind of step back, we grow roughly in the mid-single digits. We've got a revenue profile that is roughly two-thirds subscription base, which is typically the fundraising and financial management solutions and then roughly a third of the revenue base is payments and different usage and consumption models as far as kind of where we're at we're focused on driving new logo sales as well as back-to-base sales and then we'll We'll talk a lot more about innovation and AI.
Yeah, maybe to start, because I think with the emergence of AI, people are thinking a lot about, investors are thinking a lot about systems of record, systems of action, defensibility modes. You guys are both, a system of record and a system of action. So maybe talk about what these, you're the ERP, you're the SAS HR provider, you're a lot of things to your customers. So maybe talk about that moat around the Razor's Edge platform, the products, and the stickiness around that.
Yeah, for sure. And I'm happy to take that one. So Chad mentioned it, but when you look at it, at its core, a lot of our systems are mission-critical systems of record. So you think donor management, CRM, financial management, general ledger accounting system, payment processing, so processing all their donation flows. we are the tools that they wake up and log into every day and are critical to running the operations of the business and in many cases the revenue operations of the business, right? Without our solutions, they're not raising funds, they're not generating revenue for their causes. In terms of when you think of the AI overlay for that, I think there's been three waves over the last couple years in terms of how I think about AI within our platform and kind of some of the modes around that. I think for a long time now, what we call our analytics business is what I think a lot of people today are referring to as AI. And specific to our customers, it's things like donor prospecting. It's intelligent gift to ask. So how much should you be asking for, identifying the right donors to ask, when to ask them, how to ask them. And those are things that we've been doing for the last five, ten years now. Over the last two to three years, we've branched more into generative AI and embedded those in our solutions at no additional cost to our customers. We've kind of lit those solutions up within the existing CRMs and financial management solutions, et cetera. One good example of that is BlackBot AI chat. So in addition to interacting with the embedded workflows in the UI, UX, you also are able to ask natural language questions. Instead of running a formal database report or querying your database, you can ask for, hey, bring up the donor record for Rob Oliver. What types of causes does he like to give to? Hey, please draft an outreach email. I want to get lunch with him next week, right? and it's just another way that you can interact with your system and your donors and then the third wave and I think this is where a lot of companies are now talking about AI is on the agentic side and a little less than a year ago we unveiled what we call our agents for good strategy and that is now the third wave and I think where a lot of the focus at the company is that is intended to be a catalog of agentic solutions the first of those and we can talk more about that is the fundraising development agents so that is a fully autonomous virtual team rate that fund raises on behalf of your organization. That went into early adopter program Q4 of last year and into Q1 of this year and is now generally available to the full customer base as of late March, and early traction there has been good. So I think we're very confident, not only in the customer base we have and the solutions we have today, being very sticky with those core system of record products, but doing a lot on the AI innovation front to make sure that we're staying ahead of the curve on innovation and what our customers expect.
On that point, Jeff, one of the things about your market, if I can generalize, is that it always seems like they've been a few years behind the for-profit enterprise when it comes to innovation, and probably for a few reasons. One, many of them are operating on two-string budgets, and they're not-for-profit entities, and so they're sticking with kind of what they have, which benefits you. Are you seeing that with AI as well? Well, you know, obviously AI is so much in the news. Everybody can, you know, fool around and play with the tools and stuff like that. So do you think, do you guys have a kind of similar window of opportunity to execute on embedding AI into your platform? Because one of the concerns on software right now is that these SaaS companies just don't have enough time to flip the model and flip the innovation. You guys strike me as being in an industry where maybe you have that time if you're acting quickly, which you are. So address that.
Yeah, no, and I think that's a really good point. and so for one to rob's point the pace of adoption in our market historically has not been the same as the for-profit when you think of this isn't true of all of our customers we have some customers that are very sophisticated fully staffed it departments and are thinking through these things and moving quickly right but by and large our customers are not technologists their it fund functions are not staffed the same way that a public company or a large private company would be the reason we win versus the horizontal players is because our systems of record are purpose-built for them. You don't need to customize them out of the box. They're using language that makes sense to you. It's purpose-built for those nonprofit use cases and tends to be looked at that way. The other thing I'd say, too, is on that thread, I think one of the threats that broad software is seeing is, hey, why can't we use these new cloud code or AI tools to vibe code these solutions in-house, right? The cost of timeline to doing that is lower than ever before. Many of our customers, frankly, just don't have those capabilities. They're looking to vendors like us to bring those technologies to them and, frankly, educate them on the best use cases for their end market.
Got it. And maybe we could also just talk a little bit briefly before we dive back into the products and the financials about the current environment, pay your pardon, buying environment. There's been a lot of cuts. The administration came in and there's been cuts to local funding for charities, non-profits. We saw it with USAID. I know we've talked about this before and you guys even in your public calls have stated you're pretty good on this front, but since this is, I think, a concern that investors have when they look at you, maybe talk about why it is that you guys are relatively unmuted i know mike has said well you know we don't we don't get funding directly from the federal government that's really not what it's about though it's really about like those customers budgets and how they feel because you're coming into a time period now where you have some customers on that three-year renewal customer certainly yeah i mean there's a couple
of things first i would say for investors or potential investors like the the sector is massive. The nonprofit sector is roughly the third largest employer in the country. We're just looking at the U.S. So it's significant. It's also growing. So the annual donations that flow through nonprofits in the U.S. is somewhere in the range of 600 million per year and growing. So it is vibrant and significant. Doesn't mean there's not pressure. With that said, the nonprofit a sector, if you will, has weathered a lot of storms over the years from financial recessions, COVID, and the like. So I think over that time, it's proven to be very resilient. So as we talk about the macro environment, what's going on in the Middle East, You know, there are organizations that are impacted. Typically what we've seen is that whenever big nonprofits are in the federal funds flow, you know, typically like big nonprofits will have seven, eight, nine different revenue streams. If some of those are, you know, in the funds flow from the government and they go away, it just makes them more reliant on BlackBots solutions at the end of the day and then actually becomes a little bit of a tailwind to the company. Another important point is that not all nonprofits are in that space, either if you think about K-12 organizations, perhaps hospitals and hospital foundations. So it's a little bit different depending on the particular vertical, if you will. But in the main, while some of our clients have been under pressure, we haven't seen a notable change in client attrition to speak of.
Got it. Great. You guys made a bunch of changes a few years back, and you moved your customers towards three-year contracts. You also have done a lot of operational changes internally around cost structure and now leveraging AI. so for those maybe who haven't you know looked at blackbot in a few years um you know the profitability profile the business is phenomenal um maybe talk about some of the different changes and obviously on the contract side i want to dive into that a little bit but talk about some of the changes overall that you know have happened over the last few years of the business yeah certainly
we're i mean we're um we're focused on on driving profitability yeah no surprise there we we target at 6% to 8% kind of EBITDA growth on an annual basis. We've got lots of levers. Over the years, we've focused on internal kind of efficiencies, if you will, vendor consolidation-related activities. We've shut down 80% of our kind of private data centers over that time in the migration to public cloud. We actually still have a couple of those that we're focused on and look forward to winding down here in the near to midterm. Just as a few examples, beyond that, we opened up a global capability center in Hyderabad, both to access talent as well as to provide potential opportunities for labor arbitrage. We opened that roughly 18 months ago, and while we've had partners that have provided kind of staffing I mean, on a consultancy or staff augmentation basis, you know, we now have badged, you know, kind of full-time BlackBaud employees. So that's kind of like the, you know, another lever that's going quite well. It's gone from kind of, you know, site selection to employee one to hundreds of employees. We're not the first or the last, you know, software company to, you know, to be in kind of that zone. we're quite confident that we'll be successful in being able to leverage the global capability center. Beyond that, we see AI as a real potential tailwind. Obviously, there's lots of speculation in regards to, you know, does it put gross margins under pressure or not? We're going through it in a methodical manner. We're all in. We've got entirety of our employee base trained as well as kind of leveraging the tools, but being mindful in regards to the use cases and making sure that, you know, we're targeting a return at the end of the day. So, you know, I could mention, you know, leveraging the tools in engineering is probably not a surprise. We have a great opportunity to be able to further write code, test code, you know, not only for the solutions that we're selling, but also how we're running the, you know, the infrastructure of the organization. We're leveraging agentic AI for demand generation sales forecasting. You can kind of go on and on. And it's still very early days on that front, but, again, very optimistic that that will be just another kind of feather in the cap relative to how we're pressing and expanding on margins in the future.
And the music to the ears for an analyst is when you're at a user event and you're talking to a bunch of customers at a lunch. And, you know, you ask them about the price increases, and they kind of say, oh, well, you know, no one's ever happy about it. But then you ask them, what are you thinking about doing? and not one of them is leaving and in fact they're looking to do more so they can get more value. It's obviously very, very encouraging. So you guys went through this period where you pushed your customers on price which was a great test of the stickiness of your product and your platform in our view. You then moved to the three-year contracts. Some of those are coming up for renewal now. So how are those going? Give us a look into that sense because that seems like that's the next kind of you know catalyst or thing that the street should really be looking out for yeah i mean in
regards to the the the pricing and the renewal program journey we really started thinking about it about five or six years ago and you know we had shorter contracts and we made a decision to move to more standard three-year agreements we really planned to put it in place during covid and we paused so then in in 23 we roll it out these are standard you know multi-year contracts which are quite common in the space um they have embedded you know like price escalators and you know we've held very solid from a revenue record or retention perspective so it's kind of stayed stable in kind of those you know around 92 percent on a gross dollar retention perspective And to Rob's point, we've now lapped that, you know, kind of tail end of Q1. We're basically through the three-year cycle, if you will, so we're entering into that next kind of wave. And, you know, the retention is kind of in line with expectation. So we're feeling good about it. It's far better revenue durability for us, longer standard contracts, and then, you know, ability for us to be able to prove kind of the value, you know, to the clients has, you know, really not been a challenge for us to this point. So we're pleased, but at the same time, we're mindful.
And so the renewals, the retention is there. The other thing you guys have done is really kind of, which is encouraging, is really focus on that cross-sell, which has always felt like an embedded opportunity for you guys. I mean, obviously, you've got many customers that have multiple products, but it felt like a more concerted effort there could really bear fruit. You brought in some new sales leadership, and you've talked a lot about it. Mike's really made it a theme on the calls. So as these renewals come up, how should we think about not just the retention, which we expect will be there, but also that better or equivalent metric of how you guys are cross-selling?
Yeah, it is a very big piece of our model, right, that land and expand model over time. So we have roughly half our sales folks that are focused solely on new logos, right, so refilling the top of the funnel. The other half are focused on cross-selling the portfolio solutions. And I think as Chad and I have mentioned, we do have a fairly broad portfolio. It's give or take 18 products. We're now bringing new AI products to the market. The agentic AI products will be priced separately. That's a new skew and what we think is a big back-to-base opportunity, at least initially. So we are very, very focused on driving that further penetration in the customer base over time, both with the software products, the AI products, payments enablement. There's a long runway in terms of the payments side of the business and getting folks payments enabled for donation processing, tuition processing on the education side, some multiple angles there. And I think the other thing that's important to understand, because I think many companies, they really only open up their customer relationship at the time of renewal for the cross-sell, up-sell motion. Our teams are cross-selling and up-selling every day. It doesn't necessarily have to be tied just to that renewal moment. So we have multiple opportunities throughout the year to do that.
So those teams are now divided up into kind of the punters and farmers. And is customer success an element of the cross-sell as well? Has that kind of been combined?
So the cross-sell upsell motion is a sales motion today. So the direct sales force, new logo, and cross-sell upsell. And then we have a separate team in the customer success and renewals org that is handling the existing customer relationship.
Got it. okay okay great um payments um is a significant portion of the business for you guys um i should know off the top of my head it was a high 20s percent of the business roughly a third roughly yeah we're roughly a third of the business so very sticky um and in turn uh create stickier customers when they have it so and a great pedigree background here with you know mike having been at five serve and really driven this um very strong payments opportunity which you know has defied a lot of the bear cases over the years of different payment vendors coming in and taking this business. So how should we think about attach of payments currently into your installed base, the opportunity for payments down the road? Because it strikes us as a pretty meaningful compounder for you guys in terms of the customer stickiness, what it can add,
So there's a couple nice things about the transactional side of the business for us. So that's actually a piece of the business, as Chad mentioned, It's a little over the third of total revenue today, so a very meaningful part of our revenue algorithm. That piece of the business actually tends to grow slightly faster than the core software base. So core software is more mid-single-digit. This is mid to high, single-digit, 6% to 8% historically. A couple reasons for that. You've got some of the same growth levers that you have on the software side, which you've got new logos, so you sign a new customer, their payment's enabled. To Rob's point about the penetration in the existing base, there is a long runway there. we don't disclose specifically the the penetration rates but i'd say needless to say there's plenty of opportunity even within just the existing base to get them payments enabled and processing on our platforms which is obviously a benefit to us some things that are specific to payments we do have pricing levers that are unique there in terms of take rate optimization and donor cover models that have been very positive for us over time we also benefit from just what we call same store growth so donation volume growth or tuition volume growth over time within existing customers when you think of the total pie of hundreds of billions of dollars donated in the us every year that tends to grow a couple percent as well and that's a that's a further tailwind the last one which hasn't been as meaningful the last year or two but is at points in time is we're primarily monetizing the digital payment side so credit card processing and as more and more of that pie shifts to digital payments that's a further tailwind to that business so multiple growth factors that we we like within that transactional business and it continues to be a bigger piece of
our story over time got it got it exciting um i was remiss if you do have questions you can send an email the emails in front of you and i'll try to get it in we have about eight minutes left uh i have a few more questions so feel free to add in um uh on competitive landscape uh you know for years there was a you know big buzz around salesforce getting into this business and you know it they have a small share at some larger places but they never really seem to make an impact on you guys and um so you know how is the competitive landscape changed i mean the barrier to entry in this market is high you guys are far and away the number one player there's a lot of opera there's we see a lot of action at the low and a lot of startups small companies you guys actually i disclose a chart in your investor deck where you actually lay them all out but maybe talk about if there's been any change there with ai and and what you see in the market uh nothing material i i would
say this our customer bases or our competitive uh segment is extremely extremely fragmented we are the only provider in our space that has the full suite of solutions so when you think from financial management to fundraising to digital marketing to the school operations to ticketing for arts and cultural customers we have a very broad suite of solutions that integrate with each other and that tends to be a core differentiator for us our competitors by and large are vertical specific point solution players so the people we compete with on the fundraising side is different than who we compete with on the k-12 side than the financials side from time to time we do see some of the larger horizontal players right so on the crm side do we see salesforce yes microsoft dynamics yes but they're not purpose-built solutions right so if you're going down that path and some organizations do choose to you're bringing in a third party excuse me consultant to customize that database build in those workflows define the fields and label all that right there's just more work and cost involved up front but i think the competitive positioning point we're pretty well insulated the other thing i'd bring up on the competitive side and it pertains to some of the ai topics we've been talking about i think we feel very confident the data mode we have as well right and that's something that frankly has always been important especially when you think data intelligence analytics and the like that we've done over time but even more so as we talk about ai solutions and making sure that we maintain that proprietary data posture and i really think of it in in four main categories right there's different frameworks you can can look at these things in but it's it's volume it's variety it's velocity and it's vigilance right from a volume standpoint we are the largest player in the non-profit space and we've been around for 40 years right there's no one that can match i think the breadth of our data set um variety you've heard me talk about just the types of solutions we have right we've got fundraising data we have financial data we have uh marketing data right click rates and email open rates and the like right and we can go on and on so i think the variety of our data is is very very broad velocity is a very important one because we have kind of a closed system within the suite there is no import export a lot of these point solution ai startups you're going to a system of record like blackbaud you have to export data out put it into the ai tool it's transformed and then you're porting it back right and there's time and context that's lost in that porting that we don't have to deal with that we think is a core differentiator and then finally vigilance is really about trust and data governance right we've been around for a long time we have a very good reputation in the space we've invested more than anyone in terms of data and cyber security as well as spending years developing kind of data frameworks and ai governments frameworks that i think our sector in particular values trust and data security very very highly so i think all of those things together from a data mode standpoint put us in a good position competitively
great super helpful um on uh we only have a couple minutes left on i want to talk about capital allocation. You guys have acquired a lot of companies over the years, and I think it's been a pretty solid acquisition motion for the most part, and then you had a pretty high-profile hiccup with EverFi, and you still have the same CEO who's viewed by the street as being a pretty inquisitive guy. You guys have talked a little bit about this, but help us understand how how you you think about that capital allocation and you know just to mitigate that risk that you're going to go out and whale hunting again how to think about how you guys are thinking about that
market we have been um prioritizing share buybacks um significantly over the last few years so the the way that i generally think about it that that's priority number one we've been very purposeful in not only repurchasing shares but also driving down kind of the net shares available so if you kind of go back a couple of years, you'll see that we've reduced the overall share count by 14%, which is meaningful. So I anticipate that certainly in today's market and today's valuations, we'll continue to be very aggressive. We've publicly stated that our intent is to dedicate at least 50% of our free cash flow to share repurchases on an annual basis and drive down on the number of shares between five and 10%. Given where we're at with valuations, I would expect that we'll be in kind of the higher side of that in the near term. And I would balance that we're also mindful of managing our balance sheet. So we're mindful of trying to keep leverage in a good spot. We target somewhere in the low twos, preferably, at the same time with valuations where they are it's important that we you know also keep that in mind so we're balancing both of those and at the same time you know we've had you know a number of successful acquisitions over the years you know so you know as a kind of a third priority we have you know optionality for tuck-in acquisitions if it makes sense with you know today's valuations you know that there are you know opportunities out there but um again kind of tuck-ins and i would i would say that is again kind of the third priority on the capital allocation realm got it got it and you mentioned
the the free cash flow it's substantial and you guys are and the stock is currently trading at i think nine times ev to free cash and you know five times price to free cash free cash flow has
been a focus always is, you know, we've had good success driving free cash flow. It's up roughly 25% on a CAGR since 2020. You know, we're going to continue to stay focused on that. You know, if you look at deeply into the financials, you'll see that, you know, we're growing free cash significantly in 26, you know, as we kind of talked about. So yeah, we're focused on it. It's a big lever to the broader, you know, financial profile of the company. We're going to continue to target that mid-single-digit revenue growth, 6% to 8%, EBITDA growth, and then 13% plus from an EPS perspective, kind of buoyed by the strong free cash flow. So we're feeling good about it. AI is a potential tailwind for us, but that opportunity is not factored in to the guide or the numbers. So we're feeling good where we're at, and certainly with today's valuations, I think that we're a great buy for companies as well.
Great. Well, please join me in thanking the management of Blackbaud, Chad. Jeff, appreciate it. Thank you, guys, very much. Take some time.