Blackbaud

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Blackbaud is a cloud software company powering social good, serving the nonprofit and education sectors. Companies committed to social responsibility and individual change makers, its essential software is built to accelerate impact in fundraising, nonprofit financial management, digital marketing, school administration, data intelligence and analytics.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Blackbaud operates in the social impact sector, serving nonprofit organizations, educational institutions, foundations, and companies with philanthropic initiatives. They provide a comprehensive suite of software solutions aimed at enhancing operational efficiency, improving fund raising, donor management, and student engagement. In essence, they help organizations in the social good sector operate more effectively and increase their impact by simplifying their daily processes and enabling them to better connect with their stakeholders.

  • Revenue Streams:
    • Recurring revenue, primarily from their cloud-based software subscriptions, which often include multi-year contracts. This stream is considered relatively predictable and is a focus for growth.
    • Transactional recurring revenue, relating to transactions processed within their software, like donations. This includes subscription-based analytic services.
    • One-time services and other revenue, derived from fees for setup and training services, or fees for retained and managed services. These services vary significantly.

It is important to note that a mix of recurring and non-recurring revenues adds both stability and potential volatility to their earnings.

  • Industry Trends:
    • The non-profit industry is facing increasing challenges in a rapidly changing environment.
    • There is an ongoing shift towards digital transformation, and a need for robust data analytics tools.
    • An increasing focus on stakeholder engagement, transparency, and impact measurement.
    • Cloud software solutions are becoming more prevalent for nonprofits, as software capabilities continue to improve.
    • Growth in data analytics is expected to be a driver for companies like Blackbaud.
  • Margins:
    • Gross margins have historically been high. But we have recently seen that the cost of recurring revenue has slightly increased over the past few quarters.
    • Operating margins are expected to continue to improve as the company continues to scale its operations and integrate the most recent acquisitions.
  • Competitive Landscape:
    • The market is fragmented, with various competitors ranging from small niche providers to larger companies offering broader platforms.
    • Competition often focuses on pricing, feature set, and specialization.
    • The primary focus for the company is growing market share as a leader in the industry with a comprehensive suite of software solutions.
  • What makes Blackbaud different?
    • Blackbaud has a robust suite of integrated products across diverse verticals. This suite of software allows for cross-selling to customers.
    • Blackbaud’s deep understanding of its clients and their needs allows them to cater to specific problems faced by the social good industry, this includes fund raising, nonprofits, K-12 and others.
    • They have built partnerships with leading cloud providers for scalability and reliability.
    • They offer a suite of software that has been continuously expanding to include newer innovations.

One of the company’s largest advantages is that it is well known and familiar with the unique challenges faced by those in the social good sector. This is a strong foundation for growth, and helps make their products more useful and impactful.

  • Recent Concerns / Problems:
    • The company experienced a security incident that has led to litigation, investigations, and loss of data. It is still unknown the total cost to recover.
    • They have made changes to their pricing approach, which will be a headwind in the short term to their revenue growth.
    • The company is facing challenges with hiring and managing costs during growth. The labor differential between the developed countries they operate in and the emerging markets they are focusing on is also a point of concern.
    • The company has been experiencing some slowdown in the growth rate of recurring revenue.

Financial Deep Dive

Blackbaud’s financial performance has been a mixed bag, especially in 2022 and 2023. Here’s a breakdown:

  • Revenue Growth:
    • Overall revenue has seen growth, driven by acquisitions and expansion in recurring revenue from their cloud offerings. However, growth rate has slowed in the recent quarters.
    • The Social Sector is the largest segment of revenue, followed by the Corporate and K-12 segments.
    • The recurring revenue from their software continues to be the focus of the company. However, some segments of their recurring revenue are under pressure due to the change in their contract structures.
    • Total revenue in 2022 was $1.048 billion, up 11.8% YoY and $1.155 billion in 2023, a growth of 10.2%. Total Recurring Revenue was $916.3 Million and 975.3 respectively.
  • Profitability:
    • Gross profit margin has historically been high, but faces increased costs from the transition to the cloud.
    • Adjusted non-GAAP gross margin in 2022 and 2023 was 57.5% and 55.7% respectively.
    • Operating margin has increased due to efficiency and scaling, they reported 20.7% and 23.4% respectively.
    • While the company is profitable, it has low margins on its revenue, highlighting increased competition in the software industry.

The company’s continued focus on their cloud products is expected to further improve margins in the long term.

  • Cash Flow:
    • Free cash flow is a focus for the company, since much of their revenue growth involves large capital expenditures in the technology sector.
    • Their free cash flow (FCF) is used to evaluate their operations. Non-GAAP adjusted free cash flow is used as a key metric and the margins tend to be low in this industry.
    • Free Cash Flow in 2022 was 175.1 million and Non-GAAP Adjusted Free Cash Flow was 283.6 million.
    • Free Cash Flow in 2023 was 182.7 million and Non-GAAP Adjusted Free Cash Flow was 271.1 million
  • Stock Repurchases:
    • They have been actively buying back their own stock with a total of around $233 million in 2022, and $250 million in 2023, in an attempt to support their stock price.
  • Capital Structure and Debt:
    • They have a decent amount of long term debt on their balance sheet and continue to add to it to finance acquisitions.
    • They have a goal to reduce the debt to equity ratio over time.

Moat Rating: 3/5

Blackbaud exhibits several characteristics of a business with a narrow moat, but it is not as strong as some of the more dominant businesses. Here’s the justification:

  • Switching Costs (Moderate): Companies utilizing Blackbaud’s software often become deeply integrated into their systems and workflows, making it costly to switch to a new provider, due to the disruption of data migration. However, customers with limited funds and less requirements in the social good segment will be more inclined to try out new cost-effective alternatives.
  • Network Effects (Weak): While the software may exhibit a network effect by connecting organizations and donors or alumni, its effects are relatively weak compared to others. Data sharing across other customers is quite limited, limiting the network effect.
  • Intangible Assets (Moderate): Blackbaud possesses a level of brand recognition and reputation within the nonprofit and education sectors, which makes them the preferred provider for a number of groups. However, as more competitors focus on these markets, their brand recognition may come under pressure. They have built custom, proprietary software solutions that competitors don’t have which could be a moat, but is easily replicated by well funded competitors.
  • Cost advantages: Scale does not play a large role in software companies, as well as the product itself becoming the same as competitors. Some companies can leverage unique resources, but they are limited. The company uses cloud infrastructure services such as AWS to support its growing business, meaning that if competitors also opt to use them, the advantage is negligble. The company’s margins aren’t impressive, meaning competitors can reduce prices to compete with Blackbaud. This is a weak moat.
  • The company has implemented an in-house team to handle customer support, so there may be a slight cost advantage for this.

The moat for Blackbaud relies mainly on switching costs, the strong familiarity of their brand, and the fact that it is hard to replicate all of the services they provide. The regulatory environment does not provide any help.

Risks to the Moat

While Blackbaud has a fairly consistent history of profitability and market share, a few specific risks could weaken its competitive advantages and/or performance:

  • Technological Disruption: The software industry is constantly evolving, and it might mean that older methods such as on-premise software, could lose to cloud-based, more modern solutions that are offered by new or existing competitors. Competitors could introduce more innovative or cheaper alternatives to their product suite. The recent trend with AI and automation also poses a potential risk if the company fails to keep up to the cutting edge.
  • Increased Competition: The entrance of other SaaS players and tech companies could intensify competition, and erode Blackbaud’s pricing power or market share, especially with the high reliance on the social good sector, and the lower budget that many of their customers operate with. Some well funded tech companies such as Microsoft and Google are entering the nonprofit space, which could mean they would have stronger offerings.
  • Cybersecurity Risks: The company’s operations relies heavily on data and personal information to function properly. The recent cybersecurity issues may require additional investment in data protection, and could have legal repercussions and lead to lost business. This will also reduce the public’s faith in the platform.
  • Economic Downturn: Non-profit spending could be negatively impacted by economic slowdown, especially as non-profits are more vulnerable to funding cuts, therefore directly harming Blackbaud’s revenue.
  • Integration Challenges: As Blackbaud continues to acquire companies, it may face difficulty in integrating new business entities and their solutions, which could lead to decreased efficiencies and increase costs. They must also be able to maintain their existing customers, as they attempt this integration.

Business Resilience

Despite these risks, Blackbaud demonstrates some resilience:

  • Recurring Revenue: The subscription-based nature of its core business provides revenue stability.
  • Long-Term Relationships: Many clients have long-standing relationships with Blackbaud, having used their services for years.
  • Client Diversification: The company has a large, diverse customer base of non-profits and educational institutions, which minimizes the risk to a single sector or customer segment.
  • Scalability: The software business is highly scalable, and it allows the company to grow without an increase in the proportional cost.
  • High Quality Customer Service: They provide in house customer support which means they build intimate relationships with their customers, improving customer retention.

Understandability: 4/5

Blackbaud’s business model is relatively straightforward to understand as it serves a well-defined niche market, provides an easy to use platform. However, some complexities in how they make money and the various features can be confusing to newcomers. The technical aspect of their offerings adds a slight challenge to understand, and this makes a rating of 4 a better fit.

  • They do have a strong focus on improving the value to its customers, but it is also focused on creating value for its shareholders through cost optimization and growth, which can be difficult to manage.
  • Their business is easily explained but the complexity lies in how they acquire and retain customers, and maintain a good return on the value they create.

Balance Sheet Health: 3/5

Blackbaud’s balance sheet shows moderate health with some areas that require attention:

  • Leverage: The company has a relatively high debt load, having taken on $1.18 billion in debt as of September 30, 2023. They will need to monitor this going into the future and see if it has any impact on their liquidity.
    • The company has been using leverage to acquire other companies, which, although strategic, can add instability.
  • Cash:
    • The company is not sitting on large cash reserves, and has $338 million in cash as of the end of September, and might need to take on additional debt if it continues on its current trajectory of growth.
  • Liquidity:
    • The company has a current ratio of 1.2, meaning that they have a solid ability to meet their short term obligations.
  • Goodwill and Intangible Assets:
    • A substantial portion of their balance sheet is comprised of intangible assets such as goodwill, and developed tech, at about $1.8 billion.
    • This might be an indication of overpayment, as these assets are hard to monetize and might be vulnerable to future impairments.
  • The company’s debt-to-equity ratio is roughly 1.5, which indicates that debt is larger than equity, and implies they are somewhat levered, but not to an extreme extent.

The company should focus on reducing its debt and improving its return on equity, which may result in it improving its financial soundness.

This analysis is based on the provided information and should not be considered as financial advice.