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Blackbaud Earnings: Impressive Margin Expansion Builds Confidence in Achieving Rule of 40

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Blackbaud Inc
(BLKB)

Narrow-moat Blackbaud BLKB reported second-quarter results that were slightly below our revenue expectations while delivering upside against our bottom-line estimates. Management reiterated its fiscal 2023 targets and affirmed that Blackbaud is on track to achieve its Rule of 40 goal by the end of fiscal 2023. While its 2023 targets are exposed to macroeconomic risk and seasonality, we expect the firm’s pricing actions, data center closures, and improved productivity to continue to drive margin expansion in the back half of the year. We are also pleased to see strength in bookings bolstered by Everfi and expect revenue and profitability upside from the acquisition to accelerate. Balancing near-term expectations with our long-term outlook, we maintain our $70 fair value estimate and view the shares as fairly valued.

Second-quarter revenue increased 2% year over year to $271 million as reported, slightly shy of our $276 million estimate. Recurring revenue grew 4% year over year to $262 million, while one-time services decreased 30%. Non-GAAP organic revenue, which excludes the Everfi acquisition, was up 3% in constant currency. Transactional revenue grew in the high single digits year over year, supported by tuition management as enrollment trends upward and positive impacts from rate increases on Blackbaud Merchant Services take place. We expect accelerated growth in the second half of the year as the firm executes on its renewal pricing strategy across services.

Management highlighted its ultimate goal to expand margins and revenue growth to reach the Rule of 40, which entails Blackbaud achieving organic revenue growth plus adjusted EBITDA margins in excess of 40%. In the quarter, adjusted EBITDA margin was 32.8% as reported, leading to 35.6% against the Rule of 40 framework. We expect the firm’s cost-management initiatives, data center closures, and synergies from the Everfi acquisition to serve as a tailwind for margins over the next several quarters.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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