Blackbaud Earnings: Strong Margins Drive Early ‘Rule of 40′ Attainment

Narrow-moat Blackbaud BLKB reported third-quarter results that were ahead of our expectations. We were most impressed by the firm surpassing its “Rule of 40″ goal ahead of schedule. Management reiterated its full-year 2023 targets, which we are confident the firm can achieve as its pricing actions, improved productivity, and booking momentum from the EVERFI acquisition continue to take effect. Although Blackbaud is exposed to macroeconomic risk and seasonality, we expect margin expansion to continue throughout 2024. Balancing near-term expectations with our long-term outlook, we maintain our $70 fair value estimate and view the shares as fairly valued. We believe Blackbaud is well positioned as a leader in the not-for-profit niche and see no changes to that arising from third-quarter results.

Third-quarter revenue increased 6% year over year to $278 million as reported, slightly above our estimate. Recurring revenue increased 8% year over year to $269 million, while one-time services revenue decreased 28%. Non-GAAP organic revenue, which excludes the EVERFI acquisition, was up over 6% as reported. Both transactional and contractual revenue were up nicely in the quarter compared with the prior-year period, driven by rate increases and lengthier contract durations. We expect the firm’s updated pricing model to continue to positively affect revenue growth over the next several quarters.

In the quarter, management reported 41.6% within its Rule of 40 framework, which entails achieving organic revenue growth plus adjusted EBITDA margins in excess of 40%. In the quarter, adjusted EBITDA margin was 35.0% as reported, compared with 25.6% in the prior-year period. We expect the firm’s cost-management initiatives, data center closures, and synergies from the EVERFI acquisition to support margin expansion and maintain the Rule of 40 status over the next year.