Blackbaud Concentrates on Expanding Bottom Line as It Enters New Year

Narrow-moat Blackbaud BLKB reported fourth-quarter results that came in below our revenue expectations while delivering better profitability. Management laid out its 2023 targets, which while light on revenue provided a solid pathway for margin improvement toward its “rule of 40″ goal. While its 2023 targets face macroeconomic risk, the firm expects its pricing actions, data center closures, improved productivity, and substantial head count reductions to enable margin expansion, which we expect to be weighted to the back half of 2023. We are also pleased to see improvement in EVERFI bookings and anticipate revenue and profitability upside from the acquisition to bear fruit as the year progresses. Finally, we see recent pricing actions as driving modestly accelerating revenue growth throughout 2023. Balancing near-term headwinds with our long-term profitability outlook, we retain our $66 fair value estimate and view the shares as moderately undervalued.

Fourth-quarter revenue grew 11% year over year to $275 million as reported, slightly shy of FactSet consensus of $278 million. Recurring revenue grew 11% year over year to $265 million, while one-time services revenue was up 3%. Organic revenue, which excludes the EVERFI acquisition, was up 2% in constant currency. We are impressed by the firm’s strength in renewals as it transitions toward multiyear contracts, especially in light of recent price increases.

Management highlighted its overarching goal to expand profitability 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 grew 12% year over year to reach 25% in constant currency, leading to a 27% rule of 40. Margin expansion was mainly driven by an approximate 14% reduction in head count, where the firm consolidated non-customer-facing and one-time services business units, synergies from the EVERFI acquisition, and data center rationalization.