Investing In AI And Cloud To Achieve Operational Efficiencies By 2025

Key Takeaways

• Divestiture of EVERFI refocuses on core business, enhancing margins and revenue growth, leading to improved profitability and cash flow from 2025.
  
• Investment in AI and cloud solutions aims to boost customer retention, operational efficiency, and revenue, supporting long-term profitability goals.
  
• Divestiture, interest expenses, potential revenue gaps, and early AI investments could challenge Blackbaud's short-term growth and profitability.

Catalysts

Engages in the provision of cloud software and services in the United States and internationally.

• The divestiture of EVERFI, which was dilutive to revenue growth and profitability, allows Blackbaud to focus on its core business and is expected to enhance margins and revenue growth from 2025 onwards. This should lead to improved profitability and cash flow, positively impacting earnings.
  
• Blackbaud is aggressively investing in AI initiatives, such as the Blackbaud Copilot, to integrate machine learning capabilities, streamline workflows, and enhance customer efficiency. These innovations are expected to drive revenue growth through better customer outcomes and increased customer retention.
  
• The company has shifted its sales strategy towards acquiring new logos and expanding its existing customer base, focusing on sectors such as K-12, arts, and culture. This strategy is expected to support mid-single-digit organic revenue growth, positively impacting revenue and market share.
  
• Blackbaud's improved adjusted free cash flow and commitment to stock repurchase programs, buying back 3% to 5% of shares in 2025, demonstrates a robust capital allocation strategy that is poised to enhance earnings per share and return value to shareholders.
  
• With the completion of migration to cloud solutions, Blackbaud expects operational cost savings, labor efficiencies, and economies of scale. These efficiencies are anticipated to further expand EBITDA margins, positively influencing profitability and supporting its long-term Rule of 45 target by 2030.

Blackbaud Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Blackbaud's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -24.5% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $120.2 million (and earnings per share of $2.45) by about March 2028, up from $-283.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.8x on those 2028 earnings, up from -11.4x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 4.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Blackbaud Future Earnings Per Share Growth

Risks

• The divestiture of EVERFI, which was dilutive to both revenue growth and profitability in 2024, could lead to a temporary gap in revenue performance as Blackbaud refocuses on its core business. This might negatively impact revenue growth.
  
• The continuation of increased interest expenses associated with the stock repurchase program, estimated at an additional $11 million in interest expenses for 2025, could impact net earnings negatively, reducing overall profitability.
  
• With no viral giving included in the 2025 guide, there is a risk that revenue from transactional streams could be lower than anticipated if any potential viral events do not materialize, further impacting potential revenue generation.
  
• Potential softness in bookings as sales efforts transition from migrations to new logos could lead to delays in revenue recognition if the new go-to-market strategies do not yield immediate high-impact results, thus affecting short-term revenue growth.
  
• The costs and timing associated with early-stage investment in AI innovations could result in increased operational expenses in the short term, potentially impacting net margins before additional revenue from these innovations is realized.

Valuation

• The analysts have a consensus price target of $76.333 for Blackbaud based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $120.2 million, and it would be trading on a PE ratio of 33.8x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $66.58, the analyst price target of $76.33 is 12.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.