Blackbaud Stock

Good day, and welcome to Blackbaud's Second Quarter 2026 Earnings Conference Call. Today's conference is being recorded. I'll now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's Second Quarter 2026 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's Chief Executive Officer, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and Chief Financial Officer.

Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. Today's discussion will focus on non-GAAP results. Please refer to our press release and investor materials posted to our website for full details on our financial performance, including GAAP results, full year guidance and long-term aspirational goals.

We believe that a combination of GAAP and non-GAAP measures provide a more representative view of how we measure our business. Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. We have also provided a slide presentation with supplemental data and additional highlights and financial metrics. The earnings release, supplemental tables and presentation are available in the Investor Relations section of our website on blackbaud.com.

And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. We appreciate you joining today. We delivered another quarter of solid execution against our operating plan with a continued focus on efficiency in a rapidly accelerating pace of product innovation. We achieved our planned revenue and other financial targets for the quarter. As you saw in our press release, we pointed investors to the high end of our full year financial guidance ranges, which does not include any meaningful revenue contribution from our 5 new AI products launched or announced this year.

AI enablement remains central to our success, both in terms of the capabilities we're delivering to customers and in the way Blackbaud is operating, our first Agentic products moved from launch into real customer results, which is reinforcing our confidence and built our strategy and the opportunity ahead. We continue to invest aggressively in innovation to produce meaningful product enhancements and new solutions throughout our portfolio, including Generative and Agentic AI capabilities.

Our products enable our customers to dramatically improve engagement levels, raise harmony and lead their organizations while increasing operational efficiency ultimately allowing them to spend more time executing on the missions in less time on administrative tasks. No company can better help customers deliver on their meaningful missions than Blackbaud.

Blackbaud brings nearly 45 years of specialized domain expertise serving as a system of record for our customers with deeply embedded workflows purpose-built for the social impact sector. At the same time, we have continued to invest heavily in cybersecurity and AI governance to help protect our customers' data and provide a framework for our AI solutions to use that data responsibly. These are some of our customers' largest concerns, and we have addressed them head on. A significant number of organizations in our vertical markets have limited IT resources and face turnover and staffing shortages.

We win because our solutions are intuitive, require fewer complex customizations and integrations and translate advances like AI into practical outcomes, customers can trust building confidence that it's supporting longer contract turns at renewal. In fact, approximately 90% of our contractual reoccurring revenue is on 3-year or longer contracts and 25% on 4-year or longer contracts. You may recall that just a few years ago, more than half of our renewal volume was from customers on 1-year contracts. This quarter, we again saw a healthy mix of new customer logo wins and cross sales of additional solutions to our existing customers.

Several of our new logo wins were competitive displacements across multiple verticals. New logos this quarter included Nelson University, which selected Raiser's Edge NXT together with our analytics capabilities in the East Hampton Historical Society, which shows Raiser's Edge NXT to modernize its fundraising. Additionally, we continue to see great momentum in upselling with our development agent with cross-sells in our [ hired ] and nonprofit verticals. We also had several notable wins that were competitive takeaways and returning customers. Jacksonville Zoo moved to Raiser's Edge NXT and prospect insights, displacing an incumbent point solution and returning to Blackbaud after several years away.

And the Center for Autism Services Alberta selected Financial Edge NXT, a competitive takeaway from a horizontal accounting provider and another returning customer. These wins reflect the strength of purpose-built connected solutions over fragmented generic alternatives and the value of our solutions and meeting our customers' ambitious goals. We are more confident than ever that AI strengthens our ability to deliver differentiated solutions and drive future growth as well as improving how we run Blackbaud. Our first Agentic AI offering of fundraising development agent launched into general availability ahead of schedule earlier this year and we are now seeing genuine measurable results and return on investment from our customers.

The development agent identifies potential in dormant donors who are not in a major gift officer portfolio and executes personalized, brand-aligned multi-touch engagement sequences under human supervision. Early results are compelling. In production, the agent is generating a reply rate but significantly above the industry average, a message open rate metric meaningfully above industry benchmarks and an average attributable gift size well above industry norms.

Importantly, customers are engaging a broader donor base without adding headcount. And the development agent is just the first of many ways we expect to add value to our customers. Over the last few weeks, we announced 4 additional agents for good solutions planned for the coming months. Each embedded directly in the solutions our customers already use every day. The data health agent, which will run autonomously within our fundraising solutions to identify duplicate entries confirm contact information, resolve consistent life changes, helping development offices run more curated and targeted campaigns. This agent will free up customer resources as most customers have data health assigned to staff.

The admissions agent, which will enable any independent K-12 school to offer the high-touch, personalized emissions experience that previously only the most well resourced institutions could achieve. The digital marketing agent, which will help plan campaigns intelligently from selecting the right audience to generating tailored content to optimizing outreach across channels in real time and the accounts payable agent, Financial Edge NXT's first autonomous AI agent, which will work alongside finance teams to improve their own efficiencies to include being able to automate invoice intake and optimize payments.

Alongside these agents, we're advancing a reimagined cloud-native AI-first connected platform, a single operating system for social impact that connects every product learns from every interaction and gets smarter over time, all while keeping humans firmly in control. We'll unveil the full details of this connected system, along with additional product news at BBCON 2026 in Columbus, Ohio at the end of September, we're excited about what's ahead. I also wanted to highlight some innovation specific to our K-12 vertical. Within K-12, we previewed the admissions agent and our 2026 user conference and introduce a wave of embedded AI across our total school solution, including predictive candidate insights, new enrollment contract capabilities and student success insights that help schools proactively support at-risk students.

Also embedded is Blackbaud AI chat that helps administrators quickly ask questions of their data, get insights and plain language and take action directly within the solution as well as a common records engine that syncs data in real time across our student information and fundraising systems, breaking down silos between departments and offering our customers the capability to integrate various systems. Our competitive differentiation is clear and widening. Our strength comes from combining proprietary data were the most robust sets of social impact data process and secured in real time with the sector's reaches social impact Signal Graph, deep embedded sector contacts and purpose-built governance.

Native integrations across systems of record, engagement, financial accounting, transaction processing and intelligence, further strengthen that advantage. Our agents stand apart precisely because they are embedded in the solutions customers already trust, reducing the data gaps and security risks created by bolt-on-tools. We're also seeing continued momentum in customer adoption, usage of AI-powered workflows has expanded meaningfully over the past several quarters and more than half of our Raiser's Edge NXT customers use machine learning enabled donor prospecting, generating tens of billions of predictions annually that live and aggregate within our systems, creating a self-improving feedback loop that generates better fundraising outcomes across our customer base.

We also believe trust is critical to organizations, allowing intelligent systems to act on their behalf. Our customers trust in us as their partner, trust in our solutions that they are used to, trust in the data and trust in our security our advantages for both our customers and for Blackbaud, trust matters as AI usage increases. Recent research from the Blackbaud Institute shows that AI is now common across the social impact sector. yet most organizations are held back by gap between adoption and effective use. We're helping close that gap in two ways: by delivering trusted transformational AI capabilities inside the tools our customers already use and through the AI coalition for social impact, which recently launched a free product agnostic AI or social impact certification program to help professionals adopt AI effectively and responsibly. Now turning to how we use AI internally.

We continue to identify, experiment and scale solutions across engineering, sales and marketing, customer success and the back office to improve speed and operational efficiency. Our engineering teams use leading [ Generative ] AI tools such as Microsoft, GitHub, CoPilot and Anthropic Claude and other approved solutions to accelerate development, reduce time to remediate software issues and increased throughput on new product delivery. We're also applying AI to better qualify inbound interest, support sales development and improved customer support.

I believe our past performance is compelling in addition to improving our operations, go-to-market capabilities and pace of innovation, we are focused on the value creation opportunities ahead in the near, mid and long term, both operationally and financially. As a reminder, from 2026 through 2030, we are targeting double-digit annual EPS growth driven by the following: organic total revenue growth of 4% to 6% annually with potential upside based on viral events and new product launches such as our agents for good catalog. Adjusted EBITDA growth of 6% to 8% annually while expanding our adjusted EBITDA margin at 40% plus.

Slide 24 in our investor deck provides more detail on the planned initiatives to drive continued margin expansion, most of which are already underway. We expect this improvement in EBITDA to continue to translate to strong free cash flow growth. We plan to use our very strong cash flows to drive purposeful capital allocation strategy with consistent stock repurchases as a core tenet. We expect to deploy 50% or more of our cumulative free cash flow generated between 2026 and 2030, for stock purchases and continue to reduce our common stock outstanding.

This is a continuation of our significant stock repurchase program over the last couple of years in which we have reduced common stock outstanding by approximately 15% since the fourth quarter of 2023. In the more near term, as we stated in our earnings press release today, we are pointing investors to the high end of our original FY '26 guide across revenue, adjusted EBITDA, EPS and free cash flow. Chad will provide more detail and color in a minute.

To conclude, we believe Blackbaud is a compelling investment with multiple opportunities for strong shareholder returns. From an operating, financial and strategic perspective, we are pleased to be carrying real momentum into the second half of the year and the years ahead. We look forward to our continued journey. I also would like to thank the entire Blackbaud team for their continued strong efforts and having Blackbaud named to Times' list of America's Best Companies in 2026 and a job well done. I'd like to turn it over to Chad to walk through our second quarter results and our guide for the remainder of 2026.

Thanks, Mike, and good morning, everyone. In the second quarter, we continued to balance cost management with growth opportunities and innovation. As we do each quarter, we're focused on durable subscription-led performance prudent expectations around transactional revenue and steady progress on profitability and cash flow. Our Q2 performance reflected continued demand for our mission-critical solutions along with growth in transactional revenue.

As always, transactional revenue can vary from quarter-to-quarter, and our guidance philosophy assumes performance consistent with historical patterns and does not include any assumption for viral giving events. Q2 organic revenue grew 3% to $291 million. As we previously indicated, we expected some moderation in organic revenue growth during the year given the size and timing of certain renewal cohorts. Our second quarter results were in line with those expectations and support our full year outlook. Non-GAAP adjusted EBITDA was $110 million representing an adjusted EBITDA margin of approximately 38%, reflecting continued operating discipline while maintaining investment in growth initiatives and innovation.

Our disciplined operating focus again translated into strong bottom line performance. Non-GAAP EPS increased 9% to $1.33 in the second quarter, and we're on track to achieve high teens EPS for the full year 2026, the high end of our guidance range. Free cash flow increased approximately $24 million, up 46% year-over-year to $75 million in the quarter. Strong free cash flow generation continues to support our balanced capital allocation strategy.

We remain committed to investing in growth innovation and customer success while returning capital to shareholders during the first half of 2026 including the net share settlement of employee stock compensation, we repurchased just over 6% of our outstanding common stock as of December 31, 2025. Since the fourth quarter of 2023, we've offset 100% of dilution from stock-based compensation and also reduced common shares outstanding by approximately 15%. Overall, we delivered another solid quarter and first half, reinforcing our confidence in the full year outlook. Now moving on to our 2026 outlook. Based on our first half performance and our current view of the operating environment, we are reaffirming our full year guidance ranges but now expect to finish in the upper half of the range across all 4 key metrics: revenue adjusted EBITDA, EPS and free cash flow.

For EPS and free cash flow, we expect results to be at or above the high end of the ranges. As a reminder, we continue to expect 2026 quarterly financial performance, including revenue growth and profitability to be heavily weighted to the back half of the year and particularly the fourth quarter some of which I'll discuss in a moment. Before I close, I'd like to provide a few housekeeping items that are already contemplated in our financial guidance and may be helpful as you think about modeling the business through the balance of 2026 and into 2027.

Donor expectations continuing to evolve with increased emphasis on donor experience, reliability, privacy and security. Blackbaud continues to invest in modern online giving capabilities to meet these expectations. Our modern online giving forms are designed to help customers raise more for their missions through configurable donor experiences, streamline data integration and optional fee offset capabilities while maintaining a strong focus on donor trust and data protection. As part of that investment, we've introduced a platform fee on certain online form transactions.

The fee supports continued innovation and investment in secure, reliable, online giving infrastructure and related platform enhancements to minimize the impact to the majority of our customers they can use our existing donor cover option whereby donors pay the fee associated with their transaction. As we've previously discussed, the platform fee is expected to contribute to the back half weighting of our 2026 financial results with the largest benefit expected in the fourth quarter.

Turning to gross dollar retention. As we've discussed previously, Blackbaud's 2026 contractual recurring renewal cohort is approximately 40% larger than last year. As a result, we continue to expect a near-term dip in reported gross dollar retention as a greater amount of recurring revenue comes up for renewal during the year. As we move past this larger renewal cohort, we expect gross dollar retention rates to climb back to our more recent norm of 91% to 92% by the end of 2027. This dynamic was factored into our full year 2026 revenue guidance. And as stated earlier, we currently expect to finish in the upper half of the guidance range.

Looking to 2026 and beyond, we expect free cash flow to continue growing significantly. We anticipate deploying at least 50% of cumulative free cash flow generated from 2026 through 2030 and toward share repurchases beyond that commitment, the company has tremendous optionality for dynamically allocating capital to its highest and best use based on market conditions including additional share repurchases, debt reduction and strategic tuck-in acquisitions. We have a lot to be proud of, executing well through recessions, financial crisis, COVID and the shift to the cloud through a commitment to providing meaningful solutions to our customers and strong execution of our operating plan on our journey to becoming a Rule of 45 company we remain committed to providing investors with an attractive financial model, balance between growth of revenues, earnings and cash flows along with a prudent and purposeful capital allocation strategy and always, we remain focused on providing enhanced value to our customers and our shareholders. Thank you all. Mike and I would be happy to take your questions. Operator?

[Operator Instructions]. Our first question comes from Brian Peterson with Raymond James.

I wanted to start on some of the win backs that you mentioned, Mike. You don't always mentioned them every quarter, but I'd love to understand if there's anything in terms of the timing of why you're winning back some of those customers you may have lost? And as we think about win rates overall, is there anything you can share about how those have developed in 2026?

Brian, thanks for the question. Yes, I mentioned a couple of those. Those customers are coming back due to the innovation that we're driving in our core products. And then the AI solutions were embedding in those core products. So it really is all about the innovation investments that we're making and announcing and the outcomes that our customers are producing. We've got a lot of information around when customers join Blackbaud and use one of our fundraising solution, there's a pretty big uplift in donations raise it really improves their revenue. So that, I think, is a prominent factor in these win-backs. But we feel really good about when that happens.

Okay. That's great to hear. And maybe I know you guys raised the guidance to kind of the upper end of the range. Any help on what's underpinning that? And how do we think about that in terms of the line items between contractual recurring and then transactional?

Yes. Thanks. So yes, so we mentioned that we are pointing everyone to the top half of the guide range. We also mentioned in addition to that, or included is sort of the very top end of the range for cash flow and EPS. So sort of top half for the other metrics like revenue, very top for free cash flow and EPS. We're having a great year in bookings. So super positive achievement in overachieving our internal sales bookings plans, we've got a lot of great leadership in sales. Some new leadership has come in just in the last 6 or 8 months.

And so we're having a great year related to win rates, just beating our internal sales quota plans in a lot of areas in the company that gives us a lot of confidence in pointing everyone to the top half of revenue for this year. And as you know, great effects for next year and future years because pretty much when customers sign up with us based on the 3-year contract. The other thing I mentioned this in my prepared remarks, I'll just mention because it's relevant to your question, last time I talked about the fact that we had 20% of our customers on 4-year or longer contracts. I just made an update in this call, it was 25% of our customers around 4-year or longer contracts, which is really great for the long run for us.

Our next question comes from Rob Oliver with Baird.

Two for me, Mike, first for you. Just an update on the logo program. I know this has been part of your go-to-market push since bringing in new sales leadership. And obviously, there's some noise around the gross retention around current customers and stuff. But I just wanted to understand some -- where you are with the new logo program? And any proof points you can point to get us comfortable that that's on the right track?

Yes. The gross retention, we talked about is gas revenue retention and I think we've said this many times, we have a cohort this year that's 40% higher. So the results of the quarter and the guide moving to the upper half is all in our plan, and we finalized the plan a year ago. So all that stuff contemplated in the plan. So we're actually on track. All this is quite well expected. So we feel good about that, Rob.

We're doing really well with new logos in areas like K-12 and nonprofit and higher ed. Those markets are doing really well. Our year cost business is just nailing a lot of new logos across the board. I've mentioned these in past calls, your case is closing new logos with some of the largest companies in the world, Fortune 100 companies are signing up. So it's a pretty wide distribution in new logos. And again, our sales teams, many of our sales teams are only selling new logos. So we have some that you cross-sell want to do logos in the door or we announce new products, but many of them just do new logos. So again, we feel really good about sales bookings. We're nicely ahead of plan and all that's going quite well.

Great. And then Chad, one for you. Just -- I'm trying to square the commentary around the high end of the guidance versus the kind of 3% constant currency growth that we saw in this quarter versus the 4% to 4.5% for the full year. And I know that called out a couple of things second half waiting on renewals. Obviously, that makes sense. And then transactions and stuff like that in Q4. Just wondering if there's anything else going on there in terms of the pricing around these renewal contracts if you're getting the price? And then one specific question just around the platform pieces that's new. Would you be able to decide the potential impact of that on that Q4.

Yes. No, that's great. And thanks for the question, Rob. And to Mike's earlier point, we're performing the plan. So program continues to perform well. We might describe the increased cohort size. But as we think about the second half of the year, we're operating to plan. We talked about the renewals. I'd also mention that the transaction revenue in the quarter had a tough compare. So we exceeded kind of our traditional growth ranges in 2025 and have a little bit of viral giving as well.

So we've seen that come back down into kind of the normal range, as you would expect. And whenever I think about the second half of the year, we also talked about the launch of the platform fee. And really, you can think about that as investments that we're making in order to drive better outcomes for our customers from a donor experience perspective, the monetization model is quite common within the industry as well. We're feeling really good about it. Our customers will have options if they choose their donors cover the fees or not. So it's quite common we've launched that effectively in the Q3 time frame. We had planned for it. It was included in our guide, and that's contributing to the back end weighting and particularly into Q4, Rob.

Our next question comes from Parker Lane with Stifel.

Mike, I was wondering if you can talk about the sales motion agents, I think you're up to 4 solutions that are out there today. Does every seller in the organization promote those agents to try to get this into the customer base or you have dedicated teams around those today? And are you offering customers the opportunity to pilot and trial some of these agents before making the commitment on the subscription side of things? Or do they have to commit on subscription?

Yes. Thanks. So the first product out in the market is the development agent. We announced last year we had early adopter program. and then went to general availability for customers just in March, a couple of months ago. What we've done with that, Parker, is we started with a dedicated team because there was a lot of learnings for us and for customers. So in the EAP program that started last year, for the first time ever in a new product that we signed up customers to paying contracts just to the early adopters, which they all did.

And then the general availability pricing is much higher, obviously, that came out in March. And so it's sort of a ramp-up. You could think about a new product, getting announced getting early adopters using the product with a dedicated selling team, which are embedded in the product and engineering teams. So we're really close to the customer, and it's really important to get that very close feedback loop from customers because we're iterating and improving the product all the time.

And then once the product more matures, it gets to general availability. And then after a month or 2 or so, then we move it into the general global sales team. It really is to help the products mature, help our organization learn, help the customers learn. So that's sort of the evolution when we launch these new products. The really cool thing is we've announced 5 of them now. So development agent a while ago into general availability, 4 more in the press release just recently. And there'll be more announced this year.

We'll have more new AI products announced predominantly at our BBCON conference at the end of September, I think it is in Ohio. And you guys are welcome to come if you'd like. So we'll have even more products announced then. And they're getting to be specific by vertical as well. We announced the admissions agents, for example, which is obviously for tools for K-12 where the development agent kind of goes across our verticals because they all use our fundraising solutions. And these are fully Agentic new products for Blackbaud, which is super exciting. And there's nothing better in sales to have a brand-new solutions to talk to prospective or existing customers about. So we're excited about the pace of innovation, and we're just getting going here.

Thanks, Mike. Chad, maybe one for you. Looking at the levers for additional margin expansion through 2030, vendor optimization, AI and other efficiency gains are included on that list. Maybe let's go ahead in hand to some set. Can you just talk about how big those levers are relative to the other areas like the workforce strategy, platform modernization and data center closures?

Sure. And Parker, thanks for the question. And we're pleased with the progress of our margin expansion, which is continuing to progress very well there. A number of levers. It's important to know that within the guide, we haven't contemplated efficiency gains in a meaningful way from AI. It's notable. We're continuing to execute on a number of initiatives, but it's also important just to note you have the natural flow like fall through of the subscription model as well as the SaaS model.

So from that perspective, we're pleased. We continue to focus and have good outcomes relative to building out the GCC and the workforce strategy in Hyderabad. So we expect to continue to see improvements there. We've talked about modernization, those kind of our tech stack as well. So those are a couple of the items we've laid out a bit more detail on those within the investor deck for UC as well.

Yes, Mark, I'll add to that, too. We're in the in the deep process around becoming an AI-first company. We are refactoring every department in Blackbaud. Every part of the company, what you're seeing now is a pretty significant improvement in innovation with 5 AI products launched using AI to build those products. I also mentioned it's a key thing that those products are embedded in our trusted solutions, having trust in the solutions for the customers is super important.

And we've got a system of record and system of intelligence set of products has now embedded a Agentic AI that gives us a competitive advantage. But we are refactoring the whole company. So we are using AI in marketing, in sales, in support in the call center, in engineering in product management, in the PMO to refactor the entirety of how we run the business and how the business is structured as well, that's not yet factored into additional revenue growth or improve margins yet. But it's early days, but I can tell you, I can clearly see some pretty interesting improvements in the operating performance of the company based on this initiative. And we're being very aggressive but also governed as we refactor the entirety of the business.

Our next question comes from Peter Burkly with Evercore ISI.

You talked about sort of the different levels of AI maturity in the industry and you guys are refering AI coalition to sort of help that progress over time. So I'm just curious your view today on where are your customers on average in terms of that maturity stage. And understanding that it's not agents aren't necessarily expected to contribute much to revenue this year. But if you think the maturity curve is sort of progressing, where you start seeing Agentic in contribution first half of next year, second half of next year is more of a longer-term play. Just more color along those lines would be helpful.

Yes. I think I'll answer that kind of in two parts. Like the industry maturity, which is the customers. Everyone is using experimenting with AI in different ways. Our customers, it depends on -- we have customers that are such a wide range, right? Like we can -- we can talk about a very small local nonprofit or we can talk about YourCause customers, which are in the Fortune 100. So it's a pretty wide range. But I would say that the folks that we interact with -- they're all interested in using AI.

I'd say it's very early days and their ability to have AI positively impact their business, except for the products they're buying from us like the development agent. I talked about some of the things we're seeing with the development agent around big increases in things like reply rates, message open rates, it actually dip sizes, which is revenue for them. So they're getting improved outcomes based on that solution. And so I still think it's early days. The other part of that question, I think, is our ability to monetize this.

So not really in our numbers this year, we'll see some new revenue coming from these solutions next year, just growing over time. The interesting part also is, again, that a really big deal for our customers is there's a mix of excitement and fear of AI. I think everybody has that. that includes our customers of all sizes. But working with Blackbaud, is a reason why 25% of our contracts are 4 years or longer now. So there's a trust in working with Blackbaud, there's a trust that we're putting Agentic solutions into our trusted platforms.

As you know, the data in our platform are not available to large language models. Proprietary data, customer data, Blackbaud enriched data. And there's proprietary AI learned models, contextual models that are owned by Blackbaud and it's a trusted environment. So I think that this adoption is going to grow tremendously. I still think it's early days for customers, but I think the approach that we're taking, which is fully agenetic solution under customer control, embedded in our systems of record is going to be really exciting and beneficial for our customers and for Blackbaud.

Okay. Well, that's it for today. Thank you for joining us. We will be attending a number of investor events over the coming months, including several investor conferences, which are listed on our Investor Relations site and as well as Mike mentioned, our BBCON Customer Conference at the end of September. We hope to see you then and/or speak with you very soon. In the meantime, we wish you continued success and have a wonderful day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Hello, everyone. My name is Zach Canter. I'm a Managing Director in the Technology Investment Banking Group at JPMorgan. And I'm very pleased to be joined this afternoon by Mike Gianoni, CEO of Blackbaud, the leading technology platform to the nonprofit and social impact sector.

To start, Mike, can you provide an overview of Blackbaud's business and the social impact sector that you serve?

Yes, sure. We're a cloud software business. We serve several different end markets, nonprofits, foundations, community foundations, foundations within universities, within hospitals and hospital systems. We serve the education market, K-12 schools. We also serve performing art centers, arts and cultural institutions, museums. We have a platform for companies that we provide to large companies globally for volunteering and matching gift processing. And in Europe, we have a consumer-facing platform called JustGiving.

Great. How do you think about sizing up that market? How do you think about sort of the TAM around social impact and the not-for-profit industry that you guys serve?

Yes. We have the TAM pegged at $10 billion in our IR deck. We kind of break it down by sector. And we also show our penetration in each of the sectors as we break it down. So it's basically the addressable serviceable market that we serve in those end markets that I just described.

Great. Can you maybe go into a little bit more detail about sort of what are the most important products and solutions within the Blackbaud portfolio that your customers are focused on?

Yes, sure. So we have fundraising platforms for all those markets I described, except the company or corporate market. So fundraising platforms, we have a financial platform, essentially a general ledger, accounts payable, accounts receivable, fixed assets, specifically built for the accounting nuances of nonprofits and foundations. We have a full ERP platform for K-12 schools. And so in those schools, we run the entirety of the school from student recruitment, student enrollment, classroom scheduling, student information system. We have a mobile app for the parents. We do tuition processing, fundraising and financials for the schools. So we really cover a lot of what the schools do.

We have a platform for performing art centers that does fundraising, membership management, ticket sales. They all sell tickets. We have a platform for companies called YourCause. We have a lot of Fortune 500 companies as customers. So that platform, once implemented, will get integrated to the HRIS system and the payroll system. And it's used for all the employees will be registered on the platform. It's used for employees for coordinating volunteering with nonprofits, either individually or within groups, could be virtual, volunteering or in-person amongst all the employees. It's also used for them to make donations to nonprofits all over the world and for their corporate matching gift programs as well, and we distribute the funds to the end recipient nonprofits as well.

Can you talk a little bit about the competitive landscape for Blackbaud? Who do you typically see most often out there when you're selling products into the market?

Yes, sure. So with all of those product sectors and those vertical markets, our competition are small private, usually founder-led software companies, and they're kind of single point solutions. Like all that I described in that K-12 platform, if they -- if a K-12 school doesn't use us, they probably have 5 or 10 separate vendors, unintegrated. And that really is the whole of the marketplace: stand-alone, private, mostly founder-led software companies.

And to what extent do you see horizontal solutions providers trying to sell into your market with Salesforce?

Yes, we see them. So some of those small software companies build apps that go on top of Salesforce or Microsoft Dynamics, less so. And so we see them. So we compete with sort of the Salesforce and their ecosystem a little bit, but not in all of our markets. Most of our markets, we don't have a competitor like a Salesforce. So they're not in performing arts and K-12 schools, religious organizations. They're not in any of those. The corporate market we're in, they don't have a platform there. We see them occasionally in higher ed. But mostly, they're in a different part of the higher ed institution. We're in the foundation because that's our specialty, and they're usually sort of somewhere else in the school.

How do you think about -- or how do you define like the key competitive differentiators for Blackbaud? Like what are the factors that drive -- aside from breadth because clearly, there's tremendous breadth across the social impact space. But what do you think are the key factors that drive customers to choose Blackbaud over other alternative solutions in the market?

Yes. So we've been in the space a long time, and we're a vertical software provider. So our solutions are very, very deep in the data needed for these solutions. And these are all systems of record. So the data is not available to large language models because it's inside of our products. We enrich the data with our own data that we create, which are trends across the industry. And so we enrich the customers' data, very deep workflows, deeply integrated and purposely built for the markets that we serve.

And then because of our portfolio, when you have multiple solutions and they're integrated together, that also provides a different sort of competitive moat against the competition because most of the competition will have one of those platforms. For example, our fundraising solutions, we don't have a competitor that has a financial platform or that has a payments platform. They have one of those things, not all of them, and we integrate them all together.

What are the benefits to a customer that uses sort of the integrated solution versus using multiple point solutions and trying to stitch them together?

Yes. Well, it automates a lot of their workflow. So if you have a fundraising solution, which is your revenue generation platform integrated with financials and payments, you can do things like automated account reconciliation. If you don't have that from one vendor, it's manual. And then you have to make sure you can move the data between multiple vendors, right? So the fundraising platform is collecting your revenue, you have to get into your general ledger. And then you've got to reconcile with banks. And so it's not all connected together like our solutions are.

And then what we've done is we've done things like create common data models that sit on top of those. So the executives within our customer base have dashboards that look across multiple departments and multiple systems of record that aggregated into one. If you have multiple vendors, you either build that yourself, which nonprofits typically don't do or you're the systems integrator, the customer.

A moment ago, you mentioned large language models, which is a nice segue to everyone's favorite topic around AI. Can you talk a little bit about Blackbaud's AI strategy?

Yes, sure. So we've been building machine learning and predictive analytics in our solutions for over a decade. We have, in the last 2 years, put a lot of AI capabilities in many of our solutions in the last 2 years. And we just came out with our first fully agentic product. It's been in the market for 6 weeks. And it's a fully agentic fundraiser. So it raises money.

So from a system makeup standpoint, and I just did a position paper on this that got picked up by Forbes Digital yesterday, and I'll give you kind of a summary of it. So because we're a system of record, first of all, again, the data is not available to large language models. It's inside the system. It's the customers' data and the data we enrich. So that's sort of one layer of what I would describe as a moat.

Another layer is all the contextual information and predictive analytics and things that we can do to make -- that make our systems of record as systems of intelligence. So they know the workflows, they know how our customers run and what the automation is, right?

On top of that, there are specific workflows by job type, by role-based and by customer type inside of the system. So you have all of that which is proprietary with unique data and trends that we collect industry-wide in which we enrich each customer's database with. So that's all quite unique.

And of course, we're using Anthropic's Claude and Devin and other tools to advance our road maps and build new products as well. So we've become an AI development shop in the last 2 years also. So I think we're in a pretty good spot related to that. And then on top of that, we have transaction systems, too, that are embedded in our system of record. So think about like a donation processing system, akin to like a PayPal, but it's ours, it's embedded inside of our system of record.

So you've got all that transaction data, credit card data. That's data from donors that are inside the systems of record. And then on top of that, in some cases, we've built a network effect. And so that platform that we sell to corporations that does donation processing, matching gifts and volunteering, last summer, we connected that platform through our payments rails to our fundraising platforms. And it's unique in the world. And there's no company except Blackbaud that has all 3 of those pieces. There are folks we compete with that have one of those. So we connected all that.

So today, using our platform for companies, it's called YourCause, a lot of Fortune 500 companies, an employee makes a donation, the nonprofit gets the funds 24 to 48 hours later. The competition: 2 to 4 months later do the funds arrive because it's all connected. On the nonprofit side, a prospective customer looking at Blackbaud for fundraising, we have to win on the merits of our software, but a value add is you join what we call the Blackbaud Verified network. And so that nonprofit is now in a network connected to millions of employees in companies that become their volunteers and their donors, and they can get sort of posted on an employee internal system to promote their nonprofit. So it's sort of a 2-sided closed network.

Yes, that sounds really exciting. As it pertains to -- are you getting a lot of pull from your customers? They're saying, "Hey, Mike, we'd really like it if you could build out this type of functionality for us?" Or is it more your product road map, what you're thinking that they might like to have good functionality? How are you sort of product road mapping out?

Yes. It's a little bit of both. So a lot of times, a customer -- unless you're deep into the technology, you don't know what is the art of possible, right? So they can describe the business problem, but they can't describe how something like AI might address it. That's where we come in. But it's a pretty big mix. So we have customers from the animal shelter around the corner from your house to the largest universities in the world and the largest hospital systems in the world. They're a little bit different related to their ability to describe their business problems, their understanding of technology. It's a little bit different.

We do have in each of our sectors, we have customer advisory groups that we collaborate with. So there's a group of them in K-12, universities, hospitals, large nonprofits. So that is an ongoing collaborative effort around the advancement of the road maps within our existing solutions, of which we're pulling forward quite a bit because of the use of AI, which is awesome, but also around what business problems they have and how we might be able to solve those through new solutions, and we're launching new AI solutions. So we're using AI, and we're building agentic AI products.

Could you maybe talk a little bit about just sort of the overall market backdrop for nonprofits today? Where are they at and the impact of sort of the federal regulatory that overlay?

Yes. So it's -- I'll just talk about the U.S., but we're a global company. The U.S. market is a massive market. It's the third largest employer as a sector in the country. Donations crossed $600 billion a year in donations. It grew 6% in 2024. There's a report that comes out every June from Giving USA that kind of breaks down the sector. So $600 billion for the last 45 years, it's pretty much tracked U.S. GDP. It went a little flat in '07 and '08, slowed down a little bit during COVID, but massive sector.

As far as donations. There's about 1.8 million registered nonprofits in the U.S. Most of them are too small for us as an addressable market. We're sort of mid-tier and larger. And so some of the dynamics that have changed in the last 18 months or so, less federal funding. But we're not in the funds flow of that. Blackbaud isn't. So if you look at a large nonprofit, they might get -- they might have 7 or 8 revenue lines. We're in the fundraising. Our software is on the fundraising, major gifts, events side of the business. The federal funds are inbound grants. And if those have been lessened or gone away, it frankly makes our platform a higher percentage of their revenue, actually become more important to them.

So it hasn't had an impact in a way that it has caused nonprofits to close. They might have had to pull back a little bit on their spend or their operations. But the sector is large. It's growing. It's resilient. The biggest test of the sector was COVID. You think about -- so our K-12 schools -- we have thousands of K-12 schools, they shut down on a Friday. On a Monday, the kids are in school at home. And they are using our platform to run the school and but the kids are in school.

There's a lot of schools that weren't using our platform that couldn't run that way. They're out of business. Also, institutions like museums and performing art centers and zoos closed during COVID, right? And so we help them pivot to digital online fundraising. We made some changes to membership management, and we didn't have any customers go out of business during COVID, but that was the ultimate test to the sector, and they all survived. It's pretty amazing.

Remarkable.

Because we were -- we didn't know what was going to happen, right?

Yes. Okay. You mentioned the focus on the customer demographics, sort of mid-market to large enterprise within the nonprofit space. How do you think about the longer tail of smaller nonprofits?

There are tens of thousands that start up every year. And so they're really small, maybe no employees, maybe one. To get big is pretty hard to do. Some of them emerge and get big. But again, like I said, our customers have been around for a really long time. It's a massive marketplace. They have a lot of needs because turnover is fairly high. Like if you're a fundraiser, 24 months is a turnover, 24 months.

So you can equate that to a salesperson in a software company, right? You hire a salesperson. It takes 5, 6 months to kind of get going, got to build a pipeline, got to build relationships. And if you stay for several years, you can really do well. Well, fundraisers build relationships with donors, and they turn a lot. So easy-to-use, mobile-first, intuitive software with embedded AI is really important...

Yes. Sure.

For the customers. Yes.

I think the Blackbaud's revenue mix today is roughly 85% U.S., remainder is rest of world...

Correct.

How do you think about opportunities to grow the business outside the United States?

Yes. So it's interesting because like many software companies, you can't just go anywhere geographically because the regulatory environment is different. The regulatory environment for the types of institutions you sell to or the payments environment is completely different. And so we're predominantly in countries where there are nonprofits and foundations. Some of them don't have any of those, right?

So we have opportunities to grow our footprint in areas like the K-12 space. Most of our customers are U.S.-based. There's an opportunity to grow more internationally with our K-12 platform, and we are the leading provider in K-12. And a lot of our schools do have some international arms, if you will.

Also in the corporate space, our YourCause platform is really going global. We had a big customer conference in Nashville for that platform. We had 300 companies there, over 100 are Fortune 500. We're having one of those in London in a month as well. And a lot of our customers are global customers. And that platform has done really well.

In the last 6 or 8 months, we've closed new customers on that platform like Eli Lilly, Tyson Foods, PwC, Berkshire Hathaway, ServiceNow, the NASDAQ and others on that platform, all new logos. So that has a big opportunity to go global.

And we've been setting up the operation so that we can distribute the funds globally as well, which is important. There's a lot of big companies that have employees donating to global nonprofits. They can't get them the money. And so we've got this global network. We've got over 100,000 certified nonprofits that are able to receive funds from us, and that grows all the time. So we kind of bring that network in addition to the software.

So is the major hurdle to penetrating the Continental European markets, the money movement rails or just the markets themselves are less attractive? Or how do you think about that?

Yes. The markets are all different. So every country in Europe is a little bit different related to how many nonprofits, how many foundations, what's their role in society in the market. We travel well with global universities because most of them have foundations. So that's a really good spot for us.

We also have a platform that's very substantial in Europe called JustGiving, and it's a consumer-facing platform. Over 20 million people use it a year. And it's the biggest platform over there for individuals creating events and then for major events like the London Marathon and other big events are on that platform.

Cool. Maybe we could shift gears a little bit and talk about Blackbaud's financial profile. Can you just walk us through sort of high level, how we should think about the financials of the business?

Yes. So we just announced our quarter and our year last year. We had a great year last year. We crossed Rule of 40 for the first time ever, which is our combined organic revenue growth and EBITDA.

We laid out plans for the next several years around how we're going to get to Rule of 45. So you can think about us over the next several years as mid-single-digit organic revenue growth with some potential upside because these new AI products that we're building and taking to market are not factored in. They're too new to factor them in. So mid-single-digit organic revenue growth, high single-digit EBITDA growth, mid-double-digit EPS growth, sort of 13% or higher EPS growth and really strong cash flow performance. Cash flow for us last year was $208 million. Midpoint of guide this year is $285 million. So really good cash flow performance. Debt-to-EBITDA is about 2.

Can you talk a little bit about the underlying drivers of your growth projections in the coming years?

Yes. So 1/3 of our revenue is transaction processing. We have 3 platforms that make up 1/3 of our revenue. That's donation processing. If you think about that as a couple of points of volume and donations, the JustGiving platform and then tuition management for schools. Those 3 combined, a little over 1/3 of our revenue. They grow in the higher single digits organically. The rest of the business -- 70% of the business -- is all cloud software contracts.

Our customers have either 3-year or longer contracts. We just crossed over more than 20% of our customers have 4-year or longer contracts. So combined, those 2 major parts of the revenue lines, if you will, grow at sort of mid-single digits. Over the last decade, we've pretty much grown mid-single digits, slowed down a little bit during COVID, if you will. A couple of years, we grew in total revenue double digits because we made some acquisitions. But if you normalize those out, pretty much mid-single digits, but we've come a really long way in margin, EBITDA and cash flow over the last 3 or 4 years.

So as a newly minted Rule of 40 company, how do you think about balancing organic revenue growth with continuing to drive margin expansion? How do you think about the trade-offs?

Yes, it's a healthy forced balance. I think that metric is a really healthy force balance. So I trade faster growth anytime. And so it's a balance. And we're in the new world of AI related to not just building new products, pulling road maps forward of our current solutions, which we are doing, building new products using -- building AI products that are built with AI and then the potential impact of AI on internal automation, I think, is a tremendous opportunity for Blackbaud.

And we're not even there yet. So the numbers I just described in the next couple of years don't have AI-influenced products on the top line and don't have AI influenced productivity. And we've come a long way in productivity. I've been with the company over a decade. We're triple our size after about a dozen acquisitions. We're triple our size in revenue, and we have about the same headcount, and we bought 12 companies. And so we've done a pretty good job from a productivity standpoint. None of that is yet AI influenced. So I think it's a wonderful future opportunity.

So you mentioned that the AI products that you're now in market with are not currently factored into your growth expectations. How do you set a bar for yourself? How do you measure success? Or what would success look like with your -- the AI products?

Yes. So this year, we announced back in the fall at our customer conference a new category of products that we've never had before because we serve the social sector, we call them Agents for Good. I like the name. And we announced the first product in general availability 6 weeks ago, and it's a development agent. It's a fundraiser, fully agentic fundraiser that's embedded in our system of record.

So a measure of success would be that, that grows nicely. It's brand new, but also that we get to the fall and the end of the year where we've announced more products in early adopter and in general availability because we said we're going to have a catalog of many new fully agentic products. And so we're on the path to do that. You'll see some more announcements coming in the summer months and in the fall, products that we've never had before and the market has not seen before.

When you say fully agentic fundraiser, can you just go into a little more detail? What does that mean exactly?

Yes. So I'll use an example. So one of the universities we're working with has 190,000 alumni. They have our software. They have a group of fundraisers that use our software to prepare to reach out to potential donors, right? And they can only get access or have enough scale to go after 7,000 or 8,000 of the 190,000. It just -- you can't hire enough people to go after that many folks. And you can't hire someone to be a fundraiser and raise $50 either across tens of thousands of people.

But a fully agentic development agent can do that. So then let's take that a step further. Imagine we're working together and you're a fundraiser and there's a group of you, and I'm your boss, and I give you 500 potential alumni and you do your work on Blackbaud software, you get prepared, you start to build relationships and you're raising money, right? My next hire is this development agent from Blackbaud. So it's in my system because I have the management screens. I get this agent, I give this agent 500 potential donors...

Is he a calling agent?

Yes.

Okay.

SMS, e-mail and a full avatar. So we could look like you, me, if you're an animal shelter, it could be a talking dog, whatever the customer wants. And so it learns, it uses all our data in the system, uses our predictive analytics. It uses our wealth screening, does the profile work that you would do, probably does it a little bit faster than you would do it. And then it starts to build relationships and reach out to 500 potential donors.

Now before it does that, I check its work. I check the e-mail, I check the SMS text. I don't just let it go. I could just let it go, but I have controls over it, and then it just goes to work. And it can do everything from generate a lead and if the potential donor is having a conversation where they might donate $5,000. And by the way, the donor knows it's an agent. The agent could say, well, I'd like for you to talk to one of our -- and it passes it over to you and then it gets to a human or it can close the full transaction. And because it's using -- because it's inside of our system of record using our payments rails, the transaction is closed.

And so think about my university example where you would never have a person call the 10,000 students that just graduated because they don't have any money, right? But an agent, but you know what happens is they wait 20 years and then they call you to try to get you to donate some money. Well, you've lost your affinity. But if you're living on campus for 4 years and you just got out and you got a new job, our systems know all that about you.

They know that you're on campus, you're a finance major, you played in the band, you stayed in dorm A, you went to the football games and you got a financial analyst job at Blackbaud. I can build that relationship with you as an agent and ask you to donate $5 a month. And the biggest thing that you want to do in fundraising is you want to get a sustainer donor, someone that donates all the time every single month, right?

You can get a student to donate $5 a month and wait 15 years to ask for the $5,000, but you lose them. You lose the affinity. That model applies to animal shelters, religious organizations, performing art centers. So we're positioning this solution as get scale and drive revenue. And there's a big education going on related to that. Some of our customers are like, wait a second, that's my job. Some of them, the boards are saying, you got to get AI solutions in this business. It's kind of all over the map. One of these has never been built and never been sold and never been used. And we're 5 months into this thing. But we think there's tremendous upside to products like that, and we'll have more products coming out like that.

How do you price a product like that to your customers?

Yes. So first of all, we have no seat-based pricing. Seat-based pricing freaks people out because of AI. I get it. So all of our products, so 1/3 of our business is transactions. That's sort of the percentage of total transaction type model. The cloud solutions are a fixed fee per year with annual increases.

In this product, there's a particular fee. Think of it as $25,000 or $30,000 a year. That's the product cost. The ROI is how much does it raise, right? We've thought about consumption models. We thought about percentage of donations raised models. We decided not -- we could flip to that any time. We decided to come out with a pricing model that is like all of our other pricing models, and our customers want predictability. They don't want to sign up for a product that's cost $10,000 and all of a sudden, it's $100,000, right? They need to plan their year. And so this is the model that we're out with.

And we went from -- the one thing we did unique here, too, is we went from -- we went into the early adopter program in the fall and the first time we've ever done this with a brand-new product is for the early adopters, we -- they had to sign a contract and pay for the product, even though they're an early adopter. And then we went through all that, and it went to general availability about 6 weeks ago.

So 6 weeks is a short period of time, but can you comment on what the receptivity has been like so far from customers?

Yes, it's interesting. So we're doing webinars with hundreds and hundreds of existing customers. We're signing up customers every week. It's great to see that it's not just one sector. We've got customers in higher ed, hospitals, K-12 schools and nonprofits all signing up. And they're all kind of coming up the journey of how does this work, how does it learn? How do I control it? And so we've got an outreach program and a handholding program to get people accustomed to using a product like this. It's brand new for them. So it's early days.

Maybe shifting gears a little bit. Can you talk a little bit about Blackbaud's capital allocation strategy, how you think about investing in the business versus M&A versus returning cash to shareholders, buying back stock, et cetera?

Sure. Excuse me. I choked up, not on the question. Yes, it's pretty straightforward, actually. So our top priority is share buyback, especially now. And we've been doing share buybacks for a while. We've got bigger at doing more aggressive buybacks about 2 years ago. And the interesting thing is we're focused on net share reduction, not just stock-based comp coverage. And so we've had a pretty good net share reduction in the last couple of years. We've gone from about 52 million outstanding shares to about 47 million roughly. So it's an actual reduction. So that's the top priority.

Secondly, there's opportunities for continued tuck-in M&A. Everyone's valuations have gone down even private companies. And so I think there's opportunities out there for kind of near adjacency AI aware, AI-first tuck-in M&A. We've got 400 software companies in our partner program. Some of those might look like interesting opportunities. We just made an investment that we announced about a month ago in a company that has a student information system for the administrative side of running universities.

Our student information system is just in K-12. So we sell to universities. We sell tuition management, financials and fundraising. And our K-12 platform is not applicable for universities. So we invested in this start-up. These guys have done this before. They built an SIS system. For universities, we took an equity interest in it, not a big one. We have first right of refusal to buy the company if we want to. So that may end up in an acquisition or not. But it's a different go-to-market motion for us with a partner that we have an interest in now as well. So capital allocation is really pretty aggressive on buybacks, maybe some tuck-in M&A. We've reduced debt a little bit along the way in the last 18 months as well. Like I said, we're about 2.1 debt-to-EBITDA right now as well.

So on the topic of M&A, I think something which is sort of salient is the concept of build versus buy, given that the barriers to build stuff feel like they've come down with Claude and other agentic tools. How do you think about building something organically versus looking to do a tuck-in acquisition to maybe fill in a product gap?

Yes. It really depends on the fit of the product and the relationship to our core system of record. So we can build a lot faster and integrate to our system of record. Our competitive advantage is to integrate to our system of record, right, like put agentic AI solutions in there, integrate payments in there, which we've done. And so we can go a lot faster with a deep integration. But if it's a category change, it's probably an acquisition.

I'm mindful that we're at time. Is there anything that I missed that you'd like to cover here in the short time we have...

Yes. I just think that in today's market, every software company is broad-brushed like everybody else and not all software companies are the same. And I think someone like Blackbaud that has a deep data moat and a contextual workflow logic moat and customers under contract with transaction engines, putting AI in that platform, I think it's a pretty protected environment. So, thank you.

Great. Thank you very much.

Good day, and welcome to Blackbaud's First Quarter 2026 Earnings Call. Today's conference is being recorded. I'll now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's First Quarter 2026 Earnings Call. Joining me today on the call is Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and Chief Financial Officer. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks.

Today's discussion will focus on non-GAAP results. Please refer to our press release and investor materials posted to our website for full details on our financial performance, including GAAP results, full year guidance and long-term aspirational goals. We believe that a combination of GAAP and non-GAAP measures provides a more representative view of how we measure our business.

Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. We've also provided a slide presentation with supplemental data and additional highlights and financial metrics. The earnings release, supplemental tables and presentation are available in the Investor Relations section of our website on blackbaud.com.

And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. We appreciate you joining today. We delivered solid execution against our operating plan to start 2026 with a continued focus on efficiency and a strong pace of product innovation. AI enablement remains key to our success, both in terms of the capabilities we're delivering to customers and in the way Blackbaud is operating.

We continue to invest aggressively in innovation to produce meaningful product enhancements throughout our portfolio, including generative and agentic AI capabilities. Our products enable our customers to dramatically improve engagement levels, raise more money and lead their organizations while increasing operational efficiency, ultimately allowing them to spend more time executing on their missions and less time on administrative tasks.

No company can better help our customers deliver on their meaningful missions in Blackbaud. Blackbaud brings nearly 45 years of specialized domain expertise, serving as a system of record for our customers with deeply embedded workflows purpose-built for the social impact sector. Further, we have invested and continue to invest heavily in cybersecurity and AI governance to help ensure that our customers' data remains secure and that our AI solutions use data responsibly.

Many organizations in our vertical markets have limited IT resources and face turnover and staffing shortages. We win because our solutions are intuitive, require fewer complex customizations and integrations and translate advances like AI into practical outcomes customers can trust, building confidence that is supporting longer contract terms at renewal.

As I mentioned last quarter, over 20% of our customers are on 4-year or longer contract terms. This quarter, we continue to see a nice mix of new customer logo wins and selling additional solutions to our existing customers. Some examples of new logos were competitive displacements across many of our verticals. This includes several private K-12 schools that purchased our total school solution, a performing art center who moved to Financial Edge NXT and Advisory+ to unlock potential donors and meet their expansive goals, a well-known veterans organization, which replaced a fragmented siloed fundraising environment with our end-to-end solution, allowing a better view of their donors and improving their collaboration across the fundraising team and a U.K.-based nonprofit buying Raiser's Edge NXT as part of a wider digital transformation project and now can benefit from our AI innovation and solutions.

To be clear, we are all in on AI and are confident that AI strengthens our ability to deliver differentiated solutions and drive future growth as well as also improving how we run Blackbaud. While in the first quarter, our first agentic AI offering, the fundraising development agent launched into general availability ahead of schedule, we're still early stages of broader commercialization, which we view as potential upside over time as we make guidance and investment decisions.

Our engineering teams are using leading generative AI tools, such as Microsoft GitHub Copilot, Anthropic Claude and other approved solutions to accelerate development, reduce time to remediate software issues and increase throughput on new product delivery. We're also expanding generative AI features across our portfolio, including Blackbaud AI Chat, which provides contextual answers and can initiate actions within workflows.

Blackbaud AI Chat is differentiated because it's embedded within our systems of record, leveraging customer permissioned data, Blackbaud-specific data and years of social good benchmarks within a governed environment. Our competitive differentiation is clear. We have a data moat, one of the most robust sets of philanthropic and social impact data processed and secured in real time, combined with decades of domain expertise, native integrations across systems of record, engagement, financial accounting and intelligence further strengthen that advantage.

These AI capabilities are seeing strong adoption momentum. Usage of AI-powered workflows has expanded meaningfully over the past several quarters and more than half of our Raiser's Edge NXT customers use machine learning-enabled donor prospecting, generating nearly 30 billion predictions annually and creating a feedback loop and improves outcomes across our customer base. These capabilities are powered by an extensive and diverse set of data sources, including Blackbaud Institute survey and benchmarking data, licensed data sets from leading providers, identity resolution capabilities and specialized philanthropic data sets, such as Blackbaud Giving Search.

Our applied intelligence layer aggregates behavioral signals across the ecosystem to feed predictive analytics and advanced AI models, supported by strong governance, cybersecurity and a focus on data integrity. We have embedded new agentic AI solutions in our products that can operate with appropriate access to customer permissioned data and workflows.

Agents For Good is a new product category for Blackbaud. And as I mentioned earlier, in Q1, we launched our first Agent For Good solution, the Blackbaud Fundraising Development Agent, which is an agentic virtual team member that can proactively take on complex tasks, workflows and initiatives while operating within strong governance and oversight by power users. This agent natively embedded within the trusted Blackbaud environment enables teams to identify and steward donors that they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past.

This fundraising development agent is a new revenue line and a significant accomplishment for Blackbaud. To frame this a bit, the pricing model is an annual subscription fee similar to the majority of our products. It's still early, but we expect the price will be in the tens of thousands per year, and we expect to cross-sell subscriptions to thousands of existing customers in addition to new logo sales. Applicable donations raised by the development would be processed through Blackbaud Integrated Payments platform, driving additional transactional revenue. This new development agent is already producing results for our early adopter customers and is now commercially available with several new customers in Q1.

Additionally, we have run a number of webinars and sales events for our existing customers where attendance was oversubscribed and the reception was enthusiastic. We couldn't be more pleased. And this development agent is the first of many agents we plan to introduce across our product portfolio as part of our Agents For Good initiative. To reiterate, we believe this agentic AI solution embedded within our system of record provides a competitive advantage to Blackbaud.

Our agents leverage our proprietary and customer-specific data within existing workflows, underpinned by strong AI governance and cybersecurity framework. Additionally, we offer our solutions through multiyear subscription model and do not utilize seat-based pricing.

Now turning to how we use AI internally. We continue to identify, experiment and scale solutions across engineering, sales and marketing, customer success and the back office to improve speed and operational efficiency. For example, we're using AI to write code, better qualify inbound interest, support sales development and improve customer support workflows, helping teams focus more time on high-value interactions.

While our record of past performance is compelling, we're just getting started. In addition to improving our operations, go-to-market capabilities and increased pace of innovation, we have successfully addressed many of the challenges the company faced over the past few years, allowing us to focus on the value creation opportunities ahead in the near, mid and long term.

Last quarter, I walked through our longer-term aspirations. As a reminder, from 2026 through 2030, we are targeting double-digit annual EPS growth driven by the following: organic total revenue growth of 4% to 6% annually with potential upside based on viral events and new product launches, such as our Agents For Good catalog. Adjusted EBITDA growth of 6% to 8% annually while expanding our adjusted EBITDA margin to 40% plus.

Slide 24 in our investor deck provides more detail on the planned initiatives to drive continued margin expansion, most of which are already underway. We expect this improvement in EBITDA to translate to strong free cash flow growth. The $285 million midpoint of our 2026 cash flow guidance range represents a 25% CAGR since 2020. These strong cash flows drive a purposeful capital allocation strategy with consistent stock repurchases as a core tenet. We expect to deploy 50% plus of our cumulative free cash flow generated between 2026 and 2030 towards stock repurchases and continue to reduce our common stock outstanding.

This is a continuation of our significant stock repurchase program over the last couple of years in which we reduced common stock outstanding by approximately 14% since Q4 2023. Based upon the planned growth across revenue, EBITDA and cash flow as well as our aggressive repurchase of our shares, our goal is non-GAAP EPS CAGR of 13% plus between 2026 and 2030. We're off to a good start in 2026 in that regard, with expected non-GAAP EPS growth of 17% at the midpoint of our 2026 guide, and we're confident in our ability to deliver double-digit EPS growth in '27 and beyond.

To conclude, we believe Blackbaud is a compelling investment with multiple opportunities for strong shareholder returns. From an operating, financial and strategic perspective, we are pleased to be carrying momentum into the years ahead. We look forward to our continued journey. I would like to congratulate the entire Blackbaud team for a good start here in 2026. And as always, thank them for their job well done.

Thank you. I'd now like to turn it over to Chad to walk through Q1 results and our guide for the remainder of 2026. Chad?

Thanks, Mike, and good morning, everyone. I'll walk through our first quarter 2026 financial performance and then discuss our full year 2026 outlook. In Q1, we continue to balance cost management with growth opportunities and innovation. As we do each quarter, we were focused on durable subscription-led performance, prudent expectations around transactional revenue and steady progress on profitability and cash flow.

Our Q1 performance reflected continued demand for our mission-critical solutions and growth in transactional revenue volumes. As always, transactional revenue can be variable quarter-to-quarter, and our guidance philosophy assumes performance that is consistent with historical patterns and does not include any assumption for viral giving events.

Q1 organic revenues grew 4.2% to $281 million. Non-GAAP adjusted EBITDA of $99 million was up $7 million with an approximately 1 percentage point improvement to adjusted EBITDA margin. The mid-single-digit organic revenue growth and improved EBITDA margin speaks to the power of our operating focus, which positively impacted earnings per share. Non-GAAP EPS increased to $1.14, up 20% compared to $0.95 last year, and our free cash flow was up nearly $50 million year-over-year to $37 million in the quarter.

Our strong expected free cash flow for the year gives us confidence to continue investment in a number of critical areas like go-to-market initiatives, product innovation and share repurchases. In Q1, including the net share settlement of employee stock compensation, we bought back approximately 4.5% of our shares outstanding at the end of '25 -- 2025 and continue to demonstrate a strong commitment to our belief in the value of Blackbaud. It was a solid start to the year.

Now moving on to our 2026 outlook. Based on our first quarter performance and our current view of the operating environment, we are reaffirming the full year guidance ranges and assumptions we provided in February, including significant earnings and cash flow improvements. The detail on these ranges can be found in our earnings release and investor presentation on the website. As a reminder, we expect 2026 quarterly financial performance, including revenue growth and profitability to be heavily weighted to the back half of the year and particularly the fourth quarter.

Looking to 2026 and beyond, we believe free cash flow will grow significantly, and we anticipate utilizing at least 50% of our cumulative free cash flow from 2026 to 2030 for share repurchases. Beyond that, the company has tremendous optionality for dynamically allocating capital to its highest and best use based on market conditions, including additional stock repurchases, repayment of debt or synergistic tuck-in M&A.

We have a lot to be proud of, executing well through recessions, financial crisis, COVID and the shift to the cloud through a commitment to providing meaningful solutions to our customers and strong execution of our operating plan. On our journey to becoming a Rule of 45 company, we remain committed to providing investors with an attractive financial model balanced between growth of revenues, earnings and cash flows, along with prudent and purposeful capital allocation strategy, and always, we remain focused on providing enhanced value to our customers and our shareholders.

Thank you all. Mike and I would be happy to take your questions. Operator?

[Operator Instructions] We will now take our first question from Brian Peterson with Raymond James.

Congrats on the strong quarter. So Mike, maybe starting with you. I know you made the comment on AI in thousands of customers on Agents For Good. Was that comment specifically about 2026 adoption or is that a little bit longer term? And as you've had these webinars and kind of early adopter customers, are there any cohorts whether that's by end market or maybe by products that they use that you think would be the first to lean into the agentic functionality?

Yes, Brian, thanks for the questions. So as I mentioned, we announced in general availability, our first fully agentic product, the development agent. Importantly, too, that we announced that we have a new category of products that will be announced throughout this year and go forward. That's the first one. There will be more coming. So that was in early adopter mode back half of last year, first part of this year, went to general availability in March. That is targeted to thousands of existing Blackbaud customers. That's the target. So we're ramping up sales. It just went to availability about a month ago, 6 weeks ago or so. It's a great opportunity. We've had hundreds and hundreds of customers on webinars super interested and excited about this new product.

It provides them scale that they can't get to today. And it's a new category for us and for our customers. So really great start achieving our planned numbers, and it's product one in the category of many coming.

Mike, since we're on the topic of AI, I just want to take a moment on how we're continuing to invest in AI. As I mentioned during the call, we're reaffirming our guidance for the year. However, just to ensure you model quarterly spreads correctly, we expect adjusted EBITDA dollars to decline slightly year-over-year in the second quarter due to planned AI investments for customer-facing products as well as for internal operations.

Yes. Just to hit on that a little bit. Our quarters are never linear anyway. They haven't historically been linear. We're always weighted to the tail end of the year with giving, holiday giving, things like that. Full year guidance is great. We're investing in AI. We're partnered with Anthropic, investing in their tools. So really happy for our first quarter results and the guide for the year.

Our next questions come from the line of Rob Oliver with Baird.

My question, Mike, and Chad, one for me, is you guys called out some nice new logo wins in the quarter. And I know you guys have talked in the last year or 2 about that being a really important part of your go-to-market motion now. So I was wondering if you could help us try to put some precision on that, quantify in any way sort of perhaps as you look at, say, new bookings, what percentage of that is perhaps new logos? And how does that change relative to before you guys started to really focus on the new logo motion? Anything there you can provide for us about some of the context around the new logo wins would be -- and the progress there would be helpful.

Yes, Rob, thanks. Our sales teams are divided into vertical market teams. So they're focused on specific markets. For example, K-12 teams only sell to K-12, nonprofits, higher ed, et cetera. And then they're further separated into back-to-base sales and new logo sales in each of those markets. And we've got really good motion in back-to-base and new logos.

Back to base, just quickly mentioned, this new development agent is predominantly early targeted to back to base because it's embedded inside of our system of record products, like RE NXT. However, we think these new capabilities will drive new logos also because new customers will want to buy the system of record to get access to the agentic AI solution that's embedded inside of it. So that's kind of one part.

But we're seeing a nice set of wins across the verticals in new logos and even on enterprise deals. One of the deals we closed in the first quarter is one of the largest deals in our history. And I think that deal was a 5-year contract. It's an enterprise deal with a large nonprofit. They bought pretty much the product portfolio to very large veterans, not focused nonprofit, which I think is outstanding. And they bought several products from us across the portfolio, a really great competitive enterprise win in a long-term contract.

So K-12, nonprofits, YourCause, and I've named a bunch of customers in last quarters on YourCause, a lot of Fortune 500 customers signing up for YourCause. So we've got kind of a flywheel effect on new logos and stickiness for our existing customers. The other thing I'll mention is we've got some really unique Blackbaud-only things going on that we don't talk a ton about. We do with customers, but not in these calls.

We got something called the Blackbaud Verified Network. That is a network effect where we've connected our YourCause customers to our nonprofit customers. So for example, a new logo customer buying, let's say, Raiser's Edge NXT will buy that platform to do fundraising, of course. But they're in the Blackbaud Verified network, which means they're connected to hundreds of YourCause customers and millions and millions of employees, and they can promote themselves in the network.

So it's a connected network between nonprofits or fundraisers and kind of global Fortune 500 companies using those platforms, using our payments rails and it's only available at Blackbaud. It's a connected network effect, which is interesting, and that's getting attention from new logos as well.

The next questions are from the line of Parker Lane with Stifel.

When you look at the investments that you plan to make around the AI opportunity, I think you said adjusted EBITDA dollars might be a bit lower year-over-year as a result of that investment. How much of that is coming from...

Parker, we said in Q2.

In Q2? Yes, okay.

It's a smoothing comment around the quarters, not the year. To be clear, we only guide to the year, as you know. But go ahead.

So as we look at that investment, though, how much of that is going to come in the form of R&D and sales and marketing and other OpEx items versus potential impacts to gross margins as customers take on more consumption elements as part of these agents?

Yes. We see an opportunity to improve our gross margins year-over-year. We have in the first quarter, you could see with our results. So we've got some great gross margin improvement opportunities. Some of that is continued closure of 2 outstanding legacy data centers. Some of it is to get away from some legacy software infrastructure we use from vendors that we're not going to need in the future. Those will end. So we see gross margin improvement opportunities.

Our investments -- a lot of the AI investments are for new product builds, like the Agent For Good category, and we'll be announcing new products as we go throughout this year, either in early adopter or general availability. Again, development agents is sort of the first one out in the gate from a general availability standpoint.

We also have a lot of investments in tools we use and in engineering. There's just a tremendous opportunity for AI enhancements in engineering. We have agents now that we've built in engineering that obviously, we use things like Anthropic Claude for code generation, but things we've built for user stories, acceptance criteria, code scaffolding, and it's been reducing workloads from days to hours.

And so we're building agents in engineering to run engineering to get more engineering scale. And that's a big flywheel effect, and we're seeing that happen already. AI assistant anomaly detections for governance, integration, just a lot of AI innovation in productivity in engineering. And that's sort of the inside picture, the outside picture is these new products we're bringing to market.

Our next question is from the line of Kirk Materne with Evercore ISI.

Mike, I was wondering, can you talk through some of the thought process on the pricing structure around sort of the agents and sort of subscription model? Obviously, a lot of folks are talking about sort of outcome-based pricing and things like that. I know ultimately, it's all about the value delivered to your customers. So how do you guys land on that? And how are you making sure they start seeing the value kind of out of the box to get them excited about and really creating a reference flywheel as well?

Yes, you bet. We're looking at all the pricing models available to us with these new AI products. So this first product, the development agent is a pricing model, which is like our other products. It's an annual subscription fee in a multiyear contract. It's not usage-based yet. So that's a great model. We don't have any seat-based pricing. I think you know that. So we've got annual fees for our subscription products. And then we've got -- more than 1/3 of our company is transaction-based pricing now, which is arguably outcomes-based because it's a percentage of a transaction, a little over 1/3 of our total revenue.

But for the AI products, the first one is an annual subscription fee, and we're looking at other models. We've got more products coming out, so we're looking at usage models and other models of pricing, and there'll be various pricing models based on the product and where the product fits. The thing that's really exciting, though, Kirk, is the availability of the addressable market changes because our solutions are purchased from our customers' IT budgets, right? But there are other budgets that our customers have.

They have budgets for hiring more people for fundraising, which is an available different budget, not an IT budget, right? There's budgets in other hires of different vendors that we can reach into outside of the traditional IT budgets where they purchased Blackbaud products. And so we're looking at total spend of our customers outside of IT budgets as a growing addressable market for us.

At this time, I'll hand the floor back to management for any further remarks.

Okay. Well, thank you, everyone, for joining us today. We will be attending a number of investor events in May and June to include several investor conferences, which are listed on our IR website. We hope to see you then or hope to speak with you very soon and wish you continued success. Have a great day.

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.

Good day, and welcome to the Blackbaud Inc. Fourth Quarter and Full Year 2025 Earnings Call. Today's conference is being recorded. I'll now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's Fourth Quarter and Full Year 2025 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and Chief Financial Officer. Mike and Chad will make our customary prepared remarks with additional commentary this morning on our longer-term aspirations, and then we will open up the phone line for your questions.

Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. The discussion today will focus on non-GAAP results. Please refer to our press release and the investor materials posted to our website for full details on our financial performance. These include GAAP results as well as full year guidance and long-term aspirational goals.

We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures.

We have also provided a slide presentation that contains supplemental data for our fourth quarter and fiscal year and provide additional highlights and financial metrics regarding the aspirational goals we discussed today. The earnings release, supplemental tables and presentation are available on the Investor Relations section of our website on blackbaud.com. And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. On our call today, in addition to talking through our normal highlights, I'm also very excited to outline our strategy and aspirational financial goals for the next several years. So let me start with a significant achievement in 2025, where we reached a major milestone, we accomplished our goal of becoming a Rule of 40 company, 2 years ahead of plan. .

Our financial success is a result of a proven operating plan focused on company efficiencies and continuous product innovation, particularly in regard to AI enablement, improved the effectiveness of our go-to-market programs and a steadfast dedication to powering social impact centered in all we do with both our customers and employees. Blackbaud's multiyear trajectory moving forward will continue to be built on these tenants.

We continue to invest aggressively in innovation to produce meaningful product enhancements throughout our portfolio including generative and attic AI capabilities. Our products enable our customers to raise more money while increasing operational efficiency, ultimately allowing them to spend more time executing on the tunable missions and less time on administrative tasks.

Blackbaud brings nearly 45 years of specialized domain expertise. We serve as a system of record for our customers with deeply embedded workflows that are purpose built for the social impact sector. Further, we have invested heavily in cybersecurity and AI governance to ensure that our customers' data remains secure and our AI solutions utilize this data in an ethical manner. Users in our vertical markets attending less tech savvy than other industries and nonprofits consistently deal with high tower and staffing shortages.

We win because our solutions are intuitive for the average nonprofit employee and don't require complex customizations or integrations. Our customers rely on us to interpret how new technological advancements, such as AOP can benefit them and Blackbaud remains well positioned to do that now and in the future. Our customers' confidence in our commitment to them is translating into longer renewal contracts.

While our contract renewal program was designed for 3-year contracts, more than 20% have asked to move to 4 year or longer contracts.

I now want to address head on the big question our industry is facing. Will AI be beneficial to system of record vertical software firms like Blackbaud or detrimental. We are all in on AI. Every employee in the company has been required to get AI training, every department, every employee.

With that in mind, I'm going to first discuss how AI improves our ability to offer unique solutions to drive future growth. While new AI products are not meaningfully represented in our current financial guidance, they offer potential upside to our current expectations. Then I'll address how our internal use of AI is propelling our operations forward.

Regarding our unique solutions. We have our entire engineering team using leading AI generative assistance, such as Microsoft, GitHub, CoPilot and Anthropic cloud in areas like cogeneration, software above remediation and new product development. We've introduced generative AI features across multiple products and at the end of 2025, we released Blackbaud AI chat, which provides contextual responses to questions and drives actions. Blackbaud AI chat is an industry-leading innovation that only we could deliver because it's embedded within our systems of record that leverage customer and Blackbaud unique data as well as years of social good centric benchmark data.

Blackbaud's competitive differentiation is very clear, we have a data moat. We have the most robust philanthropic data process and green in real time, combined with decades of domain experience. This cannot be commoditized. Our product synergies and native integrations across systems of engagement, systems of record, systems on financial accounting and systems of intelligence add to our differentiation.

From a customer adoption perspective, these AI features continue to see significant success. Our average daily AI chat usage grew 5x since October, and now more than half of our Raiser's Edge NXT customers have machine learning enabled donor prospecting that generates nearly 30 billion predictions annually, which generates tens of petabytes of data across our base. These AI capabilities are embedded as a seamless workflow within our products and utilize the internal data within our system of record solutions.

Our solutions are powered by an extensive and diverse set of data sources. These include proprietary survey and benchmarking data from the Blackbaud Institute, combined with licensed data sets from leading providers, identity resolution capabilities and specialized philanthropic data sets such as Blackbaud giving search. Our applied intelligence layer aggregates the identified behavioral data across its ecosystem, which feeds advanced AI models and predictive analytics.

Additional layers of insights come from usage patterns, feedback signals and decision outcomes, all of which helped to surface actionable intelligence for social good organizations. Our corporate action engine further utilizes external sources, combined with the Blackbaud verified network to enhance eligibility, verification, program measurement and nonprofit profiling. What sets Blackbaud apart is not just the volume of variety of data, but how it's managed and applied.

Our data foundation is built on principles of integrity, responsible governance and outcome orientation, offering a unified and trusted platform for the social impact sector. Leveraging the 4D's framework, volume, variety, velocity and diligence, Blackbaud insurers, high-quality, real-time and secured data that supports billions of AI-driven insights annually. This robust ecosystem enables organizations to make informed decisions, optimizing fundraising and maximizing impact. This data is not publicly available on the Internet or LLM can access it.

We are now embedding new agentic AI solutions in our products that have full access to this data. We first introduced Blackbaud agents for good at our BBCON Conference in October. Blackbaud Agents for Good are agentic virtual team members who can proactively take on complex tasks, workflows and initiatives while operating within the governance oversight power users. We plan on releasing many fully genetic products, embedded within our system of record solutions near term and in the future.

Our first Agent for Good, a fundraising development agent natively embedded within the trusted Blackbaud environment enables team to identify and steward donors that they do not have the capacity to reach today, unlocking new revenue streams for them at a fraction of the cost possible in the past. As an example of a university we're working with. They have 190,000 alumni. Their fundraising team only is a bandwidth to focus on the top 10,000. Our development agent is an additional staff member assigned to cultivate relationships and raise funds from the other unaddressed 180,000 alumni.

This agent self-learns using the data, intelligence, workflows and personas within our systems and build a relationship with alumni to e-mail, text and a full conversational Avatar. This combination of our customer staff, AI agents and Blackbaud's fundraising solutions dramatically improves our customers' potential to raise funds in a secure and easy-to-use system of record. So it's clear that our customers can distinctly benefit from this solution will be clearly defined ROI, but it also benefits us.

This fundraising development agent is a new revenue line for Blackbaud. To frame this a bit, the pricing model is an annual subscription fee with multiyear contracts like the majority of our products. It's a bit early, but we expect the price will be in the tens of thousands per year, and we have thousands of existing customers, we will be cross-selling this too in addition to new logo sales.

Additionally, applicable donations raised by the development agent would be processed through the Blackbaud integrated payments, driving additional transactional revenue. This new development agent is already producing results for a number of early adopter customers and we expect it will be fully commercially available later this year. This is the first of many agents we plan to introduce across our product portfolio as part of our agents for good initiative.

To reiterate, we believe that new genic AI solutions embedded within our systems of record, provide a competitive advantage to Blackbaud. Our agents leverage our proprietary at customer-specific data within existing workflows underpinned by a strong AI governance and cybersecurity framework. Additionally, we offer our solutions through a multiyear subscription model and do not utilize seat-based pricing.

Now moving to how we continue to leverage AI to transform the way we work. We continue to identify experiment and scale a range of successful solutions across marketing, customer success and engineering to be an active innovator to apply AI and drive operational efficiency. Several examples of how we utilize AI internally include a sales development agent driving increased sales development representative conversations, book meetings and ultimately, sales pipeline.

A contract renewal agent to streamline communications and improve engagement with our customers through automation of certain administrative tasks. Our quality assurance agent that will be launched soon to automate and scale our QA process for customer support interactions and as a general use application around personal productivity, all employees have access to Microsoft CoPilot, just in the last Four weeks of 2025, we witnessed over 19,000 hours of AI-assisted outcomes with more than 196,000 actions completed. AI is making a significant impact on internal productivity.

As I said, we are all in on AI, both with product innovation and internal operations. So when our customers or employees ask me if AI can help them, my answer is absolutely. Before I turn the call over to Chad to then come back to outline the specifics of our long-term aspirational plan, I want to say how proud I am of Blackbaud's multiyear trajectory of extending our market leadership. We are providing our customers with the most intelligent solutions powered by AI and purpose-built for specific nonprofit use cases to help them pursue their world-changing missions.

When combined with our role in their future opportunities across the social impact sector and our operational discipline, we see a clear path for achieving our long-term aspirational goals. But now let me turn the call over to Chad to walk through our specific 2025 highlights and our 2016 guide.

Thanks, Mike. Our strong 2025 results closed out another successful year for Blackbaud. And as such, I continue to be excited about our ability to execute on our opportunities in the near, mid and long term. Our results in 2025 add to our strong record of improved top line organic revenue growth and dramatically improved profitability and cash flow. But to reiterate, full year 2025 organic revenues were up 5. 5% to $1.128 billion, adjusted EBITDA of $405 million was up approximately 8% after adjusting for the estimated impact of the EVERFI divestiture, this represented an adjusted EBITDA margin of 35.9%, up 220 basis points from 2024.

Our ability to grow revenue and EBITDA speaks to the power of our operating plan, which continues to positively impact earnings per share and free cash flows. Non-GAAP EPS increased to $4.45 up approximately 12% year-over-year after adjusting for the estimated impact of the EVERFI divestiture. Adjusted free cash flow for the year was stronger than expected at $208 million, exceeding the high end of our upwardly raised guidance range despite a couple of significant onetime investments we made primarily in the first quarter of 2025.

Our historical anticipated robust free cash flows provide us confidence to continue investment in a number of critical areas like product innovation and stock repurchases. We continue to aggressively repurchase our shares. We bought back approximately 8% of our common stock outstanding in 2025. This follows the 11% repurchased in 2024. We also reduced our debt leverage from 2.9x in Q1 to 2.5x at the end of the year. I'll provide more color on our 2026 capital allocation plans in a minute, and before I provide 226 guidance, I want to provide color on several other factors that help you set expectations in our your models appropriately.

In 2026, we are anticipating the following: Our 2026 financial guidance assumes no material changes, good or bad, and the current macroeconomic landscape or foreign exchange rates. The guidance assumes no viral event-based giving and no meaningful impact to 2026 revenue from AI products, which present potential revenue upside. Additionally, the guidance assumes no significant productivity gains from internal use of AI solutions. As you will have seen in the press release guidance, we expect full year 2026 organic revenue growth to be 4% to 4.5%, while the GAAP revenue growth rate improved significantly at the midpoint of guidance, we expect full year 2026 non-GAAP revenue growth to be slightly lower the non-GAAP 2025 revenue growth for 2 main reasons: transactional recurring revenue grew nearly 9% in 2025 and which is slightly elevated compared to our historical CAGR of 8% between 2020 and 2024.

Our guidance assumes transactional revenue growth more in line with historical norm with no viral events included. Our 2026 contractual revenue renewal cohort is approximately 40% larger than last year. We expect this to have a negative impact of 0.5 point to 0.75 point on total revenue growth for 2026. You can find more detail on Slide 15 of our investor deck. Regarding quarterly revenue. due to strong transactional revenue performance in the first 2 quarters of 2025 and the fact that we do not include viral giving in our guide for 2026, we expect a slightly tougher compare in Q1 and Q2 of 2026.

Additionally, we expect our revenue growth performance to be more heavily weighted into the back half of 2026. We have several growth initiatives expected to come online later in Q3 and largely in Q4, including some pricing optimization in our transactional products and modest contribution from AI initiatives Mike spoke to earlier.

Turning to profitability. Q1 tends to be our lowest quarter from a profitability standpoint due to the timing of expenses related to employee benefits and employee stock award vesting. Additionally, our annual employee merit increases go into effect on July 1, and so Q3 and Q4 tend to have higher compensation-related costs to Q1 and Q2.

Lastly, we're entering a new phase of our workforce strategy, including the expansion into India. This is a multiyear program to expand operations in the Global Capability Center or GCC. Starting in Q1 2026, we anticipate introducing the new adjustment to our non-GAAP financial measures to exclude the impact of the costs associated with this strategic initiative that we expect to provide long-term benefits to the company. We estimate these items to total approximately $6 million to $8 million in 2026 and the impact to free cash flow and the impact of free cash flow is included in the guide.

Now moving on to guidance. For the year, we are projecting revenue in the range of $1.173 billion to $1.179 billion, representing organic growth of 4% to 4.5% as reported. Shifting to profitability. We'll continue to focus on margin expansion opportunities, while at the same time, making investments in innovation, artificial intelligence, product road maps, cybersecurity and global workforce strategy. Therefore, we anticipate non-GAAP adjusted EBITDA of $430 million to $438 million, which implies adjusted EBITDA dollar growth of 6% to 8% year-over-year.

With the overall revenue and spend configuration I just outlined, in combination with our ongoing stock repurchase program, we expect 2026 non-GAAP EPS in the range of $5.15 to $5.25 or growth of 16% to 18% year-over-year. This is a big improvement in EPS, crossing $5 for the first time with strong growth in 2026. We continue to have a sharp focus on driving free cash flow and returning capital to our shareholders.

For the year, we're guiding to significantly increased free cash flow of $280 million to $290 million as we move past the approximately $60 million of onetime items in working capital fluctuations that negatively impacted our 2025 free cash flow. Our 2026 guidance range assumes a net positive impact of approximately $10 million to $15 million in cash tax savings related to the One Big Beautiful Bill Act and partially offset by expenses associated with the expansion of our global workforce strategy.

Underlying these guidance ranges we have made the following assumptions: non-GAAP annualized effective tax rate is expected to be 24.5%, unchanged from last year. Interest expense for the year is expected to be approximately $62 million to $66 million compared to $68 million last year. Fully diluted shares for the year expected to be approximately $45 million to $46 million compared to $48.5 million last year.

Capital expenditures for the year are expected to be approximately $60 million to $70 million, including $52 million to $62 million of capitalized software development costs. Looking to 2026 and beyond, we believe free cash flow will grow significantly, and we anticipate utilizing at least 50% of our cumulative free cash flow from 2026 to 2030 for stock repurchases. Beyond that, the company has tremendous optionality for dynamically allocating capital to its highest and best use based on market conditions, including additional stock repurchases and repayment of debt or synergistic tuck-in M&A.

We have a lot to be proud of, along with our customers, we've done well through recessions, financial crises, COVID and the shift to the cloud through a commitment to providing meaningful solutions to our customers, strong execution of our operating plan, and we remain committed to providing investors with an attractive financial model balance, between growth of revenues, earnings and cash flows along with prudent and purposeful capital allocation strategy and as always, we remain focused on providing enhanced value to our customers and our shareholders. I'll now turn the call back over to Mike to talk more about our aspirational goals for the next 5 years.

Thank you, Chad. I hope that today's call is a unique format for us, but it's a unique time in software. As such, I'd like to spend the next several minutes highlighting a bit more color on our aspirational goals for the next 5 years and why we are an ideal platform for sustained profitable growth. While our record of past performance is compelling, we're just getting started.

In addition to improving our operations, go-to-market capabilities and increased pace of innovation, we have successfully addressed and closed the book and many of the challenges the company faced over the past few years, allowing us to focus on the value creation opportunities ahead in the near, mid and long term.

So let's get down to more specifics on our aspirational goals. From 2026 through 2030, we are targeting organic total revenue growth of 4% to 6% and with potential upside based on viral events and new product launches such as our Agents for Good catalog and new development agent I discussed earlier. Our revenues are driven by 2 primary revenue streams, our contractual software and our transactional solutions.

Moving to profitability. We are targeting adjusted EBITDA growth at 6% to 8% CAGR between 2026 and 2030, while expanding our adjusted EBITDA margin to 40% plus margin and expenses are highly controllable and our success over the past several years should give you confidence in our discipline to continue improving our earnings. Slide 24 and our investor materials provides more detail on the planned initiatives to drive continued margin expansion, most of which are already underway.

We expect this improvement in EBITDA would translate to strong free cash flow growth. The $285 million midpoint of our 2026 guidance range represents a 25% CAGR since 2020. These strong cash flows drive a purposeful capital allocation strategy with consistent stock repurchases as a core tenant. We expect to deploy 50% plus of our cumulative free cash flow generated between 2026 and 2030, the stock repurchase and continue to reduce our common stock outstanding.

This is a continuation of our significant stock repurchase program over the last couple of years in which we reduced common stock outstanding by approximately 13% since Q4 2023. Based upon the planned growth across revenue, EBITDA and cash flow as well as our aggressive repurchase of our shares, our goal is non-GAAP EPS CAGR of 13% plus between 2026 and 2030. We are off to a good start in that regard with expected non-GAAP EPS growth of 17% at the midpoint of 2026 guide, but we're confident in our ability to deliver double-digit EPS growth in '27 and beyond.

To conclude, we believe Blackbaud is a compelling investment with multiple opportunities for strong shareholder returns. From an operating, financial and strategic perspective, we are thrilled to be carrying momentum into the years ahead. We look forward to our continued journey. And I would like to congratulate the entire Blackbaud team for a very strong year in fiscal '25, and as always, thank them for the job well done. Thank you. And operator, we're happy to take questions now.

[Operator Instructions] Our first question comes from the line of Brian Peterson with Raymond James.

Congrats on quarter. So Mike, I wanted to double-click on some of your comments as it relates to AI. You gave some details as it relates to pricing. I'm curious, is that kind of a fully deployed a genetic pricing comment across multiple categories because I can see how a genetic or agents for good can work in fundraising, but I can also see back office, how do they get granted? So it seems like there could be more there. So I'm just trying to think about what that opportunity could look like on a customer level with economics. And do you kind of envision them starting small and building over time? Or have you seen customers really lean into this? Would love to understand some of the early data points you have.

Yes. Sure, Brian. So my comments, specifically when I was talking about pricing and the cross-sell opportunity, we're just related to that first product, the development agent. We will have many products coming out in this catalog that we talked about at our customer conference. But product number one, that's a new ready line for us is this development agent. And so the pricing model and the opportunity for cross-sell that I mentioned in -- and I think it will bring is just the first product.

Got it. So it sounds like still more to come there. And I know you mentioned some of the contract renewals that some customers were pushing maybe to 3 years to 4 years. Anything else that you can share on retention or pricing or cross-sell? I know we have a bigger cohort coming up for renewal in '26. So would love to kind of understand some of the moving parts and what you're seeing from customers as they come up for renewal?

Yes. Our renewals are remaining strong at our planned numbers. We have a bigger cohort this year. Like you mentioned, -- and yes, over 20% of our customers are on 4 year or longer contracts. So we've started this program years ago. So essentially, everyone's done a 3-year or longer contract and more than 20% around 4 years and longer. So it's -- there's no big difference between the success we've had in the past. Except this year, we just have a bit of a higher cohort than regular. Yes, you bet. .

Our next question comes from the line of Rob Oliver with Baird.

I had 2 questions, Mike, first 1 for you. I appreciate all the color and the targets. I wanted to ask about you've seen a bunch of markets for nonprofits, and we're reading currently about some of the stress that is that nonprofits are seeing. There's a bunch of survey work out there about the impact of federal funding and local funding on some of these nonprofits.

And I was wondering if you could just share with us color from your discussions with customers about the current environment and what you're seeing there under stress, whether that creates risk or how you guys are addressing that and whether you're seeing customers perhaps lean more towards providers with whom they've had a long-term relationship. And then I had a quick follow-up for Chad.

Yes. Sure, Rob. So the ultimate stress in our market was COVID because customers closed their doors for a while, performing art centers, museums and others. And we saw them all open. So the resiliency test for our market was COVID. We do have customers that are getting either less or no government grants, it's not all of our customers. It's just a handful because many of them don't. But when that happens, they rely on us even more because we're the platform for donations. .

Our software solutions are not in the money flow of grants from state, local and federal government. So a part of their revenue line is under pressure, they put more emphasis on the other part of the revenue line, which is a Blackbaud platform. We haven't seen any customers go out of business. We've seen them having to tighten their belts a little bit, but it's actually beneficial for us when the requirement in need of our platform is a higher percentage of their revenue. So we haven't seen this as an issue for our customers.

I appreciate that. And then, Chad, one for you and a little bit of a follow-up on Brian's question earlier. So I appreciate the long-term targets very, very helpful. As you look at that top line CAGR. I was wondering if you could provide us any color around contribution to that, perhaps from, say, new logos versus pricing versus cross-sell? Any color that kind of rolls up into that core CAGR number on that would be extremely helpful.

Yes. Thanks, Rob. I could start off there. So I think the big piece of information here is we do not have, in those long-term numbers, our new AI products represented. It's just too early. And so that product that I described, the development agent, and I gave some color around pricing an opportunity is not included in the '26 guide or the long-term aspirational. So we give the guide and the aspiration. And we always say, plus the word plus, where that's where the plus comes from.

So we think there's some interesting opportunities there. We don't include that. And we've got a pretty good balance of in those numbers, the long-term numbers of some price increase which is just part of the system now, which is part of the engine, some price increase with our multiyear contracts. As I mentioned, we've got a big part of our customers on 4 year or longer, some new logos and some cross-selling. And then also in there, about 1/3 of our revenue is transaction revenue, and that's pretty healthy. It's kind of the high single digits organically. So that's built into those numbers as well.

Our next question comes from the line of Parker Lean with Stifel.

This is Matthew Kicker on for Parker. Congratulations on the quarter. I'm curious, you mentioned the 50% of free cash flow that would go to repurchases through 2030. I'm curious how much are you going to focus on maybe strategic M&A in the AI landscape out of that free cash flow as well? And then secondly, leverage down to 2.5x. Do you have a new leverage target in mind that you would like to see that through 2030?

Yes, I'll take the M&A part. So share repurchase is our top priority from a capital strategy standpoint. I think we've proven that in the last couple of years and and stated that for the aspirational goals. As far as tuck-in M&A still very much on the table, if you will. We're a natural buyer in this space. We've done really well in that area in the last 10 years. And so there's always some interesting things that are typically small, founder-led innovative solutions that might accelerate growth for us or expand our current footprint from a new adjacency standpoint.

So those are not off the table. It's just stock repurchase is the highest priority. And we've got capacity to do both quite well. What was the other part of this question?

The second part, Matt, was related to the delevering. right? And thank you for the question. Obviously, the share repurchases remain a high priority. But at the same time, we're continuing to focus on the balance sheet, right? So from a modeling perspective, whenever you look at our 2026 diluted share count assumption of $45 million to $46 million. our expectations based on the current share price and interest rate environment, we'll be able to not only continue to repurchase shares, but I would expect us to continue to delever as well, Matt.

So we don't necessarily share that target. But at this point, I'd consider by the time we get to the end of the year, that will be below that 2.5 point where we concluded 2025.

Thank you. [Operator Instructions] Our next question comes from the line of Bill McNamara with Evercore ISI.

This is Bill on for Kirk. Looking out to your long-term guidance, can you outline the key margin expansion catalysts and any high-level timing you can share such as the data center closures, AI-driven efficiency gains in your global workforce strategy.

Yes, sure. So those are the 3 key tenants. The internal use of AI is a significant opportunity for us. I talk a little bit about that in my prepared remarks. And it's a combination of driving future productivity and innovation from a product standpoint. We have AI usage across every department in the company.

We're using AI in sales development and pipeline building to contract renewals. We have a quality assurance agent, we're using -- I talked about the use of copilot across the entire employee base. There's a lot of use cases in engineering using tools like Microsoft CoPilot, Anthropic can for lots of things, software but remediation to QA to cogeneration. So there's a lot of opportunity there.

From a workforce standpoint, we established a pretty big footprint over the last 12, 13 months in our Blackbaud India office. That continues to grow. That will grow substantially in the next 12 to 18 months go forward. Just a fantastic opportunity to get access to really highly talented direct employees. So we've moved away from third-party relationships. So moving away from third-party relationships. It's just a natural labor arbitrage there for us.

So really great opportunities in workforce strategy, closing a couple of small data centers that are sort of the last 2 that we have, that was a multiyear effort and then internal use of AI for productivity and innovation. So we see lots of really exciting, interesting opportunities across all 3 of those.

Well, all right. Well, thank you, Melissa, and thank you, everyone, for joining us today. We will be attending a number of investor events in February and March to include several conferences, which are listed on our Investor Relations site. We hope to see you then and/or speak with you very soon. So we wish you continued success and have a wonderful day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

We're going to go ahead and get started, and I'm so pleased to join Mike here for a fireside chat to talk a little bit more about Blackbaud. And it's really fun to talk about a company that really is not only a wonderful company to invest in, but a company that really cares and really does have a social impact that really does matter. So I'm excited to talk about that specifically with Mike today, a little bit of a different conversation than our other conversations that we've had today already.

So Mike, why don't you start by educating us a little bit about Blackbaud, walk us through the value proposition and what you guys do for your customers?

Yes, sure. So we're a vertical software company headquartered in Charleston, South Carolina. We focus on the global social good space. So our customers are nonprofits, foundations, foundations within universities and hospital systems, foundations within companies. Our customers are K-12 schools. We have a platform for companies for their corporate social responsibility programs and also part of Blackbaud that you all might be familiar with is JustGiving as well as one of our businesses.

Fantastic. And so let's dive right into your Q3 2025 results. Tell us some of the highlights and takeaways from your perspective. And I know it's only halfway through the morning, but where are investors really digging in? What are they asking questions about?

Yes, sure. So we're having a great year this year, including Q3. After Q2, we raised our guidance in all of our categories. After Q3, we raised cash flow guidance again. And it's been a really good year for us. The company is achieving our financial goals. We're doing really well with new logos, bringing new solutions to market. We have some great announcements a month or so ago at our user conferences around new products coming out in '26. So we feel good about our results. We feel good about the setup for next year as well.

Perfect. So let's talk about your addressable market and where you see the most opportunity. You talked about new logos, but let's talk about -- let's look in -- not in the rearview mirror, but in the -- I guess, looking -- going forward. So talk to us a little bit about the addressable opportunity and the addressable market for you guys for the future?

Yes. So we have our TAM at $10 billion. We focus on institutions that are sort of mid-tier and enterprise size opportunities. Our go-to-market is a direct sales channel. We're in the verticals that I just explained. We've had a really good year with new logos in our K-12 space. In our corporate space with our YourCause platform, it's been a really good year. Every quarter in our earnings call, I usually announce some kind of new logos and a lot of them this year have been very recognizable names. So we're very happy with our expansion plans and our go-to-market. It's a good setup for next year. We're going to end the year strong this year, and we're very excited about the model that we're talking about in the long run. So for us, you could think of us as a mid-single-digit organic grower with some upside to that, higher than that EBITDA growth, double-digit earnings per share and a really strong cash flow story as well.

Great. Great. And so when we look at the nonprofit space, can you walk us through some of the megatrends that are impacting that space today? And then overall on fundraising, what does that look like today versus 5 or 10 years ago?

Yes. It's surprisingly a very large and resilient space if you haven't really studied it and a lot of folks don't. So just in the U.S., getting in the U.S. is around $600 billion a year. And if you go back over 40 years, it pretty much tracks U.S. GDP. So it grows 2%, 3% a year in some difficult years like in '07 and '08, went down a little bit. But at $600 billion a year, it's a massive market. It grew 6% last year. So a very large, very resilient market. The biggest test of our market was COVID.

So when COVID showed up, we didn't know what was going to happen with customers; we didn't see any customers close permanently. We saw them hunker down. We saw them focus on online activities. And we work with thousands of customers around the world to help them get through that. So we had schools where the kids were at home, but the schools were still running. We had performing art centers that closed for a while, they all opened up. So a very resilient end marketplace and a very large market.

So if we were to ask what your impact is by macro events, you would say that you're able to clearly weather the storm.

Yes, that's a good way to say it. This past year, some of the changes in the U.S. were a pullback in government funding. And so we saw some customers get less government funding. We're not in the fund flow of that. Our solutions are not in that fund flow. However, our platforms, our fundraising platforms are focused on donors. And so for cases where some customers might get less U.S. funding, government funding, they rely on us more. So our platform might be a higher percentage of the revenue because they get less grants from the government. So that hasn't been a big impact. But again, if you look back over the years, economic difficulties, COVID, very resilient marketplace.

Got it. Got it. And then do you target certain size nonprofits?

We do. We are mid-tier in enterprise targets. We don't -- there's lots of really small nonprofits. You can run a nonprofit using Microsoft Excel, I think, for the small ones. But we're focused on ones that are a few million in revenue and larger. And there's some very large nonprofits that were -- that are customers of ours.

Great. Great. So I think we all understand the market and the addressable market a little bit more clearly. But let's dive into the product itself. So how are the products priced?

So our products -- our business is 1/3 of the business is transaction revenue, and I'll walk through those platforms. The rest of the business is cloud software. It's a subscription business. We don't have any seat pricing. So it's typically a 3-year or longer contract. The transaction business, we have three platforms in that business. Two of them are a sort of a traditional payments transaction model. And the third platform is a tuition platform, which is a user model, if you will. The rest of the business is sort of a classic annual subscription fee per year and a multiyear contract.

Got it. Understood. And so what does the general sales cycle look like? And who at your customer actually buys those solutions?

Yes, it's a little different by vertical market. So typically, in a nonprofit or foundation space, it's the executives that run the business. Usually a big decision because our systems are systems of record. And so it's a decision that usually the sales cycle is 6 to 8 months. Implementations are about the same, could be longer in an enterprise, but it's a decade decision typically for our customer because it's a system of record. It's running their revenue. Our platforms are running their performing art center. We're running their school. In the schools, we have an ERP platform. That's a big decision for them to make. And so it's usually the executives for our YourCause platform and our YourCause platform, we sell to companies. Nasdaq is a customer.

We are a customers.

We use the platform. So it's for their corporate social responsibility part of the business. It's for employee engagement, for employee volunteering, for donations and matching gifts. That's typically the corporate HR or corporate social responsibility group making that decision.

Understood. Understood. And that's how it worked at Nasdaq. It was that group that made the decision, and we're very proud to be a customer. So we talked a lot about new logos. But can you talk a little bit more about your overall growth algorithm? And are you focused on all those new logos or more of a land-and-expand model?

Yes. It's a little bit of both. So the growth algorithm, first of all, 1/3 of the revenue is transactions. So we grow through adding customers to those engines and then just natural volume growth. And that's typically a high single-digit grower for us organically. The rest of the business, the growth algorithm, some of it is just renewing contracts on our customers, on our multiyear contracts or some price increases in that. And then it's our go-to-market motions, which are a combination of new logos and cross-selling to existing customers. And our sales teams are separated that way. So our go-to-market is our direct sales teams. They're focused on specific vertical markets. So for example, our K-12 school team just sells to those schools. And then they're further separated by new logos and then expanding existing customers.

Got it. Got it. So what about -- it seems like you're having tremendous success. So what does the competitive landscape look like? And how is that evolving with the new technology?

Yes, it hasn't changed much over the years. So our competitors are different by vertical market and different by software product. We pretty much compete with smaller single point solution, mostly founder-led smaller businesses. There are also some competitors that have apps built on top of Salesforce or on top of Dynamics. But we don't have an enterprise-level competitor. And so each of our vertical markets will have a separate competitor. So the YourCause platform we just talked about, there are 3 or 4 smaller private firms we compete with.

In the K-12 space, same thing, 3 or 4 private firms we compete with. In fundraising, there's lots of small alternatives in the fundraising space. JustGiving doesn't have much of a competitor. GoFundMe is a competitor, if you will, for JustGiving here in Europe. So that's the competitive landscape. It hasn't changed much over the years.

So I'm supposed to ask you about your -- what you're seeing from the horizontal players and the ankle biters. So I'm just happy I got a chance to say ankle-biters on…

Yes, ankle-biters. I think I just addressed that. So for the horizontal players, again, there are small firms that built apps on top of Salesforce. And so in a competitive situation with Salesforce, and we see them only in a couple of markets, not in all of our markets. So in a competitive situation, like a university would be an example. So Salesforce might be across a university, we'll only compete in the foundation, and that's our specialty in the foundation. So in that competitive space in a university foundation, if we see Salesforce, we really see a group of smaller customers with multiple apps that have to come together on the platform to try to compete with what we provide to that space. But we won't compete with Salesforce outside in the enterprise, but just in the vertical space that we focus on.

Got it. Got it. Understood. All right. Well, it would not be a conference in 2025 without talking about AI, right? It's a requirement at this point, I think. So let's dive into AI just a little bit. So obviously, all software companies are being forced to kind of re-justify their existence in an AI world and how they're integrating AI. So can you talk to us a little bit about what Blackbaud is doing with AI and how you see it as either an enhancer or a competitor?

Yes. So for me, personally, super exciting. I'm an engineer, and I've been in the software space for several decades. So I think this is a super interesting opportunity for a deep vertical system of record company like Blackbaud. And as a software company, we're both consumers and creators of AI. So on the consumption side, we have 18 or 20 products we've brought into the company, and we're using in sales and marketing. We're using in our support center, in customer success. We're using tools in engineering for code generation like Microsoft Copilot or Anthropic Claude to generate code.

We've got corporate strategic relationships with Microsoft, with McKinsey, with Anthropic in engineering. So we've got -- as a buyer, we're bringing solutions to drive productivity and scale in the business, early days on that, and we're measuring KPIs and ROI for that. And then as a software company, we're creating products. So we have over 70 capabilities in our core solutions today that are pure AI capabilities. We haven't relabeled old products to call them AI. And so those are out in our system of record solutions. We just announced a new product, which is a fully Agentic AI solution that will be in the market in '26.

Can you talk a little bit more about those products specifically?

Yes. So we -- in the fall, like a lot of companies, we had our series of user conferences, big one in the U.S., one here, one in Sydney, and we went through all of our AI capabilities and what's coming in '26. So we announced a catalog of products, and we announced the first one, which is a development agent. So the scenario that I think is most clearly that I used for this new product is one of our customers we're working with is a university. They have 190,000 alumni. They have 32 fundraisers who are focused on 10,000 of their alumni. There's 180,000 untouched alumni.

You can have software raise money through those -- for those alumni, right? So this development agent is a fully agentic fundraiser. It's a fundraiser. It's basically a software employee for our customers. So it uses text messaging, e-mail and a full human avatar to reach out and build a relationship and raise money on behalf of the institution. We have customers already using that in Early Adopter Program, and that will be in the market next year.

So what's the overall plan then for those, which sounds like a fantastic tool. How do you plan on your long-term plan to monetize that? And once these firms are all adopted onto these new models?

Yes, sure. So first, the competitive moat, which is sort of your first question, is this product is embedded inside of our system of record. And so for example, if I'm a manager of half a dozen fundraisers, this will be one of my new employees inside of my system, and I will assign work to this agent, and it will raise money, and I will have metrics and it will be under my management system inside of the system that I use today with access to the data that's in the system. And the data is proprietary data, not in the public; customer data, data that we create and add for the customer, data we procure and enrich. So it's inside of the system of record.

We're bringing that to market. So that's a cross-sell inside of existing customer solutions today. It will also be, I think, generating a lot of new logos for us in the future. It's a subscription model. So it is an annual fee in a multiyear contract, and that's the model. The ROI is how much does this agent cost me as a customer, how much revenue do I get? How much is it going to produce? Now for customers that also have our payments platform, we'll also get transaction revenue as well.

Right. A nice little flywheel there for you guys. Okay. So we talked about customer-facing products. Let's talk a little bit more and drill down one more time on your internal use of AI. So remind us again, you talked a little bit about an overall road map and strategy, but let's drill in a little bit more on what you're doing for internal use and how you think your own ROI will be, not your customers' ROI?

Yes. I think there's a ton of opportunity, but I think it's pretty early. So we have several solutions in sales and marketing. So we brought in a solution about 1.5 years ago to do sales forecasting. So we brought in an AI solution, sits on top of our use of Salesforce internally, ran it in parallel with our sales managers who do forecasting. And after 6 or 8 months, it was the same accuracy as our sales managers. So going forward, though, the software does the forecasting. The managers don't do forecasting. So we removed some administrative time from all of our sales managers globally.

And so when you do that, there's sort of two parts of this. One is a KPI, which is, are you removing administrative time from your leaders? So we did with our sales managers. Then the other side of it is what's your ROI? So we're paying the vendor for the software. So for me, the ROI is from our sales managers, we need higher quota achievement or because you have more time, new sales executives joining the company ramp up faster because you can spend more time with them. And there's other categories when you free up administrative time. So we're measuring all of that to make sure we're getting productivity. And we have those solutions across the whole company.

We have another solution that's doing -- which are AI agents doing lead gen, fully autonomous lead gen, adding qualified leads at the top of the funnel without sales development reps calling and creating lead gen. So we have that solution running in the business. We have solutions that are having conversations with customers in our support center, really easy use case there actually, clear ROI in that case. So we're using solutions all over the company.

The forecasting, I think, is really impressive because it means that your data quality is very good, right? You can only use AI to forecast if data is good. And so I mean, that's just another feather in your cap that your data is high enough quality to be able to do that.

Yes. Well, we sell these -- we create and sell these solutions, so our internal data better be good.

That's fair. All right. We're going to dive a little bit more into the financial side of the business and leave the customers aside for now. So let's talk about buying back a significant number of shares over the past couple of years. You recently announced upping your authorization. So what are your capital allocation plans in the near and the midterm?

Yes, sure. So yes, we were pretty aggressive last year, fairly aggressive this year. We'll buy back 7% or 8% of shares outstanding this year. And we bought back about 10% net of stock-based comp, 10% in the last 2 years. So pretty aggressive. So our hierarchy of capital allocation is buybacks. We're also paying down debt this year. Our debt-to-EBITDA ratio was about 2.4. It will get closer to 2 going forward. And thirdly, small tuck-in acquisitions. So we've made a lot of acquisitions over the last 10 years. There's nothing sort of large and looming out there, but there's always interesting near adjacency tuck-in acquisitions for us. So it is in the hierarchy, buyback, debt reduction and tuck-in acquisitions.

Perfect. Perfect. So we have a little bit less than 5 minutes left. And before I have a couple more questions, but I just want to open it to the audience to see if there's anything specific that you all want to talk about or touch on.

Okay. We're going to keep going then. Well, let's hit one more financial question, and then I would like to just go to some of your overall closing thoughts on 2026. So you've been explicit about what investors can expect from Blackbaud regarding your financial performance. But can you go through that and the drivers to achieve them one more time? You touched on it in the very beginning, so let's return back to that.

Yes, sure. So what you can expect for us, which is sort of shown in our results so far this year is a few things. So from a modeling standpoint, go forward, you can expect solid single-digit organic revenue growth with some upside. So this new development agent, this new product, it's not really in our numbers yet. It's quite new. It will be in market next year. So there's some upside. Occasionally, we get viral events in our transaction engines that provide some upside. We really don't put that into our guide because you can't really predict those.

So mid-single-digit organic revenue growth, higher than that EBITDA growth, double-digit earnings per share growth and really interesting improvements in cash flow. So we raised our cash flow guide twice this year. We also used $60 million in our first quarter this year for onetime events, which will come back next year. So half of that roughly was used to just get out of an office lease that we weren't using anymore. And if we would have kept that lease, it would have been $42 million over the term of the lease. So we paid off the lease.

So that will come back next year. We'll have some organic cash flow improvements next year. And then the July 5 bill that was signed in the U.S. provides some tailwinds from a cash flow standpoint. So mid-single-digit organic revenue growth, higher than that EBITDA growth, double-digit EPS growth and a really solid cash flow story is what you can expect from us going forward.

It's a great story. So let's just do a final wrap up. Tell us, is there anything that we missed that we should have talked about? And then if not, let's just talk about what you're optimistic about, maybe not even related to your financials, but overall in 2026.

Yes. I think you covered everything. I think in summary, we're a 98% reoccurring revenue business with really strong cash flow in a very large global, very stable end user marketplace, right? Very stable. It was tested by COVID, tested by historic economic events, and it just keeps marching forward. So very stable business, large addressable marketplace, stable customers. Our products are all system of record, so don't turn over that quickly. 1/3 of the business is transactions, which is a very large addressable market. We're very aggressive, I think, as an engineering company.

Most of our -- a large percent of our employee base is an engineering employee base. We're being very aggressive with AI, bringing AI in to run the business, using AI to automate engineering, build new products, bring new products to market. And so we feel really good about our results this year and in the future. We also feel very confident that we're quite undervalued. We're aggressive in buying back stock. There's a reason for that. That will continue in '26 and beyond. It's a core part of our capital strategy.

Well, I just want to thank that was a fantastic summary, by the way. And I just want to thank you for everything that you're doing for veterans, everything you're doing for foundations. I think you're being good by doing good, and we really appreciate that. We appreciate being a customer of yours. So thank you very much for joining us.

Thank you.

Thanks, everyone.

Thanks, everyone.

Good day, and welcome to Blackbaud's Third Quarter 2025 Earnings Call. Today's conference is being recorded. I will now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on Blackbaud's Third Quarter 2025 Earnings Call. Joining me on the call today are Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson Blackbaud's Executive Vice President and CFO. Mike and Chad will make prepared remarks, and then we will open up the line for your questions. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. The discussion today will focus on non-GAAP results.

Please refer to our press release and the investor materials posted to our website for the full details on our financial performance, including GAAP results as well as full year guidance. We believe that a combination of both GAAP and non-GAAP measures are more representative of how we internally measure our business. Unless otherwise specified, we will refer to only non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. And with that, let me turn the call over to you, Mike.

Thank you, Tom. Good morning, everyone. I'm pleased to say that Q3 was another quarter of very strong results across revenue, EBITDA, EPS and cash flow. Blackbaud generated revenue of $281 million which is 5.2% organic growth year-over-year and adjusted EBITDA margin of 35.4%, up more than 200 basis points year-over-year. Non-GAAP diluted earnings per share of $1.10, up 11% year-over-year and particularly strong free cash flow of $125 million. These results continue to demonstrate the power of our people, the importance of our product offerings to our customers and our widening moat as the market leader, providing the most comprehensive suite of purpose-built and mission-critical software for the social impact sector.

Our solutions drive revenue and enhance employee efficiency, allowing our customers to spend more time focusing on what matters to them, making concrete improvements in the world through their vital social impact work and our end markets continue to demonstrate the resiliency. Annual charitable giving in the United States alone is nearing $600 billion, up more than 6% year-over-year. Recent technological advancements have amplified the value we can create for our customers and changing the way we help them fundraise. AI is quickly becoming a fundraising standard with predictive analytics and personalization now essential for donor growth.

Digital First has become the de facto method of donor engagement with hybrid events influencers and peer-to-peer fundraising requiring online and off-line solutions. And corporate giving is an all-time high, making it the fastest-growing nonprofit revenue source over the last 5 years. Blackbaud sits squarely at the forefront of all these market trends. We continue to focus on 3 specific areas: acquiring new logos, driving innovation, and as a result, strengthening our customer relationships through selling additional solutions and renewals. On top of these, we achieved higher profitability through operational discipline and efficiencies to continue to yield positive results.

In regard to signing new logos, over the past year, I've highlighted a number of significant wins as many of our verticals. Additionally, we continue to see meaningful cross-sell wins. Here are a few examples of why Blackbaud was the right choice for their organizations. St. Mary's College of California is recognized as one of the top 5 universities on the West Coast and was a major new logo win. They have been using another legacy and after a detailed review of the power and capabilities of Raiser's Edge NXT, they signed a multiyear agreement to meet their fundraising goals. Additionally, Concordia College, based in Minnesota was a large cross-sell for us. They signed a 5-year agreement to purchase Raiser's Edge NXT along with our added analytics capabilities to produce more robust data-driven fundraising campaigns.

Concordia's advancement and research team selected us because no other company can provide the depth and capabilities around data to better engage with existing and new donors. Our second primary focus is our relentless pursuit of innovation, where we continue to advance the industry standard. Last quarter, I discussed how our Raiser's Edge NXT transformation was in full effect with hundreds of updates in the last quarter alone, along with other key developments and partnerships driving deeper product differentiation and abilities for our customers. This quarter, we continue to deliver even greater innovation. This was showcased in early October at bbcon 2025, our annual customer event, with over 2,000 people in attendance and many more virtually we began a conference by outlining all of last year's 6 waves of innovation and how we've delivered on these commitments.

We then unveiled what's coming next, powerful sector-specific AI capabilities fueled by our unmatched data embedded directly within Blackbaud solutions. Among the 70-plus planned or available AI enhancements or predictive AI that's helping customers identify billions of dollars in untapped giving potential generative AI-powered acknowledgments that are speeding and enhancing communication with supporters and the ability to chat with Blackbaud AI as a coach and assistant that will unify insights across business offices. At bbcon, we also launched our new AgenticAISuite agents for good to help social impact organizations expand their teams with virtual team members and achieve more at scale.

This suite of agents from Blackbaud will turn a genetic AI into active teammates that autonomously execute complex, high-value work under the oversight of a human manager, freeing up teams across fundraising, finance, corporate impact and more. The first agent for good, a development agent natively embedded within the trusted Blackbaud environment will enable teams to identify and steward donors they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past. A number of early adopter customers highlighted their use of our new development agent to crowded rooms at Beacon. They discussed the great potential for a genic AI in the social impact sector to help customers unlock new levels of effectiveness and deeper connections across critical fundraising operations.

The customer reaction to these announcements was positive and energetic. We frequently had standing room-only crowd for our demos and Q&A sessions. We know our customers prioritize value, ease of use and proven outcomes. And we know that the social impact sector as a whole requires solutions that will harness the power of these new technologies to drive their success. Our AI solutions deliver on both of these fronts. We continue to emphasize our operational rigor to drive increased profitability and strong cash flows. And our Q3 and year-to-date results are a strong testament to that discipline.

Additionally, Chad will discuss some investments we've made to support future profitable growth as well as some cash benefits related to tax changes in the One Big Beautiful bill. Let me conclude by offering what you can expect from Blackbaud in the future, we believe Blackbaud is a sound investment choice, but has a potential to create substantial shareholder value a belief that is supported by our strong 2025 year-to-date performance. As a reminder, the framework we're targeting going forward includes mid-single-digit plus organic revenue growth EBIT growth in excess of revenue growth, double-digit diluted EPS growth and driving very strong free cash flow to power a purposeful capital allocation strategy, our near-term capital allocation priority remains stock repurchase, especially at current valuations.

We expect to remain an active purchaser of Blackbaud stock in the fourth quarter and beyond. We are increasing our stock repurchase target 5% to 5.2% to 7% for 2025. Chad will provide more of the specifics on our plans across these metrics in his guidance section, but we look forward to continuing this journey and offering our shareholders increasing value in the coming years.

With that, let me turn the call over to Chad.

Thank you, Mike, and good morning, everyone. Blackbaud continues to be well positioned for long-term success, delivering consistent growth and enviable profitability. As Mike outlined, Blackbaud executed well in the third quarter, a strong follow-on to our Q1 and Q2 performance. We remain committed to providing investors an attractive financial model balance between growth in revenues, earnings in cash flows along with a prudent and purposeful capital allocation strategy. Mike walked through the high-level Q3 results, which tell a story of consistent mid-single-digit top line growth improved profitability and strong free cash flow.

But to reiterate, Q3 organic revenues were up 5.2% to $281 million a result of solid contractual recurring revenue growth and continued strength in our transactional recurring revenue lines. Adjusted EBITDA of $100 million was up nearly $5 million with a 220 basis point improvement to margin. Improved revenue and EBITDA margin speaks to the power of the company's 5-point operating plan, which continues to positively impact earnings per share. Non-GAAP diluted EPS increased to $1.10 compared to $0.99 last year, an 11% increase year-over-year. Adjusted free cash flow was $125 million, up from $98 million last year, representing adjusted free cash flow growth of 28% year-over-year.

Our strong free cash flow generation gives us confidence to continue significant investment in a number of critical areas like product innovation, stock repurchase and debt repayment. In the third quarter, we repurchased approximately 460,000 shares, bringing our year-to-date total through the third quarter to nearly 2 million shares, including net share settlement of employee stock compensation, this represents approximately 5.2% of the company's common stock outstanding as of December 31, 2024. This buyback activity continues to demonstrate our strong belief in the value of Blackbaud. And as Mike mentioned, we expect to be an active purchaser of Blackbaud stock in the fourth quarter and into 2026.

Additionally, leverage decreased to 2.4x in the third quarter compared to 2.7x last quarter and 2.9x in Q1. Before I move to guidance for the remainder of 2025, there are several housekeeping items that I wanted to highlight that may influence our numbers and help you set your models for both the year and upcoming quarters appropriately. Thinking about revenue seasonality, our transactional revenue can create fluctuations from quarter-to-quarter with Q4 typically being our highest revenue dollar quarter. Our annual merit increases for employee compensation went into effect on July 1, so Q3 and Q4 tend to have higher compensation-related costs compared to Q1 and Q2.

We continue to analyze the implications of the July tax law changes and believe it will meaningfully reduce cash taxes for the company through 2027. And we have updated our 2025 free cash flow guidance to include the anticipated cash tax benefit for this year, and we'll share more on the estimated benefit to 2026 free cash flow when we provide formal guidance in February. We made a number of meaningful incremental investments in the third quarter tied to product innovation, and future growth drivers, including accelerated investment in the development of our Gentek AI offerings, we estimate these incremental investments will total approximately $7 million between the third and fourth quarters and are contemplated in our full year 2025 guidance.

Finally, the company identified a prior period noncash error related to the year-end 2024 calculation of the valuation allowance in accounting for income taxes. The correction of this along with other immaterial prior period errors resulted in material impacts to our previously filed financial statements. Further information can be found in our earnings press release and in our 10-Q once it's filed.

Moving now to guidance for the remainder of 2025. Our guidance for the year assumes no material changes, positive or negative in the current macroeconomic landscape. We are reiterating our guidance across all metrics for 2025, with the exception of increased free cash flow, as I noted previously. Regarding revenue, we are projecting revenue in the range of $1.120 billion to $1.130 billion, representing organic growth at the midpoint of approximately 5% on a constant currency basis. Shifting to profitability. We continue to focus on margin expansion opportunities, while at the same time, making investment in the business in key areas like innovation, artificial intelligence and cybersecurity.

Therefore, we anticipate EBITDA margins of approximately 35.4% to 36.2%. As a reminder, EVERFI's contribution to our 2024 EBITDA was approximately $10 million to $15 million. After adjusting for the estimated impact of the EVERFI divestiture, the midpoint of our EBITDA margin range implies approximately 7% growth in adjusted EBITDA dollars year-over-year. With the overall revenue and spend configuration I just outlined, we expect 2025 non-GAAP diluted EPS in the range of $4.30 to $4.50 after adjusting for the estimated impact of EVERFI divestiture, the midpoint of our 2025 non-GAAP diluted EPS range implies an approximately 11% growth rate year-over-year. The combination of higher growth and better margin is expected to result in a rule of 40 at constant currency of 40.5% at the midpoint of guidance for the full year.

We continue to focus sharply on driving adjusted free cash flow and returning capital to our shareholders. For the year, we're increasing our adjusted free cash flow guidance to $195 million to $205 million. This increase is directly tied to the anticipated 2025 cash tax savings related to the One Big Beautiful Bill Act and net of the incremental innovation investments mentioned earlier. And as we discussed earlier this year, there are approximately $60 million of onetime items in working capital fluctuations negatively impacting our 2025 free cash flow outlook that we do not expect to repeat in 2026. You can find more details on Slide 24 of our investor deck.

Moving to our capital allocation strategy. We continue to prioritize stock repurchase. In fact, since the fourth quarter of 2023, we have reduced our common stock outstanding by 10%. We estimate that we will end 2025 with a weighted average diluted share count between 48.5 million and 49.5 million shares and to help you with your modeling, when you combine the nearly 2 million shares repurchased year-to-date with the planned future repurchases for Q4 2025 and 2026, we anticipate a preliminary range of 46.5 million to 47.5 million weighted average diluted shares for next year.

Regarding longer-term plans, we expect to continue to repurchase shares annually beyond 2026 as well as evaluate debt repayment and tuck-in M&A. We have a lot to be proud of and a lot more to look forward to in Q4 2025 and beyond. As such, we remain focused on providing enhanced value to our customers and shareholders.

At this time, I'll ask the operator let's open up the line for questions. Operator?

[Operator Instructions] Our first question is from Brian Peterson with Raymond James.

So Mike, I just wanted to follow up on some of the customer feedback post bbcon. I know there's a lot of buzz on AI and agenetic functionality. How do you think about the adoption of AgenticAI in the nonprofit space? And as we're thinking about your monetization potential over the next few years, what do we think that could mean to revenue growth?

Yes. Sure, Ryan, thanks. A lot of our bbcon main stage and breakouts was all about AI. We talked about or so capabilities and products that we've announced, and they're going across the whole product portfolio. So there's a lot of excitement there. We've already released several in our solutions. We have not yet monetize those. Some that we announced, we are going to be cross-selling those in this quarter. So brand-new products like a development agent. For example, we have a solution called Prospect Insights. And from an adoption standpoint, to your question, about 40% of our customers on that platform adopted it pretty quickly.

So there's adoption happening with these capabilities. We're also building the appropriate infrastructure to form and multi-agent environment. We announced a catalog that we called agents for -- good and the first product is the development agent. So there will be multiple new Agentic AI solutions that will all be monetized and upsold to the existing customer base and prospective new customers.

Our next question is from Rob Oliver with Baird.

Mike, is for you. You called out some of the new logo wins and cross-sells. I wanted to focus on the new logo wins since that's been one of key tenets for you guys for growth over the next couple of years. Some nice logos. So I was wondering if you could provide any color for us on those, particularly around contract size, anything you're seeing on that ACV size? And then you said multiyear engagements, are these coming in at kind of the standard 3 years as well? And then when we might and recognizing you guys have a lot of customers at 40,000, but that number really hasn't moved in a few years. So when would we expect to see that these new logo -- this new logo push start to kind of move up that customer count? And then I had a quick follow-up for Chad.

Yes. Sure, Rob. Yes, we've got a big focus on new logos. I tend to talk about them on these calls every quarter and name a few. We're doing quite well with larger ARR deals actually. We're seeing the average ARR go up in the last couple of years. We're positioned really well for the mid-tier and enterprise-size customers given all the focus on innovation, we're actually adding more capabilities, which gives us an opportunity to drive more ARR with customers, especially when we combine multiple solutions in a single cell, if you will, -- the minimum is 3 years.

We don't do contracts less than 3 years anymore. We started that a couple of years ago with the renewal program, which is also going really well. By the way, we'll be through 90% of that by the end of this year. That's just a normal course of business for us now, and we're still getting our price increases with those renewals that we talked about before. So doing really well, mid-tier and up ARR is going up. We're doing more deals with multiple modules, if you will. One of the customers I mentioned, I think it was Concordia, signed a 4-year deal on that cross-sell. So we have, I think, about 20% or more of our customers that are 4 years and longer on their contract length now, Rob, as well. So the customer base is accepted quite well, multiyear contracts and we started it several years ago. So we're really pleased with that.

Okay. Great. Appreciate that color. And then, Chad, you mentioned the tax restatement, we'll run through that. I appreciate you calling that out. There was also some revenue reclassification. So I just wanted to -- have you walked through what that was? I saw the note in the release, but also kind of the rationale for why to reclass revenue now historically, it would be helpful.

Great. Thanks, Rob. So just to reiterate, the revision was related to an immaterial noncash error related to the year-end 2024. And and that was related to the calculation of the valuation allowance for accounting for income taxes. And it's a technical matter related to a limitation on net operating losses associated with deferred tax liabilities then associated with goodwill. So rather complex, the correction of the air increased our income tax provision by the amount that we talked about. The corresponding decrease in '24 was in net income. So the correction of the error, along with the other immaterial prior period errors was corrected. The decision to adjust the other immaterial errors kind of best practice, if you will.

So whenever you're going through a revision, again, kind of best practice to address those that are considered to be an error. So we adjusted those for reference the adjusting amounts related to revenue is somewhere south of $100,000. So immaterial at the same time, we do take it very seriously and has been contemplated in all of our guidance as well.

Our next question is from Kirk Materne with Evercore ISI.

Mike, maybe just going back to the first question a little bit on the agents. When do you think monetization of those could start for you? I assume it's sometime in '26. But relatedly, if someone's on Raiser's Edge already and their data is in Raiser's edge, their ability to get ROI from those agents be pretty quick, meaning if you -- once you're up and running with it, can you get value out of that pretty much immediately? Or is there data remediation work necessary in the back end?

Yes. So we are starting to sell those this quarter. So we'll get some revenue we'll get some bookings and modest revenue next year, but it will ramp up. And again, that's the first agent. We have plans for many agents. That development agent, the ROI is pretty clear. It's a fundraising agent. So it's pretty easy to take a look at the subscription cost to that related to revenue or donations raised. So yes, we anticipate that to be a pretty quick ROI for our customers. And we already have early adopter customers using the solution and some of those folks were nice enough to get on stage and speak at BBCon a couple of weeks ago. So we expect to have a catalog of these agents across our different platforms. That's the first one.

Out on Raiser's Edge, NXT that will be coming out on our Enterprise CRM platform as well. We're very excited about it and so are our customers. And it's a great opportunity for customers to be able to reach donors and drive new revenue for themselves where they don't have the capacity today to do that. I'll give you a quick example. Think of a university that might have 200,000 alumni and a handful of fundraisers that maybe can go after several thousand alumni. So there might be 180,000 untouched alumni.

This is an opportunity to drive revenue from sources that are sitting there, but they just don't have the scale and capacity to go after that revenue. This will augment their staff and be able to do that and get new revenue lines for them. So the ROI will be quite clear. And this first agent, the pricing model is a typical multiyear SaaS subscription model.

Okay. And then, Chad, maybe somewhat just relatedly. Just gross margins, as you sell more agents, is there anything to consider on that front? I realize it's really, really small right now from a revenue perspective, so the mix won't really move. But just how should we think about that conceptually?

Yes. So I would say that you would have noted within our free cash flow raise for the quarter. So we raised the cash flow guidance by $5 million across the range that was contributed to the tax legislation, net of incremental investment in innovation and AI. So we're being calculated in regards to the investments. It's still early days relative to what the gross margins will be. But we expect that the gross margin impact will be favorable and it's also important to say the opportunity relative to company EBITDA margins will also likely be positively influenced by AI-related investments as well,. So feeling good on that front.

Yes, Kirk, I'll just add to the gross margin question. I think we have a lot by improved gross margins, not just tied to new products, but just tied to some of our internal initiatives to remove some legacy software that we run the company on in our data centers. We've got a couple of small data centers yet to be closed, which we're working on. We've got our build-out of our India office is helpful in that regard. And we have many, many initiatives across the company using AI to run the company. So as a software company, built a consumer and a creator of AI as a consumer, we had a lot of solutions across pretty much every department that we're using, and we've yet to realize measurable productivity improvements from the use of those AI solutions, but we will. And I think there's great productivity and scale opportunity with us going forward.

[Operator Instructions] Our next question is from Parker Lane with Stifel.

This is Matthew on for Parker. To start, I'm curious, after transactional revenue outperformance and continued what structural drivers are giving you confidence higher growth rate for this revenue stream going forward. And to that point, were there any viral giving events in 3Q or that are expected in 4Q?

Yes. Matthew, thanks. This is Mike. So we're doing really well across all 3 of our transaction platforms. We're winning new business. We're adding volume. There were no viral events in the quarter. So we had a really good quarter on the transaction platforms. And it's all 3 of them, and they're a little bit different. Two are in Fundraising, one's kind of consumer, JustGiving, the other is donation processing embedded in our fundraising solutions. And the last one is Tuition Management in our K-12 space. All 3 of them are doing well. We're expanding the footprint of those or cross-selling those -- and just the fundamentals are doing really well there without having viral events. So we feel pretty good about the performance of those in the quarter and year-to-date and the trajectory of those going forward.

Okay. Great. And then secondly, as you continue to move towards Rule 45, what are the primary market expansion levers from here? And how much? And when would you expect the Indian of investment to show on?

Yes. So I think you're going to -- what you can expect from us is sort of our year-to-date results going forward. We're going to keep driving the business to be mid-single-digit plus higher EBITDA, double-digit EPS. I mentioned earlier, we've got some cost takeout opportunities and infrastructure that we're working on. We've done a good job with that in the last several years. There's more to go there. We're going to have an impact on productivity using AI in the company. to run the business. We're coming out with new solutions.

This agenetic AI development agent I just talked about will be a great add to revenue and bookings in the future. We're doubling down on share repurchase. If you go back 2 years, we've repurchased 16% of our outstanding shares that nets out at about 10% and after stock-based comp, that's a big priority for us as well. So I think all those things together make up the profile of the business, that also includes in March towards Rule of 45.

Okay. I think that's it for our questions today. Thank you, everyone, for joining us. We will be attending a number of investor events in November and December around the globe actually to include several investor conferences, which are listed on our Events page on our Investor Relations site. We hope to see you and/or speaking with you soon. From all of us here at Blackbaud, we wish you good health and a great day. Thank you.

Thank you. This will conclude our conference. You may disconnect your lines at this time, and thank you for your participation.