Shares of Blackbaud (BLKB 1.27%) rallied nearly 9% on Wednesday after the social impact software specialist announced strong quarterly results.
For its third quarter of 2023, Blackbaud's revenue grew 6.2% year over year to $277.6 million, translating to non-GAAP (adjusted) net income of $60.5 million, or $1.12 per share. Analysts, on average, were looking for earnings of $0.96 per share on revenue of $275.5 million.
On Blackbaud exceeding the "Rule of 40"
Blackbaud CFO Tony Boor called the quarter an "inflection point for revenue growth," noting that organic recurring revenue accelerated to 8.3%. Generally accepted accounting principles (GAAP) recurring revenue also now represents around 97% of Blackbaud's total. With adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanding by 940 basis points year over year to 35% of revenue, the company managed to exceed the "Rule of 40" one quarter earlier than expected. The Rule of 40 is a calculation based on organic revenue growth and adjusted EBITDA margin that can be helpful for investors to determine whether to invest in software-as-a-service (SaaS) companies before they become profitable.
What's next for Blackbaud stock?
Looking to the rest of the year, Blackbaud reiterated its previous outlook for 2023: adjusted revenue of $1.095 billion to $1.125 billion, adjusted earnings per share of $3.63 to $3.94, and adjusted free cash flow of $190 million to $210 million.
So, where does that leave investors today? It's not hard to find companies that have already achieved sustained profitability or are growing at higher clips. But those businesses also tend to come with significantly higher valuation premiums. With Blackbaud stock up a modest 10% year to date leading into this report (and 19% as of this writing) and trading at a reasonable 3 times trailing-12-month sales with a forward price-to-earnings ratio of 15, there was little not to like as it grows its recurring revenue base and enjoys meaningful margin expansion.
If Blackbaud's underlying business can extend this momentum into the coming quarters, I see no reason its stock price can't continue to follow suit.