What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-04 · 271 added, 191 removed, 329 unchanged (58% of the section changed)

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In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.

The economic impact of COVID-19 on the social good industry remains uncertain and, consequently, we expect that our operating environment may continue to be challenging for the remainder of 2020, and potentially beyond, as existing and prospective customers remain cautious in their purchase decisions.

The economic impact of COVID-19 on the social good industry remains uncertain.

With our existing and prospective customers remaining cautious in their purchase decisions, we expect that our operating environment may continue to be challenging for the remainder of 2020, 2021 and potentially beyond, as discussed below.

Notwithstanding these conditions, we remain focused on continuing to execute our four-point growth strategy and strengthening our leadership position.

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

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The investments we have made to enhance our digital footprint are enabling us to be more prescriptive and cost-effective in our marketing efforts and to quickly adapt to changing market conditions, and over the longer term we believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market.

We also introduced new pricing and financing offers based on the changing needs of our customers.

Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and bookings are falling short of budgeted expectations, which we expect to put pressure on near-term revenues.

Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and elongated sales cycles, which has caused bookings to fall short of budgeted expectations for the third quarter and year-to-date periods.

We expect this shortfall to put pressure on both 2020 and 2021 revenues.

As a result, we have begun shifting investment towards digital marketing aimed at lead generation and put a greater emphasis on selling solutions with the highest lifetime value.

In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives.

After temporarily freezing our hiring efforts due to COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings.

While we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development, our top priority in the near-term is protecting our employees and continuing to support our customers at a very high standard.

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We have made transformational changes to our business over the last several years, which allowed us to immediately switch to a virtual work environment in March and supported our global employees' ability to work effectively from home.

We are re-evaluating elements of our workforce strategy based on the lessons learned over the past few months.

We have been soliciting feedback from our employees to help shape our approach to the future of work at Blackbaud.

Second Quarter 2020 Form 10-Q

We are re-evaluating elements of our workforce strategy based on what we have learned during the COVID-19 pandemic.

During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen.

This change also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices.

We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between of between $20.0 million and $25.0 million.

We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Financial Summary

Total revenue ($M)

Income from operations ($M)

YoY Growth (%)

Total revenue increased by $6.4 million and $14.1 million during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , driven largely by the following:

Growth in recurring revenue related to increases in transactional revenue, positive demand from customers across our portfolio of cloud solutions and increases in services embedded in our renewable cloud solution contracts

Decreases in one-time consulting revenue primarily from less of one-time sales related to COVID-19

Decreases in one-time analytics revenue as analytics are generally integrated in our cloud solutions

Income from operations increased by $6.1 million and $12.3 million during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , driven largely by the following:

Total revenue ($M) Income from operations ($M)

YoY Growth (%) YoY Growth (%)

Total revenue decreased by $6.1 million during the three months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:

- Decrease in recurring revenue primarily due to declines in transactional revenue and maintenance revenue.

Transactional revenue decreased as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19.

The decrease in maintenance revenue was related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

- Decrease in one-time consulting revenue primarily from less one-time sales related to COVID-19

Total revenue increased by $8.0 million during the nine months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:

+ Growth in recurring revenue related to positive demand from customers across our portfolio of cloud solutions and an increase in transactional revenue, including charitable giving related to COVID-19

- Decrease in one-time consulting revenue primarily from less of one-time sales related to COVID-19

- Decrease in one-time analytics revenue as analytics are generally integrated in our cloud solutions

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Income from operations increased by $2.2 million during the three months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:

+ Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards and the modest and targeted headcount reduction we implemented during the second quarter

+ Decrease in travel costs of $3.7 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

+ Decrease in amortization of intangible assets from business combinations of $2.0 million

+ Decrease in acquisition-related expenses and integration costs of $1.2 million

- Decrease in total revenue, as described above

- Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above

- Increase in corporate costs of $2.9 million, primarily related to increases in bad debt expense;

for additional details, see Note 2 of our condensed consolidated financial statements in this report

Income from operations increased by $14.5 million during the nine months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:

+ Growth in total revenue, as described above

+ Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Decrease in restructuring costs of $0.7 million and $2.6 million, as our facilities optimization plan was largely completed as of December 31, 2019

Decrease in acquisition-related expenses and integration costs of $0.8 million and $1.9 million

Decrease in amortization of intangible assets from business combinations of $2.1 million and $3.2 million

Increases in cost of revenue from a $4.3 million impairment charge during the three months ended June 30, 2020, against certain previously capitalized software development costs, resulting from our decision to accelerate the end of customer support for certain solutions

Increases in employee severance of $4.1 million and $0.7 million, related to a modest and targeted headcount reduction during the three months ended June 30, 2020, in response to the COVID-19 pandemic

Increases in corporate costs of $3.1 million and $3.4 million, primarily related to increases in bad debt expense

Other increases in cost of revenue related to increases in data center costs, amortization of software development costs and transaction-based costs

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

+ Decrease in travel costs of $6.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

+ Decrease in amortization of intangible assets from business combinations of $5.1 million

+ Decrease in acquisition-related expenses and integration costs of $3.1 million

+ Decrease in restructuring costs of $2.9 million as our facilities optimization plan was largely completed as of December 31, 2019

- Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic.

For additional details, see "Results of Operations - General and administrative" below.

- Increase in corporate costs of $6.1 million primarily related to an increase in bad debt expense;

for additional details, see Note 2 of our condensed consolidated financial statements in this report

- Increase in cost of revenue from a $4.3 million impairment charge during the three months ended June 30, 2020, against certain previously capitalized software development costs, resulting from our decision to accelerate the end of customer support for certain solutions

- Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers

There are three primary revenue categories with related business drivers that we continue to monitor closely in light of the COVID-19 pandemic:

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Recurring subscription contracts are typically for a term of three years at contract inception, billed annually in advance, and we have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts.

Approximately one-half of our contracted recurring revenue will be up for renewal during 2020, with the seasonal high for renewals and collections during the third quarter driven largely by mid-year fiscal year-ends and timing of the academic school year.

While our renewal rates have trended ahead of our expectations through July, our contracted recurring revenue has fallen short of our original plan due to bookings falling short of our budgeted expectations.

Our contracted recurring revenue has performed well as our renewals have continued to trend ahead of our original plan with over three quarters of 2020 now behind.

We expect the shortfall in bookings to put pressure on our revenue during the fourth quarter of 2020 and more so on our full-year 2021 revenue.

We are closely monitoring our customer receivable balances, payment terms, and creditworthiness.

We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic.

We are experiencing an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic and this development may continue in the near term.

Transactional Revenue (approximately one quarter of total revenue in 2019)

Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments.

We have historically experienced seasonal highs during the fourth quarter due to year-end giving campaigns and during the second quarter when a large number of events are held.

The early disruptions caused by COVID-19 in the first quarter drove sharp initial declines in our transactional volumes.

During the second quarter, many in-person events shifted online, had to be postponed or even canceled.

We have historically experienced seasonal highs during the fourth quarter due to year-end giving

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

campaigns and during the second quarter when a large number of events are held.

During the third quarter, we again saw many in-person events shift online, be postponed or canceled.

Social good organizations are being forced to employ new strategies to maintain momentum with current supporters while capturing the attention of potential new donors.

We saw a rise in virtual campaigns and events and we remain committed to supporting our customers in adapting to the new circumstances.

Given our ratable revenue recognition model for our recurring subscription contracts and implementation periods, we expect that declines in our 2020 bookings performance will have a greater impact on our 2021 revenue than 2020 revenue.

Of the three primary revenue categories discussed above, bookings represents the smallest potential impact on recurring revenue in 2020.

We continue to support our customers in adapting to these circumstances through virtual campaigns and events.

Of these three primary revenue categories, bookings represents the smallest potential impact on recurring revenue in 2020.

One-time services and other revenue, which is tied to bookings, would have a more immediate impact on our total revenue.

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Therefore, in line with our strategy, we have made a pivot to greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

Customer retention

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Due primarily to these factors, we believe a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts provides a better representation of our customers' overall behavior.

For the twelve months ended June 30, 2020 , approximately 92% of our customers with recurring revenue contracts were retained.

For the twelve months ended September 30, 2020, approximately 92% of our customers with recurring revenue contracts were retained.

This customer retention rate is unchanged from our rate for the full year ended December 31, 2019.

Balance sheet and cash flow

At June 30, 2020 , our cash and cash equivalents were $30.5 million and the carrying amount of our debt under the 2017 Credit Facility was $484.2 million .

At September 30, 2020, our cash and cash equivalents were $30.6 million and the carrying amount of our debt under the 2017 Credit Facility was $444.0 million.

Our net leverage ratio was 1.95 to 1.00 .

During the six months ended June 30, 2020 , we generated $37.5 million in cash from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.

During the six months ended, June 30, 2020, we had a net increase in our borrowings of $16.9 million , down from a net increase of $58.6 million during the three months ended March 31, 2020.

Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter.

During the six months ended June 30, 2020 , we also had aggregate cash outlays of $27.6 million for purchases of property and equipment and capitalized software development costs.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

During the nine months ended September 30, 2020, we generated $109.2 million in cash from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.

During the nine months ended September 30, 2020, we had a net decrease in borrowings of $23.6 million.

Our assumption of the real estate loans associated with our purchase of our Headquarter Facility was a noncash investing and financing transaction (see discussion below).

During the nine months ended September 30, 2020, we also had aggregate cash outlays of $57.9 million for purchases of property and equipment and capitalized software development costs.

Recent Developments

Pending headquarters facility purchase

In June 2020, we entered into a binding purchase and sale agreement with HPBB1, LLC, a Georgia limited liability company (the "Seller"), for the purchase and sale of the building, fixtures and other improvements and parcels of land of our headquarters facility (the "Headquarters Facility") in Charleston, South Carolina (the "Transaction").

We currently lease the Headquarters facility from the Seller.

At the closing of the Transaction, we would pay the Seller a purchase price of $76.3 million , which includes the assumption of the Seller's obligations in the aggregate principal amount of $63.0 million and cash, which we expect to fund by borrowings under the 2017 Credit Facility.

The Transaction is expected to close during the second half of 2020.

Second Quarter 2020 Form 10-Q

Purchase of Headquarters Facility

In August 2020, we completed the purchase of our Headquarters Facility.

Prior to the completion of the Transaction, we leased the Headquarters facility from the Seller.

We paid the Seller a purchase price that included the assumption of the Seller's obligations of $61.1 million, cash of $15.2 million and certain lender fees, closing costs, adjustments and prorations as set forth in the PSA.

We funded the cash portion of the purchase price through borrowings under the 2017 Credit Facility.

October 2020 refinancing

On October 30, 2020, we entered into the 2020 Credit Facility.

The 2020 Credit Facility matures in October 2025 and replaces the 2017 Credit Facility by amending and restating it to (a) increase the amount available under the revolving credit facility to $500.0 million, (b) increase the amount available under the term loan facility to $400.0 million and (c) provide for a net leverage ratio of, (i) commencing with the first fiscal quarter ending December 31, 2020 and through September 30, 2022, 4.00 to 1.00 and (ii) commencing with the fiscal quarter ending December 31, 2022 and thereafter, 3.75 to 1.00, among other changes.

See Part II, Item 5.

“Other Information” for detailed information relating to the terms of the 2020 Credit Facility.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Results of Operations

Comparison of the three and six months ended June 30, 2020 and 2019

Comparison of the three and nine months ended September 30, 2020 and 2019

Revenue and Cost of Revenue

Cost of revenue ($M)

Gross profit ($M)

Revenue ($M) Cost of revenue ($M) Gross profit ($M)

and gross margin (%)

YoY Growth (%)

YoY Growth (%) YoY Growth (%)

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services.

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Cost of recurring revenue is primarily comprised of compensation costs for customer support and production IT personnel, hosting and data center costs, third-party contractor expenses, third-party royalty and data expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.

We continued to experience growth in sales of our cloud solutions as our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services.

Our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services.

Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter.

We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Recurring revenue increased by $7.8 million or 3.7% , and $14.6 million or 3.6% , during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , driven primarily by the following:

Increases in subscriptions revenue of $11.8 million and $22.4 million related to increases in transactional revenue, positive demand from customers across our portfolio of cloud solutions and increases in services embedded in our renewable cloud solution contracts

Decreases in maintenance revenue of $4.0 million and $7.9 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

Partially offsetting the increases in subscriptions revenue were decreases in the mix of retained and managed services contracts we present in recurring.

Recurring revenue decreased by $5.1 million or 2.5%, during the three months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:

- Decrease in subscriptions revenue of $1.5 million largely related to a decrease in transactional revenue as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19

- Decrease in maintenance revenue of $3.7 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

Recurring revenue increased by $9.4 million or 1.5%, during the nine months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:

+ Increase in subscriptions revenue of $21.0 million related to positive demand from customers across our portfolio of cloud solutions, an increase in transactional revenue, including charitable giving related to COVID-19, and an increase in services embedded in our renewable cloud solution contracts

- Decrease in maintenance revenue of $11.5 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

Partially offsetting subscriptions revenue were decreases in the mix of retained and managed services contracts we present in recurring.

Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020.

This change in presentation resulted in decreases in recurring revenue and offsetting increases to one-time services and other revenue of $4.2 million and $8.5 million during the three and six months ended June 30, 2020 , respectively.

Cost of recurring revenue increased by $4.7 million or 5.4% , and $9.6 million or 5.6% , during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , driven primarily by the following:

This change in presentation resulted in decreases in recurring revenue and offsetting increases to one-time services and other revenue of $4.2 million and $12.7 million during the three and nine months ended September 30, 2020, respectively.

Cost of recurring revenue decreased by $3.4 million or 3.9%, during the three months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:

+ Increase in amortization of software development costs of $2.4 million due to investments made on innovation, quality and the integration of our cloud solutions

+ Increase in hosting and data center costs of $1.0 million as we are migrating our cloud infrastructure to leading public cloud service providers

- Decrease in transaction-based costs of $1.7 million related to payment services integrated in our cloud solutions

- Decrease in amortization of intangible assets from business combinations of $2.9 million

- Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

- Decrease in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above

Cost of recurring revenue increased by $6.2 million or 2.4%, during the nine months ended September 30, 2020, when compared to the same period in 2019, driven primarily by the following:

+ Increase in amortization of software development costs of $4.7 million due to investments made on innovation, quality and the integration of our cloud solutions

+ Impairment charge of $4.3 million during the three months ended June 30, 2020, against certain previously capitalized software development costs that reduced the carrying value of those assets to zero.

The impairment charge resulted primarily from our decision to accelerate the end of customer support for certain solutions.

Increases in hosting and data center costs of $1.7 million and $2.2 million as we are migrating our cloud infrastructure to leading public cloud service providers

Increases in amortization of software development costs of $0.8 million and $2.2 million due to investments made on innovation, quality and the integration of our cloud solutions

Increases in transaction-based costs of $0.7 million and $3.0 million related to payment services integrated in our cloud solutions

For the six months ended June 30, 2020, increase in third-party contractor costs of $1.2 million related to application security and partners delivering services embedded in our renewable cloud solution contracts

Decreases in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Decreases in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above

The 0.7% and 0.8% decreases in recurring gross margin for the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , were primarily the result of the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs.

We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.

Second Quarter 2020 Form 10-Q

+ Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers

+ Increase in transaction-based costs of $1.3 million related to payment services integrated in our cloud solutions

- Decrease in amortization of intangible assets from business combinations of $5.0 million

- Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

- Decrease in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

The 0.6% increase in recurring gross margin for the three months ended September 30, 2020, when compared to the same period in 2019 , was primarily the result of the decrease in lower margin transactional revenue.

The 0.3% decrease in recurring gross margin for the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily the result of the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs.

We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.

One-time services and other

Cost of revenue ($M)

Gross profit ($M)

Revenue ($M) Cost of revenue ($M) Gross profit ($M)

and gross margin (%)

YoY Growth (%)

YoY Growth (%) YoY Growth (%)

One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts, revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees.

Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, other costs incurred in providing onsite customer training, third-party contractor expenses, data expense incurred to perform one-time analytic services, third-party software royalties, costs of user conferences, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.

One-time services and other revenue decreased by $1.4 million , or 8.4% , and $0.4 million , or 1.2% , during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , driven primarily by the following:

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

One-time services and other revenue decreased by $1.0 million, or 6.3%, and $1.4 million, or 2.8%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, driven primarily by the following:

+ Increases in the mix of retained and managed services contracts we present in one-time services and other.

This change in presentation resulted in increases to one-time services and other revenue and offsetting decreases in recurring revenue of $4.2 million and $8.5 million during the three and six months ended June 30, 2020.

This change in presentation resulted in increases to one-time services and other revenue and offsetting decreases in recurring revenue of $4.2 million and $12.7 million during the three and nine months ended September 30, 2020.

- Decreases in one-time consulting revenue of $2.5 million and $8.0 million, respectively, primarily from less one-time sales related to COVID-19 as well as services increasingly being embedded in our renewable cloud solution contracts.

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- Decreases in one-time analytics revenue of $0.8 million and $2.9 million as analytics are generally integrated in our cloud solutions

For the six months ended June 30, 2020, decreases in revenue from one-time training services and license fees

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

Cost of one-time services and other decreased by $0.6 million , or 4.1% , during the three months ended June 30, 2020 , when compared to the same periods in 2019 , driven primarily by the following:

Increase in costs of associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above

Reduced amount of compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Cost of one-time services and other remained relatively consistent during the six months ended June 30, 2020 , when compared to the same period in 2019 .

The 3.9% and 1.5% decreases in one-time services and other gross margin during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , were primarily the result of the reductions in one-time consulting and analytics revenue discussed above outpacing declines in the related costs.

- Decreases in onsite training revenue of $0.6 million and $1.1 million due to COVID-19

Cost of one-time services and other remained relatively consistent during the three and nine months ended September 30, 2020, when compared to the same periods in 2019.

The 7.8% and 3.3% decreases in one-time services and other gross margin during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, were primarily the result of the reductions in one-time consulting and analytics revenue discussed above.

Operating Expenses

Sales, marketing and

customer success ($M)

Research and development ($M)

General and administrative ($M)

customer success ($M) Research and development ($M) General and administrative

Percentages indicate expenses as a percentage of total revenue

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Sales, marketing and customer success

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After temporarily freezing our hiring efforts due to COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

Sales, marketing and customer success expense decreased by $3.1 million or 5.6% , during the three months ended June 30, 2020 , when compared to the same period in 2019 , primarily driven by the following:

Increase in employee severance costs of $1.8 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above

Decrease in travel costs of $1.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

Decrease in compensation costs of $1.7 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Decrease in commissions expense of $0.7 million related to a decrease in commissionable sales.

Sales, marketing and customer success expense remained relatively consistent during the six months ended June 30, 2020 , when compared to the same period in 2019 , primarily driven by the following:

Increase in employee severance costs of $0.9 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above

Increase in compensation costs of $0.9 million primarily associated with the elevated headcount of our direct sales force and our lead generation teams, beginning in the fourth quarter of 2018.

The increase in compensation costs related to elevated headcount was partially offset by the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Decrease in travel costs of $1.4 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

Sales, marketing and customer success expense decreased by $7.0 million or 12.7%, and $6.8 million or 4.1%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, primarily driven by the following:

+ For the nine months ended September 30, 2020, increase in employee severance costs of $1.0 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above

- Decreases in compensation costs of $3.5 million and $2.6 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards;

for the three months ended September 30, 2020, compensation costs also decreased due to the reduction in sales headcount discussed above

- Decreases in travel costs of $2.1 million and $3.6 million, respectively, due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

- Decreases in commissions expense of $0.7 million and $0.9 million, respectively, related to a decrease in commissionable sales

Research and development

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We continue to make investments to delight our customers with innovative cloud solutions, which is a component of our four-point growth strategy.

Research and development expenses decreased by $1.0 million or 3.9% , and $4.5 million or 8.3% , during the three and six months ended June 30, 2020 , respectively, when compared to the same periods in 2019 , primarily driven by decreases in compensation costs of $1.8 million and $3.5 million, respectively, associated with the decision in March 2020 to replace our 2020 cash bonus plans with grants of performance-based equity awards.

Not included in research and development expense for the three months ended June 30, 2020 and 2019 were $10.6 million and $11.7 million , respectively, and for the six months ended June 30, 2020 and 2019 were $21.4 million and $22.8 million , respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

Research and development expenses decreased by $3.2 million or 12.2%, and $7.6 million or 9.5%, during the three and nine months ended September 30, 2020, respectively, when compared to the same periods in 2019, primarily driven by the following:

- Decreases in compensation costs of $2.5 million and $6.0 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

- Decreases in third-party contractor costs of $0.9 million and $1.2 million, respectively

Not included in research and development expense for the three months ended September 30, 2020 and 2019 were $10.2 million and $11.1 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $31.6 million and $33.9 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years.

We expect that the amount of software development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality and the integration of our solutions, which we believe will drive long-term revenue growth.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

General and administrative

General and administrative expense consists primarily of compensation costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

General and administrative expense increased by $1.3 million or 4.6% , during the three months ended June 30, 2020 and remained relatively consistent during the six months ended June 30, 2020 , when compared to the same periods in 2019 , primarily driven by the following:

Increases in corporate costs of $3.1 million and $3.4 million primarily related to increases in bad debt expense

Decreases in bonus expense of $1.3 million and $2.8 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely after our offices reopen.

This change is expected to create efficiencies within our real estate footprint as we shift toward more collaborative workspaces within our offices.

As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease ROU assets for certain of our office locations we expect to exit, which resulted in an increase in operating lease costs during the period.

For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in an increase in depreciation expense.

We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between $20.0 million and $25.0 million during the third and fourth quarters of 2020.

We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.

General and administrative expense increased by $5.2 million or 18.1%, and $5.3 million or 6.2%, during the three and nine months ended September 30, 2020, when compared to the same periods in 2019, primarily driven by the following:

+ Increases in real estate activity costs of $6.8 and $6.8, respectively, due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above

+ Increases in corporate costs of $2.5 million and $5.9 million, respectively, primarily related to increases in bad debt expense;

for additional details, see Note 2 of our condensed consolidated financial statements in this report

- Decreases in compensation costs of $2.0 million and $2.7 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

- Decreases in acquisition-related expenses and integration costs of $1.2 million and $3.1 million, respectively

- Decreases in third-party contractor costs of $1.0 million and $1.4 million, respectively

Restructuring

During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments, which was substantially completed as of December 2019.

During the three and six months ended June 30, 2019 , we incurred $0.7 million and $2.7 million , respectively, in before-tax restructuring charges related to these activities.

Such charges during the three and six months ended June 30, 2020 were insignificant.

During the three and nine months ended September 30, 2019, we incurred $0.4 million and $3.1 million, respectively, in before-tax restructuring charges related to these activities.

Such charges during the three and nine months ended September 30, 2020 were insignificant.

Interest Expense

Three months ended

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September 30,

(dollars in millions) 2020

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% of total revenue 1.9 % 2.3 % 1.8 % 2.4 %

The decreases in interest expense in dollars and as a percentage of total revenue during the three and six months ended June 30, 2020 , when compared to the same periods in 2019 , were primarily due to decreases in our average daily borrowings and our weighted average effective interest rates.

The decreases in interest expense in dollars and as a percentage of total revenue during the three and nine months ended September 30, 2020, when compared to the same periods in 2019, were primarily due to decreases in our average daily borrowings and our weighted average effective interest rates.

We expect our interest expense to remain relatively consistent in the near-term.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Deferred Revenue

The table below compares the components of deferred revenue from our consolidated balance sheets:

(dollars in millions)

Timing of recognition

Over the period billed in advance, generally one year

One-time services and other

As services are delivered

(dollars in millions) Timing of recognition September 30,

2020 December 31,

Recurring Over the period billed in advance,

generally one year $ 314.2 $ 302.8 3.8 %

One-time services and other As services are delivered 14.1 13.4 5.2 %

Total deferred revenue (1)

328.3 316.1 3.8 %

Long-term portion 5.8 1.8 222.0 %

Current portion (1)

$ 322.5 $ 314.3 2.6 %

(1) The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.

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We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end of the contract term.

Deferred revenue from recurring revenue contracts increased during the six months ended June 30, 2020 , primarily due a seasonal increase in customer contract renewals and new subscription sales of our cloud solutions.

Deferred revenue from recurring revenue contracts increased during the nine months ended September 30, 2020, primarily due a seasonal increase in customer contract renewals.

Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter.

Deferred revenue from one-time services and other increased during the six months ended June 30, 2020 , primarily due an increase in the mix of retained and managed services contracts we present in one-time services and other beginning January 1, 2020, as discussed above.

Deferred revenue from one-time services and other increased during the nine months ended September 30, 2020, primarily due an increase in the mix of retained and managed services contracts we present in one-time services and other beginning January 1, 2020, as discussed above.

We have acquired businesses whose net tangible assets include deferred revenue.

In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements.

In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements.

Therefore, our deferred revenue after an acquisition will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value.

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Three months ended

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September 30,

(dollars in millions) 2020

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Effective income tax rate 26.5 % 7.4 % 24.6 % 10.7 %

The increase in our effective income tax rate during the six months ended June 30, 2020 , when compared to the same period in 2019 , was primarily attributable to improved 2020 profitability and changes in jurisdictional mix and reduced 2020 non-deductible costs.

Furthermore, our 2020 effective tax rate was negatively impacted by a decrease in the total discrete benefit to income tax expense related to stock-based compensation.

The increase in our effective tax rate for the three months ended September 30, 2020, when compared to the same period in 2019, was primarily attributable to higher 2019 discrete benefits against lower pre-tax income.

The 2019 effective tax rate was positively impacted by a reduction to the liability for unrecognized tax benefits.

The effective tax rate for 2020 was positively impacted by an adjustment to the prior year tax provision net of a tax charge resulting from an increase in the U.K.

The increase in our effective tax rate for the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily attributable to a reduction in benefits attributable to stock based compensation against increased 2020 profitability.

Non-GAAP Financial Measures

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We use non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share internally in analyzing our operational performance.

Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance.

Accordingly, we

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance.

While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

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We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

Three months ended

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September 30,

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September 30,

(dollars in millions) 2020

GAAP Revenue $ 215.0 $ 221.1 (2.8) % $ 670.6 $ 662.6 1.2 %

Non-GAAP adjustments:

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Non-GAAP revenue (1)

$ 215.0 $ 221.4 (2.9) % $ 670.6 $ 664.3 1.0 %

GAAP gross profit $ 116.3 $ 119.3 (2.5) % $ 362.1 $ 360.7 0.4 %

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Employee severance — — (100.0) % 0.8 1.1 (28.3) %

12.9 12.3 5.0 % 37.8 39.3 (4.0) %

Non-GAAP gross profit (1)

$ 129.2 $ 131.6 (1.8) % $ 399.9 $ 400.0 — %

Non-GAAP gross margin 60.1 % 59.5 % 59.6 % 60.2 %

(1) The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding.

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

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September 30,

(dollars in millions, except per share amounts) 2020

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Acquisition-related expenses 0.1 0.2 (70.9) % 0.3 1.0 (72.0) %

Restructuring costs

Restructuring and other real estate activities 6.9 0.4 1,635.8 % 7.0 3.1 127.6 %

38.0 28.7 32.3 % 98.4 92.5 6.4 %

Non-GAAP income from operations (1)

$ 48.1 $ 36.6 31.4 % $ 136.5 $ 116.1 17.6 %

Non-GAAP operating margin 22.4 % 16.5 % 20.4 % 17.5 %

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Assumed non-GAAP income tax provision (2)

8.9 6.7 32.6 % 25.3 20.9 21.4 %

Non-GAAP net income (1)

$ 35.7 $ 26.9 32.6 % $ 101.3 $ 83.5 21.4 %

Shares used in computing non-GAAP diluted earnings per share 48,859,707 48,464,529 0.8 % 48,582,068 48,223,712 0.7 %

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Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment.

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(dollars in millions) 2020

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Non-GAAP free cash flow $ 51.3 $ 78.0 (34.2) %

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

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We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate.

(dollars in millions)

Three months ended

Six months ended

(dollars in millions) Three months ended

September 30,

Nine months ended

September 30,

GAAP revenue $ 215.0 $ 221.1 $ 670.6 $ 662.6

GAAP revenue growth (2.8) % 1.2 %

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Non-GAAP organic revenue (2)

$ 215.0 $ 221.4 $ 670.6 $ 664.3

Non-GAAP organic revenue growth (2.9) % 1.0 %

Non-GAAP organic revenue (2)

$ 215.0 $ 221.4 $ 670.6 $ 664.3

Foreign currency impact on Non-GAAP organic revenue (3)

(0.8) — 1.5 —

Non-GAAP organic revenue on constant currency basis (3)

$ 214.2 $ 221.4 $ 672.1 $ 664.3

Non-GAAP organic revenue growth on constant currency basis (3.2) % 1.2 %

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The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and EURO.

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

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The following table presents selected financial information about our financial position:

(dollars in millions)

(dollars in millions) September 30,

2020 December 31,

Cash and cash equivalents $ 30.6 $ 31.8 (3.9) %

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The following table presents selected financial information about our cash flows:

Six months ended June 30,

Nine months ended September 30,

(dollars in millions) 2020

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Net cash used in investing activities (57.9) (153.0) (62.2) %

Net cash (used in) provided by financing activities

Net cash used in financing activities (393.8) (144.6) 172.3 %

Our principal sources of liquidity are our operating cash flow, funds available under the 2020 Credit Facility and cash on hand.

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In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.

Second Quarter 2020 Form 10-Q

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

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employees' contributions to our 401(k) plan up to 6% of their salaries, effective with the payroll period commencing April 1, 2020;

Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since began backfilling sales positions;

• Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since began backfilling key roles, including engineering positions;

• Michael Gianoni, our President and Chief Executive Officer, elected to forego receipt of all but that portion of his base salary necessary to fund, on a pre-tax basis, his contributions to continue to participate in our health benefits plan, between April 1, 2020 and June 16, 2020;

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• On May 1, 2020, we granted PRSUs to our employees that were eligible for a 2020 cash bonus plan in lieu of such cash bonus, which may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us.

• During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen.

We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.

In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.

We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic.

We have received short-term payment relief requests as a result of COVID-19, most often in the form of payment deferral requests.

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Not all customer requests will ultimately result in modified payment terms, nor are we forgoing our contractual rights under customer agreements.

During the three and nine months ended September 30, 2020, our bad debt expense increased by $2.4 million and $5.3 million, respectively, compared to the same periods in 2019.

We are continually monitoring our customer receivable balances, payment terms, and creditworthiness for changes that could have a significant impact on the collectability of our accounts receivables, our operating results and financial position.

At June 30, 2020 , our total cash and cash equivalents balance included approximately $21.8 million of cash that was held by operations outside the U.S.

At September 30, 2020, our total cash and cash equivalents balance included approximately $17.2 million of cash that was held by operations outside the U.S.

While these funds may not be needed to fund our U.S.

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Operating Cash Flow

Net cash provided by operating activities decreased by $7.6 million during the six months ended June 30, 2020 , when compared to the same period in 2019 , primarily due to a $28.0 million decrease in cash flow from operations associated with working capital, partially offset by a $20.4 million increase in net income adjusted for non-cash expenses.

Net cash provided by operating activities decreased by $13.0 million during the nine months ended September 30, 2020, when compared to the same period in 2019, primarily due to a $45.5 million decrease in cash flow from operations associated with working capital, partially offset by a $32.5 million increase in net income adjusted for non-

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

cash expenses.

Throughout both periods, our cash flows from operations were derived principally from:

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and (ii) changes in our working capital.

The increase in net income adjusted for non-cash expenses was primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

The increase in net income adjusted for non-cash expenses was primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation in lieu of cash-based compensation.

Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue.

The decrease in cash flow from operations associated with working capital during the six months ended June 30, 2020 , when compared to the same period in 2019 , was primarily due to:

The decrease in cash flow from operations associated with working capital during the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily due to:

• an increase in current period bonus payments as a result of an increase in amounts accrued as of December 31, 2019 for over-performance against 2019 targets;

• a decrease in the current period bonus accrual due to our decision to replace cash payments for our 2020 bonus plans with performance-based equity awards;

• an increase in the aging of customer receivable balances primarily due to the COVID-19 pandemic;

• fluctuations in the timing of vendor payments.

Investing Cash Flow

Net cash used in investing activities of $27.6 million decreased by $110.9 million during the six months ended June 30, 2020 , when compared to the same period in 2019 .

During the six months ended June 30, 2019 , we used net cash of $109.4 million for our acquisition of YourCause and we did not make any similar investments during the same period in 2020.

During the six months ended June 30, 2020 , we used $21.7 million for software development costs, which was relatively consistent with cash spent during the same period in 2019 .

Net cash used in investing activities of $57.9 million decreased by $95.1 million during the nine months ended September 30, 2020, when compared to the same period in 2019.

During the nine months ended September 30, 2019, we used net cash of $109.4 million for our acquisition of YourCause and we did not make any similar investments during the same period in 2020.

During the nine months ended September 30, 2020, we used $32.0 million for software development costs, which was relatively consistent with cash spent during the same period in 2019.

We continue to invest in our innovative cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform.

We also spent $5.9 million of cash for purchases of property and equipment during the six months ended June 30, 2020 , which was relatively consistent with cash spent during the same period in 2019 .

We also spent $25.8 million of cash for purchases of property and equipment during the nine months ended September 30, 2020, which was an increase of $16.2 million when compared to the same period in 2019.

The additional cash expended was primarily used to purchase our Headquarters Facility.

Financing Cash Flow

During the six months ended June 30, 2020 , we had a net increase in borrowings of $16.9 million , down from a net increase of $58.6 million during the three months ended March 31, 2020.

Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter.

We paid $21.0 million to satisfy tax obligations of employees upon settlement of equity awards during the six months ended June 30, 2020 compared to $19.8 million during the same period in 2019 .

During the nine months ended September 30, 2020, we had a net decrease in borrowings of $23.6 million.

We paid $21.3 million to satisfy tax obligations of employees upon settlement of equity awards during the nine months ended September 30, 2020 compared to $20.3 million during the same period in 2019.

The amount of taxes paid by us on the behalf of employees related to the settlement of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement.

Most of our equity awards currently vest in our first quarter.

In addition, during the six months ended June 30, 2020 , we paid dividends of $6.0 million , down from $11.8 million during the same period of 2019 , as we discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020.

Cash used in financing activities associated with changes in restricted cash due to customers decreased $13.8 million during the six months ended June 30, 2020 when compared to the same period in 2019 , as the amount of restricted cash held and payable by us to customers as of December 31, 2019 was larger than at the same date in 2018.

In addition, during the nine months ended September 30, 2020, we paid dividends of $6.0 million, down from $17.7 million during the same period of 2019, as we discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020.

Cash used in financing activities associated with changes in restricted cash due to customers increased $121.9 million during the nine months ended September 30, 2020 when compared to the same period in 2019, as the amount of restricted cash held and payable by us to customers as of December 31, 2019 was significantly larger than at the same date in 2018 primarily due to the timing of year-end donations.

Additionally, effective August 3, 2020, a significant amount of restricted cash related to charitable giving transacted through our social responsibility and grantmaking solutions is now held and disbursed by the Blackbaud Giving Fund, an independent nonprofit organization, strategic partner of ours, and sponsoring organization for a donor advised fund.

This change was made primarily to facilitate faster tax receipts for our customers and their employees.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

2017 Credit Facility

We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions.

At June 30, 2020 , our available borrowing capacity under the 2017 Credit Facility was $190.7 million .

At September 30, 2020, our available borrowing capacity under the 2017 Credit Facility was $229.6 million.

The 2017 Credit Facility matures in June 2022.

The 2017 Credit Facility includes an option to request additional term loans in an aggregate principal amount of up to $200.0 million.

At June 30, 2020 , the carrying amount of our debt under the 2017 Credit Facility was $484.2 million .

Our average daily borrowings during the three and six months ended June 30, 2020 were $526.3 million and $508.9 million , respectively.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

At September 30, 2020, the carrying amount of our debt under the 2017 Credit Facility was $444.0 million.

Our average daily borrowings during the three and nine months ended September 30, 2020 were $472.7 million and $496.7 million, respectively.

The following is a summary of the financial covenants under the 2017 Credit Facility:

Financial Covenant

Ratio as of June 30, 2020

Net Leverage Ratio

≤ 3.50 to 1.00

Interest Coverage Ratio

≥ 2.50 to 1.00

11.88 to 1.00

Financial covenant Requirement Ratio as of September 30, 2020

Net leverage ratio ≤ 3.50 to 1.00 1.95 to 1.00

Interest coverage ratio ≥ 2.50 to 1.00 13.84 to 1.00

Under the 2017 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock.

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(i) no default or event of default shall have occurred and be continuing under the 2017 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2017 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase.

At June 30, 2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

At September 30, 2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

October 2020 refinancing

On October 30, 2020, we entered into the 2020 Credit Facility.

See Part II, Item 5.

“Other Information” for detailed information relating to the terms of the 2020 Credit Facility.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

Commitments and Contingencies

As of June 30, 2020 , we had contractual obligations with future minimum commitments as follows:

As of September 30, 2020, we had contractual obligations with future minimum commitments as follows:

Payments due by period

(in millions)

Less than 1 year

More than 5 years

(in millions) Total Less than 1

year 1-3 years 3-5 years More than 5

Recorded contractual obligations:

$ 509.6 $ 10.3 $ 442.2 $ 3.3 $ 53.8

Interest payments on debt (2)

4.0 4.0 — — —

Operating leases (3)

46.0 18.5 23.5 4.0 —

Unrecorded contractual obligations:

Interest payments on debt (4)

50.0 9.5 10.3 5.8 24.3

Purchase obligations (5)

85.9 50.6 35.2 — —

Total contractual obligations $ 695.4 $ 92.9 $ 511.3 $ 13.1 $ 78.1

(1) Represents principal payments only, under the following assumptions:

(i) that the amounts outstanding under the 2017 Credit Facility and our other debt at June 30, 2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Credit Facility for the purposes of determining minimum commitment amounts.

(i) that the amounts outstanding under the 2017 Credit Facility, our Real Estate Loans and our other debt at September 30, 2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Credit Facility for the purposes of determining minimum commitment amounts.

(2) Represents interest payment obligations related to our interest rate swap agreements.

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In certain cases, these arrangements require a minimum annual purchase commitment by us.

The term loan under the 2017 Credit Facility requires periodic principal payments.

The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022 .

The total liability for uncertain tax positions as of June 30, 2020 and December 31, 2019 , was $4.7 million and $4.3 million , respectively.

Our accrued interest and penalties related to tax positions taken on our tax returns was $1.1 million and $1.0 million as of June 30, 2020 and December 31, 2019 , respectively.

The term loan under the 2017 Credit Facility required, and the 2020 Credit Facility (as described below at Part II, Item 5.

“Other Information”) requires, periodic principal payments.

The balance of the term loans and any amounts drawn on the revolving credit loans previously were due in June 2022 under the 2017 Credit Facility and now will be due in October 2025 under the 2020 Credit Facility.

The Real Estate Loans also require periodic principal payments and the balance of the Real Estate Loans are due upon maturity in April 2038.

The total liability for uncertain tax positions as of September 30, 2020 and December 31, 2019, was $4.8 million and $4.3 million, respectively.

Our accrued interest and penalties related to tax positions taken on our tax returns was $1.1 million and $1.0 million as of September 30, 2020 and December 31, 2019, respectively.

Off-Balance Sheet Arrangements

As of June 30, 2020 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Second Quarter 2020 Form 10-Q

Blackbaud, Inc.

As of September 30, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Foreign Currency Exchange Rates

Approximately 16% of our total revenue for the six months ended June 30, 2020 was generated from operations outside the U.S.

Approximately 16% of our total revenue for the nine months ended September 30, 2020 was generated from operations outside the U.S.

We do not have significant operations in countries in which the economy is considered to be highly inflationary.

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dollars for purposes of reporting our consolidated financial results.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a loss of $10.6 million as of June 30, 2020 and a loss of $4.0 million as of December 31, 2019 .

The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a loss of $5.9 million as of September 30, 2020 and a loss of $4.0 million as of December 31, 2019.

Third Quarter 2020 Form 10-Q

Blackbaud, Inc.

The vast majority of our contracts are entered into by our U.S.

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dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S.

During the six months ended June 30, 2020 , foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S.

During the nine months ended September 30, 2020, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S.

Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S.

dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position.

For the six months ended June 30, 2020 , the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $2.3 million and $0.9 million, respectively .

For the nine months ended September 30, 2020, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $1.5 million and $0.8 million, respectively.

We will continue monitoring such exposure and take action as appropriate.

3 unchanged sentences

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2020 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 .

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2020 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Recently Issued Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis