What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-23 compared with 2020-02-20 · 410 added, 225 removed, 424 unchanged (60% of the section changed)

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We are the world’s leading cloud software company powering social good.

Serving the entire social good community—nonprofits, foundations, companies, education institutions, healthcare organizations and individual change agents— we connect and empower organizations and individuals to increase their impact through cloud software, services, expertise and data intelligence.

Serving the entire social good community—nonprofits, higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations and individuals to increase their impact through cloud software, services, expertise and data intelligence.

Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics.

Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.

Serving the industry for nearly four decades, we are headquartered in Charleston, South Carolina, and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.

As of December 31, 2020, we had over 45,000 global customers.

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and (iv) providing professional services, including implementation, consulting, training, analytic and other services.

COVID-19 Impact

The outbreak of COVID-19 in countries across the globe, including each country in which we currently operate, has adversely impacted the U.S.

and global economies.

We began 2020 with strong execution against our financial plan.

In March 2020, we began to experience disruptions to our business from COVID-19, and the pandemic continues to impact each of our markets.

To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions.

These measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from COVID-19.

See Note 2 to our condensed consolidated financial statements in this report for a discussion of some of these actions.

In addition to the 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.

With our existing and prospective customers remaining cautious in their purchase decisions, we expect that our operating environment may continue to be challenging in 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.

2020 Form 10-K

Blackbaud, Inc.

Four-Point Growth Strategy

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It is also enabling our growing ecosystem of partners who are also passionate about social good, to extend and expand the capabilities available to our customers.

For the first time in the history of the Company, beginning in 2019, there are now significantly more outside developers developing on our platform than Blackbaud engineers.

During 2020, we continued making critical investments in research and development and increased our engineering hiring during the fourth quarter.

We also released the Blackbaud Marketplace during 2020, offering curated third-party apps, enabling organizations of all types and sizes to discover new ways to amplify their impact by enhancing their best-of-breed Blackbaud solutions with specialized capabilities like connecting bidders at fundraising auctions, tracking branded merchandise purchased in an online store or texting volunteers about an upcoming event.

The customers we serve require vertical specific business solutions to automate their operations.

In October 2019, we announced the general availability of Blackbaud Church Management™, which is already transforming the faith community technology landscape.

We now serve congregations in more than half of the 50 U.S.

states, representing all different sizes and spanning more than 13 denominations.

Bringing this solution to market is a significant step toward addressing several challenges in the faith market and a substantial opportunity for Blackbaud.

We are seeing positive momentum as more functionality continues to be released, market awareness is increasing and win rates are improving.

2019 Form 10-K

Blackbaud, Inc.

We are also seeing momentum continue to build in our Higher Education Vertical where Blackbaud powers 24 of the top 25 private U.S.

colleges as ranked by Forbes.

A year after introducing the Cloud Solution for Higher Education, we continue to drive innovation and introduce solutions taking full advantage of the rapid innovation, modern user experience, and enhanced capabilities made possible by our Blackbaud SKY platform.

We extended our industry proven Education Management portfolio up market to small-scale higher education institutions.

We are seeing strong sales momentum and look forward to seeing these customers begin to go-live in 2020.

We also recently introduced talent management capabilities as part of the Cloud Solution for Higher Education, providing institutions the first online performance tracking tool for fundraising leaders and managers, enabling transparency, proactive management and peer gift officer benchmarking.

Throughout 2020 we have remained focused on driving value and outcomes for our customers.

We reprioritized and expedited product enhancements to support our customers needs, especially in light of COVID-19 and the continued shift to virtual, digital-first operating models.

For example, we released fitness tracking integration in Blackbaud’s peer-to-peer fundraising portfolio, a new virtual prayer wall enabling congregants at houses of worship to share and respond to prayer requests online, text messaging capabilities for scholarship directors and higher education institutions to ensure no funds were going unutilized and expanded the global capabilities of YourCause CSRConnect making it easier for companies to bring employees across geographies together in support of causes around the world.

Blackbaud Peer-to-Peer Fundraising powered by JustGiving continues to gain traction.

Since the U.S.

launch in early 2019, over 1,000 customers have signed up to use the solution and roughly half of these organizations are net new customers to Blackbaud.

During 2020, we migrated everydayhero customers over to Blackbaud Peer-to-Peer Fundraising powered by JustGiving and sunset the everydayhero product as we continue to rationalize our portfolio while continuing to delight our customers with innovative cloud solutions.

Drive Sales Effectiveness

We have been investing in sales and marketing to better address our market opportunity with a focus on adding additional sales headcount, improving productivity and putting a greater focus on adding net new logos.

One way we are equipping our growing salesforce to be more effective is by investing in the necessary technology and resources to efficiently drive an increased number of quality leads and better cover our large addressable market.

We have grown our lead generation teams, which we call business development representatives, to support our growing sales teams.

We have simultaneously increased the productivity of our business development representatives with the implementation of a leading sales engagement technology platform, enabling our teams to generate more prospects, and convert those prospects into sales opportunities.

We are entering 2020 with an improved ratio of business development representatives to account executives, and the lead generation from the team has increased substantially as a result of these changes.

We have also implemented software tools to enhance our digital footprint and drive lead generation across the company.

For the first time ever, we are taking a multi-touch attribution approach to measuring the effectiveness of our marketing campaigns to drive efficiency in our go-to-market efforts and improve returns on our marketing dollars.

We have been investing in sales and marketing to better address our market opportunity with a focus on digital lead generation.

One way we are equipping our salesforce to be more effective is by investing in the necessary technology and resources to efficiently drive an increased number of quality leads and better cover our large addressable market.

We have implemented software tools to enhance our digital footprint and drive lead generation across the company.

We are taking a multi-touch attribution approach to measuring the effectiveness of our marketing campaigns to drive efficiency in our go-to-market efforts and improve returns on our marketing dollars.

This is just one of many examples of how we are optimizing our structure, tools and processes to better address our large vertical market opportunities.

We have made significant strides in laying the foundation to develop a highly productive and scalable operating model, which included significant organizational structure changes as we centralized many back-office functions and aligned our go-to-market efforts by vertical.

This transformation is now behind us, putting us in a position to drive improved productivity across our vertical sales teams.

In January 2019, we acquired YourCause, which positions us as a global leader in corporate social responsibility and employee engagement technology.

One third of Fortune 500 companies trust Blackbaud as their CSR technology partner, and in 2019 alone, YourCause solutions processed over $1 billion dollars in donations and grants which benefited over 170,000 social good organizations.

In the year since the acquisition, we have fully integrated YourCause's administrative functions into our global centers of excellence and expanded the sales team to fuel what is already a fast-growing business within the company.

Our TAM now stands at over $10 billion, and we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development.

We have also taken lessons learned throughout 2020 and re-evaluated elements of our go-to-market strategy with a digital-first mindset and we have a significant opportunity to leverage the investments into digital to reduce our customer acquisition cost and increase our sales velocity, ultimately, driving a more scalable and cost-effective go-to-market model.

We did not complete any acquisitions during 2020 as we have remained vigilantly focused on supporting our customers and employees during this time.

We remain active in the evaluation of opportunities to further expand

2020 Form 10-K

Blackbaud, Inc.

our addressable market through acquisitions and internal product development.

We believe we have significant opportunities in front of us as we are less than 10% penetrated into a total addressable market of over $10 billion.

Improve Operating Efficiency

We are also focused on operational efficiency to strengthen the business and position us for long-term success.

During 2019, we continued executing a comprehensive workplace strategy to better align our organizational objectives with our geographic footprint.

We designated Charleston, South Carolina, Austin, Texas, London, U.K.

and Sydney, Australia as our hub locations, and we have leveraged a more flexible office strategy to replace and upgrade some of our former offices and expand our footprint into new locations for customer-facing roles.

Most recently, we moved our London offices into a new flexible workspace marking a significant milestone in the integration of our Blackbaud Europe and JustGiving teams.

In 2019, we largely completed this optimization effort, and we will continue to evaluate our footprint in alignment with our global workplace strategy.

During 2020, we pivoted to place a greater emphasis on profit in alignment with the balanced approach management takes to operating the business.

As a result of the pandemic, our near term visibility into revenue growth was impacted and we took certain actions early on to ensure our near-term liquidity (as discussed above) and shifted more of our focus to profitability.

Our employees switched to working fully remote at the onset of the pandemic and the business continued operating smoothly.

This caused us to re-evaluate our workforce strategy and when employees return to the office, we expect to have more employees working remotely either part-time or full time, even within our hub locations.

As a result, we revisited our real estate strategy with a focus on optimizing our footprint for the future of work at Blackbaud, including the purchase of our LEED Gold certified Global Headquarters Facility and exit of certain office leases globally.

Our aim is optimizing our office utilization, improving our geographic sales coverage and enhancing our employees' daily experience to improve productivity and effectiveness.

Financial Summary

Total Revenue ($M) Income from Operations ($M)

YoY Growth (%) YoY Growth (%)

Total revenue increased by $12.8 million during 2020, driven largely by the following:

+ Increase in transactional revenue, including an accelerated shift toward virtual and online fundraising and charitable giving related to COVID-19

+ Increase in contractual recurring revenue related to positive demand from customers across our portfolio of cloud solutions

- Decrease in one-time consulting revenue primarily from less one-time sales related to changes in our compensation plans to place greater emphasis on subscription sales of our cloud solutions

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

2020 Form 10-K

Blackbaud, Inc.

Total Revenue ($M)

Income from Operations ($M)

YoY Growth (%)

Total revenue increased by $51.8 million during 2019 , driven largely by the following:

Growth in recurring revenue related to positive demand from customers across our portfolio of cloud solutions and, to a lesser extent, the inclusion of YourCause, an increase in services embedded in our renewable cloud solution contracts and increased sales of subscription-based contracts for retained professional services

Decline in one-time services and other revenue from our continued shift in focus towards selling cloud subscription solutions.

In general, our cloud solutions include integrated analytics, training and payment services, and require little to no customization services.

As a result, we expect that one-time services and other revenue will continue to decline and total revenue growth will continue to be negatively impacted.

Income from operations decreased by $32.3 million during 2019 , driven largely by the following:

Income from operations increased by $10.1 million during 2020, driven largely by the following:

+ Growth in total revenue, as described above

Increased investments we have made in our sales organization and innovation

Increase in stock-based compensation of $10.4 million, due to increases in the grant date fair values of our annual equity awards granted to employees over the last three years as our headcount has grown

Increase in hosting and data center costs of $5.4 million as we are migrating our cloud infrastructure to leading public cloud service providers

Increase in amortization of software development costs of $4.1 million due to investments made on innovation, quality and the integration of our cloud solutions

Increase in amortization of intangible assets from business combinations of $3.0 million

Increase in employee severance of $2.2 million related to the elimination of certain roles within the company, most of which occurred during the first quarter of 2019

Increase in rent expense of $1.8 million primarily associated with the lease of our New Headquarters Facility in Charleston, South Carolina, which commenced in April 2018

Increase in restructuring costs of $1.2 million

Customer Retention

Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter.

We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio

+ Decrease in compensation costs (excluding stock-based compensation expense) of $43.7 million primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards, which are being recognized as stock-based compensation expense between May 1, 2020 and May 1, 2021.

These awards 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

+ Decrease in travel costs of $11.0 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 $8.2 million

+ Decrease in restructuring costs of $5.6 million as our facilities optimization restructuring plan was largely completed as of December 31, 2019

+ Decrease in acquisition-related expenses and integration costs of $3.3 million

- Increase in stock-based compensation expense of $28.6 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

- Increase in real estate activity costs of $23.1 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 $6.3 million primarily related to increases in bad debt expense;

for additional details, see Note 2 to our 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

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

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

Contractual Recurring Revenue (approximately two thirds of total revenue in 2020)

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.

Our contracted recurring revenue has performed well as our renewal rate during 2020 finished favorable to our original plan.

We expect the shortfall in bookings during 2020 to put pressure on our revenue growth during 2021.

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

While we experienced an increase in our aging of receivables during the second and third quarters of 2020 primarily associated with the COVID-19 pandemic, we have seen some improvement in our customers' payment behavior since that time.

We also saw fewer of our customers go out of business during 2020 than 2019, which demonstrated the resiliency of our market.

Transactional Revenue (approximately one quarter of total revenue in 2020)

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.

During the fourth quarter, we saw our payments transaction volumes exceed our expectations due primarily to year-end giving to our customers.

For the full year, we saw the negative impact of many in-person events being postponed or canceled.

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

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

2020 Form 10-K

Blackbaud, Inc.

and maintenance customers from a perpetual license-based model to a cloud subscription delivery model.

Our first quarter has historically been the seasonal low for bookings, with the second and fourth quarters historically being seasonally higher, and our bookings tend to be back-end loaded within individual quarters given our quarterly quota plans.

During 2020, we had a significant shortfall in bookings compared to both our original plan for the year and our prior year performance, as we experienced challenges in building pipeline after the start of the pandemic.

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

We believe the current environment has put a greater emphasis on investing in digital and cloud solutions and are optimistic this may result in an increase in pipeline and bookings at some point in 2021.

Our strategy has historically relied on a balanced approach to growth and profitability.

As discussed above, the pandemic has created short-term uncertainty in our revenue outlook and the early impacts on pipeline and bookings will likely limit our ability to drive near-term revenue growth at our originally planned levels.

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.

Customer Retention

Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter.

We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a cloud subscription delivery model.

In the long term, we also anticipate an increase in recurring subscription contract renewals as we continue focusing on innovation, quality and the integration of our cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs.

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.

During 2019 and 2018 , approximately 92% of our customers with recurring revenue contracts were retained.

During 2020 and 2019, approximately 93% and 92%, respectively, of our customers with recurring revenue contracts were retained.

This customer retention rate reflects our efforts to rationalize our portfolio of solutions and migrate customers from legacy solutions towards our next generation cloud solutions.

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Balance Sheet and Cash Flow

At December 31, 2019 , our cash and cash equivalents were $31.8 million and the carrying amount of our debt under the 2017 Credit Facility (as described below) was $467.1 million .

At December 31, 2020, our cash and cash equivalents were $35.8 million and the carrying amount of our debt under the 2020 Credit Facility was $467.1 million.

Our net leverage ratio was 1.75 to 1.00.

During 2019 , we generated $182.5 million in cash flow from operations, had net cash outlays of $109.4 million , primarily for the acquisition of YourCause, returned $23.6 million to stockholders by way of dividends and had cash outlays of $58.4 million for purchases of property and equipment and capitalized software development costs.

Adoption of New Lease Accounting Standard

On January 1, 2019, we adopted ASU 2016-02, using the transition method that allowed us to initially apply the guidance at the adoption date of January 1, 2019 without adjusting comparative periods presented.

Adopting ASU 2016-02 had a material impact on our consolidated balance sheets as we recognized lease liabilities and ROU assets for those leases classified as operating leases.

The impacts of adoption are reflected in the financial information herein.

For additional information regarding the impact of our adoption of ASU 2016-02, see Notes 2 and 11 to our consolidated financial statements in this report.

During 2020, we generated $148.0 million in cash flow from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.

During 2020, we had a net increase in borrowings of $0.9 million, we returned $47.0 million to stockholders by way of share repurchases and dividends, and had cash outlays of $71.8 million for purchases of property and equipment and capitalized software development costs.

A larger amount of cash was spent on property and equipment during 2020 primarily due to the purchase of our Global Headquarters Facility.

2020 Form 10-K

Blackbaud, Inc.

Results of Operations

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See Note 16 of our consolidated financial statements in this report for additional information.

Comparison of 2019 to 2018

For information regarding the comparison of 2018 to 2017 , please refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 20, 2019.

Comparison of 2020 vs.

2019 and 2019 vs.

During 2019 and 2018, we acquired companies that provided us with strategic opportunities to expand our TAM and share of the philanthropic giving market through the integration of complementary solutions and services to serve the changing needs of our customers.

The following are the companies we acquired and their respective acquisition dates:

YourCause Holdings, LLC ("YourCause") – January 2, 2019;

Reeher LLC ("Reeher") – April 30, 2018

• YourCause Holdings, LLC ("YourCause") on January 2, 2019

• Reeher LLC ("Reeher") on April 30, 2018

We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisition.

We determined that the YourCause and Reeher acquisitions were not material business combinations;

therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented.

therefore, revenue and earnings since the acquisition dates and pro forma information are not required or presented.

See Note 3 to our consolidated financial statements in this report for a summary of these acquisitions.

2019 Form 10-K

Blackbaud, Inc.

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 (%)

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.

Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, subscription-based contracts for professional services and variable transaction revenue associated with the use of our solutions.

Cost of recurring revenue is primarily comprised of compensation costs for customer support and production IT personnel, hosting expenses, 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 continue to experience growth in sales of our cloud solutions as we meet the demand of our customers that increasingly prefer cloud subscription offerings with integrated analytics, training and payment services.

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, payment services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment services.

Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, retained and managed services contracts that we expect to have a term consistent with our cloud solution contracts, and variable transaction revenue associated with the use of our solutions.

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.

2020 Form 10-K

Blackbaud, Inc.

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.

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Recurring revenue increased by $19.1 million, or 2.3%, driven primarily by the following:

Increase in subscriptions revenue of $87.8 million related to positive demand across our portfolio of cloud solutions and, to a lesser extent, the inclusion of YourCause, an increase in services embedded in our renewable cloud solution contracts and increased sales of subscription-based retained professional services

+ Increase in transactional revenue of $18.3 million, including an accelerated shift toward virtual and online fundraising and charitable giving related to COVID-19

+ Increase in contractual recurring revenue of $15.5 million related to positive demand from customers across our portfolio of cloud solutions

- Decrease in maintenance revenue of $14.7 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

Partially offsetting contractual recurring revenue was a decrease in the mix of retained and managed services contracts we present in recurring revenue.

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 a decrease in recurring revenue and an offsetting increase to one-time services and other revenue of $16.7 million during the twelve months ended December 31, 2020.

Cost of recurring revenue increased by $11.7 million, or 3.3%, driven primarily by the following:

+ Increase in transaction-based costs of $7.5 million related to payment services integrated in our cloud solutions

Increase in compensation costs of $11.2 million, primarily attributable to an increasing portion of our resources now providing subscription-based retained services as opposed to one-time

+ Increase in amortization of software development costs of $6.8 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.

+ Increase in hosting and data center costs of $3.8 million as we are migrating our cloud infrastructure to leading public cloud service providers

Increase in third-party data and tool costs of $5.1 million

- Decrease in amortization of intangible assets from business combinations of $5.7 million

- Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards, which are being recognized as stock-based compensation expense between May 1, 2020 and May 1, 2021.

These awards 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

- 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

Recurring gross margin decreased by 0.4%, driven primarily by an increase in the mix of payments revenue, which generally have lower gross margins than our contractual recurring revenue, 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.

Recurring revenue increased by $69.4 million, or 9.1%, driven primarily by the following:

+ Increase in subscriptions revenue of $87.8 million related to positive demand across our portfolio of cloud solutions and, to a lesser extent, the inclusion of YourCause, an increase in services embedded in our renewable cloud solution contracts and increased sales of subscription-based retained professional services

- Decrease in maintenance revenue of $18.4 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

2020 Form 10-K

Blackbaud, Inc.

Cost of recurring revenue increased by $52.5 million, or 17.2%, driven primarily by the following:

+ Increase in transaction-based costs of $13.0 million, related to payment services integrated in our cloud solutions

+ Increase in compensation costs of $11.2 million, primarily attributable to an increasing portion of our resources providing subscription-based retained services as opposed to one-time

+ Increase in hosting and data center costs of $5.4 million due to the migration of our cloud infrastructure to leading public cloud service providers

+ Increase in third-party data and tool costs of $5.1 million

+ Increase in allocated corporate costs of $5.1 million primarily due to investments in corporate IT, including cyber security and increases in related headcount

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Recurring gross margin decreased by 3.0%, driven primarily by incremental costs associated with our continued shift toward selling cloud solutions and retained services, including hosting and data center costs, compensation 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 public 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 (%)

One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, as well as revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees.

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.

We expect that the shift in our go-to-market strategy towards cloud subscription offerings, which generally include integrated analytics, training and payment services, and require little to no customization services, will continue to negatively impact one-time services and other revenue.

2020 Form 10-K

Blackbaud, Inc.

One-time services and other revenue decreased by $6.3 million, or 9.2%, driven primarily by the following:

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

This change in presentation resulted in an increase to one-time services and other revenue and an offsetting decrease in recurring revenue of $16.7 million during the twelve months ended December 31, 2020.

- Decrease in one-time consulting revenue of $12.1 million primarily from less one-time sales related to changes in our compensation plans to place greater emphasis on subscription sales of our cloud solutions.

Services increasingly being embedded in our renewable cloud solution contracts also contributed to the decrease in one-time services revenue.

Our embedded services are recorded as recurring revenue.

- Decrease in one-time analytics revenue of $4.2 million as analytics are generally integrated in our cloud solutions

- Decrease in conference revenue of $3.6 million as our annual conference, bbcon, was held virtually and provided free of charge

- Decrease in onsite training revenue of $1.3 million due to COVID-19

Cost of one-time services and other decreased $2.1 million or 3.4%, primarily driven by the following:

+ Increase in compensation costs of $3.4 million primarily related to an increase in stock-based compensation expense as we replaced our 2020 cash bonus plans and annual merit-based salary increases for our employees with grants of equity awards

- Decrease of $4.2 million in costs related to providing our annual user conference, bbcon, virtually

- Insignificant decrease in travel costs due to our restriction on non-essential employee travel in response to COVID-19

One-time services and other gross margin decreased by 5.6%, primarily as the reductions in one-time consulting and analytics revenue discussed above outpaced the decrease in related costs.

One-time services and other revenue decreased by $17.6 million, or 20.4%, driven primarily by the following:

- Decrease in one-time consulting revenue of $12.6 million.

Services are increasingly embedded in our renewable cloud solution contracts and we are selling more subscription-based contracts for retained professional services.

Both our embedded services and retained services are recorded as recurring revenue.

Our embedded services are recorded as recurring revenue.

- Decrease in one-time analytics revenue of $3.8 million as analytics are generally integrated in our cloud solutions

Cost of one-time services and other decreased by $15.8 million, or 20.8%, driven primarily by a decrease in compensation costs of $13.3 million.

The decrease in compensation costs was in line with the decrease in one-time services sold and delivered as an increasing portion of our resources are now providing subscription-based retained services as opposed to one-time.

The decrease in compensation costs was in line with the decrease in one-time services sold and delivered as an increasing portion of our resources provided subscription-based retained services as opposed to one-time.

One-time services and other gross margin increased by 0.4%, as the reductions in costs of one-time services and other discussed above slightly outpaced the declines in one-time consulting revenue and analytics revenue associated with the shift in our go-to-market strategy.

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Sales, marketing and

customer success ($M)

Research and development ($M)

General and administrative ($M)

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

Percentages indicate expenses as a percentage of total revenue

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Sales, marketing and customer success expense includes compensation costs, variable sales commissions, travel-related expenses, advertising and marketing materials, public relations costs, variable reseller commissions and allocated depreciation, facilities and IT support costs.

We see a large market opportunity and continue to make investments to improve market coverage and drive sales effectiveness, which is a component of our four-point growth strategy.

We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness, which is a component of our four-point growth strategy.

We have also implemented software tools to enhance our digital footprint and drive lead generation.

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.

The enhancements we are making in our go-to-market approach are expected to significantly reduce the payback period for our customer acquisition costs while increasing sales velocity.

As a result, we do not expect our sales, marketing and customer success expense to return to pre-pandemic levels.

Sales, marketing and customer success expenses decreased by $14.4 million, or 6.4%.

The decreases in dollars and as a percentage of total revenue were primarily driven by the following:

- Decrease in compensation costs of $6.5 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards, which are being recognized as stock-based compensation expense between May 1, 2020 and May 1, 2021.

These awards 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

- Decrease in travel costs of $5.7 million due to our restriction on non-essential employee travel in response to COVID-19

- Decrease in commissions costs of $1.4 million related to a decrease in commissionable sales

Sales, marketing and customer success expenses increased by $31.3 million, or 16.2%.

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+ Increase in commission expense of $2.2 million primarily driven by an increase in commissionable sales

2020 Form 10-K

Blackbaud, Inc.

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.

We also increased engineering hiring during the fourth quarter of 2020.

Research and development expenses decreased by $6.0 million, or 5.7%.

The decreases in dollars and as a percentage of total revenue were primarily driven by the following:

- Decrease in compensation costs of $5.8 million primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards, which are being recognized as stock-based compensation expense between May 1, 2020 and May 1, 2021.

These awards 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

- Decrease in third-party contractor costs of $1.5 million

- Decrease in travel costs of $1.2 million due to our restriction on non-essential employee travel in response to COVID-19

+ Partially offset by a decrease in software development costs of $4.5 million that were required to be capitalized under the internal-use software guidance

Not included in research and development expense for 2020 and 2019 were $41.5 million and $46.0 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.

Research and development expenses increased by $7.4 million, or 7.4%, primarily driven by the following:

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+ Increases in allocations of depreciation, facilities and IT support costs of $3.5 million primarily driven by investments made in corporate IT, including cyber security and increases in related headcount

Partially offset by an increase in software development costs of $9.5 million that were required to be capitalized under the internal-use software guidance — see discussion below

2019 Form 10-K

Blackbaud, Inc.

accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

- Partially offset by an increase in software development costs of $9.5 million that were required to be capitalized under the internal-use software guidance

Not included in research and development expense for 2019 and 2018 were $46.0 million and $36.5 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.

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.

2020 Form 10-K

Blackbaud, Inc.

During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees after our offices reopen and we expect to have more employees working remotely either part-time or full time, even within our hub locations.

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 expected to exit, which resulted in an increase in operating lease costs during the third and fourth quarters of 2020.

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 incurred approximately $23.1 million of pre-tax costs related to these real estate activities during the third and fourth quarters of 2020, which we do not expect to recur in 2021.

These activities are expected to result in future annual before-tax savings of approximately $14.0 million beginning in 2021.

General and administrative expenses increased by $21.4 million, or 18.9%.

The increases in dollars and as a percentage of total revenue were primarily driven by the following:

+ Increase in real estate activity costs of $23.1 million due to our workforce strategy changes in response to COVID-19, as discussed above

+ Increase in corporate costs $5.9 million primarily related to an increase in bad debt expense;

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

- Decrease in rent expense of $4.1 million primarily related to the purchase of our Global Headquarters Facility, see Note 7 to our consolidated financial statements in this report

- Decrease in travel costs of $2.4 million due to our restriction on non-essential employee travel in response to COVID-19

- Decrease in compensation costs of $1.8 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards, which are being recognized as stock-based compensation expense between May 1, 2020 and May 1, 2021.

These awards 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

General and administrative expenses increased by $7.1 million, or 6.6%, primarily driven by the following:

+ Increase in compensation costs of $13.2 million primarily related to stock-based compensation and our acquisition of YourCause.

The increase in stock-based compensation was primarily driven by increases in the grant date fair values of our annual equity awards granted to employees over the last three years as our headcount has grown.

Decrease in acquisition-related expenses and integration costs of $3.0 million

The increase in stock-based compensation was primarily driven by increases in the grant date fair values of our annual equity awards granted to employees between 2017 and 2019 as our headcount had grown.

- Decrease in acquisition-related expenses and integration costs of $3.0 million related to our purchase of YourCause

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 modern and more collaborative workspaces with short-term financial commitments.

These workspaces are also more centrally located for our employees and closer to our customers and prospects.

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.

We substantially completed our facilities optimization restructuring plan as of December 2019.

During the years ended December 31, 2019 and 2018, we incurred $5.8 million and $4.6 million, respectively, in before-tax restructuring charges related to these activities.

Such charges during the year ended December 31, 2020 were insignificant.

Restructuring costs incurred prior to our adoption of ASU 2016-02 on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.

Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018.

See additional details below.

Restructuring costs incurred during the year ended December 31, 2019 consisted primarily of operating lease ROU asset impairment costs and, to a lesser extent, lease payments for offices we have ceased using and write-offs of facilities-related fixed assets that we will no longer use.

See Notes 11 and 6 to the consolidated financial statements for additional details regarding these impairment costs and fixed asset write-offs.

The following table summarizes our facilities optimization restructuring costs as of December 31, 2019 :

Cumulative costs incurred as of

Costs incurred during the

year ended (1)

Cumulative costs incurred as of

(in thousands)

December 31, 2018

December 31, 2019

By component:

Contract termination costs

Includes $3.8 million of operating lease ROU asset impairment costs.

As of December 31, 2019 , we have substantially completed our facilities optimization restructuring plan.

Any remaining restructuring costs related to these activities are expected to be insignificant.

The cumulative costs incurred as of December 31, 2019 of $11.2 million exceeded the estimated range previously disclosed of between $8.5 million and $9.5 million.

Based on our updated estimates during the fourth quarter about our inability to sublease certain office spaces we had previously ceased using, we recorded incremental operating lease ROU asset impairment costs as discussed above.

Restructuring costs incurred during the year ended December 31, 2019 consisted primarily of

2020 Form 10-K

Blackbaud, Inc.

restructuring activities are expected to result in improved operating efficiencies and future annual before-tax savings of between $5.0 million and $6.0 million beginning in 2020.

The change in our liability related to our facilities optimization restructuring during the twelve months ended December 31, 2019 , consisted of the following:

Increases for incurred costs (1)

upon adoption

of ASU 2016-02 (2)

(in thousands)

December 31, 2018

December 31, 2019

By component:

Contract termination costs

Includes $3.8 million of operating lease ROU asset impairment costs.

operating lease ROU asset impairment costs and, to a lesser extent, lease payments for offices we had ceased using and write-offs of facilities-related fixed assets that we would no longer use.

Interest Expense

Years ended December 31,

(dollars in millions)

(dollars in millions) 2020 Change 2019 Change 2018

Interest expense $ 17.3 (16.2) % $ 20.6 29.7 % $ 15.9

% of total revenue 1.9 % 2.3 % 1.9 %

Interest expense decreased in dollars and as a percentage of revenue during 2020, when compared to 2019, primarily due to a decrease in our average daily borrowings.

Our acquisition of YourCause in January 2019 drove the increase in borrowings during 2019 and no business acquisitions were made in 2020.

Interest expense increased during 2019, when compared to 2018, primarily due to an increase in our average daily borrowings related to our acquisition of YourCause in January 2019.

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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 December 31,

2020 December 31,

Recurring Over the period billed in advance, generally one year $ 303.8 $ 302.8 0.4 %

One-time services and other As services are delivered 13.1 13.4 (2.3) %

Total deferred revenue (1)

316.9 316.1 0.2 %

Long-term portion 4.7 1.8 159.6 %

Current portion (1)

$ 312.2 $ 314.3 (0.7) %

(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 2019 , primarily due to new subscription sales of our cloud solutions.

Our acquisition of YourCause on January 2, 2019 also modestly contributed to the increase in recurring deferred revenue since December 31, 2018.

We also sold more subscription-based contracts for retained professional services.

Deferred revenue from recurring revenue contracts as well as one-time services and other were held flat during 2020, primarily due to declines in our 2020 bookings performance compared to our budgeted expectations as a result of COVID-19.

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 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

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.

Further explanation of this impact is included below under the caption "Non-GAAP financial measures".

2020 Form 10-K

Blackbaud, Inc.

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.

Further explanation of this impact is included below under the caption "Non-GAAP financial measures".

Income tax benefit

Our income tax benefit and effective income tax rates, including the effects of period-specific events, were:

Our income tax expense (benefit) and effective income tax rates, including the effects of period-specific events, were:

Years ended December 31,

(dollars in millions) 2020 2019 2018

Income tax benefit

Income tax expense (benefit) $ 13.9 $ (1.3) $ (0.2)

Effective income tax rate 64.3 % (12.5) % (0.5) %

Our effective income tax rate may fluctuate quarterly as a result of factors, including changes in tax law in jurisdictions where we conduct business, transactions entered into, changes in the geographic distribution of our earnings or losses, and our assessment of certain tax contingencies and valuation allowances.

Our effective income tax rate may fluctuate quarterly and annually as a result of factors, including changes in tax law in jurisdictions where we conduct business, transactions entered into, changes in the geographic distribution of our earnings or losses, and our assessment of certain tax contingencies and valuation allowances.

We have deferred tax assets for federal, state, and international net operating loss carryforwards and tax credits.

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We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

The increase in our effective tax rate in 2020 when compared to 2019, was primarily due to increase in valuation allowance attributable to state tax credit carryforwards for which we do not expect to realize benefit.

Furthermore, our 2020 effective tax rate was negatively impacted by reduced benefit attributable to research tax credit and stock based compensation deduction.

Lastly, higher 2020 earnings lessened impact of other non-deductible items.

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $4.2 million and $3.9 million at December 31, 2020 and December 31, 2019, respectively.

The decrease in our effective income tax rate in 2019, when compared to 2018, was primarily due to the heightened impact of research credit generation net of Section 162(m) nondeductible compensation.

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The reduced base further magnified the impact of other nondeductible items.

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $3.9 million and $3.3 million at December 31, 2019 and December 31, 2018 , respectively.

Non-GAAP Financial Measures

The operating results analyzed below are presented on a non-GAAP basis.

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.

We use non-GAAP financial measures 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.

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Years ended December 31,

(dollars in millions)

(dollars in millions) 2020 Change 2019 Change 2018

GAAP Revenue $ 913.2 1.4 % $ 900.4 6.1 % $ 848.6

Non-GAAP adjustments:

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Non-GAAP revenue (1)

$ 913.2 1.2 % $ 902.4 6.0 % $ 851.0

GAAP gross profit $ 485.2 0.7 % $ 482.0 3.2 % $ 466.9

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Employee severance 0.9 (25.7) % 1.2 33.0 % 0.9

53.2 3.8 % 51.3 0.9 % 50.8

Non-GAAP gross profit (1)

$ 538.4 1.0 % $ 533.3 3.0 % $ 517.7

Non-GAAP gross margin 59.0 % 59.1 % 60.8 %

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Years ended December 31,

(dollars in millions, except per share amounts)

(dollars in millions, except per share amounts) 2020 Change 2019 Change 2018

GAAP income from operations $ 37.2 37.2 % $ 27.1 (54.3) % $ 59.4

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Acquisition-related expenses 0.4 (69.6) % 1.2 (59.2) % 2.8

Restructuring costs

Restructuring and other real estate activities 23.3 301.0 % 5.8 26.5 % 4.6

157.5 26.6 % 124.4 12.0 % 111.1

Non-GAAP income from operations (1)

$ 194.8 28.5 % $ 151.6 (11.1) % $ 170.5

Non-GAAP operating margin 21.3 % 16.8 % 20.0 %

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Non-GAAP adjustments:

GAAP income tax benefit

GAAP income tax provision (benefit) 13.9 (1,150.4) % (1.3) 504.1 % (0.2)

Total Non-GAAP adjustments affecting loss from operations 157.5 26.6 % 124.4 12.0 % 111.1

1 unchanged sentence

Assumed non-GAAP income tax provision (2)

35.8 32.7 % 27.0 (13.3) % 31.1

Non-GAAP net income (1)

$ 143.3 32.7 % $ 108.0 (13.3) % $ 124.6

Shares used in computing Non-GAAP diluted earnings per share 48,696,341 0.8 % 48,312,271 0.6 % 48,045,084

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(2) We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share.

2020 Form 10-K

Blackbaud, Inc.

Non-GAAP free cash flow

1 unchanged sentence

Years ended December 31,

(dollars in millions)

(dollars in millions) 2020 Change 2019 Change 2018

GAAP net cash provided by operating activities $ 148.0 (18.9) % $ 182.5 (9.4) % $ 201.4

2 unchanged sentences

Non-GAAP free cash flow $ 76.1 (38.7) % $ 124.1 (16.7) % $ 149.0

2019 Form 10-K

Blackbaud, Inc.

Non-GAAP organic revenue growth

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

2020 Form 10-K

Blackbaud, Inc.

Years ended December 31,

(dollars in millions) 2020 2019

GAAP revenue $ 913.2 $ 900.4

GAAP revenue growth 1.4 %

Non-GAAP acquisition-related revenue (1)

Non-GAAP organic revenue (2)

$ 913.2 $ 902.4

Non-GAAP organic revenue growth 1.2 %

Non-GAAP organic revenue (2)

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

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

$ 914.0 $ 902.4

Non-GAAP organic revenue growth on constant currency basis 1.3 %

GAAP recurring revenue $ 850.7 $ 831.6

GAAP recurring revenue growth 2.3 %

Non-GAAP acquisition-related revenue (1)

Non-GAAP organic recurring revenue $ 850.7 $ 833.5

Non-GAAP organic recurring revenue growth 2.1 %

(1) Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year.

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

2020 Form 10-K

Blackbaud, Inc.

Rule of 40 is defined as non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin.

Non-GAAP adjusted EBITDA is defined as GAAP net income plus interest, net;

income tax provision (benefit);

depreciation;

amortization of intangible assets from business combinations;

amortization of software development costs;

acquisition-related deferred revenue write-down;

stock-based compensation;

acquisition-related integration costs;

acquisition-related expenses;

employee severance;

and restructuring and other real estate activities.

Years ended December 31,

(dollars in millions) 2020 2019

GAAP net income $ 7.7 $ 11.9

Non-GAAP adjustments:

Interest, net 15.6 17.8

GAAP income tax provision (benefit) 13.9 (1.3)

Depreciation (1)

Amortization of intangibles from business combinations 41.9 50.1

Amortization of software development costs (2)

Subtotal 118.5 102.6

Non-GAAP EBITDA $ 126.3 $ 114.5

Non-GAAP EBITDA margin 13.8 %

Non-GAAP adjustments:

Acquisition-related deferred revenue write-down — 1.9

Stock-based compensation expense 87.3 58.6

Employee severance 4.9 4.4

Acquisition-related integration costs (0.1) 2.4

Acquisition-related expenses 0.4 1.2

Restructuring and other real estate activities 23.3 5.8

Subtotal 115.6 74.4

Adjusted Non-GAAP EBITDA $ 241.9 $ 188.8

Adjusted Non-GAAP EBITDA margin 26.5 %

Rule of 40 (3)

(1) During th e third quarter of 2020, we reduced the estimated useful lives of our operating lease right-of-use assets for certain of our office locations we expected to exit.

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

The accelerated portion of the fixed asset depreciation expense related to these activities of $4.6 million for the year ended December 31, 2020 was presented in the "Restructuring and other real estate activities" line of the reconciliation of GAAP to non-GAAP financial measures.

Total depreciation expense for the year ended December 31, 2020 was $19.2 million.

(2) Includes amortization expense related to software development costs and amortization expense from capitalized cloud computing implementation costs.

(3) Measured by non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin.

See Non-GAAP organic revenue growth table above.

Our revenues normally fluctuate as a result of certain seasonal variations in our business.

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Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures.

Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors.

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.

Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has been lower in our second quarter as compared to our third and fourth quarters.

Partially offsetting these favorable drivers

Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of

2020 Form 10-K

Blackbaud, Inc.

of cash flow from operations in our third and fourth quarters are merit-based salary increases, which are generally effective in April each year.

acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors.

Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are merit-based salary increases, which have historically been effective in April each year.

Annual merit-based salary increases are expected to return in July 2021.

In addition, deferred revenues can vary on a seasonal basis for the same reasons.

These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors.

Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards.

Liquidity and Capital Resources

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

(dollars in millions)

(dollars in millions) December 31,

2020 December 31,

Cash and cash equivalents $ 35.8 $ 31.8 12.4 %

5 unchanged sentences

Years ended December 31,

(dollars in millions)

(dollars in millions) 2020 Change 2019 Change 2018

Net cash provided by operating activities $ 148.0 (18.9) % $ 182.5 (9.4) % $ 201.4

Net cash used in investing activities (71.8) (57.0) % (167.2) (71.0) % (97.8)

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities (10.7) (109.6) % 111.2 (138.1) % (291.9)

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

Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements and market acceptance of our solutions and services.

Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures, meet our debt obligations and pay dividends.

Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends and/or repurchase our common stock.

To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital.

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

2020 Form 10-K

Blackbaud, Inc.

These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic.

Some of these actions include the following:

• Temporarily closed our offices worldwide and transitioned our employees to work remotely;

• Rescinded our previously announced policy to pay an annual dividend at a rate of $0.48 per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as our Board of Directors may otherwise determine in its sole discretion;

• Suspended our 401(k)-match program, whereby we have historically matched 50% of qualified U.S.

employees' contributions to our 401(k) plan up to 6% of their salaries, between April 1, 2020 and December 31, 2020;

• Made a discretionary matching contribution to eligible employees 401(k) plans in December 2020 totaling $1.2 million, given our financial performance during the fourth quarter;

• Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since begun 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;

• Restricted non-essential employee travel and put in place other operating cost containment actions;

• All of our employees with a base salary equal to or less than $75 thousand received financial support in the form of a one-time bonus of $1 thousand on April 30, 2020;

• On May 1, 2020, we granted RSUs to our employees that were eligible for base salary merit increases in lieu of such increases, which will vest on May 1, 2021 subject to the recipient's continued employment with us;

• 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.

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.

Most of the transactions related to these real estate activities closed during the fourth quarter of 2020 with an aggregate one-time cash outlay of $21.9 million during the third and fourth quarters of 2020.

We incurred approximately $23.1 million of pre-tax costs related to these real estate activities during the third and fourth quarters of 2020.

These activities are expected to result in future annual before-tax savings of approximately $14.0 million beginning in 2021.

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

We are evaluating each request on a case-by-case basis to assess the customer's ability to pay.

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

During 2020, our bad debt expense increased by $4.6 million, compared to 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 December 31, 2020, our total cash and cash equivalents balance included approximately $18.5 million of cash that was held outside the U.S.

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We currently do not intend or anticipate a need to repatriate our cash held outside the U.S.

2020 Form 10-K

Blackbaud, Inc.

Operating Cash Flow

During 2021, we expect our total operating cash flow to increase when compared to 2020, primarily due to:

• the replacement of our 2020 cash bonus plans with performance-based equity awards (which we expect will continue going forward);

• the one-time cash payments associated with the exit of a number of our leases in 2020 that will not recur in 2021;

• improvements to working capital management (an expected increase in trade accounts payable);

partially offset by

• an increase in the payment of payroll taxes as we deferred payments of the employer's portion of Social Security taxes during 2020 under the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act");

• the return of annual merit-based salary increases to our employees in July 2021;

• the return of our 401(k)-match program effective January 1, 2021.

Throughout 2020, 2019 and 2018, our cash flows from operations were derived principally from:

(i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, deferred income taxes, amortization of deferred financing costs and debt discount and adjustments to our provision for sales returns and allowances;

and (ii) changes in our working capital.

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

Net cash provided by operating activities decreased by $34.5 million during the year ended December 31, 2020, when compared to the same period in 2019, primarily due a $81.0 million decrease in cash flow from operations associated with working capital, partially offset by a $46.5 million increase in net income adjusted for non-cash expenses.

The decrease in cash flow from operations associated with working capital during 2020, when compared to 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 current period bonus accrual due to our decision to replace cash payments for our 2020 bonus plans with performance-based equity awards;

• a decrease in customer billings and payment collections due to the declines in our 2020 bookings performance compared to 2019 as a result of the COVID-19 pandemic;

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

• an increase in one-time cash payments associated with the exit of a number of our leases;

• fluctuations in the timing of vendor payments.

Net cash provided by operating activities decreased by $18.9 million during the year ended December 31, 2019, when compared to the same period in 2018, primarily due to a $10.8 million decrease in net income adjusted for non-cash expenses, and a decrease in cash flow from operations associated with working capital.

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Blackbaud, Inc.

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.

Cash flow from operations associated with working capital decreased $8.1 million during 2019, when compared to 2018, primarily due to:

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• fluctuations in the timing of vendor payments.

During 2020 , we expect our total operating cash flow to decrease when compared to 2019 , primarily due to the cash payout of higher 2019 accrued bonuses, a modest increase in cash payments for income taxes and the timing of vendor payments.

Investing Cash Flow

During 2021, we expect our total capital expenditures to decrease when compared to 2020, primarily due to the purchase of our Global Headquarters Facility in 2020 that will not recur in 2021.

Net cash used in investing activities of $71.8 million decreased by $95.4 million during 2020, when compared to 2019.

We spent $109.4 million for our acquisition of YourCause in 2019 and we did not make any similar investments during 2020.

We used $42.2 million for software development costs, which was down $4.7 million from cash spent during 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 $29.7 million of cash for purchases of property and equipment during 2020, which was up $18.2 million from cash spent in 2019.

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

Net cash used in investing activities of $167.2 million increased by $69.4 million during 2019, when compared to 2018.

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We also spent $11.5 million of cash for purchases of property and equipment during 2019, which was down $3.2 million from cash spent in 2018.

The higher cash outlays for property and equipment during 2018 was primarily driven by leasehold improvements for our New Headquarters Facility in Charleston, South Carolina.

During 2020 , we expect our total capital expenditures to increase when compared to 2019 , which includes purchases of property and equipment and estimated cash outlays for capitalized software development costs.

Refer to the commitments and contingencies subsection below for future minimum commitments related to purchase obligations.

The higher cash outlays for property and equipment during 2018 was primarily driven by leasehold improvements for our Global Headquarters Facility.

Financing Cash Flow

During 2019 , we had a net increase in borrowings of $79.5 million , which was primarily attributable to our acquisition of YourCause, compared to a net decrease in borrowings of $51.6 million in 2018 .

During 2020, we had a net increase in borrowings of $0.9 million, compared to a net increase in borrowings of $79.5 million in 2019, which was primarily attributable to our acquisition of YourCause.

During 2020, we spent $41.0 million on repurchases of our common stock (see additional details below regarding our stock repurchase program).

In addition, during 2020, we paid dividends of $6.0 million, which was down compared to 2019, as we discontinued the declaration and payment of all cash dividends beginning with the second quarter of 2020.

We paid $21.4 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2020 compared to $23.8 million during 2019.

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

The amount of taxes paid by us on behalf of employees related to the settlement or exercise of equity awards varies from period to period based upon the timing of grants and vesting, employee exercise decisions, 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.

2020 Form 10-K

Blackbaud, Inc.

Cash flow from financing activities associated with changes in restricted cash due to customers decreased $16.6 million during 2020, when compared to 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 better support our YourCause CSR Connect and YourCause Grants Connect solutions.

During 2019, we had a net increase in borrowings of $79.5 million, which was primarily attributable to our acquisition of YourCause, compared to a net decrease in borrowings of $51.6 million in 2018.

We paid $23.8 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2019 compared to $27.7 million during 2018.

In addition, during 2019, we paid dividends of $23.6 million, which was relatively consistent with 2018.

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The amount of restricted cash held and payable by us to customers as of December 31, 2017 was significantly larger than at the same date in 2018 primarily due to the timing of year-end donations.

Stock repurchase program

In November 2020, our Board of Directors reauthorized and expanded a stock repurchase program that authorizes us to purchase up to $250.0 million of our outstanding shares of common stock.

The program does not have an expiration date.

Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in privately negotiated transactions.

The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities.

The repurchase program may be limited, suspended or discontinued at any time without prior notice.

During the year ended December 31, 2020, we purchased 714,000 shares for $41.0 million.

Between January 1, 2021 and February 19, 2021, we repurchased an additional 465,821 shares for $28.1 million.

2020 Credit Facility

In June 2017 , we entered into a five -year $700.0 million senior credit facility (the " 2017 Credit Facility ).

Upon closing, we drew $300.0 million on a term loan and $110.0 million in revolving credit loans, which was used to repay all amounts outstanding under our previous credit facility and for other general corporate purposes.

2019 Form 10-K

Blackbaud, Inc.

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

In October 2020, we entered into a 5-year $900.0 million Amended and Restated Credit Agreement (the “2020 Credit Facility”).

Upon closing, we drew $400.0 million on a term loan and used the proceeds to repay the outstanding principal balance of the term loan under the previous credit facility, and repay $124.4 million of outstanding revolving credit loans under the previous credit facility.

Historically, we have drawn on our credit facility from time to time to help us meet financial needs primarily due to the seasonality of our cash flows from operations and financing for business acquisitions.

At December 31, 2020, our available borrowing capacity under the 2020 Credit Facility was $429.3 million.

The 2017 Credit Facility matures in June 2022 .

The 2020 Credit Facility matures in October 2025.

At December 31, 2020, the carrying amount of our debt under the 2020 Credit Facility was $467.1 million.

Our average daily borrowings were $482.4 million during 2020.

Following is a summary of the financial covenants under our credit facility:

Financial Covenant

Ratio as of December 31, 2019

Net Leverage Ratio

≤ 3.50 to 1.00

Interest Coverage Ratio

≥ 2.50 to 1.00

Following is a summary of the financial covenants under the 2020 Credit Facility:

Financial Covenant Requirement Ratio as of December 31, 2020

Net Leverage Ratio ≤ 4.00 to 1.00 1.75 to 1.00

Interest Coverage Ratio ≥ 2.50 to 1.00 15.95 to 1.00

2020 Form 10-K

Blackbaud, Inc.

Under the 2020 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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At December 31, 2020, we were in compliance with our debt covenants under the 2020 Credit Facility.

YourCause Acquisition

In January 2019, we acquired YourCause for $157.7 million in cash, net of closing adjustments.

On January 2, 2019 , we drew down a revolving credit loan under the 2017 Credit Facility to finance the acquisition.

2019 Form 10-K

Blackbaud, Inc.

Commitments and Contingencies

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Payments due by period

(in millions)

Less than 1 year

More than 5 years

(in millions) Total (1)

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

Recorded contractual obligations:

$ 534.2 $ 12.8 $ 25.0 $ 443.0 $ 53.4

Operating leases (3)

29.5 10.4 10.2 5.1 3.8

Interest payments on debt (4)

4.5 3.4 1.1 — —

Unrecorded contractual obligations:

Purchase obligations (5)

94.8 59.1 34.6 1.0 —

Interest payments on debt (6)

79.5 11.5 23.4 21.0 23.6

Total contractual obligations (1)

$ 742.5 $ 97.2 $ 94.3 $ 470.2 $ 80.8

(1) The individual amounts for each obligation may not sum to total or total contractual obligations due to rounding.

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

(i) that the amounts outstanding under the 2017 Credit Facility at December 31, 2019 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Revolving Facility for the purposes of determining minimum commitment amounts.

(i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at December 31, 2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2020 Revolving Facility for the purposes of determining minimum commitment amounts.

(3) Our commitments related to operating leases have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements and the amount representing imputed interest of $2.8 million.

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(6) The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions described in (2) above.

Represents principal payments only for our other debt as described in Note 9 to our consolidated financial statements included in this report.

The term loan under the 2020 Credit Facility and our other debt require 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 balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2020 Credit Facility in October 2025.

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 December 31, 2020 and December 31, 2019, was $4.6 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 December 31, 2020 and 2019, respectively.

In February 2020 , our Board of Directors approved our annual dividend rate of $0.48 per share to be made in quarterly payments.

Dividends at this annual rate would aggregate to $24.0 million assuming 50.0 million shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason.

Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2017 Credit Facility , general economic conditions and our ability to generate adequate operating cash flow.

On February 10, 2020 , our Board of Directors declared a first quarter dividend of $0.12 per share payable on March 13, 2020 to stockholders of record on February 28, 2020 .

Off-Balance Sheet Arrangements

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dollars for purposes of reporting our consolidated financial results.

The accumulated currency translation adjustment, recorded within other comprehensive loss as a component of stockholders’ equity, was a loss of $4.0 million and $6.6 million as of December 31, 2019 and December 31, 2018 , respectively.

The accumulated currency translation adjustment, recorded within other comprehensive loss as a component of stockholders’ equity, was a gain of $0.6 million as of December 31, 2020 and a loss of $4.0 million as of December 31, 2019.

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 revenues and expenses denominated in non-U.S.

During 2019 , foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S.

During 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, the impact has generally not been material to our consolidated results of operations or financial position.

During 2019 , the fluctuation in foreign currency exchange rates reduced our total revenue by $5.8 million and our income from operations by $1.3 million .

During 2020, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $0.8 million and $0.7 million, respectively.

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

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Actual results could materially differ from any of our estimates under different assumptions or conditions.

Our significant accounting policies are discussed in Note 2 of our consolidated financial statements in this report.

Our significant accounting policies are discussed in Note 2 to our consolidated financial statements in this report.

We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

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Revenue Recognition

Judgments and Uncertainties