BLACKBAUD INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the condensed consolidated financial statements and related notes which are primarily denominated in thousands of dollars. Executive Summary We are the world’s leading cloud software company powering social good. 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 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 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. Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; (ii) providing payment and other transactional-type services; (iii) providing software maintenance and support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services. COVID-19 Impact The economic impact of COVID-19 on the social good industry remains uncertain. If our existing and prospective customers remain cautious in their purchase decisions, our operating environment may continue to be challenging for the remainder of 2021 and potentially beyond. Notwithstanding these conditions, we remain focused on continuing to execute our four-point strategy and strengthening our leadership position. As expected and previously disclosed, our bookings shortfalls that began at the start of the pandemic in March 2020 are putting pressure on our contractual recurring revenue growth in the near-term. However, we are optimistic this pressure will abate as we progress through 2021. We had a solid bookings performance in the first quarter of 2021, which was favorable to our plan and our first quarter 2020 bookings performance. Four-Point Strategy 1 Expand Total Addressable Market 2 Lead with World Class Teams and Operations 3 Delight Customers with Innovative Cloud Solutions 4 Focus on Employees, Culture and ESG Initiatives 1. Expand Total Addressable Market ("TAM") We remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development. We have significant opportunities in front of us as we are less than 10% penetrated into a TAM of over $10 billion. First Quarter 2021 Form 10-Q 21 Table of Contents Blackbaud, Inc. (Unaudited) 2. Lead with World Class Teams and Operations This strategy expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40 (see discussion of Non-GAAP Financial Measures below). We have a strong executive team that is delivering on our mission and executing on our strategy. We have talent across our company, at every level, who are aligned with these goals as well. 3. Delight Customers with Innovative Cloud Solutions 2020 required unprecedented speed and scale to support our customers, and we were quick to reprioritize and expedite product enhancements to support our customers' changing needs as they needed to operate more digitally. We have carried that momentum into 2021. For example, we upgraded virtually all of our Blackbaud Grantmaking customers to a new SKY UX version in just one month's time. This helps alleviate our customers' IT burden, improves data security with multi-factor authentication and provides freedom and flexibility to access advanced grant management technology anywhere via any browser on any device. With more veteran grantmakers using mobile technology and a younger generation of grantmakers emerging in the philanthropic community, providing convenient access to grant data and grant management tools will continue to be critical for success. Blackbaud plays a critical role in accelerating our customers' move to the cloud. In higher education, with the COVID-19 pandemic accelerating the need for powerful cloud-based systems that allow for easier collaboration, Blackbaud CRM has been the trusted CRM solution for a growing number of institutions to support their overall advancement needs. 4. Focus on Employees, Culture and ESG Initiatives During the first quarter of 2021, we elevated a specific strategy focused on employees, culture and ESG initiatives. This is not new for us. It is something that has been in our DNA for a long time and is a big advantage as we look to attract and retain top talent. This is evident in our 2020 social responsibility report, which was released in April 2021, and demonstrates how we responded to the unique challenges the pandemic created for our employees, customers, and communities. We also expanded this year's report to include voluntary ESG reporting disclosures that align with the Sustainability Accounting Standards Board and Global Reporting Initiative. One highlight from the report is that the Company is comprised of 46% female employees and 54% male employees, which is an industry-leading ratio. We are fully committed to continuing to create a diverse and inclusive environment at all levels of the organization. Financial Summary Total revenue ($M) Income from operations ($M) YoY Growth (%) YoY Growth (%) 22 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Total revenue decreased by $4.4 million during the three months ended March 31, 2021, when compared to the same period in 2020, driven largely by the following: - Decrease in one-time consulting revenue due primarily to less implementation and customization services. We changed our commission plans during the first quarter of 2020 to intentionally shift our sales teams' focus towards selling our cloud solutions. Additionally, the bookings shortfalls during 2020 caused by the COVID-19 pandemic contributed to the decrease in one-time consulting revenue. - Decrease in one-time analytics revenue as analytics are generally integrated in our cloud solutions + Growth in recurring revenue related to an increase in transactional revenue related to charitable giving Income from operations decreased by $1.8 million during the three months ended March 31, 2021, when compared to the same period in 2020, driven largely by the following: - Increase in stock-based compensation costs of $16.4 million due to: • replacement of our annual cash bonus plans with a short-term performance-based equity award plan; • increases in the grant date fair values of our annual equity awards granted to employees; • in response to COVID-19, replacement of our 2020 base salary merit increases with one-year time-based equity awards; • overall Company performance against 2020 goals; and • decrease in the vesting period for our annual long-term incentive time-based equity awards from 4 years (1/4 per year) to 3 years (1/3 per year), beginning in February 2021. - Decrease in total revenue, as described above + Decrease in compensation costs other than stock-based compensation of $12.7 million primarily due to a decrease in headcount + Decrease in travel costs of $3.6 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic + Decrease in amortization of intangible assets from business combinations of $2.0 million 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. For the twelve months ended March 31, 2021, approximately 93% of our customers with recurring revenue contracts were retained. This customer retention rate is unchanged from our rate for the full year ended December 31, 2020. Balance sheet and cash flow At March 31, 2021, our cash and cash equivalents were $27.8 million and the carrying amount of our debt under the 2020 Credit Facility was $488.8 million. Our net leverage ratio was 1.79 to 1.00 . First Quarter 2021 Form 10-Q 23 Table of Contents Blackbaud, Inc. (Unaudited) During the three months ended March 31, 2021, we generated $30.1 million in cash from operations, had a net increase in borrowings of $21.0 million, returned $28.1 million to stockholders by way of share repurchases and had aggregate cash outlays of $12.8 million for purchases of property and equipment and capitalized software development costs. Results of Operations Comparison of the three months ended March 31, 2021 and 2020 Revenue and Cost of Revenue Recurring Revenue ($M) Cost of revenue ($M) Gross profit ($M) and gross margin (%) YoY Growth (%) YoY Growth (%) Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services. 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. Our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services. Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter. We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth. Recurring revenue increased by $1.9 million or 0.9%, during the three months ended March 31, 2021, when compared to the same period in 2020, driven primarily by the following: + Increase in transactional revenue of $2.8 million, primarily due to the continued shift toward virtual and online fundraising and charitable giving - Decrease in contractual recurring revenue of $0.9 million largely due to a decrease in maintenance revenue related to our continuing efforts to migrate customers from legacy on-premises solutions onto our cloud solutions as well as the bookings shortfalls during 2020 resulting from COVID-19 24 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Cost of recurring revenue decreased by $0.7 million or 0.8%, during the three months ended March 31, 2021, when compared to the same period in 2020, driven primarily by the following: - Decrease in amortization of intangible assets from business combinations of $1.7 million - Decreases in allocated facilities costs related to efficiencies in our real estate footprint, and third-party contractor costs + Increase in compensation costs of $1.3 million primarily related to stock-based compensation due to the factors discussed above on page 23 + Increase in amortization of software development costs of $1.0 million due to investments made on innovation, quality and the integration of our cloud solutions Recurring gross margin increased by 0.7% for the three months ended March 31, 2021, when compared to the same period in 2020, primarily due to the increase in recurring revenue slightly outpacing the decrease in related costs. One-time services and other Revenue ($M) Cost of revenue ($M) Gross profit ($M) and gross margin (%) YoY Growth (%) YoY Growth (%) One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts, revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees. Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, other costs incurred in providing onsite customer training, third-party contractor expenses, data expense incurred to perform one-time analytic services, third-party software royalties, costs of user conferences, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations. One-time services and other revenue decreased by $6.3 million, or 33.7%, during the three months ended March 31, 2021, when compared to the same period in 2020, driven primarily by the following: - Decrease in one-time consulting revenue of $4.7 million due primarily to less implementation and customization services. We changed our commission plans during the first quarter of 2020 to intentionally shift our sales teams' focus towards selling our cloud solutions. Additionally, the bookings shortfalls during 2020 caused by the COVID-19 pandemic contributed to the decrease in one-time consulting revenue. - Decrease in one-time analytics revenue of $1.0 million as analytics are generally integrated in our cloud solutions First Quarter 2021 Form 10-Q 25 Table of Contents Blackbaud, Inc. (Unaudited) Cost of one-time services and other decreased by $0.8 million, or 5.2%, during the three months ended March 31, 2021, when compared to the same periods in 2020, driven primarily by the following: - Decrease in compensation costs other than stock-based compensation of $1.3 million largely due to a decrease in headcount - Decrease in third-party contractor costs of $0.7 million primarily due to the timing of our spending + Increase in stock-based compensation costs of $2.6 million due to the factors discussed above on page 23 One-time services and other gross margin decreased by 35.1% during the three months ended March 31, 2021, respectively, when compared to the same period in 2020, primarily due to the significant reductions in one-time consulting and analytics revenue discussed above. Operating Expenses Sales, marketing and customer success ($M) Research and development ($M) General and administrative ($M) Percentages indicate expenses as a percentage of total revenue Sales, marketing and customer success 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 in the long-term and will continue to make investments to drive sales effectiveness. 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 of 2020, 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 expense decreased by $9.9 million or 16.9%, during the three months ended March 31, 2021, respectively, when compared to the same period in 2020, primarily driven by the following: - Decrease in compensation costs other than stock-based compensation of $8.6 million due to the targeted reduction in sales headcount during the second quarter of 2020, discussed above - Decrease in allocated costs of $2.5 million primarily related to a decrease in rent expense and the impact of the targeted reduction in sales headcount during the second quarter of 2020, as discussed above - Decrease in travel costs of $2.2 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic + Increase in stock-based compensation costs of $2.9 million due to the factors discussed above on page 23 26 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Research and development Research and development expense includes compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs. We continue to make investments to delight our customers with innovative cloud solutions, which is a component of our four-point strategy. We increased engineering hiring beginning in the fourth quarter of 2020. Research and development expenses increased by $4.2 million or 16.8%, during the three months ended March 31, 2021, when compared to the same period in 2020, primarily driven by the following: + Increase in compensation costs of $3.3 million primarily related to stock-based compensation due to the factors discussed above on page 23 + Decrease in software development costs of $1.7 million that were required to be capitalized under the internal-use software guidance, primarily due to lower engineering headcount Not included in research and development expense for the three months ended March 31, 2021 and 2020 were $9.1 million and $10.8 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. 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. 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. During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility to 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. General and administrative expense increased by $4.7 million or 18.3%, during the three months ended March 31, 2021, when compared to the same period in 2020, primarily driven by the following: + Increase in stock-based compensation costs of $5.1 million due to the factors discussed above on page 23 + Increase in corporate costs of $2.2 million primarily related to increases in third-party consulting fees and insurance costs - Decrease in rent expense of $3.0 million primarily related to the purchase of our global headquarters facility during the third quarter of 2020 and our exit of certain other office leases globally during the second half of 2020 in-line with our new workforce strategy, discussed above First Quarter 2021 Form 10-Q 27 Table of Contents Blackbaud, Inc. (Unaudited) Interest Expense Interest expense ($M) Percentages indicate expenses as a percentage of total revenue The increase in interest expense in dollars and as a percentage of total revenue during the three months ended March 31, 2021, when compared to the same period in 2020, was primarily due to the Real Estate Loans assumed for the purchase of our global headquarters facility in August 2020 and the deferred financing costs and debt discount associated with the 2020 Credit Facility, which was entered into in October 2020. Deferred Revenue The table below compares the components of deferred revenue from our consolidated balance sheets: (dollars in millions) Timing of recognition March 31, 2021 December 31, 2020 Change Recurring Over the period billed in advance, generally one year $ 278.0 $ 303.8 (8.5) % One-time services and other As services are delivered 16.5 13.1 26.4 % Total deferred revenue (1) 294.5 316.9 (7.1) % Less: Long-term portion 4.5 4.7 (3.9) % Current portion (1) $ 290.0 $ 312.2 (7.1) % (1) The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding. To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. Our recurring revenue contracts are generally for a term of three years at contract inception, billed annually in advance, and non-cancelable. We have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end each one-year period. Deferred revenue from recurring revenue contracts decreased during the three months ended March 31, 2021, primarily due a seasonal decrease in customer contract renewals. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter, which generally results in our lowest balance of deferred revenue at the end of our first quarter. Deferred revenue from one-time services and other increased during the three months ended March 31, 2021, primarily due to increased bookings during the fourth quarter of 2020 and the first quarter of 2021. 28 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Income tax provision Income tax provision ($M) Percentages indicate effective income tax rates The increase in our effective income tax rate for the three months ended March 31, 2021, when compared to the same period in 2020, was primarily attributable to higher 2021 discrete tax expense against lower pre-tax income. The 2020 effective income tax rate was positively impacted by benefits attributable to stock-based compensation. The 2021 effective income tax rate was negatively impacted by tax expense attributable to stock-based compensation against lower pre-tax income. Non-GAAP Financial Measures The operating results analyzed below are presented on a non-GAAP basis. 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. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. Three months ended March 31, (dollars in millions) 2021 2020 Change GAAP gross profit $ 115.8 $ 118.8 (2.5) % GAAP gross margin 52.8 % 53.1 % Non-GAAP adjustments: Add: Stock-based compensation expense 5.4 0.9 519.4 % Add: Amortization of intangibles from business combinations 9.1 10.9 (16.5) % Subtotal (1) 14.5 11.8 22.5 % Non-GAAP gross profit (1) $ 130.3 $ 130.6 (0.2) % Non-GAAP gross margin 59.4 % 58.4 % (1) The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding. First Quarter 2021 Form 10-Q 29 Table of Contents Blackbaud, Inc. (Unaudited) Three months ended March 31, (dollars in millions, except per share amounts) 2021 2020 Change GAAP income from operations $ 6.6 $ 8.4 (21.1) % GAAP operating margin 3.0 % 3.8 % Non-GAAP adjustments: Add: Stock-based compensation expense 30.0 13.6 120.9 % Add: Amortization of intangibles from business combinations 9.7 11.7 (17.1) % Add: Employee severance 1.0 0.1 921.6 % Add: Acquisition-related integration costs (0.1) — 206.3 % Add: Acquisition-related expenses 0.1 0.1 (53.2) % Add: Restructuring and other real estate activities (0.1) — (562.5) % Subtotal (1) 40.5 25.5 59.1 % Non-GAAP income from operations (1) $ 47.2 $ 33.9 39.1 % Non-GAAP operating margin 21.5 % 15.2 % GAAP income before provision for income taxes $ 0.5 $ 5.3 (90.3) % GAAP net (loss) income $ (0.2) $ 4.6 (103.5) % Shares used in computing GAAP diluted earnings per share 47,363,197 48,455,751 (2.3) % GAAP diluted earnings per share $ — $ 0.10 (100.0) % Non-GAAP adjustments: Add: GAAP income tax provision 0.7 0.7 (1.7) % Add: Total non-GAAP adjustments affecting income from operations 40.5 25.5 59.1 % Non-GAAP income before provision for income taxes 41.0 30.8 33.2 % Assumed non-GAAP income tax provision (2) 8.2 6.2 33.2 % Non-GAAP net income (1) $ 32.8 $ 24.7 33.2 % Shares used in computing non-GAAP diluted earnings per share 48,387,042 48,455,751 (0.1) % Non-GAAP diluted earnings per share $ 0.68 $ 0.51 33.3 % (1) The individual amounts for each year may not sum to subtotal, non-GAAP income from operations or non-GAAP net income due to rounding. (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. Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment. Three months ended March 31, (dollars in millions) 2021 2020 Change GAAP net cash provided by (used in) operating activities $ 30.1 $ (24.5) (222.9) % Less: purchase of property and equipment (3.5) (2.9) 21.0 % Less: capitalized software development costs (9.3) (10.9) (14.9) % Non-GAAP free cash flow $ 17.3 $ (38.3) (145.2) % 30 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Non-GAAP organic revenue growth In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP organic recurring revenue growth, in analyzing our operating performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and they include the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate. (dollars in millions) Three months ended March 31, 2021 2020 GAAP revenue $ 219.2 $ 223.6 GAAP revenue growth (2.0) % Add: Non-GAAP acquisition-related revenue (1) — — Non-GAAP organic revenue (2) $ 219.2 $ 223.6 Non-GAAP organic revenue growth (2.0) % Non-GAAP organic revenue (2) $ 219.2 $ 223.6 Foreign currency impact on Non-GAAP organic revenue (3) (2.0) — Non-GAAP organic revenue on constant currency basis (3) $ 217.2 $ 223.6 Non-GAAP organic revenue growth on constant currency basis (2.9) % GAAP recurring revenue $ 206.8 $ 204.9 GAAP recurring revenue growth 0.9 % Add: Non-GAAP acquisition-related revenue (1) — — Non-GAAP organic recurring revenue $ 206.8 $ 204.9 Non-GAAP organic recurring revenue growth 0.9 % (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. For companies, if any, acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies. (2) Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated. (3) To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and EURO. First Quarter 2021 Form 10-Q 31 Table of Contents Blackbaud, Inc. (Unaudited) Rule of 40 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. Three months ended March 31, (dollars in millions) 2021 2020 Change GAAP net (loss) income $ (0.2) $ 4.6 (103.5) % Non-GAAP adjustments: Add: Interest, net 5.0 3.6 36.4 % Add: GAAP income tax provision 0.7 0.7 (1.7) % Add: Depreciation 3.2 3.5 (9.3) % Add: Amortization of intangibles from business combinations 9.7 11.7 (17.1) % Add: Amortization of software development costs (1) 8.0 6.7 19.3 % Subtotal 26.5 26.2 1.1 % Non-GAAP EBITDA $ 26.3 $ 30.9 (14.7) % Non-GAAP EBITDA margin 12.0 % 13.8 % Non-GAAP adjustments: Add: Stock-based compensation expense 30.0 13.6 120.9 % Add: Employee severance 1.0 0.1 921.6 % Add: Acquisition-related integration costs (0.1) — 206.3 % Add: Acquisition-related expenses 0.1 0.1 (53.2) % Add: Restructuring and other real estate activities (0.1) — (562.5) % Subtotal 30.9 13.8 123.4 % Adjusted Non-GAAP EBITDA $ 57.2 $ 44.7 28.0 % Adjusted Non-GAAP EBITDA margin 26.1 % Rule of 40 (2) 24.1 % (1) Includes amortization expense related to software development costs and amortization expense from capitalized cloud computing implementation costs. (2) Measured by non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. See Non-GAAP organic revenue growth table above. 32 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Seasonality Our revenues normally fluctuate as a result of certain seasonal variations in our business. 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. 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. Our transactional revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. 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. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the fourth quarter historically achieving the highest total revenue. 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, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with 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 of cash flow from operations in our third and fourth quarters are base salary merit increases, which were replaced in 2020 with performance-based equity awards due to COVID-19, but are expected to return in July 2021. In addition, deferred revenues can vary on a seasonal basis for the same reasons. 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. During the second quarter of 2021, we expect an increase in the amount taxes we pay on behalf of our employees related to the settlement of equity awards when compared to the same period in 2020, as the equity granted in May 2020 in lieu of cash bonus plans and base salary merit increases will vest. 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, the COVID-19 pandemic or other factors. Liquidity and Capital Resources The following table presents selected financial information about our financial position: (dollars in millions) March 31, 2021 December 31, 2020 Change Cash and cash equivalents $ 27.8 $ 35.8 (22.4) % Property and equipment, net 105.1 105.2 (0.1) % Software development costs, net 113.6 111.8 1.6 % Total carrying value of debt 550.8 531.0 3.7 % Working capital (180.9) (194.3) 6.9 % The following table presents selected financial information about our cash flows: Three months ended March 31, (dollars in millions) 2021 2020 Change Net cash provided by (used in) operating activities $ 30.1 $ (24.5) (222.9) % Net cash used in investing activities (12.8) (13.8) (7.5) % Net cash used in financing activities (379.6) (278.9) 36.1 % First Quarter 2021 Form 10-Q 33 Table of Contents Blackbaud, Inc. (Unaudited) Our principal sources of liquidity are our 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, market acceptance of our solutions and services and our customers' ability to pay. 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 and meet our debt obligations. 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. At March 31, 2021, our total cash and cash equivalents balance included approximately $16.6 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S. Operating Cash Flow Net cash provided by operating activities increased by $54.6 million during the three months ended March 31, 2021, when compared to the same period in 2020, primarily due to a $46.6 million increase in cash flow from operations associated with working capital and an $8.0 million increase in net income adjusted for non-cash expenses. Throughout both periods, 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, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales returns; and (ii) changes in our working capital. Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. The increase in cash flow from operations associated with working capital during the three months ended March 31, 2021, when compared to the sa me period in 2020, was primarily due to: • the payment of our 2019 cash bonus plans in 2020 and the replacement of our 2020 cash bonus plans with performance-based equity awards (which we expect will continue going forward); • an increase in the collection of customer receivable balances; and • fluctuations in the timing of vendor payments. Investing Cash Flow Net cash used in investing activities of $12.8 million decreased by $1.0 million during the three months ended March 31, 2021, when compared to the same period in 2020. During the three months ended March 31, 2021, we used $9.3 million for software development costs, which was down $1.6 million from cash spent during the same period in 2020, primarily due to lower engineering headcount. We increased engineering hiring beginning in the fourth quarter of 2020 and continue to invest in our innovative cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform. We also spent $3.5 million of cash for purchases of property and equipment during the three months ended March 31, 2021, which was an increase of $0.6 million when compared to the same period in 2020. Financing Cash Flow During the three months ended March 31, 2021, we had a net increase in borrowings of $21.0 million. We paid $18.4 million to satisfy tax obligations of employees upon settlement of equity awards during the three months ended March 31, 2021 compared to $19.8 million during the same period in 2020. The amount of taxes paid by us on the behalf of employees related to the settlement of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement. While most of our equity awards currently vest in our first quarter, the equity awards that we granted in May 2020 to replace our 2020 cash bonus plans and base salary merit increases will vest in May 2021. During the three months 34 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) ended March 31, 2020, we paid dividends of $6.0 million and we did not pay dividends during the same period in 2021, as we discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020. Cash used in financing activities associated with changes in restricted cash due to customers increased $42.5 million during the three months ended March 31, 2021 when compared to the same period in 2020, as the amount of restricted cash held and payable by us to customers as of December 31, 2020 was larger than at the same date in 2019 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 three months ended March 31, 2021, we purchased 465,821 shares for $28.1 million. 2020 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 March 31, 2021, our available borrowing capacity under the 2020 Credit Facility was $406.0 million. The 2020 Credit Facility matures in October 2025. At March 31, 2021, the carrying amount of our debt under the 2020 Credit Facility was $488.8 million. Our average daily borrowings during the three months ended March 31, 2021 were $489.5 million. The following is a summary of the financial covenants under the 2020 Credit Facility: Financial covenant Requirement Ratio as of March 31, 2021 Net leverage ratio ≤ 4.00 to 1.00 1.79 to 1.00 Interest coverage ratio ≥ 2.50 to 1.00 16.44 to 1.00 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. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2020 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2020 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At March 31, 2021, we were in compliance with our debt covenants under the 2020 Credit Facility. First Quarter 2021 Form 10-Q 35 Table of Contents Blackbaud, Inc. (Unaudited) Commitments and Contingencies As of March 31, 2021, we had contractual obligations with future minimum commitments as follows: Payments due by period (in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years Recorded contractual obligations: Debt (1) $ 553.5 $ 12.9 $ 23.4 $ 464.4 $ 52.9 Interest payments on debt (2) 2.6 2.2 0.3 — — Operating leases (3) 25.6 8.1 9.3 4.6 3.5 Unrecorded contractual obligations: Interest payments on debt (4) 78.9 11.9 24.9 19.2 22.9 Purchase obligations (5) 79.0 56.6 22.4 — — Total contractual obligations $ 739.6 $ 91.8 $ 80.3 $ 488.2 $ 79.3 (1) Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2020 Credit Facility, our Real Estate Loans and our other debt at March 31, 2021 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2020 Credit Facility for the purposes of determining minimum commitment amounts. (2) Represents interest payment obligations related to our interest rate swap agreements. (3) Our commitments related to operating leases have not been reduced by sublease income, incentive payments and reimbursement of leasehold improvements. (4) 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 (1) above. (5) We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. 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 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 March 31, 2021 and December 31, 2020, was $4.6 million and $4.6 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was $1.1 million and $1.1 million as of March 31, 2021 and December 31, 2020, respectively. Off-Balance Sheet Arrangements As of March 31, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Foreign Currency Exchange Rates Approximately 15% of our total revenue for the three months ended March 31, 2021 was generated from operations outside the U.S. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a gain of $3.1 million as of March 31, 2021 and a gain of $0.6 million as of December 31, 2020. 36 First Quarter 2021 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the three months ended March 31, 2021, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the three months ended March 31, 2021, the fluctuation in foreign currency exchange rates increased our total revenue and our income from operations by $2.0 million and $0.7 million, respectively. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP. Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2021 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Recently Issued Accounting Pronouncements For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 to our condensed consolidated financial statements in this report.