What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-04 · 201 added, 150 removed, 333 unchanged (51% of the section changed)

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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.

Serving the industry for 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:

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COVID-19 Impact

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

The economic impact of COVID-19 on the social good industry remains uncertain, although we are beginning to see signs of recovery in the industry.

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

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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 are now once again actively evaluating 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

Acquisitions are an important element of our strategy going forward.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

3 unchanged sentences

We have talent across our company, at every level, who are aligned with these goals as well.

In support of this strategy, during the second quarter of 2021, we merged our EMG and GMG to create one U.S.

Market Group ("UMG") to better align our resources toward customer retention and growth.

For more information, see Note 13 to our condensed consolidated financial statements in this report.

Delight Customers with Innovative Cloud Solutions

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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.

For example, as arts and cultural organizations begin to open their doors, maintaining high standards for the safety and security of their patrons is a top priority;

therefore, we recently announced the general availability of Payment Terminal™.

This solution allows organizations to receive secure, contactless chip and tap payments for tickets and donations through Blackbaud Altru® and Blackbaud Merchant Services™.

Not only does this minimize staff handling of credit cards during point-of-sale, but it enables them to process payments faster than with a magnetic swipe device and helps to better protect their constituents and their organization from credit card fraud with EMV-certified card readers that offer end-to-end encryption.

During the second quarter, we also announced the general availability of Blackbaud Peer-to-Peer Fundraising™, powered by JustGiving® in Australia, New Zealand and Canada bringing this turnkey solution to even more organizations with no subscription fees or setup costs and furthering our efforts to globalize our products.

Focus on Employees, Culture and ESG Initiatives

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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.

It is something that is in our DNA 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.

We are fully committed to continuing to create a diverse and inclusive environment at all levels of the organization.

During May 2021, we held a month-long celebration of our 40th anniversary with our employees, some of whom have been around to watch our business grow from just one product to providing purpose-built solutions for the entire social good industry.

In the second quarter of 2021, we furthered our efforts to create a best-in-class candidate and employee experience with the launch of our new careers site.

This enables us to lift our social presence and visibility, create personalized experiences for candidates via artificial intelligence, reduce the time to apply, and accept applications start to finish from a mobile device.

It also enables us to leverage data analytics to better understand the talent marketplace and inform future investments.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Financial Summary

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YoY Growth (%) YoY Growth (%)

First Quarter 2021 Form 10-Q

Blackbaud, Inc.

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.

Total revenue decreased by $2.6 million and $7.0 million during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, driven largely by the following:

- Decreases 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:

Additionally, the bookings shortfalls during 2020 caused by the COVID-19 pandemic contributed to the decreases in one-time consulting revenue.

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

+ Growth in recurring revenue related to increases in contractual revenue related to the performance of our cloud software solutions and, to a lesser extent, early progress in initiatives to bring our pricing in line with the market

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Income from operations decreased by $6.5 million and $8.3 million during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, driven largely by the following:

- Increases in stock-based compensation expense of $10.4 million and $26.8 million, respectively, due to:

• Certain changes to our compensation program that are expected to cause stock-based compensation expense to remain higher than historical levels, including

◦ replacement of our annual cash bonus plans with a short-term performance-based equity award plan

◦ 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;

◦ replacement of cash sign-on and retention bonuses with time-based equity awards.

• 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;

• As a one-time response to COVID-19, replacement of our 2020 base salary merit increases with one-year time-based equity awards, which vested and were recognized as expense between May 1, 2020 and May 1, 2021;

• Overall Company performance against 2020 goals.

• 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

- Decreases in total revenue, as described above

- Increases in transaction-based costs of $1.9 million and $1.7 million, respectively, related to payment services integrated in our cloud solutions

- Increases in hosting and data center costs of $0.8 million and $1.5 million, respectively, as we continue to migrate our cloud infrastructure to leading public cloud service providers

+ Decreases in rent expense of $4.1 million and $7.2 million, respectively, 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

+ Decreases in employee severance of $3.8 million and $2.9 million, related to a modest and targeted headcount reduction during the three months ended June 30, 2020, in response to the COVID-19 pandemic

+ Decreases in amortization of intangible assets from business combinations of $1.0 million and $3.0 million, respectively

+ Decrease in compensation costs other than stock-based compensation of $13.2 million, during the six months ended June 30, 2021, primarily due to a decrease in headcount

+ Decrease in travel costs of $3.5 million, during the six months ended June 30, 2021, due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

We are continuing to make critical investments in the business in areas such as digital marketing, engineering, security, customer success and our continued shift of cloud infrastructure to leading public cloud service providers.

We expect the level of investment in these areas to increase in the second half of 2021.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Customer retention

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

For the twelve months ended 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.

For the twelve months ended June 30, 2021, approximately 92% of our customers with recurring revenue contracts were retained.

This customer retention rate is materially 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.

At June 30, 2021, our cash and cash equivalents were $28.3 million and the carrying amount of our debt under the 2020 Credit Facility was $483.1 million.

Our net leverage ratio was 1.78 to 1.00 .

First Quarter 2021 Form 10-Q

During the six months ended June 30, 2021, we generated $99.9 million in cash from operations, had a net increase in borrowings of $14.8 million, returned $58.1 million to stockholders by way of share repurchases and had aggregate cash outlays of $26.0 million for purchases of property and equipment and capitalized software development costs.

Security Incident

As discussed in Note 9 to our unaudited, condensed consolidated financial statements included in this report, we believe it is probable that total losses related to the Security Incident will ultimately exceed the limits of our insurance coverage.

However, as we are currently unable to determine when that will be the case and the approximate amount or range of any such excess, we are unable to determine the effect the Security Incident will have on our results of operations, liquidity, or financial condition.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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

Comparison of the three and six months ended June 30, 2021 and 2020

Revenue and Cost of Revenue

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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

First Quarter 2021 Form 10-Q

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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.

Recurring revenue increased by $0.7 million, or 0.3%, during the three months ended June 30, 2021, when compared to the same period in 2020, driven primarily by the following:

+ Increase in contractual recurring revenue of $2.9 million related to the performance of our cloud solutions and, to a lesser extent, early progress in initiatives to bring our pricing in line with the market, partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions

- Decrease in transactional revenue of $2.2 million primarily due to a decrease in the volume of transactions for which we process payments when compared to the elevated online charitable giving, mainly related to COVID-19, during the second quarter of 2020

Recurring revenue increased by $2.6 million, or 0.6%, during the six months ended June 30, 2021, when compared to the same period in 2020, driven primarily by the following:

+ Increase in contractual recurring revenue of $2.0 million related to the performance of our cloud solutions, partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions

+ Increase in transactional revenue of $0.6 million, primarily due to the continued shift toward virtual fundraising and online charitable giving, partially offset by the second quarter 2021 decrease in the volume of transactions for which we process payments, as discussed above

Cost of recurring revenue increased by $3.1 million, or 3.4%, and $2.4 million, or 1.3%, during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, driven primarily by the following:

+ Increases in compensation costs of $2.8 million and $4.2 million, respectively, primarily related to stock-based compensation due to the factors discussed above on page 26

+ Increases in transaction-based costs of $1.9 million and $1.7 million, respectively, related to payment services integrated in our cloud solutions

+ Increases in hosting and data center costs of $0.6 million and $1.1 million, respectively, as we continue to migrate our cloud infrastructure to leading public cloud service providers

+ Increase in third-party contractor costs of $0.8 million during the three months ended June 30, 2021;

the increase in third-party contractor costs during the six months ended June 30, 2021 was insignificant

- Decreases in amortization of software development costs of $2.6 million and $1.6 million, respectively, due to an impairment charge in Q2 2020 which did not occur during the same period in 2021

- Decreases in amortization of intangible assets from business combinations of $0.7 million and $2.5 million, respectively

Recurring gross margin decreased by 1.3% for the three months ended June 30, 2021, when compared to the same period in 2020, primarily due to the decrease in higher margin transactional revenue.

Recurring gross margin remained relatively consistent during the six months ended June 30, 2021, when compared to the same period in 2020.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

One-time services and other

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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

One-time services and other revenue decreased by $3.3 million, or 20.8%, and $9.6 million, or 27.8%, during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, driven primarily by the following:

- Decreases in one-time consulting revenue of $2.4 million and $7.1 million, respectively, due primarily to less implementation and customization services.

In line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model, 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 decreases in one-time consulting revenue.

- Decreases in one-time analytics revenue of $0.8 million and $1.8 million, respectively, as analytics are generally integrated in our cloud solutions

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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.

Cost of one-time services and other remained relatively consistent during the three months ended June 30, 2021, when compared to the same period in 2020.

Cost of one-time services and other decreased by $0.7 million, or 2.5%, during the six months ended June 30, 2021, when compared to the same period in 2020, driven primarily by a decrease in third-party contractor costs of $1.0 million due to the timing of our spending.

One-time services and other gross margin decreased by 23.2% and 29.3% during the three and six months ended June 30, 2021, respectively, when compared to the same periods 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

customer success ($M) Research and

development ($M) General and

administrative ($M)

Percentages indicate expenses as a percentage of total revenue

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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.

The enhancements we are making in our go-to-market approach are expected to significantly reduce our average customer acquisition cost as well as the related payback period 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

First Quarter 2021 Form 10-Q

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Sales, marketing and customer success expense decreased by $6.5 million, or 12.5%, and $16.4 million, or 14.9%, during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, primarily driven by the following:

- Decreases in compensation costs other than stock-based compensation of $5.4 million and $14.0 million, respectively, due to the targeted reduction in sales headcount during the second quarter of 2020, discussed above

- Decreases in allocated costs of $1.9 million and $4.4 million, respectively, 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 $2.1 million, during the six months ended June 30, 2021, due to our restriction on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020

+ Increases in stock-based compensation costs of $1.1 million and $4.0 million, respectively, due to the factors discussed above on page 26

Research and development

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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.

Research and development expenses increased by $5.3 million or 21.4%, and $9.5 million or 19.1%, during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, primarily driven by the following:

+ Increases in compensation costs of $4.8 million and $8.1 million, respectively, primarily related to stock-based compensation due to the factors discussed above on page 26

+ Decrease in software development costs of $1.9 million, during the six months ended June 30, 2021, that were required to be capitalized under the internal-use software guidance

Not included in research and development expense for the three months ended June 30, 2021 and 2020 were $10.4 million and $10.6 million, respectively, and for the six months ended June 30, 2021 and 2020 were $19.5 million and $21.4 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.

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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

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

This change has created efficiencies within our real estate footprint as we have shifted toward more collaborative workspaces within our offices.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

General and administrative expense increased by $2.2 million, or 7.3%, and $6.9 million, or 12.4%, during the three and six months ended June 30, 2021, respectively, when compared to the same periods in 2020, primarily driven by the following:

+ Increases in stock-based compensation costs of $4.1 million and $9.2 million, respectively, due to the factors discussed above on page 26

- Decreases in rent expense, net of allocated costs, of $2.0 million and $0.9 million, respectively, 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

- Decrease in third-party contractor costs of $1.5 million during the six months ended June 30, 2021

Interest Expense

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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.

The increases in interest expense in dollars and as a percentage of total revenue during the three and six months ended June 30, 2021, respectively, when compared to the same periods 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,

(dollars in millions) Timing of recognition June 30,

2021 December 31,

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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.

First Quarter 2021 Form 10-Q

Deferred revenue from recurring revenue contracts increased during the six months ended June 30, 2021, primarily due a seasonal increase in customer contract renewals and, to a lesser extent, early progress in initiatives to bring our pricing in line with the market.

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

Deferred revenue from one-time services and other

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Income tax provision

increased during the six months ended June 30, 2021, primarily due to a seasonal increase in one-time service billings during the second quarter.

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.

The decrease in our effective income tax rate for the three months ended June 30, 2021, when compared to the same period in 2020, was primarily attributable to a 2021 discrete tax benefit against lower pre-tax income.

The 2020 effective income tax rate was negatively impacted by discrete adjustments comprised of tax expense attributable to stock-based compensation and unrecognized tax benefits net of benefit attributable to deferred tax adjustment.

The 2021 effective income tax rate was positively impacted by increased tax benefit attributable to stock-based compensation offset against tax expense attributable to a corporate income tax rate increase enacted during the period against lower pre-tax income.

The increase in our effective income tax rate for the six months ended June 30, 2021 when compared to the same periods in 2020, was primarily attributable to the impact of non deductible expenses against lower pre-tax income.

Non-GAAP Financial Measures

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

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Three months ended

(dollars in millions) 2021

Six months ended

(dollars in millions, except per share amounts) 2021

GAAP Revenue $ 229.4 $ 232.0 (1.1) % $ 448.6 $ 455.6 (1.5) %

GAAP gross profit $ 121.4 $ 127.1 (4.5) % $ 237.2 $ 245.8 (3.5) %

3 unchanged sentences

Amortization of intangibles from business combinations 8.9 9.7 (8.3) % 18.0 20.6 (12.7) %

Employee severance — 0.8 (98.1) % — 0.8 (98.2) %

14.1 13.0 8.4 % 28.6 24.9 15.1 %

2 unchanged sentences

Non-GAAP gross margin 59.1 % 60.4 % 59.2 % 59.4 %

(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

Blackbaud, Inc.

Three months ended

(dollars in millions, except per share amounts) 2021

GAAP income from operations $ 13.0 $ 19.6 (33.4) % $ 19.7 $ 28.0 (29.7) %

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Restructuring and other real estate activities 0.1 0.1 136.0 % — 0.1 (90.5) %

Security Incident-related costs, net of insurance (2)

0.5 — 100.0 % 0.5 — 100.0 %

41.1 34.9 17.8 % 81.6 60.4 35.2 %

Non-GAAP income from operations (1)

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GAAP income before provision for income taxes $ 8.5 $ 16.3 (48.1) % $ 9.0 $ 21.7 (58.5) %

GAAP net (loss) income $ (0.2) $ 4.6 (103.5) %

GAAP net income $ 6.7 $ 11.8 (43.1) % $ 6.6 $ 16.5 (60.1) %

Shares used in computing GAAP diluted earnings per share 48,444,874 48,418,378 0.1 % 48,444,658 48,465,077 — %

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Non-GAAP diluted earnings per share $ 0.82 $ 0.85 (3.5) % $ 1.50 $ 1.35 11.1 %

(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.

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

(2) Includes Security Incident-related costs incurred during the three and six months ended June 30, 2021 of $11.7 million and $24.4 million, respectively, net of probable insurance recoveries during the same periods of $11.2 million and $23.9 million, respectively.

Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees, as well as settlements of customer claims.

Not included in this adjustment were costs associated with enhancements to our cybersecurity program.

(3) 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

(dollars in millions) 2021

GAAP net cash provided by (used in) operating activities $ 30.1 $ (24.5) (222.9) %

purchase of property and equipment (3.5) (2.9) 21.0 %

capitalized software development costs (9.3) (10.9) (14.9) %

Non-GAAP free cash flow $ 17.3 $ (38.3) (145.2) %

First Quarter 2021 Form 10-Q

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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(dollars in millions) Three months ended

Six months ended

GAAP revenue $ 229.4 $ 232.0 $ 448.6 $ 455.6

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

(4.4) — (6.3) —

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

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

First Quarter 2021 Form 10-Q

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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employee severance;

and restructuring and other real estate activities.

restructuring and other real estate activities;

and Security Incident-related costs, net of insurance.

Three months ended

Six months ended

(dollars in millions) 2021

GAAP net (loss) income $ (0.2) $ 4.6 (103.5) %

GAAP net income $ 6.7 $ 11.8 (43.1) % $ 6.6 $ 16.5 (60.1) %

Non-GAAP adjustments:

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8.1 10.4 (21.7) % 16.1 17.0 (5.6) %

Subtotal 26.5 26.2 1.1 %

27.4 32.7 (16.0) % 53.9 58.9 (8.4) %

Non-GAAP EBITDA (2)

$ 34.2 $ 44.5 (23.2) % $ 60.5 $ 75.3 (19.7) %

Non-GAAP EBITDA margin 14.9 % 13.5 %

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Restructuring and other real estate activities 0.1 0.1 136.0 % — 0.1 (90.5) %

Subtotal 30.9 13.8 123.4 %

Security Incident-related costs, net of insurance (3)

0.5 — 100.0 % 0.5 — 100.0 %

31.7 24.5 29.4 % 62.5 38.3 63.3 %

Adjusted Non-GAAP EBITDA (2)

$ 65.8 $ 68.9 (4.5) % $ 123.0 $ 113.6 8.3 %

Adjusted Non-GAAP EBITDA margin 28.7 % 27.4 %

Rule of 40 (4)

27.6 % 25.9 %

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

(2) The individual amounts for each year may not sum to subtotal, non-GAAP EBITDA or adjusted non-GAAP EBITDA due to rounding.

(3) Includes Security Incident-related costs incurred, net of probable insurance recoveries.

See additional details in the reconciliation of GAAP to Non-GAAP operating income above.

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

See Non-GAAP organic revenue growth table above.

First Quarter 2021 Form 10-Q

Non-GAAP free cash flow

Six months ended

(dollars in millions) 2021

GAAP net cash provided by operating activities $ 99.9 $ 37.5 166.5 %

purchase of property and equipment (6.1) (5.9) 4.1 %

capitalized software development costs (19.9) (21.7) (8.4) %

Non-GAAP free cash flow $ 73.9 $ 9.9 645.1 %

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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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.

During the second quarter of 2021, however, we experienced an increase in the amount taxes we paid 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 vested.

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.

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

(dollars in millions) March 31,

(dollars in millions) June 30,

2021 December 31,

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

Three months ended March 31,

Six months ended June 30,

(dollars in millions) 2021

Net cash provided by (used in) operating activities $ 30.1 $ (24.5) (222.9) %

Net cash provided by operating activities $ 99.9 $ 37.5 166.5 %

Net cash used in investing activities (26.0) (27.6) (5.7) %

Net cash used in financing activities (257.0) (132.5) 93.9 %

First Quarter 2021 Form 10-Q

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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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.

At June 30, 2021, our total cash and cash equivalents balance included approximately $14.4 million of cash that was held by operations outside the U.S.

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

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Operating Cash Flow

Net cash provided by operating activities 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.

Net cash provided by operating activities increased by $62.4 million during the six months ended June 30, 2021, when compared to the same period in 2020, primarily due to a $54.6 million increase in cash flow from operations associated with working capital and an $7.9 million increase in net income adjusted for non-cash expenses.

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

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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 increase in cash flow from operations associated with working capital during the six months ended June 30, 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;

• an increase in the collection of our accounts receivable balances, including early progress in initiatives to bring our pricing in line with the market;

• 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.

Net cash used in investing activities of $26.0 million decreased by $1.6 million during the six months ended June 30, 2021, when compared to the same period in 2020.

During the six months ended June 30, 2021, we used $19.9 million for software development costs, which was down $1.8 million from cash spent during the same period in 2020, primarily due to less costs qualifying for capitalization under the internal-use software accounting guidance.

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.

We also spent $6.1 million of cash for purchases of property and equipment during the six months ended June 30, 2021, which was in line with what we spent during 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

First Quarter 2021 Form 10-Q

During the six months ended June 30, 2021, we had a net increase in borrowings of $14.8 million.

We paid $38.7 million to satisfy tax obligations of employees upon settlement of equity awards during the six months ended June 30, 2021 compared to $21.0 million during the same period in 2020.

The amount of taxes paid by us on 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

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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.

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 vested in May 2021.

During the six months ended June 30, 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 $48.4 million during the six months ended June 30, 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

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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.

During the three and six months ended June 30, 2021, we purchased 405,047 and 870,868 shares for $30.0 million and $58.1 million, respectively.

The remaining amount available to purchase stock under the stock repurchase program was $150.9 million as of June 30, 2021.

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.

At June 30, 2021, our available borrowing capacity under the 2020 Credit Facility was $409.6 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.

At June 30, 2021, the carrying amount of our debt under the 2020 Credit Facility was $483.1 million.

Our average daily borrowings during the three and six months ended June 30, 2021 were $495.6 million and $492.6 million, respectively.

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

Financial covenant Requirement Ratio as of March 31, 2021

Financial covenant Requirement Ratio as of June 30, 2021

Net leverage ratio ≤ 4.00 to 1.00 1.78 to 1.00

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(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

At June 30, 2021, we were in compliance with our debt covenants under the 2020 Credit Facility.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

Commitments and Contingencies

As of March 31, 2021, we had contractual obligations with future minimum commitments as follows:

As of June 30, 2021, we had contractual obligations with future minimum commitments as follows:

Payments due by period

(in millions) Total Less than 1

(in millions) Total (1)

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

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Total contractual obligations $ 696.4 $ 63.5 $ 75.7 $ 479.4 $ 77.8

(1) The individual amounts for each period may not sum to total due to rounding.

(2) 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.

(i) that the amounts outstanding under the 2020 Credit Facility, our Real Estate Loans and our other debt at June 30, 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.

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

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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.

The total liability for uncertain tax positions as of June 30, 2021 and December 31, 2020, was $4.7 million and $4.6 million, respectively.

Our accrued interest and penalties related to tax positions taken on our tax returns was $1.2 million and $1.1 million as of June 30, 2021 and December 31, 2020, respectively.

Security Incident

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.

As of June 30, 2021, we did not have any off-balance sheet arrangements as previously defined by Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Second Quarter 2021 Form 10-Q

Blackbaud, Inc.

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.

Approximately 16% of our total revenue for the six months ended June 30, 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.

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dollars for purposes of reporting our consolidated financial results.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a gain of $3.1 million as of March 31, 2021 and a gain of $0.6 million as of December 31, 2020.

First Quarter 2021 Form 10-Q

Blackbaud, Inc.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a gain of $4.9 million as of June 30, 2021 and a gain of $0.6 million as of December 31, 2020.

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

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

During the three months ended March 31, 2021, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S.

During the six months ended June 30, 2021, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S.

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

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

For the 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.

For the six months ended June 30, 2021, the fluctuation in foreign currency exchange rates increased our total revenue and our income from operations by $6.3 million and $2.3 million, respectively.

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

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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.

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis