What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-23 · 362 added, 346 removed, 488 unchanged (59% of the section changed)

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

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

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

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

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 (CSR) and environmental, social and governance (ESG), school management, ticketing, grantmaking, financial management, payment processing and analytics.

Serving the industry for more than four decades, we are a remote-first company headquartered in Charleston, South Carolina, with operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.

During 2021, we had nearly 40,000 customers with contractual billing arrangements and nearly 100,000 customers that paid us through transactional fees.

Through our customers and our solutions, we support millions of users and we connect millions of supporters to over 150,000 organizations and causes in over 100 countries.

Our revenue is primarily generated from the following sources:

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COVID-19 Impact

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

and global economies.

We began 2020 with strong execution against our financial plan.

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

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

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

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

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

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

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

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

2020 Form 10-K

Blackbaud, Inc.

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

We believe the COVID-19 pandemic has accelerated the shift to a digital-first world.

The percentage of giving done online grew by approximately 40% in 2020 with roughly a quarter of that giving taking place on mobile devices.

If our existing and prospective customers remain cautious in their purchase decisions, our operating environment may continue to be challenging.

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

Four-Point Growth Strategy

1 Delight Customers with Innovative Cloud Solutions

2 Drive Sales Effectiveness

1 Expand Total Addressable Market

4 Improve Operating Efficiency

2 Lead with World Class Teams and Operations

3 Delight Customers with Innovative Cloud Solutions

This strategy reflects our relentless focus on driving value and outcomes for our customers through our solutions.

Blackbaud SKY®, our platform for cloud innovation, is a core tenant of this strategy and continues to power an elevated level of innovation by our engineers.

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

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

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

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

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

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

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

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

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

Drive Sales Effectiveness

4 Focus on Employees, Culture and ESG Initiatives

In December 2021, we doubled our TAM when we acquired EVERFI, an industry leader in global social impact technology.

Adding EVERFI advances our position as a leader in the rapidly evolving ESG and CSR spaces and offers cross-selling and upselling opportunities through complementary product offerings with YourCause solutions.

Our TAM now stands at over $20 billion, and we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development.

2021 Form 10-K

Blackbaud, Inc.

Lead with World Class Teams and Operations

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

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

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

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

We remain active in the evaluation of opportunities to further expand

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

Delight Customers with Innovative Cloud Solutions

This strategy reflects our relentless focus on driving value and outcomes for our customers through our solutions.

Blackbaud SKY®, our platform for cloud innovation, is a core tenant of this strategy and continues to power an elevated level of innovation by our engineers.

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

During 2021, we continued making critical investments in research and development.

Through our commitment to giving customers the flexibility to benefit, not just from Blackbaud's innovation, but the innovation happening outside of our walls, we developed more tools designed to create new capabilities that extend Blackbaud solutions.

We now have over 6,000 non-Blackbaud developers registered in our ecosystem and we have seen substantial growth in the Blackbaud marketplace, where over 6,500 organizations have found a curated app to help them work smarter.

Some of the use cases we have seen in the market include:

an app that integrates Shopify with Raiser's Edge NXT and a new API integrating YourCause with Workday, enabling our customers to easily connect employee data into the YourCause platform for more effective employee engagement.

We have also enabled non developers with low-code or no-code tools, such as our Microsoft Power Platform connector, to build automated workflows with our APIs without having to be seasoned developers, and we continue to innovate as online gifts become a greater share of our customers' total donations.

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

In 2021, we released a variety of enhancements enabling them to maximize their time, team, and relationships, including substantial updates to Blackbaud Grantmaking and a significant release for accounts receivable functionality in Blackbaud Financial Edge NXT is now with early adopters.

Focus on Employees, Culture and ESG Initiatives

During the first quarter of 2021, we elevated a specific strategy focused on our employees, culture and ESG initiatives.

This is not new for us.

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.

Early in 2021, we established an ESG Steering Committee with our CEO as the executive sponsor, and Board of Directors involvement.

During the first quarter of 2021, we also joined the United Nations Global Compact.

Building on our culture of innovation, we launched a new ideation initiative called "Imagine Week," inviting employees across the globe to pitch their ideas directly to the executive leadership team.

Employees at every level and length of tenure in the company made proposals ranging from fundraising to customer service improvements.

These ideas are making their way into our go-forward plans.

In addition, we recently decided, effective in December 2021, to permanently close our fixed office locations (with the exception of our global headquarters facility in Charleston, South Carolina) to align our real estate footprint with our transition to a remote-first workforce.

We enter into arrangements for smaller more flexible workspaces where necessary.

This decision did not include EVERFI's office locations.

2021 Form 10-K

Blackbaud, Inc.

our addressable market through acquisitions and internal product development.

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

Improve Operating Efficiency

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

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

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

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

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

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

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

Financial Summary

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Total revenue increased by $14.5 million during 2021, driven largely by the following:

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

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

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

+ Growth in recurring revenue related to increase in transactional revenue from the continued shift toward virtual fundraising and online charitable giving and, to a lesser extent, early progress in initiatives to bring our pricing in line with the market;

also included in the increase in recurring revenue is an increase related to fluctuations in foreign currency exchange rates of $8.6 million

- Decrease in one-time consulting revenue 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.

Our cloud subscription offerings generally require less implementation and customization services.

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

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 44.

2021 Form 10-K

Blackbaud, Inc.

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

+ Growth in total revenue, as described above

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

These awards may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

+ Decrease in travel costs of $11.0 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

Income from operations decreased by $12.3 million during 2021, driven largely by the following:

- Increase in stock-based compensation expense of $33.1 million 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;

• Overall Company performance against 2020 and 2021 goals.

- Increase in transaction-based costs of $9.6 million related to payment services integrated in our cloud solutions

- Increases in third-party contractor and hosting costs of $6.9 million and $3.4 million, respectively, as we continue to migrate our cloud infrastructure to leading public cloud service providers and invest in security

- Increase in corporate costs of $3.5 million primarily related to increases in third-party consulting fees and insurance costs, partially offset by a decrease in bad debt expense

- Increase in marketing costs of $3.5 million primarily due to investments in digital marketing and, to a lesser extent, incremental spending on advertising campaigns

- Increase in acquisition-related expenses and integration costs of $2.8 million

+ Increase in total revenue, as described above

+ Decrease in real estate activity costs of $11.2 million due to our workforce strategy changes made in the third quarter of 2020

+ Decrease in rent expense of $9.2 million 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 the changes to our workforce strategy at that time

+ Decrease in amortization of intangible assets from business combinations of $4.8 million

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

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

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

- Increase in real estate activity costs of $23.1 million due to our workforce strategy changes in response to the COVID-19 pandemic.

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

- Increase in corporate costs of $6.3 million primarily related to increases in bad debt expense;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

+ Decrease in compensation costs other than stock-based compensation of $3.5 million primarily due to a decrease in headcount, partially offset by base salary merit increases in July 2021 and the return of our 401(k)-match program effective January 1, 2021

+ Decrease in travel costs of $3.5 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic

+ Decrease in employee severance of $3.4 million, related to a modest and targeted headcount reduction during the three months ended June 30, 2020, 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.

While we are making good progress, some of these investments have pushed into early 2022, particularly in areas where we are increasing headcount.

2021 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

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

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

Customer retention

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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.

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

During 2021 and 2020, approximately 93% of our customers with recurring revenue contracts were retained.

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

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Our net leverage ratio was 3.31 to 1.00.

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

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

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

During 2021, we generated $213.7 million in cash flow from operations and had a net increase in borrowings of $429.2 million, which was primarily used to finance our acquisition of EVERFI on December 31, 2021.

Additionally, we returned $108.4 million to stockholders by way of share repurchases and had aggregate cash outlays of $52.2 million for purchases of property and equipment and capitalized software development costs.

Security Incident update

As discussed in Note 11 to our consolidated financial statements included in this report, total costs related to the Security Incident have exceeded the limit of our insurance coverage during the first quarter of 2022.

Accordingly, we expect that the Security Incident will negatively impact our GAAP profitability and GAAP cash flow for the foreseeable future (see discussion regarding non-GAAP adjusted free cash flow on page 51).

For full year 2022, we currently expect net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

In line with our policy, legal fees, are expensed as incurred.

We have not recorded a liability for a loss contingency related to the Security Incident as of December 31, 2021 because we are unable at this time to reasonably estimate the possible loss or range of loss.

2021 Form 10-K

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

• EVERFI, Inc.

("EVERFI") on December 31, 2021

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

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

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

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

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

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

In accordance with applicable accounting rules, we determined that the impact of the EVERFI and YourCause acquisitions were not material to our consolidated financial statements;

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

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

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YoY Growth (%) YoY Growth (%)

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

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

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Recurring revenue increased by $30.1 million, or 3.5%, driven primarily by the following:

+ Increase in transactional revenue of $20.0 million primarily due to the continued shift toward virtual fundraising and online charitable giving;

also included in the increase in transactional revenue is an increase related to fluctuations in foreign currency exchange rates of $4.7 million

+ Increase in contractual recurring revenue of $10.1 million related to the performance of our cloud solutions and 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;

also included in the increase in contractual recurring revenue is an increase related to fluctuations in foreign currency exchange rates of $3.9 million

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 44.

Cost of recurring revenue increased by $21.1 million, or 5.7%, driven primarily by the following:

+ Increase in compensation costs of $10.3 million primarily related to stock-based compensation due to the factors discussed above on page 36 and a shift in resources historically supporting one-time services and other towards recurring revenue

+ Increase in transaction-based costs of $9.6 million related to payment services integrated in our cloud solutions

+ Increase in third-party contractor and hosting costs of $7.8 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security

- Decrease in amortization of intangible assets from business combinations of $3.7 million

- Decrease in rent expense of $1.3 million largely due to a decrease in leased hardware, including servers, network gear and storage

- Decrease in amortization of software development costs of $0.8 million

Recurring gross margin decreased by 0.9% primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.

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

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

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- Decrease in maintenance revenue of $14.7 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

2021 Form 10-K

Blackbaud, Inc.

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

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

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

These awards may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

These awards were earned and became eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

Recurring gross margin decreased by 0.4%, driven primarily by an increase in the mix of payments revenue, which generally have lower gross margins than our contractual recurring revenue, the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs.

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

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

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

- Decrease in maintenance revenue of $18.4 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

2020 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

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

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

Recurring gross margin decreased by 3.0%, driven primarily by incremental costs associated with our continued shift toward selling cloud solutions and retained services, including hosting and data center costs, compensation costs and amortization of software development costs.

One-time services and other

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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.

2021 Form 10-K

Blackbaud, Inc.

One-time services and other revenue decreased by $15.6 million, or 24.9%, driven primarily by the following:

- Decrease in one-time consulting revenue of $10.5 million 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.

Our cloud subscription offerings generally require less implementation and customization services.

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

- Decrease in onsite training revenue of $0.7 million due to COVID-19

Cost of one-time services and other decreased $6.0 million or 10.3%, primarily driven by the following:

- Decrease in allocated costs of $2.0 million primarily related to a decrease in rent expense, as discussed below in General and Administrative

- Decrease in third-party contractor costs of $1.5 million, primarily due to a decrease in partners delivering services

- Decrease in compensation costs other than stock-based compensation of $1.1 million largely due to a decrease in headcount, as well as a shift in resources historically supporting one-time services and other towards recurring revenue

- Decreases in amortization intangible assets from business combinations and employee severance

One-time services and other gross margin decreased by 18.3%, primarily due to the significant reductions in one-time consulting and analytics revenue discussed.

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

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

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

2021 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

Our embedded services are recorded as recurring revenue.

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

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

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

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

2020 Form 10-K

Blackbaud, Inc.

Operating Expenses

Sales, marketing and

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

customer success ($M) Research and

development ($M) General and

administrative ($M)

Percentages indicate expenses as a percentage of total revenue

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

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

We 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, 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.

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 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.

2021 Form 10-K

Blackbaud, Inc.

Sales, marketing and customer success expenses decreased by $23.4 million, or 11.2%.

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

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

These awards may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

- Decrease in compensation costs other than stock-based compensation of $20.7 million primarily due to the targeted reduction in sales headcount during the second quarter of 2020, as discussed above

- Decrease in allocated costs of $7.0 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 $1.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020

- Decrease in commissions expense of $1.9 million related to a decrease in overall commissionable bookings during 2020 due to the COVID-19 pandemic and a decrease in commissionable one-time services and other bookings during 2021

+ Increase in stock-based compensation costs of $4.8 million due to the factors discussed beginning on page 36

+ Increase in advertising costs of $3.5 million primarily due to incremental spending on advertising campaigns and investments in digital marketing

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

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

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

These awards were earned and became eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

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

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

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.

Research and development expense increased by $24.4 million, or 24.4%.

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

+ Increase in compensation costs of $21.2 million primarily associated with our efforts beginning in the second half of 2018 to increase our direct sales force as well as incremental headcount associated with the inclusion of YourCause.

As a result, our direct sales headcount increased 8% during 2019.

+ Increases in allocated corporate costs of $7.0 million primarily driven by investments made in corporate IT, including cyber security and increases in related headcount

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

+ Increase in compensation costs of $18.9 million primarily related to our increased engineering hiring and, to a lesser extent, stock-based compensation due to the factors discussed above on page 36

+ Increase in third-party contractor costs of $3.5 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security

+ Decrease in software development costs of $2.1 million that were required to be capitalized under the internal-use software guidance

2021 Form 10-K

Blackbaud, Inc.

Research and development

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

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

Not included in research and development expense for 2021 and 2020 were $39.4 million and $41.5 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

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, security and the integration of our solutions, which we believe will drive long-term revenue growth.

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

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

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

These awards may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

These awards were earned and became eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

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Not included in research and development expense for 2020 and 2019 were $41.5 million and $46.0 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

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

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

+ Increase in compensation costs of $11.6 million primarily associated with the inclusion of YourCause's engineering resources

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

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

Not included in research and development expense for 2019 and 2018 were $46.0 million and $36.5 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

General and administrative

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

2020 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

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

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

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

In October 2021, we made the decision to permanently close our fixed office locations (with the exception of our global headquarters facility in Charleston, South Carolina), effective in December 2021.

This change was intended to align our real estate footprint with our transition to a remote-first workforce.

We enter into arrangements for smaller more flexible workspaces where ne cessary.

As a result, during the three months ended December 31, 2021, we reduced the estimated useful lives of our operating lease ROU assets for certain of our office locations we expected to exit, which resulted in incremental operating lease costs during the fourth quarter of 2021.

For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in incremental depreciation expense during the fourth quarter of 2021.

During the three months ended December 31, 2021, we also recorded impairments of op erating lease ROU assets and certain facilities-related fixed assets we have ceased using as a result of our adjusted workforce strategy.

These impairment charges are reflected in general and administrative expense.

We incurred approximately $12.5 million of pre-tax costs related to these real estate activities during the fourth quarter of 2021.

2021 Form 10-K

Blackbaud, Inc.

General and administrative expenses increased by $11.4 million, or 8.5%.

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

+ Increase in stock-based compensation costs of $13.2 million due to the factors discussed above on page 36

+ Increase in compensation expense, excluding stock-based compensation costs, of $4.3 million due to base salary merit increases on July 2021, as well as an increase in headcount

+ Increase in corporate costs of $3.9 million primarily related to increases in third-party consulting fees and insurance costs, partially offset by decreases in bad debt expense

+ Increases in amortization expense of capitalized cloud computing implementation costs and third-party contractor costs of $1.0 million and $0.6 million, respectively

- Decrease in real estate activity costs of $7.7 million due to our workforce strategy changes made in the third quarter of 2020

- Decrease in rent expense, net of allocated costs, of $2.4 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 changes to our workforce strategy at that time

- Decreases in depreciation expense and travel costs of $1.9 million and $0.9 million, respectively

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

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

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

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

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

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

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

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

These awards may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

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

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

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

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

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

These awards were earned and became eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us

Restructuring

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

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

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

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

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

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

During the year ended December 31, 2019, we incurred $5.8 million, in before-tax restructuring charges related to these activities.

Such charges during the years ended December 31, 2021 and 2020 were insignificant.

Restructuring costs incurred prior to our adoption of ASU 2016-02 Leases (Topic 842) ("ASU 2016-02") on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.

2021 Form 10-K

Blackbaud, Inc.

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

Interest Expense

Years ended December 31,

(dollars in millions) 2020 Change 2019 Change 2018

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

Interest Expense

% of total revenue 1.9 % 2.3 % 1.9 %

Interest expense ($M)

Percentages indicate expenses as a percentage of total revenue

Interest expense increased during 2021 when compared to 2020, 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.

We expect interest expense as well as interest expense as a percentage of total revenue to increase in 2022 as a result of our acquisition of EVERFI in December 2021.

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

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

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

Deferred Revenue

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

2021 Form 10-K

Blackbaud, Inc.

To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue.

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

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

Deferred revenue from recurring revenue contracts as well as one-time services and other increased during 2021, primarily due to the inclusion of EVERFI deferred revenue balances and, to a much lesser extent, early progress in initiatives to bring our pricing in line with the market.

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

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

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

Prior to our adoption of Accounting Standards Update ("ASU") 2021-08 Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08") effective October 1, 2021 (See Note 2 to our consolidated financial statements in this report) , and in accordance with historical GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements.

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

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

2020 Form 10-K

Blackbaud, Inc.

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

Years ended December 31,

(dollars in millions) 2020 2019 2018

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

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

Income tax provision (benefit) ($M)

Percentages indicate effective income tax rates

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

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The possible decrease could result from the expiration of statutes of limitations.

The reasonably possible decrease at December 31, 2020 was $1.1 million.

The reasonably possible decrease at December 31, 2021 was insignificant.

2021 Form 10-K

Blackbaud, Inc.

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

The decrease in our effective income tax rate in 2021 when compared to 2020, was primarily due to prior year increase in valuation allowance attributable to state tax credit carryforwards for which we do not expect to realize benefit.

Furthermore, our 2021 effective income tax rate was positively impacted by increased benefit attributable to stock-based compensation deduction and a reduction to unrecognized tax benefit as a result of IRS audit settlement and statute of limitation lapses offset against negative impacts of the U.K.-enacted tax rate increase and increase in non-deductible compensation.

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $3.2 million and $4.2 million at December 31, 2021 and December 31, 2020, respectively.

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

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

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

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

Furthermore, the 2019 effective tax rate was favorably impacted by other state tax credits net of an overall increase to uncertain tax positions.

Lastly, the effective tax rate was negatively impacted by Global Intangible Low-Tax Income ("GILTI"), net of Foreign-Derived Intangible Income ("FDII") benefit, resulting from an increase in non-US earnings.

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

Non-GAAP Financial Measures

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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.

2020 Form 10-K

Blackbaud, Inc.

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

In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled.

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

The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.

Prior to our adoption of ASU 2021-08 effective October 1, 2021 (See Note 2 to our consolidated financial statements in this report) and in accordance with historical GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled.

Therefore, our GAAP revenues after the historical acquisitions did not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value.

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.

2021 Form 10-K

Blackbaud, Inc.

Years ended December 31,

(dollars in millions) 2020 Change 2019 Change 2018

(dollars in millions, except per share amounts) 2021 Change 2020 Change 2019

GAAP Revenue $ 927.7 1.6 % $ 913.2 1.4 % $ 900.4

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Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Non-GAAP revenue (2)

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Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Stock-based compensation expense 20.0 49.2 % 13.4 297.3 % 3.4

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Non-GAAP gross margin 58.1 % 59.0 % 59.1 %

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

2020 Form 10-K

Blackbaud, Inc.

Years ended December 31,

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

GAAP income from operations $ 24.9 (33.1) % $ 37.2 37.2 % $ 27.1

2 unchanged sentences

Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Stock-based compensation expense 120.4 38.0 % 87.3 48.8 % 58.6

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Restructuring and other real estate activities 12.1 (48.0) % 23.3 301.0 % 5.8

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

1.8 100.0 % — — % —

175.9 11.7 % 157.5 26.6 % 124.4

Non-GAAP income from operations (2)

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Non-GAAP diluted earnings per share $ 3.04 3.4 % $ 2.94 31.3 % $ 2.24

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

(1) We early adopted ASU 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers in the fourth quarter of 2021.

See Note 2 for additional details.

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

(3) Includes Security Incident-related costs incurred during the twelve months ended December 31, 2021 of $40.6 million net of probable insurance recoveries during the same period of $38.7 million.

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.

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

1 unchanged sentence

Blackbaud, Inc.

Non-GAAP free cash flow

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.

Years ended December 31,

(dollars in millions) 2020 Change 2019 Change 2018

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

purchase of property and equipment (29.7) 158.4 % (11.5) (21.9) % (14.7)

capitalized software development costs (42.2) (10.1) % (46.9) 24.6 % (37.6)

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

Non-GAAP organic revenue growth

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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.

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

2020 Form 10-K

Blackbaud, Inc.

As a result of our adoption of ASU 2021-08 effective October 1, 2021 (See Note 2 to our consolidated financial statements in this report), o ur calculations of non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP organic recurring revenue growth, will no longer include the non-GAAP revenue attributable to acquired companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by historical GAAP.

Years ended December 31,

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(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 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 current period 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.

10 unchanged sentences

amortization of software development costs;

acquisition-related deferred revenue write-down;

stock-based compensation;

2 unchanged sentences

employee severance;

and restructuring and other real estate activities.

restructuring and other real estate activities;

and Security Incident-related costs.

Years ended December 31,

3 unchanged sentences

Interest, net 17.6 15.6

GAAP income tax provision (benefit) 13.9 (1.3)

GAAP income tax (benefit) provision 1.4 13.9

Depreciation (1)

1 unchanged sentence

Amortization of software development costs (2)

Subtotal 118.5 102.6

Non-GAAP EBITDA (3)

$ 107.2 $ 126.3

Non-GAAP EBITDA margin 11.6 %

Non-GAAP adjustments:

Acquisition-related deferred revenue write-down — 1.9

Stock-based compensation expense 120.4 87.3

3 unchanged sentences

Restructuring and other real estate activities 12.1 23.3

Subtotal 115.6 74.4

Security Incident-related costs, net of insurance (4)

Adjusted Non-GAAP EBITDA (3)

$ 246.1 $ 241.9

Adjusted Non-GAAP EBITDA margin 26.5 %

Rule of 40 (5)

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

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

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

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

Non-GAAP adjusted EBITDA 246.1 241.9

Foreign currency impact on Non-GAAP adjusted EBITDA (6)

Non-GAAP adjusted EBITDA on constant currency basis (6)

Non-GAAP adjusted EBITDA margin on constant currency basis 26.4 %

Rule of 40 on constant currency basis (7)

(1) During the third quarter of 2020 and the fourth quarter of 2021, we reduced the estimated useful lives of our operating lease right-of-use assets for certain of our office locations we expected to exit.

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

The accelerated portions of the fixed asset depreciation expense related to these activities of $1.7 million and $3.2 million for the three months ended December 31, 2021 and 2020, respectively, and $1.7 million and $4.6 million for the twelve months ended December 31, 2021 and 2020, respectively, was presented in the "Restructuring and other real estate activities" line of the reconciliation of GAAP to non-GAAP financial measures.

Total depreciation expense was $4.9 million and $6.9 million, for the three months ended December 31, 2021 and 2020, respectively, and $14.4 million and $19.2 million for the twelve months ended December 31, 2021 and 2020, respectively.

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

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

(4) 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.

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

See Non-GAAP organic revenue growth table above.

(6) To determine non-GAAP adjusted EBITDA on a constant currency basis, non-GAAP adjusted EBITDA 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.

(7) Measured by non-GAAP organic revenue growth on constant currency basis plus non-GAAP adjusted EBITDA margin on constant currency basis.

2021 Form 10-K

Blackbaud, Inc.

Non-GAAP free cash flow

Years ended December 31,

(dollars in millions) 2021 Change 2020 Change 2019

GAAP net cash provided by operating activities $ 213.7 44.4 % $ 148.0 (18.9) % $ 182.5

purchase of property and equipment (11.7) (60.7) % (29.7) 158.4 % (11.5)

capitalized software development costs (40.5) (4.0) % (42.2) (10.1) % (46.9)

Non-GAAP free cash flow $ 161.5 112.2 % $ 76.1 (38.7) % $ 124.1

During 2022, in order to provide a meaningful basis for comparison, we will also use non-GAAP adjusted free cash flow in analyzing our operating performance.

Non-GAAP adjusted free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, capital expenditures for property and equipment, and less cash outflows, net of insurance, related to the Security Incident.

We believe non-GAAP free cash flow and non-GAAP adjusted free cash flow will provide useful measures of the company's operating performance.

Non-GAAP adjusted free cash flow is not intended to represent and should not be viewed as the amount of residual cash flow available for discretionary expenditures.

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

Our transaction revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events.

Our revenue from payment services has historically increased during the fourth quarter due to year-end giving.

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

2020 Form 10-K

Blackbaud, Inc.

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

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

Our expenses, other than transaction-based costs related to our payment services, 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 merit-based salary increases, which have historically been effective in April each year.

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

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 returned 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, however, we experienced an increase in the amount of 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.

2021 Form 10-K

Blackbaud, Inc.

Liquidity and Capital Resources

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Net cash used in investing activities (471.3) 555.9 % (71.8) 57.0 % (167.2)

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

Net cash provided by (used in) financing activities 264.1 (2,573.2) % (10.7) (109.6) % 111.2

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

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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.

We also believe that we will be able to continue to meet our long-term cash requirements due to our anticipated cash flow from operations, solid financial position and ability to access capital from financial markets.

To the extent we undertake future material acquisitions, investments or unanticipated capital or operating expenditures, including in connection with the Security Incident, we may require additional capital.

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

2020 Form 10-K

Blackbaud, Inc.

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

Some of these actions include the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During 2020, our bad debt expense increased by $4.6 million, compared to 2019.

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

As a well-known seasoned issuer, we filed an automatic shelf registration statement for an undetermined amount of debt and equity securities with the SEC on January 14, 2022.

Under this universal shelf registration statement we may offer and sell, from time to time, debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units.

Subject to certain conditions, this registration statement will be effective through January 13, 2024.

At December 31, 2021, our total cash and cash equivalents balance included approximately $15.4 million of cash that was held outside the U.S.

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

2020 Form 10-K

Blackbaud, Inc.

Operating Cash Flow

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

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

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

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

partially offset by

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

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

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

Throughout 2021, 2020 and 2019, our cash flows from operations were derived principally from:

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

2021 Form 10-K

Blackbaud, Inc.

Net cash provided by operating activities increased by $65.7 million during the year ended December 31, 2021, when compared to the same period in 2020, primarily due a $49.7 million increase in cash flow from operations associated with working capital, and a $16.1 million increase in net income adjusted for non-cash expenses.

The increase in cash flow from operations associated with working capital during 2021, when compared to 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 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;

partially offset by

• an increase in income tax payments.

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

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• fluctuations in the timing of vendor payments.

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

Security Incident update

For full year 2022, we currently expect net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

In line with our policy, legal fees, are expensed as incurred.

2021 Form 10-K

Blackbaud, Inc.

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

• an increase in the amount of deferred revenue recognized slightly outpacing customer billings;

• an increase in collection of customer account balances in 2018 from an aging improvement initiative;

• an income tax refund received in 2018 which did not recur in 2019;

partially offset by

• an increase in accrued bonuses as of December 31, 2019 when compared the same date in 2018;

• fluctuations in the timing of vendor payments.

Investing Cash Flow

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

During 2022, we expect our total capital expenditures, including estimated outlays for capitalized software development costs, to be between approximately $60.0 million and $70.0 million .

Net cash used in investing activities of $471.3 million increased by $399.4 million during 2021, when compared to 2020.

We spent $419.1 million for our acquisition of EVERFI in 2021 and we did not make any similar investments during 2020.

We used $40.5 million for software development costs, which was relatively consistent with cash spent during 2020.

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

We also spent $11.7 million of cash for purchases of property and equipment during 2021, which was down $18.0 million from cash spent in 2020.

The decrease in cash expended was primarily due to our purchase of our global headquarters facility in 2020.

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

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The additional cash expended was primarily used to purchase our global headquarters facility.

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

During 2019, we used net cash of $109.4 million, for our acquisition of YourCause, while we spent $44.9 million on investments in acquired companies in 2018.

We used $46.9 million for software development costs, which was up $9.2 million from cash spent during 2018.

The increase in cash outlays for software development costs was primarily related to our innovative cloud solutions as well as development activities for Blackbaud SKY, our modern cloud platform.

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

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

Financing Cash Flow

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

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

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

During 2021, we had a net increase in borrowings of $429.2 million attributable to our acquisition of EVERFI, compared to a net increase in borrowings of $0.9 million in 2020.

During 2021, we spent $108.4 million on repurchases of our common stock compared to $41.0 million during 2020 (see additional details below regarding our stock repurchase program which began in the fourth quarter of 2020).

During 2020, we paid dividends of $6.0 million and we did not pay dividends during 2021, as we discontinued the declaration and payment of all cash dividends beginnin g with the second quarter of 2020.

We paid $39.4 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2021 compared to $21.4 million during 2020.

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

The increase was primarily attributable to our decision to replace our annual cash bonus plans with a short-term performance-based equity award plan.

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

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

During 2021 , cash flow from financing activities associated with changes in restricted cash due to customers decreased $13.5 million , compared to an increase of $61.2 million during 2020 .

This line in the statement of cash flows represents the change in the amount of restricted cash held and payable by us to customers from one period to the next.

2021 Form 10-K

Blackbaud, Inc.

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

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

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

Cash flow from financing activities associated with changes in restricted cash due to customers decreased $16.6 million during 2020, when compared to 2019, as the amount of restricted cash held and payable by us to customers as of December 31, 2019 was significantly larger than at the same date in 2018 primarily due to the timing of year-end donations.

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This change was made primarily to better support our YourCause CSR Connect and YourCause Grants Connect solutions.

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

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

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

Cash flow from financing activities associated with changes in restricted cash due to customers increased $266.3 million during 2019, when compared to 2018.

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

Stock repurchase program

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

The program does not have an expiration date.

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

Under our 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.

The repurchase program does not have an expiration date and may be limited, suspended or discontinued at any time without prior notice.

During the year ended December 31, 2021, we purchased 1,592,933 shares for $108.4 million.

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

In December 2021, our Board of Directors reauthorized and replenished our stock repurchase program that authorizes us to purchase up to $250.0 million of our outstanding shares of common stock.

The remaining amount available to purchase stock under the stock repurchase program was $250.0 million as of December 31, 2021.

2020 Credit Facility

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

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

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

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

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The 2020 Credit Facility matures in October 2025.

On December 31, 2021, we borrowed a total of $435 million under the 2020 Credit Facility, including $250.0 million under the 2021 Incremental Term Loan (as defined in Note 9 to our consolidated financial statements in this report) and $185 million of revolving credit loans, to fund a portion of the consideration and expenses related to our acquisition of EVERFI.

At December 31, 2021, the carrying amount of our debt under the 2020 Credit Facility was $895.6 million.

Our average daily borrowings were $482.4 million during 2021.

The term loans 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 balances of the real estate loans are due upon maturity in April 2038.

2021 Form 10-K

Blackbaud, Inc.

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

Financial Covenant Requirement Ratio as of December 31, 2021

Net Leverage Ratio ≤ 4.00 to 1.00 1.75 to 1.00

Net Leverage Ratio (1)

≤ 4.25 to 1.00 3.31 to 1.00

Interest Coverage Ratio ≥ 2.50 to 1.00 17.45 to 1.00

2020 Form 10-K

Blackbaud, Inc.

(1) Under the terms of the 2020 Credit Facility, the Net Leverage Ratio requirement may be increased by up to 0.50 provided we satisfy certain requirements, including a permitted business acquisition, and provided that the maximum Net Leverage Ratio shall not exceed 4.25 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.

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At December 31, 2021, we were in compliance with our debt covenants under the 2020 Credit Facility.

First amendment to 2020 Credit Facility

On January 31, 2022, we entered into the First Amendment to Credit Agreement which amends the 2020 Credit Facility to, among other things, (i) modify the definition of “Applicable Margin”, (ii) modify the net leverage ratio financial covenant to require a net leverage ratio of (A) 4.00:1.00 or less for the fiscal quarter ended December 31, 2021 and for fiscal quarters ending thereafter through December 31, 2023 and (B) 3.75:1.00 or less for the fiscal quarters ending March 31, 2024 and thereafter, (iii) reset the $250.0 million fixed dollar basket with respect to the accordion feature, and (iv) modify certain negative covenants to provide additional operational flexibility.

See Note 19 to our consolidated financial statements in this report for additional details.

Commitments and Contingencies

As of December 31, 2020, we had contractual obligations with future minimum commitments as follows:

Payments due by period

(in millions) Total (1)

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

(in millions) Less than

1 year More than

1 year Total (1)

Recorded contractual obligations:

$ 534.2 $ 12.8 $ 25.0 $ 443.0 $ 53.4

Debt $ 18.7 $ 942.5 $ 961.2

Operating leases 11.7 64.1 75.8

29.5 10.4 10.2 5.1 3.8

Interest payments on debt (4)

4.5 3.4 1.1 — —

Unrecorded contractual obligations:

Purchase obligations 21.9 11.6 33.6

94.8 59.1 34.6 1.0 —

Interest payments on debt 21.1 81.6 102.7

79.5 11.5 23.4 21.0 23.6

Total contractual obligations (1)

$ 73.5 $ 1,099.8 $ 1,173.3

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

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

(1) The individual amounts may not sum to the total due to rounding.

As of December 31, 2021, we had total remaining principal payments of $961.2 million.

These payments represent 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 December 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 Revolving Facility for the purposes of determining minimum commitment amounts.

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

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

(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.

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

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 December 31, 2020 and December 31, 2019, was $4.6 million and $4.3 million, respectively.

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

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

See Note 9 to our consolidated financial statements in this report for more information.

Interest payments on debt

In addition to principal payments, as of December 31, 2021, we expect to pay interest expense over the life of our debt obligations of approximately $102.7 million.

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 on our remaining principal payments described above.

Operating leases

2021 Form 10-K

Blackbaud, Inc.

As of December 31, 2021, we had remaining operating lease payments of $75.8 million.

These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $13.3 million.

Our operating leases are generally for corporate offices, subleased offices and certain equipment and furniture.

Given our remote-first workforce strategy and real estate footprint optimization efforts, as discussed above, we do not anticipate entering any new, material operating leases for offices for the foreseeable future.

See Note 11 to our consolidated financial statements in this report for more information.

Purchase obligations

As of December 31, 2021, we had remaining purchase obligations of $33.6 million.

These purchase obligations are 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.

Our purchase obligations are not recorded as liabilities on our consolidated balance sheets as of December 31, 2021, as we had not received the related services.

See Note 11 to our consolidated financial statements in this report for more information.

The total liability for uncertain tax positions as of December 31, 2021 and December 31, 2020, was $3.7 million and $4.6 million , respectively.

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

Foreign Currency Exchange Rates

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dollars for purposes of reporting our consolidated financial results.

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

The accumulated currency translation adjustment, recorded within other comprehensive income (loss) as a component of stockholders’ equity, was income of $1.3 million as of December 31, 2021 and income 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 revenues and expenses denominated in non-U.S.

During 2020, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S.

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

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

During 2021, the fluctuation in foreign currency exchange rates increased our total revenue and our income from operations by $9.2 million and $3.1 million, respectively.

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

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In addition, if inflationary pressures impact the rate of giving to our customers, there could be adverse impacts to our business, financial condition and results of operations.

2021 Form 10-K

Blackbaud, Inc.

Critical Accounting Estimates

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

2020 Form 10-K

Blackbaud, Inc.

Revenue Recognition

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(5) Recognition of revenue when, or as, we satisfy a performance obligation.

We have not made any material changes in the accounting methodology we use to recognize revenue during the year ended December 31, 2021.

Our revenue recognition accounting methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment.

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If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue or deferred revenue that we report in a particular period.

2021 Form 10-K

Blackbaud, Inc.

Costs of Obtaining Contracts

6 unchanged sentences

The related amortization expense is included in sales, marketing and customer success expense in our consolidated statements of comprehensive income.

We have not made any material changes in the accounting methodology we use to record costs of obtaining contracts during the year ended December 31, 2021.

Our accounting methodology for determining the period over which we amortize costs of obtaining contracts with customers contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment.

2 unchanged sentences

If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of assets, operating expenses or income that we report in a particular period.

2020 Form 10-K

Blackbaud, Inc.

Business Combinations

6 unchanged sentences

We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date.

We have not made any material changes in the accounting methodology we use for business combinations during the year ended December 31, 2021.

Our purchase price allocation methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment to estimate the fair value of assets acquired and liabilities assumed, especially with respect to long-lived and intangible assets.

Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses.

Critical estimates in valuing intangible assets include, but are not limited to, estimates about:

expected future cash flows from customers, including revenue and operating expenses;

royalty and customer attrition rates;

proprietary technology obsolescence curve;

the acquired company's brand awareness and market position;

the market awareness of the acquired company's branded technology solutions and services;

assumptions about the period of time the brands will continue to be valuable;

as well as expected costs to develop any in-process research and development into commercially viable solutions and estimated cash flows from the projects when completed, and discount rates.

Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable.

Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

We apply significant judgement in estimating the fair value of intangible assets acquired, which involves the use of significant assumptions.

Significant assumptions used in the valuation of customer relationships include future revenue and operating expenses, customer attrition rates, contributory asset charges, tax amortization benefit, and discount rates.

Significant assumptions used in the valuation of certain developed technology assets include future revenue, proprietary technology obsolescence curve, royalty rate, and discount rate.

Significant assumptions used in the valuation of marketing assets include assumptions about the period of time the brand will continue to be valuable, royalty rate, and discount rate.

Significant assumptions used in the valuation of content intangible assets include cost-based assumptions.

Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable, and unanticipated events and changes in circumstances may occur.

If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations.

See Note 3 to our consolidated financial statements in this report for information regarding our business acquisitions.

2021 Form 10-K

Blackbaud, Inc.

Description Judgments and Uncertainties Effect if Actual Results Differ

7 unchanged sentences

We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized.

We have not made any material changes in the accounting methodology we use to assess income tax during the year ended December 31, 2021.

The calculation of our income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain.

8 unchanged sentences

If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made.

2020 Form 10-K

Blackbaud, Inc.

Long-lived Assets and Intangible Assets Other Than Goodwill

4 unchanged sentences

To the extent that the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted cash flows.

When measuring impairment of an asset using discounted cash flows, we make assumptions and apply judgment in estimating future cash flows and asset fair values, including annual revenue growth rates, a terminal year growth rate and selecting a discount rate that reflects the risk inherent in future cash flows.

We have not made any material changes in the accounting methodology we use to assess impairment loss during the year ended December 31, 2021.

During 2021, we recorded impairment charges against certain property and equipment assets and certain operating lease ROU assets.

7 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis