What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-03-01 · 363 added, 291 removed, 559 unchanged (54% of the section changed)

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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.

During 2022, we had more than 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 nearly 150,000 organizations and causes in over 100 countries.

Our revenue is primarily generated from the following sources:

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

COVID-19 Impact

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

Four-Point Strategy

1 Expand Total Addressable Market

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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.

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

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

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

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

We have 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.

This strategy expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40 (see discussion of Non-GAAP Financial Measures below).

During 2022, we announced a series of strategic organizational updates to streamline our business operations and become even more customer centric.

We created three new roles:

Chief Operating Officer, Chief Commercial Officer and Executive Vice President of Corporations.

We believe these new roles will:

ensure consistency in our approach to the customer experience;

further streamline and simplify our go-to-market efforts to maximize our outcomes as a global company;

and further align our YourCause and EVERFI offerings and continue our investment in being the partner of choice for corporations focused on social responsibility and impact.

Additionally, we took steps to better align our workforce with our strategic priorities, including further elimination of open positions as well as the difficult decision to reduce our workforce (see additional discussion regarding our workforce reduction below).

We also appointed three new members to our board of directors, providing not only new business perspectives but also adding important skills in cybersecurity, enterprise software, digital transformation and global operations.

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.

During our annual user conference, bbcon, we shared how our purpose-built solutions bring together the capabilities essential to our customers in managing their data, making their teams more productive, motivating their audiences to act, and ultimately driving outcomes.

During the third quarter, we acquired Kilter, an intuitive, gamified, activity-based engagement app.

We will initially pair Kilter with our Blackbaud TeamRaiser solution to serve nonprofits by expanding the ways they can engage with their supporters to prepare for their existing fundraising walks, runs and rides, and to create new types of engagement opportunities that are not tied to a specific date or place.

Kilter will also provide a unique solution with YourCause CSRConnect platform for companies as employers take a more active role in supporting their employees’ health and wellness pursuits across their remote and distributed workforces.

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.

During 2022, we announced that we achieved carbon neutrality for 2021.

This is a goal we have been striving towards and our shift to a remote-first workforce enabled us to accelerate our timeline.

Since 2019, Blackbaud has reduced its global real estate footprint by 50%, energy emissions to run office space by 63% and employee commute emissions by 75%.

With a multi-pronged climate strategy, Blackbaud is focused on reducing emissions, using energy efficiently and investing in environmental projects for a more sustainable future.

We shared more about our ESG strategy on our Corporate Social Responsibility website during the second quarter.

Our mission driven culture has been in our DNA since inception and is very attractive in a competitive labor market.

We continue to foster a diverse and inclusive environment focused on employee engagement and connectedness with our remote-first workforce strategy.

We have a significant role to play in driving advances in the social impact space, and we are proud of the strong corporate culture we have built and continue to cultivate in today's environment.

2022 Form 10-K

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Total revenue increased by $130.4 million during 2022, driven largely by the following:

+ 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.

+ Growth in recurring revenue primarily related to:

• an increase in contractual revenue of $107.7 million related to the performance of our cloud solutions, of which $96.2 million was attributable to EVERFI;

partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions and a decrease related to fluctuations in foreign currency exchange rates of $3.4 million.

• an increase in transactional recurring revenue of $23.2 million primarily due to an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes, an increase in online charitable giving;

and new pricing initiatives.

The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $7.5 million.

- Decrease in one-time services and other revenue primarily related to:

• decrease in one-time analytics revenue as analytics now are generally integrated in our cloud solutions;

• increase in one-time consulting revenue primarily attributable to EVERFI, largely offset by less revenue from 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 58 .

While our 2022 bookings for EVERFI were lower than expected, and we experienced some unexpected EVERFI employee attrition following the acquisition, we have taken action to bolster management and fill account executive vacancies, which are now fully staffed and ramping to drive future bookings.

We have a number of multi-year pricing initiatives underway, some to bring our pricing in line with the market while others are model changes that are expected to drive greater revenue for both us and our customers.

As a result, we expect to see an acceleration in growth in the second half of 2023 when compared to the first half of the year as we begin to see the full-year effect of some of these pricing initiatives.

We also expect that the one-time services and other revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.

2022 Form 10-K

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Income from operations decreased by $53.4 million during 2022, 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 compensation costs other than stock-based compensation of $75.7 million primarily due to increased employee headcount due to our acquisition of EVERFI

- Increase in Security Incident-related expenses, net of insurance, of $53.9 million.

See "Security Incident update" below on page 37 .

- Increases in third-party contractor and hosting costs of $26.9 million and $6.6 million, respectively, primarily attributable to our acquisition of EVERFI and, to a lesser extent, our continued migration of our cloud infrastructure to leading public cloud service providers and investments in cybersecurity

- Increase in amortization of intangible assets from business combinations of $14.4 million due to our acquisition of EVERFI

- Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments

- Increase in infrastructure costs of $8.4 million primarily related to our acquisition of EVERFI and investments in security tools

- Increase in marketing costs of $7.7 million primarily due to our acquisition of EVERFI

- Increase in travel costs of $4.5 million due to our easing of restrictions on non-essential employee travel, which went into effect during March 2020 in response to the COVID-19 pandemic

- Increase in other direct costs of revenue of $4.3 million primarily due to our acquisition of EVERFI

- Increase in employee severance of $3.7 million due to our targeted workforce reduction during the fourth quarter of 2022, as discussed below

- Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space.

We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale.

- Increase in cost of revenue from a $2.3 million impairment charge during the three months ended June 30, 2022, against previously capitalized software development costs that reduced the carrying value of those assets to zero.

The impairment charge resulted primarily from our decision to end customer support for certain solutions

+ 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 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

+ Net increase of $12.9 million related to an increase in software and content development costs that were required to be capitalized under the internal-use software guidance, largely driven by our acquisition of EVERFI, partially offset by an increase in amortization of capitalized software and content development costs

+ Decrease in real estate activity costs of $12.0 million due to our workforce strategy changes that began in the third quarter of 2020

+ Decrease in stock-based compensation expense of $10.1 million attributable to:

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

• Over performance against overall Company goals was higher in 2021 than 2022 goals;

• Our targeted workforce reduction during the fourth quarter of 2022, as discussed below

+ Decrease in corporate costs of $2.5 million primarily related to a decrease in bad debt expense

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.

Our profitability during 2022 reflects the addition of EVERFI and some of these incremental investments.

We have taken steps to better align our workforce with our strategic priorities to drive efficiencies and minimize any potential impacts from the current uncertain macroeconomic environment.

During the fourth quarter of 2022, this included further elimination of open positions as well as the decision to reduce our workforce.

As a result of the targeted workforce reduction, we incurred $4.5 million in pre-tax employee severance costs during the fourth quarter of 2022.

During the first quarter of 2023, we have remained focused on improving operating performance and driving efficiencies in the Company, including further reducing our workforce.

Following the planned action during the fourth quarter of 2022, we experienced a slowdown in voluntary attrition relative to expectations leading to a further reduction in force to achieve our original plan.

2022 Form 10-K

Blackbaud, Inc.

Customer retention

have eliminated positions in some areas, we will continue to hire in other areas.

Most of these reductions are in areas of the business that are not customer facing or in sales.

When combined with the cost actions we took in the fourth quarter of 2022, we expect our total headcount will be reduced by approximately 14% since the third quarter 2022.

We expect these workforce reductions and other cost actions to significantly reduce our pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.

In 2023, we expect our financial performance to improve with each successive quarter, starting with meaningful improvement in the second quarter as our pricing and cost initiatives take hold.

We continuously seek opportunities to optimize our portfolio of solutions to focus time and resources on innovation that will have the greatest impact for our customers and the markets we serve, and drive the highest return on investment.

To that end, we will continue to simplify and rationalize our portfolio through product sunsets and divestitures of non-core businesses and technologies.

Customer retention Gross dollar retention

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

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

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

During 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.

We are investing in innovation, which we believe will increase customer retention over the long-term.

Due primarily to these factors, we have historically used a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts, as we believed it provided a better representation of our customers' overall behavior.

During 2022 and 2021, approximately 91% and 93%, respectively, of our customers with recurring revenue contracts were retained.

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

A key factor to our overall success is the renewal and expansion of our existing subscription agreements with our customers.

Management now uses gross dollar retention in analyzing our success at delighting our customers with innovative and cloud solutions.

Gross dollar retention is defined as contracted annual recurring revenue ("CARR") divided by beginning CARR with a measurement period of twelve months.

During 2022, our gross dollar retention was approximately 91%.

This gross dollar retention rate is relatively unchanged from our rate for the full year ended December 31, 2021.

We are continually investing in innovation, which we believe will increase gross dollar retention over the long-term.

Balance sheet and cash flow

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Our net leverage ratio was 3.22 to 1.00.

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.

During 2022, we generated $203.9 million in cash flow from operations and had a net decrease in borrowings of $99.7 million, had aggregate cash outlays of $71.1 million for purchases of property and equipment and capitalized software and content development costs, spent $20.9 million for our purchases of EVERFI and Kilter and received cash proceeds of $6.4 million from our sale of certain solutions.

See Note 3 of our consolidated financial statements in this report for additional information.

2022 Form 10-K

Blackbaud, Inc.

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.

Accordingly, we expect that the Security Incident will continue to negatively impact our GAAP profitability and GAAP cash flow for the foreseeable future (see discussion regarding non-GAAP adjusted free cash flow on page 47 ).

For full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident.

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

Fo r full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate.

It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss.

There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of December 31, 2022 because we are unable at this time to reasonably estimate the possible loss or range of loss.

Each of these matters could, separately or in the aggregate, result in an adverse judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.

Results of Operations

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

• Kilter, Inc.

("Kilter") on August 19, 2022

• EVERFI, Inc.

("EVERFI") on December 31, 2021

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

on December 31, 2021

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;

In accordance with applicable accounting rules, we determined that the Kilter and EVERFI 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.

2020 Stock-based Compensation

Stock-based compensation expense increased $31.1 million in 2021 due to:

• Certain changes to our compensation program that were 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;

2022 Form 10-K

Blackbaud, Inc.

• Overall Company performance against 2020 and 2021 goals

Revenue and Cost of Revenue

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

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

2021 Form 10-K

Blackbaud, Inc.

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

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

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Recurring revenue increased by $130.9 million, or 14.9%, driven primarily by the following:

+ Increase in contractual recurring revenue of $107.7 million related to the performance of our cloud solutions, of which $96.2 million was attributable to EVERFI;

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 a decrease related to fluctuations in foreign currency exchange rates of $3.4 million

+ Increase in transactional recurring revenue of $23.2 million primarily due to:

• an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes;

• an increase in online charitable giving;

• new pricing initiatives.

The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $7.5 million

2022 Form 10-K

Blackbaud, Inc.

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 58 .

Cost of recurring revenue increased by $72.6 million, or 18.6%, driven primarily by the following:

+ Increase in compensation costs of $19.5 million primarily related to an increase in headcount due to our acquisition of EVERFI, and a continued shift in resources historically supporting one-time services and other towards recurring revenue

+ Increase in amortization of intangible assets from business combinations of $14.0 million due to our acquisition of EVERFI

+ Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments

+ Increase in third-party contractor and hosting costs of $11.1 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security;

currently, we expect our cloud infrastructure migration efforts and increased level of cybersecurity investments to continue for the foreseeable future.

Also contributing to the increase was our acquisition of EVERFI.

+ Increase in amortization of software and content development costs of $5.8 million due to our continued investments in the innovation and security of our solutions

+ Increase in third-party software costs of $3.9 million primarily related to a higher number of licenses needed and also price increases

+ Increase in allocated overhead costs of $3.7 million related to the increased headcount discussed above

+ Increase in depreciation expense of $1.5 million primarily related to investments in our cloud data centers and refresh of certain internal hardware

Recurring gross margin decreased by 1.4% primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.

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;

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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 compensation costs of $10.3 million primarily related to the stock-based compensation due to the factors discussed above on page 37 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

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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

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

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

2022 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.

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

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

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

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

+ Increase in amortization of software development costs of $6.8 million due to investments made on innovation, quality and the integration of our cloud solutions

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

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

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

- 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 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.

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, and fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts.

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, amortization of intangible assets from business combinations, and allocated depreciation, facilities and IT support costs.

We expect that the one-time services and other revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.

One-time services and other revenue decreased by $0.5 million, or 1.1%, driven primarily by the following:

- Decrease in one-time analytics revenue of $3.1 million as analytics are generally integrated in our cloud solutions

+ Increase in one-time consulting revenue of $2.8 million, of which $12.3 million was attributable to EVERFI, partially offset by a decrease in revenue from 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.

Cost of one-time services and other decreased $10.5 million or 19.9%, primarily driven by the following:

- Decrease in compensation costs of $8.8 million largely due to a continued shift in resources historically supporting one-time services and other towards recurring revenue as well as a decrease in professional services headcount

- Decrease in allocated overhead costs of $1.9 million primarily related to the decreased headcount discussed above

- Decrease in third-party contractor costs of $1.1 million primarily due to a decrease in partners delivering services

+ Increase in employee severance of $1.6 million primarily due to our targeted workforce reduction, as discussed above

One-time services and other gross margin increased by 21.3%, primarily due to the significant reductions in compensation costs discussed above.

2022 Form 10-K

Blackbaud, Inc.

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

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

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

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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.

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

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

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

Our embedded services are recorded as recurring revenue.

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

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

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

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:

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

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

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

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

Operating Expenses

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

In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter of 2020, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives.

The enhancements we are making in our go-to-market approach are expected to significantly reduce 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.

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

2022 Form 10-K

Blackbaud, Inc.

Sales, marketing and customer success expenses increased by $35.1 million, or 18.9%.

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

+ Increase in compensation costs of $20.0 million primarily related to increased employee headcount due to our acquisition of EVERFI

+ Increase in advertising costs of $7.7 million primarily due to our acquisition of EVERFI

+ Increase in third-party contractor costs of $4.0 million primarily related to strategic consulting

+ Increase in travel costs of $2.1 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020

+ Increase in software costs of $1.7 million primarily related to our acquisition of EVERFI and our use of digital marketing tools

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 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 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

- 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

- 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 stock-based compensation costs of $4.8 million due to the factors discussed on page 37

+ 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

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.

2022 Form 10-K

Blackbaud, Inc.

We continue to make investments to delight our customers with innovative cloud solutions.

We also continue to invest heavily in the security of our solutions.

Research and development expense increased by $32.3 million, or 26.0%.

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

+ Increase in compensation costs of $26.1 million primarily related to increased employee headcount due to our increased hiring of engineers, and to a lesser extent, our acquisition of EVERFI

+ Increase in third-party contractor costs of $19.8 million primarily due to an increase in our use of third-party software developers and, to a lesser extent, our acquisition of EVERFI

+ Increase in allocated overhead costs of $2.7 million primarily related to increased headcount discussed above

- Increase in software and content development costs of $19.0 million that were required to be capitalized under the internal-use software guidance, largely driven by our acquisition of EVERFI

Not included in research and development expense for 2022 and 2021 were $58.5 million and $39.4 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies.

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

We expect that the amount of software and content 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 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 $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 37

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+ 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.

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 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

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

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

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

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.

2022 Form 10-K

Blackbaud, Inc.

General and administrative expenses increased by $53.6 million, or 36.7%.

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

+ Increases in Security Incident-related expenses, net of insurance, of $53.9 million.

See "Security Incident update" above on page 37

+ Increase in compensation costs of $8.9 million primarily related to increased employee headcount due to our acquisition of EVERFI and increased cybersecurity hiring

+ Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space.

We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale.

+ A $2.3 million noncash impairment charge during the three months ended June 30, 2022 against previously capitalized software development costs that reduced the carrying value of those assets to zero.

The impairment charge resulted primarily from our decision to end customer support for certain solutions

+ Increase in rent expense of $2.0 million primarily related to leases assumed from our acquisition of EVERFI

+ Increase in travel costs of $1.3 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020

+ Increase in third-party contractor costs of $1.2 million

- Decrease in corporate costs of $2.8 million primarily related to a decrease in bad debt expense

- Increases in total costs allocated from general and administrative expense of $6.4 million primarily related to investments in security tools.

Depreciation, facilities and IT support costs are pooled and recorded to general and administrative expense and allocated to other lines of our statements of comprehensive income based on headcount.

- Decreases in real estate activity costs of $11.8 million due to our workforce strategy changes that began in the third quarter of 2020 (see discussion below)

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.

As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease right-of-use ("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.

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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.

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

These impairment charges were 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.

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- 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

- 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 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

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

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

During the 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.

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 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

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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 in dollars and as a percentage of total revenue during 2022 when compared to 2021, due to the new borrowings used to finance our acquisition of EVERFI.

We currently expect interest expense for the full year 2023 to be approximately $40 million to $44 million although our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment.

See Note 10 to our consolidated financial statements in this report for more information regarding our derivative instruments, which we use to manage our variable interest rate risk, and Item 7A.

Quantitative and Qualitative Disclosures about Market Risk:

Interest Rate Risk on page 63 for more information about our variable interest rate exposure and related risk.

Interest expense increased during 2021 when compared to 2020, primarily due to the Real Estate Loans assumed in connection with 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.

2022 Form 10-K

Blackbaud, Inc.

Deferred Revenue

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

(dollars in millions) Timing of recognition December 31,

(dollars in millions) December 31,

2022 December 31,

Recurring Over the period billed in advance, generally one year $ 360.9 $ 303.8 18.8 %

One-time services and other As services are delivered 17.9 13.1 36.6 %

Total deferred revenue (1)

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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.

Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter, billed annually in advance and non-cancelable.

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 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.

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".

Income tax provision (benefit) ($M)

We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end each one-year period.

The increase in deferred revenue during the year ended December 31, 2022 was primarily due to primarily due to new subscription sales of our cloud solutions and, to a lesser extent, progress in initiatives to bring our pricing in line with the market.

Income tax (benefit) provision ($M)

Percentages indicate effective income tax rates

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

The decrease in our effective income tax rate for year ended December 31, 2022, when compared to the same period in 2021, was primarily attributable to current-year non-deductible accruals for loss contingencies related to the Security Incident, stock-based compensation shortfall partially offset by increased tax credits and impact of tax rate decreases.

The 2021 effective income tax rate was positively impacted by benefit attributable to stock-based compensation windfall net of tax expense resulting from impact of UK corporate rate increase.

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.

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

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

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.

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

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 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, provides more meaningful comparative results.

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.

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GAAP Revenue $ 1,058.1 14.1 % $ 927.7 1.6 % $ 913.2

Non-GAAP adjustments:

Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Non-GAAP revenue (2)

$ 927.7 1.6 % $ 913.2 1.2 % $ 902.4

GAAP gross profit $ 552.7 14.1 % $ 484.5 (0.1) % $ 485.2

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Non-GAAP adjustments:

Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Stock-based compensation expense 14.4 (27.6) % 20.0 49.2 % 13.4

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Non-GAAP adjustments:

Acquisition-related deferred revenue write-down (1)

— — % — (100.0) % 1.9

Stock-based compensation expense 110.3 (8.4) % 120.4 38.0 % 87.3

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Employee severance 5.2 242.0 % 1.5 (69.0) % 4.9

Acquisition-related integration costs (0.1) (7.5) % (0.1) (105.6) % 2.4

Acquisition-related expenses 3.2 800.3 % 0.4 (69.6) % 1.2

Acquisition and disposition-related costs (2)

6.1 100.9 % 3.1 1,294.5 % 0.2

Restructuring and other real estate activities 0.1 (99.4) % 12.1 (48.0) % 23.3

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55.7 2,968.4 % 1.8 100.0 % —

Impairment of capitalized software development costs

2.3 100.0 % — — % —

231.1 31.4 % 175.9 11.7 % 157.5

Non-GAAP income from operations (1)

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Non-GAAP adjustments:

GAAP income tax provision (benefit) 1.4 (90.0) % 13.9 (1,150.4) % (1.3)

GAAP income tax (benefit) provision (10.2) (834.2) % 1.4 (90.0) % 13.9

Total Non-GAAP adjustments affecting loss from operations 231.1 31.4 % 175.9 11.7 % 157.5

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Non-GAAP diluted earnings per share $ 2.69 (11.5) % $ 3.04 3.4 % $ 2.94

(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.

(1) The individual amounts for each year may not sum to 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.

(2) Includes a $2.0 million noncash impairment of intangible assets held for sale during the twelve months ended December 31, 2022.

(3) Includes Security Incident-related costs incurred during the twelve months ended December 31, 2022 of $57.6 million, which includes approximately $23.0 million in recorded aggregate liabilities for loss contingencies, net of probable insurance recoveries during the same period of $1.9 million and 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 and accruals for certain loss contingencies.

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

For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and 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.

Each of these matters could, separately or in the

2022 Form 10-K

Blackbaud, Inc.

aggregate, result in an adverse judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.

(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.

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Non-GAAP organic revenue growth

In addition, we use non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP organic recurring revenue growth, in analyzing our operating performance.

In addition, we use non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis, non-GAAP organic recurring revenue growth and non-GAAP organic recurring revenue growth in analyzing our operating performance.

We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis.

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The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods.

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

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.

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

Years ended December 31,

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Non-GAAP acquisition-related revenue (1)

Non-GAAP revenue from divested businesses (2)

Total Non-GAAP adjustments $ — $ 102.5

Non-GAAP organic revenue (3)

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Non-GAAP organic revenue (3)

1,058.1 1,030.2

Foreign currency impact on Non-GAAP organic revenue (4)

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Non-GAAP acquisition-related revenue (1)

Non-GAAP recurring revenue from divested businesses (2)

Total Non-GAAP adjustments $ — $ 91.6

Non-GAAP organic recurring revenue $ 1,011.7 $ 972.5

Non-GAAP organic recurring revenue growth 4.0 %

Non-GAAP organic recurring revenue (3)

$ 1,011.7 $ 972.5

Foreign currency impact on non-GAAP organic recurring revenue (4)

Non-GAAP organic recurring revenue on constant currency basis (4)

$ 1,022.6 $ 972.5

Non-GAAP organic recurring revenue growth on constant currency basis 5.2 %

(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.

(2) Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated.

(3) To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S.

(2) Non-GAAP revenue from divested businesses excludes revenue associated with divested businesses.

The exclusion of the prior period revenue is to present the results of the divested business with the results of the combined company for the same period of time in both the prior and current periods.

(3) Non-GAAP organic revenue and non-GAAP organic recurring revenue for the prior year periods presented herein may not agree to non-GAAP organic revenue and non-GAAP organic recurring revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth and non-GAAP organic recurring revenue growth are calculated.

(4) To determine non-GAAP organic revenue growth and non-GAAP organic recurring revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S.

Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates.

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Blackbaud, Inc.

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

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

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

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amortization of intangible assets from business combinations;

amortization of software development costs;

amortization of software and content development costs;

stock-based compensation;

acquisition-related integration costs;

acquisition-related expenses;

employee severance;

acquisition and disposition-related costs;

restructuring and other real estate activities;

and Security Incident-related costs.

Security Incident-related costs, net of insurance;

and impairment of capitalized software development costs.

Beginning in the fiscal quarter ended June 30, 2022, we now also include in non-GAAP adjusted EBITDA impairment of capitalized software development costs because we believe it is not directly related to our operating performance in any particular period.

Years ended December 31,

(dollars in millions) 2022 2021

GAAP net income $ 5.7 $ 7.7

GAAP net (loss) income $ (45.4) $ 5.7

Non-GAAP adjustments:

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Amortization of intangibles from business combinations 51.4 37.0

Amortization of software development costs (2)

Amortization of software and content development costs (2)

Non-GAAP EBITDA (3)

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Employee severance 5.2 1.5

Acquisition-related integration costs (0.1) (0.1)

Acquisition-related expenses 3.2 0.4

Acquisition and disposition-related costs 6.1 3.1

Restructuring and other real estate activities 0.1 12.1

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

Adjusted Non-GAAP EBITDA (3)

Impairment of capitalized software development costs

Non-GAAP Adjusted EBITDA (3)

$ 262.6 $ 246.1

Adjusted Non-GAAP EBITDA margin 26.5 %

Non-GAAP Adjusted EBITDA margin 24.8 %

Rule of 40 (5)

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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.

The accelerated portions of the fixed asset depreciation expense related to these activities of $1.7 million for the three months and twelve months ended December 31, 2021, respectively, were 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 $14.4 million for the three and twelve months ended December 31, 2021, 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.

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

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

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

See Non-GAAP organic revenue growth table above.

2022 Form 10-K

Blackbaud, Inc.

Non-GAAP free cash flow

Non-GAAP free cash flow and non-GAAP adjusted 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.

Non-GAAP adjusted 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, plus cash outflows, net of insurance, related to the Security Incident.

We believe non-GAAP free cash flow and non-GAAP adjusted free cash flow provides 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.

Years ended December 31,

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purchase of property and equipment (12.3) 5.4 % (11.7) (60.7) % (29.7)

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

capitalized software and content development costs (58.8) 45.2 % (40.5) (4.0) % (42.2)

Non-GAAP free cash flow (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.

$ 132.8 (17.8) % $ 161.5 112.2 % $ 76.1

Security Incident-related cash flows, net of insurance 20.9 209.6 % 6.7 226.5 % 2.1

Non-GAAP adjusted free cash flow (1)

$ 153.7 (8.6) % $ 168.2 115.2 % $ 78.2

(1) The individual amounts for each year may not sum to non-GAAP free cash flow or non-GAAP adjusted free cash flow due to rounding.

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

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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, 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 expenses, other than transaction-based costs related to our payments 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.

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 generally been lower in our second quarter as compared to our third and fourth quarters.

Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are base salary merit increases, which were replaced in 2020 with performance-based equity awards due to COVID-19, but returned in July 2021.

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

In addition, deferred revenues can vary on a seasonal basis due to the timing of customer contract renewals and student enrollments or significant acquisitions.

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.

2022 Form 10-K

Blackbaud, Inc.

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

Liquidity and Capital Resources

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Property and equipment, net 107.4 111.4 (3.6) %

Software development costs, net 121.4 111.8 8.5 %

Software and content development costs, net 141.0 121.4 16.2 %

Total carrying value of debt 859.0 956.2 (10.2) %

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Net cash used in investing activities (85.5) (81.8) % (471.3) (555.9) % (71.8)

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

Net cash (used in) provided by financing activities (25.7) (109.7) % 264.1 (2,573.2) % (10.7)

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

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

Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements and market acceptance of our solutions and services, the volume and size of transactions for which we process payments and our customers' ability to pay.

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

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Blackbaud, Inc.

Net cash provided by operating activities decreased by $9.8 million during the year ended December 31, 2022, when compared to the same period in 2021, primarily due a $65.1 million increase in cash flow from operations associated with working capital, and a $74.9 million decrease in net income adjusted for non-cash expenses.

The increase in cash flow from operations associated with working capital during 2022, when compared to 2021, was primarily due to:

• fluctuations in the timing of vendor payments;

• a decrease in probable insurance recoveries related to the Security Incident as we have received payment for all of the related insurance claims;

• an increase in accrued expenses related to the Security Incident.

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.

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• 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.

The decrease in cash flow from operations associated with working capital during 2020, when compared to 2019, was primarily due to:

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

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

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

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

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

• fluctuations in the timing of vendor payments.

Workforce reductions

We have taken steps to better align our workforce with our strategic priorities to drive efficiencies and minimize any potential impacts from the current uncertain macroeconomic environment.

During the fourth quarter of 2022, this included further elimination of open positions as well as the decision to reduce our workforce.

As a result of the targeted workforce reduction, we incurred $4.5 million in pre-tax employee severance costs during the fourth quarter of 2022.

During the first quarter of 2023, we have remained focused on improving operating performance and driving efficiencies in the Company, including further reducing our workforce.

While we have eliminated positions in some areas, we will continue to hire in other areas.

Most of these reductions are in areas of the business that are not customer facing or in sales.

When combined with the cost actions we took in the fourth quarter of 2022, we expect our total headcount will be reduced by approximately 14% since the third quarter 2022.

We expect these workforce reductions and other cost actions to significantly reduce our pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.

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.

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.

For full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident.

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

For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

2022 Form 10-K

Blackbaud, Inc.

Investing Cash Flow

During 2023, we expect our total capital expenditures, including estimated outlays for capitalized software development costs, to be between approximately $65.0 million and $75.0 million.

Net cash used in investing activities of $85.5 million decreased by $385.7 million during 2022, when compared to 2021.

During 2022, we used $20.9 million of net cash for our acquisitions of EVERFI and Kilter, comprised primarily of (i) $17.4 million that had not been paid by EVERFI to its former option holders as of December 31, 2021, solely due to the timing of the acquisition on the last day of 2021;

(ii) $2.9 million that was paid to acquire Kilter;

and (iii) $2.6 million that was paid to a number of EVERFI's selling shareholders after determining they would be paid in cash, rather than shares of our common stock.

During 2022, we also received cash proceeds of $6.4 million from our sale of certain solutions.

See Note 3 of our consolidated financial statements in this report for additional information.

We used $58.8 million for software and content development costs, which was up $18.3 million from cash spent during 2021, primarily due to the inclusion of EVERFI's software and content development activities.

We also spent $12.3 million of cash for purchases of property and equipment during 2022, which was an increase $0.6 million from cash spent in 2021.

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

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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.

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

We used $42.2 million for software development costs, which was down $4.7 million from cash spent during 2019.

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

We also spent $29.7 million of cash for purchases of property and equipment during 2020, which was up $18.2 million from cash spent in 2019.

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

Financing Cash Flow

During 2022, we had a net decrease in borrowings of $99.7 million compared to a net increase in borrowings of $429.2 million attributable to our acquisition of EVERFI in 2021.

During 2022, we did not repurchase any of our common stock while we repurchased $108.4 million during 2021 (see additional details below regarding our stock repurchase program).

We paid $36.4 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2022 compared to $39.4 million during 2021.

The amount of taxes paid by us on behalf of employees related to the settlement or

2022 Form 10-K

Blackbaud, Inc.

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 2022 , cash flow from financing activities associated with changes in restricted cash due to customers increased $111.4 million , compared to a decrease of $13.5 million during 2021 .

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.

This restricted cash due to customers is not available to us for operational purposes.

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.

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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).

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

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

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

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

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

Stock repurchase program

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 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.

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 program does not have an expiration date.

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

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

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

During the year ended December 31, 2022, we did not purchase any shares.

The remaining amount available to purchase stock under the stock repurchase program was $250.0 million as of December 31, 2022.

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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, 2022, the carrying amount of our debt under the 2020 Credit Facility was $799.1 million.

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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.

See Note 9 to our consolidated financial statements included in this report for additional information regarding the 2020 Credit Facility.

Commitments and Contingencies

As of December 31, 2022, we had contractual obligations with future minimum commitments as follows:

Payments due by period

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Operating leases 10.0 53.5 63.4

Contingent consideration — 2.7 2.7

Unrecorded contractual obligations:

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In addition to principal payments, as of December 31, 2022, we expect to pay interest expense over the life of our debt obligations of approximately $148.6 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

These payments represent our estimated future interest payments on debt using

2022 Form 10-K

Blackbaud, Inc.

our debt balances and the related weighted average effective interest rates as of December 31, 2022, which includes the effect of interest rate swap agreements.

Operating leases

As of December 31, 2022, we had remaining operating lease payments of $63.4 million.

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The total liability for uncertain tax positions as of December 31, 2022 and December 31, 2021, was $3.1 million and $3.7 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.

Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of December 31, 2022 and 2021.

Contingent consideration

In connection with our acquisition of Kilter, we are obligated to pay contingent consideration upon the achievement of certain milestones.

For information regarding our contingent consideration obligations, see Note 3 to our consolidated financial statements in this report.

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 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 accumulated currency translation adjustment, recorded within other comprehensive income (loss) as a component of stockholders’ equity, was a loss of $14.9 million as of December 31, 2022 and income of $1.3 million as of December 31, 2021.

We have entered into foreign currency forward contracts to hedge a portion of the foreign currency exposure that arises on translation of our investments denominated in British Pounds into U.S.

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 2021, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S.

During 2022, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S.

Though we have exposure to fluctuations in currency exchange rates, the impact has generally not been material to our consolidated results of operations or financial position.

During 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.

During 2022, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $12.3 million and $2.6 million, respectively.

We have entered into foreign currency forward contracts to hedge revenues denominated in the Canadian dollar against changes in the exchange rate with the U.S.

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

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dollars using the comparable prior year period's weighted average foreign currency exchange rates.

These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.

We do not believe that inflation has had a material effect on our business, financial condition or results of operations.

If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases.

Our inability or failure to do so could harm our business, financial condition and results of operations.

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.

2022 Form 10-K

Blackbaud, Inc.

impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.

Critical Accounting Estimates

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and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time.

In addition, we exercise judgment in certain transactions when determining whether we should recognize revenue based on the gross amount billed to a customer (as a principal) or the net amount retained (as an agent).

These judgments are based on our determination of whether or not we control the service before it is transferred to the customer.

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.

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Sales commissions and related fringe benefits earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer.

These costs are deferred and then amortized in a manner that aligns with the expected period of benefit, which we have determined to be five years.

We do not generally pay commissions for contract renewals.

These costs are deferred and then amortized in a manner that aligns with the expected period of benefit, which we have primarily determined to be 5 years.

We generally do not pay commissions for contract renewals that are commensurate with the commission paid on the initial contract.

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

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If such events or changes in circumstances occur, we use the undiscounted cash flow method to determine whether our long-lived and intangible assets other than goodwill are impaired.

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.

To the extent that the carrying value of the asset or asset group exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted 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, 2022.

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.

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

In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of cash flows from other asset groups.

When measuring impairment of an asset or asset group using discounted cash flows, we make assumptions and apply judgment in estimating future cash flows and asset or asset group 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.

During 2022, we recorded impairment charges against certain previously capitalized software development costs, certain insignificant customer relationship intangible assets that were held for sale, our operating lease ROU assets and certain property and equipment assets.

For additional information, see Notes 7 and 11 to our consolidated financial statements in this report.

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However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.

2022 Form 10-K

Blackbaud, Inc.

Loss Contingencies

Description Judgments and Uncertainties Effect if Actual Results Differ

From Assumptions

We are subject to the possibility of various loss contingencies, including legal proceedings and claims, that arise in the normal course of business, as well as certain other non-ordinary course proceedings, claims and investigations, as described in Note 11 to the consolidated financial statements in this report.

We record an accrual for a loss contingency when it is both probable that a material liability has been incurred and the amount of the loss can be reasonably estimated.

If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome;

if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range.

For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, we disclose such an estimate, if material.

If such a loss or range of losses is not reasonably estimable, we disclose that fact.

We have not made any material changes in the accounting methodology we use to assess loss contingencies during the year ended December 31, 2022.

We review any such loss contingency accruals at least quarterly and adjust them to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain.

These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us.

With the exception of the 2020 Security Incident, we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine loss contingencies.

However, if facts and circumstances change in the future that change our belief regarding assumptions used to determine our estimates, we may be exposed to losses that could be material.

Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period.

Recently Issued Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis