What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-03 · 240 added, 288 removed, 387 unchanged (58% of the section changed)

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Executive Summary

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

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

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

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

We are the leading software provider exclusively dedicated to powering social impact.

Serving the nonprofit and education sectors, companies committed to social responsibility and individual change makers, our essential software is built to accelerate impact in fundraising, nonprofit financial management, digital giving, grantmaking, corporate social responsibility and education management.

A remote-first company, we have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom, supporting users in 100+ countries.

Our revenue is primarily generated from the following sources:

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and (v) 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.

Our end markets continue to display resilience in the post-pandemic recovery with a digital-first mindset.

In February 2022, the Blackbaud Institute released its annual Charitable Giving Report, which reported that overall giving in 2021 grew 9% with the percent of giving done online up significantly from pre-pandemic levels and holding steady in the low-teens.

Nearly 30% of those online donations are being made on a mobile device, which we see as a long-term positive as we equip organizations to process mobile donations and optimize mobile user interfaces.

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 Strategy

1 Expand Total Addressable Market

2 Lead with World Class Teams and Operations

3 Delight Customers with Innovative Cloud Solutions

4 Focus on Employees, Culture and ESG Initiatives

Expand Total Addressable Market ("TAM")

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

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

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

Third Quarter 2022 Form 10-Q

Update on Five Key Operational Initiatives

1 Product Innovation

2 Bookings Growth and Acceleration

3 Transactional Revenue Optimization

4 Modernized Approach to Pricing and Multi-Year Customer Contracts

5 Keen Attention to Cost Management

Product Innovation

We support our customers by replacing their aging, mission-critical systems of record and adding advanced digital services.

We continuously seek ways to add substantial value for our customers and their constituents by investing in both organic innovation and ecosystem enablement through partnerships and acquisitions.

These new capabilities and partnerships strengthen our offers and create new opportunities for our customers to deliver on their missions.

For example, with the availability of SKY API endpoints for Blackbaud CRM and Blackbaud Altru, we are enabling customers to leverage applications in the Blackbaud Marketplace to integrate complementary point solutions with our partners.

We have expanded strategic partnerships to unlock even more value for our customers with partners like Almabase and SwipeTrack's XTrulink.

We recently announced an expanded partnership with Almabase to provide a modern solution for advancement teams to unlock higher education and K-12 school alumni engagement and better fundraising by creating integrations that enable secure movement of constituent, gift and event data between systems, without friction.

Additionally, we have partnered with SwipeTrack Solutions to create an integration between Blackbaud Altru and Blackbaud Merchant Services to modernize the patron digital experience and back office operations at arts and cultural organizations.

We also recently announced a new feature for general availability with Blackbaud TeamRaiser, Good Move.

Good Move leverages Kilter, which we acquired last year, and helps charitable organizations raise more with mobile-first, gamified activity tracking and peer-to-peer fundraising.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Lead with World Class Teams and Operations

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

Recently, 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 recently 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 a new member to our board of directors, who brings over 20 years of experience in technology and cybersecurity to our board.

Delight Customers with Innovative Cloud Solutions

During our recent 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 also 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

We recently 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 good space, and we are proud of the strong corporate culture we have built and continue to cultivate in today's environment.

Third Quarter 2022 Form 10-Q

Bookings Growth and Acceleration

We drove strong bookings performance in the first quarter, up significantly versus last year, led by our corporate sector (YourCause and EVERFI solutions) which more than doubled its bookings over the first quarter of 2022.

We signed several notable large enterprise contracts during the first quarter, which speaks to the resilience of the end markets we serve and the focus we have placed on driving further improvements in sales productivity.

Productivity per sales representative (defined as new sales bookings for the period divided by the number of sales representatives) has improved over 30% versus last year.

There can be volatility quarter-to-quarter on bookings.

However, the strong start in the first quarter with the most in-year revenue impact positions us well.

Transactional Revenue Optimization and Expansion

Transactional revenue, which is about one-third of total revenue, has proven to be resilient so far in 2023 following the lower average donation sizes we experienced during the fourth quarter of 2022.

The rate changes that we announced on Blackbaud Merchant Services in the U.S.

in late 2022 began to take effect during the first quarter.

Our Blackbaud Tuition Management and JustGiving platforms continue to perform well against plan.

And as we look ahead, our teams are hard at work to drive innovation across our payments solutions that are a win-win for both our customers and Blackbaud.

We have already introduced our two fee cover models, and we are also looking at ways to optimize our payments solutions to drive a better donor experience.

Modernized Approach to Pricing and Multi-Year Contracts

We deeply value the relationships we have with our customers, many of whom have been with us for decades.

Our solutions add considerable value for our customers and raise billions of dollars annually to fuel social impact, and we continue to innovate on our suite of products to generate incremental value.

Last summer, we put in place an updated pricing policy primarily for our social sector customers that directly reflects the value we provide to them, is in-line with the broader market and reflects the inflationary pressures that all businesses are facing.

In November 2022, we started notifying customers with a March 2023 contract renewal that we would be making two important contract changes.

First, we are offering 3-year contract renewal terms as our standard, replacing one-year renewal terms.

This process was already being implemented outside of the pricing changes.

Second, we are implementing a more significant rate increase on the 1-year renewal option versus the 3-year renewal option.

And third, the 3-year renewal option includes annual rate increases that will compound.

Our 3-year renewal options did not historically include annual compounding rate increases.

Through April 2023, we have renewed over 25% of the customers that are up for renewal in our 2023 cohort.

The close day-to-day management of renewals, the mix of 3-year and 1-year contracts, and the impact of pricing are progressing very well, and we expect more impact from the compounding effect of these rate increases over time as we layer in future year contract renewals and annual rate increases.

For example, over 50% of our planned 2023 revenue will renew in a little over 3 years and approximately 35% of that renewable base is expected to renew this year.

These contracts are renewing every day and create revenue growth that we expect to accelerate with each successive quarter this year.

We expect that to lead to an even greater impact in 2024, 2025 and beyond as we begin to see the full-year impact of the rate increases compound annually.

Approximately 30% of the renewable base is up for renewal in 2024 and more than 20% in 2025.

The adoption of 3-year renewals as a standard are expected to have an added benefit of higher retention which provides greater revenue assurance and predictability.

Looking even further ahead, the cycle starts fresh in 2026 as the 2023 signed contracts will begin to renew.

We expect that this will be a sustainable and meaningful revenue growth stream for us.

Keen Attention to Cost Management

We closed four legacy data centers during 2022, and we plan to close more this year.

We renegotiated key vendor contracts including Microsoft Azure and AWS and made the difficult decision to further reduce our staff in the first quarter.

Because we have organized to achieve much better scale efficiencies, we now have reduced our headcount by approximately 14% since the third quarter of 2022.

Our goal is to run the business at about this headcount level for the foreseeable future, such that our revenue growth will better drive margin acceleration.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Financial Summary

Total revenue ($M) Income from operations ($M)

Total revenue ($M) Loss from operations ($M)

YoY Growth (%) YoY Growth (%)

Total revenue increased by $30.1 million and $103.5 million during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, driven largely by the following:

Total revenue increased by $4.6 million during the three months ended March 31, 2023, when compared to the same period in 2022, driven largely by the following:

+ Growth in recurring revenue primarily related to:

• increases in contractual recurring revenue of $27.7 million and $81.6 million, respectively, related to the performance of our cloud solutions, of which $23.7 million and $71.2 million, respectively, was attributable to EVERFI;

partially offset by decreases in maintenance revenue as customers migrate to our cloud solutions and decreases related to fluctuations in foreign currency exchange rates of $1.3 million and $2.3 million, respectively;

• increases in transactional recurring revenue of $3.2 million and $22.7 million, respectively, primarily due to an increase in online charitable giving, an increase in enrollment for our Blackbaud Tuition Management solution resulting in a higher transactional volumes and, to a lesser extent, increased transactional volume as our customer's constituents have begun to return to in-person events.

These increases in transactional recurring revenue were partially offset by decreases related to fluctuations in foreign currency exchange rates of $3.1 million and $5.5 million, respectively.

• increase in transactional recurring revenue of $5.0 million primarily due to increases in volume for our Blackbaud Tuition Management and JustGiving solutions and positive results related to a pricing initiative we implemented at the beginning of 2023;

the increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $1.7 million, respectively

• increase in contractual recurring revenue of $3.1 million related to the performance of our cloud solutions;

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 $0.8 million

- Decreases in one-time service and other revenue primarily related to:

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

partially offset by

• increases in one-time consulting revenue due primarily to our acquisition of EVERFI, largely offset by a decrease in 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.

• decrease in one-time consulting revenue due primarily due to 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

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

We currently expect that fluctuations in foreign currency exchange rates will have a significant negative impact on our total revenue for the full year 2022.

While our year-to-date bookings for EVERFI continue to be lighter than expected, we have taken action to bolster management and fill account executive vacancies, which are now fully staffed and ramping to drive future bookings.

Additionally, we currently expect one-time services and other revenue to modestly decrease during 2022 when compared to 2021, inclusive of incremental one-time revenue expected from EVERFI.

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.

• decreases 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 41 .

Income from operations decreased by $18.9 million and $44.5 million during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, driven largely by the following:

- Increases in compensation costs other than stock-based compensation of $20.7 million and $61.5 million, respectively, primarily due to increased employee headcount due to our acquisition of EVERFI

- Increases in third-party contractor costs of $6.8 million and $21.6 million, respectively, and hosting costs of $1.0 million and $5.5 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

- Increases in Security Incident-related expenses, net of insurance, of $12.8 million and $27.9 million, respectively.

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 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.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Income from operations decreased by $4.0 million during the three months ended March 31, 2023, when compared to the same period in 2022, driven largely by the following:

- Increase in Security Incident-related expenses of $10.6 million.

See "Security Incident update" below.

- Increases in transaction-based costs of $2.9 million and $12.2 million, respectively, related to the increase in the volume of transactions for which we process payments

- Increases in amortization of intangible assets from business combinations of $3.4 million and $10.8 million, respectively, due to our acquisition of EVERFI

- Increases in infrastructure costs of $1.6 million and $5.8 million, respectively, primarily related to our acquisition of EVERFI and investments in security tools

- Increases in acquisition and disposition-related costs of $2.4 million and $5.6 million, respectively, primarily related to a $2.0 million noncash impairment of certain insignificant intangible assets held for sale

- Increases in marketing costs of $1.1 million and $5.0 million, respectively, primarily due to our acquisition of EVERFI

- Increases in travel costs of $1.1 million and $3.7 million, respectively, 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

- A $2.3 million noncash impairment charge during the nine months ended September 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

+ Increases in total revenue, as described above

+ Decreases in stock-based compensation expense of $1.0 million and $5.8 million, respectively, attributable to:

• A decrease in the grant date fair value of our annual equity awards granted to employees during 2022 compared to 2021;

• 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.

- Increase in stock-based compensation expense of $2.1 million primarily due to 2022 performance-based equity award adjustments, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

- Increase in transaction-based costs of $2.1 million related to the increase in the volume of transactions for which we process payments and, to a lesser extent, increases in vendor rates

- Increase in third-party software costs of $1.9 million primarily related to a higher number of licenses needed and also price increases

- Net decrease of $0.9 million due to an increase in amortization of capitalized software and content development costs, partially offset by an increase in software and content development costs that were required to be capitalized under the internal-use software guidance

+ Decrease in compensation costs other than stock-based compensation of $7.7 million, partially offset by a corresponding increase in severance costs of $4.3 million due to our targeted workforce reductions discussed above

+ Increase in total revenue, as described above

+ Decrease in hosting and data center costs of $2.1 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

+ Decrease in third-party contractor costs of $1.9 million primarily due to a decrease in our use of third-party software developers

+ Decrease in advertising costs of $0.9 million

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

Our profitability through the third quarter 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.

This recently included further elimination of open positions as well as the decision to reduce our workforce.

As a result of the workforce targeted reduction, we expect to incur between $6 million and $8 million in pre-tax employee severance costs primarily during the fourth quarter of 2022.

We expect this workforce reduction and other cost actions will reduce our planned future pre-tax cost run rate by approximately $40 million

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

to $50 million beginning in 2023, partially offset by continued investments in cybersecurity and innovation.

We see further opportunity in 2023 and beyond to scale our infrastructure costs, reduce overhead and execute pricing initiatives.

Our profitability during the first quarter reflects some of these incremental investments.

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

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

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

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

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

For the twelve months ended September 30, 2022, approximately 91% of our customers with recurring revenue contracts were retained.

This customer retention rate decreased from our rate for the full year ended December 31, 2021 and reflects our continuing efforts to rationalize our portfolio of solutions and migrate customers from legacy solutions towards our next generation solutions.

Gross dollar retention

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

Management 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.

For the twelve months ended March 31, 2023, our gross dollar retention was approximately 90%.

This gross dollar retention rate is relatively unchanged from our rate for the full year ended December 31, 2022.

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

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Although some customer attrition is normal, our new contract pricing and renewal model (as described above on page 24) does not appear to have impacted customer attrition to date.

Balance sheet and cash flow

At September 30, 2022, our cash and cash equivalents were $31.4 million and the carrying amount of our debt under the 2020 Credit Facility was $795.5 million.

At March 31, 2023, our cash and cash equivalents were $24.1 million and the carrying amount of our debt under the 2020 Credit Facility was $817.1 million.

Our net leverage ratio was 2.99 to 1.00.

During the nine months ended September 30, 2022, we generated $189.8 million in cash from operations, had a net decrease in borrowings of $102.5 million, had aggregate cash outlays of $53.3 million for purchases of property and equipment and capitalized software and content development costs, and spent $20.9 million for our purchases of EVERFI and Kilter.

During the three months ended March 31, 2023, we generated $21.8 million in cash from operations, had a net increase in borrowings of $17.2 million, and had aggregate cash outlays of $15.3 million for purchases of property and equipment and capitalized software and content development costs.

Security Incident update

As discussed in Note 10 to our unaudited, condensed consolidated financial statements included in this report, t otal 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 profitab ility and GAAP cash flow for the foreseeable future (see discussion regarding our non-GAAP financial measures beginning on page 38 ).

Fo r full year 2022, we currently expect net pre-tax expense of approximately $30 million to $35 million for ongoing legal fees related to the Security Incident.

As discussed in Note 8 to our unaudited, condensed consolidated financial statements included in this report, t otal costs related to the Security Incident exceeded the limit of our insurance coverage in the first quarter of 2022 .

Accordingly, the Security Incident has negatively impacted, and we expect it to continue for the foreseeable future to negatively impact, our GAAP profitab ility and GAAP cash flow (see discussion regarding non-GAAP adjusted free cash flow on page 36 ) .

For the three months ended March 31, 2023, we incurred net pre-tax expense of $17.8 million related to the Security Incident, which included $7.6 million for ongoing legal fees and an additional accrual for loss contingencies of $10.2 million.

During the three months ended March 31, 2023, we had net cash outlays of $9.2 million related to the Security Incident, which included ongoing legal fees and the $3.0 million civil penalty paid related to the SEC settlement (as discussed in Note 8).

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

For full year 2022, we currently expect net cash outlays of approximately $15 million to $25 million for ongoing legal fees related to the Security Incident.

As of September 30, 2022, we have recorded approximately $5.0 million in aggregate liabilities for a loss contingencies related to the Security Incident that we believe we can reasonably estimate.

Certain of these recorded charges reflect the low end of a range of estimated losses based on our determination that no estimate within that range was better than any other amount.

It is reasonably possible that actual losses in the future for those matters will be 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 September 30, 2022 because we are unable at this time to reasonably estimate the possible loss or range of loss.

Third Quarter 2022 Form 10-Q

For full year 2023, we currently expect net pre-tax expense of approximately $20.0 million to $30.0 million and net cash outlays of approximately $25.0 million to $35.0 million for ongoing legal fees related to the Security Incident.

Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below.

As of March 31, 2023, we have recorded approximately $30.2 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 in accordance with our loss contingency procedures described in Note 8.

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 March 31, 2023 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 judgment, 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.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Results of Operations

Comparison of the three and nine months ended September 30, 2022 and 2021

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

We determined that the EVERFI and Kilter acquisitions were not material to our consolidated financial statements;

therefore, separate presentation of revenue and earnings since the acquisition date is not required.

Comparison of the three months ended March 31, 2023 and 2022

Revenue and Cost of Revenue

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YoY Growth (%) YoY Growth (%)

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, Impact-as-a-Service ™ digital educational content, hosting services, payment services, online training programs, subscription-based analytic services.

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

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

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

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

Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter.

Recurring subscription contracts are typically for a term of three years at contract inception.

We have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts.

We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.

Recurring revenue increased by $30.9 million, or 14.1%, and $104.3 million, or 16.2%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, driven primarily by the following:

+ Increases in contractual recurring revenue of $27.7 million and $81.6 million, respectively, related to the performance of our cloud solutions, of which $23.7 million and $71.2 million, respectively, was attributable to EVERFI;

partially offset by decreases in maintenance revenue as customers migrate to our cloud solutions;

also offsetting the increases in contractual recurring revenue were decreases related to fluctuations in foreign currency exchange rates of $1.3 million and $2.3 million, respectively

+ Increase in transactional recurring revenue of $3.2 million for the three months ended, September 30, 2022, primarily due to an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes.

The increase in transactional recurring revenue during the three months ended September 30, 2022, was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $3.1 million

+ Increase in transactional recurring revenue of $22.7 million for the nine months ended September 30, 2022, primarily due to:

• an increase in online charitable giving;

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

• to a lesser extent, increased transactional volume as our customer's constituents have begun to return to in-person events.

The increase in transactional recurring revenue during the nine months ended September 30, 2022, was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $5.5 million

Recurring revenue increased by $8.1 million, or 3.3%, during the three months ended March 31, 2023, when compared to the same period in 2022, driven primarily by the following:

+ Increase in transactional recurring revenue of $5.0 million primarily due to increases in volume for our Blackbaud Tuition Management and JustGiving solutions and positive results related to a pricing initiative we implemented at the beginning of 2023;

the increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $1.7 million

+ Increase in contractual recurring revenue of $3.1 million related to the performance of our cloud solutions;

partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions;

also offsetting the increase in contractual recurring revenue was a decrease related to fluctuations in foreign currency exchange rates of $0.8 million

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 41 .

Cost of recurring revenue increased by $15.7 million, or 16.3%, and $59.0 million, or 21.1%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, driven primarily by the following:

+ Increases in compensation costs of $4.6 million and $17.4 million, respectively, 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

+ Increases in transaction-based costs of $2.9 million and $12.1 million, respectively, related to the increase in the volume of transactions for which we process payments

+ Increases in amortization of intangible assets from business combinations of $3.4 million and $10.5 million, respectively, due to our acquisition of EVERFI

+ Increase in third-party contractor and hosting costs of $7.5 million for the nine months ended September 30, 2022 as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security;

Cost of recurring revenue increased by $2.3 million, or 2.1%, during the three months ended March 31, 2023, when compared to the same period in 2022, driven primarily by the following:

+ Increase in transaction-based costs of $2.1 million related to the increase in the volume of transactions for which we process payments and, to a lesser extent, increases in vendor rates

+ Increase in third-party software costs of $1.6 million primarily related to a higher number of licenses needed and also price increases

+ Increase in amortization of software development costs of $1.3 million due to our continued investments in the innovation and security of our solutions

+ Increase in amortization of intangible assets from business combinations of $0.6 million primarily due to our acquisition of EVERFI

- Decrease in compensation costs of $2.1 million primarily related to our targeted workforce reductions during the fourth quarter of 2022 and the first quarter of 2023, partially offset by a corresponding increase in severance costs of $0.4 million

- Decrease in hosting and data center costs of $2.1 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

+ Increases in amortization of software development costs of $1.8 million and $4.1 million, respectively, due to our continued investments in the innovation and security of our solutions

+ Increase in allocated overhead costs of $3.2 million for the nine months ended September 30, 2022 related to the increased headcount discussed above

Recurring gross margin decreased by 0.9% and 1.8% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

Recurring gross margin increased by 50 basis points for the three months ended March 31, 2023, when compared to the same period in 2022, primarily due to the increase in recurring revenue outpacing the increase in cost of recurring revenue.

One-time services and other

4 unchanged sentences

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

One-time services and other revenue decreased by $0.8 million, or 6.1%, and $0.8 million, or 2.1%, during the three and nine months ended September 30, 2022, when compared to the same periods in 2021, driven primarily by the following:

- Decreases in one-time analytics revenue of $0.5 million and $2.2 million, respectively, as analytics are generally integrated in our cloud solutions

+ Increases in one-time consulting revenue of $0.2 million and $1.9 million, respectively, 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.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Cost of one-time services and other decreased by $2.4 million, or 20.3%, and $8.3 million, or 20.6%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, driven primarily by the following:

- Decreases in compensation costs of $1.4 million and $6.7 million, respectively, 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 $1.4 million for the nine months ended September 30, 2022, primarily related to the decreased headcount discussed above

One-time services and other gross margin increased by 14.1% and 20.1% during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, primarily due to the significant reductions in compensation costs discussed above.

One-time services and other revenue decreased by $3.5 million, or 27.7%, during the three months ended March 31, 2023, when compared to the same periods in 2022, driven primarily by the following:

- Decrease in one-time consulting revenue of $3.0 million primarily due to 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 of $0.8 million as analytics are generally integrated in our cloud solutions

Cost of one-time services and other decreased by $2.6 million, or 23.0%, during the three months ended March 31, 2023, when compared to the same period in 2022, driven primarily by the following:

- Decrease in compensation costs of $2.5 million primarily related to our targeted workforce reductions discussed above and a continued shift in resources historically supporting one-time services and other towards recurring revenue

One-time services and other gross margin decreased by 580 basis points during the three months ended March 31, 2023, when compared to the same period in 2022, primarily due to the decrease of one-time services and other revenue outpacing the decrease compensation costs discussed above.

Operating Expenses

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

Third Quarter 2022 Form 10-Q

Sales, marketing and customer success expense decreased by $0.8 million, or 1.5%, during the three months ended March 31, 2023, when compared to the same period in 2022, primarily driven by the following:

- Decrease in advertising costs of $0.9 million

+ Net increase in the following costs primarily due to our targeted workforce reductions discussed above:

• Increase in severance costs of $1.6 million;

• Decrease in compensation costs of $0.9 million;

• Decrease in commissions expense of $0.6 million

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Sales, marketing and customer success expense increased by $11.7 million, or 26.2%, and $25.4 million, or 18.3%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, primarily driven by the following:

+ Increases in compensation costs of $6.9 million and $14.6 million, respectively, primarily related to increased employee headcount due to our acquisition of EVERFI

+ Increases in third-party contractor costs of $2.5 million and $3.4 million, respectively, primarily related to strategic consulting

+ Increases in advertising costs of $1.1 million and $5.0 million, respectively, primarily due to our acquisition of EVERFI

+ Increase in travel costs of $1.6 million for the nine months ended September 30, 2022 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 software costs of $1.3 million for the nine months ended September 30, 2022 primarily related to our acquisition of EVERFI and our use of digital marketing tools

Research and development

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

Research and development expenses increased by $8.9 million, or 28.1%, and $27.8 million or 30.5%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, primarily driven by the following:

+ Increases in compensation costs of $7.9 million and $22.0 million, respectively, primarily related to increased employee headcount due to our acquisition of EVERFI, and to a lesser extent, our increased hiring of engineers

+ Increases in third-party contractor costs of $5.0 million and $16.0 million, respectively, primarily due to our acquisition of EVERFI and, to a lesser extent, an increase in our use of third-party software developers

+ Increase in allocated overhead costs of $2.1 million for the nine months ended September 30, 2022, primarily related to increased headcount discussed above

- Increases in software development costs of $5.4 million and $14.5 million, respectively, that were required to be capitalized under GAAP, of which $5.2 million and $9.3 million was attributable to EVERFI software and content

Not included in research and development expense for the three months ended September 30, 2022 and 2021 were $15.1 million and $9.7 million, respectively, and for the nine months ended September 30, 2022 and 2021 were $43.6 million and $29.2 million, respectively, of qualifying costs associated with software and content development activities that are required to be capitalized under GAAP, such as those for our cloud solutions, as well as development costs associated with acquired companies.

Research and development expenses increased by $0.6 million or 1.6%, during the three months ended March 31, 2023, when compared to the same period in 2022, primarily driven by the following:

+ Increase in severance costs of $1.1 million primarily due to our targeted workforce reductions discussed above

+ Increase in stock-based compensation of $1.1 million primarily due to new grants related to 2022 performance-based equity award adjustments, partially offset by the targeted workforce reductions discussed above

- Decrease in third-party contractor costs of $1.1 million primarily due to a decrease in our use of third-party software developers

Not included in research and development expense for the three months ended March 31, 2023 and 2022 were $14.2 million and $13.8 million, respectively, of qualifying costs associated with software and content development activities that are required to be capitalized under GAAP, such as those for our cloud solutions, as well as development costs associated with acquired companies.

Qualifying capitalized development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related assets' estimated useful life, which generally range from three to seven years.

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

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

General and administrative expense increased by $15.1 million or 43.6%, and $43.7 million, or 44.9%, during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, primarily driven by the following:

+ Increases in Security Incident-related expenses, net of insurance, of $12.8 million and $27.9 million, respectively.

See "Security Incident update" below on page 43

+ Increases in compensation costs of $1.8 million and $8.4 million, respectively, primarily related to increased employee headcount due to our acquisition of EVERFI

+ Increases in acquisition and disposition-related costs of $2.4 million and $5.6 million, respectively, 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.

During the nine months ended September 30, 2022, 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 nine months ended September 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 $1.7 million during the nine months ended September 30, 2022 primarily related to leases assumed from our acquisition of EVERFI

+ Increase in third-party contractor costs of $1.4 million during the nine months ended September 30, 2022

+ Increase in travel costs of $1.2 million during the nine months ended September 30, 2022 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 allocated corporate IT costs of $4.1 million during the nine months ended September 30, 2022 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 condensed statements of comprehensive income based on headcount.

Third Quarter 2022 Form 10-Q

General and administrative expense increased by $9.1 million, or 20.7%, during the three months ended March 31, 2023, when compared to the same period in 2022, primarily driven by the following:

+ Increase in Security Incident-related expenses of $10.6 million.

See "Security Incident update" on page 26

+ Increase in severance costs of $0.8 million, partially offset by a corresponding decrease in compensation costs of $0.6 million due to our targeted workforce reductions discussed above

- Decrease in third-party contractor costs of $0.6 million

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

2 unchanged sentences

Percentages indicate expenses as a percentage of total revenue

The increases in interest expense in dollars and as a percentage of total revenue during the three and nine months ended September 30, 2022, when compared to the same period in 2021, were primarily due to the new borrowings used to finance our acquisition of EVERFI.

The increase in interest expense in dollars and as a percentage of total revenue during the three months ended March 31, 2023, when compared to the same period in 2022, was primarily due to an increase in our weighted average effective interest rates.

We currently expect interest expense for the full year 2023 to be approximately $37 million to $41 million although our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment.

4 unchanged sentences

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

(dollars in millions) September 30,

(dollars in millions) March 31,

2023 December 31,

9 unchanged sentences

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

The increase in deferred revenue during the nine months ended September 30, 2022 was primarily due to a seasonal increase in customer contract renewals .

The decrease in deferred revenue during the three months ended March 31, 2023 was primarily due to a seasonal decrease in customer contract renewals .

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

Generally, our lowest balance of deferred revenue during the year is at the end of our first quarter.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Income tax (benefit) provision ($M)

Income tax benefit ($M)

Percentages indicate effective income tax rates

For the six months ended June 30, 2022, we utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, Income Taxes—Interim Reporting , to calculate its interim income tax provision.

For the three months ended March 31, 2022, we utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, Income Taxes—Interim Reporting , to calculate its interim income tax provision.

The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate.

1 unchanged sentence

We believe that, at this time, the use of this discrete method is no longer more appropriate than the annual effective tax rate method.

The decreases in our effective income tax rate for the three and nine months ended September 30, 2022 when compared to the same periods in 2021 was primarily due to the effect of year-to-date losses relative to our forecasted permanent items, including foreign-derived intangible income deduction not generated in the prior year.

Furthermore, the 2022 effective income tax rate was negatively impacted by expenses attributable to stock-based compensation.

The increase in our effective income tax rate for the three months ended March 31, 2023 when compared to the same period in 2022 was primarily attributable to unfavorable impact of non-deductible Security Incident accruals, lower foreign-derived intangible income deduction and increase to the UK corporate tax rate offset against benefit attributable to valuation allowance reduction.

Non-GAAP Financial Measures

6 unchanged sentences

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

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Three months ended

September 30,

Nine months ended

September 30,

(dollars in millions, except per share amounts) 2023

10 unchanged sentences

Non-GAAP gross margin 59.8 % 58.5 %

GAAP (loss) income from operations $ (7.0) $ 11.8 (159.2) % $ (12.9) $ 31.5 (141.0) %

GAAP loss from operations $ (9.9) $ (6.0) 66.4 %

GAAP operating margin (3.8) % (2.3) %

12 unchanged sentences

17.8 7.2 147.0 %

Impairment of capitalized software development costs

66.5 49.4 34.7 %

56.9 38.6 47.2 % 160.7 120.3 33.6 %

Non-GAAP income from operations (1)

1 unchanged sentence

Non-GAAP operating margin 21.6 % 16.9 %

GAAP (loss) income before provision for income taxes $ (11.9) $ 8.7 (236.6) % $ (30.1) $ 17.7 (270.3) %

GAAP net (loss) income $ (10.3) $ 6.2 (266.8) % $ (24.1) $ 12.8 (289.3) %

Shares used in computing GAAP diluted (loss) earnings per share 51,692,152 48,274,072 7.1 % 51,519,340 48,259,956 6.8 %

GAAP diluted (loss) earnings per share $ (0.20) $ 0.13 (253.8) % $ (0.47) $ 0.26 (280.8) %

GAAP loss before provision for income taxes $ (18.6) $ (12.5) 49.3 %

GAAP net loss $ (14.7) $ (10.4) 41.3 %

Shares used in computing GAAP diluted loss per share 52,132,999 51,199,717 1.8 %

GAAP diluted loss per share $ (0.28) $ (0.20) 40.0 %

Non-GAAP adjustments:

GAAP income tax (benefit) provision (1.6) 2.5 (162.6) % (6.0) 4.9 (221.2) %

GAAP income tax benefit (3.9) (2.1) 90.3 %

Total non-GAAP adjustments affecting income from operations 66.5 49.4 34.7 %

6 unchanged sentences

Non-GAAP diluted earnings per share $ 0.72 $ 0.57 26.3 %

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

(2) Includes a $2.0 million noncash impairment of intangible assets held for sale during the three and nine months ended September 30, 2022.

(3) Includes Security Incident-related costs incurred during the three and nine months ended September 30, 2022 of $13.7 million and $31.1 million, respectively, net of insurance recoveries during the same periods of $— million and $1.9 million, respectively, and during the three and nine months ended September 30, 2021 of $11.4 million and $35.9 million, respectively, net of insurance recoveries during the same periods of $10.6 million and $34.6 million, respectively.

(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 Security Incident-related costs incurred during the three months ended March 31, 2023 of $17.8 million, which includes approximately $10.2 million in recorded liabilities for loss contingencies, net of insurance recoveries during the same period of $0.0 million and during the three months ended March 31, 2022 of $9.0 million, net of insurance recoveries during the same period of $1.8 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 2022, we currently expect net pre-tax expense of approximately $30 million to $35 million for ongoing legal fees related to the Security Incident.

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.

Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below.

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

For full year 2022, we currently expect net cash outlays of approximately $15 million to $25 million for ongoing legal fees related to the Security Incident.

There are some Security Incident-related matters for which we have not recorded a liability for a loss contingency as of September 30, 2022 because we are unable at this time to reasonably estimate the possible loss or range of 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 March 31, 2023 because we are unable at this time to reasonably estimate the possible loss or range of loss.

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

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

8 unchanged sentences

(dollars in millions) Three months ended

September 30,

Nine months ended

September 30,

GAAP revenue $ 261.8 $ 257.1

GAAP revenue growth 1.8 %

Non-GAAP acquisition-related revenue (1)

— 26.0 — 77.1

Non-GAAP revenue from divested businesses (1)

— (0.4) — (0.4)

Total Non-GAAP adjustments — 25.6 — 76.7

Non-GAAP organic revenue (2)

9 unchanged sentences

GAAP recurring revenue growth 3.3 %

Non-GAAP acquisition-related revenue (1)

— 22.8 — 68.8

Non-GAAP recurring revenue from divested businesses (1)

— (0.3) — (0.3)

Total Non-GAAP adjustments — 22.5 — 68.4

Non-GAAP organic recurring revenue (2)

7 unchanged sentences

Non-GAAP organic recurring revenue growth on constant currency basis 4.9 %

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

For companies 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.

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

4 unchanged sentences

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

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

13 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

(dollars in millions) 2023

GAAP net (loss) income $ (10.3) $ 6.2 (266.8) % $ (24.1) $ 12.8 (289.3) %

GAAP net loss $ (14.7) $ (10.4) 41.3 %

Non-GAAP adjustments:

Interest, net 9.4 7.5 26.1 %

GAAP income tax (benefit) provision (1.6) 2.5 (162.6) % (6.0) 4.9 (221.2) %

GAAP income tax benefit (3.9) (2.1) 90.3 %

3.3 3.5 (5.7) %

17 unchanged sentences

17.8 7.2 147.0 %

Impairment of capitalized software development costs

52.6 36.1 45.9 %

44.3 29.5 50.3 % 121.6 92.0 32.2 %

Non-GAAP Adjusted EBITDA (2)

2 unchanged sentences

Rule of 40 (4)

27.3 % 28.4 %

Non-GAAP adjusted EBITDA 71.3 57.2 24.7 %

5 unchanged sentences

Rule of 40 on constant currency basis (6)

29.8 % 29.9 %

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

8 unchanged sentences

See Non-GAAP organic revenue growth table above.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

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.

Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software and content 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 and content 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.

Nine months ended

September 30,

Three months ended

(dollars in millions) 2023

22 unchanged sentences

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.

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, the COVID-19 pandemic or other factors.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

1 unchanged sentence

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

(dollars in millions) September 30,

(dollars in millions) March 31,

2023 December 31,

5 unchanged sentences

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

Nine months ended September 30,

Three months ended March 31,

(dollars in millions) 2023

8 unchanged sentences

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

In the near term, we are committed to reducing our net leverage to our target level of 2 to 1.

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

1 unchanged sentence

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

At September 30, 2022, our total cash and cash equivalents balance included approximately $15.9 million of cash that was held by operations outside the U.S.

At March 31, 2023, our total cash and cash equivalents balance included approximately $14.1 million of cash that was held by operations outside the U.S.

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

1 unchanged sentence

We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

Operating Cash Flow

2 unchanged sentences

and (ii) changes in our working capital.

Third Quarter 2022 Form 10-Q

Blackbaud, Inc.

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

Net cash provided by operating activities increased by $20.0 million during the nine months ended September 30, 2022, when compared to the same period in 2021, primarily due to a $45.5 million decrease in net income adjusted for non-cash expenses and a $65.5 million increase in cash flow from operations associated with working capital.

The increase in cash flow from operations associated with working capital during the nine months ended September 30, 2022 , when compared to the same period in 2021, was primarily due to:

• a seasonal increase in the collection of customer contract renewal billings and an increase in the collection of customer account balances from an aging improvement initiative;

• 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 taxes payable;

Net cash provided by operating activities decreased by $2.7 million during the three months ended March 31, 2023, when compared to the same period in 2022, primarily due to a $15.6 million increase in net income adjusted for non-cash expenses and a $18.3 million decrease in cash flow from operations associated with working capital.

The decrease in cash flow from operations associated with working capital during the three months ended March 31, 2023 , when compared to the same period in 2022, was primarily due to:

• a decrease in taxes payable;

• fluctuations in the timing of vendor payments.

Workforce reduction

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.

This recently included further elimination of open positions as well as the decision to reduce our workforce.

As a result of the workforce targeted reduction, we expect to incur between $6 million and $8 million in pre-tax employee severance costs primarily during the fourth quarter of 2022.

We expect this workforce reduction and other cost actions will reduce our planned future pre-tax cost run rate by approximately $40 million to $50 million beginning in 2023, partially offset by continued investments in cybersecurity and innovation.

Security Incident update

As discussed in Note 10 to our unaudited, condensed consolidated financial statements included in this report, t otal costs related to the Security Incident that we expect will be recoverable has 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 our non-GAAP financial measures beginning on page 38 ).

For full year 2022, we currently expect net pre-tax expense of approximately $30 million to $35 million for ongoing legal fees related to the Security Incident.

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

For full year 2022, we currently expect net cash outlays of approximately $15 million to $25 million for ongoing legal fees related to the Security Incident.

As of September 30, 2022, we have recorded approximately $5.0 million in aggregate liabilities for a loss contingencies related to the Security Incident that we believe we can reasonably estimate.

Certain of these recorded charges reflect the low end of a range of estimated losses based on our determination that no estimate within that range was better than any other amount.

Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below.

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 March 31, 2023 because we are unable at this time to reasonably estimate the possible loss or range of loss.

Investing Cash Flow

Net cash used in investing activities of $67.8 million increased by $29.8 million during the nine months ended September 30, 2022, when compared to the same period in 2021.

During the nine months ended September 30, 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.

Third Quarter 2022 Form 10-Q

Net cash used in investing activities of $15.3 million decreased by $21.6 million during the three months ended March 31, 2023, when compared to the same period in 2022.

During the three months ended March 31, 2022, we used $20.0 million for our acquisition of EVERFI comprised 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;

and (ii) $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 the three months ended March 31, 2023, we used $14.0 million for software and content development costs, which was up $1.3 million from cash spent during the same period in 2022.

We also spent $1.4 million of cash for purchases of property and equipment during the three months ended March 31, 2023, which was a decrease of $2.9 million when compared to the same period in 2022.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

We used $42.8 million for software development costs, which was up $13.1 million from cash spent during the same period in 2021, primarily due to the inclusion of EVERFI's software and content development activities.

We also spent $10.5 million of cash for purchases of property and equipment during the nine months ended September 30, 2022, which was an increase of $2.2 million when compared to the same period in 2021.

Financing Cash Flow

During the nine months ended September 30, 2022, we had a net decrease in borrowings of $102.5 million.

We paid $36.1 million to satisfy tax obligations of employees upon settlement of equity awards during the nine months ended September 30, 2022 compared to $39.0 million during the same period in 2021.

During the three months ended March 31, 2023, we had a net increase in borrowings of $17.2 million.

We paid $31.4 million to satisfy tax obligations of employees upon settlement of equity awards during the three months ended March 31, 2023 compared to $34.7 million during the same period in 2022.

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

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

During the nine months ended September 30, 2022, cash flow from financing activities associated with changes in restricted cash due to customers decreased $243.1 million, compared to a decrease of $387.0 million during the same period in 2021.

During the three months ended March 31, 2023, cash flow from financing activities associated with changes in restricted cash due to customers decreased $337.2 million, compared to a decrease of $315.3 million during the same period in 2022.

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.

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

During the three and nine months ended September 30, 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 September 30, 2022.

During the three months ended March 31, 2023, we did not purchase any shares.

The remaining amount available to purchase stock under the stock repurchase program was $250.0 million as of March 31, 2023.

While we are committed to reducing our net leverage to our 2 to 1 target level in the near term, as we gain visibility into the timing and magnitude of probable costs related to the Security Incident over time, we expect to resume stock repurchases.

2020 Credit Facility

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

At September 30, 2022, our available borrowing capacity under the 2020 Credit Facility was $326.9 million.

At March 31, 2023, our available borrowing capacity under the 2020 Credit Facility was $298.2 million.

The 2020 Credit Facility matures in October 2025.

At September 30, 2022, the carrying amount of our debt under the 2020 Credit Facility was $795.5 million.

Our average daily borrowings during the three and nine months ended September 30, 2022 were $834.7 million and $886.8 million, respectively.

At March 31, 2023, the carrying amount of our debt under the 2020 Credit Facility was $817.1 million.

Our average daily borrowings during the three months ended March 31, 2023 were $806.3 million.

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

Financial covenant Requirement Ratio as of September 30, 2022

Financial covenant Requirement Ratio as of March 31, 2023

Net leverage ratio (1)

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(i) no default or event of default shall have occurred and be continuing under the 2020 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2020 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase.

At September 30, 2022, we were in compliance with our debt covenants under the 2020 Credit Facility.

At March 31, 2023, we were in compliance with our debt covenants under the 2020 Credit Facility.

See Note 6 to our unaudited, condensed consolidated financial statements included in this report for additional information regarding the 2020 Credit Facility.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

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Operating leases 10.2 53.4 63.5

Interest payment on debt — 8.9 8.9

Contingent consideration 1.4 1.4 2.7

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

As of September 30, 2022, we had total remaining principal payments of $857.5 million.

As of March 31, 2023, we had total remaining principal payments of $880.6 million.

These payments represent principal payments only, under the following assumptions:

(i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at September 30, 2022 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2020 Revolving Facility for the purposes of determining minimum commitment amounts.

(i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at March 31, 2023 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the revolving credit loans under the 2020 Credit Facility for the purposes of determining minimum commitment amounts.

See Note 6 to our unaudited, condensed consolidated financial statements in this report for more information.

Interest payments on debt

In addition to principal payments, as of September 30, 2022, we expect to pay interest expense over the life of our debt obligations of approximately $135.9 million.

These payments represent our estimated future interest payments on debt using our debt balances and the related weighted average effective interest rates as of September 30, 2022, which includes the effect of interest rate swap agreements.

In addition to principal payments, as of March 31, 2023, we expect to pay interest expense over the life of our debt obligations of approximately $133.6 million.

These payments represent our estimated future interest payments on debt using our debt balances and the related weighted average effective interest rates as of March 31, 2023, which includes the effect of interest rate swap agreements.

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

As of September 30, 2022, we had remaining operating lease payments of $65.9 million.

As of March 31, 2023, we had remaining operating lease payments of $63.5 million.

These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $10.4 million.

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Purchase obligations

As of September 30, 2022, we had remaining purchase obligations of $236.0 million.

As of March 31, 2023, we had remaining purchase obligations of $280.7 million.

These purchase obligations are for third-party technology used in our solutions and for other services we purchase as part of our normal operations.

In certain cases, these arrangements require a minimum annual purchase commitment by us.

Our purchase obligations are not recorded as liabilities on our consolidated balance sheets as of September 30, 2022, as we had not received the related services.

Our purchase obligations are not recorded as liabilities on our consolidated balance sheets as of March 31, 2023, as we had not received the related services.

See Note 8 to our unaudited, condensed consolidated financial statements in this report for more information.

The total liability for uncertain tax positions as of September 30, 2022 and December 31, 2021, was $4.1 million and $3.7 million , respectively.

Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of September 30, 2022 and December 31, 2021.

Third Quarter 2022 Form 10-Q

The total liability for uncertain tax positions as of March 31, 2023 was $3.3 million .

Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of March 31, 2023.

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

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 unaudited, condensed consolidated financial statements in this report.

In connection with our acquisition of Kilter in August 2022, we may be required to pay up to a maximum of $3.0 million in additional cash consideration if, during the two-year period commencing January 1, 2023, Kilter meets certain application participation targets.

As of March 31, 2023, a liability for the contingent consideration is recorded at its acquisition-date fair value of $2.7 million in other liabilities in our consolidated balance sheet.

Foreign Currency Exchange Rates

Approximately 16% of our total revenue for the nine months ended September 30, 2022 was generated from operations outside the U.S.

Approximately 15% of our total revenue for the three months ended March 31, 2023 was generated from operations outside the U.S.

We do not have significant operations in countries in which the economy is considered to be highly inflationary.

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dollars for purposes of reporting our consolidated financial results.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive income (loss) as a component of stockholders’ equity, was a loss of $22.8 million as of September 30, 2022 and income of $1.3 million as of December 31, 2021.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive income as a component of stockholders’ equity, was a loss of $12.7 million as of March 31, 2023 and a loss of $14.9 million as of December 31, 2022.

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.

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

During the nine months ended September 30, 2022, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S.

During the three months ended March 31, 2023, 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, primarily those between the U.S.

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However, we currently expect that fluctuations in foreign currency exchange rates will have a significant negative impact on our total revenue for the full year 2023.

For the nine months ended September 30, 2022, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $8.7 million and $2.2 million, respectively.

For the three months ended March 31, 2023, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $2.7 million and $0.3 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.

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Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2022 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2023 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recently Issued Accounting Pronouncements

For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 to our unaudited, condensed consolidated financial statements in this report.

Third Quarter 2022 Form 10-Q

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis