What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 261 added, 171 removed, 456 unchanged (49% of the section changed)

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(ii) providing payment and transactional services;

(iii) providing software maintenance and support services;

(iv) providing Impact-as-a-Service ™ digital educational content;

(iii) providing Impact-as-a-Service ™ digital educational content;

(iv) providing software maintenance and support services;

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

Update on Five Key Operational Initiatives

1 Product Innovation

1 Product Innovation and Delivery

2 Bookings Growth and Acceleration

3 Transactional Revenue Optimization

3 Transactional Revenue Optimization and Expansion

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

Product Innovation and Delivery

Product is core at Blackbaud, and we strive to bring increased value to our customers through their software subscriptions with improved and innovative capabilities.

For example, we recently released a new, next generation donation form in Raiser’s Edge NXT with the goal of increasing the conversion rate and donations our customers raise.

We match the new donation form with Prospect Insights, which utilizes artificial intelligence ("AI") to identify and qualify candidates for major gifts.

For years, we have been using AI-enabled capabilities in our analytics offerings.

We are expanding our strategy into next-generation and generative AI technology that addresses specific challenges of our customers.

As recently announced, we will be rolling out an extensive new set of capabilities across our product portfolio over upcoming quarters, including:

• AI for Peer-to-Peer (P2P) Fundraisers:

Enabling P2P participants to use Generative AI-based features to make sharing their own story easier and more effective for their fundraiser.

• AI for Online Giving:

Providing a personalized experience to online donors through predictive AI capabilities.

• AI for Major Giving Officers:

Expanding Prospect Insights to include AI-driven insights into planned and major giving vehicles and likelihood.

• AI for Donor Stewardship:

Enabling organizations to automate the creation of key donor stewardship documents such as thank you notes through a built-in Generative AI experience.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

• AI for Educators:

Assisting teachers with personalized, AI-driven content that has appropriate guardrails to drive more classroom engagement.

• AI for School Administrators:

Leveraging AI to automate review and recommendations for financial aid submissions.

• AI for Corporate Impact:

Empowering Corporate Social Responsibility teams to capture, visualize and tell the story of their corporate social impact missions through inclusion of modern AI services.

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.

We signed several notable large contracts during the second quarter.

As previously disclosed, there can be volatility quarter-to-quarter on bookings.

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.

A rate increase on Blackbaud Merchant Services in the U.S.

took effect on August 1, 2023, which is incremental to the January 2023 rate change previously disclosed.

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

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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.

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

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

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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.

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

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

These efforts are well on their way.

We have already notified customers with December 2023 contract renewals of the new terms.

Through July 2023, nearly 70% of our 2023 contracts eligible for renewal rate increases have already renewed.

The close day-to-day management of renewals, the mix of 3-year and 1-year contracts, and the impact of pricing are progressing 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.

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.

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.

The adoption of 3-year renewals as a standard, with more customers opting for this option than we originally expected, 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.

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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.

Because we have organized to achieve much better scale efficiencies, we have significantly reduced our headcount 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

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Financial Summary

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

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

YoY Growth (%) YoY Growth (%)

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:

Total revenue increased by $6.1 million and $10.7 million during the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, driven largely by the following:

+ Growth in recurring revenue primarily related to:

• 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

• increases in transactional recurring revenue of $6.0 million and $11.0 million, respectively, 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;

also offsetting the increases in transactional recurring revenue were decreases related to fluctuations in foreign currency exchange rates of $0.6 million and $2.2 million, respectively;

• increases in contractual recurring revenue of $3.9 million and $7.0 million, respectively, related to the performance of our cloud solutions and, to a lesser extent, the early impact of our pricing initiatives;

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 $0.3 million and $1.1 million, respectively

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

• 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

• decreases in one-time consulting revenue due primarily to less sales of creative services and 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, which generally requires less implementation and customization services;

• 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 47 .

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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.

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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

Income from operations increased by $0.2 million during the three months ended June 30, 2023, when compared to the same period in 2022, driven largely by the following:

+ Decreases in compensation costs other than stock-based compensation of $10.1 million and commission expense of $0.8 million due to our targeted workforce reductions discussed below

+ Increase in total revenue, as described above

+ Decrease in acquisition and disposition-related costs of $3.1 million primarily related to the release of $1.4 million in accrued contingent consideration related to our Kilter acquisition during the three months ended June 30, 2023 and a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale during the three months ended June 30, 2022 which did not reoccur in the comparable 2023 period

+ 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 and did not reoccur in 2023

+ Decrease in third-party contractor costs of $1.8 million primarily due to a decrease in our use of third-party software developers

+ Decrease in hosting and data center costs of $1.5 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 other corporate costs of $1.2 million primarily related to the release of certain accrued tax liabilities due to favorable sales tax rulings

+ Net decrease of $0.9 million primarily related to a decrease in rent and utilities, partially offset by higher third-party software costs due to the number of licenses needed and also price increases for the software being used

- Increase in Security Incident-related expenses of $18.4 million.

See "Security Incident update" below.

- Increase in stock-based compensation expense of $5.5 million primarily due to estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

- Increase in transaction-based costs of $1.2 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 advertising costs of $1.1 million

- Net decrease of $0.8 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

- Increase in amortization of intangible assets from business combinations of $0.7 million due to our acquisition of EVERFI

Second 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:

Income from operations decreased by $3.7 million during the six months ended June 30, 2023, when compared to the same period in 2022, driven largely by the following:

- Increase in Security Incident-related expenses of $29.0 million.

See "Security Incident update" below.

- 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 stock-based compensation expense of $7.6 million primarily due to 2022 performance-based equity award

adjustments and estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

- Increase in transaction-based costs of $3.3 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 $1.7 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 amortization of intangible assets from business combinations of $1.3 million due to our acquisition of EVERFI

- Net increase of $1.0 million primarily related to higher third-party software costs due to the number of licenses needed and also price increases for the software being used, partially offset by a decrease in rent and utilities

+ Decreases in compensation costs other than stock-based compensation of $17.8 million and commission expense of $1.5 million, partially offset by a corresponding increase in severance costs of $4.5 million due to our targeted workforce reductions discussed below

+ Increase in total revenue, as described above

+ Decrease in third-party contractor costs of $3.7 million primarily due to a decrease in our use of third-party software developers

+ Decrease in hosting and data center costs of $3.6 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

+ Decrease in acquisition and disposition-related costs of $3.5 million primarily related to the release of $1.4 million in accrued contingent consideration related to our Kilter acquisition during the six months ended June 30, 2023 and a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale during the three months ended June 30, 2022 which did not reoccur in the comparable 2023 period

+ A $2.3 million noncash impairment charge during the six 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

+ Decrease in other corporate costs of $1.6 million primarily related to the release of certain accrued tax liabilities due to favorable sales tax rulings

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 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.

Our profitability during the first half of 2023 reflects some of these incremental investments.

In the second half of 2023, we expect our financial performance to improve each quarter as our pricing and cost initiatives continue to 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.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Gross dollar retention

Our 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.

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

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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.

For the twelve months ended June 30, 2023, our gross dollar retention was approximately 90%.

This gross dollar retention rate is relatively consistent with 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.

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

Balance sheet and cash flow

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.

At June 30, 2023, our cash and cash equivalents were $29.0 million and the carrying amount of our debt under the 2020 Credit Facility was $786.8 million.

Our net leverage ratio was 2.67 to 1.00 .

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.

During the six months ended June 30, 2023, we generated $75.0 million in cash from operations, had a net decrease in borrowings of $13.8 million, and had aggregate cash outlays of $31.5 million for purchases of property and equipment and capitalized software and content development costs.

Security Incident update

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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 42 ).

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).

For the three and six months ended June 30, 2023, we incurred net pre-tax expenses of $26.8 million and $44.6 million, respectively, related to the Security Incident, which included $7.0 million and $14.6 million, respectively, for ongoing legal fees and additional accruals for loss contingencies of $19.8 million and $30.0 million, respectively.

During the six months ended June 30, 2023, we had net cash outlays of $15.8 million related to the Security Incident, which included ongoing legal fees and the $3.0 million civil penalty paid during the first quarter of 2023 related to the SEC settlement (as discussed in Note 8).

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

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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.

As of June 30, 2023, we have recorded approximately $50.0 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 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.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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 June 30, 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

Fixed asset impairment

On July 31, 2023, we entered into a sublease for a portion of our Washington, DC office location, which we previously closed in February 2023 to align with our remote-first workforce strategy.

We considered our entry into the sublease an impairment indicator.

As a result, we currently expect to incur pre-tax costs between $6.0 million and $8.0 million in the third quarter of 2023, consisting of noncash impairment charges against certain operating lease right-of-use assets and property and equipment assets.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Results of Operations

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

Comparison of the three and six months ended June 30, 2023 and 2022

Revenue and Cost of Revenue

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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.

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 $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

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Recurring revenue increased by $9.9 million, or 3.9%, and $18.0 million, or 3.6%, during the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, driven primarily by the following:

+ Increases in transactional recurring revenue of $6.0 million and $11.0 million, respectively, 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;

also offsetting the increases in transactional recurring revenue were decreases related to fluctuations in foreign currency exchange rates of $0.6 million and $2.2 million, respectively

+ Increases in contractual recurring revenue of $3.9 million and $7.0 million, respectively, related to the performance of our cloud solutions and, to a lesser extent, the early impact of our pricing initiatives;

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 $0.3 million and $1.1 million, respectively

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 47 .

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:

Cost of recurring revenue decreased by $0.6 million, or 0.5%, during the three months ended June 30, 2023, when compared to the same period in 2022, driven primarily by the following:

- Decrease in compensation costs other than stock-based compensation of $2.6 million primarily due to our targeted workforce reductions discussed above

- Decrease in hosting and data center costs of $1.5 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

+ Increase in amortization of software development costs of $1.4 million due to our continued investments in the innovation and security of our solutions

+ Increase in transaction-based costs of $1.2 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 intangible assets from business combinations of $0.7 million primarily due to our acquisition of EVERFI in December 2021

Cost of recurring revenue increased by $1.8 million, or 0.8%, during the six months ended June 30, 2023, when compared to the same period in 2022, driven primarily by the following:

+ Increase in transaction-based costs of $3.3 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 amortization of software development costs of $2.7 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

+ Increase in amortization of intangible assets from business combinations of $1.4 million primarily due to our acquisition of EVERFI in December 2021

+ Increase in third-party software costs of $1.1 million primarily related to a higher number of licenses needed and also price increases for the software being used

+ Increase in stock-based compensation costs of $0.7 million primarily due to 2022 performance-based equity award adjustments and estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

- Decrease in compensation costs other than stock-based compensation of $4.8 million primarily due to our targeted workforce reductions discussed above

- Decrease in hosting and data center costs of $3.6 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

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.

Recurring gross margin increased by 190 and 120 basis points for the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, primarily due to the increases in recurring revenue outpacing the changes in cost of recurring revenue.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

One-time services and other

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

First Quarter 2023 Form 10-Q

One-time services and other revenue decreased by $3.8 million, or 30.3%, and $7.2 million, or 29.0%, during the three and six months ended June 30, 2023, when compared to the same periods in 2022, driven primarily by the following:

- Decreases in one-time consulting revenue of $2.7 million and $5.7 million, respectively, primarily due to less sales of creative services and 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, which generally requires less implementation and customization services.

- Decreases in one-time analytics revenue of $0.8 million and $1.6 million, respectively, as analytics are generally integrated in our cloud solutions

Cost of one-time services and other decreased by $3.6 million, or 32.1%, and $6.1 million, or 27.6%, during the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, driven primarily by the following:

- Decreases in compensation costs of $2.5 million and $5.0 million, respectively, 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

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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.

One-time services and other gross margin increased by 230 basis points during the three months ended June 30, 2023, when compared to the same period in 2022, primarily due to the decrease in compensation costs discussed above outpacing the decrease in one-time services and other revenue.

One-time services and other gross margin decreased by 190 basis points during the six months ended June 30, 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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We have also implemented software tools to enhance our digital footprint and drive lead generation.

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.

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:

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

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Sales, marketing and customer success expense increased by $0.5 million or 0.9%, during the three months ended June 30, 2023, when compared to the same period in 2022, primarily driven by the following:

+ Increase in stock-based compensation costs of $1.9 million primarily due to estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

+ Increase in advertising costs of $1.1 million

- Net decrease in the following costs primarily due to our targeted workforce reductions discussed above:

• Decrease in compensation costs other than stock-based compensation of $2.0 million;

• Decrease in commissions expense of $0.9 million

Sales, marketing and customer success expense decreased by $0.4 million, or 0.3%, during the six months ended June 30, 2023, when compared to the same period in 2022, primarily driven by the following:

- Net decrease in the following costs primarily due to our targeted workforce reductions discussed above:

• Increase in severance costs of $2.1 million;

• Decrease in compensation costs of $0.9 million;

• Decrease in compensation costs other than stock-based compensation of $3.4 million;

• Decrease in commissions expense of $1.5 million

First Quarter 2023 Form 10-Q

Blackbaud, Inc.

+ Increases in stock-based compensation costs of $2.4 million primarily due to 2022 performance-based equity award adjustments and estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

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 $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.

Research and development expenses decreased by $2.2 million, or 5.7%, and $1.5 million or 2.0%, during the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, primarily driven by the following:

- Decreases in third-party contractor costs of $2.4 million and $3.6 million, respectively, primarily due to a decrease in our use of third-party software developers

- Decreases in compensation costs other than stock-based compensation of $1.3 million and $1.9 million, respectively, primarily due to our targeted workforce reductions discussed above

+ Increases in stock-based compensation of $1.7 million and $2.8 million, respectively, primarily due to estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023.

2022 performance-based equity award adjustments also contributed to the increase in stock-based compensation expense during the six months ended June 30, 2023

+ Increase in severance costs of $1.1 million, for the six months ended June 30, 2023, primarily due to our targeted workforce reductions discussed above

Not included in research and development expense for the three months ended June 30, 2023 and 2022 were $15.4 million and $14.8 million, respectively, and for the six months ended June 30, 2023 and 2022 were $29.6 million and $28.5 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 recurring revenue over the related assets' estimated useful life, which generally range from three to seven years.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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.

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.

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

General and administrative expense increased by $11.8 million or 24.8%, and $20.8 million or 22.9%, during the three and six months ended June 30, 2023, respectively, when compared to the same periods in 2022, primarily driven by the following:

+ Increases in Security Incident-related expenses of $18.4 million and $29.0 million, respectively.

See "Security Incident update" on page 29

+ 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

+ Increases in stock-based compensation costs of $1.5 million and $2.2 million, respectively, primarily due to estimated overall Company performance against 2023 goals, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023.

2022 performance-based equity award adjustments also contributed to the increase in stock-based compensation expense during the six months ended June 30, 2023

- Decreases in acquisition and disposition-related costs of $3.1 million and $3.5 million, respectively, primarily related to the release of $1.4 million in accrued contingent consideration related to our Kilter acquisition during the three and six months ended June 30, 2023 and a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale during the three and six months ended June 30, 2022 which did not reoccur in the comparable 2023 periods

- Decreases in compensation costs other than stock-based compensation of $2.0 million and $3.3 million, respectively, primarily due to our targeted workforce reductions discussed above

- A $2.3 million noncash impairment charge during the three and six 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 and did not reoccur in 2023

Fixed Asset Impairment

On July 31, 2023, we entered into a sublease for a portion of our Washington, DC office location, which we previously closed in February 2023 to align with our remote-first workforce strategy.

We considered our entry into the sublease an impairment indicator.

We expect the impairment charge to be recorded in general and administrative expense.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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Percentages indicate expenses as a percentage of total revenue

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

The increases in interest expense in dollars and as a percentage of total revenue during the three and six months ended June 30, 2023, when compared to the same period in 2022, were 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.

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

(dollars in millions) March 31,

(dollars in millions) June 30,

2023 December 31,

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

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

The increase in deferred revenue during the six months ended June 30, 2023 was primarily due to a seasonal increase 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.

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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Percentages indicate effective income tax rates

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 increases in our effective income tax rate for the three and six months ended June 30, 2023, when compared to the same periods in 2022 were primarily attributable to unfavorable impact of non-deductible Security Incident accruals.

See Note 8 to our unaudited, condensed consolidated financial statements included in this report for additional information about our loss contingency accruals related to the Security Incident.

For the three and 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.

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.

The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis.

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 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.

For the three and six months ended June 30, 2023 we have utilized the annual effective tax rate method, as we believe it can now be reliably estimated.

This methodology requires us to apply our estimated annual effective tax rate to year-to-date pre-tax earnings.

During the second quarter of 2023, our estimated annual effective tax rate increased due to the unfavorable impacts of non-deductible Security Incident accruals and its impact on pre-tax earnings.

This increase, when applied to quarter-to-date and year-to-date date pre-tax losses, resulted in recognition of income tax benefits at 126.0% and 52.8%, respectively.

Non-GAAP Financial Measures

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

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

Three months ended

Six months ended

(dollars in millions, except per share amounts) 2023

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Non-GAAP gross margin 61.6 % 58.8 % 60.7 % 58.7 %

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

GAAP income (loss) from operations $ 0.3 $ 0.1 444.4 % $ (9.7) $ (5.9) 62.9 %

GAAP operating margin 0.1 % — % (1.8) % (1.1) %

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26.8 8.3 220.8 % 44.6 15.5 186.6 %

Impairment of capitalized software development costs

— 2.3 (100.0) % — 2.3 (100.0) %

73.8 54.4 35.7 % 140.4 103.8 35.2 %

Non-GAAP income from operations (1)

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GAAP loss before provision for income taxes $ (8.1) $ (5.8) 39.8 % $ (26.7) $ (18.2) 46.3 %

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 %

GAAP net income (loss) $ 2.1 $ (3.4) (161.5) % $ (12.6) $ (13.8) (8.9) %

Shares used in computing GAAP diluted earnings (loss) per share 53,643,124 51,660,739 3.8 % 52,389,112 51,431,501 1.9 %

GAAP diluted earnings (loss) per share $ 0.04 $ (0.07) (157.1) % $ (0.24) $ (0.27) (11.1) %

Non-GAAP adjustments:

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(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.

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

(3) Includes Security Incident-related costs incurred during the three and six months ended June 30, 2023 of $26.8 million and $44.6 million, respectively, which includes approximately $19.8 million and $30.0 million, respectively, in recorded liabilities for loss contingencies, net of insurance recoveries during the same periods of $0.0 million each and during the three and six months ended June 30, 2022 of $8.4 million and $17.4 million, respectively, net of insurance recoveries during the same periods that were insignificant and $1.9 million, respectively.

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

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

(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.

First Quarter 2023 Form 10-Q

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 June 30, 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,

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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.

Non-GAAP organic revenue growth

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(dollars in millions) Three months ended

Six months ended

GAAP revenue $ 271.0 $ 264.9 $ 532.8 $ 522.1

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Non-GAAP revenue from divested businesses (1)

— (1.3) — (2.6)

Non-GAAP organic revenue (2)

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Non-GAAP recurring revenue from divested businesses (1)

— (1.3) — (2.5)

Non-GAAP organic recurring revenue (2)

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

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

13 unchanged sentences

Three months ended

Six months ended

(dollars in millions) 2023

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

GAAP net income (loss) $ 2.1 $ (3.4) (161.5) % $ (12.6) $ (13.8) (8.9) %

Non-GAAP adjustments:

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(10.2) (2.4) 330.9 % (14.1) (4.4) 219.2 %

3.3 3.6 (8.7) % 6.6 7.1 (7.2) %

Amortization of intangibles from business combinations 13.9 13.2 5.4 % 27.8 26.5 4.9 %

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26.8 8.3 220.8 % 44.6 15.5 186.6 %

Impairment of capitalized software development costs

— 2.3 (100.0) % — 2.3 (100.0) %

59.9 41.2 45.4 % 112.6 77.3 45.6 %

Non-GAAP Adjusted EBITDA (2)

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Rule of 40 (4)

35.6 % 32.7 %

Non-GAAP adjusted EBITDA 88.8 70.6 25.9 % 160.1 127.8 25.3 %

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Rule of 40 on constant currency basis (6)

36.1 % 33.5 %

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

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See Non-GAAP organic revenue growth table above.

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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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.

Three months ended

Six months ended

(dollars in millions) 2023

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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.

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

1 unchanged sentence

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

(dollars in millions) March 31,

(dollars in millions) June 30,

2023 December 31,

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

Three months ended March 31,

Six months ended June 30,

(dollars in millions) 2023

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Net cash used in investing activities (31.5) (53.7) (41.3) %

Net cash used in financing activities (353.2) (325.4) 8.5 %

Net cash provided by (used in) financing activities 10.4 (194.1) (105.4) %

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

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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.

In the near term, excluding any future material events noted above or otherwise, we intend to reduce 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.

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

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.

At June 30, 2023, our total cash and cash equivalents balance included approximately $17.3 million of cash that was held by operations outside the U.S.

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

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

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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

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;

Net cash provided by operating activities decreased by $6.8 million during the six months ended June 30, 2023, when compared to the same period in 2022, primarily due to a $11.2 million decrease in net income adjusted for non-cash expenses and a $4.5 million increase in cash flow from operations associated with working capital.

The increase in cash flow from operations associated with working capital during the six months ended June 30, 2023 , when compared to the same period in 2022, was primarily due to:

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

partially offset by

• fluctuations in the timing of vendor payments;

• a decrease in taxes payable.

Security Incident update

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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 June 30, 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 $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;

Net cash used in investing activities of $31.5 million decreased by $22.2 million during the six months ended June 30, 2023, when compared to the same period in 2022.

During the six months ended June 30, 2022, we used $19.0 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

During the six months ended June 30, 2023, we used $28.8 million for software and content development costs, which was up $1.6 million from cash spent during the same period in 2022.

We also spent $2.8 million of cash for purchases of property and

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

equipment during the six months ended June 30, 2023, which was a decrease of $4.7 million when compared to the same period in 2022.

Financing Cash Flow

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.

During the six months ended June 30, 2023, we had a net decrease in borrowings of $13.8 million.

We paid $33.7 million to satisfy tax obligations of employees upon settlement of equity awards during the six months ended June 30, 2023 compared to $35.6 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 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.

During the six months ended June 30, 2023, cash flow from financing activities associated with changes in restricted cash due to customers increased $61.3 million, compared to a decrease of $141.0 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 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.

During the three and six months ended June 30, 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 June 30, 2023.

While we intend to reduce 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 March 31, 2023, our available borrowing capacity under the 2020 Credit Facility was $298.2 million.

At June 30, 2023, our available borrowing capacity under the 2020 Credit Facility was $325.8 million.

The 2020 Credit Facility matures in October 2025.

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.

At June 30, 2023, the carrying amount of our debt under the 2020 Credit Facility was $786.8 million.

Our average daily borrowings during the three and six months ended June 30, 2023 were $823.4 million and $814.9 million, respectively.

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

Financial covenant Requirement Ratio as of March 31, 2023

Financial covenant Requirement Ratio as of June 30, 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 March 31, 2023, we were in compliance with our debt covenants under the 2020 Credit Facility.

At June 30, 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.

First Quarter 2023 Form 10-Q

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

15 unchanged sentences

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

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

As of June 30, 2023, we had total remaining principal payments of $848.7 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 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.

(i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at June 30, 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 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.

In addition to principal payments, as of June 30, 2023, we expect to pay interest expense over the life of our debt obligations of approximately $123.0 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 June 30, 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 March 31, 2023, we had remaining operating lease payments of $63.5 million.

As of June 30, 2023, we had remaining operating lease payments of $60.7 million.

These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $9.8 million.

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Purchase obligations

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

As of June 30, 2023, we had remaining purchase obligations of $270.4 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 March 31, 2023, as we had not received the related services.

Our purchase obligations are not recorded as liabilities on our consolidated balance sheets as of June 30, 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 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

The total liability for uncertain tax positions as of June 30, 2023 was $3.3 million .

Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of June 30, 2023.

Second Quarter 2023 Form 10-Q

Blackbaud, Inc.

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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.

As of June 30, 2023, a liability for the contingent consideration is recorded at its current estimated fair value of $1.4 million in other liabilities in our consolidated balance sheet.

Foreign Currency Exchange Rates

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

Approximately 15% of our total revenue for the six months ended June 30, 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 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.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive income as a component of stockholders’ equity, was a loss of $9.7 million as of June 30, 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 three months ended March 31, 2023, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S.

During the six months ended June 30, 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 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.

For the six months ended June 30, 2023, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $3.7 million and $0.6 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.

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Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 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.

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

First Quarter 2023 Form 10-Q

Second 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