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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-24 · 304 added, 402 removed, 520 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 and individuals to increase their impact through cloud software, services, expertise and data intelligence.

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

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

During 2022, we had more than 40,000 customers with contractual billing arrangements and nearly 100,000 customers that paid us through transactional fees.

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

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.

Millions of people across more than 100 countries connect, give, learn and engage through Blackbaud platforms.

During 2023, we had nearly 100,000 customers that paid Blackbaud through transactional fees and more than 40,000 customers with contractual billing arrangements.

Our revenue is primarily generated from the following sources:

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(ii) providing payment and transaction services;

(iii) providing software maintenance and support services;

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

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

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.

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

Update on Five Key Operational Initiatives

1 Product Innovation and Delivery

2 Bookings Growth and Acceleration

3 Transactional Revenue Optimization and Expansion

4 Modernized Approach to Pricing and Multi-Year Customer Contracts

5 Keen Attention to Cost Management

Product Innovation and Delivery

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

We have recently announced or released a number of product enhancements as well as new solutions that enable our customers to better deliver on their missions.

Some examples include:

• Optimized Online Donation Capabilities:

New online donation capabilities that fully integrate with Blackbaud’s payment processing and CRM software and enable customers to raise more money while reducing processing costs.

We recently began an early adopter program for the new donation capabilities with a small sample of RE NXT customers across charity, education, and arts and cultural organizations.

We expect to make them generally available in the first half of 2024.

• Prospect Insights Pro for Raiser’s Edge NXT®:

New add-on capability within Raiser’s Edge NXT® that gives fundraisers access to AI-driven insights to support planned and major gift fundraising

• Impact Edge TM :

A first-of-its-kind AI-powered, social impact reporting and storytelling solution for corporate social responsibility (CSR) and social impact teams of all sizes.

This new solution is currently in an early adopter program with our planned full roll out in the second half of 2024.

2023 Form 10-K

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).

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

We created three new roles:

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

We believe these new roles will:

ensure consistency in our approach to the customer experience;

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

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

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

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

Delight Customers with Innovative Cloud Solutions

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

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

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

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

Focus on Employees, Culture and ESG Initiatives

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

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

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

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

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

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

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

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

• JustGiving Storywriter:

With new generative AI capabilities, fundraisers on JustGiving are able to quickly and easily create personal stories to share with their networks.

Company research has shown that JustGiving pages that include a clear and personal story raise approximately 65% more than those that don’t.

• Good Move TM :

New development transformed the Good Move activity-tracking mobile app into a powerful mobile participant center for Blackbaud TeamRaiser® peer-to-peer fundraising events.

The new expansive feature for Blackbaud TeamRaiser® became generally available in the U.S.

and Canada in March 2023.

• Intelligence for Good®:

In summer 2023, we launched next generation Intelligence for Good® strategy with an extensive agenda of initiatives and investments targeted at making artificial intelligence more accessible, powerful and responsible across the social impact sector

Bookings Growth and Acceleration

We maintain a keen focus on accelerating bookings growth by signing new logos as well as upselling and cross-selling our existing customer base.

Our sales team is split between prospect account executives dedicated to prospecting for new clients and customer account executives who focus on selling additional products to current customers.

Given the breadth of our product portfolio, this “land and expand” model has proven successful for us over time.

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, is comprised of four primary components:

donation processing (~55% of total transactional revenue);

consumer giving (~20%);

tuition management (~20%);

and event-based usage (~5%).

The diversity of the underlying transaction volumes from these four sources has resulted in consistent transactional recurring revenue growth in the mid-to-high single digits over the past several years.

Strong momentum in consumer giving and tuition management, rate increases on Blackbaud Merchant Services, and increased donations tied to global events drove continued solid transactional recurring revenue growth in 2023.

Going forward we will continue to implement additional payments solutions optimization to drive enhanced donor experience.

Modernized Approach to Pricing and Multi-Year Contracts

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 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 embedded annual rate increases.

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

These efforts are well on their way and we have now completed the 2023 renewal cohort, which represented approximately 35% of the total contractual revenue eligible for this program.

Approximately another 30% of the renewable base is up for renewal in 2024, another 25% in 2025, and the remaining 10% in the beginning of 2026.

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.

Additionally, 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.

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

Keen Attention to Cost Management

Cost management initiatives already completed drove a significant improvement in profitability during 2023.

These initiatives included:

• A reduction in headcount from approximately 3,600 in the third quarter of 2022 to approximately 3,000 as of December 31, 2023

2023 Form 10-K

Blackbaud, Inc.

• Continued IT consolidation as we migrate customers from legacy private data centers to leading public cloud service providers.

We closed four legacy data centers during 2022 and two in 2023.

• Renegotiated key vendor contracts including Microsoft Azure and AWS

• Reduced our real estate footprint as part of the shift to a remote first workforce

Going forward, our goal is to run the business at about this headcount level for the foreseeable future, while continuing to drive efficiencies in other areas of the business.

Financial Summary

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+ Growth in recurring revenue primarily related to:

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

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

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

and new pricing initiatives.

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

l an increase in transactional recurring revenue of $30.5 million primarily due to positive results related to pricing initiatives we implemented during 2023 and increases in volume for our Blackbaud Tuition Management, JustGiving and Blackbaud Merchant Services solutions;

l an increase in contractual revenue of $29.3 million related to the performance of our cloud solutions and, to a lesser extent, the early impact of our pricing initiatives;

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

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

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

• increase in one-time consulting revenue primarily attributable to EVERFI, largely offset by less revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model.

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

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

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

l decrease in one-time consulting revenue due primarily to less sales of creative services and implementation and customization services.

Also contributing is an increase in utilization of third-party service delivery partners.

For several years, we have been strategically shifting away from a one-time services business model towards sales of retained and managed services and also embedding services in our renewable cloud solution contracts.

Retained and managed services contracts that we expect to have a term consistent with our cloud solution contracts, and embedded services are recorded as recurring revenue;

l decrease in one-time analytics revenue as analytics now are generally integrated in our cloud solutions.

For information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 59 .

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

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

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

As a result, we expect to see a continued acceleration in revenue growth during 2024 as we begin to see the full-year effect of some of these pricing initiatives.

We expect that the decline in our non-strategic one-time services and other revenue will slow in 2024 compared to the previous two years.

2023 Form 10-K

Blackbaud, Inc.

Income from operations decreased by $53.4 million during 2022, driven largely by the following:

- Increase in compensation costs other than stock-based compensation of $75.7 million primarily due to increased employee headcount due to our acquisition of EVERFI

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

Income from operations increased by $73.2 million during 2023, driven largely by the following:

+ Increase in total revenue, as described above

+ Net decreases in the following costs primarily due to our targeted workforce reductions discussed below:

• Decrease in compensation costs other than stock-based compensation of $35.4 million;

• Decrease in commission expense of $1.1 million

+ Decrease in third-party contractor costs of $12.2 million primarily due to our focus on cost management

+ Decrease in hosting and data center costs of $5.0 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 Security Incident-related expenses, net of insurance, of $2.3 million.

See "Security Incident update" below on page 39 .

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

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

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

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

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

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

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

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

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

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

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

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

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

+ Increase in total revenue, as described above

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2022 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

- Increase in stock-based compensation expense of $17.5 million attributable to primarily due to overall Company performance against 2023 goals and 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 $9.2 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 amortization of intangible assets from business combinations of $4.2 million due to our acquisition of EVERFI

- Net decrease of $4.0 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

We are continuing to make investments in the business in areas such as innovation, artificial intelligence, cybersecurity, and our continued shift of cloud infrastructure to leading public cloud service providers.

Our profitability during 2023 reflects some of these incremental investments.

We plan to accelerate some of the cybersecurity investments during 2024, which is expected to modestly impact our profitability in the near term.

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

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

Customer retention Gross dollar retention

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

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

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

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

2023 Form 10-K

Blackbaud, Inc.

Gross dollar retention

Our recurring subscription contracts are typically for a term of three years at contract inception with standard three year renewals thereafter.

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

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

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.

During 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, 2021.

This gross dollar retention rate was slightly lower than our rate for the full year ended December 31, 2022 primarily due to the inclusion of EVERFI beginning in 2023.

Excluding EVERFI, our gross dollar retention during 2023 was slightly higher than 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.

Although some customer attrition is normal, our new contract pricing and renewal model (as described above on page 36 ) does not appear to have had a significant impact on customer attrition to date.

Balance sheet and cash flow

At December 31, 2022, our cash and cash equivalents were $31.7 million and the carrying amount of our debt under the 2020 Credit Facility was $799.1 million.

Our net leverage ratio was 3.22 to 1.00.

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

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

2022 Form 10-K

Blackbaud, Inc.

At December 31, 2023, our cash and cash equivalents were $31.3 million.

Under the 2020 Credit Facility, the carrying amount of our debt was $720.6 million and our net leverage ratio was 1.97 to 1.00.

During 2023, we generated $199.6 million in cash flow from operations, had a net decrease in borrowings of $81.4 million and had aggregate cash outlays of $64.1 million for purchases of property and equipment and capitalized software and content development costs.

We resumed stock repurchases during the fourth quarter of 2023 under our then existing stock repurchase program that authorized us to purchase up to $250.0 million of our outstanding shares of common stock.

On January 17, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by raising the total capacity under the program from $250.0 million to $500.0 million available for repurchases.

We plan to repurchase shares going forward to at least offset the dilution from our annual stock-based compensation and possibly beyond that amount as market conditions and our strategic plans permit.

See additional details regarding our stock repurchase program below on page 56 .

Security Incident update

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

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

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

As discussed in Note 11 to our consolidated financial statements included in this report, total 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 profitability and GAAP cash flow (see discussion regarding non-GAAP free cash flow and non-GAAP adjusted free cash flow on page 53 ).

For full year 2023, we incurred net pre-tax expenses of $53.4 million related to the Security Incident, which included $22.4 million for ongoing legal fees.

It also includes settlements and recorded liabilities for loss contingencies of $31.0 million.

Also, for full year 2023, we had net cash outlays of $78.0 million related to the Security Incident, which included ongoing legal fees, the $3.0 million civil penalty paid during the first quarter of 2023 related to the SEC settlement and the $49.5 million civil penalty paid during the fourth quarter of 2023 related to the multi-state Attorneys General settlement (as discussed in Note 11).

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

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

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

For full year 2024, we currently expect net pre-tax expense of approximately $5.0 million to $10.0 million and net cash outlays of approximately $8.0 million to $13.0 million for ongoing legal fees related to the Security Incident.

2023 Form 10-K

Blackbaud, Inc.

As of December 31, 2023, we have recorded approximately $1.5 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers related to the Security Incident that we believe we can reasonably estimate in accordance with our loss contingency procedures described in Note 11.

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.

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Comparison of 2023 vs.

2021 and 2021 vs.

For information regarding the comparison of 2022 to 2021, please refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023.

During 2022 and 2021, we acquired companies that provided us with strategic opportunities to expand our TAM and share of the philanthropic giving market through the integration of complementary solutions and services to serve the changing needs of our customers.

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

2020 Stock-based Compensation

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

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

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

◦ decrease in the vesting period for our annual long-term incentive time-based equity awards from 4 years (1/4 per year) to 3 years (1/3 per year), beginning in February 2021;

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

• Increases in the grant date fair values of our annual equity awards granted to employees;

2023 Form 10-K

Blackbaud, Inc.

• Overall Company performance against 2020 and 2021 goals

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, hosting services, payment services, online training programs and 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 and content development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.

Recurring revenue includes two components:

contractual recurring and transactional recurring.

Contractual recurring revenue is primarily 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, online training programs and subscription-based analytic services.

Contractual recurring revenue also includes fees from maintenance services for our on-premises solutions.

Transactional recurring revenue is comprised of transaction fees associated with the use of our solutions, including donation processing, tuition management, consumer giving and event-based usage.

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.

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.

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 $59.8 million, or 5.9%, driven primarily by the following:

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

+ Increase in transactional recurring revenue of $30.5 million primarily due to positive results related to pricing initiatives we implemented during 2023 and increases in volume for our Blackbaud Tuition Management, JustGiving and Blackbaud Merchant Services solutions;

+ Increase in contractual recurring revenue of $29.3 million related to the performance of our cloud solutions and, to a lesser extent, the early impact of our pricing initiatives;

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

also included in the increase in contractual recurring revenue is a decrease related to fluctuations in foreign currency exchange rates of $3.4 million

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

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

• an increase in online charitable giving;

• new pricing initiatives.

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

2023 Form 10-K

2 unchanged sentences

Cost of recurring revenue increased by $7.0 million, or 1.5%, driven primarily by the following:

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

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

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

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

+ Increase in transaction-based costs of $9.2 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 amortization of software development costs of $5.6 million due to our continued investments in the innovation and security of our solutions

+ Increase in amortization of intangible assets from business combinations of $4.0 million primarily due to our acquisition of EVERFI in December 2021

+ Increase in stock-based compensation costs of $2.8 million primarily due to overall Company performance against 2023 goals and 2022 performance-based equity award adjustments, 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 $8.7 million primarily due to our targeted workforce reductions discussed above

- Decrease in hosting and data center costs of $5.1 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security;

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

Also contributing to the increase was our acquisition of EVERFI.

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

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

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

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

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

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

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

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

+ Increase in contractual recurring revenue of $10.1 million related to the performance of our cloud solutions and early progress in initiatives to bring our pricing in line with the market, partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions;

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

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

+ Increase in compensation costs of $10.3 million primarily related to the stock-based compensation due to the factors discussed above on page 37 and a shift in resources historically supporting one-time services and other towards recurring revenue

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

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

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

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

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

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

2022 Form 10-K

Blackbaud, Inc.

- Decrease in third-party contractor costs of $1.1 million primarily due to our focus on cost management

Recurring gross margin increased by 190 basis points primarily due to the increase in recurring revenue outpacing the increase in cost of recurring revenue.

One-time services and other

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YoY Growth (%) YoY Growth (%)

One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, and fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts.

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

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

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

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

+ Increase in one-time consulting revenue of $2.8 million, of which $12.3 million was attributable to EVERFI, partially offset by a decrease in revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model.

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

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

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

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

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

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

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

One-time services and other revenue is comprised of fees for one-time consulting (including creative services), analytic and onsite training services, and fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts.

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

2023 Form 10-K

1 unchanged sentence

One-time services and other revenue decreased by $12.5 million, or 26.9%, driven primarily by the following:

- Decrease in one-time consulting revenue of $10.5 million due primarily to less implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model.

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

- Decrease in one-time consulting revenue of $9.2 million primarily due to less sales of creative services and implementation and customization services.

Also contributing is an increase in utilization of third-party service delivery partners.

Retained and managed services contracts that we expect to have a term consistent with our cloud solution contracts, and embedded services are recorded as recurring revenue.

- Decrease in one-time analytics revenue of $3.0 million as analytics are generally integrated in our cloud solutions

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

Cost of one-time services and other decreased $10.2 million or 24.3%, primarily driven by the following:

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

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

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

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

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

- Decrease in compensation costs of $7.9 million primarily related to our targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023 and a continued shift in resources historically supporting one-time services and other towards recurring revenue

- Decrease in employee severance of $1.2 million primarily due to our targeted workforce reductions discussed above, the majority of which were recorded in cost of one-time services and other in the fourth quarter of 2022

- Decrease in direct costs of revenue of $1.2 million primarily related to our decrease in sales of creative services

+ Increase in third-party contractor costs of $1.2 million primarily due to an increase in partners delivering services

One-time services and other gross margin decreased by 320 basis points primarily due to the decrease in one-time services and other revenue outpacing the decrease in cost of one-time services and other revenue.

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 reduce our average customer acquisition cost as well as the related payback period while increasing sales velocity.

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.

2023 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

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

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

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

Sales, marketing and customer success expenses decreased by $9.3 million, or 4.2%.

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

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

- Decrease in allocated costs of $7.0 million primarily related to a decrease in rent expense and the impact of the targeted reduction in sales headcount during the second quarter of 2020

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

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

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

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

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

• Decrease in compensation costs other than stock-based compensation of $10.5 million;

• Decrease in commissions expense of $1.3 million;

partially offset by

• Increase in severance costs of $1.5 million

- Decrease in third-party contractor costs of $3.1 million primarily related to strategic consulting costs incurred during 2022

+ Increase in stock-based compensation costs of $3.5 million primarily due to overall Company performance against 2023 goals and 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 conference and travel costs of $1.0 million primarily due to our annual user conference, bbcon ®, which was held in-person in November 2023 for the first time since the pandemic

Research and development

Research and development expense includes compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs.

2022 Form 10-K

Blackbaud, Inc.

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

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

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

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

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

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

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

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

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

Research and development expense decreased by $3.6 million, or 2.3%.

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

- Decrease in third-party contractor costs of $6.5 million primarily due to a decrease in our use of third-party software developers

- Decrease in compensation costs other than stock-based compensation of $3.9 million primarily due to our targeted workforce reductions discussed above

+ Increase in stock-based compensation of $6.6 million primarily due to overall Company performance against 2023 goals and 2022 performance-based equity award adjustments, partially offset by the targeted workforce reductions during the fourth quarter of 2022 and first quarter of 2023

Not included in research and development expense for 2023 and 2022 were $60.7 million and $58.5 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 software and content development costs associated with our cloud solutions and online educational courses are subsequently amortized to cost of recurring revenue over the related asset's estimated useful life, which generally range from three to seven years.

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

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

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

+ Increase in compensation costs of $18.9 million primarily related to our increased engineering hiring and, to a lesser extent, stock-based compensation due to the factors discussed above on page 37

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

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

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

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

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.

2023 Form 10-K

Blackbaud, Inc.

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

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

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

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, 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 expenses decreased by $10.0 million, or 5.0%.

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

- Decrease in compensation costs other than stock-based compensation of $5.0 million primarily due to our targeted workforce reductions discussed above

- Decrease in third-party contractor costs of $2.7 million primarily due to our focus on cost management

- Decrease in Security Incident-related expenses of $2.3 million.

See "Security Incident update" above on page 39

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These impairment charges were reflected in general and administrative expense.

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

- A $2.3 million noncash impairment charge during the second quarter of 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 corporate costs of $1.3 million primarily related to the release of certain accrued tax liabilities due to favorable sales tax rulings, partially offset by an increase in bad debt expense

- Decrease in rent expense of $1.1 million

+ Increase in stock-based compensation costs of $5.2 million primarily due to overall Company performance against 2023 goals and 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 acquisition and disposition-related costs of $1.3 million primarily related to the noncash impairment charges against certain operating lease right-of-use assets and property and equipment assets resulting from the sublease of our Washington, DC office location;

partially offset by the release of $1.4 million in accrued contingent consideration related to our Kilter acquisition during the second quarter of 2023 and a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale during the second quarter of 2022 which did not reoccur in 2023

2023 Form 10-K

Blackbaud, Inc.

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

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

+ Increase in stock-based compensation costs of $13.2 million due to the factors discussed above on page 37

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

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

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

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

- Decrease in rent expense, net of allocated costs, of $2.4 million primarily related to the purchase of our global headquarters facility during the third quarter of 2020 and our exit of certain other office leases globally during the second half of 2020 in-line with changes to our workforce strategy at that time

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

Interest Expense

1 unchanged sentence

Percentages indicate expenses as a percentage of total revenue

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

Interest expense increased in dollars and as a percentage of total revenue during 2023 when compared to 2022, primarily due to an increase in our weighted average effective interest rates.

We currently expect interest expense for the full year 2024 to be approximately $34 million to $38 million although our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment.

2 unchanged sentences

Interest Rate Risk on page 64 for more information about our variable interest rate exposure and related risk.

Interest expense increased during 2021 when compared to 2020, primarily due to the Real Estate Loans assumed in connection with the purchase of our global headquarters facility in August 2020 and the deferred financing costs and debt discount associated with the 2020 Credit Facility, which was entered into in October 2020.

Other income ($M)

Percentages indicate expenses as a percentage of total revenue

Other income increased in dollars and as a percentage of total revenue during 2023 when compared to 2022, primarily due to an increase in interest income.

Interest income increased primarily due to higher interest earned on restricted cash held and payable by us to customers for our payment processing solutions.

See Note 8 to our consolidated financial statements in this report for more information regarding our other income.

2023 Form 10-K

11 unchanged sentences

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

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

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

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

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

Income tax (benefit) provision ($M)

The increase in deferred revenue during the year ended December 31, 2023 was primarily due to new subscription sales of our cloud solutions and progress in initiatives to bring our pricing in line with the market.

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

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

Income tax provision (benefit) ($M)

Percentages indicate effective income tax rates

13 unchanged sentences

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

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

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

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

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

The increase in our effective income tax rate for year ended December 31, 2023, when compared to the same period in 2022, was primarily attributable to higher 2023 non-deductible accruals for loss contingencies related to the Security Incident and other non-deductible expenses and tax rate changes, partially offset by increased tax credits.

Furthermore, our 2023 effective tax rate was negatively impacted by higher tax rates in foreign jurisdictions in which we operate which were predominantly due to UK tax rate increases.

2023 Form 10-K

Blackbaud, Inc.

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.

2022 Form 10-K

Blackbaud, Inc.

Years ended December 31,

(dollars in millions, except per share amounts) 2022 Change 2021 Change 2020

(dollars in millions, except per share amounts) 2023 2022

GAAP Revenue $ 1,105.4 $ 1,058.1

5 unchanged sentences

Employee severance 0.8 2.1

65.1 18.7 % 54.8 2.9 % 53.2

Non-GAAP gross profit (1)

1 unchanged sentence

Non-GAAP gross margin 60.9 % 58.4 %

GAAP income from operations $ (28.5) (214.4) % $ 24.9 (33.1) % $ 37.2

GAAP income (loss) from operations $ 44.7 $ (28.5)

GAAP operating margin 4.0 % (2.7) %

4 unchanged sentences

Acquisition and disposition-related costs (2)(3)

6.1 100.9 % 3.1 1,294.5 % 0.2

Restructuring and other real estate activities — 0.1

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

55.7 2,968.4 % 1.8 100.0 % —

Impairment of capitalized software development costs

2.3 100.0 % — — % —

231.1 31.4 % 175.9 11.7 % 157.5

Non-GAAP income from operations (1)

1 unchanged sentence

Non-GAAP operating margin 26.6 % 19.1 %

GAAP income before provision for income taxes $ (55.6) (884.6) % $ 7.1 (67.2) % $ 21.6

GAAP net income $ (45.4) (896.9) % $ 5.7 (26.2) % $ 7.7

Shares used in computing GAAP diluted earnings per share 51,569,148 6.9 % 48,230,438 (1.0) % 48,696,341

GAAP diluted earnings per share $ (0.88) (833.3) % $ 0.12 (25.0) % $ 0.16

GAAP income (loss) before provision (benefit) for income taxes $ 17.6 $ (55.6)

GAAP net income (loss) $ 1.8 $ (45.4)

Shares used in computing GAAP diluted earnings (loss) per share 53,721,342 51,569,148

GAAP diluted earnings (loss) per share $ 0.03 $ (0.88)

Non-GAAP adjustments:

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

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

GAAP income tax provision (benefit) 15.8 (10.2)

Total non-GAAP adjustments affecting income from operations 249.4 231.1

Non-GAAP income before provision for income taxes 267.0 175.5

Assumed non-GAAP income tax provision (5)

35.1 (4.1) % 36.6 2.1 % 35.8

Non-GAAP net income (1)

2 unchanged sentences

Non-GAAP diluted earnings per share $ 3.98 $ 2.69

2023 Form 10-K

Blackbaud, Inc.

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

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

(3) Includes Security Incident-related costs incurred during the twelve months ended December 31, 2022 of $57.6 million, which includes approximately $23.0 million in recorded aggregate liabilities for loss contingencies, net of probable insurance recoveries during the same period of $1.9 million and during the twelve months ended December 31, 2021 of $40.6 million, net of probable insurance recoveries during the same period of $38.7 million.

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

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

(3) Includes noncash impairment charges incurred during the twelve months ended December 31, 2023 related to the sublease of our Washington, DC office location the lease of which was acquired during the EVERFI acquisition.

(4) Includes Security Incident-related costs incurred during the twelve months ended December 31, 2023 of $53.4 million, which includes approximately $31.0 million in settlements and recorded aggregate liabilities for loss contingencies, net of insurance recoveries during the same period of $0.0 million and during the twelve months ended December 31, 2022 of $57.6 million, which included approximately $23.0 million in recorded aggregate liabilities for loss contingencies, net of insurance recoveries during the same period of $1.9 million.

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

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

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

In connection with the settlement of the multi-state Attorneys General investigation (as previously disclosed on October 5, 2023), we paid $49.5 million during the fourth quarter of 2023.

There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of December 31, 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

2022 Form 10-K

Blackbaud, Inc.

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

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

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

Beginning in 2024, we intend to update the non-GAAP tax rate we apply when calculating non-GAAP net income and non-GAAP diluted earnings per share in future periods.

Since the first quarter of 2018, for the purposes of determining non-GAAP net income, we have utilized a non-GAAP tax rate of 20.0% in our calculation of the assumed non-GAAP income tax provision.

We intend to adjust this rate to 24.5% to better reflect our periodic effective tax rate calculated in accordance with GAAP and our current expectations.

The increase in our non-GAAP tax rate is primarily driven by increases in income tax rates in jurisdictions we operate in.

Furthermore, as profitability increases, the effect of tax impacting items, including research and development credits, lessens such that our assumed non-GAAP tax rate moves closer to the statutory rate.

The increase in our non-GAAP tax rate is primarily driven by increases in income tax rates in jurisdictions we operate in.

Furthermore, as our non-GAAP profitability increases, the effect of tax impacting items lessens such that our assumed non-GAAP tax rate moves closer to the statutory tax rate.

The non-GAAP tax rate utilized in future periods will be reviewed annually to determine whether it remains appropriate in consideration of our financial results including our periodic effective tax rate calculated in accordance with GAAP, our operating environment and related tax legislation in effect and other factors deemed necessary.

All measures of the tax impact related to non-GAAP net income and non-GAAP diluted earnings per share included above are calculated under our historical methodology.

2023 Form 10-K

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Non-GAAP organic revenue growth

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

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

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GAAP revenue growth 4.5 %

Non-GAAP acquisition-related revenue (1)

Non-GAAP revenue from divested businesses (1)

Total Non-GAAP adjustments $ — $ 102.5

Non-GAAP organic revenue (2)

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GAAP recurring revenue growth 5.9 %

Non-GAAP acquisition-related revenue (1)

Non-GAAP recurring revenue from divested businesses (1)

Total Non-GAAP adjustments $ — $ 91.6

Non-GAAP organic recurring revenue $ 1,071.5 $ 1,008.3

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Non-GAAP organic recurring revenue growth on constant currency basis 6.3 %

(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.

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and impairment of capitalized software development costs.

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

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

Years ended December 31,

(dollars in millions) 2023 2022

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

GAAP net income (loss) $ 1.8 $ (45.4)

Non-GAAP adjustments:

Interest, net 31.1 34.1

GAAP income tax (benefit) provision (10.2) 1.4

Depreciation (1)

GAAP income tax provision (benefit)

Amortization of intangibles from business combinations 55.6 51.4

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Rule of 40 on constant currency basis (8)

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

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

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

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

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

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

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

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

(3) Measured by GAAP revenue divided by non-GAAP EBITDA.

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

(5) Measured by non-GAAP organic revenue divided by non-GAAP adjusted EBITDA.

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

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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.

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Years ended December 31,

(dollars in millions) 2022 Change 2021 Change 2020

(dollars in millions) 2023 2022

GAAP net cash provided by operating activities $ 199.6 $ 203.9

GAAP operating cash flow margin 18.1 % 19.3 %

Non-GAAP adjustments:

purchase of property and equipment (4.7) (12.3)

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$ 135.5 $ 132.8

Non-GAAP free cash flow margin 12.3 % 12.6 %

Non-GAAP adjustments:

Security Incident-related cash flows, net of insurance 78.0 20.9

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$ 213.5 $ 153.7

Non-GAAP adjusted free cash flow margin 19.3 % 14.5 %

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

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Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has generally been lower in our second quarter as compared to our third and fourth quarters.

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

Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are base salary merit increases, which occur in July.

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

Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards.

During the second quarter of 2021, however, we experienced an increase in the amount of taxes we paid on behalf of our employees related to the settlement of equity awards when compared to the same period in 2020, as the equity granted in May 2020 in lieu of cash bonus plans and base salary merit increases vested.

2023 Form 10-K

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Years ended December 31,

(dollars in millions) 2022 Change 2021 Change 2020

(dollars in millions) 2023 2022 Change

Net cash provided by operating activities $ 199.6 $ 203.9 (2.1) %

Net cash used in investing activities (64.4) (85.5) (24.7) %

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

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

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

Net cash used in financing activities

(143.0) (25.7) 456.5 %

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

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

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

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Subject to certain conditions, this registration statement will be effective through January 13, 2025.

At December 31, 2022, our total cash and cash equivalents balance included approximately $14.4 million of cash that was held outside the U.S.

The remaining amount available to purchase stock under the stock repurchase program was $499.4 million as of February 16, 2024.

See additional details regarding our stock repurchase program below on page 56 .

At December 31, 2023, our total cash and cash equivalents balance included approximately $13.2 million of cash that was held by operations outside the U.S.

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

operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate a portion of the funds.

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

operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds.

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

2023 Form 10-K

Blackbaud, Inc.

Operating Cash Flow

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

2022 Form 10-K

Blackbaud, Inc.

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

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

• fluctuations in the timing of vendor payments;

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

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

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

The increase in cash flow from operations associated with working capital during 2021, when compared to 2020, was primarily due to:

• the payment of our 2019 cash bonus plans in 2020 and the replacement of our 2020 cash bonus plans with performance-based equity awards (which we expect will continue going forward);

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

Net cash provided by operating activities decreased by $4.3 million during the year ended December 31, 2023, when compared to the same period in 2022, primarily due to a $71.3 million increase in net income adjusted for non-cash expenses and a $75.5 million decrease in cash flow from operations associated with working capital.

The decrease in cash flow from operations associated with working capital during 2023, when compared to 2022, was primarily due to:

• fluctuations in the timing of vendor payments;

partially offset by

• an increase in income tax payments.

Workforce reductions

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

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

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

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

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

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

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

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

• a decrease in accrued expenses related to the Security Incident.

Security Incident update

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

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

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

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

For full year 2023, we had net cash outlays of $78.0 million related to the Security Incident, which included ongoing legal fees, the $3.0 million civil penalty paid during the first quarter of 2023 related to the SEC settlement and the $49.5 million civil penalty paid during the fourth quarter of 2023 related to the multi-state Attorneys General settlement.

2022 Form 10-K

Blackbaud, Inc.

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2023 Form 10-K

Blackbaud, Inc.

Investing Cash Flow

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Net cash used in investing activities of $64.4 million decreased by $21.2 million during 2023, when compared to 2022.

During 2022, we received net cash of $6.4 million related to our disposition of Blackbaud FIMS™ and DonorCentral® NXT.

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

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

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

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

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

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

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

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

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

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

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

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

During 2023, we used $59.4 million for software and content development costs, which was up $0.7 million from cash spent during 2022.

We also spent $4.7 million of cash for purchases of property and equipment during 2023, which was a decrease of $7.6 million from cash spent in 2022.

Financing Cash Flow

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

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

During 2023, we had a net decrease in borrowings of $81.4 million.

During 2023, we repurchased $18.8 million of our common stock while we did not repurchase any of our common stock during 2022 (see additional details below regarding our stock repurchase program).

We paid $35.9 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2023 compared to $36.4 million during 2022.

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

2022 Form 10-K

Blackbaud, Inc.

exercise of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement.

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

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

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

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

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

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

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

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

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

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

During 2023 , cash flow from financing activities associated with changes in restricted cash due to customers decreased $6.8 million , compared to an increase of $111.4 million during 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.

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

Stock repurchase program

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

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

The program does not have an expiration date.

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

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

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

During the year ended December 31, 2023, we repurchased 221,836 shares for $18.8 million.

The remaining amount available to purchase stock under the then approved stock repurchase program was $231.2 million as of December 31, 2023.

Between January 1, 2024 and January 17, 2024, we repurchased $22.3 million under the prior authorization.

Between January 18, 2024 and February 16, 2024, we repurchased an additional 7,114 shares for $0.6 million under the new authorization.

The remaining amount available to purchase stock under the stock repurchase program was $499.4 million as of February 16, 2024.

2023 Form 10-K

Blackbaud, Inc.

to repurchase shares going forward to at least offset the dilution from our annual stock-based compensation and possibly beyond that amount as market conditions and our strategic plans permit.

2020 Credit Facility

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

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

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

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The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2020 Credit Facility in October 2025.

The Real Estate Loans also require periodic principal payments and the balances of the real estate loans are due upon maturity in April 2038.

2022 Form 10-K

Blackbaud, Inc.

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

Certain real estate loans (as described in Note 9 to our audited consolidated financial statements included in this report) also require periodic principal payments and the balances of the real estate loans are due upon maturity in April 2038.

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

Financial Covenant Requirement Ratio as of December 31, 2023

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In order to pay any cash dividends and/or repurchase shares of stock:

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

First amendment to 2020 Credit Facility

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

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

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Operating leases 8.7 46.8 55.5

Interest payments on debt — 5.5 5.5

Contingent consideration — 1.4 1.4

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

2023 Form 10-K

Blackbaud, Inc.

As of December 31, 2023, we had total remaining principal payments of $781.1 million.

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In addition to principal payments, as of December 31, 2023, we expect to pay interest expense over the life of our debt obligations of approximately $96.4 million.

These payments represent our estimated future interest payments on debt using

2022 Form 10-K

Blackbaud, Inc.

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

These payments represent our estimated future interest payments on debt using our debt balances and the related weighted average effective interest rates as of December 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.

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

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

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

The total liability for uncertain tax positions as of December 31, 2023 was $3.2 million.

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

In connection with the settlement of the multi-state Attorneys General investigation relating to the Security Incident, as discussed in Note 11 to our consolidated financial statements in this report, we have agreed to implement and improve certain of our cybersecurity programs and tools through October 2030.

The currently anticipated costs in connection with these efforts are expected to be expensed as incurred.

Contingent consideration

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

2023 Form 10-K

Blackbaud, Inc.

Foreign Currency Exchange Rates

Approximately 15% of our total revenue for 2022 was generated by operations outside the U.S.

Approximately 14% of our total revenue for 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 other comprehensive income (loss) as a component of stockholders’ equity, was a loss of $14.9 million as of December 31, 2022 and income of $1.3 million as of December 31, 2021.

The accumulated currency translation adjustment, recorded within accumulated other comprehensive (loss) income as a component of stockholders’ equity, was a loss of $9.8 million as of December 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 revenues and expenses denominated in non-U.S.

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

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

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

During 2023, foreign translation had an insignificant impact on our revenues and expenses denominated in non-U.S.

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

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

During 2023, the fluctuation in foreign currency exchange rates impacted our total revenue and our income from operations by insignificant amounts.

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

2022 Form 10-K

Blackbaud, Inc.

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

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

Critical Accounting Estimates

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

2023 Form 10-K

Blackbaud, Inc.

Revenue Recognition

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We have not made any material changes in the accounting methodology we use to recognize revenue during the year ended December 31, 2023.

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

For example, for arrangements that have multiple performance obligations, we must exercise judgment and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately;

Our revenue recognition accounting methodology may contain uncertainties because it could require us to make significant estimates and assumptions, and to apply judgment for certain customer contracts.

For example, for certain arrangements that have multiple performance obligations, we may need to exercise judgment and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately;

(2) determine the standalone selling price of each performance obligation;

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Blackbaud, Inc.

Costs of Obtaining Contracts

Description Judgments and Uncertainties Effect if Actual Results Differ

From Assumptions

We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract.

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

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

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

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

We have not made any material changes in the accounting methodology we use to record costs of obtaining contracts during the year ended December 31, 2022.

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

For example, we must exercise judgment and use estimates in order to determine the expected period of benefit of our sales commissions.

We take into consideration our customer contracts, including renewals, retention, our technology and other factors.

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

Business Combinations

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

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

During 2023, we recorded immaterial noncash impairment charges against certain operating lease ROU assets and certain property and equipment assets.

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

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

For additional information, see Note 11 to our consolidated financial statements in this report.

Recently Issued Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis