BLACKBAUD INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited, condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the unaudited, condensed consolidated financial statements and related notes which are primarily denominated in thousands of dollars. Executive Summary We are the leading software provider exclusively dedicated to powering social impact. Serving the nonprofit and education sectors, companies committed to social responsibility and individual change makers, our essential software is built to accelerate impact in fundraising, nonprofit financial management, digital giving, grantmaking, corporate social responsibility and education management. A remote-first company, we have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom, supporting users in 100+ countries. Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; (ii) providing payment and transaction services; and (iii) providing Impact-as-a-Service™ digital educational content. Update on Select Key Operational Initiatives Product Innovation and Delivery To maintain our market leadership position, we are accelerating the pace of innovation and new feature delivery to our customers. Our focus has been on two areas, generative artificial intelligence (AI) and enhancements that continue to improve the connectivity of our suite of solutions. These enhancements are aimed at improving fundraising outcomes while reducing the administrative burden of our end users. Some examples include: • We have released a number of AI capabilities over the past few quarters, including new generative AI functionality for our JustGiving platform. During the first quarter of 2024, we released generative AI capabilities for Raiser’s Edge NXT®, and we expect that Blackbaud Co-pilot will be available to our Raiser's Edge NXT customers soon. Using Blackbaud Co-pilot, users can ask ad hoc questions such as “How can I improve my average donation size?” and the tool will provide intelligent responses as well as recommended actions intended to drive that outcome. • During the first quarter of 2024, our Online Giving and Prospect Insights capabilities were natively integrated into Raiser's Edge NXT. With these integrations, fundraising administrators can now drive a viral giving campaign, keep records of each donor interaction, identify new donation opportunities, and provide personalized messaging, all in one integrated experience. • Last quarter, we announced our new optimized donation forms were coming to Raiser's Edge NXT. We now have a few hundred customers up and running with nearly a thousand more experimenting. We expect these forms to drive higher revenue for our customers and for Blackbaud. We include these exciting new features in our products at no additional cost, to increase the value our customers receive from their existing subscription. We are delivering more innovation, evolving our products and ensuring our customers receive more value from our solutions. 24 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Modernized Approach to Pricing and Multi-Year Contracts In the summer of 2022, we put in place an updated renewal 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. This program is designed to deliver sustained revenue growth beyond the initial three-year renewal cycle and will provide us with improved revenue visibility. As previously disclosed, this new approach has three main components: 1. offering 3-year contract renewal terms as our standard, which the vast majority of customers are adopting; 2. embedded annual price increases within the 3-year renewal term, which we have not had previously and are beginning to take effect; and 3. a larger first year price increase to bring our pricing in-line with the broader market. The first two components, as well as a portion of the third, will continue on beyond the initial renewal cycle, creating what we believe will be a sustainable source of revenue growth. Approximately one half of our 2024 total company revenue growth is expected to be impacted by this modernized contract and pricing initiative, and by the end of 2024, we anticipate we will renew approximately two-thirds of that base into the new model. During the first and second quarters of 2024, we expect a larger contribution to our total revenue growth to come from this initiative. Financial Summary Total revenue ($M) Income (Loss) from operations ($M) YoY Growth (%) YoY Growth (%) Total revenue increased by $17.5 million during the three months ended March 31, 2024, when compared to the same period in 2023, driven largely by the following: + Growth in recurring revenue primarily related to: • an increase in contractual recurring revenue of $13.3 million related to the impact of our modernized contract initiative and pricing within the Social Sector as well as the performance of our cloud solutions; partially offset by a decrease in revenue from EVERFI as discussed below • an increase in transactional recurring revenue of $5.5 million primarily due to positive results related to pricing initiatives we implemented at the beginning of 2023 and, to a lesser extent, increases in volume for our Blackbaud Tuition Management and JustGiving solutions - Decrease in one-time service and other revenue primarily related to: • decrease in one-time consulting revenue due primarily due to less revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services First Quarter 2024 Form 10-Q 25 Table of Contents Blackbaud, Inc. (Unaudited) As previously disclosed and discussed above, 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. 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. Our Social Sector revenue (which represents approximately 88% of our total revenue) increased $19.5 million, or 8.7%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by the increases in contractual recurring revenue and transactional recurring revenue discussed above. Our Corporate Sector revenue (which represents approximately 12% of our total revenue) decreased $2.1 million, or 5.6%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by EVERFI. EVERFI has faced macroeconomic challenges in the form of tightening corporate CSR budgets, especially in the financial services market where EVERFI has a significant position. While we expect our Corporate Sector revenue to decline for the full year 2024, we are working on plans to ensure it contributes to shareholder value. Income from operations increased by $20.7 million during the three months ended March 31, 2024, when compared to the same period in 2023, driven largely by the following: + Increase in total revenue, as described above + Decrease in Security Incident-related expenses of $7.5 million. See "Security Incident update" below. + Decrease in employee severance costs of $4.3 million primarily due to our targeted workforce reductions during the fourth quarter of 2022 and the first quarter of 2023 + Decrease in commission expense of $3.4 million due to fewer sales headcount and a prospective increase in the period of benefit over which we amortized costs of obtaining contracts with customers from 5 to 6 years beginning in the year ending December 31, 2024 + Decrease in corporate costs of $2.2 million primarily related to the release of certain accrued tax liabilities due to favorable sales tax rulings and a decrease in bad debt expense - Increase in stock-based compensation expense of $3.6 million primarily due to overall Company performance against targets for certain performance-based equity awards - Increase in advertising costs of $2.0 million primarily due to timing differences compared to 2023 - Decrease of $2.0 million due to an increase in amortization of capitalized software and content development costs and a decrease in software and content development costs that were required to be capitalized under the internal-use software guidance - Increase in amortization of intangible assets from business combinations of $1.7 million due to our acquisition of EVERFI - Increase in acquisition and disposition-related costs of $1.6 million primarily related to the disposition of EVERFI Limited; see Note 3 of our unaudited, condensed consolidated financial statements in this report for more information - Increase in transaction-based costs of $1.4 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 hosting and data center costs of $1.3 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 We are continuing to make critical investments in the business in areas such as innovation, cybersecurity, and our continued shift of cloud infrastructure to leading public cloud service providers. Our profitability during the first quarter of 2024 reflects some of these incremental investments. 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. 26 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Gross dollar retention Our recurring subscription contracts are typically for a term of three years at contract inception. A key factor to our overall success is the renewal and expansion of our existing subscription agreements with our customers. Management uses gross dollar retention in analyzing our success at delighting our customers with innovative and cloud solutions. Gross dollar retention is defined as contracted annual recurring revenue ("CARR") divided by beginning CARR with a measurement period of twelve months. For the twelve months ended March 31, 2024, our gross dollar retention was approximately 89%. This gross dollar retention rate was slightly lower than our rate for the full year ended December 31, 2023, primarily due to EVERFI. Excluding EVERFI, our gross dollar retention during the twelve months ended March 31, 2024 was slightly higher than our rate for the full year ended December 31, 2023. We are continually investing in innovation, which we believe will increase gross dollar retention over the long-term. Balance sheet and cash flow At March 31, 2024, our cash and cash equivalents were $26.4 million. Under the 2020 Credit Facility, the carrying amount of our debt was $981.7 million and our net leverage ratio was 2.72 to 1.00 . During the three months ended March 31, 2024, we generated $64.6 million in cash from operations, had a net increase in borrowings of $260.5 million, returned $262.6 million to stockholders by way of share repurchases and had aggregate cash outlays of $13.3 million for purchases of property and equipment and capitalized software and content development costs. Security Incident update As discussed in Note 9 to our unaudited, condensed consolidated financial statements in this report, t otal costs related to the Security Incident exceeded the limit of our insurance coverage in the first quarter of 2022 . Accordingly, the Security Incident has negatively impacted, and we expect it to continue for the foreseeable future to negatively impact, our GAAP profitab ility and GAAP cash flow (see discussion regarding non-GAAP free cash flow and non-GAAP adjusted free cash flow on page 37 ). For the three months ended March 31, 2024, we incurred net pre-tax expenses of $10.3 million related to the Security Incident, which included $3.3 million for ongoing legal fees and additional accruals for loss contingencies of $7.0 million. During the three months ended March 31, 2024, we had cash outlays of $2.0 million related to the Security Incident for ongoing legal fees. In line with our policy, legal fees are expensed as incurred. For full year 2024, we currently expect pre-tax expenses of approximately $5.0 million to $10.0 million and cash outlays of approximately $8.0 million to $13.0 million for ongoing legal fees related to the Security Incident. Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below. As of March 31, 2024, we have recorded approximately $8.5 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers and governmental agencies related to the Security Incident that we believed we could reasonably estimate in accordance with our loss contingency procedures described above and as more fully described in Note 9. It is reasonably possible that our estimated actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss. There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of March 31, 2024 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgment, settlement, fine, penalty or other resolution, the amount, scope and timing of First Quarter 2024 Form 10-Q 27 Table of Contents Blackbaud, Inc. (Unaudited) which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition. Termination of stockholder rights agreement On March 18, 2024, the Company and Broadridge Corporate Issuer Solutions, LLC, a Pennsylvania limited liability company, entered into the Third Amendment to Stockholder Rights Agreement, dated as of March 18, 2024 (as amended, the “Rights Agreement”). The third amendment terminated the Rights Agreement by accelerating the expiration time of the Company’s preferred share purchase rights (each, a “Right” and, collectively, the “Rights”) to 5:00 P.M., New York City time, on March 18, 2024. At the time of the termination of the Rights Agreement, all of the Rights, which were previously distributed to holders of the Company’s issued and outstanding common stock, par value $0.001, pursuant to the Rights Agreement, expired. April 2024 credit agreement refinancing On April 30, 2024, we entered into the Amendment, which amended the Existing Credit Agreement to, among other things, (a) refinance the credit facilities under the Existing Credit Agreement to provide for (i) a $700.0 million revolving credit facility with a $50.0 million letter of credit subfacility, a $50.0 million swingline subfacility and a $150.0 million sublimit available for multicurrency borrowings (the “2024 Revolving Facility”) and (ii) a $800.0 million term loan facility (the “2024 Term Facility” and together with the 2024 Revolving Facility, the “2024 Credit Facilities”), (b) extend the maturity date to April 30, 2029, (c) modify the definition of Applicable Margin (as defined below) and (iv) modify certain negative and financial covenants to provide additional operational flexibility. See Part II, Item 5. “Other Information” for a summary of the terms of the 2024 Credit Agreement. Results of Operations Comparison of the three months ended March 31, 2024 and 2023 Revenue and Cost of Revenue Recurring Revenue ($M) Cost of revenue ($M) Gross profit ($M) and gross margin (%) YoY Growth (%) YoY Growth (%) 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. 28 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) 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. 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 $18.8 million, or 7.4%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by the following: + Increase in contractual recurring revenue of $13.3 million related to the impact of our modernized contract initiative and pricing within the Social Sector as well as the performance of our cloud solutions; partially offset by a decrease in revenue from EVERFI as discussed above + Increase in transactional recurring revenue of $5.5 million primarily due to positive results related to pricing initiatives we implemented at the beginning of 2023 and, to a lesser extent, increases in volume for our Blackbaud Tuition Management and JustGiving solutions. Cost of recurring revenue increased by $4.7 million, or 4.1%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by the following: + Increase in amortization of intangible assets from business combinations of $1.6 million primarily due to our acquisition of EVERFI in December 2021 + Increase in transaction-based costs of $1.5 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 hosting and data center costs of $1.3 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security; currently, we expect our cloud infrastructure migration efforts and increased level of cybersecurity investments to continue for the foreseeable future Recurring gross margin increased by 140 basis points for the three months ended March 31, 2024, when compared to the same period in 2023, primarily due to the increases in recurring revenue outpacing the increases in cost of recurring revenue. One-time services and other Revenue ($M) Cost of revenue ($M) Gross profit ($M) and gross margin (%) 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. First Quarter 2024 Form 10-Q 29 Table of Contents Blackbaud, Inc. (Unaudited) Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, other costs incurred in providing onsite customer training, third-party contractor expenses, data expense incurred to perform one-time analytic services, third-party software royalties, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations. One-time services and other revenue decreased by $1.3 million, or 14.1%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by the following: - Decrease in one-time consulting revenue of $1.1 million primarily due to less sales of creative services and implementation and customization services. As discussed in Note 3 to our unaudited, condensed consolidated financial statements in this report, our sale of EVERFI Limited contributed to the decrease in creative services revenue. Also contributing to the decrease in one-time consulting revenue 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. Cost of one-time services and other decreased by $1.6 million, or 18.5%, during the three months ended March 31, 2024, when compared to the same period in 2023, driven primarily by the following: - Decrease in compensation costs of $1.2 million primarily related to our prior period targeted workforce reductions discussed above and a continued shift in resources historically supporting one-time services and other towards recurring revenue One-time services and other gross margin increased by 480 basis points during the three months ended March 31, 2024, when compared to the same period in 2023, primarily due to the decrease in compensation costs discussed above outpacing the decrease of one-time services and other revenue. Operating Expenses Sales, marketing and customer success ($M) Research and development ($M) General and administrative ($M) Percentages indicate expenses as a percentage of total revenue Sales, marketing and customer success Sales, marketing and customer success expense includes compensation costs, variable sales commissions, travel-related expenses, advertising and marketing materials, public relations costs, variable reseller commissions and allocated depreciation, facilities and IT support costs. We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness. 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 per customer as well as the related payback period while increasing sales velocity. 30 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Sales, marketing and customer success expense decreased by $3.5 million or 6.5%, during the three months ended March 31, 2024, when compared to the same period in 2023. The decreases in dollars and as a percentage of total revenue were primarily driven by the following: - Decrease in commission expense of $3.5 million due to fewer sales headcount and a prospective increase in the period of benefit over which we amortized costs of obtaining contracts with customers from 5 to 6 years beginning in the year ending December 31, 2024 - Decrease in employee severance costs of $1.6 million primarily due to our prior period targeted workforce reductions discussed above + Increase in advertising costs of $2.0 million primarily due to timing differences compared to 2023 Research and development Research and development expense includes compensation costs for engineering and product management personnel, third-party contractor expenses, software development tools and other expenses related to developing new solutions or upgrading and enhancing existing solutions that do not qualify for capitalization, and allocated depreciation, facilities and IT support costs. We continue to make investments to delight our customers with innovative and secure cloud solutions. Research and development expenses increased by $2.2 million or 5.4%, during the three months ended March 31, 2024, when compared to the same period in 2023, primarily driven by the following: + Increase in compensation costs of $2.4 million primarily related to an increase in resources dedicated to the security-related compliance of our solutions - Decrease in employee severance costs of $1.1 million primarily due to our prior period targeted workforce reductions discussed above Not included in research and development expense for the three months ended March 31, 2024 and 2023 were $13.7 million and $14.2 million, respectively, of qualifying costs associated with software and content development activities that are required to be capitalized under GAAP, such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized development costs associated with our cloud solutions are subsequently amortized to cost of recurring revenue over the related assets' estimated useful life, which generally range from three to seven years. 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. 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 expense decreased by $5.1 million or 9.6%, during the three months ended March 31, 2024, when compared to the same period in 2023. The decreases in dollars and as a percentage of total revenue were primarily driven by the following: - Decrease in Security Incident-related expenses of $7.5 million. See "Security Incident update" on page 27 - Decrease in corporate costs of $2.2 million primarily related to the release of certain accrued tax liabilities due to favorable sales tax rulings and a decrease in bad debt expense - Decrease in employee severance costs of $0.8 million due to our prior period targeted workforce reductions discussed above + Increase in compensation costs of $4.7 million primarily related to an increase in stock-based compensation due to overall Company performance against targets for certain performance-based equity awards + Increase in acquisition and disposition-related costs of $1.6 million primarily related to the disposition of EVERFI Limited; see Note 3 to our unaudited, condensed consolidated financial statements in this report for more information First Quarter 2024 Form 10-Q 31 Table of Contents Blackbaud, Inc. (Unaudited) Interest Expense Interest expense ($M) Percentages indicate expenses as a percentage of total revenue Interest expense in dollars and as a percentage of total revenue during the three months ended March 31, 2024, was relatively in line with the same period in 2023. We currently expect interest expense for the full year 2024 to be approximately $48 million to $52 million as we had incremental borrowings to fund our ASR Transaction (as defined on page 40 ). We also expect interest rates to remain higher throughout 2024 than we originally anticipated. Our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment. See Note 8 to our unaudited, condensed consolidated financial statements in this report for more information regarding our derivative instruments, which we use to manage our variable interest rate risk, and Item 3. Quantitative and Qualitative Disclosures about Market Risk: Interest Rate Risk (below) for more information about our variable interest rate exposure and related risk. Other Income Other income ($M) Percentages indicate other income as a percentage of total revenue Other income increased in dollars and as a percentage of total revenue during the three months ended March 31, 2024 when compared to the same period in 2023, 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 6 to our unaudited, condensed consolidated financial statements in this report for more information regarding our other income. 32 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Deferred Revenue The table below compares the components of deferred revenue from our unaudited, condensed consolidated balance sheets: (dollars in millions) March 31, 2024 December 31, 2023 Change Deferred revenue (1) $ 367.2 $ 394.9 (7.0) % Less: Long-term portion 6.8 2.4 185.0 % Current portion (1) $ 360.4 $ 392.5 (8.2) % (1) The individual amounts for each year may not sum to deferred revenue or current portion of deferred revenue due to rounding. 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, billed annually in advance, and non-cancelable. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end of each one-year period. The decrease in deferred revenue during the three months ended March 31, 2024 was primarily due to a seasonal decrease in customer contract renewals . Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter. Generally, our lowest balance of deferred revenue during the year is at the end of our first quarter. Income Taxes Income tax benefit ($M) Percentages indicate effective income tax rates The change in our effective income tax rate for the three months ended March 31, 2024 when compared to the same period in 2023 was primarily attributable to favorable impacts of benefits attributable to stock-based compensation and research and development tax credits. Non-GAAP Financial Measures The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP financial measures internally in analyzing our operational performance. Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. First Quarter 2024 Form 10-Q 33 Table of Contents Blackbaud, Inc. (Unaudited) Three months ended March 31, (dollars in millions, except per share amounts) 2024 2023 GAAP Revenue $ 279.3 $ 261.8 GAAP gross profit $ 153.0 $ 138.6 GAAP gross margin 54.8 % 53.0 % Non-GAAP adjustments: Add: Stock-based compensation expense 3.8 4.0 Add: Amortization of intangibles from business combinations 14.7 13.1 Add: Employee severance — 0.7 Subtotal (1) 18.4 17.8 Non-GAAP gross profit (1) $ 171.5 $ 156.4 Non-GAAP gross margin 61.4 % 59.8 % GAAP income (loss) from operations $ 10.7 $ (9.9) GAAP operating margin 3.8 % (3.8) % Non-GAAP adjustments: Add: Stock-based compensation expense 33.6 29.9 Add: Amortization of intangibles from business combinations 15.6 13.9 Add: Employee severance — 4.3 Add: Acquisition and disposition-related costs 2.3 0.6 Add: Security Incident-related costs (2) 10.3 17.8 Subtotal (1) 61.7 66.5 Non-GAAP income from operations (1) $ 72.4 $ 56.6 Non-GAAP operating margin 25.9 % 21.6 % GAAP income (loss) before benefit for income taxes $ 3.8 $ (18.6) GAAP net income (loss) $ 5.2 $ (14.7) Shares used in computing GAAP diluted earnings (loss) per share 53,414,495 52,132,999 GAAP diluted earnings (loss) per share $ 0.10 $ (0.28) Non-GAAP adjustments: Less: GAAP income tax benefit (1.5) (3.9) Add: Total non-GAAP adjustments affecting income from operations 61.7 66.5 Non-GAAP income before provision for income taxes 65.5 47.9 Assumed non-GAAP income tax provision (3) 16.0 9.6 Non-GAAP net income (1) $ 49.5 $ 38.3 Shares used in computing non-GAAP diluted earnings per share 53,414,495 53,171,410 Non-GAAP diluted earnings per share $ 0.93 $ 0.72 (1) The individual amounts for each year may not sum to subtotal, non-GAAP gross profit, non-GAAP income from operations, non-GAAP income before provision for income taxes or non-GAAP net income due to rounding. (2) Includes Security Incident-related costs incurred during the three months ended March 31, 2024 of $10.3 million which includes approximately $7.0 million in recorded liabilities for loss contingencies and during the three months ended March 31, 2023 of $17.8 million which included approximately $10.2 million in recorded liabilities for loss contingencies. 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. For full year 2024, we currently expect pre-tax expenses of approximately $5 million to $10 million and cash outlays of approximately $8 million to $13 million for ongoing legal fees related to the Security Incident. Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below. In line with our policy, legal fees are expensed as incurred. As of March 31, 2024, we have recorded approximately $8.5 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers and governmental agencies related to the Security Incident that we believe we can reasonably estimate. It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss. There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of March 31, 2024 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgment, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition. (3) Beginning in 2024, we now apply a non-GAAP effective tax rate of 24.5% when calculating non-GAAP net income and non-GAAP diluted earnings per share. For the three months ended March 31, 2023, the tax impact related to non-GAAP adjustments is calculated under our historical non-GAAP effective tax rate of 20.0%. 34 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) 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 on a constant currency basis 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. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate. (dollars in millions) Three months ended March 31, 2024 2023 GAAP revenue $ 279.3 $ 261.8 GAAP revenue growth 6.7 % Less: Non-GAAP revenue from divested businesses (1) — (0.6) Non-GAAP organic revenue (2) $ 279.3 $ 261.1 Non-GAAP organic revenue growth 6.9 % Non-GAAP organic revenue (2) $ 279.3 $ 261.1 Foreign currency impact on Non-GAAP organic revenue (3) (0.9) — Non-GAAP organic revenue on constant currency basis (3) $ 278.3 $ 261.1 Non-GAAP organic revenue growth on constant currency basis 6.6 % GAAP recurring revenue $ 271.5 $ 252.7 GAAP recurring revenue growth 7.4 % Less: Non-GAAP recurring revenue from divested businesses (1) — — Non-GAAP organic recurring revenue (2) $ 271.5 $ 252.7 Non-GAAP organic recurring revenue growth 7.4 % Non-GAAP organic recurring revenue (2) $ 271.5 $ 252.7 Foreign currency impact on non-GAAP organic recurring revenue (3) (0.9) — Non-GAAP organic recurring revenue on constant currency basis (3) $ 270.7 $ 252.7 Non-GAAP organic recurring revenue growth on constant currency basis 7.1 % (1) Non-GAAP revenue from divested businesses excludes revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested business with the results of the combined company for the same period of time in both the prior and current periods. (2) Non-GAAP organic revenue and non-GAAP organic recurring revenue for the prior year periods presented herein may not agree to non-GAAP organic revenue and non-GAAP organic recurring revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth and non-GAAP organic recurring revenue growth are calculated. (3) To determine non-GAAP organic revenue growth and non-GAAP organic recurring revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and Euro. First Quarter 2024 Form 10-Q 35 Table of Contents Blackbaud, Inc. (Unaudited) Rule of 40 We define Rule of 40 as non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. Non-GAAP adjusted EBITDA is defined as GAAP net income plus interest, net; income tax provision (benefit); depreciation; amortization of intangible assets from business combinations; amortization of software and content development costs; stock-based compensation; employee severance; acquisition and disposition-related costs; restructuring and other real estate activities; Security Incident-related costs; and impairment of capitalized software development costs. Three months ended March 31, (dollars in millions) 2024 2023 GAAP net income (loss) $ 5.2 $ (14.7) Non-GAAP adjustments: Add: Interest, net 8.2 9.4 Less: GAAP income tax benefit (1.5) (3.9) Add: Depreciation 3.1 3.3 Add: Amortization of intangibles from business combinations 15.6 13.9 Add: Amortization of software and content development costs (1) 12.1 10.6 Subtotal (2) 37.5 33.4 Non-GAAP EBITDA (2) $ 42.8 $ 18.7 Non-GAAP EBITDA margin (3) 15.3 % Non-GAAP adjustments: Add: Stock-based compensation expense 33.6 29.9 Add: Employee severance — 4.3 Add: Acquisition and disposition-related costs 2.3 0.6 Add: Security Incident-related costs (4) 10.3 17.8 Subtotal (2) 46.1 52.6 Non-GAAP Adjusted EBITDA (2) $ 88.9 $ 71.3 Non-GAAP Adjusted EBITDA margin (5) 31.8 % Rule of 40 (6) 38.7 % Non-GAAP adjusted EBITDA 88.9 71.3 Foreign currency impact on Non-GAAP adjusted EBITDA (7) (0.4) 1.3 Non-GAAP adjusted EBITDA on constant currency basis (7) $ 88.5 $ 72.6 Non-GAAP adjusted EBITDA margin on constant currency basis 31.8 % Rule of 40 on constant currency basis (8) 38.4 % (1) Includes amortization expense related to software 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. (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. See Non-GAAP organic revenue growth table above. (7) To determine non-GAAP adjusted EBITDA on a constant currency basis, non-GAAP adjusted EBITDA from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and Euro. (8) Measured by non-GAAP organic revenue growth on constant currency basis plus non-GAAP adjusted EBITDA margin on constant currency basis. See Non-GAAP organic revenue growth table above. 36 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) 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 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 related to the Security Incident. We believe non-GAAP free cash flow and non-GAAP adjusted free cash flow provides useful measures of the Company's operating performance. Non-GAAP adjusted free cash flow is not intended to represent and should not be viewed as the amount of residual cash flow available for discretionary expenditures. Three months ended March 31, (dollars in millions) 2024 2023 GAAP net cash provided by operating activities $ 64.6 $ 21.8 GAAP operating cash flow margin 23.1 % 8.3 % Non-GAAP adjustments: Less: purchase of property and equipment (0.3) (1.4) Less: capitalized software and content development costs (13.1) (14.0) Non-GAAP free cash flow (1) $ 51.3 $ 6.5 Non-GAAP free cash flow margin 18.4 % 2.5 % Non-GAAP adjustments: Add: Security Incident-related cash flows 2.0 9.2 Non-GAAP adjusted free cash flow (1) $ 53.3 $ 15.7 Non-GAAP adjusted free cash flow margin 19.1 % 6.0 % (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. Seasonality Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our first quarter has historically been the seasonal low for bookings, with the second and fourth quarters historically being seasonally higher, and our bookings tend to be back-end loaded within individual quarters given our quarterly quota plans. Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments. Our transactional revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. We have historically experienced seasonal highs during the fourth quarter due to year-end giving campaigns and during the second quarter when a large number of events are held. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the fourth quarter historically achieving the highest total revenue. Our expenses, other than transaction-based costs related to our payments services, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has 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 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 First Quarter 2024 Form 10-Q 37 Table of Contents Blackbaud, Inc. (Unaudited) flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, large dollar customer bookings and contract renewals, fluctuations in the timing of vendor payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors. For example, we currently do not expect that our operating cash flow in the second quarter of 2024 will be higher than that of our first quarter primarily due to fluctuations in the timing of vendor and tax payments. Liquidity and Capital Resources The following table presents selected financial information about our financial position: (dollars in millions) March 31, 2024 December 31, 2023 Change Cash and cash equivalents $ 26.4 $ 31.3 (15.6) % Property and equipment, net 96.1 98.7 (2.6) % Software and content development costs, net 162.5 160.2 1.4 % Total carrying value of debt 1,039.8 779.7 33.4 % Working capital (285.5) (267.4) (6.8) % The following table presents selected financial information about our cash flows: Three months ended March 31, (dollars in millions) 2024 2023 Change Net cash provided by operating activities $ 64.6 $ 21.8 196.3 % Net cash used in investing activities (14.5) (15.3) (5.4) % Net cash used in financing activities (394.6) (353.2) 11.7 % Our principal sources of liquidity are our operating cash flow, funds available under the 2024 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. We also believe that we will be able to continue to meet our long-term cash requirements due to our anticipated cash flow from operations, solid financial position and ability to access capital from financial markets. To the extent we undertake future material acquisitions or investments or unanticipated capital or operating expenditures, including in connection with the Security Incident, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure, including through potential debt or equity issuances. As a well-known seasoned issuer, we filed an automatic shelf registration statement for an undetermined amount of debt and equity securities with the SEC on January 14, 2022. Under this universal shelf registration statement we may offer and sell, from time to time, debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units. Subject to certain conditions, this registration statement will be effective through January 13, 2025. At March 31, 2024, our total cash and cash equivalents balance included approximately $14.3 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. 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. 38 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Operating Cash Flow Our cash flows from operations are derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, deferred taxes, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales returns; and (ii) changes in our working capital. Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. Net cash provided by operating activities increased by $42.8 million during the three months ended March 31, 2024, when compared to the same period in 2023, primarily due to a $5.3 million increase in net income adjusted for non-cash expenses and a $37.5 million increase in cash flow from operations associated with working capital. The increase in cash flow from operations associated with working capital during the three months ended March 31, 2024, when compared to the same period in 2023, was primarily due to: • fluctuations in the timing of vendor payments; and • an increase in taxes payable. Security Incident update As discussed in Note 9 to our unaudited, condensed consolidated financial statements in this report, t otal costs related to the Security Incident exceeded the limit of our insurance coverage in the first quarter of 2022 . Accordingly, the Security Incident has negatively impacted, and we expect it to continue for the foreseeable future to negatively impact, our GAAP profitab ility and GAAP cash flow (see discussion regarding non-GAAP free cash flow and non-GAAP adjusted free cash flow on page 37 ). For full year 2024, we currently expect pre-tax expenses of approximately $5 million to $10 million and cash outlays of approximately $8 million to $13 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees are expensed as incurred. Not included in these ranges are our previous settlements or current accruals for loss contingencies related to the matters discussed below. As of March 31, 2024, we have recorded approximately $8.5 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers and governmental agencies related to the Security Incident that we believed we could reasonably estimate in accordance with our loss contingency procedures described above and as more fully described in Note 9. It is reasonably possible that our estimated actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss. There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of March 31, 2024 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgment, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition. Investing Cash Flow Net cash used in investing activities of $14.5 million decreased by $0.8 million during the three months ended March 31, 2024, when compared to the same period in 2023. During the three months ended March 31, 2024, we used $13.1 million for software and content development costs, which was down $0.9 million from cash spent during the same period in 2023. We also spent $0.3 million of cash for purchases of property and equipment during the three months ended March 31, 2024, which was a decrease of $1.1 million when compared to the same period in 2023. In addition, we used net cash of $1.2 million in the disposition of a business during the three months ended March 31, 2024. First Quarter 2024 Form 10-Q 39 Table of Contents Blackbaud, Inc. (Unaudited) Financing Cash Flow During the three months ended March 31, 2024, we had a net increase in borrowings of $260.5 million, primarily due to our ASR Transaction (as defined below) in March 2024. We paid $52.7 million to satisfy tax obligations of employees upon settlement of equity awards during the three months ended March 31, 2024 compared to $31.4 million during the same period in 2023. The amount of taxes paid by us on behalf of employees related to the settlement of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement. Most of our equity awards currently vest in our first quarter. During the three months ended March 31, 2024, cash flow from financing activities associated with changes in restricted cash due to customers decreased $336.6 million, compared to a decrease of $337.2 million during the same period in 2023. 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. Stock repurchase program 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. The program does not have an expiration date. Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in privately negotiated transactions. The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In March 2024, we announced that we intend to repurchase between 7% and 10% of our outstanding common stock as of December 31, 2023 under our existing $500 million stock repurchase program. Consistent with that commitment, in March 2024, we entered into an issuer forward repurchase transaction with a large financial institution to repurchase an aggregate $200 million of shares of our common stock (the "ASR Transaction"). Pursuant to the terms of the ASR Transaction, we provided the financial institution with a prepayment of $200 million and received an initial delivery of 2.1 million shares of our common stock, representing approximately 70% of the total shares then-expected to be repurchased under the ASR Transaction. The final number of shares of common stock delivered to us under the ASR Transaction will be based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Transaction, less a discount and subject to customary adjustments upon events affecting the common stock (e.g., dilutive or concentrative events, mergers and acquisitions, and market disruptions). The final settlement of the ASR Transaction is scheduled to occur by the fourth quarter of 2024, unless settled earlier at the election of the financial institution. The difference of $52.2 million between the prepayment of $200 million and the value of the shares repurchased on the ASR Transaction date represents an unsettled prepaid forward contract indexed to our common stock and met all of the applicable criteria for equity classification; therefore, it was not accounted for as a derivative instrument as of March 31, 2024. Because of our ability to settle in shares, the $52.2 million prepaid forward contract was classified as a reduction to additional paid-in capital within our unaudited, condensed consolidated statement of stockholders' equity in this report. We funded the ASR Transaction prepayment with borrowings pursuant to a revolving credit loan under the 2020 Credit Facility. During the three months ended March 31, 2024, we repurchased 2,954,211 shares for $262.6 million. The remaining amount available to purchase stock under the stock repurchase program was $259.7 million as of March 31, 2024. After 2024, we plan to repurchase shares 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 Historically, we have drawn on our credit facility from time to time to help us meet financial needs, primarily due to the seasonality of our cash flows from operations and financing for business acquisitions. At March 31, 2024, our available borrowing capacity under the 2020 Credit Facility was $119.6 million. The 2020 Credit Facility matures in October 2025. At March 31, 2024, the carrying amount of our debt under the 2020 Credit Facility was $981.7 million. Our average daily borrowings during the three months ended March 31, 2024 were $806.1 million. 40 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) The following is a summary of the financial covenants under the 2020 Credit Facility: Financial covenant Requirement Ratio as of March 31, 2024 Net leverage ratio (1) ≤ 3.75 to 1.00 2.72 to 1.00 Interest coverage ratio ≥ 2.50 to 1.00 9.75 to 1.00 (1) Under the terms of the 2020 Credit Facility, the Net Leverage Ratio requirement may be increased by up to 0.50 provided we satisfy certain requirements, including a permitted business acquisition, and provided that the maximum Net Leverage Ratio shall not exceed 4.25 to 1.00. Under the 2020 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. 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 March 31, 2024, we were in compliance with our debt covenants under the 2020 Credit Facility. See Note 7 to our unaudited, condensed consolidated financial statements in this report for additional information regarding the 2020 Credit Facility. Debt refinancing On April 30, 2024, we refinanced our debt. See Part II, Item 5. “Other Information” for detailed information relating to the terms of the 2024 Credit Agreement. Commitments and Contingencies Payments due by period (in millions) Less than 1 year More than 1 year Total (1) Recorded contractual obligations: Debt $ 19.3 $ 1,021.7 $ 1,041.0 Operating leases 8.6 44.8 53.4 Contingent consideration 1.4 — 1.4 Unrecorded contractual obligations: Purchase obligations 86.2 153.6 239.8 Interest payments on debt 58.4 63.6 122.0 Total contractual obligations (1) $ 173.8 $ 1,284.0 $ 1,457.8 (1) The individual amounts may not sum to the total due to rounding. Debt As of March 31, 2024, we had total remaining principal payments of $1.0 billion. These payments represent principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at March 31, 2024 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the revolving credit loans under the 2020 Credit Facility for the purposes of determining minimum commitment amounts. See Note 7 to our unaudited, condensed consolidated financial statements in this report for more information. Interest payments on debt In addition to principal payments, as of March 31, 2024, we expect to pay interest expense over the life of our debt obligations of approximately $122.0 million. These payments represent our estimated future interest payments on debt using our debt balances and the related weighted average effective interest rates as of March 31, 2024, which includes the effect of interest rate swap agreements. The actual interest expense recognized in our unaudited, condensed 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. First Quarter 2024 Form 10-Q 41 Table of Contents Blackbaud, Inc. (Unaudited) Operating leases As of March 31, 2024, we had remaining operating lease payments of $53.4 million. These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $8.2 million. Our operating leases are generally for corporate offices, subleased offices and certain equipment and furnit ure. Given our remote-first workforce strategy and real estate footprint optimization efforts, as discussed above, we do not anticipate entering any new, material operating leases for offices for the foreseeable future. See Note 9 to our unaud ited, condensed consolidated financial statements in this report for more information. Purchase obligations As of March 31, 2024, we had remaining purchase obligations of $239.8 million. These purchase obligations are for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. Our purchase obligations are not recorded as liabilities on our unaudited, condensed consolidated balance sheets as of March 31, 2024, as we had not received the related services. See Note 9 to our unaudited, condensed consolidated financial statements in this report for more information. The total liability for uncertain tax positions as of March 31, 2024 was $3.5 million. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of March 31, 2024. In connection with the settlement of the multi-state Attorneys General investigation relating to the Security Incident, as discussed in Note 11 to our audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC on February 21, 2024, 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 In connection with our acquisition of Kilter in August 2022, we may be required to pay up to a maximum of $3.0 million in additional cash consideration if, during the two-year period commencing January 1, 2023, Kilter meets certain application participation targets. As of March 31, 2024, a liability for the contingent consideration is recorded at its current estimated fair value of $1.4 million in accrued expenses and other current liabilities on our unaudited, condensed consolidated balance sheets. Foreign Currency Exchange Rates Approximately 15% of our total revenue for the three months ended March 31, 2024 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. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within accumulated other comprehensive income (loss) as a component of stockholders’ equity, was a loss of $11.0 million as of March 31, 2024 and a loss of $9.8 million as of December 31, 2023. 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. dollars. The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the three months ended March 31, 2024, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S. currencies. 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. For the three months ended March 31, 2024, the fluctuation in foreign currency exchange rates increased our total revenue and our income from operations by $0.9 million and $0.3 million, respectively. We have entered into foreign currency forward contracts to hedge 42 First Quarter 2024 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) revenues denominated in the Canadian dollar against changes in the exchange rate with the U.S. dollar. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP. Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2024 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Recently Issued Accounting Pronouncements For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 to our unaudited, condensed consolidated financial statements in this report.