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, India 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; and (ii) providing payment and transaction services. Business Update Our business has proven its resilience during challenging times. The social impact market has been a consistent grower for many decades, through recessions, business upturns and downturns, and even through the COVID-19 global pandemic. We understand there are concerns about federal grant funding in the U.S. and how it potentially impacts our customers. But similar to COVID-19, we believe this uncertainty only makes our software more critical to our customer’s operations, enabling them to improve fundraising outcomes and to undertake or sharpen their own cost-management initiatives. To be clear, our solutions are not in the funds flow from federal agencies, but are used for fundraising from individual donors, which is even more critical now. Blackbaud has undertaken a number of operational initiatives that we believe set us up to perform well, even in a challenging market. • In 2023, we began transitioning our contractual revenue contracts from primarily 1-year to primarily 3-year renewal terms. This modernized approach to contract terms provides increased visibility and consistency for two-thirds of our revenue base and provides better predictability for our customers. • Over the past several years, we have transitioned the majority of our products and customers to leading public cloud service providers, while shutting down many of our private data centers, with only two of our own data centers remaining. • We continue to innovate through the use of AI to not only empower our customers but also improve our own internal productivity. • And lastly, we have right-sized our operations by rationalizing office leases and renegotiating a number of our significant vendor contracts. Despite a strong focus on reducing expenses, we continue to invest aggressively in innovation and our extensive developer network to help our customers raise more money while enhancing and streamlining their operations. Our innovation and end to end workflows continue to be a competitive differentiator and drive sales. We are supporting this initiative through enhancements in sales and marketing programs and we continue to identify, experiment, and scale a range of successful solutions across marketing, customer success, and engineering to be an active innovator through applied AI. In February 2025, we announced that we intend to repurchase during 2025 between 3% and 5% of our outstanding common stock as of December 31, 2024 under our stock repurchase program. During the three months ended March 31, 2025, we repurchased 1,513,022 shares for $100.0 million. Including net share settlement of employee stock compensation, this represents approximately 4.2% of the Company's common stock outstanding as of December 31, 2024. The remaining amount available to purchase stock under our stock repurchase program was $544.5 million as of March 31, 2025. 22 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Financial Summary Total revenue ($M) Income from operations ($M) YoY Growth (%) YoY Growth (%) Revenue decreased by $8.6 million during the three months ended March 31, 2025, when compared to the same period in 2024, driven largely by the following: - Decrease in contractual recurring revenue of $14.9 million, $22.1 million of which was related to our sale of EVERFI; partially offset by the positive impact of our pricing initiatives and the performance of our cloud solutions + Increase in transactional recurring revenue of $7.5 million primarily due to increases in volume for our Blackbaud Integrated Payments and Blackbaud Tuition Management and, to a lesser extent, positive results related to pricing initiatives - Decrease in one-time consulting revenue of $1.1 million primarily due to our sale of EVERFI Limited in March 2024 Income from operations increased by $9.7 million during the three months ended March 31, 2025, when compared to the same period in 2024, driven largely by the following: + Decrease in compensation costs other than stock-based compensation of $12.4 million primarily due to our sale of EVERFI + Decrease in stock-based compensation expense of $11.4 million primarily due to a decrease in the grant date fair value of equity award grants, and to a lesser extent, our sale of EVERFI + Decrease in Security Incident-related expenses of $8.1 million. See "Security Incident update" below. + Decrease in amortization of intangible assets from business combinations of $8.0 million due to the previously disclosed material impairment charge related to our EVERFI asset group in December 2024, which primarily included finite-lived intangible assets + Decrease in third-party contractor costs of $3.0 million primarily due to our sale of EVERFI - Increase in acquisition and disposition-related costs within general and administrative expenses of $22.9 million primarily related to our release in February 2025 from our lease for office space in Washington, DC - Decrease in total revenue, as described above - Increase in transaction-based costs of $2.3 million related to the increase in the volume of transactions for which we process payments and, to a lesser extent, increases in vendor rates - Increase in corporate costs of $1.5 million primarily related to an increase in bad debt expense and a smaller, favorable impact from the release of certain accrued tax liabilities due to favorable state sales tax rulings in 2025 compared to 2024 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. First Quarter 2025 Form 10-Q 23 Table of Contents Blackbaud, Inc. (Unaudited) 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. As a remote-first workforce company, we also continuously evaluate opportunities to shift various business units or functions to lower-cost jurisdictions, including internationally, and may do so if and when we determine that it would reduce costs without negatively impacting the quality of our products and services. 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, 2025, our gross dollar retention was approximately 92%. This gross dollar retention rate increased over our rate for the twelve months ended December 31, 2024 primarily due to our sale of EVERFI. We are continually investing in innovation, which we believe will generate strong gross dollar retention over the long-term. Balance sheet and cash flow At March 31, 2025, our cash and cash equivalents were $37.2 million. Under the 2024 Credit Facilities, the carrying amount of our debt was $1.1 billion and our net leverage ratio was 2.91 to 1.00 . During the three months ended March 31, 2025, we generated $1.4 million in cash from operations, had a net increase in borrowings of $130.7 million, returned $100.0 million to stockholders by way of share repurchases and had aggregate cash outlays of $13.7 million for purchases of property and equipment and capitalized software development costs. Security Incident update As discussed in Note 8 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 34 ). For the three months ended March 31, 2025, we incurred net pre-tax expenses of $2.2 million related to the Security Incident, which included $1.1 million for ongoing legal fees and additional accruals for loss contingencies of $1.1 million. During the three months ended March 31, 2025, we had cash outlays which were insignificant related to the Security Incident for ongoing legal fees and the settlement of putative consumer class actions cases in Canada. In line with our policy, legal fees are expensed as incurred. As of March 31, 2025, we have recorded approximately $1.6 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain plaintiffs and customers 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 8. It is reasonably possible that our estimated actual losses may change in the near term for those matters, but we believe that they are not reasonably likely, either separately or in the aggregate, to have a material adverse impact on our results of operations, cash flows or financial condition. 24 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) There may be other Security Incident-related matters, which 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. Results of Operations Comparison of the three months ended March 31, 2025 and 2024 Disposition As previously disclosed, on December 31, 2024, we disposed of our EVERFI business, formerly a wholly-owned subsidiary of Blackbaud, Inc, to a private investment firm that is unaffiliated with Blackbaud for nominal cash consideration. The results of operations of EVERFI are not included in our consolidated results of operations subsequent to the date of disposition. Reclassifications Our revenue from "recurring" and "one-time services and other" have been combined within "revenue" beginning in 2025 due to the immateriality of our one-time services and other revenue. In order to provide comparability between periods presented, our “recurring“ and “one-time services and other" revenue lines have been combined within “revenue" in the previously reported consolidated statements of comprehensive income to conform to the presentation of the current period. Similarly, "cost of recurring" and "cost of one-time services and other" have been combined within "cost of revenue" in the previously reported consolidated statements of comprehensive income to conform to the presentation of the current period. Revenue and Cost of Revenue Revenue ($M) Cost of revenue ($M) Gross profit ($M) and gross margin (%) YoY Growth (%) YoY Growth (%) Our revenue includes three components: contractual recurring, transactional recurring and one-time services and other. • Contractual recurring revenue is primarily comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, 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. • 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 2025 Form 10-Q 25 Table of Contents Blackbaud, Inc. (Unaudited) Cost of revenue is primarily comprised of compensation costs for customer support, production IT, professional services and onsite training 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, data expense incurred to perform one-time analytic services and other costs incurred in providing support, recurring services and onsite customer training 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. Revenue decreased by $8.6 million, or 3.1%, during the three months ended March 31, 2025, when compared to the same period in 2024. For a discussion of our changes in revenue, see "Revenue" above starting on page 23 in this report. Cost of revenue decreased by $11.4 million, or 9.0%, during the three months ended March 31, 2025, when compared to the same period in 2024, driven primarily by the following: - Decrease in amortization of intangible assets from business combinations of $7.6 million due to the previously disclosed material impairment charge related to our EVERFI asset group in December 2024, which primarily included finite-lived intangible assets - Decrease in compensation costs of $2.9 million primarily due to our sale of EVERFI - Decrease in allocated overhead costs of $1.6 million primarily related to the decreased headcount from our sale of EVERFI + Increase in transaction-based costs of $2.0 million related to the increase in the volume of transactions for which we process payments and, to a lesser extent, increases in vendor rates Gross margin increased by 280 basis points for the three months ended March 31, 2025, when compared to the same period in 2024, primarily due to the decreases in cost of revenue outpacing the decreases in revenue. Operating Expenses Sales, marketing and customer success ($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 26 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) making in our go-to-market approach are intended to reduce our average customer acquisition cost per customer as well as the related payback period while increasing sales velocity. Sales, marketing and customer success expense decreased by $6.2 million or 12.2%, during the three months ended March 31, 2025, when compared to the same period in 2024. The decreases in dollars and as a percentage of revenue were primarily driven by the following: - Decrease in compensation costs of $4.2 million primarily related to our sale of EVERFI - Decrease in advertising costs of $1.3 million primarily due to our sale of EVERFI 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. We also continue to invest heavily in the security of our solutions. Research and development expenses decreased by $9.2 million or 21.6%, during the three months ended March 31, 2025, when compared to the same period in 2024. The decreases in dollars and as a percentage of revenue were primarily driven by the following: - Decrease in compensation costs of $7.8 million primarily related to our sale of EVERFI - Decrease in third-party contractor costs of $2.3 million primarily related to our sale of EVERFI + Decrease in software development costs of $1.3 million, that were required to be capitalized under GAAP, primarily due to our sale of EVERFI Not included in research and development expense for the three months ended March 31, 2025 and 2024 were $12.4 million and $13.7 million, respectively, of qualifying costs associated with software development activities that are required to be capitalized under GAAP, such as those for our cloud solutions. Qualifying capitalized development costs associated with our cloud solutions are subsequently amortized to cost of revenue over the related assets' estimated useful life, which generally range from three to seven years. We expect that the amount of software development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality, security and the integration of our solutions, which we believe will drive long-term revenue growth. 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. First Quarter 2025 Form 10-Q 27 Table of Contents Blackbaud, Inc. (Unaudited) General and administrative expense increased by $8.9 million, or 18.7%, three months ended March 31, 2025, when compared to the same period in 2024. The increases in dollars and as a percentage of revenue were primarily driven by the following: + Increase in acquisition and disposition-related costs of $22.9 million primarily related to our release from our lease for office space in Washington, DC + Decrease in total costs allocated from general and administrative expense of $1.8 million primarily related to the decreased headcount from our sale of EVERFI. 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. - Decrease in Security Incident-related expenses of $8.1 million largely related to decreases in loss contingency accruals. See "Security Incident update" on page 24 - Decrease in stock-based compensation costs of $7.4 million primarily due to a decrease in the grant date fair value of equity award grants, and to a lesser extent, our sale of EVERFI - Decrease in compensation costs other than stock-based compensation of $1.5 million primarily due to our sale of EVERFI Interest Expense Interest expense ($M) Percentages indicate expenses as a percentage of total revenue The increase in interest expense in dollars and as a percentage of total revenue during the three months ended March 31, 2025, when compared to the same period in 2024, was primarily due to our incremental borrowings to fund stock repurchases during 2024 and 2025 and the expiration of favorable interest rate swaps in October 2024. We currently expect interest expense for the full year 2025 to be approximately $65 million to $69 million. Our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment. See Note 7 to our unaudited, condensed consolidated financial statements in this report for more information regarding our derivative instruments, which we use to manage our variable interest rate risk, and Item 3. Quantitative and Qualitative Disclosures about Market Risk: Interest Rate Risk (below) for more information about our variable interest rate exposure and related risk. 28 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Other Income Other income ($M) Percentages indicate other income as a percentage of total revenue The decrease in other income in dollars and as a percentage of total revenue during the three months ended March 31, 2025, when compared to the same period in 2024, was primarily due to current year losses in currency revaluation compared to prior year gains. See Note 5 to our unaudited, condensed consolidated financial statements in this report for more information regarding our other income. Deferred Revenue The table below compares the components of deferred revenue from our unaudited, condensed consolidated balance sheets: (dollars in millions) March 31, 2025 December 31, 2024 Change Deferred revenue (1) $ 332.2 $ 361.5 (8.1) % Less: Long-term portion 6.0 2.0 199.4 % Current portion (1) $ 326.2 $ 359.5 (9.3) % (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 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 of each one-year period. The decrease in deferred revenue during the three months ended March 31, 2025 was primarily due to a seasonal decrease in customer contract billings . Historically, due to the timing of customer budget cycles, we have an increase in billings and customer contract renewals at or near the beginning of our third quarter. Generally, our lowest balance of deferred revenue during the year is at the end of our first quarter. First Quarter 2025 Form 10-Q 29 Table of Contents Blackbaud, Inc. (Unaudited) Income Taxes Income tax provision (benefit) ($M) Percentages indicate effective income tax rates The increase in our effective income tax rate for the three months ended March 31, 2025 when compared to the same period in 2024 was primarily due to the impact of reduced current year stock-based compensation benefit. Additionally, the current year effective tax rate was unfavorably impacted by a valuation allowance against our net U.S. deferred tax assets. 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. 30 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Three months ended March 31, (dollars in millions, except per share amounts) 2025 2024 GAAP Revenue $ 270.7 $ 279.3 GAAP gross profit $ 155.8 $ 153.0 GAAP gross margin 57.6 % 54.8 % Non-GAAP adjustments: Add: Stock-based compensation expense 2.7 3.8 Add: Amortization of intangibles from business combinations 7.1 14.7 Subtotal (1) 9.8 18.4 Non-GAAP gross profit (1) $ 165.6 $ 171.5 Non-GAAP gross margin 61.2 % 61.4 % GAAP income from operations $ 20.4 $ 10.7 GAAP operating margin 7.5 % 3.8 % Non-GAAP adjustments: Add: Stock-based compensation expense 22.2 33.6 Add: Amortization of intangibles from business combinations 7.6 15.6 Add: Acquisition and disposition-related costs (2) 25.1 2.3 Add: Security Incident-related costs (3) 2.2 10.3 Subtotal (2) 57.1 61.7 Non-GAAP income from operations (1) $ 77.5 $ 72.4 Non-GAAP operating margin 28.6 % 25.9 % GAAP income before provision (benefit) for income taxes $ 5.6 $ 3.8 GAAP net income $ 4.9 $ 5.2 Shares used in computing GAAP diluted earnings per share 49,445,079 53,414,495 GAAP diluted earnings per share $ 0.10 $ 0.10 Non-GAAP adjustments: Add: GAAP income tax provision (benefit) 0.7 (1.5) Add: Total non-GAAP adjustments affecting income from operations 57.1 61.7 Non-GAAP income before provision for income taxes 62.7 65.5 Assumed non-GAAP income tax provision (4) 15.4 16.0 Non-GAAP net income (1) $ 47.3 $ 49.5 Shares used in computing non-GAAP diluted earnings per share 49,445,079 53,414,495 Non-GAAP diluted earnings per share $ 0.96 $ 0.93 (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 charges of $24.3 million incurred during the three months ended March 31, 2025 related to the release from our lease for office space in Washington, DC (which was acquired as part of our acquisition of EVERFI in December 2021). (3) Includes Security Incident-related costs incurred during the three months ended March 31, 2025 of $2.2 million, which included approximately $1.1 million in additional accruals of loss contingencies, and during the three months ended March 31, 2024 of $10.3 million which included approximately $7.0 million in recorded aggregate 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. As of March 31, 2025, we have recorded approximately $1.6 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain plaintiffs and customers 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, but we believe that they are not reasonably likely, either separately or in the aggregate, to have a material adverse impact on our results of operations, cash flows or financial condition. There may be other Security Incident-related matters, which 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. (4) We apply a non-GAAP effective tax rate of 24.5% when calculating non-GAAP net income and non-GAAP diluted earnings per share. 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- First Quarter 2025 Form 10-Q 31 Table of Contents Blackbaud, Inc. (Unaudited) GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies, if any, 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, 2025 2024 GAAP revenue $ 270.7 $ 279.3 GAAP revenue growth (3.1) % Less: Non-GAAP revenue from divested businesses (1) — (23.4) Non-GAAP organic revenue (2) $ 270.7 $ 255.8 Non-GAAP organic revenue growth 5.8 % Non-GAAP organic revenue (2) $ 270.7 $ 255.8 Foreign currency impact on Non-GAAP organic revenue (3) 0.3 — Non-GAAP organic revenue on constant currency basis (3) $ 271.0 $ 255.8 Non-GAAP organic revenue growth on constant currency basis 5.9 % GAAP recurring revenue $ 264.1 $ 271.5 GAAP recurring revenue growth (2.8) % Less: Non-GAAP recurring revenue from divested businesses (1) — (22.1) Non-GAAP organic recurring revenue (2) $ 264.1 $ 249.5 Non-GAAP organic recurring revenue growth 5.8 % Non-GAAP organic recurring revenue (2) $ 264.1 $ 249.5 Foreign currency impact on non-GAAP organic recurring revenue (3) 0.3 — Non-GAAP organic recurring revenue on constant currency basis (3) $ 264.3 $ 249.5 Non-GAAP organic recurring revenue growth on constant currency basis 6.0 % (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. 32 First Quarter 2025 Form 10-Q 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 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) 2025 2024 GAAP net income $ 4.9 $ 5.2 Non-GAAP adjustments: Add: Interest, net 15.3 8.2 Add: GAAP income tax provision (benefit) 0.7 (1.5) Add: Depreciation 3.0 3.1 Add: Amortization of intangibles from business combinations 7.6 15.6 Add: Amortization of software development costs (1) 11.9 12.1 Subtotal (2) 38.4 37.5 Non-GAAP EBITDA (2) $ 43.3 $ 42.8 Non-GAAP EBITDA margin (3) 16.0 % Non-GAAP adjustments: Add: Stock-based compensation expense $ 22.2 $ 33.6 Add: Acquisition and disposition-related costs 25.1 2.3 Add: Security Incident-related costs (4) 2.2 10.3 Subtotal (2) 49.5 46.1 Non-GAAP adjusted EBITDA (2) $ 92.8 $ 88.9 Non-GAAP adjusted EBITDA margin (5) 34.3 % Rule of 40 (6) 40.1 % Non-GAAP adjusted EBITDA $ 92.8 $ 88.9 Foreign currency impact on Non-GAAP adjusted EBITDA (7) 0.2 (0.4) Non-GAAP adjusted EBITDA on constant currency basis (7) $ 93.0 $ 88.5 Non-GAAP adjusted EBITDA margin on constant currency basis 34.3 % Rule of 40 on constant currency basis (8) 40.2 % (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. First Quarter 2025 Form 10-Q 33 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 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 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) 2025 2024 GAAP net cash provided by operating activities $ 1.4 $ 64.6 GAAP operating cash flow margin 0.5 % 23.1 % Non-GAAP adjustments: Less: purchase of property and equipment (0.7) (0.3) Less: capitalized software development costs (13.0) (13.1) Non-GAAP free cash flow (1) $ (12.3) $ 51.3 Non-GAAP free cash flow margin (4.5) % 18.4 % Non-GAAP adjustments: Add: Security Incident-related cash flows 0.9 2.0 Non-GAAP adjusted free cash flow (1) $ (11.4) $ 53.3 Non-GAAP adjusted free cash flow margin (4.2) % 19.1 % (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 billings and renewals, 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 billings and renewals and student enrollments or significant acquisitions. Our cash flow from financing is negatively 34 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) 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. Liquidity and Capital Resources The following table presents selected financial information about our financial position: (dollars in millions) March 31, 2025 December 31, 2024 Change Cash and cash equivalents $ 37.2 $ 67.6 (44.9) % Property and equipment, net 85.0 91.9 (7.5) % Software development costs, net 150.1 148.3 1.2 % Total carrying value of debt 1,205.7 1,075.0 12.2 % Working capital (236.4) (275.8) 14.3 % The following table presents selected financial information about our cash flows: Three months ended March 31, (dollars in millions) 2025 2024 Change Net cash provided by operating activities $ 1.4 $ 64.6 (97.9) % Net cash used in investing activities (25.9) (14.5) 78.4 % Net cash used in financing activities (330.0) (394.6) (16.4) % Our principal sources of liquidity are our operating cash flow, funds available under the 2024 Credit Facilities 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 10, 2025. 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 and pursuant to applicable SEC regulations, this registration statement is effective for three years from its date of filing with the SEC, or through January 9, 2028. At March 31, 2025, our total cash and cash equivalents balance included approximately $17.8 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. First Quarter 2025 Form 10-Q 35 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 decreased by $63.2 million during the three months ended March 31, 2025, when compared to the same period in 2024, primarily due to a $14.3 million decrease in net income adjusted for non-cash expenses and a $48.9 million decrease in cash flow from operations associated with working capital. The decrease in cash flow from operations associated with working capital during the three months ended March 31, 2025, when compared to the same period in 2024, was primarily due to: • fluctuations in the timing of vendor payments; • an increase in prepaid taxes during the first quarter of 2025 compared to an increase in taxes payable during the same period in 2024; and • a decrease in accrued expenses during the first quarter of 2025 related to disposition-related costs compared to an increase in accrued expenses during the first quarter of 2024 related to the Security Incident. See discussion of the Security Incident in Note 8 to our unaudited, condensed consolidated financial statements in this report. Investing Cash Flow Net cash used in investing activities of $25.9 million increased by $11.4 million during the three months ended March 31, 2025, when compared to the same period in 2024. During the three months ended March 31, 2025, we used cash of $13.0 million for software development costs and $0.7 million for purchases of property and equipment, both of which were relatively consistent with cash spent during the same period in 2024. During the three months ended March 31, 2025, we used net cash of $12.2 million for the disposition of a business compared to $1.2 million used during the same period in 2024. Financing Cash Flow During the three months ended March 31, 2025, we had a net increase in borrowings of $130.7 million, primarily due to our stock repurchase program and to satisfy tax obligations of employees upon settlement of equity awards (see discussion below). We paid $37.9 million to satisfy tax obligations of employees upon settlement of equity awards during the three months ended March 31, 2025 compared to $52.7 million during the same period in 2024. 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, 2025, cash flow from financing activities associated with changes in restricted cash due to customers decreased $320.2 million, compared to a decrease of $336.6 million during the same period in 2024. 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. 36 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) Stock repurchase program On July 16, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by expanding the total capacity under the program to $800.0 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. During the three months ended March 31, 2025, we repurchased 1,513,022 shares for $100.0 million. The remaining amount available to purchase stock under the stock repurchase program was $544.5 million as of March 31, 2025. During 2025, we intend to repurchase between 3% and 5% of our outstanding common stock as of December 31, 2024 under our existing stock repurchase program, including net share settlement of employee stock compensation. 2024 Credit Facilities 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, 2025, our available borrowing capacity under the 2024 Credit Facilities was $333.7 million. The 2024 Credit Facilities mature in April 2029. At March 31, 2025, the carrying amount of our debt under the 2024 Credit Facilities was $1.1 billion. Our average daily borrowings during the three months ended March 31, 2025 were $1.0 billion. The following is a summary of the financial covenants under the 2024 Credit Facilities: Financial covenant Requirement Ratio as of March 31, 2025 Net leverage ratio (1) ≤ 3.75 to 1.00 2.91 to 1.00 Interest coverage ratio ≥ 2.50 to 1.00 6.51 to 1.00 (1) Under the terms of the 2024 Credit Facilities, 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 2024 Credit Facilities, 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 2024 Credit Facilities, and (ii) our pro forma net leverage ratio, as set forth in the 2024 Credit Facilities, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At March 31, 2025, we were in compliance with our debt covenants under the 2024 Credit Facilities. See Note 6 to our unaudited, condensed consolidated financial statements in this report for additional information regarding the 2024 Credit Facilities. First Quarter 2025 Form 10-Q 37 Table of Contents Blackbaud, Inc. (Unaudited) Commitments and Contingencies Payments due by period (in millions) Less than 1 year More than 1 year Total (1) Recorded contractual obligations: Debt $ 23.4 $ 1,184.6 $ 1,207.9 Operating leases 1.2 2.5 3.7 Interest payments on debt — 1.0 1.0 Unrecorded contractual obligations: Purchase obligations 89.4 105.3 194.7 Interest payments on debt 69.9 230.4 300.4 Total contractual obligations (1) $ 183.9 $ 1,523.8 $ 1,707.7 (1) The individual amounts may not sum to the total due to rounding. Debt As of March 31, 2025, we had total remaining principal payments of $1.2 billion. These payments represent principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2024 Credit Facilities, our real estate loans and our other debt at March 31, 2025 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 2024 Revolving Facility for the purposes of determining minimum commitment amounts. See Note 6 to our unaudited, condensed consolidated financial statements in this report for more information. Interest payments on debt In addition to principal payments, as of March 31, 2025, we expect to pay interest expense over the life of our debt obligations of approximately $301.3 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, 2025, 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. Operating leases As of March 31, 2025, we had remaining operating lease payments of $3.7 million. These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest which was insignificant. 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, we do not anticipate entering any new, material operating leases for offices for the foreseeable future. See Note 8 to our unaud ited, condensed consolidated financial statements in this report for more information. Purchase obligations As of March 31, 2025, we had remaining purchase obligations of $194.7 million. These purchase obligations are for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. Our purchase obligations are not recorded as liabilities on our unaudited, condensed consolidated balance sheets as of March 31, 2025, as we had not received the related services. See Note 8 to our unaudited, condensed consolidated financial statements in this report for more information. The total liability for uncertain tax positions as of March 31, 2025 was $5.4 million. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of March 31, 2025. 38 First Quarter 2025 Form 10-Q Table of Contents Blackbaud, Inc. (Unaudited) In connection with the settlement of the multi-state Attorneys General investigation, the California Attorney General investigation and the FTC 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, 2025, we have agreed to implement and improve certain of our cybersecurity programs and tools through May 2044. The currently anticipated costs in connection with these efforts are primarily expected to be expensed as incurred. Foreign Currency Exchange Rates Approximately 15% of our total revenue for the three months ended March 31, 2025 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 loss as a component of stockholders’ equity, was a loss of $9.4 million as of March 31, 2025 and a loss of $12.7 million as of December 31, 2024. 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 revenues and expenses denominated in non-U.S. currencies. During the three months ended March 31, 2025, foreign translation resulted in decreases 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, 2025, 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. 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, 2025 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, 2024. Recently Issued Accounting Pronouncements For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 to our unaudited, condensed consolidated financial statements in this report. First Quarter 2025 Form 10-Q 39 Table of Contents Blackbaud, Inc. (Unaudited)