Our solutions provide our customers payment processing capabilities that enable their donors to make donations and purchase goods and services using numerous payment options, including credit card and automated clearing house (“ACH”) checking transactions, through secure online transactions.
Professional and Managed Services
Our expert consultants, and those in our partner program, provide implementation, optimization, data conversion implementation and customization services for each of our software solutions. These services include:
•System implementation;
•Data conversion, business process analysis and application customization;
•Database merging and enrichment, and secure credit card transaction processing;
•Database production activities; and
•Website design services;
•Outcome-based and prescriptive services.
In addition, we, and our delivery partners, apply our industry knowledge and experience, combined with expert knowledge of our solutions, to evaluate an organization's needs and consult on how to improve a business process.
Training
We provide a variety of onsite, instructor-led online and on-demand training services to our customers relating to the use ofon our solutions and application of best practices. This includes our highly-rated Blackbaud University curriculum. Blackbaud University provides certifications for our products and industry best practices. These certifications serve as important catalysts for professional growth in the nonprofit industry. Our instructors and designers have extensive trainingdeep knowledge in the social impact arena and in the use of our solutions and present course material that issolutions. Instructor-led courses are designed to include hands-on lab exercises, as well as course materials with examples and problems to solve.
At the endWe have updated our methodology for counting customers to better represent our current offerings and our growing population of 2019,customers with contractual billing arrangements and customers that pay us through solutions usage or transaction fees, some of which are in lieu of contractual billing arrangements. During 2022, we had over 45,000 globalmore than 40,000 customers including nonprofits, foundations, companies, education institutions, healthcare organizationswith contractual billing arrangements and other social good entities. There arenearly 100,000 customers that paid us through transactional fees. Through our customers and our solutions, we support millions of users and we connect millions of our solutionssupporters to nearly 150,000 organizations and causes in more thanover 100 countries. Our largest single customer accounted for less than 1%approximately 0.9% of our 20192022 consolidated revenue.
Most of our solutions and related services are sold through our direct sales force. Our direct sales force is complemented by a team of business development representatives responsible for sales lead generation and qualification. These sales and marketing professionals are primarily located throughout the United States, the U.K., Canada and Australia. As of December 31, 2019,2022, we had 560approximately 290 direct sales employees.
We conductOur marketing programsorganization, which includes brand, digital, content, product, event and demand generation marketing and corporate communications, develops and launches multi-channel campaigns designed to create brand recognition and market awareness for our solutions and services. Through the Blackbaud Institute, we also give back to the social impact community by developing in-depth research and thought leadership content to help to drive better outcomes for their organizations with data, technology and expertise.
Our digital demand generation motion focuses on targeted account-based marketing efforts includeplays, as well as intent-based programs including paid search, retargeting, social and content syndication programs. We supplement the digital motion with select participation at tradeshows,virtual and in-person third-party trade shows, technical conferences, and technology seminars,seminars. We also target publication of technicalour thought leadership content and educational articlesposition our subject matter experts in industry journals preparationand publications. We have a large base of competitive analyses and the use of software tools to enhance our digital footprint and drive lead generation. Ourloyal customers and strategic partners that provide references and recommendations that we often featurefeatured in our advertising and promotional activities.
We believe relationships with third parties can enhance our sales and marketing efforts. We have and will continue to establish additional relationships with companies that provide services to the philanthropic industry, such as consultants, educators, publishers, financial service providers, complementary technology providers and data providers. These companies promote or complement our solutions and provide us access to new customers.
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Corporate Philanthropy and Volunteerism |
Blackbaud operates under a fundamental belief that the world would be better if good took over. The company is an active participant in the ecosystem of good, working to drive positive change both through what we do as a business and how we serve individually. We offer an array of philanthropy programs aimed at engaging our employees as agents of good, including matching gifts, competitive grants that honor excellent examples of volunteerism, employee-led grants committees, skills-based volunteerism initiatives, as well as science, technology, engineering and mathematics focused community programs. Blackbaud attracts people who are committed to service, with 89% saying our focus on nonprofits was a driver in their decision to join the company, 89% actively serving as volunteers and 25% serving on a nonprofit board or committee.
The market for software and related services in the philanthropic industrytargeting philanthropic-focused for-profit and nonprofit organizations is competitive and highly fragmented. For certain areas of the market, entry barriers are low, as general tools for small businesses can usually be configured to manage the most basic marketing, contact management, and accounting needs of social goodimpact organizations. In parallel, as software development evolves from a highly-complex tradecraft with nuanced understanding of architectural patterns and discrete languages, to click-to-code and drag-and-drop development with natively cloud-based infrastructure, it becomes easier for competitors to quickly spin up basic applications with embedded security and functionality.to solve common problems. However, once basic needs are met, programs unique to social goodimpact organizations like the stewardship of relationships and partnerships critical to major gift fundraising, giftcommunity and grantemployee education; the cultivation and management of gifts, grants and K12 digital education sponsorship; the multi-level networking required for peer-to-peer activism requireand employee engagement; and the sensitive data and reporting behind critical programs run by and for healthcare and education institutions ensure the ongoing need for highly specialized tools to configure and transform general business software to match the complexities of the industry.tools. These specialized applications have a higher barrier of entry as they require industry insight to accurately articulate the business workflow that generates the requirements that are translated into code for software products. Moreover, because social goodimpact organizations rely heavily on relationships with and among their supporters, integration of systems drives value beyond mere efficiency. Hence, we believe our insight, the full spectrum of our current solutions and our ability to deliver on future solutions makesmake us a strong competitor. We expect to continue to see new entrants as focus on social investment solutions increases to satisfy Millennial and Gen Z donors, customers and employees, the barriers of entry continue to decline with natively cloud solutions and social goodimpact organizations rely intrinsically on technology to manage emerging revenue channelsmore readily require digital transformation of business processes and increasingly complex operations.data-driven decision making.
Our competition falls into four primary categories:
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• | Niche products are usually developed as a solution for a single problem at an organization and are adopted by similar organizations to solve a specialized need. These are typically offered by vendors who may have deep industry expertise but may not have the resources to expand beyond a specialized area. We believe we compete against these solutions by offering a set of integrated solutions rather than a single point solution, which we believe improves the overall customer experience. In addition, our open platform allows integration to specialized applications so the opportunity for disruption from these competitors is minimized.
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• | Vertical-specific solutions are offered by competitors seeking to meet the enterprise-wide needs of a specific sub-segment of social good community. Typically, these solutions are offered by vendors who may offer either a point solution or integrated suite of products used by a vertical. We believe we compete successfully against these competitors through a combination of our integrated suite of offerings within verticals where we compete, offering solutions with market leading robustness as well as the scale, reach, and reputation of our organization.
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• | General business software vendors such as Salesforce.com and Oracle, compete with us in certain areas of our business. While there is a growing trend toward social investment that is prompting philanthropic solutions from these general business vendors, most do not have a complete nonprofit specific focus and, therefore, do not offer or intend to offer nonprofit-specific versions for outside sales.•Niche products are usually developed as a solution for a single problem at an organization and are adopted by similar organizations to solve a specialized need. These are typically offered by vendors who may have deep industry expertise but may not have the resources to expand beyond a specialized area. We believe we compete against these solutions by offering a set of integrated solutions rather than a single point solution, which we believe improves the overall customer experience. In addition, our open platform allows integration to specialized applications so the opportunity for disruption from these competitors is minimized. •Vertical-specific solutions are offered by competitors seeking to meet the enterprise-wide needs of a specific sub-segment of the social impact community. Typically, these solutions are offered by vendors who may offer either a point solution or integrated suite of products used by a vertical. We believe we compete successfully against these competitors through a combination of our integrated suite of offerings and nationwide community networks within verticals where we compete, offering solutions with market leading robustness and reporting as well as the scale, reach, and reputation of our organization. •General business software vendors, such as Microsoft, Oracle and Salesforce.com, compete with us in certain areas of our business. While there is a growing trend toward social investment that is prompting philanthropic solutions from these general business vendors, most do not have a complete nonprofit specific focus and, therefore, do not offer or intend to offer nonprofit-specific versions. However, there is a subset of general business software competitors who have introduced nonprofit-specific versions of their products. These products generally do not satisfy the needs of nonprofits from end-to-end as they were not designed to support the specific needs of nonprofits during the original architecture, design, and requirements elicitation phases; therefore, we believe that because these products were not originally designed for nonprofits, they are not yet fully capable of meeting market needs without significant customization. The significant customization required to transform general business products into nonprofit solutions often requires the use of consultants to guide the implementation, without which, leave the adoption of general business software competitors who have introduced nonprofit-specific versions of their products. These products generally do not satisfy the needs of nonprofits from end-to-end as they were not designed to support the specific needs of nonprofits during the original architecture, design, and requirements elicitation phases; therefore, we believe that because these products were not originally designed for nonprofits, they are not yet capable of meeting market needs without significant customization. The significant customization required to transform general business products into nonprofit solutions often requires the use of consultants to guide the implementation, without which, leave the adoption of general business software |
limited to very basic operations and simple needs. We believe our solutions compete successfully against general business software as a nonprofit’s needs grow more complex. As a result, we believe we can compete successfully to meet nonprofit-specific requirements, often integrating with general business platforms used for their more generalized operations.
•Consumer-oriented fundraising platforms, such as GoFundMe and Facebook compete with our business where consumers raise funds directly. To drive adoption of their platforms, these vendors rely on a combination of direct-to-consumer marketing, marketing to nonprofits who in turn market to their supporters, and marketing to intermediate entities such as an event sponsor who will market to participants. We believe we compete well in this market through a combination of positive brand recognition among all three of these groups and the combination of our consumer- and organization-oriented tools relative to those of the competition.
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•2022 Form 10-K | Consumer-oriented fundraising platforms such as GoFundMe, Virgin Money Giving and Facebook compete with our business where consumers raise funds directly. To drive adoption of their platforms, these vendors rely on a combination of direct-to-consumer marketing, marketing to nonprofits who in turn market to their supporters, and marketing to intermediate entities such as an event sponsor who will market to participants. We believe we compete well in this market through a combination of positive brand recognition among all three of these groups and the combination of our consumer- and organization-oriented tools relative to those of the competition. | 11 |
Less frequently, we compete with providers of traditional, non-automated fundraising service providers, including parties providing services in support of traditional direct mail or email campaigns, special events fundraising, peer to peer, telemarketing and personal solicitations. We believe we compete successfully against these traditional fundraising service providers, primarily because our solutions and services are more automated, more robust, more tailored to the needs of nonprofit organizationorganizations and more efficient.
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Technology and Architecture |
Blackbaud SKY provides the foundation for allOur technology strategy consists of Blackbaud’sseveral key building blocks including cloud solutions, enabling highly availableoperations, developer tools, data intelligence and easy-to-use cloud capabilities that integrate seamlesslycore services. We leverage multiple clouds in our architectures (including AWS and offering best-in-class infrastructure, integrated shared services,Azure) and modern, effective, purpose-builthave both single and multi-tenant solutions. The platform’s service-oriented architecture organizes application features into independently deployable services and then leverages these self-contained services as integrated capabilities across our solution portfolio. Thisbest-in-class infrastructure enables rapid innovation with high qualitylevels of reliability, availability and high availabilitysecurity, and lets Blackbaud evolve services over time at asymmetricindependent paces as tech trends and tools emerge. Blackbaud SKY prioritizes customer value and speed of delivery. It enables rapid releases, scalable and high-quality services, and speedy time to market. Blackbaud SKY also provides a toolset for customers, partners, and developers to create and deploy self-contained services withinextend the Blackbaud SKY ecosystem. SKY API enables developers to augment Blackbaud solutions with industry-standard REST APIs, standards-based authentication protocols, and a best-in-class developer experience. SKY UX allows developers to create applications with the same consistent, cohesive user interface as Blackbaud’s native solutions using an open sourceopen-source framework that implements Blackbaud design patterns and provides guidelines and tooling for the entire application lifecycle. These tools enable Blackbaud customers to benefit not just from the innovation of Blackbaud’s own large team of developers, but also from an exponentially larger community of partners and third-party developers.
The development strategy for all Blackbaud cloud solutions emphasizes:
•Flexibility: Customers and partners can extend our component-based architecture to accommodate changing demands without modifying source code.
•Adaptability: The architecture of our applications allows us to easily add functionality or integrate with third-party applications to adapt to customer needs and market demands.
•Scalability: Scalable architecture and the performance, capacity and load balancing of our customers' industry-standard web servers and databases ensure that applications can scale to meet the needs of large organizations.
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• | Flexibility: Customers can extend our component-based architecture to accommodate changing demands without modifying source code.
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• | Adaptability: The architecture of our applications allows us to easily add functionality or integrate with third-party applications to adapt to customer needs and market demands.
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• | Scalability: Scalable architecture and the performance, capacity and load balancing of our customers' industry-standard web servers and databases ensure that applications can scale to meet the needs of large organizations.
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Intellectual Property and Other Proprietary Rights |
To protect our intellectual property, we rely on a combination of patent, trademark, copyright and trade secret laws in various jurisdictions, as well as employee and third-party nondisclosure agreements and confidentiality procedures. We maintain many trademarks, including, but not limited to “Blackbaud,” “Raiser's Edge NXT” and “Luminate.” We currently have threetwo active patents on our technology and have twoone pending patent applications.application.
As of December 31, 2019,2022, we had 3,611over 3,200 employees, none of whom are represented by unions or are covered by collective bargaining agreements. We are not involved in any material disputes with any of our employees, and we believe that relations with our employees are satisfactory.strong.
We benefit from an engaged and driven employee base motivated to join the Company by our work to support organizations and individuals driving social impact. Our purpose attracts and retains talented, competitive applicants, with approximately 90% of employees saying the fact that Blackbaud operates in a socially responsible manner is important to them. This differentiator not only builds stronger employee engagement, but also helps us provide a higher level of service to our customers, with almost 70% of employees reporting that they continued to volunteer during the pandemic despite its unique challenges and one in seven serve on a nonprofit board or committee—direct experience that enables them to better serve our customer base. Blackbaud also attracts and promotes talented employees through effective and targeted recruiting strategies. In 2020, Blackbaud announced the launch of a new workforce strategy, allowing for employees to have the option to work from home or other geographic locations within the country to further support the overall well-being during the COVID-19 pandemic. In 2021, we formally went Remote First as a company which expanded our pool of qualified applicants for roles and internal career progression and signals Blackbaud's goal to attract talent globally.
Employee engagement is a focus at Blackbaud, and we continually work to understand what matters and to make our workplace better to attract, develop, and retain talent. Every manager at Blackbaud is required to take a multi-course
"Engagement Labs" training designed to equip them with the practical skills to ensure their teams are highly engaged. During 2022, all employees participated in a new, expanded Respect at Work training. We assess and measure progress on engagement and growth opportunities at the individual level through quarterly check-ins, which focus on impact and learnings, and a global career framework that guides employee progression on both management and individual contributor career paths; we also assess engagement on the team and company level through regular employee surveying as well as "Ask Anything" sessions with senior leaders and dedicated Q&A sessions in our company-wide All Hands meetings. We enable employees to have opportunities for career development through on-demand and company-led trainings in our internal DevelopU platform. Our compensation framework is designed so that employees are compensated equitably and competitively, including through base salary, variable pay, equity awards and benefits. We also seek to support the whole person, through increased benefits and focus on well-being.
Ultimately, we believe that Blackbaud is an excellent place to work because we are energized by our opportunity to fuel social impact and committed to running our business in a way that amplifies the difference we make in the world: we govern our business ethically, contribute to causes and communities that matter to our employees through corporate philanthropy, we pursue sustainability, and we work every day to ensure our workplace is supportive, inclusive and engaging. We offer an array of philanthropy programs aimed at engaging our employees as agents of good, including matching gifts, competitive grants that honor noteworthy examples of volunteerism, employee-led grant committees, skills-based volunteerism initiatives, as well as science, technology, engineering and mathematics (STEM) focused community programs.
Our commitment to diversity, equity and inclusion supports our efforts to attract, develop and retain a high-performing employee base. In September 2020, we welcomed our first Diversity and Inclusion Officer, as part of our strategy to further accelerate our diversity, inclusion and belonging efforts, while continuing to strengthen relationships with our people and the communities in which we operate. This new leadership focus has amplified and accelerated the significant initiatives already in place at Blackbaud, including: ongoing workshops on creating an inclusive culture; respect in the workplace training for all employees and enhanced training for managers; and affinity groups. We now have 14 employee-led affinity groups, including, but not limited to those that represent veterans, LGBTQ+, women in technology, women in sales, Black employees, those interested in sustainability and those with a disability.
During 2022, Blackbaud achieved carbon neutrality and committed to new, transparent ESG reporting. Blackbaud was recognized by Newsweek as one of America's Most Responsible Companies 2023, by Quartz as one of the Best Companies for Remote Workers and was named to Forbes' list of America's Best Employers 2022.
Additional information related to our human capital strategy can be found in our 2021 Social Responsibility Report, which is available on the Corporate Social Responsibility section of our website. Information contained on or accessible through our websites is not incorporated into, and does not form a part of, this Annual Report or any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
For a discussion of seasonal variations in our business, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Seasonality” in Item 7 in this report.
For a discussion of our working capital practices, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital Resources” in Item 7 in this report.
Our website address is www.blackbaud.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC, but other information on our website is not incorporated into this report. The SEC maintains an Internet site that contains these reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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Information About Our Executive Officers |
The following table sets forth information concerning our executive officers as of February 15, 2020:2023: |
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Name | | Age |
| | Title |
Michael P. Gianoni | | 5962 |
| | President and Chief Executive Officer |
Anthony W. Boor | | 5760 |
| | Executive Vice President and Chief Financial Officer |
Kevin W. MooneyDavid J. Benjamin | | 6151 |
| | Executive Vice President and President, General Markets GroupChief Commercial Officer |
Kevin P. Gregoire | | 5255 |
| | Executive Vice President and President, Enterprise Markets GroupChief Operating Officer |
Kevin R. McDearis | | 55 | | | Executive Vice President and Chief Technology Officer |
Kevin W. Mooney | | 64 | | | Executive Vice President, Strategy and Business Development |
Jon W. Olson | | 5659 |
| | Senior Vice President and General Counsel |
Michael P. Gianoni joined us as President and Chief Executive Officer in January 2014. Prior to joining us, he served as Executive Vice President and Group President, Financial Institutions at Fiserv, Inc., a global technology provider serving the financial services industry, from January 2010 to December 2013. He joined Fiserv as President of its Investment Services division in December 2007. Mr. Gianoni was Executive Vice President and General Manager of CheckFree Investment Services, which provided investment management solutions to financial services organizations, from June 2006 until December 2007 when CheckFree was acquired by Fiserv. From May 1994 to November 2005, he served as Senior Vice President of DST Systems Inc., a global provider of technology-based service solutions. Mr. Gianoni is a member of the Board of Directors of Teradata Corporation, a publicly traded global big data analytics company.company, and has been Chairman of the Board since February 2020. Mr. Gianoni has served on several nonprofit boards across several segments, including relief organizations, hospitals and higher education. He currently is a board member of the International African American Museum. He holds an AS in electrical engineering from Waterbury State Technical College, a BS with a business concentration from Charter Oak State College, and an MBA and an honorary Doctorate from the University of New Haven.
Anthony W. Boor joined us as Executive Vice President and Chief Financial Officer in November 2011 and served as our interim President and Chief Executive Officer from August 2013 to January 2014. Prior to joining us, he served as an executive with Brightpoint, Inc., a global provider of device lifecycle services to the wireless industry, beginning in 1999, most recently as its Executive Vice President, Chief Financial Officer and Treasurer. He also served as the interim President of Europe, Middle East and Africa during Brightpoint's significant restructuring of that region. Mr. Boor served as Director of Business Operations for Brightpoint North America from August 1998 to July 1999. Prior to joining Brightpoint, Mr. Boor was employed in various financial positions with Macmillan Computer Publishing, Inc., a Viacom owned book publishing company specializing in computer hardware and software related topics, Day Dream Publishing, Inc., a publishing company specializing in calendars, posters and time management materials, Ernst & Young LLP, an accounting firm, Expo New Mexico, a state-owned fair and expo grounds and live pari-mutual horse racing venue, KPMG LLP, an accounting firm, and Ernst & Whinney LLP, an accounting firm. He holds a BS in Accounting from New Mexico State University.
David J. Benjamin has served as our Executive Vice President and Chief Commercial Officer since July 2022. He joined us as Executive Vice President and President, International Markets Group in April 2018. Prior to joining us, Mr. Benjamin was Senior Vice President and General Manager at Box, a cloud content management platform for businesses, from October 2016 to March 2022. Prior to that, he was Vice President of Global Services at British Telecom, a multinational telecommunications holding company, from October 2007 to September 2016. Prior to that, he was at Guardian Media Group, a mass media company owning various media operations company, where he served as Divisional Chief Operating Officer, among other leadership roles, from June 1995 to September 2007. He holds a BA in European Business from London Metropolitan University and an MBA from The Manchester Metropolitan University.
Kevin P. Gregoire has served as our Executive Vice President and Chief Operating Officer since July 2022. Prior to that, he was the Executive Vice President and President of U.S. Markets since April 2021. He joined us as Executive Vice President and President, Enterprise Markets Group in April 2018. Prior to joining us, Mr. Gregoire was Group President of the Financial Institutions Group at Fiserv, a global technology provider serving the financial services industry, from March 2014 until February 2018. He joined Fiserv in December 2002 and served in other key leadership roles including Division President and Chief Operating Officer, Card Services, and Senior Vice President of Product and Network Strategy. Mr. Gregoire is also a veteran of the United States Army, where he served as Lieutenant in the Corps of Engineers and was awarded three Army Commendation Medals. He holds a BS from the United States Military Academy at West Point, and an MBA from the F.W. Olin School of Business at Babson College.
Kevin R. McDearis has served as our Executive Vice President and Chief Technology Officer since October 2016. He joined us in August 2014 as our Senior Vice President of Global Product Development. Prior to joining us, Mr. McDearis was the Chief Information Officer at Manhattan Associates, Inc., a technology leader in supply chain and omnichannel commerce, from August 2012 to July 2014. He was responsible for leading a global IT organization in strategy development, organization development, portfolio and project management, software and infrastructure engineering, service delivery and operations. Prior to that, Mr. McDearis served as Chief Technology Officer for the Enterprise Technology Group and other key leadership positions at Fiserv (formerly CheckFree), a global technology provider serving the financial services industry, from October 1996 to August 2012. Mr. McDearis serves on the Board of Directors for the USS Yorktown Foundation. He also served on the Board of Directors of the Technology Association of Georgia ("TAG") from 2011 to 2016 and as Vice Chairman of the Board in 2014. He holds a BS in Management from The Georgia Institute of Technology.
Kevin W. Mooney has served as our Executive Vice President, Strategy and Business Development since April 2021. Before that he was the Executive Vice President and President, General Markets Group since January 2010. He joined us in July 2008 as our Chief Commercial Officer. Before joining Blackbaud, Mr. Mooney was a senior executive at Travelport GDS from August 2007 to May 2008. As Chief Commercial Officer of Travelport GDS, one of the world's largest providers of information services and transaction processing to the travel industry, Mr. Mooney was responsible for global sales, marketing, training, service and support activities. Prior to that he was Chief Financial Officer for Worldspan from March 2005 until it was acquired by Travelport in August 2007. Mr. Mooney has also held key executive positions in the telecommunications industry and he served as a member of the Board of Directors of Level 3 Communications, Inc., a publicly traded global managed network services company, from October 2014 to November 2017. Prior to that he served on the Board of Directors of tw telecom from August 2005 until it was acquired by Level 3 in October 2014. He holds a BS in Finance from Seton Hall University, and an MBA in Finance from Georgia State University.
Kevin P. Gregoire joined us as Executive Vice President and President, Enterprise Markets Group in April 2018. Prior to joining us, Mr. Gregoire was Group President of the Financial Institutions Group at Fiserv, a global technology provider serving the financial services industry, from March 2014 until February 2018. He joined Fiserv in December 2002 and served in other key leadership roles including Division President and Chief Operating Officer, Card Services, and Senior Vice President of Product and Network Strategy. Mr. Gregoire is also a veteran of the United States Army, where he served as Lieutenant in the Corps of Engineers and was awarded three Army Commendation Medals. He holds a BS from the United States Military Academy at West Point, and an MBA from the F.W. Olin School of Business at Babson College.
Jon W. Olsonjoined us as Senior Vice President and General Counsel in September 2008. Mr. Olson is responsible for Blackbaud's legal and real estate activities. Prior to joining us, he was an attorney with Alcatel-Lucent USA, the U.S. subsidiary of France-based Alcatel-Lucent (now owned by Nokia Corporation) that designs, develops, and builds wireline, wireless, and converged communications networks, from July 1997 to September 2008. Prior to joining Alcatel-Lucent, Mr. Olson was employed in legal positions with MCI, Inc., a global business and residential communications company, from September 1996 to July 1997, and Unisys Corporation, a global information technology company, from July 1992 to September 1996. Mr. Olson is a member of the MUSC (Medical University of South Carolina) Hollings Cancer Center Citizens Advisory CouncilBoard and is on the board of the Charleston Symphony and Charleston Jazz. He holds a BS from Georgetown University, a JD from Dickinson School of Law and an MBA from Seton Hall University.
ITEM 1A. RISK FACTORS
Our business operations face a number of risks. These risks should be read and considered with other information provided in this report.
Our failure to compete successfully could cause our revenue or market share to decline.
Our market is highly competitive and rapidly evolving, and there are limited barriers to entry for many segments of this market.
The companies we compete with and other potential competitors may have greater financial, technical and marketing resources, and generate greater revenue and have better name recognition than we do. Also, a large, diversified software enterprise could decide to enter the market directly, including through acquisitions. Competitive pressures can adversely impact our business by limiting the prices we can charge our customers and making the adoption and renewal of our solutions more difficult.
Our competitors might also establish or strengthen cooperative relationships with resellers and third-party consulting firms or other parties with whom we have had relationships, thereby limiting our ability to promote our solutions.
These competitive pressures could cause our revenue and market share to decline.
Because competition for highly qualified personnel is intense, we might not be able to attract and retain key personnel needed to support our planned growth.
To meet our objectives successfully, we must attract and retain highly qualified personnel with specialized skill sets. If we are unable to attract and retain suitably qualified management, there could be a material adverse impact on our business.
Further, in the past, we have useduse equity incentive programs and equity awards in lieu of cash as part of our overall employee compensation agreements to both attract and retain personnel. A decline in our stock price could negatively impact the value of these equity incentive and related compensation programs as retention and recruiting tools. We may need to create new or additional equity incentive programs and/or compensation packages to remain competitive, which could be dilutive to our existing stockholders and/or adversely affect our results of operations.
More rapid than expected success in implementing our strategic shift from a license-based and one-time services business model to a cloud subscription business model with partners delivering some of our services could negatively impact our total revenue growth and financial performance.
We continue to intentionally shift our focus towards selling cloud subscription solutions, which generally require less customization services. Also, our cloud solution contracts now frequently include subscription-based professional, analytic and training services.services or those services can be delivered through our partner program. This strategic shift to migrate our existing customers, and sell new customers our cloud subscription solutions and have some services delivered by our partners results in a decrease in our one-time services contracts and revenue. Although our business model seeks to anticipate the rate of migration and resulting negative impact on our total revenue growth, more rapid than expected success in implementing this strategic shift could negatively impact our total revenue growth and financial performance.
The market for software and services for the social goodimpact community might not grow and the organizations in that community might not continue to adopt our solutions and services.
Many organizations in the social goodimpact community, including nonprofits, foundations, companies, education institutions, and healthcare organizations, have not traditionally used integrated and comprehensive software and services for their specific needs. We cannot be certain that the market for such solutions and services will continue to develop and grow or that these organizations will elect to adopt our solutions and services rather than continue to use traditional, less automated methods, attempt to develop software internally, rely upon legacy software systems, or use software solutions not specifically designed for this market. Organizations that have already invested substantial resources in other fundraising methods or other non-integrated software solutions might be reluctant to adopt our solutions and services to supplement or replace their existing systems or methods. In addition, the implementation of one or more of our software solutions can involve significant capital commitments by our customers, which they may be unwilling or unable to make. If demand for and market acceptance of our solutions and services does not increase, we might not grow our business as we expect.
If we fail to respond to technological changes or successfully introduce new and improved solutions, our competitive position may be harmed and our business may suffer.
The introduction of solutions encompassing new technologies can render existing solutions obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing solutions and develop and introduce in a timely manner or acquire new solutions that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. If we are unable to develop or acquire on a timely and cost-effective basis new software solutions or enhancements to existing solutions or if such new solutions
or enhancements do not achieve market acceptance, our business, results of operations and financial condition may be materially adversely affected.
If we do not successfully address the risks inherent in the expansion of our international operations, our business could suffer.
We currently have non-U.S. operations primarily in the U.K., Canada, Australia and Costa Rica, and we intend to expand further into international markets. Expansion of our international operations will require a significant amount of attention from our management and substantial financial resources and might require us to add qualified management in these markets. Our direct sales model requires us to attract, retain and manage qualified sales personnel capable of selling into markets outside the United States. In some cases, our costs of sales might increase if our customers require us to sell through local distributors. If we are unable to grow our international operations in a cost-effective and timely manner, our business and operating results could be harmed.
We expect that an increasing portion of our international revenues will be denominated in foreign currencies, subjecting us to fluctuations in foreign currency exchange rates. If we expand our international operations, exposures to gains and losses on foreign currency transactions may increase. (See Foreign Currency Exchange Rates on page 58 for more information regarding the impact of foreign currency exchange rates on our operations.) Doing business internationally involves additional risks that could harm our operating results. Along with risks similar to those faced by our U.S. operations, our international operations are also subject to risks related to differing legal, political, social and regulatory requirements and economic conditions, including:
•the imposition of additional withholding taxes or other tax on our foreign income, tariffs or restrictions on foreign trade or investment, including currency exchange controls;
•greater risk of a failure of our employees and partners to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010, and any trade regulations ensuring fair trade practices; and
•the imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, including those pertaining to export restrictions, privacy and data protection, trade and employment restrictions and intellectual protections.
Unfavorable media coverage related to peer-to-peer fundraising campaigns on our social platforms could negatively impact our business.
Our online social giving platforms receive a high degree of media coverage for particularly news-worthy or controversial fundraising campaigns, as well as for our fee-based business model. Although our terms of service provide express limitations on the platforms' user-initiated fundraising campaigns and reserve our right to remove content that violates our terms of service, it may not always be possible to remove such content prior to it receiving attention in the media. Negative publicity related to our online social giving platforms could have an adverse effect on the size, engagement and loyalty of our user base and could result in decreased revenue, which could adversely affect our business and financial results.
Acquisitions could be difficult to consummate and integrate into our operations, and they could disrupt our business, dilute stockholder value or impair our financial results.
As part of our business strategy, we will continue from time to time to seek to grow our business through acquisitions of new or complementary businesses, technologies or products that we believe can improve our ability to compete in our existing customer markets or allow us to enter new markets. The potential risks associated with acquisitions and investment transactions include, but are not limited to:
•failure to realize anticipated returns on investment, cost savings and synergies;
•difficulty in assimilating the operations, policies and personnel of the acquired company;
•unanticipated costs associated with acquisitions;
•challenges in combining product offerings and entering into new markets in which we may not have experience;
•distraction of management’s attention from normal business operations;
•potential loss of key employees of the acquired company;
•difficulty implementing effective internal controls over financial reporting, and disclosure controls and procedures and data protection procedures;
•impairment of relationships with customers or suppliers; and
•issues not discovered in due diligence, which may include product quality issues or legal or other contingencies.
For example, following our acquisition of EVERFI, Inc. (as further described in Note 3 to our consolidate financial statements in this report) we experienced the loss of certain employees and unexpected delays in realizing anticipated returns on our investment.
Acquisitions, including for example our recent acquisition of EVERFI, Inc., may also result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the expenditure of available cash, and amortization expenses or write-downs related to intangible assets such as goodwill, any of which could have a material adverse effect on our operating results or financial condition. We may experience risks relating to the challenges and costs of closing a business combination and the risk that an announced business combination may not close. There can be no assurance that we will be successful in making additional acquisitions in the future or in integrating or executing on our business plan for existing or future acquisitions.
A reduction in the growth or amount of charitable giving due to deteriorating general economic conditions, a recession or otherwise could adversely affect our operating results and financial condition.
A large percentage of our customers are nonprofits, foundations, education institutions, healthcare organizations and other members of the social goodimpact community that fully or partially rely on charitable donations. If charitable giving, including online giving, does not continue to grow or declines, it could limit our current and potential customers' ability to use and pay for our solutions and services, which could adversely affect our operating results and financial condition.
In addition, we derive a significant portion of our revenue from transaction-based payment processing fees that we collect from our customers through our Blackbaud Merchant Services solution, which enables our customers' donors to make donations and purchase goods and services using various payment options. A reduction in the growth of, or a decline in, charitable giving to these customers, whether due to deteriorating general economic conditions, the impact of recentpast or future changes to applicable tax laws, or otherwise, could negatively impact the volume and size of such payment processing transactions and thereby adversely affect our operating results and financial condition.
Our failure to obtain licenses for, or our use of, third-party technologies could harm our business.
We expect to continue licensing technologies from third parties, including applications used in our research and development activities, technologies whichthat are integrated into our solutions and solutions that we resell. We believe that the loss of any third-party technologies currently integrated into our solutions could have a material adverse effect on our business. Our inability in the future to obtain any third-party licenses on commercially reasonable terms, or at all, could delay future solution development until equivalent technology can be identified, licensed or developed and integrated. This inability in turn could harm our business and operating results.
Our use of third-party technologies also exposes us to increased risks including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs.
The U.K.'s departure from the European Union ("EU"E.U.") could adversely affect us.
The U.K. held a referendum on June 23, 2016 on its membership in the E.U., in which a majority of U.K. voters voted to exit the E.U. (commonly referred to as "Brexit"). Thereafter, the E.U. and the U.K. engaged in extensive negotiations designed to reach agreement regarding the future terms of the U.K.'s relationship with the E.U., including the terms of trade between the U.K. and the E.U. and a transition period during which the agreed relationship would be implemented in stages to facilitate a gradual and orderly Brexit. Effective January 31, 2020, the U.K. is no longer a member of the E.U., and Effective January 1, 2021, the transition period is currently set to expire on December 31, 2020, during which timerelationship between the U.K. and the E.U. will continue to negotiate an agreement. There can be no assuranceis governed primarily by certain trade and cooperation agreements, that they will be successful in doing so.set forth, among other things, terms regarding the trade of goods and services, workers’ rights, social and environmental matters, data sharing, data privacy and financial services. Because we currently conduct business in the U.K. and in Europe, the U.K.’s exit from the E.U. under such circumstances creates uncertainty and could disrupt our business. For example, Brexit could affect the business of and/or our relationships with our customers and partners including with regard to data privacy, as well as alter the relationship among tariffs and currencies, including the value of the British Pound and the Euro relative to the USU.S. dollar. The ultimate effects of Brexit on us, including those mentioned above and others we cannot now anticipate, are difficult to predict and could adversely affect our business, business opportunities, results of operations or financial condition in both the short-term and thereafter.
Breaches of our software, our failure to securely collect, store and transmit customer information, or our failure to safeguard confidential donor data, exposes us to liability, litigation, government investigations, penalties and remedial costs and our reputation and business could suffer.
Fundamental to the use of our solutions is the secure collection, storage and transmission of confidential donor and end user data and transaction data, including in our payment services. Despite the network, application and physical security procedures and internal control measures we employ to safeguard our systems, we have been, and in the future may be, vulnerable to a security breach, intrusion, loss or theft of confidential donor data and transaction data, which has in the past harmed and may in the future harm our business, reputation and future financial results. Furthermore, our reliance on remote access to information systems increases our exposure to potential cybersecurity incidents.
Like many major businesses, we are, from time to time, a target of cyberattacks, phishing and social engineering schemes, such as the Security Incident (as described below and in Note 11 to our consolidated financial statements in this report), and we expect these threats to continue, some of which have been, and in the future may be, successful to varying degrees. Because the numerous and evolving cybersecurity threats used to obtain unauthorized access, disable, degrade or sabotage systems have become increasingly more complex and sophisticated, it may be difficult to anticipate these acts or to detect them for periods of time, as with the Security Incident, and we may be unable to respond adequately or timely. As these threats continue to evolve and increase, we have already devoted and expect to continue to devote significant resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.
A compromise of our data security, such as the Security Incident, that results in customer or customer constituent personal or payment card data being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity has resulted in, and could in the future result in, litigation against us, government investigations or the imposition of fines and penalties. (See Note 11 to our consolidated financial statements in this report for information regarding litigation, government investigations, fines and penalties related to the Security Incident.) We might be required to expend significant additional capital and other resources to rectify problems caused by a security breach, including notification under data privacy laws and regulations, and incur expenses related to remediating our information security systems.
Even though we may carry cyber-technology insurance policies that provide insurance coverage under certain circumstances, we have in the past suffered losses and may in the future suffer losses as a result of a security breach that exceed the coverage available under our insurance policies or for which we do not have coverage. (See Note 11 to our consolidated financial statements in this report for expense and insurance coverage information related to the Security Incident.) Furthermore, in the future such insurance may not be available on commercially reasonable terms, or at all. A security breach and any efforts we make to address such breach could also result in a disruption of our operations, particularly our online sales operations.
The occurrence of actual cyber security events, such as the Security Incident, could magnify the severity of the adverse effects of future incidents on our business. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage information systems can be difficult to detect for long periods of time and can involve difficult or prolonged assessment or remediation periods even once detected. We, therefore, cannot assure you that all potential causes of past significant incidents, including the Security Incident, have been fully identified and remediated. The steps we take may not be sufficient to prevent future significant incidents and, as a result, such incidents may occur again.
The Security Incident has had, and may continue to have, numerous adverse effects on our business, results of operations, financial condition and cash flows.
As previously disclosed, on July 16, 2020, we contacted certain customers to inform them about the Security Incident, including that in May 2020 we discovered and stopped a ransomware attack. Prior to our successfully preventing the cybercriminal from blocking our system access and fully encrypting files, and ultimately expelling them from our system with no significant disruption to our operations, the cybercriminal removed a copy of a subset of data from our self-hosted environment. Based on the nature of the incident, our research and third party (including law enforcement) investigation we believe that no data went beyond the cybercriminal, was or will be misused, or will be disseminated or otherwise made available publicly. However, our investigation into the Security Incident remains ongoing and may provide additional information.
To date, we have received approximately 260 customer reimbursement requests and approximately 400 reservations of the right to seek expense recovery in the future from customers or their attorneys in the U.S., U.K. and Canada related to the Security Incident. We have also received notices of proposed claims on behalf of a number of UK data subjects, which we are reviewing. In addition, insurance companies representing various customers’ interests through subrogation claims have contacted us, and certain insurance companies have filed subrogation claim in court. Customer and insurer subrogation claims generally seek reimbursement of their costs and expenses associated with notifying their own customers of the Security Incident and taking steps to assure that personal information has not been compromised as a result of the Security Incident. In addition, presently, we are a defendant in 19 putative consumer class action cases [17 in U.S. federal courts (which have been consolidated under multi district litigation to a single federal court) and 2 in Canadian courts] alleging harm from the Security Incident. The plaintiffs in these cases, who generally purport to represent various classes of individual constituents of our customers, generally claim to have been harmed by alleged actions and/or omissions by us in connection with the Security Incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief. To date, we also have received a consolidated, multi-state Civil Investigative Demand issued on behalf of 49 state Attorneys General and the District of Columbia and a separate Civil Investigative Demand from the office of the California Attorney General relating to the Security Incident. In addition, we are subject to pending governmental actions or investigations by the U.S. Federal Trade Commission, the U.S. Department of Health and Human Services, the U.S. Securities and Exchange Commission (the "SEC"), the Office of the Australian Information Commissioner and the Office of the Privacy Commissioner of Canada. (See Note 11 to our consolidated financial statements included in this report for a more detailed description of the Security Incident and related matters.)
We may be named as a party in additional lawsuits, other claims may be asserted by or on behalf of our customers or their constituents, and we may be subject to additional governmental inquires, requests or investigations. Responding to and resolving these current and any future lawsuits, claims and/or investigations could result in material remedial and other expenses that will not be covered by insurance. For example, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies related to the Security Incident that we believe we can reasonably estimate as of December 31, 2022. Certain governmental authorities are seeking to impose undertakings, injunctive relief, consent decrees, or other civil or criminal penalties, which could, among other things, materially increase our data security costs or otherwise require us to alter how we operate our business. Although we intend to defend ourselves vigorously against the claims asserted against us, we cannot predict the potential outcomes, cost and expenses associated with current and any future claims, lawsuits, inquiries and investigations.
In addition, any legislative or regulatory changes adopted in reaction to the Security Incident or other companies’ data breaches could require us to make modifications to the operation of our business that could have an adverse effect and/or increase or accelerate our compliance costs.
Significant management time and Company resources have been, and are expected to continue to be, devoted to the Security Incident. For example, for full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident. For full year 2023, we currently expect pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident. Inclusive of accrued liabilities for loss contingencies discussed above, we incurred a total of $55.7 million of net pre-tax expense related to the Security Incident during 2022. Although we carry insurance against certain losses related to the Security Incident, we have exceeded the limit of that insurance coverage. As a result, we will be responsible for all expenses or other losses (including penalties, fines or other judgments) or all types of claims that may arise in connection with the Security Incident, which could materially and adversely affect our liquidity and results of operations. (See Note 11 to our consolidated financial statements included in this report.) If any such fines or penalties were great enough that we could not pay them through funds generated from operating activities and/or cause a default under the 2020 Credit Facility, we may be forced to renegotiate or obtain a waiver under the 2020 Credit Facility and/or seek additional debt or equity financing. Such renegotiation or financing may not be available on acceptable terms, or at all. In these circumstances, if we were unable to obtain sufficient financing, we may not be able to meet our obligations as they come due. In addition, publicity or developments related to the Security Incident could in the future have a range of other adverse effects on our business or prospects, including causing or contributing to loss of customer confidence, reduced customer demand, reduced customer retention, strategic growth opportunities, and associated retention and recruiting difficulties, some or all of which could be material. Climate change and other natural disasters, new regulations and standards and climate-related goals have impacted, and may in the future impact, our operations and financial performance.
The long-term effects of climate change on the global economy and our industry may impact our business operations and those of our suppliers, customers and partners. Climate change increases the severity and frequency of extreme weather events such as hurricanes, wildfires, floods, heat waves, or power shortages, all of which could lead to business disruptions. The locations of our principal executive offices and our data centers are vulnerable to the effects of climate events and other natural disasters, including hurricanes, heat waves and earthquakes, which we have experienced in the past. In addition, the effects of climate change are harder to mitigate for our remote-first workforce, which exposes the Company to business disruption. Even though we carry business interruption insurance policies and typically have provisions in our commercial contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.
Expected new regulations and standards relating to public disclosure, including those related to climate change, could adversely could impose significant costs on us to comply with such regulations.
Finally, a failure to meet our climate-related goals, such as our commitment and progress towards reduction of greenhouse gas emissions, could damage our reputation, affect our financial performance and ability to attract and retain talent.
Defects, delays or interruptions in our cloud solutions and hosting services could diminish demand for these services and subject us to substantial liability.
We currently utilize data center hosting facilities to provide cloud solutions to most of our subscription customers and hosting services to our on-premise license customers. Any damage to, or failure of, these data center systems generally could result in interruptions in service to our customers, notwithstanding any business continuity or disaster recovery agreements that may currently be in place at these facilities. As noted above, our executive offices and some of our data centers are located in areas that are vulnerable to the effects of climate change and could be subject to increased interruptions as a result of the severity and increased frequency of extreme weather events such as hurricanes, wildfires, floods, heat waves, or power shortages. Because our cloud solutions and hosting service offerings are complex and we have incorporated a variety of new computer hardware and software systems at our data centers, our services might have errors or defects that users identify after they begin using our services. This could result in unanticipated downtime for our customers and harm to our reputation and business results. Internet-based services sometimes contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found defects in our web-based services and new errors
might again be detected in the future. In addition, our customers might use our Internet-based offerings in unanticipated ways that cause a disruption in service for other customers attempting to access their data.
Because our customers use these services for important aspects of their businesses, any defects, delays or disruptions in service or other performance problems with our services could hurt our reputation and damage our customers' businesses. If that occurs, customers could elect to cancel their service, delay or withhold payment to us, not purchase from us in the future or make claims against us, which could result in an increase in our provision for doubtful accounts,credit losses, an increase in collection cycles for accounts receivable or the expense and risk of litigation. Any of these could harm our business and reputation.
Material defects or errors in the software we use to deliver our services could harm our reputation, result in significant costs to us and impair our ability to sell our services.
The software applications underlying our services are inherently complex and may contain material defects or errors, particularly when first introduced or when new versions or enhancements are released. We have from time to time found defects in our software, and new errors in our existing software may be detected in the future.
After the release of our software, defects or errors may also be identified from time to time by our internal team and our customers. The costs incurred in correcting any material defects or errors in our software may be substantial and could harm our operating results. Furthermore, our customers may use our software together with solutions from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our solution development efforts, impact our reputation and cause significant customer relations problems.
If we are unable, or our customers believe we aremay be unable, to detect and prevent unauthorized use of payment card or other private financial or personal information, we could be subject to financial liability, our reputation could be harmed and customers may be reluctant to use our solutions and services.
The rules of payment card associations in which we participate require that we comply with Payment Card Industry Data Security Standard ("PCI DSS") in order to preserve security of payment card data. Under PCI DSS, we are required to adopt and implement internal controls over the use, storage and security of payment card data to help prevent card fraud. Conforming our solutions and services to PCI DSS or other payment services related regulations or requirements imposed by payment networks or our customers or payment processing partners is expensive and time-consuming. However, failure to comply may subject us to fines, penalties, damages and civil liability, may impair the security of payment card data in our possession, and may harm our reputation and our business prospects, including by limiting our ability to process transactions. Currently someAll Blackbaud products in scope for PCI DSS compliance meet applicable PCI DSS security requirements.
In addition, we routinely subject our various data protection processes and controls to voluntary third-party review, audit or reporting, including, for example, the American Institute of Certified Public Accountants’ System and Organization Controls reporting. Failure to conduct these voluntary data protection process and control reviews or to obtain and maintain audits or reports covering our data protection processes and controls may harm our reputation or our business prospects and our ability to market our solutions to our customers.
We are subject to payment processing risk that could negatively impact our results of operation and business if not adequately controlled and managed.
Our solutions provide our customers payment processing capabilities that enable their constituents to make donations and purchase services using numerous payment options, including credit card and automated clearing house (“ACH”) checking transactions, through secure online transactions. The provision of convenient, trusted, fast and effective payment processing services to our customers and potential customers is critical to our business, and revenue from payments processing constitutes a significant percentage of our solutions are not fully compliant with PCI DSS, primarily duetotal revenue. Increases in payment processing fees, material changes in our payment processing systems, changes to the lagrules or regulations concerning payments or disruptions or failures in our payment processing systems or payment products, including products we use to update payment information, could materially adversely impact our customer retention and results of operation. In addition, from time required for integrating acquired businesses.
to time, we encounter fraudulent use of payment methods that could result in substantial additional costs or delay, preclude planned transactions, product launches or improvements, require significant and costly operational changes, impose restrictions, limitations, or additional requirements on our business, products and services, prevent or limit us from providing our products or services in a given market and adversely impact customer retention. Furthermore, we continue to undertake system upgrades designed to
improve the availability, reliability, resiliency and speed of our payments systems. These efforts are costly and time-consuming, involve significant technical complexity and risk, may divert our resources from new features and products and may ultimately not be effective.
If the security of our software is breached, we fail to securely collect, store and transmit customer information, or we fail to safeguard confidential donor data, we could be exposed to liability, litigation, penalties and remedial costs and our reputation and business could suffer.
Fundamental to the use of our solutions is the secure collection, storage and transmission of confidential donor and end user data and transaction data, including in our payment services. Despite the network and application security, internal control measures, and physical security procedures we employ to safeguard our systems, we may still be vulnerable to a security breach, intrusion, loss or theft of confidential donor data and transaction data, which may harm our business, reputation and future financial results.
Like many major businesses, we are, from time to time, a target of cyber-attacks and phishing schemes, and we expect these threats to continue. Because of the numerous and evolving cybersecurity threats, including advanced and persistent cyber-attacks, phishing and social engineering schemes, used to obtain unauthorized access, disable or degrade systems have become increasingly more complex and sophisticated and may be difficult to detect for periods of time, we may not anticipate these acts or respond adequately or timely. As these threats continue to evolve and increase, we may be required to devote significant additional resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.
A compromise of our data security that results in customer or donor personal or payment card data being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial condition and liquidity and could result in litigation against us or the imposition of penalties. We might be required to expend significant capital and other resources to further protect against security breaches or to rectify problems caused by any security breach, including notification under data privacy laws and regulations and expenses related to remediating our information security systems. Even though we carry cyber-technology insurance policies that may provide insurance coverage under certain circumstances, we might suffer losses as a result of a security breach that exceed the coverage available under our insurance policies or for which we do not have coverage. A security breach and any efforts we make to address such breach could also result in a disruption of our operations, particularly our online sales operations.
Further, the existence of vulnerabilities, even if they do not result in a security breach, may harm client confidence and require substantial resources to address, and we may not be able to discover or remedy such security vulnerabilities before they are exploited, which may harm our business, reputation and future financial results.
Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.
We depend on our principal executive offices and other facilities for the continued operation of our business. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events, including terrorist attacks, computer hacker attacks and natural disasters such as hurricanes, flooding and earthquakes, could disrupt one or more of these facilities and adversely affect our operations. Our principal executive offices are located in a coastal region that has experienced hurricanes and earthquakes in the past. Even though we carry business interruption insurance policies and typically have provisions in our commercial contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us could have a significant negative impact on our operations.
Complications with the design or implementation of our new global enterprise resource planning ("ERP") system could adversely affect our operations and operating results
We rely extensively on information systems and technology to manage our business and summarize our operating results. We are in the process of a multi-year implementation of a new ERP system, which will replace our existing core financial systems. Such an implementation is a major undertaking, both financially and from a management and personnel perspective. The new ERP system is designed to accurately maintain our financial records, enhance the flow of financial information, improve data management, and provide timely information to our management team. We may not be able to successfully implement the ERP system without experiencing delays, unexpected additional costs and other difficulties. Failure to successfully design and implement the new ERP system as planned could harm our business, financial condition and operating results. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be negatively affected.
Because a significant portion of our revenue is recognized over time on a ratable basis over the contract term, downturns in sales may not be immediately reflected in our revenue.
We generally recognize our subscription and maintenance revenue ratably over time over the contract term. Our subscription arrangements are generally for a term of three years at contract inception with one to three-year renewals thereafter. Most of our maintenance arrangements are for a one-year term. As a result, much of the revenue we report in each quarter is attributable to arrangements entered into during previous quarters. Consequently, a decline in sales to new customers, renewals by existing customers or market acceptance of our solutions in any one quarter will not necessarily be fully reflected in the revenues in that quarter and could negatively affect our revenues and profitability in future quarters.
If our customers do not renew their subscriptions for our solutions or annual maintenance and support arrangements or if they do not renew them on terms that are favorable to us, our business might suffer.
Our subscription arrangements are generally for a term of three years at contract inception with one to three-year renewals thereafter. Most of our maintenance arrangements are for a one-year term. As the end of the contract term approaches, we seek the renewal of the agreement with the customer. Historically, subscription and maintenance renewals have represented a significant portion of our total revenue. Because of this characteristic of our business, if our customers choose not to renew their subscriptions or maintenance and support arrangements with us on beneficial terms or at all, our business, operating results and financial condition could be harmed. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our solutions and services and their ability to continue their operations and spending levels.levels due to general economic conditions, extraordinary business interruptions, client-specific financial issues or otherwise.
We significantly increased our leverage in connection with acquisitions.acquisition of EVERFI and may increase our leverage in the future in connection with additional acquisitions, Security Incident costs or other business purposes, which could adversely impact our business and financial performance, as described below.
We incurred a substantial amount of indebtedness in connection with recent acquisitions.acquisitions, including our acquisition of EVERFI, Inc. (as described in Note 3 to our consolidated financial statements included in this report). As a result of this indebtedness, our interest payment obligations have increased. In addition, we have been named as a party in various lawsuits in connection with the Security Incident, claims have been asserted by or on behalf of our customers or their constituents, and we are subject to various governmental inquires, requests or investigations. Responding to and resolving these current and any future lawsuits, claims and/or investigations could result in material remedial and other expenses. Although we intend to defend ourselves vigorously against the claims asserted against us, we cannot predict the potential outcomes, cost and expenses associated with current and any future claims, lawsuits, inquiries and investigations, which could require that we incur additional indebtedness to fund. (See Note 11 to our consolidated financial statements in this report for additional information regarding the Security Incident.)
The degree to which we are leveraged could have adverse effects on our business, including the following:
•Requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, dividends, share repurchases and other general corporate purposes;
•Limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
•Restricting us from making additional strategic acquisitions or exploiting business opportunities;
•Placing us at a competitive disadvantage compared to our competitors that have less debt;
Limiting•Reducing our currently available borrowing capacity or limiting our ability to borrow additional funds; and
•Decreasing our ability to compete effectively or operate successfully under adverse economic and industry conditions.
If we incur additional debt, these risks may intensify.intensify, particularly if interest rates increase in the future. Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.
In addition, additional leverage could impact our ability to meet certain financial and other covenants contained in our 2020 Credit Facility. (See Note 9 to our consolidated financial statements included in this report for a more detailed description of our 2020 Credit Facility.) There can be no assurance that we will be able to remain in compliance with the covenants to which we are now subject or may be subject in the future and, if we fail to do so, that we will be able to obtain waivers from our lenders or amend the covenants.
In the event of a default under our 2020 Credit Facility, we could be required to immediately repay all outstanding borrowings, which we might not be able to do and which would materially negatively affect our business, operations and financial condition.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets could negatively affect our operating results.
As of December 31, 2019,2022, we had $634.1 million$1.1 billion and $317.9$635.1 million of goodwill and intangible assets, respectively. On at least an annual basis, we assess whether there have been impairments in the carrying value of goodwill and intangible assets. If the carrying value of an asset is determined to be impaired, then it is written down to fair value by a non-cash charge to operating earnings. Changes in circumstances that could indicate that the carrying value of goodwill or intangible assets may not be recoverable include declines in our stock price, market capitalization, cash flows and slower growth
rates in our industry. We cannot accurately predict the likelihood or potential amount and timing of any impairment of goodwill or other intangible assets. An impairment of a significant portion of goodwill or intangible assets could materially and negatively affect our results of operations and financial condition.
Restrictions in our credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
Our credit facility contains restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock and enter into transactions with affiliates. There can be no assurance that we will be able to remain in compliance with the covenants to which we are subject in the future and, if we fail to do so, that we will be able to obtain waivers from our lenders or amend the covenants.
In the event of a default under our credit facility, we could be required to immediately repay all outstanding borrowings, which we might not be able to do. In addition, certain of our material domestic subsidiaries are required to guarantee amounts borrowed under the credit facility, and we have pledged the shares of certain of our subsidiaries as collateral for our obligations under the credit facility. Any such default could have a material adverse effect on our ability to operate, including allowing lenders under the credit facility to enforce guarantees of our subsidiaries, if any, or exercise their rights with respect to the shares pledged as collateral.
We cannot guarantee that our stock repurchase program will be fully consummated or that it will enhance long-term stockholder value. Share repurchases could also increase the volatility of the trading price of our stock and will diminish our cash reserves.
Although our board of directors has authorized a stock repurchase program that does not have an expiration date, the program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our common stock. We cannot guarantee that the program will be fully consummated or that it will enhance long-term stockholder value. The program could affect the trading price of our stock and increase volatility, and any announcement of a termination of this program may result in a decrease in the trading price of our stock. In addition, this program will diminish our cash reserves, which may impact our ability to finance future growth, to pursue possible future strategic opportunities and acquisitions and fund liabilities and expenses related to the Security Incident. (See Note 14 to our consolidated financial statements in this report for additional information related to our stock repurchase program.)
We have recorded significant deferred tax assets, and we might never realize their full value, which would result in a charge against our earnings.
As of December 31, 2019,2022, we had deferred tax assets of $93.8$118.9 million. Realization of our deferred tax assets is dependent upon our generating sufficient taxable income in future years to realize the tax benefit from those assets. Deferred tax assets
are reviewed at least annually for realizability. A charge against our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized beyond our existing valuation allowance. This could be caused by, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the solutions sold by our business and a variety of other factors.factors. For example, during 2020, we recorded an increase in our valuation allowance attributable to state tax credit carryforwards for which we do not expect to realize benefit. (See Note 12 to our consolidated financial statements in this report for additional details.) If a deferred tax asset net of our valuation allowance was determined to be not realizable in a future period, the charge to earnings would be recognized as an expense in our results of operations in the period the determination is made. Additionally, if we are unable to utilize our deferred tax assets, our cash flow available to fund operations could be adversely affected.
Depending on future circumstances, it is possible that we might never realize the full value of our deferred tax assets. Any future impairment charges related to a significant portion of our deferred tax assets would have an adverse effect on our financial condition and results of operations.
|
| |
Legal and Compliance Risks |
Privacy and data protection concerns, including evolving domestic and international government regulation in the area of consumer data privacy or data protection, could adversely affect our business and operating results.
The effectiveness of our software solutions relies on our customers' storage and use of data concerning their customers, including financial, personally identifying or other sensitive data. Our customers' collection and use of this data for donor profiling, data analytics or communications outreach might raise privacy and data protection concerns and negatively impact the demand for our solutions and services. For example, our custom modeling and analytical services rely heavily on processing and using of data we gather from customers and various sources. Privacy and data protection laws could add restrictions or regulatory burdens, which could limit to our ability to market and profit from those services.
Governments in some jurisdictions have enacted or are considering enacting consumer data privacy or data protection legislation, including laws and regulations applying to the solicitation, collection, transfer, processing and use of personal data. This legislation could reduce the demand for our software solutions if we fail to design or enhance our solutions to enable our customers to comply with the privacy and data protection measures required by the legislation. Moreover, we may be exposed to liability under existing or new consumer privacy or data protection legislation. For example, when
providing our solutions to certain customers in the healthcare industry, we must comply with applicable provisions of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), and might be subject to similar provisions of other legislation, including, without limitation, the Gramm-Leach-Bliley Act and related regulations, and the California Consumer Privacy Act of 2018, which became effective January 1, 2020, and may apply to some of our customers and areas of business. Even technical violations of these laws may result in penalties that are assessed for each non-compliant transaction.
Recently,Blackbaud, and some of our customers, are subject to the E.U. General Data Protection Regulation (“GDPR”), which became effective in the E.U. in May 2018 extendedand its provisions continue to apply in the scopeU.K. after Brexit by virtue of legislation incorporating the E.U.GDPR into U.K. data protection law, to many companies processing data of E.U. residents, regardless ofknown as the company’s location."U.K. GDPR." The law requires companies to meet new requirements regarding the handling of personal data, including new rights such as the portability of personal data. We completed an extensive program of product and operational changes to address GDPR requirements and all future solutions sold to customers subject to GDPR must include GDPR features. The implementation of GDPR has affected our ability to offer some features and services to customers in the E.U. and U.K. Furthermore, actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase, which could impact us through increased costs or restrictions on our business, and noncompliance could result in significant regulatory penalties and legal liability.
If our customers or we were found to be subject to and in violation of any privacy or data protection laws or regulations, our business may be materially and adversely impacted and we and/or our customers would likely have to change our business practices. In addition, these laws and regulations could impose significant costs on our customers and us and make it more difficult for donors to make online donations. (See Note 11 to our consolidated financial statements included in this report for a description of the Security Incident and related legal proceedings and regulatory matters.)
We are in the information technology business, and our solutions and services store, retrieve, transfer, manipulate and manage our customers’ information and data. The effectiveness of our software solutions relies on our customers’ storage and use of data concerning their donors, including financial, personally identifying and other sensitive data and our business uses similar systems that require us to store and use data with respect to our customers and personnel. Our collection and our customers’ collection and use of this data might raise privacy and data protection concerns and negatively impact our business or the demand for our solutions and services. If a breach of data security, such as the Security Incident, were to occur, or other violation of privacy or data protection laws and regulations were to be alleged, our business may be materially and adversely impacted and solutions may be perceived as less desirable, which would negatively affect our business and operating results.
Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur significant costs, enter into royalty or licensing agreements or develop or license substitute technology.
We have been, and may in the future be subject to claims that the technologies in our solutions and services infringe upon the intellectual property or other proprietary rights of a third party. In addition, the vendors providing us with technology that we use in our own solutions could become subject to similar infringement claims. Although we believe that our solutions and services do not infringe any intellectual property or other proprietary rights, we cannot be certain that our solutions and services do not, or that they will not in the future, infringe intellectual property or other proprietary rights held by others. Any claims of infringement could cause us to incur substantial costs to defend against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts, or obtain a license to continue to use the technology and services that are the subject of the claim, and/or otherwise restrict or prohibit our use of the same. There can be no assurance that we would be able to obtain a license on commercially reasonable terms from the third party asserting any particular claim, or that we would be able to successfully develop alternative technology on a timely basis, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the solutions and services. In addition, we generally provide in our customer arrangements for certain solutions and services that we will indemnify our customers against third-party infringement claims relating to technology we provide to those customers, which could obligate us to pay damages if the solutions and services were found to be infringing. Infringement claims asserted against us, our vendors or our customers may have a material adverse effect on our business, prospects, financial condition and results of operations.
Our solutions utilize open source software, which may subject us to litigation, require us to re-engineer our solutions, or otherwise divert resources away from our development efforts.
We use open source software in connection with certain of our solutions. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License,
the GNU Lesser General Public License, “Apache-style” licenses, “BSD-style” licenses and other open source licenses. There is little legal precedent governing the interpretation of many of the terms of some of these licenses and, therefore, the potential impact of these terms on our business is currently unable to be determined and may result in unanticipated obligations regarding our solutions and technologies. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms. Therefore, we could be subject to litigation by parties claiming ownership of open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their own software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose the source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.
We rely upon trademark, copyright, patent and trade secret laws to protect our proprietary rights, which might not provide us with adequate protection.
Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology rights. We might not be successful in protecting our proprietary technology and our proprietary rights might not provide us with a meaningful competitive advantage. To protect our core proprietary technology, we rely on a combination of patent,
trademark, copyright and trade secret laws, as well as nondisclosure agreements, each of which affords only limited protection.
Increasing and evolvingChanging domestic and international laws, government financial regulationregulations and policies, including, without limitation, California AB488 and other similar laws and regulations, could adversely affect our business and operating results.results by increasing compliance costs, reducing customer demand for our solutions or damaging our reputation.
Certain of our solutions, in particular our financial management and payment services solutions, relate to activity heavily regulated by government agencies in the U.S. by federal, the U.K. and state government regulatory agencies and in other countries in which we operate by local regulatory agencies.operate. The laws and regulations enforced by these agencies are proposed or enacted to deter fraud and other illicit financial transactions and to protect consumers and the financial system.system and are often revised or increased in scope. We have procedures and controls in place to monitor compliance with numerous federal, state and foreign laws and regulations. However, because these laws and regulations are complex, differ between jurisdictions, and are often subject to interpretation, or as a result of unintended errors, we may, from time to time, inadvertently violate these laws and regulations. Compliance with these laws and regulations is expensive and requires the time and attention of management. These costs divert capital and focus away from efforts intended to grow our business. If we do not successfully comply with laws, regulations, or policies, we could incur fines or penalties, be subject to litigation, lose existing or new customer contracts or other business, and suffer damage to our reputation. Changes
In addition, changes in thesecertain laws, and regulations canor policies could impact our customers, alter our business environment and limit business operations, require substantial investmentsour operations. For example, various financial institutions subscribe to achieve complianceour EVERFI training solution, which they may then provide free of charge to schools in low-income and increase costsmoderate-income communities as a means of doing business,satisfying their obligations under the Community Reinvestment Act of 1977, as amended (the “CRA”). Repeal or significant modification of the CRA or the many government agency regulations and we cannot predict thepolicies implementing its provisions could cause financial institutions to limit or eliminate their purchases of these EVERFI solutions and thereby negatively impact such changes would have on our operating results and financial condition.
Anti-takeover provisions in our charter documents, our Stockholder Rights Agreement (as described below, the "Rights Agreement") and Delaware law may delay or prevent an acquisition of our company.Company.
Provisions of Delaware law, our certificate of incorporation and bylaws and our Rights Agreement may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests. Our certificate of incorporation authorizes “blank check” preferred stock, which could be issued by the board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us and could effectively be used as an anti-takeover device. Currently there are no shares of our preferred stock issued or outstanding. Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and limit the persons who may call special meetings of stockholders.
On October 7, 2022, we declared a dividend of one preferred share purchase right (a “Right”) for each of our issued and outstanding shares of common stock. Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value $0.001 per share (the “Preferred Stock”) at a price of $313.00, subject to certain adjustments (as adjusted from time to time, the “Exercise Price”). Under the Rights Agreement, the Rights will become exercisable if an entity, person or group acquires beneficial ownership of 20% or more of our outstanding common stock in a transaction not approved by our Board of Directors. In the event that the Rights become exercisable due to the ownership threshold being crossed, each Right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase additional shares of common stock having a then-current market value of twice the Exercise Price. Subject to the terms of the Rights Agreement, the Rights will expire on October 2, 2023. Additional information regarding the Rights Agreement is contained in a Form 8-K filed with the SEC on October 11, 2022.
The anti-takeover provisions of Delaware law and provisions in our organizational documents and the Rights Agreement may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover
context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
Unanticipated changes in our effective tax rate and additional tax liabilities and global tax developments may impact our financial results.
We are subject to income taxes in the United States and various other jurisdictions. Significant judgment is often required in the determination of our worldwide provision for income taxes. Our effective tax rate could be impacted by changes in our earnings and losses in countries with differing statutory tax rates, changes in operations, changes in non-deductible expenses, changes in excess tax benefits of stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, effects from acquisitions, and changes in accounting principles and tax laws. Any changes, ambiguity or uncertainty in taxing jurisdictions’ administrative interpretations, decisions, policies and positions could also materially impact our income tax liabilities.
We may also be subject to additional tax liabilities and penalties due to changes in non-income based taxes resulting from changes in federal, state, local or international tax laws, changes in taxing jurisdictions’ administrative interpretations, decisions, policies and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, or changes to our business operations, including as a result of acquisitions. Any resulting increase in our tax obligation or cash taxes paid could adversely affect our cash flows and financial results.
We are also subject to tax examinations or engaged in alternative resolutions in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or changes in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results or financial position.
As our business continues to grow, increasing our brand recognition and profitability, we may be subject to increased scrutiny and corresponding tax disputes, which may impact our cash flows and financial results. Furthermore, our growing prominence may bring public attention to our tax profile, and if perceived negatively, may cause brand or reputational harm.
As we utilize our tax credits and net operating loss carryforwards, we may be unable to mitigate our tax obligations to the same extent as in prior years, which could have a material impact to our future cash flows. In addition, changes to our operating structure, including changes related to acquisitions, may result in cash tax obligations.
Global tax developments applicable to multinational businesses may have a material impact to our business, cash flow from operating activities, or financial results. Such developments, for example, may include certain United States’ proposals as well as the Organization for Economic Co-operation and Development’s, the European Commission’s and certain major jurisdictions’ heightened interest in and taxation of companies participating in the digital economy.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We leaseown our newLEED Gold certified global headquarters facility in Charleston, South Carolina, which consists of approximately 172,000 square feet (the "Global Headquarters Facility"). The lease on our Global Headquarters Facility expires in April 2038 and we have the option for 4 renewal periods of 5 years each. The lease agreement also grants us a Phase Two option to request that the landlord construct and lease to us a second office building and related improvements. We continue to lease our former headquarters facility, now called our Customer Operations Center, in Charleston, South Carolina, which consists of approximately 218,000 square feet. The lease on our Customer Operations Center expires in October 2023, and we have the option for 2 renewal periods of 5 years each.
We also lease or have purchased the right to use additional office space in Austin, Texas; Bedford, New Hampshire; Charleston, South Carolina; Glasgow, Scotland; London, England; Plano, Texas; St. Paul, Minnesota; San Jose, Costa Rica; Sydney, Australia; Brisbane, Australia; and Toronto, Canada, among other locations. We believe that our properties areit is in good operating condition and adequately serveserves our current business operations.
In December 2021, we acquired EVERFI and assumed a lease for office space in Washington, D.C. and an office in London, U.K. In February 2023, we closed our Washington, DC office location to align with our remote-first workforce strategy. We also anticipate that suitable additional or alternativeare pursuing strategic alternatives for the Washington, DC office space, including those under lease options, will be available at commercially reasonable terms for future expansion.sublease, and we have the intent and ability to sublease this office space.
ITEM 3. LEGAL PROCEEDINGS
From timeFor a discussion of our legal proceedings, see Note 11 to time we may become involvedour consolidated financial statements in litigation relating to claims arising from our ordinary coursethis report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is trading on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “BLKB.” As of February 5, 2020,17, 2023, there were approximately 100138 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, this number is not representative of the total number of beneficial owners of our stock. On February 5, 2020,17, 2023, the closing price of our common stock was $76.03.
The following performance graph shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act except as shall be expressly set forth by specific reference in such filing. The performance graph compares the performance of our common stock to the Nasdaq Composite Index, the Nasdaq Computer Index and the Nasdaq Computer and Data Processing Index. The Nasdaq Computer Index has replaced the the Nasdaq Computer and Data Processing Index in this analysis as the Nasdaq Computer and Data Processing Index is no longer considered widely recognized and used. The graph covers the most recent five-year period ended December 31, 2019.2022. The graph assumes that the value of the investment in our common stock and each index was $100.00 at December 31, 2014,2017, and that all dividends are reinvested.
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| | | | | | | | | | | | | | | | | | | | | | | |
December 31, | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
| | 2019 |
|
Blackbaud, Inc. | $ | 100.00 |
| | $ | 153.62 |
| | $ | 150.42 |
| | $ | 223.36 |
| | $ | 149.47 |
| | $ | 190.28 |
|
Nasdaq Composite Index | 100.00 |
| | 106.96 |
| | 116.45 |
| | 150.96 |
| | 146.67 |
| | 200.49 |
|
Nasdaq Computer & Data Processing Index | 100.00 |
| | 123.21 |
| | 132.37 |
| | 185.07 |
| | 187.89 |
| | 262.83 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Blackbaud, Inc. | $100.00 | | $66.92 | | $85.19 | | $61.71 | | $84.67 | | $63.10 |
Nasdaq Composite Index | 100.00 | | 97.16 | | 132.81 | | 192.47 | | 235.15 | | 158.65 |
Nasdaq Computer Index | 100.00 | | 96.27 | | 142.73 | | 224.55 | | 285.17 | | 185.29 |
Nasdaq Computer & Data Processing Index | 100.00 | | 91.84 | | 125.86 | | 184.56 | | 234.05 | | 144.30 |
| | | | | | | | | | | |
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Common Stock Acquisitions and Repurchases |
The following table provides information about shares of common stock acquired or repurchased during the three months ended December 31, 2019. All of these acquisitions were of2022 under the stock repurchase program then in effect, as well as common stock withheld by us to satisfy the minimum tax obligations of employees due upon exercisevesting of restricted stock appreciation rightsawards and units.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased(1) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs(2) | | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)(2) |
Beginning balance, October 1, 2022 | | | | | | | | $ | 250,000 | |
October 1, 2022 through October 31, 2022 | | — | | | $ | — | | | — | | | 250,000 | |
November 1, 2022 through November 30, 2022 | | 5,486 | | | 58.22 | | | — | | | 250,000 | |
December 1, 2022 through December 31, 2022 | | — | | | — | | | — | | | 250,000 | |
Total | | 5,486 | | | $ | 58.22 | | | — | | | $ | 250,000 | |
(1)Includes 5,486 shares in November withheld by us to satisfy the minimum tax obligations of employees due upon vesting of restricted stock awards and units. The level of this acquisition activity varies from period to period based upon the timing of award grants and vesting as well as employee exercise decisions.vesting.
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| | | | | | | | | | | | | | |
Period | | Total number of shares purchased |
| | Average price paid per share |
| | Total number of shares purchased as part of publicly announced plans or programs(1) |
| | Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands) |
|
Beginning balance, October 1, 2019 | | | | | | | | $ | 50,000 |
|
October 1, 2019 through October 31, 2019 | | 1,870 |
| | $ | 87.33 |
| | — |
| | 50,000 |
|
November 1, 2019 through November 30, 2019 | | 4,347 |
| | 84.30 |
| | — |
| | 50,000 |
|
December 1, 2019 through December 31, 2019 | | 37,338 |
| | 79.60 |
| | — |
| | 50,000 |
|
Total | | 43,555 |
| | $ | 80.40 |
| | — |
| | $ | 50,000 |
|
| |
(1) | In (2)August 2010, our Board of Directors approved a stock repurchase program that authorized us to purchase up to $50.0 million of our outstanding shares of common stock. We have not made any repurchases under the program to date, and the program does not have an expiration date.
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Our Board of Directors has adopted a dividend policy which reflects an intention to distribute to our stockholders a portion of the cash generated by our business that exceeds our operating needs and capital expenditures as regular quarterly dividends. This policy reflects our judgment that we can provide greater value to our stockholders by distributing to them a portion of the cash generated by our business.
In accordance with this dividend policy, we paid quarterly dividends at an annual rate of $0.48 per share in 2019 and 2018, resulting in aggregate dividend payments to stockholders of $23.6 million and $23.3 million in 2019 and 2018, respectively. In February 2020,December 2021, our Board of Directors approved an annual dividend rate of $0.48 per share for 2020reauthorized and we declared a first quarter dividend of $0.12 per share payable on March 13, 2020, to stockholders of record on February 28, 2020.
Dividends onreplenished our common stock will not be cumulative. Consequently, if dividends on our common stock are not declared and/or paid at the targeted level, our stockholders will not be entitled to receive such payments in the future. We are not obligated to pay dividends, and as described more fully below, our stockholders might not receive any dividends as a result of the following factors:
Our credit facility limits the amount of dividends we are permitted to pay;
Our Board of Directors could decide to reduce dividends or not to pay dividends at all, at any time and for any reason;
The amount of dividends distributed is subject to state law restrictions (as discussed below); and
We might not have enough cash to pay dividends due to changes to our operating earnings, working capital requirements and anticipated cash needs.
Assumptions and Considerations
We estimate that the cash necessary to fund dividends on our common stock for 2020 at an annual rate of $0.48 per share is approximately $24.0 million (assuming 50.0 million shares of common stock are outstanding, net of treasury stock).
We have a stock repurchase program that authorizesto authorize us to purchase up to $50.0$250.0 million of our outstanding shares of common stock. The program does not have an expiration date. The shares could be purchased in
As a self-tender forpart of a series of measures to better enable us to weather the extraordinary business challenges occasioned by COVID-19 and further effect our stock, from timelong-term strategy to timedeliver the greatest value to our stockholders, we announced on the open market or in privately negotiated transactions depending upon market conditions and other factors, all in accordance with the requirementsApril 6, 2020 that our Board of applicable law. Any open market purchases under the repurchase program will be made in compliance with Rule 10b-18Directors had rescinded its previously announced policy to pay an annual dividend at a rate of the Exchange Act and all other applicable securities regulations. We might not purchase any shares$0.48 per share of common stock and ourdiscontinued the declaration and payment of all cash dividends beginning with the second quarter of 2020 and thereafter until such time, if any, as the Board of Directors may decide,determine in its absolute discretion, at any time and for any reason, to cancel the stock repurchase program.
We believe that our cash on hand and the cash flowssole discretion. As a result, we expect to generate from operations will be sufficient to meet our liquidity requirements through 2020, including dividends and purchases under our stock repurchase program. See “Management’s Discussion and Analysispaid a first quarter dividend of Financial Conditions and Results of Operations — Liquidity and Capital Resources” in Item 7 in this report.
If our assumptions as to operating expenses, working capital requirements and capital expenditures are too low or if unexpected cash needs arise that we are not able to fund with cash on hand or with borrowings under our credit facility, we would need to either reduce or eliminate dividends. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash available for future dividends and other purposes, which could negatively impact our stock price, financial condition, results of operations and ability to maintain or expand our business.
We have estimated our dividend only for 2020, and we cannot assure our stockholders that during or following 2020 we will pay dividends at the estimated levels, or at all except with regard to dividends previously declared by the Board of Directors but not yet paid. We are not required to pay dividends and our Board of Directors may modify or revoke our dividend policy at any time. Dividend payments are within the absolute discretion of our Board of Directors and will be dependent upon many factors and future developments that could differ materially from our current expectations. Over time, our capital and other cash needs, including unexpected cash needs, will invariably change and remain subject to uncertainties, which could impact the level of any dividends we pay in the future.
We believe that our dividend policy could limit, but not preclude, our ability to pursue growth as we intend to retain sufficient cash after the distribution of dividends to permit the pursuit of growth opportunities. In order to pay dividends at the level currently anticipated under our dividend policy and to fund any substantial portion of our stock repurchase program, we could require financing or borrowings to fund any significant acquisitions or to pursue growth opportunities requiring capital significantly beyond our anticipated levels. Management will evaluate potential growth opportunities as they arise and, if our Board of Directors determines that it is in our best interest to use cash that would otherwise be available for distribution as dividends to pursue an acquisition opportunity, to materially increase capital spending or for some other purpose, the Board would be free to depart from or change our dividend policy at any time.
Restrictions on Payment of Dividends
Under Delaware law, we can only pay dividends either out of “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or out of current or the immediately preceding year’s earnings. As of December 31, 2019, we had $31.8 million in cash and cash equivalents. In addition, we anticipate that we will have sufficient earnings$0.12 per share in 2020 resulting in aggregate dividend payments to paystockholders of $6.0 million, but no further dividends at the level described above. Although we believe we will have sufficient surplus and earnings to pay dividends at the anticipated levels forwere declared or paid in 2020, our Board of Directors will seek periodically to assure itself of this sufficiency before actually2021 or 2022. We currently do not anticipate declaring any dividends.
Under our 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 payor paying any cash dividends and/or repurchase shares of stock: (1) no default or event of default shall have occurred and be continuing underfor the credit facility, and (2) our pro forma net leverage ratio, as set forth in the credit agreement, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital Resources” in Item 7 in this report.foreseeable future.
ITEM 6. [RESERVED]
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 in this report and our financial statements and the related notes included elsewhere in this report to fully understand factors, including our business acquisitions and dispositions, that may affect the comparability of the information presented below.
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| | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands, except per share data) | 2019(1) |
| | 2018 |
| | 2017(2) |
| | 2016(2) |
| | 2015 |
|
SUMMARY OF OPERATIONS | | | | | | | | | |
Total revenue | $ | 900,423 |
| | $ | 848,606 |
| | $ | 788,487 |
| | $ | 731,642 |
| | $ | 637,940 |
|
Total cost of revenue | 418,424 |
| | 381,742 |
| | 361,904 |
| | 339,220 |
| | 304,631 |
|
Gross profit | 481,999 |
| | 466,864 |
| | 426,583 |
| | 392,422 |
| | 333,309 |
|
Total operating expenses | 454,854 |
| | 407,447 |
| | 358,405 |
| | 324,198 |
| | 286,597 |
|
Income from operations | 27,145 |
| | 59,417 |
| | 68,178 |
| | 68,224 |
| | 46,712 |
|
Net income | 11,908 |
| | 44,841 |
| | 73,633 |
| | 45,404 |
| | 25,649 |
|
PER SHARE DATA | | | | | | | | | |
Basic net income | $ | 0.25 |
| | $ | 0.95 |
| | $ | 1.58 |
| | $ | 0.98 |
| | $ | 0.56 |
|
Diluted net income | 0.25 |
| | 0.93 |
| | 1.54 |
| | 0.96 |
| | 0.55 |
|
Cash dividends | 0.48 |
| | 0.48 |
| | 0.48 |
| | 0.48 |
| | 0.48 |
|
BALANCE SHEET DATA | | | | | | | | | |
Total assets(3) | $ | 1,992,963 |
| | $ | 1,615,305 |
| | $ | 1,797,846 |
| | $ | 1,345,009 |
| | $ | 1,223,336 |
|
Deferred revenue, including current portion | 316,137 |
| | 298,555 |
| | 278,706 |
| | 250,289 |
| | 237,335 |
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Total debt, including current portion(3) | 467,100 |
| | 387,124 |
| | 438,224 |
| | 342,393 |
| | 408,087 |
|
Total long-term liabilities(3) | 607,362 |
| | 435,867 |
| | 486,946 |
| | 396,466 |
| | 446,450 |
|
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(1) | Reflects the impact of adopting Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) in 2019, on a prospective basis. See Note 2 of our consolidated financial statements in this report for further discussion. |
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(2) | Reflects the impact of adopting ASU 2014-09, Revenue from Contracts with Customers (Topic 606) in 2018, on a retrospective basis. |
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(3) | As previously disclosed, on January 1, 2016, we adopted ASU 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs, on a retrospective basis. Accordingly, we retrospectively adjusted other non-current assets and debt, net of current portion, which had the effect of reducing each of those respective line items in our consolidated balance sheets as of December 31, 2015 by approximately $0.5 million. |
ITEM 7. 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 Item 1A Risk factors and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 consolidated financial statements and related notes, which are primarily denominated in thousands of dollars.
We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, foundations, companies,higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations and individuals to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility (CSR) and environmental, social and governance (ESG), school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than threefour decades, we are a remote-first company headquartered in Charleston, South Carolina, and havewith operations in the United States, Australia, Canada, Costa Rica and the United Kingdom. As of December 31, 2019,During 2022, we had more than 40,000 customers with contractual billing arrangements and nearly 100,000 customers that paid us through transactional fees. Through our customers and our solutions, we support millions of users and we connect millions of supporters to nearly 150,000 organizations and causes in over 45,000 global customers.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; (iii) providing software maintenance and support services; and (iv) providing professional services, including implementation, consulting, training, analytic and other services.
Four-Point Growth Strategy
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| 1 | | Expand Total Addressable Market | |
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| 12 | | Lead with World Class Teams and Operations | |
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| 3 | | Delight Customers with Innovative Cloud Solutions | |
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| 2 | | Drive Sales Effectiveness | |
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| 3 | | Expand Total Addressable Market | |
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| 4 | | Improve Operating Efficiency | |
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1. | Delight Customers with Innovative Cloud Solutions |
This strategy reflects our relentless focus on driving value and outcomes for our customers through our solutions. Blackbaud SKY®, our platform for cloud innovation, is a core tenant of this strategy and continues to power an elevated level of innovation by our engineers. It is also enabling our growing ecosystem of partners who are also passionate about social good, to extend and expand the capabilities available to our customers. For the first time in the history of the Company, beginning in 2019, there are now significantly more outside developers developing on our platform than Blackbaud engineers.
The customers we serve require vertical specific business solutions to automate their operations. In October 2019, we announced the general availability of Blackbaud Church Management™, which is already transforming the faith community technology landscape. We now serve congregations in more than half of the 50 U.S. states, representing all different sizes and spanning more than 13 denominations. Bringing this solution to market is a significant step toward addressing several challenges in the faith market and a substantial opportunity for Blackbaud. We are seeing positive momentum as more functionality continues to be released, market awareness is increasing and win rates are improving.
We are also seeing momentum continue to build in our Higher Education Vertical where Blackbaud powers 24 of the top 25 private U.S. colleges as ranked by Forbes. A year after introducing the Cloud Solution for Higher Education, we continue to drive innovation and introduce solutions taking full advantage of the rapid innovation, modern user experience, and enhanced capabilities made possible by our Blackbaud SKY platform. We extended our industry proven Education Management portfolio up market to small-scale higher education institutions. We are seeing strong sales momentum and look forward to seeing these customers begin to go-live in 2020. We also recently introduced talent management capabilities as part of the Cloud Solution for Higher Education, providing institutions the first online performance tracking tool for fundraising leaders and managers, enabling transparency, proactive management and peer gift officer benchmarking.
Blackbaud Peer-to-Peer Fundraising powered by JustGiving continues to gain traction. Since the U.S. launch in early 2019, over 1,000 customers have signed up to use the solution and roughly half of these organizations are net new customers to Blackbaud.
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2. | Drive Sales Effectiveness4 | | Focus on Employees, Culture and ESG Initiatives | |
We have been investing1.Expand TAM
In December 2021, we doubled our TAM when we acquired EVERFI, an industry leader in sales and marketing to better addressglobal social impact technology. Adding EVERFI advances our market opportunity withposition as a focus on adding additional sales headcount, improving productivity and putting a greater focus on adding net new logos. One way we are equipping our growing salesforce to be more effective is by investingleader in the necessary technologyrapidly evolving ESG and resources to efficiently drive an increased number of quality leadsCSR spaces and better cover our large addressable market. We have grown our lead generation teams, which we call business development representatives, to support our growing sales teams. We have simultaneously increased the productivity of our business development representativesoffers cross-selling and upselling opportunities through complementary product offerings with the implementation of a leading sales engagement technology platform, enabling our teams to generate more prospects, and convert those prospects into sales opportunities. We are entering 2020 with an improved ratio of business development representatives to account executives, and the lead generation from the team has increased substantially as a result of these changes. We have also implemented software tools to enhance our digital footprint and drive lead generation across the company. For the first time ever, we are taking a multi-touch attribution approach to measuring the effectiveness of our marketing campaigns to drive efficiency in our go-to-market efforts and improve returns on our marketing dollars. This is just one of many examples of how we are optimizing our structure, tools and processes to better address our large vertical market opportunities. We have made significant strides in laying the foundation to develop a highly productive and scalable operating model, which included significant organizational structure changes as we centralized many back-office functions and aligned our go-to-market efforts by vertical. This transformation is now behind us, putting us in a position to drive improved productivity across our vertical sales teams.
In January 2019, we acquired YourCause, which positions us as a global leader in corporate social responsibility and employee engagement technology. One third of Fortune 500 companies trust Blackbaud as their CSR technology partner, and in 2019 alone, YourCause solutions processed over $1 billion dollars in donations and grants which benefited over 170,000 social good organizations. In the year since the acquisition, we have fully integrated YourCause's administrative functions into our global centers of excellence and expanded the sales team to fuel what is already a fast-growing business within the company.YourCause® solutions. Our TAM now stands at over $10$20 billion, and we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development.
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4.32 | Improve Operating Efficiency | 2022 Form 10-K |
2.Lead with World Class Teams and Operations
This strategy expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40 (see discussion of Non-GAAP Financial Measures below). During 2022, we announced a series of strategic organizational updates to streamline our business operations and become even more customer centric. We are alsocreated three new roles: Chief Operating Officer, Chief Commercial Officer and Executive Vice President of Corporations. We believe these new roles will: ensure consistency in our approach to the customer experience; further streamline and simplify our go-to-market efforts to maximize our outcomes as a global company; and further align our YourCause and EVERFI offerings and continue our investment in being the partner of choice for corporations focused on operational efficiency to strengthen the businesssocial responsibility and position us for long-term success. During 2019,impact. Additionally, we continued executing a comprehensive workplace strategytook steps to better align our organizational objectivesworkforce with our geographic footprint. strategic priorities, including further elimination of open positions as well as the difficult decision to reduce our workforce (see additional discussion regarding our workforce reduction below). We designated Charleston, South Carolina, Austin, Texas, London, U.K.also appointed three new members to our board of directors, providing not only new business perspectives but also adding important skills in cybersecurity, enterprise software, digital transformation and Sydney, Australiaglobal operations.
3.Delight Customers with Innovative Cloud Solutions
During our annual user conference, bbcon, we shared how our purpose-built solutions bring together the capabilities essential to our customers in managing their data, making their teams more productive, motivating their audiences to act, and ultimately driving outcomes. During the third quarter, we acquired Kilter, an intuitive, gamified, activity-based engagement app. We will initially pair Kilter with our Blackbaud TeamRaiser solution to serve nonprofits by expanding the ways they can engage with their supporters to prepare for their existing fundraising walks, runs and rides, and to create new types of engagement opportunities that are not tied to a specific date or place. Kilter will also provide a unique solution with YourCause CSRConnect platform for companies as employers take a more active role in supporting their employees’ health and wellness pursuits across their remote and distributed workforces.
4.Focus on Employees, Culture and ESG Initiatives
During 2022, we announced that we achieved carbon neutrality for 2021. This is a goal we have been striving towards and our hub locations,shift to a remote-first workforce enabled us to accelerate our timeline. Since 2019, Blackbaud has reduced its global real estate footprint by 50%, energy emissions to run office space by 63% and employee commute emissions by 75%. With a multi-pronged climate strategy, Blackbaud is focused on reducing emissions, using energy efficiently and investing in environmental projects for a more sustainable future. We shared more about our ESG strategy on our Corporate Social Responsibility website during the second quarter. Our mission driven culture has been in our DNA since inception and is very attractive in a competitive labor market. We continue to foster a diverse and inclusive environment focused on employee engagement and connectedness with our remote-first workforce strategy. We have a significant role to play in driving advances in the social impact space, and we are proud of the strong corporate culture we have leveraged a more flexible office strategy to replacebuilt and upgrade some of our former offices and expand our footprint into new locations for customer-facing roles. Most recently, we moved our London offices into a new flexible workspace marking a significant milestone in the integration of our Blackbaud Europe and JustGiving teams. In 2019, we largely completed this optimization effort, and we will continue to evaluate our footprintcultivate in alignment with our global workplace strategy. Our aim is optimizing our office utilization, improving our geographic sales coverage and enhancing our employees' daily experience to improve productivity and effectiveness.
today's environment.
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Total Revenue ($M) | | Income from Operations ($M) |
YoY Growth (%) | | YoY Growth (%) |
Total revenue increased by $51.8$130.4 million during 2019,2022, driven largely by the following:
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| + | | Growth in recurring revenue primarily related to: •an increase in contractual revenue of $107.7 million related to positive demand fromthe performance of our cloud solutions, of which $96.2 million was attributable to EVERFI; partially offset by a decrease in maintenance revenue as customers acrossmigrate to our portfolio of cloud solutions and a decrease related to a lesser extent, the inclusionfluctuations in foreign currency exchange rates of YourCause, $3.4 million. •an increase in services embeddedtransactional recurring revenue of $23.2 million primarily due to an increase in enrollment for our renewable cloudBlackbaud Tuition Management solution contractsresulting in higher transactional volumes, an increase in online charitable giving; and increased salesnew pricing initiatives. The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of subscription-based contracts for retained professional services$7.5 million. |
| - | | DeclineDecrease in one-time services and other revenue primarily related to: •decrease in one-time analytics revenue as analytics now are generally integrated in our cloud solutions; and •increase in one-time consulting revenue primarily attributable to EVERFI, largely offset by less revenue from implementation and customization services, in line with our continuedmulti-year strategic shift in focus towards sellingfrom a license-based and one-time services business model to a cloud subscription solutions. In general, ourbusiness model. Our cloud solutions include integrated analytics, trainingsubscription offerings generally require less implementation and payment services, and require little to no customization services. As a result, we expect that one-time services and other revenue will continue to decline and total revenue growth will continue to be negatively impacted. |
For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 58. While our 2022 bookings for EVERFI were lower than expected, and we experienced some unexpected EVERFI employee attrition following the acquisition, we have taken action to bolster management and fill account executive vacancies, which are now fully staffed and ramping to drive future bookings. We have a number of multi-year pricing initiatives underway, some to bring our pricing in line with the market while others are model changes that are expected to drive greater revenue for both us and our customers. As a result, we expect to see an acceleration in growth in the second half of 2023 when compared to the first half of the year as we begin to see the full-year effect of some of these pricing initiatives.
We also expect that the one-time services and other revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.
Income from operations decreased by $32.3$53.4 million during 2019,2022, driven largely by the following:
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| +- | | Growth in total revenue, as described above |
| - | | Increased investments we have made in our sales organization and innovation |
| - | | Increase in compensation costs other than stock-based compensation of $10.4$75.7 million primarily due to increases in the grant date fair valuesincreased employee headcount due to our acquisition of our annual equity awards granted to employees over the last three years as our headcount has grownEVERFI |
| - | | Increase in hostingSecurity Incident-related expenses, net of insurance, of $53.9 million. See "Security Incident update" below on page 37. |
| - | | Increases in third-party contractor and data centerhosting costs of $5.4$26.9 million as we are migratingand $6.6 million, respectively, primarily attributable to our acquisition of EVERFI and, to a lesser extent, our continued migration of our cloud infrastructure to leading public cloud service providers and investments in cybersecurity |
| - | | Increase in amortization of software development costs of $4.1 million due to investments made on innovation, quality and the integration of our cloud solutions |
| - | | Increase in amortization of intangible assets from business combinations of $3.0$14.4 million due to our acquisition of EVERFI |
| - | | Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments |
| - | | Increase in infrastructure costs of $8.4 million primarily related to our acquisition of EVERFI and investments in security tools |
| - | | Increase in marketing costs of $7.7 million primarily due to our acquisition of EVERFI |
| - | | Increase in travel costs of $4.5 million due to our easing of restrictions on non-essential employee travel, which went into effect during March 2020 in response to the COVID-19 pandemic |
| - | | Increase in other direct costs of revenue of $4.3 million primarily due to our acquisition of EVERFI |
| - | | Increase in employee severance of $2.2$3.7 million due to our targeted workforce reduction during the fourth quarter of 2022, as discussed below |
| - | | Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space. We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale. |
| - | | Increase in cost of revenue from a $2.3 million impairment charge during the three months ended June 30, 2022, against previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge resulted primarily from our decision to end customer support for certain solutions |
| + | | Increase in total revenue, as described above |
| + | | Net increase of $12.9 million related to an increase in software and content development costs that were required to be capitalized under the eliminationinternal-use software guidance, largely driven by our acquisition of certain roles withinEVERFI, partially offset by an increase in amortization of capitalized software and content development costs |
| + | | Decrease in real estate activity costs of $12.0 million due to our workforce strategy changes that began in the company, mostthird quarter of 2020 |
| + | | Decrease in stock-based compensation expense of $10.1 million attributable to: •As a one-time response to COVID-19, replacement of our 2020 base salary merit increases with one-year time-based equity awards, which occurredvested and were recognized as expense between May 1, 2020 and May 1, 2021; •Over performance against overall Company goals was higher in 2021 than 2022 goals; and •Our targeted workforce reduction during the firstfourth quarter of 20192022, as discussed below |
| -+ | | IncreaseDecrease in rent expensecorporate costs of $1.8$2.5 million primarily associated with the lease of our New Headquarters Facilityrelated to a decrease in Charleston, South Carolina, which commenced in April 2018 |
| - | | Increase in restructuring costs of $1.2 million |
We are continuing to make critical investments in the business in areas such as digital marketing, engineering, security, customer success and our continued shift of cloud infrastructure to leading public cloud service providers. Our profitability during 2022 reflects the addition of EVERFI and some of these incremental investments.
We have taken steps to better align our workforce with our strategic priorities to drive efficiencies and minimize any potential impacts from the current uncertain macroeconomic environment. During the fourth quarter of 2022, this included further elimination of open positions as well as the decision to reduce our workforce. As a result of the targeted workforce reduction, we incurred $4.5 million in pre-tax employee severance costs during the fourth quarter of 2022. During the first quarter of 2023, we have remained focused on improving operating performance and driving efficiencies in the Company, including further reducing our workforce. Following the planned action during the fourth quarter of 2022, we experienced a slowdown in voluntary attrition relative to expectations leading to a further reduction in force to achieve our original plan. While we
have eliminated positions in some areas, we will continue to hire in other areas. Most of these reductions are in areas of the business that are not customer facing or in sales. When combined with the cost actions we took in the fourth quarter of 2022, we expect our total headcount will be reduced by approximately 14% since the third quarter 2022. We expect these workforce reductions and other cost actions to significantly reduce our pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.
In 2023, we expect our financial performance to improve with each successive quarter, starting with meaningful improvement in the second quarter as our pricing and cost initiatives take hold.
We continuously seek opportunities to optimize our portfolio of solutions to focus time and resources on innovation that will have the greatest impact for our customers and the markets we serve, and drive the highest return on investment. To that end, we will continue to simplify and rationalize our portfolio through product sunsets and divestitures of non-core businesses and technologies.
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Customer Retentionretention | | Gross dollar retention |
Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter. We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio
and maintenance customers from a perpetual license-based model to a cloud subscription delivery model. In the long term, we also anticipate an increase in recurring subscription contract renewals as we continue focusing on innovation, quality and the integration of our cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believehave historically used a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts, providesas we believed it provided a better representation of our customers' overall behavior. During 20192022 and 2018,2021, approximately 92%91% and 93%, respectively, of our customers with recurring revenue contracts were retained. This customer retention rate reflects our efforts to rationalize our portfolio of solutions through product sunsets and divestitures, and migrate customers from legacy solutions towards our next generation cloud solutions.
A key factor to our overall success is the renewal and expansion of our existing subscription agreements with our customers. Management now uses gross dollar retention in analyzing our success at delighting our customers with innovative and cloud solutions. Gross dollar retention is defined as contracted annual recurring revenue ("CARR") divided by beginning CARR with a measurement period of twelve months. During 2022, our gross dollar retention was approximately 91%. This gross dollar retention rate is relatively unchanged from our rate for the full year ended December 31, 2021. We are continually investing in innovation, which we believe will increase customergross dollar retention over the long-term.
Balance Sheetsheet and Cash Flowcash flow
At December 31, 2019,2022, our cash and cash equivalents were $31.8$31.7 million and the carrying amount of our debt under the 20172020 Credit Facility (as described below) was $467.1$799.1 million. Our net leverage ratio was 2.303.22 to 1.00.
During 2019,2022, we generated $182.5$203.9 million in cash flow from operations and had a net decrease in borrowings of $99.7 million, had aggregate cash outlays of $109.4 million, primarily for the acquisition of YourCause, returned $23.6 million to stockholders by way of dividends and had cash outlays of $58.4$71.1 million for purchases of property and equipment and capitalized software and content development costs.
Adoptioncosts, spent $20.9 million for our purchases of New Lease Accounting Standard
On January 1, 2019, we adopted ASU 2016-02, using the transition method that allowed us to initially apply the guidance at the adoption dateEVERFI and Kilter and received cash proceeds of January 1, 2019 without adjusting comparative periods presented. Adopting ASU 2016-02 had a material impact on$6.4 million from our sale of certain solutions. See Note 3 of our consolidated balance sheets as we recognized lease liabilities and ROU assetsfinancial statements in this report for those leases classified as operating leases. The impactsadditional information.
Security Incident update
As discussed in the financial information herein. For additional information regarding the impact of our adoption of ASU 2016-02, see Notes 2 andNote 11 to our consolidated financial statements included in this report.report, total costs related to the Security Incident have exceeded the limit of our insurance coverage. Accordingly, we expect that the Security Incident will continue to negatively impact our GAAP profitability and GAAP cash flow for the foreseeable future (see discussion regarding non-GAAP adjusted free cash flow on page 47). For full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees are expensed as incurred. For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident. As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate. 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 December 31, 2022 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 judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.
Reportable segment
We report our operating results and financial information in one operating and reportable segment. See Note 16 of our consolidated financial statements in this report for additional information.
Comparison of 2019 to 2018
For information regarding the comparison of 2018 to 2017, please refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 20, 2019.2022 vs. 2021 and 2021 vs. 2020
Acquisitions
During 20192022 and 2018,2021, we acquired companies that provided us with strategic opportunities to expand our TAM and share of the philanthropic giving market through the integration of complementary solutions and services to serve the changing needs of our customers. The following are the companies we acquired and their respective acquisition dates:
YourCause Holdings, LLC•Kilter, Inc. ("YourCause"Kilter") – January 2, 2019; andon August 19, 2022
Reeher LLC ("Reeher") – April 30, 2018•EVERFI, Inc. on December 31, 2021
We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisition. Weacquisitions. In accordance with applicable accounting rules, we determined that the YourCauseKilter and ReeherEVERFI acquisitions were not material business combinations;to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented. See Note 3 to our consolidated financial statements in this report for a summary of these acquisitions.
2021 vs. 2020 Stock-based Compensation
Stock-based compensation expense increased $31.1 million in 2021 due to:
•Certain changes to our compensation program that were expected to cause stock-based compensation expense to remain higher than historical levels, including:
◦replacement of our annual cash bonus plans with a short-term performance-based equity award plan
◦decrease in the vesting period for our annual long-term incentive time-based equity awards from 4 years (1/4 per year) to 3 years (1/3 per year), beginning in February 2021; and
◦replacement of cash sign-on and retention bonuses with time-based equity awards.
•Increases in the grant date fair values of our annual equity awards granted to employees; and
•Overall Company performance against 2020 and 2021 goals
Revenue and Cost of Revenue
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Recurring | | | | |
Revenue ($M) | | Cost of revenue ($M) | | Gross profit ($M) and gross margin (%) |
YoY Growth (%) | | YoY Growth (%) | | |
Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, payment services, online training programs and subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services. Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, subscription-basedretained and managed services contracts for professional servicesthat we expect to have a term consistent with our cloud solution contracts, and variable transaction revenue associated with the use of our solutions.
Cost of recurring revenue is primarily comprised of compensation costs for customer support and production IT personnel, hosting expenses,and data center costs, third-party contractor expenses, third-party royalty and data expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software and content development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.
WeOur customers continue to experience growth in sales of our cloud solutions as we meet the demand of our customers that increasingly prefer cloud subscription offerings with integrated analytics, training and payment services. Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter. We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.
Recurring revenue increased by $69.4$130.9 million, or 9.1%14.9%, driven primarily by the following:
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| + | | Increase in contractual recurring revenue of $107.7 million related to the performance of our cloud solutions, of which $96.2 million was attributable to EVERFI; partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions; also included in the increase in contractual recurring revenue is a decrease related to fluctuations in foreign currency exchange rates of $3.4 million |
| + | | Increase in transactional recurring revenue of $23.2 million primarily due to: •an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes; •an increase in online charitable giving; and •new pricing initiatives. The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $7.5 million |
For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 58. Cost of recurring revenue increased by $72.6 million, or 18.6%, driven primarily by the following:
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| + | | Increase in compensation costs of $19.5 million primarily related to an increase in headcount due to our acquisition of EVERFI, and a continued shift in resources historically supporting one-time services and other towards recurring revenue |
| + | | Increase in amortization of intangible assets from business combinations of $14.0 million due to our acquisition of EVERFI |
| + | | Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments |
| + | | Increase in third-party contractor and hosting costs of $11.1 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security; currently, we expect our cloud infrastructure migration efforts and increased level of cybersecurity investments to continue for the foreseeable future. Also contributing to the increase was our acquisition of EVERFI. |
| + | | Increase in amortization of software and content development costs of $5.8 million due to our continued investments in the innovation and security of our solutions |
| + | | Increase in third-party software costs of $3.9 million primarily related to a higher number of licenses needed and also price increases |
| + | | Increase in allocated overhead costs of $3.7 million related to the increased headcount discussed above |
| + | | Increase in depreciation expense of $1.5 million primarily related to investments in our cloud data centers and refresh of certain internal hardware |
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Recurring gross margin decreased by 1.4% primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.
Recurring revenue increased by $30.1 million, or 3.5%, driven primarily by the following:
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| + | | Increase in subscriptionstransactional revenue of $87.8$20.0 million primarily due to the continued shift toward virtual fundraising and online charitable giving; also included in the increase in transactional revenue is an increase related to fluctuations in foreign currency exchange rates of $4.7 million |
| + | | Increase in contractual recurring revenue of $10.1 million related to positive demand acrossthe performance of our portfolio of cloud solutions and early progress in initiatives to bring our pricing in line with the market, partially offset by a lesser extent, the inclusion of YourCause, an increase in services embedded in our renewable cloud solution contracts and increased sales of subscription-based retained professional services |
| - | | Decreasedecrease in maintenance revenue of $18.4 million primarilyas customers migrate to our cloud solutions; also included in the increase in contractual recurring revenue is an increase related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platformfluctuations in foreign currency exchange rates of $3.9 million |
Cost of recurring revenue increased by $52.5$21.1 million, or 17.2%5.7%, driven primarily by the following:
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| + | | Increase in compensation costs of $10.3 million primarily related to the stock-based compensation due to the factors discussed above on page 37 and a shift in resources historically supporting one-time services and other towards recurring revenue |
| + | | Increase in transaction-based costs of $13.0$9.6 million related to payment services integrated in our cloud solutions |
| + | | Increase in compensationthird-party contractor and hosting costs of $11.2 million, primarily attributable to an increasing portion of our resources now providing subscription-based retained services as opposed to one-time |
| + | | Increase in hosting and data center costs of $5.4$7.8 million as we are migratingcontinue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security |
| +- | | IncreaseDecrease in third-party dataamortization of intangible assets from business combinations of $3.7 million |
| - | | Decrease in rent expense of $1.3 million largely due to a decrease in leased hardware, including servers, network gear and toolstorage |
| - | | Decrease in amortization of software development costs of $5.1$0.8 million |
|
| | | |
| + | | Increase in allocated corporate costs of $5.1 million primarily due to investments in corporate IT, including cyber security and increases in related headcount |
| + | | Increase in amortization of software development costs of $4.1 million due to investments made on innovation, quality and the integration of our cloud solutions |
Recurring gross margin decreased by 3.0%, driven0.9% primarily by incremental costs associated with our continued shift toward selling cloud solutions and retained services, including hosting and data center costs, compensation costs and amortizationdue to the increase in cost of software development costs. We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading public cloud service providers.
revenue outpacing the increase in recurring revenue.
| | | | | | | | | | | | | | |
One-time services and other | | | | |
Revenue ($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, as well as revenue from the sale ofand fees for retained and managed services contracts that we do not expect to have a term consistent with our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees.cloud solution contracts.
Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, other costs incurred in providing onsite customer training, third-party contractor expenses, data expense incurred to perform one-time analytic services, third-party software royalties, costsamortization of user conferences,intangible assets from business combinations, and allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.costs.
We expect that the shift in our go-to-market strategy towards cloud subscription offerings, which generally include integrated analytics, training and payment services, and require little to no customization services, will continue to negatively impact one-time services and other revenue.revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.
One-time services and other revenue decreased by $17.6$0.5 million, or 20.4%1.1%, driven primarily by the following:
|
| | | | | | | | | | |
| - | | Decrease in one-time consulting revenue of $12.6 million. Services are increasingly embedded in our renewable cloud solution contracts and we are selling more subscription-based contracts for retained professional services. Both our embedded services and retained services are recorded as recurring revenue. |
| - | | Decrease in one-time analytics revenue of $3.8$3.1 million as analytics are generally integrated in our cloud solutions |
| + | | Increase in one-time consulting revenue of $2.8 million, of which $12.3 million was attributable to EVERFI, partially offset by a decrease in revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services. |
| | | |
Cost of one-time services and other decreased by $15.8$10.5 million or 20.8%19.9%, primarily driven primarily by a decrease in compensation costs of $13.3 million. The decrease in compensation costs was in line with the decrease in one-time services sold and delivered as an increasing portion of our resources are now providing subscription-based retained services as opposed to one-time.following:
| | | | | | | | | | | |
| - | | Decrease in compensation costs of $8.8 million largely due to a continued shift in resources historically supporting one-time services and other towards recurring revenue as well as a decrease in professional services headcount |
| - | | Decrease in allocated overhead costs of $1.9 million primarily related to the decreased headcount discussed above |
| - | | Decrease in third-party contractor costs of $1.1 million primarily due to a decrease in partners delivering services |
| + | | Increase in employee severance of $1.6 million primarily due to our targeted workforce reduction, as discussed above |
| | | |
| | | |
One-time services and other gross margin increased by 0.4%21.3%, asprimarily due to the significant reductions in compensation costs of one-time services and other discussed above slightly outpaced the declines in one-time consulting revenue and analytics revenue associated with the shift in our go-to-market strategy.
above.
Operating Expenses
One-time services and other revenue decreased by $15.6 million, or 24.9%, driven primarily by the following:
| | | | | | | | | | | |
| - | | Decrease in one-time consulting revenue of $10.5 million due primarily to less implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services. |
| - | | Decrease in one-time analytics revenue of $4.2 million as analytics are generally integrated in our cloud solutions |
| - | | Decrease in onsite training revenue of $0.7 million due to COVID-19 |
Cost of one-time services and other decreased $6.0 million or 10.3%, primarily driven by the following:
| | | | | | | | | | | |
| - | | Decrease in allocated costs of $2.0 million primarily related to a decrease in rent expense, as discussed below in General and Administrative |
| - | | Decrease in third-party contractor costs of $1.5 million, primarily due to a decrease in partners delivering services |
| - | | Decrease in compensation costs other than stock-based compensation of $1.1 million largely due to a decrease in headcount, as well as a shift in resources historically supporting one-time services and other towards recurring revenue |
| - | | Decreases in amortization intangible assets from business combinations and employee severance |
| | | |
One-time services and other gross margin decreased by 18.3%, primarily due to the significant reductions in one-time consulting and analytics revenue discussed.
Operating Expenses
| | | | | | | | | | | | | | |
Sales, marketing and customer success ($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 improve market coverage and drive sales effectiveness, which is a component of our four-point growth strategy.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 as well as the related payback period while increasing sales velocity.
Sales, marketing and customer success expenses increased by $31.3$35.1 million, or 16.2%18.9%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:
| | | | | | | | | | | |
| + | | Increase in compensation costs of $20.0 million primarily related to increased employee headcount due to our acquisition of EVERFI |
| + | | Increase in advertising costs of $7.7 million primarily due to our acquisition of EVERFI |
| + | | Increase in third-party contractor costs of $4.0 million primarily related to strategic consulting |
| + | | Increase in travel costs of $2.1 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020 |
| + | | Increase in software costs of $1.7 million primarily related to our acquisition of EVERFI and our use of digital marketing tools |
| | | |
| | | |
| + | | Increase |
| | | |
In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter of 2020, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives.
Sales, marketing and customer success expenses decreased by $23.4 million, or 11.2%. The decreases in dollars and as a percentage of total revenue were primarily driven by the following:
| | | | | | | | | | | |
| - | | Decrease in compensation costs other than stock-based compensation of $21.2$20.7 million primarily associated with our efforts beginningdue to the targeted reduction in sales headcount during the second halfquarter of 2018 to increase our direct sales force as well as incremental headcount associated with the inclusion of YourCause. As a result, our direct sales headcount increased 8% during 2019.2020 |
| +- | | IncreasesDecrease in allocated corporate costs of $7.0 million primarily driven by investments maderelated to a decrease in corporate IT, including cyber securityrent expense and increasesthe impact of the targeted reduction in relatedsales headcount during the second quarter of 2020 |
| +- | | Decrease in travel costs of $1.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020 |
| - | | Decrease in commissions expense of $1.9 million related to a decrease in overall commissionable bookings during 2020 due to the COVID-19 pandemic and a decrease in commissionable one-time services and other bookings during 2021 |
| + | | Increase in stock-based compensation costs of $4.8 million due to the factors discussed on page 37 |
| + | | Increase in commission expenseadvertising costs of $2.2$3.5 million primarily driven by an increasedue to incremental spending on advertising campaigns and investments in commissionable salesdigital marketing |
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 cloud solutions, which is a componentsolutions. We also continue to invest heavily in the security of our four-point growth strategy.solutions. Research and development expensesexpense increased by $7.4$32.3 million, or 7.4%,26.0%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:
|
| | | | | | | | | | |
| + | | Increase in compensation costs of $11.6$26.1 million primarily associated with the inclusionrelated to increased employee headcount due to our increased hiring of YourCause's engineering resourcesengineers, and to a lesser extent, our acquisition of EVERFI |
| + | | IncreasesIncrease in allocations of depreciation, facilities and IT supportthird-party contractor costs of $3.5$19.8 million primarily driven by investments made in corporate IT, including cyber security and increases in related headcount |
| - | | Partially offset bydue to an increase in our use of third-party software developers and, to a lesser extent, our acquisition of EVERFI |
| + | | Increase in allocated overhead costs of $2.7 million primarily related to increased headcount discussed above |
| - | | Increase in software and content development costs of $9.5$19.0 million that were required to be capitalized under the internal-use software guidance, — see discussion belowlargely driven by our acquisition of EVERFI |
Not included in research and development expense for 20192022 and 20182021 were $46.0$58.5 million and $36.5$39.4 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software
accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software and content development costs associated with our cloud solutions and online educational courses are subsequently amortized to cost of recurring revenue over the related asset's estimated useful life, which generally range from three to seven years. We expect that the amount of software and content development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality, security and the integration of our solutions, which we believe will drive long-term revenue growth. |
| | |
36 | | 2019 Form 10-K2021 vs. 2020 |
| | | | | | | | | | | |
| + | | Increase in compensation costs of $18.9 million primarily related to our increased engineering hiring and, to a lesser extent, stock-based compensation due to the factors discussed above on page 37 |
| + | | Increase in third-party contractor costs of $3.5 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security |
| + | | Decrease in software development costs of $2.1 million that were required to be capitalized under the internal-use software guidance |
Blackbaud, Inc.
Not included in research and development expense for 2021 and 2020 were $39.4 million and $41.5 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years. 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 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, third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.
General and administrative expenses increased by $7.1$53.6 million, or 6.6%,36.7%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:
| | | | | | | | | | | |
| + | | Increases in Security Incident-related expenses, net of insurance, of $53.9 million. See "Security Incident update" above on page 37 |
| + | | Increase in compensation costs of $8.9 million primarily related to increased employee headcount due to our acquisition of EVERFI and increased cybersecurity hiring |
| + | | Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space. We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale. |
| + | | A $2.3 million noncash impairment charge during the three months ended June 30, 2022 against previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge resulted primarily from our decision to end customer support for certain solutions |
| + | | Increase in rent expense of $2.0 million primarily related to leases assumed from our acquisition of EVERFI |
| + | | Increase in travel costs of $1.3 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020 |
| + | | Increase in third-party contractor costs of $1.2 million |
| - | | Decrease in corporate costs of $2.8 million primarily related to a decrease in bad debt expense |
| - | | Increases in total costs allocated from general and administrative expense of $6.4 million primarily related to investments in security tools. Depreciation, facilities and IT support costs are pooled and recorded to general and administrative expense and allocated to other lines of our statements of comprehensive income based on headcount. |
| - | | Decreases in real estate activity costs of $11.8 million due to our workforce strategy changes that began in the third quarter of 2020 (see discussion below) |
| | | |
| | | |
| + | | Increase in compensation costs of $13.2 million primarily related to stock-based compensation and our acquisition of YourCause. The increase in stock-based compensation was primarily driven by increases in the grant date fair values of our annual equity awards granted to employees over the last three years as our headcount has grown. |
| - | | Decrease in acquisition-related expenses and integration costs of $3.0 million |
| | | |
Restructuring
During 2017, in an effortthe third quarter of 2020, we adjusted our workforce strategy to further our organizational objectives including, improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to modern andprovide more collaborative workspaces with short-term financial commitments. These workspaces are also more centrally locatedflexibility for our employees to work remotely. As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease right-of-use ("ROU") assets for certain of our office locations we expected to exit, which resulted in an increase in operating lease costs during the third and closer to our customers and prospects. Restructuring costs incurred prior to our adoptionfourth quarters of ASU 2016-02 on January 1, 2019 consisted primarily2020. For these same office locations, we also reduced the estimated useful lives of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-offcertain facilities-related fixed assets, thatwhich resulted in an increase in depreciation expense. We incurred approximately $23.1 million of pre-tax costs related to these real estate activities during the third and fourth quarters of 2020.
In October 2021, we would no longer use.
Upon adoptionmade the decision to permanently close our fixed office locations (with the exception of ASU 2016-02 at January 1, 2019,our global headquarters facility in Charleston, South Carolina), effective in December 2021. This change was intended to align our real estate footprint with our transition to a remote-first workforce. As a result, during the three months ended December 31, 2021, we reduced the estimated useful lives of our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leasedof our office spaces thatlocations we ceased using priorexpected to December 31, 2018. See additional details below.
Restructuringexit, which resulted in incremental operating lease costs incurred during the yearfourth quarter of 2021. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in incremental depreciation expense during the fourth quarter of 2021. During the three months ended December 31, 2019 consisted primarily2021, we also recorded impairments of operating lease ROU asset impairment costsassets and to a lesser extent, lease payments for offices we have ceased using and write-offs ofcertain facilities-related fixed assets that we will no longer use. See Notes 11ceased using as a result of our adjusted workforce strategy. These impairment charges were reflected in general and 6 to the consolidated financial statements for additional details regarding these impairment costs and fixed asset write-offs.
The following table summarizes our facilities optimization restructuring costs asadministrative expense. We incurred approximately $12.5 million of December 31, 2019:
|
| | | | | | | | | | | |
| Cumulative costs incurred as of |
| | Costs incurred during the year ended(1) |
| | Cumulative costs incurred as of |
|
(in thousands) | December 31, 2018 |
| | December 31, 2019 | |
By component: | | | | | |
Contract termination costs | $ | 4,176 |
| | $ | 4,906 |
| | $ | 9,082 |
|
Other costs | 1,208 |
| | 902 |
| | 2,110 |
|
Total | $ | 5,384 |
| | $ | 5,808 |
| | $ | 11,192 |
|
| |
(1) | Includes $3.8 million of operating lease ROU asset impairment costs.
|
As of December 31, 2019, we have substantially completed our facilities optimization restructuring plan. Any remaining restructuringpre-tax costs related to these real estate activities are expected to be insignificant. The cumulative costs incurred as of December 31, 2019 of $11.2 million exceeded the estimated range previously disclosed of between $8.5 million and $9.5 million. Based on our updated estimates during the fourth quarter about our inability to sublease certain office spaces we had previously ceased using, we recorded incremental operating lease ROU asset impairment costs as discussed above. These
of 2021.
| | |
2019 Form 10-K | | 372021 vs. 2020 |
restructuring activities are expected to result in improved operating efficiencies and future annual before-tax savings of between $5.0 million and $6.0 million beginning in 2020.
The change in our liability related to our facilities optimization restructuring during the twelve months ended December 31, 2019, consisted oftotal revenue were primarily driven by the following:
|
| | | | | | | | | | | | | | | | | | | |
| Accrued at |
| | Increases for incurred costs(1) |
| | Written off upon adoption of ASU 2016-02(2) |
| | Costs paid |
| | Accrued at |
|
(in thousands) | December 31, 2018 |
| | | | | December 31, 2019 |
|
By component: | | | | | | | | | |
Contract termination costs | $ | 1,865 |
| | $ | 4,906 |
| | $ | (1,656 | ) | | $ | (5,115 | ) | | $ | — |
|
Other costs | 50 |
| | 902 |
| | — |
| | (952 | ) | | — |
|
Total | $ | 1,915 |
| | $ | 5,808 |
| | $ | (1,656 | ) | | $ | (6,067 | ) | | $ | — |
|
| | | | | | | | | | | |
(1) | + | | Includes $3.8Increase in stock-based compensation costs of $13.2 million of operating lease ROU asset impairment costs. due to the factors discussed above on page 37 |
| + | | Increase in compensation expense, excluding stock-based compensation costs, of $4.3 million due to base salary merit increases on July 2021, as well as an increase in headcount |
| + | | Increase in corporate costs of $3.9 million primarily related to increases in third-party consulting fees and insurance costs, partially offset by decreases in bad debt expense |
| + | | Increases in amortization expense of capitalized cloud computing implementation costs and third-party contractor costs of $1.0 million and $0.6 million, respectively |
| - | | Decrease in real estate activity costs of $7.7 million due to our workforce strategy changes made in the third quarter of 2020 |
| - | | Decrease in rent expense, net of allocated costs, of $2.4 million primarily related to the purchase of our global headquarters facility during the third quarter of 2020 and our exit of certain other office leases globally during the second half of 2020 in-line with changes to our workforce strategy at that time |
| - | | Decreases in depreciation expense and travel costs of $1.9 million and $0.9 million, respectively |
| | | |
(2) | Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018. | | |
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|
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Interest expense | | | |
| Years ended December 31, | | |
(dollars in millions) | 2019 |
| 2018 |
| Change |
|
Interest expense | $ | 20.6 |
| $ | 15.9 |
| 29.7 | % |
% of total revenue | 2.3 | % | 1.9 | % | |
Interest Expense | | | | | | | | |
Interest expense ($M) | | |
Percentages indicate expenses as a percentage of total revenue | | |
Interest expense increased in dollars and as a percentage of total revenue during 2022 when compared to 2021, due to the new borrowings used to finance our acquisition of EVERFI. We currently expect interest expense for the full year 2023 to be approximately $40 million to $44 million although our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment. See Note 10 to our 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 7A. Quantitative and Qualitative Disclosures about Market Risk: Interest Rate Risk on page 63 for more information about our variable interest rate exposure and related risk. Interest expense increased during 2019,2021 when compared to 2018,2020, primarily due to an increasethe Real Estate Loans assumed in connection with the purchase of our average daily borrowings related to our acquisitionglobal headquarters facility in August 2020 and the deferred financing costs and debt discount associated with the 2020 Credit Facility, which was entered into in October 2020.
Deferred revenueRevenue
The table below compares the components of deferred revenue from our consolidated balance sheets:
| | | | | | | | | | | |
(dollars in millions) | December 31, 2022 | December 31, 2021 | Change |
Total deferred revenue(1) | 385.2 | | 378.7 | | 1.7 | % |
Less: Long-term portion | 2.8 | | 4.2 | | (33.7) | % |
Current portion(1) | $ | 382.4 | | $ | 374.5 | | 2.1 | % |
|
| | | | | | | | | |
(dollars in millions) | Timing of recognition | December 31, 2019 |
| December 31, 2018 |
| Change |
|
Recurring | Over the period billed in advance, generally one year | $ | 302.8 |
| $ | 287.0 |
| 5.5 | % |
One-time services and other | As services are delivered | 13.4 |
| 11.6 |
| 15.4 | % |
Total deferred revenue(1) | | 316.1 |
| 298.6 |
| 5.9 | % |
Less: Long-term portion | | 1.8 |
| 2.6 |
| (29.7 | )% |
Current portion(1) | | $ | 314.3 |
| $ | 296.0 |
| 6.2 | % |
(1)The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding. | |
(1) | The individual amounts for each year may not sum to total 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 one to 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 ofeach one-year period.
The increase in deferred revenue during the contract term.
Deferred revenue from recurring revenue contracts increased during 2019, year ended December 31, 2022 was primarily due to primarily due to new subscription sales of our cloud solutions. Our acquisition of YourCause on January 2, 2019 also modestly contributed to the increase in recurring deferred revenue since December 31, 2018. We also sold more subscription-based contracts for retained professional services.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue from customer arrangements predating the acquisition to fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and, services under those customer arrangements. Therefore,to a lesser extent, progress in initiatives to bring our deferred revenue after an acquisitionpricing in line with the market.
|
| | | | | | | |
2019 Form 10-KIncome tax (benefit) provision ($M) | | 38 |
Percentages indicate effective income tax rates | | |
will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".
Income tax benefit
Our income tax benefit and effective income tax rates, including the effects of period-specific events, were: |
| | | | | | |
| Years ended December 31, | |
(dollars in millions) | 2019 |
| 2018 |
|
Income tax benefit | $ | (1.3 | ) | $ | (0.2 | ) |
Effective income tax rate | (12.5 | )% | (0.5 | )% |
Our effective income tax rate may fluctuate quarterly and annually as a result of factors, including changes in tax law in jurisdictions where we conduct business, transactions entered into, changes in the geographic distribution of our earnings or losses, and our assessment of certain tax contingencies and valuation allowances.
We have deferred tax assets for federal, state, and international net operating loss carryforwards and tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. A portion of the foreign and state net operating loss carryforwards and a portion of state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future.
We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the U.K., Australia, Ireland and Costa Rica. We are generally subject to U.S. federal income tax examination for calendar tax years ending 20162019 through 2019,2022, as well as state and foreign income tax examinations for various years depending on statute of limitations of those jurisdictions.
We have taken federal and state tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease at December 31, 20192022 was $1.4 million.insignificant.
We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
The decrease in our effective income tax rate for year ended December 31, 2022, when compared to the same period in 2021, was primarily attributable to current-year non-deductible accruals for loss contingencies related to the Security Incident, stock-based compensation shortfall partially offset by increased tax credits and impact of tax rate decreases. The 2021 effective income tax rate was positively impacted by benefit attributable to stock-based compensation windfall net of tax expense resulting from impact of UK corporate rate increase.
The decrease in our effective income tax rate in 2019,2021 when compared to 2018,2020, was primarily due to the heightened impact of research credit generation net of Section 162(m) nondeductible compensation. Furthermore, the 2019 effective tax rate was favorably impacted by otherprior year increase in valuation allowance attributable to state tax credits net of an overall increasecredit carryforwards for which we do not expect to uncertain tax positions. Lastly, the effective tax rate was negatively impacted by Global Intangible Low-Tax Income ("GILTI"), net of Foreign-Derived Intangible Income ("FDII") benefit, resulting from an increase in non-US earnings. The reduced base further magnified the impact of other nondeductible items.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect therealize benefit. Furthermore, our 2021 effective income tax rate was $3.9 millionpositively impacted by increased benefit attributable to stock-based compensation deduction and $3.3 million at December 31, 2019a reduction to unrecognized tax benefit as a result of IRS audit settlement and December 31, 2018, respectively.statute of limitation lapses offset against negative impacts of the U.K.-enacted tax rate increase and increase in non-deductible compensation.
Non-GAAP financial measuresFinancial Measures
The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP revenue, non-GAAP gross profit, non-GAAP gross margin, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per sharefinancial 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.
We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.
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.
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| | | | | | | | |
| Years ended December 31, | | |
(dollars in millions) | 2019 |
| 2018 |
| Change |
|
GAAP Revenue | $ | 900.4 |
| $ | 848.6 |
| 6.1 | % |
Non-GAAP adjustments: | | | |
Add: Acquisition-related deferred revenue write-down | 1.9 |
| 2.4 |
| (19.8 | )% |
Non-GAAP revenue(1) | $ | 902.4 |
| $ | 851.0 |
| 6.0 | % |
| | | |
GAAP gross profit | $ | 482.0 |
| $ | 466.9 |
| 3.2 | % |
GAAP gross margin | 53.5 | % | 55.0 | % | |
Non-GAAP adjustments: | | | |
Add: Acquisition-related deferred revenue write-down | 1.9 |
| 2.4 |
| (19.8 | )% |
Add: Stock-based compensation expense | 3.4 |
| 5.2 |
| (35.8 | )% |
Add: Amortization of intangibles from business combinations | 44.8 |
| 42.2 |
| 6.0 | % |
Add: Employee severance | 1.2 |
| 0.9 |
| 33.0 | % |
Subtotal(1) | 51.3 |
| 50.8 |
| 0.9 | % |
Non-GAAP gross profit(1) | $ | 533.3 |
| $ | 517.7 |
| 3.0 | % |
Non-GAAP gross margin | 59.1 | % | 60.8 | % | |
| | | | | | | | |
(1)2022 Form 10-K | The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding. | 47 |
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(dollars in millions, except per share amounts) | 2022 | Change | 2021 | Change | 2020 |
GAAP Revenue | $ | 1,058.1 | | 14.1 | % | $ | 927.7 | | 1.6 | % | $ | 913.2 | |
| | | | | |
GAAP gross profit | $ | 552.7 | | 14.1 | % | $ | 484.5 | | (0.1) | % | $ | 485.2 | |
GAAP gross margin | 52.2 | % | | 52.2 | % | | 53.1 | % |
Non-GAAP adjustments: | | | | | |
Add: Stock-based compensation expense | 14.4 | | (27.6) | % | 20.0 | | 49.2 | % | 13.4 | |
Add: Amortization of intangibles from business combinations | 48.5 | | 39.3 | % | 34.8 | | (10.7) | % | 39.0 | |
Add: Employee severance | 2.1 | | 7,262.1 | % | — | | (96.8) | % | 0.9 | |
| | | | | |
Subtotal(1) | 65.1 | | 18.7 | % | 54.8 | | 2.9 | % | 53.2 | |
Non-GAAP gross profit(1) | $ | 617.8 | | 14.5 | % | $ | 539.3 | | 0.2 | % | $ | 538.4 | |
Non-GAAP gross margin | 58.4 | % | | 58.1 | % | | 59.0 | % |
| | | | | |
GAAP income from operations | $ | (28.5) | | (214.4) | % | $ | 24.9 | | (33.1) | % | $ | 37.2 | |
GAAP operating margin | (2.7) | % | | 2.7 | % | | 4.1 | % |
Non-GAAP adjustments: | | | | | |
Add: Stock-based compensation expense | 110.3 | | (8.4) | % | 120.4 | | 38.0 | % | 87.3 | |
Add: Amortization of intangibles from business combinations | 51.4 | | 38.8 | % | 37.0 | | (11.6) | % | 41.9 | |
Add: Employee severance | 5.2 | | 242.0 | % | 1.5 | | (69.0) | % | 4.9 | |
Add: Acquisition and disposition-related costs(2) | 6.1 | | 100.9 | % | 3.1 | | 1,294.5 | % | 0.2 | |
Add: Restructuring and other real estate activities | 0.1 | | (99.4) | % | 12.1 | | (48.0) | % | 23.3 | |
Add: Security Incident-related costs, net of insurance(3) | 55.7 | | 2,968.4 | % | 1.8 | | 100.0 | % | — | |
Add: Impairment of capitalized software development costs | 2.3 | | 100.0 | % | — | | — | % | — | |
Subtotal(1) | 231.1 | | 31.4 | % | 175.9 | | 11.7 | % | 157.5 | |
Non-GAAP income from operations(1) | $ | 202.6 | | 0.9 | % | $ | 200.8 | | 3.1 | % | $ | 194.8 | |
Non-GAAP operating margin | 19.1 | % | | 21.6 | % | | 21.3 | % |
| | | | | |
GAAP income before provision for income taxes | $ | (55.6) | | (884.6) | % | $ | 7.1 | | (67.2) | % | $ | 21.6 | |
GAAP net income | $ | (45.4) | | (896.9) | % | $ | 5.7 | | (26.2) | % | $ | 7.7 | |
Shares used in computing GAAP diluted earnings per share | 51,569,148 | | 6.9 | % | 48,230,438 | | (1.0) | % | 48,696,341 | |
GAAP diluted earnings per share | $ | (0.88) | | (833.3) | % | $ | 0.12 | | (25.0) | % | $ | 0.16 | |
Non-GAAP adjustments: | | | | | |
Add: GAAP income tax (benefit) provision | (10.2) | | (834.2) | % | 1.4 | | (90.0) | % | 13.9 | |
Add: Total Non-GAAP adjustments affecting loss from operations | 231.1 | | 31.4 | % | 175.9 | | 11.7 | % | 157.5 | |
| | | | | |
| | | | | |
Non-GAAP income before provision for income taxes | 175.5 | | (4.1) | % | 183.0 | | 2.1 | % | 179.1 | |
Assumed non-GAAP income tax provision(4) | 35.1 | | (4.1) | % | 36.6 | | 2.1 | % | 35.8 | |
Non-GAAP net income(1) | $ | 140.4 | | (4.1) | % | $ | 146.4 | | 2.1 | % | $ | 143.3 | |
| | | | | |
Shares used in computing Non-GAAP diluted earnings per share | 52,207,573 | | 8.2 | % | 48,230,438 | | (1.0) | % | 48,696,341 | |
Non-GAAP diluted earnings per share | $ | 2.69 | | (11.5) | % | $ | 3.04 | | 3.4 | % | $ | 2.94 | |
(1)The individual amounts for each year may not sum to subtotal, non-GAAP gross profit, non-GAAP income from operations, non-GAAP income before provision for income taxes or non-GAAP net income due to rounding.
(2)Includes a $2.0 million noncash impairment of intangible assets held for sale during the twelve months ended December 31, 2022.
(3)Includes Security Incident-related costs incurred during the twelve months ended December 31, 2022 of $57.6 million, which includes approximately $23.0 million in recorded aggregate liabilities for loss contingencies, net of probable insurance recoveries during the same period of $1.9 million and during the twelve months ended December 31, 2021 of $40.6 million, net of probable insurance recoveries during the same period of $38.7 million. Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees, as well as settlements of customer claims and accruals for certain loss contingencies. Not included in this adjustment were costs associated with enhancements to our cybersecurity program. For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees, are expensed as incurred. As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate. 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 December 31, 2022 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 judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.
(4)We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share. |
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| Years ended December 31, | | |
(dollars in millions, except per share amounts) | 2019 |
| 2018 |
| Change |
|
GAAP income from operations | $ | 27.1 |
| $ | 59.4 |
| (54.3 | )% |
GAAP operating margin | 3.0 | % | 7.0 | % | |
Non-GAAP adjustments: | | | |
Add: Acquisition-related deferred revenue write-down | 1.9 |
| 2.4 |
| (19.8 | )% |
Add: Stock-based compensation expense | 58.6 |
| 48.3 |
| 21.5 | % |
Add: Amortization of intangibles from business combinations | 50.1 |
| 47.1 |
| 6.4 | % |
Add: Employee severance | 4.4 |
| 2.2 |
| 97.0 | % |
Add: Acquisition-related integration costs | 2.4 |
| 3.7 |
| (35.0 | )% |
Add: Acquisition-related expenses | 1.2 |
| 2.8 |
| (59.2 | )% |
Add: Restructuring costs | 5.8 |
| 4.6 |
| 26.5 | % |
Subtotal(1) | 124.4 |
| 111.1 |
| 12.0 | % |
Non-GAAP income from operations(1) | $ | 151.6 |
| $ | 170.5 |
| (11.1 | )% |
Non-GAAP operating margin | 16.8 | % | 20.0 | % | |
| | | |
GAAP income before provision for income taxes | $ | 10.6 |
| $ | 44.6 |
| (76.3 | )% |
GAAP net income | $ | 11.9 |
| $ | 44.8 |
| (73.4 | )% |
Shares used in computing GAAP diluted earnings per share | 48,312,271 |
| 48,045,084 |
| 0.6 | % |
GAAP diluted earnings per share | $ | 0.25 |
| $ | 0.93 |
| (73.1 | )% |
Non-GAAP adjustments: | | | |
Less: GAAP income tax benefit | (1.3 | ) | (0.2 | ) | 504.1 | % |
Add: Total Non-GAAP adjustments affecting loss from operations | 124.4 |
| 111.1 |
| 12.0 | % |
Non-GAAP income before provision for income taxes | 135.0 |
| 155.7 |
| (13.3 | )% |
Assumed non-GAAP income tax provision(2) | 27.0 |
| 31.1 |
| (13.3 | )% |
Non-GAAP net income(1) | $ | 108.0 |
| $ | 124.6 |
| (13.3 | )% |
| | | |
Shares used in computing Non-GAAP diluted earnings per share | 48,312,271 |
| 48,045,084 |
| 0.6 | % |
Non-GAAP diluted earnings per share | $ | 2.24 |
| $ | 2.59 |
| (13.5 | )% |
| |
(1) | The individual amounts for each year may not sum to subtotal, non-GAAP income from operations, non-GAAP income before provision for income taxes or non-GAAP net income due to rounding. |
| |
(2) | We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share. |
Non-GAAP 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.
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| Years ended December 31, | | |
(dollars in millions) | 2019 |
| 2018 |
| Change |
|
GAAP net cash provided by operating activities | $ | 182.5 |
| $ | 201.4 |
| (9.4 | )% |
Less: purchase of property and equipment | (11.5 | ) | (14.7 | ) | (21.9 | )% |
Less: capitalized software development costs | (46.9 | ) | (37.6 | ) | 24.6 | % |
Non-GAAP free cash flow | $ | 124.1 |
| $ | 149.0 |
| (16.7 | )% |
Non-GAAP organic revenue growth
In addition, we use non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis, non-GAAP organic recurring revenue growth and non-GAAP organic recurring revenue growth in analyzing our operating performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. 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, and they include the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP.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 itsour current business’ organic revenue growth and revenue run-rate.
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| Years ended December 31, |
(dollars in millions) | 2022 | 2021 |
GAAP revenue | $ | 1,058.1 | | $ | 927.7 | |
GAAP revenue growth | 14.1 | % | |
Add: Non-GAAP acquisition-related revenue(1) | — | | 104.4 | |
Less: Non-GAAP revenue from divested businesses(2) | — | | (1.9) | |
Total Non-GAAP adjustments | $ | — | | $ | 102.5 | |
Non-GAAP organic revenue(3) | $ | 1,058.1 | | $ | 1,030.2 | |
Non-GAAP organic revenue growth | 2.7 | % | |
| | |
Non-GAAP organic revenue(3) | 1,058.1 | | 1,030.2 | |
Foreign currency impact on Non-GAAP organic revenue(4) | 12.3 | | — | |
Non-GAAP organic revenue on constant currency basis(4) | $ | 1,070.4 | | $ | 1,030.2 | |
Non-GAAP organic revenue growth on constant currency basis | 3.9 | % | |
| | |
GAAP recurring revenue | $ | 1,011.7 | | $ | 880.9 | |
GAAP recurring revenue growth | 14.9 | % | |
Add: Non-GAAP acquisition-related revenue(1) | — | | 93.5 | |
Less: Non-GAAP recurring revenue from divested businesses(2) | — | | (1.9) | |
Total Non-GAAP adjustments | $ | — | | $ | 91.6 | |
Non-GAAP organic recurring revenue | $ | 1,011.7 | | $ | 972.5 | |
Non-GAAP organic recurring revenue growth | 4.0 | % | |
| | |
Non-GAAP organic recurring revenue(3) | $ | 1,011.7 | | $ | 972.5 | |
Foreign currency impact on non-GAAP organic recurring revenue(4) | 10.9 | | — | |
Non-GAAP organic recurring revenue on constant currency basis(4) | $ | 1,022.6 | | $ | 972.5 | |
Non-GAAP organic recurring revenue growth on constant currency basis | 5.2 | % | |
(1)Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period.
(2)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.
(3)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.
(4)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.
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| Years ended December 31, | | |
(dollars in millions) | 2019 |
| 2018 |
| Change |
|
GAAP revenue | $ | 900.4 |
| $ | 848.6 |
| 6.1 | % |
(Less) Add: Non-GAAP acquisition-related revenue (1) | (20.1 | ) | 5.6 |
| |
Non-GAAP organic revenue (2) | $ | 880.3 |
| $ | 854.2 |
| 3.1 | % |
Foreign currency impact on Non-GAAP organic revenue (3) | 6.0 |
| — |
| |
Non-GAAP organic revenue on constant currency basis (3) | $ | 886.3 |
| $ | 854.2 |
| 3.8 | % |
| | | |
GAAP recurring revenue | $ | 831.6 |
| $ | 762.2 |
| 9.1 | % |
(Less) Add: Non-GAAP acquisition-related revenue (1) | (19.8 | ) | 5.5 |
| |
Non-GAAP organic recurring revenue | $ | 811.8 |
| $ | 767.6 |
| 5.8 | % |
| | | | | | | | |
(1)50 | Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the current period non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies. | 2022 Form 10-K |
Rule of 40
We previously defined 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, net of insurance; and impairment of capitalized software development costs. Beginning in the fiscal quarter ended June 30, 2022, we now also include in non-GAAP adjusted EBITDA impairment of capitalized software development costs because we believe it is not directly related to our operating performance in any particular period.
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| Years ended December 31, |
(dollars in millions) | 2022 | 2021 |
GAAP net (loss) income | $ | (45.4) | | $ | 5.7 | |
Non-GAAP adjustments: | | |
Add: Interest, net | 34.1 | | 17.6 | |
Add: GAAP income tax (benefit) provision | (10.2) | | 1.4 | |
Add: Depreciation(1) | 14.1 | | 12.7 | |
Add: Amortization of intangibles from business combinations | 51.4 | | 37.0 | |
Add: Amortization of software and content development costs(2) | 39.0 | | 32.8 | |
Subtotal(3) | 128.4 | | 101.5 | |
Non-GAAP EBITDA(3) | $ | 83.0 | | $ | 107.2 | |
Non-GAAP EBITDA margin | 7.8 | % | |
| | |
Non-GAAP adjustments: | | |
Add: Stock-based compensation expense | 110.3 | | 120.4 | |
Add: Employee severance | 5.2 | | 1.5 | |
Add: Acquisition and disposition-related costs | 6.1 | | 3.1 | |
Add: Restructuring and other real estate activities | 0.1 | | 12.1 | |
Add: Security Incident-related costs, net of insurance(4) | 55.7 | | 1.8 | |
Add: Impairment of capitalized software development costs | 2.3 | | — | |
Subtotal(3) | 179.7 | | 138.9 | |
Non-GAAP Adjusted EBITDA(3) | $ | 262.6 | | $ | 246.1 | |
Non-GAAP Adjusted EBITDA margin | 24.8 | % | |
| | |
Rule of 40(5) | 27.5 | % | |
| | |
Non-GAAP adjusted EBITDA | 262.6 | | 246.1 | |
Foreign currency impact on Non-GAAP adjusted EBITDA(6) | 6.3 | | (3.6) | |
Non-GAAP adjusted EBITDA on constant currency basis(6) | 268.9 | | 242.5 | |
Non-GAAP adjusted EBITDA margin on constant currency basis | 25.1 | % | |
| | |
Rule of 40 on constant currency basis(7) | 29.0 | % | |
(1)During the third quarter of 2020 and the fourth quarter of 2021, we reduced the estimated useful lives of our operating lease right-of-use assets for certain of our office locations we expected to exit. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in increases in depreciation expense. The accelerated portions of the fixed asset depreciation expense related to these activities of $1.7 million for the three months and twelve months ended December 31, 2021, respectively, were presented in the "Restructuring and other real estate activities" line of the reconciliation of GAAP to non-GAAP financial measures. Total depreciation expense was $4.9 million and $14.4 million for the three and twelve months ended December 31, 2021, respectively.
(2)Includes amortization expense related to software development costs and amortization expense from capitalized cloud computing implementation costs.
(3)The individual amounts for each year may not sum to subtotal, non-GAAP EBITDA, non-GAAP adjusted EBITDA or non-GAAP adjusted EBITDA on a constant currency basis due to rounding.
(4)Includes Security Incident-related costs incurred, net of probable insurance recoveries. See additional details in the reconciliation of GAAP to Non-GAAP operating income above.
(5)Measured by non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. See Non-GAAP organic revenue growth table above.
(6)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.
(7)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.
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(2)2022 Form 10-K | Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated. | 51 |
| |
(3) | To determine non-GAAP organic 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. |
Non-GAAP free cash flow and non-GAAP adjusted free cash flow
Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment.
Non-GAAP adjusted free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development and capital expenditures for property and equipment, plus cash outflows, net of insurance, related to the Security Incident.
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.
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| Years ended December 31, |
(dollars in millions) | 2022 | Change | 2021 | Change | 2020 |
GAAP net cash provided by operating activities | $ | 203.9 | | (4.6) | % | $ | 213.7 | | 44.4 | % | $ | 148.0 | |
Less: purchase of property and equipment | (12.3) | | 5.4 | % | (11.7) | | (60.7) | % | (29.7) | |
Less: capitalized software and content development costs | (58.8) | | 45.2 | % | (40.5) | | (4.0) | % | (42.2) | |
Non-GAAP free cash flow(1) | $ | 132.8 | | (17.8) | % | $ | 161.5 | | 112.2 | % | $ | 76.1 | |
Add: Security Incident-related cash flows, net of insurance | 20.9 | | 209.6 | % | 6.7 | | 226.5 | % | 2.1 | |
Non-GAAP adjusted free cash flow(1) | $ | 153.7 | | (8.6) | % | $ | 168.2 | | 115.2 | % | $ | 78.2 | |
(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 transactionfirst 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. Our revenue from payment services hasWe have historically increasedexperienced seasonal highs during the fourth quarter due to year-end giving.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, however,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, the payment of bonuses, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and 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 merit-basedbase salary merit increases, which are generally effectivewere replaced in April each year.2020 with performance-based equity awards due to COVID-19, but returned in July 2021. In addition, deferred revenues can vary on a seasonal basis fordue to the same reasons. These patterns may change as a resulttiming of the continued shift to online giving, growth in volume of transactions for which we process payments,customer contract renewals and student enrollments or as a result of acquisitions, new market opportunities, new solution introductions or other factors.significant acquisitions. Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards.
During the second quarter of 2021, however, we experienced an increase in the amount of taxes we paid on behalf of our employees related to the settlement of equity awards when compared to the same period in 2020, as the equity granted in May 2020 in lieu of cash bonus plans and base salary merit increases vested.
These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, large dollar customer bookings and contract renewals, or as a result of acquisitions, new market opportunities, new solution introductions or other factors.
| | |
Liquidity and Capital Resources |
The following table presents selected financial information about our financial position:
| | (dollars in millions) | December 31, 2019 |
| December 31, 2018 |
| Change |
| (dollars in millions) | December 31, 2022 | December 31, 2021 | Change |
Cash and cash equivalents | $ | 31.8 |
| $ | 30.9 |
| 3.1 | % | Cash and cash equivalents | $ | 31.7 | | $ | 55.1 | | (42.5) | % |
Property and equipment, net | 35.5 |
| 40.0 |
| (11.2 | )% | Property and equipment, net | 107.4 | | 111.4 | | (3.6) | % |
Software development costs, net | 101.3 |
| 75.1 |
| 34.9 | % | |
Software and content development costs, net | | Software and content development costs, net | 141.0 | | 121.4 | | 16.2 | % |
Total carrying value of debt | 467.1 |
| 387.1 |
| 20.7 | % | Total carrying value of debt | 859.0 | | 956.2 | | (10.2) | % |
Working capital | (254.3 | ) | (207.7 | ) | (22.5 | )% | Working capital | (312.0) | | (258.7) | | (20.6) | % |
The following table presents selected financial information about our cash flows: