UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2015~~March 31, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-50600

Blackbaud, Inc.

(Exact name of registrant as specified in its charter)




Delaware	11-2617163
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2000 Daniel Island Drive

Charleston, South Carolina 29492

(Address of principal executive offices, including zip code)

(843) 216-6200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer	¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO þ

The number of shares of the registrant’s Common Stock outstanding as of ~~October~~April 26, ~~2015~~2016 was ~~46,900,094.~~47,496,620.

TABLE OF CONTENTS



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		2

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial statements
	Consolidated balance sheets as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 (unaudited)	3
	Consolidated statements of comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ (unaudited)	4
	Consolidated statements of cash flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ (unaudited)	5
	Consolidated statements of stockholders’ equity for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 and the year ended December 31, ~~2014~~2015 (unaudited)	6
	Notes to consolidated financial statements (unaudited)	7
Item 2.	Management's discussion and analysis of financial condition and results of operations	3026
Item 3.	Quantitative and qualitative disclosures about market risk	4945
Item 4.	Controls and procedures	4945

PART II.	OTHER INFORMATION	5046

Item 1A.	Risk factors	5046
Item 2.	Unregistered sales of equity securities and use of proceeds	5046
Item 6.	Exhibits	5147

SIGNATURES		5248



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		1

Table of Contents

Blackbaud, Inc.



		CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference, contains ~~“forward-looking statements”~~forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These ~~statements~~"forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of ~~1934. All~~1934, as amended. Forward-looking statements ~~in this report not dealing with historical~~consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, ~~or current facts are forward-looking~~our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions ~~and projections. Statements which include the words~~of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or ~~the negative version~~any variations of ~~those~~such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of a future ~~or forward-looking nature identify~~performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.

~~Although we attempt to be accurate in making these forward-looking statements, future circumstances might differ from the assumptions on which such statements are based. In addition, other important~~Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those ~~set forth elsewhere in this report,~~summarized under “Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise ~~publicly~~ any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.



2		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

~~PART I. FINANCIAL INFORMATION~~



		PART I. FINANCIAL INFORMATION

~~Item~~ITEM 1. ~~Financial Statements~~FINANCIAL STATEMENTS

~~Blackbaud, Inc.~~

~~Consolidated balance sheets~~

~~(Unaudited)~~


(in thousands, except share amounts)	September 30, 2015			December 31, 2014
Blackbaud, Inc. Consolidated Balance Sheets (Unaudited)							Blackbaud, Inc. Consolidated Balance Sheets (Unaudited)
(dollars in thousands)							March 31, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	17,555		$	14,735		$	12,084		$	15,362
Donor restricted cash	63,460			140,709
Accounts receivable, net of allowance of $4,448 and $4,539 at September 30, 2015 and December 31, 2014, respectively	78,152			77,523
Restricted cash due to customers							115,000			255,038
Accounts receivable, net of allowance of $4,541 and $4,943 at March 31, 2016 and December 31, 2015, respectively							78,456			80,046
Prepaid expenses and other current assets	39,557			40,392			48,435			48,666
Deferred tax asset, current portion	10,608			14,423
Total current assets	209,332			287,782			253,975			399,112
Property and equipment, net	49,024			50,402			54,543			52,651
Software development costs, net							23,021			19,551
Goodwill	345,770			349,008			435,994			436,449
Intangible assets, net	204,738			229,307			284,188			294,672
Other assets	35,300			26,684			20,207			20,901
Total assets	$	844,164		$	943,183		$	1,071,928		$	1,223,336
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	13,137		$	11,436		$	18,286		$	19,208
Accrued expenses and other current liabilities	45,576			52,201			37,577			57,461
Donations payable	63,460			140,709
Due to customers							115,000			255,038
Debt, current portion	4,375			4,375			4,375			4,375
Deferred revenue, current portion	227,161			212,283			222,415			230,216
Total current liabilities	353,709			421,004			397,653			566,298
Debt, net of current portion	237,293			276,196			417,989			403,712
Deferred tax liability	34,800			43,639			28,546			27,996
Deferred revenue, net of current portion	7,369			8,991			6,583			7,119
Other liabilities	7,025			7,437			8,000			7,623
Total liabilities	640,196			757,267			858,771			1,012,748
Commitments and contingencies (see Note 10)
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding	—			—			—			—
Common stock, $0.001 par value; 180,000,000 shares authorized, 56,693,785 and 56,048,135 shares issued at September 30, 2015 and December 31, 2014, respectively	57			56
Common stock, $0.001 par value; 180,000,000 shares authorized, 57,496,559 and 56,873,817 shares issued at March 31, 2016 and December 31, 2015, respectively							57			57
Additional paid-in capital	265,024			245,674			285,376			276,340
Treasury stock, at cost; 9,796,306 and 9,740,054 shares at September 30, 2015 and December 31, 2014, respectively	(193,168		)	(190,440		)
Treasury stock, at cost; 10,007,715 and 9,903,071 shares at March 31, 2016 and December 31, 2015, respectively							(205,377		)	(199,861		)
Accumulated other comprehensive loss	(2,020		)	(1,032		)	(1,091		)	(825		)
Retained earnings	134,075			131,658			134,192			134,877
Total stockholders’ equity	203,968			185,916			213,157			210,588
Total liabilities and stockholders’ equity	$	844,164		$	943,183		$	1,071,928		$	1,223,336

The accompanying notes are an integral part of these consolidated financial statements.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		3

~~Blackbaud, Inc.~~

~~Consolidated statements of comprehensive income~~

~~(Unaudited)~~


(in thousands, except share and per share amounts)	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited)													Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited)
(dollars in thousands, except per share amounts)													Three months ended March 31,
													2016			2015
Revenue
Subscriptions	$	80,901		$	67,043		$	233,423		$	190,296		$	96,851		$	72,513
Maintenance	38,209			36,821			115,732			109,000			37,160			38,896
Services	35,905			35,843			100,878			95,768			32,414			31,306
License fees and other	3,796			4,891			12,030			16,544			2,831			4,278
Total revenue	158,811			144,598			462,063			411,608			169,256			146,993
Cost of revenue
Cost of subscriptions	39,485			33,257			115,063			95,130			49,672			36,178
Cost of maintenance	6,708			6,147			21,179			17,544			5,323			7,502
Cost of services	26,235			27,111			79,121			78,914			24,319			26,971
Cost of license fees and other	1,745			1,633			4,052			4,586			602			1,161
Total cost of revenue	74,173			68,148			219,415			196,174			79,916			71,812
Gross profit	84,638			76,450			242,648			215,434			89,340			75,181
Operating expenses
Sales and marketing	31,139			27,098			89,424			78,647
Sales, marketing and customer success													35,614			28,562
Research and development	20,561			19,707			62,003			54,265			22,779			21,276
General and administrative	18,446			15,519			53,244			42,118			19,756			16,843
Amortization	524			624			1,536			1,629			752			488
Total operating expenses	70,670			62,948			206,207			176,659			78,901			67,169
Income from operations	13,968			13,502			36,441			38,775			10,439			8,012
Interest income	8			17			23			46
Interest expense	(1,816		)	(1,272		)	(5,375		)	(4,059		)	(2,675		)	(1,686		)
Loss on sale of business	—			—			(1,976		)	—
Loss on debt extinguishment and termination of derivative instruments (see Notes 8 and 9)	—			—			—			(996		)
Other income, net	184			29			584			18
Other expense, net													(105		)	(287		)
Income before provision for income taxes	12,344			12,276			29,697			33,784			7,659			6,039
Income tax provision	4,433			1,896			10,459			10,310			2,664			1,754
Net income	$	7,911		$	10,380		$	19,238		$	23,474		$	4,995		$	4,285
Earnings per share
Basic	$	0.17		$	0.23		$	0.42		$	0.52		$	0.11		$	0.09
Diluted	$	0.17		$	0.23		$	0.41		$	0.51		$	0.11		$	0.09
Common shares and equivalents outstanding
Basic weighted average shares	45,616,832			45,196,277			45,576,029			45,160,434			45,967,863			45,529,668
Diluted weighted average shares	46,596,714			45,883,570			46,403,196			45,704,157			46,757,458			46,168,096
Dividends per share	$	0.12		$	0.12		$	0.36		$	0.36		$	0.12		$	0.12
Other comprehensive (loss) income
Foreign currency translation adjustment	168			(232		)	(354		)	(62		)	403			(326		)
Unrealized (loss) gain on derivative instruments, net of tax	(262		)	468			(634		)	386
Total other comprehensive (loss) income	(94		)	236			(988		)	324
Unrealized loss on derivative instruments, net of tax													(669		)	(469		)
Total other comprehensive loss													(266		)	(795		)
Comprehensive income	$	7,817		$	10,616		$	18,250		$	23,798		$	4,729		$	3,490

The accompanying notes are an integral part of these consolidated financial statements.



4		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

~~Blackbaud, Inc.~~

~~Consolidated statements of cash flows~~

~~(Unaudited)~~


Blackbaud, Inc. Consolidated statements of cash flows (Unaudited)							Blackbaud, Inc. Consolidated statements of cash flows (Unaudited)
	Nine months ended September 30,						Three months ended March 31,
(in thousands)	2015			2014
(dollars in thousands)							2016			2015
Cash flows from operating activities
Net income	$	19,238		$	23,474		$	4,995		$	4,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	41,340			32,586			17,609			13,678
Provision for doubtful accounts and sales returns	4,573			3,837			1,017			1,358
Stock-based compensation expense	17,899			12,492			7,916			5,102
Excess tax benefits from exercise and vesting of stock-based compensation	(1,490		)	(3,762		)	(1,137		)	(584		)
Deferred taxes	(2,274		)	86			558			(886		)
Loss on sale of business	1,976			—
Impairment of capitalized software development costs	—			775
Loss on debt extinguishment and termination of derivative instruments	—			996
Amortization of deferred financing costs and discount	660			524			239			210
Other non-cash adjustments	(159		)	1,672			(217		)	524
Changes in operating assets and liabilities, net of acquisition of businesses:
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable	(6,378		)	(1,261		)	817			555
Prepaid expenses and other assets	(324		)	(255		)	1,846			3,633
Trade accounts payable	3,284			939			139			(111		)
Accrued expenses and other liabilities	(9,027		)	2,902			(24,795		)	(18,768		)
Donor restricted cash	76,091			57,059
Donations payable	(76,091		)	(57,059		)
Restricted cash due to customers							141,055			82,140
Due to customers							(141,055		)	(82,140		)
Deferred revenue	15,973			10,487			(8,883		)	(4,765		)
Net cash provided by operating activities	85,291			85,492			104			4,231
Cash flows from investing activities
Purchase of property and equipment	(14,560		)	(8,317		)	(7,837		)	(2,521		)
Capitalized software development costs	(10,868		)	(6,287		)	(5,798		)	(3,129		)
Purchase of net assets of acquired companies, net of cash acquired	(520		)	(33,275		)
Net cash used in sale of business	(521		)	—
Net cash used in investing activities	(26,469		)	(47,879		)	(13,635		)	(5,650		)
Cash flows from financing activities
Proceeds from issuance of debt	83,600			201,000			74,600			41,800
Payments on debt	(122,581		)	(181,095		)	(60,494		)	(36,694		)
Debt issuance costs	(429		)	(2,484		)
Proceeds from exercise of stock options	23			182			3			11
Excess tax benefits from exercise and vesting of stock-based compensation	1,490			3,762			1,137			584
Dividend payments to stockholders	(16,883		)	(16,631		)	(5,700		)	(5,626		)
Net cash (used in) provided by financing activities	(54,780		)	4,734
Net cash provided by financing activities							9,546			75
Effect of exchange rate on cash and cash equivalents	(1,222		)	(276		)	707			(105		)
Net increase in cash and cash equivalents	2,820			42,071
Net decrease in cash and cash equivalents							(3,278		)	(1,449		)
Cash and cash equivalents, beginning of period	14,735			11,889			15,362			14,735
Cash and cash equivalents, end of period	$	17,555		$	53,960		$	12,084		$	13,286

The accompanying notes are an integral part of these consolidated financial statements.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		5

~~Blackbaud, Inc.~~

~~Consolidated statements of stockholders' equity~~

~~(Unaudited)~~


(in thousands, except share amounts)	Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive loss			Retained earnings			Total stockholders' equity
	Shares		Amount
Balance at December 31, 2013	55,699,817		$	56	$	220,763	$	(183,288	)	$	(1,385	)	$	125,398		$	161,544
Blackbaud, Inc. Consolidated statements of stockholders' equity (Unaudited)																			Blackbaud, Inc. Consolidated statements of stockholders' equity (Unaudited)
(dollars in thousands)																			Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive loss			Retained earnings			Total stockholders' equity
																			Shares		Amount
Balance at December 31, 2014																			56,048,135		$	56	$	245,674	$	(190,440	)	$	(1,032	)	$	131,658		$	185,916
Net income	—		—		—		—			—			28,290			28,290			—		—		—		—			—			25,649			25,649
Payment of dividends	—		—		—		—			—			(22,107		)	(22,107		)	—		—		—		—			—			(22,508		)	(22,508		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	186,473		—		188		—			—			—			188			202,078		—		32		—			—			—			32
Surrender of 166,952 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights	—		—		—		(7,152		)	—			—			(7,152		)
Surrender of 163,017 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights																			—		—		—		(9,421		)	—			—			(9,421		)
Excess tax benefits from exercise and vesting of stock-based compensation	—		—		7,455		—			—			—			7,455			—		—		5,466		—			—			—			5,466
Stock-based compensation	—		—		17,268		—			—			77			17,345			—		—		25,168		—			—			78			25,246
Restricted stock grants	248,567		—		—		—			—			—			—			736,252		1		—		—			—			—			1
Restricted stock cancellations	(86,722	)	—		—		—			—			—			—			(112,648	)	—		—		—			—			—			—
Other comprehensive income (loss)	—		—		—		—			353			—			353
Balance at December 31, 2014	56,048,135		$	56	$	245,674	$	(190,440	)	$	(1,032	)	$	131,658		$	185,916
Other comprehensive income																			—		—		—		—			207			—			207
Balance at December 31, 2015																			56,873,817		$	57	$	276,340	$	(199,861	)	$	(825	)	$	134,877		$	210,588
Net income	—		—		—		—			—			19,238			19,238			—		—		—		—			—			4,995			4,995
Payment of dividends	—		—		—		—			—			(16,883		)	(16,883		)	—		—		—		—			—			(5,700		)	(5,700		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	119,575		—		23		—			—			—			23			144,941		—		3		—			—			—			3
Surrender of 56,252 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights	—		—		—		(2,728		)	—			—			(2,728		)
Surrender of 104,644 shares upon vesting of restricted stock and restricted stock units and exercise of stock appreciation rights																			—		—		—		(5,516		)	—			—			(5,516		)
Excess tax benefits from exercise and vesting of stock-based compensation	—		—		1,490		—			—			—			1,490			—		—		1,137		—			—			—			1,137
Stock-based compensation	—		—		17,837		—			—			62			17,899			—		—		7,896		—			—			20			7,916
Restricted stock grants	609,435		1		—		—			—			—			1			497,456		—		—		—			—			—			—
Restricted stock cancellations	(83,360	)	—		—		—			—			—			—			(19,655	)	—		—		—			—			—			—
Other comprehensive income (loss)	—		—		—		—			(988		)	—			(988		)
Balance at September 30, 2015	56,693,785		$	57	$	265,024	$	(193,168	)	$	(2,020	)	$	134,075		$	203,968
Other comprehensive loss																			—		—		—		—			(266		)	—			(266		)
Balance at March 31, 2016																			57,496,559		$	57	$	285,376	$	(205,377	)	$	(1,091	)	$	134,192		$	213,157

The accompanying notes are an integral part of these consolidated financial statements.



6		Third Quarter 2015 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements

(Unaudited)

1. Organization

We are a leading provider of software and services for the worldwide philanthropic community. We offer a full spectrum of cloud-based and ~~on-premise~~on-premises solutions, as well as a resource network that empowers and connects organizations of all sizes. Our portfolio of software and services ~~support~~supports nonprofit fundraising and relationship management, ~~eMarketing,~~digital marketing, advocacy, accounting, payments and analytics, as well as grant management, corporate social responsibility, and education. As of ~~September 30, 2015,~~March 31, 2016, we had ~~more than 30,000~~approximately 35,000 active ~~clients~~customers including nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations and other charitable giving entities, and corporations.

2. ~~Summary of significant accounting policies~~

2. Summary of Significant Accounting Policies

Unaudited interim consolidated financial statements

The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("GAAP"). The consolidated balance sheet at December 31, ~~2014,~~2015, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2015,~~2016, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2014,~~2015, and other forms filed with the SEC from time to time.

Reclassifications

In order to provide comparability between periods presented, ~~"license fees"~~"interest income", "loss on sale of business", "loss on debt extinguishment and termination of derivative instruments" and "other ~~revenue"~~income (expense), net" have been combined within ~~"license fees and other"~~"other expense, net" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period. Similarly, "cost of license fees" and "cost of other revenue" have been combined within "cost of license fees and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period.

Reclassifications were also made to prior period segment disclosures to reflect a change in reportable segments including the reassignment of goodwill from a former reportable segment to our remaining reportable segments. See Note ~~6 and Note 14~~7 to these consolidated financial statements for additional ~~discussion.~~details.

Basis of consolidation

The consolidated financial statements include the accounts of Blackbaud, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.



~~Third Quarter 2015 Form 10-Q~~		7

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets including goodwill, stock-based compensation, the provision for income taxes, deferred taxes, capitalization of software development costs and related amortization, our allowances for sales returns and doubtful accounts, deferred sales commissions and professional services costs, valuation of derivative instruments, accounting for business combinations and loss contingencies. Changes in the facts or



First Quarter 2016 Form 10-Q		7

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.

Revenue recognition

Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud-based and hosted environments; (ii) providing software maintenance and support services; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; (iv) providing transaction and payment processing services; and (v) selling perpetual licenses of our software solutions.

We recognize revenue when all of the following conditions are met:

•Persuasive evidence of an arrangement exists;

•The solutions or services have been delivered;

•The fee is fixed or determinable; and

•Collection of the resulting receivable is probable.

Determining whether and when these criteria have been met can require significant judgment and estimates. We deem acceptance of a contract to be evidence of an arrangement. Delivery of our services occurs when the services have been performed. Delivery of our solutions occurs when the solution is shipped or transmitted, and title and risk of loss have transferred to the ~~clients.~~customers. Our typical arrangements do not include ~~client~~customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the ~~client~~customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection. Revenue is recognized net of actual and estimated sales returns and allowances.

We follow guidance provided in ASC 605-45, Principal Agent Considerations, which states that determining whether a company should recognize revenue based on the gross amount billed to a ~~client~~customer or the net amount retained is a matter of judgment that depends on the facts and circumstances of the arrangement and that certain factors should be considered in the evaluation.

Subscriptions

We ~~make certain of our software~~provide cloud-based subscription solutions to customers which are available for use in hosted application arrangements without licensing perpetual rights to the software (“hosted applications”). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation or set-up fees is deferred and recognized ratably over the estimated period that the ~~client~~customer benefits from the related hosted application. Direct and incremental costs related to upfront activation or set-up activities for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed ratably over the estimated period that the ~~client~~customer benefits from the related hosted application.



8		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

We provide hosting services to ~~clients~~customers who have purchased perpetual rights to certain of our software solutions (“hosting services”). Revenue from hosting services, online training programs as well as subscription-based analytic services such as data enrichment and data management services, is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the ~~client~~customer benefits from the related hosting service. The estimated period of benefit is evaluated on an annual basis using historical ~~client~~customer retention information by solution or service.

For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (“VSOE”) of fair value if available; (ii) ~~third-party~~third-



8		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

party evidence (“TPE”) if VSOE is not available; and (iii) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.

We offer certain payment processing services with the assistance of third-party vendors. In general, when we are the principal in a transaction based on the predominant weighting of factors identified in ASC 605-45, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross amount billed to the ~~client~~customer and record the net amount as revenue.

Revenue from transaction processing services is recognized when the service is provided and the amounts are determinable. Revenue directly associated with processing donations for ~~clients~~customers are included in subscriptions revenue.

Maintenance

We recognize revenue from maintenance services ratably over the term of the arrangement, generally ~~three years~~one year at contract inception with ~~one year~~ annual renewals thereafter. Maintenance contracts are at rates that vary according to the level of the maintenance program associated with the software solution and are generally renewable annually. Maintenance contracts may also include the right to unspecified solution upgrades on an if-and-when available basis. Certain incremental support services are sold in prepaid units of time and recognized as revenue upon their usage.

Services

We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are delivered.

We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide ~~clients~~customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.

We sell fixed-rate programs, which permit ~~clients~~customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue in those cases is recognized ratably over the contract period. Additionally, we sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the ~~client~~customer attending and completing training.



~~Third Quarter 2015 Form 10-Q~~		9

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

License fees

We sell perpetual software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to each of the elements in these arrangements using the residual method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on VSOE of fair value of the various elements. We determine VSOE of fair value of the various elements using different methods. VSOE of fair value for maintenance services associated with software licenses is based upon renewal rates stated in the arrangements with ~~clients,~~customers, which demonstrate a consistent relationship of maintenance pricing as a percentage of the contractual license fee. VSOE of fair value of professional services and other solutions and services is based on the average selling price of these same solutions and services to other ~~clients~~customers when sold on a stand-alone basis. Any remaining revenue is allocated to the delivered elements, which is normally the software license in the arrangement. In general, revenue is recognized for software licenses upon delivery to our ~~clients.~~customers.

When a software license is sold with software customization services, generally the services are to provide the ~~client~~customer assistance in creating special reports and other enhancements that will improve operational efficiency and/or help to support business process improvements. These services are generally not essential to the functionality of the software and the related revenues are recognized either as the services are delivered or upon completion. However, when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services using the percentage-of-completion method.



First Quarter 2016 Form 10-Q		9

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

Deferred revenue

To the extent that our ~~clients~~customers are billed for the above described solutions and services in advance of delivery, we record such amounts in deferred revenue. For example, our subscription and maintenance ~~clients~~customers are generally billed one year in advance.

Fair value measurements

We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. An active market is defined as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - Quoted prices for identical assets or liabilities in active markets;

Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial asset's or liability's level within the fair value hierarchy are determined as of the end of a reporting period. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.



10		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

Earnings per share

We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units.

Recently ~~issued~~adopted accounting pronouncements

In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 requires for acquirers in business combinations to recognize adjustments to provisional amounts identified during measurement periods in the reporting periods in which adjusted amounts are determined. The update requires that acquirers record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, resulting from changes in provisional amounts, calculated as if the accounting had been completed at acquisition date. The update also requires separate income statement presentation or note disclosure of amounts recorded in current period earnings by line item that would have been recorded in previous reporting periods if the provisional amount adjustments had been recognized at the acquisition date (requirements to retrospectively account for those adjustments have been eliminated). The guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after its effective date, with earlier application permitted for financial statements that have not been issued. We ~~will adopt~~adopted ASU 2015-16 on January 1, ~~2016 and apply this guidance where applicable in any future business combinations.~~2016. See Note 3 to these consolidated financial statements for details of the immaterial measurement period adjustment recorded during the three months ended March 31, 2016.



10		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05). The amendments in this update provide guidance to ~~clients~~customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that the ~~client~~customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the ~~client~~customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. ~~ASU 2015-05 will be effective for the Company in fiscal year 2016. Early adoption is permitted.~~ An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. We ~~will adopt~~adopted ASU 2015-05 on January 1, 2016 on a prospective basis and doit did not ~~expect that the implementation of this standard will~~ have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 sets forth a requirement that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the amendments in this update. ~~ASU 2015-03 will be effective for the Company in fiscal year 2016. Early adoption is permitted.~~ An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. We adopted ASU 2015-03 on January 1, 2016 and retrospectively restated other non-current assets and debt, net of current portion, which had the effect of reducing each of those respective line items in our December 31, 2015 consolidated balance sheet by approximately $0.5 million.

Recently issued accounting pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 updates the accounting for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. The guidance also updates an employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted but all of the guidance must be adopted in the same period. We expect ASU 2016-09 will impact our consolidated balance sheets, statements of comprehensive income and cash flows, and we are currently ~~considering early adoption~~evaluating the extent of ~~ASU 2015-03 and do not expect~~the impact that ~~the~~ implementation of this standard will have on adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 will require lessees to record most leases on their balance sheets but recognize expenses in the income statement in a ~~material~~manner similar to current guidance. The updated guidance also eliminates certain real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Upon adoption, entities will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. We expect ASU 2016-02 will impact on our ~~consolidated balance sheets.~~



~~Third Quarter 2015 Form 10-Q~~		11

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to~~ consolidated financial statements ~~(continued)~~and are currently evaluating the extent of the impact that implementation of this standard will have on adoption.

~~(Unaudited)~~

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016. An entity should apply ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized as an adjustment to the opening balance of retained earnings at the date of initial application. In July, 2015, the FASB decided to delay the effective date of the new standard for one year. The new standard now requires application no later than annual reporting periods beginning after December 15, 2017, including interim reporting periods therein; however, public entities are permitted to elect to early adopt the new standard as of the original effective date. In March 2016, the FASB finalized amendments to the guidance in the new standard to clarify whether an entity is a principal or an agent in a revenue transaction. In April 2016, the FASB finalized additional amendments to the



First Quarter 2016 Form 10-Q		11

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

guidance in the new standard to clarify the accounting for licenses of intellectual property and identifying performance obligations. We expect the adoption of ASU 2014-09 will impact our consolidated financial statements. We are currently evaluating implementation methods and the extent of the impact that implementation of this standard will have upon adoption.

3. ~~Business combinations~~

~~2014~~

3. Business Combinations

2015 Acquisitions

~~MicroEdge~~Smart Tuition

On October ~~1, 2014,~~2, 2015, we completed our acquisition of all of the outstanding equity, including all voting equity interests, of ~~MicroEdge Holdings,~~Smart, LLC (“~~MicroEdge”~~Smart Tuition”). ~~MicroEdge~~Smart Tuition is a leading provider of payment software ~~solutions that enable the worldwide giving community to organize, simplify~~ and ~~measure their acts of charitable giving.~~services for private schools and parents. The acquisition of ~~MicroEdge~~Smart Tuition further expanded our offerings in the ~~philanthropic giving sector with its comprehensive solutions for grant-making, corporate social responsibility and foundation management.~~K-12 technology sector. We acquired ~~MicroEdge~~Smart Tuition for ~~an aggregate purchase price of $159.8~~$187.3 million in ~~cash.~~cash, net of closing adjustments including an adjustment of approximately $0.5 million during the three months ended March 31, 2016 which reduced our net cash outlay. On October 2, 2015, we drew down a $186.0 million revolving credit loan under our 2014 Credit Facility (as defined in Note 8 below) to finance the acquisition of Smart Tuition. As a result of the acquisition, ~~MicroEdge~~Smart Tuition has become a wholly-owned subsidiary of ours. ~~The~~We included the operating results of ~~MicroEdge have been~~Smart Tuition as well as goodwill arising from the acquisition in our consolidated financial statements within the General Markets Business Unit ("GMBU") from the date of acquisition. For the three months ended March 31, 2016, Smart Tuition's total revenue and operating income included in our consolidated financial statements was $9.2 million and $1.2 million, respectively.

The preliminary purchase price allocation is based upon a preliminary valuation of assets and liabilities and the estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the ~~date~~acquisition date. The assets and liabilities pending finalization include the valuation of ~~acquisition within~~acquired intangible assets, the ~~Enterprise Customer Business Unit. For~~assumed deferred revenue and deferred taxes. Differences between the ~~three~~preliminary and ~~nine months ended September 30, 2015, MicroEdge's total revenue was $8.3 million~~final valuation could have a material impact on our future results of operations and $22.2 million, respectively. Because we have integrated a substantial amount of MicroEdge's operations into ours, it is impracticable to determine the operating costs attributable solely to the acquired business. We financed the acquisition of MicroEdge through cash on hand and borrowings of $140.0 million under our existing credit facility.

financial position. The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:


(in thousands)
(dollars in thousands)				Purchase Price Allocation
Net working capital, excluding deferred revenue	$	9,442		$	510
Property and equipment	1,371			2,457
Other long-term assets	992
Deferred revenue	(11,670		)	(6,500		)
Deferred tax liability	(4,509		)
Deferred tax asset				2,637
Intangible assets	90,200			97,800
Goodwill	73,960			90,068
Total purchase price	$	159,786
Total purchase price⁽¹⁾				$	186,972

(1) The purchase price differs from the net cash outlay of $187.3 million due to certain insignificant acquisition-related expenses included therein.

The estimated fair value of accounts receivable acquired approximates the contractual value of $2.9 million. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of Smart Tuition, all of which was assigned to our GMBU reporting segment. Approximately $86.0 million of the goodwill arising in the acquisition is deductible for income tax purposes.



12		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

The estimated fair value of accounts receivable acquired approximates the contractual value of $6.3 million. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of MicroEdge, all of which was assigned to our Enterprise Customer Business Unit reporting segment. Approximately $37.4 million of the goodwill arising in the acquisition is deductible for income tax purposes. We finalized the purchase price allocation for MicroEdge, including the valuation of assets acquired and liabilities assumed, during the third quarter of 2015. No measurement period adjustments were made for this acquisition during the three months ended September 30, 2015. During the nine months ended September 30, 2015, we recorded a measurement period adjustment to the estimated fair value of the deferred tax liability following the receipt of new information. The adjustment resulted in a decrease in the deferred tax liability of $1.6 million, with the corresponding offset to goodwill. No historical financial information was retrospectively revised as the measurement period adjustment was not material.

The ~~MicroEdge~~Smart Tuition acquisition resulted in the identification of the following identifiable intangible assets:


	Intangible assets acquired		Weighted average amortization period	Intangible assets acquired		Weighted average amortization period
MicroEdge	(in thousands)		(in years)
				(in thousands)		(in years)
Customer relationships	$	61,200	13	$	72,300	17
Marketing assets	2,500		7
Marketing assets	1,600		Indefinite	1,200		3
Acquired technology	24,300		7	22,100		7
Non-compete agreements	600		3	2,200		5
Total intangible assets	$	90,200	11	$	97,800	14

The estimated fair values of the finite-lived intangible assets were based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate which included the relief-from-royalty method, incremental cash flow method ~~excess earnings method, as well as~~including the with and without method and excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships and acquired technology are being amortized on an accelerated ~~basis. Marketing~~basis while marketing assets ~~certain of the acquired technology~~ and non-compete agreements are being amortized on a straight-line ~~basis. Certain of the acquired technology is also being amortized on an accelerated~~ basis.

The following unaudited pro forma condensed combined consolidated results of operations assume that the acquisition of ~~MicroEdge~~Smart Tuition occurred on January 1, ~~2013.~~2014. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, ~~2013,~~2014, or of the results that may occur in the future. The unaudited pro forma information reflects adjustments for amortization of intangibles related to the fair value adjustments of the assets acquired, write-down of acquired deferred revenue to fair value, additional interest expense related to the financing of the transaction and the related tax effects of the adjustments.


	Three months ended September 30,		Nine months ended September 30,		Three months ended March 31,
(in thousands, except per share amounts)	2014		2014
(dollars in thousands, except per share amounts)					2015
Revenue	$	151,681	$	429,271	$	155,812
Net income	10,219		19,722		$	4,439
Basic earnings per share	$	0.23	$	0.44	$	0.10
Diluted earnings per share	$	0.22	$	0.43	$	0.10



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		13

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

~~WhippleHill~~

On June 16, 2014, we acquired all of the outstanding stock of WhippleHill Communications, Inc. (“WhippleHill”), a privately held company based in New Hampshire, for $35.0 million in cash. WhippleHill is a provider of cloud-based solutions designed exclusively to serve K-12 private schools. The acquisition of WhippleHill expanded our offerings in the K-12 technology sector. The operating results of WhippleHill have been included in our consolidated financial statements from the date of acquisition. Because we have integrated WhippleHill's operations into ours, including our historical K-12 solutions, it is impracticable to determine the revenue and operating costs attributable solely to the acquired business.

We recorded $22.2 million of finite-lived intangible assets, $9.3 million of goodwill (all of which is deductible for income tax purposes) and $3.5 million of net tangible assets acquired and liabilities assumed associated with the WhippleHill acquisition based on our determination of estimated fair values. Included in net tangible assets acquired and liabilities assumed was $4.6 million of acquired accounts receivable, for which fair value was estimated to approximate the contractual value. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of WhippleHill, all of which was assigned to our General Markets Business Unit reporting segment. We finalized the purchase price allocation for WhippleHill, including the valuation of assets acquired and liabilities assumed, during the second quarter of 2015.

~~The WhippleHill acquisition resulted in the identification of the following identifiable finite-lived intangible assets:~~

Intangible assets acquired
Weighted average amortization period
WhippleHill (in thousands)
(in years)
Customer relationships $ 11,300
11
Acquired technology 8,500
7
Marketing assets 2,300
9
Non-compete agreements 100
3
Total intangible assets $ 22,200
9

The estimated fair values of the finite-lived intangible assets were based on variations of the income approach which estimates fair value based upon the present value of cash flows that the assets are expected to generate and which included the relief-from-royalty method, incremental cash flow method, excess earnings method, as well as the with and without method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships are being amortized on an accelerated basis. Acquired technology, trade names and non-compete agreements are being amortized on a straight-line basis.

~~We determined that the WhippleHill acquisition was a non-material business combination. As such, pro forma disclosures are not required and are not presented.~~



14		~~Third Quarter 2015 Form 10-Q~~4. Earnings Per Share

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

4. ~~Earnings per share~~

The following table sets forth the computation of basic and diluted earnings per share:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(in thousands, except share and per share amounts)	2015		2014		2015		2014
(dollars in thousands, except per share amounts)									2016		2015
Numerator:
Net income	$	7,911	$	10,380	$	19,238	$	23,474	$	4,995	$	4,285
Denominator:
Weighted average common shares	45,616,832		45,196,277		45,576,029		45,160,434		45,967,863		45,529,668
Add effect of dilutive securities:
Stock-based compensation	979,882		687,293		827,167		543,723		789,595		638,428
Weighted average common shares assuming dilution	46,596,714		45,883,570		46,403,196		45,704,157		46,757,458		46,168,096
Earnings per share:
Basic	$	0.17	$	0.23	$	0.42	$	0.52	$	0.11	$	0.09
Diluted	$	0.17	$	0.23	$	0.41	$	0.51	$	0.11	$	0.09

The following shares underlying stock-based awards were not included in diluted earnings per share because their inclusion would have been anti-dilutive:

Three months ended
September 30, Nine months ended
September 30,

2015
2014
2015
2014
Shares excluded from calculations of diluted earnings per share 9,765
—
18,658
347,178



	Three months ended March 31,
	2016	2015
Shares excluded from calculations of diluted earnings per share	55,844	18,575



14		First Quarter 2016 Form 10-Q

5. ~~Fair value measurements~~

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

5. Fair Value Measurements

Recurring fair value measurements

Financial assets and liabilities measured at fair value on a recurring basis consisted of the following, as of:


	Fair value measurement using								Fair value measurement using
(in thousands)	Level 1		Level 2		Level 3		Total
Fair value as of September 30, 2015
(dollars in thousands)									Level 1		Level 2		Level 3		Total
Fair value as of March 31, 2016
Financial liabilities:
Derivative instruments⁽¹⁾	$	—	$	1,312	$	—	$	1,312	$	—	$	1,135	$	—	$	1,135
Total financial liabilities	$	—	$	1,312	$	—	$	1,312	$	—	$	1,135	$	—	$	1,135

Fair value as of December 31, 2014
Fair value as of December 31, 2015
Financial assets:
Derivative instruments⁽¹⁾									$	—	$	406	$	—	$	406
Total financial assets									$	—	$	406	$	—	$	406

Fair value as of December 31, 2015
Financial liabilities:
Derivative instruments⁽¹⁾	$	—	$	268	$	—	$	268	$	—	$	438	$	—	$	438
Total financial liabilities	$	—	$	268	$	—	$	268	$	—	$	438	$	—	$	438


(1)	The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy.



~~Third Quarter 2015 Form 10-Q~~		15

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

We believe the carrying amounts of our cash and cash equivalents, ~~donor~~ restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and ~~donations payable~~due to customers approximate their fair values at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, due to the immediate or short-term maturity of these instruments.

We believe the carrying amount of our debt approximates its fair value at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.

Non-recurring fair value measurements

Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, were based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of the goodwill and intangible assets using a discounted cash flow approach, which contains significant unobservable inputs and therefore is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.

There were no non-recurring fair value adjustments ~~recorded~~ to intangible assets and goodwill during the three months ended ~~September 30, 2015. There were no non-recurring fair value adjustments to intangible assets and goodwill during the nine months ended September 30, 2015,~~March 31, 2016, except ~~for certain fair value measurements to reassign goodwill from the change in reportable segments beginning in March 2015 (as disclosed in Note 6 to these consolidated financial statements) as well as~~ for certain insignificant business combination accounting adjustments to the initial fair value estimates of the ~~MicroEdge~~Smart Tuition assets acquired and liabilities assumed at the acquisition date (as disclosed in Note 3 to these consolidated financial statements) from updated estimates and assumptions during the measurement period. The measurement period may be up to one year from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.



First Quarter 2016 Form 10-Q		15

6. ~~Goodwill and other intangible assets~~

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

6. Goodwill and Other Intangible Assets

The change in goodwill for each reportable segment (as defined in Note ~~14)~~14 below) during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, consisted of the following:

(in thousands) ECBU GMBU IBU
Other⁽¹⁾
Total
Balance at December 31, 2014 $ 240,621
$ 99,806
$ 6,485
$ 2,096
$ 349,008
Additions related to business combinations⁽²⁾
—
—
115
—
115
Adjustments related to prior year business combinations⁽³⁾
(1,581 ) —
—
—
(1,581 )
Adjustments related to dispositions⁽⁴⁾
—
—
(1,153 ) —
(1,153 )
Effect of foreign currency translation⁽⁵⁾
—
—
(619 ) —
(619 )
Balance at September 30, 2015 $ 239,040
$ 99,806
$ 4,828
$ 2,096
$ 345,770



(dollars in thousands)	ECBU		GMBU			IBU		Total
Balance at December 31, 2015	$	240,494	$	190,976		$	4,979	$	436,449
Adjustments related to prior year business combinations⁽¹⁾	—		(490		)	—		(490		)
Effect of foreign currency translation	—		—			35		35
Balance at March 31, 2016	$	240,494	$	190,486		$	5,014	$	435,994


(1)	~~Other includes goodwill not assigned to one of our three reportable segments.~~


~~(2)~~	~~Represents goodwill related to an immaterial business combination completed during the three months ended September 30, 2015.~~


~~(3)~~	See Note 3 to these consolidated financial statements for details of the immaterial measurement period adjustment.


~~(4)~~	~~See~~ ~~Note 15~~ ~~to these consolidated financial statements for a summary of the disposition.~~


~~(5)~~	~~Includes an insignificant reduction in goodwill related to the disposition discussed in (4) above.~~



16		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

As a result of the change in our reportable segments effective beginning in March 2015, $33.2 million of goodwill that had been attributed to the former Target Analytics segment as of December 31, 2014 was reassigned. Of that amount $17.3 million, $15.6 million and $0.3 million was reassigned to ECBU, GMBU and IBU, respectively, based on their relative fair values. The reassignment of goodwill is reflected in the goodwill balances as of September 30, 2015 and December 31, 2014. In connection with the change in reportable segments, goodwill allocated to the ECBU, GMBU and IBU reporting units was reviewed under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance. Under the first step of the authoritative guidance for impairment testing, the fair value of the reporting units was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Based on the first step of the analysis, we determined the fair value of each reporting unit was significantly above its respective carrying amount. As such, we were not required to perform step two of the analysis for the purposes of determining the amount of any impairment loss and no impairment charge was recorded as a result of the interim period impairment test performed during the three months ended March 31, 2015.

Amortization expense

Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes, except for marketing assets and non-compete agreements, for which the associated amortization expense is included in operating expenses.

The following table summarizes amortization expense:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(in thousands)	2015		2014		2015		2014
(dollars in thousands)									2016		2015
Included in cost of revenue:
Cost of subscriptions	$	5,761	$	4,721	$	17,300	$	13,715	$	7,811	$	5,772
Cost of maintenance	1,000		114		3,160		344		1,332		1,153
Cost of services	698		768		2,007		2,100		653		607
Cost of license fees and other	86		107		283		318		85		107
Total included in cost of revenue	7,545		5,710		22,750		16,477		9,881		7,639
Included in operating expenses	524		624		1,536		1,629		752		488
Total amortization of intangibles from business combinations	$	8,069	$	6,334	$	24,286	$	18,106	$	10,633	$	8,127

The following table outlines the estimated future amortization expense for each of the next five years for our finite-lived intangible assets as of ~~September 30, 2015:~~March 31, 2016:


Year ending December 31,	Amortization
(in thousands)	expense
2015 - remaining	$	8,069
2016	34,821
(dollars in thousands) Years ending December 31,			Amortization expense
2016 - remaining			$	31,615
2017	32,272		41,419
2018	30,168		39,783
2019	27,114		36,475
2020			27,699
Total	$	132,444	$	176,991



~~Third Quarter 2015 Form 10-Q~~16		17First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

7. ~~Consolidated financial statement details~~

7. Consolidated Financial Statement Details

Prepaid expenses and other assets


(in thousands)	September 30, 2015		December 31, 2014
(dollars in thousands)					March 31, 2016		December 31, 2015
Deferred sales commissions	$	26,801	$	22,630	$	29,938	$	30,141
Software development costs, net	16,480		8,914
Prepaid software maintenance	12,427		9,480		14,443		15,308
Deferred professional services costs	4,186		5,753		3,060		3,603
Taxes, prepaid and receivable	1,195		8,991		8,439		9,121
Deferred tax asset					3,325		2,869
Prepaid royalties	1,840		3,192		1,471		1,767
Other assets	11,928		8,116		7,966		6,758
Total prepaid expenses and other assets	74,857		67,076		68,642		69,567
Less: Long-term portion	35,300		26,684		20,207		20,901
Prepaid expenses and other current assets	$	39,557	$	40,392	$	48,435	$	48,666

Accrued expenses and other liabilities


(in thousands)	September 30, 2015		December 31, 2014
(dollars in thousands)					March 31, 2016		December 31, 2015
Accrued bonuses	$	18,229	$	19,480	$	8,221	$	24,591
Accrued commissions and salaries	5,091		8,712		4,760		8,391
Taxes payable	3,824		4,285		3,502		3,923
Deferred rent liabilities	4,001		4,200		3,905		4,070
Lease incentive obligations	3,637		4,099		4,514		4,734
Unrecognized tax benefit	2,856		3,791		3,197		3,147
Customer credit balances	2,843		2,573		3,298		3,515
Accrued vacation costs					2,221		2,446
Accrued health care costs	2,802		2,707		3,491		2,356
Other liabilities	9,318		9,791		8,468		7,911
Total accrued expenses and other liabilities	52,601		59,638		45,577		65,084
Less: Long-term portion	7,025		7,437		8,000		7,623
Accrued expenses and other current liabilities	$	45,576	$	52,201	$	37,577	$	57,461

Deferred revenue


(in thousands)	September 30, 2015		December 31, 2014
(dollars in thousands)					March 31, 2016		December 31, 2015
Subscriptions	$	110,582	$	98,225	$	122,238	$	122,524
Maintenance	91,297		92,823		78,204		85,901
Services	30,236		29,457		27,866		28,517
License fees and other	2,415		769		690		393
Total deferred revenue	234,530		221,274		228,998		237,335
Less: Long-term portion	7,369		8,991		6,583		7,119
Deferred revenue, current portion	$	227,161	$	212,283	$	222,415	$	230,216



18First Quarter 2016 Form 10-Q		~~Third Quarter 2015 Form 10-Q~~17

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

8. ~~Debt~~Other expense, net



	Three months ended March 31,
(dollars in thousands)	2016			2015
Interest income	$	121		$	8
Other expense, net	(226		)	(295		)
Other expense, net	$	(105	)	$	(287	)

8. Debt

The following table summarizes our debt balances and the related weighted average effective interest rates, which includes the effect of interest rate swap agreements.


	Debt balance at				Weighted average effective interest rate at				Debt balance at				Weighted average effective interest rate at
(in thousands, except percentages)	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
(dollars in thousands)									March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
Credit facility:
Revolving credit loans	$	75,000	$	110,700	2.61	%	1.56	%	$	258,100	$	242,900	2.16	%	2.15	%
Term loans	168,437		171,719		2.44	%	2.03	%	166,250		167,344		2.52	%	2.51	%
Total debt	243,437		282,419		2.49	%	1.85	%	424,350		410,244		2.30	%	2.30	%
Less: Unamortized debt discount	1,769		1,848						1,986		2,157
Less: Debt, current portion	4,375		4,375		1.83	%	1.39	%	4,375		4,375		2.13	%	2.11	%
Debt, net of current portion	$	237,293	$	276,196	2.50	%	1.85	%	$	417,989	$	403,712	2.31	%	2.30	%

We were previously party to a $325.0 million five-year credit facility entered into during February 2012. The credit facility included: a dollar and a designated currency revolving credit facility with sublimits for lettersSummary of ~~credit and swingline loans (the “2012 Revolving Facility”) and a delayed draw term loan (the “2012 Term Loan”) together, (the “2012~~the 2014 Credit ~~Facility”).~~

~~2014 refinancing~~Facility

In February 2014, we entered into a five-year $325.0 million credit facility (the “2014 Credit Facility”) and drew $175.0 million on a term loan upon closing, which was used to repay all amounts outstanding under the 2012 Credit Facility.

The 2014 Credit Facility includes the following facilities: (i) a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans (the “2014 Revolving Facility”) and (ii) a term loan facility (the “2014 Term Loan”).

Certain lenders of the 2012 Term Loan participated in the 2014 Term Loan and the change in the present value of our future cash flows to these lenders under the 2012 Term Loan and under the 2014 Term Loan was less than 10%. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2012 Term Loan did not participate in the 2014 Term Loan. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2012 Revolving Facility participated in the 2014 Revolving Facility and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2012 Revolving Facility did not participate in the 2014 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.

We recorded a $0.4 million loss on debt extinguishment related to the write-off of deferred financing costs for the portions of the 2012 Credit Facility considered to be extinguished. This loss was recognized in the consolidated statements of comprehensive income within loss on debt extinguishment and termination of derivative instruments.

In connection with our entry into the 2014 Credit Facility, we paid $2.5 million in financing costs, of which $1.1 million were capitalized and, together with a portion of the unamortized deferred financing costs from ~~the 2012 Credit Facility and~~ prior facilities, are being amortized into interest expense over the term of the new facility using the effective interest method. As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, deferred financing costs totaling ~~$1.5~~$0.8 million and ~~$1.7~~$0.9 million, respectively, were included in other assets on the consolidated balance sheet.



~~Third Quarter 2015 Form 10-Q~~		19

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

~~Summary of the 2014 Credit Facility~~

The 2014 Credit Facility is secured by the stock and limited liability company interests of certain of our subsidiaries and is guaranteed by our material domestic subsidiaries.

Amounts borrowed under the dollar tranche revolving credit loans and term loan under the 2014 Credit Facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate, (ii) federal funds rate plus 0.50% and (iii) one month LIBOR plus 1.00% (the “Base Rate”), in addition to a margin of 0.00% to 0.50%, or (b) LIBOR rate plus a margin of 1.00% to 1.50%.

We also pay a quarterly commitment fee on the unused portion of the 2014 Revolving Facility from 0.15% to 0.225% per annum, depending on our net leverage ratio. At ~~September 30, 2015,~~March 31, 2016, the commitment fee was 0.225%.



18		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

The ~~term loan under the~~ 2014 ~~Credit Facility~~Term Loan requires periodic principal payments. The balance of the ~~term loan~~2014 Term Loan and any amounts drawn on the ~~revolving credit loans~~2014 Revolving Facility are due upon maturity of the 2014 Credit Facility in February 2019. We evaluate the classification of our debt as current or non-current based on the required annual maturities of the 2014 Credit Facility.

The 2014 Credit Facility includes financial covenants related to the net leverage ratio and interest coverage ratio, as well as restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At ~~September 30, 2015,~~March 31, 2016, we were in compliance with our debt covenants under the 2014 Credit Facility.

Financing for MicroEdge acquisition

The 2014 Credit Facility includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $200.0 million. On October 1, 2014, we exercised this option, and certain lenders agreed, to increase the revolving credit commitments by $100.0 million (the "October 2014 Additional Revolving Credit Commitments") such that for the period commencing October 1, 2014, the aggregate revolving credit commitments available were $250.0 million. The October 2014 Additional Revolving Credit Commitments have the same terms as the existing revolving credit commitments.

On October 1, 2014, we drew down $140.0 million in revolving credit commitments under the 2014 Credit Facility to finance the acquisition of MicroEdge.

~~2015 increase in revolving credit commitments~~Financing for Smart Tuition acquisition

On July 17, 2015, we again exercised this option and certain lenders agreed to increase the revolving credit commitments by an additional $100.0 million (the "July 2015 Additional Revolving Credit Commitments") such that ~~for the period~~ commencing July 17, 2015, the aggregate revolving credit commitments available were $350.0 million. The July 2015 Additional Revolving Credit Commitments have the same terms as the existing revolving credit commitments.

On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of Smart Tuition.

As of ~~September 30, 2015,~~March 31, 2016, the required annual maturities related to the 2014 Credit Facility were as follows:


Year ending December 31, (in thousands)	Annual maturities
2015 - remaining	$	1,094
2016	4,375
Years ending December 31, (dollars in thousands)			Annual maturities
2016 - remaining			$	3,281
2017	4,375		4,375
2018	4,375		4,375
2019	229,218		412,319
2020			—
Thereafter	—		—
Total required maturities	$	243,437	$	424,350



20		~~Third Quarter 2015 Form 10-Q~~9. Derivative Instruments

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

9. ~~Derivative instruments~~

We use derivative instruments to manage our variable interest rate risk. In February 2014, in connection with the refinancing of our debt, we terminated the two interest rate swap agreements associated with the 2012 Credit Facility. As part of the settlement of our swap liabilities, we recorded a loss of $0.6 million, which was recognized in the consolidated statements of comprehensive income within loss on debt extinguishment and termination of derivative instruments.

In March 2014, we entered into ~~a new~~an interest rate swap agreement (the "March 2014 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the swap agreement. The initial notional value of the March 2014 Swap Agreement was $125.0 million with an effective date beginning in March 2014. In March 2017, the notional value of the March 2014 Swap Agreement will decrease to $75.0 million for the remaining term through February 2018. We designated the March 2014 Swap Agreement as a cash flow hedge at the inception of the contract.



First Quarter 2016 Form 10-Q		19

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

In October 2014, we entered into an additional interest rate swap agreement (the “October 2014 Swap Agreement”), which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the swap agreement. The initial notional value of the October 2014 Swap Agreement was $75.0 million with an effective date beginning in October 2014. In September 2015, the notional value of the October 2014 Swap Agreement decreased to $50.0 million for the remaining term through June 2016. We designated the October 2014 Swap Agreement as a cash flow hedge at the inception of the contract.

In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the October 2015 Swap Agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 and maturing in February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.

The fair values of our derivative instruments were as follows as of:


(in thousands)	Balance sheet location	September 30, 2015		December 31, 2014
(dollars in thousands)						Balance sheet location	March 31, 2016		December 31, 2015
Derivative instruments designated as hedging instruments:
Interest rate swap, long-term portion						Other assets	$	—	$	406
Total derivative instruments designated as hedging instruments							$	—	$	406
							March 31, 2016		December 31, 2015
Derivative instruments designated as hedging instruments:
Interest rate swaps, current portion	Accrued expenses and other current liabilities	$	78	$	—	Accrued expenses and other current liabilities	$	15	$	2
Interest rate swaps, long-term portion	Other liabilities	1,234		268		Other liabilities	1,120		436
Total derivative instruments designated as hedging instruments		$	1,312	$	268		$	1,135	$	438

The effects of derivative instruments in cash flow hedging relationships were as follows:


	Gain (loss) recognized in accumulated other comprehensive loss as of			Location of gain (loss) reclassified from accumulated other comprehensive loss into income	Gain (loss) reclassified from accumulated other comprehensive loss into income						Gain (loss) recognized in accumulated other comprehensive loss as of			Location of gain (loss) reclassified from accumulated other comprehensive loss into income	Gain (loss) reclassified from accumulated other comprehensive loss into income
	September 30, 2015				Three months ended September 30,			Nine months ended September 30,
(in thousands)					2015		Location of gain (loss) reclassified from accumulated other comprehensive loss into income	2015
(dollars in thousands)										March 31, 2016			Location of gain (loss) reclassified from accumulated other comprehensive loss into income		Three months ended March 31, 2016
Interest rate swaps	$	(1,312	)	Interest expense	$	(373		$	(1,122	)	$	(1,135		)	$	(308	)

	September 30, 2014				Three months ended September 30,				Nine months ended September 30,			March 31, 2015				Three months ended March 31, 2015
					2014			2014
Interest rate swaps	$	214		Interest expense	$	(318	)	$	(848	)	$	(1,030	)	Interest expense	$	(375	)
Interest rate swaps	—			Loss on debt extinguishment and termination of derivative instruments	—			(587		)
Total	$	214			$	(318	)	$	(1,435	)



~~Third Quarter 2015 Form 10-Q~~		21

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive loss as of ~~September 30, 2015~~March 31, 2016 that is expected to be reclassified into earnings within the next twelve months is ~~$1.0~~$0.9 million. There were no ineffective portions of our interest rate swap derivatives during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 and ~~2014.~~2015. See Note 13 to these consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component.



20		First Quarter 2016 Form 10-Q

~~10.~~ ~~Commitments and contingencies~~

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

10. Commitments and Contingencies

Leases

We lease our headquarters facility under a 15-year lease agreement which was entered into in October 2008, and has two five-year renewal options. The current annual base rent of the lease is $5.0 million, payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year.

We have a lease for office space in Austin, Texas which terminates on September 30, 2023, and has two five-year renewal options. Under the terms of the lease, we will increase our leased space by approximately 20,000 square feet on July 31, 2016. The current annual base rent of the lease is $2.3 million. The base rent escalates annually between 2% and 4% based on the terms of the agreement. The rent expense is recorded on a straight-line basis over the length of the lease term. At ~~September 30, 2015,~~March 31, 2016, we had a standby letter of credit of $2.0 million for a security deposit for this lease.

We have provisions in our leases that entitle us to aggregate remaining leasehold improvement allowances of ~~$5.1~~$5.3 million. These amounts are being recorded as a reduction to rent expense ratably over the terms of the leases. The reductions in rent expense related to these lease provisions during the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014~~ were insignificant. ~~The reductions in rent expense related to these lease provisions during the nine months ended September 30, 2015 and 2014, were $0.6 million and $0.5 million, respectively.~~ The leasehold improvement allowances have been included in the table of operating lease commitments below as a reduction in our lease commitments ratably over the then remaining terms of the leases. The timing of the reimbursements for the actual leasehold improvements may vary from the amounts reflected in the table below.

We have also received, and expect to receive through 2016, quarterly South Carolina state incentive payments as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense upon receipt and were ~~$0.6~~$1.0 million and ~~$0.5~~$0.6 million for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and $1.8 million and $1.7 million for the nine months ended September 30, 2015 and 2014,~~ respectively.

Total rent expense was ~~$2.5~~$2.0 million and ~~$2.3~~$2.5 million for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and $7.4 million and $6.9 million for the nine months ended September 30, 2015 and 2014,~~ respectively.



22		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

As of ~~September 30, 2015,~~March 31, 2016, the future minimum lease commitments related to lease agreements, net of related lease incentives, were as follows:


Year ending December 31,	Operating
(in thousands)	leases
2015 – remaining	$	3,157
2016	13,015
Years ending December 31, (dollars in thousands)			Operating leases
2016 – remaining			$	10,320
2017	11,625		12,171
2018	11,464		11,935
2019	11,216		12,366
2020			11,637
Thereafter	38,561		32,076
Total minimum lease payments	$	89,038	$	90,505

Other commitments

As discussed in Note 8 to these consolidated financial statements, the term loans under the 2014 Credit Facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2014 Credit Facility in February 2019.

We utilize third-party technology in conjunction with our solutions and services, with contractual ~~arrangements~~obligations varying in length from one to ~~five~~four years. In certain cases, ~~these~~such arrangements require a minimum annual purchase commitment. As of ~~September 30, 2015,~~March 31, 2016, the remaining aggregate minimum purchase commitment under these arrangements was approximately ~~$6.7~~$15.5 million through ~~2018.~~2020.



First Quarter 2016 Form 10-Q		21

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

Product and service indemnifications

In the ordinary course of business, we provide certain indemnifications of varying scope to ~~clients~~customers against claims of intellectual property infringement made by third parties arising from the use of our ~~products~~solutions or services. If we determine that it is probable that a loss has been incurred related to ~~product~~solution or service indemnifications, any such loss that could be reasonably estimated would be recognized. We have not identified any losses and, accordingly, we have not recorded a liability related to these indemnifications.

Legal contingencies

We are subject to legal proceedings and claims that arise in the ordinary course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. As of ~~September 30, 2015,~~March 31, 2016, in our opinion, there was not at least a reasonable possibility that these actions arising in the ordinary course of business will have a material adverse effect upon our consolidated financial position, results of operations or cash flows and, therefore, no material loss contingencies were recorded.

~~11.~~ ~~Income taxes~~

11. Income Taxes

Our income tax provision and effective income tax rates including the effects of period-specific events, were:

Three months ended
September 30, Nine months ended
September 30,
2015
2014
2015
2014
Effective tax rate 35.9 % 15.4 % 35.2 % 30.5 %



	Three months ended March 31,
(dollars in thousands)	2016			2015
Income tax provision	$	2,664		$	1,754
Effective income tax rate	34.8		%	29.0		%

The increase in our effective income tax rate during the three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014,~~2015, was primarily due to a discrete tax ~~benefits~~benefit included in the ~~2014~~2015 period from the settlement of ~~$1.6 million~~an IRS audit and the estimated impact to our annual 2016 effective tax rate from statute of limitations expirations and $1.0 million from a reduction in the state income tax effective rate in the U.S., and that impact was partially offset by an increase in the domestic production activities deduction.



~~Third Quarter 2015 Form 10-Q~~		23

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

~~In addition to the tax matters described above,~~Section 162(m) nondeductible compensation. Partially offsetting the increase in our effective income tax rate during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014, reflects a loss from~~2015, was the ~~sale~~benefit of ~~our Netherlands entity for which we have determined~~federal and state research tax credits that a related valuation allowance is appropriate and therefore did not recognize any tax benefit. This increase in our effective income tax rate was partially offset by a discrete tax benefit from the settlement of an auditwere permanently enacted into law December 2015 and an increase in the domestic production activities deduction.

Our effective income tax rate may fluctuate quarterly as a result of factors, including transactions entered into, changes in the geographic distribution of our earnings or losses, our assessment of certain tax contingencies, valuation allowances, and changes in tax law in jurisdictions where we conduct business.

We have deferred tax assets for federal, state, and international net operating loss carryforwards and state 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.

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was ~~$2.1 million and $2.8~~$2.3 million at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014, respectively.~~2015. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.



22		First Quarter 2016 Form 10-Q

~~12.~~ ~~Stock-based compensation~~

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

12. Stock-based Compensation

Stock-based compensation expense is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense:


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(in thousands)	2015		2014		2015		2014
(dollars in thousands)									2016		2015
Included in cost of revenue:
Cost of subscriptions	$	213	$	192	$	681	$	556	$	281	$	143
Cost of maintenance	107		161		353		502		123		161
Cost of services	449		529		1,685		1,653		468		597
Total included in cost of revenue	769		882		2,719		2,711		872		901
Included in operating expenses:
Sales and marketing	768		562		2,273		1,621
Sales, marketing and customer success									901		701
Research and development	1,145		762		3,309		2,186		1,535		978
General and administrative	3,804		2,242		9,598		5,974		4,608		2,522
Total included in operating expenses	5,717		3,566		15,180		9,781		7,044		4,201
Total stock-based compensation expense	$	6,486	$	4,448	$	17,899	$	12,492	$	7,916	$	5,102



24		~~Third Quarter 2015 Form 10-Q~~13. Stockholders' Equity

Dividends

~~Table~~Our Board of ~~Contents~~

~~Blackbaud, Inc.~~

~~Notes~~Directors has adopted a dividend policy, which provides for the distribution to ~~consolidated financial statements (continued)~~

~~(Unaudited)~~

~~13.~~ ~~Stockholders' equity~~

~~Dividends~~stockholders a portion of cash generated by us that is in excess of operational needs and capital expenditures. The 2014 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.

In February ~~2015,~~2016, our Board of Directors approved an annual dividend rate of $0.48 per share to be made in quarterly payments. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends. The following table provides information with respect to quarterly dividends of $0.12 per share paid on common stock during the ~~nine~~three months ended ~~September 30, 2015.~~March 31, 2016.

Declaration Date Dividend per Share
Record Date Payable Date
February 2015 $ 0.12
February 27 March 13
April 2015 $ 0.12
May 28 June 15
July 2015 $ 0.12
August 28 September 15



Declaration Date	Dividend per Share		Record Date	Payable Date
February 2016	$	0.12	February 26	March 15

In ~~October 2015,~~April 2016, our Board of Directors declared a ~~fourth~~second quarter dividend of $0.12 per share payable on ~~December~~June 15, ~~2015~~2016 to stockholders of record on ~~November 25, 2015.~~May 27, 2016.



First Quarter 2016 Form 10-Q		23

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

Changes in accumulated other comprehensive loss by component

The changes in accumulated other comprehensive loss by component, consisted of the following:


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
(in thousands)	2015			2014			2015			2014
(dollars in thousands)													2016			2015
Accumulated other comprehensive loss, beginning of period	$	(1,926	)	$	(1,297	)	$	(1,032	)	$	(1,385	)	$	(825	)	$	(1,032	)
By component:
Gains and losses on cash flow hedges:
Accumulated other comprehensive loss balance, beginning of period	$	(536	)	$	(337	)	$	(164	)	$	(255	)	$	(19	)	$	(164	)
Other comprehensive (loss) income before reclassifications, net of tax effects of $309, $(175), $831 and $313	(491		)	273			(1,322		)	(482		)
Other comprehensive loss before reclassifications, net of tax effects of $555 and $439													(856		)	(698		)
Amounts reclassified from accumulated other comprehensive loss to interest expense	373			318			1,122			848			308			375
Amounts reclassified from accumulated other comprehensive loss to loss on debt extinguishment and termination of derivative instruments	—			—			—			587
Tax benefit included in provision for income taxes	(144		)	(123		)	(434		)	(567		)	(121		)	(146		)
Total amounts reclassified from accumulated other comprehensive loss	229			195			688			868			187			229
Net current-period other comprehensive (loss) income	(262		)	468			(634		)	386
Accumulated other comprehensive (loss) income balance, end of period	$	(798	)	$	131		$	(798	)	$	131
Net current-period other comprehensive loss													(669		)	(469		)
Accumulated other comprehensive loss balance, end of period													$	(688	)	$	(633	)
Foreign currency translation adjustment:
Accumulated other comprehensive loss balance, beginning of period	$	(1,390	)	$	(960	)	$	(868	)	$	(1,130	)	$	(806	)	$	(868	)
Translation adjustments	168			(232		)	(354		)	(62		)	403			(326		)
Accumulated other comprehensive loss balance, end of period	(1,222		)	(1,192		)	(1,222		)	(1,192		)	(403		)	(1,194		)
Accumulated other comprehensive loss, end of period	$	(2,020	)	$	(1,061	)	$	(2,020	)	$	(1,061	)	$	(1,091	)	$	(1,827	)



~~Third Quarter 2015 Form 10-Q~~		2514. Segment Information

~~Table~~As of ~~Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

~~14.~~ ~~Segment information~~

In March ~~2015, we implemented a new internal reporting structure in which Target Analytics is no longer being viewed as a stand-alone business unit, but rather as a suite of solutions being sold by~~31, 2016, our reportable segments were the General Markets Business Unit ("GMBU"), the Enterprise Customer Business Unit ~~(the “ECBU”), the General Markets Business Unit (the “GMBU”~~("ECBU"), and the International Business Unit ~~(the “IBU”~~("IBU"). As a result of the change in our internal reporting structure, which became effective in March 2015, the operating results of Target Analytics are no longer regularly reviewed by our chief operating decision maker ("CODM") to make decisions about resources to be allocated nor to assess performance, and, therefore, Target Analytics no longer meets the definition of an operating segment. In addition, Target Analytics did not meet any of the quantitative thresholds set forth in ASC 280, ~~Segment Reporting~~, during the three and nine months ended September 30, 2014 and had been previously disclosed for informational purposes. The change in reportable segments had no effect on our consolidated financial position, results of operations or cash flows for the periods presented.

~~As of September 30, 2015, our reportable segments were the ECBU, the GMBU, and the IBU.~~ Following is a description of each reportable segment:

The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America;

The ECBU is focused on marketing, sales, delivery and support to all large and/or strategic prospects and ~~clients in North America;~~

~~The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and clients~~customers in North America; and

The IBU is focused on marketing, sales, delivery and support to all prospects and ~~clients~~customers outside of North America.

Our CODM is our chief executive officer ("CEO"). The CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, excluding stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Currently, the CEO believes that the exclusion of these costs allows for a better understanding of the operating performance of the operating units and management of other operating expenses and cash needs. The CEO does not review any segment balance sheet information.



2624		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to consolidated financial statements (continued)

(Unaudited)

~~We have recast our segment disclosures for the three and nine months ended September 30, 2014 in order to present them on a consistent basis with our change in reportable segments in the current year.~~ Summarized reportable segment financial results, were as follows:


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
(in thousands)	2015			2014			2015			2014
(dollars in thousands)													2016			2015
Revenue by segment:
GMBU													$	87,952		$	69,929
ECBU	$	69,326		$	60,556		$	205,625		$	176,524		71,499			66,914
GMBU	78,244			70,965			224,311			199,124
IBU	11,181			13,117			31,995			35,937			9,758			10,127
Other⁽¹⁾	60			(40		)	132			23			47			23
Total revenue	$	158,811		$	144,598		$	462,063		$	411,608		$	169,256		$	146,993
Segment operating income⁽²⁾:
GMBU													$	42,611		$	34,663
ECBU	$	33,568		$	31,560		$	99,522		$	89,892		35,766			32,204
GMBU	40,718			36,317			114,719			104,842
IBU	2,431			1,553			5,823			3,334			996			1,301
Other⁽¹⁾	(219		)	283			(276		)	1,070			30			(312		)
	76,498			69,713			219,788			199,138			79,403			67,856
Less:
Corporate unallocated costs⁽³⁾	(47,975		)	(45,429		)	(141,162		)	(129,765		)	(50,415		)	(46,615		)
Stock based compensation costs	(6,486		)	(4,448		)	(17,899		)	(12,492		)	(7,916		)	(5,102		)
Amortization expense	(8,069		)	(6,334		)	(24,286		)	(18,106		)	(10,633		)	(8,127		)
Interest expense, net	(1,808		)	(1,255		)	(5,352		)	(4,013		)
Loss on sale of business	—			—			(1,976		)	—
Loss on debt extinguishment and termination of derivative instruments	—			—			—			(996		)
Other income, net	184			29			584			18
Interest expense													(2,675		)	(1,686		)
Other expense, net													(105		)	(287		)
Income before provision for income taxes	$	12,344		$	12,276		$	29,697		$	33,784		$	7,659		$	6,039


(1)	Other includes revenue and the related costs from the sale of solutions and services not directly attributable to a reportable segment.


(2)	Segment operating income includes direct, controllable costs related to the sale of solutions and services by the reportable segment.


(3)	Corporate unallocated costs include research and development, depreciation expense, and certain corporate sales, marketing, general and administrative expenses.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		2725

Table of Contents

Blackbaud, Inc.

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

~~15.~~ ~~Disposition of business~~

On May 18, 2015, we completed the sale of RLC Customer Technology B.V. ("RLC"), a formerly wholly-owned entity based in the Netherlands, to a private software company by selling all of the issued and outstanding stock of RLC in exchange for $0.4 million in gross cash proceeds. We incurred an insignificant amount of legal costs associated with the disposition of this business. As part of the disposition, we derecognized $1.4 million of goodwill related to RLC. As a result of this disposition, we also recognized an insignificant foreign currency translation gain in our consolidated statement of comprehensive income, which was recorded in stockholders’ equity immediately preceding the disposition. In addition, due to the inability to currently deduct a capital loss and the uncertainty of utilizing a capital loss tax benefit in the future, a tax benefit was not recognized on a portion of the recorded loss on sale of the business. Overall, this transaction, including costs associated with the disposition and the recognition of an insignificant foreign currency translation gain, resulted in a $2.0 million loss, which was recorded in loss on sale of business in our consolidated statements of comprehensive income for the nine months ended September 30, 2015. The disposition of RLC did not qualify for reporting as a discontinued operation since the transaction did not represent a strategic shift in our operations.

The following table presents the carrying amounts of RLC's assets and liabilities immediately preceding the disposition on May 18, 2015, which are excluded from our consolidated balance sheet as of September 30, 2015.

(in thousands)
Cash and cash equivalents $ 952
Accounts receivable, net of allowance 132
Prepaid expenses and other assets 38
Property and equipment, net 31
Deferred tax asset 6
Goodwill 1,374
Intangible assets, net 289
Total assets held-for-sale $ 2,822

Trade accounts payable $ 82
Accrued expenses and other liabilities 181
Deferred revenue 490
Deferred tax liability 90
Total liabilities held-for-sale $ 843



28		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to consolidated financial statements (continued)~~

~~(Unaudited)~~

~~16.~~ ~~Subsequent events~~

~~Smart Tuition acquisition~~

On October 2, 2015, we completed our acquisition from Smart Tuition Holdings, LLC of all of the outstanding equity, including all voting equity interests, of Smart, LLC (“Smart Tuition”), pursuant to the unit purchase agreement dated August 10, 2015. Smart Tuition is a leading provider of payment software and services for private schools and parents. The acquisition of Smart Tuition further expanded our offerings in the K-12 technology sector. We acquired Smart Tuition for an aggregate purchase price of $187.8 million in cash, net of closing adjustments. As a result of the acquisition, Smart Tuition has become a wholly-owned subsidiary of ours. We will include the operating results of Smart Tuition as well as any goodwill arising from the acquisition in our consolidated financial statements within GMBU from the date of acquisition. During the three and nine months ended September 30, 2015, we incurred acquisition-related expenses associated with the acquisition of Smart Tuition of $0.6 million and $0.8 million, respectively, which were recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2015 acquisition date.

On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of Smart Tuition. Following the draw down, approximately $261.0 million was outstanding under the revolving credit loans with approximately $85.0 million of capacity unutilized when including issued letters of credit. Following the closing of the Smart Tuition transaction on October 2, 2015, the principal amount outstanding on the term loan was approximately $168.0 million, resulting in a total amount outstanding on the revolving credit loans and term loan of approximately $429.0 million after the acquisition.

~~Entry into interest rate swap agreement~~

In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the swap agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 through February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.



~~Third Quarter 2015 Form 10-Q~~		29

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item~~ITEM 2. ~~Management's discussion and analysis of financial condition and results of operations~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the consolidated financial statements and related notes which are primarily denominated in thousands of dollars. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this report and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

~~Executive summary~~

Executive Summary

We are a leading provider of software and services for the ~~worldwide~~global philanthropic community. We offer a full spectrum of cloud-based and ~~on-premise~~on-premises software solutions, as well as a resource network that empowers and connects organizations of all sizes. Our portfolio of software and services support nonprofit fundraising and relationship management, ~~eMarketing,~~digital marketing, advocacy, accounting, payments and analytics, as well as grant management, corporate social responsibility, and education. We continue to make investments in our solution portfolio and go-to-market organization to ensure we are well positioned to benefit from shifts in the market, including demand for our cloud-based subscription offerings, which we expect will drive higher long-term revenue growth. As of ~~September 30, 2015,~~March 31, 2016, we had ~~more than 30,000~~approximately 35,000 active ~~clients~~customers including nonprofits, K-12 private and higher education institutions, healthcare organizations, foundations and other charitable giving entities, and corporations.

~~We derive~~Our revenue is primarily generated from the following sources: (i) charging ~~subscription fees~~ for the use of our software solutions in cloud-based ~~solutions, selling perpetual licenses~~ and hosted environments; (ii) providing ~~a broad offering of~~software maintenance and support services; (iii) providing professional services including implementation, training, consulting, ~~training, installation~~analytic, hosting and ~~implementation services, as well as ongoing client support and maintenance. Furthermore, we derive revenue from providing hosting services,~~other services; (iv) providing transaction and payment processing ~~services~~services; and ~~from providing analytic services including performing donor prospect research engagements, benchmarking studies, data modeling services and~~(v) selling ~~lists~~perpetual licenses of ~~potential donors.~~our software solutions. We have experienced growth in our payment processing services from the continued shift to online giving, further integration of these services to our existing solution portfolio and the sale of these services to new and existing ~~clients.~~customers.

Our long-term goals include accelerating organic revenue growth, expanding our operating margins and increasing our operating cash flow. During the ~~third~~first quarter of ~~2015,~~2016, we continued to execute on the following five growth strategies targeted to achieve those goals and to drive an extended period of quality enhancement, solution and service innovation, and increasing operating efficiency and financial performance:


1.	~~Accelerate organic revenue growth;~~Integrated and Open Solutions in the Cloud

We continue to transition our business to predominantly serve customers through a subscription-based cloud delivery model, enabling lower cost of entry, greater scalability and lower total cost of ownership to our customers. There is a concerted effort underway to optimize our portfolio of solutions and integrate powerful capabilities — such as built in data, analytics, payment processing and tailored user-specific experiences — to bring even greater value and performance to our customers. In 2015, we announced the general availability of Raiser's Edge NXT™, Financial Edge NXT™, and we introduced Blackbaud SKY™, which is our new, innovative cloud technology architecture for the global philanthropic community that now powers six of our next generation solutions including Raiser's Edge NXT and Financial Edge NXT.


2.	~~Accelerate our solution portfolio's move to the cloud;~~Drive Sales Effectiveness

We are making investments to increase the effectiveness of our sales organization, with a focus on enabling our expanding sales teams with the talent, processes, and tools to accelerate our revenue growth and improve effectiveness. Our customer success program separates account management from the sales organization, and is intended to drive customer loyalty and retention. In the first quarter of 2016, we launched a value added reseller ("VAR") program.



26		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.


3.	Expand ~~our total addressable market;~~TAM into Near Adjacencies with Acquisitions;

We will continue to evaluate compelling opportunities to expand our product portfolio and acquire companies, technologies and/or services. We will be guided by our acquisition criteria for considering attractive assets, which expand our total addressable market ("TAM"), provide entry into new and near adjacencies, accelerate our shift to the cloud, accelerate revenue growth, are accretive to margins and present synergistic opportunities.


4.	~~Optimize our back-office infrastructure; and~~Streamline Operations

We have largely completed the installations of best-in-breed back-office solutions to standardize operations utilizing scalable tools and systems. Our focus is now shifting towards optimizing those systems, as well as operational excellence and quality initiatives focused on streamlining processes to gain efficiency and scalability.


5.	~~Implement a margin improvement plan.~~Execute our 3-Year Margin Improvement Plan

In 2014, we implemented a 3-year operating margin improvement plan designed to increase our operating effectiveness and efficiency and improve non-GAAP operating margins 300 to 600 basis points on a constant currency basis as measured against our 2014 baseline of 17.5%, by the time we exit 2017.

We plan to continue ~~focusing on~~making investments in our solution portfolio, sales, and customer success organization to ensure we are well positioned to benefit from shifts in the market, including demand for our cloud-based subscription offerings, ~~and on expanding our payment processing and analytics services as~~which we ~~execute on our key growth initiatives and strengthen our market leadership position, while achieving our targeted level of profitability.~~expect will drive higher long-term revenue growth. We also plan to continue ~~to invest~~making investments in our ~~solutions,~~ sales and marketing ~~organizations~~organization and ~~our back-office processes as well as~~ the infrastructure that supports our cloud-based subscription offerings and certain solution development initiatives, including further expansion of our payment processing and analytics services. As we execute on our five key growth initiatives to ~~achieve optimal~~accelerate organic revenue growth and strengthen our market leadership position, we also plan to focus on achieving scalability of our operations, ~~as we execute on~~and attaining our ~~key growth initiatives.~~targeted level of profitability.

We completed our ~~acquisitions~~acquisition of ~~WhippleHill and MicroEdge~~Smart Tuition in ~~June 2014 and~~ October ~~2014, respectively.~~2015. We have included the results of operations of ~~acquired companies~~Smart Tuition in our consolidated results of operations from the date of ~~their respective~~ acquisition, which impacts the comparability of our results of operations when comparing the ~~three~~first quarter of 2016 and ~~nine months ended September 30, 2015 and 2014.~~2015. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations to prior year results due to the inclusion of ~~acquired companies.~~



30		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

In May 2015, we completed the sale of RLC as discussed in Note 15 of our consolidated financial statements in this report. The sale resulted in a loss of $2.0 million, which negatively impacted net income for the nine months ended September 30, 2015. We continue to sell and support many of our offerings to clients in the Netherlands either directly through our other foreign subsidiaries or through the use of partnerships, which we view as a better approach for serving that market.Smart Tuition.


Total revenue
	Three months ended September 30,									Nine months ended September 30,									Three months ended March 31,
(in millions, except percentages)	2015			2014		$ Change		% Change		2015			2014		$ Change		% Change
(dollars in millions)																			2016⁽¹⁾		2015		Change
Total revenue⁽¹⁾	$	158.8	⁽¹⁾	$	144.6	$	14.2	9.8	%	$	462.1	⁽¹⁾	$	411.6	$	50.5	12.3	%	$	169.3	$	147.0	15.2	%


(1)	Included in total revenue for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 was $~~8.3~~9.2 million ~~and$22.2 million, respectively,~~ attributable to the inclusion of ~~MicroEdge. WhippleHill also positively impacted revenue for the nine months ended~~ ~~September 30, 2015~~ ~~when compared to the same period in~~ ~~2014~~.Smart Tuition.

Excluding the impact of ~~acquisitions, our~~Smart Tuition as discussed above, the remaining $13.1 million increase in revenue ~~growth~~ during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 was primarily driven by growth in subscriptions revenue as our business model continues to shift towards providing predominantly cloud-based subscription solutions. Subscriptions revenue also grew as a result of increases in the number of ~~clients~~customers and the volume of transactions for which we process payments. ~~Excluding~~Services revenue contributed $1.1 million to the ~~impact of MicroEdge, maintenance~~increase in total revenue during the three months ended March 31, 2016, when compared to the same period in 2015, primarily due to increases in both analytic and training services deliveries. Maintenance revenue as well as license fees and other revenue declined for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 from the continued migration of our business model toward subscription-based solutions, including our Raiser's Edge NXT and Financial Edge NXT solutions. In the near-term, the transition to subscription-based solutions negatively impacts total revenue growth, as time-based license revenue from subscription arrangements is deferred and recognized ratably over the subscription period, whereas ~~on-premise~~on-premises license revenue from arrangements that include perpetual licenses is recognized up-front. In addition, the fluctuation in foreign currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, negatively impacted our total revenue during the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2016 by $1.5 million. Further explanation of this impact is included below under the caption "Foreign ~~currency exchange rates"~~Currency Exchange Rates".



First Quarter 2016 Form 10-Q		27

Table of Contents

Blackbaud, Inc.


Income from operations
	Three months ended September 30,								Nine months ended September 30,									Three months ended March 31,
(in millions, except percentages)	2015		2014		$ Change		% Change		2015		2014		$ Change			% Change
(dollars in millions)																		2016		2015		Change
Income from operations	$	14.0	$	13.5	$	0.5	3.7	%	$	36.4	$	38.8	$	(2.4	)	(6.2	)%	$	10.4	$	8.0	30.0	%


(1)	Included in income from operations for the three months endedMarch 31, 2016 was $1.2 millionattributable to the inclusion of Smart Tuition.

~~The modest~~Excluding the impact of Smart Tuition as discussed above, the remaining $1.2 million increase in income from operations during the three months ended ~~September 30, 2015~~March 31, 2016 was primarily driven by growth in subscriptions revenue as discussed ~~above. The decrease~~above, improvements in the utilization of consulting services personnel and a reduction in non-billable implementation service hours. Partially offsetting these favorable impacts to income from operations during the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 were ~~primarily attributable to~~ increases in stock-based compensation expense and amortization of intangible assets from business combinations of ~~$1.8~~$2.8 million and ~~$6.2 million, respectively, and increases in stock-based compensation of $2.1 million and $5.4~~$2.5 million, respectively. ~~For~~In addition, the ~~nine months ended September 30, 2015, we also recorded charges for employee severance of $2.2 million related to~~fluctuation in foreign currency exchange rates, primarily those between the ~~elimination of certain roles within the company. These unfavorable impacts on~~U.S. dollar and Canadian dollar, negatively impacted our income from operations ~~were partially offset by the increases in subscriptions revenue, as well as the non-recurrence in the three and nine months ended September 30, 2015 of certain incremental investments we made~~ during the three ~~and nine~~ months ended ~~September 30, 2014, that were targeted~~March 31, 2016 by $0.8 million. Further explanation of this impact is included below under the caption "Foreign Currency Exchange Rates".

Customer retention

Our subscription contracts are typically for a term of three years at contract inception with one year renewals thereafter. Over time, we anticipate a decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to ~~drive~~a cloud-based subscription delivery model. We also anticipate an increase in subscription contract renewals as we continue focusing on innovation, quality and the ~~success~~integration of our ~~five growth strategies. While~~subscription solutions which we ~~continue~~believe will provide value-adding capabilities to ~~invest in~~better address our customers' needs. Due primarily to these ~~strategies, the amount~~factors, we believe a recurring revenue customer retention measure that combines subscription and maintenance customer contracts provides an accurate representation of ~~investments has decreased in~~our customers' overall behavior. For the three ~~and nine~~ months ended ~~September 30, 2015, when compared to the same periods in 2014.~~March 31, 2016, approximately 93% of our customers with recurring subscription or maintenance contracts were retained.

Balance sheet and cash flow

At ~~September 30, 2015,~~March 31, 2016, our cash and cash equivalents were ~~$17.6~~$12.1 million and outstanding borrowings under the 2014 Credit Facility were ~~$243.4~~$424.4 million. During the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, we generated ~~$85.3~~$0.1 million in cash flow from operations, ~~reduced outstanding~~increased our net borrowings by ~~$39.0~~$14.1 million, returned ~~$16.9~~$5.7 million to stockholders by way of dividends and had cash outlays of ~~$25.4~~$13.6 million for purchases of property and equipment and capitalized software development costs.



~~Third Quarter 2015 Form 10-Q~~28		31First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

~~Recent Developments~~

~~Smart Tuition acquisition~~

Results of Operations

As previously disclosed, on October 2, 2015, we completed our acquisition from Smart Tuition, pursuant to the unit purchase agreement dated August 10, 2015. Smart Tuition is a leading provider of payment software and services for private schools and parents. The acquisition of Smart Tuition further expanded our offerings in the K-12 technology sector. We acquired Smart Tuition for $187.8 million in cash, net of closing adjustments. As a result of the acquisition, Smart Tuition has become a wholly-owned subsidiary of ours. We will include the operating results of Smart Tuition in our consolidated financial statements within GMBU from the date of acquisition. During the three and nine months ended September 30, 2015, we incurred acquisition-related expenses associated with the acquisition of Smart Tuition of $0.6 million and $0.8 million, respectively, which were recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2015 acquisition date.

~~Entry into interest rate swap agreement~~

In October 2015, we entered into the October 2015 Swap Agreement, which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the swap agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 through February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.

Comparison of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~

~~Results of operations~~

We have included the results of operations of ~~acquired companies~~Smart Tuition in our consolidated results of operations from the date of ~~their respective~~ acquisition, which impacts the comparability of our results of operations when comparing the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 and ~~2014.~~2015. We have noted in the discussion below, to the extent meaningful and quantifiable, the impact on the comparability of our consolidated results of operations to prior year results due to the inclusion of ~~acquired companies.~~Smart Tuition.

We acquired WhippleHill on June 16, 2014. Because we have integrated WhippleHill's solutions and operations into ours, including our historical K-12 solutions, it is impracticable to determine the revenue and operating costs attributable solely to the acquired business. We acquired MicroEdgeSmart Tuition on October ~~1, 2014.~~2, 2015. For the three ~~and nine~~ months ended ~~September 30, 2015, MicroEdge's~~March 31, 2016, Smart Tuition's total revenue and income from operations was ~~$8.3~~$9.2 million and ~~$22.2~~$1.2 million, respectively. ~~Because we have integrated a substantial portion of MicroEdge's operations into ours, it is impracticable to determine the operating costs attributable solely to the acquired business.~~ See Note 3 to our consolidated financial statements in this report for a summary of ~~these acquisitions.~~

this acquisition.



32		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~


Revenue by segment	Revenue by segment
	Three months ended September 30,										Nine months ended September 30,										Three months ended March 31,
(in millions, except percentages)	2015			2014		$ Change			% Change		2015			2014		$ Change			% Change
(dollars in millions)																					2016⁽¹⁾		2015		Change
GMBU																					$	88.0	$	69.9	25.9	%
ECBU	$	69.3	⁽¹⁾	$	60.6	$	8.7		14.4	%	$	205.6	⁽¹⁾	$	176.5	$	29.1		16.5	%	71.5		66.9		6.9	%
GMBU	78.2			71.0		7.2			10.1	%	224.3		⁽²⁾	199.1		25.2			12.7	%
IBU	11.2			13.1		(1.9		)	(14.5	)%	32.0			35.9		(3.9		)	(10.9	)%	9.8		10.1		(3.0	)%
Other	0.1			—		0.1			100.0	%	0.1			—		0.1			100.0	%
Total revenue⁽³⁾	$	158.8		$	144.6	$	14.2		9.8	%	$	462.1		$	411.6	$	50.5		12.3	%
Total revenue⁽²⁾																					$	169.3	$	147.0	15.2	%


(1)	Included in ~~ECBU~~GMBU revenue and total revenue for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 was $~~8.3~~9.2 million~~and$22.2 million, respectively,~~ attributable to the inclusion of ~~MicroEdge.~~Smart Tuition.


(2)	~~WhippleHill positively impacted GMBU revenue and total revenue for the nine months ended~~ ~~September 30, 2015~~ ~~when compared to the same period in~~ ~~2014~~.


~~(3)~~	The individual amounts for each year may not sum to total revenue due to rounding.

ECBU
Three months ended
September 30, Nine months ended
September 30,
(in millions, except percentages) 2015
2014
$
Change

%
Change

2015
2014
$
Change

%
Change

ECBU revenue $ 69.3
⁽¹⁾
$ 60.6
$ 8.7
14.4 % $ 205.6
⁽¹⁾
$ 176.5
$ 29.1
16.5 %
% of total revenue 43.6 % 41.9 % 44.5 % 42.9 %


~~(1)~~	~~Included in ECBU revenue for the~~ ~~three and nine months endedSeptember 30, 2015~~ ~~was~~ ~~$8.3 millionand$22.2 million, respectively, attributable to the inclusion of MicroEdge.~~

When removing the impact attributable to MicroEdge as discussed above, ECBU revenue remained relatively unchanged during the three months ended September 30, 2015, when compared to the same period in 2014. Growth in subscriptions revenue was primarily offset by a decrease in consulting services revenue. The subscriptions revenue growth was driven primarily by an increase in the number of clients and the volume of transactions for which we process payments, as well as an increase in demand for our hosting services associated with our Blackbaud CRM solution. We expect that the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services and little to no customization services when compared our traditional on-premise perpetual license arrangements, will negatively impact consulting services revenue growth over time. In addition, implementation services associated with our larger perpetual license transactions, such as those for Blackbaud CRM, can be of substantial value and take an extended period of time which can result in period-to-period variations in revenue. Similarly, the timing of when on-premise perpetual license arrangements are entered into can result in period-to-period variations in revenue since license fee revenue associated with these arrangements is generally recognized up front.

When removing the impact attributable to MicroEdge as discussed above, the increase in ECBU revenue during the nine months ended September 30, 2015, when compared to the same period in 2014, was primarily attributable to

growth in subscriptions revenue, partially offset by decreases in consulting services revenue and revenue from license fees. The growth in subscriptions resulted primarily from an increase in the number of clients and the volume of transactions for which we process payments, as well as increases in demand for our hosting services associated with our Blackbaud CRM solution and our cloud-based solution Luminate CRM. Also contributing to the overall growth in ECBU revenue was an increase in maintenance revenue related to new Blackbaud CRM clients. As discussed above, consulting services revenue decreased as a result of the continuing shift in our go-to-market strategy towards cloud-based solutions, which in general, require less implementation services. The decrease in license fees revenue was primarily related to the timing of our larger Blackbaud CRM sales.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		3329

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~


GMBU
	Three months ended September 30,										Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015			2014			$ Change		% Change		2015				2014			$ Change		% Change
(dollars in millions)																						2016			2015			Change
GMBU revenue	$	78.2		$	71.0		$	7.2	10.1	%	$	224.3		⁽¹⁾	$	199.1		$	25.2	12.7	%	$	88.0		$	69.9		25.9	%
% of total revenue	49.2		%	49.1		%					48.5		%		48.4		%					52.0		%	47.6		%


(1)	~~WhippleHill positively impacted~~Included in GMBU revenue for the ~~nine~~three months ended~~September 30, 2015~~March 31, 2016 ~~when compared~~was $9.2 million attributable to the ~~same period in~~ ~~2014~~.inclusion of Smart Tuition.

~~The increases~~Excluding the impact of Smart Tuition as discussed above, the remaining $8.9 million increase in GMBU revenue during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was primarily attributable to growth in subscriptions revenue, partially offset by declines in maintenance revenue and license fee and other ~~revenue and maintenance~~ revenue. The growth in subscriptions revenue was primarily due to increases in demand across our portfolio of cloud-based solutions. GMBU subscriptions revenue also benefited from increases in the number of ~~clients~~customers and the volume of transactions for which we process payments. ~~The contribution of revenue from WhippleHill added to GMBU's subscription revenue growth during the nine months ended September 30, 2015.~~ Also contributing to overall growth in GMBU revenue during the three ~~and nine~~ months ended ~~September 30, 2015 were modest increases~~March 31, 2016 was an increase in consulting services revenue related to our ~~Raiser's Edge NXT and Luminate Online solutions, as well as training services revenue.~~cloud-based solutions. The growth in subscriptions and services revenue were partially offset by decreases in maintenance revenue and license fee and other revenue ~~and maintenance revenue~~ during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 from the continued migration of our business to subscription-based solutions.

IBU
Three months ended
September 30, Nine months ended
September 30,
(in millions, except percentages) 2015
2014
$
Change

%
Change

2015
2014
$
Change

%
Change

IBU revenue $ 11.2
$ 13.1
$ (1.9 ) (14.5 )% $ 32.0
$ 35.9
$ (3.9 ) (10.9 )%
% of total revenue 7.1 % 9.1 % 6.9 % 8.7 %



ECBU
	Three months ended March 31,
(dollars in millions)	2016			2015			Change
ECBU revenue	$	71.5		$	66.9		6.9	%
% of total revenue	42.2		%	45.5		%

The increase in ECBU revenue during the three months ended March 31, 2016, when compared to the same period in 2015, was primarily attributable to growth in subscriptions revenue, partially offset by decreases in consulting services revenue, maintenance revenue and revenue from license fees. The growth in subscriptions resulted primarily from an increase in the number of customers and the volume of transactions for which we process payments, as well as increases in demand for our cloud-based solutions including Gifts Online, Luminate Online and Raiser's Edge NXT. As discussed above, consulting services, maintenance revenue and license fees revenue decreased as a result of the continuing shift in our go-to-market strategy towards cloud-based solutions, which in general, require less implementation services.



IBU
	Three months ended March 31,
(dollars in millions)	2016			2015			Change
IBU revenue	$	9.8		$	10.1		(3.0	)%
% of total revenue	5.8		%	6.9		%

The decrease in IBU revenue during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was primarily related to reductions in ~~perpetual license sales of our Raiser's Edge solution, which also caused IBU~~ consulting services revenue and maintenance revenue, ~~to decrease.~~partially offset by an increase in subscriptions revenue. In the near term, we expect a continued reduction in IBU revenue related to Raiser's Edge license fees, consulting services and maintenance as our ~~clients~~customers transition to our Raiser's Edge NXT solution. ~~Also contributing to the decrease~~The increase in IBU subscriptions revenue during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 was primarily due to an increase in demand for our Raiser's Edge NXT solution as well as an increase in the ~~sale~~volume of ~~RLC in May 2015.~~transactions for which we process payments.



3430		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

Operating results


Subscriptions
	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015				2014			$ Change		% Change		2015				2014			$ Change		% Change
(dollars in millions)																							2016⁽¹⁾			2015			Change
Subscriptions revenue	80.9			⁽¹⁾	67.0			13.9		20.7	%	233.4			⁽¹⁾	190.3			43.1		22.6	%	$	96.9		$	72.5		33.7	%
Cost of subscriptions	39.5				33.3			6.2		18.6	%	115.1				95.1			20.0		21.0	%	49.7			36.2			37.3	%
Subscriptions gross profit	$	41.4			$	33.7		$	7.7	22.8	%	$	118.3			$	95.2		$	23.1	24.3	%	$	47.2		$	36.3		30.0	%
Subscriptions gross margin	51.2		%		50.3		%					50.7		%		50.0		%					48.7		%	50.1		%

(1)

Included in subscriptions revenue and cost of subscriptions for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 was ~~$4.8~~$9.0 million and ~~$12.8~~$4.9 million,, respectively, attributable to the inclusion of ~~MicroEdge. WhippleHill also positively impacted subscriptions revenue for the nine months ended~~ ~~September 30, 2015~~ ~~when compared to the same period in~~ ~~2014~~.Smart Tuition.

Subscriptions revenue is comprised of revenue from charging for the use of our subscription-based software solutions, which includes providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, revenue from payment processing services as well as variable transaction revenue associated with the use of our solutions.

We continue to experience growth in sales of our hosted applications and hosting services as we meet the demand of our ~~clients~~customers that increasingly prefer cloud-based subscription ~~offerings.~~offerings, including existing customers that are migrating from on-premises solutions to our cloud-based solutions. In addition, we have experienced growth in our payment processing services from the continued shift to online giving, further integration of these services to our existing solution portfolio and the sale of these services to new and existing ~~clients.~~

~~Excluding the incremental~~customers. Recurring subscriptions contracts are typically for a term of three years at contract inception with one year annual renewals thereafter. We intend to continue focusing on innovation, quality and integration of our subscription solutions which we believe will drive subscriptions revenue ~~from MicroEdge as discussed above, the increases~~growth. We are also investing in ~~subscriptions revenue during the three~~our customer success organization to drive customer loyalty, retention, and nine months ended September 30, 2015, when compared to the same periods in 2014, were primarily due to strong demand across our solution portfolio including our cloud-based solutions, as well as from providing hosting services to clients who have purchased perpetual rights to certain of our software solutions. Subscriptions revenue also grew as a result of increases in the number of clients and the volume of transactions for which we process payments, as well as increases in the volume of subscription-based analytic services provided. Also contributing to the increases in subscriptions revenue was the inclusion of WhippleHill during the nine months ended September 30, 2015.referrals.

Cost of subscriptions is primarily comprised of ~~human resource~~compensation costs, ~~stock-based compensation expense,~~third-party contractor expenses, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of ~~intangibles~~intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and services to our ~~clients.~~customers.

Excluding the incremental subscriptions revenue from Smart Tuition as discussed above, subscriptions revenue increased by $15.4 million during the three months ended March 31, 2016, when compared to the same period in 2015. The increase was primarily due to strong demand across our cloud-based solution portfolio. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for which we process payments.

The ~~increases~~increase in cost of subscriptions during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was relatively consistent with the ~~increases~~increase in ~~revenue during those periods.~~revenue. The ~~increases~~increase in cost of subscriptions ~~were~~was primarily due to ~~increases~~a $4.5 million increase in transaction-based costs related to our payments services and those of ~~$1.4~~Smart Tuition, a $2.0 million ~~and $6.0 million, respectively, increases in human resource costs of $0.8 million and $3.9 million, respectively, increases~~increase in amortization of intangible assets from business combinations, ~~of $1.0~~a $1.5 million ~~and $3.6~~increase in third-party contractor expenses, a $1.4 million ~~respectively, and increases~~increase in compensation costs, a $1.2 million increase in the cost of third-party technology embedded in certain of our subscription solutions and a $1.1 million increase in amortization of ~~$1.2 million and $2.5 million, respectively.~~software development costs. The increases in ~~human resource~~compensation costs and amortization of intangible assets from business combinations were primarily due to an increase in subscription client support headcount directly related to our growing base of subscription clients. The inclusion of MicroEdge also contributed to the increases in human resource costs during the three and nine months ended September 30, 2015 while the inclusion of ~~WhippleHill contributed to the increase during the nine months ended September 30, 2015.~~

Smart Tuition. The increases in third-party contract costs and amortization of software development costs were from investments made on innovation, quality and the integration of our cloud-based solutions.

The decrease in subscriptions gross ~~margins~~margin for the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was primarily the result of ~~gains~~a shift in ~~efficiency~~the mix of subscriptions revenue generated from our payment processing services and ~~scalability~~those of Smart Tuition, both of which have historically yielded lower gross margins than our cloud-based solutions. Also contributing to the decrease in subscriptions gross margin was incremental amortization of intangible assets due to Smart Tuition and incremental software development costs from the ~~incremental~~ investments ~~made during 2014.~~discussed above.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		3531

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~


Maintenance
	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015				2014			$ Change		% Change		2015				2014			$ Change		% Change
(dollars in millions)																							2016			2015			Change
Maintenance revenue	$	38.2		⁽¹⁾	$	36.8		$	1.4	3.8	%	$	115.7		⁽¹⁾	$	109.0		$	6.7	6.1	%	$	37.2		$	38.9		(4.4	)%
Cost of maintenance	6.7				6.1			0.6		9.8	%	21.2				17.5			3.7		21.1	%	5.3			7.5			(29.3	)%
Maintenance gross profit	$	31.5			$	30.7		$	0.8	2.6	%	$	94.5			$	91.5		$	3.0	3.3	%	$	31.9		$	31.4		1.6	%
Maintenance gross margin	82.5		%		83.4		%					81.7		%		83.9		%					85.7		%	80.7		%


~~(1)~~	~~Included in maintenance revenue for the~~ ~~three and nine months endedSeptember 30, 2015~~ ~~was~~ ~~$2.9 million~~ ~~and~~ ~~$7.8 million, respectively, attributable to the inclusion of MicroEdge.~~

Maintenance revenue is comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide ~~clients~~customers with updates, enhancements and certain upgrades to our software solutions and online, telephone and email support. Maintenance contracts are typically ~~for a term~~renewed on an annual basis.

Cost of ~~three years at contract inception with one year annual renewals thereafter,~~maintenance is primarily comprised of compensation costs, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and ~~maintenance renewal rates~~IT support costs, amortization of intangible assets from business combinations, amortization of software development costs and other costs incurred in ~~the period reported did not vary materially compared~~providing support and services to ~~prior periods. Over time, we anticipate a~~our customers.

The decrease in maintenance ~~contract renewals as we transition our solution portfolio and maintenance clients to a cloud-based subscription delivery model and away from a perpetual license-based model.~~

~~Excluding the incremental maintenance~~ revenue ~~from MicroEdge as discussed above, maintenance decreased by $1.5 million~~ during the three months ended ~~September 30, 2015,~~March 31, 2016 when compared to the same period in 2014. The decrease was primarily comprised of (i) $3.6 million of reductions in maintenance from contracts that were not renewed and reductions in contracts with existing clients; partially offset by (ii) $1.3 million of incremental maintenance from new clients associated with new license contracts and increases in contracts with existing clients; and (iii) $0.7 million of incremental maintenance from contractual inflationary rate adjustments. The decrease in maintenance revenue, excluding amounts attributable to MicroEdge, during the three months ended September 30, 2015, ~~when compared to the same period in 2014,~~ was primarily related to a reduction in maintenance contracts associated with ~~on-premise~~on-premises Raiser's Edge as clients migrated to our Raiser's Edge NXT cloud-based solution. As discussed above, this is a trend we expect to continue as we transition our solution portfolio to a cloud-based subscription delivery model.

Excluding the incremental maintenance revenue from MicroEdge as discussed above, maintenance revenue decreased by $1.1 million during the nine months ended September 30, 2015, when compared to the same period in 2014. The decrease was primarily comprised of (i) $7.7 million of reductions in maintenance from contracts that were not renewed and reductions in contracts with existing clients; partially offset by (ii) $4.4 million of incremental maintenance from new clients associated with new license contracts and increases in contracts with existing clients; and (iii) $2.2 million of incremental maintenance from contractual inflationary rate adjustments. The decrease in maintenance revenue during the nine months ended September 30, 2015, when compared to the same period in 2014, was primarily related to a reduction in maintenance contracts associated with on-premise Raiser's Edge as clientscustomers migrated to our Raiser's Edge NXT cloud-based solution, partially offset by an increase in maintenance contracts associated with Blackbaud Enterprise CRM. The decrease was primarily comprised of (i) $5.4 million of reductions in maintenance from contracts that were migrated to a cloud-based subscription or not renewed and reductions in contracts with existing customers; partially offset by (ii) $3.2 million of incremental maintenance from new customers associated with new license contracts and increases in contracts with existing customers; and (iii) $0.5 million of incremental maintenance from contractual inflationary rate adjustments.

Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our clients.

~~Cost of maintenance increased~~decreased during the three ~~and nine~~ months ended September 30, 2015, when compared to the same periods in 2014, primarily as a result of increases in amortization of intangible assets from business combinations of $0.9 million and $2.8 million, respectively. Also contributing to the increase in cost of subscriptions for the nine months ended September 30, 2015,March 31, 2016, when compared to the same period in ~~2014, was an increase~~2015, primarily as a result of a decrease in ~~human resource~~compensation costs ~~primarily due~~of $2.0 million from a shift in support headcount from maintenance towards sales, marketing and customer success expense and a shift in the volume of customer support requests from maintenance towards subscriptions. Also contributing to the ~~inclusion~~decrease in compensation costs were improvements in the efficiency of ~~MicroEdge.~~our customer support center.

Maintenance gross margins ~~decreased~~increased during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 when compared to the same ~~periods~~period in ~~2014,~~2015, primarily due to the ~~transition of our solution portfolio to a cloud-based subscription delivery model,~~shifts in compensation costs from maintenance as discussed above, as well as ~~incremental amortization~~the improvements in the efficiency of ~~intangible assets from business combinations attributable to MicroEdge.~~our customer support center.



3632		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~


Services
	Three months ended September 30,												Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015				2014			$ Change			% Change		2015				2014			$ Change		% Change
(dollars in millions)																								2016⁽¹⁾			2015			Change
Services revenue	$	35.9		⁽¹⁾	$	35.8		$	0.1		0.3	%	$	100.9		⁽²⁾	$	95.8		$	5.1	5.3	%	$	32.4		$	31.3		3.5	%
Cost of services	26.2				27.1			(0.9		)	(3.3	)%	79.1				78.9			0.2		0.3	%	24.3			27.0			(10.0	)%
Services gross profit	$	9.7			$	8.7		$	1.0		11.5	%	$	21.8			$	16.9		$	4.9	29.0	%	$	8.1		$	4.3		88.4	%
Services gross margin	27.0		%		24.3		%						21.6		%		17.6		%					25.0		%	13.8		%


(1)	~~The impact on services revenue for the three months ended~~ ~~September 30, 2015~~ ~~as a result of the inclusion of MicroEdge was not significant.~~


~~(2)~~	Included in services revenue and cost of services for the ~~nine~~three months endedMarch 31, 2016 ~~months ended~~ ~~September 30, 2015~~ ~~was~~ ~~$1.2 million~~were insignificant amounts attributable to the inclusion of ~~MicroEdge.~~Smart Tuition.

We derive services revenue from consulting, implementation, education, analytic and installation services. Consulting, implementation and installation services involve converting data from a ~~client’s~~customer’s existing system, system configuration, process re-engineering and assistance in file set up. Education services involve ~~client~~customer training activities. Analytic services are comprised of donor prospect research, sales of lists of potential donors, benchmarking studies and data modeling services. These analytic services involve the assessment of current and prospective donor information of the ~~client~~customer and are performed using our proprietary analytical tools. The end product is intended to enable organizations to more effectively target their fundraising activities.

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

Services revenue ~~was relatively unchanged~~increased during the three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014.~~ 2015, primarily due to increases in both analytic and training services deliveries.

We expect that the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services and little to no customization services when compared our traditional ~~on-premise~~on-premises perpetual license arrangements, will negatively impact consulting services revenue growth over time. ~~In addition,~~The maturation of our Blackbaud Enterprise CRM solution, our only remaining perpetual licensed-based offering, is lessening the extent of implementation services associated with our larger perpetual license transactions, such as those for Blackbaud CRM, can be of substantial value and take an extended period of time which can result in period-to-period variations in services revenue.

Excluding the incremental services revenue from MicroEdge as discussed above, the increase in services revenue during the nine months ended September 30, 2015, when compared to the same period in 2014, was primarily a result of an increase in consulting services revenue related to our Blackbaud CRM solution. Also contributing to the growth in services revenue during the nine months ended September 30, 2015, when compared to the same period in 2014, was an increase in training services deliveries.

Cost of services is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, classroom rentals, costs incurred in providing client training, data expense incurred to perform analytic services, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations.required.

The decrease in cost of services during the three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014,~~2015, was primarily due to a $2.0 million decrease in ~~human resource~~compensation costs related to a reduction in consulting services ~~headcount.~~headcount from utilization improvements and a reduction in non-billable implementation service hours for our Blackbaud Enterprise CRM solution.

~~Cost of services was relatively unchanged~~Services gross margin increased during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014.~~

~~Services gross margins increased during the three and nine months ended September 30,~~ 2015, ~~when compared to the same periods in 2014,~~ primarily due to increased analytics and training revenue coupled with improvements in the utilization of consulting services personnel and ~~decreases~~a reduction in ~~human resource costs.~~non-billable implementation hours.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		3733

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~


License fees and other
	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015			2014			$ Change			% Change		2015			2014			$ Change			% Change
(dollars in millions)																							2016			2015			Change
License fees and other revenue	$	3.8		$	4.9		$	(1.1	)	(22.4	)%	$	12.0		$	16.5		$	(4.5	)	(27.3	)%	$	2.8		$	4.3		(34.9	)%
Cost of license fees and other	1.7			1.6			0.1			6.3	%	4.1			4.6			(0.5		)	(10.9	)%	0.6			1.2			(50.0	)%
License fees and other gross profit	$	2.1		$	3.3		$	(1.2	)	(36.4	)%	$	7.9		$	11.9		$	(4.0	)	(33.6	)%	$	2.2		$	3.1		(29.0	)%
License fees and other gross margin	55.3		%	67.3		%						65.8		%	72.1		%						78.7		%	72.9		%

License fees and other revenue includes revenue from the sale of our software solutions under perpetual license arrangements, ~~the sale of business forms that are used in conjunction with our software solutions,~~ reimbursement of travel-related expenses primarily incurred during the performance of services at ~~client~~customer locations, fees from user conferences and third-party software referral fees.

Cost of license fees and other is primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs, compensation costs, costs of business forms, costs of user conferences, reimbursable expenses relating to the performance of services at customer locations, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.

Revenue from license fees and other decreased during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014,~~2015, primarily as a result of the ongoing transition of our solution portfolio away from a perpetual license-based model toward a cloud-based subscription delivery model. In addition, our larger perpetual license transactions such as those for Blackbaud CRM can be of substantial value, which can result in period-to-period variations in revenue since the license fee revenue associated with these arrangements is generally recognized up front when the arrangements are entered into.

Cost of license fees and other is primarily comprised of third-party software royalties, variable reseller commissions, amortization of software development costs, human resource costs, costs of business forms, costs of user conferences, reimbursable expenses relating to the performance of services at client locations, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations.

The ~~increase~~decrease in cost of license fees and other during the three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014,~~2015, was primarily due to ~~costs associated with our~~ ~~bbcon® user conference, which occurs each year in October.~~less reimbursable expenses relating to the performance of services at customer locations.

~~The decrease in cost of license~~License fees and other gross margin increased during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in 2014, was primarily due to reductions in reseller commissions and third-party software royalties, driven by the ongoing transition of our solution portfolio away from a perpetual license-based model toward a subscription-based delivery model.

~~License fees and other gross margin decreased during the three and nine months ended September 30,~~ 2015, ~~when compared to the same periods in 2014,~~ primarily due to the ~~ongoing transition of our solution portfolio away from a perpetual license-based model toward a subscription-based delivery model~~less reimbursable expenses which carry no margin relative to the ~~modest changes~~reduction in ~~cost of~~ license fees ~~and other.~~revenue.



3834		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

Operating expenses

Sales and marketing
Three months ended
September 30, Nine months ended
September 30,
(in millions, except percentages) 2015
2014
$
Change

%
Change

2015
2014
$
Change

%
Change

Sales and marketing expense $ 31.1
$ 27.1
$ 4.0
14.8 % $ 89.4
$ 78.6
$ 10.8
13.7 %
% of total revenue 19.6 % 18.7 % 19.3 % 19.1 %



Sales, marketing, and customer success
	Three months ended March 31,
(dollars in millions)	2016			2015			Change
Sales, marketing and customer success expense	$	35.6		$	28.6		24.5	%
% of total revenue	21.0		%	19.4		%

Sales, marketing, and ~~marketing~~customer success expense includes ~~human resource~~compensation costs, ~~stock-based compensation expense,~~ travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.

~~Sales~~We are investing in sales, marketing, and customer success which is a component of our five point growth strategy to accelerate revenue growth. The increase in sales, marketing, and customer success expense in dollars and as a percentage of total revenue ~~increased~~ during the three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in 2014, primarily due to an increase in commission expense of $2.1 million and an increase in human resource costs of $1.6 million, in each, as discussed below. Sales and marketing expense as a percentage of revenue remained relatively unchanged during the nine months ended September 30, 2015, ~~when compared to the same period in 2014.~~

~~The increase in sales and marketing expense during the nine months ended September 30, 2015, when compared to the same period in 2014,~~ was primarily due to increases in ~~human resource~~compensation costs and commissions expense of ~~$4.3~~$4.1 million and ~~$3.1~~$1.8 million, respectively. ~~An increase in IT support costs of $0.9 million also contributed to the increase in sales and marketing expense during the nine months ended September 30, 2015. Human resource~~Compensation costs increased primarily due to incremental headcount to support the increase in direct sales, marketing, and ~~marketing~~customer success efforts of our growing operations. The expansion of our customer success program is targeted to ensure our customers are fully realizing the value of our solutions, which we believe will drive customer loyalty and retention and will also result in increased customer referrals. The increase in commission expense was primarily driven by an increase in commissionable revenue during the three months ended March 31, 2016, when compared to the same period in 2015. The inclusion of ~~MicroEdge~~Smart Tuition also contributed to the increases in ~~human resource~~compensation costs ~~as well as the increase in allocated IT support costs. The increases in commission expense were primarily driven by increases in commissionable revenue during the three~~ and ~~nine months ended September 30, 2015, when compared to the same periods in 2014, as well as an increase in sales of solutions for which commission expense is recognized immediately upon sale.~~commissions expense.


Research and development
	Three months ended September 30,										Nine months ended September 30,										Three months ended March 31,
(in millions, except percentages)	2015			2014			$ Change		% Change		2015			2014			$ Change		% Change
(dollars in millions)																					2016			2015			Change
Research and development expense	$	20.6		$	19.7		$	0.9	4.6	%	$	62.0		$	54.3		$	7.7	14.2	%	$	22.8		$	21.3		7.0	%
% of total revenue	13.0		%	13.6		%					13.4		%	13.2		%					13.5		%	14.5		%

Research and development expense includes ~~human resource~~compensation costs, ~~stock-based compensation expense,~~ third-party contractor expenses, software development tools and other expenses related to developing new solutions, upgrading and enhancing existing solutions, and allocated depreciation, facilities and IT support costs.

~~Research and development expense as a percentage of revenue remained relatively unchanged during the three and nine months ended September 30, 2015, when compared to the same periods in 2014.~~



~~Third Quarter 2015 Form 10-Q~~		39

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

The ~~increases~~increase in research and development expense during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was primarily due to increases in ~~human resource~~compensation costs of ~~$1.6 million and $10.0 million, respectively.~~$2.9 million. We have added engineering headcount to drive our ~~product~~solution development efforts. The inclusion of ~~MicroEdge~~Smart Tuition contributed to the ~~increases~~increase in ~~human resource~~compensation costs. Also contributing to the ~~increases~~increase in research and development expense during the ~~nine~~three months ended ~~September 30, 2015 were increases~~March 31, 2016 was an increase in ~~stock-based compensation~~third-party contractor expenses of ~~$1.2~~$0.9 million ~~and allocated IT support costs of $1.1 million, respectively.~~to assist in our solution development efforts. Partially offsetting these increases during the three ~~and nine~~ months ended ~~September 30, 2015 were increases of $1.5~~March 31, 2016 was a $2.5 million ~~and $5.1 million, respectively,~~increase in the amount of software development costs that were ~~capitalized from an~~capitalized. The increase in amount capitalized was a result of incurring more qualifying costs associated with development activities ~~for~~that are required to be capitalized under the internal-use software ~~including~~guidance such as those related to development ~~costs such as~~of our Raiser's Edge NXT, ~~and~~ Financial Edge NXT and Luminate cloud-based solutions, as well as development costs associated with the ~~software~~ solutions of acquired companies. We expect that the increase in the amount of software development costs capitalized ~~is a trend that~~ will continue in the ~~near-term.~~near-term as we make investments on innovation, quality and the integration of our solutions which we believe will drive revenue growth. Capitalized software development costs associated with our cloud-based solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life.

Research and development expense decreased as a percentage of revenue during the three months ended March 31, 2016, when compared to the same periods in 2015, primarily due to the increase in the amount of software development costs capitalized as discussed above.



First Quarter 2016 Form 10-Q		35

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Blackbaud, Inc.


General and administrative
	Three months ended September 30,										Nine months ended September 30,										Three months ended March 31,
(in millions, except percentages)	2015			2014			$ Change		% Change		2015			2014			$ Change		% Change
(dollars in millions)																					2016			2015			Change
General and administrative expense	$	18.4		$	15.5		$	2.9	18.7	%	$	53.2		$	42.1		$	11.1	26.4	%	$	19.8		$	16.8		17.9	%
% of total revenue	11.6		%	10.7		%					11.5		%	10.2		%					11.7		%	11.5		%

General and administrative expense consists primarily of ~~human resource~~compensation costs for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, ~~stock-based compensation expense,~~ third-party professional fees, insurance, allocated depreciation, facilities and IT support costs, acquisition-related ~~expense~~expenses and other administrative expenses.

General and administrative expense increased as a percentage of revenue during the three and nine months ended September 30, 2015, when compared to the same periods in 2014, primarily due to the inclusion of MicroEdge, which historically had higher general and administrative expenses as a percentage of revenue. The ~~growth in stock-based compensation discussed below contributed to the increases in general and administrative expense as a percentage of revenue.~~

~~The increases~~increase in general and administrative expense during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014, were~~2015, was primarily due to an increase in compensation costs of $2.7 million. Compensation costs increased primarily due to increases ~~in human resource costs of $2.0 million and $6.6 million, respectively, increases in infrastructure costs of $0.9 million and $3.6 million, respectively, and increases in~~ stock-based compensation expense, ~~of $1.6 million~~employee benefit costs and $3.6 million, respectively. Partially offsetting these increases during the three and nine months ended September 30, 2015 were decreases in other corporate costs of $1.1 million and $3.5 million, respectively. Human resource costs increased primarily due to additional resources needed to support the growth of our ~~business and from the inclusion of WhippleHill and MicroEdge personnel.~~business. The ~~increases in infrastructure and acquisition-related expenses and integration costs were due to our acquisitions of WhippleHill and MicroEdge. The increases~~increase in stock-based compensation expense ~~were~~was primarily ~~attributable to a change~~driven by an increase in ~~timing~~the grant date fair value of ~~certain~~our annual equity ~~award grants, whereby annual grants that would have otherwise been made in 2013 were instead made~~awards granted during ~~2014, as well as~~ the ~~impact of new equity award grants in the current year to certain senior management hires. There was no change in the timing of annual equity award grants in the current year~~three months ended March 31, 2016 when compared to the grant date fair value of our annual equity awards granted during the same period in 2015.

General and administrative expense as a percentage of revenue remained relatively unchanged during the three months ended March 31, 2016, when compared to the same period in 2015.



Interest expense
	Three months ended March 31,
(dollars in millions)	2016			2015			Change
Interest expense	$	2.7		$	1.7		58.8	%
% of total revenue	1.6		%	1.1		%

Interest expense increased during the three months ended March 31, 2016, when compared to the same period in 2015, primarily due to an increase in our average daily borrowings related to our acquisition of Smart Tuition in October 2015.



36		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Deferred revenue

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



(dollars in millions)	Timing of recognition	March 31, 2016		Change		December 31, 2015
Subscriptions	Over the period billed in advance, generally one year	$	122.2	(0.2	)%	$	122.5
Maintenance	Over the period billed in advance, generally one year	78.2		(9.0	)%	85.9
Services	As services are delivered	27.9		(2.1	)%	28.5
License fees and other	Upon delivery of the solution or service	0.7		75.0	%	0.4
Total deferred revenue⁽¹⁾		229.0		(3.5	)%	237.3
Less: Long-term portion		6.6		(7.0	)%	7.1
Current portion⁽¹⁾		$	222.4	(3.4	)%	$	230.2


(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. We generally invoice our maintenance and subscription customers in annual cycles 30 days prior ~~year.~~to the end of the contract term. The decreases in deferred revenue attributable to maintenance, services and license fees and other during the three months ended March 31, 2016 were primarily due to the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which do not require maintenance contracts and, in general, require less implementation services than our traditional on-premises arrangements. Deferred revenue from subscriptions remained relatively unchanged primarily due to the timing of customer contract renewals, many of which take place at or near the beginning of our third quarter. As a result, our deferred revenue has historically been lower in our first and second quarters as compared to our third and fourth quarters.

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, our deferred revenue after an acquisition 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. The impact of acquisition-related deferred revenue write-downs largely impacted deferred revenue from subscriptions as of March 31, 2016 and December 31, 2015. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".



Income tax provision
	Three months ended March 31,
(dollars in millions)	2016			2015			Change
Income tax provision	$	2.7		$	1.8		50.0	%
Effective income tax rate	34.8		%	29.0		%

The increase in our effective income tax rate during the three months ended March 31, 2016, when compared to the same period in 2015, was primarily due to a discrete tax benefit included in the 2015 period from the settlement of an IRS audit and the estimated impact to our annual 2016 effective tax rate from Section 162(m) nondeductible compensation. Partially offsetting the increase in our effective income tax rate during the three months ended March 31, 2016, when compared to the same period in 2015, was the benefit of federal and state research tax credits that were permanently enacted into law December 2015 and an increase in the domestic production activities deduction.



First Quarter 2016 Form 10-Q		37

Table of Contents

Blackbaud, Inc.

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.

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $2.3 million at March 31, 2016 and December 31, 2015. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

Non-GAAP financial 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, ~~EBITDA~~non-GAAP net income and ~~Adjusted EBITDA~~non-GAAP diluted earnings per share 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.



40		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

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.


	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
(in millions, except percentages)	2015			2014			$ Change			% Change		2015			2014			$ Change			% Change
(dollars in millions)																							2016			2015			Change
GAAP Revenue	$	158.8		$	144.6		$	14.2		9.8	%	$	462.1		$	411.6		$	50.5		12.3	%	$	169.3		$	147.0		15.2	%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	1.1			1.6			(0.5		)	(31.3	)%	7.1			1.6			5.5			343.8	%	1.8			3.5			(48.6	)%
Non-GAAP revenue(1)	$	159.9		$	146.2		$	13.7		9.4	%	$	469.2		$	413.2		$	56.0		13.6	%	$	171.0		$	150.5		13.6	%

GAAP income from operations	$	14.0		$	13.5		$	0.5		3.7	%	$	36.4		$	38.8		$	(2.4	)	(6.2	)%
GAAP operating margin	8.8		%	9.3		%						7.9		%	9.4		%
GAAP gross profit																							$	89.3		$	75.2		18.8	%
GAAP gross margin																							52.8		%	51.1		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	1.1			1.6			(0.5		)	(31.3	)%	7.1			1.6			5.5			343.8	%	1.8			3.5			(48.6	)%
Add: Stock-based compensation expense	6.5			4.4			2.1			47.7	%	17.9			12.5			5.4			43.2	%	0.9			0.9			—	%
Add: Amortization of intangibles from business combinations	8.1			6.3			1.8			28.6	%	24.3			18.1			6.2			34.3	%	9.9			7.6			30.3	%
Add: Employee severance	0.6			—			0.6			100.0	%	2.2			—			2.2			100.0	%	0.1			0.6			(83.3	)%
Add: Impairment of capitalized software development costs	—			—			—			—	%	—			0.8			(0.8		)	(100.0	)%
Add: Acquisition-related integration costs	0.1			0.2			(0.1		)	(50.0	)%	0.7			0.3			0.4			133.3	%
Add: Acquisition-related expenses	0.3			1.1			(0.8		)	(72.7	)%	1.0			1.1			(0.1		)	(9.1	)%
Add: CEO transition costs	—			—			—			—	%	—			0.9			(0.9		)	(100.0	)%
Subtotal⁽¹⁾	16.6			13.7			3.1			22.6	%	53.3			35.3			17.9			50.7	%	12.6			12.7			(0.8	)%
Non-GAAP income from operations⁽¹⁾	$	30.6		$	27.2		$	3.4		12.5	%	$	89.7		$	74.1		$	15.6		21.1	%
Non-GAAP operating margin	19.1		%	18.6		%						19.1		%	17.9		%
Non-GAAP gross profit⁽¹⁾																							$	101.9		$	87.8		16.1	%
Non-GAAP gross margin																							59.6		%	58.4		%


(1)	The individual amounts for each year may not sum to non-GAAP revenue, subtotal or non-GAAP gross profit due to rounding.



38		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.



	Three months ended March 31,
(dollars in millions, except per share amounts)	2016			2015			Change
GAAP income from operations	$	10.4		$	8.0		30.0	%
GAAP operating margin	6.2		%	5.5		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	1.8			3.5			(48.6	)%
Add: Stock-based compensation expense	7.9			5.1			54.9	%
Add: Amortization of intangibles from business combinations	10.6			8.1			30.9	%
Add: Employee severance	0.3			1.1			(72.7	)%
Add: Acquisition-related integration costs	0.4			0.5			(20.0	)%
Add: Acquisition-related expenses	0.1			0.1			—	%
Subtotal⁽¹⁾	21.1			18.4			14.7	%
Non-GAAP income from operations⁽¹⁾	$	31.6		$	26.5		19.2	%
Non-GAAP operating margin	18.5		%	17.6		%

GAAP net income	$	5.0		$	4.3		16.3	%
Shares used in computing GAAP diluted earnings per share	46,757,458			46,168,096			1.3	%
GAAP diluted earnings per share	$	0.11		$	0.09		22.2	%
Non-GAAP adjustments:
Add: Total Non-GAAP adjustments affecting loss from operations	21.1			18.4			14.7	%
Less: Tax impact related to Non-GAAP adjustments	(6.5		)	(7.8		)	(16.7	)%
Non-GAAP net income⁽¹⁾	$	19.6		$	14.9		31.5	%

Shares used in computing Non-GAAP diluted earnings per share	46,757,458			46,168,096			1.3	%
Non-GAAP diluted earnings per share	$	0.42		$	0.32		31.3	%


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

The increases in non-GAAP income from operations and non-GAAP operating margins during the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same ~~periods~~period in ~~2014,~~2015, were primarily due to ~~the~~ growth in subscriptions revenue, improvements in the utilization of consulting services personnel and ~~the incremental revenue from acquired companies as discussed above,~~a reduction in non-billable implementation service hours, partially offset by increases in ~~human resource costs,~~ transaction-based costs related to our payments services and ~~IT infrastructure~~compensation costs. ~~Also contributing~~The inclusion of Smart Tuition contributed to the increase in subscriptions revenue as well as the increases in costs related to our payment services and compensation costs.

Historically, for the purposes of determining non-GAAP net income, ~~from operations~~we have utilized a non-GAAP tax rate of 39.0% in our calculation of the tax impact related to non-GAAP adjustments. Beginning in 2016, we now apply a non-GAAP effective tax rate of 32.0% in our calculation of the tax impact on non-GAAP adjustments, which affects the tax impact related to non-GAAP adjustments, non-GAAP net income and non-GAAP diluted earnings per share measures. As announced at our 2015 Investor Day, we previously communicated that we would be adjusting this rate to 36.0% to better reflect our periodic effective tax rate calculated in accordance with GAAP and our then current expectations related to tax rate impacting legislation such as the domestic production activities deduction and certain credits which are recurring in nature. Subsequent to that Investor Day communication, the business research and development tax credit was permanently extended. The non-GAAP effective tax rate utilized will be reviewed annually to determine whether it remains appropriate in consideration of our financial results including our periodic effective tax rate calculated in accordance with GAAP, our operating ~~margins were the non-recurrence~~environment and related tax legislation in effect and other factors deemed necessary. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2015, the tax impact related to non-GAAP adjustments is calculated under our historical non-GAAP effective tax rate of certain incremental investments made during the three and nine months ended September 30, 2014, that were targeted to drive the success of our five growth strategies. Our non-GAAP operating margins have started to benefit from gains in efficiency and scalability as a result of these incremental investments. While we continue to invest in these strategies, the amount of investments has decreased in the three and nine months ended September 30, 2015, when compared to the same periods in 2014.39.0%.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		4139

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion~~

Non-GAAP organic revenue growth

In addition, we discuss non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and ~~analysis~~non-GAAP organic recurring revenue growth, which we believe provides useful information for evaluating the periodic growth of ~~financial condition~~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 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 it includes 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. 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 ~~operations (continued)~~the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate. Unaudited calculations of non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis and non-GAAP recurring revenue growth for the first quarter of 2016, as well as unaudited reconciliations of those non-GAAP measures to their most directly comparable GAAP measures, are as follows:

Three months ended
September 30, Nine months ended
September 30,
(in millions, except percentages) 2015
2014
$
Change

%
Change

2015
2014
$
Change

%
Change

GAAP net income $ 7.9
$ 10.4
(2.5 ) (24.0 )% $ 19.2
$ 23.5
(4.3 ) (18.3 )%
Non-GAAP adjustments:
Add: Interest, net 1.8
1.3
0.5
38.5 % 5.4
4.0
1.4
35.0 %
Add: Income tax provision 4.4
1.9
2.5
131.6 % 10.5
10.3
0.2
1.9 %
Add: Depreciation 4.5
4.6
(0.1 ) (2.2 )% 13.8
13.2
0.6
4.5 %
Add: Amortization of intangibles from business combinations 8.1
6.3
1.8
28.6 % 24.3
18.1
6.2
34.3 %
Add: Amortization of software development costs 1.5
0.5
1.0
200.0 % 3.3
1.2
2.1
175.0 %
Subtotal⁽¹⁾
20.3
14.5
5.8
40.0 % 57.2
46.9
10.3
22.0 %
EBITDA⁽¹⁾
$ 28.2
$ 24.9
$ 3.3
13.3 % $ 76.4
$ 70.4
$ 6.0
8.5 %
EBITDA Margin 17.6 % 17.0 % 16.3 % 17.0 %
Non-GAAP adjustments:
Add: Other (income) expense, net $ (0.2 ) $ —
$ (0.2 ) 100.0 % $ (0.6 ) $ —
$ (0.6 ) 100.0 %
Add: Loss on sale of business —
—
—
— % 2.0
—
2.0
100.0 %
Add: Loss on debt extinguishment and termination of derivative instruments —
—
—
— % —
1.0
(1.0 ) (100.0 )%
Add: Acquisition-related deferred revenue write-down 1.1
1.6
(0.5 ) (31.3 )% 7.1
1.6
5.5
343.8 %
Add: Stock-based compensation expense 6.5
4.4
2.1
47.7 % 17.9
12.5
5.4
43.2 %
Add: Employee severance 0.6
—
0.6
100.0 % 2.2
—
2.2
100.0 %
Add: Impairment of capitalized software development costs —
—
—
— % —
0.8
(0.8 ) (100.0 )%
Add: Acquisition-related integration costs 0.1
0.2
(0.1 ) (50.0 )% 0.7
0.3
0.4
133.3 %
Add: Acquisition-related expenses 0.3
1.1
(0.8 ) (72.7 )% 1.0
1.1
(0.1 ) (9.1 )%
Add: CEO transition costs —
—
—
— % —
0.9
(0.9 ) (100.0 )%
Subtotal⁽¹⁾
8.4
7.3
1.1
15.1 % 30.4
18.2
12.2
67.0 %
Adjusted EBITDA⁽¹⁾
$ 36.6
$ 32.3
$ 4.3
13.3 % $ 106.8
$ 88.6
$ 18.2
20.5 %
Adjusted EBITDA Margin 22.9 % 22.1 % 22.8 % 21.4 %



(dollars in millions)	Three months ended March 31,
(dollars in millions)	2016			2015
GAAP revenue	$	169.3		$	147.0
GAAP revenue growth	15.1		%
Add: Non-GAAP acquisition-related revenue ⁽¹⁾	1.8			12.3
Less: Revenue from divested businesses ⁽²⁾	—			(0.4		)
Total Non-GAAP adjustments	1.8			11.9
Non-GAAP revenue	$	171.0		$	158.9
Non-GAAP organic revenue growth	7.6		%

Non-GAAP revenue ⁽³⁾	$	171.0		$	158.9
Foreign currency impact on Non-GAAP organic revenue ⁽⁴⁾	1.5			—
Non-GAAP revenue on constant currency basis ⁽⁴⁾	$	172.6		$	158.9
Non-GAAP organic revenue growth on constant currency basis	8.6		%

GAAP subscriptions revenue	$	96.9		$	72.5
GAAP maintenance revenue	37.2			38.9
GAAP recurring revenue	134.0			111.4
GAAP recurring revenue growth	20.3		%
Add: Non-GAAP acquisition-related revenue ⁽¹⁾	1.8			11.9
Less: Revenue from divested businesses ⁽²⁾	—			(0.2		)
Total Non-GAAP adjustments	1.8			11.7
Non-GAAP recurring revenue	$	135.8		$	123.1
Non-GAAP organic recurring revenue growth	10.3		%

(1)

Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies acquired in the immediately preceding fiscal year, non-GAAP acquisition-related revenue reflects presentation of full-year incremental non-GAAP revenue derived from such companies, as if they were combined throughout the prior period, and it includes the non-GAAP revenue from the acquisition-related deferred revenue write-down attributable to those companies.


(2)	For businesses divested in the prior fiscal year, non-GAAP organic revenue growth excludes revenue associated with divested businesses. The ~~individual amounts~~exclusion of the prior period revenue is to present the results of the divested business with the results of the combined company for ~~each~~the same period of time in both the prior and current periods.


(3)	Non-GAAP revenue for the prior year periods presented herein may not ~~sum~~agree to ~~subtotals, EBITDA or Adjusted EBITDA~~non-GAAP revenue presented in the respective prior period quarterly financial information solely due to ~~rounding.~~the manner in which non-GAAP organic revenue growth is calculated.


(4)	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 Canadian Dollar, EURO, British Pound and Australian Dollar.

Interest expense
Three months ended
September 30, Nine months ended
September 30,
(in millions, except percentages) 2015
2014
$
Change

%
Change

2015
2014
$
Change

%
Change

Interest expense $ 1.8
$ 1.3
$ 0.5
38.5 % $ 5.4
$ 4.1
$ 1.3
31.7 %
% of total revenue 1.1 % 0.9 % 1.2 % 1.0 %

Interest expense increased during the three and nine months ended September 30, 2015, when compared to the same periods in 2014, primarily due to an increase in our average daily borrowings related to our acquisition of MicroEdge in October 2014. In the near term, we expect interest expense as well as interest expense as a percentage of revenue to increase as a result of our acquisition of Smart Tuition.



4240		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

~~Deferred revenue~~

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

(in millions) Timing of recognition September 30,
2015
December 31,
2014
Change
% Change
Subscriptions Over the period billed in advance, generally one year $ 110.6
$ 98.2
$ 12.4
12.6 %
Maintenance Over the period billed in advance, generally one year 91.3
92.8
(1.5 ) (1.6 )%
Services As services are delivered 30.2
29.5
0.7
2.4 %
License fees and other Upon delivery of the solution or service 2.4
0.8
1.6
200.0 %
Total deferred revenue⁽¹⁾
234.5
221.3
13.2
6.0 %
Less: Long-term portion 7.4
9.0
(1.6 ) (17.8 )%
Current portion⁽¹⁾
$ 227.2
$ 212.3
$ 14.8
7.0 %


~~(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 clients are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. Deferred revenue attributable to subscriptions increased during the nine months ended September 30, 2015 as a result of both an increase subscription sales as well as a seasonal increase in billings for subscription renewals. Historically, due to the timing of client budget cycles, we have an increase in client contract renewals in our second quarter as compared to our fourth quarter, which results in a greater amount of deferred revenue for subscriptions as of September 30, 2015 as compared to our fourth quarter. We generally invoice our maintenance and subscription clients in annual cycles 30 days prior to the end of the contract term. The increase in deferred revenue from license fees and other during the nine months ended September 30, 2015 was primarily due to a seasonal increase in advance registration billings associated with our ~~bbcon® user conference, which occurs each year in October. Deferred revenue from both maintenance and services remained relatively unchanged during the nine months ended September 30, 2015.~~

~~Income tax provision~~

~~Our effective income tax rates, including the effects of period-specific events, were:~~

Three months ended
September 30, Nine months ended
September 30,
2015
2014
2015
2014
Effective tax rate 35.9 % 15.4 % 35.2 % 30.5 %

The increase in our effective income tax rate during the three months ended September 30, 2015 when compared to the same period in 2014 was primarily due to discrete tax benefits included in the 2014 period of $1.6 million from statute of limitations expirations and $1.0 million from a reduction in the state income tax effective rate in the U.S., and that impact was partially offset by an increase in the domestic production activities deduction.

In addition to the tax matters described above, the increase in our effective income tax rate during the nine months ended September 30, 2015 when compared to the same period in 2014, reflects a loss from the sale of RLC for which we have determined that a related valuation allowance is appropriate and therefore did not recognize any tax benefit. This increase in our effective income tax rate was partially offset by a discrete tax benefit from the settlement of an audit and an increase in the domestic production activities deduction.



~~Third Quarter 2015 Form 10-Q~~		43

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective income tax rate, was $2.1 million and $2.8 million at September 30, 2015 and December 31, 2014, respectively. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

Seasonality

Our revenues normally fluctuate as a result of certain seasonal variations in our business. 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. In addition, our transaction revenue has historically been at its lowest in the first quarter due to the timing of ~~client~~customer fundraising initiatives and events. Our revenue from payment processing services has also historically increased during the fourth quarter due to year-end giving. 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 third and fourth quarters historically achieving the highest total revenues. ~~Our revenue from payment processing services has also historically increased during the fourth quarter due to year-end giving.~~ Our expenses, however, 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 ~~client~~customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of ~~client~~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, our cash flow from operations has been lowest in our first quarter, and due to the timing of ~~client budget cycles,~~customer contract renewals, many of which take place at or near the beginning of our third quarter, our cash flow from operations has 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-based salary increases, which are generally effective in April each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. These patterns may change ~~however,~~ as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors.

~~Liquidity and capital resources~~

Liquidity and Capital Resources

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



(dollars in millions)	March 31, 2016			Change		December 31, 2015
Cash and cash equivalents	$	12.1		(21.4	)%	$	15.4
Property and equipment, net	54.5			3.4	%	52.7
Software development costs, net	23.0			17.3	%	19.6
Total carrying value of debt	422.4			3.5	%	408.1
Working capital	(143.7		)	(14.1	)%	(167.2		)
Working capital excluding deferred revenue	78.7			24.9	%	63.0

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

(in millions, except percentages) September 30,
2015
December 31,
2014
$
Change
%
Change
Cash and cash equivalents $ 17.6
$ 14.7
$ 2.9
19.7 %
Property and equipment, net 49.0
50.4
(1.4 ) (2.8 )%
Software development costs, net 16.5
8.9
7.6
85.4 %
Total carrying value of debt 241.7
280.6
(38.9 ) (13.9 )%
Working capital (144.4 ) (133.2 ) (11.2 ) 8.4 %
Working capital excluding deferred revenue 82.8
79.1
3.7
4.7 %

Nine months ended
September 30,
2015
2014
$
Change
%
Change
Net cash provided by operating activities $ 85.3
$ 85.5
$ (0.2 ) (0.2 )%
Net cash used in investing activities (26.5 ) (47.9 ) 21.4
(44.7 )%
Net cash (used in) provided by financing activities (54.8 ) 4.7
(59.5 ) (1,266.0 )%



	Three months ended March 31,
(dollars in millions)	2016			Change		2015
Net cash provided by operating activities	$	0.1		(97.6	)%	$	4.2
Net cash used in investing activities	(13.6		)	138.6	%	(5.7		)
Net cash provided by financing activities	9.5			9,400.0	%	0.1



44		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

Our principal sources of liquidity are operating cash flow, funds available under the 2014 Credit Facility and cash on hand. Our operating cash flow depends on continued ~~client~~customer renewal of our subscription, maintenance and support arrangements and market acceptance of our solutions and services. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures, meet our debt obligations and pay dividends. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends and/or repurchase our common stock. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt issuances.



First Quarter 2016 Form 10-Q		41

Table of Contents

Blackbaud, Inc.

At ~~September 30, 2015,~~March 31, 2016, our total cash and cash equivalents balance included approximately ~~$6.3~~$5.2 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.

Operating cash flow

Net cash provided by operating activities of ~~$85.3~~$0.1 million ~~was relatively unchanged~~decreased by $4.1 million during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014.~~2015, primarily due to a decrease in cash flow from operations associated with working capital. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, ~~loss on sale of business, impairment of capitalized software development costs, loss on debt extinguishment and termination of derivative instruments,~~ amortization of deferred financing costs and debt discount and adjustments to our provision for sales returns and allowances; and (ii) changes in our working capital.

Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. Cash flow from operations associated with working capital decreased ~~$9.3~~$11.4 million during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014,~~2015, primarily due to:

an increase in current period bonus payments ~~from~~as a ~~prior year change in the timing~~result of ~~payouts for certain bonus plans, from quarterly to annually, partially offset by~~ an increase in amounts accrued as of December 31, 2015 for ~~current period performance~~over-performance against ~~current period~~2015 targets;

an increase in ~~monthly commission~~tax payments ~~from over-performance against current period targets and from a net increase in the current year payment~~on behalf of employees for ~~prior period over-performance against the prior period target;~~surrendered shares upon vesting of equity awards;

~~an increase in cash outlays for facility costs primarily due to prior year acquisitions; which were partially offset by:~~

~~fluctuations in~~ the timing of vendor ~~payments.~~payments; and to a lesser extent

a seasonal decrease in customer billings due to the timing of customer contract renewals.

Investing cash flow

Net cash used in investing activities of ~~$26.5~~$13.6 million ~~decreased~~increased by ~~$21.4~~$8.0 million during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, when compared to the same period in ~~2014.~~2015. During the ~~nine~~three months ended September 30, 2014, we used $33.3 million of cash for the acquisition of companies including WhippleHill, compared to $0.5 million used for similar investments during the nine months ended September 30, 2015.



~~Third Quarter 2015 Form 10-Q~~		45

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

~~During the nine months ended September 30, 2015,~~March 31, 2016, we had cash outlays of ~~$14.6~~$7.8 million and ~~$10.9~~$5.8 million for purchases of property and equipment and software development costs, respectively, which were up ~~$6.2~~$5.3 million and$~~4.6~~2.7 million, respectively, from cash spent during the same period in ~~2014.~~2015. The increase in cash outlays for property and equipment were primarily driven by investments in our information technology infrastructure, technology platforms and infrastructure used in the delivery of our solutions to ~~clients,~~customers, fluctuations in the timing of vendor payments, various facilities upgrades at a number of our U.S. and international locations, as well as incremental property and equipment costs from prior year business acquisitions. The increase in cash outlays for software development costs was primarily driven by development activities related to the Raiser's Edge NXT, ~~and~~ Financial Edge NXT and Luminate cloud-based solutions, development activities for other solutions and the inclusion of software development costs related to solutions historically provided by ~~companies acquired in 2014.~~Smart Tuition.

Financing cash flow

During the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, we had a net ~~reduction~~increase in borrowings of ~~$39.0~~$14.1 million compared to a net increase in borrowings of ~~$19.9~~$5.1 million during the same period in ~~2014.~~2015. Also during the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, we paid dividends of ~~$16.9~~$5.7 million, which was relatively consistent with the amount paid in the comparable period of ~~2014.~~2015.

2014 Credit Facility

We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. At ~~September 30, 2015,~~March 31, 2016, our available borrowing capacity under the 2014 Credit Facility was ~~$272.6~~$88.5 million. We believe the 2014 Credit Facility will provide us with sufficient flexibility to meet our future financial needs. The 2014 Credit Facility matures in February 2019.

At ~~September 30, 2015,~~March 31, 2016, the carrying amount of our debt under the 2014 Credit Facility was ~~$241.7~~$422.4 million. Our average daily borrowings during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 were ~~$247.0 million and $265.9 million, respectively.~~$408.0 million.



42		First Quarter 2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

Following is a summary of the financial covenants under our credit facility:



Financial Covenant	Requirement	Ratio as of ~~September 30, 2015~~March 31, 2016
Net Leverage Ratio	≤ 3.50 to 1.00	~~1.79~~2.77 to 1.00
Interest Coverage Ratio	≥ 2.50 to 1.00	~~18.78~~16.41 to 1.00

Under the 2014 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2014 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the ~~credit agreement,~~2014 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At ~~September 30, 2015,~~March 31, 2016, we were in compliance with all debt covenants under the 2014 Credit Facility.

~~Smart Tuition acquisition~~

We acquired Smart Tuition for $187.8 million in cash, net of closing adjustments. On October 2, 2015, we drew down a $186.0 million revolving credit loan under the 2014 Credit Facility to finance the acquisition of Smart Tuition. Following the draw down, approximately $261.0 million was outstanding under the revolving credit loans with approximately $85.0 million of capacity unutilized when including issued letters of credit. Following the closing of the Smart Tuition transaction on October 2, 2015, the principal amount outstanding on the term loan was approximately $168.0 million, resulting in a total amount outstanding on the revolving credit loans and term loan of approximately $429.0 million after the acquisition.

~~Entry into interest rate swap agreement~~

In October 2015, we entered into the October 2015 Swap Agreement, which effectively converts portions of our variable rate debt under the 2014 Credit Facility to a fixed rate for the term of the October 2015 Swap Agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 through February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.



46		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

Commitments and contingencies

As of ~~September 30, 2015,~~March 31, 2016, we had contractual obligations with future minimum commitments as follows:


	Payments due by period										Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Recorded contractual obligations:
Debt⁽¹⁾	$	243.4	$	4.4	$	8.7	$	230.3	$	—	$	424.4	$	4.4	$	420.0	$	—	$	—
Interest payments on debt⁽²⁾	1.3		1.0		0.3		—		—		1.2		0.9		0.3		—		—

Unrecorded contractual obligations:
Operating leases⁽³⁾	94.7		13.9		25.2		23.5		32.1		97.7		15.0		26.9		25.0		30.8
Interest payments on debt⁽⁴⁾	17.3		5.1		10.3		1.9		—		26.0		8.9		17.1		—		—
Purchase obligations⁽⁵⁾	6.7		3.7		3.0		—		—		15.5		7.7		5.7		2.1
Total contractual obligations	$	363.4	$	28.1	$	47.5	$	255.7	$	32.1	$	564.8	$	36.9	$	470.0	$	27.1	$	30.8

(1)

Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2014 Credit Facility at ~~September 30, 2015~~March 31, 2016 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2014 Revolving Facility for the purposes of determining minimum commitment amounts.


(2)	Represents interest payment obligations related to our interest rate swap agreements.


(3)	Our commitments related to operating leases have not been reduced by incentive payments and reimbursement of leasehold improvements.


(4)	The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions described in (1) above.


(5)	We utilize third-party technology in conjunction with our solutions and services, with contractual ~~arrangements~~obligations varying in length from one to ~~five~~four years. In certain cases, these arrangements require a minimum annual purchase commitment by us.

The term loan under the 2014 Credit Facility requires periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2014 Credit Facility in February 2019.

The total liability for uncertain tax positions as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, was ~~$2.9~~$3.1 million and ~~$3.6~~$3.0 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.

In February ~~2015,~~2016, our Board of Directors approved our annual dividend rate of $0.48 per share to be made in quarterly payments. Dividends at this annual rate would aggregate to $22.6 million assuming 47.0 million shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2014 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.

In April 2016, our Board of Directors declared a second quarter dividend of $0.12 per share payable on June 15, 2016 to stockholders of record on May 27, 2016.



First Quarter 2016 Form 10-Q		43

~~Off-balance sheet arrangements~~

Table of Contents

Blackbaud, Inc.

Off-Balance Sheet Arrangements

As of ~~September 30, 2015,~~March 31, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



~~Third Quarter 2015 Form 10-Q~~		47Foreign Currency Exchange Rates

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item 2. Management's discussion and analysis of financial condition and results of operations (continued)~~

~~Foreign currency exchange rates~~

Approximately ~~11%~~10% of our total revenue for the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 was derived from operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within other comprehensive loss as a component of stockholders’ equity, was a loss of ~~$1.2~~$0.4 million and ~~$0.9~~$0.8 million as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively.

The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in Pounds Sterling, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, the fluctuation in foreign currency exchange rates reduced our total revenue and income from operations by ~~$7.2 million.~~$1.5 million and $0.8 million, respectively. We will continue monitoring such exposure and take action as appropriate. To determine the ~~impact~~impacts on total revenue of(or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. ~~This impact is~~These impacts are non-GAAP financial information and isare not in accordance with, or an alternative to, information prepared in accordance with GAAP.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. In addition, if inflationary pressures impact the rate of giving to our ~~clients,~~customers, there could be adverse impacts to our business, financial condition and results of operations.

~~Critical accounting policies and estimates~~

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014.~~2015.



44		First Quarter 2016 Form 10-Q

~~Recently issued accounting pronouncements~~

Table of Contents

Blackbaud, Inc.

Recently Issued Accounting Pronouncements

For a discussion of the impact that recently issued accounting pronouncements are expected to have on our financial position and results of operations when adopted in the future, see Note 2 of our consolidated financial statements in this report.



48		~~Third Quarter 2015 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Item~~ITEM 3. ~~Quantitative and qualitative disclosures about market risk~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market rate sensitivity for interest rates and foreign currency exchange rates.

~~Interest rate risk~~

Interest Rate Risk

Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage our variable rate interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments entered into for hedging purposes. Due to the nature of our debt, the materiality of the fair values of the derivative instruments and the highly liquid, short-term nature and level of our cash and cash equivalents as of ~~September 30, 2015,~~March 31, 2016, we believe there is no material risk of exposure to changing interest rates for those positions. There were no significant changes in how we manage interest rate risk between December 31, ~~2014~~2015 and ~~September 30, 2015.~~March 31, 2016.

~~Foreign currency risk~~

Foreign Currency Risk

For a discussion of our exposure to foreign currency exchange rate fluctuations, see “Management’s discussion and analysis of financial condition and results of operations — Foreign ~~currency exchange rates”~~Currency Exchange Rates” in this report.

~~Item~~ITEM 4. ~~Controls and procedures~~CONTROLS AND PROCEDURES

~~Evaluation of disclosure controls and procedures~~

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.

~~Changes in internal control over financial reporting~~

Changes in Internal Control Over Financial Reporting

No change in internal control over financial reporting occurred during the most recent fiscal quarter ended ~~September 30, 2015~~March 31, 2016 with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		4945

Table of Contents

Blackbaud, Inc.

~~PART II. OTHER INFORMATION~~



		PART II. OTHER INFORMATION

~~Item~~ITEM 1A. ~~Risk factors~~RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item IA, "Risk factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2014,~~2015, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, ~~2014.~~2015.

~~Item~~ITEM 2. ~~Unregistered sales of equity securities and use of proceeds~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Issuer purchases of equity securities~~

Issuer Purchases of Equity Securities

The following table provides information about shares of common stock acquired or repurchased during the three months ended ~~September 30, 2015.~~March 31, 2016. All of these acquisitions were of common stock withheld by us to satisfy minimum tax obligations of employees due upon exercise of stock appreciation rights and vesting of restricted stock awards and units. The level of acquisition activity varies from period to period based upon the timing of grants and vesting as well as employee exercise decisions.

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, July 1, 2015 $ 50,000
July 1, 2015 through July 31, 2015 —
$ —
—
50,000
August 1, 2015 through August 31, 2015 8,277
60.53
—
50,000
September 1, 2015 through September 30, 2015 —
—
—
50,000
Total 8,277
$ 60.53
—
$ 50,000



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, January 1, 2016					$	50,000
January 1, 2016 through January 31, 2016	—	$	—	—	50,000
February 1, 2016 through February 29, 2016	104,970	52.72		—	50,000
March 1, 2016 through March 31, 2016	—	—		—	50,000
Total	104,970	$	52.72	—	$	50,000


(1)	In 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.



5046		~~Third~~First Quarter ~~2015~~2016 Form 10-Q

Table of Contents

Blackbaud, Inc.

~~Item~~ITEM 6. ~~Exhibits~~EXHIBITS

The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q:

Filed In
Exhibit Number Description of Document Filed Herewith Form Exhibit Number Filing Date
10.78 Unit Purchase Agreement, dated as of August 10, 2015, by and between Smart Tuition Holdings, LLC and Blackbaud, Inc. 8-K 10.78 10/8/2015
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
101.INS* XBRL Instance Document. X
101.SCH* XBRL Taxonomy Extension Schema Document. X
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. X
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. X
101.LAB* XBRL Taxonomy Extension Label Linkbase Document. X
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. X



		Filed In
Exhibit Number	Description of Document	Filed Herewith	Form	Exhibit Number	Filing Date
10.82	Offer Letter Agreement between Blackbaud, Inc. and Brian E. Boruff	X
10.83	Employee Agreement between Blackbaud, Inc. and Brian E. Boruff	X
31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.INS*	XBRL Instance Document.	X
101.SCH*	XBRL Taxonomy Extension Schema Document.	X
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.	X
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.	X
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.	X
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.	X

* Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to liability of that Section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.



~~Third~~First Quarter ~~2015~~2016 Form 10-Q		5147

Table of Contents

Blackbaud, Inc.



		SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.



		BLACKBAUD, INC.

Date:	~~November 5, 2015~~May 4, 2016	By:	/s/ Michael P. Gianoni
			Michael P. Gianoni
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November 5, 2015~~May 4, 2016	By:	/s/ Anthony W. Boor
			Anthony W. Boor
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)



5248		~~Third~~First Quarter ~~2015~~2016 Form 10-Q



	Intangible assets acquired		Weighted average amortization period
WhippleHill	(in thousands)		(in years)
Customer relationships	$	11,300	11
Acquired technology	8,500		7
Marketing assets	2,300		9
Non-compete agreements	100		3
Total intangible assets	$	22,200	9



Declaration Date	Dividend per Share		Record Date	Payable Date
February 2015	$	0.12	February 27	March 13
April 2015	$	0.12	May 28	June 15
July 2015	$	0.12	August 28	September 15



(in thousands)
Cash and cash equivalents	$	952
Accounts receivable, net of allowance	132
Prepaid expenses and other assets	38
Property and equipment, net	31
Deferred tax asset	6
Goodwill	1,374
Intangible assets, net	289
Total assets held-for-sale	$	2,822

Trade accounts payable	$	82
Accrued expenses and other liabilities	181
Deferred revenue	490
Deferred tax liability	90
Total liabilities held-for-sale	$	843