UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~June 30, 2020~~March 31, 2021



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

65 Fairchild Street

Charleston,, South Carolina29492

(Address of principal executive offices, including zip code)

(~~843~~) (843) 216-6200

(Registrant’s telephone number, including area code)




Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock, $0.001 Par Value	BLKB	Nasdaq Global Select Market

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☑ No ☐

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☑

The number of shares of the registrant’s Common Stock outstanding as of ~~July 29, 2020~~April 28, 2021 was ~~49,575,132.~~48,818,991.

TABLE OF CONTENTS


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS					2

PART I.			FINANCIAL INFORMATION		3

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS~~Item 1.			2Financial statements

~~PART I.~~	~~FINANCIAL INFORMATION~~			3

~~Item 1.~~	~~Financial statements~~
	Condensed Consolidated Balance Sheets (Unaudited)	3
			Condensed Consolidated Statements of Comprehensive Income (Unaudited)		4
			Condensed Consolidated Statements of Cash Flows (Unaudited)		5
			Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)		6
			Notes to Condensed Consolidated Financial Statements (Unaudited)		87
Item 2.			Management's discussion and analysis of financial condition and results of operations		2221
Item 3.			Quantitative and qualitative disclosures about market risk		4137
Item 4.			Controls and procedures		4238

PART II.			OTHER INFORMATION		4339

Item ~~1A.~~1.			~~Risk factors~~Legal proceedings		4339
Item 2.1A.			Risk factors		39
Item 2.			Unregistered sales of equity securities and use of proceeds		4540

Item 6.			Exhibits		4641

SIGNATURES					4742



~~Second~~First Quarter ~~2020~~2021 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 that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These "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, as amended. Forward-looking statements consist of, among other things, specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations and on the markets and communities in which we and our customers and partners operate, 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, 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, cybersecurity and data protection risks, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or any variations of 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 future performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.

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 summarized under “Part II, Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 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 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						~~Second~~First Quarter ~~2020~~2021 Form 10-Q



						PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Blackbaud, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(dollars in thousands) June 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents $ 30,531
$ 31,810
Restricted cash due to customers 421,915
545,485
Accounts receivable, net of allowance of $9,025 and $5,529 at June 30, 2020 and December 31, 2019, respectively 129,675
88,868
Customer funds receivable 1,284
524
Prepaid expenses and other current assets 83,699
67,852
Total current assets 667,104
734,539
Property and equipment, net 36,539
35,546
Operating lease right-of-use assets 95,575
104,400
Software development costs, net 106,044
101,302
Goodwill 630,687
634,088
Intangible assets, net 292,187
317,895
Other assets 68,673
65,193
Total assets $ 1,896,809
$ 1,992,963
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable $ 41,029
$ 47,676
Accrued expenses and other current liabilities 52,893
73,317
Due to customers 423,199
546,009
Debt, current portion 9,194
7,500
Deferred revenue, current portion 332,570
314,335
Total current liabilities 858,885
988,837
Debt, net of current portion 478,919
459,600
Deferred tax liability 45,108
44,594
Deferred revenue, net of current portion 4,626
1,802
Operating lease liabilities, net of current portion 86,586
95,624
Other liabilities 11,883
5,742
Total liabilities 1,486,007
1,596,199
Commitments and contingencies (see Note 9)

Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding —
—
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,901,100 and 60,206,091 shares issued at June 30, 2020 and December 31, 2019, respectively 61
60
Additional paid-in capital 491,450
457,804
Treasury stock, at cost; 11,332,912 and 11,066,354 shares at June 30, 2020 and December 31, 2019, respectively (311,661 ) (290,665 )
Accumulated other comprehensive loss (14,476 ) (5,290 )
Retained earnings 245,428
234,855
Total stockholders’ equity 410,802
396,764
Total liabilities and stockholders’ equity $ 1,896,809
$ 1,992,963

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


Blackbaud, Inc. Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands)	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	27,753	$	35,750
Restricted cash	255,158		609,219
Accounts receivable, net of allowance of $10,361 and $10,292 at March 31, 2021 and December 31, 2020, respectively	83,333		95,404
Customer funds receivable	945		321
Prepaid expenses and other current assets	98,095		78,366
Total current assets	465,284		819,060
Property and equipment, net	105,124		105,177
Operating lease right-of-use assets	20,055		22,671
Software development costs, net	113,624		111,827
Goodwill	637,113		635,854
Intangible assets, net	269,118		277,506
Other assets	74,022		72,639
Total assets	$	1,684,340	$	2,044,734
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	35,274	$	27,836
Accrued expenses and other current liabilities	53,013		52,228
Due to customers	254,947		608,264
Debt, current portion	12,875		12,840
Deferred revenue, current portion	290,025		312,236
Total current liabilities	646,134		1,013,404
Debt, net of current portion	537,924		518,193
Deferred tax liability	54,444		54,086
Deferred revenue, net of current portion	4,495		4,678
Operating lease liabilities, net of current portion	15,744		17,357
Other liabilities	9,439		10,866
Total liabilities	1,268,180		1,618,584
Commitments and contingencies (see Note 9)	0		0
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, 0ne outstanding	0		0
Common stock, $0.001 par value; 180,000,000 shares authorized, 61,595,276 and 60,904,638 shares issued at March 31, 2021 and December 31, 2020, respectively	62		61
Additional paid-in capital	574,958		544,963
Treasury stock, at cost; 12,760,956 and 12,054,268 shares at March 31, 2021 and December 31, 2020, respectively	(399,583)		(353,091)
Accumulated other comprehensive income (loss)	4,163		(2,497)
Retained earnings	236,560		236,714
Total stockholders’ equity	416,160		426,150
Total liabilities and stockholders’ equity	$	1,684,340	$	2,044,734

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



~~Second~~First Quarter ~~2020~~2021 Form 10-Q						3

Blackbaud, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended
June 30, Six months ended
June 30,
(dollars in thousands, except per share amounts) 2020
2019
2020
2019
Revenue
Recurring $ 216,260
$ 208,468
$ 421,127
$ 406,562
One-time services and other 15,731
17,166
34,485
34,902
Total revenue 231,991
225,634
455,612
441,464
Cost of revenue
Cost of recurring 91,370
86,657
180,921
171,368
Cost of one-time services and other 13,569
14,150
28,883
28,722
Total cost of revenue 104,939
100,807
209,804
200,090
Gross profit 127,052
124,827
245,808
241,374
Operating expenses
Sales, marketing and customer success 51,954
55,009
110,689
110,464
Research and development 24,895
25,902
49,872
54,363
General and administrative 29,842
28,543
55,697
55,660
Amortization 729
1,152
1,470
2,528
Restructuring 50
730
74
2,683
Total operating expenses 107,470
111,336
217,802
225,698
Income from operations 19,582
13,491
28,006
15,676
Interest expense (3,893 ) (5,799 ) (8,052 ) (11,122 )
Other income, net 630
2,181
1,700
2,363
Income before provision for income taxes 16,319
9,873
21,654
6,917
Income tax provision 4,496
2,733
5,192
899
Net income $ 11,823
$ 7,140
$ 16,462
$ 6,018
Earnings per share
Basic $ 0.25
$ 0.15
$ 0.34
$ 0.13
Diluted $ 0.24
$ 0.15
$ 0.34
$ 0.13
Common shares and equivalents outstanding
Basic weighted average shares 48,239,928
47,714,621
48,138,125
47,622,740
Diluted weighted average shares 48,418,378
48,160,684
48,465,077
48,101,212
Other comprehensive loss
Foreign currency translation adjustment (887 ) (6,018 ) (6,615 ) (1,428 )
Unrealized gain (loss) on derivative instruments, net of tax 551
(1,939 ) (2,571 ) (2,871 )
Total other comprehensive loss (336 ) (7,957 ) (9,186 ) (4,299 )
Comprehensive income (loss) $ 11,487
$ (817 ) $ 7,276
$ 1,719

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


Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	Three months ended March 31,
(dollars in thousands, except per share amounts)		2021		2020
Revenue
Recurring		$	206,750	$	204,867
One-time services and other		12,441		18,754
Total revenue		219,191		223,621
Cost of revenue
Cost of recurring		88,865		89,551
Cost of one-time services and other		14,520		15,314
Total cost of revenue		103,385		104,865
Gross profit		115,806		118,756
Operating expenses
Sales, marketing and customer success		48,793		58,735
Research and development		29,179		24,977
General and administrative		30,587		25,855
Amortization		549		741
Restructuring		54		24
Total operating expenses		109,162		110,332
Income from operations		6,644		8,424
Interest expense		(5,114)		(4,159)
Other (expense) income, net		(1,010)		1,070
Income before provision for income taxes		520		5,335
Income tax provision		684		696
Net (loss) income		$	(164)	$	4,639
Earnings (loss) per share
Basic		$	0	$	0.10
Diluted		$	0	$	0.10
Common shares and equivalents outstanding
Basic weighted average shares		47,363,197		48,036,300
Diluted weighted average shares		47,363,197		48,455,751
Other comprehensive income (loss)
Foreign currency translation adjustment		2,511		(5,728)
Unrealized gain (loss) on derivative instruments, net of tax		4,149		(3,122)
Total other comprehensive income (loss)		6,660		(8,850)
Comprehensive income (loss)		$	6,496	$	(4,211)

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



4						~~Second~~First Quarter ~~2020~~2021 Form 10-Q


Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)	Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)						Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six months ended June 30,							Three months ended March 31,
(dollars in thousands)	2020			2019			(dollars in thousands)	2021		2020
Cash flows from operating activities							Cash flows from operating activities
Net income	$	16,462		$	6,018
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income							Net (loss) income	$	(164)	$	4,639
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:							Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization	46,088			43,113			Depreciation and amortization	20,461		21,804
Provision for credit losses and sales returns	6,677			4,646			Provision for credit losses and sales returns	2,141		2,488
Stock-based compensation expense	33,713			28,755			Stock-based compensation expense	30,005		13,580
Deferred taxes	1,945			465			Deferred taxes	(1,142)		954
Amortization of deferred financing costs and discount	376			376			Amortization of deferred financing costs and discount	506		188
Other non-cash adjustments	477			1,982			Other non-cash adjustments	(32)		102
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:							Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable	(48,167		)	(45,071		)	Accounts receivable	10,407		(3,876)
Prepaid expenses and other assets	(7,068		)	(12,725		)	Prepaid expenses and other assets	(17,426)		(5,303)
Trade accounts payable	(8,984		)	216			Trade accounts payable	7,550		(4,021)
Accrued expenses and other liabilities	(26,520		)	(9,014		)	Accrued expenses and other liabilities	549		(31,694)
Deferred revenue	22,489			26,328			Deferred revenue	(22,752)		(23,364)
Net cash provided by operating activities	37,488			45,089
Net cash provided by (used in) operating activities							Net cash provided by (used in) operating activities	30,103		(24,503)
Cash flows from investing activities							Cash flows from investing activities
Purchase of property and equipment	(5,887		)	(6,375		)	Purchase of property and equipment	(3,470)		(2,867)
Capitalized software development costs	(21,679		)	(23,206		)	Capitalized software development costs	(9,302)		(10,937)
Purchase of net assets of acquired companies, net of cash and restricted cash acquired	—			(109,386		)
Other investing activities	—			500

Net cash used in investing activities	(27,566		)	(138,467		)	Net cash used in investing activities	(12,772)		(13,804)
Cash flows from financing activities							Cash flows from financing activities
Proceeds from issuance of debt	202,100			329,100			Proceeds from issuance of debt	80,700		144,700
Payments on debt	(185,250		)	(155,150		)	Payments on debt	(59,667)		(86,075)

Employee taxes paid for withheld shares upon equity award settlement	(20,996		)	(19,760		)	Employee taxes paid for withheld shares upon equity award settlement	(18,426)		(19,782)
Proceeds from exercise of stock options	4			6			Proceeds from exercise of stock options	0		1
Change in due to customers	(121,612		)	(107,808		)	Change in due to customers	(353,597)		(311,095)
Change in customer funds receivable	(828		)	(3,741		)	Change in customer funds receivable	(563)		(733)
Purchase of treasury stock							Purchase of treasury stock	(28,066)		0
Dividend payments to stockholders	(5,960		)	(11,802		)	Dividend payments to stockholders	0		(5,960)
Net cash (used in) provided by financing activities	(132,542		)	30,845
Net cash used in financing activities							Net cash used in financing activities	(379,619)		(278,944)
Effect of exchange rate on cash, cash equivalents and restricted cash	(2,229		)	(526		)	Effect of exchange rate on cash, cash equivalents and restricted cash	230		(2,822)
Net decrease in cash, cash equivalents and restricted cash	(124,849		)	(63,059		)	Net decrease in cash, cash equivalents and restricted cash	(362,058)		(320,073)
Cash, cash equivalents and restricted cash, beginning of period	577,295			449,846			Cash, cash equivalents and restricted cash, beginning of period	644,969		577,295
Cash, cash equivalents and restricted cash, end of period	$	452,446		$	386,787		Cash, cash equivalents and restricted cash, end of period	$	282,911	$	257,222

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown above in the condensed consolidated statements of cash flows:


(dollars in thousands)	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	27,753	$	35,750
Restricted cash	255,158		609,219
Total cash, cash equivalents and restricted cash in the statement of cash flows	$	282,911	$	644,969

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

(dollars in thousands) June 30,
2020
December 31,
2019
Cash and cash equivalents $ 30,531
$ 31,810
Restricted cash due to customers 421,915
545,485
Total cash, cash equivalents and restricted cash in the statement of cash flows $ 452,446
$ 577,295

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



~~Second~~First Quarter ~~2020~~2021 Form 10-Q						5

Blackbaud, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)


(dollars in thousands)	Common stock			Additional paid-in capital		Treasury stock		Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
	Shares	Amount
Balance at December 31, 2020	60,904,638	$	61	$	544,963	$	(353,091)	$	(2,497)	$	236,714	$	426,150
Net loss	—	—		—		—		—		(164)		(164)

Purchase of 465,821 treasury shares under stock repurchase program	—	—		—		(28,066)		—		—		(28,066)
Vesting of restricted stock units	206,418	—		0		—		—		—		0
Employee taxes paid for 240,867 withheld shares upon equity award settlement	—	—		—		(18,426)		—		—		(18,426)
Stock-based compensation	—	—		29,995		—		—		10		30,005
Restricted stock grants	519,009	1		—		—		—		—		1
Restricted stock cancellations	(34,789)	—		—		—		—		—		—
Other comprehensive income	—	—		—		—		6,660		—		6,660
Balance at March 31, 2021	61,595,276	$	62	$	574,958	$	(399,583)	$	4,163	$	236,560	$	416,160


(dollars in thousands)	Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity			(dollars in thousands)	Common stock			Additional paid-in capital		Treasury stock		Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
	Shares		Amount																	Shares	Amount
Balance at December 31, 2019	60,206,091		$	60	$	457,804	$	(290,665	)	$	(5,290	)	$	234,855		$	396,764		Balance at December 31, 2019	60,206,091	$	60	$	457,804	$	(290,665)	$	(5,290)	$	234,855	$	396,764
Net income	—		—		—		—			—			4,639			4,639			Net income	—	—		—		—		—		4,639		4,639
Payment of dividends ($0.12 per share)	—		—		—		—			—			(5,960		)	(5,960		)	Payment of dividends ($0.12 per share)	—	—		—		—		—		(5,960)		(5,960)
Exercise of stock options and vesting of restricted stock units	210,057		—		1		—			—			—			1			Exercise of stock options and vesting of restricted stock units	210,057	—		1		—		—		—		1
Employee taxes paid for 245,358 withheld shares upon equity award settlement	—		—		—		(19,782		)	—			—			(19,782		)	Employee taxes paid for 245,358 withheld shares upon equity award settlement	—	—		—		(19,782)		—		—		(19,782)
Stock-based compensation	—		—		13,539		—			—			41			13,580			Stock-based compensation	—	—		13,539		—		—		41		13,580
Restricted stock grants	563,947		1		—		—			—			—			1			Restricted stock grants	563,947	1		—		—		—		—		1
Restricted stock cancellations	(47,456	)	—		—		—			—			—			—			Restricted stock cancellations	(47,456)	—		—		—		—		—		—
Other comprehensive loss	—		—		—		—			(8,850		)	—			(8,850		)	Other comprehensive loss	—	—		—		—		(8,850)		—		(8,850)
Balance at March 31, 2020	60,932,639		$	61	$	471,344	$	(310,447	)	$	(14,140	)	$	233,575		$	380,393		Balance at March 31, 2020	60,932,639	$	61	$	471,344	$	(310,447)	$	(14,140)	$	233,575	$	380,393
Net income	—		—		—		—			—			11,823			11,823
Exercise of stock options and vesting of restricted stock units	7,111		—		3		—			—			—			3
Employee taxes paid for 21,200 withheld shares upon equity award settlement	—		—		—		(1,214		)	—			—			(1,214		)
Stock-based compensation	—		—		20,103		—			—			30			20,133
Restricted stock grants	20,776		—		—		—			—			—			—
Restricted stock cancellations	(59,426	)	—		—		—			—			—			—
Other comprehensive loss	—		—		—		—			(336		)	—			(336		)
Balance at June 30, 2020	60,901,100		$	61	$	491,450	$	(311,661	)	$	(14,476	)	$	245,428		$	410,802



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



6						~~Second~~First Quarter ~~2020~~2021 Form 10-Q

~~Blackbaud, Inc.~~

~~Condensed Consolidated statements of stockholders' equity (continued)~~

~~(Unaudited)~~

(dollars in thousands) Common stock
Additional
paid-in
capital

Treasury
stock

Accumulated
other
comprehensive
income (loss)

Retained
earnings

Total stockholders' equity
Shares
Amount
Balance at December 31, 2018 59,327,633
$ 59
$ 399,241
$ (266,884 ) $ (5,110 ) $ 246,477
$ 373,783
Net loss —
—
—
—
—
(1,122 ) (1,122 )
Payment of dividends ($0.12 per share) —
—
—
—
—
(5,901 ) (5,901 )
Exercise of stock options and stock appreciation rights and vesting of restricted stock units 234,453
—
3
—
—
—
3
Employee taxes paid for 239,311 withheld shares upon equity award settlement —
—
—
(18,400 ) —
—
(18,400 )
Stock-based compensation —
—
13,693
—
—
33
13,726
Restricted stock grants 663,906
1
—
—
—
—
1
Restricted stock cancellations (43,314 ) —
—
—
—
—
—
Other comprehensive income —
—
—
—
3,658
—
3,658
Balance at March 31, 2019 60,182,678
$ 60
$ 412,937
$ (285,284 ) $ (1,452 ) $ 239,487
$ 365,748
Net income —
—
—
—
—
7,140
7,140
Payment of dividends ($0.12 per share) —
—
—
—
—
(5,901 ) (5,901 )
Exercise of stock options and stock appreciation rights and vesting of restricted stock units 21,726
—
3
—
—
—
3
Employee taxes paid for 17,119 withheld shares upon equity award settlement —
—
—
(1,360 ) —
—
(1,360 )
Stock-based compensation —
—
15,010
—
—
19
15,029
Restricted stock grants 12,405
—
—
—
—
—
—
Restricted stock cancellations (29,746 ) —
—
—
—
—
—
Other comprehensive loss —
—
—
—
(7,957 ) —
(7,957 )
Balance at June 30, 2019 60,187,063
$ 60
$ 427,950
$ (286,644 ) $ (9,409 ) $ 240,745
$ 372,702

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



~~Second Quarter 2020 Form 10-Q~~		7

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1. Organization

We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, higher education institutions, K–12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for ~~more than three~~nearly four decades, we are headquartered in Charleston, South Carolina, and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom.



2. Basis of Presentation

Unaudited condensed consolidated interim financial statements

The accompanying condensed consolidated interim 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 ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, ~~2019~~2020 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2020,~~2021, 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 condensed consolidated interim 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, ~~2019,~~2020, and other forms filed with the SEC from time to time.

Basis of consolidation

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

Reportable segment

We report our operating results and financial information in one operating and reportable segment. Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. Our chief operating decision maker is our chief executive officer ("CEO").

Risks and uncertainties

~~Impact of~~ related to COVID-19

We are subject to risks and uncertainties as a result of the global COVID-19 pandemic. We ~~expect~~believe that COVID-19 ~~will~~may continue to impact ~~all of~~ our vertical markets ~~across all of our~~and geographies, ~~to some degree,~~ but the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ~~ultimate geographic spread of the disease, the~~ duration of the outbreak, travel restrictions and business closures, the effectiveness of vaccination programs and other actions taken to contain the disease and other unforeseeable consequences.



8First Quarter 2021 Form 10-Q						~~Second Quarter 2020 Form 10-Q~~7

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that 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, income taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others. Changes in the facts or circumstances underlying these estimates, including due to COVID-19, could result in material changes and actual results could materially differ from these estimates.

~~Response to COVID-19~~

~~Temporarily closed our offices worldwide and transitioned our employees to work remotely;~~


•	~~Rescinded our previously announced policy to pay an annual dividend at a rate of~~ ~~$0.48~~ per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as our Board of Directors may otherwise determine in its sole discretion;


•	~~Temporarily suspended our 401(k)-match program, whereby we have historically matched~~ ~~50%~~ ~~of qualified U.S. employees' contributions to our 401(k) plan up to~~ 6% ~~of their salaries, effective with the payroll period commencing April 1, 2020;~~

~~Temporarily froze our hiring efforts and implemented a modest and targeted headcount reduction, though we have since began backfilling sales positions;~~

Michael Gianoni, our President and Chief Executive Officer, elected to forego receipt of all but that portion of his base salary necessary to fund, on a pre-tax basis, his contributions to continue to participate in our health benefits plan, between April 1, 2020 and June 16, 2020;

~~Restricted non-essential employee travel and put in place other operating cost containment actions;~~


•	~~All of our employees with a base salary equal to or less than~~ ~~$75 thousand~~ ~~received financial support in the form of a one-time bonus of~~ ~~$1 thousand~~ ~~on April 30, 2020;~~


•	On ~~May 1, 2020, we granted restricted stock units with a total grant date fair value of~~ ~~$8.3 million~~ ~~to our employees that were eligible for base salary merit increases in lieu of such increases, which will vest on May 1, 2021 subject to the recipient's continued employment with us;~~


•	On ~~May 1, 2020, we granted performance-based restricted stock units with a total grant date fair value of~~ ~~$34.4 million~~ to our employees that were eligible for a 2020 cash bonus plan in lieu of such cash bonus, which may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us.

~~Recently adopted accounting pronouncements~~

~~In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ (“ASU 2016-13”). ASU 2016-13 requires certain types of financial instruments, including trade receivables, to be presented at the net amount expected to be collected based on historical events, current conditions and forward-looking information. We adopted ASU 2016-13 as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We adopted ASU 2018-15 prospectively as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated financial statements.



~~Second Quarter 2020 Form 10-Q~~		9

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

Recently issued accounting pronouncements

There are no recently issued accounting pronouncements that ~~are expected~~we expect to have a material impact on our consolidated financial ~~position or results of operations~~statements when adopted in the future.

Summary of significant accounting policies

~~Except for the accounting policies for allowance for credit losses and allowance for sales returns below that were updated as a result of adopting ASU 2016-13, there~~There have been no new or material changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the SEC on February ~~20, 2020.~~23, 2021.

~~Allowance for credit losses~~

Our accounts receivable consist of a single portfolio segment. Accounts receivable are recorded at original invoice amounts less an allowance for credit losses, an amount we estimate to be sufficient to provide adequate protection against lifetime expected losses resulting from extending credit to our customers. In judging the adequacy of the allowance for credit losses, we consider multiple factors including historical bad debt experience, the current aging of our receivables and current economic conditions that may affect our customers' ability to pay. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an additional provision for credit losses could be required. Accounts are written off after all means of collection are exhausted and recovery is considered remote. Provisions for credit losses are recorded in general and administrative expense.

~~Below is a summary of the changes in our allowance for credit losses.~~

(in thousands)
Balance at
beginning of year ⁽¹⁾

Provision/
adjustment

Write-off
Recovery
Balance at June 30, 2020
2020 $ 4,011
$ 3,708
$ (554 ) $ 243
$ 7,408


~~(1)~~	Upon adoption of ASU 2016-13 at January 1, 2020, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses, as these amounts reflect the credit risk associated with our accounts receivable.

The increase in our allowance for credit losses during the six months ended June 30, 2020 was primarily due to an increase in the aging of our receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic. The increase in the amount of write-offs during the six months ended June 30, 2020 was insignificant.

~~Allowance for sales returns~~

We maintain a reserve for returns and credits which is estimated based on several factors including historical experience, known credits yet to be issued, the aging of customer accounts and the nature of service level commitments. A considerable amount of judgment is required in assessing these factors. Provisions for sales returns and credits are charged against the related revenue items.

~~Below is a summary of the changes in our allowance for sales returns.~~

(in thousands)
Balance at
beginning of year ⁽¹⁾

Provision/
adjustment

Deduction
Balance at June 30, 2020
2020 $ 1,518
$ 2,969
$ (2,870 ) $ 1,617


~~(1)~~	~~As discussed above, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses upon adoption of ASU 2016-13 at January 1, 2020.~~



10				~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

3. Goodwill and Other Intangible Assets

The change in goodwill during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, consisted of the following:

(dollars in thousands) Total
Balance at December 31, 2019 $ 634,088
Effect of foreign currency translation (3,401 )
Balance at June 30, 2020 $ 630,687


(dollars in thousands)	Total
Balance at December 31, 2020	$	635,854


Effect of foreign currency translation	1,259
Balance at March 31, 2021	$	637,113


4. Earnings (Loss) Per Share

We compute basic earnings (loss) per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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 (loss) 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. Diluted loss per share for the three months ended March 31, 2021 was the same as basic loss per share as there was a net loss in the period and inclusion of potentially dilutive securities was anti-dilutive.


8						First Quarter 2021 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands, except per share amounts) 2020
2019
2020
2019
Numerator:
Net income $ 11,823
$ 7,140
$ 16,462
$ 6,018
Denominator:
Weighted average common shares 48,239,928
47,714,621
48,138,125
47,622,740
Add effect of dilutive securities:
Stock-based awards 178,450
446,063
326,952
478,472
Weighted average common shares assuming dilution 48,418,378
48,160,684
48,465,077
48,101,212
Earnings per share:
Basic $ 0.25
$ 0.15
$ 0.34
$ 0.13
Diluted $ 0.24
$ 0.15
$ 0.34
$ 0.13

Anti-dilutive shares excluded from calculations of diluted earnings per share 1,484,976
245,060
1,329,519
748,743


	Three months ended March 31,
(dollars in thousands, except per share amounts)		2021		2020
Numerator:
Net (loss) income		$	(164)	$	4,639
Denominator:
Weighted average common shares		47,363,197		48,036,300
Add effect of dilutive securities:
Stock-based awards		0		419,451
Weighted average common shares assuming dilution		47,363,197		48,455,751
Earnings (loss) per share:
Basic		$	0	$	0.10
Diluted		$	0	$	0.10

Anti-dilutive shares excluded from calculations of diluted earnings (loss) per share		1,360,378		1,170,289



~~Second Quarter 2020 Form 10-Q~~				11

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

5. Fair Value Measurements

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.


First Quarter 2021 Form 10-Q						9

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Recurring fair value measurements

Assets and liabilities that are measured at fair value on a recurring basis consisted of the following, as of the dates indicated below:

Fair value measurement using
(dollars in thousands) Level 1
Level 2
Level 3
Total
Fair value as of June 30, 2020
Financial liabilities:
Derivative instruments $ —
$ 5,233
$ —
$ 5,233
Total financial liabilities $ —
$ 5,233
$ —
$ 5,233

Fair value as of December 31, 2019
Financial liabilities:
Derivative instruments $ —
$ 1,757
$ —
$ 1,757
Total financial liabilities $ —
$ 1,757
$ —
$ 1,757


	Fair value measurement using
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Fair value as of March 31, 2021
Financial assets:
Derivative instruments	$	0	$	2,851	$	0	$	2,851
Total financial assets	$	0	$	2,851	$	0	$	2,851


Financial liabilities:
Derivative instruments	$	0	$	1,431	$	0	$	1,431
Total financial liabilities	$	0	$	1,431	$	0	$	1,431






Fair value as of December 31, 2020
Financial liabilities:
Derivative instruments	$	0	$	4,159	$	0	$	4,159
Total financial liabilities	$	0	$	4,159	$	0	$	4,159

Our derivative instruments within the scope of Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, are required to be recorded at fair value. Our derivative instruments that are recorded at fair value include interest rate swaps.

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. The Financial ~~Conduct~~Conduct Authority in the U.K. has stated that it plans to phase out LIBOR by the end of calendar year 2021. We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts currently indexed to LIBOR will either expire or be modified without significant financial impact before the ~~phase~~phase out occurs.

We believe the carrying amounts of our cash and cash equivalents, restricted cash, ~~due to customers,~~ accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at ~~June 30,~~March 31, 2021 and December��31, 2020, ~~and December 31, 2019,~~ due to the immediate or short-term maturity of these instruments.

We believe the carrying amount of our debt approximates its fair value at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt under the 2020 Credit Facility (as defined below) is classified within Level 2 of the fair value hierarchy. Our fixed rate debt is also classified within Level 2 of the fair value hierarchy.

We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021. Additionally, we did not hold any Level 3 assets or liabilities during the ~~six~~three months ended ~~June 30, 2020.~~

March 31, 2021.



1210						~~Second~~First Quarter ~~2020~~2021 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Non-recurring fair value measurements

Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, intangible assets, goodwill and operating lease right-of-use ("ROU") assets. These assets ~~which~~ are recognized at fair value during the period in which an acquisition is completed or at lease commencement, 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 long-lived assets, intangible assets acquired and operating lease ROU assets, are based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of these assets other than goodwill 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. For goodwill impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.

During the six months ended June 30, 2020, we recorded an impairment charge of $4.3 million against certain previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge is reflected in cost of recurring revenue and resulted primarily from our decision to accelerate the end of customer support for certain solutions. During the six months ended June 30, 2020, we also recorded an insignificant impairment of operating lease ROU assets associated with certain leased office space we ceased using. This impairment charge is reflected in general and administrative expense.

There were no ~~other~~ non-recurring fair value adjustments to our long-lived assets, intangible assets, goodwill and operating lease ROU assets ~~and goodwill~~ during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.



6. Consolidated Financial Statement Details

Restricted cash


(dollars in thousands)	March 31, 2021		December 31, 2020
Restricted cash due to customers	$	254,002	$	607,943
Real estate escrow balances	1,156		1,276
Total restricted cash	255,158		609,219

Prepaid expenses and other assets


(dollars in thousands)	March 31, 2021		December 31, 2020
Costs of obtaining contracts(1)(2)	$	83,421	$	84,914
Prepaid software maintenance and subscriptions(3)	33,113		24,471
Receivables for probable insurance recoveries(4)	15,723		6,288
Implementation costs for cloud computing arrangements, net(5)(6)	11,451		11,298
Unbilled accounts receivable	7,660		10,385
Prepaid insurance	6,397		1,426
Derivative instruments	2,851		0
Taxes, prepaid and receivable	1,486		1,891
Other assets	10,015		10,332
Total prepaid expenses and other assets	172,117		151,005
Less: Long-term portion	74,022		72,639
Prepaid expenses and other current assets	$	98,095	$	78,366

(dollars in thousands) June 30,
2020
December 31,
2019
Costs of obtaining contracts⁽¹⁾⁽²⁾
$ 89,080
$ 90,764
Prepaid software maintenance and subscriptions⁽³⁾
28,975
17,384
Implementation costs for cloud computing arrangements, net⁽⁴⁾⁽⁵⁾
10,563
7,294
Unbilled accounts receivable 8,647
6,233
Prepaid insurance 2,638
1,585
Taxes, prepaid and receivable 842
849
Security deposits 861
885
Other assets 10,766
8,051
Total prepaid expenses and other assets 152,372
133,045
Less: Long-term portion 68,673
65,193
Prepaid expenses and other current assets $ 83,699
$ 67,852

(1)Amortization expense from costs of obtaining contracts was $9.2 million and $9.5 million for the three months ended March 31, 2021 and 2020, respectively.

~~(1)~~

~~Amortization expense from~~

(2)The current portion of costs of obtaining contracts as of March 31, 2021 and December 31, 2020 was $31.6 million and $31.9 million, respectively.

(3)The current portion of prepaid software maintenance and subscriptions as of March 31, 2021 and December 31, 2020 was $28.0 million and $19.8 million, respectively.

(4)See discussion of the Security Incident at Note 9.

(5)These costs primarily relate to the multi-year implementations of our new global enterprise resource planning and customer relationship management systems.

(6)Amortization expense from capitalized cloud computing implementation costs was insignificant for the three months ended March 31, 2021 and 2020, respectively. Accumulated amortization for these costs was $1.6 million as of March 31, 2021 and $1.1 million as of December 31, 2020.~~$9.4 million~~ ~~and~~ ~~$18.9 million~~ ~~for the~~ ~~three and six months endedJune 30, 2020, respectively,~~ ~~$9.8 million~~ ~~and~~ ~~$19.4 million~~ ~~for the~~ ~~three and six months endedJune 30, 2019, respectively.~~


~~(2)~~	~~The current portion of costs of obtaining contracts as of~~ ~~June 30, 2020~~ ~~and~~ ~~December 31, 2019~~ ~~was~~ ~~$32.7 million~~ ~~and~~ ~~$33.0 million, respectively.~~


~~(3)~~	~~The current portion of prepaid software maintenance and subscriptions as of~~ ~~June 30, 2020~~ ~~and~~ ~~December 31, 2019~~ ~~was~~ ~~$24.4 million~~ ~~and~~ ~~$16.1 million, respectively.~~


~~(4)~~	These costs, which were previously included in prepaid software maintenance and subscriptions, primarily relate to the multi-year implementations of our new global enterprise resource planning and customer relationship management systems.


~~(5)~~	~~Amortization expense from capitalized cloud computing implementation costs was insignificant for the~~ ~~three and six months endedJune 30, 2020~~ ~~and~~ ~~2019, respectively. Accumulated amortization for these costs was~~ ~~insignificant~~ ~~as of~~ ~~June 30, 2020~~ ~~and~~ ~~December 31, 2019~~.



~~Second~~First Quarter ~~2020~~2021 Form 10-Q						1311

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Accrued expenses and other liabilities


(dollars in thousands)	March 31, 2021		December 31, 2020
Taxes payable(1)	$	16,458	$	19,577
Accrued legal costs	12,055		4,808
Operating lease liabilities, current portion	7,191		9,359
Customer credit balances	5,891		5,874
Accrued commissions and salaries	5,524		5,010
Unrecognized tax benefit	3,546		3,351
Accrued health care costs	2,389		2,341
Accrued vacation costs	2,304		2,311
Derivative instruments	1,431		4,159
Other liabilities	5,663		6,304
Total accrued expenses and other liabilities	62,452		63,094
Less: Long-term portion	9,439		10,866
Accrued expenses and other current liabilities	$	53,013	$	52,228

(dollars in thousands) June 30,
2020
December 31,
2019
Operating lease liabilities, current portion $ 19,316
$ 19,784
Accrued bonuses⁽¹⁾
5
24,617
Accrued commissions and salaries 7,601
6,980
Taxes payable 12,576
6,835
Derivative instruments 5,233
1,757
Customer credit balances 5,032
4,505
Unrecognized tax benefit 3,833
3,758
Accrued vacation costs 2,278
2,232
Accrued health care costs 2,991
2,399
Other liabilities 5,911
6,192
Total accrued expenses and other liabilities 64,776
79,059
Less: Long-term portion 11,883
5,742
Accrued expenses and other current liabilities $ 52,893
$ 73,317

(1)We deferred payments of the employer's portion of Social Security taxes during 2020 under the Coronavirus, Aid, Relief and Economic Security Act ("CARES Act"), half of which is due by the end of calendar year 2021 with the remainder due by the end of calendar year 2022.

Other (expense) income, net

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
Interest income $ 110
$ 525
$ 632
$ 1,179
Other income, net 520
1,656
1,068
1,184
Other income, net $ 630
$ 2,181
$ 1,700
$ 2,363


	Three months ended March 31,
(dollars in thousands)		2021		2020
Interest income		$	152	$	522


Other (expense) income, net		(1,162)		548
Other (expense) income, net		$	(1,010)	$	1,070

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

(dollars in thousands) June 30,
2020
December 31,
2019
June 30,
2020
December 31,
2019
Credit facility:
    Revolving credit loans $ 207,600
$ 187,000
2.41 % 3.11 %
    Term loans 277,500
281,250
3.02 % 3.22 %
Other debt 3,926
—
5.00 % — %
        Total debt 489,026
468,250
2.78 % 3.18 %
Less: Unamortized discount and debt issuance costs 913
1,150

Less: Debt, current portion 9,194
7,500
2.29 % 3.05 %
Debt, net of current portion $ 478,919
$ 459,600
2.78 % 3.18 %


	Debt balance at				Weighted average effective interest rate at
(dollars in thousands)	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Credit facility:
Revolving credit loans	$	93,425	$	69,625	1.80	%	1.83	%
Term loans	397,500		400,000		3.13	%	3.12	%
Real estate loans	60,358		60,626		5.22	%	5.22	%
Other debt	2,232		3,926		5.00	%	5.00	%
Total debt	553,515		534,177		3.14	%	3.21	%
Less: Unamortized discount and debt issuance costs	2,716		3,144
Less: Debt, current portion	12,875		12,840		2.67	%	2.61	%
Debt, net of current portion	$	537,924	$	518,193	3.15	%	3.22	%

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~2017~~2020 credit facility

In ~~June 2017,~~October 2020, we entered into a five-year ~~$700.0~~$900.0 million senior credit facility (the ~~"2017~~"2020 Credit Facility"). At ~~June 30, 2020,~~March 31, 2021, we were in compliance with our debt covenants under the ~~2017~~2020 Credit Facility.

In August 2020, we completed the purchase of our global headquarters facility. As part of the purchase price, we assumed the Seller’s obligations under two senior secured notes with an aggregate outstanding principal amount of $61.1 million (collectively, the “Real Estate Loans”). At March 31, 2021, we were in compliance with our debt covenants under the Real Estate Loans.

~~In December 2019,~~From time to time, we ~~entered~~enter into ~~a 51-month $2.2 million agreement to finance our purchase~~third-party financing agreements for purchases of software and related services for our internal use. ~~The agreement is a~~Generally, the agreements are non-interest-bearing ~~note~~notes requiring ~~four equal~~ annual ~~payments, where the first payment was due in January 2020.~~payments. Interest associated with the ~~note has been~~notes is imputed at the rate we would incur for amounts borrowed under ~~the 2017 Credit Facility.~~

~~In January 2020, we entered into an additional 39-month $3.5 million agreement to finance~~ our purchase of software and related services for our internal use. The agreement is a non-interest-bearing note requiring three equal annual payments, where the first payment was due in March 2020. Interest associated with the note has been imputedthen-existing credit facility at the ~~rate we would incur for amounts borrowed under~~inception of the ~~2017 Credit Facility.~~notes.

The following table summarizes our currently effective financing agreements as of March 31, 2021:


(dollars in thousands)	Term in Months	Number of Annual Payments	First Annual Payment Due	Original Loan Value
Effective dates of agreements:
December 2019	51	4	January 2020	$	2,150
January 2020	39	3	March 2020	3,470

As of ~~June 30, 2020,~~March 31, 2021, the required annual maturities related to the ~~2017~~2020 Credit Facility, the Real Estate Loans and our other debt were as follows:

Years ending December 31,
(dollars in thousands)
Annual maturities
2020 - remaining $ 3,750
2021 9,194
2022 475,544
2023 538
2024 —
Thereafter —
Total required maturities $ 489,026


Years ending December 31, (dollars in thousands)	Annual maturities
2021 - remaining	$	8,378
2022	12,985
2023	11,982
2024	11,609
2025	455,209

Thereafter	53,352
Total required maturities	$	553,515



8. Derivative Instruments

We generally use derivative instruments to manage our variable interest rate risk. We have entered into interest rate swap agreements, which effectively convert portions of our variable rate debt under the ~~2017~~2020 Credit Facility to a fixed rate for the term of the swap agreements. We designated each of the interest rate swap agreements as a cash flow hedge at the inception of the contracts.

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The terms and notional values of our derivative instruments were as follows as of ~~June 30, 2020:~~

(dollars in thousands) Term of derivative instrument Notional Value
Derivative instruments designated as hedging instruments:
Interest rate swap July 2017 - July 2021 $ 150,000
Interest rate swap February 2018 - June 2021 50,000
Interest rate swap June 2019 - June 2021 75,000
$ 275,000


(dollars in thousands)	Term of derivative instrument	Notional value
Derivative instruments designated as hedging instruments:
Interest rate swap	July 2017 - July 2021	$	150,000
Interest rate swap	February 2018 - June 2021	50,000
Interest rate swap	June 2019 - June 2021	75,000
Interest rate swap	November 2020 - October 2024	60,000
Interest rate swap	November 2020 - October 2024	60,000
		$	395,000

~~Second Quarter 2020 Form 10-Q~~Forward-starting interest rate swap	June 2021 - October 2024	15120,000
Forward-starting interest rate swap	July 2021 - October 2024	120,000
		$	240,000

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

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

Liability Derivatives
(dollars in thousands) Balance sheet location June 30,
2020
December 31,
2019
Derivative instruments designated as hedging instruments:
Interest rate swaps, current portion
Accrued expenses
and other current liabilities
$ 2,515
$ —
Interest rate swaps, long-term portion Other liabilities 2,718
1,757
Total derivative instruments designated as hedging instruments $ 5,233
$ 1,757


		Asset derivatives					Liability derivatives
(dollars in thousands)	Balance sheet location	March 31, 2021		December 31, 2020		Balance sheet location	March 31, 2021		December 31, 2020
Derivative instruments designated as hedging instruments:
Interest rate swaps, current portion	Prepaid expenses and other current assets	$	0	$	0	Accrued expenses and other current liabilities	$	1,431	$	2,698
Interest rate swaps, long-term portion	Other assets	2,851		0		Other liabilities	0		1,461
Total derivative instruments designated as hedging instruments		$	2,851	$	0		$	1,431	$	4,159

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

(dollars in thousands) June 30,
2020
Three months ended
June 30, 2020
Six months ended
June 30, 2020
Interest rate swaps $ (5,233 ) Interest expense $ (1,018 ) $ (1,223 )

June 30,
2019
Three months ended
June 30, 2019
Six months ended
June 30, 2019
Interest rate swaps $ (1,826 ) Interest expense $ 244
$ 473


	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
(dollars in thousands)	March 31, 2021			Three months ended March 31, 2021
Interest rate swaps	$	1,420	Interest expense	$	(1,373)

	March 31, 2020			Three months ended March 31, 2020
Interest rate swaps	$	(5,979)	Interest expense	$	(205)

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 ~~June 30, 2020~~March 31, 2021 that is expected to be reclassified into earnings within the next twelve months is ~~$5.1~~$2.2 million. There were no0 ineffective portions of our interest rate swap derivatives during the ~~six~~three months ended ~~June 30, 2020~~

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

March 31, 2021 and ~~2019.~~2020. See Note 12 for a summary of the changes in accumulated other comprehensive income (loss) by component.



9. Commitments and Contingencies

We have operating leases for corporate offices, subleased offices and certain equipment and furniture. As of ~~June 30, 2020,~~March 31, 2021, we had operating leases for ~~equipment~~office space that had not yet commenced with future rent payments of ~~$0.9~~$3.5 million. These operating leases are expected to commence during ~~2020~~2021 with lease terms of 53 years.



16		~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

The components of lease expense were as follows:


	Three months ended March 31,
(dollars in thousands)		2021		2020
Operating lease cost(1)		$	2,841	$	6,311
Variable lease cost		699		1,258
Sublease income		(460)		(913)
Net lease cost		$	3,080	$	6,656

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
Operating lease cost⁽¹⁾⁽²⁾
$ 6,281
$ 5,894
$ 12,592
$ 11,894
Variable lease cost 1,113
988
2,371
1,979
Sublease income (940 ) (755 ) (1,853 ) (1,459 )
Net lease cost $ 6,454
$ 6,127
$ 13,110
$ 12,414
(1)Includes short-term lease costs, which were immaterial.

The term loans under the ~~2017~~2020 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 ~~2017~~2020 Credit Facility in ~~June 2022.~~October 2025. The Real Estate Loans also require periodic principal payments and the balance of the Real Estate Loans are due upon maturity in April 2038.

We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of ~~June 30, 2020,~~March 31, 2021, the remaining aggregate minimum purchase commitment under these arrangements was approximately ~~$90.5~~$79.0 million through 2024.

Solution and service indemnifications

In the ordinary course of business, we provide certain indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our solutions or services. If we determine that it is probable that a loss has been incurred related to 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.

We are subject to legal proceedings and claims that arise in the ordinary course of business, as well as certain other non-ordinary course proceedings, claims and inquiries, as described below. We make a provision for a loss contingency when it is both probable that a material liability has been incurred and the amount of the loss can be reasonably estimated. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For proceedings in which an unfavorable outcome is reasonably possible but not probable and an estimate of the loss or range of losses arising from the proceeding can be made, we disclose such an estimate, if material. If such a loss or range of losses is not reasonably estimable, we disclose that fact. We review any such loss contingency provisions at least quarterly and adjust them to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. We

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

recognize insurance recoveries, if any, when they are probable of receipt. All associated legal costs are expensed as incurred.

Legal proceedings are inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending or threatened against us and intend to defend ourselves vigorously against all claims asserted. We further believe that the amount or range of reasonably possible losses related to such pending or threatened legal proceedings will not have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation be resolved unfavorably. It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be materially negatively affected in any particular period by an unfavorable resolution of one or more of such legal proceedings.

WeAs previously disclosed, we are subject to risks and uncertainties as a result of a ransomware attack against us in May 2020 in which a cybercriminal removed a copy of a subset of data from our self-hosted environment (the ~~"Incident"~~"Security Incident"). Based on the nature of the Security Incident, our research and third party (including law enforcement) investigation, we have no reason to believe that any data went beyond the cybercriminal, was or will be misused, or will be disseminated or otherwise made available publicly. Our investigation into the Security Incident by our cybersecurity team and third-party forensic advisors remains ongoing. ~~We incurred insignificant costs associated with~~

As a result of the Security Incident, ~~during~~we are currently subject to certain legal proceedings, claims, inquiries and investigations, as discussed below, and could be the subject of additional legal proceedings, claims, inquires and investigations in the future that might result in adverse judgments, settlements, fines, penalties, or other resolution. To limit our exposure to losses related to claims against us, including data breaches such as the Security Incident, we maintain $50 million of insurance above a $250 thousand deductible payable by us. As noted below, this coverage has reduced our financial exposure related to the Security Incident, and we will continue to seek recoveries under these insurance policies. Although it is possible that total losses related to the Security Incident will ultimately exceed the limits of our insurance coverage, we are currently unable to determine if or when that will be the case and, if so, the approximate amount or range of any such excess.

In the three months ended ~~June 30, 2020. It is expected that~~March 31, 2021, we ~~will~~recorded $12.8 million of expenses related to the Security Incident and offsetting probable insurance recoveries of $12.8 million. As of March 31, 2021, we have recorded cumulative expenses related to the Security Incident of $22.6 million and cumulative probable insurance recoveries of $22.1 million. Due to the time required to submit and process such insurance claims, we have not yet received all of the accrued insurance recoveries. Of the insurance recoveries recorded, $6.4 million had been paid as of March 31, 2021. Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees. We present expenses and insurance recoveries related to the Security Incident in general and administrative expense on our condensed consolidated statements of comprehensive income. We expect to continue to experience ~~increased costs~~significant expenses related to our response to the Security Incident, resolution of legal proceedings, claims, inquiries and investigations discussed below, and our efforts to further enhance our security ~~measures. Because~~measures, which expenses may be material.

Based on our analysis of the factors described above, we have not recorded a liability related to the Security Incident as of March 31, 2021 because we are unable at this time to reasonably estimate the possible loss or range of ~~loss,~~loss.

Customer claims. To date, we have ~~not recorded a liability~~received approximately 630 claims for reimbursement of expenses from customers or their attorneys in the U.S., U.K. and Canada related to the Security Incident (none of which have as yet been filed in court or in arbitration). Possible exposure could result from our customers’ costs and expenses associated with notifying their own customers of ~~June 30, 2020.~~

~~Legal proceedings~~

the Security Incident and taking steps to assure that personal information has not been compromised as a result of the Security Incident. We are ~~subject to legal proceedings and claims that arise~~ in the ~~ordinary course~~process of ~~business. We make~~analyzing individual customer contracts into which we have entered, the specific claims made and applicable law.

Customer constituent class actions. Presently, we are a ~~provision for a loss contingency when it is both probable that a liability has~~defendant in 30 putative consumer class action cases [27 in U.S. federal courts (some of which have been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertainingconsolidated under multi district litigation to a ~~particular case. Unless otherwise specifically disclosed~~single federal court), 1 in ~~this note, we~~a U.S. state court and 2 in Canadian courts] alleging harm from the Security Incident. The plaintiffs in these cases, who purport to represent various classes of individual constituents of our customers, generally claim to have determined as of June 30, 2020, that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial. All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be negatively affected in any particular periodbeen harmed by ~~an unfavorable resolution of one or more of such proceedings, claims or investigations.~~

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

alleged actions and/or omissions by us in connection with the Security Incident and assert a variety of common law and statutory claims seeking monetary damages, injunctive relief, costs and attorneys’ fees, and other related relief.

Lawsuits that are putative class actions require a plaintiff to satisfy a number of procedural requirements before proceeding to trial. These requirements include, among others, demonstration to a court that the law proscribes in some manner our activities, the making of factual allegations sufficient to suggest that our activities exceeded the limits of the law and a determination by the court—known as class certification—that the law permits a group of individuals to pursue the case together as a class. If these procedural requirements are not met, the lawsuit cannot proceed as a class action and the plaintiff may lose the financial incentive to proceed with the case. Frequently, a court’s determination as to these procedural requirements is subject to appeal to a higher court. As a result of these uncertainties, we may be unable to determine the probability of loss until, or after, a court has finally determined that a plaintiff has satisfied the applicable class action procedural requirements.

Furthermore, for putative class actions, it is often not possible to estimate the possible loss or a range of loss amounts, even where we have determined that a loss is reasonably possible. Generally, class actions involve a large number of people and raise complex legal and factual issues that result in uncertainty as to their outcome and, ultimately, making it difficult for us to estimate the amount of damages that a plaintiff might successfully prove. This analysis is further complicated by the fact that the plaintiffs lack contractual privity with us.

Governmental inquiries and investigations. To date, we have received a consolidated, multi-state Civil Investigative Demand issued on behalf of 47 state Attorneys General and the District of Columbia and a separate Civil Investigative Demand from the office of the Illinois Attorney General’s Office relating to the Security Incident. In addition, we have received communications, inquires and requests from the U.S. Federal Trade Commission, the U.S. Securities and Exchange Commission, the U.S. Department of Health and Human Services, the Information Commissioner’s Office in the United Kingdom (the “ICO”) under the U.K. Data Protection Act 2018, the Office of the Australian Information Commissioner and the Office of the Privacy Commissioner of Canada. We are cooperating with these offices and responding to their inquiries, which include various requests for documents, policies, narratives and communications, as well as requests to interview or depose various Company-related personnel. As noted above, each of these separate governmental inquiries and investigations could result in adverse judgements, settlements, fines, penalties, or other resolution, the amount, scope and timing of which we are currently unable to predict, but could be material.



10. Income Taxes

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

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
Income tax provision $ 4,496
$ 2,733
$ 5,192
$ 899
Effective income tax rate 27.6 % 27.7 % 24.0 % 13.0 %


	Three months ended March 31,
(dollars in thousands)		2021			2020
Income tax provision		$	684		$	696
Effective income tax rate		131.5		%	13.0		%

The increase in our effective income tax rate ~~during~~for the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, when compared to the same period in ~~2019,~~2020, was primarily attributable to ~~improved~~higher 2021 discrete tax expense against lower pre-tax income. The 2020 ~~profitability and changes in jurisdictional mix and reduced 2020 non-deductible costs. Furthermore, our 2020~~ effective income tax rate was positively impacted by benefits attributable to stock-based compensation. The 2021 effective income tax rate was negatively impacted by ~~a decrease in the total discrete benefit to income~~ tax expense ~~related~~attributable to stock-based ~~compensation.~~

compensation against lower pre-tax income.



First Quarter 2021 Form 10-Q						17

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Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)


11. Stock-based Compensation

Stock-based compensation expense is allocated to cost of revenue and operating expenses on the condensed 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
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
Included in cost of revenue:
Cost of recurring $ 1,151
$ 451
$ 1,621
$ 963
Cost of one-time services and other 1,419
340
1,814
802
Total included in cost of revenue 2,570
791
3,435
1,765
Included in operating expenses:
Sales, marketing and customer success 3,603
2,827
6,081
5,738
Research and development 4,348
2,753
7,147
5,427
General and administrative 9,612
8,658
17,050
15,825
Total included in operating expenses 17,563
14,238
30,278
26,990
Total stock-based compensation expense $ 20,133
$ 15,029
$ 33,713
$ 28,755


	Three months ended March 31,
(dollars in thousands)		2021		2020
Included in cost of revenue:
Cost of recurring		$	2,411	$	470
Cost of one-time services and other		2,947		395
Total included in cost of revenue		5,358		865
Included in operating expenses:
Sales, marketing and customer success		5,428		2,478
Research and development		6,714		2,799
General and administrative		12,505		7,438
Total included in operating expenses		24,647		12,715
Total stock-based compensation expense		$	30,005	$	13,580

~~See Note 2 for discussion of the additional equity award grants we made in response to COVID-19 pandemic.~~



12. Stockholders' Equity

~~Dividends~~Stock repurchase program

In ~~March~~November 2020, ~~in response to the global COVID-19 pandemic,~~ our Board of Directors ~~rescinded its previously announced policy~~reauthorized and expanded a stock repurchase program that authorizes us to ~~pay~~purchase up to $250.0 million of our outstanding shares of common stock. The program does not have an ~~annual dividend at a rate~~expiration date. Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of ~~$0.48 per share~~1934, as amended, and in privately negotiated transactions. The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. Under the ~~declaration and payment~~2020 Credit Facility, we have restrictions on our ability to repurchase shares of ~~all cash dividends, beginning with~~our common stock.

We account for purchases of treasury stock under the ~~second quarter~~cost method. During the three months ended March 31, 2021, we purchased 465,821 shares for $28.1 million. The remaining amount available to purchase stock under the stock repurchase program was $180.9 million as of ~~2020 and thereafter until such time, if any, as it may otherwise determine in its sole discretion.~~

March 31, 2021.



18						~~Second~~First Quarter ~~2020~~2021 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~Dividends paid on common stock during the six months ended June 30, 2020, consisted of the following:~~

Declaration Date
Dividend
per Share

Record Date Payable Date
February 10, 2020 $ 0.12
February 28 March 13

Changes in accumulated other comprehensive income (loss) by component

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

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
Accumulated other comprehensive loss, beginning of period $ (14,140 ) $ (1,452 ) $ (5,290 ) $ (5,110 )
By component:
Gains and losses on cash flow hedges:
Accumulated other comprehensive (loss) income balance, beginning of period $ (4,445 ) $ 566
$ (1,323 ) $ 1,498
Other comprehensive loss before reclassifications, net of tax effects of $71, $628, $1,225 and $904 (200 ) (1,759 ) (3,473 ) (2,522 )
Amounts reclassified from accumulated other comprehensive loss to interest expense 1,018
(244 ) 1,223
(473 )
Tax (benefit) expense included in provision for income taxes (267 ) 64
(321 ) 124
Total amounts reclassified from accumulated other comprehensive loss 751
(180 ) 902
(349 )
Net current-period other comprehensive income (loss) 551
(1,939 ) (2,571 ) (2,871 )
Accumulated other comprehensive loss balance, end of period $ (3,894 ) $ (1,373 ) $ (3,894 ) $ (1,373 )
Foreign currency translation adjustment:
Accumulated other comprehensive loss balance, beginning of period $ (9,695 ) $ (2,018 ) $ (3,967 ) $ (6,608 )
Translation adjustments (887 ) (6,018 ) (6,615 ) (1,428 )
Accumulated other comprehensive loss balance, end of period (10,582 ) (8,036 ) (10,582 ) (8,036 )
Accumulated other comprehensive loss, end of period $ (14,476 ) $ (9,409 ) $ (14,476 ) $ (9,409 )


	Three months ended March 31,
(dollars in thousands)		2021		2020
Accumulated other comprehensive loss, beginning of period		$	(2,497)	$	(5,290)
By component:
Gains and losses on cash flow hedges:
Accumulated other comprehensive loss balance, beginning of period		$	(3,101)	$	(1,323)
Other comprehensive income (loss) before reclassifications, net of tax effects of $(1,100) and $1,154		3,130		(3,273)

Amounts reclassified from accumulated other comprehensive income (loss) to interest expense		1,376		205
Tax benefit included in provision for income taxes		(357)		(54)
Total amounts reclassified from accumulated other comprehensive income (loss)		1,019		151
Net current-period other comprehensive income (loss)		4,149		(3,122)
Accumulated other comprehensive income (loss) balance, end of period		$	1,048	$	(4,445)
Foreign currency translation adjustment:
Accumulated other comprehensive income (loss) balance, beginning of period		$	604	$	(3,967)
Translation adjustments		2,511		(5,728)
Accumulated other comprehensive income (loss) balance, end of period		3,115		(9,695)
Accumulated other comprehensive income (loss), end of period		$	4,163	$	(14,140)



13. Revenue Recognition

Transaction price allocated to the remaining performance obligations

As of ~~June 30, 2020,~~March 31, 2021, approximately ~~$854~~$776 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 60% of these remaining performance obligations over the next 12 months, with the remainder recognized thereafter.

We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less (one-time services); and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed ~~(payment services and usage)~~(transactional revenue).



~~Second Quarter 2020 Form 10-Q~~		19

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

Our contract assets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 were insignificant. Our opening and closing balances of deferred revenue were as follows:

(in thousands) June 30,
2020
December 31,
2019
Total deferred revenue $ 337,196
$ 316,137


(in thousands)	March 31, 2021		December 31, 2020

Total deferred revenue	$	294,520	$	316,914

The ~~increase~~decrease in deferred revenue during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was primarily due to a seasonal ~~increase~~decrease in customer contract renewals ~~and new subscription sales of our cloud solutions.~~. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter generally resulting in our lowest balance of deferred revenue at the end of our first quarter. The amount of revenue recognized during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 that was included in the deferred ~~revenue~~revenue balance at the beginning of the period was approximately ~~$219~~

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

$134 million. The amount of revenue recognized during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 from performance obligations satisfied in prior periods was insignificant.

Disaggregation of revenue

We sell our cloud solutions and related services in three primary geographical markets: to customers in the United States, to customers in the United Kingdom and to customers located in other countries. The following table presents our revenue by geographic area based on the address of our customers:

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
United States $ 189,304
$ 190,399
$ 383,263
$ 378,525
United Kingdom 29,535
19,307
45,359
33,105
Other countries 13,152
15,928
26,990
29,834
Total revenue $ 231,991
$ 225,634
$ 455,612
$ 441,464

The General Markets Group ("GMG"), the Enterprise Markets Group ("EMG"), and the International Markets Group ("IMG") ~~comprise~~comprised our go-to-market ~~organizations.~~organizations as of March 31, 2021. The following is a description of each market ~~group:~~group as of that date:

•The GMG focuses on sales primarily to all K-12 private schools, ~~faith-based~~faith communities and arts and cultural organizations, as well as emerging and mid-sized prospects in the U.S.;

•The EMG focuses on sales primarily to all healthcare and higher education institutions, corporations and foundations, as well as large and/or strategic prospects in the U.S.; and

•The IMG focuses on sales primarily to all prospects and customers outside of the U.S.

The following table presents our revenue by market group:

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2020
2019
2020
2019
GMG $ 90,453
$ 93,259
$ 185,906
$ 185,774
EMG 98,199
96,710
196,322
191,875
IMG 43,167
35,614
73,248
63,736
Other 172
51
136
79
Total revenue $ 231,991
$ 225,634
$ 455,612
$ 441,464


	Three months ended March 31,
(dollars in thousands)		2021		2020
GMG		$	93,339	$	95,453
EMG		89,527		98,123
IMG		36,370		30,081
Other		(45)		(36)
Total revenue		$	219,191	$	223,621

The following table presents our recurring revenue by type:

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~~Blackbaud, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(Unaudited)~~

~~14. Restructuring~~

During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments. We substantially completed our facilities optimization restructuring plan as of December 2019. During the three and six months ended June 30, 2019, we incurred $0.7 million and $2.7 million, respectively, in before-tax restructuring charges related to these activities. Such charges during the three and six months ended June 30, 2020 were insignificant.

~~15. Property and Equipment~~

~~Pending Headquarters Facility Purchase~~

In June 2020, we entered into a binding purchase and sale agreement with HPBB1, LLC, a Georgia limited liability company (the "Seller"), for the purchase and sale of the building, fixtures and other improvements and parcels of land of our headquarters facility (the "Headquarters Facility") in Charleston, South Carolina (the "Transaction"). We currently lease the Headquarters facility from the Seller. At the closing of the Transaction, we would pay the Seller a purchase price of $76.3 million, which includes the assumption of the Seller's obligations in the aggregate principal amount of $63.0 million and cash, which we expect to fund by borrowings under the 2017 Credit Facility. The Transaction is expected to close during the second half of 2020.



~~Second Quarter 2020 Form 10-Q~~		21

~~Table of Contents~~

Blackbaud, Inc.

(Unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the condensed consolidated financial statements and related notes which are primarily denominated in thousands of dollars.



Executive Summary

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

COVID-19 Impact

The outbreak of COVID-19 in numerous countries across the globe, including each country in which we currently operate, has adversely impacted the U.S. and global economies. We began 2020 with strong execution against our financial plan. In March 2020, we began to experience disruptions to our business from COVID-19, and the pandemic continues to impact each of our markets.

To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. See Note 2 to our condensed consolidated financial statements in this report for a discussion of some of these actions. In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.

~~The~~ economic impact of COVID-19 on the social good industry remains ~~uncertain~~uncertain. If our existing and ~~consequently, we expect that~~prospective customers remain cautious in their purchase decisions, our operating environment may continue to be challenging for the remainder of ~~2020,~~2021 and potentially ~~beyond, as existing and prospective customers remain cautious in their purchase decisions.~~beyond. Notwithstanding these conditions, we remain focused on continuing to execute our four-point ~~growth~~ strategy and strengthening our leadership position.

As expected and previously disclosed, our bookings shortfalls that began at the start of the pandemic in March 2020 are putting pressure on our contractual recurring revenue growth in the near-term. However, we are optimistic this pressure will abate as we progress through 2021. We had a solid bookings performance in the first quarter of 2021, which was favorable to our plan and our first quarter 2020 bookings performance.

Four-Point Strategy

~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

~~Four-Point Growth Strategy~~

Expand Total Addressable Market

		12	Lead with World Class Teams and Operations

		3	Delight Customers with Innovative Cloud Solutions

	2	~~Drive Sales Effectiveness~~

	3	~~Expand Total Addressable Market~~

	4	~~Improve Operating Efficiency~~


1.			~~Delight Customers with Innovative Cloud Solutions~~4

Our solutions are already equipped with features that are lending themselves to the current environment and we have quickly acted upon customer feedback to add enhancements and new functionality to serve our customers, so they can continue to focus on their missions during this time. For example, we built new integration between our peer-to-peer fundraising and donor management solutions simplifying the process of raising donations and acquiring new supporters through pandemic-friendly virtual events and peer-to-peer campaigns. We simplified donation forms to expedite fundraising by allowing organizations to create campaigns quickly and easily, which is critical in the current environment. We also added new financial management capabilities, further easing the transition to working from home with tools that support collaboration and efficient cash flow management and financial operations from the cloud.

			Focus on Employees, Culture and ESG Initiatives
2.	~~Drive Sales Effectiveness~~

The investments we have made to enhance our digital footprint are enabling us to be more prescriptive and cost-effective in our marketing efforts and to quickly adapt to changing market conditions, and over the longer term we believe the impact of COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market. 1.Expand Total Addressable Market ("TAM")

We also introduced new pricing and financing offers based on the changing needs of our customers. Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and bookings are falling short of budgeted expectations, which we expect to put pressure on near-term revenues. As a result, we have begun shifting investment towards digital marketing aimed at lead generation and put a greater emphasis on selling solutions with the highest lifetime value. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives. After temporarily freezing our hiring efforts due to COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings.

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(Unaudited)

2.Lead with World Class Teams and Operations

This strategy expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40 (see discussion of Non-GAAP Financial Measures below). We have a strong executive team that is delivering on our mission and executing on our strategy. We have talent across our company, at every level, who are aligned with these goals as well.

3.Delight Customers with Innovative Cloud Solutions

2020 required unprecedented speed and scale to support our customers, and we were quick to reprioritize and expedite product enhancements to support our customers' changing needs as they needed to operate more digitally. We have carried that momentum into 2021. For example, we upgraded virtually all of our Blackbaud Grantmaking customers to a new SKY UX version in just one month's time. This helps alleviate our customers' IT burden, improves data security with multi-factor authentication and provides freedom and flexibility to access advanced grant management technology anywhere via any browser on any device. With more veteran grantmakers using mobile technology and a younger generation of grantmakers emerging in the philanthropic community, providing convenient access to grant data and grant management tools will continue to be critical for success. Blackbaud plays a critical role in accelerating our customers' move to the cloud. In higher education, with the COVID-19 pandemic accelerating the need for powerful cloud-based systems that allow for easier collaboration, Blackbaud CRM has been the trusted CRM solution for a growing number of institutions to support their overall advancement needs.

4.Focus on Employees, Culture and ESG Initiatives

During the first quarter of 2021, we elevated a specific strategy focused on employees, culture and ESG initiatives. This is not new for us. It is something that has been in our DNA for a long time and is a big advantage as we look to attract and retain top talent. This is evident in our 2020 social responsibility report, which was released in April 2021, and demonstrates how we responded to the unique challenges the pandemic created for our employees, customers, and communities. We also expanded this year's report to include voluntary ESG reporting disclosures that align with the Sustainability Accounting Standards Board and Global Reporting Initiative. One highlight from the report is that the Company is comprised of 46% female employees and 54% male employees, which is an industry-leading ratio. We are fully committed to continuing to create a diverse and inclusive environment at all levels of the organization.

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(Unaudited)

Total revenue ~~increased~~decreased by ~~$6.4 million and $14.1~~$4.4 million during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, driven largely by the following:



	+-	Growth in recurring revenue related to increases in transactional revenue, positive demand from customers across our portfolio of cloud solutions and increases in services embedded in our renewable cloud solution contracts
-	~~Decreases~~Decrease in one-time consulting revenue due primarily ~~from~~to less implementation and customization services. We changed our commission plans during the first quarter of 2020 to intentionally shift our sales teams' focus towards selling our cloud solutions. Additionally, the bookings shortfalls during 2020 caused by the COVID-19 pandemic contributed to the decrease in one-time ~~sales related to COVID-19~~consulting revenue.
	-	~~Decreases~~Decrease in one-time analytics revenue as analytics are generally integrated in our cloud solutions
	+	Growth in recurring revenue related to an increase in transactional revenue related to charitable giving

Income from operations ~~increased~~decreased by ~~$6.1 million and $12.3~~$1.8 million during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, driven largely by the following:



	+-	~~Growth~~ Increase in stock-based compensation costs of $16.4 million due to: •replacement of our annual cash bonus plans with a short-term performance-based equity award plan; •increases in the grant date fair values of our annual equity awards granted to employees; •in response to COVID-19, replacement of our 2020 base salary merit increases with one-year time-based equity awards; •overall Company performance against 2020 goals; and •decrease in the vesting period for our annual long-term incentive time-based equity awards from 4 years (1/4 per year) to 3 years (1/3 per year), beginning in February 2021.
	-	Decrease in total revenue, as described above
	+	~~Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards~~
	+	Decrease in ~~restructuring~~compensation costs other than stock-based compensation of ~~$0.7~~$12.7 million ~~and $2.6 million, as our facilities optimization plan was largely completed as of December 31, 2019~~primarily due to a decrease in headcount
	+	Decrease in ~~acquisition-related expenses and integration~~travel costs of ~~$0.8~~$3.6 million ~~and $1.9 million~~due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
	+	Decrease in amortization of intangible assets from business combinations of ~~$2.1 million and $3.2~~$2.0 million
	-	Increases in cost of revenue from a $4.3 million impairment charge during the three months ended June 30, 2020, against certain previously capitalized software development costs, resulting from our decision to accelerate the end of customer support for certain solutions
-	~~Increases in employee severance of $4.1 million and $0.7 million, related to a modest and targeted headcount reduction during the three months ended June 30, 2020, in response to the COVID-19 pandemic~~
-	~~Increases in corporate costs of $3.1 million and $3.4 million, primarily related to increases in bad debt expense~~
-	~~Other increases in cost of revenue related to increases in data center costs, amortization of software development costs and transaction-based costs~~



24		~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

~~There are three primary revenue categories with related business drivers that we continue to monitor closely in light of the COVID-19 pandemic:~~

Our strategy has historically relied on a balanced approach to growth and profitability. As discussed above, the pandemic has created short-term uncertainty in our revenue outlook and the early impacts on pipeline and bookings will likely limit our ability to drive near-term revenue growth at our originally planned levels. Therefore, in line with our strategy, we have made a pivot to greater emphasis on delivering shareholder value through increased profitability and cash flow, which are more controllable.



~~Second Quarter 2020 Form 10-Q~~				25

~~Table of Contents~~

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~~(Unaudited)~~

Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter. We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a cloud subscription delivery model. In the long term, we also anticipate an increase in recurring subscription contract renewals as we continue focusing on innovation, quality and the integration of our cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts provides a better representation of our customers' overall behavior. For the twelve months ended ~~June 30, 2020,~~March 31, 2021, approximately ~~92%~~93% of our customers with recurring revenue contracts were retained. This customer retention rate is unchanged from our rate for the full year ended December 31, ~~2019.~~2020.

Balance sheet and cash flow

At ~~June 30, 2020,~~March 31, 2021, our cash and cash equivalents were ~~$30.5~~$27.8 million and the carrying amount of our debt under the ~~2017~~2020 Credit Facility was ~~$484.2~~$488.8 million. Our net leverage ratio was ~~2.21~~1.79 to ~~1.00.~~1.00.

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(Unaudited)

During the six months ended June 30, 2020, we generated $37.5 million in cash from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation. During the six months ended, June 30, 2020, we had a net increase in our borrowings of $16.9 million, down from a net increase of $58.6 million during the three months ended March 31, ~~2020. Historically, due to lower revenues~~2021, we generated $30.1 million in ~~our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our~~ cash ~~flow~~ from operations, ~~has been lowest~~had a net increase in ~~our first quarter.~~

~~During the six months ended June 30, 2020, we also~~borrowings of $21.0 million, returned $28.1 million to stockholders by way of share repurchases and had aggregate cash outlays of ~~$27.6~~$12.8 million for purchases of property and equipment and capitalized software development costs.

~~Recent Developments~~



26				~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

Results of Operations

Revenue and Cost of Revenue

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, online training programs, subscription-based analytic services, such as donor acquisitions and data enrichment, and payment services. Recurring revenue also includes fees from maintenance services for our on-premises solutions, services included in our renewable subscription contracts, retained and managed services contracts that we expect to have a term consistent with our cloud solution contracts, and variable transaction revenue associated with the use of our solutions.

Cost of recurring revenue is primarily comprised of compensation costs for customer support and production IT personnel, hosting and data center costs, third-party contractor expenses, third-party royalty and data expenses, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.

~~We continued to experience growth in sales of our cloud solutions as our~~Our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services. Recurring subscription contracts are typically for a term of three years at contract inception with one to three-year renewals thereafter. We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.



~~Second Quarter 2020 Form 10-Q~~		27

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

Recurring revenue increased by ~~$7.8~~$1.9 million or ~~3.7%, and $14.6 million or 3.6%~~0.9%, during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, driven primarily by the following:



			+						~~Increases in subscriptions revenue of $11.8 million and $22.4 million related to increases~~Increase in transactional revenue ~~positive demand from customers across our portfolio~~ of ~~cloud solutions~~$2.8 million, primarily due to the continued shift toward virtual and ~~increases in services embedded in our renewable cloud solution contracts~~online fundraising and charitable giving
			-						~~Decreases~~Decrease in contractual recurring revenue of $0.9 million largely due to a decrease in maintenance revenue ~~of $4.0 million and $7.9 million primarily~~ related to our continuing efforts to migrate customers from legacy on-premises solutions onto our cloud solutions ~~powered by Blackbaud SKY, our modern cloud platform~~as well as the bookings shortfalls during 2020 resulting from COVID-19

~~Partially offsetting the increases in subscriptions revenue were decreases in the mix~~

Cost of recurring revenue ~~increased~~decreased by ~~$4.7~~$0.7 million or ~~5.4%, and $9.6 million or 5.6%~~0.8%, during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, driven primarily by the following:



	+-	~~Impairment charge~~Decrease in amortization of ~~$4.3 million during the three months ended June 30, 2020, against certain previously capitalized software development costs that reduced the carrying value of those~~intangible assets ~~to zero. The impairment charge resulted primarily~~ from ~~our decision to accelerate the end of customer support for certain solutions.~~
+	~~Increases in hosting and data center costs~~business combinations of $1.7 million ~~and $2.2 million as we are migrating our cloud infrastructure to leading public cloud service providers~~
	+-	~~Increases~~Decreases in allocated facilities costs related to efficiencies in our real estate footprint, and third-party contractor costs
	+	Increase in compensation costs of $1.3 million primarily related to stock-based compensation due to the factors discussed above on page 23
	+	Increase in amortization of software development costs of ~~$0.8 million and $2.2~~$1.0 million due to investments made on innovation, quality and the integration of our cloud solutions
	+	~~Increases in transaction-based costs of $0.7 million and $3.0 million related to payment services integrated in our cloud solutions~~
	+	For the six months ended June 30, 2020, increase in third-party contractor costs of $1.2 million related to application security and partners delivering services embedded in our renewable cloud solution contracts
	-	~~Decreases in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards~~
-	~~Decreases in costs associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above~~

~~The 0.7% and 0.8% decreases in recurring~~Recurring gross margin increased by 0.7% for the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019, were~~2020, primarily due to the ~~result of~~increase in recurring revenue slightly outpacing the impairment of previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software developmentdecrease in related costs. ~~We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.~~



28		~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts, revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees.

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

One-time services and other revenue decreased by ~~$1.4~~$6.3 million, or ~~8.4%, and $0.4 million, or 1.2%~~33.7%, during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, driven primarily by the following:



	+-	Increases in the mix of retained and managed services contracts we present in one-time services and other. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020. This change in presentation resulted in increases to one-time services and other revenue and offsetting decreases in recurring revenue of $4.2 million and $8.5 million during the three and six months ended June 30, 2020.
-	~~Decreases~~Decrease in one-time consulting revenue of ~~$3.8~~$4.7 million due primarily to less implementation and ~~$5.5 million, respectively, primarily from less~~customization services. We changed our commission plans during the first quarter of 2020 to intentionally shift our sales teams' focus towards selling our cloud solutions. Additionally, the bookings shortfalls during 2020 caused by the COVID-19 pandemic contributed to the decrease in one-time ~~sales related to COVID-19 as well as services increasingly being embedded in our renewable cloud solution contracts. Our embedded services are recorded as recurring~~consulting revenue.
	-	~~Decreases~~Decrease in one-time analytics revenue of ~~$1.2 million and $2.1~~$1.0 million as analytics are generally integrated in our cloud solutions
	-	~~For the six months ended June 30, 2020, decreases in revenue from one-time training services and license fees~~

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(Unaudited)

Cost of one-time services and other decreased by ~~$0.6~~$0.8 million, or ~~4.1%~~5.2%, during the three months ended ~~June 30, 2020,~~March 31, 2021, when compared to the same periods in ~~2019,~~2020, driven primarily by the following:



	+-	Decrease in compensation costs other than stock-based compensation of $1.3 million largely due to a decrease in headcount
	-	Decrease in third-party contractor costs of $0.7 million primarily due to the timing of our spending
	+	Increase in stock-based compensation costs of ~~associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as~~$2.6 million due to the factors discussed above
-	~~Reduced amount of compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards~~ on page 23

~~Cost of one-time~~One-time services and other ~~remained relatively consistent~~gross margin decreased by 35.1% during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, respectively, when compared to the same period in ~~2019.~~

~~The 3.9% and 1.5% decreases in one-time services and other gross margin during the three and six months ended June 30,~~ 2020, ~~respectively, when compared~~primarily due to the ~~same periods in 2019, were primarily the result of the~~significant reductions in one-time consulting and analytics revenue discussed ~~above outpacing declines in the related costs.~~above.

Sales, marketing and customer success

Sales, marketing and customer success expense includes compensation costs, variable sales commissions, travel-related expenses, advertising and marketing materials, public relations costs, variable reseller commissions and allocated depreciation, facilities and IT support costs.

We see a large market opportunity in the long-term and will continue to make investments to drive sales ~~effectiveness, which is a component of our four-point growth strategy.~~effectiveness. We have also implemented software tools to enhance our digital footprint and drive lead generation. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter of 2020, including a reduction in our sales headcount with a focus on retaining our most highly productive sales executives. ~~After temporarily freezing~~The enhancements we are making in our ~~hiring efforts due~~go-to-market approach are expected to ~~COVID-19,~~significantly reduce the payback period for our customer acquisition costs while increasing sales velocity. As a result, we ~~have since began backfilling~~do not expect our sales, ~~positions with a focus on 2021 bookings.~~



30		~~Second Quarter 2020 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

marketing and customer success expense to return to pre-pandemic levels.

Sales, marketing and customer success expense decreased by ~~$3.1~~$9.9 million or ~~5.6%~~16.9%, during the three months ended ~~June 30, 2020,~~March 31, 2021, respectively, when compared to the same period in ~~2019,~~2020, primarily driven by the following:



	+-	~~Increase~~Decrease in ~~employee severance~~compensation costs other than stock-based compensation of $8.6 million due to the targeted reduction in sales headcount during the second quarter of 2020, discussed above
	-	Decrease in allocated costs of ~~$1.8~~$2.5 million primarily related to a decrease in rent expense and the impact of the targeted reduction in ~~our~~ sales headcount ~~in response to~~during the ~~COVID-19 pandemic~~second quarter of 2020, as discussed above
	-	Decrease in travel costs of ~~$1.9~~$2.2 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
	-	~~Decrease~~
	+	Increase in stock-based compensation costs of ~~$1.7~~$2.9 million ~~primarily related~~due to the ~~decision to replace our 2020 cash bonus plans with grants of performance-based equity awards~~
-	~~Decrease in commissions expense of $0.7 million related to a decrease in commissionable sales.~~factors discussed above on page 23

~~Sales, marketing and customer success expense remained relatively consistent during the six months ended June 30, 2020, when compared to the same period in 2019, primarily driven by the following:~~

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(Unaudited)

Research and development

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

We continue to make investments to delight our customers with innovative cloud solutions, which is a component of our four-point ~~growth~~ strategy. We increased engineering hiring beginning in the fourth quarter of 2020.

Research and development expenses ~~decreased~~increased by ~~$1.0~~$4.2 million or ~~3.9%, and $4.5 million or 8.3%~~16.8%, during the three ~~and six~~ months ended ~~June 30, 2020, respectively,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, primarily driven by ~~decreases in compensation costs of $1.8 million and $3.5 million, respectively, associated with~~ the ~~decision in March 2020 to replace our 2020 cash bonus plans with grants of performance-based equity awards.~~following:


			+						Increase in compensation costs of $3.3 million primarily related to stock-based compensation due to the factors discussed above on page 23

			+						Decrease in software development costs of $1.7 million that were required to be capitalized under the internal-use software guidance, primarily due to lower engineering headcount

Not included in research and development expense for the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were ~~$10.6~~$9.1 million and ~~$11.7 million, respectively, and for the six months ended June 30, 2020 and 2019 were $21.4 million and $22.8~~$10.8 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years. We expect that the amount of software development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality and the integration of our solutions, which we believe will drive long-term revenue growth.

General and administrative

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



~~Second Quarter 2020 Form 10-Q~~		31

~~Table~~During the third quarter of ~~Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

2020, we adjusted our workforce strategy to provide more flexibility to our employees after our offices reopen and we expect to have more employees working remotely either part-time or full-time, even within our hub locations. This change is expected to create efficiencies within our real estate footprint as we shift toward more collaborative workspaces within our offices.

General and administrative expense increased by ~~$1.3~~$4.7 million or ~~4.6%~~18.3%, during the three months ended ~~June 30, 2020 and remained relatively consistent during the six months ended June 30, 2020,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019,~~2020, primarily driven by the following:


			+						Increase in stock-based compensation costs of $5.1 million due to the factors discussed above on page 23
			+						Increase in corporate costs of $2.2 million primarily related to increases in third-party consulting fees and insurance costs
			-						Decrease in rent expense of $3.0 million primarily related to the purchase of our global headquarters facility during the third quarter of 2020 and our exit of certain other office leases globally during the second half of 2020 in-line with our new workforce strategy, discussed above


			+						~~Increases in corporate costs of $3.1 million and $3.4 million primarily related to increases in bad debt expense~~
			-						~~Decreases in bonus expense of $1.3 million and $2.8 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards~~

During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments, which was substantially completed as of December 2019. During the three and six months ended June 30, 2019, we incurred $0.7 million and $2.7 million, respectively, in before-tax restructuring charges related to these activities. Such charges during the three and six months ended June 30, 2020 were insignificant.

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Interest expense ($M)
Percentages indicate expenses as a percentage of total revenue

The ~~decreases~~increase in interest expense in dollars and as a percentage of total revenue during the three ~~and six~~ months ended ~~June 30, 2020,~~March 31, 2021, when compared to the same ~~periods~~period in ~~2019, were~~2020, was primarily due to ~~decreases~~the Real Estate Loans assumed for the purchase of our global headquarters facility in ~~our average daily borrowings~~August 2020 and ~~our weighted average effective interest rates.~~the deferred financing costs and debt discount associated with the 2020 Credit Facility, which was entered into in October 2020.

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


(dollars in millions)	Timing of recognition	March 31, 2021		December 31, 2020		Change
Recurring	Over the period billed in advance, generally one year	$	278.0	$	303.8	(8.5)	%
One-time services and other	As services are delivered	16.5		13.1		26.4	%
Total deferred revenue(1)		294.5		316.9		(7.1)	%
Less: Long-term portion		4.5		4.7		(3.9)	%
Current portion(1)		$	290.0	$	312.2	(7.1)	%

(dollars in millions) Timing of recognition June 30,
2020
December 31,
2019
Change
Recurring Over the period billed in advance, generally one year $ 322.1
$ 302.8
6.4 %
One-time services and other As services are delivered 15.1
13.4
12.8 %
Total deferred revenue⁽¹⁾
337.2
316.1
6.7 %
Less: Long-term portion 4.6
1.8
156.7 %
Current portion⁽¹⁾
$ 332.6
$ 314.3
5.8 %
(1)The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.

To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. Our recurring revenue contracts are generally for a term of three years at contract inception, ~~with one to three-year renewals thereafter,~~ billed annually in advance, and non-cancelable. We have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end ~~of the contract term.~~each one-year period.

Deferred revenue from recurring revenue contracts ~~increased~~decreased during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, primarily due a seasonal ~~increase~~decrease in customer contract ~~renewals and new subscription sales of our cloud solutions.~~renewals. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter, which generally results in our lowest balance of deferred revenue at the end of our first quarter. Deferred revenue from one-time services and other increased during the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, primarily due ~~an increase in~~to increased bookings during the ~~mix~~fourth quarter of ~~retained~~2020 and ~~managed services contracts we present in one-time services and other beginning January 1, 2020, as discussed above.~~

~~We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs~~the first quarter of ~~deferred revenue from customer arrangements predating the acquisition to~~

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Income tax provision

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. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".


Income tax provision ($M)
Percentages indicate effective income tax rates

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, non-GAAP net income and non-GAAP diluted earnings per share~~financial measures internally in analyzing our operational performance. Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies.

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 March 31,
(dollars in millions)		2021			2020			Change





GAAP gross profit		$	115.8		$	118.8		(2.5)	%
GAAP gross margin		52.8		%	53.1		%
Non-GAAP adjustments:

Add: Stock-based compensation expense		5.4			0.9			519.4	%
Add: Amortization of intangibles from business combinations		9.1			10.9			(16.5)	%


Subtotal(1)		14.5			11.8			22.5	%
Non-GAAP gross profit(1)		$	130.3		$	130.6		(0.2)	%
Non-GAAP gross margin		59.4		%	58.4		%

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	Three months ended March 31,
(dollars in millions, except per share amounts)		2021			2020			Change
GAAP income from operations		$	6.6		$	8.4		(21.1)	%
GAAP operating margin		3.0		%	3.8		%
Non-GAAP adjustments:

Add: Stock-based compensation expense		30.0			13.6			120.9	%
Add: Amortization of intangibles from business combinations		9.7			11.7			(17.1)	%
Add: Employee severance		1.0			0.1			921.6	%
Add: Acquisition-related integration costs		(0.1)			—			206.3	%
Add: Acquisition-related expenses		0.1			0.1			(53.2)	%
Add: Restructuring and other real estate activities		(0.1)			—			(562.5)	%
Subtotal(1)		40.5			25.5			59.1	%
Non-GAAP income from operations(1)		$	47.2		$	33.9		39.1	%
Non-GAAP operating margin		21.5		%	15.2		%

GAAP income before provision for income taxes		$	0.5		$	5.3		(90.3)	%
GAAP net (loss) income		$	(0.2)		$	4.6		(103.5)	%
Shares used in computing GAAP diluted earnings per share		47,363,197			48,455,751			(2.3)	%
GAAP diluted earnings per share		$	—		$	0.10		(100.0)	%
Non-GAAP adjustments:
Add: GAAP income tax provision		0.7			0.7			(1.7)	%
Add: Total non-GAAP adjustments affecting income from operations		40.5			25.5			59.1	%


Non-GAAP income before provision for income taxes		41.0			30.8			33.2	%
Assumed non-GAAP income tax provision(2)		8.2			6.2			33.2	%
Non-GAAP net income(1)		$	32.8		$	24.7		33.2	%

Shares used in computing non-GAAP diluted earnings per share		48,387,042			48,455,751			(0.1)	%
Non-GAAP diluted earnings per share		$	0.68		$	0.51		33.3	%



34		~~Second Quarter 2020 Form 10-Q~~

Three months ended
June 30, Six months ended
June 30,
(dollars in millions, except per share amounts) 2020
2019
Change
2020
2019
Change
GAAP income from operations $ 19.6
$ 13.5
45.1 % $ 28.0
$ 15.7
78.7 %
GAAP operating margin 8.4 % 6.0 % 6.1 % 3.6 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down —
0.7
(100.0 )% —
1.4
(100.0 )%
Add: Stock-based compensation expense 20.1
15.0
34.0 % 33.7
28.8
17.2 %
Add: Amortization of intangibles from business combinations 10.4
12.5
(16.6 )% 22.1
25.3
(12.6 )%
Add: Employee severance 4.3
0.2
2,132.5 % 4.4
3.6
20.7 %
Add: Acquisition-related integration costs (0.1 ) 0.5
(115.3 )% (0.1 ) 1.2
(108.7 )%
Add: Acquisition-related expenses 0.1
0.4
(76.7 )% 0.2
0.8
(72.3 )%
Add: Restructuring costs 0.1
0.7
(93.2 )% 0.1
2.7
(97.2 )%
Subtotal⁽¹⁾
34.9
30.0
16.3 % 60.4
63.7
(5.3 )%
Non-GAAP income from operations⁽¹⁾
$ 54.5
$ 43.5
25.3 % $ 88.4
$ 79.4
11.3 %
Non-GAAP operating margin 23.5 % 19.2 % 19.4 % 17.9 %

GAAP income before provision for income taxes $ 16.3
$ 9.9
65.3 % $ 21.7
$ 6.9
213.1 %
GAAP net income $ 11.8
$ 7.1
65.6 % $ 16.5
$ 6.0
173.5 %
Shares used in computing GAAP diluted earnings per share 48,418,378
48,160,684
0.5 % 48,465,077
48,101,212
0.8 %
GAAP diluted earnings per share $ 0.24
$ 0.15
60.0 % $ 0.34
$ 0.13
161.5 %
Non-GAAP adjustments:
Add: GAAP income tax provision 4.5
2.7
64.5 % 5.2
0.9
477.5 %
Add: Total non-GAAP adjustments affecting income from operations 34.9
30.0
16.3 % 60.4
63.7
(5.3 )%
Non-GAAP income before provision for income taxes 51.2
39.8
28.5 % 82.0
70.7
16.1 %
Assumed non-GAAP income tax provision⁽²⁾
10.2
8.0
28.5 % 16.4
14.1
16.1 %
Non-GAAP net income⁽¹⁾
$ 41.0
$ 31.9
28.5 % $ 65.6
$ 56.5
16.1 %

Shares used in computing non-GAAP diluted earnings per share 48,418,378
48,160,684
0.5 % 48,465,077
48,101,212
0.8 %
Non-GAAP diluted earnings per share $ 0.85
$ 0.66
28.8 % $ 1.35
$ 1.18
14.4 %

Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and capital expenditures for property and equipment.

Six months ended
June 30,
(dollars in millions) 2020
2019
Change
GAAP net cash provided by operating activities $ 37.5
$ 45.1
(16.9 )%
Less: purchase of property and equipment (5.9 ) (6.4 ) (7.7 )%
Less: capitalized software development costs (21.7 ) (23.2 ) (6.6 )%
Non-GAAP free cash flow $ 9.9
$ 15.5
(36.0 )%


	Three months ended March 31,
(dollars in millions)	2021		2020		Change
GAAP net cash provided by (used in) operating activities	$	30.1	$	(24.5)	(222.9)	%
Less: purchase of property and equipment	(3.5)		(2.9)		21.0	%
Less: capitalized software development costs	(9.3)		(10.9)		(14.9)	%
Non-GAAP free cash flow	$	17.3	$	(38.3)	(145.2)	%

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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 non-GAAP organic recurring revenue growth, in analyzing our operating performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period, and they include the non-GAAP revenue attributable to those companies, as if there were no acquisition-related write-downs of acquired deferred revenue to fair value as required by GAAP. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate.


(dollars in millions)	Three months ended March 31,
		2021			2020
GAAP revenue		$	219.2		$	223.6
GAAP revenue growth		(2.0)		%
Add: Non-GAAP acquisition-related revenue (1)		—			—
Non-GAAP organic revenue (2)		$	219.2		$	223.6
Non-GAAP organic revenue growth		(2.0)		%

Non-GAAP organic revenue (2)		$	219.2		$	223.6
Foreign currency impact on Non-GAAP organic revenue (3)		(2.0)			—
Non-GAAP organic revenue on constant currency basis (3)		$	217.2		$	223.6
Non-GAAP organic revenue growth on constant currency basis		(2.9)		%

GAAP recurring revenue		$	206.8		$	204.9
GAAP recurring revenue growth		0.9		%
Add: Non-GAAP acquisition-related revenue (1)		—			—
Non-GAAP organic recurring revenue		$	206.8		$	204.9
Non-GAAP organic recurring revenue growth		0.9		%

(dollars in millions) Three months ended
June 30, Six months ended
June 30,
2020
2019
2020
2019
GAAP revenue $ 232.0
$ 225.6
$ 455.6
$ 441.5
GAAP revenue growth 2.8 % 3.2 %
Add: Non-GAAP acquisition-related revenue ⁽¹⁾
—
0.7
—
1.4
Non-GAAP organic revenue ⁽²⁾
$ 232.0
$ 226.4
$ 455.6
$ 442.9
Non-GAAP organic revenue growth 2.5 % 2.9 %

Non-GAAP organic revenue ⁽²⁾
$ 232.0
$ 226.4
$ 455.6
$ 442.9
Foreign currency impact on Non-GAAP organic revenue ⁽³⁾
2.0
—
2.3
—
Non-GAAP organic revenue on constant currency basis ⁽³⁾
$ 234.0
$ 226.4
$ 457.9
$ 442.9
Non-GAAP organic revenue growth on constant currency basis 3.4 % 3.4 %

GAAP recurring revenue $ 216.3
$ 208.5
$ 421.1
$ 406.6
GAAP recurring revenue growth 3.7 % 3.6 %
Add: Non-GAAP acquisition-related revenue ⁽¹⁾
—
0.7
—
1.4
Non-GAAP organic recurring revenue $ 216.3
$ 209.2
$ 421.1
$ 408.0
Non-GAAP organic recurring revenue growth 3.4 % 3.2 %
(1)Non-GAAP acquisition-related revenue excludes incremental acquisition-related revenue calculated in accordance with GAAP that is attributable to companies acquired in the current fiscal year. For companies, if any, 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)Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated.

(3)To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and EURO.

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Rule of 40

Rule of 40 is defined as non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. Non-GAAP adjusted EBITDA is defined as GAAP net income plus interest, net; income tax provision (benefit); depreciation; amortization of intangible assets from business combinations; amortization of software development costs; acquisition-related deferred revenue write-down; stock-based compensation; acquisition-related integration costs; acquisition-related expenses; employee severance; and restructuring and other real estate activities.


	Three months ended March 31,
(dollars in millions)		2021			2020			Change
GAAP net (loss) income		$	(0.2)		$	4.6		(103.5)	%
Non-GAAP adjustments:
Add: Interest, net		5.0			3.6			36.4	%
Add: GAAP income tax provision		0.7			0.7			(1.7)	%
Add: Depreciation		3.2			3.5			(9.3)	%
Add: Amortization of intangibles from business combinations		9.7			11.7			(17.1)	%
Add: Amortization of software development costs(1)		8.0			6.7			19.3	%
Subtotal		26.5			26.2			1.1	%
Non-GAAP EBITDA		$	26.3		$	30.9		(14.7)	%
Non-GAAP EBITDA margin		12.0		%	13.8		%

Non-GAAP adjustments:

Add: Stock-based compensation expense		30.0			13.6			120.9	%
Add: Employee severance		1.0			0.1			921.6	%
Add: Acquisition-related integration costs		(0.1)			—			206.3	%
Add: Acquisition-related expenses		0.1			0.1			(53.2)	%
Add: Restructuring and other real estate activities		(0.1)			—			(562.5)	%
Subtotal		30.9			13.8			123.4	%
Adjusted Non-GAAP EBITDA		$	57.2		$	44.7		28.0	%
Adjusted Non-GAAP EBITDA margin		26.1		%

Rule of 40(2)		24.1		%

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

(2)Measured by non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. See Non-GAAP organic revenue growth table above.


32						First Quarter 2021 Form 10-Q

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Seasonality

Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our ~~transaction~~first quarter has historically been the seasonal low for bookings, with the second and fourth quarters historically being seasonally higher, and our bookings tend to be back-end loaded within individual quarters given our quarterly quota plans. Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments. Our transactional revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. ~~Our revenue from payment services has~~We have historically ~~increased~~experienced seasonal highs during the fourth quarter due to year-end ~~giving.~~giving campaigns and during the second quarter when a large number of events are held. Our revenue from professional services has historically been lower in the first quarter when many of those services commence and in the fourth quarter due to the holiday season. As a result of these and other factors, our total revenue has historically been lower in the first quarter than in the remainder of our fiscal year, with the fourth quarter historically achieving the highest total revenue. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures.

Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, ~~the payment of bonuses,~~ as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with ~~the payment of bonuses from the prior year in our first quarter and~~ the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has 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~~base salary merit increases, which were replaced in 2020 with performance-based equity awards due to COVID-19, but are ~~generally effective~~expected to return in ~~April each year.~~July 2021. In addition, deferred revenues can vary on a seasonal basis for the same reasons. Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards. During the second quarter of 2021, we expect an increase in the amount taxes we pay on behalf of our employees related to the settlement of equity awards when compared to the same period in 2020, as the equity granted in May 2020 in lieu of cash bonus plans and base salary merit increases will vest. These patterns may change 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, the COVID-19 pandemic or other factors.



Liquidity and Capital Resources

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


(dollars in millions)	June 30, 2020			December 31, 2019			Change		(dollars in millions)	March 31, 2021		December 31, 2020		Change
Cash and cash equivalents	$	30.5		$	31.8		(4.0	)%	Cash and cash equivalents	$	27.8	$	35.8	(22.4)	%
Property and equipment, net	36.5			35.5			2.8	%	Property and equipment, net	105.1		105.2		(0.1)	%
Software development costs, net	106.0			101.3			4.7	%	Software development costs, net	113.6		111.8		1.6	%
Total carrying value of debt	488.1			467.1			4.5	%	Total carrying value of debt	550.8		531.0		3.7	%
Working capital	(191.8		)	(254.3		)	24.6	%	Working capital	(180.9)		(194.3)		6.9	%

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


	Three months ended March 31,
(dollars in millions)	2021		2020		Change
Net cash provided by (used in) operating activities	$	30.1	$	(24.5)	(222.9)	%
Net cash used in investing activities	(12.8)		(13.8)		(7.5)	%
Net cash used in financing activities	(379.6)		(278.9)		36.1	%

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Our principal sources of liquidity are our operating cash flow, funds available under the ~~2017~~2020 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements, market acceptance of our solutions and services and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations. 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 or equity issuances.



~~Second Quarter 2020 Form 10-Q~~		37

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~(Unaudited)~~

~~In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.~~

We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic. We have received short-term payment relief requests as a result of COVID-19, most often in the form of payment deferral requests. We are evaluating each request on a case-by-case basis to assess the customer's ability to pay. Not all customer requests will ultimately result in modified payment terms, nor are we forgoing our contractual rights under customer agreements. We are continually monitoring our customer receivable balances, payment terms, and creditworthiness for changes that could have a significant impact on the collectability of our accounts receivables, our operating results and financial position.



Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited)
	Three months ended June 30,						Six months ended June 30,
(dollars in thousands, except per share amounts)	2020			2019			2020			2019
Revenue
Recurring	$	216,260		$	208,468		$	421,127		$	406,562
One-time services and other	15,731			17,166			34,485			34,902
Total revenue	231,991			225,634			455,612			441,464
Cost of revenue
Cost of recurring	91,370			86,657			180,921			171,368
Cost of one-time services and other	13,569			14,150			28,883			28,722
Total cost of revenue	104,939			100,807			209,804			200,090
Gross profit	127,052			124,827			245,808			241,374
Operating expenses
Sales, marketing and customer success	51,954			55,009			110,689			110,464
Research and development	24,895			25,902			49,872			54,363
General and administrative	29,842			28,543			55,697			55,660
Amortization	729			1,152			1,470			2,528
Restructuring	50			730			74			2,683
Total operating expenses	107,470			111,336			217,802			225,698
Income from operations	19,582			13,491			28,006			15,676
Interest expense	(3,893		)	(5,799		)	(8,052		)	(11,122		)
Other income, net	630			2,181			1,700			2,363
Income before provision for income taxes	16,319			9,873			21,654			6,917
Income tax provision	4,496			2,733			5,192			899
Net income	$	11,823		$	7,140		$	16,462		$	6,018
Earnings per share
Basic	$	0.25		$	0.15		$	0.34		$	0.13
Diluted	$	0.24		$	0.15		$	0.34		$	0.13
Common shares and equivalents outstanding
Basic weighted average shares	48,239,928			47,714,621			48,138,125			47,622,740
Diluted weighted average shares	48,418,378			48,160,684			48,465,077			48,101,212
Other comprehensive loss
Foreign currency translation adjustment	(887		)	(6,018		)	(6,615		)	(1,428		)
Unrealized gain (loss) on derivative instruments, net of tax	551			(1,939		)	(2,571		)	(2,871		)
Total other comprehensive loss	(336		)	(7,957		)	(9,186		)	(4,299		)
Comprehensive income (loss)	$	11,487		$	(817	)	$	7,276		$	1,719

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



(in thousands)	Balance at beginning of year ⁽¹⁾		Provision/ adjustment		Write-off			Recovery		Balance at June 30, 2020
2020	$	4,011	$	3,708	$	(554	)	$	243	$	7,408


~~(1)~~	In March 2020, we reduced our accrued bonuses due to the payment of bonuses from the prior year and, in response to the global COVID-19 pandemic, determined to replace our 2020 cash bonus plans with performance-based equity awards (See Note 2).



Years ending December 31, (dollars in thousands)	Annual maturities
2020 - remaining	$	3,750
2021	9,194
2022	475,544
2023	538
2024	—
Thereafter	—
Total required maturities	$	489,026



(dollars in thousands)	Term of derivative instrument	Notional Value
Derivative instruments designated as hedging instruments:
Interest rate swap	July 2017 - July 2021	$	150,000
Interest rate swap	February 2018 - June 2021	50,000
Interest rate swap	June 2019 - June 2021	75,000
		$	275,000


~~(1)~~	~~Includes short-term lease costs, which were immaterial.~~


~~(2)~~	~~See Note 15 for a discussion of the pending purchase of our Headquarters Facility that we currently lease.~~



Declaration Date	Dividend per Share		Record Date	Payable Date
February 10, 2020	$	0.12	February 28	March 13



Total revenue ($M)						Income from operations ($M)
YoY Growth (%)						YoY Growth (%)


1.	~~Contractual Recurring Revenue (approximately two thirds of total revenue in 2019)~~


2.	~~Transactional Revenue (approximately one quarter of total revenue in 2019)~~



26		+	~~Increase in employee severance costs of $0.9 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above~~
	+	Increase in compensation costs of $0.9 million primarily associated with the elevated headcount of our direct sales force and our lead generation teams, beginning in the fourth quarter of 2018. The increase in compensation costs related to elevated headcount was partially offset by the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
	-	~~Decrease in travel costs of $1.4 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic~~First Quarter 2021 Form 10-Q


~~(1)~~	~~The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.~~


~~(2)~~	~~We apply a non-GAAP effective tax rate of 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share.~~


~~(2)~~	Non-GAAP organic revenue for the prior year periods presented herein will not agree to non-GAAP organic revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth is calculated.


~~(3)~~	To determine non-GAAP organic revenue growth on a constant currency basis, revenues from entities reporting in foreign currencies were translated to U.S. Dollars using the comparable prior period's quarterly weighted average foreign currency exchange rates. The primary foreign currencies creating the impact are the Australian Dollar, British Pound, Canadian Dollar and EURO.



36First Quarter 2021 Form 10-Q						~~Second Quarter 2020 Form 10-Q~~31



	Six months ended June 30,
(dollars in millions)	2020			2019			Change
Net cash provided by operating activities	$	37.5		$	45.1		(16.9	)%
Net cash used in investing activities	(27.6		)	(138.5		)	(80.1	)%
Net cash (used in) provided by financing activities	(132.5		)	30.8			(529.7	)%



Financial ~~Covenant~~covenant	Requirement	Ratio as of ~~June 30, 2020~~March 31, 2021
Net ~~Leverage Ratio~~leverage ratio	≤ ~~3.50~~4.00 to 1.00	~~2.21~~1.79 to 1.00
Interest ~~Coverage Ratio~~coverage ratio	≥ 2.50 to 1.00	~~11.88~~16.44 to 1.00


	Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Recorded contractual obligations:
Debt(1)	$	553.5	$	12.9	$	23.4	$	464.4	$	52.9
Interest payments on debt(2)	2.6		2.2		0.3		—		—
Operating leases(3)	25.6		8.1		9.3		4.6		3.5

Unrecorded contractual obligations:
Interest payments on debt(4)	78.9		11.9		24.9		19.2		22.9
Purchase obligations(5)	79.0		56.6		22.4		—		—
Total contractual obligations	$	739.6	$	91.8	$	80.3	$	488.2	$	79.3


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


~~(3)~~	~~Our commitments related to operating leases have not been reduced by sublease income, 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.



44First Quarter 2021 Form 10-Q						~~Second Quarter 2020 Form 10-Q~~39


Period	Total number of shares purchased(1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs(2)	Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
Beginning balance, January 1, 2021					$	208,999
January 1, 2021 through January 31, 2021	464,149	$	60.23	464,149	181,042
February 1, 2021 through February 28, 2021	242,539	76.42		1,672	180,933
March 1, 2021 through March 31, 2021	—	—		—	180,933
Total	706,688	$	65.79	465,821	$	180,933



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, April 1, 2020					$	50,000
April 1, 2020 through April 30, 2020	175	$	80.18	—	50,000
May 1, 2020 through May 31, 2020	12,829	53.28		—	50,000
June 1, 2020 through June 30, 2020	8,196	63.10		—	50,000
Total	21,200	$	57.30	—	$	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.


				BLACKBAUD, INC.

Date:			May 4, 2021	~~BLACKBAUD, INC.~~
By:
~~Date:~~	~~August 4, 2020~~	~~By:~~	/s/ Michael P. Gianoni
					Michael P. Gianoni
					President and Chief Executive Officer
					(Principal Executive Officer)

Date:			~~August~~May 4, ~~2020~~2021	By:	/s/ Anthony W. Boor
					Anthony W. Boor
					Executive Vice President and Chief Financial Officer
					(Principal Financial and Accounting Officer)