# BLACKBAUD INC (BLKB) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BLACKBAUD INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1280058/000128005823000006/blkb-20221231.htm
Accession: 0001280058-23-000006
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BLKB/
All MD&A years: /company/BLKB/mda/
Previous year: /company/BLKB/mda/fy2021/ (FY 2021)
Next year: /company/BLKB/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 1A Risk factors and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis presents financial information denominated in millions of dollars which can lead to differences from rounding when compared to similar information contained in the consolidated financial statements and related notes, which are primarily denominated in thousands of dollars.

Executive Summary

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 and individuals to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility (CSR) and environmental, social and governance (ESG), school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than four decades, we are a remote-first company headquartered in Charleston, South Carolina, with operations in the United States, Australia, Canada, Costa Rica and the United Kingdom. During 2022, we had more than 40,000 customers with contractual billing arrangements and nearly 100,000 customers that paid us through transactional fees. Through our customers and our solutions, we support millions of users and we connect millions of supporters to nearly 150,000 organizations and causes in over 100 countries.

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

Four-Point Strategy

[[GREPCENT_TABLE]]
[["","1","","Expand Total Addressable Market"],["","2","","Lead with World Class Teams and Operations"],["","3","","Delight Customers with Innovative Cloud Solutions"],["","4","","Focus on Employees, Culture and ESG Initiatives"]]
[[/GREPCENT_TABLE]]

1.Expand TAM

In December 2021, we doubled our TAM when we acquired EVERFI, an industry leader in global social impact technology. Adding EVERFI advances our position as a leader in the rapidly evolving ESG and CSR spaces and offers cross-selling and upselling opportunities through complementary product offerings with YourCause® solutions. Our TAM now stands at over $20 billion, and we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product development.

[[GREPCENT_TABLE]]
[["32","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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2.Lead with World Class Teams and Operations

This strategy expands upon our previous strategies to drive sales effectiveness and improve operating efficiency to include improving overall company performance as measured by the Rule of 40 (see discussion of Non-GAAP Financial Measures below). During 2022, we announced a series of strategic organizational updates to streamline our business operations and become even more customer centric. We created three new roles: Chief Operating Officer, Chief Commercial Officer and Executive Vice President of Corporations. We believe these new roles will: ensure consistency in our approach to the customer experience; further streamline and simplify our go-to-market efforts to maximize our outcomes as a global company; and further align our YourCause and EVERFI offerings and continue our investment in being the partner of choice for corporations focused on social responsibility and impact. Additionally, we took steps to better align our workforce with our strategic priorities, including further elimination of open positions as well as the difficult decision to reduce our workforce (see additional discussion regarding our workforce reduction below). We also appointed three new members to our board of directors, providing not only new business perspectives but also adding important skills in cybersecurity, enterprise software, digital transformation and global operations.

3.Delight Customers with Innovative Cloud Solutions

During our annual user conference, bbcon, we shared how our purpose-built solutions bring together the capabilities essential to our customers in managing their data, making their teams more productive, motivating their audiences to act, and ultimately driving outcomes. During the third quarter, we acquired Kilter, an intuitive, gamified, activity-based engagement app. We will initially pair Kilter with our Blackbaud TeamRaiser solution to serve nonprofits by expanding the ways they can engage with their supporters to prepare for their existing fundraising walks, runs and rides, and to create new types of engagement opportunities that are not tied to a specific date or place. Kilter will also provide a unique solution with YourCause CSRConnect platform for companies as employers take a more active role in supporting their employees’ health and wellness pursuits across their remote and distributed workforces.

4.Focus on Employees, Culture and ESG Initiatives

During 2022, we announced that we achieved carbon neutrality for 2021. This is a goal we have been striving towards and our shift to a remote-first workforce enabled us to accelerate our timeline. Since 2019, Blackbaud has reduced its global real estate footprint by 50%, energy emissions to run office space by 63% and employee commute emissions by 75%. With a multi-pronged climate strategy, Blackbaud is focused on reducing emissions, using energy efficiently and investing in environmental projects for a more sustainable future. We shared more about our ESG strategy on our Corporate Social Responsibility website during the second quarter. Our mission driven culture has been in our DNA since inception and is very attractive in a competitive labor market. We continue to foster a diverse and inclusive environment focused on employee engagement and connectedness with our remote-first workforce strategy. We have a significant role to play in driving advances in the social impact space, and we are proud of the strong corporate culture we have built and continue to cultivate in today's environment.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","33"]]
[[/GREPCENT_TABLE]]

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Financial Summary

[[GREPCENT_TABLE]]
[["Total Revenue ($M)","","Income from Operations ($M)"],["YoY Growth (%)","","YoY Growth (%)"]]
[[/GREPCENT_TABLE]]

Total revenue increased by $130.4 million during 2022, driven largely by the following:

[[GREPCENT_TABLE]]
[["","+","","Growth in recurring revenue primarily related to:\u2022an increase in contractual revenue of $107.7 million related to the performance of our cloud solutions, of which $96.2 million was attributable to EVERFI; partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions and a decrease related to fluctuations in foreign currency exchange rates of $3.4 million.\u2022an increase in transactional recurring revenue of $23.2 million primarily due to an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes, an increase in online charitable giving; and new pricing initiatives. The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $7.5 million."],["","-","","Decrease in one-time services and other revenue primarily related to:\u2022decrease in one-time analytics revenue as analytics now are generally integrated in our cloud solutions; and\u2022increase in one-time consulting revenue primarily attributable to EVERFI, largely offset by less revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services."]]
[[/GREPCENT_TABLE]]

For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 58.

While our 2022 bookings for EVERFI were lower than expected, and we experienced some unexpected EVERFI employee attrition following the acquisition, we have taken action to bolster management and fill account executive vacancies, which are now fully staffed and ramping to drive future bookings. We have a number of multi-year pricing initiatives underway, some to bring our pricing in line with the market while others are model changes that are expected to drive greater revenue for both us and our customers. As a result, we expect to see an acceleration in growth in the second half of 2023 when compared to the first half of the year as we begin to see the full-year effect of some of these pricing initiatives.

We also expect that the one-time services and other revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.

[[GREPCENT_TABLE]]
[["34","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Income from operations decreased by $53.4 million during 2022, driven largely by the following:

[[GREPCENT_TABLE]]
[["","-","","Increase in compensation costs other than stock-based compensation of $75.7 million primarily due to increased employee headcount due to our acquisition of EVERFI"],["","-","","Increase in Security Incident-related expenses, net of insurance, of $53.9 million. See \"Security Incident update\" below on page 37."],["","-","","Increases in third-party contractor and hosting costs of $26.9 million and $6.6 million, respectively, primarily attributable to our acquisition of EVERFI and, to a lesser extent, our continued migration of our cloud infrastructure to leading public cloud service providers and investments in cybersecurity"],["","-","","Increase in amortization of intangible assets from business combinations of $14.4 million due to our acquisition of EVERFI"],["","-","","Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments"],["","-","","Increase in infrastructure costs of $8.4 million primarily related to our acquisition of EVERFI and investments in security tools"],["","-","","Increase in marketing costs of $7.7 million primarily due to our acquisition of EVERFI"],["","-","","Increase in travel costs of $4.5 million due to our easing of restrictions on non-essential employee travel, which went into effect during March 2020 in response to the COVID-19 pandemic"],["","-","","Increase in other direct costs of revenue of $4.3 million primarily due to our acquisition of EVERFI"],["","-","","Increase in employee severance of $3.7 million due to our targeted workforce reduction during the fourth quarter of 2022, as discussed below"],["","-","","Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space. We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale."],["","-","","Increase in cost of revenue from a $2.3 million impairment charge during the three months ended June 30, 2022, against previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge resulted primarily from our decision to end customer support for certain solutions"],["","+","","Increase in total revenue, as described above"],["","+","","Net increase of $12.9 million related to an increase in software and content development costs that were required to be capitalized under the internal-use software guidance, largely driven by our acquisition of EVERFI, partially offset by an increase in amortization of capitalized software and content development costs"],["","+","","Decrease in real estate activity costs of $12.0 million due to our workforce strategy changes that began in the third quarter of 2020"],["","+","","Decrease in stock-based compensation expense of $10.1 million attributable to:\u2022As a one-time response to COVID-19, replacement of our 2020 base salary merit increases with one-year time-based equity awards, which vested and were recognized as expense between May 1, 2020 and May 1, 2021;\u2022Over performance against overall Company goals was higher in 2021 than 2022 goals; and \u2022Our targeted workforce reduction during the fourth quarter of 2022, as discussed below"],["","+","","Decrease in corporate costs of $2.5 million primarily related to a decrease in bad debt expense"]]
[[/GREPCENT_TABLE]]

We are continuing to make critical investments in the business in areas such as digital marketing, engineering, security, customer success and our continued shift of cloud infrastructure to leading public cloud service providers. Our profitability during 2022 reflects the addition of EVERFI and some of these incremental investments.

We have taken steps to better align our workforce with our strategic priorities to drive efficiencies and minimize any potential impacts from the current uncertain macroeconomic environment. During the fourth quarter of 2022, this included further elimination of open positions as well as the decision to reduce our workforce. As a result of the targeted workforce reduction, we incurred $4.5 million in pre-tax employee severance costs during the fourth quarter of 2022. During the first quarter of 2023, we have remained focused on improving operating performance and driving efficiencies in the Company, including further reducing our workforce. Following the planned action during the fourth quarter of 2022, we experienced a slowdown in voluntary attrition relative to expectations leading to a further reduction in force to achieve our original plan. While we

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","35"]]
[[/GREPCENT_TABLE]]

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have eliminated positions in some areas, we will continue to hire in other areas. Most of these reductions are in areas of the business that are not customer facing or in sales. When combined with the cost actions we took in the fourth quarter of 2022, we expect our total headcount will be reduced by approximately 14% since the third quarter 2022. We expect these workforce reductions and other cost actions to significantly reduce our pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.

In 2023, we expect our financial performance to improve with each successive quarter, starting with meaningful improvement in the second quarter as our pricing and cost initiatives take hold.

We continuously seek opportunities to optimize our portfolio of solutions to focus time and resources on innovation that will have the greatest impact for our customers and the markets we serve, and drive the highest return on investment. To that end, we will continue to simplify and rationalize our portfolio through product sunsets and divestitures of non-core businesses and technologies.

[[GREPCENT_TABLE]]
[["Customer retention","","Gross dollar retention"]]
[[/GREPCENT_TABLE]]

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 have historically used a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts, as we believed it provided a better representation of our customers' overall behavior. During 2022 and 2021, approximately 91% and 93%, respectively, of our customers with recurring revenue contracts were retained. This customer retention rate reflects our efforts to rationalize our portfolio of solutions through product sunsets and divestitures, and migrate customers from legacy solutions towards our next generation cloud solutions.

A key factor to our overall success is the renewal and expansion of our existing subscription agreements with our customers. Management now uses gross dollar retention in analyzing our success at delighting our customers with innovative and cloud solutions. Gross dollar retention is defined as contracted annual recurring revenue ("CARR") divided by beginning CARR with a measurement period of twelve months. During 2022, our gross dollar retention was approximately 91%. This gross dollar retention rate is relatively unchanged from our rate for the full year ended December 31, 2021. We are continually investing in innovation, which we believe will increase gross dollar retention over the long-term.

Balance sheet and cash flow

At December 31, 2022, our cash and cash equivalents were $31.7 million and the carrying amount of our debt under the 2020 Credit Facility was $799.1 million. Our net leverage ratio was 3.22 to 1.00.

During 2022, we generated $203.9 million in cash flow from operations and had a net decrease in borrowings of $99.7 million, had aggregate cash outlays of $71.1 million for purchases of property and equipment and capitalized software and content development costs, spent $20.9 million for our purchases of EVERFI and Kilter and received cash proceeds of $6.4 million from our sale of certain solutions. See Note 3 of our consolidated financial statements in this report for additional information.

[[GREPCENT_TABLE]]
[["36","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Security Incident update

As discussed in Note 11 to our consolidated financial statements included in this report, total costs related to the Security Incident have exceeded the limit of our insurance coverage. Accordingly, we expect that the Security Incident will continue to negatively impact our GAAP profitability and GAAP cash flow for the foreseeable future (see discussion regarding non-GAAP adjusted free cash flow on page 47). For full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees are expensed as incurred. For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate. It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss.

There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of December 31, 2022 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.

Results of Operations

Reportable segment

We report our operating results and financial information in one operating and reportable segment. See Note 16 of our consolidated financial statements in this report for additional information.

Comparison of 2022 vs. 2021 and 2021 vs. 2020

Acquisitions

During 2022 and 2021, we acquired companies that provided us with strategic opportunities to expand our TAM and share of the philanthropic giving market through the integration of complementary solutions and services to serve the changing needs of our customers. The following are the companies we acquired and their respective acquisition dates:

•Kilter, Inc. ("Kilter") on August 19, 2022

•EVERFI, Inc. on December 31, 2021

We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisitions. In accordance with applicable accounting rules, we determined that the Kilter and EVERFI acquisitions were not material to our consolidated financial statements; therefore, revenue and earnings since the acquisition date and pro forma information are not required or presented. See Note 3 to our consolidated financial statements in this report for a summary of these acquisitions.

2021 vs. 2020 Stock-based Compensation

Stock-based compensation expense increased $31.1 million in 2021 due to:

•Certain changes to our compensation program that were expected to cause stock-based compensation expense to remain higher than historical levels, including:

◦replacement of our annual cash bonus plans with a short-term performance-based equity award plan

◦decrease in the vesting period for our annual long-term incentive time-based equity awards from 4 years (1/4 per year) to 3 years (1/3 per year), beginning in February 2021; and

◦replacement of cash sign-on and retention bonuses with time-based equity awards.

•Increases in the grant date fair values of our annual equity awards granted to employees; and

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","37"]]
[[/GREPCENT_TABLE]]

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•Overall Company performance against 2020 and 2021 goals

Revenue and Cost of Revenue

[[GREPCENT_TABLE]]
[["Recurring"],["Revenue ($M)","","Cost of revenue ($M)","","Gross profit ($M) and gross margin (%)"],["YoY Growth (%)","","YoY Growth (%)"]]
[[/GREPCENT_TABLE]]

Recurring revenue is comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, hosting services, payment services, online training programs and subscription-based analytic services. 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 and content development costs, transaction-based costs related to payments services including remittances of amounts due to third-parties and other costs incurred in providing support and recurring services to our customers.

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.

2022 vs. 2021

Recurring revenue increased by $130.9 million, or 14.9%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in contractual recurring revenue of $107.7 million related to the performance of our cloud solutions, of which $96.2 million was attributable to EVERFI; partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions; also included in the increase in contractual recurring revenue is a decrease related to fluctuations in foreign currency exchange rates of $3.4 million"],["","+","","Increase in transactional recurring revenue of $23.2 million primarily due to:\u2022an increase in enrollment for our Blackbaud Tuition Management solution resulting in higher transactional volumes; \u2022an increase in online charitable giving; and \u2022new pricing initiatives.The increase in transactional recurring revenue was partially offset by a decrease related to fluctuations in foreign currency exchange rates of $7.5 million"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["38","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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For additional information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 58.

Cost of recurring revenue increased by $72.6 million, or 18.6%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in compensation costs of $19.5 million primarily related to an increase in headcount due to our acquisition of EVERFI, and a continued shift in resources historically supporting one-time services and other towards recurring revenue"],["","+","","Increase in amortization of intangible assets from business combinations of $14.0 million due to our acquisition of EVERFI"],["","+","","Increase in transaction-based costs of $12.0 million related to the increase in the volume of transactions for which we process payments"],["","+","","Increase in third-party contractor and hosting costs of $11.1 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security; currently, we expect our cloud infrastructure migration efforts and increased level of cybersecurity investments to continue for the foreseeable future. Also contributing to the increase was our acquisition of EVERFI."],["","+","","Increase in amortization of software and content development costs of $5.8 million due to our continued investments in the innovation and security of our solutions"],["","+","","Increase in third-party software costs of $3.9 million primarily related to a higher number of licenses needed and also price increases"],["","+","","Increase in allocated overhead costs of $3.7 million related to the increased headcount discussed above"],["","+","","Increase in depreciation expense of $1.5 million primarily related to investments in our cloud data centers and refresh of certain internal hardware"]]
[[/GREPCENT_TABLE]]

Recurring gross margin decreased by 1.4% primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.

2021 vs. 2020

Recurring revenue increased by $30.1 million, or 3.5%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in transactional revenue of $20.0 million primarily due to the continued shift toward virtual fundraising and online charitable giving; also included in the increase in transactional revenue is an increase related to fluctuations in foreign currency exchange rates of $4.7 million"],["","+","","Increase in contractual recurring revenue of $10.1 million related to the performance of our cloud solutions and early progress in initiatives to bring our pricing in line with the market, partially offset by a decrease in maintenance revenue as customers migrate to our cloud solutions; also included in the increase in contractual recurring revenue is an increase related to fluctuations in foreign currency exchange rates of $3.9 million"]]
[[/GREPCENT_TABLE]]

Cost of recurring revenue increased by $21.1 million, or 5.7%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in compensation costs of $10.3 million primarily related to the stock-based compensation due to the factors discussed above on page 37 and a shift in resources historically supporting one-time services and other towards recurring revenue"],["","+","","Increase in transaction-based costs of $9.6 million related to payment services integrated in our cloud solutions"],["","+","","Increase in third-party contractor and hosting costs of $7.8 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security"],["","-","","Decrease in amortization of intangible assets from business combinations of $3.7 million"],["","-","","Decrease in rent expense of $1.3 million largely due to a decrease in leased hardware, including servers, network gear and storage"],["","-","","Decrease in amortization of software development costs of $0.8 million"]]
[[/GREPCENT_TABLE]]

Recurring gross margin decreased by 0.9% primarily due to the increase in cost of recurring revenue outpacing the increase in recurring revenue.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","39"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["One-time services and other"],["Revenue ($M)","","Cost of revenue ($M)","","Gross profit ($M) and gross margin (%)"],["YoY Growth (%)","","YoY Growth (%)"]]
[[/GREPCENT_TABLE]]

One-time services and other revenue is comprised of fees for one-time consulting, analytic and onsite training services, and fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts.

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, amortization of intangible assets from business combinations, and allocated depreciation, facilities and IT support costs.

We expect that the one-time services and other revenue will continue to significantly decrease during 2023 compared to 2022 driven by our continued migration to the cloud in our core business as well as our opportunity to shift EVERFI one-time revenue to a recurring model.

2022 vs. 2021

One-time services and other revenue decreased by $0.5 million, or 1.1%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","-","","Decrease in one-time analytics revenue of $3.1 million as analytics are generally integrated in our cloud solutions"],["","+","","Increase in one-time consulting revenue of $2.8 million, of which $12.3 million was attributable to EVERFI, partially offset by a decrease in revenue from implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services."]]
[[/GREPCENT_TABLE]]

Cost of one-time services and other decreased $10.5 million or 19.9%, primarily driven by the following:

[[GREPCENT_TABLE]]
[["","-","","Decrease in compensation costs of $8.8 million largely due to a continued shift in resources historically supporting one-time services and other towards recurring revenue as well as a decrease in professional services headcount"],["","-","","Decrease in allocated overhead costs of $1.9 million primarily related to the decreased headcount discussed above"],["","-","","Decrease in third-party contractor costs of $1.1 million primarily due to a decrease in partners delivering services"],["","+","","Increase in employee severance of $1.6 million primarily due to our targeted workforce reduction, as discussed above"]]
[[/GREPCENT_TABLE]]

One-time services and other gross margin increased by 21.3%, primarily due to the significant reductions in compensation costs discussed above.

[[GREPCENT_TABLE]]
[["40","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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2021 vs. 2020

One-time services and other revenue decreased by $15.6 million, or 24.9%, driven primarily by the following:

[[GREPCENT_TABLE]]
[["","-","","Decrease in one-time consulting revenue of $10.5 million due primarily to less implementation and customization services, in line with our multi-year strategic shift from a license-based and one-time services business model to a cloud subscription business model. Our cloud subscription offerings generally require less implementation and customization services."],["","-","","Decrease in one-time analytics revenue of $4.2 million as analytics are generally integrated in our cloud solutions"],["","-","","Decrease in onsite training revenue of $0.7 million due to COVID-19"]]
[[/GREPCENT_TABLE]]

Cost of one-time services and other decreased $6.0 million or 10.3%, primarily driven by the following:

[[GREPCENT_TABLE]]
[["","-","","Decrease in allocated costs of $2.0 million primarily related to a decrease in rent expense, as discussed below in General and Administrative"],["","-","","Decrease in third-party contractor costs of $1.5 million, primarily due to a decrease in partners delivering services"],["","-","","Decrease in compensation costs other than stock-based compensation of $1.1 million largely due to a decrease in headcount, as well as a shift in resources historically supporting one-time services and other towards recurring revenue"],["","-","","Decreases in amortization intangible assets from business combinations and employee severance"]]
[[/GREPCENT_TABLE]]

One-time services and other gross margin decreased by 18.3%, primarily due to the significant reductions in one-time consulting and analytics revenue discussed.

Operating Expenses

[[GREPCENT_TABLE]]
[["Sales, marketing and customer success ($M)","","Research and development ($M)","","General and administrative ($M)"],["Percentages indicate expenses as a percentage of total revenue"]]
[[/GREPCENT_TABLE]]

Sales, marketing and customer success

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

We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness. We have also implemented software tools to enhance our digital footprint and drive lead generation. The enhancements we are making in our go-to-market approach are expected to reduce our average customer acquisition cost as well as the related payback period while increasing sales velocity.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","41"]]
[[/GREPCENT_TABLE]]

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2022 vs. 2021

Sales, marketing and customer success expenses increased by $35.1 million, or 18.9%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in compensation costs of $20.0 million primarily related to increased employee headcount due to our acquisition of EVERFI"],["","+","","Increase in advertising costs of $7.7 million primarily due to our acquisition of EVERFI"],["","+","","Increase in third-party contractor costs of $4.0 million primarily related to strategic consulting"],["","+","","Increase in travel costs of $2.1 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020"],["","+","","Increase in software costs of $1.7 million primarily related to our acquisition of EVERFI and our use of digital marketing tools"]]
[[/GREPCENT_TABLE]]

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.

2021 vs. 2020

Sales, marketing and customer success expenses decreased by $23.4 million, or 11.2%. The decreases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","-","","Decrease in compensation costs other than stock-based compensation of $20.7 million primarily due to the targeted reduction in sales headcount during the second quarter of 2020"],["","-","","Decrease in allocated costs of $7.0 million primarily related to a decrease in rent expense and the impact of the targeted reduction in sales headcount during the second quarter of 2020"],["","-","","Decrease in travel costs of $1.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020"],["","-","","Decrease in commissions expense of $1.9 million related to a decrease in overall commissionable bookings during 2020 due to the COVID-19 pandemic and a decrease in commissionable one-time services and other bookings during 2021"],["","+","","Increase in stock-based compensation costs of $4.8 million due to the factors discussed on page 37"],["","+","","Increase in advertising costs of $3.5 million primarily due to incremental spending on advertising campaigns and investments in digital marketing"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["42","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

2022 vs. 2021

We continue to make investments to delight our customers with innovative cloud solutions. We also continue to invest heavily in the security of our solutions. Research and development expense increased by $32.3 million, or 26.0%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in compensation costs of $26.1 million primarily related to increased employee headcount due to our increased hiring of engineers, and to a lesser extent, our acquisition of EVERFI"],["","+","","Increase in third-party contractor costs of $19.8 million primarily due to an increase in our use of third-party software developers and, to a lesser extent, our acquisition of EVERFI"],["","+","","Increase in allocated overhead costs of $2.7 million primarily related to increased headcount discussed above"],["","-","","Increase in software and content development costs of $19.0 million that were required to be capitalized under the internal-use software guidance, largely driven by our acquisition of EVERFI"]]
[[/GREPCENT_TABLE]]

Not included in research and development expense for 2022 and 2021 were $58.5 million and $39.4 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software and content development costs associated with our cloud solutions and online educational courses are subsequently amortized to cost of recurring revenue over the related asset's estimated useful life, which generally range from three to seven years. We expect that the amount of software and content development costs capitalized will be relatively consistent in the near-term as we continue making investments in innovation, quality, security and the integration of our solutions, which we believe will drive long-term revenue growth.

2021 vs. 2020

Research and development expense increased by $24.4 million, or 24.4%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in compensation costs of $18.9 million primarily related to our increased engineering hiring and, to a lesser extent, stock-based compensation due to the factors discussed above on page 37"],["","+","","Increase in third-party contractor costs of $3.5 million as we continue to migrate our cloud infrastructure to leading public cloud service providers and make investments in security"],["","+","","Decrease in software development costs of $2.1 million that were required to be capitalized under the internal-use software guidance"]]
[[/GREPCENT_TABLE]]

Not included in research and development expense for 2021 and 2020 were $39.4 million and $41.5 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years.

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.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","43"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

2022 vs. 2021

General and administrative expenses increased by $53.6 million, or 36.7%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","+","","Increases in Security Incident-related expenses, net of insurance, of $53.9 million. See \"Security Incident update\" above on page 37"],["","+","","Increase in compensation costs of $8.9 million primarily related to increased employee headcount due to our acquisition of EVERFI and increased cybersecurity hiring"],["","+","","Increase in acquisition and disposition-related costs of $3.1 million primarily related to aggregate noncash impairment charges of $1.3 million against certain operating lease right-of-use assets and property and equipment assets resulting from our decision to cease using a portion of EVERFI's leased office space. We also recorded a $2.0 million noncash impairment of certain insignificant intangible assets that were held for sale."],["","+","","A $2.3 million noncash impairment charge during the three months ended June 30, 2022 against previously capitalized software development costs that reduced the carrying value of those assets to zero. The impairment charge resulted primarily from our decision to end customer support for certain solutions"],["","+","","Increase in rent expense of $2.0 million primarily related to leases assumed from our acquisition of EVERFI"],["","+","","Increase in travel costs of $1.3 million due to our easing of restrictions on non-essential employee travel in response to the COVID-19 pandemic, which went into effect during March 2020"],["","+","","Increase in third-party contractor costs of $1.2 million"],["","-","","Decrease in corporate costs of $2.8 million primarily related to a decrease in bad debt expense"],["","-","","Increases in total costs allocated from general and administrative expense of $6.4 million primarily related to investments in security tools. Depreciation, facilities and IT support costs are pooled and recorded to general and administrative expense and allocated to other lines of our statements of comprehensive income based on headcount."],["","-","","Decreases in real estate activity costs of $11.8 million due to our workforce strategy changes that began in the third quarter of 2020 (see discussion below)"]]
[[/GREPCENT_TABLE]]

During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely. As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease right-of-use ("ROU") assets for certain of our office locations we expected to exit, which resulted in an increase in operating lease costs during the third and fourth quarters of 2020. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in an increase in depreciation expense. We incurred approximately $23.1 million of pre-tax costs related to these real estate activities during the third and fourth quarters of 2020.

In October 2021, we made the decision to permanently close our fixed office locations (with the exception of our global headquarters facility in Charleston, South Carolina), effective in December 2021. This change was intended to align our real estate footprint with our transition to a remote-first workforce. As a result, during the three months ended December 31, 2021, we reduced the estimated useful lives of our operating lease ROU assets for certain of our office locations we expected to exit, which resulted in incremental operating lease costs during the fourth quarter of 2021. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in incremental depreciation expense during the fourth quarter of 2021. During the three months ended December 31, 2021, we also recorded impairments of operating lease ROU assets and certain facilities-related fixed assets we ceased using as a result of our adjusted workforce strategy. These impairment charges were reflected in general and administrative expense. We incurred approximately $12.5 million of pre-tax costs related to these real estate activities during the fourth quarter of 2021.

[[GREPCENT_TABLE]]
[["44","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

2021 vs. 2020

General and administrative expenses increased by $11.4 million, or 8.5%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

[[GREPCENT_TABLE]]
[["","+","","Increase in stock-based compensation costs of $13.2 million due to the factors discussed above on page 37"],["","+","","Increase in compensation expense, excluding stock-based compensation costs, of $4.3 million due to base salary merit increases on July 2021, as well as an increase in headcount"],["","+","","Increase in corporate costs of $3.9 million primarily related to increases in third-party consulting fees and insurance costs, partially offset by decreases in bad debt expense"],["","+","","Increases in amortization expense of capitalized cloud computing implementation costs and third-party contractor costs of $1.0 million and $0.6 million, respectively"],["","-","","Decrease in real estate activity costs of $7.7 million due to our workforce strategy changes made in the third quarter of 2020"],["","-","","Decrease in rent expense, net of allocated costs, of $2.4 million primarily related to the purchase of our global headquarters facility during the third quarter of 2020 and our exit of certain other office leases globally during the second half of 2020 in-line with changes to our workforce strategy at that time"],["","-","","Decreases in depreciation expense and travel costs of $1.9 million and $0.9 million, respectively"]]
[[/GREPCENT_TABLE]]

Interest Expense

[[GREPCENT_TABLE]]
[["Interest expense ($M)"],["Percentages indicate expenses as a percentage of total revenue"]]
[[/GREPCENT_TABLE]]

2022 vs. 2021

Interest expense increased in dollars and as a percentage of total revenue during 2022 when compared to 2021, due to the new borrowings used to finance our acquisition of EVERFI. We currently expect interest expense for the full year 2023 to be approximately $40 million to $44 million although our interest expense in connection with the variable rate portion of our outstanding debt could increase in a rising interest rate environment. See Note 10 to our consolidated financial statements in this report for more information regarding our derivative instruments, which we use to manage our variable interest rate risk, and Item 7A. Quantitative and Qualitative Disclosures about Market Risk: Interest Rate Risk on page 63 for more information about our variable interest rate exposure and related risk.

2021 vs. 2020

Interest expense increased during 2021 when compared to 2020, primarily due to the Real Estate Loans assumed in connection with the purchase of our global headquarters facility in August 2020 and the deferred financing costs and debt discount associated with the 2020 Credit Facility, which was entered into in October 2020.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","45"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

Deferred Revenue

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

[[GREPCENT_TABLE]]
[["(dollars in millions)","December 31, 2022","December 31, 2021","Change"],["Total deferred revenue(1)","385.2","","378.7","","1.7","%"],["Less: Long-term portion","2.8","","4.2","","(33.7)","%"],["Current portion(1)","$","382.4","","$","374.5","","2.1","%"]]
[[/GREPCENT_TABLE]]

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

To the extent that our customers are billed for our solutions and services in advance of delivery, we record such amounts in deferred revenue. Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter, billed annually in advance and non-cancelable. We generally invoice our customers with recurring revenue contracts in annual cycles 30 days prior to the end each one-year period.

The increase in deferred revenue during the year ended December 31, 2022 was primarily due to primarily due to new subscription sales of our cloud solutions and, to a lesser extent, progress in initiatives to bring our pricing in line with the market.

Income Taxes

[[GREPCENT_TABLE]]
[["Income tax (benefit) provision ($M)"],["Percentages indicate effective income tax rates"]]
[[/GREPCENT_TABLE]]

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

We have deferred tax assets for federal, state, and international net operating loss carryforwards and tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. A portion of the foreign and state net operating loss carryforwards and a portion of state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future.

We file income tax returns in the U.S. for federal and various state jurisdictions as well as in foreign jurisdictions including Canada, the U.K., Australia, Ireland and Costa Rica. We are generally subject to U.S. federal income tax examination for calendar tax years ending 2019 through 2022, as well as state and foreign income tax examinations for various years depending on statute of limitations of those jurisdictions.

We have taken federal and state tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits may decrease within the next twelve months. The possible decrease could result from the expiration of statutes of limitations. The reasonably possible decrease at December 31, 2022 was insignificant.

[[GREPCENT_TABLE]]
[["46","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

2022 vs. 2021

The decrease in our effective income tax rate for year ended December 31, 2022, when compared to the same period in 2021, was primarily attributable to current-year non-deductible accruals for loss contingencies related to the Security Incident, stock-based compensation shortfall partially offset by increased tax credits and impact of tax rate decreases. The 2021 effective income tax rate was positively impacted by benefit attributable to stock-based compensation windfall net of tax expense resulting from impact of UK corporate rate increase.

2021 vs. 2020

The decrease in our effective income tax rate in 2021 when compared to 2020, was primarily due to prior year increase in valuation allowance attributable to state tax credit carryforwards for which we do not expect to realize benefit. Furthermore, our 2021 effective income tax rate was positively impacted by increased benefit attributable to stock-based compensation deduction and a reduction to unrecognized tax benefit as a result of IRS audit settlement and statute of limitation lapses offset against negative impacts of the U.K.-enacted tax rate increase and increase in non-deductible compensation.

Non-GAAP Financial Measures

The operating results analyzed below are presented on a non-GAAP basis. We use non-GAAP financial measures internally in analyzing our operational performance. Accordingly, we believe these non-GAAP measures are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. While we believe these non-GAAP measures provide useful supplemental information, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies.

The non-GAAP financial measures discussed below exclude the impact of certain transactions because we believe they are not directly related to our operating performance in any particular period, but are for our long-term benefit over multiple periods. We believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","47"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in millions, except per share amounts)","2022","Change","2021","Change","2020"],["GAAP Revenue","$","1,058.1","","14.1","%","$","927.7","","1.6","%","$","913.2"],["GAAP gross profit","$","552.7","","14.1","%","$","484.5","","(0.1)","%","$","485.2"],["GAAP gross margin","52.2","%","","52.2","%","","53.1","%"],["Non-GAAP adjustments:"],["Add: Stock-based compensation expense","14.4","","(27.6)","%","20.0","","49.2","%","13.4"],["Add: Amortization of intangibles from business combinations","48.5","","39.3","%","34.8","","(10.7)","%","39.0"],["Add: Employee severance","2.1","","7,262.1","%","\u2014","","(96.8)","%","0.9"],["Subtotal(1)","65.1","","18.7","%","54.8","","2.9","%","53.2"],["Non-GAAP gross profit(1)","$","617.8","","14.5","%","$","539.3","","0.2","%","$","538.4"],["Non-GAAP gross margin","58.4","%","","58.1","%","","59.0","%"],["GAAP income from operations","$","(28.5)","","(214.4)","%","$","24.9","","(33.1)","%","$","37.2"],["GAAP operating margin","(2.7)","%","","2.7","%","","4.1","%"],["Non-GAAP adjustments:"],["Add: Stock-based compensation expense","110.3","","(8.4)","%","120.4","","38.0","%","87.3"],["Add: Amortization of intangibles from business combinations","51.4","","38.8","%","37.0","","(11.6)","%","41.9"],["Add: Employee severance","5.2","","242.0","%","1.5","","(69.0)","%","4.9"],["Add: Acquisition and disposition-related costs(2)","6.1","","100.9","%","3.1","","1,294.5","%","0.2"],["Add: Restructuring and other real estate activities","0.1","","(99.4)","%","12.1","","(48.0)","%","23.3"],["Add: Security Incident-related costs, net of insurance(3)","55.7","","2,968.4","%","1.8","","100.0","%","\u2014"],["Add: Impairment of capitalized software development costs","2.3","","100.0","%","\u2014","","\u2014","%","\u2014"],["Subtotal(1)","231.1","","31.4","%","175.9","","11.7","%","157.5"],["Non-GAAP income from operations(1)","$","202.6","","0.9","%","$","200.8","","3.1","%","$","194.8"],["Non-GAAP operating margin","19.1","%","","21.6","%","","21.3","%"],["GAAP income before provision for income taxes","$","(55.6)","","(884.6)","%","$","7.1","","(67.2)","%","$","21.6"],["GAAP net income","$","(45.4)","","(896.9)","%","$","5.7","","(26.2)","%","$","7.7"],["Shares used in computing GAAP diluted earnings per share","51,569,148","","6.9","%","48,230,438","","(1.0)","%","48,696,341"],["GAAP diluted earnings per share","$","(0.88)","","(833.3)","%","$","0.12","","(25.0)","%","$","0.16"],["Non-GAAP adjustments:"],["Add: GAAP income tax (benefit) provision","(10.2)","","(834.2)","%","1.4","","(90.0)","%","13.9"],["Add: Total Non-GAAP adjustments affecting loss from operations","231.1","","31.4","%","175.9","","11.7","%","157.5"],["Non-GAAP income before provision for income taxes","175.5","","(4.1)","%","183.0","","2.1","%","179.1"],["Assumed non-GAAP income tax provision(4)","35.1","","(4.1)","%","36.6","","2.1","%","35.8"],["Non-GAAP net income(1)","$","140.4","","(4.1)","%","$","146.4","","2.1","%","$","143.3"],["Shares used in computing Non-GAAP diluted earnings per share","52,207,573","","8.2","%","48,230,438","","(1.0)","%","48,696,341"],["Non-GAAP diluted earnings per share","$","2.69","","(11.5)","%","$","3.04","","3.4","%","$","2.94"]]
[[/GREPCENT_TABLE]]

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

(2)Includes a $2.0 million noncash impairment of intangible assets held for sale during the twelve months ended December 31, 2022.

(3)Includes Security Incident-related costs incurred during the twelve months ended December 31, 2022 of $57.6 million, which includes approximately $23.0 million in recorded aggregate liabilities for loss contingencies, net of probable insurance recoveries during the same period of $1.9 million and during the twelve months ended December 31, 2021 of $40.6 million, net of probable insurance recoveries during the same period of $38.7 million. Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees, as well as settlements of customer claims and accruals for certain loss contingencies. Not included in this adjustment were costs associated with enhancements to our cybersecurity program. For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees, are expensed as incurred. As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate. It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss. There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of December 31, 2022 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the

[[GREPCENT_TABLE]]
[["48","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

aggregate, result in an adverse judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.

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

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","49"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

Non-GAAP organic revenue growth

In addition, we use non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis, non-GAAP organic recurring revenue growth and non-GAAP organic recurring revenue growth in analyzing our operating performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period. 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.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in millions)","2022","2021"],["GAAP revenue","$","1,058.1","","$","927.7"],["GAAP revenue growth","14.1","%"],["Add: Non-GAAP acquisition-related revenue(1)","\u2014","","104.4"],["Less: Non-GAAP revenue from divested businesses(2)","\u2014","","(1.9)"],["Total Non-GAAP adjustments","$","\u2014","","$","102.5"],["Non-GAAP organic revenue(3)","$","1,058.1","","$","1,030.2"],["Non-GAAP organic revenue growth","2.7","%"],["Non-GAAP organic revenue(3)","1,058.1","","1,030.2"],["Foreign currency impact on Non-GAAP organic revenue(4)","12.3","","\u2014"],["Non-GAAP organic revenue on constant currency basis(4)","$","1,070.4","","$","1,030.2"],["Non-GAAP organic revenue growth on constant currency basis","3.9","%"],["GAAP recurring revenue","$","1,011.7","","$","880.9"],["GAAP recurring revenue growth","14.9","%"],["Add: Non-GAAP acquisition-related revenue(1)","\u2014","","93.5"],["Less: Non-GAAP recurring revenue from divested businesses(2)","\u2014","","(1.9)"],["Total Non-GAAP adjustments","$","\u2014","","$","91.6"],["Non-GAAP organic recurring revenue","$","1,011.7","","$","972.5"],["Non-GAAP organic recurring revenue growth","4.0","%"],["Non-GAAP organic recurring revenue(3)","$","1,011.7","","$","972.5"],["Foreign currency impact on non-GAAP organic recurring revenue(4)","10.9","","\u2014"],["Non-GAAP organic recurring revenue on constant currency basis(4)","$","1,022.6","","$","972.5"],["Non-GAAP organic recurring revenue growth on constant currency basis","5.2","%"]]
[[/GREPCENT_TABLE]]

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

(2)Non-GAAP revenue from divested businesses excludes revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested business with the results of the combined company for the same period of time in both the prior and current periods.

(3)Non-GAAP organic revenue and non-GAAP organic recurring revenue for the prior year periods presented herein may not agree to non-GAAP organic revenue and non-GAAP organic recurring revenue presented in the respective prior period quarterly financial information solely due to the manner in which non-GAAP organic revenue growth and non-GAAP organic recurring revenue growth are calculated.

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

[[GREPCENT_TABLE]]
[["50","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

Table of Contents

Blackbaud, Inc.

Rule of 40

We previously defined Rule of 40 as non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. Non-GAAP adjusted EBITDA is defined as GAAP net income plus interest, net; income tax provision (benefit); depreciation; amortization of intangible assets from business combinations; amortization of software and content development costs; stock-based compensation; employee severance; acquisition and disposition-related costs; restructuring and other real estate activities; Security Incident-related costs, net of insurance; and impairment of capitalized software development costs. Beginning in the fiscal quarter ended June 30, 2022, we now also include in non-GAAP adjusted EBITDA impairment of capitalized software development costs because we believe it is not directly related to our operating performance in any particular period.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in millions)","2022","2021"],["GAAP net (loss) income","$","(45.4)","","$","5.7"],["Non-GAAP adjustments:"],["Add: Interest, net","34.1","","17.6"],["Add: GAAP income tax (benefit) provision","(10.2)","","1.4"],["Add: Depreciation(1)","14.1","","12.7"],["Add: Amortization of intangibles from business combinations","51.4","","37.0"],["Add: Amortization of software and content development costs(2)","39.0","","32.8"],["Subtotal(3)","128.4","","101.5"],["Non-GAAP EBITDA(3)","$","83.0","","$","107.2"],["Non-GAAP EBITDA margin","7.8","%"],["Non-GAAP adjustments:"],["Add: Stock-based compensation expense","110.3","","120.4"],["Add: Employee severance","5.2","","1.5"],["Add: Acquisition and disposition-related costs","6.1","","3.1"],["Add: Restructuring and other real estate activities","0.1","","12.1"],["Add: Security Incident-related costs, net of insurance(4)","55.7","","1.8"],["Add: Impairment of capitalized software development costs","2.3","","\u2014"],["Subtotal(3)","179.7","","138.9"],["Non-GAAP Adjusted EBITDA(3)","$","262.6","","$","246.1"],["Non-GAAP Adjusted EBITDA margin","24.8","%"],["Rule of 40(5)","27.5","%"],["Non-GAAP adjusted EBITDA","262.6","","246.1"],["Foreign currency impact on Non-GAAP adjusted EBITDA(6)","6.3","","(3.6)"],["Non-GAAP adjusted EBITDA on constant currency basis(6)","268.9","","242.5"],["Non-GAAP adjusted EBITDA margin on constant currency basis","25.1","%"],["Rule of 40 on constant currency basis(7)","29.0","%"]]
[[/GREPCENT_TABLE]]

(1)During the third quarter of 2020 and the fourth quarter of 2021, we reduced the estimated useful lives of our operating lease right-of-use assets for certain of our office locations we expected to exit. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in increases in depreciation expense. The accelerated portions of the fixed asset depreciation expense related to these activities of $1.7 million for the three months and twelve months ended December 31, 2021, respectively, were presented in the "Restructuring and other real estate activities" line of the reconciliation of GAAP to non-GAAP financial measures. Total depreciation expense was $4.9 million and $14.4 million for the three and twelve months ended December 31, 2021, respectively.

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

(3)The individual amounts for each year may not sum to subtotal, non-GAAP EBITDA, non-GAAP adjusted EBITDA or non-GAAP adjusted EBITDA on a constant currency basis due to rounding.

(4)Includes Security Incident-related costs incurred, net of probable insurance recoveries. See additional details in the reconciliation of GAAP to Non-GAAP operating income above.

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

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

(7)Measured by non-GAAP organic revenue growth on constant currency basis plus non-GAAP adjusted EBITDA margin on constant currency basis. See Non-GAAP organic revenue growth table above.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","51"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

Non-GAAP free cash flow and non-GAAP adjusted free cash flow

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

Non-GAAP adjusted free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development and capital expenditures for property and equipment, plus cash outflows, net of insurance, related to the Security Incident.

We believe non-GAAP free cash flow and non-GAAP adjusted free cash flow provides useful measures of the Company's operating performance. Non-GAAP adjusted free cash flow is not intended to represent and should not be viewed as the amount of residual cash flow available for discretionary expenditures.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in millions)","2022","Change","2021","Change","2020"],["GAAP net cash provided by operating activities","$","203.9","","(4.6)","%","$","213.7","","44.4","%","$","148.0"],["Less: purchase of property and equipment","(12.3)","","5.4","%","(11.7)","","(60.7)","%","(29.7)"],["Less: capitalized software and content development costs","(58.8)","","45.2","%","(40.5)","","(4.0)","%","(42.2)"],["Non-GAAP free cash flow(1)","$","132.8","","(17.8)","%","$","161.5","","112.2","%","$","76.1"],["Add: Security Incident-related cash flows, net of insurance","20.9","","209.6","%","6.7","","226.5","%","2.1"],["Non-GAAP adjusted free cash flow(1)","$","153.7","","(8.6)","%","$","168.2","","115.2","%","$","78.2"]]
[[/GREPCENT_TABLE]]

(1)The individual amounts for each year may not sum to non-GAAP free cash flow or non-GAAP adjusted free cash flow due to rounding.

Seasonality

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

Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has generally been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are base salary merit increases, which were replaced in 2020 with performance-based equity awards due to COVID-19, but returned in July 2021. In addition, deferred revenues can vary on a seasonal basis due to the timing of customer contract renewals and student enrollments or significant acquisitions. Our cash flow from financing is negatively impacted in our first quarter when most of our equity awards vest, as we pay taxes on behalf of our employees related to the settlement or exercise of equity awards. During the second quarter of 2021, however, we experienced an increase in the amount of taxes we paid on behalf of our employees related to the settlement of equity awards when compared to the same period in 2020, as the equity granted in May 2020 in lieu of cash bonus plans and base salary merit increases vested.

[[GREPCENT_TABLE]]
[["52","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, large dollar customer bookings and contract renewals, or as a result of acquisitions, new market opportunities, new solution introductions or other factors.

Liquidity and Capital Resources

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

[[GREPCENT_TABLE]]
[["(dollars in millions)","December 31, 2022","December 31, 2021","Change"],["Cash and cash equivalents","$","31.7","","$","55.1","","(42.5)","%"],["Property and equipment, net","107.4","","111.4","","(3.6)","%"],["Software and content development costs, net","141.0","","121.4","","16.2","%"],["Total carrying value of debt","859.0","","956.2","","(10.2)","%"],["Working capital","(312.0)","","(258.7)","","(20.6)","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["(dollars in millions)","2022","","Change","2021","","Change","2020"],["Net cash provided by operating activities","$","203.9","","(4.6)","%","$","213.7","","44.4","%","$","148.0"],["Net cash used in investing activities","(85.5)","","(81.8)","%","(471.3)","","(555.9)","%","(71.8)"],["Net cash (used in) provided by financing activities","(25.7)","","(109.7)","%","264.1","","(2,573.2)","%","(10.7)"]]
[[/GREPCENT_TABLE]]

Our principal sources of liquidity are operating cash flow, funds available under the 2020 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements and market acceptance of our solutions and services, the volume and size of transactions for which we process payments and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations. We also believe that we will be able to continue to meet our long-term cash requirements due to our anticipated cash flow from operations, solid financial position and ability to access capital from financial markets. To the extent we undertake future material acquisitions, investments or unanticipated capital or operating expenditures, including in connection with the Security Incident, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.

As a well-known seasoned issuer, we filed an automatic shelf registration statement for an undetermined amount of debt and equity securities with the SEC on January 14, 2022. Under this universal shelf registration statement we may offer and sell, from time to time, debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units. Subject to certain conditions, this registration statement will be effective through January 13, 2024.

At December 31, 2022, our total cash and cash equivalents balance included approximately $14.4 million of cash that was held outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate a portion of the funds. We currently do not intend or anticipate a need to repatriate our cash held outside the U.S.

Operating Cash Flow

Throughout 2022, 2021 and 2020, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash expenses such as depreciation, amortization, stock-based compensation, deferred income taxes, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales returns; and (ii) changes in our working capital.

Working capital changes are comprised of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities and deferred revenue.

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","53"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

2022 vs. 2021

Net cash provided by operating activities decreased by $9.8 million during the year ended December 31, 2022, when compared to the same period in 2021, primarily due a $65.1 million increase in cash flow from operations associated with working capital, and a $74.9 million decrease in net income adjusted for non-cash expenses.

The increase in cash flow from operations associated with working capital during 2022, when compared to 2021, was primarily due to:

•fluctuations in the timing of vendor payments;

•a decrease in probable insurance recoveries related to the Security Incident as we have received payment for all of the related insurance claims; and

•an increase in accrued expenses related to the Security Incident.

2021 vs. 2020

Net cash provided by operating activities increased by $65.7 million during the year ended December 31, 2021, when compared to the same period in 2020, primarily due a $49.7 million increase in cash flow from operations associated with working capital, and a $16.1 million increase in net income adjusted for non-cash expenses.

The increase in cash flow from operations associated with working capital during 2021, when compared to 2020, was primarily due to:

•the payment of our 2019 cash bonus plans in 2020 and the replacement of our 2020 cash bonus plans with performance-based equity awards (which we expect will continue going forward);

•an increase in the collection of our accounts receivable balances, including early progress in initiatives to bring our pricing in line with the market; and

•fluctuations in the timing of vendor payments; partially offset by

•an increase in income tax payments.

Workforce reductions

We have taken steps to better align our workforce with our strategic priorities to drive efficiencies and minimize any potential impacts from the current uncertain macroeconomic environment. During the fourth quarter of 2022, this included further elimination of open positions as well as the decision to reduce our workforce. As a result of the targeted workforce reduction, we incurred $4.5 million in pre-tax employee severance costs during the fourth quarter of 2022. During the first quarter of 2023, we have remained focused on improving operating performance and driving efficiencies in the Company, including further reducing our workforce. Following the planned action during the fourth quarter of 2022, we experienced a slowdown in voluntary attrition relative to expectations leading to a further reduction in force to achieve our original plan. While we have eliminated positions in some areas, we will continue to hire in other areas. Most of these reductions are in areas of the business that are not customer facing or in sales. When combined with the cost actions we took in the fourth quarter of 2022, we expect our total headcount will be reduced by approximately 14% since the third quarter 2022. We expect these workforce reductions and other cost actions to significantly reduce our pre-tax costs in 2023, partially offset by continued investments in cybersecurity and innovation.

Security Incident update

As discussed in Note 11 to our consolidated financial statements included in this report, total costs related to the Security Incident have exceeded the limit of our insurance coverage. Accordingly, we expect that the Security Incident will negatively impact our GAAP profitability and GAAP cash flow for the foreseeable future (see discussion regarding non-GAAP financial measures beginning on page 47). For full year 2022, we incurred net pre-tax expense of $32.7 million and had net cash outlays of $20.9 million for ongoing legal fees related to the Security Incident. In line with our policy, legal fees are expensed as incurred. For full year 2023, we currently expect net pre-tax expense of approximately $20 million to $30 million and net cash outlays of approximately $25 million to $35 million for ongoing legal fees related to the Security Incident.

[[GREPCENT_TABLE]]
[["54","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

As of December 31, 2022, we have recorded approximately $23.0 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain governmental agencies related to the Security Incident that we believe we can reasonably estimate. It is reasonably possible that our estimated or actual losses may change in the near term for those matters and be materially in excess of the amounts accrued, but we are unable at this time to reasonably estimate the possible additional loss.

There are other Security Incident-related matters, including customer claims, customer constituent class actions and governmental investigations, for which we have not recorded a liability for a loss contingency as of December 31, 2022 because we are unable at this time to reasonably estimate the possible loss or range of loss. Each of these matters could, separately or in the aggregate, result in an adverse judgement, settlement, fine, penalty or other resolution, the amount, scope and timing of which we are currently unable to predict, but could have a material adverse impact on our results of operations, cash flows or financial condition.

Investing Cash Flow

During 2023, we expect our total capital expenditures, including estimated outlays for capitalized software development costs, to be between approximately $65.0 million and $75.0 million.

2022 vs. 2021

Net cash used in investing activities of $85.5 million decreased by $385.7 million during 2022, when compared to 2021.

During 2022, we used $20.9 million of net cash for our acquisitions of EVERFI and Kilter, comprised primarily of (i) $17.4 million that had not been paid by EVERFI to its former option holders as of December 31, 2021, solely due to the timing of the acquisition on the last day of 2021; (ii) $2.9 million that was paid to acquire Kilter; and (iii) $2.6 million that was paid to a number of EVERFI's selling shareholders after determining they would be paid in cash, rather than shares of our common stock. During 2022, we also received cash proceeds of $6.4 million from our sale of certain solutions. See Note 3 of our consolidated financial statements in this report for additional information.

We used $58.8 million for software and content development costs, which was up $18.3 million from cash spent during 2021, primarily due to the inclusion of EVERFI's software and content development activities.

We also spent $12.3 million of cash for purchases of property and equipment during 2022, which was an increase $0.6 million from cash spent in 2021.

2021 vs. 2020

Net cash used in investing activities of $471.3 million increased by $399.4 million during 2021, when compared to 2020.

We spent $419.1 million for our acquisition of EVERFI in 2021 and we did not make any similar investments during 2020. We used $40.5 million for software development costs, which was relatively consistent with cash spent during 2020. We continue to invest in our innovative cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform.

We also spent $11.7 million of cash for purchases of property and equipment during 2021, which was down $18.0 million from cash spent in 2020. The decrease in cash expended was primarily due to our purchase of our global headquarters facility in 2020.

Financing Cash Flow

2022 vs. 2021

During 2022, we had a net decrease in borrowings of $99.7 million compared to a net increase in borrowings of $429.2 million attributable to our acquisition of EVERFI in 2021. During 2022, we did not repurchase any of our common stock while we repurchased $108.4 million during 2021 (see additional details below regarding our stock repurchase program).

We paid $36.4 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2022 compared to $39.4 million during 2021. The amount of taxes paid by us on behalf of employees related to the settlement or

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","55"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

exercise of equity awards varies from period to period based upon the timing of grants and vesting, as well as the market price for shares of our common stock at the time of settlement. Most of our equity awards currently vest in our first quarter.

During 2022, cash flow from financing activities associated with changes in restricted cash due to customers increased $111.4 million, compared to a decrease of $13.5 million during 2021. This line in the statement of cash flows represents the change in the amount of restricted cash held and payable by us to customers from one period to the next. This restricted cash due to customers is not available to us for operational purposes.

2021 vs. 2020

During 2021, we had a net increase in borrowings of $429.2 million attributable to our acquisition of EVERFI, compared to a net increase in borrowings of $0.9 million in 2020. During 2021, we spent $108.4 million on repurchases of our common stock compared to $41.0 million during 2020 (see additional details below regarding our stock repurchase program which began in the fourth quarter of 2020). During 2020, we paid dividends of $6.0 million and we did not pay dividends during 2021, as we discontinued the declaration and payment of all cash dividends beginning with the second quarter of 2020.

We paid $39.4 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2021 compared to $21.4 million during 2020. The increase was primarily attributable to our decision to replace our annual cash bonus plans with a short-term performance-based equity award plan.

During 2021, cash flow from financing activities associated with changes in restricted cash due to customers decreased $13.5 million, compared to an increase of $61.2 million during 2020. This line in the statement of cash flows represents the change in the amount of restricted cash held and payable by us to customers from one period to the next.

Stock repurchase program

In December 2021, our Board of Directors reauthorized and replenished our stock repurchase program that authorizes us to purchase up to $250.0 million of our outstanding shares of common stock. The program does not have an expiration date. Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in privately negotiated transactions. The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. During the year ended December 31, 2022, we did not purchase any shares. The remaining amount available to purchase stock under the stock repurchase program was $250.0 million as of December 31, 2022.

2020 Credit Facility

In October 2020, we entered into a 5-year $900.0 million Amended and Restated Credit Agreement (the “2020 Credit Facility”). Upon closing, we drew $400.0 million on a term loan and used the proceeds to repay the outstanding principal balance of the term loan under our previous credit facility, and repay $124.4 million of outstanding revolving credit loans under the previous credit facility.

Historically, we have drawn on our credit facility from time to time to help us meet financial needs primarily due to the seasonality of our cash flows from operations and financing for business acquisitions. At December 31, 2022, our available borrowing capacity under the 2020 Credit Facility was $319.8 million. The 2020 Credit Facility matures in October 2025.

At December 31, 2022, the carrying amount of our debt under the 2020 Credit Facility was $799.1 million. Our average daily borrowings were $863.2 million during 2022.

The term loans under the 2020 Credit Facility and our other debt 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 2020 Credit Facility in October 2025. The Real Estate Loans also require periodic principal payments and the balances of the real estate loans are due upon maturity in April 2038.

[[GREPCENT_TABLE]]
[["56","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

Following is a summary of the financial covenants under the 2020 Credit Facility:

[[GREPCENT_TABLE]]
[["Financial Covenant","Requirement","Ratio as of December 31, 2022"],["Net Leverage Ratio(1)","\u2264 4.00 to 1.00","3.22 to 1.00"],["Interest Coverage Ratio","\u2265 2.50 to 1.00","7.43 to 1.00"]]
[[/GREPCENT_TABLE]]

(1)Under the terms of the 2020 Credit Facility, the Net Leverage Ratio requirement may be increased by up to 0.50 provided we satisfy certain requirements, including a permitted business acquisition, and provided that the maximum Net Leverage Ratio shall not exceed 4.25 to 1.00.

Under the 2020 Credit Facility, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2020 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2020 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At December 31, 2022, we were in compliance with our debt covenants under the 2020 Credit Facility.

First amendment to 2020 Credit Facility

On January 31, 2022, we entered into the First Amendment to Credit Agreement which amends the 2020 Credit Facility to, among other things, (i) modify the definition of “Applicable Margin”, (ii) modify the net leverage ratio financial covenant to require a net leverage ratio of (A) 4.00:1.00 or less for the fiscal quarter ended December 31, 2021 and for fiscal quarters ending thereafter through December 31, 2023 and (B) 3.75:1.00 or less for the fiscal quarters ending March 31, 2024 and thereafter, (iii) reset the $250.0 million fixed dollar basket with respect to the accordion feature, and (iv) modify certain negative covenants to provide additional operational flexibility. See Note 9 to our consolidated financial statements included in this report for additional information regarding the 2020 Credit Facility.

Commitments and Contingencies

As of December 31, 2022, we had contractual obligations with future minimum commitments as follows:

[[GREPCENT_TABLE]]
[["","Payments due by period"],["(in millions)","Less than 1 year","More than 1 year","Total(1)"],["Recorded contractual obligations:"],["Debt","$","18.8","","$","843.2","","$","862.0"],["Operating leases","10.0","","53.5","","63.4"],["Contingent consideration","\u2014","","2.7","","2.7"],["Unrecorded contractual obligations:"],["Purchase obligations","70.0","","224.4","","294.4"],["Interest payments on debt","38.8","","109.8","","148.6"],["Total contractual obligations(1)","$","137.6","","$","1,233.5","","$","1,371.1"]]
[[/GREPCENT_TABLE]]

(1)The individual amounts may not sum to the total due to rounding.

Debt

As of December 31, 2022, we had total remaining principal payments of $862.0 million. These payments represent principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2020 Credit Facility, our real estate loans and our other debt at December 31, 2022 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2020 Revolving Facility for the purposes of determining minimum commitment amounts. See Note 9 to our consolidated financial statements in this report for more information.

Interest payments on debt

In addition to principal payments, as of December 31, 2022, we expect to pay interest expense over the life of our debt obligations of approximately $148.6 million. These payments represent our estimated future interest payments on debt using

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","57"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

our debt balances and the related weighted average effective interest rates as of December 31, 2022, which includes the effect of interest rate swap agreements. 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 on our remaining principal payments described above.

Operating leases

As of December 31, 2022, we had remaining operating lease payments of $63.4 million. These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $10.8 million. Our operating leases are generally for corporate offices, subleased offices and certain equipment and furniture. Given our remote-first workforce strategy and real estate footprint optimization efforts, as discussed above, we do not anticipate entering any new, material operating leases for offices for the foreseeable future. See Note 11 to our consolidated financial statements in this report for more information.

Purchase obligations

As of December 31, 2022, we had remaining purchase obligations of $294.4 million. These purchase obligations are for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. Our purchase obligations are not recorded as liabilities on our consolidated balance sheets as of December 31, 2022, as we had not received the related services. See Note 11 to our consolidated financial statements in this report for more information.

The total liability for uncertain tax positions as of December 31, 2022 and December 31, 2021, was $3.1 million and $3.7 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was insignificant as of December 31, 2022 and 2021.

Contingent consideration

In connection with our acquisition of Kilter, we are obligated to pay contingent consideration upon the achievement of certain milestones. For information regarding our contingent consideration obligations, see Note 3 to our consolidated financial statements in this report.

Foreign Currency Exchange Rates

Approximately 15% of our total revenue for 2022 was generated by operations outside the U.S. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within other comprehensive income (loss) as a component of stockholders’ equity, was a loss of $14.9 million as of December 31, 2022 and income of $1.3 million as of December 31, 2021. We have entered into foreign currency forward contracts to hedge a portion of the foreign currency exposure that arises on translation of our investments denominated in British Pounds into U.S. dollars.

The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenues and expenses denominated in non-U.S. currencies. During 2022, foreign translation resulted in decreases in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, the impact has generally not been material to our consolidated results of operations or financial position. During 2022, the fluctuation in foreign currency exchange rates reduced our total revenue and our income from operations by $12.3 million and $2.6 million, respectively. We have entered into foreign currency forward contracts to hedge revenues denominated in the Canadian dollar against changes in the exchange rate with the U.S. dollar. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These

[[GREPCENT_TABLE]]
[["58","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.

Critical Accounting Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires us 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.

We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from any of our estimates under different assumptions or conditions. Our significant accounting policies are discussed in Note 2 to our consolidated financial statements in this report. We believe the accounting estimates listed below are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

[[GREPCENT_TABLE]]
[["Revenue Recognition"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["See Note 2 to our consolidated financial statements in this report for a complete discussion of our revenue recognition policies. Revenues are recognized when control of our services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We determine revenue recognition through the following steps: (1) Identification of the contract, or contracts, with a customer; (2) Identification of the performance obligations in the contract; (3) Determination of the transaction price; (4) Allocation of the transaction price to the performance obligations in the contract; and (5) Recognition of revenue when, or as, we satisfy a performance obligation.We have not made any material changes in the accounting methodology we use to recognize revenue during the year ended December 31, 2022.","Our revenue recognition accounting methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment. For example, for arrangements that have multiple performance obligations, we must exercise judgment and use estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time.","If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue or deferred revenue that we report in a particular period."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","59"]]
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Blackbaud, Inc.

[[GREPCENT_TABLE]]
[["Costs of Obtaining Contracts"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["We pay sales commissions at the time contracts with customers are signed or shortly thereafter, depending on the size and duration of the sales contract. Sales commissions and related fringe benefits earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized in a manner that aligns with the expected period of benefit, which we have primarily determined to be 5 years. We generally do not pay commissions for contract renewals that are commensurate with the commission paid on the initial contract. The related amortization expense is included in sales, marketing and customer success expense in our consolidated statements of comprehensive income.We have not made any material changes in the accounting methodology we use to record costs of obtaining contracts during the year ended December 31, 2022.","Our accounting methodology for determining the period over which we amortize costs of obtaining contracts with customers contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment. For example, we must exercise judgment and use estimates in order to determine the expected period of benefit of our sales commissions. We take into consideration our customer contracts, including renewals, retention, our technology and other factors.","If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of assets, operating expenses or income that we report in a particular period."]]
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[[GREPCENT_TABLE]]
[["Business Combinations"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["We allocate the purchase price of an acquired business to its identifiable assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The excess of the purchase price over the amount allocated to the identifiable assets acquired and liabilities assumed, if any, is recorded as goodwill. We use available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of long-lived and identifiable intangible assets, and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain new information about facts and circumstances that existed as of the closing date.We have not made any material changes in the accounting methodology we use for business combinations during the year ended December 31, 2022.","Our purchase price allocation methodology contains uncertainties because it requires us to make significant estimates and assumptions, and to apply judgment to estimate the fair value of assets acquired and liabilities assumed, especially with respect to long-lived and intangible assets. Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows, market multiple analyses and replacement cost. We apply significant judgement in estimating the fair value of intangible assets acquired, which involves the use of significant assumptions. Significant assumptions used in the valuation of customer relationships include future revenue and operating expenses, customer attrition rates, contributory asset charges, tax amortization benefit, and discount rates. Significant assumptions used in the valuation of certain developed technology assets include future revenue, proprietary technology obsolescence curve, royalty rate, and discount rate. Significant assumptions used in the valuation of marketing assets include assumptions about the period of time the brand will continue to be valuable, royalty rate, and discount rate. Significant assumptions used in the valuation of content intangible assets include cost-based assumptions. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable, and unanticipated events and changes in circumstances may occur.","If actual results are materially different than the assumptions we used to determine fair value of the assets acquired and liabilities assumed through a business combination as well as the estimated useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations. See Note 3 to our consolidated financial statements in this report for information regarding our business acquisitions."]]
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[[GREPCENT_TABLE]]
[["60","","2022 Form 10-K"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

[[GREPCENT_TABLE]]
[["Income Taxes"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["We make estimates and judgments in accounting for income taxes. Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. We measure and recognize uncertain tax positions. To recognize uncertain tax positions, we must first determine if it is more likely than not that the position will be sustained upon audit. We must then measure the benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We make estimates in determining tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial reporting purposes. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized.We have not made any material changes in the accounting methodology we use to assess income tax during the year ended December 31, 2022.","The calculation of our income tax provision requires estimates due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. Our effective income tax rate is also affected by changes in the geographic distribution of our earnings or losses, changes in tax law in jurisdictions where we conduct business. Significant judgment is required in the identification and measurement of uncertain tax positions. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. In assessing the adequacy of a recorded valuation allowance significant judgment is required. We consider all positive and negative evidence and a variety of factors including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income, and prudent and feasible tax planning strategies.","Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent actual results differ from estimated amounts recorded, such differences will impact the income tax provision in the period in which the determination is made. If we determine there is less than a 50% likelihood that we will be able to use a deferred tax asset in the future in excess of its net carrying value, then an adjustment to the deferred tax asset valuation allowance is made to increase income tax expense, thereby reducing net income in the period such determination was made."]]
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[[GREPCENT_TABLE]]
[["Long-lived Assets and Intangible Assets Other Than Goodwill"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["We review our long-lived assets and intangible assets other than goodwill for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If such events or changes in circumstances occur, we use the undiscounted cash flow method to determine whether our long-lived and intangible assets other than goodwill are impaired. To the extent that the carrying value of the asset or asset group exceeds the undiscounted cash flows over the estimated remaining life of the asset, we measure the impairment using discounted cash flows.We have not made any material changes in the accounting methodology we use to assess impairment loss during the year ended December 31, 2022.","In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of cash flows from other asset groups. When measuring impairment of an asset or asset group using discounted cash flows, we make assumptions and apply judgment in estimating future cash flows and asset or asset group fair values, including annual revenue growth rates, a terminal year growth rate and selecting a discount rate that reflects the risk inherent in future cash flows.","During 2022, we recorded impairment charges against certain previously capitalized software development costs, certain insignificant customer relationship intangible assets that were held for sale, our operating lease ROU assets and certain property and equipment assets. For additional information, see Notes 7 and 11 to our consolidated financial statements in this report.We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to assess impairment losses. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2022 Form 10-K","","61"]]
[[/GREPCENT_TABLE]]

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Blackbaud, Inc.

[[GREPCENT_TABLE]]
[["Loss Contingencies"],["Description","Judgments and Uncertainties","Effect if Actual Results Differ From Assumptions"],["We are subject to the possibility of various loss contingencies, including legal proceedings and claims, that arise in the normal course of business, as well as certain other non-ordinary course proceedings, claims and investigations, as described in Note 11 to the consolidated financial statements in this report. We record an accrual 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 have not made any material changes in the accounting methodology we use to assess loss contingencies during the year ended December 31, 2022.","We review any such loss contingency accruals 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. Often these issues are subject to substantial uncertainties and, therefore, the probability of loss and the estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by us.","With the exception of the 2020 Security Incident, we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine loss contingencies. However, if facts and circumstances change in the future that change our belief regarding assumptions used to determine our estimates, we may be exposed to losses that could be material.Although we believe we have substantial defenses in these matters, we could incur judgments or enter into settlements of claims that could have a material adverse effect on our consolidated financial position, results of operations or cash flows in any particular period."]]
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Recently Issued Accounting Pronouncements

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

[[GREPCENT_TABLE]]
[["62","","2022 Form 10-K"]]
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Blackbaud, Inc.