BLACKBAUD INC (BLKB) FY 2024 MD&A

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 leading software provider exclusively dedicated to powering social impact. Serving the nonprofit and education sectors, companies committed to social responsibility and individual change makers, our essential software is built to accelerate impact in fundraising, nonprofit financial management, digital giving, grantmaking, corporate social responsibility and education management. A remote-first company, we have operations in the United States, Australia, Canada, Costa Rica, India and the United Kingdom, supporting users in 100+ countries.

Our revenue is primarily generated from the following sources: (i) charging for the use of our software solutions in cloud and hosted environments; and (ii) providing payment and transaction services.

Update on Five Key Operational Initiatives

In early 2023, we outlined five key operational initiatives targeted to drive innovation, bookings growth, revenue expansion and lower costs. During 2024, we continued to execute on these key initiatives.

1.Product Innovation and Delivery

To maintain our market leadership position, we are accelerating the pace of innovation and new feature delivery to our customers. Our focus has been on two areas, artificial intelligence (AI) and enhancements that continue to improve the connectivity of our suite of solutions. These enhancements are aimed at improving fundraising outcomes while reducing the administrative burden of our end users. Some examples include:

•We have released a number of AI capabilities in our solutions, including generative AI functionality for our JustGiving platform. During 2024, we released generative AI capabilities for Raiser’s Edge NXT®, and we expect that Blackbaud Copilot will be available to our Raiser's Edge NXT customers soon. Using Blackbaud Copilot, users can ask ad hoc questions such as “How can I improve my average donation size?” and the tool will provide intelligent responses as well as recommended actions intended to drive that outcome.

•During 2024, our Online Giving and Prospect Insights capabilities were natively integrated into Raiser's Edge NXT. With these integrations, fundraising administrators can now drive a giving campaign, keep records of each donor interaction, identify new donation opportunities, and provide personalized messaging, all in one integrated experience.

•During 2024, we released our new optimized donation forms for Raiser's Edge NXT, Blackbaud CRM and Blackbaud Altru that fully integrate with our payment processing and CRM software. We expect these forms to drive higher revenue for our customers and for Blackbaud.

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We are delivering more innovation, evolving our products and ensuring our customers receive more value from our solutions.

2.Bookings Growth and Acceleration

We maintain a keen focus on accelerating bookings growth by signing new logos as well as upselling and cross-selling our existing customer base. Our sales team is split between prospect account executives dedicated to prospecting for new clients and customer account executives who focus on selling additional products to current customers. Given the breadth of our product portfolio, this “land and expand” model has proven successful for us over time. As previously disclosed, there can be volatility quarter-to-quarter on bookings.

3.Transactional Revenue Optimization and Expansion

Transactional revenue, which is about one-third of total revenue, is comprised of four primary components: donation processing (~55% of total transactional revenue); consumer giving (~20%); tuition management (~20%); and event-based usage (~5%). The diversity of the underlying transaction volumes from these four sources has resulted in consistent transactional recurring revenue growth in the mid-to-high single digits over the past several years. We continue to see strong momentum in consumer giving and tuition management, we have implemented rate increases across select areas of our payments portfolio, and we continue to implement additional payments solutions optimization to drive enhanced donor experience.

4.Modernized Approach to Pricing and Multi-Year Contracts

In the summer of 2022, we put in place an updated pricing policy primarily for our social sector customers that directly reflects the value we provide to them, is in-line with the broader market and reflects the inflationary pressures that all businesses are facing. This program is designed to deliver sustained revenue growth beyond the initial three-year renewal cycle and will provide us with improved revenue visibility. As previously disclosed, this new approach has three main components: offering 3-year contract renewal terms as our standard, which the vast majority of customers are adopting; embedded annual price increases within the 3-year renewal term, which we have not had previously and are beginning to take effect; and a larger first year price increase to bring our pricing in-line with the broader market.

The first two components, as well as a portion of the third, will continue on beyond the initial renewal cycle, creating what we believe will be a sustainable source of revenue growth.

We have now completed the 2023 and 2024 renewal cohorts, which represented approximately 65% of the total contractual revenue eligible for this program. Approximately another 25% of the renewable base is up for renewal in 2025, and the remaining 10% in the beginning of 2026. The close day-to-day management of renewals, the mix of 3-year and 1-year contracts, and the impact of pricing are progressing well. Additionally, the adoption of 3-year renewals as a standard, with more customers opting for this option than we originally expected, are expected to have an added benefit of higher retention which provides greater revenue assurance and predictability.

5.Keen Attention to Cost Management

Cost management initiatives already completed drove a significant improvement in profitability during 2023. These initiatives included:

•A reduction in headcount from approximately 3,600 in the third quarter of 2022 to approximately 3,000 as of December 31, 2023

•Continued IT consolidation as we migrate customers from legacy private data centers to leading public cloud service providers. We closed four legacy data centers during 2022 and two in 2023.

•Renegotiated key vendor contracts including Microsoft Azure and AWS

•Reduced our real estate footprint as part of the shift to a remote-first workforce

During 2024, we continued to run the business at about the same headcount level, while continuing to drive efficiencies in other areas of the business. After the divestiture of EVERFI on December 31, 2024, we had approximately 2,600 employees.

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As a remote-first workforce company, we can be strategic about selecting the appropriate geographic region for various functions in order to reduce costs without negatively impacting the quality of our products and services. For example, we are currently expanding our operations in India, which we expect will give us greater access to talent, and increase the number of our employees, including management, in India. We have rented office space in India to accommodate those new operations, although we do not currently expect to generate revenue in India in the foreseeable future.

There are two remaining legacy data centers that we are currently working towards closing in the future.

Financial Summary

Total revenue increased by $50.1 million during 2024, driven largely by the following:

For information on the impact of foreign currency fluctuations on our financial results, see Foreign Currency Exchange Rates below on page 59.

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.

Our Social Sector revenue (which represents approximately 88% of our total full year revenue) increased $67.4 million, or 7.1%, during 2024, when compared to the same period in 2023, driven primarily by the increases in contractual recurring revenue and transactional recurring revenue discussed above. The Social Sector has proven to be very resilient as demonstrated through the last several economic downturns and the COVID-19 pandemic, and we have great confidence in the long-term trajectory of this portion of our business.

Our Corporate Sector revenue (which represents approximately 12% of our total full year revenue) decreased $17.3 million, or 11.5%, during 2024, when compared to the same period in 2023, driven primarily by the underperformance of EVERFI and our disposition of EVERFI Limited in March 2024 (see Note 3 to our consolidated financial statements in this report for more information).

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As previously disclosed, our EVERFI business faced a number of external challenges and even with the decisive actions we took during 2024, including changes to our Corporate Sector leadership and the disposition of a non-recurring revenue component (EVERFI Limited discussed above), EVERFI continued to be a drag on our overall performance, and we expected that to continue. As a result, we took further actions to right-size EVERFI's business to better align costs to its lower revenues, and we hired a strategic advisor to assist us in considering a range of alternatives for EVERFI, one of which included a potential divestiture of the business. This work resulted in the sale of EVERFI in December 2024 in exchange for nominal cash consideration (see page 40 below and Note 3 to our consolidated financial statements in this report for more information).

Income from operations decreased by $315.2 million during 2024, driven largely by the following:

We are continuing to make investments in the business in areas such as innovation, AI, cybersecurity and our continued shift of cloud infrastructure to leading public cloud service providers. Our profitability during 2024 reflects some of these incremental investments.

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

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Gross dollar retention

Our recurring subscription contracts are typically for a term of three years at contract inception with standard three year renewals thereafter. A key factor to our overall success is the renewal and expansion of our existing subscription agreements with our customers. Management uses gross dollar retention in analyzing our success at delighting our customers with innovative and cloud solutions. Gross dollar retention is defined as contracted annual recurring revenue ("CARR") divided by beginning CARR with a measurement period of twelve months. During 2024, our gross dollar retention was approximately 90%. This gross dollar retention rate was consistent with our rate for the full year ended December 31, 2023. Excluding EVERFI, our gross dollar retention during the twelve months ended December 31, 2024 was approximately 92%. 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, 2024, our cash and cash equivalents were $67.6 million. Under the 2024 Credit Facilities, the carrying amount of our debt was $1.0 billion and our net leverage ratio was 2.57 to 1.00.

During 2024, we generated $296.0 million in cash flow from operations, had a net increase in borrowings of $296.7 million, returned $418.0 million to stockholders by way of share repurchases and had aggregate cash outlays of $67.2 million for purchases of property and equipment and capitalized software and content development costs.

Release from Washington, DC lease

In February 2025, we made a one-time cash release payment of $28 million to the lessor in connection with a release from our lease for office space in Washington, DC (which was acquired as part of our acquisition of EVERFI in December 2021). Due to our remote-first workforce strategy, we had not used the office space since February 2023 and had subleased a portion of the space.

Security Incident update

As discussed in Note 11 to our consolidated financial statements included in this report, total costs related to the Security Incident exceeded the limit of our insurance coverage in the first quarter of 2022. Accordingly, the Security Incident has negatively impacted, and we expect it to continue for the foreseeable future to negatively impact, our GAAP profitability and GAAP cash flow (see discussion regarding non-GAAP free cash flow and non-GAAP adjusted free cash flow on page 53). For the year ended December 31, 2024, we incurred net pre-tax expenses of $13.7 million related to the Security Incident, which included $7.0 million for ongoing legal fees. It also includes settlements and recorded liabilities for loss contingencies of $6.8 million. Also, for the year ended December 31, 2024, we had net cash outlays of $15.9 million related to the Security Incident, which included ongoing legal fees and the $6.8 million paid during the third quarter of 2024 related to our settlement with the Attorney General of the State of California (as discussed in Note 11). In line with our policy, legal fees are expensed as incurred. For the year ended December 31, 2025, we currently expect net pre-tax expense of approximately $2.0 million to $3.0 million and net cash outlays of approximately $3.0 million to $4.0 million for ongoing legal fees related to the Security Incident.

As of December 31, 2024, we have recorded approximately $0.7 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers related to the Security Incident that we believe we can reasonably estimate in accordance with our loss contingency procedures described in Note 11. 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.

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There are other Security Incident-related matters for which we have not recorded a liability for a loss contingency as of December 31, 2024 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 judgment, 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.

EVERFI disposition

On December 9, 2024, the Company concluded that a material impairment charge of up to $415 million was required related to its EVERFI asset group, which primarily included finite-lived intangible assets and capitalized software and content development costs. The total pre-tax noncash charges were subsequently determined to be $390.2 million. On December 31, 2024, we disposed of EVERFI for a nominal amount that resulted in a loss on disposition of $15.2 million, which together with the impairment charges, is recorded within EVERFI disposition on our consolidated statements of comprehensive loss for the year ended December 31, 2024. See Note 4 to our consolidated financial statements in this report for additional details.

Results of Operations

Reportable segment

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

Comparison of 2024 vs. 2023

For information regarding the comparison of 2023 to 2022, please refer to Part II Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 21, 2024.

Acquisition

On August 19, 2022, we acquired Kilter, Inc. ("Kilter") in order to provide us with strategic opportunities to expand our total addressable market and share of the philanthropic giving market through the integration of complementary solutions and services to serve the changing needs of our customers.

We have included the results of operations of the acquired company in our consolidated results of operations from the date of acquisition. In accordance with applicable accounting rules, we determined that the Kilter acquisition was 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 this acquisition.

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Revenue and Cost of Revenue

Recurring revenue includes two components: contractual recurring and transactional recurring.

Contractual recurring revenue is primarily comprised of fees for the use of our subscription-based software solutions, which includes providing access to cloud solutions, online training programs and subscription-based analytic services. Contractual recurring revenue also includes fees from maintenance services for our on-premises solutions.

Transactional recurring revenue is comprised of transaction fees associated with the use of our solutions, including donation processing, tuition management, consumer giving and event-based usage.

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

Our customers continue to prefer cloud subscription offerings with integrated analytics, training and payment services. We intend to continue focusing on innovation, quality and integration of our cloud solutions, which we believe will drive future revenue growth.

2024 vs. 2023

Recurring revenue increased by $57.6 million, or 5.4%, driven primarily by the following:

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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 59.

Cost of recurring revenue increased by $24.1 million, or 5.1%, driven primarily by the following:

Recurring gross margin increased by 10 basis points primarily due to the increase in recurring revenue outpacing the increase in cost of recurring revenue.

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, third-party software royalties, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.

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2024 vs. 2023

One-time services and other revenue decreased by $7.5 million, or 22.2%, driven primarily by the following:

Cost of one-time services and other decreased $10.0 million or 31.6%, primarily driven by the following:

One-time services and other gross margin increased by 1,130 basis points primarily due to the decrease in cost of one-time services and other revenue outpacing the decrease in one-time services and other revenue.

Operating Expenses

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 per customer as well as the related payback period while increasing sales velocity.

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2024 vs. 2023

Sales, marketing and customer success expenses decreased by $14.7 million, or 6.9%. The decreases in dollars and as a percentage of total revenue were primarily driven by the following:

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.

2024 vs. 2023

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 $7.3 million, or 4.8%. The increases in dollars and as a percentage of total revenue were primarily driven by the following:

Not included in research and development expense for 2024 and 2023 were $60.8 million and $60.7 million, respectively, of qualifying costs associated with software and content development activities that are required to be capitalized under GAAP, 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 development costs capitalized will modestly decrease in the near-term due to the disposition of EVERFI. We continue to prioritize making investments in innovation, quality, security and the integration of our solutions, which we believe will drive long-term revenue growth.

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General and administrative

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

2024 vs. 2023

General and administrative expenses decreased by $47.2 million, or 24.9%. The decreases in dollars and as a percentage of total revenue were primarily driven by the following:

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Interest Expense

2024 vs. 2023

Interest expense increased in dollars and as a percentage of total revenue during 2024 when compared to 2023, primarily due to our incremental borrowings to fund our ASR Transaction (as defined on page 105) and other stock repurchases. We currently expect interest expense for the full year 2025 to be approximately $65 million to $69 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 64 for more information about our variable interest rate exposure and related risk.

Other Income

2024 vs. 2023

Other income increased in dollars and as a percentage of total revenue during 2024 when compared to 2023, primarily due to an increase in interest income. Interest income increased primarily due to higher interest earned on restricted cash due to customers for our payment processing solutions. See Note 8 to our consolidated financial statements in this report for more information regarding our other income.

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Deferred Revenue

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

(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 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 decrease in deferred revenue during the year ended December 31, 2024 was primarily due to our divestiture of EVERFI on December 31, 2024. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third quarter. Generally, our lowest balance of deferred revenue during the year is at the end of our first quarter.

Income Taxes

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, a federal and state capital loss carryforward and tax credits. The federal and state net operating loss and capital loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. The foreign net operating loss carryforwards have a valuation reserve due to the uncertainty of realizing such carryforwards in the future. Further, as of December 31, 2024, we recorded a valuation allowance against all of our U.S. deferred tax assets in excess of deferred tax liabilities due to combination of our cumulative pretax loss position and net deferred tax asset position resulting from divestiture of EVERFI. We intend to continue maintaining a full valuation allowance on our U.S. net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

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 2021 through 2024, as well as state and foreign income tax examinations for various years depending on statute of limitations of those jurisdictions.

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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, 2024 was insignificant.

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

2024 vs. 2023

The decrease in our effective income tax rate for year ended December 31, 2024, when compared to the same period in 2023, was primarily attributable to the valuation allowance recorded in the current period. As of December 31, 2024, we recorded a valuation allowance against all of our U.S. deferred tax assets in excess of deferred tax liabilities due to the combination of our cumulative pretax loss position and net deferred tax asset position resulting from our divestiture of EVERFI. We intend to continue maintaining a full valuation allowance on our U.S. net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Furthermore, the effect of our various rate drivers is reversed by the Company’s 2024 loss position versus income in 2023.

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.

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(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 noncash impairment charges incurred during the twelve months ended December 31, 2024 and 2023 related to the subleases of our Washington, DC office location the lease of which was acquired during the EVERFI acquisition.

(3)Includes Security Incident-related costs incurred during the twelve months ended December 31, 2024 of $13.7 million, which included approximately $6.8 million in recorded liabilities for loss contingencies, and during the twelve months ended December 31, 2023 of $53.4 million, which included approximately $31.0 million in recorded liabilities for loss contingencies. Recorded expenses consisted primarily of payments to third-party service providers and consultants, including legal fees, as well as settlements of customer claims, negotiated settlements and accruals for certain loss contingencies. Not included in this adjustment were costs associated with enhancements to our cybersecurity program. For full year 2025, we currently expect pre-tax expenses of approximately $2 million to $3 million and cash outlays of approximately $3 million to $4 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, 2024, we have recorded approximately $0.7 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers related to the Security Incident that we believe we can reasonably estimate. There are other Security Incident-related matters for which we have not recorded a liability for a loss contingency as of December 31, 2024 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 judgment, 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)Beginning in 2024, we now apply a non-GAAP effective tax rate of 24.5% when calculating non-GAAP net income and non-GAAP diluted earnings per share. For the twelve months ended December 31, 2023, the tax impact related to non-GAAP adjustments is calculated under our historical non-GAAP effective tax rate of 20.0%.

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Non-GAAP organic revenue growth

In addition, we use non-GAAP organic revenue growth, non-GAAP organic revenue growth on a constant currency basis, non-GAAP organic recurring revenue growth and non-GAAP organic recurring revenue growth on a constant currency basis in analyzing our operating performance. We believe that these non-GAAP measures are useful to investors, as a supplement to GAAP measures, for evaluating the periodic growth of our business on a consistent basis. Each of these measures of non-GAAP organic revenue growth excludes incremental acquisition-related revenue attributable to companies, if any, acquired in the current fiscal year. For companies, if any, acquired in the immediately preceding fiscal year, each of these non-GAAP organic revenue growth measures reflects presentation of full year incremental non-GAAP revenue derived from such companies as if they were combined throughout the prior period. In addition, each of these non-GAAP organic revenue growth measures excludes prior period revenue associated with divested businesses. The exclusion of the prior period revenue is to present the results of the divested businesses within the results of the combined company for the same period of time in both the prior and current periods. We believe this presentation provides a more comparable representation of our current business’ organic revenue growth and revenue run-rate.

(1)Includes EVERFI revenue of $85.5 million and $106.9 million for the year ended December 31, 2024 and 2023, respectively.

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

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

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

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Rule of 40

We define Rule of 40 as non-GAAP organic revenue growth plus non-GAAP adjusted EBITDA margin. Non-GAAP adjusted EBITDA is defined as GAAP net income plus interest, net; income tax provision (benefit); depreciation; amortization of intangible assets from business combinations; amortization of software and content development costs; stock-based compensation; employee severance; acquisition and disposition-related costs; Security Incident-related costs; and impairment and disposition charges.

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

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

(3)Measured by GAAP revenue divided by non-GAAP EBITDA.

(4)See additional details in the reconciliation of GAAP to Non-GAAP operating income above.

(5)Measured by non-GAAP organic revenue divided by non-GAAP adjusted EBITDA.

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

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

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

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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 and content 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 and content 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.

(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, delivery of professional services and occurrence of customer events, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has generally been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are base salary merit increases, which occur in July. In addition, deferred revenues can vary on a seasonal basis due to the timing of customer contract 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.

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These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, large dollar customer bookings and contract renewals, fluctuations in the timing of vendor payments or as a result of acquisitions, dispositions, such as our sale of EVERFI on December 31, 2024, new market opportunities, new solution introductions or other factors.

Liquidity and Capital Resources

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

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

Our principal sources of liquidity are our operating cash flow, funds available under the 2024 Credit Facilities and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance arrangements, market acceptance of our solutions and services, the volume and size of transactions for which we process payments and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations. We also believe that we will be able to continue to meet our long-term cash requirements due to our anticipated cash flow from operations, solid financial position and ability to access capital from financial markets. To the extent we undertake future material acquisitions, investments or unanticipated capital or operating expenditures, including in connection with the Security Incident, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure, including through potential debt or equity issuances.

As a well-known seasoned issuer, we filed an automatic shelf registration statement for an undetermined amount of debt and equity securities with the SEC on January 10, 2025. Under this universal shelf registration statement we may offer and sell, from time to time, debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts and stock purchase units. Subject to certain conditions, this registration statement will be effective through January 9, 2028.

At December 31, 2024, our total cash and cash equivalents balance included approximately $13.9 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.

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Operating Cash Flow

Throughout 2024 and 2023, 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, adjustments to our provision for credit losses and sales returns, the EVERFI impairment charges, loss on disposition of business; 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.

2024 vs. 2023

Net cash provided by operating activities increased by $96.3 million during the year ended December 31, 2024, when compared to the same period in 2023, primarily due to a $49.4 million increase in net income adjusted for non-cash expenses and a $46.9 million increase in cash flow from operations associated with working capital.

The increase in cash flow from operations associated with working capital during 2024, when compared to 2023, was primarily due to:

•fluctuations in the timing of vendor payments;

•a decrease in accrued expenses related to the Security Incident; partially offset by

•an increase in cash taxes paid.

In February 2025, we made a one-time cash release payment of $28 million to the lessor in connection with a release from our lease for office space in Washington, DC (which was acquired as part of our acquisition of EVERFI in December 2021). Due to our remote-first workforce strategy, we had not used the office space since February 2023 and had subleased a portion of the space.

Security Incident update

As discussed in Note 11 to our consolidated financial statements included in this report, total costs related to the Security Incident exceeded the limit of our insurance coverage in the first quarter of 2022. Accordingly, the Security Incident has negatively impacted, and we expect it to continue for the foreseeable future to negatively impact, our GAAP profitability and GAAP cash flow (see discussion regarding non-GAAP free cash flow and non-GAAP adjusted free cash flow on page 53). For full year 2024, we had net cash outlays of $15.9 million related to the Security Incident, which included ongoing legal fees and the $6.8 million paid during the third quarter of 2024 related to our settlement with the Attorney General of the State of California. For full year 2025, we currently expect net pre-tax expense of approximately $2.0 million to $3.0 million and net cash outlays of approximately $3.0 million to $4.0 million for ongoing legal fees related to the Security Incident.

As of December 31, 2024, we have recorded approximately $0.7 million in aggregate liabilities for loss contingencies based primarily on recent negotiations with certain customers related to the Security Incident that we believe we can reasonably estimate in accordance with our loss contingency procedures described in Note 11. 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 for which we have not recorded a liability for a loss contingency as of December 31, 2024 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 judgment, 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.

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Investing Cash Flow

During 2025, we expect our total capital expenditures, including estimated outlays for capitalized software development costs, to be between approximately $55.0 million and $65.0 million.

2024 vs. 2023

Net cash used in investing activities of $73.4 million increased by $9.0 million during 2024, when compared to 2023.

During 2024, we used $59.8 million for software and content development costs, which was up $0.3 million from cash spent during 2023. We also spent $7.4 million of cash for purchases of property and equipment during 2024, which was an increase of $2.8 million from cash spent in 2023. In addition, we used net cash of $1.2 million in the disposition of a business and $5.0 million for a minority investment in a business during 2024.

Financing Cash Flow

2024 vs. 2023

During 2024, we had a net increase in borrowings of $296.7 million, primarily due to our stock repurchase program, including our ASR Transaction (as defined on page 105) in March 2024. During 2024, we repurchased $418.0 million of our common stock compared to $18.8 million during 2023 (see additional details below regarding our stock repurchase program). We also paid $6.5 million in debt issuance costs in conjunction with our April 2024 refinancing.

We paid $56.8 million to satisfy tax obligations of employees upon settlement or exercise of equity awards during 2024 compared to $35.9 million during 2023. The amount of taxes paid by us on behalf of employees related to the settlement or 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 2024, cash flow from financing activities associated with changes in restricted cash due to customers increased $47.0 million, compared to a decrease of $6.8 million during 2023. 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.

Stock repurchase program

On January 17, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by raising the total capacity under the program from $250.0 million to $500.0 million available for repurchases. The program does not have an expiration date. Under the stock repurchase program, we are authorized to repurchase shares from time to time in accordance with applicable laws both on the open market, including under trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, and in privately negotiated transactions. The timing and amount of repurchases depends on several factors, including market and business conditions, the trading price of our common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice.

In March 2024, we announced that we intended to repurchase during 2024 between 7% and 10% of our outstanding common stock as of December 31, 2023 under our repurchase program. Consistent with that commitment, in March 2024, we entered into the ASR Transaction to repurchase an aggregate $200 million of shares of our common stock. Pursuant to the terms of the ASR Transaction, we provided the financial institution with a prepayment of $200 million and received an initial delivery of 2.1 million shares of our common stock, representing approximately 70% of the total shares then-expected to be repurchased under the ASR Transaction. The final number of shares of common stock delivered to us under the ASR Transaction was based on the average of the daily volume-weighted average prices of the common stock during the term of the ASR Transaction, less a discount and subject to customary adjustments upon events affecting the common stock (e.g., dilutive or concentrative events, mergers and acquisitions, and market disruptions). We funded the ASR Transaction prepayment with borrowings pursuant to a revolving credit loan under the then effective 2020 Credit Agreement. On October 29, 2024, in connection with the settlement of the ASR Transaction, we received approximately 490,000 shares of our common stock, in addition to the 2.1 million shares received in March 2024. No cash was exchanged as part of the settlement of the ASR Transaction.

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On July 16, 2024, our Board of Directors reauthorized, expanded and replenished our stock repurchase program by expanding the total capacity under the program from $500.0 million to $800.0 million available for repurchases.

During the year ended December 31, 2024, we repurchased an aggregate of 5,362,439 shares for $418.0 million, including the shares repurchased pursuant to the ASR Transaction and representing approximately 10.0% of the Company's common stock outstanding as of December 31, 2023. When including the net share settlement on employee stock-based compensation, this figure increases to approximately 11%. The remaining amount available to purchase stock under the approved stock repurchase program was $644.6 million as of December 31, 2024. During 2025, we intend to repurchase between 3% and 5% of our outstanding common stock as of December 31, 2024 under our existing stock repurchase program.

2024 Credit Facilities

Historically, we have drawn on our credit facility from time to time to help us meet financial needs primarily due to the seasonality of our cash flows from operations and financing for business acquisitions. At December 31, 2024, our available borrowing capacity under the 2024 Credit Facilities was $468.7 million. The 2024 Credit Facilities mature in April 2029.

At December 31, 2024, the carrying amount of our debt under the 2024 Credit Facilities was $1.0 billion. Our average daily borrowings were $929.5 million during 2024.

The term loans under the 2024 Credit Facilities 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 2024 Credit Facilities in April 2029. Certain real estate loans (as described in Note 9 to our audited consolidated financial statements included in this report) also require periodic principal payments and the balances of the real estate loans are due upon maturity in April 2038.

The following is a summary of the financial covenants under the 2024 Credit Facilities:

(1)Under the terms of the 2024 Credit Facilities, the Net Leverage Ratio requirement may be increased by up to 0.50 provided we satisfy certain requirements, including a permitted business acquisition, and provided that the maximum Net Leverage Ratio shall not exceed 4.25 to 1.00.

Under the 2024 Credit Facilities, we also have restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. In order to pay any cash dividends and/or repurchase shares of stock: (i) no default or event of default shall have occurred and be continuing under the 2024 Credit Facilities, and (ii) our pro forma net leverage ratio, as set forth in the 2024 Credit Facilities, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or stock repurchase. At December 31, 2024, we were in compliance with our debt covenants under the 2024 Credit Facilities. See Note 9 to our consolidated financial statements included in this report for additional information regarding the 2024 Credit Facilities.

Commitments and Contingencies

As of December 31, 2024, we had contractual obligations with future minimum commitments as follows:

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

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Debt

As of December 31, 2024, we had total remaining principal payments of $1.1 billion. These payments represent principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2024 Credit Facilities, our real estate loans and our other debt at December 31, 2024 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2024 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, 2024, we expect to pay interest expense over the life of our debt obligations of approximately $273.4 million. These payments represent our estimated future interest payments on debt using our debt balances and the related weighted average effective interest rates as of December 31, 2024, which includes the effect of interest rate swap agreements. The actual interest expense recognized in our consolidated statements of comprehensive loss 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, 2024, we had remaining operating lease payments of $45.4 million. These payments have not been reduced by sublease income, incentive payments, reimbursement of leasehold improvements or the amount representing imputed interest of $6.7 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.

In February 2025, we made a one-time cash release payment of $28 million to the lessor in connection with a release from our lease for office space in Washington, DC (which was acquired as part of our acquisition of EVERFI in December 2021). Due to our remote-first workforce strategy, we had not used the office space since February 2023 and had subleased a portion of the space.

Purchase obligations

As of December 31, 2024, we had remaining purchase obligations of $184.4 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, 2024, 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, 2024 was $5.2 million. Our accrued interest and penalties related to tax positions taken on our tax returns was $0.9 million as of December 31, 2024.

In connection with the settlement of the multi-state Attorneys General investigation, the California Attorney General investigation and the FTC investigation relating to the Security Incident, as discussed in Note 11 to our consolidated financial statements in this report, we have agreed to implement and improve certain of our cybersecurity programs and tools through May 2044. The currently anticipated costs in connection with these efforts are expected to be expensed as incurred.

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Foreign Currency Exchange Rates

Approximately 14% of our total revenue for 2024 was generated from operations outside the U.S. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a loss of $12.7 million as of December 31, 2024 and a loss of $9.8 million as of December 31, 2023. 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 2024, foreign translation resulted in increases in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. During 2024, the fluctuation in foreign currency exchange rates increased our total revenue and our income from operations by $3.0 million and $1.1 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 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.

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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.

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