UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September~~June 30, ~~2017~~2020



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

For the transition period from to .

Commission file number:000-50600

Blackbaud, Inc.

(Exact name of registrant as specified in its charter)




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

~~2000 Daniel Island Drive~~65 Fairchild Street

Charleston, South Carolina29492

(Address of principal executive offices, including zip code)

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

(Registrant’s telephone number, including area code)




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

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

~~YES~~ þ NO ¨Yes☑ No ☐

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

~~YES~~ þ NO ¨Yes☑ No ☐

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



Large accelerated filerþ	☑	Accelerated filer	¨☐
Non-accelerated filer¨ ~~(Do not check if a smaller reporting company)~~	☐	Smaller reporting company	¨☐
		Emerging growth company	¨☐

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

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

~~YES~~ ¨ NO þYes ☐ No ☑

The number of shares of the registrant’s Common Stock outstanding as of ~~October 23, 2017~~July 29, 2020 was ~~48,089,595.~~49,575,132.

TABLE OF CONTENTS



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		2

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial statements
	Condensed Consolidated ~~balance sheets as of September 30, 2017 and December 31, 2016 (unaudited)~~Balance Sheets (Unaudited)	3
	Condensed Consolidated ~~statements~~Statements of ~~comprehensive income for the three and nine months ended September 30, 2017 and 2016 (unaudited)~~Comprehensive Income (Unaudited)	4
	Condensed Consolidated ~~statements~~Statements of ~~cash flows for the nine months ended September 30, 2017 and 2016 (unaudited)~~Cash Flows (Unaudited)	5
	Condensed Consolidated ~~statement~~Statements of ~~stockholders’ equity for the nine months ended September 30, 2017 (unaudited)~~Stockholders’ Equity (Unaudited)	6
	Notes to ~~consolidated financial statements (unaudited)~~Condensed Consolidated Financial Statements (Unaudited)	78
Item 2.	Management's discussion and analysis of financial condition and results of operations	2322
Item 3.	Quantitative and qualitative disclosures about market risk	41
Item 4.	Controls and procedures	41

~~PART II.~~	~~OTHER INFORMATION~~	42

~~Item 1A.~~PART II.	~~Risk factors~~	42
~~Item 2.~~	~~Unregistered sales of equity securities and use of proceeds~~	42
~~Item 6.~~	~~Exhibits~~OTHER INFORMATION	43

~~SIGNATURES~~Item 1A.	44Risk factors	43
Item 2.	Unregistered sales of equity securities and use of proceeds	45
Item 6.	Exhibits	46

SIGNATURES		47



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		1

Table of Contents

Blackbaud, Inc.



		CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference, contains forward-looking statements that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These "forward-looking statements" are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements consist of, among other things, specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations and on the markets and communities in which we and our customers and partners operate, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock-based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “believes,” “seeks,” “expects,” “may,” “might,” “should,” “intends,” “could,” “would,” “likely,” “will,” “targets,” “plans,” “anticipates,” “aims,” “projects,” “estimates” or any variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Accordingly, they should not be viewed as assurances of future performance, and actual results may differ materially and adversely from those expressed in any forward-looking statements.

Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those summarized under ~~“Item~~“Part II, Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.



2		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q



		PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Blackbaud, Inc. Consolidated balance sheets (Unaudited)
Blackbaud, Inc. Condensed Consolidated Balance Sheets (Unaudited)							Blackbaud, Inc. Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands)	September 30, 2017			December 31, 2016			June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	17,050		$	16,902		$	30,531		$	31,810
Restricted cash due to customers	139,095			353,771			421,915			545,485
Accounts receivable, net of allowance of $4,540 and $3,291 at September 30, 2017 and December 31, 2016, respectively	100,868			88,932
Accounts receivable, net of allowance of $9,025 and $5,529 at June 30, 2020 and December 31, 2019, respectively							129,675			88,868
Customer funds receivable							1,284			524
Prepaid expenses and other current assets	50,082			48,314			83,699			67,852
Total current assets	307,095			507,919			667,104			734,539
Property and equipment, net	43,903			50,269			36,539			35,546
Operating lease right-of-use assets							95,575			104,400
Software development costs, net	48,618			37,582			106,044			101,302
Goodwill	472,776			438,240			630,687			634,088
Intangible assets, net	252,713			253,676			292,187			317,895
Other assets	21,889			22,524			68,673			65,193
Total assets	$	1,146,994		$	1,310,210		$	1,896,809		$	1,992,963
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	17,830		$	23,274		$	41,029		$	47,676
Accrued expenses and other current liabilities	45,650			54,196			52,893			73,317
Due to customers	139,095			353,771			423,199			546,009
Debt, current portion	8,576			4,375			9,194			7,500
Deferred revenue, current portion	277,008			244,500			332,570			314,335
Total current liabilities	488,159			680,116			858,885			988,837
Debt, net of current portion	329,380			338,018			478,919			459,600
Deferred tax liability	39,352			29,558			45,108			44,594
Deferred revenue, net of current portion	5,412			6,440			4,626			1,802
Operating lease liabilities, net of current portion							86,586			95,624
Other liabilities	7,799			8,533			11,883			5,742
Total liabilities	870,102			1,062,665			1,486,007			1,596,199
Commitments and contingencies (see Note 10)
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding	—			—			—			—
Common stock, $0.001 par value; 180,000,000 shares authorized, 58,503,687 and 57,672,401 shares issued at September 30, 2017 and December 31, 2016, respectively	59			58
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,901,100 and 60,206,091 shares issued at June 30, 2020 and December 31, 2019, respectively							61			60
Additional paid-in capital	341,476			310,452			491,450			457,804
Treasury stock, at cost; 10,426,122 and 10,166,801 shares at September 30, 2017 and December 31, 2016, respectively	(234,329		)	(215,237		)
Treasury stock, at cost; 11,332,912 and 11,066,354 shares at June 30, 2020 and December 31, 2019, respectively							(311,661		)	(290,665		)
Accumulated other comprehensive loss	(1,013		)	(457		)	(14,476		)	(5,290		)
Retained earnings	170,699			152,729			245,428			234,855
Total stockholders’ equity	276,892			247,545			410,802			396,764
Total liabilities and stockholders’ equity	$	1,146,994		$	1,310,210		$	1,896,809		$	1,992,963

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



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		3


Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited)
(dollars in thousands, except per share amounts)	Three months ended September 30,						Nine months ended September 30,
													Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited)
													Three months ended June 30,						Six months ended June 30,
(dollars in thousands, except per share amounts)	2017			2016			2017			2016			2020			2019			2020			2019

Subscriptions	$	127,492		$	105,440		$	370,923		$	306,330
Maintenance	31,486			36,410			98,184			111,019
Services and other	36,535			41,213			102,222			115,161
Recurring													$	216,260		$	208,468		$	421,127		$	406,562
One-time services and other													15,731			17,166			34,485			34,902
Total revenue	195,513			183,063			571,329			532,510			231,991			225,634			455,612			441,464
Cost of revenue
Cost of subscriptions	58,045			51,943			170,336			153,772
Cost of maintenance	5,698			5,531			17,551			16,547
Cost of services and other	23,262			25,843			71,595			76,499
Cost of recurring													91,370			86,657			180,921			171,368
Cost of one-time services and other													13,569			14,150			28,883			28,722
Total cost of revenue	87,005			83,317			259,482			246,818			104,939			100,807			209,804			200,090
Gross profit	108,508			99,746			311,847			285,692			127,052			124,827			245,808			241,374
Operating expenses
Sales, marketing and customer success	44,193			40,690			129,394			115,707			51,954			55,009			110,689			110,464
Research and development	22,071			22,510			67,647			67,973			24,895			25,902			49,872			54,363
General and administrative	23,545			22,319			67,350			62,089			29,842			28,543			55,697			55,660
Amortization	734			687			2,164			2,147			729			1,152			1,470			2,528
Restructuring													50			730			74			2,683
Total operating expenses	90,543			86,206			266,555			247,916			107,470			111,336			217,802			225,698
Income from operations	17,965			13,540			45,292			37,776			19,582			13,491			28,006			15,676
Interest expense	(3,092		)	(2,641		)	(8,685		)	(8,037		)	(3,893		)	(5,799		)	(8,052		)	(11,122		)
Other income (expense), net	468			(15		)	1,581			(185		)
Other income, net													630			2,181			1,700			2,363
Income before provision for income taxes	15,341			10,884			38,188			29,554			16,319			9,873			21,654			6,917
Income tax provision	2,793			1,950			2,964			5,323			4,496			2,733			5,192			899
Net income	$	12,548		$	8,934		$	35,224		$	24,231		$	11,823		$	7,140		$	16,462		$	6,018
Earnings per share
Basic	$	0.27		$	0.19		$	0.76		$	0.53		$	0.25		$	0.15		$	0.34		$	0.13
Diluted	$	0.26		$	0.19		$	0.74		$	0.51		$	0.24		$	0.15		$	0.34		$	0.13
Common shares and equivalents outstanding
Basic weighted average shares	46,711,709			46,159,956			46,627,213			46,078,306			48,239,928			47,714,621			48,138,125			47,622,740
Diluted weighted average shares	47,846,997			47,394,106			47,679,103			47,268,469			48,418,378			48,160,684			48,465,077			48,101,212
Dividends per share	$	0.12		$	0.12		$	0.36		$	0.36
Other comprehensive (loss) income
Other comprehensive loss
Foreign currency translation adjustment	(188		)	289			(467		)	261			(887		)	(6,018		)	(6,615		)	(1,428		)
Unrealized (loss) gain on derivative instruments, net of tax	(267		)	409			(89		)	(378		)
Total other comprehensive (loss) income	(455		)	698			(556		)	(117		)
Comprehensive income	$	12,093		$	9,632		$	34,668		$	24,114
Unrealized gain (loss) on derivative instruments, net of tax													551			(1,939		)	(2,571		)	(2,871		)
Total other comprehensive loss													(336		)	(7,957		)	(9,186		)	(4,299		)
Comprehensive income (loss)													$	11,487		$	(817	)	$	7,276		$	1,719

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



4		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q


Blackbaud, Inc. Consolidated statements of cash flows (Unaudited)
Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)							Blackbaud, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine months ended September 30,						Six months ended June 30,
(dollars in thousands)	2017			2016			2020			2019
Cash flows from operating activities
Net income	$	35,224		$	24,231		$	16,462		$	6,018
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	54,765			53,109			46,088			43,113
Provision for doubtful accounts and sales returns	7,246			3,139
Provision for credit losses and sales returns							6,677			4,646
Stock-based compensation expense	31,055			25,005			33,713			28,755
Deferred taxes	(2,511		)	(225		)	1,945			465
Amortization of deferred financing costs and discount	650			718			376			376
Other non-cash adjustments	572			(634		)	477			1,982
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable	(17,169		)	(9,288		)	(48,167		)	(45,071		)
Prepaid expenses and other assets	596			(934		)	(7,068		)	(12,725		)
Trade accounts payable	(2,891		)	267			(8,984		)	216
Accrued expenses and other liabilities	(9,522		)	(12,837		)	(26,520		)	(9,014		)
Restricted cash due to customers	214,244			119,291
Due to customers	(214,244		)	(119,291		)
Deferred revenue	25,370			17,593			22,489			26,328
Net cash provided by operating activities	123,385			100,144			37,488			45,089
Cash flows from investing activities
Purchase of property and equipment	(8,417		)	(15,459		)	(5,887		)	(6,375		)
Capitalized software development costs	(20,605		)	(19,078		)	(21,679		)	(23,206		)
Purchase of net assets of acquired companies, net of cash acquired	(49,729		)	(3,377		)
Purchase of derivative instruments	(516		)	—
Proceeds from settlement of derivative instruments	1,030			—
Purchase of net assets of acquired companies, net of cash and restricted cash acquired							—			(109,386		)
Other investing activities							—			500
Net cash used in investing activities	(78,237		)	(37,914		)	(27,566		)	(138,467		)
Cash flows from financing activities
Proceeds from issuance of debt	588,300			179,000			202,100			329,100
Payments on debt	(594,144		)	(212,581		)	(185,250		)	(155,150		)
Debt issuance costs	(3,085		)	—
Employee taxes paid for withheld shares upon equity award settlement	(19,092		)	(10,497		)	(20,996		)	(19,760		)
Proceeds from exercise of stock options	14			10			4			6
Change in due to customers							(121,612		)	(107,808		)
Change in customer funds receivable							(828		)	(3,741		)
Dividend payments to stockholders	(17,299		)	(17,108		)	(5,960		)	(11,802		)
Net cash used in financing activities	(45,306		)	(61,176		)
Effect of exchange rate on cash and cash equivalents	306			46
Net increase in cash and cash equivalents	148			1,100
Cash and cash equivalents, beginning of period	16,902			15,362
Cash and cash equivalents, end of period	$	17,050		$	16,462

The accompanying notes are an integral part of these consolidated financial statements.
Net cash (used in) provided by financing activities							(132,542		)	30,845
Effect of exchange rate on cash, cash equivalents and restricted cash							(2,229		)	(526		)
Net decrease in cash, cash equivalents and restricted cash							(124,849		)	(63,059		)
Cash, cash equivalents and restricted cash, beginning of period							577,295			449,846
Cash, cash equivalents and restricted cash, end of period							$	452,446		$	386,787

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



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

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



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		5

Blackbaud, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)


Blackbaud, Inc. Consolidated statement of stockholders' equity (Unaudited)
(dollars in thousands)	Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive loss			Retained earnings			Total stockholders' equity			Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
	Shares		Amount																Shares		Amount
Balance at December 31, 2016	57,672,401		$	58	$	310,452	$	(215,237	)	$	(457	)	$	152,729		$	247,545
Balance at December 31, 2019																			60,206,091		$	60	$	457,804	$	(290,665	)	$	(5,290	)	$	234,855		$	396,764
Net income	—		—		—		—			—			35,224			35,224			—		—		—		—			—			4,639			4,639
Payment of dividends	—		—		—		—			—			(17,299		)	(17,299		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	349,713		—		14		—			—			—			14
Employee taxes paid for 259,321 withheld shares upon equity award settlement	—		—		—		(19,092		)	—			—			(19,092		)
Payment of dividends ($0.12 per share)																			—		—		—		—			—			(5,960		)	(5,960		)
Exercise of stock options and vesting of restricted stock units																			210,057		—		1		—			—			—			1
Employee taxes paid for 245,358 withheld shares upon equity award settlement																			—		—		—		(19,782		)	—			—			(19,782		)
Stock-based compensation	—		—		31,010		—			—			45			31,055			—		—		13,539		—			—			41			13,580
Restricted stock grants	549,589		1		—		—			—			—			1			563,947		1		—		—			—			—			1
Restricted stock cancellations	(68,016	)	—		—		—			—			—			—			(47,456	)	—		—		—			—			—			—
Other comprehensive loss	—		—		—		—			(556		)	—			(556		)	—		—		—		—			(8,850		)	—			(8,850		)
Balance at September 30, 2017	58,503,687		$	59	$	341,476	$	(234,329	)	$	(1,013	)	$	170,699		$	276,892
Balance at March 31, 2020																			60,932,639		$	61	$	471,344	$	(310,447	)	$	(14,140	)	$	233,575		$	380,393
Net income																			—		—		—		—			—			11,823			11,823
Exercise of stock options and vesting of restricted stock units																			7,111		—		3		—			—			—			3
Employee taxes paid for 21,200 withheld shares upon equity award settlement																			—		—		—		(1,214		)	—			—			(1,214		)
Stock-based compensation																			—		—		20,103		—			—			30			20,133
Restricted stock grants																			20,776		—		—		—			—			—			—
Restricted stock cancellations																			(59,426	)	—		—		—			—			—			—
Other comprehensive loss																			—		—		—		—			(336		)	—			(336		)
Balance at June 30, 2020																			60,901,100		$	61	$	491,450	$	(311,661	)	$	(14,476	)	$	245,428		$	410,802

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



6		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Blackbaud, Inc.

Condensed Consolidated statements of stockholders' equity (continued)

(Unaudited)



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

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



Second Quarter 2020 Form 10-Q		7

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements~~Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

We are the world’s leading cloud software company powering social good. Serving the entire social good community—nonprofits, ~~foundations, corporations,~~higher education institutions, K–12 schools, healthcare ~~institutions~~organizations, faith communities, arts and cultural organizations, foundations, companies and individual change agents—we connect and empower organizations to increase their impact through cloud software, services, expertise and data intelligence. Our portfolio is tailored to the unique needs of vertical markets, with solutions for fundraising and CRM, marketing, advocacy, peer-to-peer fundraising, corporate social responsibility, school management, ticketing, grantmaking, financial management, payment processing and analytics. Serving the industry for more than three decades, we are headquartered in Charleston, South Carolina, and have operations in the United States, Australia, Canada, Costa Rica and the United Kingdom. ~~As of September 30, 2017, we had approximately 35,000 customers.~~

2. Basis of Presentation

Unaudited condensed consolidated interim ~~consolidated~~ financial statements

The accompanying condensed consolidated interim ~~consolidated~~ financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, ~~2016,~~2019 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017,~~2020, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These condensed consolidated interim ~~consolidated~~ financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, and other forms filed with the SEC from time to time.

~~Reclassifications~~

Due to the insignificance of our revenue from "license fees and other," we have combined that revenue with our "services" revenue beginning in 2017. In order to provide comparability between periods presented, "services" and "license fees and other" have been combined within "services and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period. Similarly, "cost of services" and "cost of license fees and other" have been combined within "cost of services and other" in the previously reported consolidated statements of comprehensive income to conform to presentation of the current period.

Basis of consolidation

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

~~Recently adopted accounting pronouncements~~Reportable segment

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718) - Scope~~We report our operating results and financial information in one operating and reportable segment. Our chief operating decision maker uses consolidated financial information to make operating decisions, assess financial performance and allocate resources. Our chief operating decision maker is our chief executive officer ("CEO").

Risks and uncertainties

Impact of ~~Modification Accounting ("ASU 2017-09"), which provides guidance about which changes~~COVID-19

We are subject to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changesrisks and uncertainties as a result of the ~~change in terms or conditions. ASU 2017-09 is effective for~~global COVID-19 pandemic. We expect that COVID-19 will impact all ~~companies for annual and interim periods beginning after December 15, 2017, with early adoption permitted in any interim period for reporting periods for~~



~~Third Quarter 2017 Form 10-Q~~		7

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

which financial statements have not been issued. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. We early adopted ASU 2017-09 as of April 1, 2017. As this standard is prospective in nature, the impact to our financial statements will depend on the nature of our ~~future award modifications.~~

~~In January 2017, the FASB issued ASU 2017-01,~~ ~~Business Combinations (Topic 805) Clarifying the Definition of a Business ("ASU 2017-01"), which provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially~~vertical markets across all of our geographies to some degree, but the ~~fair value~~significance and duration of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted, and applied prospectively. We early adopted ASU 2017-01 as of July 1, 2017 and do not expect the standard to have a material impact on our ~~consolidated financial statements.~~

~~In January 2017,~~business cannot be determined at this time due to numerous uncertainties, including the ~~FASB issued ASU 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment("ASU 2017-04")~~, which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted, and applied prospectively. We early adopted ASU 2017-04 as of July 1, 2017 for use in our fourth quarter annual goodwill impairment testing and do not expect the standard to have a material impact on our consolidated financial statements.

~~Recently issued accounting pronouncements~~

~~In November 2016, the FASB issued ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230) - Restricted Cash ("ASU 2016-18")~~, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected asultimate geographic spread of the ~~beginning~~disease, the duration of the ~~fiscal year that includes that interim period. The new standard must be adopted retrospectively. We are currently evaluating~~outbreak, travel restrictions and business closures, the ~~impact~~effectiveness of ~~this standard on our consolidated statements of cash flows.~~actions taken to contain the disease and other unforeseeable consequences.

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

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606) (ASU 2014-09)~~. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. ASU 2014-09 will be effective for us beginning in the first quarter of 2018 and we anticipate using the full retrospective transition method. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements and related disclosures. As a result of our evaluation to date, we expect that ASU 2014-09 will generally result in the deferral of more costs to obtain a contract over a longer period using the expected period of benefit as compared with our current practice of using our average initial contract term. We also anticipate incremental disclosures, including, but not limited to, the opening and closing balances of contract assets and liabilities, revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period, and the aggregate amount of the transaction price allocated to remaining performance obligations at the end of each reporting period including when we expect to recognize that amount.



8		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

The preparation of financial statements ~~(continued)~~

~~(Unaudited)~~

~~3. Business Combinations~~

~~AcademicWorks acquisition~~

~~On April 3, 2017, we acquired all~~in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of ~~the outstanding shares~~assets and liabilities and disclosure of capital stock, including all voting equity interests, of AcademicWorks, Inc., a Texas corporation ("AcademicWorks"), pursuant to a stock purchase agreement. AcademicWorks is the market leader in scholarship management for higher educationcontingent assets and K-12 institutions, foundations, and grant-making institutions. The acquisition extends our offerings for our higher education, K-12, and corporate and foundation customers. We acquired AcademicWorks for $52.1 million in cash, net of closing adjustments. We financed the acquisition through a draw down of a revolving credit loan under our then-existing credit facility. As a result of the acquisition, AcademicWorks has become a wholly-owned subsidiary of ours. The operating results of AcademicWorks have been included in our consolidated financial statements within our EMG and GMG reportable segments (as defined in Note 14 below) fromliabilities at the date of ~~acquisition. During~~ the three and nine months ended September 30, 2017, we incurred insignificant acquisition-related expenses associated with the acquisition of AcademicWorks, which were recorded in general and administrative expense.

The fair values assigned to the assets acquired and liabilities assumed in the table below are based on our best estimates and assumptions as of the reporting date and are considered preliminary pending finalization. The estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the acquisition date. The assets and liabilities, pending finalization, include the valuation of acquired finite-lived intangible assetsfinancial statements, as well as the ~~assumed deferred~~reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and ~~deferred~~intangible assets, income ~~tax balances.~~taxes, business combinations, stock-based compensation, capitalization of software development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others. Changes in the facts or circumstances underlying these estimates due to COVID-19 could result in material changes and actual results could materially differ from these estimates.

Response to COVID-19

(in thousands) Purchase price allocation
Net working capital, excluding deferred revenue $ 2,949
Property and equipment 290
Finite-lived intangible assets 30,900
Deferred revenue (3,950 )
Deferred tax liability (12,350 )
Goodwill 34,305
Total purchase price $ 52,144

~~The estimated fair~~To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value of accounts receivable acquired approximates the contractual value of $1.0 million. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining operations and the assembled workforce of AcademicWorks, with $20.6 million and $13.7 million assigned to our ~~EMG and GMG reportable segments, respectively. None of the goodwill arising in the acquisition is deductible for income tax purposes.~~

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

Intangible assets acquired
Weighted average amortization period
AcademicWorks (in thousands)
(in years)
Acquired technology $ 22,500
9
Customer relationships 8,000
15
Marketing assets 320
2
Non-compete agreements 80
3
Total intangible assets $ 30,900
10

~~The estimated fair values of the finite-lived intangible assets were based on variations of the income approach, which estimates fair value based upon the present value of cash flows that the assets~~stockholders, we have taken several actions. These initial measures taken are expected to ~~generate,~~provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. Some of these actions include the following:

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


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


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

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

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

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


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


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


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

Recently adopted accounting pronouncements

In June 2016, the ~~relief-from-royalty method, incremental cash flow method,~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires certain types of financial instruments, including trade receivables, to be presented at the ~~comparative (with~~net amount expected to be collected based on historical events, current conditions and ~~without) method~~forward-looking information. We adopted ASU 2016-13 as of the January 1, 2020 effective date and ~~multi-period excess earnings method, depending~~the adoption did not have a material impact on our consolidated financial statements.

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



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		9

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~identifiable finite-lived intangible assets~~Recently issued accounting pronouncements

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

Summary of significant accounting policies

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

Allowance for credit losses

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

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



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


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

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

Allowance for sales returns

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

Below is a summary of the respective assets are consumed or otherwise used up. Customer relationships and acquired technology are being amortized on an accelerated basis. Marketing assets and non-compete agreements are being amortized on a straight-line basis.changes in our allowance for sales returns.

We determined that the impact of this 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.



(in thousands)	Balance at beginning of year ⁽¹⁾		Provision/ adjustment		Deduction			Balance at June 30, 2020
2020	$	1,518	$	2,969	$	(2,870	)	$	1,617


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



10		Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

4.3. Goodwill and Other Intangible Assets

The change in goodwill ~~for each reportable segment (as defined in Note 14 below)~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, consisted of the following:



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

(dollars in thousands) EMG GMG IMG Total
Balance at December 31, 2016 $ 241,334
$ 192,238
$ 4,668
$ 438,240
Additions related to current year business combination⁽¹⁾
20,583
13,722
—
34,305
Adjustments related to prior year business combination⁽²⁾
(29 ) (58 ) (1 ) (88 )
Effect of foreign currency translation —
—
319
319
Balance at September 30, 2017 $ 261,888
$ 205,902
$ 4,986
$ 472,776


~~(1)~~	~~See~~ ~~Note 3~~ ~~to these consolidated financial statements for details regarding our acquisition of AcademicWorks.~~


~~(2)~~	The change in goodwill was related to a post-closing working capital adjustment associated with the prior year acquisition of Good+Geek, Inc. ("Attentive.ly"), as well as an immaterial measurement period adjustment.

5.4. Earnings Per Share

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



10		~~Third Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

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



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

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

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands, except per share amounts) 2017
2016
2017
2016
Numerator:
Net income $ 12,548
$ 8,934
$ 35,224
$ 24,231
Denominator:
Weighted average common shares 46,711,709
46,159,956
46,627,213
46,078,306
Add effect of dilutive securities:
Stock-based awards 1,135,288
1,234,150
1,051,890
1,190,163
Weighted average common shares assuming dilution 47,846,997
47,394,106
47,679,103
47,268,469
Earnings per share:
Basic $ 0.27
$ 0.19
$ 0.76
$ 0.53
Diluted $ 0.26
$ 0.19
$ 0.74
$ 0.51

Anti-dilutive shares excluded from calculations of diluted earnings per share 1,719
1,723
4,938
3,766



Second Quarter 2020 Form 10-Q		11

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6.5. Fair Value Measurements

We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

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

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

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



~~Third Quarter 2017 Form 10-Q~~		11

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

Recurring fair value measurements

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


	Fair value measurement using								Fair value measurement using
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Fair value as of September 30, 2017
Financial assets:
Derivative instruments	$	—	$	223	$	—	$	223
Total financial assets	$	—	$	223	$	—	$	223

Fair value as of September 30, 2017
Fair value as of June 30, 2020
Financial liabilities:
Derivative instruments	$	—	$	369	$	—	$	369	$	—	$	5,233	$	—	$	5,233
Total financial liabilities	$	—	$	369	$	—	$	369	$	—	$	5,233	$	—	$	5,233

Fair value as of December 31, 2016
Financial assets:
Derivative instruments	$	—	$	206	$	—	$	206
Total financial assets	$	—	$	206	$	—	$	206

Fair value as of December 31, 2016
Fair value as of December 31, 2019
Financial liabilities:
Derivative instruments	$	—	$	163	$	—	$	163	$	—	$	1,757	$	—	$	1,757
Total financial liabilities	$	—	$	163	$	—	$	163	$	—	$	1,757	$	—	$	1,757

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

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

~~Our foreign currency forward and option~~ The Financial Conduct Authority in the U.K. has stated that it plans to phase out LIBOR by the end of calendar year 2021. We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts are valued using standard calculations/models that use as their basis readily observable market parameters including, foreign currency exchange rates, volatilities, and interest rates. Therefore, our foreign currency forward and option contracts are classified within Level 2 ofcurrently indexed to LIBOR will either expire or be modified before the ~~fair value hierarchy.~~phase out occurs.

We believe the carrying amounts of our cash and cash equivalents, restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, due to the immediate or short-term maturity of these instruments.

We believe the carrying amount of our debt approximates its fair value at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.

We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020. Additionally, we did not hold any Level 3 assets or liabilities during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020.



12		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Non-recurring fair value measurements

Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets, goodwill and ~~goodwill,~~operating lease right-of-use ("ROU") assets, which are recognized at fair value during the period in which an acquisition is completed or at lease commencement, from updated estimates and assumptions during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for long-lived assets, intangible assets acquired and operating lease ROU assets, are based on Level 3 unobservable inputs. In the event of an impairment, we determine the fair value of ~~the~~these assets other than goodwill ~~and intangible assets~~ using a discounted cash flow approach, which contains significant unobservable inputs and, therefore, is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate. For goodwill impairment testing, we estimate fair value using market-based methods including the use of market capitalization and consideration of a control premium.

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

There were no other non-recurring fair value adjustments to our long-lived assets, intangible assets, operating lease ROU assets and goodwill during the ~~nine~~six months ended ~~September~~June 30, 2017, except for an insignificant business combination accounting adjustment to the initial fair value estimates of the Attentive.ly assets acquired and liabilities assumed at the acquisition date from updated information obtained during the measurement period. See Note 4 to these consolidated financial statements for additional details. The measurement period of a business combination may be up to one year from the acquisition date. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.2020.

7.6. Consolidated Financial Statement Details

~~Accrued~~Prepaid expenses and other ~~liabilities~~assets



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


(1)	Amortization expense from costs of obtaining contracts was $9.4 million and $18.9 million for the three and six months endedJune 30, 2020, respectively, $9.8 million and $19.4 million for the three and six months endedJune 30, 2019, respectively.


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


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


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


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

(dollars in thousands) September 30,
2017
December 31,
2016
Accrued bonuses $ 14,581
$ 19,217
Accrued commissions and salaries 5,429
9,352
Lease incentive obligations 4,780
5,604
Customer credit balances 5,246
5,148
Deferred rent liabilities 4,400
4,110
Taxes payable 2,584
3,452
Unrecognized tax benefit 3,609
3,295
Accrued subscriptions 2,638
2,840
Accrued vacation costs 2,626
2,214
Accrued health care costs 2,479
1,495
Other liabilities 5,077
6,002
Total accrued expenses and other liabilities 53,449
62,729
Less: Long-term portion 7,799
8,533
Accrued expenses and other current liabilities $ 45,650
$ 54,196

~~Other income (expense), net~~

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2017
2016
2017
2016
Components of Other Income (Expense), Net
Interest income $ 393
$ 224
$ 771
$ 463
(Loss) gain on derivative instrument (3 ) —
472
—
Loss on debt extinguishment (137 ) —
(299 ) —
Other income (expense), net 215
(239 ) 637
(648 )
Other income (expense), net $ 468
$ (15 ) $ 1,581
$ (185 )



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		13

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Accrued expenses and other liabilities



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


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

Other income, net



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

8.7. Debt

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



	Debt balance at				Weighted average effective interest rate at
(dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Credit facility:
Revolving credit loans	$	207,600	$	187,000	2.41	%	3.11	%
Term loans	277,500		281,250		3.02	%	3.22	%
Other debt	3,926		—		5.00	%	—	%
Total debt	489,026		468,250		2.78	%	3.18	%
Less: Unamortized discount and debt issuance costs	913		1,150
Less: Debt, current portion	9,194		7,500		2.29	%	3.05	%
Debt, net of current portion	$	478,919	$	459,600	2.78	%	3.18	%

Debt balance at
Weighted average
effective interest rate at

(dollars in thousands) September 30,
2017
December 31,
2016
September 30,
2017
December 31,
2016
Credit facility:
    Revolving credit loans $ 39,900
$ 180,900
3.38 % 2.36 %
    Term loans 298,125
162,969
2.64 % 2.62 %
Other debt 2,151
—
4.50 % — %
        Total debt 340,176
343,869
2.74 % 2.48 %
Less: Unamortized discount and debt issuance costs 2,220
1,476

Less: Debt, current portion 8,576
4,375
2.74 % 2.50 %
Debt, net of current portion $ 329,380
$ 338,018
2.74 % 2.48 %

~~Financing for AcademicWorks acquisition~~

As discussed in Note 3 to these consolidated financial statements, on April 3, 2017 we acquired AcademicWorks for $52.1 million in cash, net of closing adjustments. We financed the acquisition through a draw down of a revolving credit loan under the 2014 Credit Facility (defined below).

~~2017 refinancing~~

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

In June 2017, we entered into a five-year $700.0 million senior credit facility (the “2017 Credit Facility”). The 2017 Credit Facility includes a $400.0 million revolving credit facility (the “2017 Revolving Facility”) and a $300.0 million term loan facility (the “2017 Term Loan”). Upon closing we drew $300.0 million on a term loan and $110.0 million in revolving credit loans, which was used to repay all amounts outstanding under the 2014 Credit Facility, fees and expenses incurred in connection with the 2017 Credit Facility, and for other general corporate purposes.

Certain lenders of the 2014 Term Loan participated in the 2017 Term Loan and the change in the present value of our future cash flows to these lenders under the 2014 Term Loan and under the 2017 Term Loan was less than 10%. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2014 Term Loan did not participate in the 2017 Term Loan. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment. Certain lenders of the 2014 Revolving Facility participated in the 2017 Revolving Facility and provided increased borrowing capacities. Accordingly, we accounted for the refinancing event for these lenders as a debt modification. Certain lenders of the 2014 Revolving Facility did not participate in the 2017 Revolving Facility. Accordingly, we accounted for the refinancing event for these lenders as a debt extinguishment.

We recorded an insignificant loss on debt extinguishment related to the write-off of debt discount and deferred financing costs for the portions of the 2014 Credit Facility considered to be extinguished. This loss was recognized in the consolidated statements of comprehensive income within other income (expense), net.

In connection with our entry into the 2017 Credit Facility, we paid $3.1 million in financing costs, of which $1.0 million was capitalized in other assets and, together with a portion of the unamortized deferred financing costs from the 2014 Credit Facility and prior facilities, are being amortized into interest expense ratably over the term of the new facility. As of September 30, 2017, deferred financing costs totaling $1.3 million were included in other assets on our consolidated balance sheets. As of December 31, 2016, deferred financing costs included in other assets on our consolidated balance sheets were insignificant. We recorded aggregate financing costs of $1.8 million as a direct deduction from the carrying



14		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~amount of our debt liability, which related to debt discount (fees paid to lenders) and debt issuance costs for the~~ 2017 ~~Term Loan.~~credit facility

~~Summary of the~~In June 2017, we entered into a five-year $700.0 million senior credit facility (the "2017 Credit ~~Facility~~

The 2017 Revolving Facility includes (i) a $50.0 million sublimit available for the issuance of standby letters of credit, (ii) a $50.0 million sublimit available for swingline loans, and (iii) a $100.0 million sublimit available for multicurrency borrowings.

~~The 2017 Credit Facility is secured by the stock and limited liability company interests of certain of our subsidiaries and any of our material domestic subsidiaries.~~

Amounts borrowed under the dollar tranche revolving credit loans and term loan under the 2017 Credit Facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate announced by Bank of America, N.A., (ii) the Federal Funds Rate plus 0.50% and (iii) the Eurocurrency Rate (which varies depending on the currency in which the loan is denominated) plus 1.00% (the “Base Rate”Facility")~~, in addition to a margin of 0.00% to 0.75%, or (b) Eurocurrency Rate plus a margin of 1.00% to 1.75%~~.

~~We also pay a quarterly commitment fee on the unused portion of the 2017 Revolving Facility from 0.15% to 0.25% per annum, depending on our net leverage ratio.~~ At ~~September~~June 30, ~~2017, the commitment fee was 0.20%.~~

The term loan under the 2017 Credit Facility requires periodic principal payments. The balance of the term loan and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022. We evaluate the classification of our debt as current or non-current based on the required annual maturities of the 2017 Credit Facility.

The 2017 Credit Facility includes financial covenants related to the net leverage ratio and interest coverage ratio, as well as restrictions on our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At September 30, 2017,2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

The 2017 Credit Facility also includes an option to request increases in the revolving commitments and/or request additional term loans in an aggregate principal amount of up to $200.0 million plus an amount, if any, such that the Net Leverage Ratio shall be no greater than 3.00 to 1.00.

Other debt

In ~~September 2017,~~December 2019, we entered into a ~~two-year~~51-month $2.2 million agreement to finance our purchase of software ~~licenses~~ and related ~~services.~~services for our internal use. The agreement is a ~~non-interest bearing~~non-interest-bearing note requiring four equal annual payments, ~~with~~where the first payment was due in ~~November 2017.~~January 2020. Interest associated with the note ishas been imputed at the rate we would incur for amounts borrowed under the 2017 Credit Facility.

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

As of ~~September~~June 30, ~~2017,~~2020, the required annual maturities related to the 2017 Credit Facility and other debt were as follows:

Years ending December 31,
(dollars in thousands)
Annual maturities
2017 - remaining $ 2,950
2018 8,576
2019 7,500
2020 7,500
2021 7,500
Thereafter 306,150
Total required maturities $ 340,176



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



~~Third Quarter 2017 Form 10-Q~~		15

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

9.8. Derivative Instruments

Cash flow hedges

We generally use derivative instruments to manage our variable interest rate risk. ~~In March 2014, we~~We have entered into an interest rate swap ~~agreement (the "March 2014 Swap Agreement"),~~agreements, which effectively ~~converts~~convert portions of our variable rate debt under ~~our credit facility~~the 2017 Credit Facility to a fixed rate for the term of the swap ~~agreement. The initial notional value~~agreements. We designated each of the March 2014 Swap Agreement was $125.0 million with an effective date beginning in March 2014. In March 2017, the notional value of the March 2014 Swap Agreement decreased to $75.0 million for the remaining term through February 2018. We designated the March 2014 Swap Agreementinterest rate swap agreements as a cash flow hedge at the inception of the ~~contract.~~contracts.

~~In October 2015, we entered into an additional interest rate swap agreement (the "October 2015 Swap Agreement"), which effectively converts portions~~The terms and notional values of our ~~variable rate debt under our credit facility to a fixed rate for the term~~derivative instruments were as follows as of the October 2015 Swap Agreement. The notional value of the October 2015 Swap Agreement was $75.0 million with an effective date beginning in October 2015 and maturing in February 2018. We designated the October 2015 Swap Agreement as a cash flow hedge at the inception of the contract.June 30, 2020:

In July 2017, we entered into an additional interest rate swap agreement (the "July 2017 Swap Agreement"), which effectively converts portions of our variable rate debt under our credit facility to a fixed rate for the term of the swap agreement. The notional value of the July 2017 Swap Agreement was $150.0 million with an effective date beginning in July 2017 through July 2021. We designated the July 2017 Swap Agreement as a cash flow hedge at the inception of the contract.



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

~~Undesignated contracts~~

In June 2017, we entered into a foreign currency option contract to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving because the purchase price was denominated in British Pounds. The notional value of the instrument was £100.0 million with an effective date beginning in June 2017 and maturing in September 2017. We settled the foreign currency option contract in September 2017. We did not designate the foreign currency option contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative are recognized currently in earnings. The insignificant premium paid for this option and the $1.0 million in proceeds from the settlement are shown within cash flows from investing activities in our consolidated statements of cash flows.

As the closing date of our acquisition of JustGiving extended beyond the settlement date of the foreign currency option contract, we entered into a foreign currency forward contract in September 2017 with settlement in October 2017. The notional value of the instrument was £103.5 million. We did not designate the foreign currency forward contract as a cash flow hedge for accounting purposes since it involved a business combination. As such, changes in the fair value of this derivative are recognized currently in earnings.



16Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~15

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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


		Asset Derivatives					Liability Derivatives					Liability Derivatives
(dollars in thousands)	Balance sheet location	September 30, 2017		December 31, 2016		Balance sheet location	September 30, 2017		December 31, 2016		Balance sheet location	June 30, 2020		December 31, 2019
Derivative instruments designated as hedging instruments:
Interest rate swaps, current portion	Prepaid expenses and other current assets	$	223	$	—	Accrued expenses and other current liabilities	$	—	$	—	Accrued expenses and other current liabilities	$	2,515	$	—
Interest rate swaps, long-term portion	Other assets	—		206		Other liabilities	328		163		Other liabilities	2,718		1,757
Total derivative instruments designated as hedging instruments		$	223	$	206		$	328	$	163		$	5,233	$	1,757

Derivative instruments not designated as hedging instruments:
Foreign currency forward contracts	Prepaid expenses and other current assets	$	—	$	—	Accrued expenses and other current liabilities	$	41	$	—
Total derivative instruments not designated as hedging instruments		$	—	$	—		$	41	$	—

Total derivative instruments		$	223	$	206		$	369	$	163

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


	Gain (loss) recognized in accumulated other comprehensive loss as of			Location of gain (loss) reclassified from accumulated other comprehensive loss into income	Gain (loss) reclassified from accumulated other comprehensive loss into income						Gain (loss) recognized in accumulated other comprehensive loss as of			Location of gain (loss) reclassified from accumulated other comprehensive loss into income	Gain (loss) reclassified from accumulated other comprehensive loss into income
(dollars in thousands)	September 30, 2017				Three months ended September 30, 2017			Nine months ended September 30, 2017			June 30, 2020				Three months ended June 30, 2020			Six months ended June 30, 2020
Interest rate swaps	$	(105	)	Interest expense	$	(88	)	$	(192	)	$	(5,233	)	Interest expense	$	(1,018	)	$	(1,223	)

	September 30, 2016				Three months ended September 30, 2016			Nine months ended September 30, 2016			June 30, 2019				Three months ended June 30, 2019			Six months ended June 30, 2019
Interest rate swaps	$	(654	)	Interest expense	$	(265	)	$	(875	)	$	(1,826	)	Interest expense	$	244		$	473

Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive ~~income~~loss as of ~~September~~June 30, ~~2017~~2020 that is expected to be reclassified into earnings within the next twelve months is ~~insignificant.~~$5.1 million. There were no ineffective portions of our interest rate swap derivatives during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016.~~2019. See Note ~~13 to these consolidated financial statements~~12 for a summary of the changes in accumulated other comprehensive income (loss) by component.

9. Commitments and Contingencies

Leases

We have operating leases for corporate offices, subleased offices and certain equipment and furniture. As of June 30, 2020, we had operating leases for equipment that had not yet commenced with future rent payments of $0.9 million. These operating leases are expected to commence during 2020 with lease terms of 5 years.



~~Third Quarter 2017 Form 10-Q~~16		17Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~We did not have any undesignated derivative instruments during 2016.~~ The ~~effects~~components of ~~undesignated derivative instruments during the three and nine months ended September 30, 2017~~lease expense were as follows:

Location of gain (loss)
recognized in income on derivative
Gain (loss) recognized in income
(dollars in thousands) Three months ended
September 30, 2017
Nine months ended
September 30, 2017
Foreign currency option contracts Other income (expense), net $ 38
$ 513
Foreign currency forward contracts Other income (expense), net $ (41 ) $ (41 )
Total (loss) gain⁽¹⁾
$ (3 ) $ 472



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


(1)	~~The individual amounts for each year may not sum to total gain (loss) due to rounding.~~Includes short-term lease costs, which were immaterial.


(2)
~~10. Commitments and Contingencies~~See Note 15 for a discussion of the pending purchase of our Headquarters Facility that we currently lease.

~~Leases~~

Total rent expense was $3.8 million and $3.1 million for the three months ended September 30, 2017 and 2016, respectively, and $11.9 million and $8.6 million for the nine months ended September 30, 2017 and 2016, respectively. The quarterly South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina, ended in the fourth quarter of 2016. These amounts were recorded as a reduction of rent expense upon receipt and were insignificant during the three months ended September 30, 2016 and $2.2 million during the nine months ended September 30, 2016.

Other commitments

The term loans under the 2017 Credit Facility require periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022.

We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of ~~September~~June 30, ~~2017,~~2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately ~~$51.9~~$90.5 million through ~~2021.~~2024.

Solution and service indemnifications

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

Security incident

We are subject to risks and uncertainties as a result of a ransomware attack against us in May 2020 in which a cybercriminal removed a copy of a subset of data from our self-hosted environment (the "Incident"). Based on the nature of the Incident, our research and third party (including law enforcement) investigation, we have no reason to believe that any data went beyond the cybercriminal, was or will be misused, or will be disseminated or otherwise made available publicly. Our investigation into the Incident by our cybersecurity team and third-party forensic advisors remains ongoing. We incurred insignificant costs associated with the Incident during the three months ended June 30, 2020. It is expected that we will continue to experience increased costs related to our response to the Incident and our efforts to further enhance our security measures. Because we are unable at this time to reasonably estimate the possible loss or range of loss, we have not recorded a liability related to the Incident as of June 30, 2020.

Legal proceedings

We are subject to legal proceedings and claims that arise in the ordinary course of business. We make a provision for a loss contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined as of ~~September~~June 30, ~~2017,~~2020, that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, results of operations or cash flows could be negatively affected in any particular period by an unfavorable resolution of one or more of such proceedings, claims or investigations.



18Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~17

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

~~11.~~10. Income Taxes

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



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

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2017
2016
2017
2016
Income tax provision $ 2,793
$ 1,950
$ 2,964
$ 5,323
Effective income tax rate 18.2 % 17.9 % 7.8 % 18.0 %

~~Our effective income tax rate during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016.~~ The ~~decrease~~increase in our effective income tax rate during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same period in ~~2016,~~2019, was primarily ~~due~~attributable to improved 2020 profitability and changes in jurisdictional mix and reduced 2020 non-deductible costs. Furthermore, our 2020 effective tax rate was negatively impacted by a ~~$9.0 million~~decrease in the total discrete ~~tax~~ benefit to income tax expense ~~relating~~related to stock-based compensation items, as compared to a $4.3 million discrete tax benefit for the same period in 2016. The increase in the discrete tax benefit for the nine months ended September 30, 2017, as compared to the same period in 2016, was attributable to an increase in the market price for shares of our common stock, as reported by the NASDAQ Stock Market LLC ("NASDAQ"), as well as an increase in the number of stock awards that vested and were exercised. Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.compensation.

~~12.~~11. Stock-based Compensation

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



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

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

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2017
2016
2017
2016
Included in cost of revenue:
Cost of subscriptions $ 331
$ 318
$ 963
$ 904
Cost of maintenance 103
137
294
391
Cost of services and other 500
461
1,418
1,308
Total included in cost of revenue 934
916
2,675
2,603
Included in operating expenses:
Sales, marketing and customer success 1,686
1,055
4,906
2,972
Research and development 2,093
1,674
5,877
4,874
General and administrative 6,213
5,173
17,597
14,556
Total included in operating expenses 9,992
7,902
28,380
22,402
Total stock-based compensation expense $ 10,926
$ 8,818
$ 31,055
$ 25,005

12. Stockholders' Equity

Dividends

In March 2020, in response to the global COVID-19 pandemic, our Board of Directors rescinded its previously announced policy to pay an annual dividend at a rate of $0.48 per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as it may otherwise determine in its sole discretion.



~~Third Quarter 2017 Form 10-Q~~18		19Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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



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

Changes in accumulated other comprehensive income (loss) by component

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



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

13. ~~Stockholders' Equity~~Revenue Recognition

~~Dividends~~Transaction price allocated to the remaining performance obligations

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

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



Second Quarter 2020 Form 10-Q		19

Table of Contents

Blackbaud, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Contract balances

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

The increase in deferred revenue during the six months ended June 30, 2020 was primarily due a ~~dividend policy, which provides for~~seasonal increase in customer contract renewals and new subscription sales of our cloud solutions. Historically, due to the ~~distribution to stockholders~~timing of ~~a portion~~customer budget cycles, we have an increase in customer contract renewals at or near the beginning of ~~cash generated by us that is in excess of operational needs and capital expenditures.~~our third quarter. The ~~2017 Credit Facility limits the~~ amount of ~~dividends payable and certain state laws restrict~~revenue recognized during the six months ended June 30, 2020 that was included in the deferred revenue balance at the beginning of the period was approximately $219 million. The amount of ~~dividends distributed.~~revenue recognized during the six months ended June 30, 2020 from performance obligations satisfied in prior periods was insignificant.

~~In February 2017,~~Disaggregation of revenue

We sell our ~~Board of Directors approved an annual dividend rate of $0.48 per share~~cloud solutions and related services in three primary geographical markets: to ~~be made~~customers in ~~quarterly payments. Dividend payments are not guaranteed~~the United States, to customers in the United Kingdom and ~~our Board of Directors may decide,~~to customers located in ~~its absolute discretion, at any time and for any reason, not to declare and pay further dividends.~~other countries. The following table ~~provides information with respect~~presents our revenue by geographic area based on the address of our customers:



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

The General Markets Group ("GMG"), the Enterprise Markets Group ("EMG"), and the International Markets Group ("IMG") comprise our go-to-market organizations. The following is a description of each market group:

The GMG focuses on sales primarily to ~~quarterly dividends of $0.12 per share paid~~all K-12 private schools, faith-based and arts and cultural organizations, as well as emerging and mid-sized prospects in the U.S.;

The EMG focuses on ~~common stock during~~sales primarily to all healthcare and higher education institutions, corporations and foundations, as well as large and/or strategic prospects in the ~~nine months ended September 30, 2017.~~

U.S.; and

Declaration Date
Dividend
per Share

Record Date Payable Date
February 8, 2017 $ 0.12
February 28 March 15
May 1, 2017 $ 0.12
May 26 June 15
July 31, 2017 $ 0.12
August 28 September 15

~~On October 25, 2017, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable~~The IMG focuses on ~~December 15, 2017~~sales primarily to ~~stockholders of record on November 28, 2017.~~

~~Changes in accumulated other comprehensive loss by component~~

~~The changes in accumulated other comprehensive loss by component, consisted~~all prospects and customers outside of the ~~following:~~

U.S.

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2017
2016
2017
2016
Accumulated other comprehensive loss, beginning of period $ (558 ) $ (1,640 ) $ (457 ) $ (825 )
By component:
Gains and losses on cash flow hedges:
Accumulated other comprehensive income (loss) balance, beginning of period $ 203
$ (806 ) $ 25
$ (19 )
Other comprehensive (loss) income before reclassifications, net of tax effects of $209, $(161), $135 and $589 (320 ) 248
(205 ) (909 )
Amounts reclassified from accumulated other comprehensive loss to interest expense 88
265
192
875
Tax benefit included in provision for income taxes (35 ) (104 ) (76 ) (344 )
Total amounts reclassified from accumulated other comprehensive loss 53
161
116
531
Net current-period other comprehensive (loss) income (267 ) 409
(89 ) (378 )
Accumulated other comprehensive loss balance, end of period $ (64 ) $ (397 ) $ (64 ) $ (397 )
Foreign currency translation adjustment:
Accumulated other comprehensive loss balance, beginning of period $ (761 ) $ (834 ) $ (482 ) $ (806 )
Translation adjustments (188 ) 289
(467 ) 261
Accumulated other comprehensive loss balance, end of period (949 ) (545 ) (949 ) (545 )
Accumulated other comprehensive loss, end of period $ (1,013 ) $ (942 ) $ (1,013 ) $ (942 )
The following table presents our revenue by market group:



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



20		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to ~~consolidated financial statements (continued)~~Condensed Consolidated Financial Statements (Continued)

(Unaudited)

14. ~~Segment Information~~Restructuring

During ~~the first quarter of~~ 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we ~~changed the names~~initiated a multi-year plan to consolidate and relocate some of our ~~reportable segments. However, there was no change~~existing offices to highly modern and more collaborative workspaces with short-term financial commitments. We substantially completed our facilities optimization restructuring plan as of December 2019. During the three and six months ended June 30, 2019, we incurred $0.7 million and $2.7 million, respectively, in the determination of our reportable segments or our reporting units at that time. As of September 30, 2017, our reportable segments were the General Markets Group ("GMG"), the Emerging Markets Group ("EMG"), and the International Markets Group ("IMG"). The following is a description of each reportable segment:

~~The GMG is generally focused on sales to all emerging and mid-sized prospects and customers in North America;~~

~~The EMG is generally focused on sales to all large and/or strategic prospects and customers in North America; and~~

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

Our chief operating decision maker is our chief executive officer ("CEO"). Currently, our CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, as adjusted, which excludes stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Segment operating income, as adjusted, includes direct, controllable costsbefore-tax restructuring charges related to these activities. Such charges during the ~~sale of our solutions~~three and ~~services, and our customer success program.~~six months ended June 30, 2020 were insignificant.

~~The CEO does not review any segment balance sheet information. Summarized reportable segment financial results, were as follows:~~

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2017
2016
2017
2016
Revenue by segment:
GMG $ 102,838
$ 97,621
$ 296,954
$ 279,543
EMG 81,836
74,351
243,713
220,887
IMG 10,846
11,030
30,632
31,926
Other⁽¹⁾
(7 ) 61
30
154
Total revenue $ 195,513
$ 183,063
$ 571,329
$ 532,510
Segment operating income, as adjusted⁽²⁾:

GMG $ 49,971
$ 46,540
$ 143,658
$ 134,408
EMG 44,375
38,696
130,887
113,186
IMG 2,888
1,064
7,084
3,126
Other⁽¹⁾
(58 ) (157 ) (113 ) (109 )
97,176
86,143
281,516
250,611
Less:
Corporate unallocated costs⁽³⁾
(57,575 ) (53,236 ) (173,102 ) (156,013 )
Stock-based compensation costs (10,926 ) (8,818 ) (31,055 ) (25,005 )
Amortization expense (10,710 ) (10,549 ) (32,067 ) (31,817 )
Interest expense (3,092 ) (2,641 ) (8,685 ) (8,037 )
Other income (expense), net 468
(15 ) 1,581
(185 )
Income before provision for income taxes $ 15,341
$ 10,884
$ 38,188
$ 29,554


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


~~(2)~~	~~Segment operating income, as adjusted, includes direct, controllable costs related to the sale of our solutions~~15. Property and ~~service, and our customer success program.~~Equipment


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

Pending Headquarters Facility Purchase

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



~~Third~~Second Quarter ~~2017~~2020 Form 10-Q		21

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

In light of the ongoing and anticipated increasing centralization of our operations, including without limitation marketing, customer support, customer success and professional services, we are evaluating whether changes may need to be made to our internal reporting structure to better support and assess the operations of our business going forward. If changes are made, we will assess the resulting effect on our reportable segments, operating segments and reporting units, if any.

~~15. Subsequent Events~~

~~JustGiving acquisition~~

On October 2, 2017, Blackbaud Global Limited (“Blackbaud Global”), a United Kingdom limited liability company and wholly-owned subsidiary of ours, acquired the entire issued share capital, including all voting equity interests, of Giving Limited, a United Kingdom private limited company doing business as “JustGiving” for an aggregate purchase price of £95.0 million, or approximately $127.4 million, in cash, subject to certain adjustments set forth in the stock purchase agreement. JustGiving is a market leading social platform for giving, and the acquisition is expected to enhance our capabilities to serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we offer today. As a result of the acquisition, JustGiving has become a wholly-owned subsidiary of ours. We will include the operating results of JustGiving as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. During the three and nine months ended September 30, 2017, we incurred acquisition-related expenses associated with the acquisition of JustGiving of $0.7 million and $2.2 million, respectively, which are recorded in general and administrative expense. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2017 acquisition date.

On October 2, 2017, we borrowed $138.7 million pursuant to a revolving credit loan under the 2017 Credit Facility to finance the acquisition of JustGiving. Following the borrowing, approximately $178.6 million was outstanding under the revolving credit loans with approximately $169.8 million of available borrowing capacity under the 2017 Credit Facility.



22		~~Third Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

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

Executive Summary

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

COVID-19 Impact

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

~~During~~To better enable us to weather the ~~third quarter~~extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of ~~2017,~~our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we ~~continued~~have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. See Note 2 to our condensed consolidated financial statements in this report for a discussion of some of these actions. In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed.

The economic impact of COVID-19 on the social good industry remains uncertain and, consequently, we expect that our operating environment may continue to be challenging for the remainder of 2020, and potentially beyond, as existing and prospective customers remain cautious in their purchase decisions. Notwithstanding these conditions, we remain focused on continuing to execute on our four-point growth strategy ~~targeted to drive an extended period of quality enhancement, solution~~ and ~~service innovation and increasing operating efficiency and financial performance:~~


1.	~~Deliver Integrated and Open Solutions in the Cloud~~

~~We continue to transition~~strengthening our business to predominantly serve customers through a subscription-based cloud delivery model, enabling lower cost of entry, greater scalability and lower total cost of ownership to our customers. We continue to optimize our portfolio of solutions and integrate powerful capabilities — such as built in data, analytics, artificial intelligence, payment processing and tailored user-specific experiences — to bring even greater value and performance to our customers.leadership position.

The Blackbaud SKY™ cloud platform is allowing us to innovate at a more rapid pace, including delivering enhanced integrated analytics capabilities that surface directly in our customers’ software through SKY AI and SKY Analytics—components of our broader Intelligence for Good approach that combines AI, analytics, one of the industry’s most robust data sets and expertise to drive powerful insights for our customers. These embedded, cloud-delivered insights provide high impact, workflow-integrated intelligence that drives fundraising, advocacy, event participation and other purpose driven constituent interactions.

~~At our annual user conference,~~ ~~bbcon,~~ we announced a joint-partnership with Microsoft to couple together Microsoft's horizontal solutions with our industry-leading vertical solutions. We now intend to fully power Blackbaud SKY in the Microsoft Azure environment, and we will become a Cloud Solution Provider Partner for the Microsoft platform.



~~Third Quarter 2017 Form 10-Q~~22		23Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Four-Point Growth Strategy



	1		Delight Customers with Innovative Cloud Solutions

	2		Drive Sales Effectiveness

	3		Expand Total Addressable Market

	4		Improve Operating Efficiency


1.	Delight Customers with Innovative Cloud Solutions

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


2.	Drive Sales Effectiveness

~~We continue~~The investments we have made to ~~invest in a world-class sales organization to accelerate revenue growth and penetrate~~enhance our ~~large and expanding total addressable market ("TAM"), which is currently estimated~~digital footprint are enabling us to be more prescriptive and cost-effective in our marketing efforts and to quickly adapt to changing market conditions, and over ~~$7.0 billion. During~~ the ~~first three quarters~~longer term we believe the impact of ~~2017,~~COVID-19 will accelerate the existing trends driving adoption of modern cloud solutions in our market. We also introduced new pricing and financing offers based on the changing needs of our customers. Despite our optimism over the long-term, the uncertainty of the current environment has created near-term challenges in our ability to build new pipeline and bookings are falling short of budgeted expectations, which we ~~created~~expect to put pressure on near-term revenues. As a ~~new Senior Vice President of Global Sales position to lead this effort across the organization and~~result, we have ~~focused~~begun shifting investment towards digital marketing aimed at lead generation and put a greater emphasis on ~~enabling our expanding sales teams~~selling solutions with ~~training, processes,~~the highest lifetime value. In response to the COVID-19 pandemic, we implemented a modest and ~~tools to improve effectiveness and drive revenue growth. The further development of our customer success program is allowing~~targeted headcount reduction during the second quarter, including a reduction in our sales ~~teams to~~headcount with a focus on ~~closing~~retaining our most highly productive sales ~~rather than account management. The move~~executives. After temporarily freezing our hiring efforts due to ~~selling pre-integrated solution suites instead of individual point-solutions continues to be successful, and~~COVID-19, we have ~~furthered our go-to-market shift~~since began backfilling sales positions with a ~~concentrated sales~~ focus ~~by sub-vertical, including K-12 private schools, foundations, corporations, arts & cultural, higher education and healthcare.~~on 2021 bookings.


3.	Expand TAM ~~into Near Adjacencies through Acquisitions and Product Investments~~

We continue to evaluate compelling opportunities to acquire companies, technologies and/or services. We are guided by our acquisition criteria for considering attractive assets that expand our TAM, provide entry into new and near adjacencies, accelerate our shift to the cloud, accelerate revenue growth, are accretive to margins and present synergistic opportunities.

~~During the third quarter,~~While we launched Blackbaud Labs as a means to incubate new ideas and foster our strong culture of innovation and creativity within Blackbaud, with the sole focus of bringing new capabilities to market organically. We previously announced the promotion of our new Senior Vice President of Corporate Strategy and Business Development, who led the effort for many of our acquisitions, including AcademicWorks in April 2017 and, most recently, JustGiving.

AcademicWorks is the market leader in scholarship management for higher education and K-12 institutions, foundations, and grant-making institutions. Their cloud platform enables students to apply for all awards at an institution using one intuitive and streamlined process, while offering schools and awarding institutions a common platform for improved awarding, reporting, compliance, communication and stewardship of those awards. Additional details regarding our acquisition of AcademicWorks are provided in Note 3 to our consolidated financial statements in this report. During the third quarter, we focused on integrating AcademicWorks' solutions and operations as well as cross-selling.

In October 2017, we closed our acquisition of the United Kingdom-based online fundraising services provider JustGiving, whose online social giving platform has played a powerful role in the growth of peer-to-peer fundraising. The acquisition enhances our capability to serve both individual donors and nonprofits, expanding the peer-to-peer fundraising capabilities we currently offer today through TeamRaiser and everydayhero, which are used by leading nonprofit organizations to connect their causes to the individuals who support them. JustGiving also adds personal crowdfunding to our portfolio, which is an offering we did not previously provide and a fast growing segment of charitable giving. Additional details regarding our acquisition of JustGiving are provided below and in Note 15 to our consolidated financial statements in this report.

~~Both AcademicWorks and JustGiving meet the acquisition criteria discussed above. We~~ remain active in the evaluation of ~~acquisition~~ opportunities to ~~broaden~~further expand our ~~portfolio, provide better integrated solutions for~~addressable market through acquisitions and internal product development, our top priority in the near-term is protecting our employees and continuing to support our customers ~~differentiate ourselves from the competition and improve our financial performance.~~at a very high standard. We have significant opportunities in front of us as we are less than 10% penetrated into a total addressable market of over $10 billion.


4.	Improve Operating Efficiency

We ~~are also focused on operational efficiency~~have made transformational changes to ~~deliver improved profitability. Our organizational model has evolved in recent~~our business over the last several years, ~~allowing~~which allowed us to ~~gain efficiency~~immediately switch to a virtual work environment in March and ~~consistency in how we execute.~~supported our global employees' ability to work effectively from home. We are re-evaluating elements of our workforce strategy based on the lessons learned over the past few months. We have centralized our operations, including marketing, product management, finance, customer support, customer success and professional services. In 2014, we set a long-term aspirational goal to improve operating margins annually, and increase our non-GAAP operating margins by at least 300 basis points on a constant currency basisbeen soliciting feedback from our ~~2014 baseline~~employees to help shape our approach to the future of ~~17.5%,~~work at Blackbaud.



Second Quarter 2020 Form 10-Q		23

Table of Contents

Blackbaud, Inc.

(Unaudited)

Financial Summary



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

Total revenue increased by $6.4 million and $14.1 million during the three and six months ended June 30, 2020, respectively, when compared to the same periods in 2019, driven largely by the ~~end of 2017. Since setting that goal, we have improved margins annually, inclusive of heightened investments to drive future growth~~following:



	+		Growth in recurring revenue related to increases in transactional revenue, positive demand from customers across our portfolio of cloud solutions and increases in services embedded in our renewable cloud solution contracts
	-		Decreases in one-time consulting revenue primarily from less of one-time sales related to COVID-19
	-		Decreases in one-time analytics revenue as analytics are generally integrated in our cloud solutions

Income from operations increased by $6.1 million and in$12.3 million during the ~~midst of migrating our customer base~~three and six months ended June 30, 2020, respectively, when compared to the ~~cloud. We expect to deliver on our goal, and we see future opportunity ahead to further improve profitability through~~same periods in 2019, driven largely by the ~~infrastructure investments we have made in our back office for scale, focus on operational excellence, and achieving our productivity initiatives.~~following:

We have included the results of operations of AcademicWorks in our consolidated results of operations from the date of acquisition. We determined that the AcademicWorks acquisition was not a material business combination; therefore, revenue and earnings since the acquisition date are not required or presented.



	+		Growth in total revenue, as described above
	+		Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
	+		Decrease in restructuring costs of $0.7 million and $2.6 million, as our facilities optimization plan was largely completed as of December 31, 2019
	+		Decrease in acquisition-related expenses and integration costs of $0.8 million and $1.9 million
	+		Decrease in amortization of intangible assets from business combinations of $2.1 million and $3.2 million
	-		Increases in cost of revenue from a $4.3 million impairment charge during the three months ended June 30, 2020, against certain previously capitalized software development costs, resulting from our decision to accelerate the end of customer support for certain solutions
	-		Increases in employee severance of $4.1 million and $0.7 million, related to a modest and targeted headcount reduction during the three months ended June 30, 2020, in response to the COVID-19 pandemic
	-		Increases in corporate costs of $3.1 million and $3.4 million, primarily related to increases in bad debt expense
	-		Other increases in cost of revenue related to increases in data center costs, amortization of software development costs and transaction-based costs



24		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Total revenue
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Total revenue $ 195.5
$ 183.1
6.8 % $ 571.3
$ 532.5
7.3 %

~~The increases in total~~There are three primary revenue ~~during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily driven by growth in subscriptions revenue as our~~categories with related business model continues to shift towards providing predominantly cloud-based subscription solutions. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for whichdrivers that we process payments. Services and other revenue as well as maintenance revenue declined during the three and nine months ended September 30, 2017 from our continued shift in focus towards selling cloud-based subscription solutions. In general, our NXT and other cloud-based solutions require less implementation services, which we expect to continue to negatively impact services and other revenue over time. In addition, we have also used promotions and discounts for our consulting services as incentives to accelerate the migration of our existing customer base from on-premises solutions toward our cloud-based subscriptions. In the near-term, the transition to subscription-based solutions also negatively impacts total revenue growth, as time-based revenue from subscription arrangements is deferred and recognized ratably over the subscription period, typically three years at contract inception, whereas on-premises license revenue from arrangements that include perpetual licenses is recognized up-front.

Income from operations
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Income from operations $ 18.0
$ 13.5
32.7 % $ 45.3
$ 37.8
19.9 %

~~Income from operations increased during the three and nine months ended September 30, 2017, when compared to the same periods~~monitor closely in 2016. The positive impact of growth in total revenue driven by subscriptions as discussed above was partially offset primarily by investments we are making in our sales organization and customer success program and, to a lesser extent, increases in stock based compensation expense of $2.1 million and $6.1 million, respectively, rent expense of $0.7 million and $3.3 million, respectively, and net increases in acquisition-related expenses and integration costs of $0.8 million and $2.8 million, respectively. An increase of $2.5 million in employee severance costs during the nine months ended September 30, 2017 also negatively impacted income from operations. The increase in rent expense was primarily driven by the end in the fourth quarter of 2016light of the South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts were recorded as a reduction of rent expense upon receipt. Also contributing to the increase in rent expense were new operating leases for equipment that we have historically purchased.COVID-19 pandemic:


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

~~Customer retention~~

~~Subscription~~Recurring subscription contracts are typically for a term of three years at contract inception, billed annually in advance, and we have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. Approximately one-half of our contracted recurring revenue will be up for renewal during 2020, with the seasonal high for renewals and collections during the third quarter driven largely by mid-year fiscal year-ends and timing of the academic school year. While our renewal rates have trended ahead of our expectations through July, our contracted recurring revenue has fallen short of our original plan due to bookings falling short of our budgeted expectations. We are closely monitoring our customer receivable balances, payment terms, and creditworthiness. We have started to experience an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic.


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

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. 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. The early disruptions caused by COVID-19 in the first quarter drove sharp initial declines in our transactional volumes. During the second quarter, many in-person events shifted online, had to be postponed or even canceled. Social good organizations are being forced to employ new strategies to maintain momentum with current supporters while capturing the attention of potential new donors. We saw a rise in virtual campaigns and events and we remain committed to supporting our customers in adapting to the new circumstances.


3.	Bookings

Given our ratable revenue recognition model for our recurring subscription contracts and implementation periods, we expect that declines in our 2020 bookings performance will have a greater impact on our 2021 revenue than 2020 revenue. Of the three primary revenue categories discussed above, bookings represents the smallest potential impact on recurring revenue in 2020. One-time services and other revenue, which is tied to bookings, would have a more immediate impact on our total revenue. 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. Although our bookings have performed slightly better than our initial COVID-19 scenario planning, we are currently expecting a significant shortfall in 2020 bookings compared to our original plan for the year as we continue to see challenges in building pipeline. The magnitude of our 2020 bookings shortfall is expected to be impacted by the depth and duration of the COVID-19 pandemic.

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



Second Quarter 2020 Form 10-Q		25

Table of Contents

Blackbaud, Inc.

(Unaudited)



Customer retention

Our recurring revenue contracts are generally for a term of three years at contract inception with one to ~~three year~~three-year renewals thereafter. ~~Over time, we~~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-based~~cloud subscription delivery model. WeIn 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 ~~subscription~~cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines recurring subscription, maintenance and ~~maintenance~~service customer contracts provides ~~an accurate~~a better representation of our customers' overall behavior. For the ~~year~~twelve months ended ~~September~~June 30, ~~2017,~~2020, approximately ~~93%~~92% of our customers with recurring ~~subscription or maintenance~~revenue contracts were retained. This customer retention rate is ~~relatively~~ unchanged from our rate for the full year ~~2016.~~



~~Third Quarter 2017 Form 10-Q~~		25

~~Table of Contents~~

~~Blackbaud, Inc.~~

ended December 31, 2019.

Balance sheet and cash flow

At ~~September~~June 30, ~~2017,~~2020, our cash and cash equivalents were ~~$17.1~~$30.5 million and ~~outstanding borrowings~~the carrying amount of our debt under the 2017 Credit Facility ~~were $340.2~~was $484.2 million. Our net leverage ratio was 2.21 to 1.00.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we generated ~~$123.4~~$37.5 million in cash from operations, primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation. During the six months ended, June 30, 2020, we had a net increase in our borrowings of $16.9 million, down from a net increase of $58.6 million during the three months ended March 31, 2020. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations ~~reduced~~has been lowest in our ~~net borrowings by $5.8 million, inclusive of~~first quarter.

During the ~~incremental borrowings needed to finance the acquisition of AcademicWorks, returned $17.3 million to stockholders by way of dividends and~~six months ended June 30, 2020, we also had aggregate cash outlays of ~~$29.0~~$27.6 million for purchases of property and equipment and capitalized software development costs.

Recent ~~development - JustGiving acquisition~~Developments

~~On October 2, 2017,~~Pending headquarters facility purchase

In June 2020, we ~~acquired~~entered into a binding purchase and sale agreement with HPBB1, LLC, a Georgia limited liability company (the "Seller"), for the ~~entire issued share capital~~purchase and sale of ~~JustGiving for an aggregate~~the building, fixtures and other improvements and parcels of land of our headquarters facility (the "Headquarters Facility") in Charleston, South Carolina (the "Transaction"). We currently lease the Headquarters facility from the Seller. At the closing of the Transaction, we would pay the Seller a purchase price of ~~£95.0~~$76.3 million, ~~or approximately $127.4 million, in cash, subject to certain adjustments set forth~~which includes the assumption of the Seller's obligations in the ~~stock purchase agreement. We financed the acquisition through~~aggregate principal amount of $63.0 million and cash, which we expect to fund by borrowings under the 2017 Credit Facility. As a result of the acquisition, JustGiving has become a wholly-owned subsidiary of ours. We will include the operating results of JustGiving as well as the net assets acquired and liabilities assumed in our consolidated financial statements from the date of acquisition. DueThe Transaction is expected to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, is not complete and is pending detailed analyses of the facts and circumstances that existed as of the October 2, 2017 acquisition date.

~~Results of Operations~~

~~Comparison of the three and nine months ended September 30, 2017 and 2016~~

Revenue by segment
Three months ended
September 30,
Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
GMG $ 102.8
$ 97.6
5.3 % $ 297.0
$ 279.5
6.2 %
EMG 81.8
74.4
10.1 % 243.7
220.9
10.3 %
IMG 10.8
11.0
(1.7 )% 30.6
31.9
(4.1 )%
Total revenue⁽¹⁾
$ 195.5
$ 183.1
6.8 % $ 571.3
$ 532.5
7.3 %


~~(1)~~	~~The individual amounts for each year may not sum to total revenue due to rounding.~~

GMG
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
GMG revenue $ 102.8
$ 97.6
5.3 % $ 297.0
$ 279.5
6.2 %
% of total revenue 52.6 % 53.3 % 52.0 % 52.5 %

~~The increases in GMG revenue~~close during the three and nine months ended September 30, 2017 when compared to the same periods in 2016 were attributable to growth in subscriptions revenue, partially offset by declines in maintenance revenue and, to a lesser extent, services and other revenue. The growth in GMG subscriptions revenue was primarily due to increases in demand across our portfoliosecond half of cloud-based solutions. To a much lesser extent, GMG subscriptions revenue growth was also driven by increases in the number of customers and the volume of transactions for which we process payments. We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.2020.



26		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

EMG
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
EMG revenue $ 81.8
$ 74.4
10.1 % $ 243.7
$ 220.9
10.3 %
% of total revenue 41.9 % 40.6 % 42.7 % 41.5 %

Results of Operations

~~The increases in EMG revenue during~~Comparison of the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, when compared to the same periods in 2016, were primarily attributable to growth in subscriptions revenue, partially offset by decreases in services~~2020 and other revenue and, to a lesser extent, maintenance revenue. The growth in EMG subscriptions was driven primarily by increases in demand for our cloud-based solutions, as well as an increase in the number of customers and the volume of transactions for which we process payments. We are increasingly selling our Blackbaud CRM solution as a subscription offering, which has resulted in less license fees revenue during the three and nine months ended, September 30, 2017, when compared to the same periods in 2016. We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.2019

IMG
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
IMG revenue $ 10.8
$ 11.0
(1.7 )% $ 30.6
$ 31.9
(4.1 )%
% of total revenue 5.5 % 6.0 % 5.4 % 6.0 %

~~The decreases in IMG revenue during the three~~Revenue and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily related to reductions in services and other revenue and maintenance revenue, partially offset by increases in subscriptions revenue. The increases in IMG subscriptions revenue during the three and nine months ended September 30, 2017 were primarily due to increased demand for our cloud-based solutions and, to a much lesser extent, increases in the volumeCost of transactions for which we process payments. The fluctuation in foreign currency exchange rates had an insignificant impact on IMG revenue during the three months ended September 30, 2017 and negatively impacted IMG revenue during the nine months ended September 30, 2017 by approximately $0.8 million. Further explanation of this impact is included below under the caption "Foreign Currency Exchange Rates". We expect that the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services will continue to negatively impact both services and other revenue and maintenance revenue over time.

Revenue



~~Third Quarter 2017 Form 10-Q~~		27

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Operating results~~

Subscriptions
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Subscriptions revenue $ 127.5
$ 105.4
20.9 % $ 370.9
$ 306.3
21.1 %
Cost of subscriptions 58.0
51.9
11.7 % 170.3
153.8
10.8 %
Subscriptions gross profit⁽¹⁾
$ 69.4
$ 53.5
29.8 % $ 200.6
$ 152.6
31.5 %
Subscriptions gross margin 54.5 % 50.7 % 54.1 % 49.8 %


~~(1)~~Recurring	~~The individual amounts for each year may not sum to subscriptions~~
Revenue ($M)		Cost of revenue ($M)	Gross profit ($M) and gross ~~profit due to rounding.~~margin (%)
YoY Growth (%)		YoY Growth (%)

~~Subscriptions~~

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

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

Cost of ~~subscriptions~~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, hosting~~ 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.

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



Second Quarter 2020 Form 10-Q		27

Table of Contents

Blackbaud, Inc.

(Unaudited)

Recurring revenue increased by $7.8 million or 3.7%, and $14.6 million or 3.6%, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, when compared to the same periods in ~~2016, were~~2019, driven primarily ~~due to strong demand across our cloud-based solution portfolio, and, to a much lesser extent,~~by the following:



	+		Increases in subscriptions revenue of $11.8 million and $22.4 million related to increases in transactional revenue, positive demand from customers across our portfolio of cloud solutions and increases in services embedded in our renewable cloud solution contracts
	-		Decreases in maintenance revenue of $4.0 million and $7.9 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

Partially offsetting the increases in subscriptions revenue were decreases in the ~~number~~mix of ~~customers~~retained and ~~the volume~~managed services contracts we present in recurring. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020. This change in presentation resulted in decreases in recurring revenue and offsetting increases to one-time services and other revenue of ~~transactions for which we process payments.~~

~~The increases in cost of subscriptions~~$4.2 million and $8.5 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively.

Cost of recurring revenue increased by $4.7 million or 5.4%, and $9.6 million or 5.6%, during the three and six months ended June 30, 2020, respectively, when compared to the same periods in ~~2016, were~~2019, driven primarily ~~due to increases in transaction-based costs related to our payments services of $4.7 million and $12.4 million, respectively and increases in~~by the cost of third-party technology embedded in certain of our subscription solutions of $1.5 million and $4.8 million. Partially offsetting the increase in cost of subscriptions during the nine months ended September 30, 2017 was a decrease in third-party contractor expenses of $1.5 million.following:



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

The ~~increases~~0.7% and 0.8% decreases in ~~subscriptions~~recurring gross margin for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, when compared to the same periods in ~~2016,~~2019, were primarily the result of the ~~positive economics~~impairment of ~~shifting customers~~previously capitalized software development costs, and incremental costs associated with our continued shift toward selling cloud solutions, including data center costs and amortization of software development costs. We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to our next generation cloud-based solutions as growth in subscriptions revenue outpaced the growth in related costs. The results of AcademicWorks did not significantly impact our subscriptions gross margins for the three and nine months ended September 30, 2017.leading cloud service providers.



28		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Maintenance
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Maintenance revenue $ 31.5
$ 36.4
(13.5 )% $ 98.2
$ 111.0
(11.6 )%
Cost of maintenance 5.7
5.5
3.0 % 17.6
16.5
6.1 %
Maintenance gross profit⁽¹⁾
$ 25.8
$ 30.9
(16.5 )% $ 80.6
$ 94.5
(14.6 )%
Maintenance gross margin 81.9 % 84.8 % 82.1 % 85.1 %


~~(1)~~	~~The individual amounts for each year may not sum to maintenance gross profit due to rounding.~~

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

Cost of maintenance is primarily comprised of compensation costs for customer support personnel, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangible assets from business combinations, amortization of software development costs and other costs incurred in providing support and services to our customers.

The decreases in maintenance revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily comprised of (i) reductions in maintenance from contracts that were migrated to a cloud-based subscription or not renewed and reductions in contracts with existing customers of $9.2 million and $25.7 million, respectively; partially offset by (ii) incremental maintenance from new customers associated with new license contracts and increases in contracts with existing customers of $4.3 million and $12.1 million, respectively; and (iii) insignificant amounts of incremental maintenance from contractual inflationary rate adjustments.

Cost of maintenance during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016. Cost of maintenance increased during the nine months ended September 30, 2017, when compared to the same period in 2016, primarily as a result of an increase in compensation costs of $1.0 million, driven by a refinement in the method in which we allocate customer support costs between cost of maintenance and cost of subscriptions.

Maintenance gross margin decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to the increase in maintenance customer support costs combined with the decline in maintenance revenue as discussed above.



~~Third Quarter 2017 Form 10-Q~~		29

~~Table of Contents~~

~~Blackbaud, Inc.~~

Services and other
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Services and other revenue $ 36.5
$ 41.2
(11.4 )% $ 102.2
$ 115.2
(11.2 )%
Cost of services and other 23.3
25.8
(10.0 )% 71.6
76.5
(6.4 )%
Services and other gross profit⁽¹⁾
$ 13.3
$ 15.4
(13.6 )% $ 30.6
$ 38.7
(20.8 )%
Services and other gross margin 36.3 % 37.3 % 30.0 % 33.6 %


~~(1)~~	~~The individual amounts for each year may not sum to~~One-time services and other
Revenue ($M)		Cost of revenue ($M)	Gross profit ($M) and gross ~~profit due to rounding.~~margin (%)
YoY Growth (%)		YoY Growth (%)

~~Services~~

One-time services and other revenue ~~includes~~is comprised of fees for one-time consulting, ~~implementation, training,~~ analytic and ~~installation~~onsite training services, ~~as well as~~fees for retained and managed services contracts that we do not expect to have a term consistent with our cloud solution contracts, revenue from the sale of our software sold under perpetual license arrangements, fees from user conferences and third-party software referral fees. Consulting, implementation and installation services involve converting data from a customer’s existing system, system configuration, process re-engineering and assistance in file set up. Analytic services are comprised of donor prospect research, sales of lists of potential donors, benchmarking studies and data modeling services. These analytic services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product is intended to enable organizations to more effectively target their fundraising activities.

Cost of one-time services and other is primarily comprised of compensation costs for professional services and onsite training personnel, ~~third-party contractor expenses,~~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, ~~variable reseller commissions,~~ costs of user conferences, allocated depreciation, facilities and IT support costs and amortization of intangible assets from business combinations.

~~Services~~One-time services and other revenue decreased by $1.4 million, or 8.4%, and $0.4 million, or 1.2%, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, when compared to the same periods in ~~2016,~~2019, driven primarily ~~due to decreases in consulting revenue and, to a lesser extent, declines in analytics revenue and license fees revenue. We expect that~~by the ongoing shift in our go-to-market strategy towards cloud-based subscription offerings, which, in general, require less implementation services, will continue to negatively impact services and other revenue over time. We have also used promotions and discounts for our consulting services as incentives to accelerate the migration of our existing customer base from on-premises solutions toward our cloud-based subscriptions. The maturation of our Blackbaud Enterprise CRM solution is lessening the extent of implementation services required for that solution. In addition, we are increasingly selling our Blackbaud CRM solution as a subscription offering, which has resulted in less license fees revenue.following:

Cost of services and other decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to decreases in compensation costs of $1.4 million and $2.5 million, respectively, which is in line with the ongoing shift in our go-to-market strategy as discussed above.

Services and other gross margin decreased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to the declines in consulting, analytics and license fees revenue coupled with the slightly more modest reductions in costs



	+		Increases in the mix of retained and managed services contracts we present in one-time services and other. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue beginning January 1, 2020. This change in presentation resulted in increases to one-time services and other revenue and offsetting decreases in recurring revenue of $4.2 million and $8.5 million during the three and six months ended June 30, 2020.
	-		Decreases in one-time consulting revenue of $3.8 million and $5.5 million, respectively, primarily from less one-time sales related to COVID-19 as well as services increasingly being embedded in our renewable cloud solution contracts. Our embedded services are recorded as recurring revenue.
	-		Decreases in one-time analytics revenue of $1.2 million and $2.1 million as analytics are generally integrated in our cloud solutions
	-		For the six months ended June 30, 2020, decreases in revenue from one-time training services and license fees



30Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~29

Table of Contents

Blackbaud, Inc.

(Unaudited)

~~Operating expenses~~

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



	+		Increase in costs of associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above
	-		Reduced amount of compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

Cost of one-time services and other remained relatively consistent during the six months ended June 30, 2020, when compared to the same period in 2019.

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

Operating Expenses

Sales, marketing and customer success
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Sales, marketing and customer success expense $ 44.2
$ 40.7
8.6 % $ 129.4
$ 115.7
11.8 %
% of total revenue 22.6 % 22.2 % 22.6 % 21.7 %



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

Sales, marketing and customer success

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

We see a large market opportunity in the long-term and will continue to make investments to drive sales effectiveness, which is a component of our four-point growth ~~strategy~~strategy. We have also implemented software tools to ~~accelerate revenue growth. We are also investing~~enhance our digital footprint and drive lead generation. In response to the COVID-19 pandemic, we implemented a modest and targeted headcount reduction during the second quarter, including a reduction in our ~~customer success organization~~sales headcount with a focus on retaining our most highly productive sales executives. After temporarily freezing our hiring efforts due to ~~drive customer loyalty, retention, and referrals. The increase in~~COVID-19, we have since began backfilling sales positions with a focus on 2021 bookings.



30		Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Sales, marketing and customer success expense ~~in dollars and as a percentage of total revenue~~decreased by $3.1 million or 5.6%, during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same ~~periods~~period in ~~2016, were~~2019, primarily ~~due to increases in compensation costs of $3.3 million and $10.5 million, respectively. Also contributing to~~driven by the ~~increase~~following:



	+		Increase in employee severance costs of $1.8 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above
	-		Decrease in travel costs of $1.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
	-		Decrease in compensation costs of $1.7 million primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
	-		Decrease in commissions expense of $0.7 million related to a decrease in commissionable sales.

Sales, marketing and customer success expense ~~for~~remained relatively consistent during the ~~nine~~six months ended ~~September~~June 30, ~~2017 was an increase~~2020, when compared to the same period in commission expense of $1.8 million. Compensation costs increased primarily due to incremental headcount associated with the increase in direct sales, marketing, and customer success efforts of our growing operations. The increase in commission expense was2019, primarily driven by ~~a refinement in~~ the ~~period over which we recognize deferred commission to expense.~~

following:

Research and development
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions)
2017⁽¹⁾

2016⁽¹⁾

Change

2017⁽²⁾

2016⁽²⁾

Change
Research and development expense $ 22.1
$ 22.5
(2.0 )% $ 67.6
$ 68.0
(0.5 )%
% of total revenue 11.3 % 12.3 % 11.8 % 12.8 %



~~(1)~~	~~Not included~~+	Increase in ~~research and development expense for~~employee severance costs of $0.9 million related to a reduction in our sales headcount in response to the ~~three months ended September 30, 2017~~ ~~and~~ ~~2016~~ ~~were $7.0~~COVID-19 pandemic as discussed above
	+	Increase in compensation costs of $0.9 million ~~and $6.9 million, respectively, of qualifying costs~~primarily associated with ~~development activities that are required to be capitalized under~~ the ~~internal-use software accounting guidance such as those~~elevated headcount of our direct sales force and our lead generation teams, beginning in the fourth quarter of 2018. The increase in compensation costs related to ~~development~~elevated headcount was partially offset by the decision to replace our 2020 cash bonus plans with grants of our next generation cloud-based solutions. Qualifying capitalized software development costs associated with our cloud-based solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years.

	performance-based equity awards
~~(2)~~	~~Not included~~-		Decrease in ~~research and development expense for~~travel costs of $1.4 million due to our restriction on non-essential employee travel in response to the ~~nine months endedSeptember 30, 2017~~ ~~and~~ ~~2016~~ ~~were $20.6 million and $18.9 million, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance.~~COVID-19 pandemic

Research and development

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

We continue to make investments to ~~deliver integrated and open~~delight our customers with innovative cloud solutions, ~~in the cloud,~~ which is a component of our four-point growth ~~strategy to accelerate revenue growth.~~strategy. Research and development ~~expense remained relatively unchanged~~expenses decreased by $1.0 million or 3.9%, and $4.5 million or 8.3%, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, when compared to the same periods in ~~2016. During the nine months ended September 30, 2017, an increase~~2019, primarily driven by decreases in compensation costs of ~~$1.4~~$1.8 million and $3.5 million, respectively, associated with the decision in March 2020 to replace our ~~addition~~2020 cash bonus plans with grants of ~~specialized engineering resources to help drive our solution~~performance-based equity awards.

Not included in research and development ~~efforts was offset primarily by an increase in~~expense for the ~~amount~~three months ended June 30, 2020 and 2019 were $10.6 million and $11.7 million, respectively, and for the six months ended June 30, 2020 and 2019 were $21.4 million and $22.8 million, respectively, of ~~software development costs that were capitalized of $1.7 million. As discussed above, the increases in the amounts capitalized were a result of incurring more~~ qualifying costs associated with development activities that are required to be capitalized under the internal-use software ~~guidance.~~accounting guidance such as those for our cloud solutions, as well as development costs associated with acquired companies. Qualifying capitalized software development costs associated with our cloud solutions are subsequently amortized to cost of subscriptions revenue over the related asset's estimated useful life, which generally range from three to seven years. We expect that the amount of software development costs capitalized will ~~continue to increase modestly~~be relatively consistent in the near-term as we ~~make~~continue making investments in innovation, quality and the integration of our solutions, which we believe will drive long-term revenue growth.

~~Research~~General and development expense decreased as a percentage of total revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to productivity gains, which have allowed us to scale our business. The increases in the amounts of software development costs capitalized as discussed above also contributed to the decreases in research and development expense as a percentage of total revenue.



~~Third Quarter 2017 Form 10-Q~~		31

~~Table of Contents~~

~~Blackbaud, Inc.~~

General and administrative
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
General and administrative expense $ 23.5
$ 22.3
5.5 % $ 67.4
$ 62.1
8.5 %
% of total revenue 12.0 % 12.2 % 11.8 % 11.7 %
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.

The increases in general and administrative expense during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to increases in rent expense of $0.7 million and $3.3 million, respectively, and net increases in acquisition-related expenses and integration costs of $0.8 million and $2.8 million, respectively. An increase of $2.5 million in employee severance costs during the nine months ended September 30, 2017 also drove up general and administrative expense. The increases in rent expense were primarily driven by the end in the fourth quarter of 2016 of the South Carolina state incentive payments we received as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts were recorded as a reduction of rent expense upon receipt. Also contributing to the increases in rent expense were new operating leases for equipment that we have historically purchased.

~~General and administrative expense as a percentage of total revenue remained relatively unchanged during the three and nine months ended September 30, 2017, when compared to the same periods in 2016.~~

Interest expense
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
Interest expense $ 3.1
$ 2.6
17.1 % $ 8.7
$ 8.0
8.1 %
% of total revenue 1.6 % 1.4 % 1.5 % 1.5 %

Interest expense increased during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, primarily due to modest increases in our weighted average effective interest rates. Also contributing to the increase in interest expense during the nine months ended September 30, 2017 was the required immediate expense recognition for certain debt issuance costs when we refinanced our credit facility in June 2017. In the near term, we expect interest expense as well as interest expense as a percentage of revenue to increase as a result of our acquisition of JustGiving.



32Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~31

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(Unaudited)

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



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

Restructuring

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



Interest Expense
	Three months ended June 30,								Six months ended June 30,
(dollars in millions)	2020			2019			Change		2020			2019			Change
Interest expense	$	3.9		$	5.8		(32.9	)%	$	8.1		$	11.1		(27.6	)%
% of total revenue	1.7		%	2.6		%			1.8		%	2.5		%

The decreases in interest expense in dollars and as a percentage of total revenue during the three and six months ended June 30, 2020, when compared to the same periods in 2019, were primarily due to decreases in our average daily borrowings and our weighted average effective interest rates.

Deferred ~~revenue~~Revenue

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


(dollars in millions)	Timing of recognition	September 30, 2017		Change		December 31, 2016		Timing of recognition	June 30, 2020		December 31, 2019		Change
Subscriptions	Over the period billed in advance, generally one year	$	179.9	24.4	%	$	144.6
Maintenance	Over the period billed in advance, generally one year	68.5		(10.8	)%	76.8
Services and other	As services are delivered	34.0		15.2	%	29.5
Recurring								Over the period billed in advance, generally one year	$	322.1	$	302.8	6.4	%
One-time services and other								As services are delivered	15.1		13.4		12.8	%
Total deferred revenue⁽¹⁾		282.4		12.5	%	250.9			337.2		316.1		6.7	%
Less: Long-term portion		5.4		(16.0	)%	6.4			4.6		1.8		156.7	%
Current portion⁽¹⁾		$	277.0	13.3	%	$	244.5		$	332.6	$	314.3	5.8	%


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

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

Deferred revenue from ~~subscriptions~~recurring revenue contracts increased during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, primarily due ~~to an increase in subscription sales, as well as~~ a seasonal increase in ~~subscription~~ customer contract ~~renewals.~~renewals and new subscription sales of our cloud solutions. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals inat or near the beginning of our ~~second quarter as compared to our fourth~~third quarter. ~~The increase in deferred~~Deferred revenue from one-time services and other increased during the ~~nine~~six months ended ~~September~~June 30, ~~2017 was~~2020, primarily ~~the result of~~due an increase in ~~training sales~~the mix of retained and ~~related billings. A seasonal increase~~managed services contracts we present in ~~advance registration billings associated with our~~ ~~bbcon~~ ~~user conference, which occurs each year in October, also contributed to the increase in deferred revenue from~~one-time services and other. The decrease in deferred revenue attributable to maintenance during the nine months ended September 30, 2017 was primarily due to the continuing shift in our go-to-market strategy towards cloud-based subscription offerings, which do not require maintenance contracts.other beginning January 1, 2020, as discussed above.

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



32		Second Quarter 2020 Form 10-Q

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(Unaudited)

fair value, which resulted in lower recorded deferred revenue as of the acquisition date than the actual amounts paid in advance for solutions and services under those customer arrangements. Therefore, our deferred revenue after an acquisition will not reflect the full amount of deferred revenue that would have been reported if the acquired deferred revenue was not written down to fair value. Further explanation of this impact is included below under the caption "Non-GAAP financial measures".


Income tax provision	Income tax provision
	Three months ended September 30,								Nine months ended September 30,								Three months ended June 30,								Six months ended June 30,
(dollars in millions)	2017			2016			Change		2017			2016			Change		2020			2019			Change		2020			2019			Change
Income tax provision	$	2.8		$	2.0		43.2	%	$	3.0		$	5.3		(44.3	)%	$	4.5		$	2.7		64.5	%	$	5.2		$	0.9		477.5	%
Effective income tax rate	18.2		%	17.9		%			7.8		%	18.0		%			27.6		%	27.7		%			24.0		%	13.0		%

~~Our effective income tax rate during the three months ended September 30, 2017 remained relatively unchanged when compared to the same period in 2016.~~ The ~~decrease~~increase in our effective income tax rate during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same period in ~~2016,~~2019, was primarily ~~due~~attributable to improved 2020 profitability and changes in jurisdictional mix and reduced 2020 non-deductible costs. Furthermore, our 2020 effective tax rate was negatively impacted by a ~~$9.0 million~~decrease in the total discrete ~~tax~~ benefit to income tax expense ~~relating~~related to stock-based compensation items, as compared to a $4.3 million discrete tax benefit for the same period in 2016. The increase in the discrete tax benefit for the nine months ended September 30, 2017, as compared to the same period in 2016, was attributable to an increase in the market price for shares of our common stock, as reported by NASDAQ, as well as an increase in the number of stock awards that vested and were exercised. Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.compensation.



~~Third Quarter 2017 Form 10-Q~~		33

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Non-GAAP ~~financial measures~~Financial Measures

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

We have acquired businesses whose net tangible assets include deferred revenue. In accordance with GAAP reporting requirements, we recorded write-downs of deferred revenue under arrangements predating the acquisition to fair value, which resulted in lower recognized revenue than the contributed purchase price until the related obligations to provide services under such arrangements are fulfilled. Therefore, our GAAP revenues after the acquisitions will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP measures described below reverse the acquisition-related deferred revenue write-downs so that the full amount of revenue booked by the acquired companies is included, which we believe provides a more accurate representation of a revenue run-rate in a given period and, therefore, will provide more meaningful comparative results in future periods.

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



Second Quarter 2020 Form 10-Q		33

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(Unaudited)


	Three months ended September 30,								Nine months ended September 30,								Three months ended June 30,								Six months ended June 30,
(dollars in millions)	2017			2016			Change		2017			2016			Change		2020			2019			Change		2020			2019			Change
GAAP Revenue	$	195.5		$	183.1		6.8	%	$	571.3		$	532.5		7.3	%	$	232.0		$	225.6		2.8	%	$	455.6		$	441.5		3.2	%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			—			100.0	%	0.7			3.6			(80.8	)%	—			0.7			(100.0	)%	—			1.4			(100.0	)%
Non-GAAP revenue⁽¹⁾	$	195.9		$	183.1		7.0	%	$	572.0		$	536.1		6.7	%	$	232.0		$	226.4		2.5	%	$	455.6		$	442.9		2.9	%

GAAP gross profit	$	108.5		$	99.7		8.8	%	$	311.8		$	285.7		9.2	%	$	127.1		$	124.8		1.8	%	$	245.8		$	241.4		1.8	%
GAAP gross margin	55.5		%	54.5		%			54.6		%	53.7		%			54.8		%	55.3		%			54.0		%	54.7		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			—			100.0	%	0.7			3.6			(80.8	)%	—			0.7			(100.0	)%	—			1.4			(100.0	)%
Add: Stock-based compensation expense	0.9			0.9			2.0	%	2.7			2.6			2.8	%	2.6			0.8			224.9	%	3.4			1.8			94.6	%
Add: Amortization of intangibles from business combinations	10.0			9.9			1.2	%	29.9			29.7			0.8	%	9.7			11.3			(14.5	)%	20.6			22.7			(9.4	)%
Add: Employee severance	—			—			(100.0	)%	1.0			0.2			508.1	%	0.8			—			(19,625.0	)%	0.8			1.1			(27.1	)%
Add: Acquisition-related integration costs	—			—			—	%	0.1			—			100.0	%
Subtotal⁽¹⁾	11.3			10.8			4.3	%	34.3			36.1			(4.8	)%	13.0			12.8			1.6	%	24.9			27.1			(8.1	)%
Non-GAAP gross profit⁽¹⁾	$	119.8		$	110.5		8.3	%	$	346.2		$	321.8		7.6	%	$	140.1		$	137.7		1.8	%	$	270.7		$	268.4		0.8	%
Non-GAAP gross margin	61.1		%	60.4		%			60.5		%	60.0		%			60.4		%	60.8		%			59.4		%	60.6		%


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



34		~~Third~~Second Quarter ~~2017~~2020 Form 10-Q

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(Unaudited)


	Three months ended September 30,								Nine months ended September 30,								Three months ended June 30,								Six months ended June 30,
(dollars in millions, except per share amounts)	2017			2016			Change		2017			2016			Change		2020			2019			Change		2020			2019			Change
GAAP income from operations	$	18.0		$	13.5		32.7	%	$	45.3		$	37.8		19.9	%	$	19.6		$	13.5		45.1	%	$	28.0		$	15.7		78.7	%
GAAP operating margin	9.2		%	7.4		%			7.9		%	7.1		%			8.4		%	6.0		%			6.1		%	3.6		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			—			100.0	%	0.7			3.6			(80.8	)%	—			0.7			(100.0	)%	—			1.4			(100.0	)%
Add: Stock-based compensation expense	10.9			8.8			23.9	%	31.1			25.0			24.2	%	20.1			15.0			34.0	%	33.7			28.8			17.2	%
Add: Amortization of intangibles from business combinations	10.7			10.5			1.5	%	32.1			31.8			0.8	%	10.4			12.5			(16.6	)%	22.1			25.3			(12.6	)%
Add: Employee severance	0.1			0.1			77.8	%	3.0			0.5			533.0	%	4.3			0.2			2,132.5	%	4.4			3.6			20.7	%
Add: Acquisition-related integration costs	0.4			0.9			(58.2	)%	0.6			1.4			(56.8	)%	(0.1		)	0.5			(115.3	)%	(0.1		)	1.2			(108.7	)%
Add: Acquisition-related expenses	1.5			0.2			899.3	%	3.9			0.3			1,353.2	%	0.1			0.4			(76.7	)%	0.2			0.8			(72.3	)%
Add: Restructuring costs																	0.1			0.7			(93.2	)%	0.1			2.7			(97.2	)%
Subtotal⁽¹⁾	24.0			20.5			17.1	%	71.3			62.6			13.8	%	34.9			30.0			16.3	%	60.4			63.7			(5.3	)%
Non-GAAP income from operations⁽¹⁾	$	42.0		$	34.0		23.3	%	$	116.6		$	100.4		16.1	%	$	54.5		$	43.5		25.3	%	$	88.4		$	79.4		11.3	%
Non-GAAP operating margin	21.4		%	18.6		%			20.4		%	18.7		%			23.5		%	19.2		%			19.4		%	17.9		%

GAAP income before provision for income taxes																	$	16.3		$	9.9		65.3	%	$	21.7		$	6.9		213.1	%
GAAP net income	$	12.5		$	8.9		40.5	%	$	35.2		$	24.2		45.4	%	$	11.8		$	7.1		65.6	%	$	16.5		$	6.0		173.5	%
Shares used in computing GAAP diluted earnings per share	47,846,997			47,394,106			1.0	%	47,679,103			47,268,469			0.9	%	48,418,378			48,160,684			0.5	%	48,465,077			48,101,212			0.8	%
GAAP diluted earnings per share	$	0.26		$	0.19		36.8	%	$	0.74		$	0.51		45.1	%	$	0.24		$	0.15		60.0	%	$	0.34		$	0.13		161.5	%
Non-GAAP adjustments:
Add: Total Non-GAAP adjustments affecting income from operations	24.0			20.5			17.1	%	71.3			62.6			13.8	%
Add (less): Loss (gain) on derivative instrument	—			—			100.0	%	(0.5		)	—			100.0	%
Add: Loss on debt extinguishment	0.1			—			100.0	%	0.3			—			100.0	%
Less: Tax impact related to Non-GAAP adjustments⁽²⁾	(9.8		)	(8.1		)	21.6	%	(32.0		)	(24.2		)	32.4	%
Add: GAAP income tax provision																	4.5			2.7			64.5	%	5.2			0.9			477.5	%
Add: Total non-GAAP adjustments affecting income from operations																	34.9			30.0			16.3	%	60.4			63.7			(5.3	)%
Non-GAAP income before provision for income taxes																	51.2			39.8			28.5	%	82.0			70.7			16.1	%
Assumed non-GAAP income tax provision⁽²⁾																	10.2			8.0			28.5	%	16.4			14.1			16.1	%
Non-GAAP net income⁽¹⁾	$	26.9		$	21.3		25.8	%	$	74.3		$	62.7		18.6	%	$	41.0		$	31.9		28.5	%	$	65.6		$	56.5		16.1	%

Shares used in computing Non-GAAP diluted earnings per share	47,846,997			47,394,106			1.0	%	47,679,103			47,268,469			0.9	%
Shares used in computing non-GAAP diluted earnings per share																	48,418,378			48,160,684			0.5	%	48,465,077			48,101,212			0.8	%
Non-GAAP diluted earnings per share	$	0.56		$	0.45		24.4	%	$	1.56		$	1.33		17.3	%	$	0.85		$	0.66		28.8	%	$	1.35		$	1.18		14.4	%


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


(2)	We apply a non-GAAP effective tax rate of ~~32.0% in our determination of~~20.0% when calculating non-GAAP net income ~~which represents the GAAP effective tax rate, excluding the discrete tax effect of stock-based compensation.~~and non-GAAP diluted earnings per share.

~~The increases in non-GAAP income from operations during the three~~Non-GAAP free cash flow is defined as operating cash flow less capital expenditures, including costs required to be capitalized for software development, and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily due to growth in subscriptions revenue, partially offset by investments we are making in our sales organizationcapital expenditures for property and ~~customer success program and, to a lesser extent, increases in rent expense, which are discussed above.~~equipment.



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



Second Quarter 2020 Form 10-Q		35

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(Unaudited)

Non-GAAP organic revenue growth

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



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(dollars in millions) Three months ended
September 30, Nine months ended
September 30,
2017
2016
2017
2016
GAAP revenue $ 195.5
$ 183.1
$ 571.3
$ 532.5
GAAP revenue growth 6.8 % 7.3 %
(Less) Add: Non-GAAP acquisition-related revenue ⁽¹⁾
(2.1 ) —
(4.0 ) 3.6
Total Non-GAAP adjustments (2.1 ) —
(4.0 ) 3.6
Non-GAAP revenue $ 193.4
$ 183.1
$ 567.3
$ 536.1
Non-GAAP organic revenue growth 5.6 % 5.8 %

Non-GAAP revenue ⁽²⁾
$ 193.4
$ 183.1
$ 567.3
$ 536.1
Foreign currency impact on Non-GAAP organic revenue ⁽³⁾
(0.5 ) —
0.8
—
Non-GAAP revenue on constant currency basis ⁽³⁾
$ 192.9
$ 183.1
$ 568.1
$ 536.1
Non-GAAP organic revenue growth on constant currency basis 5.4 % 6.0 %

GAAP subscriptions revenue $ 127.5
$ 105.4
$ 370.9
$ 306.3
GAAP subscriptions revenue growth 20.9 % 21.1 %
(Less) Add: Non-GAAP acquisition-related revenue ⁽¹⁾
(2.0 ) —
(3.7 ) 3.5
Total Non-GAAP adjustments (2.0 ) —
(3.7 ) 3.5
Non-GAAP organic subscriptions revenue $ 125.5
$ 105.4
$ 367.2
$ 309.9
Non-GAAP organic subscriptions revenue growth 19.0 % 18.5 %

GAAP subscriptions revenue $ 127.5
$ 105.4
$ 370.9
$ 306.3
GAAP maintenance revenue $ 31.5
$ 36.4
98.2
111.0
GAAP recurring revenue $ 159.0
$ 141.9
469.1
417.3
GAAP recurring revenue growth 12.1 % 12.4 %
(Less) Add: Non-GAAP acquisition-related revenue ⁽¹⁾
(2.0 ) —
(3.7 ) 3.6
Total Non-GAAP adjustments (2.0 ) —
(3.7 ) 3.6
Non-GAAP recurring revenue $ 157.0
$ 141.9
$ 465.4
$ 421.0
Non-GAAP organic recurring revenue growth 10.7 % 10.5 %



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

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

GAAP recurring revenue	$	216.3		$	208.5	$	421.1		$	406.6
GAAP recurring revenue growth	3.7		%			3.6		%
Add: Non-GAAP acquisition-related revenue ⁽¹⁾	—			0.7		—			1.4
Non-GAAP organic recurring revenue	$	216.3		$	209.2	$	421.1		$	408.0
Non-GAAP organic recurring revenue growth	3.4		%			3.2		%

(1)

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


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

(3)

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



36		Second Quarter 2020 Form 10-Q

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(Unaudited)

Seasonality

Our revenues normally fluctuate as a result of certain seasonal variations in our business. Our transaction revenue has historically been at its lowest in the first quarter due to the timing of customer fundraising initiatives and events. Our revenue from payment ~~processing~~ services has historically increased during the fourth quarter due to year-end giving. 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 ~~third and~~ fourth ~~quarters~~quarter historically achieving the highest total ~~revenues.~~revenue. Our expenses, however, do not vary significantly as a result of these factors, but do fluctuate on a quarterly basis due to varying timing of expenditures. Our cash flow from operations normally fluctuates quarterly due to the combination of the timing of customer contract renewals including renewals associated with customers of acquired companies, delivery of professional services and occurrence of customer events, the payment of bonuses, as well as merit-based salary increases, among other factors. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in



36		~~Third Quarter 2017 Form 10-Q~~

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~~Blackbaud, Inc.~~

our first ~~quarter, and due~~quarter. Due to the timing of customer contract renewals and student enrollments, many of which take place at or near the beginning of our third quarter, our cash flow from operations has been lower in our second quarter as compared to our third and fourth quarters. Partially offsetting these favorable drivers of cash flow from operations in our third and fourth quarters are merit-based salary increases, which are generally effective in April each year. In addition, deferred revenues can vary on a seasonal basis for the same reasons. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions or other factors. 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. These patterns may change as a result of the continued shift to online giving, growth in volume of transactions for which we process payments, or as a result of acquisitions, new market opportunities, new solution introductions, the COVID-19 pandemic or other factors.

Liquidity and Capital Resources

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


(dollars in millions)	September 30, 2017			Change		December 31, 2016			June 30, 2020			December 31, 2019			Change
Cash and cash equivalents	$	17.1		0.9	%	$	16.9		$	30.5		$	31.8		(4.0	)%
Property and equipment, net	43.9			(12.7	)%	50.3			36.5			35.5			2.8	%
Software development costs, net	48.6			29.4	%	37.6			106.0			101.3			4.7	%
Total carrying value of debt	338.0			(1.3	)%	342.4			488.1			467.1			4.5	%
Working capital	(181.1		)	(5.1	)%	(172.2		)	(191.8		)	(254.3		)	24.6	%
Working capital excluding deferred revenue	95.9			32.7	%	72.3

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


	Nine months ended September 30,								Six months ended June 30,
(dollars in millions)	2017			Change		2016			2020			2019			Change
Net cash provided by operating activities	$	123.4		23.2	%	$	100.1		$	37.5		$	45.1		(16.9	)%
Net cash used in investing activities	(78.2		)	106.4	%	(37.9		)	(27.6		)	(138.5		)	(80.1	)%
Net cash used in financing activities	(45.3		)	(25.9	)%	(61.2		)
Net cash (used in) provided by financing activities									(132.5		)	30.8			(529.7	)%

Our principal sources of liquidity are our operating cash flow, funds available under the 2017 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance ~~and support~~ arrangements, ~~and~~ market acceptance of our solutions and ~~services.~~services and our customers' ability to pay. Based on current estimates of revenue and expenses, we believe that the currently available sources of funds and anticipated cash flows from operations will be adequate for at least the next twelve months to finance our operations, fund anticipated capital expenditures and meet our debt obligations and pay dividends. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to declare and pay further dividends and/or repurchase our common stock.obligations. To the extent we undertake future material acquisitions, investments or unanticipated capital expenditures, we may require additional capital. In that context, we regularly evaluate opportunities to enhance our capital structure including through potential debt or equity issuances.



Second Quarter 2020 Form 10-Q		37

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(Unaudited)

To better enable us to weather the extraordinary business challenges brought about by the global COVID-19 pandemic, to protect the safety and welfare of our employees, and to further effect our long-term strategy to deliver the greatest value to our stockholders, we have taken several actions. These initial measures taken are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. Some of these actions include the following:

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

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

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

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

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

On May 1, 2020, we granted RSUs to our employees that were eligible for base salary merit increases in lieu of such increases, which will vest on May 1, 2021 subject to the recipient's continued employment with us; and

On May 1, 2020, we granted PRSUs to our employees that were eligible for a 2020 cash bonus plan in lieu of such cash bonus, which may be earned and become eligible for vesting on May 1, 2021 subject to meeting certain performance conditions and the recipient's continued employment with us.

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

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

At ~~September~~June 30, ~~2017,~~2020, our total cash and cash equivalents balance included approximately ~~$7.5~~$21.8 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.

Operating ~~cash flow~~Cash Flow

Net cash provided by operating activities ~~of $123.4 million increased~~decreased by ~~$23.2~~$7.6 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same period in ~~2016,~~2019, primarily due to ~~an increase in net income adjusted for non-cash expenses, and an increase~~a $28.0 million decrease in cash flow from operations associated with working ~~capital.~~capital, partially offset by a $20.4 million increase in net income adjusted for non-cash expenses. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash



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expenses such as depreciation, amortization, stock-based compensation, amortization of deferred financing costs and debt discount and adjustments to our provision for credit losses and sales ~~returns and allowances;~~returns; and (ii) changes in our working capital. The increase in net income adjusted for non-cash expenses was primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation.



38		Second Quarter 2020 Form 10-Q

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(Unaudited)

Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. ~~Cash~~The decrease in cash flow from operations associated with working capital ~~increased $1.6 million~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same period in ~~2016,~~2019, was primarily due to to:

an increase in current period bonus payments as a result of an increase in amounts accrued as of December 31, 2019 for over-performance against 2019 targets;

a decrease in the current period bonus accrual due to our decision to replace cash payments ~~partially offset by an increase~~for our 2020 bonus plans with performance-based equity awards; and

fluctuations in ~~cash taxes paid.~~the timing of vendor payments.

Investing ~~cash flow~~Cash Flow

Net cash used in investing activities of ~~$78.2~~$27.6 million ~~increased~~decreased by ~~$40.3~~$110.9 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, when compared to the same period in ~~2016.~~2019.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we used net cash of ~~$49.7~~$109.4 million for ~~the~~our acquisition of ~~AcademicWorks compared to $3.4 million spent on~~YourCause and we did not make any similar investments ~~in acquired companies~~ during the same period in ~~2016. We~~2020. During the six months ended June 30, 2020, we used ~~$20.6~~$21.7 million for software development costs, which was ~~up $1.5 million from~~relatively consistent with cash spent induring the same period in ~~2016. The increase~~2019. We continue to invest in ~~cash outlays for software development costs was primarily driven by development activities related to~~ our ~~next generation cloud-based~~innovative cloud solutions, ~~and~~as well as development activities for Blackbaud SKY, our ~~new~~ modern cloud platform.

We also spent ~~$8.4~~$5.9 million of cash for purchases of property and equipment during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, which was ~~down $7.0 million from~~relatively consistent with cash spent during the same period in 2016. The decrease in cash outlays for property and equipment was primarily driven by a shift toward leasing certain equipment that we have historically purchased. Cash outlays for operating leases are presented in operating cash flows.2019.

Financing ~~cash flow~~Cash Flow

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we had a net ~~decrease~~increase in borrowings of ~~$5.8~~$16.9 million, ~~even~~down from a net increase of $58.6 million during the three months ended March 31, 2020. Historically, due to lower revenues in our first quarter, combined with the ~~incremental borrowings needed to finance~~payment of bonuses from prior year in our ~~acquisition~~first quarter and the payment of ~~AcademicWorks. We also paid $3.1 million~~certain annual vendor contracts, our cash flow from operations has been lowest in ~~financing costs as a result of refinancing~~ our ~~credit facility.~~first quarter.

We paid ~~$19.1~~$21.0 million to satisfy tax obligations of employees upon settlement ~~or exercise~~ of equity awards during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 compared to ~~$10.5~~$19.8 million during the same period in ~~2016.~~2019. The amount of taxes paid by us on the 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, ~~employee exercise decisions,~~ as well as the market price for shares of our common stock at the time of settlement. ~~Due to a change in the timing of our annual equity award grants, most~~Most of our equity awards ~~now~~currently vest in our first quarter. In addition, during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, we paid dividends of ~~$17.3~~$6.0 million, ~~which was relatively consistent~~down from $11.8 million during the same period of 2019, as we discontinued the declaration and payment of all cash dividends, beginning with the ~~comparable~~second quarter of 2020.

Cash used in financing activities associated with changes in restricted cash due to customers decreased $13.8 million during the six months ended June 30, 2020 when compared to the same period in 2019, as the amount of ~~2016.~~restricted cash held and payable by us to customers as of December 31, 2019 was larger than at the same date in 2018.

2017 Credit Facility

As discussed above, in June 2017, we entered into the 2017 Credit Facility. Upon closing, we drew $300.0 million on a term loan and $110.0 million in revolving credit loans, which was used to repay all amounts outstanding under our previous credit facility and for other general corporate purposes.

We have drawn on our credit facility from time to time to help us meet financial needs, such as financing for business acquisitions. At ~~September~~June 30, ~~2017,~~2020, our available borrowing capacity under the 2017 Credit Facility was ~~$356.2~~$190.7 million. The 2017 Credit Facility matures in June 2022. The 2017 Credit Facility includes an option to request additional term loans in an aggregate principal amount of up to $200.0 million.

At ~~September~~June 30, ~~2017,~~2020, the carrying amount of our debt under the 2017 Credit Facility was ~~$335.8~~$484.2 million. Our average daily borrowings during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 were ~~$355.4~~$526.3 million and ~~$368.5~~$508.9 million, respectively.



Second Quarter 2020 Form 10-Q		39

Table of Contents

Blackbaud, Inc.

(Unaudited)

The following is a summary of the financial covenants under ~~our credit facility:~~the 2017 Credit Facility:



Financial Covenant	Requirement	Ratio as of ~~September~~June 30, ~~2017~~2020
Net Leverage Ratio	≤ 3.50 to 1.00	~~1.79~~2.21 to 1.00
Interest Coverage Ratio	≥ 2.50 to 1.00	~~16.31~~11.88 to 1.00



38		~~Third Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

Under the 2017 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 2017 Credit Facility, and (ii) our pro forma net leverage ratio, as set forth in the 2017 Credit Facility, must be 0.25 less than the net leverage ratio requirement at the time of dividend declaration or share repurchase. At ~~September~~June 30, ~~2017,~~2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

Commitments and ~~contingencies~~Contingencies

As of ~~September~~June 30, ~~2017,~~2020, we had contractual obligations with future minimum commitments as follows:


	Payments due by period										Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Recorded contractual obligations:
Debt⁽¹⁾	$	340.2	$	8.6	$	16.1	$	315.5	$	—	$	489.0	$	9.2	$	479.8	$	—	$	—
Interest payments on debt⁽²⁾											5.2		5.1		0.1		—		—
Operating leases⁽³⁾											148.9		24.9		35.6		17.1		71.2

Unrecorded contractual obligations:
Operating leases⁽²⁾	190.4		20.2		40.0		33.1		97.1
Interest payments on debt⁽³⁾	41.9		8.9		18.7		14.3		—
Purchase obligations⁽⁴⁾	51.9		21.3		30.6		—		—
Interest payments on debt⁽⁴⁾											16.1		8.4		7.7		—		—
Purchase obligations⁽⁵⁾											90.5		48.4		42.1		—		—
Total contractual obligations	$	624.4	$	59.0	$	105.4	$	362.9	$	97.1	$	749.8	$	96.1	$	565.4	$	17.1	$	71.2

(1)

Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2017 Credit Facility and our other debt at ~~September~~June 30, ~~2017~~2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 ~~Revolving~~Credit Facility for the purposes of determining minimum commitment amounts.


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


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


~~(3)~~(4)	The actual interest expense recognized in our consolidated statements of comprehensive income will depend on the amount of debt, the length of time the debt is outstanding and the interest rate, which could be different from our assumptions described in (1) above.


~~(4)~~(5)	We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us.

The term loan under the 2017 Credit Facility ~~and our other debt require~~requires periodic principal payments. The balance of the term loans and any amounts drawn on the revolving credit loans are due upon maturity of the 2017 Credit Facility in June 2022.

The total liability for uncertain tax positions as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, was ~~$3.4~~$4.7 million and ~~$3.1~~$4.3 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was ~~insignificant~~$1.1 million and $1.0 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~

In February 2017, our Board of Directors approved our annual dividend rate of $0.48 per share to be made in quarterly payments. Dividends at this annual rate would aggregate to $23.0 million assuming 48.0 million shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2017 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.

~~On October 25, 2017, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable on December 15, 2017 to stockholders of record on November 28, 2017.~~2019, respectively.

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2017,~~2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



~~Third Quarter 2017 Form 10-Q~~40		39Second Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Foreign Currency Exchange Rates

Approximately ~~10%~~16% of our total revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 was generated from operations outside the ~~United States.~~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 ~~$0.9 million and $0.5~~$10.6 million as of ~~September~~June 30, ~~2017~~2020 and a loss of $4.0 million as of December 31, ~~2016, respectively.~~2019.

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 revenue and expenses denominated in non-U.S. currencies. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, foreign translation resulted in ana decrease in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the fluctuation in foreign currency exchange rates ~~had insignificant impacts on~~reduced our total revenue and our income from ~~operations. For the nine months ended September 30, 2017, the fluctuation in foreign currency exchange rates decreased IMG revenue~~operations by ~~approximately $0.8 million.~~$2.3 million and $0.9 million, respectively. 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.

In June and September 2017, we entered into a foreign currency option contract and a foreign currency forward contract, respectively, to hedge our exposure to currency fluctuations in connection with our acquisition of JustGiving, because the purchase price was denominated in British Pounds. See Note 9 of our consolidated financial statements in this report for additional information about these derivative instruments.

~~Inflation~~

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

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019.

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 ofto our condensed consolidated financial statements in this report.



40		~~Third Quarter 2017 Form 10-Q~~

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage our variable rate interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments entered into for hedging purposes. Our interest rate exposure includes LIBOR rates. The Financial Conduct Authority in the U.K. has stated that it plans to phase out LIBOR by the end of calendar year 2021. We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts currently indexed to LIBOR will either expire or be modified before the phase out occurs. Due to



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(Unaudited)

the nature of our debt, the materiality of the fair values of the derivative instruments and the highly liquid, short-term nature and level of our cash and cash equivalents as of ~~September~~June 30, ~~2017,~~2020, we believe ~~there is no material~~that the risk of exposure to changing interest rates for those ~~positions.~~positions is immaterial. There were no significant changes in how we manage interest rate risk between December 31, ~~2016~~2019 and ~~September~~June 30, ~~2017.~~2020.

Foreign Currency Risk

For a discussion of our exposure to foreign currency exchange rate fluctuations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Foreign Currency Exchange Rates” in this report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

No ~~change~~changes in internal control over financial reporting occurred during the most recent fiscal quarter ended ~~September~~June 30, ~~2017~~2020 with respect to our operations, which ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.



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		PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

~~Our operations and financial results~~We are ~~subject to various risks and uncertainties, including those described in Part I,~~supplementing Item ~~IA, "Risk factors"~~1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, as filed with the Securities and Exchange Commission on February 20, 2020 (the “Annual Report”). The following risk factors should be read in conjunction with the risk factors set forth in that Annual Report.

Operational Risks

The COVID-19 pandemic (“COVID-19”) has disrupted, and is expected to continue to disrupt, our business, which is likely to adversely affect our operations and financial performance.

The outbreak of COVID-19 in numerous countries across the globe, including each country in which we currently operate, has adversely impacted the U.S. and global economies. We have experienced disruptions to our business thus far from COVID-19, and the pandemic continues to impact each of our markets. Governmental authorities have taken, and continue to take, countermeasures to slow the outbreak, including shelter-in-place and business closure orders and large-scale restrictions on travel. Furthermore, because the pandemic is a rapidly evolving situation, we cannot anticipate with any certainty the length, scope or severity of such restrictions in the jurisdictions in which we operate.

Certain vertical markets we serve are especially vulnerable to the global business disruption. For example, many arts and cultural organizations, including museums, zoos, performing arts centers and theaters, among others, have had to cancel events or have seen a significant decline in attendance due to COVID-19. Many of these organizations have also suspended their operations temporarily. In addition, we believe that a number of K-12 private schools, that would ordinarily consider purchasing our cloud solutions for the 2020-2021 academic school year, have delayed their expenditure decisions due to the uncertainty of COVID-19.

We expect that COVID-19 will impact all of our vertical markets across all of our geographies to some degree, but the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease and other unforeseeable consequences. This impact could include:

changes in customer demand;

our relationship with, and the financial and operational capacities of our service providers, suppliers and business partners, including their ability to fulfill their obligations to us;

further declines in our customers' ability to pay for our solutions and services;

reduced workforce availability and productivity due to working remotely using different technologies and potential health effects and concerns;

risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms);

the adequacy of our cash flow and earnings and other conditions which may affect our liquidity;

disruptions to our technology network and other critical systems; and

impairment charges against our goodwill and other intangible assets, operating lease right-of-use assets and other long-lived assets.

We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the U.S. and global economies and may materially adversely impact our business, financial condition and results of operations.



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If the security of our software is breached, we fail to securely collect, store and transmit customer information, or we fail to safeguard confidential donor data, we could be exposed to liability, litigation, penalties and remedial costs and our reputation and business could suffer.

Fundamental to the use of our solutions is the secure collection, storage and transmission of confidential donor and end user data and transaction data, including in our payment services. Despite the network and application security, internal control measures, and physical security procedures we employ to safeguard our systems, we may still be vulnerable to a security breach, intrusion, loss or theft of confidential donor data and transaction data, which may harm our business, reputation and future financial results.

Like many major businesses, we are, from time to time, a target of cyber-attacks and phishing schemes, and we expect these threats to continue. Because of the numerous and evolving cybersecurity threats, including advanced and persistent cyber-attacks, phishing and social engineering schemes, used to obtain unauthorized access, disable or degrade systems have become increasingly more complex and sophisticated and may be difficult to detect for periods of time, we may not anticipate these acts or respond adequately or timely. As these threats continue to evolve and increase, we may be required to devote significant additional resources in order to modify and enhance our security controls and to identify and remediate any security vulnerabilities.

A compromise of our data security that results in customer or donor personal or payment card data being obtained by unauthorized persons could adversely affect our ~~business, financial condition,~~reputation with our customers and others, as well as our operations, results of operations, ~~cash flows,~~financial condition and liquidity and could result in litigation against us or the ~~trading price~~imposition of penalties. We might be required to expend significant capital and other resources to further protect against security breaches or to rectify problems caused by any security breach, including notification under data privacy laws and regulations and expenses related to remediating our information security systems. Even though we carry cyber-technology insurance policies that may provide insurance coverage under certain circumstances, we might suffer losses as a result of a security breach that exceed the coverage available under our insurance policies or for which we do not have coverage. A security breach and any efforts we make to address such breach could also result in a disruption of our ~~stock. There~~operations, particularly our online sales operations.

Further, the existence of vulnerabilities, even if they do not result in a security breach, may harm client confidence and require substantial resources to address, and we may not be able to discover or remedy such security vulnerabilities before they are exploited, which may harm our business, reputation and future financial results.

On July 16, 2020, we contacted certain customers to inform them about a recent security incident. Our communication to these customers included the information that in May 2020 we discovered and stopped a ransomware attack. In a ransomware attack, cybercriminals attempt to disrupt the business by locking companies out of their own data and servers. After discovering the attack, our cybersecurity team—together with independent forensics experts and law enforcement—successfully prevented the cybercriminal from blocking our system access and fully encrypting files, and ultimately expelled them from our system with no significant disruption to our operations. Prior to our locking the cybercriminal out of our system, the cybercriminal removed a copy of a subset of data from our self-hosted environment. This incident did not involve solutions in our public cloud environment (Microsoft Azure, Amazon Web Services), nor did it involve the majority of our self-hosted environment. Based on the nature of the incident, our research and third party (including law enforcement) investigation, we have no reason to believe that any data went beyond the cybercriminal, was or will be misused, or will be disseminated or otherwise made available publicly. Most of our customers were not part of the incident. The subset of customers who were part of this incident have been ~~no material changes~~notified and supplied with additional information and resources. Our investigation into the incident by our cybersecurity team and third-party forensic advisors remains ongoing. It is expected that we will continue to experience increased costs related to our ~~risk factors since~~response to this incident and our ~~Annual Report on Form 10-K~~efforts to further enhance our security measures. In addition, it is possible that the incident may result in loss of customers and partners, harm our reputation, increased costs to maintain insurance coverage, devotion of substantial management time, litigation or regulatory enforcement, claims for ~~the year ended December 31, 2016.~~indemnification obligations, future cybersecurity attacks and other potential liabilities.



44		Second Quarter 2020 Form 10-Q

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information about shares of common stock acquired or repurchased during the three months ended ~~September~~June 30, ~~2017.~~2020. All of these acquisitions were of common stock withheld by us to satisfy tax obligations of employees due upon ~~exercise of stock appreciation rights and~~ vesting of restricted stock awards and units. The level of acquisition activity varies from period to period based upon the timing of grants and vesting as well as employee exercise decisions.

Period
Total
number
of shares
purchased

Average
price
paid
per
share

Total number
of shares
purchased as
part of
publicly
announced
plans or
programs⁽¹⁾

Approximate
dollar value
of shares
that may yet
be purchased
under the
plans or programs
(in thousands)

Beginning balance, July 1, 2017 $ 50,000
July 1, 2017 through July 31, 2017 —
$ —
—
50,000
August 1, 2017 through August 31, 2017 24,710
86.24
—
50,000
September 1, 2017 through September 30, 2017 3,644
87.00
—
50,000
Total 28,354
$ 86.34
—
$ 50,000



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽¹⁾	Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
Beginning balance, April 1, 2020					$	50,000
April 1, 2020 through April 30, 2020	175	$	80.18	—	50,000
May 1, 2020 through May 31, 2020	12,829	53.28		—	50,000
June 1, 2020 through June 30, 2020	8,196	63.10		—	50,000
Total	21,200	$	57.30	—	$	50,000


(1)	In August 2010, our Board of Directors approved a stock repurchase program that authorized us to purchase up to $50.0 million of our outstanding shares of common stock. We have not made any repurchases under the program to date, and the program does not have an expiration date.



42Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~45

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ITEM 6. EXHIBITS

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



		Filed In
Exhibit Number	Description of Document	Filed Herewith	Form	Exhibit Number	Filing Date
~~31.1~~10.1	~~Certification by the Chief Executive Officer pursuant~~Fifth Amendment to ~~Section 302~~Lease Agreement, dated as of ~~the Sarbanes-Oxley Act of 2002.~~February 18, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
~~31.2~~10.2	~~Certification by the Chief Financial Officer pursuant~~Sixth Amendment to ~~Section 302~~Lease Agreement, dated as of ~~the Sarbanes-Oxley Act of 2002.~~March 17, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
~~32.1~~10.3	Seventh Amendment to Lease Agreement, dated as of April 14, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
10.4	Eighth Amendment to Lease Agreement, dated as of May 26, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
10.5	Ninth Amendment to Lease Agreement, dated as of June 8, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
10.6	Purchase and Sale Agreement dated June 17, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
10.7	Tenth Amendment to Lease Agreement, dated as of June 26, 2020, between HPBB1, LLC and Blackbaud, Inc.	X
31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.INS*101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document.	X
101.SCH*101.SCH	Inline XBRL Taxonomy Extension Schema Document.	X
101.CAL*101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	X
101.DEF*101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	X
101.LAB*101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.	X
101.PRE*101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.	X
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).	X

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



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Blackbaud, Inc.



		SIGNATURES

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



		BLACKBAUD, INC.

Date:	~~November 2, 2017~~August 4, 2020	By:	/s/ Michael P. Gianoni
			Michael P. Gianoni
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November 2, 2017~~August 4, 2020	By:	/s/ Anthony W. Boor
			Anthony W. Boor
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)



44Second Quarter 2020 Form 10-Q		~~Third Quarter 2017 Form 10-Q~~47



(in thousands)	Purchase price allocation
Net working capital, excluding deferred revenue	$	2,949
Property and equipment	290
Finite-lived intangible assets	30,900
Deferred revenue	(3,950		)
Deferred tax liability	(12,350		)
Goodwill	34,305
Total purchase price	$	52,144



	Intangible assets acquired		Weighted average amortization period
AcademicWorks	(in thousands)		(in years)
Acquired technology	$	22,500	9
Customer relationships	8,000		15
Marketing assets	320		2
Non-compete agreements	80		3
Total intangible assets	$	30,900	10



Years ending December 31, (dollars in thousands)	Annual maturities
2017 - remaining	$	2,950
2018	8,576
2019	7,500
2020	7,500
2021	7,500
Thereafter	306,150
Total required maturities	$	340,176



	Location of gain (loss) recognized in income on derivative	Gain (loss) recognized in income
(dollars in thousands)	Location of gain (loss) recognized in income on derivative	Three months ended September 30, 2017			Nine months ended September 30, 2017
Foreign currency option contracts	Other income (expense), net	$	38		$	513
Foreign currency forward contracts	Other income (expense), net	$	(41	)	$	(41	)
Total (loss) gain⁽¹⁾		$	(3	)	$	472



Revenue by segment
	Three months ended September 30,						Nine months ended September 30,
(dollars in millions)	2017		2016		Change		2017		2016		Change
GMG	$	102.8	$	97.6	5.3	%	$	297.0	$	279.5	6.2	%
EMG	81.8		74.4		10.1	%	243.7		220.9		10.3	%
IMG	10.8		11.0		(1.7	)%	30.6		31.9		(4.1	)%
Total revenue⁽¹⁾	$	195.5	$	183.1	6.8	%	$	571.3	$	532.5	7.3	%

(in thousands)

June 30,
2020

December 31,
2019

Total deferred revenue