
Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited)													Blackbaud, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited)
														Three months ended September 30,				Nine months ended September 30,
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,
	2017			2016			2017			2016			(dollars in thousands, except per share amounts)	2020		2019		2020		2019
Revenue													Revenue
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													Recurring	$	200,102	$	205,227	$	621,229	$	611,789
One-time services and other													One-time services and other	14,899		15,893		49,384		50,795
Total revenue	195,513			183,063			571,329			532,510			Total revenue	215,001		221,120		670,613		662,584
Cost of revenue													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													Cost of recurring	84,251		87,645		265,172		259,013
Cost of one-time services and other													Cost of one-time services and other	14,434		14,152		43,317		42,874
Total cost of revenue	87,005			83,317			259,482			246,818			Total cost of revenue	98,685		101,797		308,489		301,887
Gross profit	108,508			99,746			311,847			285,692			Gross profit	116,316		119,323		362,124		360,697
Operating expenses													Operating expenses
Sales, marketing and customer success	44,193			40,690			129,394			115,707			Sales, marketing and customer success	48,460		55,499		159,149		165,963
Research and development	22,071			22,510			67,647			67,973			Research and development	22,783		25,941		72,655		80,304
General and administrative	23,545			22,319			67,350			62,089			General and administrative	34,132		28,897		89,829		84,557
Amortization	734			687			2,164			2,147			Amortization	749		703		2,219		3,231
Restructuring													Restructuring	105		400		179		3,083
Total operating expenses	90,543			86,206			266,555			247,916			Total operating expenses	106,229		111,440		324,031		337,138
Income from operations	17,965			13,540			45,292			37,776			Income from operations	10,087		7,883		38,093		23,559
Interest expense	(3,092		)	(2,641		)	(8,685		)	(8,037		)	Interest expense	(3,997)		(5,111)		(12,049)		(16,233)
Other income (expense), net	468			(15		)	1,581			(185		)
Other income, net													Other income, net	542		2,158		2,242		4,521
Income before provision for income taxes	15,341			10,884			38,188			29,554			Income before provision for income taxes	6,632		4,930		28,286		11,847
Income tax provision	2,793			1,950			2,964			5,323			Income tax provision	1,756		364		6,948		1,263
Net income	$	12,548		$	8,934		$	35,224		$	24,231		Net income	$	4,876	$	4,566	$	21,338	$	10,584
Earnings per share													Earnings per share
Basic	$	0.27		$	0.19		$	0.76		$	0.53		Basic	$	0.10	$	0.10	$	0.44	$	0.22
Diluted	$	0.26		$	0.19		$	0.74		$	0.51		Diluted	$	0.10	$	0.09	$	0.44	$	0.22
Common shares and equivalents outstanding													Common shares and equivalents outstanding
Basic weighted average shares	46,711,709			46,159,956			46,627,213			46,078,306			Basic weighted average shares	48,271,139		47,757,769		48,182,799		47,668,235
Diluted weighted average shares	47,846,997			47,394,106			47,679,103			47,268,469			Diluted weighted average shares	48,859,707		48,464,529		48,582,068		48,223,712
Dividends per share	$	0.12		$	0.12		$	0.36		$	0.36
Other comprehensive (loss) income
Other comprehensive income (loss)													Other comprehensive income (loss)
Foreign currency translation adjustment	(188		)	289			(467		)	261			Foreign currency translation adjustment	4,661		(3,893)		(1,954)		(5,321)
Unrealized (loss) gain on derivative instruments, net of tax	(267		)	409			(89		)	(378		)
Total other comprehensive (loss) income	(455		)	698			(556		)	(117		)
Unrealized gain (loss) on derivative instruments, net of tax													Unrealized gain (loss) on derivative instruments, net of tax	943		(363)		(1,628)		(3,234)
Total other comprehensive income (loss)													Total other comprehensive income (loss)	5,604		(4,256)		(3,582)		(8,555)
Comprehensive income	$	12,093		$	9,632		$	34,668		$	24,114		Comprehensive income	$	10,480	$	310	$	17,756	$	2,029

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 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,							Nine months ended September 30,
(dollars in thousands)	2017			2016			(dollars in thousands)	2020		2019
Cash flows from operating activities							Cash flows from operating activities
Net income	$	35,224		$	24,231		Net income	$	21,338	$	10,584
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	54,765			53,109			Depreciation and amortization	68,755		63,998
Provision for doubtful accounts and sales returns	7,246			3,139
Provision for credit losses and sales returns							Provision for credit losses and sales returns	10,156		6,192
Stock-based compensation expense	31,055			25,005			Stock-based compensation expense	54,556		43,621
Deferred taxes	(2,511		)	(225		)	Deferred taxes	1,879		(75)
Amortization of deferred financing costs and discount	650			718			Amortization of deferred financing costs and discount	569		564
Other non-cash adjustments	572			(634		)	Other non-cash adjustments	2,203		2,047
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:							Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable	(17,169		)	(9,288		)	Accounts receivable	(18,319)		(6,375)
Prepaid expenses and other assets	596			(934		)	Prepaid expenses and other assets	4,292		(5,129)
Trade accounts payable	(2,891		)	267			Trade accounts payable	(17,203)		(74)
Accrued expenses and other liabilities	(9,522		)	(12,837		)	Accrued expenses and other liabilities	(31,595)		(13,592)
Restricted cash due to customers	214,244			119,291
Due to customers	(214,244		)	(119,291		)
Deferred revenue	25,370			17,593			Deferred revenue	12,534		20,363
Net cash provided by operating activities	123,385			100,144			Net cash provided by operating activities	109,165		122,124
Cash flows from investing activities							Cash flows from investing activities
Purchase of property and equipment	(8,417		)	(15,459		)	Purchase of property and equipment	(25,836)		(9,597)
Capitalized software development costs	(20,605		)	(19,078		)	Capitalized software development costs	(32,028)		(34,513)
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							Purchase of net assets of acquired companies, net of cash and restricted cash acquired	0		(109,353)
Other investing activities							Other investing activities	0		500
Net cash used in investing activities	(78,237		)	(37,914		)	Net cash used in investing activities	(57,864)		(152,963)
Cash flows from financing activities							Cash flows from financing activities
Proceeds from issuance of debt	588,300			179,000			Proceeds from issuance of debt	267,400		371,200
Payments on debt	(594,144		)	(212,581		)	Payments on debt	(290,999)		(255,625)
Debt issuance costs	(3,085		)	—			Debt issuance costs	(593)		0
Employee taxes paid for withheld shares upon equity award settlement	(19,092		)	(10,497		)	Employee taxes paid for withheld shares upon equity award settlement	(21,286)		(20,279)
Proceeds from exercise of stock options	14			10			Proceeds from exercise of stock options	4		7
Change in due to customers							Change in due to customers	(337,821)		(215,942)
Change in customer funds receivable							Change in customer funds receivable	(4,495)		(6,283)
Dividend payments to stockholders	(17,299		)	(17,108		)	Dividend payments to stockholders	(5,960)		(17,705)
Net cash used in financing activities	(45,306		)	(61,176		)	Net cash used in financing activities	(393,750)		(144,627)
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.
Effect of exchange rate on cash, cash equivalents and restricted cash							Effect of exchange rate on cash, cash equivalents and restricted cash	(623)		(2,240)
Net decrease in cash, cash equivalents and restricted cash							Net decrease in cash, cash equivalents and restricted cash	(343,072)		(177,706)
Cash, cash equivalents and restricted cash, beginning of period							Cash, cash equivalents and restricted cash, beginning of period	577,295		449,846
Cash, cash equivalents and restricted cash, end of period							Cash, cash equivalents and restricted cash, end of period	$	234,223	$	272,140

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~~


Third Quarter 2020 Form 10-Q						15

Table of Contents

~~As discussed in Note 3~~

Blackbaud, Inc.

Notes 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).Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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~~"2017 Credit ~~Facility”~~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 Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to 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.~~

~~Summary of 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”), 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 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.

Real estate loans

~~The 2017 Credit Facility also includes an option to request increases~~In August 2020, we completed the purchase of our Headquarters Facility. As part of the purchase price, we assumed the Seller’s obligations under (i) a 5.12% Senior Secured Note, Series A1, in the ~~revolving commitments and/or request additional term loans in an aggregate~~outstanding principal amount of ~~up to $200.0~~$49.1 million, ~~plus~~dated May 2, 2018, and (ii) a 5.61% Senior Secured Note, Series A2, in the outstanding principal amount of $12.0 million, dated May 2, 2018, or an aggregate outstanding principal amount ~~if any, such~~of $61.1 million (collectively, the “Real Estate Loans”). The Series A1 Note provides that we will pay the ~~Net Leverage Ratio shall be no greater than 3.00 to 1.00.~~

remaining principal amount due thereunder together with interest thereon at the rate indicated above, in monthly installments until it matures in April 2038. The Series A2 Note provides that we pay interest only in monthly installments at the rate indicated above with the principal amount due at maturity in April 2038. The Real Estate Loans are secured by a first priority lien on the real property constituting the Headquarters Facility. Our assumption of the Real Estate Loans was a noncash investing and financing transaction and, therefore, is not reflected in the statement of cash flows. At September 30, 2020, we were in compliance with our debt covenants under the Real Estate Loans.

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


Years ending December 31, (dollars in thousands)	Annual maturities		Years ending December 31, (dollars in thousands)	Annual maturities
2017 - remaining	$	2,950
2018	8,576
2019	7,500
2020	7,500
2020 - remaining			2020 - remaining	$	2,139
2021	7,500		2021	10,340
2022			2022	438,435
2023			2023	1,983
2024			2024	1,609
Thereafter	306,150		Thereafter	55,135
Total required maturities	$	340,176	Total required maturities	$	509,641



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

Table of Contents

Blackbaud, Inc.

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

(Unaudited)



9. 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.

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.

~~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.

30, 2020:


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

16$	275,000	~~Third Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

~~Notes to 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		(dollars in thousands)	Balance sheet location	September 30, 2020		December 31, 2019
Derivative instruments designated as hedging instruments:											Derivative instruments designated as hedging instruments:
Interest rate swaps, current portion	Prepaid expenses and other current assets	$	223	$	—	Accrued expenses and other current liabilities	$	—	$	—	Interest rate swaps, current portion	Accrued expenses and other current liabilities	$	3,957	$	0
Interest rate swaps, long-term portion	Other assets	—		206		Other liabilities	328		163		Interest rate swaps, long-term portion	Other liabilities	0		1,757
Total derivative instruments designated as hedging instruments		$	223	$	206		$	328	$	163	Total derivative instruments designated as hedging instruments		$	3,957	$	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


2.	~~Drive Sales Effectiveness~~

We continue to invest in a world-class sales organization to accelerate revenue growth and penetrate our large and expanding total addressable market ("TAM"), which is currently estimated to be over $7.0 billion. During the first three quarters of 2017, we created a new Senior Vice President of Global Sales position to lead this effort across the organization and we have focused on enabling our expanding sales teams with training, processes, and tools to improve effectiveness and drive revenue growth. The further development of our customer success program is allowing our sales teams to focus on closing sales rather than account management. The move to selling pre-integrated solution suites instead of individual point-solutions continues to be successful, and we have furthered our go-to-market shift with a concentrated sales focus by sub-vertical, including K-12 private schools, foundations, corporations, arts & cultural, higher education and healthcare.


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, 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 our portfolio, provide better integrated solutions for our customers, differentiate ourselves from the competition and improve our financial performance.


4.	~~Improve Operating Efficiency~~

We are also focused on operational efficiency to deliver improved profitability. Our organizational model has evolved in recent years allowing us to gain efficiency and consistency in how we execute. 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 basis from our 2014 baseline of 17.5%, by the end of 2017. Since setting that goal, we have improved margins annually, inclusive of heightened investments to drive future growth and in the midst of migrating our customer base to the cloud. We expect to deliver on our goal, and we see future opportunity ahead to further improve profitability through the infrastructure investments we have made in our back office for scale, focus on operational excellence, and achieving our productivity initiatives.

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.



24Total revenue ($M)						~~Third Quarter 2017 Form 10-Q~~Income from operations ($M)
YoY Growth (%)						YoY Growth (%)

~~Table of Contents~~

~~Blackbaud, Inc.~~

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~~Total revenue decreased by $6.1 million during the three ~~and nine~~ months ended September 30, ~~2017,~~2020, when compared to the same ~~periods~~period in ~~2016, were primarily~~2019, driven largely by ~~growth in subscriptions~~the following:


			-						Decrease in recurring revenue primarily due to declines in transactional revenue and maintenance revenue. Transactional revenue decreased as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19. The decrease in maintenance revenue was related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform
			-						Decrease in one-time consulting revenue primarily from less one-time sales related to COVID-19

Total revenue as our business model continues to shift towards providing predominantly cloud-based subscription solutions. Subscriptions revenue also grew as a result of increases in the number of customers and the volume of transactions for which 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 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$8.0 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~~2020, when compared to the same period in ~~rent expense was primarily~~2019, driven largely by the ~~end~~following:


			+						Growth in recurring revenue related to positive demand from customers across our portfolio of cloud solutions and an increase in transactional revenue, including charitable giving related to COVID-19
			-						Decrease in one-time consulting revenue primarily from less of one-time sales related to COVID-19
			-						Decrease in one-time analytics revenue as analytics are generally integrated in our cloud solutions


28						Third Quarter 2020 Form 10-Q

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Blackbaud, Inc.

(Unaudited)

Income from operations increased by $2.2 million during the three months ended September 30, 2020, when compared to the same period in 2019, driven largely by the ~~fourth quarter of 2016~~following:


			+						Reduced overall compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards and the modest and targeted headcount reduction we implemented during the second quarter
			+						Decrease in travel costs of $3.7 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
			+						Decrease in amortization of intangible assets from business combinations of $2.0 million
			+						Decrease in acquisition-related expenses and integration costs of $1.2 million
			-						Decrease in total revenue, as described above
			-						Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above
			-						Increase in corporate costs of $2.9 million, primarily related to increases in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report

Income from operations increased by $14.5 million during the nine months ended September 30, 2020, when compared to the same period in 2019, driven largely by the following:


			+						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 travel costs of $6.9 million due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
			+						Decrease in amortization of intangible assets from business combinations of $5.1 million
			+						Decrease in acquisition-related expenses and integration costs of $3.1 million
			+						Decrease in restructuring costs of $2.9 million as our facilities optimization plan was largely completed as of December 31, 2019
			-						Increase in real estate activity costs of $6.8 million due to our workforce strategy changes in response to the COVID-19 pandemic. For additional details, see "Results of Operations - General and administrative" below.
			-						Increase in corporate costs of $6.1 million primarily related to an increase in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report
			-						Increase 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
			-						Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers

There are three primary revenue categories with related business drivers that we continue to monitor closely in light of the ~~South Carolina state incentive payments we received as a result~~COVID-19 pandemic:

1.Contractual Recurring Revenue (approximately two thirds of ~~locating our headquarters facility~~total revenue 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.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. Our contracted recurring revenue has performed well as our renewals have continued to trend ahead of our original plan with over three quarters of 2020 now behind. We expect the shortfall in bookings to put pressure on our revenue during the fourth quarter of 2020 and more so on our full-year 2021 revenue. We are closely monitoring our customer receivable balances, payment terms, and creditworthiness. We are experiencing an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic and this development may continue in the near term.

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


Third Quarter 2020 Form 10-Q						29

Table of Contents

Blackbaud, Inc.

(Unaudited)

campaigns and during the second quarter when a large number of events are held. During the third quarter, we again saw many in-person events shift online, be postponed or 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 continue to support our customers in adapting to these circumstances through virtual campaigns and events.

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 negative impact on our 2021 revenue than 2020 revenue. Of these three primary revenue categories, 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.


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 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 30, ~~2017,~~2020, our cash and cash equivalents were ~~$17.1~~$30.6 million and ~~outstanding borrowings~~the carrying amount of our debt under the 2017 Credit Facility ~~were $340.2~~was $444.0 million. Our net leverage ratio was 1.95 to 1.00.


30						Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

During the nine months ended September 30, ~~2017,~~2020, we generated ~~$123.4~~$109.2 million in cash ~~flow~~ from operations, ~~reduced our~~primarily from operating cost reductions put in place in response to COVID-19 and the increased use of stock-based compensation. During the nine months ended September 30, 2020, we had a net decrease in borrowings ~~by $5.8 million, inclusive~~of $23.6 million. Our assumption of the ~~incremental borrowings needed to finance~~real estate loans associated with our purchase of our Headquarter Facility was a noncash investing and financing transaction (see discussion below).

During the ~~acquisition of AcademicWorks, returned $17.3 million to stockholders by way of dividends and~~nine months ended September 30, 2020, we also had aggregate cash outlays of ~~$29.0~~$57.9 million for purchases of property and equipment and capitalized software development costs.

Recent ~~development - JustGiving acquisition~~Developments

~~On October 2, 2017,~~Purchase of Headquarters Facility

In August 2020, we ~~acquired~~completed the ~~entire issued share capital~~purchase of ~~JustGiving for an aggregate~~our Headquarters Facility. Prior to the completion of the Transaction, we leased the Headquarters facility from the Seller. We paid the Seller a purchase price that included the assumption of ~~£95.0~~the Seller's obligations of $61.1 million, ~~or approximately $127.4~~cash of $15.2 million ~~in cash, subject to~~and certain lender fees, closing costs, adjustments and prorations as set forth in the ~~stock~~PSA. We funded the cash portion of the purchase ~~agreement. We financed the acquisition~~price through borrowings under the 2017 Credit Facility. As

October 2020 refinancing

On October 30, 2020, we entered into the 2020 Credit Facility. The 2020 Credit Facility matures in October 2025 and replaces the 2017 Credit Facility by amending and restating it to (a) increase the amount available under the revolving credit facility to $500.0 million, (b) increase the amount available under the term loan facility to $400.0 million and (c) provide for a ~~result~~net leverage ratio of, (i) commencing with the first fiscal quarter ending December 31, 2020 and through September 30, 2022, 4.00 to 1.00 and (ii) commencing with the fiscal quarter ending December 31, 2022 and thereafter, 3.75 to 1.00, among other changes. See Part II, Item 5. “Other Information” for detailed information relating to the terms 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. 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.

2020 Credit Facility.



Third Quarter 2020 Form 10-Q						31

Table of Contents

Blackbaud, Inc.

(Unaudited)


Results of Operations

Comparison of the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019

Revenue and Cost of Revenue

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 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 portfolio 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.



26Recurring						~~Third Quarter 2017 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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 %

The increases in EMG revenue during the three and nine months ended September 30, 2017, when compared to the same periods in 2016, were primarily attributable to growth in subscriptions revenue, partially offset by decreases in services 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.

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 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 volume 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.

~~Third Quarter 2017 Form 10-Q~~Revenue ($M)

27Cost of revenue ($M)

Gross profit ($M)
and gross margin (%)

~~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 %

YoY Growth (%)

~~(1)~~

~~The individual amounts for each year may not sum to subscriptions gross profit due to rounding.~~

Table of Contents

Blackbaud, Inc.

(Unaudited)

~~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

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 to drive customer loyalty, retention, and referrals. The increase in~~ sales headcount with a focus on retaining our most highly productive sales executives.

Sales, marketing and customer success expense ~~in dollars~~decreased by $7.0 million or 12.7%, and ~~as a percentage of total revenue~~$6.8 million or 4.1%, during the three and nine months ended September 30, ~~2017,~~2020, respectively, when compared to the same periods in 2016, were primarily due to increases in compensation costs of $3.3 million and $10.5 million, respectively. Also contributing to the increase in sales, marketing and customer success expense for the nine months ended September 30, 2017 was an increase 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~~+	For the nine months ended September 30, 2020, increase in ~~research~~employee severance costs of $1.0 million related to a reduction in our sales headcount in response to the COVID-19 pandemic as discussed above
	-	Decreases in compensation costs of $3.5 million and ~~development expense~~$2.6 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards; for the three months ended September 30, ~~2017~~ ~~and~~ ~~2016~~ ~~were $7.0~~2020, compensation costs also decreased due to the reduction in sales headcount discussed above
	-	Decreases in travel costs of $2.1 million and ~~$6.9~~$3.6 million, respectively, due to our restriction on non-essential employee travel in response to the COVID-19 pandemic
	-	Decreases in commissions expense of ~~qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those~~$0.7 million and $0.9 million, respectively, related to development 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.a decrease in commissionable sales


~~(2)~~	~~Not included in research~~ Research and development ~~expense for 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.~~

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 $3.2 million or 12.2%, and $7.6 million or 9.5%, during the three and nine months ended September 30, ~~2017,~~2020, respectively, when compared to the same periods in ~~2016. During~~2019, primarily driven by the following:


			-						Decreases in compensation costs of $2.5 million and $6.0 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
			-						Decreases in third-party contractor costs of $0.9 million and $1.2 million, respectively

Not included in research and development expense for the three months ended September 30, 2020 and 2019 were $10.2 million and $11.1 million, respectively, and for the nine months ended September 30, ~~2017, an increase in compensation costs~~2020 and 2019 were $31.6 million and $33.9 million, respectively, of $1.4 million associated with our addition of specialized engineering resources to help drive our solution development efforts was offset primarily by an increase in the amount 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 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.



36	Third Quarter ~~2017~~2020 Form 10-Q	31

Table of Contents

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(Unaudited)

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 %
General and administrative

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

~~The increases~~During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely after our offices reopen. This change is expected to create efficiencies within our real estate footprint as we shift toward more collaborative workspaces within our offices. As a result, during the three months ended September 30, 2020, we reduced the estimated useful lives of our operating lease ROU assets for certain of our office locations we expect to exit, which resulted in ~~general~~an increase in operating lease costs during the period. For these same office locations, we also reduced the estimated useful lives of certain facilities-related fixed assets, which resulted in an increase in depreciation expense. We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between $20.0 million and $25.0 million during the third and fourth quarters of 2020. We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.

General and administrative expense increased by $5.2 million or 18.1%, and $5.3 million or 6.2%, during the three and nine months ended September 30, ~~2017,~~2020, when compared to the same periods in ~~2016, were~~2019, primarily driven by the following:


			+						Increases in real estate activity costs of $6.8 and $6.8, respectively, due to our workforce strategy changes in response to the COVID-19 pandemic, as discussed above
			+						Increases in corporate costs of $2.5 million and $5.9 million, respectively, primarily related to increases in bad debt expense; for additional details, see Note 2 of our condensed consolidated financial statements in this report
			-						Decreases in compensation costs of $2.0 million and $2.7 million, respectively, primarily related to the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
			-						Decreases in acquisition-related expenses and integration costs of $1.2 million and $3.1 million, respectively
			-						Decreases in third-party contractor costs of $1.0 million and $1.4 million, respectively

Restructuring

During 2017, in an effort to ~~increases in rent expense~~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 ~~$0.7 million~~our existing offices to highly modern and ~~$3.3 million, respectively,~~more collaborative workspaces with short-term financial commitments, which was substantially completed as of December 2019. During the three 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~~2019, we incurred $0.4 million and ~~administrative expense. The increases~~$3.1 million, respectively, 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 contributingbefore-tax restructuring charges related 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~~these activities. Such charges during the three and nine months ended September 30, ~~2017, when compared to the same periods in 2016.~~2020 were insignificant.

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


	Three months ended September 30,								Nine months ended September 30,
(dollars in millions)	2020			2019			Change		2020			2019			Change

Interest expense	$	4.0		$	5.1		(21.8)	%	$	12.0		$	16.2		(25.8)	%
% of total revenue	1.9		%	2.3		%			1.8		%	2.4		%

The decreases in interest expense ~~increased~~in dollars and as a percentage of total revenue during the three and nine months ended September 30, ~~2017,~~2020, when compared to the same periods in ~~2016,~~2019, were primarily due to ~~modest increases~~decreases in our average daily borrowings and our weighted average effective interest rates. ~~Also contributing to the increase in~~We expect our interest expense ~~during~~to remain relatively consistent in 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.

near-term.



32	Third Quarter ~~2017~~2020 Form 10-Q	37

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(Unaudited)

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, 2020		December 31, 2019		Change
Recurring	Over the period billed in advance, generally one year	$	314.2	$	302.8	3.8	%
One-time services and other	As services are delivered	14.1		13.4		5.2	%
Total deferred revenue(1)		328.3		316.1		3.8	%
Less: Long-term portion		5.8		1.8		222.0	%
Current portion(1)		$	322.5	$	314.3	2.6	%

(dollars in millions) Timing of recognition September 30,
2017
Change
December 31,
2016
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
Total deferred revenue⁽¹⁾
282.4
12.5 % 250.9
Less: Long-term portion 5.4
(16.0 )% 6.4
Current portion⁽¹⁾
$ 277.0
13.3 % $ 244.5
(1)The individual amounts for each year may not sum to total deferred revenue or current portion of deferred revenue due to rounding.


~~(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 months ended September 30, ~~2017,~~2020, primarily due ~~to an increase in subscription sales, as well as~~ a seasonal increase in ~~subscription~~ customer contract renewals. 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 months ended September 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 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 September 30,								Nine months ended September 30,
(dollars in millions)	2017			2016			Change		2017			2016			Change		(dollars in millions)	2020			2019			Change		2020			2019			Change
Income tax provision	$	2.8		$	2.0		43.2	%	$	3.0		$	5.3		(44.3	)%	Income tax provision	$	1.8		$	0.4		382.4	%	$	6.9		$	1.3		450.1	%
Effective income tax rate	18.2		%	17.9		%			7.8		%	18.0		%			Effective income tax rate	26.5		%	7.4		%			24.6		%	10.7		%

~~Our~~The increase in our effective ~~income~~ tax rate ~~during~~for the three months ended September 30, ~~2017 remained relatively unchanged~~2020, when compared to the same period in ~~2016.~~2019, was primarily attributable to higher 2019 discrete benefits against lower pre-tax income. The ~~decrease~~2019 effective tax rate was positively impacted by a reduction to the liability for unrecognized tax benefits. The effective tax rate for 2020 was positively impacted by an adjustment to the prior year tax provision net of a tax charge resulting from an increase in the U.K. tax rate.

The increase in our effective ~~income~~ tax rate ~~during~~for the nine months ended September 30, ~~2017,~~2020, when compared to the same period in ~~2016,~~2019, was primarily ~~due~~attributable to a ~~$9.0 million discrete tax benefit to expense relating to stock-based compensation items, as compared to a $4.3 million discrete tax benefit for the same period~~reduction 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~~benefits 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.based compensation against increased 2020 profitability.



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

~~Table of Contents~~

~~Blackbaud, Inc.~~

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


38						Third Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

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

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

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


	Three months ended September 30,								Nine months ended September 30,
(dollars in millions)	2020			2019			Change		2020			2019			Change
GAAP Revenue	$	215.0		$	221.1		(2.8)	%	$	670.6		$	662.6		1.2	%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	—			0.3			(100.0)	%	—			1.7			(100.0)	%
Non-GAAP revenue(1)	$	215.0		$	221.4		(2.9)	%	$	670.6		$	664.3		1.0	%

GAAP gross profit	$	116.3		$	119.3		(2.5)	%	$	362.1		$	360.7		0.4	%
GAAP gross margin	54.1		%	54.0		%			54.0		%	54.4		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	—			0.3			(100.0)	%	—			1.7			(100.0)	%
Add: Stock-based compensation expense	3.7			0.8			370.4	%	7.1			2.5			179.4	%
Add: Amortization of intangibles from business combinations	9.2			11.2			(17.9)	%	29.8			34.0			(12.2)	%
Add: Employee severance	—			—			(100.0)	%	0.8			1.1			(28.3)	%

Subtotal(1)	12.9			12.3			5.0	%	37.8			39.3			(4.0)	%
Non-GAAP gross profit(1)	$	129.2		$	131.6		(1.8)	%	$	399.9		$	400.0		—	%
Non-GAAP gross margin	60.1		%	59.5		%			59.6		%	60.2		%

Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2017
2016
Change
2017
2016
Change
GAAP Revenue $ 195.5
$ 183.1
6.8 % $ 571.3
$ 532.5
7.3 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down 0.3
—
100.0 % 0.7
3.6
(80.8 )%
Non-GAAP revenue⁽¹⁾
$ 195.9
$ 183.1
7.0 % $ 572.0
$ 536.1
6.7 %

GAAP gross profit $ 108.5
$ 99.7
8.8 % $ 311.8
$ 285.7
9.2 %
GAAP gross margin 55.5 % 54.5 % 54.6 % 53.7 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down 0.3
—
100.0 % 0.7
3.6
(80.8 )%
Add: Stock-based compensation expense 0.9
0.9
2.0 % 2.7
2.6
2.8 %
Add: Amortization of intangibles from business combinations 10.0
9.9
1.2 % 29.9
29.7
0.8 %
Add: Employee severance —
—
(100.0 )% 1.0
0.2
508.1 %
Add: Acquisition-related integration costs —
—
— % 0.1
—
100.0 %
Subtotal⁽¹⁾
11.3
10.8
4.3 % 34.3
36.1
(4.8 )%
Non-GAAP gross profit⁽¹⁾
$ 119.8
$ 110.5
8.3 % $ 346.2
$ 321.8
7.6 %
Non-GAAP gross margin 61.1 % 60.4 % 60.5 % 60.0 %


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

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



34Third Quarter 2020 Form 10-Q						39

Table of Contents

Blackbaud, Inc.

(Unaudited)


	Three months ended September 30,								Nine months ended September 30,
(dollars in millions, except per share amounts)	2020			2019			Change		2020			2019			Change
GAAP income from operations	$	10.1		$	7.9		28.0	%	$	38.1		$	23.6		61.7	%
GAAP operating margin	4.7		%	3.6		%			5.7		%	3.6		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	—			0.3			(100.0)	%	—			1.7			(100.0)	%
Add: Stock-based compensation expense	20.8			14.9			40.2	%	54.6			43.6			25.1	%
Add: Amortization of intangibles from business combinations	10.0			11.9			(16.4)	%	32.1			37.2			(13.8)	%
Add: Employee severance	0.2			—			383.3	%	4.6			3.7			25.5	%
Add: Acquisition-related integration costs	—			1.0			(101.5)	%	(0.1)			2.2			(105.3)	%
Add: Acquisition-related expenses	0.1			0.2			(70.9)	%	0.3			1.0			(72.0)	%
Add: Restructuring and other real estate activities	6.9			0.4			1,635.8	%	7.0			3.1			127.6	%
Subtotal(1)	38.0			28.7			32.3	%	98.4			92.5			6.4	%
Non-GAAP income from operations(1)	$	48.1		$	36.6		31.4	%	$	136.5		$	116.1		17.6	%
Non-GAAP operating margin	22.4		%	16.5		%			20.4		%	17.5		%

GAAP income before provision for income taxes	$	6.6		$	4.9		34.5	%	$	28.3		$	11.8		138.8	%
GAAP net income	$	4.9		$	4.6		6.8	%	$	21.3		$	10.6		101.6	%
Shares used in computing GAAP diluted earnings per share	48,859,707			48,464,529			0.8	%	48,582,068			48,223,712			0.7	%
GAAP diluted earnings per share	$	0.10		$	0.09		11.1	%	$	0.44		$	0.22		100.0	%
Non-GAAP adjustments:
Add: GAAP income tax provision	1.8			0.4			382.4	%	6.9			1.3			450.1	%
Add: Total non-GAAP adjustments affecting income from operations	38.0			28.7			32.3	%	98.4			92.5			6.4	%


Non-GAAP income before provision for income taxes	44.7			33.7			32.6	%	126.7			104.3			21.4	%
Assumed non-GAAP income tax provision(2)	8.9			6.7			32.6	%	25.3			20.9			21.4	%
Non-GAAP net income(1)	$	35.7		$	26.9		32.6	%	$	101.3		$	83.5		21.4	%

Shares used in computing non-GAAP diluted earnings per share	48,859,707			48,464,529			0.8	%	48,582,068			48,223,712			0.7	%
Non-GAAP diluted earnings per share	$	0.73		$	0.56		30.4	%	$	2.09		$	1.73		20.8	%

(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 20.0% when calculating non-GAAP net income and non-GAAP diluted earnings per share.

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


	Nine months ended September 30,
(dollars in millions)	2020		2019		Change
GAAP net cash provided by operating activities	$	109.2	$	122.1	(10.6)	%
Less: purchase of property and equipment	(25.8)		(9.6)		169.2	%
Less: capitalized software development costs	(32.0)		(34.5)		(7.2)	%
Non-GAAP free cash flow	$	51.3	$	78.0	(34.2)	%


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

Table of Contents

Blackbaud, Inc.

(Unaudited)

Three months ended
September 30, Nine months ended
September 30,
(dollars in millions, except per share amounts) 2017
2016
Change
2017
2016
Change
GAAP income from operations $ 18.0
$ 13.5
32.7 % $ 45.3
$ 37.8
19.9 %
GAAP operating margin 9.2 % 7.4 % 7.9 % 7.1 %
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down 0.3
—
100.0 % 0.7
3.6
(80.8 )%
Add: Stock-based compensation expense 10.9
8.8
23.9 % 31.1
25.0
24.2 %
Add: Amortization of intangibles from business combinations 10.7
10.5
1.5 % 32.1
31.8
0.8 %
Add: Employee severance 0.1
0.1
77.8 % 3.0
0.5
533.0 %
Add: Acquisition-related integration costs 0.4
0.9
(58.2 )% 0.6
1.4
(56.8 )%
Add: Acquisition-related expenses 1.5
0.2
899.3 % 3.9
0.3
1,353.2 %
Subtotal⁽¹⁾
24.0
20.5
17.1 % 71.3
62.6
13.8 %
Non-GAAP income from operations⁽¹⁾
$ 42.0
$ 34.0
23.3 % $ 116.6
$ 100.4
16.1 %
Non-GAAP operating margin 21.4 % 18.6 % 20.4 % 18.7 %

GAAP net income $ 12.5
$ 8.9
40.5 % $ 35.2
$ 24.2
45.4 %
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 %
GAAP diluted earnings per share $ 0.26
$ 0.19
36.8 % $ 0.74
$ 0.51
45.1 %
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 %
Non-GAAP net income⁽¹⁾
$ 26.9
$ 21.3
25.8 % $ 74.3
$ 62.7
18.6 %

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 %
Non-GAAP diluted earnings per share $ 0.56
$ 0.45
24.4 % $ 1.56
$ 1.33
17.3 %


~~(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 non-GAAP net income, which represents the GAAP effective tax rate, excluding the discrete tax effect of stock-based compensation.

The increases in non-GAAP income from operations during the three 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 organization and customer success program and, to a lesser extent, increases in rent expense, which are discussed above.

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.


(dollars in millions)	Three months ended September 30,					Nine months ended September 30,
	2020			2019		2020			2019
GAAP revenue	$	215.0		$	221.1	$	670.6		$	662.6
GAAP revenue growth	(2.8)		%			1.2		%
Add: Non-GAAP acquisition-related revenue (1)	—			0.3		—			1.7
Non-GAAP organic revenue (2)	$	215.0		$	221.4	$	670.6		$	664.3
Non-GAAP organic revenue growth	(2.9)		%			1.0		%

Non-GAAP organic revenue (2)	$	215.0		$	221.4	$	670.6		$	664.3
Foreign currency impact on Non-GAAP organic revenue (3)	(0.8)			—		1.5			—
Non-GAAP organic revenue on constant currency basis (3)	$	214.2		$	221.4	$	672.1		$	664.3
Non-GAAP organic revenue growth on constant currency basis	(3.2)		%			1.2		%

GAAP recurring revenue	$	200.1		$	205.2	$	621.2		$	611.8
GAAP recurring revenue growth	(2.5)		%			1.5		%
Add: Non-GAAP acquisition-related revenue (1)	—			0.3		—			1.7
Non-GAAP organic recurring revenue	$	200.1		$	205.5	$	621.2		$	613.5
Non-GAAP organic recurring revenue growth	(2.6)		%			1.3		%

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

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

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



Third Quarter ~~2017~~2020 Form 10-Q						3541

Table of Contents

Blackbaud, Inc.

(Unaudited)

(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 %

~~(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 revenue for the prior year periods presented herein may not agree to non-GAAP 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 Canadian Dollar, EURO, British Pound and Australian Dollar.

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~~

~~Table of Contents~~

~~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			(dollars in millions)	September 30, 2020		December 31, 2019		Change
Cash and cash equivalents	$	17.1		0.9	%	$	16.9		Cash and cash equivalents	$	30.6	$	31.8	(3.9)	%
Property and equipment, net	43.9			(12.7	)%	50.3			Property and equipment, net	109.5		35.5		208.0	%
Software development costs, net	48.6			29.4	%	37.6			Software development costs, net	108.9		101.3		7.5	%
Total carrying value of debt	338.0			(1.3	)%	342.4			Total carrying value of debt	508.3		467.1		8.8	%
Working capital	(181.1		)	(5.1	)%	(172.2		)	Working capital	(207.6)		(254.3)		18.4	%
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,									Nine months ended September 30,
(dollars in millions)	2017			Change		2016			(dollars in millions)	2020		2019		Change
Net cash provided by operating activities	$	123.4		23.2	%	$	100.1		Net cash provided by operating activities	$	109.2	$	122.1	(10.6)	%
Net cash used in investing activities	(78.2		)	106.4	%	(37.9		)	Net cash used in investing activities	(57.9)		(153.0)		(62.2)	%
Net cash used in financing activities	(45.3		)	(25.9	)%	(61.2		)	Net cash used in financing activities	(393.8)		(144.6)		172.3	%

Our principal sources of liquidity are our operating cash flow, funds available under the ~~2017~~2020 Credit Facility and cash on hand. Our operating cash flow depends on continued customer renewal of our subscription and maintenance ~~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.


42						Third Quarter 2020 Form 10-Q

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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 key roles, including engineering 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 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.

•During the third quarter of 2020, we adjusted our workforce strategy to provide more flexibility for our employees to work remotely when our offices reopen. This change also expands our access to a larger and more diverse talent pool, empowers our leaders to make decisions based on skills and business need rather than location, and it is expected to create efficiencies within our real estate strategy as we optimize our footprint and shift toward more collaborative workspaces within our offices. We currently expect most of the transactions related to these real estate activities will close during the fourth quarter of 2020 with a one-time cash outlay of between $20.0 million and $25.0 million during the third and fourth quarters of 2020. We incurred approximately $6.8 million of pre-tax costs related to these real estate activities during the third quarter of 2020.

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 are experiencing an increase in our aging of receivables and observed changes in some of our customers' payment behavior associated with the COVID-19 pandemic and this development may continue in the near term. 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. During the three and nine months ended September 30, 2020, our bad debt expense increased by $2.4 million and $5.3 million, respectively, compared to the same periods in 2019. 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 30, ~~2017,~~2020, our total cash and cash equivalents balance included approximately ~~$7.5~~$17.2 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next twelve months, if we need these funds, we may be required to accrue and pay taxes to repatriate the funds. We currently do not intend nor anticipate a need to repatriate our cash held outside the U.S.

Operating ~~cash flow~~Cash Flow

Net cash provided by operating activities ~~of $123.4 million increased~~decreased by ~~$23.2~~$13.0 million during the nine months ended September 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 $45.5 million decrease in cash flow from operations associated with working ~~capital.~~capital, partially offset by a $32.5 million increase in net income adjusted for non-


Third Quarter 2020 Form 10-Q						43

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(Unaudited)

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



~~Third Quarter 2017 Form 10-Q~~		37

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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 in lieu of cash-based compensation.

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~~during the nine months ended September 30, 2020, when compared to the same period in 2019, was primarily due 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 for our 2020 bonus plans with performance-based equity awards;

•an increase in the aging of customer receivable balances primarily due to the COVID-19 pandemic; and

•fluctuations in the timing of vendor payments.

Investing Cash Flow

Net cash used in investing activities of $57.9 million decreased by $95.1 million during the nine months ended September 30, ~~2017,~~2020, when compared to the same period in ~~2016, primarily due to a decrease in bonus payments partially offset by an increase in cash taxes paid.~~

~~Investing cash flow~~

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

During the nine months ended September 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 nine months ended September 30, 2020, we used ~~$20.6~~$32.0 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~~$25.8 million of cash for purchases of property and equipment during the nine months ended September 30, ~~2017,~~2020, which was ~~down $7.0~~an increase of $16.2 million ~~from cash spent during~~when compared to the same period in ~~2016.~~2019. The ~~decrease in~~additional cash ~~outlays for property and equipment~~expended 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.~~used to purchase our Headquarters Facility.

Financing ~~cash flow~~Cash Flow

During the nine months ended September 30, ~~2017,~~2020, we had a net decrease in borrowings of ~~$5.8 million, even with the incremental borrowings needed to finance our acquisition of AcademicWorks. We also paid $3.1 million in financing costs as a result of refinancing our credit facility.~~$23.6 million.

We paid ~~$19.1~~$21.3 million to satisfy tax obligations of employees upon settlement ~~or exercise~~ of equity awards during the nine months ended September 30, ~~2017~~2020 compared to ~~$10.5~~$20.3 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 months ended September 30, ~~2017,~~2020, we paid dividends of ~~$17.3~~$6.0 million, ~~which was relatively consistent~~down from $17.7 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 increased $121.9 million during the nine months ended September 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 significantly larger than at the same date in 2018 primarily due to the timing of year-end donations. Additionally, effective August 3, 2020, a significant amount of restricted cash related to charitable giving transacted through our social responsibility and grantmaking solutions is now held and disbursed by the Blackbaud Giving Fund, an independent nonprofit organization, strategic partner of ours, and sponsoring organization for a donor advised fund. This change was made primarily to facilitate faster tax receipts for our customers and their employees.


44						Third Quarter 2020 Form 10-Q

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(Unaudited)

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 30, ~~2017,~~2020, our available borrowing capacity under the 2017 Credit Facility was ~~$356.2~~$229.6 million. The 2017 Credit Facility matures in June 2022.

At September 30, ~~2017,~~2020, the carrying amount of our debt under the 2017 Credit Facility was ~~$335.8~~$444.0 million. Our average daily borrowings during the three and nine months ended September 30, ~~2017~~2020 were ~~$355.4~~$472.7 million and ~~$368.5~~$496.7 million, respectively.

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

the 2017 Credit Facility:



Financial ~~Covenant~~covenant	Requirement	Ratio as of September 30, ~~2017~~2020
Net ~~Leverage Ratio~~leverage ratio	≤ 3.50 to 1.00	~~1.79~~1.95 to 1.00
Interest ~~Coverage Ratio~~coverage ratio	≥ 2.50 to 1.00	~~16.31~~13.84 to 1.00



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

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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 30, ~~2017,~~2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

October 2020 refinancing


Third Quarter 2020 Form 10-Q						45

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(Unaudited)

Commitments and ~~contingencies~~Contingencies

As of September 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		(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Recorded contractual obligations:											Recorded contractual obligations:
Debt⁽¹⁾	$	340.2	$	8.6	$	16.1	$	315.5	$	—	Debt(1)	$	509.6	$	10.3	$	442.2	$	3.3	$	53.8
Interest payments on debt(2)											Interest payments on debt(2)	4.0		4.0		—		—		—
Operating leases(3)											Operating leases(3)	46.0		18.5		23.5		4.0		—

Unrecorded contractual obligations:											Unrecorded contractual obligations:
Operating leases⁽²⁾	190.4		20.2		40.0		33.1		97.1
Interest payments on debt⁽³⁾⁽⁴⁾	41.9		8.9		18.7		14.3		—		50.0		9.5		10.3		5.8		24.3
Purchase obligations⁽⁴⁾⁽⁵⁾	51.9		21.3		30.6		—		—		85.9		50.6		35.2		—		—
Total contractual obligations	$	624.4	$	59.0	$	105.4	$	362.9	$	97.1	Total contractual obligations	$	695.4	$	92.9	$	511.3	$	13.1	$	78.1



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



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


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS					2

PART I.			FINANCIAL INFORMATION		3

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS~~Item 1.			2Financial statements
			Condensed Consolidated Balance Sheets (Unaudited)		3

~~PART I.~~Condensed Consolidated Statements of Comprehensive Income (Unaudited)	~~FINANCIAL INFORMATION~~4			3

~~Item 1.~~Condensed Consolidated Statements of Cash Flows (Unaudited)	~~Financial statements~~5
	~~Consolidated balance sheets as of September 30, 2017 and December 31, 2016 (unaudited)~~	3
			Condensed Consolidated ~~statements~~Statements of ~~comprehensive income for the three and nine months ended September 30, 2017 and 2016 (unaudited)~~Stockholders’ Equity (Unaudited)		46
			~~Consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 (unaudited)~~		5
	~~Consolidated statement of stockholders’ equity for the nine months ended September 30, 2017 (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		2326
Item 3.			Quantitative and qualitative disclosures about market risk		4147
Item 4.			Controls and procedures		4148

PART II.			OTHER INFORMATION		4249

Item ~~1A.~~1.			~~Risk factors~~Legal proceedings		4249
Item 1A.			Risk factors		49
Item 2.			Unregistered sales of equity securities and use of proceeds		4252
Item 5.			Other information		52
Item 6.			Exhibits		4354

SIGNATURES					4455


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			(dollars in thousands)	September 30, 2020		December 31, 2019
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	17,050		$	16,902		Cash and cash equivalents	$	30,563	$	31,810
Restricted cash due to customers	139,095			353,771
Accounts receivable, net of allowance of $4,540 and $3,291 at September 30, 2017 and December 31, 2016, respectively	100,868			88,932
Restricted cash							Restricted cash	203,660		545,485
Accounts receivable, net of allowance of $10,727 and $5,529 at September 30, 2020 and December 31, 2019, respectively							Accounts receivable, net of allowance of $10,727 and $5,529 at September 30, 2020 and December 31, 2019, respectively	96,830		88,868
Customer funds receivable							Customer funds receivable	4,901		524
Prepaid expenses and other current assets	50,082			48,314			Prepaid expenses and other current assets	76,761		67,852
Total current assets	307,095			507,919			Total current assets	412,715		734,539
Property and equipment, net	43,903			50,269			Property and equipment, net	109,469		35,546
Operating lease right-of-use assets							Operating lease right-of-use assets	30,218		104,400
Software development costs, net	48,618			37,582			Software development costs, net	108,891		101,302
Goodwill	472,776			438,240			Goodwill	632,840		634,088
Intangible assets, net	252,713			253,676			Intangible assets, net	284,414		317,895
Other assets	21,889			22,524			Other assets	72,617		65,193
Total assets	$	1,146,994		$	1,310,210		Total assets	$	1,651,164	$	1,992,963
Liabilities and stockholders’ equity							Liabilities and stockholders’ equity
Current liabilities:							Current liabilities:
Trade accounts payable	$	17,830		$	23,274		Trade accounts payable	$	31,775	$	47,676
Accrued expenses and other current liabilities	45,650			54,196			Accrued expenses and other current liabilities	48,380		73,317
Due to customers	139,095			353,771			Due to customers	207,356		546,009
Debt, current portion	8,576			4,375			Debt, current portion	10,305		7,500
Deferred revenue, current portion	277,008			244,500			Deferred revenue, current portion	322,452		314,335
Total current liabilities	488,159			680,116			Total current liabilities	620,268		988,837
Debt, net of current portion	329,380			338,018			Debt, net of current portion	497,953		459,600
Deferred tax liability	39,352			29,558			Deferred tax liability	46,989		44,594
Deferred revenue, net of current portion	5,412			6,440			Deferred revenue, net of current portion	5,803		1,802
Operating lease liabilities, net of current portion							Operating lease liabilities, net of current portion	25,706		95,624
Other liabilities	7,799			8,533			Other liabilities	12,610		5,742
Total liabilities	870,102			1,062,665			Total liabilities	1,209,329		1,596,199
Commitments and contingencies (see Note 10)							Commitments and contingencies (see Note 10)
Stockholders’ equity:							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
Preferred stock; 20,000,000 shares authorized, 0ne outstanding							Preferred stock; 20,000,000 shares authorized, 0ne outstanding	0		0
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,903,925 and 60,206,091 shares issued at September 30, 2020 and December 31, 2019, respectively							Common stock, $0.001 par value; 180,000,000 shares authorized, 60,903,925 and 60,206,091 shares issued at September 30, 2020 and December 31, 2019, respectively	61		60
Additional paid-in capital	341,476			310,452			Additional paid-in capital	512,269		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; 11,337,486 and 11,066,354 shares at September 30, 2020 and December 31, 2019, respectively							Treasury stock, at cost; 11,337,486 and 11,066,354 shares at September 30, 2020 and December 31, 2019, respectively	(311,951)		(290,665)
Accumulated other comprehensive loss	(1,013		)	(457		)	Accumulated other comprehensive loss	(8,872)		(5,290)
Retained earnings	170,699			152,729			Retained earnings	250,328		234,855
Total stockholders’ equity	276,892			247,545			Total stockholders’ equity	441,835		396,764
Total liabilities and stockholders’ equity	$	1,146,994		$	1,310,210		Total liabilities and stockholders’ equity	$	1,651,164	$	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.


(in thousands)	Balance at beginning of year (1)		Provision/ adjustment		Write-off		Recovery		Balance at September 30, 2020
2020	$	4,011	$	6,303	$	(971)	$	302	$	9,645



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



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


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			(dollars in thousands)	Common stock			Additional paid-in capital		Treasury stock		Accumulated other comprehensive income (loss)		Retained earnings		Total stockholders' equity
	Shares		Amount																	Shares	Amount
Balance at December 31, 2016	57,672,401		$	58	$	310,452	$	(215,237	)	$	(457	)	$	152,729		$	247,545
Balance at December 31, 2019																			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			Net income	—	—		—		—		—		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)																			Payment of dividends ($0.12 per share)	—	—		—		—		—		(5,960)		(5,960)
Exercise of stock options and vesting of restricted stock units																			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																			Employee taxes paid for 245,358 withheld shares upon equity award settlement	—	—		—		(19,782)		—		—		(19,782)
Stock-based compensation	—		—		31,010		—			—			45			31,055			Stock-based compensation	—	—		13,539		—		—		41		13,580
Restricted stock grants	549,589		1		—		—			—			—			1			Restricted stock grants	563,947	1		—		—		—		—		1
Restricted stock cancellations	(68,016	)	—		—		—			—			—			—			Restricted stock cancellations	(47,456)	—		—		—		—		—		—
Other comprehensive loss	—		—		—		—			(556		)	—			(556		)	Other comprehensive loss	—	—		—		—		(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																			Balance at March 31, 2020	60,932,639	$	61	$	471,344	$	(310,447)	$	(14,140)	$	233,575	$	380,393
Net income																			Net income	—	—		—		—		—		11,823		11,823

The accompanying notes are an integral part of these consolidated financial statements.
Exercise of stock options and vesting of restricted stock units																			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																			Employee taxes paid for 21,200 withheld shares upon equity award settlement	—	—		—		(1,214)		—		—		(1,214)
Stock-based compensation																			Stock-based compensation	—	—		20,103		—		—		30		20,133
Restricted stock grants																			Restricted stock grants	20,776	0		—		—		—		—		0
Restricted stock cancellations																			Restricted stock cancellations	(59,426)	—		—		—		—		—		—
Other comprehensive loss																			Other comprehensive loss	—	—		—		—		(336)		—		(336)
Balance at June 30, 2020																			Balance at June 30, 2020	60,901,100	$	61	$	491,450	$	(311,661)	$	(14,476)	$	245,428	$	410,802
Net income																			Net income	—	—		—		—		—		4,876		4,876

Vesting of restricted stock units																			Vesting of restricted stock units	906	—		0		—		—		—		0
Employee taxes paid for 4,574 withheld shares upon equity award settlement																			Employee taxes paid for 4,574 withheld shares upon equity award settlement	—	—		—		(290)		—		—		(290)
Stock-based compensation																			Stock-based compensation	—	—		20,819		—		—		24		20,843
Restricted stock grants																			Restricted stock grants	48,783	0		—		—		—		—		0
Restricted stock cancellations																			Restricted stock cancellations	(46,864)	—		—		—		—		—		—
Other comprehensive income																			Other comprehensive income	—	—		—		—		5,604		—		5,604
Balance at September 30, 2020																			Balance at September 30, 2020	60,903,925	$	61	$	512,269	$	(311,951)	$	(8,872)	$	250,328	$	441,835

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.



(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


~~(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.


										Fair value measurement using
(dollars in thousands)									(dollars in thousands)	Level 1		Level 2		Level 3		Total

	Fair value measurement using
(dollars in thousands)	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 September 30, 2020									Fair value as of September 30, 2020
Financial liabilities:									Financial liabilities:
Derivative instruments	$	—	$	369	$	—	$	369	Derivative instruments	$	0	$	3,957	$	0	$	3,957
Total financial liabilities	$	—	$	369	$	—	$	369	Total financial liabilities	$	0	$	3,957	$	0	$	3,957

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									Fair value as of December 31, 2019
Financial liabilities:									Financial liabilities:
Derivative instruments	$	—	$	163	$	—	$	163	Derivative instruments	$	0	$	1,757	$	0	$	1,757
Total financial liabilities	$	—	$	163	$	—	$	163	Total financial liabilities	$	0	$	1,757	$	0	$	1,757


(dollars in thousands)	Assets acquired		Estimated useful life (years)
Land	$	9,548	—
Building	61,284		39
Building systems	4,393		7 - 15
Total long-lived assets	$	75,225


	Debt balance at				Weighted average effective interest rate at
(dollars in thousands)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Credit facility:
Revolving credit loans	$	169,200	$	187,000	2.21	%	3.11	%
Term loans	275,625		281,250		2.77	%	3.22	%
Real estate loans	60,890		0		5.22	%	0	%
Other debt	3,926		0		5.00	%	0	%
Total debt	509,641		468,250		2.89	%	3.18	%
Less: Unamortized discount and debt issuance costs	1,383		1,150
Less: Debt, current portion	10,305		7,500		2.39	%	3.05	%
Debt, net of current portion	$	497,953	$	459,600	2.90	%	3.18	%


	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			(dollars in thousands)	September 30, 2020			Three months ended September 30,		Nine months ended September 30, 2019
Interest rate swaps	$	(105	)	Interest expense	$	(88	)	$	(192	)	Interest rate swaps	$	(3,957)	Interest expense	$	(1,276)	$	(2,499)

	September 30, 2016				Three months ended September 30, 2016			Nine months ended September 30, 2016				September 30, 2019			Three months ended September 30, 2019		Nine months ended September 30, 2019
Interest rate swaps	$	(654	)	Interest expense	$	(265	)	$	(875	)	Interest rate swaps	$	(2,318)	Interest expense	$	196	$	669



1. Organization



2. Basis of Presentation



	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


Years ending December 31, (dollars in thousands)	Operating leases
2020 – remaining	$	5,055
2021	16,745
2022	12,034
2023	9,107
2024	2,491
Thereafter	535
Total lease payments	45,967
Less: Amount representing interest	3,628
Present value of future payments	$	42,339



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


~~(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 and service, and our customer success program.~~


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


			1						Delight Customers with Innovative Cloud Solutions

			2						Drive Sales Effectiveness

			3						Expand Total Addressable Market

			4						Improve Operating Efficiency



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	%


			-						Decrease in subscriptions revenue of $1.5 million largely related to a decrease in transactional revenue as many of our customers' in-person events have shifted online, been postponed or cancelled due to COVID-19
			-						Decrease in maintenance revenue of $3.7 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


			+						Increase in subscriptions revenue of $21.0 million related to positive demand from customers across our portfolio of cloud solutions, an increase in transactional revenue, including charitable giving related to COVID-19, and an increase in services embedded in our renewable cloud solution contracts
			-						Decrease in maintenance revenue of $11.5 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


			+						Increase in amortization of software development costs of $2.4 million due to investments made on innovation, quality and the integration of our cloud solutions
			+						Increase in hosting and data center costs of $1.0 million as we are migrating our cloud infrastructure to leading public cloud service providers
			-						Decrease in transaction-based costs of $1.7 million related to payment services integrated in our cloud solutions
			-						Decrease in amortization of intangible assets from business combinations of $2.9 million
			-						Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
			-						Decrease 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


			+						Increase in amortization of software development costs of $4.7 million due to investments made on innovation, quality and the integration of our cloud solutions
			+						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.
			+						Increase in hosting and data center costs of $3.3 million as we are migrating our cloud infrastructure to leading public cloud service providers
			+						Increase in transaction-based costs of $1.3 million related to payment services integrated in our cloud solutions
			-						Decrease in amortization of intangible assets from business combinations of $5.0 million
			-						Decrease in compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards
			-						Decrease 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


			+						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 $12.7 million during the three and nine months ended September 30, 2020.
			-						Decreases in one-time consulting revenue of $2.5 million and $8.0 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 $0.8 million and $2.9 million as analytics are generally integrated in our cloud solutions
			-						Decreases in onsite training revenue of $0.6 million and $1.1 million due to COVID-19


~~(2)~~	~~Our commitments related to operating leases have not been reduced by incentive payments and reimbursement of leasehold improvements.~~


~~(3)~~	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)~~	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.


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, 2020					$	50,000
July 1, 2020 through July 31, 2020	—	$	—	—	50,000
August 1, 2020 through August 31, 2020	3,844	63.85		—	50,000
September 1, 2020 through September 30, 2020	730	60.02		—	50,000
Total	4,574	$	63.24	—	$	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.October 2020 Refinancing


				BLACKBAUD, INC.

Date:			November 3, 2020	~~BLACKBAUD, INC.~~
By:
~~Date:~~	~~November 2, 2017~~	~~By:~~	/s/ Michael P. Gianoni
					Michael P. Gianoni
					President and Chief Executive Officer
					(Principal Executive Officer)

Date:			November ~~2, 2017~~3, 2020	By:	/s/ Anthony W. Boor
					Anthony W. Boor
					Executive Vice President and Chief Financial Officer
					(Principal Financial and Accounting Officer)