UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020



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

For the transition period from to .

Commission file number: 000-50600

Blackbaud, Inc.

(Exact name of registrant as specified in its charter)




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

65 Fairchild Street

Charleston, South Carolina 29492

(Address of principal executive offices, including zip code)

(843) 216-6200

(Registrant’s telephone number, including area code)




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

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

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

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



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Yes ☐ No ☑

The number of shares of the registrant’s Common Stock outstanding as of ~~October 23, 2019~~April 29, 2020 was ~~49,186,476.~~49,621,157.

TABLE OF CONTENTS



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		2

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial statements
	Consolidated ~~balance sheets (unaudited)~~Balance Sheets (Unaudited)	3
	Consolidated ~~statements~~Statements of ~~comprehensive income (unaudited)~~Comprehensive Income (Unaudited)	4
	Consolidated ~~statements~~Statements of ~~cash flows (unaudited)~~Cash Flows (Unaudited)	5
	Consolidated ~~statements~~Statements of ~~stockholders’ equity (unaudited)~~Stockholders’ Equity (Unaudited)	6
	Notes to ~~consolidated financial statements (unaudited)~~Consolidated Financial Statements (Unaudited)	87
Item 2.	Management's discussion and analysis of financial condition and results of operations	2420
Item 3.	Quantitative and qualitative disclosures about market risk	4037
Item 4.	Controls and procedures	4038

PART II.	OTHER INFORMATION	4139

Item 1A.	Risk factors	4139
Item 2.	Unregistered sales of equity securities and use of proceeds	4140
Item 6.	Exhibits	4241

SIGNATURES		4342



~~Third~~First Quarter ~~2019~~2020 Form 10-Q		1

Table of Contents

Blackbaud, Inc.



		CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

Important factors that could cause actual results to differ materially from our expectations expressed in forward-looking statements include, but are not limited to, those summarized under ~~“Item~~“Part II, Item 1A. Risk factors” and elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 and in our other SEC filings. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statement, whether as a result of new information, future events or otherwise.



2		~~Third~~First Quarter ~~2019~~2020 Form 10-Q



		PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


Blackbaud, Inc. Consolidated balance sheets (Unaudited)
Blackbaud, Inc. Consolidated Balance Sheets (Unaudited)							Blackbaud, Inc. Consolidated Balance Sheets (Unaudited)
(dollars in thousands)	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	29,084		$	30,866		$	24,972		$	31,810
Restricted cash due to customers	243,056			418,980			232,250			545,485
Accounts receivable, net of allowance of $4,791 and $4,722 at September 30, 2019 and December 31, 2018, respectively	90,700			86,595
Accounts receivable, net of allowance of $5,928 and $5,529 at March 31, 2020 and December 31, 2019, respectively							89,191			88,868
Customer funds receivable	7,784			1,753			1,205			524
Prepaid expenses and other current assets	75,321			59,788			81,004			67,852
Total current assets	445,945			597,982			428,622			734,539
Property and equipment, net	37,285			40,031			35,661			35,546
Operating lease right-of-use assets	110,840			—			100,568			104,400
Software development costs, net	94,055			75,099			105,594			101,302
Goodwill	630,644			545,213			631,033			634,088
Intangible assets, net	327,089			291,617			303,097			317,895
Other assets	64,154			65,363			66,346			65,193
Total assets	$	1,710,012		$	1,615,305		$	1,670,921		$	1,992,963
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	34,169		$	34,538		$	44,510		$	47,676
Accrued expenses and other current liabilities	63,947			46,893			45,781			73,317
Due to customers	250,840			420,733			233,455			546,009
Debt, current portion	7,500			7,500			10,351			7,500
Deferred revenue, current portion	320,982			295,991			288,682			314,335
Total current liabilities	677,438			805,655			622,779			988,837
Debt, net of current portion	495,556			379,624			520,576			459,600
Deferred tax liability	47,237			44,291			43,286			44,594
Deferred revenue, net of current portion	2,014			2,564			1,715			1,802
Operating lease liabilities, net of current portion	100,133			—			91,235			95,624
Other liabilities	6,177			9,388			10,937			5,742
Total liabilities	1,328,555			1,241,522			1,290,528			1,596,199
Commitments and contingencies (see Note 10)
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Preferred stock; 20,000,000 shares authorized, none outstanding	—			—			—			—
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,207,091 and 59,327,633 shares issued at September 30, 2019 and December 31, 2018, respectively	60			59
Common stock, $0.001 par value; 180,000,000 shares authorized, 60,932,639 and 60,206,091 shares issued at March 31, 2020 and December 31, 2019, respectively							61			60
Additional paid-in capital	442,803			399,241			471,344			457,804
Treasury stock, at cost; 11,022,799 and 10,760,574 shares at September 30, 2019 and December 31, 2018, respectively	(287,163		)	(266,884		)
Treasury stock, at cost; 11,311,712 and 11,066,354 shares at March 31, 2020 and December 31, 2019, respectively							(310,447		)	(290,665		)
Accumulated other comprehensive loss	(13,665		)	(5,110		)	(14,140		)	(5,290		)
Retained earnings	239,422			246,477			233,575			234,855
Total stockholders’ equity	381,457			373,783			380,393			396,764
Total liabilities and stockholders’ equity	$	1,710,012		$	1,615,305		$	1,670,921		$	1,992,963

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



~~Third~~First Quarter ~~2019~~2020 Form 10-Q		3


Blackbaud, Inc. Consolidated statements of comprehensive income (Unaudited)
Blackbaud, Inc. Consolidated Statements of Comprehensive Income (Unaudited)													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,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Revenue
Recurring	$	205,227		$	188,656		$	611,789		$	562,251		$	204,867		$	198,094
One-time services and other	15,893			20,876			50,795			65,137			18,754			17,736
Total revenue	221,120			209,532			662,584			627,388			223,621			215,830
Cost of revenue
Cost of recurring	87,645			76,535			259,013			221,964			89,551			84,711
Cost of one-time services and other	14,152			18,702			42,874			56,482			15,314			14,572
Total cost of revenue	101,797			95,237			301,887			278,446			104,865			99,283
Gross profit	119,323			114,295			360,697			348,942			118,756			116,547
Operating expenses
Sales, marketing and customer success	55,499			49,077			165,963			143,047			58,735			55,455
Research and development	25,941			24,218			80,304			75,473			24,977			28,461
General and administrative	28,897			24,894			84,557			78,392			25,855			27,117
Amortization	703			1,237			3,231			3,707			741			1,376
Restructuring	400			(914		)	3,083			3,585			24			1,953
Total operating expenses	111,440			98,512			337,138			304,204			110,332			114,362
Income from operations	7,883			15,783			23,559			44,738			8,424			2,185
Interest expense	(5,111		)	(4,140		)	(16,233		)	(11,960		)	(4,159		)	(5,323		)
Other income (expense), net	2,158			(147		)	4,521			359
Income before provision for income taxes	4,930			11,496			11,847			33,137
Other income, net													1,070			182
Income (loss) before provision for income taxes													5,335			(2,956		)
Income tax provision (benefit)	364			332			1,263			(2,370		)	696			(1,834		)
Net income	$	4,566		$	11,164		$	10,584		$	35,507
Earnings per share
Net income (loss)													$	4,639		$	(1,122	)
Earnings (loss) per share
Basic	$	0.10		$	0.24		$	0.22		$	0.75		$	0.10		$	(0.02	)
Diluted	$	0.09		$	0.23		$	0.22		$	0.74		$	0.10		$	(0.02	)
Common shares and equivalents outstanding
Basic weighted average shares	47,757,769			47,279,591			47,668,235			47,174,903			48,036,300			47,516,912
Diluted weighted average shares	48,464,529			48,160,146			48,223,712			48,074,698			48,455,751			47,516,912
Other comprehensive (loss) income
Foreign currency translation adjustment	(3,893		)	1,047			(5,321		)	(1,333		)	(5,728		)	4,590
Unrealized (loss) gain on derivative instruments, net of tax	(363		)	566			(3,234		)	2,410
Unrealized loss on derivative instruments, net of tax													(3,122		)	(932		)
Total other comprehensive (loss) income	(4,256		)	1,613			(8,555		)	1,077			(8,850		)	3,658
Comprehensive income	$	310		$	12,777		$	2,029		$	36,584
Comprehensive (loss) income													$	(4,211	)	$	2,536

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



4		~~Third~~First Quarter ~~2019~~2020 Form 10-Q


Blackbaud, Inc. Consolidated statements of cash flows (Unaudited)
Blackbaud, Inc. Consolidated Statements of Cash Flows (Unaudited)							Blackbaud, Inc. Consolidated Statements of Cash Flows (Unaudited)
	Nine months ended September 30,						Three months ended March 31,
(dollars in thousands)	2019			2018			2020			2019
Cash flows from operating activities
Net income	$	10,584		$	35,507
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	4,639		$	(1,122	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	63,998			59,993			21,804			21,724
Provision for doubtful accounts and sales returns	6,192			4,760
Provision for credit losses and sales returns							2,488			2,032
Stock-based compensation expense	43,621			35,683			13,580			13,726
Deferred taxes	(75		)	1,430			954			(1,155		)
Amortization of deferred financing costs and discount	564			564			188			188
Other non-cash adjustments	2,047			(2,085		)	102			1,820
Changes in operating assets and liabilities, net of acquisition and disposal of businesses:
Accounts receivable	(6,375		)	(4,480		)	(3,876		)	(1,797		)
Prepaid expenses and other assets	(5,129		)	(12,372		)	(5,303		)	(12,107		)
Trade accounts payable	(74		)	(134		)	(4,021		)	(3,624		)
Accrued expenses and other liabilities	(13,592		)	(6,923		)	(31,694		)	(11,690		)
Deferred revenue	20,363			25,888			(23,364		)	(18,006		)
Net cash provided by operating activities	122,124			137,831
Net cash used in operating activities							(24,503		)	(10,011		)
Cash flows from investing activities
Purchase of property and equipment	(9,597		)	(12,910		)	(2,867		)	(1,152		)
Capitalized software development costs	(34,513		)	(26,629		)	(10,937		)	(11,319		)
Purchase of net assets of acquired companies, net of cash and restricted cash acquired	(109,353		)	(45,315		)	—			(109,386		)
Other investing activities	500			—
Net cash used in investing activities	(152,963		)	(84,854		)	(13,804		)	(121,857		)
Cash flows from financing activities
Proceeds from issuance of debt	371,200			219,900			144,700			271,500
Payments on debt	(255,625		)	(233,225		)	(86,075		)	(75,175		)
Employee taxes paid for withheld shares upon equity award settlement	(20,279		)	(27,398		)	(19,782		)	(18,400		)
Proceeds from exercise of stock options	7			11			1			3
Change in due to customers	(215,942		)	(425,218		)	(311,095		)	(242,885		)
Change in customer funds receivable	(6,283		)	(4,371		)	(733		)	(3,573		)
Dividend payments to stockholders	(17,705		)	(17,484		)	(5,960		)	(5,901		)
Net cash used in financing activities	(144,627		)	(487,785		)	(278,944		)	(74,431		)
Effect of exchange rate on cash, cash equivalents and restricted cash	(2,240		)	(285		)	(2,822		)	1,036
Net decrease in cash, cash equivalents and restricted cash	(177,706		)	(435,093		)	(320,073		)	(205,263		)
Cash, cash equivalents and restricted cash, beginning of period	449,846			640,174			577,295			449,846
Cash, cash equivalents and restricted cash, end of period	$	272,140		$	205,081		$	257,222		$	244,583

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


(dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Cash and cash equivalents	$	29,084	$	30,866	$	24,972	$	31,810
Restricted cash due to customers	243,056		418,980		232,250		545,485
Total cash, cash equivalents and restricted cash in the statement of cash flows	$	272,140	$	449,846	$	257,222	$	577,295

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



~~Third~~First Quarter ~~2019~~2020 Form 10-Q		5

Blackbaud, Inc.

Consolidated ~~statements~~Statements of ~~stockholders' equity~~Stockholders' Equity

(Unaudited)


(dollars in thousands)	Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity			Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
	Shares		Amount																Shares		Amount
Balance at December 31, 2018	59,327,633		$	59	$	399,241	$	(266,884	)	$	(5,110	)	$	246,477		$	373,783
Net loss	—		—		—		—			—			(1,122		)	(1,122		)
Payment of dividends ($0.12 per share)	—		—		—		—			—			(5,901		)	(5,901		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	234,453		—		3		—			—			—			3
Employee taxes paid for 239,311 withheld shares upon equity award settlement	—		—		—		(18,400		)	—			—			(18,400		)
Stock-based compensation	—		—		13,693		—			—			33			13,726
Restricted stock grants	663,906		1		—		—			—			—			1
Restricted stock cancellations	(43,314	)	—		—		—			—			—			—
Other comprehensive income	—		—		—		—			3,658			—			3,658
Balance at March 31, 2019	60,182,678		$	60	$	412,937	$	(285,284	)	$	(1,452	)	$	239,487		$	365,748
Balance at December 31, 2019																			60,206,091		$	60	$	457,804	$	(290,665	)	$	(5,290	)	$	234,855		$	396,764
Net income	—		—		—		—			—			7,140			7,140			—		—		—		—			—			4,639			4,639
Payment of dividends ($0.12 per share)	—		—		—		—			—			(5,901		)	(5,901		)	—		—		—		—			—			(5,960		)	(5,960		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	21,726		—		3		—			—			—			3
Employee taxes paid for 17,119 withheld shares upon equity award settlement	—		—		—		(1,360		)	—			—			(1,360		)
Exercise of stock options and vesting of restricted stock units																			210,057		—		1		—			—			—			1
Employee taxes paid for 245,358 withheld shares upon equity award settlement																			—		—		—		(19,782		)	—			—			(19,782		)
Stock-based compensation	—		—		15,010		—			—			19			15,029			—		—		13,539		—			—			41			13,580
Restricted stock grants	12,405		—		—		—			—			—			—			563,947		1		—		—			—			—			1
Restricted stock cancellations	(29,746	)	—		—		—			—			—			—			(47,456	)	—		—		—			—			—			—
Other comprehensive loss	—		—		—		—			(7,957		)	—			(7,957		)	—		—		—		—			(8,850		)	—			(8,850		)
Balance at June 30, 2019	60,187,063		$	60	$	427,950	$	(286,644	)	$	(9,409	)	$	240,745		$	372,702
Net income	—		—		—		—			—			4,566			4,566
Payment of dividends ($0.12 per share)	—		—		—		—			—			(5,903		)	(5,903		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	5,315		—		1		—			—			—			1
Employee taxes paid for 5,795 withheld shares upon equity award settlement	—		—		—		(519		)	—			—			(519		)
Stock-based compensation	—		—		14,852		—			—			14			14,866
Restricted stock grants	37,920		—		—		—			—			—			—
Restricted stock cancellations	(23,207	)	—		—		—			—			—			—
Other comprehensive loss	—		—		—		—			(4,256		)	—			(4,256		)
Balance at September 30, 2019	60,207,091		$	60	$	442,803	$	(287,163	)	$	(13,665	)	$	239,422		$	381,457
Balance at March 31, 2020																			60,932,639		$	61	$	471,344	$	(310,447	)	$	(14,140	)	$	233,575		$	380,393



(dollars in thousands)	Common stock				Additional paid-in capital		Treasury stock			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
	Shares		Amount
Balance at December 31, 2018	59,327,633		$	59	$	399,241	$	(266,884	)	$	(5,110	)	$	246,477		$	373,783
Net loss	—		—		—		—			—			(1,122		)	(1,122		)
Payment of dividends ($0.12 per share)	—		—		—		—			—			(5,901		)	(5,901		)
Exercise of stock options and stock appreciation rights and vesting of restricted stock units	234,453		—		3		—			—			—			3
Employee taxes paid for 239,311 withheld shares upon equity award settlement	—		—		—		(18,400		)	—			—			(18,400		)
Stock-based compensation	—		—		13,693		—			—			33			13,726
Restricted stock grants	663,906		1		—		—			—			—			1
Restricted stock cancellations	(43,314	)	—		—		—			—			—			—
Other comprehensive income	—		—		—		—			3,658			—			3,658
Balance at March 31, 2019	60,182,678		$	60	$	412,937	$	(285,284	)	$	(1,452	)	$	239,487		$	365,748

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



6		~~Third~~First Quarter ~~2019~~2020 Form 10-Q

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

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

Treasury
stock

Accumulated
other
comprehensive
income (loss)

Retained
earnings

Total stockholders' equity
Shares
Amount
Balance at December 31, 2017 58,551,761
$ 59
$ 351,042
$ (239,199 ) $ (642 ) $ 225,029
$ 336,289
Net income —
—
—
—
—
17,751
17,751
Payment of dividends ($0.12 per share) —
—
—
—
—
(5,825 ) (5,825 )
Exercise of stock options and stock appreciation rights and vesting of restricted stock units 279,422
—
9
—
—
—
9
Employee taxes paid for 234,454 withheld shares upon equity award settlement —
—
—
(22,511 ) —
—
(22,511 )
Stock-based compensation —
—
11,062
—
—
30
11,092
Restricted stock grants 437,878
—
—
—
—
—
—
Restricted stock cancellations (35,218 ) —
—
—
—
—
—
Other comprehensive income —
—
—
—
7,516
—
7,516
Reclassification upon early adoption of ASU 2018-02

167
(167 ) —
Balance at March 31, 2018 59,233,843
$ 59
$ 362,113
$ (261,710 ) $ 7,041
$ 236,818
$ 344,321
Net income —
—
—
—
—
6,592
6,592
Payment of dividends ($0.12 per share) —
—
—
—
—
(5,828 ) (5,828 )
Exercise of stock options and stock appreciation rights and vesting of restricted stock units 40,741
—
2
—
—
—
2
Employee taxes paid for 25,678 withheld shares upon equity award settlement —
—
—
(2,673 ) —
—
(2,673 )
Stock-based compensation —
—
13,834
—
—
27
13,861
Restricted stock grants 68,313
—
—
—
—
—
—
Restricted stock cancellations (41,688 ) —
—
—
—
—
—
Other comprehensive loss —
—
—
—
(8,052 ) —
(8,052 )
Balance at June 30, 2018 59,301,209
$ 59
$ 375,949
$ (264,383 ) $ (1,011 ) $ 237,609
$ 348,223
Net income —
—
—
—
—
11,164
11,164
Payment of dividends ($0.12 per share) —
—
—
—
—
(5,831 ) (5,831 )
Exercise of stock options and stock appreciation rights and vesting of restricted stock units 27,238
—
—
—
—
—
—
Employee taxes paid for 20,736 withheld shares upon equity award settlement —
—
—
(2,214 ) —
—
(2,214 )
Stock-based compensation —
—
10,708
—
—
22
10,730
Restricted stock grants 26,460
—
—
—
—
—
—
Restricted stock cancellations (31,359 ) —
—
—
—
—
—
Other comprehensive income —
—
—
—
1,613
—
1,613
Balance at September 30, 2018 59,323,548
$ 59
$ 386,657
$ (266,597 ) $ 602
$ 242,964
$ 363,685

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



~~Third Quarter 2019 Form 10-Q~~		7

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

1. Organization

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

2. Basis of Presentation

Unaudited interim consolidated financial statements

The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity, for the periods presented in accordance with accounting principles generally accepted in the United States ("U.S.") ("GAAP"). The consolidated balance sheet at December 31, ~~2018,~~2019 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2019,~~2020, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, and other forms filed with the SEC from time to time.

Basis of consolidation

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

Reportable segment

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

~~Recently adopted accounting pronouncements~~Risks and uncertainties

~~In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02,~~ ~~Leases (Topic 842)~~ ("ASU 2016-02"). ASU 2016-02 requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to previous guidance. The way in which entities classify leases determines how to recognize lease-related revenue and expense.Impacts of COVID-19

We ~~adopted ASU 2016-02~~are subject to risks and uncertainties as a result of ~~January 1, 2019 using~~ the ~~transition method~~global COVID-19 pandemic. We expect that ~~allowed us~~COVID-19 will impact all of our vertical markets, across all of our geographies to ~~initially apply~~some degree, but the ~~guidance~~significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ~~adoption date~~ultimate geographic spread of ~~January 1, 2019 without adjusting comparative periods presented. We elected~~the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to ~~use~~contain the ~~package of practical expedients that allowed us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases~~disease and ~~(3) initial direct costs for any existing leases. We did not elect to use the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing~~other unforeseeable consequences.



8First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~7

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

~~impairment. Additionally, we elected not~~The preparation of financial statements in conformity with GAAP requires management to ~~apply~~make estimates and assumptions that affect the ~~recognition requirements~~reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ~~new lease~~financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets, income taxes, stock-based compensation, capitalization of software development costs, our allowances for credit losses and sales returns, costs of obtaining contracts, valuation of derivative instruments and loss contingencies, among others. Changes in the facts or circumstances underlying these estimates due to COVID-19 could result in material changes and actual results could materially differ from these estimates.

Recently adopted accounting ~~standard~~pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires certain types of financial instruments, including trade receivables, to ~~short-term leases. Adopting~~be presented at the net amount expected to be collected based on historical events, current conditions and forward-looking information. We adopted ASU ~~2016-02 had~~2016-13 as of the January 1, 2020 effective date and the adoption did not have a material impact on our consolidated ~~balance sheet~~financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We adopted ASU 2018-15 prospectively as of the January 1, ~~2019, as we recognized $121.6 million~~2020 effective date and the adoption did not have a material impact on our consolidated financial statements.

Recently issued accounting pronouncements

There are no recently issued accounting pronouncements that are expected to have a material impact on our financial position or results of ~~lease liabilities and $113.4 million of right-of-use ("ROU") assets for those leases classified as operating leases.~~operations when adopted in the future.

Summary of significant accounting policies

Except for the accounting ~~policy added~~policies for ~~leases~~allowance for credit losses and allowance for sales returns below that were updated as a result of adopting ASU ~~2016-02,~~2016-13, there have been no new or material changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on February 20, ~~2019, that have had~~2020.

Allowance for credit losses

Our accounts receivable consist of a ~~material impact on~~single portfolio segment. Accounts receivable are recorded at original invoice amounts less an allowance for credit losses, an amount we estimate to be sufficient to provide adequate protection against lifetime expected losses resulting from extending credit to our ~~consolidated financial statements.~~

~~Leases~~

~~We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, accrued expense and other~~customers. In judging the adequacy of the allowance for credit losses, we consider multiple factors including historical bad debt experience, the current ~~liabilities, and operating lease liabilities, net of current portion in our consolidated balance sheet as of September 30, 2019.~~

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As mostaging of our ~~leases do not provide~~receivables and current economic conditions that may affect our customers' ability to pay. A considerable amount of judgment is required in assessing these factors and if any receivables were to deteriorate, an ~~implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value~~additional provision for credit losses could be required. Accounts are written off after all means of ~~lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any initial direct costs~~collection are exhausted and ~~lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it~~recovery is ~~reasonably certain that we will exercise that option. Lease expense~~considered remote. Provisions for ~~lease payments related to our operating leases is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which~~credit losses are generally accounted for separately. We do not recognize short-term leases (those that, at the commencement date, have a lease term of 12 months or less) on our consolidated balance sheets. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by us, are recognized in operating expenses in the period in which the obligation for those payments is incurred.

~~3. Business Combinations~~

~~YourCause acquisition~~

On January 2, 2019, we acquired all of the outstanding equity securities, including all voting equity interests, of YourCause Holdings, LLC, a Delaware limited liability company ("YourCause"), pursuant to a purchase agreement and plan of merger. The acquisition expands our footprint in corporate social responsibility and employee engagement and enhances our position as a leader in providing solutions to both nonprofit organizations and for-profit companies committed to addressing social issues. We acquired the equity securities for an aggregate purchase price of $157.7 million in cash, net of closing adjustments. The purchase price and related expenses were funded primarily through borrowings under the 2017 Credit Facility (as defined below). As a result of the acquisition, YourCause has become a wholly owned subsidiary of ours. The operating results of YourCause have been included in our consolidated financial statements from the date of acquisition. During the three and nine months ended September 30, 2019, we incurred insignificant acquisition-related expenses associated with the acquisition, which were recorded in general and administrative expense.

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



(in thousands)	Balance at beginning of year ⁽¹⁾		Provision/ adjustment		Write-off			Recovery		Balance at March 31, 2020
2020	$	4,011	$	593	$	(466	)	$	172	$	4,310


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

The increase in our allowance for credit losses and the amount of write-offs during the three months ended March 31, 2020 were insignificant.



~~Third Quarter 2019 Form 10-Q~~8		9First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

~~The fair values assigned to the assets acquired~~Allowance for sales returns

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

Below is a summary of the reporting date and are considered preliminary pending finalization. The estimates and assumptions are subject to change as we obtain additional information during the measurement period, which may be up to one year from the acquisition date. The assets and liabilities, pending finalization, include the valuation of intangible assets as well as the assumed deferred revenue and deferred income tax balances.

(in thousands) Purchase price allocation
Net working capital, excluding deferred revenue $ 3,699
Other long-term assets 2,574
Identifiable intangible assets 74,690
Deferred tax liability (4,615 )
Deferred revenue (4,300 )
Other long-term liabilities (1,650 )
Goodwill 87,316
Total purchase price $ 157,714

~~The estimated fair value of accounts receivable acquired approximates the contractual value of $4.1 million and $54.7 million of the goodwill arising~~changes in ~~the acquisition is deductible~~our allowance for income tax purposes. The estimated goodwill recognized is attributable primarily to the opportunities for expected synergies from combining the operations and assembled workforce of YourCause. During the nine months ended September 30, 2019, we recorded insignificant measurement period adjustments to the estimated fair value of the YourCause assets acquired and liabilities assumed following the receipt of new information. The adjustments resulted in an increase to net working capital, excluding deferred revenue, with the corresponding offset to goodwill.sales returns.

~~The YourCause acquisition resulted in the identification of the following identifiable intangible assets:~~

Intangible assets acquired
Weighted average amortization period
YourCause (in thousands)
(in years)
Acquired technology $ 47,800
12
Customer relationships 25,900
15
Marketing assets 830
2
Non-compete agreements 160
0
Total intangible assets $ 74,690
13

The estimated fair values of the intangible assets were based on variations of the income approach, which estimates fair value based upon the present value of cash flows that the assets are expected to generate, and which included the relief-from-royalty method, incremental cash flow method, including the comparative (with and without) method and multi-period excess earnings method, depending on the intangible asset being valued. The method of amortization of identifiable finite-lived intangible assets is based on the expected pattern in which the estimated economic benefits of the respective assets are consumed or otherwise used up. Customer relationships and acquired technology assets are being amortized on an accelerated basis. Marketing assets are being amortized on a straight-line basis. The non-compete agreements were fully amortized as of March 31, 2019, based on the insignificance of the acquired assets.

We determined that the impact of this acquisition was not material to our consolidated financial statements; therefore, separate presentation of revenue and earnings since the acquisition date and pro forma information are not required nor included herein.



(in thousands)	Balance at beginning of year ⁽¹⁾		Provision/ adjustment		Deduction			Balance at March 31, 2020
2020	$	1,518	$	1,895	$	(1,795	)	$	1,618



10(1)		~~Third Quarter 2019 Form 10-Q~~As discussed above, we reclassified certain balances previously disclosed within the allowance for sales returns to the allowance for credit losses upon adoption of ASU 2016-13 at January 1, 2020.

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

4.3. Goodwill and Other Intangible Assets

The change in goodwill during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, consisted of the following:

(dollars in thousands) Total
Balance at December 31, 2018 $ 545,213
Additions related to current year business combinations 87,316
Effect of foreign currency translation (1,885 )
Balance at September 30, 2019 $ 630,644



(dollars in thousands)	Total
Balance at December 31, 2019	$	634,088
Effect of foreign currency translation	(3,055		)
Balance at March 31, 2020	$	631,033

5.4. Earnings (Loss) Per Share

We compute basic earnings (loss) per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Diluted earnings (loss) per share reflect the assumed exercise, settlement and vesting of all dilutive securities using the “treasury stock method” except when the effect is anti-dilutive. Potentially dilutive securities consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units. Diluted loss per share for the three months ended March 31, 2019 was the same as basic loss per share as there was a net loss in the period and inclusion of potentially dilutive securities was anti-dilutive.



First Quarter 2020 Form 10-Q		9

Table of Contents

Blackbaud, Inc.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(dollars in thousands, except per share amounts)	2019		2018		2019		2018		2020		2019
Numerator:
Net income	$	4,566	$	11,164	$	10,584	$	35,507
Net income (loss)									$	4,639	$	(1,122	)
Denominator:
Weighted average common shares	47,757,769		47,279,591		47,668,235		47,174,903		48,036,300		47,516,912
Add effect of dilutive securities:
Stock-based awards	706,760		880,555		555,477		899,795		419,451		—
Weighted average common shares assuming dilution	48,464,529		48,160,146		48,223,712		48,074,698		48,455,751		47,516,912
Earnings per share:
Earnings (loss) per share:
Basic	$	0.10	$	0.24	$	0.22	$	0.75	$	0.10	$	(0.02	)
Diluted	$	0.09	$	0.23	$	0.22	$	0.74	$	0.10	$	(0.02	)

Anti-dilutive shares excluded from calculations of diluted earnings per share	227,523		—		252,282		—
Anti-dilutive shares excluded from calculations of diluted earnings (loss) per share									1,170,289		740,119



~~Third Quarter 2019 Form 10-Q~~		11

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

6.5. Fair Value Measurements

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

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

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

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

Recurring fair value measurements

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


	Fair value measurement using								Fair value measurement using
(dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Fair value as of September 30, 2019
Fair value as of March 31, 2020
Financial liabilities:
Derivative instruments	$	—	$	2,318	$	—	$	2,318	$	—	$	5,979	$	—	$	5,979
Total financial liabilities	$	—	$	2,318	$	—	$	2,318	$	—	$	5,979	$	—	$	5,979

Fair value as of December 31, 2018
Financial assets:
Derivative instruments	$	—	$	2,260	$	—	$	2,260
Total financial assets	$	—	$	2,260	$	—	$	2,260

Fair value as of December 31, 2018
Fair value as of December 31, 2019
Financial liabilities:
Derivative instruments	$	—	$	186	$	—	$	186	$	—	$	1,757	$	—	$	1,757
Total financial liabilities	$	—	$	186	$	—	$	186	$	—	$	1,757	$	—	$	1,757



10		First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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

The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy. The Financial Conduct Authority in the U.K. has stated that it plans to phase out LIBOR by the end of calendar year 2021. We do not currently anticipate a significant impact to our financial position or results of operations as a result of this action as we expect that our financial contracts currently indexed to LIBOR will either expire or be modified before the phase out occurs.

We believe the carrying amounts of our cash and cash equivalents, restricted cash due to customers, accounts receivable, trade accounts payable, accrued expenses and other current liabilities and due to customers approximate their fair values at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, due to the immediate or short-term maturity of these instruments.

We believe the carrying amount of our debt approximates its fair value at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, as the debt bears interest rates that approximate market value. As LIBOR rates are observable at commonly quoted intervals, our debt is classified within Level 2 of the fair value hierarchy.

We did not transfer any assets or liabilities among the levels within the fair value hierarchy during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Additionally, we did not hold any Level 3 assets or liabilities during the ~~nine~~three months ended ~~September 30, 2019.~~



12		~~Third Quarter 2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

March 31, 2020.

Non-recurring fair value measurements

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

During the nine months ended September 30, 2019, we recorded $1.3 million in impairments of operating lease ROU assets associated with certain leased office spaces we ceased using as part of our facilities optimization restructuring. These impairments were recorded as restructuring expense on our consolidated statements of comprehensive income. See Note 15 to these consolidated financial statements for additional details regarding our facilities optimization restructuring.

There were no non-recurring fair value adjustments to our long-lived assets, intangible assets, operating lease ROU assets and goodwill during the ~~nine~~three months ended ~~September 30, 2019, except for insignificant business combination accounting adjustments~~March 31, 2020.



First Quarter 2020 Form 10-Q		11

Table of Contents

Blackbaud, Inc.

Notes to the initial fair value estimates of the YourCause assets acquired and liabilities assumed at the acquisition date from updated information obtained during the measurement period. See Note 3 to these consolidated financial statements for additional details. We record any measurement period adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.Consolidated Financial Statements (Continued)

(Unaudited)

7.6. Consolidated Financial Statement Details

Prepaid expenses and other assets


(dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Costs of obtaining contracts⁽¹⁾⁽²⁾	$	89,158	$	85,590	$	86,867	$	90,764
Prepaid software maintenance and subscriptions(3)	28,659		21,134		30,097		17,384
Implementation costs for cloud computing arrangements, net⁽⁴⁾⁽⁵⁾					8,881		7,294
Unbilled accounts receivable	6,065		4,161		8,145		6,233
Prepaid insurance					2,994		1,585
Taxes, prepaid and receivable	1,995		2,055		843		849
Security deposits	934		1,020		864		885
Other assets	12,664		11,191		8,659		8,051
Total prepaid expenses and other assets	139,475		125,151		147,350		133,045
Less: Long-term portion	64,154		65,363		66,346		65,193
Prepaid expenses and other current assets	$	75,321	$	59,788	$	81,004	$	67,852


(1)	Amortization expense from costs of obtaining contracts was $~~9.2~~9.5 million and $~~28.6~~9.6 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively, and~~ ~~$9.0 million~~March 31, 2020 and ~~$26.6 million~~ ~~for the~~ ~~three and nine months endedSeptember 30, 2018~~2019, respectively.


(2)	The current portion of costs of obtaining contracts as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was $~~32.4~~31.9 million and $~~31.7~~33.0 million, respectively.


(3)	The current portion of prepaid software maintenance and subscriptions as of March 31, 2020 and December 31, 2019 was $24.7 million and $16.1 million, respectively.


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


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

Accrued expenses and other liabilities



(dollars in thousands)	March 31, 2020		December 31, 2019
Operating lease liabilities, current portion	$	19,672	$	19,784
Accrued bonuses⁽¹⁾	2,116		24,617
Accrued commissions and salaries	3,945		6,980
Taxes payable	4,659		6,835
Derivative instruments	5,979		1,757
Customer credit balances	4,359		4,505
Unrecognized tax benefit	3,821		3,758
Accrued vacation costs	2,145		2,232
Accrued health care costs	2,416		2,399
Other liabilities	7,606		6,192
Total accrued expenses and other liabilities	56,718		79,059
Less: Long-term portion	10,937		5,742
Accrued expenses and other current liabilities	$	45,781	$	73,317


(1)	In March 2020, we reduced our accrued bonuses due to the payment of bonuses from the prior year and, in response to the global COVID-19 pandemic, determined to replace our 2020 cash bonus plans with performance-based equity awards (See Note 15 to these financial statements).



~~Third Quarter 2019 Form 10-Q~~12		13First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

~~Accrued expenses and other liabilities~~

(dollars in thousands) September 30,
2019
December 31,
2018
Operating lease liabilities, current portion ⁽¹⁾
$ 19,399
$ —
Accrued bonuses 18,859
14,868
Accrued commissions and salaries 4,477
9,934
Taxes payable 5,932
6,204
Customer credit balances 4,365
4,076
Unrecognized tax benefit 3,633
2,719
Accrued vacation costs 2,040
2,352
Accrued health care costs 1,777
1,497
Other liabilities 9,642
14,631
Total accrued expenses and other liabilities 70,124
56,281
Less: Long-term portion 6,177
9,388
Accrued expenses and other current liabilities $ 63,947
$ 46,893


~~(1)~~	~~Upon adoption of ASU 2016-02 at January 1, 2019, we recognized lease liabilities for our operating leases. See Note 2 of these consolidated financial statements for details.~~

Other income, ~~(expense),~~ net


	Three months ended September 30,					Nine months ended September 30,					Three months ended March 31,
(dollars in thousands)	2019		2018			2019		2018			2020		2019
Interest income	$	1,247	$	943		$	2,426	$	1,613		$	522	$	654
Other income (expense), net	911		(1,090		)	2,095		(1,254		)	548		(472		)
Other income (expense), net	$	2,158	$	(147	)	$	4,521	$	359
Other income, net											$	1,070	$	182

8.7. Debt

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


	Debt balance at				Weighted average effective interest rate at				Debt balance at				Weighted average effective interest rate at
(dollars in thousands)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Credit facility:
Revolving credit loans	$	221,200	$	100,000	3.70	%	4.13	%	$	247,500	$	187,000	2.51	%	3.11	%
Term loans	283,125		288,750		3.54	%	3.44	%	279,375		281,250		2.99	%	3.22	%
Other debt									5,083		—		5.00	%	—	%
Total debt	504,325		388,750		3.61	%	3.61	%	531,958		468,250		2.79	%	3.18	%
Less: Unamortized discount and debt issuance costs	1,269		1,626						1,031		1,150
Less: Debt, current portion	7,500		7,500		3.54	%	3.77	%	10,351		7,500		3.00	%	3.05	%
Debt, net of current portion	$	495,556	$	379,624	3.61	%	3.61	%	$	520,576	$	459,600	2.78	%	3.18	%

2017 credit facility



14		~~Third Quarter 2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

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

Other debt

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



First Quarter 2020 Form 10-Q		13

Table of Contents

Blackbaud, Inc.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

As of ~~September 30, 2019,~~March 31, 2020, the required annual maturities related to the 2017 Credit Facility and other debt were as follows:


Years ending December 31, (dollars in thousands)	Annual maturities		Annual maturities
2019 - remaining	$	1,875
2020	7,500
2020 - remaining			$	6,782
2021	7,500		9,194
2022	487,450		515,444
2023	—		538
2024			—
Thereafter	—		—
Total required maturities	$	504,325	$	531,958

~~Financing for 2019 acquisition~~

~~On January 2, 2019, we acquired YourCause for $157.7 million in cash, net of closing adjustments. We financed the acquisition with a revolving credit loan under the 2017 Credit Facility.~~

9.8. Derivative Instruments

Cash flow hedges

We generally use derivative instruments to manage our variable interest rate risk. ~~In July 2017, we~~We have entered into an interest rate swap ~~agreement (the "July 2017 Swap Agreement"),~~agreements, which effectively ~~converts~~convert portions of our variable rate debt under the 2017 Credit Facility to a fixed rate for the term of the ~~July 2017 Swap Agreement. The notional value~~swap agreements. We designated each 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~~interest rate swap agreements as a cash flow hedge at the inception of the ~~contract.~~contracts.

~~In February 2018, we entered into an additional interest rate swap agreement (the "February 2018 Swap Agreement"), which effectively converts portions~~The terms and notional values of our ~~variable rate debt under the 2017 Credit Facility to a fixed rate for the term~~derivative instruments were as follows as of the February 2018 Swap Agreement. The notional value of the February 2018 Swap Agreement was $50.0 million with an effective date beginning in February 2018 through June 2021. We designated the February 2018 Swap Agreement as a cash flow hedge at the inception of the contract.March 31, 2020:

In June 2019, we entered into an additional interest rate swap agreement (the "June 2019 Swap Agreement"), which effectively converts portions of our variable rate debt under the 2017 Credit Facility to a fixed rate for the term of the June 2019 Swap Agreement. The notional value of the June 2019 Swap Agreement was $75.0 million with an effective date beginning in June 2019 through June 2021. We designated the June 2019 Swap Agreement as a cash flow hedge at the inception of the contract.



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

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, 2019		December 31, 2018		Balance sheet location	September 30, 2019		December 31, 2018		Balance sheet location	March 31, 2020		December 31, 2019
Derivative instruments designated as hedging instruments:
Interest rate swaps, long-term portion	Other assets	—		2,260		Other liabilities	2,318		186		Other liabilities	$	5,979	$	1,757
Total derivative instruments designated as hedging instruments		$	—	$	2,260		$	2,318	$	186		$	5,979	$	1,757

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



	Gain (loss) recognized in accumulated other comprehensive loss as of			Location of gain (loss) reclassified from accumulated other comprehensive loss into income	Gain (loss) reclassified from accumulated other comprehensive loss into income
(dollars in thousands)	March 31, 2020				Three months ended March 31, 2020
Interest rate swaps	$	(5,979	)	Interest expense	$	(205	)

	March 31, 2019				Three months ended March 31, 2019
Interest rate swaps	$	806		Interest expense	$	229



~~Third Quarter 2019 Form 10-Q~~14		15First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

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

Gain (loss) recognized
in accumulated other
comprehensive
loss as of

Location
of gain (loss)
reclassified from
accumulated other
comprehensive
loss into income
Gain (loss) reclassified from accumulated
other comprehensive loss into income

(dollars in thousands) September 30,
2019
Three months ended
September 30, 2019
Nine months ended
September 30, 2019
Interest rate swaps $ (2,318 ) Interest expense $ 196
$ 669

September 30,
2018
Three months ended
September 30, 2018
Nine months ended
September 30, 2018
Interest rate swaps $ 4,558
Interest expense $ 23
$ (17 )

Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accumulated other comprehensive income (loss) includes unrealized gains or losses from the change in fair value measurement of our derivative instruments each reporting period and the related income tax expense or benefit. Changes in the fair value measurements of the derivative instruments and the related income tax expense or benefit are reflected as adjustments to accumulated other comprehensive income (loss) until the actual hedged expense is incurred or until the hedge is terminated at which point the unrealized gain (loss) is reclassified from accumulated other comprehensive income (loss) to current earnings. The estimated accumulated other comprehensive loss as of ~~September 30, 2019~~March 31, 2020 that is expected to be reclassified into earnings within the next twelve months is ~~$0.9~~$4.6 million. There were no ineffective portions of our interest rate swap derivatives during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. See Note 1312 to these consolidated financial statements for a summary of the changes in accumulated other comprehensive income (loss) by component.

~~10.~~9. Commitments and Contingencies

Leases

We have operating leases for corporate offices, subleased offices and certain equipment and furniture. ~~Our leases have remaining lease terms~~As of ~~less than 1 year to 19 years, some of which include options to extend the~~March 31, 2020, we had operating leases for ~~up to 5 years. We do not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants.~~

In May 2016, we entered into a lease agreement for our New Headquarters Facility in Charleston, South Carolina. There are two phases for construction of the New Headquarters Facility. Phase One included a building with approximately 172,000 rentable square feet, which we began using in April 2018. The lease agreement also grants us a Phase Two option to request that the landlord construct and lease to us a second office building and related improvements. The lease agreement expires in April 2038 and provides for four renewal periods of five years each at a base rent equal to the then prevailing market rate for comparable buildings.

We continue to lease our former headquarters facility, now called our Customer Operations Center, in Charleston, South Carolina. The lease expires in October 2023 and has two five-year renewal options. We also have a lease for office space in Austin, Texas which expires in September 2023 and has two five-year renewal options.

For each of the leases discussed above, we have not included the renewal options in the lease terms for calculating the lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these options at this time.

~~As of September 30, 2019, we did not have any significant future leases~~equipment that had not yet ~~commenced.~~



16		~~Third Quarter 2019 Form 10-Q~~

~~Table~~commenced with future rent payments of ~~Contents~~

~~Blackbaud, Inc.~~

~~Notes~~$2.9 million. These operating leases are expected to ~~consolidated financial statements (continued)~~

~~(Unaudited)~~

commence during 2020 with lease terms of 3 to 5 years.

The components of lease expense ~~for the three and nine months ended September 30, 2019,~~ were as follows:


	Three months ended September 30,			Nine months ended September 30,			Three months ended March 31,
(dollars in thousands)	2019			2019			2020			2019
Operating lease cost⁽¹⁾	$	6,786		$	18,680		$	6,311		$	6,001
Variable lease cost	923			2,901			1,258			991
Sublease income	(803		)	(2,262		)	(913		)	(705		)
Net lease cost	$	6,906		$	19,319		$	6,656		$	6,287


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

~~Total rent expense as determined under ASC 840 for the three and nine months ended September 30, 2018 was $6.2 million and $16.2 million, respectively.~~

~~Maturities of our operating lease liabilities as of September 30, 2019 were as follows:~~

Years ending December 31,
(dollars in thousands)
Operating leases⁽¹⁾

2019 – remaining $ 6,652
2020 25,667
2021 21,482
2022 16,944
2023 14,604
Thereafter 81,958
Total lease payments 167,307
Less: Amount representing interest 47,775
Present value of future payments $ 119,532


~~(1)~~	~~Our maturities of our operating lease liabilities do not include payments related to Phase Two of our New Headquarters Facility, as that option had not been exercised as of~~ ~~September 30, 2019~~.

As determined under ASC 840, the future minimum lease payments related to lease agreements with a remaining noncancelable term in excess of one year, net of related sublease commitments and lease incentives, as of December 31, 2018 were as follows:

Years ending December 31,
(dollars in thousands)
Operating leases
2019 $ 20,808
2020 20,274
2021 16,924
2022 14,391
2023 12,923
Thereafter 81,755
Total minimum lease payments $ 167,075



~~Third Quarter 2019 Form 10-Q~~		17

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

~~Our ROU assets and lease liabilities are included in the following line items in our consolidated balance sheet:~~

(dollars in thousands) September 30,
2019
Operating leases
Operating lease right-of-use assets $ 110,840

Accrued expenses and other current liabilities $ 19,399
Operating lease liabilities, net of current portion 100,133
Total operating lease liabilities $ 119,532

~~As of September 30, 2019, the weighted average remaining lease terms and discount rates were as follows:~~



~~(dollars in thousands)~~	September 30, 2019
~~Operating leases~~
~~Weighted average remaining lease term (years)~~	~~12.5~~
~~Weighted average discount rate~~	~~5.96~~	%

~~Supplemental cash flow information related to leases during the nine months ended September 30, 2019, was as follows:~~

Nine months ended
September 30,
(dollars in thousands) 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 17,869
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases $ 108,685

Other commitments

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

We have contractual obligations for third-party technology used in our solutions and for other services we purchase as part of our normal operations. In certain cases, these arrangements require a minimum annual purchase commitment by us. As of ~~September 30, 2019,~~March 31, 2020, the remaining aggregate minimum purchase commitment under these arrangements was approximately ~~$87.7~~$76.7 million through 2023.

Solution and service indemnifications

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

Legal proceedings

We are subject to legal proceedings and claims that arise in the ordinary course of business. We make a provision for a loss contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically



18First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~15

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

disclosed in this note, we have determined as of ~~September 30, 2019,~~March 31, 2020, that no provision for liability nor disclosure is required related to any claim against us because (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

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

~~11.~~10. Income Taxes

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


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
(dollars in thousands)	2019			2018			2019			2018			2020			2019
Income tax provision (benefit)	$	364		$	332		$	1,263		$	(2,370	)	$	696		$	(1,834	)
Effective income tax rate	7.4		%	2.9		%	10.7		%	(7.2		)%	13.0		%	62.0		%

The ~~increases~~Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act did not have a material impact on our provision for income taxes for the three months ended March 31, 2020. We will continue to analyze and monitor potential impact throughout the year.

The decrease in our effective income tax rate during the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018, were~~2019, was primarily due to ~~a decrease in~~ the impact of discrete ~~benefit to~~tax benefits on pre-tax income ~~tax expense relating to stock-based compensation. The impact was attributable to a decrease in~~for the ~~market price for shares of our common stock, when~~quarter as compared to pre-tax loss for the same ~~periods~~period in ~~2018, as reported by the Nasdaq Stock Market LLC ("Nasdaq"). Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.~~2019.

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

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(dollars in thousands)	2019		2018		2019		2018		2020		2019
Included in cost of revenue:
Cost of recurring	$	452	$	616	$	1,415	$	1,786	$	470	$	512
Cost of one-time services and other	332		654		1,134		2,224		395		462
Total included in cost of revenue	784		1,270		2,549		4,010		865		974
Included in operating expenses:
Sales, marketing and customer success	2,826		2,234		8,564		6,866		2,478		2,911
Research and development	2,847		2,153		8,274		6,737		2,799		2,674
General and administrative	8,409		5,073		24,234		18,070		7,438		7,167
Total included in operating expenses	14,082		9,460		41,072		31,673		12,715		12,752
Total stock-based compensation expense	$	14,866	$	10,730	$	43,621	$	35,683	$	13,580	$	13,726



~~Third Quarter 2019 Form 10-Q~~16		19First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

~~13.~~12. Stockholders' Equity

Dividends

Our Board of ~~Directors has~~Directors' previously adopted a dividend policy ~~which provides~~provided for the distribution to stockholders of a portion of cash generated by us that iswas in excess of operational needs and capital expenditures. ~~The 2017 Credit Facility limits the amount of dividends payable and certain state laws restrict the amount of dividends distributed.~~

In February ~~2019,~~2020, our Board of Directors approved an annual dividend rate of $0.48 per share to be made in quarterly ~~payments. Dividend~~ payments, ~~are not guaranteed and~~consistent with previous years.

In March 2020, in response to the global COVID-19 pandemic, our Board of Directors rescinded its previously announced policy to pay an annual dividend at a rate of $0.48 per share of common stock and discontinued the declaration and payment of all cash dividends, beginning with the second quarter of 2020 and thereafter until such time, if any, as it may ~~decide,~~otherwise determine in its ~~absolute discretion, at any time and for any reason, not to declare and pay further dividends. The following table provides information with respect to quarterly dividends of $0.12 per share~~sole discretion.

Dividends paid on common stock during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020, consisted of the following:



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

Declaration Date
Dividend
per Share

Record Date Payable Date
February 6, 2019 $ 0.12
February 27 March 15
April 30, 2019 $ 0.12
May 28 June 14
July 30, 2019 $ 0.12
August 28 September 13

~~On October 28, 2019, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable on December 13, 2019 to stockholders of record on November 27, 2019.~~

Changes in accumulated other comprehensive income (loss) by component

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


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
(dollars in thousands)	2019			2018			2019			2018			2020			2019
Accumulated other comprehensive loss, beginning of period	$	(9,409	)	$	(1,011	)	$	(5,110	)	$	(642	)	$	(5,290	)	$	(5,110	)
By component:
Gains and losses on cash flow hedges:
Accumulated other comprehensive (loss) income balance, beginning of period	$	(1,373	)	$	2,759		$	1,498		$	748		$	(1,323	)	$	1,498
Other comprehensive (loss) income before reclassifications, net of tax effects of $78, $(209), $982 and $(860)	(219		)	583			(2,741		)	2,398
Amounts reclassified from accumulated other comprehensive (loss) income to interest expense	(196		)	(23		)	(669		)	17
Tax benefit included in provision for income taxes	52			6			176			(5		)
Total amounts reclassified from accumulated other comprehensive (loss) income	(144		)	(17		)	(493		)	12
Net current-period other comprehensive (loss) income	(363		)	566			(3,234		)	2,410
Reclassification upon early adoption of ASU 2018-02	—			—			—			167
Other comprehensive loss before reclassifications, net of tax effects of $1,154 and $276													(3,273		)	(763		)
Amounts reclassified from accumulated other comprehensive loss to interest expense													205			(229		)
Tax (benefit) expense included in provision for income taxes													(54		)	60
Total amounts reclassified from accumulated other comprehensive loss													151			(169		)
Net current-period other comprehensive loss													(3,122		)	(932		)
Accumulated other comprehensive (loss) income balance, end of period	$	(1,736	)	$	3,325		$	(1,736	)	$	3,325		$	(4,445	)	$	566
Foreign currency translation adjustment:
Accumulated other comprehensive loss balance, beginning of period	$	(8,036	)	$	(3,770	)	$	(6,608	)	$	(1,390	)	$	(3,967	)	$	(6,608	)
Translation adjustments	(3,893		)	1,047			(5,321		)	(1,333		)	(5,728		)	4,590
Accumulated other comprehensive loss balance, end of period	(11,929		)	(2,723		)	(11,929		)	(2,723		)	(9,695		)	(2,018		)
Accumulated other comprehensive (loss) income, end of period	$	(13,665	)	$	602		$	(13,665	)	$	602
Accumulated other comprehensive loss, end of period													$	(14,140	)	$	(1,452	)



20		~~Third Quarter 2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

~~14.~~13. Revenue Recognition

Transaction price allocated to the remaining performance obligations

As of ~~September 30, 2019,~~March 31, 2020, approximately ~~$785~~$811 million of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 60% of these remaining performance obligations over the next 12 months, with the remainder recognized thereafter.



First Quarter 2020 Form 10-Q		17

Table of Contents

Blackbaud, Inc.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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

Contract balances

Our contract assets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were insignificant. Our opening and closing balances of deferred revenue were as follows:


(in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Total deferred revenue	$	322,996	$	298,555	$	290,397	$	316,137

The ~~increase~~decrease in deferred revenue during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was primarily due to ~~new subscription sales of our cloud-based solutions and a seasonal increase in customer contract renewals.~~less billings for recurring revenue contracts. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third ~~quarter. Our acquisition~~quarter generally resulting in our lowest balance of ~~YourCause on January 2, 2019 also modestly contributed to the increase in~~ deferred revenue ~~since December 31, 2018.~~at the end of our first quarter. The amount of revenue recognized during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 that was included in the deferred revenue balance at the beginning of the period was approximately ~~$271~~$113 million. The amount of revenue recognized during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 from performance obligations satisfied in prior periods was insignificant.

Disaggregation of revenue

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


	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
(dollars in thousands)	2019		2018		2019		2018		2020		2019
United States	$	188,649	$	178,715	$	567,174	$	534,224	$	193,959	$	188,126
Other countries	32,471		30,817		95,410		93,164		29,662		27,704
Total revenue	$	221,120	$	209,532	$	662,584	$	627,388	$	223,621	$	215,830

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

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

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

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

The following table presents our revenue by market group:



	Three months ended March 31,
(dollars in thousands)	2020			2019
GMG	$	95,453		$	92,515
EMG	98,123			95,165
IMG	30,081			28,122
Other	(36		)	28
Total revenue	$	223,621		$	215,830



~~Third Quarter 2019 Form 10-Q~~18		21First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

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

(Unaudited)

~~The following table presents our revenue by market group:~~

Three months ended
September 30, Nine months ended
September 30,
(dollars in thousands) 2019
2018⁽²⁾

2019
2018⁽²⁾

GMG $ 92,029
$ 88,247
$ 277,803
$ 265,856
EMG⁽¹⁾
96,270
89,954
288,145
266,395
IMG 32,731
31,254
96,467
94,902
Other 90
77
169
235
Total revenue $ 221,120
$ 209,532
$ 662,584
$ 627,388


~~(1)~~	~~The operating results of YourCause have been included in EMG from the date of acquisition. See Note 3 to these consolidated financial statements for details regarding this acquisition.~~


~~(2)~~	~~Beginning in the first quarter of 2019, all of our Canadian operations are included in IMG. We have recast our revenue by market group for the~~ ~~three and nine months endedSeptember 30, 2018, to present them on a consistent basis with the current year.~~

~~15.~~14. Restructuring

During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial commitments. These workspaces are also more centrally located for our employees and closer to our customers and prospects. Restructuring costs incurred prior to our adoption of ASU 2016-02 on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.

Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018. See additional details below.

Restructuring costs incurred during the nine months ended September 30, 2019 consisted primarily of operating lease ROU asset impairment costs and, to a lesser extent, lease payments for offices we have ceased using and write-offs of facilities-related fixed assets that we will no longer use.

We ~~currently expect to incur before-tax restructuring costs associated with these activities of between $8.5 million and $9.5 million, with~~ substantially ~~all of the remaining costs expected to be incurred by the end of 2019.~~

~~The following table summarizes~~completed our facilities optimization restructuring ~~costs~~plan as of ~~September 30, 2019:~~December 2019. We incurred $2.0 million in before-tax restructuring charges related to these activities during the three months ended March 31, 2019. Such charges during the three months ended March 31, 2020 were insignificant.

Cumulative costs incurred as of
Costs incurred during the three months ended

Costs incurred during the nine months ended⁽¹⁾

Cumulative costs incurred as of
(in thousands) December 31, 2018
September 30, 2019
By component:
Contract termination costs $ 4,176
$ 389
$ 2,307
$ 6,483
Other costs 1,208
11
776
1,984
Total $ 5,384
$ 400
$ 3,083
$ 8,467

15. Subsequent Events

COVID-19

To better enable us to weather the extraordinary business challenges occasioned 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, in addition to suspending the payment of quarterly dividends as discussed in Note 12 to these consolidated financial statements, are expected to provide us the financial flexibility needed to manage a wide array of outcomes that may result from the pandemic. Certain of the actions commenced, after the quarter ended March 31, 2020, include the following:

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, was temporarily suspended effective with the payroll period commencing April 1, 2020. We have not yet determined when the match might recommence.


~~(1)~~•	~~Includes~~On May 1, 2020, we granted restricted stock units 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. The grant date fair value of these awards was $~~1.3~~8.3 million ~~of operating lease ROU asset impairment costs.~~.


•	On May 1, 2020, we granted performance-based restricted stock units 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. The grant date fair value of these awards was $34.4 million.



22		~~Third~~First Quarter ~~2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

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

~~(Unaudited)~~

~~The change in our liability related to our facilities optimization restructuring during the nine months ended September 30, 2019, consisted of the following:~~

Accrued at

Increases for incurred costs⁽¹⁾

Written off
upon adoption
of ASU 2016-02⁽²⁾

Costs paid
Accrued at
(in thousands) December 31, 2018
September 30, 2019
By component:
Contract termination costs $ 1,865
$ 2,307
$ (1,656 ) $ (2,516 ) $ —
Other costs 50
776
—
(815 ) 11
Total $ 1,915
$ 3,083
$ (1,656 ) $ (3,331 ) $ 11


~~(1)~~	~~Includes~~ ~~$1.3 million~~ ~~of operating lease ROU asset impairment costs.~~


~~(2)~~	Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018.



~~Third Quarter 2019~~2020 Form 10-Q		2319

Table of Contents

Blackbaud, Inc.

(Unaudited)

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

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

Executive Summary

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

~~During 2019,~~COVID-19 Impact

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

To better enable us to weather the extraordinary business challenges occasioned 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 and create over $300 million of additional annualized borrowing capacity. Some of these actions include the following:

Enacted our business continuity plans so that we can continue to serve our customers while protecting the well-being of our employees;

Closed our offices worldwide and transitioned our more than 3,600 global employees to work remotely;

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

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

Temporarily froze our hiring efforts;

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, effective with the payroll period commencing April 1, 2020 and until Mr. Gianoni otherwise determines;

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

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;



20		First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

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

In addition to the initial actions we have taken to date, we are continuously evaluating further possible actions in order to respond quickly to rapidly changing conditions, if needed. The economic impact of COVID-19 on the social good industry remains uncertain and, consequently, we expect that our operating environment may continue to be challenging for the remainder of 2020, and potentially beyond, as existing and prospective customers remain cautious in their purchase decisions.

Notwithstanding these conditions, we remain focused on continuing to execute on our four-point growth strategy ~~targeted to drive solution~~ and ~~service innovation, quality enhancement, increasing operating efficiency and financial performance:~~strengthening our leadership position.

Four-Point Growth Strategy



	1		Delight Customers with Innovative Cloud Solutions

	2		Drive Sales Effectiveness

	3		Expand Total Addressable Market

	4		Improve Operating Efficiency


1.	Delight Customers with Innovative Cloud Solutions

~~This strategy reflects our relentless focus on driving value and outcomes for~~Many of our customers ~~through~~have had to cancel or postpone their planned in-person fundraising events due to COVID-19 and our ~~solutions. Our Blackbaud SKY™ platform is a core tenant of this strategy~~agile engineering teams have moved quickly to respond to these customers. We have been reprioritizing and ~~continues~~expediting product enhancements to ~~power an elevated level of innovation by our engineers. It is also enabling our growing ecosystem of partners who are also passionate about social good,~~support their changing needs. Examples range from pivoting to ~~create~~virtual fitness events to putting new ~~capabilities that often look and feel like Blackbaud-built capabilities. For the first time~~livestream fundraising tools in the ~~history~~hands of both organizations and individuals. This industry has been undergoing a digital transformation in which we have been the ~~Company, there~~global leader and that has accelerated in recent weeks. Our move over the last several years to cloud solutions purpose-built for vertical markets has proved to be the right strategy as this crisis has highlighted how important modern, scalable, and secure cloud systems are now ~~significantly more outside developers developing on our platform than Blackbaud engineers.~~

The customers we serve require vertical specific business solutions to automate their operations. Among the many product and innovation updates across all of our vertical markets, we recently announced the general availability of Blackbaud Church Management™, which is already transforming the church technology landscape. Within just one year of announcing plans for Blackbaud Church Management, we now serve churches in more than half of the 50 U.S. states, representing congregations of all different sizes and spanning more than 10 denominations. Bringing this solution to market is a ~~significant step toward addressing several challenges in the church market and a substantial opportunity for Blackbaud.~~

We have built an environment of rapid innovation through a combination of our modern cloud architecture and industry standard methodologies. Our early adopter customers have a significant role in shaping our new solutions and our SKY platform enables us to rapidly iterate based on their feedback before releasing the solutions to the market. This culture of innovation led to the general availability of Blackbaud Church Management and the process is highly repeatable. For example, we are also well underway with early adopters in our Higher Education vertical as we extend our proven Education Management portfolio up market.



24		~~Third Quarter 2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

required standard.


2.	Drive Sales Effectiveness

We have ~~spent the last several years organizing~~been investing in sales and marketing to better address our large market opportunity and, as part of this effort, we have implemented software tools to enhance our digital footprint and drive efficiency. The investments we have made enable us to quickly adapt to changing market conditions, including competitive opportunities. Our ability to ensure business continuity for our customers, perform at scale and ~~laying~~pivot to offer solutions to the ~~foundation~~changing needs of our customers has become a new differentiator for us, and we have moved quickly to capitalize on these early opportunities by leveraging our ~~salespeople~~enhanced go-to-market capabilities. While the disruption caused by the virus has caused some deal pipeline to ~~be more successful. This year marks an important milestone in that process~~push out to our second quarter and the second half of 2020, we have been able to showcase ourselves as the ~~structural transformation~~best long-term partner for social good organizations and we remain very well positioned as a leader in ~~sales is now largely complete, enabling~~this market. As part of our ~~account executives to focus~~cost control measures, we have put a freeze on ~~leading with total solution selling by vertical, driving more products per customer, higher ASPs and overall increased customer lifetime value. With~~hiring across the structural changes behind us, our focus is on adding sales headcount and improving overall sales productivity. This effort extends beyond our sales organization into areas like marketing, where we are investing in the necessary technology and resources to efficiently drive an increased number of quality leads and better cover our large addressable market. Over the last three years, we've tripled the number of account executives dedicated to prospect accounts, and these investments are just one way we're equipping our growing salesforce to be more effective.company, including sales.


3.	Expand TAM

In January 2019, we acquired YourCause, a market leader in corporate social responsibility software, and our ability to move fast on back-office integration is enabling us to further differentiate our solutions from the competition. As corporate social responsibility programs are implemented around the world, it is becoming increasingly important for companies to have acute local knowledge in the countries where employees are accessing their programs and to remove any functionality barriers. We recently announced expansion in YourCause's global footprint by developing in-market partnerships to advance employee giving and nonprofit support globally, while also implementing key product features for universal functionality. Our TAM now stands at over $10 billion, andWhile we remain active in the evaluation of opportunities to further expand our addressable market through acquisitions and internal product ~~development.~~


4.	~~Improve Operating Efficiency~~

development, our top priority in the near-term is protecting our people and continuing to support our customers. We ~~are also focused on operational efficiency to strengthen the business and position~~have significant opportunities in front of us ~~for long-term success. This continuous effort spans the entire organization~~ as we ~~drive towards~~are less than 10% penetrated into a more scalable operating model that creates efficiency and consistency in how we execute through infrastructure investments, productivity initiatives, and organizational re-alignments. For example, we are now selling a portfoliototal addressable market of modern cloud solutions, which is driving a shift away from one-time services as we reduce the hours needed for implementation and integration of our solutions. In order to efficiently scale as the Company continues to grow, we are continuing to build out our partner ecosystem, which includes partnerships to implement our cloud solutions. We have made significant progress building out this program in 2019 and expect to continue the effort in 2020.

Total revenue
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
Total revenue $ 221.1
$ 209.5
5.5 % $ 662.6
$ 627.4
5.6 %

The increases in total revenue during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, were primarily driven by growth in recurring revenue as we continue to see positive demand from customers across our portfolio of cloud-based solutions. Our acquisition of YourCause, which occurred on January 2, 2019, also contributed to the increases in recurring and total revenue. As expected, one-time services and other revenue declined $5.0 million and $14.3 million, respectively, during the three and nine months ended September 30, 2019 due to our continued shift in focus towards selling cloud-based subscription solutions. In general, our cloud-based solutions include integrated analytics, training and payments services, and require less implementation services and little to no customization services. We are also selling more subscription-based contracts for retained services and services embedded in our renewable cloud-based solution contracts. As a result, we continue to expect one-time services and other revenue to decline.over $10 billion.



~~Third~~First Quarter ~~2019~~2020 Form 10-Q		2521

Table of Contents

Blackbaud, Inc.

(Unaudited)


4.	Improve Operating Efficiency

We have made transformational changes to our business, which has created a scalable operating model that has been tested with this global crisis. Our internal IT and organization structure changes over the last several years enabled us to immediately go virtual and have all of our global employees working from home as if they continued to come into the office every day, allowing our high level of support to continue. Our support teams immediately became an efficient mobile call center. Not only did the team maintain service levels, but they have driven customer satisfaction levels into the high nineties. Our implementation services teams had previously moved to a largely remote implementation model before this crisis and are fully equipped to continue customer engagements uninterrupted. We have reorganized our business to focus on vertical go-to-market teams with a centralized back-office consisting of global centers of excellence, and those changes are now benefiting us.

Financial Summary

Income from operations
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
Income from operations $ 7.9
$ 15.8
(50.1 )% $ 23.6
$ 44.7
(47.3 )%



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

~~Income from operations decreased~~

Total revenue increased by $7.8 million during the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018. The positive impact of growth in total revenue~~2019, driven largely by ~~recurring subscriptions was offset primarily by investments we are making in our sales organization and innovation, which we expect to continue for~~ the ~~remainder of 2019. Contributing to the decreases in income~~following:



	+		Growth in recurring revenue related to an increase in payment services, positive demand from customers across our portfolio of cloud solutions and an increase in services embedded in our renewable cloud solution contracts
	+		An increase in revenue from sales of retained and managed services

Income from operations ~~were increases in stock-based compensation of $4.1~~increased by $6.2 million and $7.9 million, respectively, and hosting and data center costs of $1.0 million and $4.0 million, respectively. Increases in employee severance of $1.9 million, amortization of intangible assets from business combinations of $1.8 million and rent expense of $1.7 million, also negatively impacted income from operations during the ~~nine~~three months ended September 30, 2019. The increases in stock-based compensation expense were primarily driven by an increase in the grant date fair value of our annual equity awards granted to employees during the first quarter of 2019,March 31, 2020, when compared to the ~~grant date fair value of the awards granted during the~~ same period in ~~2018. The increase~~2019, driven largely by the following:



	+		Growth in total revenue, as described above
	+		Decrease in employee severance of $3.3 million related to the elimination of certain roles within the company, most of which occurred during the first quarter of 2019
	+		Decrease in restructuring costs of $1.9 million as our facilities optimization plan was largely completed as of December 31, 2019
	+		Decrease in acquisition-related expenses and integration costs of $1.1 million
	+		Decrease in amortization of intangible assets from business combinations of $1.1 million
	-		Increase in cost of revenue of $5.6 million related to increases in transaction-based costs, amortization of software development costs, third-party contractor costs and data center costs
	-		Increased investments we have made in our sales organization, including the elevated headcount of our direct sales force and our lead generation teams beginning in the fourth quarter of 2018



22		First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

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


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

Recurring subscription contracts are typically for a term of three years at contract inception, billed annually in advance, and we have been for several years successfully shifting our legacy customer base away from annual renewals and moving them onto multi-year renewal contracts. Approximately one-half of our contracted recurring revenue will be up for renewal during 2020, with the seasonal high for renewals and collections during the ~~nine months ended September 30, 2019 was primarily associated~~third quarter driven largely by mid-year fiscal year-ends and timing of the academic school year. To date, our renewal rates are trending ahead of our pre-COVID-19 expectations. We are monitoring our customer receivable balances, payment terms, and creditworthiness and have not experienced a significant deterioration in our customers' ability to pay thus far.


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

Transactional revenue is non-contractual and less predictable given the susceptibility to certain drivers such as timing and number of events and marketing campaigns, as well as fluctuations in donation volumes and tuition payments. We have historically experienced seasonal highs during the fourth quarter due to year-end giving campaigns and during the second quarter when a large number of events are held. The early disruptions caused by COVID-19 drove sharp initial declines in our transactional volumes. In recent weeks, we have seen a rebound in volume in the form of online events and campaigns as our customers look for innovative ways to close funding gaps. We are focused on helping our customers successfully stand up virtual campaigns and events.


3.	Bookings

Given our ratable revenue recognition model for our recurring subscription contracts and implementation periods, we expect that any declines in our 2020 bookings performance will have a greater impact on our 2021 revenue than 2020. Of the three primary revenue categories discussed above, bookings represents the smallest potential impact on recurring revenue in 2020. One-time services and other revenue, which is tied to bookings, would have a more immediate impact on our total revenue. Our first quarter has historically been the seasonal low for bookings, with the ~~lease~~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. Bookings fell off sharply in the second half of March 2020, and we have seen a slow-down in pipeline build. We are currently expecting a significant shortfall in 2020 bookings compared to our original plan for the year. The magnitude of our 2020 bookings shortfall is expected to be heavily impacted by the depth and duration of the COVID-19 pandemic. We have enabled our teams to offer relief measures to help ease the financial burden for our ~~New Headquarters Facility in Charleston, South Carolina,~~customers with near-term liquidity needs. For example, we have allowed, on a limited basis, for a 60-day extension on payment terms which ~~commenced in April 2018. The increase in employee severance was related~~will delay cash collections. However, we expect the impact to ~~the elimination of certain roles within the company, most of which occurred~~be largely offset during the ~~first quarter~~third quarter. We have also partnered to offer zero-percent financing options for some customers on a case-by-case basis, and we continue to monitor and inform our customers on the available government assistance programs.



Customer retention



First Quarter 2020 Form 10-Q		23

Table of ~~2019.~~Contents

~~Customer retention~~

Blackbaud, Inc.

(Unaudited)

Our recurring revenue contracts are generally for a term of three years at contract inception with one to three-year renewals thereafter. We anticipate a continued decrease in maintenance contract renewals as we transition our solution portfolio and maintenance customers from a perpetual license-based model to a ~~cloud-based~~cloud subscription delivery model. In the long term, we also anticipate an increase in recurring subscription contract renewals as we continue focusing on innovation, quality and the integration of our ~~cloud-based~~cloud solutions, which we believe will provide value-adding capabilities to better address our customers' needs. Due primarily to these factors, we believe a recurring revenue customer retention measure that combines recurring subscription, maintenance and service customer contracts provides a better representation of our customers' overall behavior. For the twelve months ended ~~September 30, 2019,~~March 31, 2020, approximately 92% of our customers with recurring revenue contracts were retained. This customer retention rate is unchanged from our rate for the full year ended December 31, ~~2018.~~2019.

Balance sheet and cash flow

At ~~September 30, 2019,~~March 31, 2020, our cash and cash equivalents were ~~$29.1~~$25.0 million and the carrying amount of our debt under the 2017 Credit Facility was ~~$503.1~~$525.8 million. Our net leverage ratio was ~~2.47~~2.61 to 1.00.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we ~~generated $122.1~~used $24.5 million in cash ~~from~~for operations, had a net increase in our borrowings of ~~$115.6~~$58.6 million, ~~which was primarily used to finance the acquisition of YourCause,~~ returned ~~$17.7~~$6.0 million to stockholders by way of dividends and had aggregate cash outlays of ~~$44.1~~$13.8 million for purchases of property and equipment and capitalized software development costs. Historically, due to lower revenues in our first quarter, combined with the payment of bonuses from the prior year in our first quarter and the payment of certain annual vendor contracts, our cash flow from operations has been lowest in our first quarter.

~~Adoption of new lease accounting standard~~

On January 1, 2019, we adopted ASU 2016-02, using the transition method that allowed us to initially apply the guidance at the adoption date of January 1, 2019 without adjusting comparative periods presented. Adopting ASU 2016-02 had a material impact on our consolidated balance sheet as we recognized lease liabilities and ROU assets for those leases classified as operating leases. The impacts of adoption are reflected in the financial information herein. For additional information regarding the impact of our adoption of ASU 2016-02, see Notes 2 and 10 of our consolidated financial statements in this report.



2624		~~Third~~First Quarter ~~2019~~2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Results of Operations

Comparison of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

We have included the results of operations of YourCause in our consolidated results of operations from the date of acquisition. We determined that the YourCause acquisition was not a material business combination; therefore, separate presentation of revenue and earnings since the acquisition date are not required nor included herein.

~~Operating results~~

Revenue and Cost of Revenue

Recurring revenue
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
Recurring revenue $ 205.2
$ 188.7
8.8 % $ 611.8
$ 562.3
8.8 %
Cost of recurring 87.6
76.5
14.5 % 259.0
222.0
16.7 %
Recurring gross profit⁽¹⁾
$ 117.6
$ 112.1
4.9 % $ 352.8
$ 340.3
3.7 %
Recurring gross margin 57.3 % 59.4 % 57.7 % 60.5 %



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

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

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

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

~~The increases in recurring~~Recurring revenue increased by $6.8 million, or 3.4%, during the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018, were~~2019, driven primarily ~~due to positive demand across our portfolio of cloud-based solutions as revenue from subscriptions increased $21.2 million and $63.3 million, respectively. The inclusion of YourCause contributed to~~by the increases in recurring revenue as the acquisition was completed on January 2, 2019. We also saw increases in revenue from subscription-based retained services as well as services embedded in our renewable cloud-based solution contracts. These favorable impacts from subscriptions were partially offset by decreases in maintenance revenue of $4.6 million and $13.8 million, respectively during the three and nine months ended September 30, 2019, when compared to the same periods in 2018. These continued decreases in maintenance revenue were primarily related to our ongoing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform.following:

The increases in cost of recurring revenue during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, were primarily due to increases in transaction-based costs of $2.9



	+		Increase in subscriptions revenue of $10.6 million ~~and $9.4 million, respectively,~~ related to payment services integrated in our cloud-based solutions, compensation costs of $2.2 million and $6.7 million, respectively, third-party data and tool costs of $1.5 million and $3.8 million, respectively, amortization of software development costs of $1.1 million and $3.1 million, respectively, and hosting costs and data center costs of $1.0 million and $4.0 million, respectively. Also contributing to an increase in payment services, positive demand from customers across our portfolio of cloud solutions and an increase in services embedded in our renewable cloud solution contracts
	-		Decrease in maintenance revenue of $3.9 million primarily related to our continuing efforts to migrate customers from legacy on-premises solutions onto our solutions powered by Blackbaud SKY, our modern cloud platform

Partially offsetting the increase in ~~cost~~subscriptions revenue was a decrease in the mix of ~~recurring~~retained and managed services contracts we present in recurring. Revenue from retained and managed service contracts that we do not expect to have a term consistent with our cloud solution contracts is included in one-time services and other revenue ~~for the nine months~~beginning January



~~Third~~First Quarter ~~2019~~2020 Form 10-Q		2725

Table of Contents

Blackbaud, Inc.

(Unaudited)

~~ended September 30, 2019 was allocations of depreciation, facilities~~1, 2020. This change in presentation resulted in a $4.3 million decrease in recurring revenue and ~~IT support costs of $3.8 million. The growth in compensation costs was primarily attributable~~an offsetting increase to ~~an increasing portion of our resources now providing subscription-based retained~~one-time services ~~as opposed to one-time. The inclusion of YourCause also contributed to the increases in cost of recurring~~and other revenue during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020.

Cost of recurring revenue increased by $4.8 million, or 5.7%, during the three months ended March 31, 2020, when compared to the same ~~periods~~period in ~~2018. The increase in amortization of software development costs was~~2019, driven primarily ~~due to investments made on innovation, quality and~~by the ~~integration of our cloud-based solutions. The increase in allocated corporate costs was primarily driven by investments made in corporate IT, including cyber security and increases in headcount.~~following:



	+		Increase in transaction-based costs of $2.3 million, related to payment services integrated in our cloud solutions
	+		Increase in amortization of software development costs of $1.4 million due to investments made on innovation, quality and the integration of our cloud solutions
	+		Increase in third-party contractor costs of $1.2 million related to application security and partners delivering services embedded in our renewable cloud solution contracts
	+		Increase in data center costs as we are migrating our cloud infrastructure to leading public cloud service providers
	-		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

The ~~decreases~~0.9% decrease in recurring gross margin for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018, were~~2019, was primarily the result of incremental costs associated with our continued shift toward selling ~~cloud-based~~cloud solutions, ~~and retained services,~~ including ~~hosting and data center costs, compensation costs and~~ amortization of software development costs and data center costs. We expect continued pressure on recurring gross margin largely driven by duplicate data center costs as we migrate our cloud infrastructure to leading cloud service providers.

One-time services and other revenue
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
One-time services and other revenue $ 15.9
$ 20.9
(23.9 )% $ 50.8
$ 65.1
(22.0 )%
Cost of one-time services and other 14.2
18.7
(24.3 )% 42.9
56.5
(24.1 )%
One-time services and other gross profit⁽¹⁾
$ 1.7
$ 2.2
(19.9 )% $ 7.9
$ 8.7
(8.5 )%
One-time services and other gross margin 11.0 % 10.4 % 15.6 % 13.3 %



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

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

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

One-time services and other revenue decreased during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, primarily due to decreases in one-time consulting revenue of $3.9 million and $10.1 million, respectively and analytics revenue of $0.9 million and $2.8 million, respectively. We expect that the shift in our go-to-market strategy towards cloud-based subscription offerings, which generally include integrated analytics and require less implementation and customization services, will continue to negatively impact one-time services and other revenue. We also continue to sell more subscription-based contracts for retained services and services embedded in our renewable cloud-based solution contracts, both of which are recorded as recurring revenue.

Cost of one-time services and other decreased during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, primarily due to a decrease in compensation costs of $3.8 million and $10.2 million, respectively, which is in line with the ongoing shift in our go-to-market strategy as discussed above as an increasing portion of our resources are now providing subscription-based retained services as opposed to one-time.

One-time services and other gross margin increased during the three and nine months ended September 30, 2019, when compared to the same periods in 2018, as the reductions in costs of one-time services and other discussed above outpaced the declines in one-time consulting revenue and higher margin analytics revenue associated with the shift in our go-to-market strategy.



2826		~~Third~~First Quarter ~~2019~~2020 Form 10-Q

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(Unaudited)

~~Operating expenses~~One-time services and other revenue increased by $1.0 million, or 5.7%, during the three months ended March 31, 2020, when compared to the same period in 2019, driven primarily by the following:



	+		Increase 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 a $4.3 million increase to one-time services and other revenue and an offsetting decrease in recurring revenue during the three months ended March 31, 2020.
	-		Decrease in one-time consulting revenue of $1.7 million. Services are increasingly embedded in our renewable cloud solution contracts. Our embedded services are recorded as recurring revenue.
	-		Decrease in one-time analytics revenue of $0.9 million as analytics are generally integrated in our cloud solutions

Cost of one-time services and other increased by $0.7 million, or 5.1%, during the three months ended March 31, 2020, when compared to the same period in 2019, driven primarily by the following:



	+		Increase in costs of associated with certain retained and managed services contracts for which revenue is included in one-time services and other revenue beginning January 1, 2020, as discussed above
	+		Increase in third-party contractor costs of $0.9 million, related to partners delivering services
	-		Reduced amount of compensation costs primarily associated with the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards

The 0.5% increase in one-time services and other gross margin during the three months ended March 31, 2020, when compared to the same period in 2019, was primarily the result of the decision to replace our 2020 cash bonus plans with grants of performance-based equity awards.

Operating Expenses

Sales, marketing and customer success
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
Sales, marketing and customer success expense $ 55.5
$ 49.1
13.1 % $ 166.0
$ 143.0
16.0 %
% of total revenue 25.1 % 23.4 % 25.0 % 22.8 %



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

Sales, marketing and customer success

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

We see a large market opportunity and continue to make investments to improve market coverage and drive sales effectiveness, which is a component of our four-point growth strategy. ~~The increases in sales,~~We have also implemented software tools to enhance our digital footprint and drive lead generation. Sales, marketing and customer success ~~expense~~expenses increased by $3.3 million, or 5.9%, during the three months ended March 31, 2020, when compared to the same period in 2019. The increases in dollars and as a percentage of total revenue ~~during the three and nine months ended September 30, 2019, when compared to the same periods in 2018,~~ were primarily due to increases in compensation costs of $4.4 million and $15.7 million, respectively and increases in allocations of depreciation, facilities and IT support costs of $1.3 million and $5.0 million, respectively. Also contributing to the increase in sales, marketing and customer success expense during the nine months ended September 30, 2019, when compared to the same period in 2018, was an increase in commissions expense of $2.2 million. The increases in compensation costs were primarily associated with our efforts during the second half of 2018 to increase our direct sales force and we expect to continue making investments during the remainder of 2019. These incremental investments are intended to address the large market opportunity that we see for ourselves and fuel future revenue growth. In addition, compensation costs increased due to incremental headcount associated with the inclusion of YourCause. The increase in commission expense was primarily driven by an increase in ~~commissionable sales.~~compensation costs of $2.6 million primarily associated with the elevated headcount of our direct sales force and our lead generation teams, beginning in the fourth quarter of 2018. The ~~increases~~increase in ~~allocated corporate~~compensation costs ~~were primarily driven by investments made in corporate IT, including cyber security and increases in headcount.~~related to elevated headcount was partially

Research and development
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions)
2019⁽¹⁾

2018⁽¹⁾

Change

2019⁽²⁾

2018⁽²⁾

Change
Research and development expense $ 25.9
$ 24.2
7.1 % $ 80.3
$ 75.5
6.4 %
% of total revenue 11.7 % 11.6 % 12.1 % 12.0 %



~~(1)~~First Quarter 2020 Form 10-Q	~~Not included in research and development expense for the~~ ~~three months ended September 30, 2019~~ ~~and~~ ~~2018~~ ~~were~~ ~~$11.1 million~~ ~~and~~ ~~$9.9 million~~, respectively, of qualifying costs associated with development activities that are required to be capitalized under the internal-use software accounting guidance such as those 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.	27

~~(2)~~

~~Not included in research~~

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Blackbaud, Inc.

(Unaudited)

offset by the decision in March 2020 to replace our 2020 cash bonus plans with grants of performance-based equity awards.

Research and development ~~expense for the~~ ~~nine months ended September 30, 2019~~ ~~and~~ ~~2018~~ ~~were~~ ~~$33.9 million~~ ~~and~~ ~~$26.0 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 delight our customers with innovative cloud solutions, which is a component of our four-point growth strategy. ~~The increases~~Research and development expenses decreased by $3.5 million, or 12.2%, during the three months ended March 31, 2020, when compared to the same period in 2019, primarily driven by the following:



	-		Decrease in compensation costs of $1.8 million primarily associated with the decision in March 2020 to replace our 2020 cash bonus plans with grants of performance-based equity awards
	-		Decrease in employee severance costs of $1.2 million related to the elimination of certain roles within the company, most of which occurred during the first quarter of 2019

Not included in research and development expense ~~during the three~~for 2020 and ~~nine months ended September 30,~~ 2019 ~~when compared to the same periods in 2018,~~ were ~~primarily due to increases in compensation costs of $2.4~~$10.8 million and ~~$8.3~~$11.1 million, ~~respectively. The increases in compensation~~respectively, of qualifying costs ~~were primarily~~ associated with ~~the inclusion of YourCause's engineering resources. The increase in research and~~ development ~~expense was partially offset by an increase in the amount of software development costs~~activities that ~~were~~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~~



~~Third Quarter 2019 Form 10-Q~~		29

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~~Blackbaud, Inc.~~

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.

General and administrative
Three months ended
September 30, Nine months ended
September 30,
(dollars in millions) 2019
2018
Change
2019
2018
Change
General and administrative expense $ 28.9
$ 24.9
16.1 % $ 84.6
$ 78.4
7.9 %
% of total revenue 13.1 % 11.9 % 12.8 % 12.5 %
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, ~~cybersecurity,~~ allocated depreciation, facilities and IT support costs, acquisition-related expenses and other administrative expenses.

~~The increases in general~~General and administrative ~~expense~~expenses decreased by $1.3 million, or 4.7%, during the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018, were~~2019, primarily ~~due to increases in compensation costs of $5.4 million and $8.9 million, respectively. Also contributing to~~driven by the increase in general and administrative expense during the nine months ended September 30, 2019 was rent expense of $1.6 million. These increases were partially offset by a decrease in acquisition-related expenses and integration costs of $2.0 million. The increase in compensation costs was primarily related to stock-based compensation and our acquisition of YourCause. The increase in rent expense was related to the lease of our New Headquarters Facility in Charleston, South Carolina, which commenced in April 2018.following:



	+		Increase in corporate IT costs of $0.8M, including cyber security investments
	-		Reduced amount of compensation costs primarily associated with the decision in March 2020 to replace our 2020 cash bonus plans with grants of performance-based equity awards
	-		Decrease in acquisition-related expenses and integration costs of $1.1 million

Restructuring

During 2017, in an effort to further our organizational objectives, including improved operating efficiency, customer outcomes and employee satisfaction, we initiated a multi-year plan to consolidate and relocate some of our existing offices to highly modern and more collaborative workspaces with short-term financial ~~commitments. These workspaces are also more centrally located for our employees and closer to our customers and prospects. Restructuring costs~~commitments, which was substantially completed as of December 2019. We incurred prior to our adoption of ASU 2016-02 on January 1, 2019 consisted primarily of costs to terminate lease agreements, contractual lease payments, net of estimated sublease income, upon vacating space as part of the plan, as well as insignificant costs to relocate affected employees and write-off facilities-related fixed assets that we would no longer use.

~~We currently expect to incur~~$2.0 million in before-tax restructuring ~~costs associated with these activities of between $8.5 million and $9.5 million, with substantially all of the remaining costs expected~~charges related to be incurred by the end of 2019. These restructuring activities are currently expected to result in improved operating efficiencies and future annual before-tax savings of between $5.0 million and $6.0 million beginning in 2020.

~~The following table summarizes~~ our facilities optimization ~~restructuring costs as of September 30, 2019:~~



3028		~~Third~~First Quarter ~~2019~~2020 Form 10-Q

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(Unaudited)


~~(1)~~	~~Includes~~ ~~$1.3 million~~ ~~of operating lease ROU asset impairment costs.~~

~~The change in our liability related to our facilities optimization restructuring during the nine months ended September 30, 2019, consisted of the following:~~


~~(1)~~	~~Includes~~ ~~$1.3 million~~ ~~of operating lease ROU asset impairment costs.~~


~~(2)~~	Upon adoption of ASU 2016-02 at January 1, 2019, we reduced our operating lease ROU assets recognized at transition by the carrying amounts of the restructuring liabilities for certain leased office spaces that we ceased using prior to December 31, 2018.


Interest expense
Interest Expense
	Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,
(dollars in millions)	2019			2018			Change		2019			2018			Change		2020			2019			Change
Interest expense	$	5.1		$	4.1		23.5	%	$	16.2		$	12.0		35.7	%	$	4.2		$	5.3		(21.9	)%
% of total revenue	2.3		%	2.0		%			2.4		%	1.9		%			1.9		%	2.5		%

The ~~increases~~decrease in interest expense in dollars and as a percentage of total revenue during the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018, were~~2019, was primarily due to ~~increases~~decreases in our average daily borrowings ~~related to~~and our ~~acquisition of YourCause in January 2019.~~weighted average effective interest rates.

Deferred ~~revenue~~Revenue

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


(dollars in millions)	Timing of recognition	September 30, 2019		Change		December 31, 2018		Timing of recognition	March 31, 2020		December 31, 2019		Change
Recurring	Over the period billed in advance, generally one year	$	306.8	6.9	%	$	287.0	Over the period billed in advance, generally one year	$	277.2	$	302.8	(8.4	)%
One-time services and other	As services are delivered	16.2		39.5	%	11.6		As services are delivered	13.2		13.4		(1.2	)%
Total deferred revenue⁽¹⁾		323.0		8.2	%	298.6			290.4		316.1		(8.1	)%
Less: Long-term portion		2.0		(21.5	)%	2.6			1.7		1.8		(4.8	)%
Current portion⁽¹⁾		$	321.0	8.4	%	$	296.0		$	288.7	$	314.3	(8.2	)%


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

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

Deferred revenue from recurring revenue contracts ~~increased~~decreased during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, primarily due to ~~new subscription sales of our cloud-based solutions and a seasonal increase in~~less customer ~~contract renewals.~~billings. Historically, due to the timing of customer budget cycles, we have an increase in customer contract renewals at or near the beginning of our third ~~quarter. Our acquisition~~quarter, which generally results in our lowest balance of ~~YourCause on January 2, 2019 also modestly contributed to the increase in~~ deferred revenue ~~from recurring revenue contracts since December 31, 2018. Deferred revenue from one-time services and other increased during~~at the ~~nine months ended September 30, 2019, primarily due to a seasonal increase in advance registration billings associated with~~end of our ~~bbcon user conference, which occurs each year in October.~~first quarter.

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



~~Third Quarter 2019 Form 10-Q~~		31

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~~Blackbaud, Inc.~~

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 (benefit)
	Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,
(dollars in millions)	2019			2018			Change		2019			2018			Change		2020			2019			Change
Income tax provision (benefit)	$	0.4		$	0.3		9.6	%	$	1.3		$	(2.4	)	(153.3	)%	$	0.7		$	(1.8	)	(137.9	)%
Effective income tax rate	7.4		%	2.9		%			10.7		%	(7.2		)%			13.0		%	62.0		%

The ~~increases in~~Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act did not have a material impact on our ~~effective~~provision for income ~~tax rate during~~taxes for the three ~~and nine~~ months ended ~~September 30, 2019, when compared~~March 31, 2020. We will continue to analyze and monitor potential impact throughout the same periods in 2018, were primarily due to a decrease in the discrete benefit to income tax expense relating to stock-based compensation. The impact was attributable to a decrease in the market price for shares of our common stock, when compared to the same periods in 2018, as reported by Nasdaq. Most of our equity awards are granted during our first quarter and vest in subsequent years during the same quarter.year.



32First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~29

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(Unaudited)

The decrease in our effective income tax rate during the three months ended March 31, 2020, when compared to the same period in 2019, was primarily due to the impact of discrete tax benefits on pre-tax income for the quarter as compared to pre-tax loss for the same period in 2019.

Non-GAAP ~~financial measures~~Financial Measures

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

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

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


	Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,
(dollars in millions)	2019			2018			Change		2019			2018			Change		2020			2019			Change
GAAP Revenue	$	221.1		$	209.5		5.5	%	$	662.6		$	627.4		5.6	%	$	223.6		$	215.8		3.6	%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			0.6			(54.6	)%	1.7			1.8			(8.0	)%	—			0.7			(100.0	)%
Non-GAAP revenue⁽¹⁾	$	221.4		$	210.1		5.4	%	$	664.3		$	629.2		5.6	%	$	223.6		$	216.5		3.3	%

GAAP gross profit	$	119.3		$	114.3		4.4	%	$	360.7		$	348.9		3.4	%	$	118.8		$	116.5		1.9	%
GAAP gross margin	54.0		%	54.5		%			54.4		%	55.6		%			53.1		%	54.0		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			0.6			(54.6	)%	1.7			1.8			(8.0	)%	—			0.7			(100.0	)%
Add: Stock-based compensation expense	0.8			1.3			(38.3	)%	2.5			4.0			(36.4	)%	0.9			1.0			(11.2	)%
Add: Amortization of intangibles from business combinations	11.2			10.6			5.6	%	34.0			31.7			7.2	%	10.9			11.4			(4.3	)%
Add: Employee severance	—			0.3			(93.2	)%	1.1			0.9			30.9	%	—			1.1			(97.1	)%
Subtotal⁽¹⁾	12.3			12.7			(3.6	)%	39.3			38.4			2.4	%	11.8			14.2			(16.9	)%
Non-GAAP gross profit⁽¹⁾	$	131.6		$	127.0		3.6	%	$	400.0		$	387.4		3.3	%	$	130.6		$	130.8		(0.1	)%
Non-GAAP gross margin	59.5		%	60.5		%			60.2		%	61.6		%			58.4		%	60.4		%


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



~~Third Quarter 2019 Form 10-Q~~30		33First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)


	Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,
(dollars in millions, except per share amounts)	2019			2018			Change		2019			2018			Change		2020			2019			Change
GAAP income from operations	$	7.9		$	15.8		(50.1	)%	$	23.6		$	44.7		(47.3	)%	$	8.4		$	2.2		285.5	%
GAAP operating margin	3.6		%	7.5		%			3.6		%	7.1		%			3.8		%	1.0		%
Non-GAAP adjustments:
Add: Acquisition-related deferred revenue write-down	0.3			0.6			(54.6	)%	1.7			1.8			(8.0	)%	—			0.7			(100.0	)%
Add: Stock-based compensation expense	14.9			10.7			38.5	%	43.6			35.7			22.2	%	13.6			13.7			(1.1	)%
Add: Amortization of intangibles from business combinations	11.9			11.9			0.6	%	37.2			35.4			5.1	%	11.7			12.8			(8.8	)%
Add: Employee severance	—			0.7			(93.0	)%	3.7			1.7			113.7	%	0.1			3.4			(97.2	)%
Add: Acquisition-related integration costs	1.0			0.8			35.4	%	2.2			3.4			(34.8	)%	—			0.7			(104.5	)%
Add: Acquisition-related expenses	0.2			0.3			(18.2	)%	1.0			1.9			(45.0	)%	0.1			0.4			(68.8	)%
Add: Restructuring costs	0.4			(0.9		)	(143.8	)%	3.1			3.6			(14.0	)%	—			2.0			(98.8	)%
Subtotal⁽¹⁾	28.7			24.0			20.0	%	92.5			83.5			10.8	%	25.5			33.8			(24.6	)%
Non-GAAP income from operations⁽¹⁾	$	36.6		$	39.7		(7.8	)%	$	116.1		$	128.2		(9.5	)%	$	33.9		$	36.0		(5.7	)%
Non-GAAP operating margin	16.5		%	18.9		%			17.5		%	20.4		%			15.2		%	16.6		%

GAAP income before provision for income taxes	$	4.9		$	11.5		(57.1	)%	$	11.8		$	33.1		(64.2	)%
GAAP net income	$	4.6		$	11.2		(59.1	)%	$	10.6		$	35.5		(70.2	)%
Shares used in computing GAAP diluted earnings per share	48,464,529			48,160,146			0.6	%	48,223,712			48,074,698			0.3	%
GAAP diluted earnings per share	$	0.09		$	0.23		(60.9	)%	$	0.22		$	0.74		(70.3	)%
GAAP income (loss) before provision for income taxes																	$	5.3		$	(3.0	)	(280.5	)%
GAAP net income (loss)																	$	4.6		$	(1.1	)	(513.5	)%
Shares used in computing GAAP diluted earnings (loss) per share																	48,455,751			47,516,912			2.0	%
GAAP diluted earnings (loss) per share																	$	0.10		$	(0.02	)	(600.0	)%
Non-GAAP adjustments:
Add: GAAP income tax provision (benefit)	0.4			0.3			9.6	%	1.3			(2.4		)	(153.3	)%	0.7			(1.8		)	(137.9	)%
Add: Total non-GAAP adjustments affecting income from operations	28.7			24.0			20.0	%	92.5			83.5			10.8	%	25.5			33.8			(24.6	)%
Non-GAAP income before provision for income taxes	33.7			35.5			(5.0	)%	104.3			116.6			(10.5	)%	30.8			30.8			—	%
Assumed non-GAAP income tax provision⁽²⁾	6.7			7.1			(5.0	)%	20.9			23.3			(10.5	)%	6.2			6.2			—	%
Non-GAAP net income⁽¹⁾	$	26.9		$	28.4		(5.0	)%	$	83.5		$	93.3		(10.5	)%	$	24.7		$	24.7		—	%

Shares used in computing non-GAAP diluted earnings per share	48,464,529			48,160,146			0.6	%	48,223,712			48,074,698			0.3	%	48,455,751			48,051,289			0.8	%
Non-GAAP diluted earnings per share	$	0.56		$	0.59		(5.1	)%	$	1.73		$	1.94		(10.8	)%	$	0.51		$	0.51		—	%


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

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,								Three months ended March 31,
(dollars in millions)	2019			Change		2018			2020			2019			Change
GAAP net cash provided by operating activities	$	122.1		(11.4	)%	$	137.8
GAAP net cash used in operating activities									$	(24.5	)	$	(10.0	)	144.8	%
Less: purchase of property and equipment	(9.6		)	(25.7	)%	(12.9		)	(2.9		)	(1.2		)	148.9	%
Less: capitalized software development costs	(34.5		)	29.6	%	(26.6		)	(10.9		)	(11.3		)	(3.4	)%
Non-GAAP free cash flow	$	78.0		(20.6	)%	$	98.3		$	(38.3	)	$	(22.5	)	70.4	%



34First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~31

Table of Contents

Blackbaud, Inc.

(Unaudited)

Non-GAAP organic revenue growth

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


(dollars in millions)	Three months ended September 30,					Nine months ended September 30,					Three months ended March 31,
(dollars in millions)	2019			2018		2019			2018		2020			2019
GAAP revenue	$	221.1		$	209.5	$	662.6		$	627.4	$	223.6		$	215.8
GAAP revenue growth	5.5		%			5.6		%			3.6		%
(Less) Add: Non-GAAP acquisition-related revenue ⁽¹⁾	(5.3		)	0.6		(14.2		)	5.1
Add: Non-GAAP acquisition-related revenue ⁽¹⁾											—			0.7
Non-GAAP organic revenue(2)	$	215.9		$	210.1	$	648.4		$	632.4	$	223.6		$	216.5
Non-GAAP organic revenue growth	2.7		%			2.5		%			3.3		%

Non-GAAP organic revenue ⁽²⁾	$	215.9		$	210.1	$	648.4		$	632.4	$	223.6		$	216.5
Foreign currency impact on Non-GAAP organic revenue ⁽³⁾	1.5			—		5.4			—		0.3			—
Non-GAAP organic revenue on constant currency basis ⁽³⁾	$	217.3		$	210.1	$	653.8		$	632.4	$	223.9		$	216.5
Non-GAAP organic revenue growth on constant currency basis	3.4		%			3.4		%			3.4		%

GAAP recurring revenue	$	205.2		$	188.7	$	611.8		$	562.3	$	204.9		$	198.1
GAAP recurring revenue growth	8.8		%			8.8		%			3.4		%
(Less) Add: Non-GAAP acquisition-related revenue ⁽¹⁾	(5.5		)	0.6		(14.0		)	4.9
Add: Non-GAAP acquisition-related revenue ⁽¹⁾											—			0.7
Non-GAAP organic recurring revenue	$	199.7		$	189.2	$	597.8		$	567.1	$	204.9		$	198.8
Non-GAAP organic recurring revenue growth	5.6		%			5.4		%			3.0		%

(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 2019 Form 10-Q~~32		35First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Seasonality

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

Liquidity and Capital Resources

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


(dollars in millions)	September 30, 2019			Change		December 31, 2018			March 31, 2020			December 31, 2019			Change
Cash and cash equivalents	$	29.1		(5.8	)%	$	30.9		$	25.0		$	31.8		(21.5	)%
Property and equipment, net	37.3			(6.9	)%	40.0			35.7			35.5			0.3	%
Software development costs, net	94.1			25.2	%	75.1			105.6			101.3			4.2	%
Total carrying value of debt	503.1			29.9	%	387.1			530.9			467.1			13.7	%
Working capital	(231.5		)	(11.5	)%	(207.7		)	(194.2		)	(254.3		)	23.6	%

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


	Nine months ended September 30,								Three months ended March 31,
(dollars in millions)	2019			Change		2018			2020			2019			Change
Net cash provided by operating activities	$	122.1		(11.4	)%	$	137.8
Net cash used in operating activities									$	(24.5	)	$	(10.0	)	144.8	%
Net cash used in investing activities	(153.0		)	80.3	%	(84.9		)	(13.8		)	(121.9		)	(88.7	)%
Net cash used in financing activities	(144.6		)	(70.4	)%	(487.8		)	(278.9		)	(74.4		)	274.8	%

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



36First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~33

Table of Contents

Blackbaud, Inc.

(Unaudited)

To better enable us to weather the extraordinary business challenges occasioned 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 and create over $300 million of additional annualized borrowing capacity. Some of these actions include the following:

Temporarily froze our hiring efforts;

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

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

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

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

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

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

At ~~September 30, 2019,~~March 31, 2020, our total cash and cash equivalents balance included approximately ~~$17.8~~$17.5 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 decreased by ~~$15.7~~$14.5 million during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same period in ~~2018,~~2019, primarily due to a ~~$8.9~~$21.0 million ~~decrease in net income adjusted for non-cash expenses, and a~~ decrease in cash flow from operations associated with working ~~capital.~~capital, partially offset by a $6.5 million increase in net income adjusted for non-cash expenses. Throughout both periods, our cash flows from operations were derived principally from: (i) our earnings from on-going operations prior to non-cash 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.



34		First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Working capital changes are composed of changes in accounts receivable, prepaid expenses and other assets, trade accounts payable, accrued expenses and other liabilities, and deferred revenue. ~~Cash~~The decrease in cash flow from operations associated with working capital ~~decreased $6.8 million~~ during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same period in ~~2018,~~2019, was primarily due to to:

an increase in ~~the amount~~current period bonus payments as a result of ~~deferred revenue recognized slightly outpacing customer billings and~~ an increase in ~~the collection~~amounts accrued as of ~~customer account balances in 2018 from an aging improvement initiative. Fluctuations~~December 31, 2019 for over-performance against 2019 targets;

a decrease in the ~~timing~~current period bonus accrual upon internally announcing the replacement of ~~vendor~~cash payments ~~also contributed to the~~for our 2020 bonus plans with performance-based equity awards; and

a larger decrease in ~~cash flow~~deferred revenue during the first quarter of 2020 than the same period a year ago from ~~operation associated with working capital.~~less customer billings, as described above.

Investing ~~cash flow~~Cash Flow

Net cash used in investing activities of ~~$153.0~~$13.8 million ~~increased~~decreased by ~~$68.1~~$108.1 million during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same period in ~~2018.~~2019.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2019, we used net cash of $109.4 million for our acquisition of YourCause ~~compared to $45.3 million spent on~~and we did not make any similar investments during the same period in ~~2018. We~~2020. During the three months ended March 31, 2020, we used ~~$34.5~~$10.9 million for software development costs, which was ~~up $7.9 million from~~relatively consistent with cash spent during the same period in ~~2018. The increase~~2019. We continue to invest in ~~cash outlays for software development costs was primarily related to~~ our innovative ~~cloud-based~~cloud solutions, as well as development activities for Blackbaud SKY, our modern cloud platform.

We also spent ~~$9.6~~$2.9 million of cash for purchases of property and equipment during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, which was ~~down $3.3~~up $1.7 million from cash spent during the same period in ~~2018.~~2019. The higher cash outlays for property and equipment ~~during the same period~~ in ~~2018 was~~2020 were primarily driven by ~~leasehold improvements for~~investments in the renovation of certain of our ~~New Headquarters Facility in Charleston, South Carolina.~~office spaces.

Financing ~~cash flow~~Cash Flow

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we had a net increase in borrowings of ~~$115.6 million, which was primarily used~~$58.6 million. Historically, due to ~~finance~~lower revenues in our ~~acquisition~~first quarter, combined with the payment of ~~YourCause.~~bonuses from prior year in our first quarter, our cash flow from operations has been lowest in our first quarter.

We paid ~~$20.3~~$19.8 million to satisfy tax obligations of employees upon settlement ~~or exercise~~ of equity awards during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$27.4~~$18.4 million during the same period in ~~2018.~~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. Most of our equity awards currently vest in our first quarter. In addition, during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we paid dividends of ~~$17.7~~$6.0 million, which was relatively consistent with the comparable period of ~~2018.~~2019.

Cash used in financing activities associated with changes in restricted cash due to customers ~~increased $209.3~~decreased $68.2 million during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 when compared to the same period in ~~2018,~~2019, as the amount of restricted cash held and payable by us to customers as of December 31, ~~2017~~2019 was ~~significantly~~ larger than at the same date in 2018.



~~Third Quarter 2019 Form 10-Q~~		37

~~Table of Contents~~

~~Blackbaud, Inc.~~

2017 Credit Facility

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, 2019,~~March 31, 2020, our available borrowing capacity under the 2017 Credit Facility was ~~$175.6~~$150.9 million. The 2017 Credit Facility matures in June 2022. The 2017 Credit Facility includes an option to request additional term loans in an aggregate principal amount of up to $200.0 million.

At ~~September 30, 2019,~~March 31, 2020, the carrying amount of our debt under the 2017 Credit Facility was ~~$503.1~~$525.8 million. Our average daily borrowings during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 were ~~$517.8 million and $553.3 million, respectively.~~$491.4 million.



First Quarter 2020 Form 10-Q		35

Table of Contents

Blackbaud, Inc.

(Unaudited)

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



Financial Covenant	Requirement	Ratio as of ~~September 30, 2019~~March 31, 2020
Net Leverage Ratio	≤ 3.50 to 1.00	~~2.47~~2.61 to 1.00
Interest Coverage Ratio	≥ 2.50 to 1.00	~~9.59~~10.02 to 1.00

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, 2019,~~March 31, 2020, we were in compliance with our debt covenants under the 2017 Credit Facility.

Commitments and ~~contingencies~~Contingencies

As of ~~September 30, 2019,~~March 31, 2020, we had contractual obligations with future minimum commitments as follows:


	Payments due by period										Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Recorded contractual obligations:
Debt⁽¹⁾	$	504.3	$	7.5	$	496.8	$	—	$	—	$	532.0	$	10.4	$	521.6	$	—	$	—
Interest payments on debt⁽²⁾	2.4		1.0		1.4		—		—		6.0		4.6		1.4		—		—
Operating leases⁽³⁾	167.3		26.1		40.5		24.8		75.8		155.7		25.7		37.5		19.7		72.7

Unrecorded contractual obligations:
Interest payments on debt⁽⁴⁾	46.2		17.4		28.8		—		—		23.2		10.1		13.1		—		—
Purchase obligations⁽⁵⁾	87.7		35.4		51.5		0.8		—		76.7		39.6		37.0		—		—
Total contractual obligations	$	807.9	$	87.4	$	619.0	$	25.6	$	75.8	$	793.4	$	90.4	$	610.6	$	19.7	$	72.7

(1)

Represents principal payments only, under the following assumptions: (i) that the amounts outstanding under the 2017 Credit Facility and our other debt at ~~September 30, 2019~~March 31, 2020 will remain outstanding until maturity, with minimum payments occurring as currently scheduled, and (ii) that there are no assumed future borrowings on the 2017 Credit Facility for the purposes of determining minimum commitment amounts.


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


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


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


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

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

The total liability for uncertain tax positions as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, was ~~$4.2~~$4.3 million and ~~$3.7~~$4.3 million, respectively. Our accrued interest and penalties related to tax positions taken on our tax returns was ~~$0.9 million and $0.7~~$1.0 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively.~~



38		~~Third Quarter 2019 Form 10-Q~~

~~Table of Contents~~

~~Blackbaud, Inc.~~

In February 2019, our Board of Directors approved our annual dividend rate of $0.48 per share to be made in quarterly payments. Dividends at this annual rate would aggregate to $23.5 million assuming 49.0 million shares of common stock are outstanding, although dividends are not guaranteed and our Board of Directors may decide, in its absolute discretion, to change or suspend dividend payments at any time for any reason. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of the 2017 Credit Facility, general economic conditions and our ability to generate adequate operating cash flow.

~~On October 28, 2019, our Board of Directors declared a fourth quarter dividend of $0.12 per share payable on December 13, 2019 to stockholders of record on November 27,~~ 2019.

Off-Balance Sheet Arrangements

As of ~~September 30, 2019,~~March 31, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



36		First Quarter 2020 Form 10-Q

Table of Contents

Blackbaud, Inc.

(Unaudited)

Foreign Currency Exchange Rates

Approximately ~~14%~~13% of our total revenue for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was generated from operations outside the U.S. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within accumulated other comprehensive loss as a component of stockholders’ equity, was a loss of ~~$11.9~~$9.7 million as of ~~September 30, 2019~~March 31, 2020 and a loss of ~~$6.6~~$4.0 million as of December 31, ~~2018.~~2019.

The vast majority of our contracts are entered into by our U.S. or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars or Canadian dollars, and contracts entered into by our U.K., Australian and Irish subsidiaries are generally denominated in British Pounds, Australian dollars and Euros, respectively. Historically, as the U.S. dollar weakened, foreign currency translation resulted in an increase in our revenues and expenses denominated in non-U.S. currencies. Conversely, as the U.S. dollar strengthened, foreign currency translation resulted in a decrease in our revenue and expenses denominated in non-U.S. currencies. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, foreign translation ~~resulted in a decrease~~remained relatively flat in our revenues and expenses denominated in non-U.S. currencies. Though we have exposure to fluctuations in currency exchange rates, primarily those between the U.S. dollar and both the British Pound and Canadian dollar, the impact has generally not been material to our consolidated results of operations or financial position. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the fluctuation in foreign currency exchange rates ~~reduced~~impacted our total revenue ~~by $5.2 million~~ and our income from operations by ~~$1.1 million.~~an insignificant amount. We will continue monitoring such exposure and take action as appropriate. To determine the impacts on revenue (or income from operations) from fluctuations in currency exchange rates, current period revenues (or income from operations) from entities reporting in foreign currencies were translated into U.S. dollars using the comparable prior year period's weighted average foreign currency exchange rates. These impacts are non-GAAP financial information and are not in accordance with, or an alternative to, information prepared in accordance with GAAP.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.



~~Third Quarter 2019 Form 10-Q~~		39

~~Table of Contents~~

~~Blackbaud, Inc.~~

Recently Issued Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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



First Quarter 2020 Form 10-Q		37

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Blackbaud, Inc.

(Unaudited)

the nature of our debt, the materiality of the fair values of the derivative instruments and the highly liquid, short-term nature and level of our cash and cash equivalents as of ~~September 30, 2019,~~March 31, 2020, we believe that the risk of exposure to changing interest rates for those positions is immaterial. There were no significant changes in how we manage interest rate risk between December 31, ~~2018~~2019 and ~~September 30, 2019.~~March 31, 2020.

Foreign Currency Risk

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

No changes in internal control over financial reporting occurred during the most recent fiscal quarter ended ~~September 30, 2019~~March 31, 2020 with respect to our operations, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As discussed in Note 2 to our consolidated financial statements in this report, we adopted ASU 2016-02 effective January 1, 2019. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new standard on our financial statements. There were no significant changes to our internal control over financial reporting due to the adoption of ASU 2016-02.



4038		~~Third~~First Quarter ~~2019~~2020 Form 10-Q

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Blackbaud, Inc.



		PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

~~Our operations~~In light of the global COVID-19 pandemic and ~~financial results~~related developments, we are ~~subject to various risks and uncertainties, including those described in Part I,~~supplementing Item ~~1A, "Risk factors"~~1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the Securities and Exchange Commission on February 20, 2020 (the “Annual Report”). The following risk factor should be read in conjunction with the risk factors set forth in that Annual Report.

Operational Risks

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

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

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

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

changes in customer demand;

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

a decline in our customers' ability to use and pay for our solutions and services;

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

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

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

disruptions to our technology network and other critical systems; and

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

We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the global economy and may materially adversely impact our business, financial condition and results of ~~operations, cash flows, and the trading price of our stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2018.~~operations.



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Blackbaud, Inc.

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

Issuer Purchases of Equity Securities

The following table provides information about shares of common stock acquired or repurchased during the three months ended ~~September 30, 2019.~~March 31, 2020. All of these acquisitions were of common stock withheld by us to satisfy tax obligations of employees due upon ~~exercise of stock appreciation rights and~~ vesting of restricted stock awards and units. The level of acquisition activity varies from period to period based upon the timing of grants and vesting as well as employee exercise decisions.

Period
Total
number
of shares
purchased

Average
price
paid
per
share

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

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

Beginning balance, July 1, 2019 $ 50,000
July 1, 2019 through July 31, 2019 1,088
$ 85.34
—
50,000
August 1, 2019 through August 31, 2019 4,349
90.40
—
50,000
September 1, 2019 through September 30, 2019 358
92.55
—
50,000
Total 5,795
$ 89.58
—
$ 50,000



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽¹⁾	Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
Beginning balance, January 1, 2020					$	50,000
January 1, 2020 through January 31, 2020	—	$	—	—	50,000
February 1, 2020 through February 29, 2020	244,598	80.66		—	50,000
March 1, 2020 through March 31, 2020	760	67.91		—	50,000
Total	245,358	$	80.62	—	$	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.



~~Third Quarter 2019 Form 10-Q~~40		41First Quarter 2020 Form 10-Q

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Blackbaud, Inc.

ITEM 6. EXHIBITS

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



		Filed In
Exhibit Number	Description of Document	Filed Herewith	Form	Exhibit Number	Filing Date
31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	X
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
32.2	Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.INS*101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags ~~including Cover Page XBRL tags,~~ are embedded within the Inline XBRL Document.	X
101.SCH*101.SCH	Inline XBRL Taxonomy Extension Schema Document.	X
101.CAL*101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	X
101.DEF*101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	X
101.LAB*101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.	X
101.PRE*101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.	X
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).	X

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



42First Quarter 2020 Form 10-Q		~~Third Quarter 2019 Form 10-Q~~41

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Blackbaud, Inc.



		SIGNATURES

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



		BLACKBAUD, INC.

Date:	~~November 1, 2019~~May 7, 2020	By:	/s/ Michael P. Gianoni
			Michael P. Gianoni
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~November 1, 2019~~May 7, 2020	By:	/s/ Anthony W. Boor
			Anthony W. Boor
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)



~~Third Quarter 2019 Form 10-Q~~42		43First Quarter 2020 Form 10-Q



(in thousands)	Purchase price allocation
Net working capital, excluding deferred revenue	$	3,699
Other long-term assets	2,574
Identifiable intangible assets	74,690
Deferred tax liability	(4,615		)
Deferred revenue	(4,300		)
Other long-term liabilities	(1,650		)
Goodwill	87,316
Total purchase price	$	157,714



	Intangible assets acquired		Weighted average amortization period
YourCause	(in thousands)		(in years)
Acquired technology	$	47,800	12
Customer relationships	25,900		15
Marketing assets	830		2
Non-compete agreements	160		0
Total intangible assets	$	74,690	13



Years ending December 31, (dollars in thousands)	Operating leases⁽¹⁾
2019 – remaining	$	6,652
2020	25,667
2021	21,482
2022	16,944
2023	14,604
Thereafter	81,958
Total lease payments	167,307
Less: Amount representing interest	47,775
Present value of future payments	$	119,532



Years ending December 31, (dollars in thousands)	Operating leases
2019	$	20,808
2020	20,274
2021	16,924
2022	14,391
2023	12,923
Thereafter	81,755
Total minimum lease payments	$	167,075



	Cumulative costs incurred as of		Costs incurred during the three months ended		Costs incurred during the nine months ended⁽¹⁾		Cumulative costs incurred as of
(in thousands)	December 31, 2018		September 30, 2019
By component:
Contract termination costs	$	4,176	$	389	$	2,307	$	6,483
Other costs	1,208		11		776		1,984
Total	$	5,384	$	400	$	3,083	$	8,467



	Accrued at		Increases for incurred costs⁽¹⁾		Written off upon adoption of ASU 2016-02⁽²⁾			Costs paid			Accrued at
(in thousands)	December 31, 2018		Increases for incurred costs⁽¹⁾		Written off upon adoption of ASU 2016-02⁽²⁾			Costs paid			September 30, 2019
By component:
Contract termination costs	$	1,865	$	2,307	$	(1,656	)	$	(2,516	)	$	—
Other costs	50		776		—			(815		)	11
Total	$	1,915	$	3,083	$	(1,656	)	$	(3,331	)	$	11



Recurring revenue
	Three months ended September 30,								Nine months ended September 30,
(dollars in millions)	2019			2018			Change		2019			2018			Change
Recurring revenue	$	205.2		$	188.7		8.8	%	$	611.8		$	562.3		8.8	%
Cost of recurring	87.6			76.5			14.5	%	259.0			222.0			16.7	%
Recurring gross profit⁽¹⁾	$	117.6		$	112.1		4.9	%	$	352.8		$	340.3		3.7	%
Recurring gross margin	57.3		%	59.4		%			57.7		%	60.5		%



One-time services and other revenue
	Three months ended September 30,								Nine months ended September 30,
(dollars in millions)	2019			2018			Change		2019			2018			Change
One-time services and other revenue	$	15.9		$	20.9		(23.9	)%	$	50.8		$	65.1		(22.0	)%
Cost of one-time services and other	14.2			18.7			(24.3	)%	42.9			56.5			(24.1	)%
One-time services and other gross profit⁽¹⁾	$	1.7		$	2.2		(19.9	)%	$	7.9		$	8.7		(8.5	)%
One-time services and other gross margin	11.0		%	10.4		%			15.6		%	13.3		%