FORM 10-Q 2013 Q1


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     .
Commission file number: 000-50600
 
BLACKBAUD, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
11-2617163
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant’s telephone number, including area code)
 
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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    ý
Accelerated filer                      
¨
Non-accelerated filer      ¨ (Do not check if a smaller reporting company)
Smaller reporting company    
¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
YES  ¨  NO  ý
The number of shares of the registrant’s Common Stock outstanding as of April 22, 2013 was 45,647,090.




BLACKBAUD, INC.
TABLE OF CONTENTS
 
 
 
 
Page No.
PART I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
Item 2.
 
Item 6.
 
 
 
 
 
 
Exhibit – 10.67
 
 
 
Exhibit – 10.68
 
 
 
Exhibit – 10.69
 
 
 
Exhibit – 31.1
 
 
 
Exhibit – 31.2
 
 
 
Exhibit – 32.1
 
 
 
Exhibit – 32.2
 
 
 
Exhibit – 101
 
 
 


















Safe Harbor Cautionary Statement
This Quarterly Report on Form 10-Q, including the section titled “Management's discussion and analysis of financial condition and results of operations” in Part I, Item 2, contains forward-looking statements within the meaning of 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, 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 “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “likely,” “will,” “should,” “believes,” “estimates,” “seeks,” 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. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause actual results to differ materially from our expectations expressed in the report include: general economic risks; lengthy sales and implementation cycles, particularly in larger organizations; uncertainty regarding increased business and renewals from existing customers; continued success in sales growth; management of integration of recently acquired companies and other risks associated with acquisitions; the ability to attract and retain key personnel; risks associated with successful implementation of multiple integrated software products; risks related to our dividend policy and stock repurchase program, including potential limitations on our ability to grow and the possibility that we might discontinue payment of dividends; risks relating to restrictions imposed by the credit facility; risks associated with management of growth; technological changes that make our products and services less competitive; and the other risk factors set forth from time to time in our SEC filings. Factors that could cause or contribute to such differences include, but are not limited to, those summarized under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012, and our quarterly reports on Forms 10-Q. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this quarterly report on Form 10-Q. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.





PART I- FINANCIAL INFORMATION
Item 1.        Financial Statements
Blackbaud, Inc.
Consolidated balance sheets
(Unaudited) 
(in thousands, except share amounts)
March 31, 2013

 
December 31, 2012

Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,449

 
$
13,491

Donor restricted cash
26,280

 
68,177

Accounts receivable, net of allowance of $7,560 and $8,546 at March 31, 2013 and December 31, 2012, respectively
69,402

 
75,692

Prepaid expenses and other current assets
27,528

 
40,589

Deferred tax asset, current portion
17,745

 
15,799

Total current assets
149,404

 
213,748

Property and equipment, net
48,045

 
49,063

Goodwill
265,667

 
265,055

Intangible assets, net
162,525

 
168,037

Other assets
16,752

 
9,844

Total assets
$
642,393

 
$
705,747

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
9,746

 
$
13,623

Accrued expenses and other current liabilities
37,512

 
45,996

Donations payable
26,280

 
68,177

Debt, current portion
10,000

 
10,000

Deferred revenue, current portion
166,986

 
173,899

Total current liabilities
250,524

 
311,695

Debt, net of current portion
201,000

 
205,500

Deferred tax liability
26,758

 
24,468

Deferred revenue, net of current portion
10,060

 
11,119

Other liabilities
4,366

 
5,281

Total liabilities
492,708

 
558,063

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, 54,883,954 and 54,859,604 shares issued at March 31, 2013 and December 31, 2012, respectively
55

 
55

Additional paid-in capital
208,853

 
203,638

Treasury stock, at cost; 9,239,829 and 9,209,371 shares at March 31, 2013 and December 31, 2012, respectively
(171,733
)
 
(170,898
)
Accumulated other comprehensive loss
(1,569
)
 
(1,973
)
Retained earnings
114,079

 
116,862

Total stockholders’ equity
149,685

 
147,684

Total liabilities and stockholders’ equity
$
642,393

 
$
705,747

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

1



Blackbaud, Inc.
Consolidated statements of comprehensive income
(Unaudited)
(in thousands, except share and per share amounts)
Three months ended March 31,
 
2013

 
2012

Revenue
 
 
 
License fees
$
2,980

 
$
7,168

Subscriptions
47,756

 
28,062

Services
28,838

 
23,958

Maintenance
34,148

 
33,566

Other revenue
1,901

 
1,952

Total revenue
115,623

 
94,706

Cost of revenue
 
 
 
Cost of license fees
725

 
613

Cost of subscriptions
20,383

 
12,974

Cost of services
25,399

 
20,042

Cost of maintenance
5,874

 
5,977

Cost of other revenue
1,197

 
1,469

Total cost of revenue
53,578

 
41,075

Gross profit
62,045

 
53,631

Operating expenses
 
 
 
Sales and marketing
24,392

 
20,377

Research and development
16,429

 
13,304

General and administrative
12,742

 
14,501

Restructuring
3,210

 

Amortization
678

 
197

Total operating expenses
57,451

 
48,379

Income from operations
4,594

 
5,252

Interest income
17

 
47

Interest expense
(1,694
)
 
(191
)
Other income (expense), net
103

 
(308
)
Income before provision for income taxes
3,020

 
4,800

Income tax provision
354

 
2,041

Net income
$
2,666

 
$
2,759

Earnings per share
 
 
 
Basic
$
0.06

 
$
0.06

Diluted
$
0.06

 
$
0.06

Common shares and equivalents outstanding
 
 
 
Basic weighted average shares
44,473,519

 
43,944,459

Diluted weighted average shares
45,009,213

 
44,613,256

Dividends per share
$
0.12

 
$
0.12

 
 
 
 
Other comprehensive income
 
 
 
Foreign currency translation adjustment
285

 
279

Unrealized gain on derivative instruments, net of tax
119

 

Total other comprehensive income
404

 
279

Comprehensive income
$
3,070

 
$
3,038

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

2



Blackbaud, Inc.
Consolidated statements of cash flows
(Unaudited)
 
Three months ended March 31,
 
(in thousands)
2013

 
2012

Cash flows from operating activities
 
 
 
Net income
$
2,666

 
$
2,759

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
10,408

 
4,816

Provision for doubtful accounts and sales returns
670

 
1,117

Stock-based compensation expense
5,178

 
3,836

Excess tax benefits from stock-based compensation

 
(310
)
Deferred taxes
(188
)
 
967

Other non-cash adjustments
353

 
(555
)
Changes in operating assets and liabilities, net of acquisition of businesses:
 
 
 
Accounts receivable
5,404

 
(1,686
)
Prepaid expenses and other assets
6,416

 
(1,754
)
Trade accounts payable
(754
)
 
1,739

Accrued expenses and other liabilities
(10,074
)
 
(5,253
)
Donor restricted cash
42,588

 
19,361

Donations payable
(42,588
)
 
(19,361
)
Deferred revenue
(7,139
)
 
(1,691
)
Net cash provided by operating activities
12,940

 
3,985

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(6,292
)
 
(6,297
)
Purchase of net assets of acquired companies, net of cash acquired
(876
)
 

Capitalized software development costs
(764
)
 

Net cash used in investing activities
(7,932
)
 
(6,297
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of debt
16,700

 

Payments on debt
(21,200
)
 

Payments of deferred financing costs

 
(2,440
)
Proceeds from exercise of stock options
67

 
2,959

Excess tax benefits from stock-based compensation

 
310

Dividend payments to stockholders
(5,479
)
 
(5,409
)
Net cash used in financing activities
(9,912
)
 
(4,580
)
Effect of exchange rate on cash and cash equivalents
(138
)
 
339

Net decrease in cash and cash equivalents
(5,042
)
 
(6,553
)
Cash and cash equivalents, beginning of period
13,491

 
52,520

Cash and cash equivalents, end of period
$
8,449

 
$
45,967

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

3



Blackbaud, Inc.
Consolidated statements of stockholders’ equity
(Unaudited)
 
(in thousands, except share amounts)
Common stock
 
 
Additional
paid-in
capital

 
Treasury
stock

 
Accumulated
other
comprehensive
loss

 
Retained
earnings

 
Total stockholders' equity

Shares

 
Amount

 
Balance at December 31, 2011
53,959,532

 
$
54

 
$
175,401

 
$
(166,226
)
 
$
(1,148
)
 
$
131,921

 
$
140,002

Net income

 

 

 

 

 
6,583

 
6,583

Payment of dividends

 

 

 

 

 
(21,731
)
 
(21,731
)
Exercise of stock options, stock appreciation rights and restricted stock units
355,180

 

 
3,146

 

 

 

 
3,146

Surrender of 189,547 shares upon restricted stock and restricted stock unit vesting and exercise of stock options and stock appreciation rights

 

 

 
(4,672
)
 

 

 
(4,672
)
Tax impact of exercise of equity-based compensation

 

 
81

 

 

 

 
81

Stock-based compensation

 

 
19,151

 

 

 
89

 
19,240

Equity-based awards assumed in business combination

 

 
5,859

 

 

 

 
5,859

Restricted stock grants
687,652

 
1

 

 

 

 

 
1

Restricted stock cancellations
(142,760
)
 

 

 

 

 

 

Other comprehensive loss

 

 

 

 
(825
)
 

 
(825
)
Balance at December 31, 2012
54,859,604

 
$
55

 
$
203,638

 
$
(170,898
)
 
$
(1,973
)
 
$
116,862

 
$
147,684

Net income

 

 

 

 

 
2,666

 
2,666

Payment of dividends

 

 

 

 

 
(5,479
)
 
(5,479
)
Exercise of stock options, stock appreciation rights and restricted stock units
73,341

 

 
67

 

 

 

 
67

Surrender of 30,458 shares upon restricted stock and restricted stock unit vesting and exercise of stock options and stock appreciation rights

 

 

 
(835
)
 

 

 
(835
)
Stock-based compensation

 

 
5,148

 

 

 
30

 
5,178

Restricted stock grants
11,618

 

 

 

 

 

 

Restricted stock cancellations
(60,609
)
 

 

 

 

 

 

Other comprehensive income

 

 

 

 
404

 

 
404

Balance at March 31, 2013
54,883,954

 
$
55

 
$
208,853

 
$
(171,733
)
 
$
(1,569
)
 
$
114,079

 
$
149,685


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

4

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)



1. Organization
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. As of March 31, 2013, we had over 28,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare, as well as international foreign affairs.
2. Summary of significant accounting policies
Unaudited interim consolidated financial statements
The 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, 2012, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. 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, 2012, and other forms filed with the SEC from time to time.
Basis of consolidation
The consolidated financial statements include the accounts of the Blackbaud, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we reconsider and evaluate our estimates and assumptions, including those that impact revenue recognition, long-lived and intangible assets and goodwill, stock-based compensation, the provision for income taxes, capitalization of software development costs, our allowance for sales returns and doubtful accounts, deferred sales commissions, accounting for business combinations and loss contingencies. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.
Revenue recognition
Our revenue is primarily generated from the following sources: (i) charging for the use of our software products in a hosted environment; (ii) selling perpetual licenses of our software products; (iii) providing professional services including implementation, training, consulting, analytic, hosting and other services; and (iv) providing software maintenance and support services.
We recognize revenue when all of the following conditions are met:
Persuasive evidence of an arrangement exists;
The product or services has been delivered;

5

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The fee is fixed or determinable; and
Collection of the resulting receivable is probable.
Determining whether and when these criteria have been met can require significant judgment and estimates. We deem acceptance of an agreement to be evidence of an arrangement. Delivery for our products occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical agreements do not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection. Revenue is recognized net of sales returns and allowances.
Subscriptions
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs, is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related hosting service.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized ratably beginning on the activation date over the term of the agreement, which generally ranges from one to three years. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor specific objective evidence (VSOE) if available; (ii) third-party evidence (TPE) if VSOE is not available; and (iii) best estimate of selling price if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
Revenue from transaction processing fees is recognized when the service is provided and the amounts are determinable. Credit card fees directly associated with processing donations for customers are included in subscriptions revenue, net of related transaction costs.
License fees
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to each of the elements in these arrangements using the residual method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on objective evidence of the fair value of the various elements. We determine the fair value of the various elements using different methods. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under the maintenance program. Fair value of professional services and other products and services is based on sales of these products and services to other customers when sold on a stand-alone basis. Any remaining revenue is allocated to the delivered elements which is normally the software license in the arrangement.
When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other enhancements that will assist with efforts to improve operational efficiency and/or to support business process improvements. These services are not essential to the functionality of the software. However,

6

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services using the percentage-of-completion method.
Services
We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed.
We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.
We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue upon the customer attending and completing training. Additionally, we sell fixed-rate programs, which permit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over the contract period.
Maintenance
We recognize revenue from maintenance services ratably over the contract term, typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.
Deferred revenue
To the extent that our customers are billed for the above described services in advance of delivery, we record such amounts in deferred revenue.
Goodwill
The change in goodwill for each reportable segment during the three months ended March 31, 2013, consisted of the following:

(in thousands)
ECBU
 
GMBU
 
IBU
 
Target Analytics
 
Other
 
Total
Balance at December 31, 2012
$
148,322

 
$
75,149

 
$
6,311

 
$
33,177

 
$
2,096

 
$
265,055

Additions related to business combinations

 

 
397

 

 

 
397

Adjustments related to prior year business combinations
289

 
112

 

 

 

 
401

Effect of foreign currency translation

 

 
(186
)
 

 

 
(186
)
Balance at March 31, 2013
$
148,611

 
$
75,261

 
$
6,522

 
$
33,177

 
$
2,096

 
$
265,667


 

7

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


Amortization expense
Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes and the nature of the intangible asset. The following table summarizes amortization expense for:
 
Three months ended March 31,
 
(in thousands)
2013

 
2012

Included in cost of revenue:
 
 
 
Cost of license fees
$
121

 
$
123

Cost of subscriptions
4,633

 
982

Cost of services
633

 
411

Cost of maintenance
114

 
244

Cost of other revenue
19

 
19

Total included in cost of revenue
5,520

 
1,779

Included in operating expenses
678

 
197

Total
$
6,198

 
$
1,976


The following table outlines the estimated future amortization expense for each of the next five years for our finite-lived intangible assets as of March 31, 2013:
Year ending December 31,
Amortization

(in thousands)
expense

2013 - remaining
$
18,452

2014
22,667

2015
22,284

2016
21,869

2017
19,543

Total
$
104,815


Recently adopted accounting pronouncements
Effective January 1, 2013, we adopted ASU 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires that entities provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements. We have presented the amounts reclassified out of accumulated other comprehensive income by component in Note 12 to our consolidated financial statements.
Effective January 1, 2013, we adopted ASU 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test currently required by ASC Topic 350-30 on general intangibles other than goodwill. The adoption of ASU 2012-02 did not have a material impact on our consolidated financial statements.

8

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


3. Business combinations
Convio
In May 2012, we completed our acquisition of Convio, Inc. (Convio), for approximately $329.8 million in cash consideration and the assumption of unvested equity awards valued at approximately $5.9 million, for a total of $335.7 million. Convio was a leading provider of on-demand constituent engagement solutions that enabled nonprofit organizations to more effectively raise funds, advocate for change and cultivate relationships. The acquisition of Convio expands our subscription and online offerings and accelerates our evolution to a subscription-based revenue model. As a result of the acquisition, Convio has become a wholly-owned subsidiary of ours. The results of operations of Convio are included in our consolidated financial statements from the date of acquisition. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business. During the year ended December 31, 2012, we incurred $6.4 million of acquisition-related costs associated with the acquisition of Convio, which were recorded in general and administrative expense.
We financed the acquisition of Convio through cash on hand and borrowings of $312.0 million under our amended credit facility. In connection with closing the Convio acquisition, we designated Convio as a material domestic subsidiary under our credit facility. As a material domestic subsidiary, Convio guarantees amounts outstanding under the credit facility and pledges certain stock of its subsidiaries.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:
(in thousands)
 
Net working capital, excluding deferred revenue
$
54,912

Property and equipment
6,591

Other long term assets
75

Deferred revenue
(7,917
)
Deferred tax liability
(32,049
)
Intangible assets and liabilities
139,650

Goodwill
174,412

 
$
335,674


The estimated fair value of accounts receivable acquired approximates the contractual value of $12.8 million. The goodwill recognized is attributable primarily to the assembled workforce of Convio and the opportunities for expected synergies. None of the goodwill arising in the acquisition is deductible for income tax purposes. The estimated amount of goodwill assigned to the Enterprise Customer Business Unit, or ECBU, and the General Markets Business Unit, or GMBU, reporting segments was $125.6 million, and $48.8 million, respectively.


9

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The acquisition resulted in the identification of the following identifiable intangible assets:
 
Intangible assets acquired

 
Weighted average amortization period
 
 (in thousands)

 
(in years)
Customer relationships
$
53,000

 
15
Marketing assets
7,800

 
7
Acquired technology
69,000

 
8
In-process research and development
9,100

 
7
Non-compete agreements
1,440

 
2
Unfavorable leasehold interests
(690
)
 
7
 
$
139,650

 
 

The fair value of the intangible assets was based on the income approach, cost approach, relief of royalty rate method and excess earnings methods. Customer relationships are amortized on an accelerated basis. Marketing assets, acquired technology and non-compete agreements are amortized on a straight-line basis. In-process research and development was placed into service subsequent to the time of acquisition and is amortized on a straight-line basis from the time of being placed into service over a weighted average amortization period of seven years.

The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Convio occurred on January 1, 2011. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, 2011, or of the results that may occur in the future.
 
Three months ended March 31,
 
(in thousands, except per share amounts)
2013

 
2012

Revenue
$
115,623

 
$
115,575

Net income (loss)
$
2,666

 
$
(4,065
)
Basic earnings (loss) per share
$
0.06

 
$
(0.09
)
Diluted earnings (loss) per share
$
0.06

 
$
(0.09
)
4. Earnings per share
We compute basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common shares then outstanding. Diluted earnings per share reflect the assumed conversion of all dilutive securities using the treasury stock method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units.

10

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The following table sets forth the computation of basic and diluted earnings per share:
 
  
Three months ended March 31,
 
(in thousands, except share and per share amounts)
2013

 
2012

Numerator:
 
 
 
Net income, as reported
$
2,666

 
$
2,759

Denominator:
 
 
 
Weighted average common shares
44,473,519

 
43,944,459

Add effect of dilutive securities:
 
 
 
Employee equity-based compensation
535,694

 
668,797

Weighted average common shares assuming dilution
45,009,213

 
44,613,256

Earnings per share:
 
 
 
Basic
$
0.06

 
$
0.06

Diluted
$
0.06

 
$
0.06


The following shares and potential shares underlying stock-based awards were not included in diluted earnings per share because their inclusion would have been anti-dilutive:
  
Three months ended March 31,
 
  
2013

 
2012

Shares excluded from calculations of diluted earnings per share
473,299

 
114,563

5. Prepaid expenses and other assets
Prepaid expenses and other assets consisted of the following as of:
 
(in thousands)
March 31, 2013

 
December 31, 2012

Deferred sales commissions
$
17,685

 
$
18,142

Prepaid software maintenance
5,504

 
5,530

Taxes, prepaid and receivable
1,760

 
7,398

Deferred professional services costs
8,112

 
8,057

Other assets
11,219

 
11,306

Total prepaid expenses and other assets
44,280

 
50,433

Less: Long-term portion
16,752

 
9,844

Total prepaid expenses and other current assets
$
27,528

 
$
40,589


11

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


6. Accrued expenses and other liabilities
Accrued expenses and other liabilities consisted of the following as of:
 
(in thousands)
March 31, 2013

 
December 31, 2012

Taxes payable
$
6,486

 
$
7,607

Accrued commissions and salaries
4,954

 
5,905

Accrued bonuses
5,466

 
11,966

Customer credit balances
3,439

 
4,577

Accrued software and maintenance
3,427

 
3,875

Unrecognized tax benefit
3,184

 
3,846

Other liabilities
14,922

 
13,501

Total accrued expenses and other liabilities
41,878

 
51,277

Less: Long-term portion
4,366

 
5,281

Total accrued expenses and other current liabilities
$
37,512

 
$
45,996

7. Debt
Credit facility
We have a five-year $325.0 million credit facility which includes the following facilities: (i) a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans, and (ii) a delayed draw term loan. The credit facility is secured by the stock and limited liability company interests of certain subsidiaries and is guaranteed by our material domestic subsidiaries.
Amounts borrowed under the dollar tranche revolving credit loans and delayed draw term loans under the credit facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate, (ii) federal funds rate plus 0.50% and (iii) one month LIBOR plus 1% (Base Rate), in addition to a margin of 0.25% to 1.25% (Base Rate Loans), or (b) the LIBOR rate plus a margin of 1.25% to 2.25% (LIBOR Loans). Swingline loans bear interest at a rate per annum equal to the Base Rate plus a margin of 0.25% to 1.25% or such other rate agreed to between the Swingline lender and us. Designated currency tranche revolving credit loans bear interest at a rate per annum equal to the LIBOR rate plus a margin of 1.25% to 2.25%. The exact amount of any margin depends on the nature of the loan and our leverage ratio.
We also pay a quarterly commitment fee on the unused portion of the revolving credit facility from 0.20% to 0.35% per annum, depending on our leverage ratio. At March 31, 2013, the commitment fee was 0.30%.
Under the credit facility, we have the ability to choose either Base Rate Loans or LIBOR Loans. Base Rate borrowings mature in February 2017. LIBOR Loans can be one, two, three or six month maturities (or, if agreed to by the applicable lenders, nine or twelve months), and rollover automatically, if we take no other action, at their maturity into Base Rate Loans. We evaluate the classification of our debt based on the required annual maturities of our credit facility.
The credit facility includes financial covenants related to the leverage ratio and interest ratio, as well as restrictions on the maximum amount of annual capital expenditures, our ability to declare and pay dividends and our ability to repurchase shares of our common stock. At March 31, 2013, we were in compliance with our debt covenants under the credit facility.

12

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The following table summarizes our debt as of March 31, 2013 and December 31, 2012. The effective interest rate includes our interest cost incurred and the effect of interest rate swap agreements.
 
Debt balance at
 
 
Effective interest rate at
 
(in thousands, except percentages)
March 31, 2013

 
December 31, 2012

 
March 31, 2013

 
December 31, 2012

Credit facility:
 
 
 
 
 
 
 
    Revolving credit loans
$
121,000

 
$
123,000

 
2.48
%
 
2.68
%
    Term loans
90,000

 
92,500

 
2.89
%
 
3.14
%
        Total debt
211,000

 
215,500

 
2.65
%
 
2.88
%
Less: Debt, current portion
10,000

 
10,000

 
2.89
%
 
3.14
%
Debt, net of current portion
$
201,000

 
$
205,500

 
2.64
%
 
2.86
%
We believe the carrying amount of our credit facility approximates its fair value at March 31, 2013 and December 31, 2012, due to the variable rate nature of the debt. As LIBOR rates are observable at commonly quoted intervals, it is classified within Level 2 of the fair value hierarchy.
As of March 31, 2013, the required annual maturities related to our credit facility were as follows:
Year ending December 31,
(in thousands)
Annual maturities

2013 - remaining
$
7,500

2014
13,750

2015
15,000

2016
15,000

2017
159,750

Total required maturities
$
211,000

Deferred financing costs
In February 2012, we amended and restated our credit facility to increase our borrowing capacity. In connection with our amended and restated credit facility we paid $2.4 million of financing costs. These costs together with a portion of the unamortized financing costs from our previous credit facility are being amortized over the term of the new facility. As of March 31, 2013 and December 31, 2012, deferred financing costs totaling $2.4 million and $2.5 million, respectively, are included in other assets on the consolidated balance sheet.
8. Derivative instruments
We use derivative instruments to manage interest rate risk. We have two interest rate swap agreements which effectively convert portions of our variable rate debt under our credit facility to a fixed rate for the terms of the swap agreements. The aggregate notional value of the swap agreements was $150.0 million with effective dates beginning in May 2012 through January 2017. We designated the swap agreements as cash flow hedges at the inception of the contracts.
The fair values of our derivative instruments as of March 31, 2013 and December 31, 2012, were as follows:
 
 
 
Liability fair value at
 
(in thousands)
Balance sheet location
 
March 31, 2013

 
December 31, 2012

Derivative instruments designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
Other liabilities
 
$
1,101

 
$
1,296

Total derivative instruments designated as hedging instruments
 
 
$
1,101

 
$
1,296


13

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


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 effects of derivative instruments in cash flow hedging relationships for the three months ended March 31, 2013, were as follows:
 
Loss recognized in accumulated other comprehensive loss

 
Location of loss reclassified from accumulated other comprehensive loss into income
 
Loss reclassified from accumulated other comprehensive loss into income

 
March 31, 2013

 
 
Three months ended March 31,

(in thousands)
 
 
2013

Interest rate swaps
$
(1,101
)
 
Interest expense
 
$
(190
)
We did not have derivative instruments during the three months ended March 31, 2012. The tax benefit allocated to the loss recognized in accumulated other comprehensive loss was $0.1 million for the three months ended March 31, 2013. There was no ineffective portion of our interest swaps during the three months ended March 31, 2013.
9. Commitments and contingencies
Leases
We lease our headquarters facility under a 15-year lease agreement which was entered into in October 2008, and has two five-year renewal options. The current annual base rent of the lease is $3.9 million payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year. In addition, under the terms of the lease, the lessor will reimburse us an aggregate amount of $4.0 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease. During each of the three month periods ended March 31, 2013 and 2012, rent expense was reduced by $66,700, respectively, related to this lease provision. The $4.0 million leasehold improvement allowance has been included in the table of operating lease commitments below as a reduction in our lease commitments ratably over the then remaining life of the lease from October 2008. The timing of the reimbursements for the actual leasehold improvements may vary from the amount reflected in the table below.
In our acquisition of Convio, we assumed a lease for office space in Austin, Texas which terminates on September 30, 2023, and has two five-year renewal options. Under the terms of the lease, we will increase our leased space by approximately 20,000 square feet on July 31, 2016. The current annual base rent of the lease is $2.1 million. The terms of the agreement include a rent holiday during the first year and base rent that escalates annually thereafter between 2% and 4%. The related rent expense is recorded on a straight-line basis over the length of the lease term. In addition, we are entitled to an allowance of approximately $3.3 million from the lessor for leasehold improvements, allocated among the existing and new expansion premises. We have a standby letter of credit for a security deposit for this lease of $2.0 million.
Additionally, we have subleased a portion of our facilities under various agreements extending through 2013. Under these agreements, rent expense was reduced by $0.1 million during the three months ended March 31, 2012. The reduction in rent expense related to these agreements during the three months ended March 31, 2013 was not material to the consolidated statements of comprehensive income. We have also received, and expect to receive through 2023, quarterly South Carolina state incentive payments as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense and were $0.6 million and $0.5 million for the three months ended March 31, 2013 and 2012, respectively. Total rent expense was $2.2 million and $1.4 million for the three months ended March 31, 2013 and 2012, respectively.
Additionally, we lease various office space and equipment under operating leases. We also have various non-cancelable capital leases for computer equipment and furniture that are not significant.

14

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


As of March 31, 2013, the future minimum lease commitments related to lease agreements, net of related sublease commitments and lease incentives, were as follows:
 
Year ending December 31,
Operating

(in thousands)
leases

2013 – remaining
$
7,784

2014
10,219

2015
9,167

2016
8,408

2017
8,436

Thereafter
47,884

Total minimum lease payments
$
91,898

Other commitments
We utilize third-party relationships in conjunction with our products and services, with contractual arrangements varying in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. As of March 31, 2013, the remaining aggregate minimum purchase commitment under these arrangements is approximately $3.8 million through 2015. We incurred expense under these arrangements of $0.6 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.
Legal contingencies
We are subject to legal proceedings and claims that arise in the ordinary course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We do not believe the amount of potential liability with respect to these actions will have a material adverse effect upon our consolidated financial position, results of operations or cash flows.
10. Income taxes
Our effective tax rate, including the effects of period-specific events, was:
  
Three months ended March 31,
 
 
2013

 
2012

Effective tax rate
11.7
%
 
42.5
%
The decrease in the effective tax rate during the three months ended March 31, 2013 compared to the same period in 2012 is primarily due an increase in the benefit from research and development credits and a decrease in nondeductible acquisition costs. The research and development credits were reinstated in January 2013 with retrospective application to the 2012 tax year. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to research and development tax credits, which were partially offset by foreign loss jurisdictions where we have determined a valuation allowance is appropriate, as well as state taxes. Our effective income tax rate may fluctuate quarterly as a result of factors, including changes in our assessment of certain tax contingencies, valuation allowances, and changes in tax law.
We have deferred tax assets for federal, state, and international net operating loss carryforwards and state tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. The foreign net operating loss carryforwards, a portion of the state net operating loss carryforwards and a portion of state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate, was $3.2 million at March 31, 2013 and $3.8 million at December 31, 2012. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.

15

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


11. Stock-based compensation

During the three months ended March 31, 2013, we issued 11,618 shares of restricted stock and 37,039 stock appreciation rights with an aggregate grant date fair value of approximately $0.3 million and $0.2 million, respectively.
Stock-based compensation expense is allocated to expense categories 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 March 31,
 
(in thousands)
2013

 
2012

Included in cost of revenue:
 
 
 
Cost of subscriptions
$
226

 
$
181

Cost of services
844

 
492

Cost of maintenance
62

 
111

Total included in cost of revenue
1,132

 
784

Included in operating expenses:
 
 
 
Sales and marketing
698

 
417

Research and development
1,152

 
651

General and administrative
2,196

 
1,984

Total included in operating expenses
4,046

 
3,052

Total
$
5,178

 
$
3,836

12. Stockholders’ equity
Dividends
In February 2013, our Board of Directors approved an annual dividend of $0.48 per share and declared its first quarter dividend of $0.12 per share, which was paid on March 15, 2013 to stockholders of record on February 28, 2013.
In May 2013, our Board of Directors declared a second quarter dividend of $0.12 per share payable on June 14, 2013, to stockholders of record on May 28, 2013.
Changes in accumulated other comprehensive loss by component
The changes in accumulated other comprehensive loss by component, consisted of the following:
(in thousands)
Gains and losses on cash flow hedges

 
Foreign currency translation adjustment

 
Total

Balance at December 31, 2012
$
(791
)
 
$
(1,182
)
 
$
(1,973
)
Other comprehensive (loss) income before reclassifications
(71
)
 
285

 
214

Amounts reclassified from accumulated other comprehensive loss to interest expense
190

 

 
190

Net current-period other comprehensive income
119

 
285

 
404

Balance at March 31, 2013
$
(672
)
 
$
(897
)
 
$
(1,569
)

16

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


13. Segment information
As of March 31, 2013, our reportable segments were as follows: the ECBU, the GMBU, the International Business Unit, or the IBU, and Target Analytics. Following is a description of each reportable segment:
The ECBU is focused on marketing, sales, delivery and support to large and/or strategic, specifically identified named prospects and customers in North America;
The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America;
The IBU is focused on marketing, sales, delivery and support to all prospects and customers outside of North America; and
Target Analytics is primarily focused on marketing, sales and delivery of analytics services to all prospects and customers in North America.
Our chief operating decision maker is our chief executive officer, or CEO. The CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, excluding stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. Currently, the CEO believes that the exclusion of these costs allows for a better understanding of the operating performance of the operating units and management of other operating expenses and cash needs. The CEO does not review any segment balance sheet information.

17

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


We have recast our segment disclosures for the three months ended March 31, 2012, to present the reportable segments on a consistent basis with the current year. Summarized reportable segment financial results, were as follows:
 
 
Three months ended March 31,
 
(in thousands)
2013

 
2012

Revenue by segment:
 
 
 
ECBU
$
44,679

 
$
33,841

GMBU
53,018

 
43,831

IBU
9,238

 
8,670

Target Analytics
8,668

 
8,364

Other(1)
20

 

Total revenue
$
115,623

 
$
94,706

Segment operating income(2):
 
 
 
ECBU
$
23,642

 
$
15,187

GMBU
32,176

 
26,059

IBU
624

 
361

Target Analytics
3,176

 
3,444

Other(1) 
209

 
253

 
59,827

 
45,304

Less:
 
 
 
Corporate unallocated costs(3)
43,857

 
34,240

Stock-based compensation costs
5,178

 
3,836

Amortization expense
6,198

 
1,976

Interest expense (income), net
1,677

 
144

Other expense (income), net
(103
)
 
308

Income before provision for income taxes
$
3,020

 
$
4,800

(1)
Other includes revenue and the related costs from the sale of products and services not directly attributable to an operating segment.
(2)
Segment operating income includes direct, controllable costs related to the sale of products and services by the reportable segment, except for IBU, which includes operating costs from our foreign locations such as sales, marketing, general, administrative, depreciation and facilities costs.
(3)
Corporate unallocated costs include research and development, depreciation expense, and certain corporate sales, marketing, general and administrative expenses.
14. Restructuring
During 2012, in an effort to consolidate our operating locations, we decided not to renew our current lease for office space in San Diego, CA, which matures on June 30, 2013. As a result, we initiated a plan to transition most of our operations based in San Diego, CA to our Austin, TX location, which we expect to be completed by June 2013 when the lease matures.

18

Table of Contents

Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The following table summarizes our restructuring costs related to our San Diego office transition as of March 31, 2013:
 
Total costs expected to be incurred

 
Costs incurred during the three months ended

 
Cumulative costs incurred as of

(in thousands)
March 31, 2013
 
By component:
 
 
 
 
 
Employee severance and retention costs
$
465

 
$
41

 
$
216

Employee relocation costs
265

 
34

 
34

 
730

 
75

 
250

By reportable segment:
 
 
 
 
 
Other
$
730

 
$
75

 
$
250

The change in our liability related to our San Diego office transition during the three months ended March 31, 2013, consisted of the following:
 
Accrued at

 
Increases for incurred costs

 
Costs paid

 
Accrued at

(in thousands)
December 31, 2012

March 31, 2013

Employee severance and retention costs
$
175

 
$
41

 
$

 
$
216

Employee relocation costs

 
34

 
(34
)
 

 
$
175

 
$
75

 
$
(34
)
 
$
216

In January 2013, we implemented a realignment of our workforce in response to changes in the nonprofit industry and global economy. The realignment included a reduction in workforce of approximately 130 positions. The cost associated with this realignment is expected to be incurred during 2013.
The following table summarizes our restructuring costs related to the reduction in workforce as of March 31, 2013:
 
Total costs expected to be incurred

 
Costs incurred during the three months ended

 
Cumulative costs incurred as of

(in thousands)
March 31, 2013
 
By component:
 
 
 
 
 
Employee severance costs
$
3,300

 
$
3,135

 
$
3,135

By reportable segment:
 
 
 
 
 
ECBU
$
828

 
$
828

 
$
828

GMBU
290

 
290

 
290

Target Analytics
136

 
136

 
136

Other
2,046

 
1,881

 
1,881

 
$
3,300

 
$
3,135

 
$
3,135

The change in our liability related to the reduction in workforce during the three months ended March 31, 2013, consisted of the following:
 
Accrued at

 
Increases for incurred costs

 
Costs paid

 
Accrued at

(in thousands)
December 31, 2012

March 31, 2013

Employee severance costs
$

 
$
3,135

 
$
(2,822
)
 
$
313


19

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under “Safe Harbor Cautionary Statement” at the beginning of this report and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Executive summary
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. As of March 31, 2013, we had over 28,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare, as well as international foreign affairs.
We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation are generally not essential to the functionality of our software products and are sold separately. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, and providing transaction processing services, benchmarking studies and data modeling services.

In January 2013, we announced that our President and Chief Executive Officer would resign from the Company at the end of 2013, or earlier if a successor is appointed. Our board of directors has a search underway for his replacement.
We completed our acquisition of Convio in May 2012 for $335.7 million in consideration. We funded the acquisition through both cash on hand and borrowings under our amended credit facility. We have included the results of operations of Convio in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing 2013 to 2012. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business.
During the first quarter of 2013, we remained focused on:
executing on operational efficiencies and initiating investments in core back-office systems for future growth;
restructuring activities that included a realignment of our workforce, as well as the transition of our San Diego, California operations to our Austin, Texas location; and
continuing the shift in our offerings towards subscription-based pricing to meet the needs and preferences of our customers.
Overall, revenue in the first quarter of 2013 increased 22% compared to the same period in 2012. This increase was principally attributable to growth in our subscriptions revenue as a result of incremental revenue from Luminate Online, previously a Convio product, as well as the continued increase in demand for our subscription-based offerings as our business shifts towards subscription-based offerings. An increase in transaction fees associated with our payment processing services also contributed to the increase in subscription revenue. Services revenue also contributed to our revenue growth during the first quarter of 2013 primarily due to an increase in consulting and education services revenue. Consulting service revenue growth was driven by incremental revenue from Convio in addition to increases in revenue associated with implementation services of Blackbaud CRM arrangements. License revenue decreased in the first quarter of 2013 when compared to the same period in 2012 as a result of fewer sales of our Blackbaud CRM offering to large and/or strategic customers. The decrease in license revenue is also attributable to the shift in our business from perpetual licenses to subscription-based offerings.

20

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


Income from operations for the first quarter of 2013 decreased by $0.7 million when compared to the same period in 2012. The decrease was primarily attributable to (i) a $3.2 million increase in restructuring costs; (ii) a $2.8 million net increase in costs associated with our acquisition of Convio related to transaction and integration costs and amortization of acquired intangibles from business combinations; and (iii) our continued shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term. These decreases in income from operations were partially offset by improved operational efficiencies as we integrated the Convio operations and a $1.5 million decrease in costs related to strategic investments we made in the first quarter of 2012 for our business optimization efforts and the re-engineering of our accounting processes.
We ended the first quarter of 2013 with cash and cash equivalents totaling $8.4 million and $211.0 million in outstanding borrowings on our credit facility. During the first three months of 2013, we generated $12.9 million in cash flow from operations, paid $5.5 million in dividends, used $6.3 million to purchase computer equipment and software and reduced our debt balance by $4.5 million.
During the first quarter of 2013, we continued to experience growth in overall revenue primarily driven by the growing demand for our subscription-based offerings and synergies from combining Blackbaud and Convio offerings. However, we continue to believe the pace and impact of economic recovery on the nonprofit market remains uncertain. Notwithstanding these conditions, we plan to further increase our focus on subscription-based offerings as we execute on our key growth initiatives and strengthen our leadership position, while achieving our targeted level of profitability. In the near term, we anticipate there will continue to be a dilutive impact on our profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term.
We also plan to continue to invest in our back-office processes, the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalability of our operations as we execute on our key growth initiatives.
Comparison of the three months ended March 31, 2013 and 2012
Results of operations
We completed the acquisition of Convio on May 4, 2012. Because we have integrated a substantial amount of the Convio operations and have made product rationalization decisions, it is not possible to determine the revenue and operating costs attributable solely to the acquired business.
We have included the results of operations of Convio in our consolidated results of operations from the date of acquisition, which impacts the comparability of our results of operations when comparing 2013 to 2012. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations due to the inclusion of Convio.
Revenue
The table below compares revenue from our consolidated statements of comprehensive income for the three months ended March 31, 2013, with the same period in 2012.
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

License fees
$
3.0

 
$
7.2

 
$
(4.2
)
 
(58
)%
Subscriptions
47.8

 
28.1

 
19.7

 
70
 %
Services
28.8

 
24.0

 
4.8

 
20
 %
Maintenance
34.1

 
33.5

 
0.6

 
2
 %
Other
1.9

 
1.9

 

 
 %
Total revenue
$
115.6

 
$
94.7

 
$
20.9

 
22
 %
 
The increase in revenue in the first quarter of 2013 compared to the same period in 2012 was primarily attributable to growth in our subscriptions revenue as a result of an increase in demand for our online fundraising offerings, including Luminate Online, previously a Convio product. The increase in demand for our subscription offerings was primarily driven by the ongoing

21

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


evolution of our product offerings from a license-based to subscription-based model as we continue to experience a shift in our emerging and mid-sized customers’ buying preferences away from perpetual licenses towards hosted solutions. Also contributing to the growth in our subscription revenue was an increase in transaction fees associated with our payment processing services. The increase in maintenance revenue is attributable to maintaining high renewal rates, new maintenance contracts associated with new license agreements and increases in contracts with existing customers during the first quarter of 2013 when compared to the same period in 2012, partially offset by a reduction in revenue as a result of a change in presentation from gross to net revenue for certain third-party software arrangements that had a change in contractual terms. Services revenue grew during the first quarter of 2013 compared to the same period in 2012 principally as a result of the inclusion of Convio consulting services revenue. Also contributing to the growth in services revenue were increases in revenue associated with implementation services of Blackbaud CRM arrangements, as well as our education services. License revenue decreased in the first quarter of 2013 when compared to the same period in 2012 as a result of fewer sales of our Blackbaud CRM offering to large and/or strategic customers.
Operating results
License fees
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

License fees revenue
$
3.0

 
$
7.2

 
$
(4.2
)
 
(58
)%
Cost of license fees
0.7

 
0.6

 
0.1

 
17
 %
License fees gross profit
$
2.3

 
$
6.6

 
$
(4.3
)
 
(65
)%
License fees gross margin
77
%
 
92
%
 
 
 
 

We derive revenue from license fees from the sale of our software products under a perpetual license agreement. During the first quarter of 2013, revenue from license fees decreased as a result of fewer Blackbaud CRM sales when compared to the same period in 2012. Our larger perpetual license transactions have long sales cycles and their timing can result in significant period-to-period variations in revenue. We are increasingly experiencing a shift in our emerging and mid-sized customers’ buying preferences away from solutions offered under perpetual license arrangements towards subscription-based hosted applications, while our large and/or strategic customers continue to be an area of growth, particularly as it relates to our Blackbaud CRM offering to the higher education vertical.
Cost of license fees is principally comprised of third-party software royalties, variable reseller commissions, amortization of software development costs and amortization of intangibles from business combinations. Cost of license fees in the first quarter of 2013 compared to the same period in 2012 remained relatively unchanged.
The decrease in license fees gross margin in the first three months of 2013 is the result of fewer sales of Blackbaud CRM when compared to the same period in 2012.
Subscriptions
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Subscriptions revenue
$
47.8

 
$
28.1

 
$
19.7

 
70
%
Cost of subscriptions
20.4

 
13.0

 
7.4

 
57
%
Subscriptions gross profit
$
27.4

 
$
15.1

 
$
12.3

 
81
%
Subscriptions gross margin
57
%
 
54
%
 
 
 
 

Revenue from subscriptions is principally comprised of revenue from providing access to hosted applications and hosting services, access to certain data services and our online subscription training offerings, as well as variable transaction fees associated with the use of our products to fundraise online. We continue to experience growth in our hosted applications business and are increasingly experiencing a shift in our emerging and mid-sized customers’ buying preference away from perpetual licenses towards subscription-based offerings. We anticipate that there will continue to be a dilutive impact on our

22

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


profitability as we shift from a license-based model with upfront revenue recognition to a subscription-based model, which recognizes revenue ratably over the agreement term.

The increase in subscriptions revenue during the first quarter of 2013 compared to the same period in 2012 is principally attributable to an increase in demand for our online fundraising offerings, including Luminate Online, previously a Convio product. Also contributing to the growth in subscriptions revenue was an increase in transaction fees associated with our payment processing services.
Cost of subscriptions is primarily comprised of human resource costs, stock-based compensation expense, third-party royalty and data expenses, hosting expenses, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. The increase in cost of subscriptions in the first quarter of 2013 compared to the same period in 2012 is principally attributable to increases in hosting costs, human resource costs and amortization of intangibles from business combinations.
Hosting costs and amortization of intangibles from business combinations increased by $1.6 million and $3.7 million, respectively, in the first quarter of 2013 compared to the same period in 2012 primarily as a result of incremental costs due to the inclusion of Convio. Human resource costs increased $0.8 million in the first quarter of 2013 compared to the same period in 2012 primarily as a result of an increase in headcount due to the inclusion of Convio.
The increase in subscriptions gross margin during the first quarter of 2013 compared to the same period in 2012 was primarily a result of the inclusion of Convio's subscription-based offerings which have historically yielded higher gross margins. Also contributing to the increase in subscriptions gross margin was an increase in transaction revenue associated with our payment processing services, which have also historically yielded higher gross margins than our other offerings.
Services 
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Services revenue
$
28.8

 
$
24.0

 
$
4.8

 
20
 %
Cost of services
25.4

 
20.0

 
5.4

 
27
 %
Services gross profit
$
3.4

 
$
4.0

 
$
(0.6
)
 
(15
)%
Services gross margin
12
%
 
17
%
 
 
 
 

We derive services revenue from consulting, installation, implementation, education and analytic services. Consulting, installation and implementation services involve converting data from a customer’s existing system, assistance in file set up and system configuration, and/or process re-engineering. Education services involve customer training activities. Analytic services are comprised of donor prospect research, selling lists of potential donors, benchmarking studies and data modeling services. These services involve the assessment of current and prospective donor information of the customer and are performed using our proprietary analytical tools. The end product enables organizations to more effectively target their fundraising activities. We recognize services revenue attributable to consulting services for implementation of our hosted applications and subscription offerings ratably over the period the customer benefits from those services. We also recognize the direct and incremental costs associated with consulting services revenue ratably over the same period. However, we continue to expense indirect costs in the period the implementation services are provided.
The increase in services revenue during the first quarter of 2013 compared to the same period in 2012 is principally attributable to increases in consulting and education services revenue. Consulting services revenue increased primarily due to the inclusion of Convio. Also contributing to the growth in consulting services revenue was an increase in the effective rate we charge our customers which was driven by a decrease in the investment we are making in early adopters of Blackbaud CRM. The rates we charge for our education services have remained relatively constant year over year, as such, the increase in revenue is the result of an increase in volume. The volume of education services revenue increased due to higher demand for subscription-based training.
Cost of services is principally comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, classroom rentals, costs incurred in providing customer training, data expense incurred to perform analytic services, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. The increase in cost of services in the first quarter of 2013 when compared to the same period in 2012 is primarily attributable to an increase

23

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


in human resource costs. Human resource costs increased $3.5 million in the first quarter of 2013 compared to the same period in 2012 as a result of an increase in headcount. The increase in headcount was primarily attributable to the inclusion of additional resources from Convio. Also contributing to the increase in cost of services for the first quarter of 2013 when compared to the same period in 2012 was a $0.8 million increase in allocated depreciation and facilities and IT support costs, which was due to both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable.
The services gross margin decreased in the first quarter of 2013 compared to the same period in 2012 primarily due to the inclusion of Convio's services offerings which have historically yielded lower gross margins. The increases in headcount and allocated costs discussed above also contributed to the decrease in services gross margin.
Maintenance
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Maintenance revenue
$
34.1

 
$
33.5

 
$
0.6

 
2
 %
Cost of maintenance
5.9

 
6.0

 
(0.1
)
 
(2
)%
Maintenance gross profit
$
28.2

 
$
27.5

 
$
0.7

 
3
 %
Maintenance gross margin
83
%
 
82
%
 
 
 
 

Revenue from maintenance is comprised of annual fees derived from maintenance contracts associated with new software licenses and annual renewals of existing maintenance contracts. These contracts provide customers with updates, enhancements and upgrades to our software products and online, telephone and email support. The increase in maintenance revenue in the first quarter of 2013 compared the same period in 2012 is principally comprised of (i) $2.7 million of maintenance from new customers associated with new license agreements and increases in contracts with existing customers and (ii) $1.0 million from maintenance contract inflationary rate adjustments, partially offset by (iii) $2.5 million from maintenance contracts that were not renewed and reductions in contracts with existing customers and (iv) $0.6 million decrease in maintenance revenue attributable to a change in presentation from gross to net of revenue and costs for certain third-party software arrangements that had a change in contractual terms. The net revenue attributable to these third-party software arrangements has been included in "Other revenue" for 2013.
Cost of maintenance is primarily comprised of human resource costs, stock-based compensation expense, third-party contractor expenses, third-party royalty costs, allocated depreciation, facilities and IT support costs, amortization of intangibles from business combinations and other costs incurred in providing support and services to our customers. Cost of maintenance decreased during the first quarter of 2013 when compared to the same period in 2012 as a result of a decrease in proprietary software costs. The decrease in proprietary software costs is attributable to a change in presentation from gross to net of revenue and costs for certain third-party software arrangements that had a change in contractual terms.
Other revenue
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Other revenue
$
1.9

 
$
1.9

 
$

 
 %
Cost of other revenue
1.2

 
1.5

 
(0.3
)
 
(20
)%
Other gross profit
$
0.7

 
$
0.4

 
$
0.3

 
75
 %
Other gross margin
37
%
 
21
%
 
 
 
 

Other revenue includes the sale of business forms that are used in conjunction with our software products, reimbursement of travel-related expenses primarily incurred during the performance of services at customer locations, fees from user conferences and third-party software referral fees. Other revenue during the first quarter of 2013 compared to the same period in 2012 remained relatively unchanged.
Cost of other revenue includes human resource costs, costs of business forms, costs of user conferences, reimbursable expenses relating to the performance of services at customer locations, allocated depreciation, facilities and IT support costs and amortization of intangibles from business combinations. Cost of other revenue decreased during the first quarter of 2013

24

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


compared to the same period in 2012 primarily due to less reimbursable expenses related to services provided at customer locations.
Other gross margin increased in the first quarter of 2013 when compared to the same period in 2012 primarily due to the an increase in third-party software fees.
Operating expenses
Sales and marketing
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Sales and marketing expense
$
24.4

 
$
20.4

 
$
4.0

 
20
%
% of revenue
21
%
 
22
%
 
 
 
 

Sales and marketing expense includes salaries and related human resource costs, stock-based compensation expense, travel-related expenses, sales commissions, advertising and marketing materials, public relations costs and allocated depreciation, facilities and IT support costs.

Sales and marketing expense increased in the first quarter of 2013 compared to the same period in 2012 primarily due to increases in human resource costs of $2.8 million. Human resource costs increased primarily due to the inclusion of additional headcount from Convio. Also contributing to the increase in sales and marketing expense was an increase of $0.6 in allocated depreciation facilities and IT support costs, which resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable.
Research and development
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

Research and development expense
$
16.4

 
$
13.3

 
$
3.1

 
23
%
% of revenue
14
%
 
14
%
 
 
 
 

Research and development expense includes human resource costs, stock-based compensation expense, third-party contractor expenses, software development tools and other expenses related to developing new products, upgrading and enhancing existing products, and allocated depreciation, facilities and IT support costs.

Research and development expense increased during the first quarter of 2013 compared to the same period in 2012 primarily due to increased human resource costs of $3.4 million. Human resource costs increased primarily due to the inclusion of additional headcount from Convio, partially offset by an increase of $0.8 million in the amount of software development costs that were capitalized. Contributing to the increase research and development expense was an increase of $0.8 in allocated depreciation, facilities and IT support costs, which resulted from both the inclusion of allocable costs from the Convio operations as well as investments we have made in our infrastructure to make our operations more scalable. The increases in human resource costs and allocated costs were partially offset by a $0.9 million decrease in third-party contractor expenses during the first quarter of 2013 when compared to the same period in 2012. Third-party contractor expenses decreased primarily as a result of a one-time investment to improve certain product offerings during the first quarter of 2012.

25

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


General and administrative
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

General and administrative expense
$
12.7

 
$
14.5

 
$
(1.8
)
 
(12
)%
% of revenue
11
%
 
15
%
 
 
 
 

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

General and administrative expense decreased during the first quarter of 2013 compared to the same period in 2012 primarily due to decreases in acquisition transaction costs and professional fees partially offset by increases in human resource costs and acquisition integration costs. Acquisition transaction costs associated with our acquisition of Convio decreased $2.2 million during the first quarter of 2013 compared to the same period in 2012. Professional fees decreased $1.5 million during the first quarter of 2013 primarily due to strategic investments made in our business optimization efforts and the re-engineering of our accounting processes during the first quarter of 2012 that did not recur in the first quarter of 2013. Human resource costs and Convio-related acquisition integration costs increased $1.8 million and $0.8 million, respectively, during the first quarter of 2013 compared to the same period in 2012. Excluding the increase in human resource costs attributable to additional headcount from Convio, an increase in accrued bonus costs during the first quarter of 2013 compared to the same period in 2012 also contributed to the increase in human resource costs.
Restructuring
Restructuring costs consist primarily of one-time severance and termination benefits associated with the realignment of our workforce in response to changes in the nonprofit industry and global economy, as well as the move of our San Diego, California operations to our Austin, Texas location. We expect to incur a total of $3.8 million in before-tax restructuring costs during 2013 related to these activities. We had no restructuring activities during the first quarter of 2012.

26

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


Non-GAAP income from operations
The operating results analyzed below are presented on a non-GAAP basis in that the results exclude the impact of (i) the writedown of Convio's deferred revenue balance, (ii) stock-based compensation expense, (iii) amortization expense, (iv) acquisition integration costs, (v) restructuring costs, (vi) CEO severance, and (vii) acquisition-related expenses. We believe that the exclusion of these amounts allows us and investors to better understand our operating expenses and cash needs, particularly when evaluating current performance against prior periods.
 
Three months ended March 31,
 
 
 
 
 
(in millions)
2013

 
2012

 
Change

 
% Change

GAAP income from operations
$
4.6

 
$
5.3

 
$
(0.7
)
 
(13
)%
 
 
 
 
 
 
 
 
Non-GAAP adjustments:
 
 
 
 
 
 
 
Add: Convio deferred revenue writedown
0.6

 

 
0.6

 
100
 %
Add: Stock-based compensation expense
5.2

 
3.8

 
1.4

 
37
 %
Add: Amortization of intangibles from business combinations
6.2

 
2.0

 
4.2

 
210
 %
Add: Acquisition integration costs
0.8

 

 
0.8

 
100
 %
Add: Restructuring costs
3.2

 

 
3.2

 
100
 %
Add: CEO severance
0.3

 

 
0.3

 
100
 %
Add: Acquisition-related expenses

 
2.2

 
(2.2
)
 
(100
)%
Total Non-GAAP adjustments
16.3

 
8.0

 
8.3

 
104
 %
Non-GAAP income from operations
$
20.9

 
$
13.3

 
$
7.6

 
57
 %
Non-GAAP operating margin
18
%
 
14
%
 
 
 
 

The increases in non-GAAP income from operations and non-GAAP operating margin during the first quarter of 2013 compared to the same period in 2012 were principally due to (i) cost synergies realized from our improved operational efficiencies as we integrated the Convio operations; (ii) the inclusion of Convio's subscription-based offerings which have historically yielded higher gross margins; and (iii) an increase in demand for our online fundraising offerings and our payment processing services, which have also historically yielded higher gross margins. Contributing to these increases were strategic investments made for our business optimization efforts and the re-engineering of our accounting processes during the first quarter of 2012 that did not recur in the first quarter of 2013.
Interest expense
Interest expense increased $1.5 million during the first quarter of 2013 compared to the same period in 2012. This increase in interest expense is directly related to the borrowings we incurred to fund our acquisition of Convio in May 2012.
Income tax provision
Our effective tax rate, including the effects of period-specific events, was:
  
Three months ended March 31,
 
 
2013

 
2012

Effective tax rate
11.7
%
 
42.5
%
The decrease in the effective tax rate during the three months ended March 31, 2013 compared to the same period in 2012 is primarily due an increase in the benefit from research and development credits and a decrease in nondeductible acquisition costs. The research and development credits were reinstated in January 2013 with retrospective application to the 2012 tax year. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to research and development tax credits, which were partially offset by foreign loss jurisdictions where we have determined a valuation allowance is appropriate, as well as state taxes. Our effective income tax rate may fluctuate quarterly as a result of factors including changes in our assessment of certain tax contingencies, valuation allowances, and changes in tax law.

27

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


We have deferred tax assets for federal, state, and international net operating loss carryforwards and state tax credits. The federal and state net operating loss carryforwards are subject to various Internal Revenue Code limitations and applicable state tax laws. The foreign net operating loss carryforwards, a portion of the state net operating loss carryforwards and a portion of state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate, was $3.2 million at March 31, 2013 and $3.8 million at December 31, 2012. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
Liquidity and capital resources
At March 31, 2013, cash and cash equivalents totaled $8.4 million, compared to $13.5 million at December 31, 2012. The $5.1 million decrease in cash and cash equivalents during the first three months of 2013 is principally attributable to the payment of dividends of $5.5 million, the purchase of computer equipment and software of $6.3 million, a net reduction in debt of $4.5 million, partially offset by cash generated from operations of $12.9 million.
Our principal source of liquidity is our operating cash flow, which depends on continued customer renewal of our maintenance, support and subscription agreements and market acceptance of our products and services. 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, 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 or pay further dividends and/or repurchase our common stock.
We have drawn on our credit facility from time to time to help us meet financial needs, such as business acquisitions and purchases of common stock under our repurchase program. In February 2012, we amended and restated our credit facility to increase the available borrowing capacity to $325.0 million. The amended credit facility matures in February 2017. We believe our credit facility will provide us with sufficient flexibility to meet our future financial needs. At March 31, 2013, we had $211.0 million of outstanding borrowings under our credit facility. Our average daily borrowings outstanding were $208.3 million during the first quarter of 2013.
Following is a summary of the financial covenants under our credit facility:
Financial Covenant
Requirement
Ratio as of March 31, 2013
Leverage Ratio
< 3.00 to 1.0
2.07 to 1.00
Interest Coverage Ratio
> 3.50 to 1.0
14.38 to 1.00
Under our credit facility, we also have restrictions on the maximum amount of annual capital expenditures, 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: (1) no default or event of default shall have occurred and be continuing under the credit facility, and (2) we must be in compliance with the leverage ratio set forth in the credit agreement. At March 31, 2013, we were in compliance with all debt covenants under our credit facility.
At March 31, 2013, our total cash and cash equivalents balance includes approximately $5.2 million of cash that was held by operations outside the U.S. While these funds may not be needed to fund our U.S. operations for at least the next 12 months, if we need these funds, we would be required to accrue and pay taxes to repatriate the funds. Our current plans anticipate repatriating undistributed earnings in Canada. We currently do not anticipate a need to repatriate our other cash held outside the U.S.
Operating cash flow
Net cash provided by operating activities of $12.9 million increased by $9.0 million during the first three months of 2013 when compared to the same period in 2012 primarily due to an increase in earnings as adjusted for non-cash transactions. 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 and stock-based compensation and adjustments to our provision for sales returns and allowances; (ii) the tax benefit associated with our deferred tax asset, which reduces our cash outlay for income tax expense; and (iii) changes in our working capital.

28

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


Working capital changes as they impact the statement of cash flows are composed of changes in accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities and deferred revenue. Cash flow from operations associated with working capital remained relatively unchanged in the first three months of 2013 when compared to the same period in 2012.
Investing cash flow
The increase in cash used for investing activities during the first three months of 2013 compared to the same period in 2012 is due to an increase in investments in acquired companies and an increase in capitalized software development costs. Additionally, we spent $6.3 million on computer equipment and software associated with the infrastructure that supports our subscription-based offerings.
Financing cash flow
During the first three months of 2013, we had a net reduction in debt of $4.5 million. We paid dividends of $5.5 million, which was relatively consistent with the amount paid in 2012.
Commitments and contingencies
As of March 31, 2013, we had future minimum commitments as follows:
 
Payments due by period
(in millions)
Total

 
Less than 1 year

 
1-2 years

 
3-5 years

 
More than 5 years

Operating leases
$
94.6

 
$
10.6

 
$
19.5

 
$
17.4

 
$
47.1

Debt and interest(1)
230.4

 
15.6

 
40.0

 
174.8

 

    Total
$
325.0

 
$
26.2

 
$
59.5

 
$
192.2

 
$
47.1

(1)
Included in the table above is $19.4 million of interest. 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 used in the above table.
The term loans under our 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 credit facility in February 2017. Our commitments related to operating leases have not been reduced by the future minimum lease commitments under sublease agreements, incentive payments and reimbursement of leasehold improvements.
We utilize third-party relationships in conjunction with our products. The contractual arrangements vary in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. The total remaining minimum purchase commitments under these arrangements at March 31, 2013, were approximately $3.8 million through 2015. We incurred expense under these arrangements of $0.6 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.
In February 2013, our Board of Directors approved our annual dividend rate of $0.48 per share for 2013. Dividends at the annual rate would aggregate to $22.1 million assuming 46.0 million shares of common stock are outstanding. Our ability to continue to declare and pay dividends quarterly this year and beyond might be restricted by, among other things, the terms of our credit facility, general economic conditions and our ability to generate adequate operating cash flow.
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.

29

Table of Contents

Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


Foreign currency exchange rates
Approximately 13% of our total net revenue for the three months ended March 31, 2013 was derived from operations outside the United States. We do not have significant operations in countries in which the economy is considered to be highly inflationary. Our consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rate between foreign currencies and the U.S. dollar will affect the translation of our subsidiaries’ financial results into U.S. dollars for purposes of reporting our consolidated financial results. The accumulated currency translation adjustment, recorded within other comprehensive loss as a component of stockholders’ equity, was a loss of $0.9 million and $1.2 million at March 31, 2013 and December 31, 2012, respectively.
The vast majority of our contracts are entered into by our U.S., Canadian or U.K. entities. The contracts entered into by the U.S. entity are almost always denominated in U.S. dollars, contracts entered into by our Canadian subsidiary are generally denominated in Canadian dollars, and contracts entered into by our U.K., Australian and Netherlands subsidiaries are generally denominated in pounds sterling, 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. During the first quarter of 2013, foreign translation resulted in a decrease in our revenues and expenses denominated in non-U.S. currencies. Though we do not believe our exposure to currency exchange rates has had a material impact on our consolidated results of operations or financial position, we intend to continue to monitor such exposure and take action as appropriate.
Item 3. Quantitative and qualitative disclosures about market risk
We have market rate sensitivity for interest rates and foreign currency exchange rates. Our variable rate debt is our primary financial instrument with market risk exposure for changing interest rates. We manage interest rate risk through a combination of short-term and long-term borrowings and the use of derivative instruments. Due to the nature of our debt, we have concluded that we face no material market risk exposure as of March 31, 2013. For a discussion of our exposure to foreign currency exchange rate fluctuations, see the “Foreign currency exchange rates” section of Management’s discussion and analysis of financial condition and results of operations in this report.
Item 4. Controls and procedures
Evaluation of disclosure controls and procedures
Disclosure controls and procedures (as defined in Exchange Act Rule 13a-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 and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide the reasonable assurance discussed above.
Changes in internal control over financial reporting
No change in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30

Table of Contents

Blackbaud, Inc.

PART II. OTHER INFORMATION

Item 2. Unregistered sales of equity securities and use of proceeds
The following table provides information about shares of common stock repurchased during the three months ended March 31, 2013. All of these were common stock withheld by us to satisfy minimum tax obligations of employees due upon vesting of restricted stock.
 
Period
Total
number
of shares
purchased

 
Average
price
paid
per
share

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

Beginning balance, January 1, 2013
 
 
 
 
$
50,000