Executive Summary / Key Takeaways

• Strategic Reinvigoration Post-Divestiture: Blackbaud has successfully divested its dilutive EVERFI business, sharpening its focus on the core social impact sector. This strategic clarity, combined with a multi-year operational plan, is driving improved financial performance and a clear path to long-term growth.
• Robust Financial Performance and Raised Guidance: The company delivered a record-setting Rule of 45 in Q2 2025, reflecting strong organic revenue growth and significant EBITDA margin expansion. Management has raised its full-year 2025 guidance across all key metrics, signaling confidence in its operational discipline and market position.
• AI-Driven Innovation as a Core Moat: Blackbaud is leveraging its unique access to social good-centric data to develop differentiated AI solutions, including Blackbaud Copilot and Agentic AI, which enhance customer efficiency and unlock new revenue streams, reinforcing its competitive advantage.
• Disciplined Capital Allocation and Deleveraging: Strong adjusted free cash flow generation supports a purposeful capital allocation strategy, including aggressive share repurchases and a commitment to deleveraging, with a target of reaching low-2x net leverage by year-end 2025.
• Resilient Market and Competitive Edge: Operating in the consistently growing social impact market, Blackbaud's specialized, integrated solutions and deep customer relationships provide a sticky ecosystem, differentiating it from broader enterprise software competitors.

The Enduring Mission: Blackbaud's Foundation in Social Impact

Blackbaud, Inc., founded in 1981 and headquartered in Charleston, South Carolina, has consistently dedicated its cloud software and services to powering social impact globally. Serving a diverse clientele across nonprofit, education, corporate social responsibility, and individual giving sectors, Blackbaud's mission-critical software is designed to accelerate impact in fundraising, financial management, digital giving, and education management. This specialized focus has allowed Blackbaud to cultivate deep expertise and tailor solutions uniquely suited to its customers' vital work.

The social impact market has demonstrated remarkable resilience, consistently growing through economic cycles and even global pandemics. This inherent stability makes Blackbaud's software even more critical to its customers, enabling them to enhance fundraising outcomes and optimize cost management, particularly as external funding dynamics, such as federal grants, evolve. Blackbaud's solutions, which primarily facilitate fundraising from individual donors, become indispensable tools for organizations seeking to diversify and secure their revenue streams.

Technological Edge: AI as a Differentiator

Blackbaud's strategic advantage is deeply rooted in its proprietary technology and an aggressive "AI Everywhere" strategy. The company's platforms, such as Raiser's Edge NXT and Financial Edge NXT, are not merely systems of record but are evolving into systems of intelligence. This transformation is powered by Blackbaud's unique access to extensive first, second, and third-party social good-centric data, providing a significant competitive moat for AI development.

The "Intelligence for Good" program integrates advanced machine learning and AI capabilities. Predictive AI, already adopted by over 5,000 Raiser's Edge NXT customers, helps identify billions of dollars in untapped giving potential. Generative AI features streamline communications, speeding up acknowledgments and enhancing supporter engagement. A significant upcoming innovation is Blackbaud Copilot, an AI-powered coach and assistant, which entered technical preview in Q2 2025. This tool allows users to interact with their data using natural language, asking questions and gaining insights directly within their solutions. Management describes Copilot as an "industry-leading innovation that only we could deliver, thanks to our access to years of social good-centric benchmark data."

Further advancing its technological leadership, Blackbaud is developing a full Agentic AI offering, expected to launch at the bbcon conference in October 2025. These solutions, such as a "virtual fundraiser," are designed to autonomously identify and cultivate donors who might otherwise be overlooked, driving accelerated revenue for customers. For instance, a university with 200,000 alumni and only 30 gift officers can deploy a virtual fundraiser to engage the 190,000 alumni not actively cultivated, operating 24 hours a day to generate new donations. This capability promises to "unlock new levels of effectiveness and deeper connections" across critical fundraising operations.

Beyond core platforms, Blackbaud is enhancing its transactional offerings. The integration of its YourCause corporate social responsibility solution with payments and fundraising platforms enables "Expedited Giving," reducing the time for employee donations to reach charities from months to "just a day or two." This integrated capability provides Blackbaud a "unique position in this market." The company is also introducing Payment Assist, a new transactional product focused on monetizing accounts payables and eliminating checks. These innovations, coupled with a continuous investment in R&D and a thriving developer network, underscore Blackbaud's commitment to driving long-term value for its customers and shareholders.

Competitive Positioning: Niche Leadership in a Dynamic Market

Blackbaud operates as a niche leader within the broader cloud software market, specializing in the social impact sector. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Blackbaud holds an estimated 10-15% market share in its core segments. This specialized focus provides a distinct competitive advantage, fostering deep customer loyalty and tailored solutions that often outperform generalist offerings from larger technology firms.

Directly, Blackbaud competes with enterprise software giants like Salesforce (CRM), Microsoft (MSFT), Adobe (ADBE), and Oracle (ORCL), particularly in areas like CRM, marketing automation, and financial management. These larger competitors typically exhibit higher revenue growth rates and superior profitability margins due to their immense scale and diversified portfolios. For instance, Salesforce reported 11% YoY revenue growth in Q2 2025 with a gross margin of around 75%, while Microsoft achieved 16% YoY revenue growth in Q3 2025 with a gross margin of 69%. In contrast, Blackbaud's Q2 2025 gross margin was 59.6% (GAAP) and 63.4% (Non-GAAP).

However, Blackbaud's strength lies in its qualitative advantages: its solutions offer notably easier integration for small organizations, reducing setup time by 30-50% compared to generalist tools. Its user-friendly interfaces and sector-specific analytics provide unique value in fundraising insights and donor engagement. While competitors like Salesforce and Microsoft offer broader AI capabilities and faster data processing (e.g., Salesforce's AI tools enable 20-30% faster processing, Microsoft's Azure AI can be 25% faster), Blackbaud's "system of record" status and specialized data access for the social good sector provide a crucial differentiator for its AI strategy. The company's strategic appointment of Bill Fort, formerly of Salesforce.org, Oracle, and SAP (SAP), as Head of North American Sales, further underscores its intent to leverage deep industry knowledge to enhance competitive wins and expand its market footprint.

Financial Strength and Operational Discipline

Blackbaud's financial performance in the first half of 2025 demonstrates a strong trajectory, building on significant improvements since 2020. The company's organic growth rate increased from 1.2% in 2020 to 5.2% in 2024, while its adjusted EBITDA margin expanded from 26.5% to 33.7% over the same period. Adjusted free cash flow margin also saw substantial growth, from 8.3% to 21.2%. This consistent progression culminated in Blackbaud achieving a Rule of 45 in Q2 2025, marking its highest quarterly performance in company history.

For the second quarter ended June 30, 2025, Blackbaud reported total revenue of $281.4 million, a 2.1% decrease year-over-year. However, this figure was heavily influenced by the divestiture of the EVERFI business, which contributed $23.4 million to contractual recurring revenue in the comparable prior period. On an organic basis, revenue grew 6.8% year-over-year in Q2 2025, and 6.3% for the six months ended June 30, 2025, on a constant currency basis.

Transactional recurring revenue, a key growth driver, increased 8.6% year-over-year in Q2 2025 to $95.4 million, driven by higher volumes in Blackbaud Integrated Payments and Blackbaud Tuition Management. Contractual recurring revenue, excluding the EVERFI impact, also saw positive performance from pricing initiatives and cloud solutions.

Profitability metrics showed significant improvement. Gross profit for Q2 2025 was $167.7 million, with a gross margin of 59.6% (GAAP), up from 56.6% in Q2 2024. Non-GAAP gross margin reached 63.4%, a nearly 300 basis point improvement. Income from operations increased by $14.6 million in Q2 2025, primarily due to reduced compensation costs (excluding stock-based compensation), lower amortization of intangible assets (following the EVERFI asset group impairment in December 2024), and decreased Security Incident-related expenses.

Blackbaud's operational discipline extends to its balance sheet and cash flow management. As of June 30, 2025, cash and cash equivalents stood at $41.6 million. The company's debt leverage decreased to 2.7x in Q2 2025 from 2.9x in Q1 2025, with a strategic goal to reach the "low-2s" by year-end.

Blackbaud generated $68.3 million in cash from operations during the first six months of 2025. The company's capital allocation strategy is purposeful, balancing investments in product innovation with shareholder returns. The Board reauthorized an $800 million stock repurchase program in July 2024. In the first half of 2025, Blackbaud repurchased 1.51 million shares for $100 million, representing approximately 4.2% of its outstanding common stock as of December 31, 2024, with $544.5 million remaining under the program.

Outlook and Risks

Blackbaud has raised its full-year 2025 financial guidance, reflecting confidence in its core business and first-half performance. The company now projects revenue in the range of $1.120 billion to $1.130 billion, representing organic growth at the midpoint of approximately 5% on a constant currency basis. Adjusted EBITDA margin is anticipated to be between 35.4% and 36.2%, implying approximately 7% growth in adjusted EBITDA dollars year-over-year after adjusting for the EVERFI divestiture. Non-GAAP EPS is expected in the range of $4.30 to $4.50, implying approximately 11% year-over-year growth. Adjusted free cash flow guidance has also been increased to $190 million to $200 million.

This guidance assumes no material changes in the macroeconomic landscape. The increase is driven by strong first-half transactional revenue performance and some foreign exchange upside. It's important to note that the revised guidance does not assume the same level of transactional revenue overperformance in the second half, and any "viral giving" events would represent upside. Furthermore, the potential positive impact of the newly enacted One Big Beautiful Bill Act (OBBBA) on cash taxes in the near term is not yet reflected in the current guidance, representing a potential future tailwind. The company also anticipates approximately $60 million of one-time working capital fluctuations in 2025 that are not expected to recur in 2026, signaling a strong free cash flow outlook for the following year.

Despite the positive outlook, investors should consider several risks. The company continues to manage liabilities related to the May 2020 Security Incident, with approximately $1.6 million in aggregate loss contingencies recorded as of June 30, 2025, though management believes these are not reasonably likely to have a material adverse impact. The rapidly evolving AI landscape presents both opportunities and risks, including regulatory uncertainty, privacy concerns, intellectual property issues, and the need for substantial ongoing investment and specialized expertise. While Blackbaud aims to develop AI responsibly, the potential for misleading or flawed output and ethical issues could impact its reputation and legal standing. Additionally, the company faces significant competition from other firms developing AI-enhanced products, which may be more cost-effective or technologically superior.

Conclusion

Blackbaud is executing a compelling investment narrative, transforming its business through strategic divestiture, operational discipline, and a relentless focus on innovation. The company's core strength lies in its specialized position within the resilient social impact market, where its purpose-built software and deep customer relationships create a powerful competitive moat. The strong financial performance in the first half of 2025, marked by record Rule of 45 attainment and raised full-year guidance, underscores the effectiveness of its strategic initiatives.

Looking ahead, Blackbaud's commitment to its "AI Everywhere" strategy, leveraging its unique data access to deliver differentiated solutions like Blackbaud Copilot and Agentic AI, is poised to drive future growth and enhance its competitive standing. Coupled with a disciplined capital allocation strategy focused on deleveraging and shareholder returns, Blackbaud is well-positioned on its journey to achieve the Rule of 45 by 2030. While the evolving AI landscape and competitive pressures warrant monitoring, Blackbaud's clear vision, operational rigor, and technological advancements present a compelling case for long-term value creation in the social impact sector.