Executive Summary / Key Takeaways

• Blackbaud (NASDAQ:BLKB) stands as the undisputed market leader in social impact software, serving a resilient and growing sector with mission-critical cloud solutions for fundraising, financial management, and engagement.
• The company is aggressively advancing its "AI Everywhere" strategy, launching innovative agentic AI solutions like "Agents for Good" and "Blackbaud Copilot" that leverage its unique position as a system of record with vast data, creating a significant technological differentiator and new monetization opportunities.
• Strong financial performance in Q3 2025, with 5.2% organic revenue growth and a 35.4% adjusted EBITDA margin, underscores operational discipline and a clear path towards achieving a "Rule of 45" by 2030.
• A purposeful capital allocation strategy, prioritizing significant stock repurchases (targeting 5.2% to 7% of outstanding shares in 2025) and debt reduction, is enhancing shareholder value.
• Despite macroeconomic uncertainties and the EVERFI divestiture, Blackbaud's focused strategy, robust innovation pipeline, and disciplined execution position it for sustained profitable growth and increased free cash flow.

The Enduring Mission and Market Dominance

Blackbaud, Inc., founded in 1981, has established itself as the premier software provider exclusively dedicated to powering social impact globally. The company's mission-critical cloud solutions cater to a diverse ecosystem of nonprofits, educational institutions, socially responsible corporations, and individual change-makers across 100 countries. This specialized focus has allowed Blackbaud to cultivate deep domain expertise, making its software essential for accelerating impact in fundraising, financial management, digital giving, grantmaking, corporate social responsibility, and education management.

The social impact market itself demonstrates remarkable resilience, with annual charitable giving in the United States nearing $600 billion, reflecting a more than 6% year-over-year increase. Corporate giving is also at an all-time high, marking it as the fastest-growing nonprofit revenue source over the last five years. Blackbaud's solutions are strategically positioned to capitalize on these trends, enabling customers to enhance fundraising outcomes and optimize cost management, particularly when facing external pressures such as shifts in federal grant funding.

Technological Edge: AI and the Future of Social Impact

Blackbaud's "Intelligence for Good" program and "AI Everywhere" strategy are at the forefront of its technological differentiation, leveraging its unique position as a system of record for social impact data. The company has integrated over 70 embedded, sector-specific AI capabilities across its product portfolio, streamlining workflows and enhancing efficiency for its customers. This extensive access to first, second, and third-party data provides a significant competitive advantage, allowing Blackbaud to develop impactful AI solutions tailored to the social impact sector.

Key innovations include predictive AI, which helps customers identify billions of dollars in untapped giving potential, and generative AI-powered acknowledgments that speed and enhance communication with supporters. A significant upcoming development is "Blackbaud Copilot," an AI-powered coach and assistant that will enable users to interact with their data using natural language questions, moving beyond traditional screen-by-screen navigation to gain deeper insights within their solutions. This is expected to be a game-changer for improving business operations and driving revenue.

The company's groundbreaking "Agents for Good" suite, launched at bbcon 2025, introduces agentic AI to turn virtual team members into active teammates that autonomously execute complex, high-value workflows. The first offering, a Development Agent, is designed to identify and steward donors that organizations currently lack the capacity to reach, thereby unlocking new revenue streams. For instance, a university with 200,000 alumni and a limited number of fundraisers can leverage this agent to engage a vast, untouched donor base, driving new revenue at a fraction of traditional costs. These Agentic AI solutions are being monetized through new multiyear SaaS subscription models, with sales commencing in Q4 2025 and expected to ramp up in 2026.

Beyond AI, Blackbaud continues to innovate across its core platforms. Raiser's Edge NXT has seen hundreds of continuous updates, including modernized pledge giving and new integrations with digital marketing solutions like Constant Contact. Financial Edge NXT is transforming into a system of intelligence with seamless integration and advanced methods for journal entry and invoicing, significantly boosting customer efficiency. In K-12 education, a "common records engine" is being rolled out to connect advancement offices with school administrations, while YourCause innovations like "Expedited Giving" aim to reduce the time for corporate employee donations to reach nonprofits to just "a day or two." These technological advancements are not merely features; they are foundational to Blackbaud's competitive moat, driving higher customer value, improved retention, and new revenue opportunities.

Strategic Pillars for Growth and Efficiency

Blackbaud's strategic initiatives are centered on three core areas: acquiring new logos, driving innovation to strengthen customer relationships, and enhancing profitability through operational discipline. The company has successfully pivoted its sales efforts towards new logo acquisition, with significant wins across various verticals. Notable examples include St. Mary's College of California and Concordia College adopting Raiser's Edge NXT, a large youth development organization securing Raiser's Edge NXT and Data Intelligence, and the SunnyBrook Foundation selecting Blackbaud CRM. The YourCause platform has also seen strong growth, adding and expanding large corporate customers like NASDAQ (NDAQ), Tyson Foods (TSN), and Chevron (CVX). These wins often involve multiyear agreements, with a minimum contract length of three years now standard.

Operational discipline is a continuous focus for margin expansion. Blackbaud has transitioned the majority of its products and customers to leading public cloud service providers, with only two private data centers remaining, offering a long runway for gross margin improvement. The company is also expanding its operations in India to access high-quality, cost-effective tech talent, which is expected to provide labor arbitrage benefits over time. Internally, Blackbaud is leveraging AI across its marketing, sales, customer success, and engineering departments to drive productivity and scale, further contributing to its goal of achieving a "Rule of 45" by 2030.

Financial Performance: A Trajectory of Strength

Blackbaud's financial performance in the third quarter of 2025 demonstrates the effectiveness of its strategic initiatives. Total revenue for the three months ended September 30, 2025, was $281.14 million, a 1.90% decrease year-over-year. For the nine months ended September 30, 2025, total revenue was $833.11 million, a 2.28% decrease compared to the same period in 2024. This decline was primarily due to a decrease in contractual recurring revenue, largely attributable to the divestiture of EVERFI, which represented $18.40 million and $63.90 million in the three and nine months ended September 30, 2024, respectively. This was partially offset by positive impacts from pricing initiatives and the strong performance of cloud solutions.
Transactional recurring revenue, a key growth driver, increased by 8.99% to $92.82 million in Q3 2025 and by 9.23% to $276.83 million for the nine months ended September 30, 2025. This growth was fueled by increased volumes in Blackbaud Integrated Payments, pricing initiatives, and favorable foreign currency exchange rates. The company's gross margin significantly improved, increasing by 470 basis points in Q3 2025 and 390 basis points for the nine months ended September 30, 2025, primarily because cost of revenue decreases outpaced revenue declines.

Income from operations saw a substantial increase of $13.40 million in Q3 2025 and $35.70 million for the nine months ended September 30, 2025. This improvement was largely driven by reduced compensation costs (excluding stock-based compensation), lower amortization of intangible assets (due to the EVERFI impairment), decreased Security Incident-related expenses, and reduced third-party contractor and advertising costs, all primarily linked to the EVERFI divestiture. Non-GAAP diluted earnings per share for Q3 2025 was $1.10, an 11% increase year-over-year.

The company's gross dollar retention for the twelve months ended September 30, 2025, was approximately 92%, an increase over the prior year, primarily due to the EVERFI divestiture. Deferred revenue saw a seasonal increase in the nine months ended September 30, 2025, reflecting higher customer contract billings and renewals. Blackbaud achieved a Rule of 40 score of 40.5% at the midpoint of its full-year guidance, demonstrating a balanced approach to growth and profitability.

Capital Allocation and Shareholder Value

Blackbaud's strong free cash flow generation underpins its purposeful capital allocation strategy, which prioritizes returning value to shareholders. For the nine months ended September 30, 2025, net cash provided by operating activities was $207.50 million. The company's adjusted free cash flow guidance for full-year 2025 has been increased to $195 million to $205 million. This upward revision is directly linked to anticipated cash tax savings through 2027 from the One Big Beautiful Bill Act (OBBBA), which makes permanent the immediate expensing of U.S. R&D expenditures.

A key component of this strategy is aggressive stock repurchases. In Q3 2025, Blackbaud repurchased approximately 460,000 shares, bringing the year-to-date total to nearly 2 million shares. Including net share settlement of employee stock compensation, this represents approximately 5.2% of common stock outstanding as of December 31, 2024. The company has increased its stock repurchase target for 2025 to between 5.2% and 7% of outstanding common stock and expects similar activity in 2026, aiming for a weighted average diluted share count of 46.5 million to 47.5 million next year. Since Q4 2023, common stock outstanding has been reduced by 10%.

Debt management is another critical aspect of capital allocation. Blackbaud has successfully delevered, with its net leverage ratio decreasing to 2.45 to 1 as of September 30, 2025, down from 2.9x in Q1 2025. The company remains in compliance with its debt covenants under the 2024 Credit Facilities, which provide $463.50 million in available borrowing capacity. While interest expense increased due to prior borrowings for repurchases and expiring interest rate swaps, the OBBBA legislation is expected to meaningfully reduce cash taxes, further bolstering future cash flow. Management also highlighted that approximately $60 million in one-time working capital fluctuations impacting 2025 free cash flow are not expected to recur in 2026, signaling a stronger cash flow outlook.

Competitive Arena: A Specialized Moat

Blackbaud operates with a widening moat as the market leader in social impact software, a position reinforced by its specialized focus and deep understanding of its customers' unique needs. While larger technology companies like Salesforce (CRM), Microsoft (MSFT), Adobe (ADBE), and Oracle (ORCL) offer broader CRM, cloud, and marketing solutions, Blackbaud's strength lies in its purpose-built, mission-critical software tailored specifically for the nonprofit and education sectors.

Salesforce, with its Nonprofit Cloud, offers a generalized platform that can be customized, but Blackbaud's Raiser's Edge NXT and Blackbaud CRM provide greater depth in nonprofit-specific features, such as grant management and donor cultivation. Blackbaud's emphasis on niche expertise and long-term customer relationships often translates into stronger customer loyalty and retention in its core segments. Similarly, against Microsoft's Dynamics 365, Blackbaud's Financial Edge NXT offers more tailored financial and enrollment management tools, providing greater efficiency for nonprofit workflows. Blackbaud's unique value proposition, particularly in integrating marketing with fundraising and its "Expedited Giving" for YourCause, creates a cohesive experience that broader players may struggle to replicate.

Blackbaud's "system of record" advantage, coupled with its vast repository of social good-centric benchmark data, provides a significant competitive edge for its AI solutions. This allows for the development of highly relevant and impactful AI tools that are deeply embedded within customer workflows, a capability that generalist AI competitors may find difficult to match. While some analysts express concerns about potential disruption from AI competitors, Blackbaud's proactive and specialized AI strategy, including its Agentic AI offerings, directly addresses this by creating new, monetizable solutions that leverage its core data assets.

However, Blackbaud's niche focus and scale limitations could present vulnerabilities against the sheer financial and R&D might of tech giants. While Blackbaud leads in domain-specific innovation for nonprofits, it may lag in overall innovation speed and R&D investment compared to companies like Salesforce and Microsoft, which can deploy vast resources across a broader technological front. Despite this, Blackbaud's strategic positioning, focused product development, and strong customer relationships allow it to maintain a robust competitive stance within its specialized market.

Risks and Considerations

Investing in Blackbaud, while compelling, involves certain risks. The company continues to incur expenses related to the May 2020 Security Incident, with $2.80 million in legal fees and $1.10 million in loss contingency accruals for the nine months ended September 30, 2025. While all customer constituent class actions are resolved, a subset of insurance carriers has appealed a dismissal of their subrogation claims, representing ongoing legal uncertainty.

Transactional revenue, a significant growth driver, remains non-contractual and susceptible to volatility from events, marketing campaigns, and donation volumes. Although management's guidance excludes viral giving events, any unexpected downturn in these volumes could impact revenue. Furthermore, Blackbaud's interest expense could increase in a rising interest rate environment due to its variable rate debt, although the company uses derivative instruments to manage this risk. While management believes its solutions are critical even with concerns about federal grant funding, a significant reduction in such funding could indirectly impact the financial health of some larger customers, potentially affecting their ability to invest in new solutions or expand existing contracts.

Conclusion

Blackbaud, Inc. is a compelling investment opportunity, firmly entrenched as the market leader in the resilient and growing social impact sector. The company's strategic focus on AI-driven innovation, particularly with its "Agents for Good" suite and Blackbaud Copilot, leverages its unique data assets and system-of-record position to create powerful, monetizable solutions that enhance customer efficiency and unlock new revenue streams. This technological edge, combined with a disciplined operational approach, is driving significant improvements in profitability and cash flow, as evidenced by its strong Q3 2025 financial performance and clear trajectory towards a "Rule of 45" by 2030.

Blackbaud's purposeful capital allocation strategy, marked by aggressive share repurchases and prudent debt management, underscores management's confidence in the company's intrinsic value. While the competitive landscape includes formidable tech giants, Blackbaud's specialized expertise and tailored solutions provide a robust moat, fostering deep customer loyalty. Despite inherent risks such as legal contingencies and transactional revenue volatility, Blackbaud's foundational strengths, strategic clarity, and commitment to innovation position it for sustained profitable growth and increasing shareholder value in the years ahead.