BLKB — Q2 2026 Financial Report Analysis

Slow sales, much bigger profit: buybacks and a tax change did most of the work

Blackbaud sells cloud software that charities, schools and foundations use to raise money, process donations and tuition payments, and run their finances. In the second quarter of 2026 (April–June) revenue rose just 3.0% to $290.6 million, but GAAP diluted earnings per share (EPS, profit divided by the number of shares) jumped 44% to $0.79. Most of that gap comes from outside the core business. The tax rate fell from 33.9% to 23.8%, and buybacks left 7.0% fewer shares outstanding. Underlying operating profit grew about 8%. The figure to watch is customer retention. It fell to about 91% because an unusually large batch of contracts is up for renewal this year.

At a glance

• Revenue +3.0% ($290.6M), slower than Q1's ~4.2%. In constant currency (stripping out exchange-rate moves) growth was 2.8%. Almost all of it came from price increases and payment volumes, not new customers.
• GAAP EPS $0.79 vs $0.55 (+44%). Roughly $0.09 of the $0.24 gain came from better operating profit and lower interest, about $0.10 from the lower tax rate and about $0.05 from the smaller share count.
• Free cash flow $75.3M, up from $51.5M. That is 26% of revenue. Most of the improvement came from lower tax payments under the 2025 US tax law, which the company says will partly reverse in 2026–27.

The numbers

Operating margin is the share of revenue left after running the business, before interest and tax. "Non-GAAP" figures are the company's own adjusted versions, which leave out stock pay and some other costs (explained below). Gross dollar retention is the share of last year's contracted subscription revenue still being paid a year later. It counts losses only, so price increases and upsells don't lift it.

Where the growth came from

Revenue rose by $8.6 million. According to the 10-Q, that came from three pieces:

• Contractual recurring revenue (subscriptions) rose $6.2M, or 3.5%, to $186.4M. Management credits "the positive impact of our pricing initiatives and the demand of our cloud solutions." Price increases come first in that explanation.
• Transactional recurring revenue rose $2.8M, or 2.9%, to $98.9M. This is fees taken on donations and tuition payments processed through Blackbaud Integrated Payments and Blackbaud Tuition Management. It grows with payment volume, so it partly tracks how much donors give and families pay.
• One-time services (implementation and customisation work) fell to $5.3M from $5.8M because fewer projects were sold.

Currency added about $0.7M this quarter and $2.9M in the first half. Without it, first-half growth would have been 3.1% instead of 3.6%. Blackbaud made no acquisitions or disposals in either period, so all of this growth is organic.

Retention: the number that matters most this year

Blackbaud's contracts usually run three years. About 90% of subscription revenue is now on contracts of three years or longer, and 25% on four years or longer. That makes revenue predictable, but renewals arrive in uneven batches. The 10-Q says the contract value up for renewal in 2026 is about 40% larger than in 2025. Gross dollar retention for the 12 months to June fell to about 91%, below the level at December 2025. Management says it expects "some temporary pressure" this year and a return to normal levels "by the end of 2027."

This matters because retention limits growth. A 91% rate means about 9% of last year's subscription base has to be replaced before any growth can count. Blackbaud is filling that gap mainly with price increases. Price rises are hardest to push through in the year the biggest batch of customers is deciding whether to renew.

What the headline numbers hide

• The EPS jump is mostly not operating improvement. Pre-tax income rose 15.9%, helped by $0.8M less interest expense and smaller currency losses. Net income rose 33.6% because the effective tax rate fell from 33.9% to 23.8%. The 10-Q attributes that to "a reduction in our valuation allowance" (an accounting reserve against future tax deductions) after the 2025 US tax law (OBBBA) made more of those deductions usable. The share count then fell 7.0%. Taxed at last year's rate, Q2 EPS would have been about $0.68 rather than $0.79.
• Adjusted profit barely moved. Non-GAAP net income rose only 1.7% ($59.7M vs $58.7M). Nearly all of the 9.0% rise in non-GAAP EPS came from the lower share count. The adjusted operating margin fell 1.1 points to 32.6%, and the adjusted EBITDA margin fell 0.7 points to 38.0%. On the company's own adjusted view, profitability slipped slightly this quarter.
• The GAAP vs adjusted gap is mostly stock pay. The $32.6M difference between GAAP and non-GAAP operating income is $22.7M of stock-based compensation, plus $6.0M of acquired-intangible amortisation, $2.0M of costs from moving work to its new Global Capability Center in Hyderabad, India, a $1.1M software write-down and $0.9M of deal costs. Stock pay is 7.8% of revenue, and it is a real cost to shareholders. It fell from $27.3M partly because the company now expects to hit 2026 bonus targets at plan rather than above plan, which the 10-Q says was the expectation last year. That makes GAAP margins look better this quarter for a reason that has nothing to do with efficiency.
• Margin drivers. GAAP gross margin rose 1.6 points. Across the business, third-party contractor costs fell $4.7M as work moved to employees in India. Contractor savings outweighed higher in-house pay costs. Advertising rose $2.1M, for the JustGiving platform and the new AI products.
• Cash flow is strong, partly for tax reasons. First-half operating cash flow was $142.5M, about 2.1 times net income. Free cash flow was $112.3M, against $39.2M a year earlier. The 10-Q says the 2025 tax law's full expensing of R&D and equipment, plus loss carryforwards, "meaningfully reduced U.S. cash taxes in 2025 and 2026." It adds that state rules and international provisions will partly offset this in 2026–27. Receivables jumped from $80.5M to $134.9M since December. That is the normal mid-year billing pattern (deferred revenue rose 9.3%), and the build was smaller than last year's ($57.5M vs $65.0M).
• Buybacks are partly debt-funded on a thin equity base. In the first half Blackbaud spent $110.1M buying back 2.4M shares and another $25.3M on shares withheld for employee taxes. That is $135.4M, more than the $112.3M of free cash flow. Net borrowing rose $28.6M. Debt stands at about $1.15 billion against $34.4M of cash, and shareholders' equity is only $67.0M. Counting shares withheld for employee taxes, repurchases already equal 6.2% of shares outstanding at the start of the year, and the target is 6–10%.
• First-half comparison is flattered by a one-off. First-half GAAP net income more than doubled ($66.5M vs $30.8M), but 2025 included a $24.3M charge for exiting a Washington, DC office lease.
• Guidance is unchanged. The full-year ranges were reaffirmed, not raised. Management now says it expects results in the upper half of the ranges, with EPS and free cash flow at the high end.

Takeaway: Blackbaud is a 3%-growth business turning that growth into fast per-share gains through price increases, cost cuts and borrowing to buy back stock. Adjusted net income grew just 1.7% this quarter. EPS grew because there are fewer shares and the tax bill shrank. That works as long as retention holds, and retention has fallen to about 91% in the year the largest batch of contracts comes up for renewal.

Outlook

Blackbaud's 2026 guidance, reaffirmed with this release:

The second-half figures are our arithmetic from the company's ranges. The heavy second half is normal for Blackbaud. The 10-Q notes that billings and renewals cluster "at or near the beginning of our third quarter," which brings cash in early in Q3. The ranges imply second-half revenue 5–6% above the first half. With growth slowing from about 4.2% in Q1 to 3.0% in Q2, that is the part to watch. Assumptions: interest expense of $62–66M, a 24.5% non-GAAP tax rate and 45–46M diluted shares.

Our read: the per-share targets look reachable. Buybacks and the share count are largely in management's control, and the first half was on track. Revenue is the weaker part. Two things decide whether this model keeps working into 2027:

1. Retention through the big 2026 renewal batch. If the next 10-Q shows retention below 91%, it would suggest price increases are costing customers. Holding steady would support management's recovery story for 2027.
2. Whether the AI products start adding revenue. The new fundraising "agent" is sold as a separate subscription at prices "generally in the tens of thousands of dollars" a year. But the 10-Q says commercialisation "remains in the early stages," and none of it shows up in growth yet.

The Q3 report, normally filed in late October, will be the first quarter with most of the 2026 renewal batch in the numbers.