Good day, and welcome to the Q4 2022 BlackLine Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Matt Humphries, Vice President of Investor Relations. Sir, you may begin.

Good afternoon, and thank you for joining us today. With me on this call is Marc Huffman, Chief Executive Officer of BlackLine; and Mark Partin, Chief Financial Officer. Before we get started, I'd like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, in particular, our guidance for Q1 and full year 2023 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during the call are reasonable, actual results could differ materially, as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. And also, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is currently available in our earnings release, which may be found on our Investor Relations website. Now, I will turn the call over to BlackLine's Chief Executive Officer, Marc Huffman. Marc?

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today. BlackLine delivered solid financial results for Q4, rounding out a year of demonstrated profitable growth. We reported fourth quarter total revenue of $140 million, up 21%, and for the full year, $523 million, up 23%. We also delivered further margin expansion in the quarter due to operating efficiencies, combined with disciplined and sustainable expense management, giving us confidence in our ability to achieve the medium-term targets laid out at our recent Investor Day. Turning to an update on the macro environment and our sales performance in Q4. We're still seeing elongated deal cycles, which we noted on our prior earnings calls, as customer buying behavior reflects ongoing market uncertainty. While strong competitive win rates and healthy demand signals at the top of the funnel reinforce our long-term confidence in our business, we expect near-term demand to be influenced by delayed decision-making and ongoing budget re-prioritization. Our lower-than-expected bookings performance in Q4 reflects these conditions and underpins the assumptions we've embedded into our 2023 revenue guidance, which Mark Partin will speak to shortly. We're pleased that many of you listening today were able to participate in our BeyondTheBlack customer conference in November. As part of the event, we hosted some of the largest global enterprises and unveiled a series of new solutions and programs that enable, enhance and transform accounting. Specifically, we announced innovative new solutions and capabilities such as Financial Reporting Analytics, or FRA, and BlackLine Accounting Studio. We also expanded our Modern Accounting Playbook to our Cash Application solution and unveiled a new Microsoft Dynamics 365 connector. Additionally, we added new services and support offerings to drive greater value for our customers, enabling them to accelerate the adoption of time to value of our industry-leading solutions. Following the event, we received very positive feedback from our customers and prospects, which directly resulted in a number of customer wins in Q4. In the weeks following the conference, into the fourth quarter's end, we signed multiple FRA deals above our expectations. While we are still early, the fact that customers trust BlackLine and are speaking with their wallets reinforces our confidence that the innovative solutions we're delivering differentiate us further in the market and support the long-term growth opportunities ahead for BlackLine. Furthermore, we are tracking towards general availability for BlackLine Accounting Studio later this summer. Of note, we've already signed a number of early adopter customers seeking to accelerate their digital transformation journey with BlackLine. These recent successes and the additional innovation we have planned over the next few years serve to demonstrate BlackLine's focus on becoming the platform company for the office of the CFO. Moving to progress in our strategic products portfolio. We are pleased to announce that we recently completed the PQ process for SAP for our intercompany financial management non-trade solution. Through our SAP SolEx partnership, our teams are now moving forward to actively sell this additional solution to SAP customers and prospects globally, extending our reach and expanding our ability to capture the large and unpenetrated intercompany market. And finally, we recently extended our relationship with Kofax, a global leader in intelligence automation, adding globally compliant electronic invoicing capabilities to our accounts receivable automation solutions. This expanded alliance strengthens and extends BlackLine’s accounts receivable solutions, ensuring customers remain compliant with rapidly changing electronic invoicing requirements around the world and B2B receipts. Our go-to-market strategy continues to evolve as we strengthen the alignment between our strategy, product portfolio, and the market opportunity. As you saw in December, we announced an action that was largely driven by macro uncertainty and our near-term goal of optimizing our existing capacity to market demand. As part of this, we made several changes to our go-to-market strategy. We introduced a strategic product quota for all quota-carrying reps, aligning the sales force's incentives with our product portfolio and the market opportunity. Additionally, we have largely removed the overlay component in our sales teams, which we expect to improve sales efficiency, reduce friction, and enable quicker wins with customers. While still early in this natural evolution, this is a key part of ensuring alignment of our sales force with BlackLine's goal of growing strategic products, ARR, and driving higher sales efficiency. Now, let's take a moment to review our Q4 results and the highlights from the quarter in a bit more detail. In our markets, APAC was a strong performer and delivered a record sales quarter led by some important wins in Japan. Our North American business remained relatively consistent with some great new logos and expansion deals. As expected, EMEA remained relatively soft as the macro and geopolitical environment continues to weigh on business activity in that region. On the customer side, we saw some relative strength in the new customer bookings this quarter, especially in our enterprise, driven by our SolEx partnership. Additionally, average deal sizes increased this quarter, up 8% year-over-year to $127,000. And finally, we had 48 customers that generate $1 million or more in ARR, up 33%. Despite the ongoing uncertainty in the market, we still see examples of strong wins, including the signing of several deals with new and existing airline customers such as Alaska Airlines and Qantas. For reference, BlackLine serves many of the largest global airlines that leverage our solution and customer teams to drive automation and efficiencies across their businesses. In a great net new SolEx deal, we signed one of the world's largest airlines that was looking to move away from a competitor that lacked many of the modern features and functionality needed to successfully execute against their digital transformation goals. As part of our engagement, leveraging the strength of our SAP partnership and our global consulting partner network, we were successful in demonstrating how BlackLine's best-in-class solutions can be leveraged to support their future growth. Additionally, we signed a record SolEx deal with the largest North American energy and chemicals producer, leveraging the capabilities of our core financial close solution combined with our innovative and high automation intercompany solutions. As part of a larger digital transformation project that includes a cloud transition, this customer was focused on ensuring that key processes remain sustainable and efficient as they grew while also resolving a growing set of complex intercompany challenges. Finally, in EMEA, we signed Renault, a leading European automobile manufacturer as part of our SolEx partnership. This new customer was embarking on a complex and large-scale digital transformation process to support their ambitions of becoming a leading electronic vehicle manufacturer. As part of this, they are reimagining their financial processes to better execute their digital transformation in an efficient, automated, and compliant manner. Having BlackLine as a strategic partner was a clear choice, and we look forward to growing this partnership over time. In accounts receivables automation, we saw a notable acceleration in deal activity in the quarter as we continuously work to refine our target customer profile while enhancing and expanding our offerings. Furthermore, we are seeing more and more customers selecting our broader accounts receivable platform instead of solely choosing our Cash Application solution, setting the stage for long-term success in this business. Notably, we saw record payment value from our accounts receivable business this year, up 33% to over $327 billion. We signed multiple new and existing global customers who see the benefits of automating the order-to-cash process, thereby unlocking working capital to support their business in today's uncertain environment. In one example, we were able to leverage our recently announced Modern Accounting Playbook for Cash Application and sign a growing Canadian customer who is looking to purchase an accounts receivable solution to drive automation, support future growth, and improve their working capital profile. As part of this competitive process, we demonstrated the value a modern accounts receivable platform can deliver and how these work hand-in-hand with other strategic tools BlackLine offers, such as transaction matching. This combined accounts receivable and matching deal is exactly the type of deal that delivers exceptional value for customers and for BlackLine. In another competitive instance, we leveraged our accounts receivable platform to expand with a leading UK provider of financial market data. As an existing customer, they were seeking to move away from manual and unsustainable cash collection processes and ensure they had robust and efficient solutions in place that met global regulatory requirements. All in all, another great win and opportunity to deliver tangible value to customers. In closing, while we see uncertainty ahead in the markets, the value that we deliver and the trust of our customers remains clear. And we're confident BlackLine is well positioned for long-term value creation. We remain focused on executing against our go-to-market strategy as we align our business with near-term market conditions while investing appropriately for future growth. I want to thank our employees around the world for their dedication and determination during these uncertain times. With that, I'll turn it over to Mark Partin to discuss the details of our financial performance and our outlook.

Thank you, Marc, and good afternoon, everyone. BlackLine reported solid top line growth and further margin expansion as we closed out the year, driven by further efficiencies and productivity across the business. Expanding on what Marc mentioned earlier, we saw lower-than-expected bookings performance in Q4 as market uncertainty continues to influence deal cycles and customer buying behavior. This was most evident in the last few weeks of the quarter, especially in EMEA and in the middle market as deals that were expected to close in Q4 slipped into future periods. Despite this, we continue to focus our efforts on what we can control in the near term while positioning the business for long-term success. As such, we see multiple factors that give us confidence to deliver against our targets in 2023. First, as Marc mentioned, we recently took action to better align capacity to near-term demand while further refining and enhancing our go-to-market strategy. Second, we're entering 2023 with a more seasoned and efficient sales force as we lap a period of heavy hiring and unramped sales capacity. Third, we continue to arm our sales force with innovative new solutions and capabilities like FRA and BlackLine Accounting Studio that drive customer engagement, support top of funnel activity, and ultimately deliver incremental revenue. Fourth, we continue to develop, build, and expand our global partner network to expand our reach and capabilities. And finally, we continue to see healthy competitive win rates across our markets. Now, let's review some highlights for Q4. Total revenue grew to $140 million, up 21% compared to the fourth quarter of 2021. Note, FX was a 1-point headwind to revenue growth in the quarter. Also, stronger-than-expected demand for professional services resulted in 41% growth versus the prior year as customers desire to unlock the embedded value of our solutions drove higher utilization. Calculated billings growth was 17% versus last year, despite a 2-point headwind from FX. Remaining performance obligation, or RPO, was up 30% with current RPO growing 23% year-over-year. We closed the quarter with total annual recurring revenue, or ARR, of over $533 million, a 19% increase year-over-year. We added 128 net new customers in Q4, bringing our total customer count at the end of the year to 4,188. Net revenue retention was 107% in the quarter, and it includes a 1.5-point headwind from FX. Gross revenue retention remained strong and picked up to 98% in Q4. Strategic product performance remained healthy and represented 27% of sales, driven by demand for high automation and high ROI solutions. For the full year, strategic products represented 25% of sales, up 2 points from 23% last year and at the upper end of our target range. Partners were involved in 67% of large deals as we leveraged our growing partner network to drive additional opportunities. As expected, we saw strong performance from our SolEx relationship, leading to a record net new sales quarter as we signed several large multiproduct deals globally. In Q4, the SAP partnership represented 24% of total revenue. Shifting to margin. Non-GAAP overall gross margin came in above our expectations at 80%, with non-GAAP subscription gross margin of 83%. In services, our teams delivered impressive performance in the quarter due to higher utilization and additional productivity gains. Non-GAAP operating margin was 13% in the quarter, marking a notable 5-point improvement over Q3 and an 8-point improvement versus last year. Improvement here was driven by a combination of gross margin outperformance, operating efficiencies, and disciplined expense management. Non-GAAP net income attributable to BlackLine was $25.5 million in Q4, representing an 18% non-GAAP net income margin, up sharply versus both the prior year and Q3. We generated $25.8 million in operating cash flow and $20.3 million in free cash flow in the quarter, with a free cash flow margin of 14%, representing 2 points of expansion over the prior quarter. And finally, we ended the year with $1.1 billion in cash, cash equivalents, and marketable securities, providing great financial flexibility as we look toward 2023 and beyond. Now turning to guidance. We anticipate the uncertain market environment we experienced in Q4 and the second half of '22 to persist through 2023. We expect deal cycle lengths to remain extended as customer decision-making processes remain centralized and deliberate, resulting in longer lead times and extended approval processes. Additionally, we expect an approximate 1 point headwind to full year revenue growth from FX, which is embedded in our guidance. All in all, we believe our guidance appropriately reflects these factors while also considering our goals of driving further operating efficiencies across the business. For the first quarter, we expect total GAAP revenue to be in the range of $137 million to $139 million, representing approximately 14% to 16% growth compared to the first quarter of 2022. We expect to report non-GAAP net income attributable to BlackLine in the range of $11 million to $13 million or $0.15 to $0.17 on a per share basis. Our share count will be approximately 74.6 million diluted weighted average shares. And for the full year, 2023, we expect total GAAP revenue in the range of $586 million to $596 million, representing 12% to 14% growth compared to the full year 2022. On the bottom line, we expect to report non-GAAP net income attributable to BlackLine in the range of $66 million to $70 million or $0.89 to $0.94 on a per share basis. Our share count will be approximately 74.4 million diluted weighted average shares. Before we turn to Q&A, I want to thank all of our BlackLine employees for their efforts and their hard work in 2022 as well as our customers who continue to acknowledge our leadership and innovation. While we expect ongoing market uncertainty in the near term, we remain confident in the long-term opportunities ahead and our ability to drive profitable growth. Now, I'll ask the operator to open the discussion to take your questions.

Will come from the line of Rob Oliver with Baird.

So, a couple of questions for me. Thanks. So, Marc Huffman, I'll start with you. It sounds like late December was just a tough time period for deals to close. And it does sound like you guys had some continued success in Asia, I know Japan has been a strong area for you. EMEA a struggle. North America, it sounds like gets tough. From a geographic perspective, can you talk about how the year closed? And then, maybe how the full year guidance for '23 contemplates kind of the geographic breakdown relative to kind of where we are right now? And then, I had a quick follow-up.

Sure. I'll start, and then Mark can talk about guidance. I would describe what we saw in Q4 as a continuance of what we have been describing in terms of uncertainty and deal elongation. I think you got it right. There was strength in APJ in Japan specifically, some strength in some industries, energy, travel, hospitality, and then softness broadly in Europe, new business, and mid-market. In terms of the guidance?

I think it's very similar. We look at as a marker going into this year, our strength in pipeline and the demand, and we would carry forward what we're seeing in EMEA, APAC and also as part of North America. So, in the first half of the year, we believe that that's going to continue.

And then, you mentioned some of the sales changes that you're making and the strategic products quota. Can you just talk about strategic products, how they're performing now? And I don't think I heard you guys talk about FourQ at all on the call. And I know we're still early in FourQ. I think, actually, you may have mentioned that you got approval on the SAP pipe, but just wanted to get a sense for the setup for strategic products for this year. Thanks.

Yes. Overall, last year, for the year, we were up 2 points, 25%. FourQ is 27% of bookings and strategic products. I would say that at the end of the year, our accounts receivable business had some nice wins. We took a number of customers live in accounts receivable. We continue to perform well across a variety of the components that we would call strategic products. FourQ, if I just talk about it as IFM, we talked about this real significant SolEx win, which had a multiproduct element to it, the largest SolEx win we have in the history of the relationship. That had IFM in it. So we continue to exhibit strength in intercompany. But by and large, all of those things still subject to the same continuance of that macro uncertainty and some of the elongation of cycles. As you did note, we did achieve one of the primary product objectives for the year with the integration of FourQ, which was to get the intercompany non-trade element on SolEx through the PQ process, which we did achieve in the quarter.

One moment for our next question. Will come from the line of Matthew VanVliet with BTIG.

Maybe I wanted to dig in a little bit on the mid-market performance. Didn't hear much in the prepared comments, although Mark, I think you just mentioned that was on a little bit of the weaker side. Did you see the maybe the reaction to the macro and some of the overarching themes you see there just, I guess, bubble up a little quicker and have a greater impact there or anything else you might point to around your mid-market performance and anything that you're sort of altering into '23 to help jump-start that?

Yes. If you look backwards in the several quarters, mid-market was an area of acceleration, high execution, strong demand. It actually took longer for it to exhibit some of the macro behaviors, but we did observe that in Q4, we did observe that in Q4. I would say, interest in the top of funnel is still healthy in all markets and geos, interest in mid-market included. But the uncertainty there has really affected the velocity through the funnel itself. In terms of how we respond to that, our observation of win rates remains steady there. Things that go to conclusion, decisions through that velocity and the funnel challenge is down a bit. So, we continue to sort of just study making sure we win the ones that we want to win in the markets and the spaces that we play as we see some pressure in the mid-market to the macro uncertainty.

Okay. Helpful. And then as you look at a number of reductions in headcount across some very large companies, especially in tech, but in other industries as well. How do you feel like that's impacting either the sales pipeline or any sort of re-negotiations or renewal types of business with some of your existing customers as they look towards the future and maybe operating a slightly smaller company, any impact on initial deal sizes potentially as you look ahead at that? Thanks.

Yes. It's a good question. There's a few things that we observed. I think in Q4, we had a very strong user expansion number in the fourth quarter. So, our ability to land and expand inside the accounting and controller’s office continued. The important go-forward is going to be where the cuts taking place. So the front end of the house and the enterprises or the back end of the house, I think we would have some indications that strengthening the back end and accounting and finance continues to be a fairly stable environment. I'll also add that users are not a part of our pricing strategy and strategic products. So we're able to drive value for the customer through value realization through that strategic portfolio, which I think was part of the rationale moving forward for pricing strength.

Yes. And I wouldn't say we observed any headwinds in pipeline regarding any reductions that are out there. Obviously, you've got a high awareness to it in our organization as well as many other organizations, particularly concentrated in tech. I don't think the uncertainty more broadly impacted bookings performance, not anything to do with the reduction.

One moment for our next question. That will come from the line of Matt Stotler with William Blair.

Maybe just first to start with one on guidance. So very, very clear, and I appreciate the color in terms of what you're seeing from a macro perspective. It sounds like a lot of the same things you were talking about last quarter. When I look at initial guidance for top line for 2023 and then put that next to current RPO growth, ARR growth, billings growth and the exit rate for 2022, it seems like there's a little bit of a disparity there, right, a little bit of a gap. And so, if you could just double-click on maybe help bridge that gap, double-click on what you're seeing, what's embedded in 2023 versus what you've seen exiting 2022 and into the kind of first couple of months here of '23 would be helpful.

Yes. Thanks. I appreciate that. Yes. Just maybe to reiterate some of our philosophy around guidance has to do with being very pragmatic, particularly in a time like today, where there is uncertainty in the macro environment that we're operating in. Our guidance philosophy continues to be that we want to provide a range. We have high conviction that we can deliver against, particularly in these times. If and when demand changes or accelerates, we feel that we're in a good position to execute on that and build from. When I look at the question that you have around the disparity of some strong signals coming out of Q4, I think it's important to realize that we had decelerating or lower-than-expected bookings growth in the second half, particularly in the later stages of Q4. And trailing 12-month billing is a good example of that, and that was due to the macro environment. We're also lapping some tough comps, particularly related to the inorganic contribution from FourQ last year, which I think is important. And then, as we also stated, we have a near-term sort of FX headwind that we're working through that is a part of that number. So, that's really how we got to that range from where we jump off in December and Q4.

That's very clear, very helpful. And then maybe just one follow-up. Obviously, it was a very exciting announcement, the BlackLine Accounting Studio at BeyondTheBlack last year. Any early feedback you've gotten from the beta for that offering? And what are you hearing from customers? Is that resonating? And then an update on the timeline. I think you previously said Q2, and it sounds like, if I heard you correctly, you were talking about over the summer or some update on the timeline there would be helpful, too.

Yes. Starting with the timeline. I think summer is the right way to think about it. That's kind of the border of Q2 and Q3. Interest is high, which I think tells you that large organizations that have a bunch of complexity in there and complexity being multiple ERP systems, multiple different processes distributed across workers around the globe, the ability to orchestrate that, tie all those systems together, and create standard business processes through accounting really resonates with people. And so, I would say, Matt, it's too early to say anything more about it. It's in early adopter phase. We keep good tabs on how it's going there. And we think that's obviously a long-term value driver towards our vision of creating a platform that's really indispensable to the office of the controller and broadly to the CFO.

One moment for our next question. That will come from the line of Pinjalim Bora with JPMorgan Chase.

Continuing on the Accounting Studio line, Marc, can you help us understand how applicable Accounting Studio is to the over 4,000 customers you have? And I know it's very early, but what kind of annual recurring revenue uplift do you anticipate it might generate over the next year?

I believe it is too early to consider the ARR uplift, particularly within the timeframe you mentioned, Pinjalim. I understand the question's relevance. This situation likely applies to 50% to 60% of our customers, based on their size, demographics, and complexity, as well as the various workflows we manage for them. The Accounting Studio is just one part of our wider platform strategy that we discussed at Investor Day. Its effect on ARR over time will result in both direct billing capabilities and indirect contributions, such as net revenue retention, expansion, and enhancing the functionality of our multiproduct solutions. This will enable customers to better integrate their data sources into their complex business processes.

Yes. Understood. Got it. Thank you. And Mark, pardon, one for you on the guidance. Trying to understand, since you're also driving some of the sales changes, trying to understand if you have layered in maybe a little bit more conservatism than usual. You say there has been a little bit of a peak in the guidance philosophy going into this year, given the heightened uncertainty?

I understand your question, Pinjalim. Our philosophy has remained consistent over the years. Considering our business model, the predictability of our base, the recurring nature of our revenue, and the small percentage of services, we have a high level of confidence in our forward forecast. We analyzed our experiences from the last few quarters, including closure rates and deal timing, and projected that into the future. While we aren't being overly precise about when demand will return, our forward forecast range is aligned with our historical approach. It’s practical, and we are confident in our execution ability. When demand does return, we believe we will be in a strong position to enhance and build upon our current offerings.

One moment for our next question. And that will come from the line of Joseph Meares with Truist.

It's Bobby Dee speaking for Joe Meares tonight. It's great to hear about the strength with SolEx, but I'm curious if there are any updates on the recently signed partnership with Accenture. Has it resulted in any new logo wins or additions to the pipeline? I also have one follow-up. Thanks.

Yes. Starting with your point about SolEx, was a very productive quarter and obviously, we announced the big win with them, so. Albeit we always feel like we should be doing more through that partnership, pleased with the performance in Q4. But it's still really early with Accenture. And without being able to name exact names, they did contribute to our results. They are influencing some new customer sales, they are building pipeline with us, they are influencing some of our existing customers that they have embedded relationships with, and that's a global phenomenon. We have examples in Germany, we had examples in North America and more broadly, Mainland Europe that they've had great influence on. So still early, but I'd say it's off to a real productive start.

That's great. I appreciate the color there. And switching gears a little bit. I'm curious how many ERP integrations the BlackLine platform currently has? And how many do you plan to expand that by in 2023? I think based on some of our recent conversations with customers, it seems to be a pretty important effort. And I think you all talked last quarter about 5% in our NRR from connector utilization last quarter.

Yes, I’m not sure I can provide an exact number for the ERP integrations, Bobby. We have specific and purpose-built connectors with embedded use cases for all the major names you would expect, which align with our land and expand strategy, including SAP and Oracle. We recently announced the Microsoft connector as well. Additionally, the integration platform is a key component of our strategy, particularly since we see higher net revenue retention from those using connectors or our APIs. The ability to write to APIs has become increasingly strategic for us. Several large customers who joined last year are now going live and providing excellent feedback. With the introduction of APIs, even if a company is among the least common ERP vendors, they could potentially connect to our APIs. While I can't quantify the exact number, I'm excited about the potential and see it as a strategic focus for ongoing investment.

One moment for our next question. That will come from the line of Alex Sklar with Raymond James.

Great. Thanks. I don't know who wants to take this one, but a two-part question on reiterating the medium-term growth targets. So first, any color if the December headcount changes impact the expected timing to return to those growth levels. And with that, I think you said the top of funnel growth was still performing really well in the quarter. Can you directionally quantify if the pipeline growth currently supports those medium-term targets? Thanks.

Yes. Thank you. I think I can start the question with the action we took in December does not extend out the timeline. In fact, as we look at our medium-term targets for both growth and Rule of 40 operating efficiency, we feel like we're making traction, particularly around our ability to execute in the sales force and the GT, in the go-to-market areas with more product, more opportunities for them to drive accountability. And then for the second part of the question?

Yes. In terms of the transition between our annual plan and the ability to meet the objectives this year, which I feel like we have adequate pipeline to meet the 2023 objectives, it's sort of hard to translate that into the 24-month view of the pipeline. I wouldn't suspect that anything with regard to the action we took has a detrimental impact on that. We are paying close attention to the signals to make sure that we're bringing back capacity as it becomes required to build the 2024 capacity model to meet those midterm objectives, Alex.

Okay, great. That's helpful context. I guess, Mark Partin, just one follow-up for you on the first quarter guide. Is there anything onetime in nature that's kind of driving the quarter-over-quarter decline versus fourth quarter? Is that just services timing? Anything you'd call out there?

It's expected to be between 14 and 16 compared to the fourth quarter. I want to remind you that we had FourQ impact from our inorganic segment last year. Additionally, the first quarter of last year was one of our strongest periods, coming off a very solid 2021. First quarters tend to be seasonal, making last year's performance particularly noteworthy and contributing to a more challenging comparison for this quarter.

One moment for our next question. And that will come from the line of Koji Ikeda with Bank of America.

Hey Mark Partin and Marc Huffman. Thanks for taking the questions. Just a couple from me. I wanted to go back to the guidance and ask a question there, maybe a little bit more directly. I appreciate all the commentary that you had, thinking about it pragmatically and high visibility. But I guess more directly, does the guidance assume the macro gets worse? And if it does, how are you thinking about maybe some of the key metrics that you might be flexing down, whether it be net revenue retention or sales cycles or deal sizes or anything of that nature? Just curious to understand if the guidance does assume macro gets a little worse from here.

I appreciate that. Our guidance is based on the best-case scenarios we've observed recently, including closure rates, sales cycles, and timing, and we’re projecting that into the first half of this year. Q1 is typically a seasonal quarter, and we're currently experiencing the effects of the macro environment on closure rates and decision-making. Therefore, extending our observations into this year seems like the most sensible approach. We don't provide guidance on other metrics, but we believe that our existing customer base and our ability to offer strategic products in the current environment remain a key focus and priority. At the end of last year, we noted our growth profile shifted closer to 65-35, with growth primarily coming from our base, and we expect this trend to continue early in the year. Additionally, we mentioned that foreign exchange fluctuations negatively impact revenue, billing, and ARR figures, and we expect this to carry into the beginning of this year as well. Thus, our current assumption is to project what we’ve observed over the last couple of quarters into the first half of this year.

And just a follow-up for you, if I may here. Typically don't ask questions on the numbers on the press release getting in the weeds, but I saw kind of in the non-GAAP reconciliation an impairment of cloud computing implementation cost. Could you maybe walk us through what that is? Is this a onetime for this quarter, or is this something that we can anticipate something more on a quarterly basis going forward?

Yes, definitely. Recently, in the fourth quarter, we decided to change our approach regarding a lengthy third-party implementation of a quote-to-cash tool that was not providing the expected benefits. As a result, we wrote off the implementation costs from what had been a three-year, intermittent project amounting to around $5 million. This is reflected in the reconciliation, and we have moved past this issue, which is recorded as a charge-off in our fourth quarter.

One moment for our next question. And that will come from the line of Brent Bracelin with Piper Sandler.

This is Mauro jumping on for Brent. Just two questions from us. So, the first part of my question is on the strategic product attach rates. I think at the Analyst Day, you called out single-digit attach rates for most of the products. Any noteworthy changes to call out in terms of how those products closed out the year? And then, as you think about the full year guide, what are you contemplating in terms of the mix of strategic products and overall revenue mix for the year?

Well, I'll start with the first one. The view that we have in terms of the attach rate and the sort of TAM to go get there, we don't refresh on a quarterly basis. So, I don't know that we, off the top of our head, could come up with like-for-like for you there, nor do we sort of guide or report on that. I would say in the quarter, some strong performance, largely on the back of a real large opportunity in IFM, as I mentioned previously, AR at the end of the year had a nice uptick, including new customer wins some expansion, and then we took a number of customers live, and we continue to see strong throughput on our platform in terms of how much cash actually gets applied and processed, $327 billion in payments via our platform. And then lastly, our strategy continues with the additional strategic products like journal entries, smart close had, strong quarter for us.

Yes. On the second part of that question, we've guided within 5-point increments in the past where, for the full year, we would want to see a product mix of 20% to 25% in previous years. In this past year '22, we had a goal of 25% to 30%. And I think going into this upcoming year, 25% to 30% continues to be the right range. And the reason for that is balance, right? We're managing a global core financial close, along with a strategic portfolio, along with new products. And the right balance here for us would be 25% to 30% and then to try to hit the top end of that target for this year. So, that's what we are planning and thinking towards.

Got it. That's very helpful. And then the last one from us is just around EMEA and the mid-market. Have there been any changes in win rates there, or has the softness just kind of remained a function of deal slippage? And then maybe just more broadly, have there been any changes in the competitive environment that you'd call out? Thank you.

So, EMEA and mid-market, the phenomenon that we are observing there is actually a declination of deals that go to decision. So, sort of the deferment, if you will. Win rates, steady. Steady meaning they toggle by 1 or 2 points, so immaterial, in my opinion, over the course of time. And the biggest phenomenon is less deals reaching conclusion there.

One moment for our next question. Next question will come from the line of Daniel Jester with BMO.

Apologies if there's some background noise. Just one for me. I appreciate sort of all the color you gave on the consumption metrics and how much that's improved for the strategic products. Can you just remind us, like how deeply penetrated within your customers with how these strategic products are? And if you think about those consumption metrics as they grow, is it solely going to be new clients and new products, or can you get deeper penetration within your customers that have already adopted them? Thank you.

Great question. Transaction matching remains our most penetrated product, and among our 4,000 customers, that figure is still in the hundreds. Other products, such as cash and accounts receivable and IFM, are still in the early stages with adoption in the single digits. This presents an opportunity for us to sell into that existing customer base. Regarding your question about whether strategic products can expand within a single customer, the answer is yes. Our pricing strategy and modular approach allow us to successfully introduce and deepen our strategic products within accounts.

One moment for our next question. Will come from the line of Josh Beck with KeyBanc Capital Markets.

Hey guys. This is Maddie on for Josh. Thanks for taking my question. My first one is at a higher level. Just wondering how you guys are thinking about IT budget changes in 2023 and where you fit in that prioritization. And then my follow-up is, obviously, you called out lower bookings than expected in Q4. Just wondering if some of those deals would trickle into Q1, and we might get better bookings than expected? Thanks.

Thank you. Regarding the question about deal slippage, it's challenging to forecast that, especially as we transition from Q4 to Q1 amid the current macro environment. It's important to note that we haven't lost any pipeline deals; they remain part of our pipeline funnel. As Marc mentioned earlier, our competitive win rates are stable, and interest levels remain strong. The macro conditions have an impact on our closure rates. Whether it's Q1 or beyond, much depends on the ongoing macro uncertainty affecting various regions and customers. Now, concerning the market we serve, it focuses on CFOs and controllers, especially in the context of digital transformation. IT budgets and CIO involvement come into play in these areas. We believe that in the early stages of macro uncertainty and recessions, there tends to be a pullback and re-prioritization of budgets. However, as Marc noted earlier, there will be an increased need for efficiency and automation, driven by the competition for talent and pressures on margins. CFOs and controllers are expected to do more with less. Therefore, we view our product as a high ROI solution and anticipate it being one of the first budget priorities when organizations are ready to invest. While it's difficult to predict the exact timing as we move into this year, that is our perspective on the market.

One moment for our next question. And that will come from the line of Andrew DeGasperi with Berenberg.

Hi. This is Stephanie on for Andrew. Thank you for taking the question. I'm wondering if you could elaborate a little bit on your new customers added this quarter and what the mix was between the customers, if you have that. And whether there are specific products driving this new customer growth or that are popular with new customers? Thank you.

We currently have a little over 4,000 customers, with roughly half of them being enterprise clients. Some of these companies exceed $750 million in revenue, while the other half falls into the mid-market category, below that threshold. Typically, we see the growth in customer numbers occurring primarily in the mid-market sector each quarter. This is due to the influx of mid-market customers joining the platform, although the enterprise clients represent a larger scale. We expect that the average increase in customer numbers each quarter will mainly come from the mid-market segment, while the annual recurring revenue growth primarily comes from enterprise customers. As for whether there's a specific driver for new customer growth, it's challenging to attribute it to a particular product or factor. Most of our customers start with a financial close and then expand from there, which is generally the trend we observe.

One moment for our next question. And that will come from the line of Fred Lee with Credit Suisse.

Good to see the margin protection in a tough selling environment. Another question regarding macro. And just to clarify, would you say macro deteriorated quarter-to-quarter, or is it equally as difficult as Q3? And then just a follow-up.

Yes. I would say it remained consistent. I think it didn't improve or decline. We observed a continuity.

Okay. My second question is about the strong performance of services and the demand we observed. The company achieved some of the highest service margins in recent history. Shouldn't that lead to increased subscription demand and help identify opportunities? How should we approach this?

Potentially, what I think has occurred there is one, it was strong execution. In the inflationary time, we spent a lot of time focused on how we can drive improved rate, and we have proven that out. And as that rate burns through burning hours in these engagements, that turns into revenue. So focus and execution across rate improvement, the utilization rates and then some level of demand in our installed base for additional services which we continue to focus on how we monetize existing investments that we have in services and make them billable, I think, led to that performance.

All right. Great. And actually one last one for Mark Partin. Accounts receivables saw a big cash outflow in the quarter, that looks greater than normal seasonal. Can you talk a little bit about what's happening underneath there?

Yes. I'll tell you what, I will do that in a follow-up with you on our call tonight. I think there's nothing out of the ordinary. So we'll spend a little bit of time looking at that as possible, that if you're looking at cash flows, it could just be our investments. We have $1 billion on the balance sheet. We're investing that in a safe, secure investment and earning a return on that. So, it's possible that that's what you're looking at. But I'll have a more detailed answer for you on our next follow-up call.

One moment for our next question. And that will come from the line of Steve Enders with Citi.

I guess just on the outlook. I just want to get a better sense of how you're thinking about further investments through the year and I guess, in particular with a little bit of the reorganization on the sales side, how you're thinking about some changes or putting more dollars to work to build out the sales capacity there. Thanks.

Yes. The sales capacity has been one of the sort of stories over the last couple of years as we talked about at Analyst Day that during the early days of COVID that we took a lot of the slack out of the system and then as demand started to increase, we rehydrated with a great deal of hiring and putting talent out in the street. And so, when we started 2022, our capacity was very high. What we've seen is we've adjusted that or stayed in an area where the capacity going into '23 is sufficient for the demand that we're expecting. Marc talked about some of the changes within that go-to-market organization to help drive efficiency and effectiveness on the streets. And so, those are the changes that you're seeing. For us, our investment profile is that we feel we've made very good early investments in the team, in some automation in the back end, and in some sort of customer-focused team members so that we're in a good position going into this year, without having to add more incremental cost beyond what our revenue growth is expected to be.

Thank you. One moment for our next question. That will come from the line of Adam Hotchkiss with Goldman Sachs.

Could you guys dig a little bit deeper on some of the places that you're finding efficiencies outside of the December workforce reduction that you announced and sort of what's left to go there? I think the discipline there seemed relatively broad-based from what we've seen in the performance relative to the first half on fairly comparable gross margins is pretty noteworthy. So any color there would be helpful.

Yes, thank you. To start with gross margin, we experienced an increase every quarter last year, culminating in the fourth quarter with a peak of 80%. This improvement is largely attributed to the strong performance of our services organization, which has enhanced our operating margin through elevated rates, increased utilization, and higher quality work. Additionally, we have effectively managed the migration to GCP, although it still presents a 1.5 to 2-point headwind. Despite that challenge, we have maintained effective operations. The key to our leverage lies in the broad-based efficiencies and cost discipline we have implemented across the P&L. Beyond just cutting expenses, we have identified key efficiency areas in general and administrative costs, where we have built infrastructure to support our recent growth and are now moderating investments. We believe we are well-positioned in areas like recruiting and automation. In the sales and marketing sector, we saw improved sales rep productivity in the latter half of the year. A larger portion of our sales team is now ramped up, coinciding with the timing of our hiring, and we've provided further product opportunities and increased upselling of strategic products. This has created a more dynamic motion within our ecosystem and product offerings. Lastly, in product development, we have benefited from moderated investments, improved efficiency through vendor consolidation, off-shoring some development work, and establishing a center of excellence for our development teams. These efforts are enhancing the efficiency of our engineers with better tools and streamlining those tools. Overall, our management teams globally have effectively focused on driving down costs while still investing for future growth and fostering efficiency.

Great. Yes, that's really helpful. And I know this may be looking a bit forward, but what's your process like once you see accelerating demand signals for building the cost base into that growth, especially as you think about your medium-term targets? Is that a lot more challenging given the variability in the macro and how quickly things can change?

It's interesting. We've seen that now twice, and I think that's one of our strengths, frankly, is the agility or the ability to see those demand signals. A great example is that we have a very strong base of partners and a very strong base of customer team and salespeople. And so, we're able to get coverage in the markets where we're seeing demand. If demand for example, increases in our existing base, we've got plenty of coverage with our account managers, with our customer success teams to be able to sort of flood the zone, if you will, or to get to that demand opportunity. The tough part as you're alluding to is when you have long lead times with sales hires, how do you get that capacity on board. We're able to manage that given sort of our capacity management where we are today. And so looking into '23 and '24, Marc mentioned, we'll be sort of looking very closely at those signals so that we're prepared for it.

Thank you. One moment for our next question. That will come from the line of Patrick Walravens with JMP Securities.

Great. Thank you. And first of all, let me wish everyone a Happy Valentine's Day, and I hope you guys end up having time…

Likewise, Pat.

So Mark, is there a shortage of accountants? And if so, what are the challenges in translating that into closing deals for software that should make accounts more productive?

Is there a shortage of accountants? Yes, I believe so. There is a shortage of exceptional accountants and a general shortage of accountants overall. We estimate that there are about 13.5 million to 14 million accountants globally who are engaged in activities related to what we assist them with. Our ongoing challenge has been reaching these accountants. Many of them exhibit inertia and an unwillingness to change, as well as fear regarding the risks associated with change. Our focus has always been on effectively communicating with accountants, and we aim to convert this need into opportunities. So, that seems quite clear.

And then my follow-up is, and this will be 1 million people are going to ask you this later, so we might as well get it on the transcript. You're 1.5-month through the quarter. How has it gone so far?

It's early in the quarter, and it's a seasonal quarter for us. And it's about what we expected at this stage. Again, it's early in the quarter.

Yes. I would say it's a continuity. We've got a month's worth of experience. It just happens to be the most seasonal month of the year for us, given that a lot of our clients are busy closing their annual books. So, I would just use the same kind of word. It's a continuation of what we've been experiencing thus far.

Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Marc Huffman for any closing remarks.

Thank you again for your interest in BlackLine. On behalf of the management team, I'd like to thank our employees throughout the world as well as our customers and encourage you as you interact with your clients in the investment world, where they need efficiencies in their finance and accounting operations to send them to BlackLine. Have a great day.

Thank you all for participating. This concludes today's program. You may now disconnect.