Blackline, Inc. Q1 FY2024 Earnings Call

Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan and Therese Tucker, Co-Chief Executive Officers of BlackLine as well as Mark Partin, Chief Financial Officer. Before we get started, I would 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 Q2 and full year 2024 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, and 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. Finally, 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 at investors.blackline.com or on our Form 8-K filed with the SEC today. Now I will turn the call over to BlackLine's Co-Chief Executive Officer, Owen Ryan. Owen?

Thank you, Matt, and good afternoon, everyone. Thank you all for joining us today. BlackLine exceeded revenue and profitability expectations in the first quarter with $157 million in total revenue, a 17% non-GAAP operating margin, and $40 million in non-GAAP net income. While we are still in the early stages of implementing our new operating model, we are pleased with the progress we are seeing. I will review this progress, highlighting areas of early success and identifying those areas that require a bit more time to achieve operational maturity. Regarding execution, we are seeing an uptick in activity at the top end of our sales plan. While the volume of deals is still lower than we want, this improvement in activity gives us some early indications of demand stabilization. In the first quarter specifically, we encountered several instances where larger multi-solution deals pushed out. As part of this, we still see customers and prospects maintaining their prudent and thoughtful purchasing behavior. Going forward, we expect to aggressively pursue these opportunities either directly or jointly with our partners. Next, efforts around elevating our market message and brand are progressing well. We are receiving positive feedback from both customers and partners, indicating that our message, particularly around artificial intelligence and our industry-focused strategy, is generating favorable interest. On AI, this was evidenced during our recent BeyondTheBlack event in London, where innovation in AI dominated discussions among attendees. We believe that our innovation here, which Therese will detail shortly, is beginning to stand as a meaningful differentiator with the opportunity to drive and accelerate even deeper accounting and finance automation for our customers. We are also seeing signs that our industry approach is resonating strongly with our customers, partners, and prospects, who see numerous opportunities to address their industry-specific challenges. In fact, because our approach has garnered such positive reception, we are accelerating and broadening our deployment schedule. Our commitment to delivering on the BlackLine promise remains steadfast with progress being made. While external metrics reflecting these efforts are still evolving, we see progress across our customer base, particularly in areas like adoption and engagement, but also with respect to customer experience. With additional innovation being embedded within our solutions, along with a refined and streamlined approach to pricing, which we expect to move forward with later this year, we see opportunities to enhance the value and ROI that customers receive, while simultaneously making it easier to do business with BlackLine. Next, we are seeing notable progress in our distribution efforts as we transition towards a more partner-powered model. Globally, we are experiencing more comprehensive engagement with our partners, especially within our solution pillars. For instance, within invoice to cash, partners are expressing interest in expanding their practices and collaborating with BlackLine, particularly in light of competitors' shifting strategies or unmet promises. Also, we are seeing a building interest among our partners with our electronic invoicing presentment and payment offering. Partners are also actively seeking out leaders in the AI space to align for mutual growth opportunities. We are confident that our focus on innovating for the office of the CFO will not only align with our collective objectives but also support our differentiation and market leadership. On retention, we are advancing various programmatic initiatives aimed at enhancing customer adoption and stickiness. These initiatives gained momentum late last year and have further accelerated with the implementation of our new operating model. As an example, we know that there are significant benefits from partner engagement at the start of a customer journey, including better adoption and elevated value delivery. As such, we have taken steps to more closely integrate our partners and customers at the outset of that process. While our first quarter retention rates fell slightly below expectations, we believe there is tangible progress being made. Our key focus on customer adoption underscores its significance as one of my top priorities. As testaments to our commitment here, we recently appointed industry veteran, Jimmy Duan as our new Chief Customer Officer, to spearhead these efforts and ensure that additional focus, scrutiny and partner engagement remain paramount across our company. Turning to deal activity in the first quarter, while our net customer additions are not where we would like, mostly due to changes to our lower middle market targeting, we were pleased to see that many of our new logos were influenced or driven by partners, including SAP. In one example, we signed a federally owned electric utility company that was burdened by too many manual processes and an outdated ERP. Through the combination of BlackLine, SAP, and a key partner, we were able to offer a better way forward, one that offered modern technology, robust automation, and trusted partners to support their transformation journey. Notably, this is our second customer within the federal government space. In Europe, we signed a competitive multi-solution deal, again leveraging our SolEx partnership with a global biotechnology company. As part of an ERP replacement, BlackLine was selected to standardize, automate, and govern their critical finance and accounting processes, serving as a key partner during a multi-year transformation. As part of a phased approach, this deal provides us additional opportunities to support their needs as they grow. Also in Europe, we signed a net new deal with a leading chemical manufacturer as part of an ERP migration. Historically, the customer has leveraged Excel as their primary tool to support their accounting and finance processes, which have become unsustainable and lack a proper global controls framework. Further, the customer understood that there were real benefits to both attracting and retaining talent by modernizing their financial technology landscape, effectively alleviating many executive-level concerns by choosing to partner with BlackLine. In Invoice-to-Cash, which remains a very topical set of solutions in today's interest rate environment, we saw some solid wins and customer expansions as well. Specifically, we expanded with an existing customer, a multinational food products company, who saw such success with their initial purchase that they chose to expand even further and add our complete invoice-to-cash offering to additional geographies and business lines. We expect that over time, our relationship with this customer will continue to grow. In the middle market, we saw a number of competitive replacements driven by an interest in a more modern approach to both their close and consolidation processes. In one instance, a North American financial institution sought to replace an incumbent vendor due to a poor experience with a lack of real transformation in the office of the CFO. BlackLine's close and consolidation solutions were exactly what the customer was looking for and gave the customer the confidence to partner with a trusted leader. With that, I will turn it over to Therese to discuss how we are continuing to drive and deliver meaningful innovation for our customers. Therese?

Thank you, Owen. As the demands and challenges within the office of the CFO continue to evolve, there is a critical need for innovative solutions that deliver tangible results and drive business outcomes. We firmly believe that artificial intelligence will be pivotal in meeting these needs and will rapidly become integral to modern finance and accounting operations. As leaders in the market who are committed to providing an AI-driven platform for the office of the CFO, we are moving swiftly to fulfill our promises and execute on our strategy. This entails not only integrating AI into our platform but also introducing new AI-powered solutions to better serve our customers. To bring this to life, I want to outline how we are doing this today and what we plan to release over the coming quarters to support our customers and greatly enhance the value that they receive from BlackLine. In our financial close pillar, we've recently introduced a new solution aimed at identifying and mitigating risks within the journal entry process. Our Journal Risk Analyzer utilizes generative AI to visually present accounting teams with key trends, insights, and anomaly detection related to manual journal entries. This solution efficiently captures and assesses journal entries from various ERPs and subledger systems, providing dynamic actionable insights for customers to proactively address potential areas of fraud and policy violations. Given the large volumes of data spread across our customers' technology landscape, generative AI serves as an invaluable tool to empower informed decision-making and minimize compliance and audit risk. Currently available to early adopters, we anticipate making this solution generally available later this year. Next, within both our financial close and consolidation and financial analytics pillars, we are launching BlackLine's document description summarizer. Integrated seamlessly into our current solutions, this represents a productivity enhancement to our customers' workflows and processes. This feature streamlines repetitive tasks involved in account reconciliations and during consolidation by autonomously scanning supporting documentation of any type and generating concise summaries of their content. As a result, our customers can significantly cut down on preparation time for their close while strengthening their controls and potentially mitigating audit risk. Furthermore, within our consolidation and financial analytics pillar, we're developing a comprehensive and cohesive suite of AI-powered enhancements aimed at delivering even more value to our customers. Initially, we plan to unveil a financial statement summarizer and footnote generator, capable of automatically summarizing financial statement data and providing key insights. This empowers customers to proactively analyze our behavior at a consolidated level and conduct comparisons across different time periods. Additionally, it will facilitate the creation of financial statement footnotes to imitate material items. Looking forward, we plan to introduce a variance automation feature in the latter half of the year. This feature will identify account fluctuations, utilize these AI-generated footnotes, and offer automated explanations for accounting and finance teams to quickly identify and explain drivers of financial performance. Lastly, within our invoice-to-cash pillar, we're gearing up to unveil an upgraded AI-powered payment forecasting tool for our customers. The enhanced payment forecasting tool empowers customers to convert accounts receivable data into actionable insights, significantly enhancing collection forecast accuracy by up to 40% compared to our previous version. Further, we are also working to release a predictive guidance tool that features natural language processing to produce visual responses for our accounting and finance teams based on natural language queries. The ability to transform data into insights and drive business decisions is a powerful and real use case for modern technologies like AI. Undoubtedly, AI stands as a powerful enabler, capable of accelerating automation and delivering additional efficiency within any organizational framework. However, it's equally undeniable that apprehension of the companies be unfamiliar, especially when it comes to integrating AI into core financial operations. Recognizing this, we are committed to a deliberate and responsible deployment of this technology. Our strategy aims not only to instill confidence but also fosters familiarity, and most importantly, cultivate deeper trust with our customers. Through this, we seek to bridge the gap between technological advancement and human adoption, ensuring a balanced approach that aligns with our customers' willingness and ability to adopt AI. Shifting to broader platform innovation, we're excited to announce the long-awaited release of the BlackLine Accounting Studio. This updated solution has been enhanced to offer unparalleled visibility, control, and orchestration for finance and accounting processes that span disparate ERP and third-party systems. At its core, the BlackLine Accounting Studio is a user-friendly solution that helps visualize and orchestrate processes efficiently. Ensuring that dependencies are captured and controlled and the processes move forward at the right time and in the right order. One of its key strengths is its versatility in integrating with various systems, both within BlackLine and externally, leveraging our integration platform and extensive API library. This gives customers the unique ability to visualize and control their workflows across their entire financial technology landscape, something that doesn't exist in the market today. With this solution, we can become the indispensable partner for the office of the CFO and one that supports customers through every stage of their transformation journey. Regardless of how their technology, teams, or strategy evolves. As Owen mentioned earlier, we are moving rapidly to deploy our industry-focused go-to-market strategy. To support this, from an innovation perspective, we have three initiatives in flight: First, we are building a community of users within industries to identify current challenges and opportunities that are unique; second, leveraging the configurable nature of our software, we are highlighting customer-specific use cases that can benefit others in the industries, maximizing our software's utility and value; and third, we plan to deliver new solutions and enhancements that are high value to these industries. For example, we are developing a high-frequency account reconciliation solution tailored specifically for the financial services and retail industries. This targeted approach demonstrates our commitment to addressing the unique needs of these industries while also strengthening our broader go-to-market efforts. And last but certainly not least, we recently announced that we hired a new Chief Technology Officer, Jeremy Ung, who is charged with leading and supporting many of these efforts. Jeremy and I will partner closely to drive our innovation agenda faster and further than before. One of the benefits of hiring a like-minded leader is that I can spend more time on customer-centric innovation, helping customers progress on adopting and using technology like AI on exploring further use cases for the BlackLine Accounting Studio and on our industry-specific innovation. Before I close, I would like to say that I am immensely proud of our team's achievements thus far, and I'm even more excited about the opportunities that we have ahead to reshape how accounting and finance work gets done. With that, I'd like to turn it over to Mark Partin, who will review our financial results and updated financial guidance. Mark?

Thank you, Therese. Our financial results this quarter highlight our disciplined approach as we navigate both the current market environment as well as our ongoing business transition. Despite this, we expect to continue to invest into strategic parts of our business to support our long-term growth drivers, especially innovation. Further, we remain committed to aggressively pursuing opportunities to drive even higher levels of efficiency and productivity across the business. With that in mind, let's review the financial results for the first quarter in a bit more detail. Total revenue grew to $157 million, up 13% with subscription revenue growing 15%. Services revenue declined 7%, primarily due to progress on our partner-driven services delivery model. Calculated billings growth was 6%, with trailing 12-month billings growth of 11%. As Owen mentioned, we experienced a number of larger deals slip this quarter, which was a driver of the lower-than-expected billings performance. Remaining performance obligations, or RPO, was up 7% with current RPO growing 10%. We closed the quarter with total annual recurring revenue, or ARR, of $605 million, up 10%. Net new customers increased by 13 in the quarter, bringing our total customer count to 4,411. As discussed previously, our strategy to become more targeted in the middle market is expected to influence this metric in the near term. Our revenue renewal rate in the first quarter was 93%. We are still seeing recurring themes here, such as vendor consolidation and cost discipline from customers, especially within the enterprise. Net retention rate, or NRR, was 105% and in line with our expectations, driven primarily by modest account growth and user adds this quarter. Strategic product performance represented 20% of sales and came in below our target range of 25% to 30%. This was influenced by large deal slippage this quarter as many of these were multi-solution deals with strategic products attached, particularly Intercompany. Partners were involved in 75% of large new and expansion deals this quarter with a higher mix of partner involvement in new deals, giving us some early but positive indications that our partner-powered approach is gaining traction. SolEx performance was below expectations, driven primarily by deal slippage. In Q1, SAP partnership revenue represented 26% of total revenue, a slight increase versus last year. Turning to margin. Our non-GAAP gross margin was 79%, with non-GAAP subscription gross margin of 82%, benefiting from leverage on cloud spend this quarter. Non-GAAP operating margin was 17% due to better-than-expected revenue performance, along with efficiency and productivity gains, especially within our product and technology teams who continue to drive agility across the organization. Non-GAAP net income attributable to BlackLine was $40 million, representing a 25% non-GAAP net income margin. Operating income outperformance, combined with favorable net interest income, drove bottom line strength yet again. We generated $50 million in operating cash flow and $44 million in free cash flow in the quarter, with a free cash flow margin of 28%. Record cash collections this quarter was a key driver of our better-than-expected cash flow performance. Finally, we ended the quarter with $1.2 billion in cash, cash equivalents, and marketable securities. Our strong financial position affords us the ability to invest strategically while also addressing our near-term convertible maturities. On this point, we expect to retire our 2024 convertible notes in cash when they mature on August 1 of this year. Now on guidance, I want to remind everyone that we continue to take a disciplined and thoughtful approach considering the recent rollout of our operating model, broader economic factors, and our performance in the first quarter. As such, we are raising the midpoint of our full-year revenue guidance, while also raising our full-year non-GAAP operating margin and non-GAAP net income ranges. Finally, we continue to expect that services revenue will be an approximate 1 point headwind to our full-year revenue growth rate. Now for the second quarter of 2024, we expect total GAAP revenue to be in the range of $157 million to $159 million, representing approximately 9% to 10% growth. We expect non-GAAP operating margin to be in a range of 16.5% to 17.5%. And we expect non-GAAP net income attributable to BlackLine to be in a range of $37 million to $39 million or $0.49 to $0.51 on a per share basis. Our share count is expected to be approximately 76 million diluted weighted average shares. And for the full year 2024, our updated guidance is as follows: We expect total GAAP revenue to be in the range of $641.5 million to $649.5 million representing 9% to 10% growth. We expect non-GAAP operating margin to be in the range of 17.5% to 18.5%. And we expect non-GAAP net income attributable to BlackLine to be in the range of $158 million to $168 million or $2.12 to $2.26 on a per share basis. Our share count is expected to be approximately 74.5 million diluted weighted average shares. With that, I'll now ask the operator to open the discussion and take your questions.

Thank you. One moment while we compile the Q&A roster. The first question comes from the line of Rob Oliver of Baird.

Mark, my first question is for you regarding the deal slippage this quarter. Could you provide some insights into how much of this might be attributed to general macroeconomic factors and confidence in deal closures, compared to any potential incremental weakness or reduced spending from some of your customers, or possibly less partner support from SAP? I also have a quick follow-up.

Remainder of the year and staying focused on them. The fact that they're in the pipeline, we are actively working with our customers and our sales team on driving those deals. That's where we are now. So for your question is that those deals continue to move through the pipeline today.

Great. I may have missed the first part of your answer. I wanted to take a moment to reflect on your anniversary since joining the company and discuss some of your strategic initiatives. Considering the various aspects you outlined, such as your go-to-market strategy, revamping sales, the SAP partnership, and your collaborations with system integrators, where do you believe you've made the most progress? Additionally, how do you see that progress translating into tangible activities as we advance through this year, and where might you still need to focus more effort?

Sure. Thanks, Rob. We have made significant progress with our partners over the past year. We've streamlined our partner list, and those we are working with are fully engaged. For example, one of our partners, with whom we hadn't previously done much work on a key product, recently reallocated 50 offshore resources to focus on the BlackLine solution instead of a competitor's. It will take some time for this change to take effect, but it demonstrates our partners' strong commitment to our goals. I consider this to be a major success area for us. Additionally, our collaboration with SAP is progressing well, leading to enhanced marketplace presence and improved win rates together, which is fantastic. Lastly, when we examined our customer portfolio, we realized we have a strong narrative in our industry. For instance, while overseas, Therese and I met with a consulting firm that was preparing an RFP for a major global company. We dedicated about an hour to discussing how BlackLine can assist customers in that specific industry, and it was eye-opening for them. I am confident that when the RFP is issued and the selection is made, our ability to demonstrate how BlackLine supports customers across their industry's needs will be a key differentiator. We are now effectively communicating in the industry's language, which is crucial for achieving our objectives.

The next question comes from the line of Chris Quintero of Morgan Stanley.

Owen, you mentioned you're taking a more streamlined approach to pricing that will go live later this year. Do I have that right? And if so, what changes are you making? And what do you expect the impact of these changes to be? And then I've got a follow-up.

Yes. A couple of things. So we've completed most of the pricing study work at this particular point in time. We'll be rolling that out over the course of this year and as renewals come up over the succeeding years; I think a couple of things that were important for us to sort of step back and think about is with our fuller platform of what we offer. Some of them are more sort of user-based; some are more usage-based. And we had gotten feedback from our customers asking for us to make it easier and simpler for us to go ahead and price and do work with them. So that's a lot of what we have been focused on trying to drive. I think overall, we feel pretty good about the results of that work. We've tested it with several hundred customers and prospects to sort of validate what we were seeing and experiencing. And so we'll get that rolled out again very, very soon. Obviously, change in management with these things are important. And we're also doing it in an environment where we still have to compete against certain companies as we go up against them in the marketplace. But overall, we like the work that's been done. We feel good about the outcome. And ultimately, you do this so you can charge more for the product that you're delivering, and that's ultimately what we expect to be able to do. I think we've learned a lot about how to articulate our value to our customers, and that's based upon the feedback from our customers. So we'll make sure we get that done.

Got it. That's really helpful. And maybe for Mark, really great to see the free cash flow margin of 28%. Is there anything one-time in nature impacting that number? And how should we think about free cash flow conversion for the rest of the year?

Yes. I think the team did an excellent job in Q1, collecting AR that was really a great effort from everyone. As we move through the year, I think we'll see free cash flow margin at or around our operating margin rate. So I don't expect our cash generation from AR to continue like that. So it will come down here through the remainder of the year.

The next question comes from the line of Pinjalim Bora from JPMorgan.

This is Jaiden Patel on for Pinjalim. ARR came in a little bit below expectations. You mentioned that there were large deals that got pushed out. Is there any way to quantify those deals? And of those, do you think there's a certain percentage that will close in Q2?

Thanks, Pinjalim. Yes, we will close some of those deals and already have in Q2. Yes, we'll continue to work them through the remainder of the year. It's not uncommon to have slipped deals from quarter to quarter. We saw more in Q1 around the large deals. And in some ways, I think in our earlier remarks, we talked about those related to being macro as well as our ability to get our arms around what our new operating model has strengthened as we move through the year on our new operating model. So quantifying it, I think would be difficult at the moment. So thanks.

Our next question comes from the line of Adam Hotchkiss of Goldman Sachs.

I guess to start, could you just give us an update on the product education aspect of your customer success efforts? I know this is something that's been a focus for you in the past, in particular, around cross-sell opportunities and platform usage within your existing base. But I'm just curious how you think about that within the context of the things you're doing with AI and AI being such a focus for folks in the office of the CFO. Does that allow you to get your foot in the door around continuing to educate customers and drive more usage of the platform?

Thanks, Adam. We have spent a lot of time in the last year, making sure that our entire organization is extremely customer-centric and focused on the value that BlackLine can actually deliver. As a result of that, we've got a number of different training programs that are really being extremely well received by our customers. They include a number of recurring webinars on new features to make sure that our customers know what the roadmap is entailing, as well as bottom line events that have been going on in person where we get both prospects and customers together. And there's a fair amount of education that happens during those. And then there's also the BlackLine Academy with its corresponding consulting events, where we actually will take different accounting practices, processes and help them transform them because when people really use BlackLine well, the result is digital finance transformation. And so these are hands-on workshops that our customers can attend to really get deep knowledge on how to use BlackLine to transform their organizations. So it has been a big push of ours over the last year, and it's been very well received by our customers.

That's really helpful, Therese. And then within that context, how are you broadly thinking about monetizing some of these AI investments, particularly as you think about seat or usage-based pricing within the context of the productivity improvements that AI might bring your customers? How do you ensure that you're going to be extracting the value you think some of these investments have been worth?

Well, one of the best things about including productivity enhancements is that the software becomes more sticky. People cannot imagine giving it up for something that's free. So I love the stickiness factor, and for me, that's worth more than sort of extracting another dollar out of somebody. And that's really for the places where we are embedding AI. I think it was Rob Kugel of Ventana, who said productivity by a thousand cuts. I loved it, right? Just like everywhere where people are doing things manually, where can you introduce AI to really make their jobs go faster and be more accurate? So in the embedding part, I think it just becomes part of the fabric of what we offer to our customers and makes them delighted. In terms of new products, we're still sort of learning our way here. We just came out with the Journals Risk Analyzer, and we've already got more than 20 early adopters signed up for that. We're going to use them to help us determine what the value that they are receiving is, and that will help us determine how to price it.

The next question comes from the line of Brent Bracelin of Piper Sandler.

Mark, I wanted to start with you around the pipeline build today versus three months ago. I get there are some deals that slipped, not uncommon in Q1. But can you just characterize visibility in the pipeline and how much build you saw in the last three months?

I can. Thank you, Brent. We've got a handful of new great leaders in the company. One of them is running marketing and has been instrumental and already beginning to accelerate our pipeline coming out of Q1 and into Q2. So what I would say about the pipeline is that in Q1, we talked about the top end of the funnel being strong, big deals, multi-products having really good influence with partners. Our ability to close those deals in Q1 was challenged. As we move into Q2, our ability to hold on to those, nurture them and get them over the finish line is part of where we're spending a lot of time and then creating new accounts, new logos, new customers and expanding in our customer base across the globe is a concerted effort now with Emily and the rest of the sales team. And that has actually picked up quite nicely, heading here into the sort of middle to the end of Q2.

Helpful color. And then maybe, Therese, for you. If I go back a couple of years ago, the pandemic clearly drove a higher spend priority around finance transformation projects. Obviously, in the last year and a half, we've seen the priority go down as people focused on economic macro headwinds. We are now looking at S/4HANA end of life in 2027. I know SAP is starting to get a little more excited about some migrations to the cloud. Do you think that could be the next catalyst that could drive maybe an increased priority around finance transformation? Just trying to think through the tailwind you saw in the pandemic, some of the headwinds you've been challenged with on the macro side and just thinking through maybe that as a potential catalyst or not for increasing priority around these finance transformation projects.

Well, we do certainly see the potential that the SAP partnership could bring us, especially with the migrations to S/4HANA. But Brent, you raised a really interesting point, and it's one that we wrestle with as well. Companies, CFOs in particular, have been very focused on digital finance transformation. But at the same time, they've not always gotten sort of the results that they had hoped for. And it's really been one of our focuses is how can we actually deliver that kind of value in a way that makes people want to continue that journey with BlackLine and invest more. So I think that part of it is, how do we communicate better with our customers and with our prospects on how to have effective digital finance transformation as opposed to a result that disappoints. So we have been internally thinking about that a lot, and that's really driving a lot of the work that we're doing around case studies, around the academy, around different trainings. Even the product roadmap itself is how do we deliver digital finance transformation in a way that's going to keep people engaged and keep them on that journey. So I think we're hoping for the macro to get better. That's disappointing in and of itself. We certainly do appreciate the partnership with SAP. It always has great potential, especially as people move to S/4HANA. And then I think there's work that we ourselves can do to better prove out the value proposition to our customers.

The next question comes from the line of Koji Ikeda of Bank of America.

I got two. So the first one, big picture question on Accounting Studio. Congrats on the long-awaited release there. I know that's quite a milestone. So the question is around is the platform such a meaningful change to what BlackLine has offered in the past that it could require your partners and the buyers out there to really digest all the new innovation that I assume is packaged into this new Accounting Studio before they're really ready to buy it?

We have been collaborating with partners to launch an exciting product, Koji. I don’t believe they will need a lot of time to fully understand it. Regarding the Accounting Studio, one of our goals is to enable our partners, who are specialists in process transformation, to incorporate their specific intellectual property into a collection of potential templates. To implement this, they would need to collaborate with the partner. The main purpose of the Accounting Studio is to provide our partners with a platform to deliver their expertise to many customers swiftly. This may require some planning and work on their part to outline the steps and identify the necessary APIs. However, we have been keeping them updated throughout the process.

Got it. Got it. And maybe another question for you, Therese, or Owen or Mark, is really around how ready the end market is for generative AI? I found over the years that your end market and really kind of the accountants out there that I've spoken with can be very loyal to their software vendors, but also can be very resistant to change at the same time. And it does sound like some of the demand can be pinned to how ready to end market is ready to adopt generative AI. So just curious on your thoughts on the overall acceptance of generative AI out there?

Boy, I am so familiar with our market and our buyers, and they don't love change. That is 100% true. It's why we're taking the approach that we are with the embedding of different features that are just incredibly useful, and by the way, they all have flags that allow you to turn them off. We're going to use that as a way of building trust in generative AI with our customer base. So in other words, we're taking them on that journey. We're a little here, a little there, a little more, build the trust, make them familiar, and then over time, we can increase their productivity by embedding it more and more and more. So I would say that you're correct. People do change slowly. But if you take them on a journey with you and show them the benefits as they go, they'll be much more apt to adopt overall.

I think, Therese, to add to that, when we launched an executive sponsor program at the end of last year, we focused on our top 400 customers. Several of our executives are meeting with the CFOs and corporate controllers of our largest clients. There are a couple of important points here. First, these clients are feeling pressure to incorporate AI in various ways and have set aside some budgets for it, but they are uncertain about how and where to implement it. The discussions we are having with them are helping us identify the areas where they will feel most comfortable—and where their auditors will also be comfortable, as they need to approve these initiatives. That's our goal. Looking at the first couple of months of the year, particularly March and April, one encouraging trend we've observed is that when we talk with customers about their plans, they have a BlackLine roadmap extending 24 to 30 months out, outlining the different products they are considering and when they might begin to utilize them. We've noted before that the behavior of buyers has changed. In the past, large-scale projects that had a higher risk of failure were common, but now customers are adopting a more incremental approach. They are pursuing smaller projects, making sure each one works and demonstrates value to others in their organization before moving on to the next. This is positive for us as the future looks promising given these opportunities and our position in their roadmaps. However, the challenge we face is the desire for everything to move faster, but that's not how things are likely to unfold in the foreseeable future from our perspective.

The next question comes from the line of George Kurosawa from Citi.

Owen I wanted to ask about kind of the changes to the go-to-market organization. It sounds like those are playing out well so far. Maybe if you could talk about what seems to be working and what changes are left to be made?

I had a meeting with some of our top producers this morning to discuss what more we can do in the marketplace, and it was a productive session where we brainstormed ideas for collaboration and ways to effectively convey our story. Overall, we are optimistic about the changes in the marketing leadership team. Recently, we appointed a new Chief Customer Officer, and we are confident in his potential. I've noticed the positive feedback he has received on LinkedIn, and it's clear that Jimmy Duan will add significant value for our customers. We are making strides in ensuring effective implementation and adoption, and this transition has been more seamless than in the past. We are also focusing on our marketing materials and differentiating ourselves. Buyers care not only about the product but also about the entire customer experience and their confidence in security. For example, five out of the top seven accounting firms in the world use BlackLine services, not just as a provider but within their own operations, which is a powerful validation. Our aim is to consistently share this narrative, highlighting not only our outstanding products and innovations but also additional factors that make a difference. There is a significant opportunity for us to enhance our narrative about what we can do for customers within specific industries. Connecting our customers and prospects is proving to be a key differentiator for us, and there is still much to accomplish.

No. Go ahead, Please.

I was just going to say we're going to continue to try to make ours easier to do business with. And we're going to just keep driving real hard.

That's great color. And one quick follow-up, if I may. The new user metric came in a little below what we had penciled in. Maybe if you could just double click on kind of the trends you're seeing underneath the hood. And with kind of the shift to the pricing strategy, to what extent are you guys even managing the business to seat counts?

Yes. Seat count is a proxy for one aspect of growth of our business, and it did not do well in Q1. We do expect that to pick back up in the coming years. But recall that a lot of our pricing, particularly in the strategic products and some of the big-ticket items are not seat priced. So you're right about your Q1 number. And it still, again, is a great opportunity for us to expand in the financial close and the core platform, which we intend to do moving forward.

The next question comes from the line of Pat Walravens of Citizens JMP.

I apologize if this is a challenging question, but I believe it's necessary to address. On April 11, OneStream announced in a press release that they achieved $450 million in ARR and experienced a 34% growth in Q1. They also mentioned that their focus is on the office of the CFO. Can you explain the differences in the results? Is it related to the specific segment of the office of the CFO you are targeting, or is there another explanation? What is your perspective on this?

Yes, Pat, I think you made an excellent point. The opportunities lie within the office of the CFO, which has led to significant spending. This isn't only true for OneStream; several other companies in the CPM space have also reported strong first quarters. Right now, CPMs are a top priority for the office of the CFO. This doesn't mean that areas like financial transformation—which include financial close, intercompany processes, consolidation, and invoice-to-cash—are unimportant. However, the current focus and spending are more directed towards that specific area, and we recognize this trend as it unfolds.

Okay. Great. Is there any plan on your part to get more exposure there?

We're always looking at our platform, and that will never stop. And we are always talking with our customers about what they want, where they need. So last week, Therese, Mark, and I hosted a Customer Advisory Board. It was a phenomenal day, a lot of insight into the things that they would like us to continue to focus on and build out. And so just stay tuned as we continue to evolve the platform.

The next question comes from the line of Alex Sklar from Raymond James.

This is John Messina on for Alex. I wanted to start with product innovation. Therese, you have several big product roadmap launches in 2024, Accounting Studio, The Financial Close, Central Command, the Journal risk analyzer, just to name a few. It's a two-part question here. Of the new products you're rolling out, which do you think is the most potential to play the biggest swing factor to drive more near-term adoption? And if the answer is different, what are you most excited for long term?

There's been a strong focus on the innovation roadmap over the past year. It includes not only the Accounting Studio and the Journals Risk Analyzer but also the new integrated version of the Intercompany Financial Management product. We've been working on a lot of initiatives related to FRA and consolidation too. It's tough to pick a favorite among them, but at the moment, I think I'm most excited about the Accounting Studio. Its capability to visually manage the various processes within the CFO's office is quite thrilling. The insight it provides into identifying roadblocks and revealing the complexities that people sometimes introduce is transformative. Moreover, expanding it to include our library of process transformations enables users to achieve real, tangible results, which aligns with my goal of demonstrating value. The Accounting Studio stands out in this regard. The Journals Risk Analyzer is also impressive, as it allows auditors to run analytics by providing a complete set of manual journals ahead of time, allowing for better identification of anomalies, key trends, and out-of-policy violations—insights that are currently lacking. So, those two are my top picks, but I could easily delve into the merits of the others if given a bit more time.

The next question comes from the line of Ryan Krieger from Wolfe Research.

Just two quick ones for me. On the customer side, if we look at the $1 million cohort, it's a little surprising to see that number actually go down this quarter. So anything to call out there? And then on the gross retention side, can you just break down how gross retention shook out from an enterprise or just mid-market perspective and maybe how that compared to last quarter or the last couple of quarters?

Yes. Thank you. Regarding the number you mentioned, we experienced a significant impact on ARR in Q1 due to foreign exchange fluctuations. Consequently, you can see a decline in the number of customers exceeding $1 million because of that FX calculation. Otherwise, it remained stable compared to the previous year. As for your second question, could you please repeat it? We are experiencing some technical issues on both ends. Please go ahead and repeat it.

Yes. And just on the gross retention side, if we look at the number, how did it break down on an enterprise versus mid-market basis? And how did that compare to the last quarter or the last couple of quarters?

Yes. Mid-market is hanging in the low 90s, and that's pretty typical for us. It even ticked up a little bit in Q1. Where we saw a bit of a step back is on the enterprise side in Q1, and we've talked a little bit about those in the prepared remarks that had hit us in both Q4 and Q1.

The last question comes from the line of Matt VanVliet from BTIG.

Just to be quick, I guess, as you're looking at the headcount over the next year plus here, now that you've backfilled a lot of the open senior positions, what is the general headcount? And how should we think about opportunities in go-to-market to either add headcount or add sort of sales support to improve efficiency and productivity there?

Thank you. Yes. Where we are today, we feel we've got really strong and adequate sales capacity for not just where the market demand is today and coming out of the first part of this year, but well into the second half. So we don't expect to have to hire or build a lot of QCR capacity. In fact, we have one of the most tenured and ramped rep forces we've ever had, and we find that to be a competitive and differentiated strategy as we're in the market with some of these great new innovative projects. So we're really proud of that team. And expect to get productivity as we move through this year. With the remainder of the company, our goal, at least in the near term, and to hit our midterm target model is to continue to grow different areas of the company, keep our pedal on the metal or metal on the pedal in R&D as we invest in some of the initiatives that Therese was talking about, and you see that already in the numbers. And then as we move forward, we will work to drive continued operating leverage in other aspects of the business. And we've talked about where some of those are, including not just our cloud and our data centers but in G&A as well.

That does conclude the Q&A portion. I would now like to hand the call back over to Owen Ryan.

Thank you, operator, and thank you, everyone, for joining the call today. We appreciate your questions and following us as a company. And we look forward to talking to you soon. Have a great rest of the day. Take care. Thank you. Bye-bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.