Blackline, Inc. Q3 FY2025 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2025 BlackLine Earnings Conference Call. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Matt Humphries, Senior Vice President, Investor Relations. Sir, please begin.

Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan, Chief Executive Officer of BlackLine as well as Patrick Villanova, Chief Financial Officer. For the Q&A portion of today's call, we'll also have Jeremy Ung, BlackLine's Chief Technology Officer joining us. 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 Q4 and full year 2025, 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. 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 available in our earnings release and presentation, 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'll turn the call over to BlackLine's Chief Executive Officer, Owen Ryan. Owen?

Thank you, Matt. Good afternoon, everyone. Today, I will detail the changes we have made across our business that are beginning to deliver tangible results. Over the past 2-plus years, we have methodically rearchitected our leadership team, our go-to-market engine and our technology and operational structures. That foundational work is now largely complete. These changes give us greater confidence that we can deliver accelerating revenue growth and margin expansion as we exit this year and move into 2026. But first, let's start with this quarter's performance. We delivered another solid quarter of improving execution. Revenue growth increased to 7.5%. We achieved a non-GAAP operating margin of 21.4% and a free cash flow margin of 32%. Patrick will provide a more detailed discussion on the financials shortly. The strength this quarter was from new customer acquisition. New customer bookings were up 45% and the quality of these wins is evident with the average new deal size more than doubling by 111% and the median new deal size up by approximately 50%. New customer bookings mix accounted for 41% of overall bookings. This is not just about closing more deals; it is about winning larger, more strategic platform deals often against our biggest competitors. Let me put this into perspective with some examples. Through our direct sales efforts, we secured our largest ever total contract value deal with a leading global commercial real estate services company. This deal took 2 years to close and was multifaceted, with intercompany serving as an entry point and includes a multiyear expansion across our financial close suite, leveraging Studio360 and our new platform pricing. We directly landed another new logo with a Fortune 20 company who chose our entire financial close suite, Studio360, and our platform pricing model, replacing existing tools and solutions. This was a great example of perseverance and leveraging past success as the CFO's previous experience with BlackLine translated into a meaningful new win. And in the insurance industry, we won a multi-solution deal with Accelerate, a leading middle-market specialty insurance exchange, looking for a scalable platform across both invoice-to-cash and financial close, the customer moved forward with BlackLine recognizing that a platform approach with Studio360 was the optimal solution to support their future revenue growth versus remaining with multiple legacy vendors. On the partner side, our SolEx channel performance is improving. We closed mega company deals this quarter with Coca-Cola Europe Pacific Partners and with Boots U.K. Limited, proving the strength of our golden architecture with SAP. A key driver in many of these wins was our new platform-based pricing model, which accounted for nearly three-quarters of new customer bookings and is seeing solid international adoption after only 2 quarters. Our strategy is not just about winning in established markets; it is also important to unlock new growth opportunities. We have continued to make progress within the public sector. Despite the federal government shutdown, our pipeline continues to grow and we successfully delivered the production instance for our sponsoring agency in October. We anticipate completing final testing by mid-December and are on track to receive final FedRAMP approval in early 2026. Now turning to our existing account base. The interest in our Studio360 platform, new pricing model and our Verity AI offerings created some noise this quarter. We are seeing two dynamics play out as we see more customers evaluate or adopt platform pricing. First, as we succeed in delivering higher levels of automation, customers can achieve their outcomes with the need for fewer licenses, which is leading to user attrition. Second, we saw several large customers pause user ads to instead engage in deeper, more strategic discussions about moving to Studio360, platform-based pricing and our Verity AI offerings. Our platform pricing model is designed to decouple our growth from a simple seat count and align our revenue directly with the value we deliver. While this strategic transition will take time to work through our installed base, we believe the outcome is clear: a more committed customer base providing more predictable value-aligned revenue. Although these dynamics created a slight headwind to net revenue retention, we view it as a leading indicator of a positive transition. In fact, the most telling indicator of long-term customer confidence came from our renewal activity, along with our solid platform pricing adoption. Importantly, the mix of multiyear renewals has increased to represent over half of all renewal bookings this quarter, demonstrating that customers are buying into our long-term vision and locking in their partnership, which increases the predictability and durability of our revenue. Finally, the planned churn from our strategic deemphasis of the lower end of the market is nearing its conclusion. We expect this headwind to be largely complete in the first half of next year. These outcomes are not an accident; they are the direct output of the foundational transformation I mentioned earlier. With much of this foundational work now complete, I want to detail the three pillars driving these outcomes. First is our go-to-market engine. Much of our success this quarter comes directly from the methodical work we have done to re-architect our go-to-market engine for scalable, efficient growth, focusing on three key areas. We have invested heavily in the tools and the processes our teams need to win. Our entire sales motion is now powered by modern billing, prospecting, contracting, and CRM systems that remove friction and provide better insight. For example, our experience with a new AI-powered prospecting tool has shown that a BDR can nearly triple their pipeline generation. All of our BDRs will now use this tool to more quickly create and qualify opportunities. We've also transformed our marketing efficiency. Our teams are leveraging new digital campaigns and tools to drive a significantly higher ROI on our spend. In fact, despite a decrease in aggregate marketing spend since 2023, we have seen strong growth in pipeline generation through the end of Q3, which is up approximately 50%. And while it's important to leverage new technologies and reengineered processes, it comes down to people. With new leadership established across the globe, we've actioned a more rigorous performance management program, elevating the bar and adding seasoned sales professionals. This focus is already paying off. Rep productivity is improving. And by the end of 2025, we expect it to improve by nearly 30% versus last year. These coordinated efforts are delivering clear results. As I mentioned, rep productivity is up, and importantly, our competitive win rates, especially in takeaways approved again in Q3. We believe this is direct evidence that our Studio360, platform pricing, and improving go-to-market execution are enabling us to win more in the market. The ultimate outcome is clear: we are building a more productive growth engine that costs less to operate. We expect these changes will drive a 10% improvement in our customer acquisition costs in 2025 and even greater improvements next year. Second is our progress in product and technology. We have modernized our technology stack to support future scale, efficiency, and AI-powered innovation. It starts with infrastructure. A critical milestone is the near completion of our multiyear GCP migration. I'm pleased to report we only have a few customers remaining before we can fully decommission our private data centers. Finishing this project will unlock significant operating leverage and provides a modern, scalable foundation for our future innovation. This serves as the foundation for our Studio360 platform, as the central nervous system for modern finance; its power begins with a unified data layer. Powered by our partnership with Snowflake, this layer is now leveraged by 90% of our customer base for advanced reporting in less than 1 year. This helped us achieve an approximately 80% cost reduction in data storage. The real game changer for Studio360 is our progress in open connectivity. Our platform was architected from the ground up to be ERP-agnostic and our Studio360 integrated capability extends this vision far beyond ERPs to third-party financial systems. This ability to rapidly connect to any data source can allow customers to realize financial transformation much more quickly. We're also seeing good momentum with our ERP connectors. Our Oracle Fusion Connector is already live with over 50 customers, and our Workday and D365 connectors are already being used by paying early adopter clients. This success is now unlocking the full potential of Studio360 for our large portfolio of Oracle, Workday, and Microsoft customers. This powerful platform infrastructure is enhancing our entire solution portfolio from our newest technology to our most established products. The performance improvements are dramatic. For example, our new big data matching solution built on this modern stack delivers a 98% reduction in match times and handles nearly 30 times the data volume our previous solution, which we see as tangible proof of our ability to deliver at any scale. We are also accelerating the delivery of new innovation. Our high-frequency reconciliation solution was adopted by 10 customers shortly after its general availability in Q3 and is already helping build a multimillion-dollar pipeline. And this just isn't about new products; we are also driving product-led growth within our core. For established solutions like Journals, we've introduced new self-service capabilities for several common use cases, allowing customers to realize value faster and at a lower cost. Importantly, this unified trusted data ecosystem is the essential fuel for our Agentic AI capabilities named Verity. Now I want to spend a moment on this because in a world of intense AI hype and uncertainty, it is critical to understand why we see AI as a significant opportunity that deepens our competitive advantage. Our moat is not built on a single attribute but on a powerful combination of our proprietary data and our deep expertise in delivering trusted, auditable solutions to the office of the CFO. First is our expertise and trust in auditability. In the office of the CFO, Black Box AI is a nonstarter; trust, transparency, and auditability are paramount. Our entire platform was built from the ground up to be a system of record with a complete unbroken audit trail. Our approach is validated by our recent ISO 42001 certification for responsible AI, which formalizes our commitment to governance, risk management, and human oversight. In a world of increasing regulation, we view our deep, culturally ingrained expertise in building auditable enterprise-grade systems that finance leaders and their auditors trust as a massive competitive advantage. And second is data; AI models are only as good as the data they are trained on, and we believe our data is unique. It is not just that we have data from over 4,000 customers of all sizes, across all industries and all geographies; it is that we have the historical financial and operational data set for our customers going back to the day they started with BlackLine. This proprietary data set represents the accumulated knowledge of what thousands of companies have done to close their books and manage their financial operations. We believe we are sitting on a wealth of process-specific data, which we are only at the early stages of utilizing. This can allow us to deliver unparalleled value. We can provide industry-specific benchmarking that shows the customer how their processes compare to their peers and where they can improve. We are able to train our AI models on the most intricate cases by industry in a secure, auditable way because we have the real-world historical data to do so. This combination of proprietary data and our leadership in trusted auditable systems is precisely why we believe we are positioned to win with AI in the office of the CFO. And this is just not a theoretical advantage. We are translating this directly into product reality. We began deploying Vera, our conversational AI to our customer base in October, just one month after its debut at BeyondTheBlack. With Vera as the supervisor of our agentic workforce, we are launching a suite of powerful agents to execute high-value tasks. For example, we already prepared our agent for account reconciliations, has shown they can deliver even higher levels of automation for customers in a trusted and auditable manner. Soon, we will deploy Verity Collect to deliver agentic capabilities to our invoice to cash customers, automating customer outreach and accelerating cash collection cycles. These initial agents are the first step in our broader strategy to address the full spectrum of financial operations. Future releases will target other complex areas across record-to-report and invoice-to-cash, including agents focused on high-volume transaction matching, variance analysis, remittance automation, and on-demand financial analysis. In parallel, we are executing a proof of concept with SAP to ensure the seamless technical and commercial integration of our AI-powered solutions into their ecosystem. This is a critical step in aligning our platforms and preparing to monetize our joint offering to our shared customer base. And finally, our focus on innovation and AI also extends to the implementation process. Our efforts to reinvent the implementation process are already delivering significant results. In Q3, the number of customer go-lives increased by nearly 70% year-over-year and 17% sequentially. This is a powerful proof point of our team's improved execution and directly contributed to our services revenue this quarter. More importantly, it means our customers are realizing the value of their investments faster. We are also applying our AI strategy to go to the next level. We are preparing to launch implementation agents designed to automate and standardize the most common phases of deployment. We will begin piloting these agents with customers later this month before scaling them globally in the first quarter of 2026. Our focus on efficiency extends across the entire business and is organized around two key initiatives: creating a more efficient operational structure and leveraging AI to drive internal productivity. We have further adjusted our cost base for greater operating leverage. We have aggressively optimized our global footprint by moving headcount from high-cost to lower-cost locations. When I joined as co-CEO, our workforce was overly concentrated in high-cost locations. As we exit this year, approximately 25% of our BlackLine professionals are delivering for customers in lower-cost geographies. This strategic shift provides a significant and durable structural advantage on margin as we move forward. In parallel, we closed offices in high-cost areas while opening or expanding talent hubs in lower-cost centers like India, Poland, Romania, and Mexico. Our confidence in AI comes from firsthand experience; we are not just selling this transformation; we are living it. Internally, we have aggressively created and deployed AI tools to become a more efficient and innovative company. Today, BlackLiners are leveraging our internal AI platform or third-party AI tools in their daily work. The results in our product organization are promising. Nearly all of our engineers are leveraging AI tools today and our most active developers are completing over 100% more pull requests than less active users. This is not just about coding faster; it is about delivering value to customers faster. Our innovation cycle time, the time from an initial idea to that feature being in a customer's hands, has improved by 23% year-over-year, with over 160 features and products being released this year. We have also created our own AI tools to drive efficiency, reduce costs, and better serve our customers globally. Our recent example is our own internal AI translation services for our solutions that can rapidly create and provide documentation and training for customers in multiple languages, allowing us to not only reduce costs but ensure we provide consistent and high-quality experiences for our customers. This internal adoption is a powerful efficiency engine. We view it as an opportunity to bend the curve on future costs and accelerate revenue growth through innovation. In summary, while operational improvements are never done, we have made real strides in how we run the business. Our strategy is clear and our execution is showing tangible results. While I am pleased with this progress, our team remains intensely focused on the execution that lies ahead. The leading indicators we have seen this year all point to a business that is accelerating. These factors give us great confidence in our ability to deliver sustained profitable growth consistent with what we have previously shared at our past two Investor Days. With that, I will turn the call over to Patrick to provide more detail on the financials and our outlook.

Thank you, Owen. Our third quarter financial results reflect the execution Owen has laid out. Disciplined operational management, combined with steady progress across key indicators that point to continued acceleration through the end of this year and into next. I'll walk through the details of the quarter and our guidance for the remainder of this year as well as a preliminary view into 2026. Total revenue grew to over $178 million, up 7.5%. Subscription revenue grew 7%, with services revenue growth of 13% due to accelerated project delivery in the quarter. Annual recurring revenue, or ARR, was $685 million, up 7.3%. We continue to see tangible evidence of deepening customer commitment in our forward-looking metrics. Total RPO growth was 12.4% and current RPO was up 8%. For reference, our average contract length was 27 months this quarter, up versus last year and sequentially. And more importantly, new customer contract length was up nearly 10 months versus the prior year. Calculated billings grew 4% in the quarter. This figure has an embedded 4-point headwind, which is largely timing related. As we continue to win larger, more complex enterprise deals, we have seen some customers move forward with quarterly versus annual billing terms. Our trailing 12-month billings growth, which helps normalize for these effects, was 7%. Our customer count of 4,424 this quarter reflects our strategic resegmentation of the market moving away from lower-end customers. We project this transition to be substantially complete in the first half of next year. Our revenue renewal rate in the third quarter was 93%, up versus the prior year and the prior quarter driven by healthy enterprise performance in the upper 90s with middle market in the mid-80s. Net retention rate for the quarter was 103%, which includes a full point of headwind from FX. On NRR, we also saw net user adds slow in advance of customers adopting our platform pricing model and evaluating our AI roadmap. We continue to see a positive shift in our sales mix towards higher-value solutions. Our strategic products accounted for 36% of sales this quarter, up from 32% last year. This growth is a direct result of our go-to-market teams leveraging our unified platform to drive larger multi-solution deals. Demand was particularly strong for our market-leading intercompany and invoice-to-cash solutions. SolEx was seasonally steady in Q3, accounting for 26% of total revenue. Looking ahead, our Q4 SolEx pipeline is solid, and we are executing against it with several deals already closed in October, positioning us for a solid finish to the year. Turning to margin. Our non-GAAP subscription gross margin remained strong at 82%. Our aggregate non-GAAP gross margin was approximately 79%, reflecting a higher mix of services revenue this quarter due to the strong performance at accelerated project delivery from our teams. Non-GAAP operating margin was 21.4%, driven by better productivity across our GTN teams this quarter and reflects costs from our BeyondTheBlack event, which took place in September. Non-GAAP net income attributable to BlackLine was $38 million, representing a 21% non-GAAP net income margin. We delivered a record quarter for cash flow. Operating cash flow was $64 million and free cash flow was $57 million. This performance was driven by the combination of strong collections execution from our team and the timing of certain payments within the quarter. Regarding our balance sheet and capital allocation, we have approximately $804 million in cash, cash equivalents, and marketable securities versus $895 million in debt. Finally, we continue to execute on our capital allocation strategy this quarter. We returned approximately $113 million to shareholders through the repurchase of 2.1 million shares. This brings our year-to-date total to over $200 million and underscores our confidence in the long-term value of our business. Now turning to guidance for the fourth quarter of 2025. We expect total GAAP revenue to be in the range of $182 million to $184 million, representing approximately 7.4% to 8.6% growth. We expect non-GAAP operating margin to be in the range of 24% to 25%. And we expect non-GAAP net income attributable to BlackLine to be in a range of $42 million to $44 million or $0.58 to $0.61 on a per-share basis. Our share count is expected to be about 75.1 million diluted weighted average shares. And for the full year 2025, our updated guidance is as follows: We expect total GAAP revenue to be in the range of $699 million to $701 million, representing approximately 7% to 7.3% growth. We expect non-GAAP operating margin to be in the range of 22% to 22.5%. And finally, we expect our non-GAAP net income attributable to BlackLine to be $153 million to $157 million or $2.08 to $2.13 on a per-share basis. Our share count is expected to be about 76.6 million diluted weighted average shares. While we still have 2 months left in the year, the trends we see across the business give us increasing confidence in our preliminary outlook for 2026. Based on our strong pipeline, the adoption of our platform pricing model, and operational improvements, we expect to deliver a combination of accelerating revenue growth and continued margin expansion next year, assuming a stable macro environment. The balanced approach to growth and profitability gives us increasing confidence on our path to achieving the Rule of 40 targets we outlined at our Investor session recently.

Thank you, Patrick. And before we go to Q&A, let me just say that we are obviously aware of the recent market commentary about BlackLine. As a matter of policy, we do not comment on market rumors or speculation. The Board and management team engaged with shareholders routinely as well as constructively, and we will continue to do so, and that is all we intend to say on this topic. Operator, could you please now open up the line for questions.

Our first question comes from Patrick O'Neill from Wolfe Research.

I wanted to clarify the comments regarding some large customers pausing user additions while they evaluate the pricing of the Studio360 platform and some of your AI offerings. Is this the accurate interpretation? Did some potential new annual recurring revenue slip away this quarter as a result? Can you help quantify the impact of these factors on net new annual recurring revenue? Do you anticipate this trend to continue into the fourth quarter, or is it just specific to this quarter?

Yes, that's a good question. We did experience some deals slip at the end of the quarter, especially following the Verity announcement, which sparked significant interest in AI. This trend of increasing conversations has continued until now. As a result, we lost out on a couple of million dollars due to delayed deals at the end of the third quarter that have now moved to the fourth quarter. Some of these have already closed in October, while we expect others to close over the next couple of quarters. The pipeline indicates a notable increase in larger deals in the mega enterprise and enterprise sectors. While these deals typically take longer to finalize, they are crucial for our organization as we aim to transition customers to our platform and fully harness the capabilities of the Studio360 platform.

The month of October is when some will close, and we expect this trend to continue over the next couple of quarters. The pipeline indicates a notable increase in larger deals within the mega enterprise and enterprise sectors. Although these deals may take longer to finalize, they are significant for our goals as we transition customers to our platform and maximize the full capabilities of the Studio360 platform.

Operator, do you have more questions?

Just a second, sir.

For all the listeners, apologies, it seems the operator is having some technical difficulties that he's trying to get sorted out, so please just bear with us again, apologies.

We have Patrick O'Neill from Wolfe Research in the queue.

Operator, we just completed that one. The next person in the queue should be Rob Oliver from Baird. Can you please let him then to ask his question? Thank you.

Our next question comes from Rob Oliver from Baird.

Can you guys hear me okay?

Yes. And I'm very sorry about what's going on here.

I wanted to revisit the earlier question for a moment. It seems that something this quarter caught you off guard. As you navigate this transition, I’d like to ask about the issue of automation, customers, and the distinction between seat and platform. It appears that what you outlined last year indicates a strategic shift allowing customers to gain value without having to commit to seat licenses. Are you experiencing logo churn in terms of size and seat count as you transition to the new platform? I also have a quick follow-up for Patrick to gain further insight.

Thank you, Rob. I want to share what we are observing in the business that gives both the team and me increasing confidence in our ability to fulfill our commitments. As you know, we have established guidance aimed at returning to mid-teens growth rates, improving operating margins, and returning capital through share repurchases. There are four key components to consider: gross bookings, churn, our expense management, and attrition strategies. Regarding gross bookings, our performance this year indicates that we can secure larger, transformational deals with clients. New customer bookings increased by over 40% this quarter, and our net average deal sizes have doubled since last year. Our pipeline is expanding and progressing well, continuing an ongoing trend. However, securing larger deals, especially in the mega enterprise and enterprise sectors, typically takes 10 to 12 months. Year-to-date, our gross bookings growth is around 15%, and we anticipate approximately 20% growth in the fourth quarter, which we expect to maintain into next year. This demonstrates our ability to compete effectively and gain market share. On the subject of churn, we face some headwinds due to a strategic reduction of our lower-end customer base, which is nearing completion. We expect this to stabilize by mid-next year, driven by our rigorous customer qualification and selection processes initiated in early 2023. Most of our deals were signed three years ago and are now rolling off. Additionally, we have significantly revamped our implementation processes, focusing on successful go-lives and outcomes for our customers. All indications show that new clients acquired over the past couple of years have adopted our offerings well. We have also made substantial organizational changes to enhance our foundation, concentrating on operational efficiency. While many have inquired about our go-to-market effectiveness, these efforts now enable us to scale efficiently with a modern platform designed to optimize costs. Importantly, we have begun decoupling revenue growth from operating expenses, which we expect to lead to further margin expansion and increased free cash flow next year, bolstering our confidence in margin improvement.

Yes, I appreciate it. I wanted to ask Patrick about the positive signs we've seen over the last couple of quarters regarding customers adopting the new pricing model and the associated like-for-like pricing. I know you’ve shared some impressive numbers on bookings from customers using the new platform. Are there any early insights on pricing, especially considering the seat-based churn? Are there still customers where you are experiencing the anticipated uplift?

Thanks, Rob. Yes, we are. So when we started, I guess, introducing this platform pricing, which we started domestically here in the United States in Q1 and then internationally in Q2, we had a plan. And we continue to be ahead of that plan in terms of the amount of bookings or conversions what we've had to that. We are well ahead of that plan from a new logo standpoint. As you heard in the prepared remarks, we landed a large deal, our largest deal ever in terms of TCV, and that was on platform pricing. So from a new logo perspective, we are well ahead of our plan. We have seen an uptick in Q3 in our installed base, our existing customers adopting this. And in combination, we still continue to be ahead of our plan that we laid out earlier this year from a platform pricing perspective.

And I see our next question comes from the line of Chris Quintero from Morgan Stanley.

Really great to hear about the expected acceleration into next year. I guess as you kind of just mentioned bookings growth of about 20% expected next year. If you would kind of distill that into maybe the top three factors, what's really driving that booking strength and improvement here as you go into next year?

Yes. Thanks, Chris. I would say the biggest thing, again, has been us changing the conversations and having them at higher levels in organizations, and seeing and being able to talk to our customers truly about digital finance transformation. So we've been sort of working our way through being viewed as a point solution to more of a platform. Those conversations, the capabilities, the innovation that we've been able to bring to the market in the last 2 years is resonating very well. One of the things that Jeremy and the team have done has listened very closely to our customers. And so you look at the amount of new product and innovation we rolled out last year, that same thing this year, and then the roadmap we have, our customers are really starting to see us in a way that says we are going to be a true partner for them as they go through digital finance transformation. I think the other thing is the work we do with our partners. If you remember, one of the strategic choices we made a couple of years ago was to call out a lot of partners, and we have deepened the relationships with the blue-chip firms that are out there in the world. And they also are part of those conversations we're having with customers about digital financial transformation. Many of those folks are working with CFOs and Chief Accounting Officers, Corporate Controllers every day. And so that is certainly a piece of it. It's the access and the conversations at a higher level. Our guys have really raised their game in the conversations when they're out there talking with customers. And then candidly, so much of it is about the product-led growth that we've been trying to drive. I mean, again, one of the things that we've gotten back to doing really well is listening to the voice of our customer and building solutions that work for what they're trying to accomplish, but now doing that through the lens of a platform versus just a point solution. So those are the things, Chris, that are showing up. And again, when you look at our pipeline and how it's maturing, so much of that is on the higher end of the market, which is really where we see we can deliver a lot of value for our customers.

Awesome. And then I wanted to follow up on the competition angle. It seems like on this call in your prepared remarks, you were talking more about kind of competitive takeaways than you have in the past. Is that kind of the right takeaway here? And I guess, like what's really working well for you to take some deals away from the competitors here?

We are experiencing a significant increase in competitive wins. BlackLine is perceived as a reliable choice by CFOs, supported by our proven track record. The quality of our implementations continues to improve, and we are building trust and brand recognition with our products and operational scale. Our new offerings are enhancing customer confidence in our ability to fulfill our commitments. I often remind our team that we are focused on delivering outcomes for our customers, rather than just selling software. This approach is clearly reflected in our win rates and the valuable references from existing customers. Moreover, we are deeply engaged in various industries, allowing us to tailor our discussions to the specific accounting and finance needs of each sector. When we demonstrate our successes in comparable organizations, it reinforces confidence among our risk-averse customer base, proving that we can deliver results effectively.

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

Owen, maybe for you on SAP, a lot of optimism on building pipeline throughout the year with some of the changes there. I think the comments were you've got a good start to the Q4 selling season, but what else from the BlackLine side, are you still focused on to really inflect that opportunity?

Yes. Look, I think the health of the SAP relationship overall is really solid. And I think we mentioned in the prepared remarks, the joint proof of concept that we're working with them from an AI perspective, we continue to put the innovation that we're creating here through their PQ process. Obviously, having Stuart Van Houten and a number of other people that have joined from SAP be part of the go-to-market framework has all worked very, very well. I think we mentioned in one of the earlier calls, the point that we were now sharing customer success or customer usage between BlackLine and SAP, which was something brand new. We now have sort of dedicated customer success people on both sides of the SAP BlackLine relationship that will really help us to reduce some of the attrition we sometimes see in that partnership because now we're focusing in a way that, quite frankly, we hadn't been able to do in the past and again, gives us that confidence we're going to see the attrition rate drop in 2026 and beyond. So those are all the things that are going on. There's lots of activity taking place in each of the markets. I just came back from a couple of weeks in Asia Pac. Some of my other colleagues also went over to Asia Pac, where we met with the leaders in the different countries over there. So obviously, it's nice to hear things coming out of L.A. and Waldorf, but what's more important is what's the boots on the ground; I think those are where the relationships are getting better and deeper. And so we're seeing nice progress there across the board.

Okay, great. I have a follow-up question for Patrick regarding the 2026 outlook. You mentioned factoring in a consistent macro environment, which has been challenging to project this year. How are you describing the current macro situation? We've discussed some of the challenges your customers are facing with platform pricing and Studio360 adoption. From a macro perspective, how has the situation evolved since Q1 when we began discussing various scenarios through the third quarter? What specific factors are you considering for next year?

Yes. Thank you. So with regard to the macro environment that would lead to the 20% growth rate that Owen indicated, it would be the environment that we're in today. So when we were thinking about back in April and evaluating the potential impact of tariffs, we found that, that largely did not have an impact on the business this year. So when we talk about a macro environment going forward, if we maintain the current state that we're in today, that is the basis for the projection that we were casting upon 2026.

I believe one key area we're focusing on with our customers is the significant job layoffs, approximately 1 million, that have occurred in recent months. Many of these layoffs are in back office roles, presenting us with opportunities to discuss how they can leverage BlackLine to enhance efficiency. Coupling that with what we are showcasing around AI, it could serve as a slight advantage rather than a disadvantage depending on how these companies decide to proceed. During my recent travels, I found it interesting that markets I expected to be slower or hesitant to embrace change, similar to trends in North America, are actually accelerating their adoption processes. I view this as a positive sign from my current perspective.

And I show our next question comes from the line of Patrick Walravens from Citizens.

Great. It's nice to see the signs of what you've been working on for so long, Owen.

Yes, I'm right, Patrick.

My question for you is, you made an interesting comment. You said that the conversations between the ERP providers, the customers and the implementation partners can be very difficult; why is that?

Customers often have certain expectations about how quickly and easily their transformation will occur after replacing an ERP system, which is a complex project. Changes in personnel and priorities can affect progress, leading people to believe that simply adopting the technology will result in success. However, that is not the case. It's essential not only to update the technology but also to adapt the related processes and support people through the changes involved. It’s easy for someone to attribute challenges to a single factor, but typically there are multiple factors at play. We are now focusing more on engaging in these conversations, and we're seeing positive outcomes reflected in multiyear renewals. We are taking steps that may not have been pursued in the past to guide our customers back on track and demonstrate the potential possibilities. It is crucial for Studio360 to have the blueprints that support this process. We need to discuss our integration capabilities and the ability to manage and visualize their initiatives while ensuring control and compliance. These are vital topics that we are now incorporating into discussions, even though it can be challenging. Mere inaction benefits no one. The increase in multiyear agreements indicates that our customers recognize the need to continue their transformation journey. Furthermore, I believe that as people return to the office, face-to-face interactions are positively influencing the developments and changes we are witnessing.

Yes, I agree with that. Okay. And then Patrick, I have two quick questions for you. First, why did you lower the EPS guidance for the year by $0.05 to $0.11 at the top of the range for Q4?

There's two factors there, Patrick. The first one is you're talking about non-GAAP net income is the interest that we earn on our cash balance. And as we indicated earlier, we have purchased $200 million plus in stock this year as part of our share buyback program, which is driving down the interest that we earn on that. The second driver is the big beautiful bill. While that has provided an infusion of cash flow for us and many other businesses, it does not change our non-GAAP tax expense. So the expense remains constant from a provision standpoint, but we do have a cash flow benefit from that bill.

Okay. The second question is to clarify what you’re saying about next year. During your financial analyst session, you presented two slides. One detailed the target model framework, which outlines total revenue growth of 13% to 16% and includes information on your operating margin. The second slide demonstrated your commitment to the Rule of 40, showing you at 38% in 2027 and 40% in 2028. What should we expect to see in 2026?

In 2026, you will see at least a Rule of 33 as we committed to in Las Vegas.

Okay. So is there any acceleration of this framework?

For 2027, yes, Patrick. That's where, again, we talked about what we're seeing from a gross bookings perspective, what we're doing on the churn and what we're seeing on the expense side. So as we think about the revenue growth, that's really when we get to that teen growth number in '27; we'll see an acceleration of revenue throughout the year. We think we'll see an acceleration on the bottom line. But the real impact of that will work its way throughout the financial statements throughout the course of the year and again, then show up pretty clearly starting in 2027.

And I show our next question comes from the line of Steve Enders from Citi.

Okay. Great. I guess I want to go back to just the 20% kind of bookings commentary and I guess the view of that kind of accelerating from where we're at today. Just I guess, what is it that you're seeing like gives the confidence around that picking up going into Q4 and then going into next year? And then I guess, on the other side of that, also the commentary around this kind of transition going from the headcount impacts to kind of driving that platform model? I'm just trying to understand, I guess, the kind of like puts and takes to kind of make that 20% happen there?

Yes. Since September of last year, we've been noting growth in our gross bookings pipeline, and this trend continued through October. We see ongoing progress in the size of the opportunities and the brands we aim to partner with. Our team's discussions with customers and the exceptional efforts of our marketing team are key factors driving this growth. You can observe its progression through the sales stages, which bolsters our confidence about what we anticipate for the fourth quarter and looking ahead to next year. It's important to remember that in the mega enterprise segment, it takes about 10 to 12 months for developments to reflect in our pipeline, while for mid-markets, it typically takes around 4 to 6 months. We are actively working to enhance the quality of our pipeline by engaging with the right customers and partners, and we're experiencing significant customer engagement. This all contributes to our increased confidence; we witnessed acceleration in gross bookings throughout the year, with a notable uptick now in the fourth quarter. As we look ahead to next year, we can see our pipeline maturing from January through the end of October, which reassures us that we have sufficient pipeline to meet our goals for increasing gross bookings. Furthermore, significant effort was necessary to reposition BlackLine to reach a $1 billion valuation. Reflecting on our infrastructure, it was more aligned with $250 million operations than with the demands of scaling to $1 billion. Various enhancements in our go-to-market strategy, general and administrative functions, as well as product and technology have been in progress, culminating in our current ability to function with increased operational efficiency. The investments we've made are facilitating smoother workflows for our team, leading to a 30% rise in productivity from our quota-carrying representatives. I believe Stuart and his team are just beginning to tap into this potential. The advancements made by Jeremy Ung and his engineering team regarding productivity are impressive. We're capitalizing on process improvements, technological advancements, and necessary organizational changes. We are optimistic about decoupling revenue growth from constant headcount additions as we expand the business. While we may still recruit quota-carrying representatives and product and tech professionals as needed, the correlation won't be as strong as it has been in the past. This situation presents us with opportunities to enhance both our top-line growth and bottom-line performance.

Okay. That's great to hear. And then maybe to follow up on Pat's question on just the next year kind of view. I guess appreciate saying that 33% number. I guess maybe asked a little bit differently, like if I'm looking at where consensus numbers are for next year, I think it's at high 8%, almost 9% growth. Is that the right ballpark in terms of how you're thinking about now? Or how should we maybe think about the mix of growth and margin to get to that 33% number?

I believe you have a good understanding of it. Our target of a Rule of 33 for 2026 represents our minimum expectation for next year. We recognize that the consensus is at 8.8%, but we are confident in our growth outlook for next year and believe we can achieve at least the Rule of 33.

And I show our next question comes from the line of Jake Roberge from William Blair.

Great to hear about the pipeline strength, but can you give us some more color on what you're seeing with close rates and win rates, just given the divergence between pipeline, gross bookings and then also ARR growth would just be helpful to understand what you're seeing on that front.

Yes. I believe our win rate has increased by about 10 percentage points compared to the past. For instance, if it was around 20%, it might now be closer to 22%. Although those figures might underestimate the actual rates, they help illustrate the trend. We're noticing an improvement in our close and win rates, indicating that we're capturing market share from competitors, which is very encouraging. We anticipate this momentum will continue, potentially even accelerate, due to the positive feedback we're receiving from customers regarding platform pricing, a better understanding of what Studio360 represents, and the efforts made by our team on Verity AI. The extent of change we've implemented in the company over the past two years, particularly on the product and technology side, is significant. It's one thing to introduce these changes to the market; it’s quite another to ensure our team understands, embraces, and communicates them effectively. We're finding that our team is increasingly proficient at expressing our value proposition and engaging in meaningful conversations at both broader and deeper levels. That's the current status of our business. Patrick, do you have anything to add regarding specific numbers?

And I show our next question comes from the line of Koji Ikeda from Bank of America.

I apologize for being on mute. I appreciate that you don't comment on media speculation and that level setting is important. However, I believe it's crucial to discuss how you're approaching shareholder value moving forward. Any insights you can provide on that topic would be helpful. I'm looking at the third quarter growth and profitability, but I also note the 7% growth in duration adjusted billings. Additionally, it seems that bookings are gaining momentum. Any information on your strategies for driving shareholder value would be greatly appreciated.

I appreciate your focus on driving shareholder value. We regularly meet with the Board, who understands our fiduciary responsibilities to enhance shareholder value. We are actively working on reaccelerating growth, improving our bottom-line performance, and returning cash to shareholders. These are the areas where we have control and are making progress. No one has brought up AI yet, which is interesting because that seems to be a concern affecting our stock price. Investors often ask if AI will threaten our business. We're addressing this by focusing on two key strengths. First, we are recognized as a reliable and trustworthy partner by our customers, accounting firms, and implementation partners. We take our responsibility seriously—being mostly right in accounting means being completely wrong. We're deeply committed to this since the company's inception. Earlier today, I met with leaders from a crucial organization that collaborates with auditing firms and regulators to discuss AI's role in accounting and auditing. It's vital for us to stay aligned with and even shape policy developments as AI evolves. Secondly, we have access to significant data that we are beginning to leverage, allowing our customers to experience its potential. In discussions with finance and IT teams, two trends are emerging: companies prefer proven solutions over lesser-known brands for financial processes, and IT teams are concentrating on larger business opportunities rather than prioritizing financial close and reporting. We understand that our AI solutions must remain reliable, transparent, auditable, and cost-effective for our customers. It's also worth noting that our client roster includes top technology firms engaging with us about AI. Although these companies are promoting AI, they haven't shown interest in incorporating it into financial processes. If we can demonstrate to the market that different players will emerge as winners or losers in the AI landscape, we believe we will be one of the winners, which could positively impact our share price. However, it's important to note that regulations surrounding public companies will take time to develop, and we don't anticipate significant changes in how they manage financial reporting and disclosures soon. We feel well-positioned for discussions with our customers who trust us and value what we bring to the table, and we see this as an opportunity to generate positive results.

And I show our last question in the queue comes from the line of Terry Tillman with Truist Securities.

This is Dominique Manansala on for Terry. So just considering the federal motion of early and FedRAMP unlocks future opportunity, how does adoption typically sequence here? Do you expect it to expand horizontally into additional agencies or more so vertically within a single agency into workloads like intercompany or invoiced to cash? And then on top of that, are there specific things that shorten time to live once FedRAMP has achieved like maybe a shared service model or preexisting SAP footprint?

Yes, that's a great question, Dominique. The answer to the first part is both. We are seeing opportunities arise, such as the recent win with the DOJ, which is now available to various agencies within the DOJ. Many of them are exploring what we have to offer. Additionally, it's interesting to note that we can now engage in more discussions across different federal agencies that have a strong interest in BlackLine's offerings. Some of our earlier conversations revolved around what I would consider our traditional financial close capabilities, including REX, matching, and journals. I had not viewed the federal government as an intercompany opportunity, but it turns out it is indeed an intercompany opportunity due to the various interagency billing and activities involved. We are quickly identifying numerous opportunities within the federal sector and are also seeing traction in the state sector. We are confident that, based on feedback, BlackLine is an excellent fit for the federal government. Our ability to provide automation, control, and auditability is crucial for these agencies. Given the current pressures on the federal workforce, what BlackLine can offer is resonating very well as we pursue this market.

That's helpful. As a follow-up, how do you prioritize partners when building an elite partner group and being selective with your investments or enablement dollars? Is it based on transformational deal formation, industry specialization, or their contribution to the source pipeline?

It's a couple of different factors. Many of the partners we collaborate with often have dedicated teams closely associated with the CFO and Controller. We aim to work with those who have strong brand recognition among our customers. We avoid sole sourcing decisions. When a customer requests a recommendation, we strive to provide at least three names of partners we cooperate with, aligning those suggestions with the organization's preferences. We engage with a prominent list of partners, focusing on their recognition in the industry and their capabilities. When partners invest in enhancing their expertise on specific BlackLine products, we've noticed increased interest from them in understanding areas like intercompany transactions and our invoice to cash solution. The better prepared they are, the more likely we are to recommend them as a potential option in any opportunity. Navigating a smaller list of partners has proven to be much easier compared to the larger, less organized group we had before. These strengthened relationships have led to partners feeling more confident in recommending BlackLine. We've observed a clear distinction among partners, with them preferring to endorse BlackLine as the best choice and explaining the reasons for their recommendation over others.

And I'm sure our last question in the queue comes from the line of Adam Hotchkiss from Goldman Sachs.

I'll keep it to one quick one. I just wanted to ask on the 10- to 12-month sales cycles you mentioned, Owen. Obviously, that makes sense given the size of some of these opportunities. But what are you doing from the perspective of trying to automate some of the implementation work in order to lower sales cycles? And do you have any sense for how quickly and by what magnitude do you think you can reduce time and cost of implementation for customers would be really helpful to get some context.

Yes, that's an excellent question. The CFO has a project that can yield a 20% return, and the decision will always favor sales over other projects. We need to find ways to deliver more value more quickly. Since Therese and I took on our roles, we have revamped almost the entire leadership team in professional services and customer success to drive better implementation and optimization. This is about improving our processes to make them more efficient. Over the past 6 to 9 months, we’ve been focused on taking lessons from our implementations and optimizations, categorized by industry, company size, and workflow, to identify quicker and better ways to assist. We’ll be making these improvements available to our partners and customers to accelerate the value we deliver. We’ve mentioned the increase in our go-lives, both sequentially and year-over-year, and importantly, the time to complete those implementations is decreasing. I will have more specific information for you in February about how much we expect that time frame to shorten, but it will be a significant reduction from the moment a customer signs the contract to when they go live and start optimizing our services.

That concludes our Q&A session. At this time, I'd like to turn the call back over to Owen Ryan, CEO, for closing remarks.

So thank you all for joining the call tonight. Sorry about the little bit of technology glitches at the beginning, but we really do appreciate your interest in following BlackLine. Look forward to continuing to talk with you, share more about our journey and how we're going to make the plans that we've committed to you. Everybody, have a great night. Take care.

Thank you. Thank you for attending today's conference call. This concludes the program. You may all disconnect.