Earnings Call Transcript - BL Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q1 2026 BlackLine Earnings Conference Call. Operator Instructions: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Humphries, SVP of Investor Relations. Please go ahead.

Matt Humphries, SVP of Investor Relations

Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan, Chief Executive Officer of BlackLine; as well with Patrick Villanova, Chief Financial Officer. With the Q&A portion of today's call, we'll also have Jeremy Ung, BlackLine's Chief Technology Officer, join 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 Q2 and full year 2026 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 this 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 report 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 today on the call will relate to our corresponding period of last year, unless otherwise noted. 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 in 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?

Owen Ryan, Chief Executive Officer

Thank you, Matt. Good afternoon, everyone. At our AI investor session in March, we shared our technology vision in detail and made our case for why BlackLine is positioned to be the trusted governance and control layer for CFOs deploying AI across their financial operations. Today is about sharing with you the momentum we are building as we translate that vision into reality. Our Q1 results demonstrated that our strategy is working, delivering solid top line growth and profitability. Revenue grew 9.7% year-over-year and non-GAAP operating margin improved to 21.6%. These results are underpinned by progress on our key strategic initiatives. The adoption of our platform, Studio360, continues to build with the metric reaching 13% of eligible ARR, up from 11% in Q4. More importantly, we are seeing this strategy translate into deeper customer commitments. This is best reflected in our remaining performance obligations, or RPO, which grew 18%, driven by the longer contract terms that are inherent to our new platform strategy. Let me go deeper into our platform strategy and commercial model. Platform adoption maintained a healthy pace following Q4 seasonality with 94% of the eligible new bookings landing on platform pricing, a strong signal that our commercial model is becoming the standard for how customers buy BlackLine. We also saw continued migration activity from existing customers in Q1. Our teams are actively engaged with customers preparing for platform conversion ahead of their upcoming renewals. This new model is also positively changing our deal economics. Average new deal size this quarter was up 85% to $162,000 driven by platform and strategic product sales. Our standard offering now includes a broader set of capabilities on Studio360, which naturally increases the initial land. Our platform model allows us to sell units of financial productivity rather than seats, which, over time, we believe opens access to labor and operational budgets beyond traditional software spend. It also creates the natural expansion path for our agentic AI offerings. The model works like this: as customers adopt our platform, they commit to a platform fee that provides access to the full breadth of our capabilities within a framework of governance, reliability and control that they and their auditors already trust. As they then deploy Verity agents and automate work that was previously manual, consumption-based pricing layers on top of that base, similar to how we price capabilities like matching today. That alignment between how our customers drive efficiency and how we capture value, all within a trusted control environment, is fundamental to what we are building. When we look at the full picture, we believe that a platform that provides broad access, embedded AI driving deeper daily engagement and agentic offerings layering consumption on top meaningfully increases the lifetime value of a BlackLine customer. This brings me to what I believe is the most important topic on today's call, AI and our Verity portfolio. Last month at our BeyondTheBlack Conference in London, we introduced agentic financial operations, a new operating model that defines how the office of the CFO harnesses AI safely, strategically and at scale. The response from customers, partners and the broader market has reinforced our conviction that we are addressing the right problem at the right time and with the right approach. The opportunity is straightforward. As an enterprise deploys AI agents across their business—in procurement, sales operations, accounts payable—they are creating new uncontrolled financial touch points that need to be governed. Every one of those AI-generated transactions eventually hits the general ledger. Everything must be reconciled, validated and audited. For a CFO, who personally attests to the accuracy of financial statements, that is a responsibility that requires a trusted platform. Agentic financial operations is designed to close this governance and trust gap. Every action an AI agent takes within BlackLine leaves a digital footprint identical to a human user: full chain of thought, immutable audit trails, embedded controls. This is what CFOs demand, what audit committees rely upon and what auditors require. The market reaction from customers and partners since our London launch has been encouraging. Customers are telling us they want to leverage what we are building and provide input on our roadmap rather than try to build these capabilities themselves. Their ROI framework is clear: make their finance operations more durable and competitive and let a trusted partner handle their AI infrastructure so they can focus on running their business. Before I walk you through what Verity is delivering commercially, I want to spend a moment on how we build because the pace of our innovation is becoming a strength. We are using AI to fundamentally accelerate our own product development. Our engineering teams have adopted AI-augmented coding practices across our development workflows and the results are measurable. The time from idea to production has decreased 22% versus last year. We are shipping capabilities faster with fewer resources and at a higher quality. This is a structural improvement in R&D productivity that we expect to compound over time. That increased velocity is translating directly into how we deliver value. Our customers have benefited from our foundational AI capability since last year. We are expanding further into Agentic AI. A year ago, Verity agents were a strategic vision. Today, we have multiple purpose-built agents in market in preview and launching in the near term. Combined with our new AI innovation hub and a fully integrated AI-native acquisition, we are executing against our AI roadmap with clear deliberate focus. Now let me share what this engine is producing for our customers. Over the past year, we have been building and refining our embedded Verity AI capabilities like Verity Assist, Verity Narrate and Verity Flag in close collaboration with our customers, their auditors and our partners. That feedback loop has been critical, allowing us to validate not just performance, but the trust and governance framework around them. Even before we broaden access, adoption among early users was doubling every quarter. In Q1, with that validation in hand, we made these capabilities standard across most of our customer base. Over two-thirds of our customers are now actively using these tools, a 285% increase in adoption quarter-over-quarter. In Q1 alone, unique users grew 68% and total usage grew 183%. What this tells us is that AI is moving beyond experimentation for our customers and into their day-to-day workflows. As they embed these capabilities into how they operate, it deepens their relationship with BlackLine. Over time, we expect that to support both stronger retention and additional consumption under our platform pricing model. Verity Prepare, our AI-powered reconciliation agent, is now available to customers and is deployed with several mega-enterprise customers. The validated outcomes customers are seeing are significant: over 90% reduction in reconciliation processing time. One customer that had been spending three hours manually executing certain reconciliations has seen that fall to ten minutes, a 95% time savings. Based on their experience, they are now ready to enable Verity Prepare broadly across their business. That progression from pilot to enterprise-wide rollout is exactly the adoption pattern we are building toward. Early usage data shows the cost to serve is efficient at current scale with clear paths to optimize further as adoption grows. Our multi-model architecture allows us to deliver meaningful customer value at margins consistent with our financial targets. Verity Match is now in its early adopter phase. Our existing matching solution is a powerful capability as it handles high-volume, complex data sets across multiple ERPs and source systems and delivers strong automation rates for our customers. Verity Match builds on that foundation by applying AI to the long tail of complex exceptions like combined vendor payments, transposed invoice numbers and missing remittance details. Rules-based systems have historically left these for accountants to resolve manually. In early customer testing, we see a 64% reduction in transactions requiring manual investigation. And by running our models on NVIDIA GPUs, we can process matches up to 25x more cost efficiently and faster than on prior architectures, improving both the customer experience and unit economics as this scales. Verity Collect will launch this quarter and the demand signal has been stronger than expected. We had to close our early adopter program because customer demand exceeded our planned capacity. The value proposition is direct: predicting payment delinquency before an invoice becomes past due and autonomously managing the collections outreach across voice, e-mail and digital channels. For CFOs, this translates directly to working capital improvement, which in the current macro environment is a top priority. While it is still early, we believe the initial proof points are compelling. In one early adopter scenario, our AI agent completed collections outreach activities in under 30 minutes that would have taken a human team approximately 45 hours. That kind of efficiency gain, freeing collections teams to focus on high-value accounts and complex disputes, is exactly what is driving the demand we are seeing. We expect Verity Collect to be a meaningful accelerant to our broader invoice-to-cash momentum as it scales. Verity Accruals has seen a significant acceleration in customer interest and pipeline growth as its value proposition resonates in the market, anchored by initial successes including closed deals and proof of concepts with key targets in both the enterprise and mid-market. These are largely existing customers looking to expand their footprint, which validates the cross-sell motion we have been building. Customers land on Studio360 and then adopt additional Verity agents as they see results. One advantage worth highlighting is that our customers do not need to build a new governance framework to deploy Verity. BlackLine already is that framework. Verity agents operate within the same SOX-compliant controls, audit trails and approval workflows our customers have relied on for years. Customers can begin deploying AI within a controlled environment today that their auditors already trust, which we believe lowers the barrier to adoption and supports a faster path from pilot to broader rollout. Turning to how this strategy aligns with our Q1 execution, our platform and AI approach is showing consistent progress in the enterprise. This sustained focus is reflected in our metrics. First, we saw an increase in customers with over $1 million in ARR. We closed the first quarter with 86 customers at this level, an increase of 9% year-over-year along with 14% growth in our $250,000-plus customer cohort. Second, this strategy is driving deeper adoption and additional cross-sell across our portfolio. Our strategic products represented 37% of sales in Q1, up from 33% last quarter and 27% in the prior year. This proves that when we lead with value and outcomes, customers invest more deeply in BlackLine, adopting more solutions with less friction. And third, you can see the strategy in action in key wins from the quarter. Within our existing customer base, we saw significant validation for our AI offerings, particularly Verity Accruals. We secured a major renewal and expansion with a leading billing company, demonstrating their deep loyalty to BlackLine and strong interest in our AI capabilities. We saw similar momentum with a leading global mobility and car sharing company, which also expanded its footprint with a strategic win for Verity Accruals. Our upmarket motion and governance thesis also continues to resonate strongly in highly regulated and complex environments. This quarter, we welcomed one of the nation's largest health care providers as a new logo, replacing an ERP competitor, which is a powerful validation of our trusted control framework and innovation. We also saw significant expansion within our enterprise base, including a premier global construction services company that added our invoice-to-cash solution. Additionally, we executed a major rip-and-replace at a leading fintech provider, successfully displacing multiple competitors to consolidate their financial operations onto BlackLine, adopting Studio360, Journals, Reconciliations and Transaction Matching. Last, we delivered highly strategic wins, particularly among companies at the forefront of the AI revolution. We secured a net new agreement with a global leader in memory and data storage for AI, successfully migrating their processes off an ERP competitor and onto BlackLine. Through that same channel, we also expanded our footprint with one of the world's premier data and AI platform companies. The fact that organizations building the future of AI rely on BlackLine for their own financial governance speaks to the strength and trust of our platform. We believe our customer base is healthier than our headline retention metrics suggest and it is getting stronger. The lower mid-market churn we have discussed in prior quarters is running through a finite and shrinking pool of at-risk accounts. At the same time, the changes we have made—platform pricing that creates stickier customer relationships, a broader solution footprint per customer, increasing multiyear renewal commitments and a redesigned customer success model—are fundamentally improving the quality of our installed base. We expect the cumulative effect of these changes to become more visible in our retention metrics as we move throughout the year and into next. Finally, our partner ecosystem and our SAP relationship continue to be meaningful contributors to growth. Our integration with SAP's Advanced Financial Close is now generating pipeline as we were able to sell into SAP's installed base of AFC customers. Our Joule, Verity proof of concept is also progressing toward a commercial framework, and we are actively working to launch platform pricing within SolEx. We are also seeing acceleration in our public sector business through SAP with several active deals in the pipeline. We see our partner ecosystem as a force multiplier across demand generation, delivery and customer success and critical to scaling our growth. In closing, our path forward is clear. AI is creating more financial activity across the enterprise, not less. All of it must be governed, reconciled and audited. We are the system of record and control that makes this possible. Our customers are telling us they want to move fast with AI, but they also tell us that trust, reliability and security are nonnegotiables. This is exactly what 25 years of BlackLine expertise delivers. With that, let me turn it over to Patrick for a detailed review of our financial results and our guidance.

Patrick Villanova, Chief Financial Officer

Thank you, Owen. As discussed, our strategy is building clear momentum, and our Q1 financial results reflect that progress. We delivered solid top line growth, demonstrated the quality and durability of that growth through our key strategic metrics and showed significant leverage in our operating model. Let me walk you through the details. Total revenue was $183 million, up 10%, with subscription revenue growing 10% and service revenue growing 11%. The acceleration in services reflects the faster implementation timelines and go-live activity we are driving through our delivery engine. ARR reached $712 million, up 9%, reflecting the bookings momentum we saw in Q4 carrying forward and continued strength in platform and strategic product adoption. Importantly, we believe the quality and predictability of our future revenue growth is strengthening. This is best illustrated by our RPO, which grew 18% to $1.1 billion, fueled by larger deal sizes and longer contract terms inherent to our platform model. Similarly, the health of our near-term pipeline is also reflected in our current RPO growth of 12%, which underscores the solid market demand for our solutions. This momentum is directly linked to the steady adoption of platform pricing, which reached 13% of ARR at quarter end, up from 11% in Q4. Calculated billings growth was 9% in the quarter; our trailing 12-month billings growth, which helps normalize for quarterly variations, improved to 9%. Turning to the health of our customer base, our key metrics remained solid across our 4,300 customers. Net revenue retention was 105%, which includes an approximate 1 point headwind from FX. Underlying expansion within our installed base remains solid, driven by two dynamics: customers migrating to platform pricing, which naturally expands the scope of their relationship with us, and strong attach rates for our strategic products, which represented 37% of sales this quarter. Customers are investing more broadly in BlackLine and our platform model is making that expansion easier and faster. On retention, our revenue renewal rate was 93%. Enterprise renewal rates remained strong at 96%, consistent with the durability we have seen in this segment. The lower mid-market headwind we have discussed in prior quarters continues to weigh on the overall rate, though the remaining at-risk pool is finite and shrinking. We expect this drag to diminish as we move through the year. Our SolEx channel delivered one of its strongest new bookings quarters as our joint go-to-market with SAP continues to mature. SAP customers now account for over 26% of our total revenue, and we see further opportunity ahead as our broader platform strategy opens new avenues into SAP's installed base of commercial and public sector customers. Now let me turn to profitability and cash flow. Our non-GAAP subscription gross margin improved to 83%. Our non-GAAP gross margin improved to 80.2%, in line with our expectations. Non-GAAP operating margin was 21.6%, reflecting the continued productivity improvements we are driving across the business. We are seeing meaningful efficiency gains from our own adoption of AI and automation in areas like customer onboarding, implementation delivery and internal operations. This enables us to grow revenue faster than expenses while maintaining our investment in innovation. Non-GAAP net income attributable to BlackLine was $40 million, representing a 22% non-GAAP net income margin with adjusted earnings per share growing 14% to $0.56. We delivered operating cash flow of $46 million and free cash flow of $36 million, or a 20% free cash flow margin. After paying off our 2026 convertible notes in March, we have approximately $525 million in cash, cash equivalents and marketable securities versus $667 million in debt. Finally, we continue to execute our capital allocation strategy. In the quarter, we returned approximately $47 million to shareholders through the purchase of 1.2 million shares. Before I get into guidance, I want to step back and frame where we are against our multiyear financial targets. We entered the year with a clear objective: continue accelerating revenue growth toward double digits, expand operating margin and do both while increasing our pace of innovation. Q1 demonstrated progress on all three fronts. Revenue growth accelerated, margins expanded and the pace of our product delivery has never been faster. These results give us confidence to raise our full year outlook. On the specifics, I want to call out a few dynamics that are important for modeling purposes. The first quarter's top line performance included about a $1 million benefit from certain items related to specific customer deployments and timing. These are nonrecurring in nature. Looking ahead, we anticipate a modest revenue headwind of roughly $1 million to $2 million over the balance of the year due to FX. After accounting for both of these dynamics, our Q2 and full year guidance reflect continued acceleration in our underlying revenue growth rate as we move through the year. On the macro, we are not immune to the external environment, and we have built our guidance with that in mind. That said, the financial close is a regulatory obligation, not a discretionary spend item. Our customers cannot defer compliance and the complexity of their financial operations is increasing, not decreasing. Combined with our growing RPO, strong multiyear renewal trends and an expanding enterprise pipeline, we have good visibility into the rest of the year. Our raised guidance reflects both that visibility at an appropriate level of prudence given the uncertainty in the broader environment. With that context, for the second quarter, we expect total GAAP revenue to be in the range of $186 million to $188 million, representing 8.1% to 9.3% growth. We expect non-GAAP operating margin to be in the range of 21.5% to 22.5%, and we expect non-GAAP net income attributable to BlackLine to be in a range of $40 million to $42 million, or $0.57 to $0.59 on a per share basis. Our share count is expected to be about 73.3 million diluted weighted average shares. And for the full year 2026, we expect total GAAP revenue to be in the range of $765 million to $769 million, representing 9.2% to 9.8% growth. We expect non-GAAP operating margin to be in the range of 24% to 24.5%. And finally, we expect our non-GAAP net income attributable to BlackLine to be $174 million to $182 million, or $2.42 to $2.53 on a per share basis. Our share count is expected to be 74.4 million diluted weighted average shares. Operator, we're ready for questions.

Operator, Operator

Operator Instructions: And our first question comes from Alex Sklar of Raymond James.

Alexander Sklar, Analyst (Raymond James)

Owen, maybe first for you on Verity and some of the adoption you've seen there. You spoke to it being a big factor in the majority of the large deals in the last two quarters. What are you seeing in terms of adoption and usage from new customer cohorts, specifically as they've gone live on BlackLine? And Patrick, maybe can you remind us if there's any consumption revenue embedded in the 2026 outlook?

Owen Ryan, Chief Executive Officer

Yes, Alex, first of all, good to hear from you. Thanks for the question. I think whether it's a new customer or even an existing customer, what we're hearing from that cohort is basically, one, they want to move at a good pace with AI, move a bit faster. But they also tell us they do not want to compromise anything on trust and governance. What they're trying to figure out with us when we go in and talk with them is: first, the AI that we're rolling out needs to work within an existing controls environment, which is what we have and what they really appreciate. They want to make sure that the AI they're deploying has actually been built by people in the business that understand their business. So they're not necessarily enamored with generic AI. We can show the hundreds of billions of transactions that we have processed for our customers over the years and demonstrate the accuracy, effectiveness and efficiency with which that works and then the ability for their auditors to know, rely on and trust it. That all becomes really important in the conversation. The last thing we hear from them is that what they buy today is not the end of the story. They want to understand our roadmap, how it aligns to their interests and how they can potentially weigh in with others in their industry to move forward. One example of a big win we had this quarter was with a very large health care company. If you look at the largest health care companies in the United States, we probably have nine out of ten at this point. Bringing that cohort together to show that experience is important because they all have common issues and are trying to figure out how to use AI the right way in that environment. So those are the things we really hear: yes, they want to be cutting edge, but they also want to be able to trust it. They want to make sure it's accurate, auditable, reliable and secure. Emerging after the quarter, there's been more conversation about total cost of ownership and cost certainty, because in other parts of the market people are consuming tokens at a very high level without understanding the ROI. That's what I'm seeing in those conversations. Patrick, over to you.

Patrick Villanova, Chief Financial Officer

Yes, Alex, to answer the second part of your question, there is a nominal amount of consumption revenue included in the 2026 guide for the remainder of the year. With that said, you should start to see that in our leading indicators. For all the reasons Owen just described, our customers are uptaking these agentic offerings as well as other AI offerings, testing them out, getting comfortable with them and increasing consumption. As they move up through the consumption tiers, we expect to see that show up in our leading indicators, which materializes in revenue in 2027. At the pace we're at, we can reassert that at least 50% of our ARR exiting 2026 will be non-seat-based as a result of everything we discussed.

Alexander Sklar, Analyst (Raymond James)

Okay. That's great color from both of you. I appreciate that. Maybe just a follow-up on the strategic product bookings mix. I think that's a new record — can you just talk about the commonality you saw in terms of solution adoption? And I heard faster adoption of strategic products for those customers under platform pricing. Can you elaborate what you're seeing there with 13% of the base now on platform? How much of an unlock is that?

Owen Ryan, Chief Executive Officer

So I think, Alex — and I want to make sure I understood your question, which was what's driving strategic product sales into the platform. Basically, it's the work that Jeremy and his team are doing with Stuart and his team to make sure the whole system works together seamlessly and can be implemented by our partners. Our teams, sometimes jointly with our customers, are able to demonstrate faster time to value for what customers are asking for. Importantly, as we continue to innovate in those products, we're widening the gap with competitors. Those are the things we're seeing in the market so far.

Alexander Sklar, Analyst (Raymond James)

Great. Thanks, Owen.

Patrick Villanova, Chief Financial Officer

Yes, Alex, to address the second part of your question, the continual increase in the strategic product mix is derivative of our platform approach. The short answer is yes: we expect a continued increase in the mix of our strategic products versus nonstrategic because most, if not all, of our strategic products are consumption-based. As customers migrate to our platform, that enables a smoother sales motion for our strategic products. The platform is connective tissue between our solutions, allowing data to flow seamlessly and enabling us to sell into that customer base with fewer obstacles. So as more customers move to the platform, we expect the strategic product mix to continue to increase.

Operator, Operator

Our next question comes from Chris Quintero of Morgan Stanley.

Christopher Quintero, Analyst (Morgan Stanley)

I want to ask about RPO — a really nice growth rate to see there. At a time when there's so much innovation going on in the space, I'm curious from your perspective at a high level: why are customers existing and new customers making such deep longer-term commitments and really tying themselves to the BlackLine story and product roadmap?

Owen Ryan, Chief Executive Officer

I think it's what I said earlier. We've been a trusted partner for the world's leading companies for 25 years. There's a lot of safety and security in that track record. When you combine that with how BlackLine innovates with customers and partners, staying close to auditors' requirements and BPOs, there's a collaborative effort that builds confidence. We announced the innovation hub to formalize that collaboration. Customers are telling us they don't want to build this themselves; they'd rather partner with a company like BlackLine. These initiatives are not one-year projects. The rollout and building of AI will continue for 12, 18, 24 months and beyond. You're seeing longer commitments because customers want to partner and go on that journey with us.

Patrick Villanova, Chief Financial Officer

Chris, for all the reasons Owen just said, our RPO story is very positive. Delivering 18% overall RPO growth and 12% CRPO growth year-over-year indicates that the customers we're landing are larger and signing longer terms. Coupled with existing customers renewing for multiple years and being intrigued by our innovation, they want to be part of this and partner with us rather than going it alone. It's a very positive story underpinning our RPO growth rate and shows customers want to be with us for several more years.

Christopher Quintero, Analyst (Morgan Stanley)

Excellent. Super helpful. I want to follow up on Verity. Within that early customer cohort adopting the product, what are you seeing from a transaction volume perspective for those customers that are adopting it? How does that compare versus customers that haven't gone there yet?

Owen Ryan, Chief Executive Officer

Jeremy, do you want to take that question?

Jeremy Ung, Chief Technology Officer

Yes. We are definitely seeing repeat engagement from customers using Verity, which is very promising. Customers are seeing significant time savings — Owen mentioned the 90% time savings in preparation activities — and that value is driving repeat usage. In the cohort, people using Verity come back to use it again for risk analysis, narration capabilities and other analyses. That's what's driving both usage and transactions from these customers.

Operator, Operator

Our next question comes from Patrick Walravens of Citizens.

Patrick Walravens, Analyst (Citizens)

Congratulations on the progress. Owen, I'd love to talk more about SAP, particularly the public sector opportunity. I don't usually think about the public sector and BlackLine because the public sector has different accounting. Also, I noticed one of your SolEx salespeople moved to SAP focusing on the public sector recently, so I figured there's some connection there. I'd love to hear your thoughts.

Owen Ryan, Chief Executive Officer

The relationship with SAP continues to get stronger. The collaboration on product roadmap, customer success and AI work together has been positive. SAP is professional and thorough, which can trade some speed for rigor, and that works well for larger implementations. Regarding the public sector, we've been moving to IL-2 and then IL-4 compliance and have had some wins in the public sector. We are investing in this area and have a growing pipeline of opportunities with various federal agencies. The government is trying to modernize, and it's historically had a hard time producing audited financial statements. No matter the basis of accounting, they still need to get it right, which creates an opportunity for us to grow in that space. We're excited about it.

Patrick Walravens, Analyst (Citizens)

Okay. Are there any really big deals in the pipeline on this?

Owen Ryan, Chief Executive Officer

There's always big deals; we just need to get them across the finish line. The government spends big when it spends, but they have a selling season, as you know, and much of that activity isn't until the end of the third quarter.

Operator, Operator

Our next question comes from George Kurosawa of Citi.

George Michael Kurosawa, Analyst (Citi)

Maybe you could talk about the move from POCs to more scaled enterprise production for Verity. How hands-on is that transition process? Is there a component of forward-deployed engineers or some similar construct required? How turnkey is it? What are the learnings in customers making that migration?

Jeremy Ung, Chief Technology Officer

In terms of adoption, with earlier capabilities and the agentic capability, we've been fairly hands-on with customers. We've historically used a forward-deployed engineering motion to customize solutions and journal entry capabilities to fit customers' needs, and we're taking the same hands-on approach with the earliest cohort adopting these agentic capabilities. We're set up well to expand this forward-deployed engineer motion in the future based on our existing customer engineering model.

George Michael Kurosawa, Analyst (Citi)

Okay. Great. I wanted to touch on platform pricing cadence. I think it was a 7% increase in percent of eligible ARR in Q4 and 2% in Q1. I'm sure this metric is lumpy. Is there seasonality, the number of at-bats you had, and what are the dynamics under the hood? How confident are you in doubling the ARR on that pricing model?

Patrick Villanova, Chief Financial Officer

We're very confident we'll reach 25%-plus by the end of the year in terms of eligible ARR on the platform model. That said, the path isn't linear. Our largest renewal cohorts are in Q2 and Q4; Q1 is traditionally the lightest. So we did not expect a linear path from 11% to 25% and we're right where we thought we'd be coming out of a lighter quarter.

Operator, Operator

Our next question comes from Matt VanVliet of Cantor.

Matthew VanVliet, Analyst (Cantor)

A follow-up on the SolEx partnership and a broader question on go-to-market. You talked about greater alignment with senior SAP executives. How much of that is already coming through the pipeline versus being back-half weighted given seasonality? And how is Stuart's execution around daily accountability playing out on both SolEx and the rest of the go-to-market team?

Owen Ryan, Chief Executive Officer

We're pleased with progress teaming with SAP. Their business has seasonality — a lot of bookings in their second and fourth quarters — so some of the pipeline is back-half weighted. The teams are working well together in presales and incentives are aligned properly. Success stories among SAP system integrators, BlackLine and customers become compelling for large ERP and BlackLine implementations. As our deal sizes get larger, there are more constituencies around the table, including CIOs and sometimes AI leads, so we're spending more time aligning across those groups. Stuart is the right leader to drive that work with our team.

Matthew VanVliet, Analyst (Cantor)

As customers migrate to platform pricing, is there any different margin structure you assume in year one or year two of those deals that ultimately builds back up? How does the pricing around platform usage and company size/complexity have a margin profile different from the seat-based model?

Owen Ryan, Chief Executive Officer

We analyze our customer cohorts coming up for renewal to see who is eligible and likely to adopt the platform and at what rate. Based on data from the last year, we're not seeing margin compression as a result of platform adoption. The cost of delivery on day one is not significant, so we see an immediate uplift. We're now monitoring the secondary element of the platform's revenue generation, which is consumption. So far, we are not seeing margin compression; in fact, Q1 had our highest gross margin in years as planned, part of our migration to GCP. We still had some redundancy in data centers in Q1. For the time being, we expect gross margin to expand throughout the year, and we will continue to closely monitor the impact of AI.

Operator, Operator

Our next question comes from Daniel Jester of BMO Capital Markets. Kyle Aberasturi is on for Dan Jester.

Kyle Aberasturi, Analyst (BMO Capital Markets)

It sounded like a solid quarter for both Verity and platform deals. How do you see customers allocating resources between pure AI products and broader digital transformation trends?

Owen Ryan, Chief Executive Officer

Our customers are not buying AI for the sake of AI. For our customer base, it's about being part of a digital financial transformation journey that is powered more effectively by AI. There has to be a real foundation under these investments. Continuing to underline everything we do will be the complete platform across record-to-report or invoice-to-cash further powered by the AI capabilities Jeremy and the team are building. That's the market response we're seeing.

Jeremy Ung, Chief Technology Officer

Overall, customers are excited about our roadmap and vision, but AI needs to tie to their overall objectives as an organization. It supports and accelerates the transformation objectives BlackLine has always supported. AI enables those changes more quickly and with fewer resources on the customer's side, but ultimately it ties to the transformation objectives we already help achieve.

Kyle Aberasturi, Analyst (BMO Capital Markets)

Great. Quick follow-up: The Middle East was an area of investment last year. Has there been any impact to the business today from recent events?

Owen Ryan, Chief Executive Officer

Timing matters. We opened operations at the tail end of last year in Saudi Arabia and had a first nice win in February. Then the conflict in the region began in late February, and it has impacted the environment in the Middle East. We didn't have large numbers built into our plan for this year from that region. The thing we are watching closely is the potential impact on Europe. We saw some slowdown at the end of the quarter and are monitoring whether there will be more of an impact in Europe as the Middle East situation unfolds. Geopolitical tensions between the U.S. and Europe could also affect infrastructure decisions in Europe, and we're modeling for that possibility. We're ready to respond, but it's an area we're watching closely.

Operator, Operator

Our next question comes from Rob Oliver of Baird.

Robert Oliver, Analyst (Baird)

You hosted an AI event this quarter with longtime customers like Quest and Bristol-Myers. As you talk about usage ramp and Verity, can you provide an update on how Verity usage ramps toward your 2027 targets? Some customers are all in while others are still dabbling. More color on how customers that know and trust you are using the AI components would be helpful.

Owen Ryan, Chief Executive Officer

We have customers across the spectrum. Some want to be at the front of the adoption curve, others prefer to wait and observe. The important outcome from Q1 is that when we launched these capabilities, customers validated they worked, were reliable and trusted because they had already tested them extensively and auditors were comfortable. We are trying to get customers in the same industries to discuss experiences so they can build confidence from peers. That accelerates adoption in a responsible way.

Jeremy Ung, Chief Technology Officer

That's also why we launched the AI hub. Some customers want to be design partners and be forward-leaning about expanding AI into their organizations while defining its role for finance and accounting. The hub's intent is to push the envelope with customers in a safe, governed and trustworthy manner and to design together with them. Leaders are looking for exactly that kind of collaboration.

Operator, Operator

Our next question comes from Patrick O'Neill of Wolfe Research.

John O'Neill, Analyst (Wolfe Research)

I wanted to ask about the mid-market churn. Can you quantify the growth headwind attributed to that churn in the results and what is factored into guidance? When that subsides, which you mentioned later this year, how should we think about net retention expanding into next year and beyond?

Patrick Villanova, Chief Financial Officer

No surprises in Q1. We've been signaling for over a year the churn in the lower mid-market and expect it to slow in the second half of this year. We're tracking that cohort carefully and are confident the number will trend down. It is a headwind we've baked into the guide. A useful data point: for every customer we land, the average new logo size is over three times the size of a customer we lose. That indicates the success and nature of customers we're landing and is a positive indicator for future DBNRR and GRR as we work through the at-risk cohort into 2027.

Operator, Operator

Our next question comes from Billy Fitzsimmons of Piper Sandler.

William Fitzsimmons, Analyst (Piper Sandler)

I want to double-click on the demand environment outside North America and the opportunity there, which came up earlier. You mentioned Europe and some macro impacts in Q1. Can you double-click on that impact in Q1 and what you're seeing in Q2? There are investor conversations about potential elevated pullbacks relative to other geos.

Owen Ryan, Chief Executive Officer

Broadly, pipeline is growing healthily around the globe. We're not seeing a significant difference across geographies overall. However, at the end of March we saw a bit less than expected and some large deals were pushed out. North America looks solid. Asia-Pac has areas that look strong—Japan is performing well. Europe is okay, but we're watching geopolitical tensions between the U.S. and Europe, which could affect infrastructure and data sovereignty requirements. We're prepared, but that is something we're monitoring closely. We can manage through macroeconomic issues, but geopolitical implications could require further investments and are on our radar.

William Fitzsimmons, Analyst (Piper Sandler)

Super helpful. Glad to hear about some of the momentum in specific geos like Japan.

Operator, Operator

Our next question comes from Adam Hotchkiss of Goldman Sachs.

Adam Hotchkiss, Analyst (Goldman Sachs)

Patrick, you mentioned a $1 million nonrecurring benefit to Q1. Could you help us understand that better — what it was and why it's not recurring?

Patrick Villanova, Chief Financial Officer

Adam, it relates to timing of implementations and delivery; it's one-time in nature. The key takeaway is that even with the $1 million of one-time benefits in Q1, we've passed that into the guide less the FX headwind. Of the $2.1 million beat, we're passing about half into the full year guide; the other half reflects FX movement versus where rates were when we established the guide.

Adam Hotchkiss, Analyst (Goldman Sachs)

Okay, that's helpful color. Owen, any updated thoughts on win rates or the broader competitive environment? In the down market there are AI-native full-stack ERPs getting funding that serve smaller companies. How are things going broadly with enterprise players?

Owen Ryan, Chief Executive Officer

At the enterprise level, we believe we've distinguished ourselves further from the traditional competitor set. The robustness of our platform, the completeness of the roadmap, improved time to value and cost certainty, and our collaborative approach have been positive differentiators. Our pipeline is growing in dollar size even if not by headcount of opportunities, and we're encouraged by the number of seven-figure deals in front of us for this year and next year.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn it back to BlackLine's CEO, Owen Ryan, for closing remarks.

Owen Ryan, Chief Executive Officer

Thank you, and thank you all for taking the time to listen to our call today and to ask questions about our company. We appreciate your interest in us, and we look forward to catching up and talking more soon. Thanks, everybody. Have a great night.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.