BlackLine - Q2 2023

Transcript

Operator (participant)

Good day, thank you for standing by. Welcome to the Q2 2023 BlackLine Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Humphries, Vice President of Investor Relations. Please go ahead.

Matt Humphries (VP of Investor Relations)

Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan and Therese Tucker, Co-Chief Executive Officers of BlackLine, as well as Mark Partin, Chief Financial Officer. Before we get started, I'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 Q3 and full year 2023, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call.

While we believe any forward-looking statements made during the call are reasonable, actual results could differ materially as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Finally, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP.

A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is currently available in our earnings release, which may be found on our investor relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now I'll turn the call over to BlackLine Co-Chief Executive Officer, Owen Ryan. Owen?

Owen Ryan (Co-CEO and Chairman)

Thank you, Matt, and good afternoon. Thank you for joining us today. This was a solid quarter for BlackLine, even as the market environment for enterprise software remains uncertain. We were able to exceed our revenue and non-GAAP net income targets this quarter and took some key steps as we look to strengthen and expand our market leadership and competitive positioning. Specifically, we delivered total revenue of $145 million and non-GAAP net income of $31 million. Approximately 70% of sales this quarter came from existing customers, underscoring our commitment to expand and go deeper with our customer base. As part of this, the number of customers with $1 million or more in annual recurring revenue increased to 53 this quarter, up 23%. If you recall, there are five key areas that I am focused on in my role.

These are: One, relentless execution across our business operations. Two, BlackLine's market message and brand. Three, ensuring customers receive the value of the BlackLine promise. Four, building and optimizing our distribution network, five, customer retention. Given these, I will walk through each area and provide some insights on how we are addressing each while driving even higher operating efficiency going forward. On execution, we delivered against our revenue and non-GAAP net income targets this quarter, despite market uncertainty. While living up to these promises is of great importance, there is more work to be done to generate even more consistent, effective, and efficient execution across BlackLine. Specifically, we are thoroughly analyzing and refining the structure of our organization to ensure we have the right people in the right roles and working to ensure that accountability and ownership align with our strategic goals.

For example, we recently moved our business development teams from marketing to sales. This change is important as demand generation and the seamless creation of quality pipeline is vital to our continued success. By integrating our business development teams into sales, and more importantly, under the same leadership, we can ensure that alignment and ownership drive our desired outcomes while avoiding inefficient activities. Additionally, we are beginning to leverage our deep industry expertise and transition from an industry-agnostic go-to-market model to a more industry-equipped approach. With a long history and a strong presence in key sectors like manufacturing, retail, and financial services, we believe that the combination of domain expertise in accounting and financial automation, along with industry experience, can accelerate our growth and provide our customers with additional value.

As the premier brand and clear leader in finance and accounting automation for the office of the CFO, having a consistent market message and brand promise is critical. We are actively working to better align our global messaging to speak to our customers in one voice. This quarter, we hosted numerous events across the world, including our BeyondTheBlack event in Australia and numerous local events. It has become clear that our customers' challenges and priorities are very similar across markets. By optimizing and aligning our message globally, we will speak to the customer with one voice and make it easier for them to understand the value BlackLine delivers. This has the added benefit of creating a better customer experience, and in turn, makes it easier and more efficient to do business with BlackLine.

The BlackLine promise we offer to customer holds immense value, and we expect to deliver even greater time to value while extending our market leadership and competitive positioning. As part of these efforts, we announced a new five-day implementation program specifically tailored for mid-market customers. This program is designed to be the starting point of a customer's long-term journey with BlackLine. It allows customers to accelerate their time to value by leveraging our core financial close solutions, such as Account Reconciliations, Task Management, and Transaction Matching. We already have a number of customers that have successfully completed the five-day implementation program. Some even did so right before they moved into a monthly or quarter-end close.

Innovative offerings like this are important to our customers, as implementation challenges are one of the top drivers of customer dissatisfaction, which can ultimately lead to churn and attrition, an outcome we are driven to eliminate. Moving to distribution, we see opportunity in reshaping and optimizing our global partner network to deliver more consistent performance and further profitable growth. We are working to drive greater accountability and alignment across our partners, and clearly defining what we expect from them and what they can expect from BlackLine in return. Importantly, we are accelerating the transition of partners from enablement to commercialization. As part of these efforts, we recently entered into a reseller agreement with a blue-chip global consulting firm and current partner.

This partnership holds great potential for both parties, as it provides an appropriate framework for new customer acquisition and expansion via cross-sell and up-sell of our strategic product portfolio to our existing customers. As you are aware, it is all about the customer at BlackLine. We take great pride in how we enable our customers and support them as they grow. We only succeed if they succeed. One of the key metrics we use to track this is renewal rates. While they are very strong relative to our broader software peer group, we are not satisfied with current levels. As such, we plan to place a more disciplined focus on our existing customers. For example, we are moving quickly to standardize our processes internally, removing friction and realigning resources to deliver a seamless customer experience from sales to onboarding, to implementation and through renewal.

We plan to introduce new engagement programs that prioritize digital transformation for customers. Leveraging best practices backed by years of BlackLine customer data, these programs are designed to accelerate our customer success and time to value. As new customers come to BlackLine, we expect to co-create customer blueprints to drive digital transformation in their business, along with milestones and touch points to ensure adoption and satisfaction remains high. Despite market uncertainty, we are seeing greater customer wins and competitive takeaways across both the enterprise and the middle market. At the enterprise level, we signed a competitive expansion deal with a leading software and workflow company, who also had an existing partnership with one of our direct enterprise competitors. Despite this, the customer recognized their existing set of homegrown solutions and what their partner offered were not sufficient to support the growth they envisioned.

Further, they recognized that the ability to seamlessly leverage key data from their ERP to BlackLine via connectors was vital to deliver the level of automation they demanded. We also signed a leading financial services, technology, and payments company in a direct compete with a known consolidation provider. The customer recognized the power of accounting automation and the benefits that can accrue from removing inefficient and manual work. Further, the expected ROI, time to value, and focus on governance and security resonated strongly, and we believe far exceeds anything else in the market. Additionally, we signed a number of intercompany deals this quarter with customers like Shift4, a leading integrated payment provider, and NOV, a provider of equipment, technology, and services to the global energy industry. We also signed our largest middle market deal on record, driven by the need for modern, innovative solutions for complex intercompany processes.

SolEx deal activity remained healthy this quarter, with a number of new customer wins globally. For example, companies like Restar Holdings in Japan and Anglo American in Europe are just beginning their BlackLine journey. We remain excited about the long-term opportunity with SAP. Our senior leadership team will drive the broadening and deepening of this partnership. With that, I will turn it over to our founder and my fellow CEO, Therese, to discuss her thoughts. Therese?

Therese Tucker (Co-CEO and Founder)

Thank you, Owen. As many listening know, I recently assumed the chief technology officer role on an interim basis, a natural fit, given my past experience founding BlackLine and building out our product and technology footprint. Let's talk about what I see as the opportunities going forward and where we can build upon our strength. First and foremost, the talent we have in the organization is truly incredible. I see it every day in the products we build and in the customers we delight. I see that the structure we have in place today is likely not the one most appropriate to support our growth going forward. We need to be able to move even faster with more agility, while delivering innovation as we grow.

Removing self-created barriers and enhancing the discipline and efficiency inside our product and technology teams is crucial to our success and something that I am intense on driving as we scale. Speaking of scale, we're seeing more and more consumption across our product sets, like Accounts Receivable. In Q2 alone, we saw a 24% increase in payment value, up to nearly $112 billion. Across our solutions, we also see tremendous growth in API usage from our customers. In fact, we had more than 14 million API calls alone this quarter, up 219%. While these stats are impressive for a company of our size, we need to ensure that the infrastructure in place can continue to support this growth profitably, while also providing the flexibility to add new features and functionalities.

While it's still early, we are in the market for a new chief information officer who can really focus on infrastructure for scale, while I, in turn, focus on our product and platform roadmap. Let's turn to product specifics for a moment. We recently shipped our latest expansion of the Financial Reporting Analytics solution. If you recall, we previously were able to provide customers with a real-time income statement and balance sheet based off of their accounting data. This has resonated well with our customers, and as expected, has left them asking for even more. The addition of cash flow statements, already enthusiastically configured by several customers, allows real-time visibility with drill-down capabilities across all three interconnected financial statements.

This gives our customers a complete picture on where their business is at any given period of time, in a consolidated view, with comparisons to other periods, budget numbers, and external consolidation systems. This level of real-time analysis is unavailable in batch-oriented consolidation systems. We expect that this will be well received in the market, and our roadmap for additional innovative use cases and enhancements remains robust. Now, I want to discuss generative AI for a moment and what that means for BlackLine, our customers, and our market. We see exciting opportunity ahead to add value to our existing financial close and strategic products by leveraging generative AI. As part of our efforts, we continue to uncover interesting and unique use cases that have the potential to drive further efficiency while minimizing risk for our customers.

Our customers and partners have been very interested in our approach, but are appropriately cautious on go-forward applications, given the inherent challenges related to governance and security. Delivering value on the front end while increasing risk on the back end is not a recipe for long-term success with generative AI. We're here to win the long game. Fortunately, we believe BlackLine's brand permission, combined with our commitment to governance and security surrounding sensitive customer data, should be a key differentiator in our market. I expect that you will hear and see more from us at our upcoming BeyondTheBlack user conference in September. I hope that you can attend. Turning to our strategic product portfolio, we are delivering unique and differentiated innovation into these large and underpenetrated markets.

In intercompany, for example, we recently released multiple new features, including Intercompany Intelligence, using the aforementioned AI, Task Heat Map, and e-invoicing support for our Non-Trade module. In the coming months, we also plan to introduce a new Trade module for our intercompany solution. This new module is designed to solve complex challenges for customers that operate in industries dominated by inventory and physical goods. The lack of capable, modern automation solutions here only reinforces our view on the large embedded opportunities for intercompany ahead of us. Finally, in Accounts receivable automation, we're working on customer-driven innovation to enhance our AR management module and expand the innovative solutions we offer. Importantly, our own internal finance organization has just finished implementing a number of our own Accounts Receivable solutions and remains one of our important channels for customer-driven innovation and feedback.

To close, we are driven to better articulate and deliver the value that customers can achieve by partnering with BlackLine. Whether it's taking the first steps in modernizing their finance and accounting operations or moving forward with full digital transformation, customers can be confident knowing that they have a trusted partner to guide them on this journey.

With that, I'll turn it over to Mark Partin to discuss the details of our financial performance and our outlook.

Mark Partin (CFO)

Thank you, Therese. BlackLine's financial performance this quarter highlights our ability to balance growth and profitability in an uncertain market. As Owen and Therese mentioned previously, our focus remains on driving a higher level of operational efficiency in order to strengthen our position and drive a sustainable level of long-term profitable growth. With that in mind, let's review our financial highlights from the second quarter in more detail. Total revenue grew to $145 million, up 13%, slightly ahead of our expectations. Calculated billings growth was 11% this quarter due to a combination of lower services growth combined with lower net new customer bookings. Remaining performance obligation, or RPO, was up 14%, with current RPO growing 15%. We closed the quarter with total annual recurring revenue, or ARR, of $566 million, up 13%.

We added 43 net new customers in the quarter, bringing our total customer count at the end of the quarter to 4,279. Our revenue renewal rate was consistent with the prior quarter at 95%, as a small number of enterprise customers impacted our renewal rate in period. Net revenue retention remained stable at 106% as we continue to experience a lower velocity of customer expansion activity due to persistent macro uncertainty. Strategic product performance represented 20% of sales. Partners were involved in 80% of large deals this quarter, driving both net new and expansion deals globally, as we continue to enable, train, and drive higher levels of partner activity. SolEx performance in the second quarter remained solid, with several new deals closing across our global markets.

In Q2, our SAP partnership represented 25% of total revenue, consistent with the previous quarter. Turning to margin, non-GAAP gross margin was 79%, with non-GAAP subscription growth margin of 82%, in line with our expectations. Non-GAAP operating margin was 13% this quarter, driven by consistent operating discipline across sales and marketing and G&A. Non-GAAP net income attributable to BlackLine was $30.7 million, representing a 21% non-GAAP net income margin. Our operating income outperformance, combined with interest income from our healthy cash position, drove our results on the bottom line. We generated $24.6 million in operating cash flow and $18 million in free cash flow in the quarter, with a free cash flow margin of 12%.

Finally, we ended the quarter with $1.1 billion in cash, cash equivalents, and marketable securities, providing considerable financial flexibility to execute across our strategic priorities, evaluate opportunistic M&A, and optimally manage our capital structure. Most notably, our 2024 Notes coming due next August. Of note, the 2024 Notes become current this month. As we enter 2023, we expected to see a slight improvement in market demand in the back half of the year. However, as we closed out the second quarter, and based on current trends, we now see a slightly flatter demand profile for the back half of the year. As such, we are taking the high end of our previous range off the table and adjusting our full-year revenue expectations to reflect this. Positively, we are seeing continued margin strength and will again be raising our full-year non-GAAP net income guidance.

For the third quarter, we expect total GAAP revenue to be in the range of $149 million-$151 million, representing approximately 11%-13% growth compared to the third quarter of 2022. We expect to report non-GAAP net income attributable to BlackLine in the range of $24 million-$26 million, or $0.32-$0.35 on a per share basis. Our share count is expected to be approximately 74.5 million diluted weighted average shares. For the full year of 2023, we expect total GAAP revenue to be in the range of $586 million-$591 million, representing 12%-13% growth compared to full year 2022.

On the bottom line, we are again raising our guidance for non-GAAP net income attributable to BlackLine to $108 million-$112 million, or $1.45-$1.51 on a per share basis. Our share count is expected to be approximately 74.4 million diluted weighted average shares. In closing, we expect to drive further operating efficiency across our business as we navigate this near-term period. As part of this, we will ensure that we have the appropriate level of capacity to match market demand while supporting our long-term growth objectives. I'll now ask the operator to open the discussion to take your questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the lines of Rob Oliver of Baird. Please proceed with your question.

Rob Oliver (Senior Research Analyst)

Hi, great. Good afternoon, folks. I had two questions. Owen, one for you, and then I had a follow-up for Mark. Owen, you mentioned in your prepared remarks around what essentially sounded like a move towards vertical sales, which sounds exciting because, you know, in some of the verticals you guys have mentioned, you have some really big fish and some great reference customers. I just would be curious to know, does this involve a sales reorg? Where are we right now in that process, and when should we begin to see kind of results of that effort?

Owen Ryan (Co-CEO and Chairman)

Sure. Thanks, Rob. Good to hear from you. I think one of the things that's become very apparent as Therese and I and the leadership team have been digging into our business, is the strength that we have in, in all the industry verticals. You can start that, for example, broadly, let's say, financial services, where we have a tremendous clientele, and then you can drill down further, and you can take that into the insurance industry, and then you could take that down to life insurance or property and casualty or agents and brokers. What I find remarkable is that we have so much depth of, of knowledge in the organization from those experiences with those customers.

When our customers are speaking with us, they talk broadly about our domain expertise, as we, as we engage with them, but then the ability to go and have really meaty conversations with them in their, in their unique issues, I think is something that is, is quite a differentiator for us. We're just in the early stages of, of, of, of starting that. We're working very closely with all parts of our organization to make sure we're aligned to go to market, to, to attract that, but there'll be more to come, but that's directly where we are heading.

Rob Oliver (Senior Research Analyst)

Okay, great. Appreciate that. Mark, one for you. You know, you, you closed your remarks by talking about, you know, the operating leverage. Obviously, the results so far really speak for themselves. You, you guys entered the year, I think it was 89%-94%, and you're shaking out 60% or so, roughly above that number right now. I guess, can you just help us understand, you, you were fairly clear early on that there was some low-hanging fruit, you know, in terms of infrastructure costs and others. How should we feel about the continued opportunities to find leverage in the business, particularly relative to some of the, you know, branding, marketing, and sales initiatives that may cost some money? Thank you.

Mark Partin (CFO)

Yeah, thanks, Rob. Look, I think, from the comments from Therese and Owen earlier, you can see the intensity for which, they're focused, and we all are, on driving productivity, driving operating leverage and efficiency, most of which is sustainable, in our business model. One of the areas is, over the last several years, like a lot of companies, we've been hiring ahead of the curve. Particularly, we've talked about this in the area of sales capacity and, and in the go-to-market unit. As we, meet the level of demand, it means we're hiring less in the current environment, and that, you know, as we move forward and we've began again, at some point to see the, the demand environment start to increase, there'll be areas that we'll rehydrate.

For the most part, we're finding operating leverage across the business, sales and marketing, product and tech, and in the G&A side of this. The team's been working very hard to help deliver this, and so we're really very proud to be able to, to deliver these kinds of efficiencies and results, given all of the other growth initiatives and things that we're currently focused on.

Rob Oliver (Senior Research Analyst)

Great. Thanks, Mark. Thanks, guys, very much.

Mark Partin (CFO)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Alex Sklar of Raymond James. Please proceed with your question.

Alex Sklar (Director of Application Software)

Great. Thank you. I had a two-part question for Mark and Therese on strategic products. I guess first, here for Mark, I wanted to ask about how the quota attainment for strategic products basket is trending. I know you, you put in that, that specific level for your sales force and if you've made any changes there. Then second, for Therese, I appreciate all the prepared remarks, comments on the FRA traction, and as a pre-consolidation solution. Can you just elaborate a little bit more on whether that opens up any ancillary areas for, for BlackLine to expand into? Thank you.

Mark Partin (CFO)

Yeah. I-I'll start. As you know, we did put a sales quota for strategic products on the sales team, and now, along with everyone else in the company, they've got skin in the game to deliver strategic products to the base. At this point in the year, we have not made changes to any of the quotas around this, which is sort of reinforcing our drive to sell into the base strategic products, which we know, are a very valuable opportunity for our customers to, in this digital transformation age and this sort of margin enhancement age for them, could be of great value. We're all still, at the moment, very focused on strategic products.

Therese Tucker (Co-CEO and Founder)

Alex, thanks for asking about FRA. You know, it's a great example of customer-driven innovation, and our customers have been asking for this type of solution for quite a while, and we have delivered a very rich product, and we think it delivers some real value to them. To you, you're exactly right in where you're going. We do think that the FRA solution is a bigger platform than we may have initially thought, and it's got some very interesting use cases for our customers, particularly in the mid-market, where they have less tools and less automation to really help them with some of their, you know, close and period end processes and reporting. There will be more to follow on this at BeyondTheBlack.

... as much as I would love to take about an hour to tell you more, I know that Mark and Owen would shut me down.

Alex Sklar (Director of Application Software)

All right, that's, that's great color, and look forward to hearing more about it next month. One follow-up for you, Owen. On the five-day implementation program, it seems like a really great natural extension for what you were already doing with MAP. Can you just help frame, though, what percent of kind of the mid-market target customers you, you think that expedited implementation is gonna, gonna make sense for? Then, if partners are gonna be enabled to sell this. Thank you.

Owen Ryan (Co-CEO and Chairman)

Yeah. Look, let me start, and then I'm also gonna ask Therese to weigh in, 'cause she's been a little bit closer to all parts of the five-day implementation. I think what we've seen so far is, as we've been talking with customers, with our partners, with prospects, that the idea of being able to do something this quickly is important. I don't know what the percentage will be, but it's probably higher than we might have originally estimated. We certainly would like to see others be enabled where, where it's appropriate, and so we're trying to work through that right now. Therese, like I said, has been a lot closer to all the day-to-day pieces of this, do you wanna pick up from there?

Therese Tucker (Co-CEO and Founder)

Absolutely. First off, just to be clear, implementing BlackLine can be very straightforward, like this five-day, or it can be more involved, depending on the type of products that someone purchases or the size and reach of the customer. For example, an intercompany implementation across 50 different global entities is going to be very different than, you know, account recs for a small mid-market company. The five-day implementation is specific right now to mid-market companies that are coming through our MAP process. All right? The idea with this, it's very interesting because we come on site, all right? We've already gotten the files from our customers, and we've enabled the instances, and we basically work through all the things that, you know, if they're busy with other things, then they could take months to actually happen.

We end up not only getting them up and running, in fact, in one instance, we did it in four days, all right? We also get them trained. After that comes hypercare to get them through their first couple of closes, but it really, it just sets this standard for immediate value going to the customer, and it increases their appetite to do more. It gets them a very early success, and they go, "Okay, this works. What else can we do with BlackLine?" The other thing that I like about this, Alex, is that it really helps us build relationships with our customers. Okay, when you are face-to-face in the conference room with them for eight hours a day, five days straight, you get to know them. Again, we like having good relationships with our customers.

We're very pleased with how that initiative's going, and I do think to Owen's point, I think it's going to expand far bigger than what we initially thought.

Alex Sklar (Director of Application Software)

All right, great. Thank you both for the color there.

Therese Tucker (Co-CEO and Founder)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Steve Enders of Citi. Please proceed with your question.

Steve Enders (Equity Research Analyst)

Okay, great. Thanks for, thanks for taking the question here. Maybe to start, I just wanna ask on, you know, what has exactly changed in, in the macro situation that's, that's leading to, the, the lowered outlook here? Are things changing on, you know, pipeline development, sales cycles, or anything kind of mid-market versus enterprise? I guess, what is exactly different today than, than maybe you were guiding to, guiding to before?

Owen Ryan (Co-CEO and Chairman)

Yeah, look, I, I don't know that I would sit here and say that the macro has changed tremendously from where we were. I think that, you know, we're still sitting there watching our customers and prospects think about how they prioritize their spend, how decision-making is happening. There certainly are a few more people around the table now weighing in on the conversation. Every time you add a little bit more to that, it takes just a little bit longer. When I look at the top of the funnel, when we look at the top of the funnel together as a leadership team, we still feel pretty good about those things that are coming in. Again, like everything else, it's how you get them through the funnel and how quickly that takes place.

We're certainly seeing CFOs more involved in the process, the CIO more involved in the process. We're continuing to work our way through that with them. I think in some ways, while it, it, it doesn't feel great that it's taking a little bit longer today, the positive from a BlackLine perspective is the more time our prospects and customers spend with us, I think the better they feel about the value proposition that BlackLine can bring to them. It's a little bit of a timing issue for us. We're working our way through it. I don't think that I would sit here and say anything has changed that dramatically on the macro. I do think we were hoping by the third quarter of this year that it would have cleared up a little bit.

That quite hasn't happened yet, as, as, as you all know.

Steve Enders (Equity Research Analyst)

Okay. Nope, that's helpful context there. Maybe, maybe switching gears a little bit, just on, you know, some of the, the management changes that, that happened again this past quarter. I guess, what's kind of the update on, on how you're looking to, to backfill those areas? Is there any kind of change in, you know, the strategy going forward now for, for both of those? I know that you've highlighted some changes already, but I guess any, any kind of further change in the strategy that we should be thinking about here as well?

Owen Ryan (Co-CEO and Chairman)

Yeah, I, I... That's a really good question, and, and let me start with, one of the hardest things to do in business is to fix something that isn't broken, but you know that it's not good enough to get you where you wanna go. We are very, very busy disrupting ourselves right now, and it's taking a great deal of our, our time and energy and passion to drive the execution on that vision. That's what we are, that's what we are committed to. We will be sharing more about some of the strategic choices that we're making around BeyondTheBlack.

I think one of the things that the leadership team all feels good about, we've been very clear about the choices we want to make around all aspects of our strategy, whether it's partners, product, customer segmentation, things of that nature, geographic footprint. We're going to be very clear and relentless in how we execute as we move forward. I think there's a lot of optimism in the organization about what we're trying to do.

Koji Ikeda (Director of Enterprise Software Equity Research)

All right, perfect. Thanks for taking the question.

Owen Ryan (Co-CEO and Chairman)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Pinjalim Bora of JPMorgan. Please proceed with your question.

Pinjalim Bora (Executive Director of Equity Research)

Oh, great. Hey, thanks for taking the questions. I wanted to go back to the macro point and ask you if there's any difference that you're seeing in the different segments between mid-market and enterprise? I remember, I think last time you said mid-market was lagging a bit, enterprise was more steady. Did, did that kind of improve or seems like it's, or might have been kind of the same as last quarter?

Owen Ryan (Co-CEO and Chairman)

Yeah, I wouldn't say that it's, it's changed dramatically quarter-over-quarter. At, at a high level, I would say the themes feel pretty similar. As I said, you know, deals are taking a little bit longer. There's more approvals required, more scrutiny from our buyers. I think if you're looking at the mid-market or enterprise, I'm not sure that I would sit there and say it's, it's, it's that different. Certainly, we still see parts of the world that are, are lagging from where we would like them to be, particularly Western Europe. That's, you know, something that we'll just continue to work our way through. Conversely, we're very optimistic about Japan.

We have our BeyondTheBlack event coming up in just a couple of weeks, where we have 2,500 prospects and customers registered, which is just unbelievable from my vantage point. So we're excited about, you know, where things might be heading, but it also takes time to get there. So we're just gonna keep executing as relentlessly as we can to move forward.

Pinjalim Bora (Executive Director of Equity Research)

Got it. One question on the industry, industry or the verticalization of the sales force. Are you thinking of verticalizing kind of products as well, or is that purely a sales motion?

Owen Ryan (Co-CEO and Chairman)

I'm sorry, a verticalization-

Pinjalim Bora (Executive Director of Equity Research)

Products.

Owen Ryan (Co-CEO and Chairman)

of products?

Pinjalim Bora (Executive Director of Equity Research)

Yeah.

Owen Ryan (Co-CEO and Chairman)

Well, I'll turn this over to Therese in a second, but as Therese and I and the leadership team have been talking, there are things that are very unique to specific industries, and we wanna make sure, working with our partners and our customers, that we help customize our solutions to meet those particular unique aspects of, of, of what they need. And so we've been very busy talking to customers about that over the last four or five months at this particular... Well, almost three, six months, almost together now, five plus months. And so we're gonna continue to, to look at that with our partners and, and customers. But I think that there is a belief that there's more that we can do to help them with their particular unique issues.

It, it, it, you know, it, it transcends the industry, if you will. The same issues you might deal with an automobile manufacturer in Germany are the same as one in Japan, is the same as the U.S. auto manufacturers as well. That's what we're looking to make sure we do. Therese, I know you're spending a lot of time thinking about this.

Therese Tucker (Co-CEO and Founder)

Yeah, absolutely. You asked if it was just sales motion or sales motion plus product, and the answer is the latter. There are definitely functionalities and features that we are focused on building that will be more valuable to some industries more than others, okay? For example, banking has some pretty specific requirements that are kind of cool, but some of those same requirements actually fit nicely into retail. What we wanna do when we do make enhancements to our product offerings, we wanna make sure that we can take what we have, make it highly configurable, not customizable, and if it can apply to more than one industry, then that's a win. There will be some product modifications in order to make sure that we can address the specific needs of different industries. However, we do want to repurpose.

We want to make sure it's very configurable and flexible, and that's how you get a win. Hope that helps.

Pinjalim Bora (Executive Director of Equity Research)

Yeah, definitely. Thank you very much.

Operator (participant)

One moment for our next question. Our next question comes from the line of Koji Ikeda of Bank of America. Please proceed with your question.

Koji Ikeda (Director of Enterprise Software Equity Research)

Hey, Therese, Owen, and Mark, thanks so much for taking the question. I wanted to ask kind of the triangulation of revenue guidance and billing performance in the second quarter, and really just how to think about the billings growth trend for the rest of the year. You know, really trying to hone in on what that fourth quarter exit rate, could be. Any sort of quantitative or qualitative color there would be helpful, either from a, you know, deferred revenue perspective or renewal cadence or anything else, anything else we should be thinking about in respects to billings?

Owen Ryan (Co-CEO and Chairman)

Yeah. Yeah, thanks. Thanks, Koji. You know, given what we're seeing in, in the leading indicators in the business and, and kind of where we are in the year, it wouldn't be. We would most likely expect to see for the balance of the year.

Mark Partin (CFO)

... a similar trend coming out of Q2 that we've seen. That's really sort of this macro environment manifesting. Owen talked about it sort of impacting many parts of the business, including Europe and mid-market, but also at the very high end, large deals, digital transformations. Those are the ones that move the needle. As we sort of take a pragmatic view, heading into the end of the year, we don't guide on billings, but I, I think based on the revenue guidance that we've given, you'd see that our expectation is to, is to probably see a flat environment through the remainder of the year.

Koji Ikeda (Director of Enterprise Software Equity Research)

That's super helpful, Mark. Thank you for that. Just one follow-up here on, on SAP. When we look at the growth rate on the SAP partnership revenue, it's been bouncing around a little bit, you know, a little bit above 20%, you know, at 20%, a little bit below 20% over the past several quarters. I mean, how do we think about this channel, and what needs to happen to drive sustained 20%+ growth there? Is it just the partnership-

Mark Partin (CFO)

Yeah, let me, let me start.

Koji Ikeda (Director of Enterprise Software Equity Research)

Yeah. Yeah. Thank you.

Mark Partin (CFO)

Yeah, thanks, Koji. Sorry, I interrupted, but let me just start with your comment. You know, the, the SAP growth trend actually was a bit ahead of the overall company, even in this last quarter. It's not uncommon, as you know, to see pretty material fluctuations on a quarterly basis, where they can be very back-end loaded. They also carry the large, you know, the large part of our large deal, digital transformations. Those are the very strategic parts of our, of our business pipeline. I think, Owen's going to talk in a minute about driving the SAP partnership, but it, it has actually performed quite well, at least in this environment, compared to other parts of the business.

So from a partnership standpoint, beginning with what we saw at the end of last year and again in this last quarter, it's holding up nicely. Owen, you wanted to say something about that?

Owen Ryan (Co-CEO and Chairman)

No, look, I think, as you can imagine, the SAP partnership is critical to, to all of us at, at BlackLine. Therese, Mark, myself, and other leaders are spending a significant amount of time to make sure that we execute against this top priority. I think the big thing for us to do is to get that more consistent experience around the world as we work with, with SAP. We're going to make sure that we do that. In, in fact, in the short order, Therese, Mark, and I will be, in a number of European countries, making sure we continue to deepen that, that footprint. Also, we want to make sure we're leveraging our other partners that have strong relationships with SAP as well.

We talked about this Power of Three, which is SAP, ourselves, and a partner, and we're going to continue to work that. It is absolutely critical as we move forward, that we continue to work together to achieve the full potential of this relationship.

Koji Ikeda (Director of Enterprise Software Equity Research)

Got it. Thanks, guys. Thanks so much for taking the questions.

Owen Ryan (Co-CEO and Chairman)

Thank you.

Mark Partin (CFO)

Thank you.

Alex Sklar (Director of Application Software)

Thanks, Koji.

Operator (participant)

One moment for our next question. The next question comes from the line of Matt VanVliet of BTIG. Please proceed with your question.

Matt VanVliet (Managing Director of Software Equity Research)

Yeah, good afternoon. Thanks for taking the question. Wanted to see if we could get a little bit more color on the Blue Chip SI partner that you talked about expanding to a reseller agreement. You know, any additional details you can help us with, kind of what the discussions were there, how much they've sort of invested in the BlackLine ecosystem, and whether this is reflective of potential other expansion deals with some of your other partners, or is there any kind of, you know, other exclusivity or just kind of preference here because of their past investments? Thanks.

Owen Ryan (Co-CEO and Chairman)

Yeah. Thank you. As you know, I came from the consulting world, and I believe that I have a pretty good understanding of what's important to our partners and how best to sort of build those relationships and partners in a way that they're structured and aligned and actually getting executed against. I think for BlackLine, as we move forward, we're trying to make sure that we have the right partners with the right incentives to, to, to drive our mutual success. You heard in the prepared remarks, we've become very clear with our partners of what they can expect from BlackLine and what we expect in return. In this particular relationship, this is a partner that's had a long-standing relationship with us.

They've invested quite a bit around the world. It's sort of the next stage in their, in their own evolution, as many of these consultancies will move from not just doing implementation, but to doing business process outsourcing. I think many of them call it their own operate business, as well as being resellers in various parts of the world. I don't want to predict that there'll be more arrangements like this, but we are certainly making sure that for those partners who we choose to do business with and choose to do business with us, that we take full advantage of all of those firms' capabilities with what all that BlackLine has to offer.

We'll keep moving forward with this, and certainly, we're engaging quite frequently with our partners to make sure that we have comprehensive plans, as we can move forward with them. That will be everything from how we, we govern our relationship, to the plans we create together, to how do we make sure the professionals on their side are certified to deliver BlackLine offerings, how we train them, how we co-invest in things together. There's a whole myriad of things we're doing to make sure that this partner relationship, this partner channel for us, works the right way.

Matt VanVliet (Managing Director of Software Equity Research)

Okay, very helpful. You talked about high, high renewal rates for, for overall software comparisons, but, you know, not, not enough for, for your own liking at this point. Curious, you know, what kind of programs or incentives you're putting in place internally to improve that further? You know, sort of off of that, should we expect to potentially see some improvements on the Net Dollar Retention Rate, as presumably, you're, you're maybe spending a little more time engaging with your customers on a frequent basis, and with that, maybe upselling is more potential?

Owen Ryan (Co-CEO and Chairman)

Thank, thank you. That's a really good question. Look, I think from, from our perspective, we've invested strategically into our customer success teams over the years. Candidly, I think we've had good results from both a retention and expansion perspective, but from my view, not good enough. You fight really hard to get a customer in the front door, and there's no way in hell I want them to go out the back door. We're gonna make sure that we do everything we have to, to make sure that those customers that come to BlackLine achieve all that we have to offer to, to them. Therese, Mark, the rest of the leadership team, we are intent on driving even better results for our customers.

We talked about the five-day implementation as an example, but there are other things that we're doing. We're, we're consolidating some of our customer support teams to make sure they align much more closely with our account management organization to, again, make sure we're driving success for our customers. We're not waiting for the phone to ring to call us. We're proactively engaging with those customers much more aggressively over the last couple of months to make sure that we are delivering on the BlackLine promise. We're, we're working really hard on that. Then also, for the new customers that are coming through the door, we wanna make sure that they're getting the, the full value from day one.

It's a big effort for what we're trying to do, but we think it's the right thing to do for our customers that will allow us to not only land a customer, but to delight them and then to expand that relationship over time.

Mark Partin (CFO)

Yeah, Matt, the renewal rate, in addition to what Owen just said, is 97% for the enterprise. You know, driving that higher will absolutely have an impact on the dollar retention rate. The biggest impact we can have on the retention rate, of course, is the expansion within those accounts. The ability to show the customer and help them digitally transform using our strategic product portfolio and to fully adopt and penetrate globally inside their companies. Those are the big sort of additions to the rates.

Matt VanVliet (Managing Director of Software Equity Research)

All right, great. Thank you.

Mark Partin (CFO)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Joseph Meares of Truist Securities. Please proceed with your question.

Bobby Dion (Analyst)

Great. Thanks for taking the questions. This is Bobby Dion for Joe. Regarding five-day fast-track implementations, you know, is there any early evidence that reducing implementation time can actually reaccelerate customer adds? I had one follow-up. Thank you.

Therese Tucker (Co-CEO and Founder)

Well, I do think it's a competitive differentiator, Bobby D, right? I mean, the ability to get there, get it up and running, and then they see immediate value, and then having customers, you may have seen our press release on this, having customers that are willing to talk about that, is certainly building enthusiasm with our prospects.

Bobby Dion (Analyst)

Awesome. Sounds great. Then, yeah, just, just one quick follow-up on an earlier question. How are strategic product sales trending? You know, are those accretive to NRR currently? Thank you.

Mark Partin (CFO)

Yeah. Our strategic product sales has been very strong over the last year, or two even, and we've seen them typically range in the 25%-30% of total bookings in any quarter. That's our target range and what we like to see. Given that portfolio and that it's expanded and that it is a big part of customers' transformation, we would like to see that at the 25%-30% range. At 20% in Q2, where it landed, not where we want it to be or need it to be. We're working through many of these things that Owen has described, to drive greater adoption and penetration in sales of those products.

Operator (participant)

One moment for our next question.

Bobby Dion (Analyst)

Operator?

Operator (participant)

Our next question comes from the line of Andrew DeGasperi of Berenberg. Please proceed with your question.

Andrew DeGasperi (Senior Analyst)

Thanks for taking my question. Just wanted to maybe ask a big-picture question. You gave out some mid-term targets at your Investor Day last year, and obviously, you've had some sizable changes within the organization over the last few months. I'm just wondering, in terms of particularly as it pertains to revenue growth, I know the window there for returning to 2025 was three to five years. I guess, just in terms of those numbers, are you still confident you can reach them? Would you plan on maybe updating us in a month or so at the BeyondTheBlack?

Mark Partin (CFO)

Yeah, as you know, we put out the targets, literally, literally less than a year ago, and we still believe that there are multiple levers that we have at our disposal to achieve those targets, whether it's our partner channel, working with SAP, the strategic product portfolio, as well as new innovation. All of these items support the future growth we envision for the business, and we're taking steps to make sure we deliver on that. We feel good about the foundation, and we are focused on reaccelerating our growth going forward.

Andrew DeGasperi (Senior Analyst)

Thanks, Mark. Then lastly, on the gross margin, side, I mean.

... Wouldn't you think the runway is to expand that to, to the, you know, 83+%? Is that still likely? I mean, that we've not seen the dividends yet coming through that line item.

Mark Partin (CFO)

That's right. Yeah, we have not gotten that back to. Well, first, we've got a migration taking place that'll take us into 2024 and onto the public cloud. Until we complete that for all customers, we're substantially, I think, over or at least over halfway through it. We have a number of customers this year and next year to get through, and then we can start to move or migrate to a higher gross margin. That's sort of our longer-term target or our midterm target as well.

Andrew DeGasperi (Senior Analyst)

Great. Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Matt Stotler of William Blair. Please proceed with your question.

Matt Stotler (Equity Research Analyst)

Hey there. Thank you for taking the questions. Couple of, couple of strategic products here, follow-ups. In terms of intercompany, you mentioned intercompany intelligence, obviously continuing to take a more holistic approach to intercompany financial management around that core ICH. Would love to just get some, some color on if that's, you're seeing that make a difference in the pace of adoption for ICH, for intercompany. Obviously, adjusting for kind of the near-term macro challenges, given those are big deals. As you think forward, what other levers do you think that you have to drive further adoption of those products specifically?

Therese Tucker (Co-CEO and Founder)

Specifically, IFM or all strategic products? Just asking, which are you asking about?

Matt Stotler (Equity Research Analyst)

Specific to IFM. Specific to IFM.

Therese Tucker (Co-CEO and Founder)

Well, you know, it, it is, it is ideally suited for large, complex, multinational organizations. These customers really are focused on continuing to drive efficiencies in their business and, you know, adopt high automation. It is still a fairly long, involved process because it's something that, you know, you've got to get buy-in across multiple areas of the business. You've got to have people that have an appetite for change and for transformation. I wish I, I wish I knew how to goose acceleration around digital transformation, because that's really what we do so very, very well. It really is just part of a journey that a company goes on. We did have a number of great IFM deals this quarter, and we still really expect it to be a key contributor to our longer-term growth.

Matt Stotler (Equity Research Analyst)

Got it. It's helpful. A follow-up on the go-to-market. You know, obviously, you guys have discussed removing the overlay sales team for strategic products and introducing, you know, the general quotas there. You know, would love to just touch on if you're seeing that have any impact on deal momentum, you know, or top of the funnel, and any sense of, you know, if you would consider that to be running at, at full productivity in terms of selling strategic products, or if there's still some room to go on that front as well?

Mark Partin (CFO)

Yeah, there's still room to go. You know, year to date, I think, we continue to be sort of in, in our target range at the low end on strategic products. We continue to see customers' interest level at the top of the funnel. For us to close out this year and for the sales people to, to participate, we need to convert and move, these products and these deals through the, through the pipeline. We're intently focused on programs and customer communication and, a sales performance that will do just that. We know that the strategic products, particularly, Therese gave some fascinating growth figures in, not, not just, in the AR product, where we know that the customers that are using our products are getting incredible value for it, and that they're accelerating their usage of those products.

It's really getting it into those hands and closing out those deals. The strategic products quota this year was a good idea. We're still early in the year. We were a back-end-loaded company. We've got pipeline for strategic products, and we're working hard to get those closed.

Matt Stotler (Equity Research Analyst)

Very helpful. Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Chris Quintero of Morgan Stanley. Your line is now open.

Chris Quintero (VP of Equity Research Analyst)

Hey, thanks for squeezing me in here. Owen, I wanted to ask about the changes you're making to the global partner network. Are there any specifics you can give on, you know, how you expect to drive greater accountability and some of the commercial changes you're looking to make there?

Mark Partin (CFO)

The question is, how are we looking to drive greater accountability in the global partnership network? Is that what I thought I heard you say?

Chris Quintero (VP of Equity Research Analyst)

Correct. Yes.

Mark Partin (CFO)

Yeah, look, I think that, from my experiences being on both sides of this over many, many years, lots of people sign up to be partners without very clear understanding of what you would sort of call your wedding vows, to make sure that each party understands what, in fact, they're committed to. Best practices are to be very clear about that. That's a process that we are going through with all of our partners at, at this particular point in time, and we'll have that completed over, you know, the next six, eight weeks.

We have a, at BeyondTheBlack, we have a big partner summit, and I expect that those that are willing to commit and that we're committing to, those relationships will get, you know, broader and deeper and more productive for everyone. Then I expect a number of partners to fall by the wayside because they're not going to be able to make the commitments that we need from them. Rather than prolong something in, in name only, we'll move on from those. So that's, that's what we're working our way towards all around the globe at this point in time.

Therese Tucker (Co-CEO and Founder)

Excellent. Thank you.

Operator (participant)

One moment for our next question. Our next question comes from the line of Adam Hotchkiss of Goldman Sachs. Please proceed with your question.

Adam Hotchkiss (VP of Emerging Software Equity Research)

Great. Thanks so much for taking the questions. Would, would be great to get an update on how you're thinking about capital allocation here. I think, there have been a couple of cases on the public and private side where M&A activity has picked up in the space. Just curious, with profitability coming in better and the 2026 Convert pretty far down the curve here, how you're thinking about opportunities to continue to expand the portfolio inorganically or other capital allocation opportunities?

Mark Partin (CFO)

Yeah, thank you. With $1 billion on our balance sheet, and as you mentioned, some maturities that are fairly decent ways out, you know, a couple things that we view, it's a very strong weapon in our own market as a competitor, where we've got the balance sheet. Second is we've got a number of deals that we continue to prove and validate our thesis around our strategy, our ability to move around inside the office of the CFO and raise that level of conversation to get inside these strategic transformations. Just as a reminder, the office of the CFO transformation is still very early, and so BlackLine's ability to play in those spaces continues to validate as we, as we have done these deals and proven it.

Look, our view is that we can and will be opportunistic, very targeted, but, we'll be looking at M&A, where we can make a difference and buy capabilities for our customers that are important to them, that will not just drive revenue growth, but drive real value inside 4,000 of the biggest, best companies in the world. We're, we're sort of leaning forward at the moment in our ability to use M&A as a growth strategy.

Adam Hotchkiss (VP of Emerging Software Equity Research)

Okay, great. That's really helpful. Thanks. Then appreciate the color around strategic sales quotas. Just zooming out on sales productivity more broadly, would be great to get a sense for how you're thinking about, you know, where you're at from a current productivity perspective, and how that's informing your view on optimal headcount. you know, any thoughts on incremental hiring, things like that, would be helpful. Thanks.

Mark Partin (CFO)

Yeah. We, we had the benefit of, of a, an aggressive or at least an assertive hiring into the market demand last year, and so we've been able to decelerate on hiring on the demand side of the business. Really focus on programs such as incentive and alignment, and even reorienting some of the go-to-market groups to be more efficient. Those are giving us the opportunity to drive productivity into what is now one of the most ramped, you know, sales headcounts that we've had. So as we move forward, we will be able to be agile and adapt to the market demand environment. At the moment, that demand is flat, our hiring is flat, and so we're gonna continue to sort of modulate that way.

Adam Hotchkiss (VP of Emerging Software Equity Research)

Great, really helpful. Thanks a lot.

Mark Partin (CFO)

Thank you.

Operator (participant)

One moment for our next question. Our last question comes from the line of Daniel Jester of BMO Capital Markets. Please proceed with your question.

Kyle Aberasturi (Equity Research Senior Associate)

Hi, this is Kyle Aberasturi for Dan Jester. Thanks for squeezing us in, and appreciate the color on the fast-track implementation program for midsize companies. I was just wondering, what was the catalyst to put this program together? Thank you.

Therese Tucker (Co-CEO and Founder)

You know, we know that mid-market companies are constrained when it comes to both accounting and IT resources, okay? This was really about serving that contingency even better. Anything that could get them up and running more quickly and have them see time to value shortened, was we considered a win. The interesting thing is, you know, over the longer term, I think this program will probably expand to even larger companies because people really enjoy the focused attention and being able to get something done very rapidly. They actually enjoy building the relationships with the people at BlackLine, because then they feel like their journey is going to be supportive, supported, and they also feel like there's more to come, right? If you can get something up and running in five days.

For goodness sakes, they certainly want to look at more products at that point.

Operator (participant)

Thank you. I would now like to turn the conference back to Owen Ryan, Co-CEO, for closing remarks.

Mark Partin (CFO)

Thank you. On behalf of all BlackLiners, thank you so much for your interest in and support of our company. Please have a great day. Talk soon.

Operator (participant)

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