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

Good afternoon, and thank you for joining us today. With me on this call is Marc Huffman, Chief Executive Officer of BlackLine; and Mark Partin, Chief Financial Officer. Before we get started, I'd like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, in particular, our guidance for Q1 and full year 2023 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during the call are reasonable, actual results could differ materially, as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. And also, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is currently available in our earnings release, which may be found on our Investor Relations website at investors.blackline.com or on our Form 8-K filed with the SEC today. Now, I will turn the call over to BlackLine's Chief Executive Officer, Marc Huffman. Marc?

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today. BlackLine delivered solid financial results for Q4, rounding out a year of demonstrated profitable growth. We reported fourth quarter total revenue of $140 million, up 21% and for the full year, $523 million, up 23%. We also delivered further margin expansion in the quarter due to operating efficiencies, combined with disciplined and sustainable expense management, giving us confidence in our ability to achieve the medium-term targets laid out at our recent Investor Day. Turning to an update on the macro environment and our sales performance in Q4. We're still seeing elongated deal cycles, which we noted on our prior earnings calls, as customer buying behavior reflects ongoing market uncertainty. While strong competitive win rates and healthy demand signals at top of funnel reinforce the long-term confidence in our business, we expect near-term demand to be influenced by delayed decision-making and ongoing budget re-prioritization. Our lower-than-expected bookings performance in Q4 reflects these conditions and underpins the assumptions we've embedded into our 2023 revenue guidance, which Mark Partin will speak to shortly. We're pleased that many of you listening today were able to participate in our BeyondTheBlack customer conference in November. As part of the event, we hosted some of the largest global enterprises and unveiled a series of new solutions and programs that enable, enhance and transform accounting. Specifically, we announced innovative new solutions and capabilities such as Financial Reporting Analytics, or FRA and BlackLine Accounting Studio. We also expanded our Modern Accounting Playbook to our Cash Application solution and unveiled a new Microsoft Dynamics 365 connector. Additionally, we added new services and support offerings to drive greater value for our customers, enabling them to accelerate the adoption of time to value of our industry-leading solutions. Following the…

Thank you, Marc, and good afternoon, everyone. BlackLine reported solid top line growth and further margin expansion as we closed out the year, driven by further efficiencies and productivity across the business. Expanding on what Marc mentioned earlier, we saw lower-than-expected bookings performance in Q4 as market uncertainty continues to influence deal cycles and customer buying behavior. This was most evident in the last few weeks of the quarter especially in EMEA and in the middle market as deals that were expected to close in Q4 slipped into future periods. Despite this, we continue to focus our efforts on what we can control in the near term while positioning the business for long-term success. As such, we see multiple factors that give us confidence to deliver against our targets in 2023. First, as Marc mentioned, we recently took action to better align capacity to near-term demand while further refining and enhancing our go-to-market strategy. Second, we're entering 2023 with a more seasoned and efficient sales force as we lap a period of heavy hiring and unramped sales capacity. Third, we continue to arm our sales force with innovative new solutions and capabilities like FRA and BlackLine Accounting Studio that drive customer engagement, support top of funnel activity and ultimately deliver incremental revenue. Fourth, we continue to develop, build and expand our global partner network to expand our reach and capabilities. And finally, we continue to see healthy competitive win rates across our markets. Now, let's review some highlights for Q4. Total revenue grew to $140 million, up 21% compared to the fourth quarter of 2021. Note, FX was a 1 point headwind to revenue growth in the quarter. Also, stronger-than-expected demand for professional services resulted in 41% growth versus the prior year as customers desire to unlock the embedded value…

[Operator Instructions] Will come from the line of Rob Oliver with Baird.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continuing on the Accounting Studio line, Marc, can you help us understand maybe -- it seems like -- or maybe how applicable is Accounting Studio to the plus 4,000 customers that you have? And I know it's very early, but what kind of ARR uplift would you say that might drive over the next year?

Yes. I think it's way premature to be thinking about the ARR uplift, especially in the time box you just put on it, Pinjalim. I appreciate the nature of the question. It's -- I think it applies to at least 50% to 60% of our customers based on the size, demographics and complexity of them and the complexity and the workloads that we do for them. The Accounting Studio itself is one component, and it's the first component of our broader platform strategy that we have, and we talked about at Investor Day. How it comes to impact the ARR over time will have some direct -- I would say, direct impact from an ability to bill and charge for it and then some indirect in terms of net revenue retention, expansion and making the ability of some of the multiproduct solutions, high automation things really come to life for some of these customers that they're better integrating their data sources in these complex business processes that they do have.

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

Pinjalim, I understand the question. It's a fairly consistent philosophy that we've had in previous years, which, given our business model, the predictability of the base, the recurring revenue nature, the small percentage of services, we've got a fairly high confidence in a forward forecast. The key is that we took what we saw in the last couple of quarters, learned from it, everything from closure rates to deal timing and cycle timing and extrapolated that forward. Without trying to be too exact on the return of the demand environment, we've built our forward forecast range very similar to what we've done in the past. It's pragmatic. There's high conviction in our ability to execute and if and when -- or actually when demand returns, we feel like we're able to improve upon and build off of what we've provided.

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

It’s actually Bobby Dee on for Joe Meares tonight. Starting off your -- great to hear about the strength with SolEx, but I'm curious if there are any updates to the recently signed partnership with Accenture. Has that led us to any new logo wins or addition to the pipeline there? And then I have one follow-up. Thanks.

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

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

Yes. I guess in some ways -- one, I'm not sure I can quantify for you, Bobby, the amount of ERP integrations. We have very specific and purpose-built with use cases embedded connectors. And so we have those for all the big names that you would expect, and they support our strategy and -- sort of land and expand strategy with those like SAP, Oracle, et cetera. We announced recently the Microsoft connector as well. Then we've -- as a part of our platform and the BlackLine Accounting Studio, the integration platform itself is an important part of the strategy, keeping in mind we get a higher net revenue retention from those connectors, people who use connectors or our APIs. And so on unleashing the ability to write to APIs has become really, really, I think, strategic. We've had a number of large customers sort of utilizing those who landed last year and are now coming live, providing some great feedback on it. And so, with the advent of the APIs, theoretically, even if you had this item that was at the longest tail of the list of ERP companies out there, you could theoretically write to our APIs and create connectivity. So I can't really quantify how many. But as you can tell, excited about the potential. I think it's strategic. And we'll continue to invest in that.

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

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

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

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

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

Right. So, it's a 14 to 16 coming off of Q4. I think I would remind you, we had FourQ in the inorganic in last year. Last -- that's number one. Secondly, as Q1 of last year was one of our strongest quarters of the year, we came out of a very strong 2021 into a strong Q1 of last year. Q1s are typically seasonal. So, last year's Q1 strength was extra special, and that also sets up the tougher comp for this quarter.

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

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

Yes. I appreciate that. Look, our guidance takes what we've seen in the best case that we can, takes what we've seen in the last couple of quarters in terms of closure rates, sales cycle and timing and extrapolate that through the first half of this year for -- that seems the most pragmatic way to look at it. Q1 is a seasonal quarter. We're in it now. We have, I think, with a couple -- two or three quarters now consistently seen closure rates being impacted and decisions being impacted by the macro and so moving in the early part of this year, that is the right approach to sort of extrapolate that for us. With regard to other metrics. We don't guide on other metrics, but our view is that the base of customers that we have and our ability to drive strategic products in this environment is notwithstanding the macro is a point of emphasis and priority for us. And so, that's -- at the end of last year, we saw our growth profile move closer to 65-35, where the growth coming from the base and we would expect that to be the early part of this year, too. We also, I think, mentioned that the FX has some damage as a headwind, both in revenue and in billing and in the ARR numbers, and we expect that to be the early part of this year, too. So, that's our sort of current working assumption, is to extrapolate what we've seen in the last half of these quarters and put that into the first half of this year.

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

Yes, for sure. Look, we recently -- in the fourth quarter, we decided to shift our focus from what had been a fairly lengthy third-party implementation of a quote-to-cash tool that wasn't delivering the benefits that we were expecting. And so as part of that, we wrote off the implementation costs from the past what had been sort of a three-year on and off project worth about $5 million. And so, that's what you saw in that reconciliation. And so, we've moved on from that, and that's in our fourth quarter as a charge-off.

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

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

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

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

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

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

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

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

Great question. Look, transaction matching continues to be our highest penetrated, and that's still -- out of 4,000 customers, that number is still in the hundreds. And the other products from the cash and AR to IFM, those still continue to be nascent in the single digits. So, the opportunity there is for -- to sell into that base. To your question around can strategic products land and expand within a single customer? The answer is yes. The way the pricing works and the way we've modularized, we can absolutely land and expand our strategic products to build within further penetration on account.

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

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

Yes. Thank you. So on that last question about deal slippage, we've -- it's tough to predict that, particularly as we move from Q4 into Q1 in this macro. So, I think the right way to think about that is those are not pipeline deals that we've lost. They continue to be in some form of our pipeline funnel. Marc mentioned earlier, our competitive win rates continue to be stable. Our interest levels continue to be strong and trying to close that gap for closure rates is where we see the macro impact. So, whether or not it's Q1 or continues forward, I think, is a lot to do with that macro uncertainty within many of these regions and customers. Moving to the first question. So, the market that we serve is in the CFO and controllers market, particularly when it has to do with digital transformation. And you see IT budgets and CIOs can get involved certainly in those areas. We do have a thesis around those budgets, which is there's -- within the office of the CFO, you'll see in the early stages of uncertainty and macro and recessions and other issues, you'll see a retraction, re-prioritization but then you'll see a greater need, as Marc said in his earlier -- to re-prioritize because to drive efficiency and automation in either a war for talent or a more pressure on margin and margin expansion, CFO and controllers, obviously doing more with less. So, we think being a high ROI product that we sit in the first budget prioritization out of the gate when they're ready to start spending. And so from that environment going into this year, tough to know the timing, but that's how we think about the market.

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

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

Yes, interesting. Like --we have a little over 4,000 customers today, about half of them are enterprise. Some -- a company we would describe is over $750 million and then the other half are mid-market, below $750 million. And we often see in any given quarter, the velocity or the expansion of the customer number is in the mid-market space. As you might imagine, there's more mid-market customers coming onto the platform, but the enterprise are at a much larger size. So, we would think of the gain each quarter on average to be mostly mid-market in the customer number, but mostly enterprise in the ARR growth number. And so, to your question around, is there a specific driver in each case, the answer to that is not necessarily. It's hard to put a particular product or driver on those. Most of our customers today begin and start with a financial close and then they build up from there. And that's just an average.

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

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

Yes. Just to -- I would call it a continuity. I think I would describe, it didn't improve nor did it degrade. It was a continuity of our observation.

Okay. And then, my second question is, how should we think about the outperformance of services and the demand that we saw there? I mean the company posted some of the highest services margins in recent history. Shouldn't that lead to incremental subscription demand -- kind of identify opportunities? How should we think about that?

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

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

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

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

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

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

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

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

Yes. Thank you. I think you start with the gross margin, where each quarter last year, we saw an uptick to finally in the fourth quarter, getting to 80%. And that's been through just very impressive performance in the services organization to drive a higher operating margin in their business from higher rates, higher utilization and higher quality work as well as a better balanced and thoughtful migration on the GCP, which in that number, still is creating a 1.5 to 2-point headwind. They were still able to operate effectively. So I think that's the sort of key part of the leverage. Throughout the P&L, though, we've had -- on all cases -- on all fronts, as you said, fairly broad-based efficiencies and as well as cost discipline. So in addition to just belt tightening, key areas of efficiency are in G&A, we've had built out the infrastructure to support our growth over the past few years. And now we're moderating these investments, and we feel like we're in a good place to, for example, in areas of recruiting and in areas of automation. In the sales and marketing organization, as I mentioned earlier, we have better sales rep productivity in the second half of the year coming out of the year. More of our sales force now based on the timing of when we hired are ramped coming out of the year. And then, we are obviously giving a lot more product and opportunity, more upsell of strategic products. So, there's more of a flywheel motion with our ecosystem and with our product set. Finally, in the product testing [ph] organization, that's been a great beneficiary of things like moderating our investments, improved efficiency through consolidation of vendors, off-shoring some developments and building a center of excellence for our development teams, driving efficiency for our engineers through better tooling and consolidation of those tools. So, a number of places where the management teams across the company globally have done a very good job of getting focused on how to drive cost out of the business, yet still be investing for the future and have efficiency.

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

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

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

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

Likewise, Pat.

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

Is there a shortage of accountants? Yes, I think so. There's a shortage of great accountants. There's a shortage of all accountants. We think our markets got about 13.5 million to 14 million accountants around the world that are doing something along what we help them do. And our challenge to reach the accountant has always been the same. The accountants, I think, they’re -- it's inertia. It's the unwillingness to change. It's risk that comes from changing. And so, what we are sort of always focused on and what we're great at is talking to the accountant. And what we are focused on is how to turn that level of need into opportunity, Pat. So, that's, I think -- that's obvious.

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

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

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

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

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

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