BlackLine, Inc. (BL) Q2 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q2 2024 BlackLine Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Humphries, Vice President of Investor Relations. Please go ahead.

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 2024 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe forward-looking statements made during the call are reasonable, actual results could differ materially as these statements are based on our current expectations as of today, and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Finally, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is available in our earnings release, 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 will turn the call over to BlackLine's Co-Chief Executive Officer, Owen Ryan. Owen?

Thank you, Matt, and good afternoon, everyone. Thank you all for joining us today. BlackLine's results this quarter were driven by improved execution as progress against our operating model continues at a steady pace. Specifically, we delivered $161 million in total revenue, non-GAAP operating margin of 20% and $43 million in non-GAAP net income. Our strategic products portfolio had a solid quarter and we also saw the number of customers with $1 million or more in annual recurring revenue increased to 68. Our go-to-market teams executed well this quarter and we believe that the additional focus, rigor and discipline across the business is supporting our results. We also have several strong and proven leaders that recently joined BlackLine, and their early efforts are beginning to drive the types of outcomes we expect longer term. While there is even more work to do going forward, we believe early results are validating our efforts while further enhancing our differentiation in this large and growing market opportunity. Going deeper into execution this quarter, we saw improved close rates, larger deal sizes and solid competitive win rates. Also, our enterprise business was a highlight this quarter with notable performance in Europe and APAC. While total deal volume remains subdued and new business sales cycles remain extended, these results give us confidence that our efforts are driving improvements. We also saw solid results from our strategic product portfolio and note that our consolidation and financial analytics pillar saw some great wins and expansions. We recently began packaging our financial close and consolidation solutions together as a unified end-to-end offering for customers and prospects. While this initiative is still in its early stages, initial results are promising, and we look forward to expanding this offering more broadly in the months ahead. We also saw some improvement in pipeline creation, especially as we exited the quarter. One area supporting this improved pipeline is in our invoice to cash pillar, which has seen building interest from customers and prospects interested in electronic invoicing, presentment and [indiscernible] or EIPP. We acquired this capability last year as part of our data interconnect acquisition. And after a successful integration process have started to position our offering in the market as a complete end-to-end invoice-to-cash solution. Further, this additional capability helps support our recent inclusion in the Gartner Magic Quadrant for invoice to cash. Next, we are making progress enhancing our marketing message and brand, thanks to our refocused marketing efforts. We have become more disciplined in our customer targeting while driving more comprehensive end-to-end message. We have also become more intentional on meeting customers where they are in their life cycle, both pre and post purchase to not only land new customers but also enable quicker, more efficient expansion within existing accounts. While early, these efforts help support our strategic goal of elevating the conversation with our customers in the office of the CFO. One area where I am pleased to see progress is in our continuing effort to ensure that the value of the BlackLine promise remains steadfast than absolute. We focus on delivering a strong value proposition to our customers. emphasizing not only time to value, but also the ROI on their precious spend. This value-centric approach has become especially important in today's environment and has strengthened our position against competitors will often rely more on price as a differentiator. We believe our improving competitive win rates indicate that our focus on value is resonating well in a market increasingly attuned to value over cost. As many of you know, I regularly meet with customers and prospects to understand their needs and how BlackLine can better help transform their accounting and finance organizations. This quarter, I've seen a clear trend reinforced and that is digital finance transformation is still very much in focus. Customers still see this as a multiyear journey, and it is a core component of their long-term strategies. The key takeaway here is that while we may encounter short-term challenges related to budgets and the pace of transformation, the long-term opportunities and secular trends within the office of the CFO remains strong and highly relevant. In addition to meeting with customers, I spent considerable time with our partners, aligning our goals and exploring joint opportunities to support our customers. We find that partner-led implementations, especially in the enterprise and upper end of the middle market, enhance our value proposition and supports our strategy of improving customer outcomes. Building on this, in quarter 2, we made progress on enhancing our distribution efforts through our partner network. We've achieved better partner alignment, particularly in enterprise, resulting in a higher percentage of partner influence pipeline and an increased sharing of services and implementation work. Additionally, we are integrating our partners more deeply into all 4 of our pillars to drive further global opportunities. We have also seen notable increases in partner participation at our customer events reinforcing and validating our progress. Our partnership with SAP showed solid performance this quarter from our SolEx business, driven primarily by new customer wins. And we recently announced that SAP has included our financial reporting and analytics solution as part of the SolEx partnership. We are optimistic about this joint offering with SAP given recent success with this solution. Our renewal rate this quarter was in line with expectations, but below where we expect to be over the longer term. So how are we continuing to address this? First, we have been prioritizing and enhanced customer onboarding experience to ensure consistency and adoption. This approach directly supports our value proposition and accelerates time to value for customers. It also has the potential to accelerate expansion and renewal activity within our customer base. Next, we are quickly driving more digital self-service options for customers based on continued customer feedback. This shift aims to increase customer satisfaction while reducing our cost to serve. We have also begun building customer groups within key industries where users are sharing their experiences and success leveraging BlackLine. Finally, our recent efforts to drive process optimization with customers has led to improved levels of customer satisfaction, better customer engagement and increased usage. While we are pleased with these initiatives, we anticipate that it will take a few more quarters to fully realize these benefits and drive our renewal rate to our traditionally high level. As mentioned earlier, we saw terrific new customer wins this quarter. with notable outperformance in Europe and APAC. Specifically, we won a competitive replacement with one of the top 2 U.K.-based pharmaceutical companies as part of our SolEx partnership. The customer was looking for a partner to automate and transform their finance and accounting processes while also consolidating on a single trusted vendor from a collection of manual tools. This multi-solution deal, including financial close, automated journals, intercompany and Smart Close positions the customer to drive real transformation across their accounting and finance organization. Next, in North America, we signed a well-known fast food chain to a multi-solution deal as part of a competitive replacement. The customer was initially looking to replace their financial close solutions with a more modern and end-to-end solution. They were also considering moving away from their current vendor to their native ERP partner. However, our efforts to position and sell both financial close and consolidation together, providing an end-to-end solution exceeded their expectations and with the logical choice for their finance and accounting teams. In the mid-market, we signed a leading global law firm to a multi-solution deal as part of their digital finance transformation efforts. Their existing financial close and consolidation processes are manual, time-consuming and lack appropriate visibility and automation. Our sales team working hand-in-hand with our pillar leaders were able to speak to the value of a modern end-to-end solution for their financial close and consolidation process to support their longer-term strategic goals. We also saw some large expansions with customers this quarter, with notable cross-selling of our strategic products. We signed our largest deal ever in Canada with an existing global insurance customer that needed a partner to help them consolidate their complex financial systems landscape enhance their compliance and controls and drive automation as they continue to grow. Leveraging a partner, we were able to deliver compelling value proposition that supports their multiyear digital finance transformation journey. In APAC, we expanded with Australia Post, an existing customer in one of Australia's largest government-owned entities. They were seeking a solution to improve and automate their invoice to cash processes, working with their finance team, we demonstrated how our invoice-to-cash solution and partnership could serve to drive real automation, unlock working capital and give them additional visibility and control as they look to reshape their business. With that, I'll hand it off to Therese to discuss how we're continuing to accelerate innovation for our customers.

Thank you, Owen. This was a solid execution quarter at BlackLine, and I am proud to highlight several key achievements from the quarter that underscores our commitment to innovation and customer success while delivering a more complete solution for our customers. First, our R&D teams are delivering cutting-edge solutions and capabilities that are now or will be soon available to our customers. These new solutions and capabilities are designed to meet and exceed our customers' evolving needs and help them stay ahead. As you know, the complexities within the company's financial systems landscape are growing due to increased demands placed on accounting and finance teams the need for high-quality data and insights that drive decision-making. As an example, we are progressing through the early adopter phase of our studio solution with a growing matter of customers transitioning into production and increasing their usage, while still in the early stages of rollout, we are seeing encouraging levels of engagement and strong satisfaction from our customers. This positive feedback is an indicator of the solution's longer to potential and impact. Looking ahead, we are poised to expand the rollout of Studio more broadly in the latter half of this year, bringing its innovative capabilities to a wider audience and offering additional value for our customers. We also recently entered the early adopter phase with our Gen AI-powered Journal Risk Analyzer solution. Customers, especially those seeking better insights and intelligence into their journal processes continue to show interest in this unique and powerful solution. It can reduce the level of risk through an analysis and visibility, while also enhancing compliance and audit readiness through its automated capabilities. We believe AI-powered solutions like the Journal Risk Analyzer offer a low-risk way to build trust and confidence with customers who want to leverage AI responsibly in their most sensitive and critical accounting and finance processes. Our methodical approach to innovation involves not just creating new solutions, but also seamlessly integrating them into customers' existing workflows and processes. This past quarter, we rolled out several new AI-powered capabilities that we expect to enhance the customer experience, driving greater levels of productivity, automation and delivering value wherever customers are at in their digital finance transformation journeys. We are introducing and embedding these AI-powered capabilities thoughtfully, educating customers on low-risk use cases to enhance adoption and instilling confidence and trust over time. Building an AI foundation with customers and leveraging this to expand usage and adoption is core our strategy, recognizing that AI is not a one-size-fits-all approach. To go a bit further in our financial close pillar, we are starting to integrate natural language processing into our core financial close solutions, beginning with account reconciliations. This unique and powerful enhancement is just the start. Looking ahead, we envision extending and embedding these advanced capabilities broadly across our suite of financial close solutions, setting a new standard for efficiency, intelligence and risk reduction in finance and accounting operations. Additionally, within both our financial close and consolidation and financial analytics pillars, we went live with our document description summarizer in May for early adopters. We've seen customers begin to use these additional capabilities. And while early, we are pleased with the initial results. As Owen mentioned, our invoice-to-cash solution was recently included in the Gartner Magic Quadrant for the first time. which we believe should enhance our competitive positioning and support our long-term growth objectives. Core to be an additive quadrant was the addition of EIPP capabilities from our acquisition of Data Interconnect last year and, of course, our successful integration efforts. We are already seeing early opportunities with prospects and customers seeking a comprehensive end-to-end invoice-to-cash solution to solve their most challenging business problems. In addition, we have made significant strides in advancing our platform strategy, driven by the expansion of our global cloud and infrastructure capabilities. These efforts not only address today's complex mission-critical customer processes, but also anticipate future needs. By strengthening our platform's foundation, we believe that we can ensure that our services remain reliable, secure and accessible worldwide. This supports our goal of delivering unparalleled service quality regardless of customers' price or location. As part of these efforts, we recently stood up our APAC data center in partnership with our public provider to enhance localized cloud operations. We're also advancing our data strategy and data platform build-out to support the integration and management of high-volume customer data and reporting. This not only supports our customers directly, but also supports our own AI development work. Lastly, we are adding additional connectors and APIs to further support the real-time ingestion and bidirectional movement of high-volume data required by a modern platform. Looking ahead, our product road map and platform build-out are filled with exciting developments. We are poised to introduce further customer-centric innovation, supporting our market leadership and differentiation. Each step we take is guided by a clear vision and strategy reinforced by our ongoing commitment to our customers' success. To close, our company's performance this quarter is beginning to reflect the changes we have made over the past year. While there is much to do, we feel we are well positioned for long-term success and remain committed to delivering value to our customers, partners and stakeholders. And of course, we thank all black liners for making this happen. With that, I'd like to turn it over to Mark Partin, who will review our updated financial guidance. Mark?

Thank you, Therese. Our overall performance in the second quarter improved compared to Q1. Some of these improvements were anticipated as we continue to execute on our operating model, while others are being driven by our recently strengthened leadership team. We've also seen some early signals that top of funnel demand is improving, but acknowledge that it is early, and we are still below levels that we would consider normal or healthy. Despite this, we remain focused on our financial results, especially our progress on margin expansion and free cash flow generation and that such results support our ability to meet demand where it is and invest strategically. With that in mind, let's review our financial performance in more detail. Total revenue grew to $161 million, up 11% with subscription revenue growth of 12%. Services revenue growth was flat and continues to weigh on our overall top line performance. We expect that services will remain a headwind to our full year revenue growth. Calculated billings growth was 12% with trailing 12-month billings growth of 11%. Remaining performance obligations, or RPO, was up 9% with current RPO growth of 10%. We closed the quarter with total annual recurring revenue, or ARR, of $620 million, up 10%. Net new customers increased by 24% in the quarter, bringing our total customer count to 4,435. Gross customer adds were healthy this quarter, but were offset with expected lower middle market customer churn. Our revenue renewal rate in the second quarter was 93%, in line with expectations as we continue to see instances of vendor consolidation occurring. Net retention rate, or NRR, was 104% this quarter primarily driven by a lower velocity of account growth and slightly higher customer churn. Strategic product performance was a highlight this quarter, and it represented 28% of sales, coming in towards the higher end of our target range. Performance this quarter was primarily driven by strength in financial reporting and analytics, Smart Close and transaction matching. Partners were involved in 85% of large deals this quarter. with consistency across both new and existing opportunities. SolEx performance was in line with our expectations, driven by a higher mix of new business. In Q2, SAP partnership revenue represented 25% of total revenue. Turning to margins. Our non-GAAP gross margin was 79% was non-GAAP subscription gross margin of 82%. Gross margin performance remains in line with our expectations as we focus on optimizing cloud spend and progress with our GCP migration efforts. Non-GAAP operating margin was 20% above our expectations, largely driven by productivity gains across our sales team is across our R&D teams. Non-GAAP net income attributable to BlackLine was $43 million, up 40% and represented a 27% non-GAAP net income margin due primarily to operating income outperformance. We generated $41 million in operating cash flow and $34 million in free cash flow in the quarter with a free cash flow margin of 21%. Our free cash flow generation remains a key strength for BlackLine. Turning to our balance sheet. In May, we took action to repurchase 80% of existing 2026 convertible notes from the proceeds of a new $675 million convertible note along with cash on hand. After these concurrent transactions, we ended the quarter with over $1 billion in cash, cash equivalents and marketable securities. Last week, we also retired our existing $250 million face value 2024 convertible notes using cash from the balance sheet. Following this recent transaction, we have approximately $800 million in cash, cash equivalents and marketable securities. Our updated share count guidance reflects these transactions. Now on guidance. We are raising our full year revenue and non-GAAP operating margin guidance ranges. Our execution in the second quarter, while improved, is balanced against our view that the demand environment remains muted, but stable as we move through the end of the year. Further, we still expect that services revenue growth will be a headwind to our full year total revenue growth rate. Now for the third quarter of 2024, we expect total GAAP revenue to be in the range of $162 million to $164 million, representing approximately 8% to 9% growth. We expect non-GAAP operating margin to be in the range of 19% to 20%. And we expect non-GAAP net income attributable to BlackLine to be in the range of $38 million to $40 million or $0.49 to $0.52 on a per share basis. Our share count is expected to be approximately 77 million diluted weighted average shares. And for the full year 2024, our updated guidance is as follows: we expect total GAAP revenue to be in the range of $647 million to $651 million, representing 10% growth; we expect non-GAAP operating margin to be in the range of 18% to 19%; and finally, we expect non-GAAP net income attributable to BlackLine to be in the range of $158 million to $168 million or $2.08 to $2.21 on a per share basis. Our share count is expected to be approximately 76.1 million diluted weighted average shares. With that, I'll now ask the operator to open the discussion to take your questions.

[Operator Instructions] Our first question comes from Steve Enders with Citi.

Okay. Great. I guess I'm just going to get a better sense for the -- what you're seeing out there in the deal environment. I guess how much do you feel like is just a bit of a change in the go-to-market that you've made over the past year or so and those investments beginning to have an impact versus some improvement in the deal environment or some other competitive dynamics potentially changing here?

So thanks, Steve, for the question. And I think the thing that we're seeing is our deliberate focus and our execution and spending more time with our customers is beginning to have a very positive impact I can't tell you that the demand is increasing just because it's increasing. It feels to us like we're driving through our execution and performance and having those kind of real conversations with our customers that show the value that we can bring the impact that we can make is beginning to resonate with our customers. But it doesn't certainly feel like we have a tailwind. It feels like we're working very hard for every opportunity to bring it to fruition.

Okay. No, it's great to hear. I guess, as we think a little bit about like the revenue mix this quarter, it looks like the net new users came in pretty solid here and definitely improvement from last quarter. I guess, was there kind of any change in terms of maybe module adoption or anything to call out sort of kind of what drove the solid sequential improvement in new users on the platform this quarter?

I think it ties to when we said we had good success in the enterprise space. What you're beginning to see is the efforts that we have, again, focused on the right kind of customers that can really take advantage of the BlackLine platform. And so that's what drove that number.

Our next question comes from Rob Oliver with Baird.

The first is just on the -- congratulations on the FRA product being included now with SolEx. Can you talk a little bit about the potential pipeline for that product? Or the timing on that, was that included in the basket for Solex as part of this quarter? Or is that new? And then I guess, maybe for Mark Partin, on the 25% contribution from SAP, should we expect that, that number could grow as some of the initiatives around SAP and their move towards S4 HANA conversions and stuff could start to pick up? Is that your expectation?

Rob, it's Therese, and I'll begin. We are super pleased that SAP recognizes the value that FRA is bringing to their enterprise group reporting. And the intent is it does get sold together, which, again, is a very, very powerful combination. We had -- we did not have any deals this quarter. under that partnership. However, we are putting together quite a nice little pipeline. Now I can't promise anything in Q3 because it is SAP, it's typically larger enterprise deals and time lines on those, I don't want to be predictive on that. But I am pleased with that development, and I'm pleased with what I'm seeing.

Yes. I think what -- just to add to that, so we got a lot of good publicity at the Sapphire [ph] conference, where we got on the main stage to shop showcase that solution did receive a lot of positive reaction. And we think that there's a real good ability for us working very closely with SAP to drive very positive outcomes for our customers. So still very early days. But we like what we're seeing so far. But as we all know, it takes a little bit longer to sometimes get things done.

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

Congrats on the solid execution. Really great to hear about the strong momentum in Europe and APAC. Curious where you think those areas are showing better growth? Is it the lower penetration rate there? Or is there something else going on that's driving that performance versus U.S.?

Well, obviously, we're a little bit smaller in Europe and APAC than we are in North America. But again, I would be remiss if I did not give our BlackLine, there's a lot of credit for executing and they really since the beginning of the year, just understood what we're trying to do, how we're going to go about doing it, and they're doing what we've asked them to do and more. And that's just terrific. And I think that's just going to continue around the globe. So very, very confident in our ability to execute right now.

Got it. That's helpful. And then the free cash flow margin being above 20%, again, is quite impressive. So would be great to hear how you're thinking about the growth versus margin equation? Are you thinking about it differently today, especially kind of given the fact that you're approaching the high end of your medium-term margin targets here?

Yes. We've been super pleased with the performance of the business, both the accounting team that's generating the extra cash and just the business model from a profitability were high-margin business, which generates free cash flow. And I think we've been proving that sort of quarter after quarter and expect to keep putting the pressure on and driving free cash flow.

Our next question comes from Matt VanVliet with BTIG.

Yes. I guess first on the AI front. Therese, you mentioned continuing to embed more functionality, sort of gaining the trust and confidence of customers but curious on how you're thinking of that longer term. How do you monetize the AI development you have? Are you anticipating sort of stand-alone modules that you use there? Or is this really just driving the value over the cost component that I had mentioned.

Both, Matt. So first off, I think that embedded AI is going to become table stakes. And I think if you implement it properly, then your customers get a lot more value. And that creates a stickiness that I really, really want to see with our customers and our products. Secondly, I think the ability to create new products that are very specifically gen AI-driven that can do some amazing things. Those things are very easily monetizable. Okay. So they are -- so I think both embedded increases stickiness and not really so much looking to monetize and nickel and dime our customers to that on those. I think there'll be table stakes. And absolutely, products like our new Journals Risk Analyzer are going to be super important to leverage and monetize AI in a way that our customers are delighted in.

All right. Very helpful. And then I wanted to just maybe dig a little bit deeper on some of the increased partner participation, both at your events and obviously on the deal flow with 85% of your deals, including that. Curious, is this just sort of a steady improvement of the relationship with those partners? Is there something very specific that has been implemented over the last few months that you're seeing definitive upside from? Just maybe help us understand how that's progressing today and what we should expect maybe for the back half of the year.

Yes. Remember, I think we shared a while back that we created, if you will, a contract between our partners and ourselves and what they could expect from us and what we expected in return. As you know, we also reduce the number of partners we've worked dramatically with because we're really trying to focus and deepen those relationships on the very top of the firms that we're dealing with all around the globe across all of our portfolio and in the markets that we're trying to serve. And that is just beginning to show up day after day after day. in how we're working through new opportunities, how to try to improve optimization, how they're helping reason the team think about product enhancements. There's just a real good momentum that is building, and we expect it's going to continue to build as we move forward with these partners. I think they're excited about the fact that they're in the tent with us, and we're really trying to make them to partners in a way that maybe we see with software firms and their system integrators.

Our next question comes from Pat Walravens with Citizens JMP.

Great congratulations. So Owen, I was intrigued by the part of your script where you talked about bundling consolidation and close -- and so I was wondering if you could just sort of remind us and maybe Therese will pitch in here, the history of the consolidation capability and then tell us sort of in the go-to-market, why you're calling that out now?

I'll take the short version and Therese will definitely add to this. And good to hear from you, Pat. Hope we had a good vacation when you're away a little bit. Look, I think obviously, financial close is at the heart of what we've been doing. Our customers have been asking us for a while now to help them with consolidation, Therese and the team went out and built our financial reporting and analytics tool, which also had a consolidation capability. One of the things that we started to really experience was in the middle market, specifically as our customers taking the FRA tool and using it for consolidation and then encouraging us to continue to invest in it. That's where, again, the voice of our partners and our customers become so important in how we innovate and trying to meet them where they are. And so that's sort of been the evolution. And I think just in this -- last year, we have a dedicated pillar leader around our CFA team. He's working really well with our financial close team going out to talk to our customers about a more holistic journey and our customers deciding not only do they want financial close, but they want consolidation as part of that. So as we continue to evolve and build out our platform, I think you're going to see more and more of that as we draw our success. But I'm not the platform expert. I'm going to turn it over to Therese to add a lot more to that.

Pat, thanks for the great question. One of the reasons that this combination is so powerful is because the information that comes into BlackLine comes way upstream. So we have some very, very granular information. So when you flow that into consolidation and reporting, you get this end-to-end transparency that customers absolutely love. So you can drill into any line on your balance sheet and see precisely how that number calculated. You can look at the underlying reps or various analyses that are tied to some general ledger account in some other business units and learn precisely why things were flux in a certain way. So it's that end-to-end ability starting with some very granular data that makes us a very powerful combination.

Our next question comes from Alex Sklar with Raymond James.

Just in terms of the strategic product bookings, really nice results in terms of mix this quarter. I just wanted to get an update, what you have seen in terms of the results of having the 4 pillar heads in place. A big step up in the 1 million-plus customers, I assume that's kind of all tied in. But what changed there with strategic products versus recent quarters? And then just a follow-up. Any way to think about the mix of strategic product opportunities in your pipeline relative to that bookings mix? Could this be kind of a new normal level?

So I think probably the most important thing that's changed is we have dedicated pillar leaders across each of what we're trying to do, and that has had a profound impact not only in what we're trying to do in the marketplace, but also around the product, how we promote that, how we go at our pipeline. And that is just resonating its way up and across the whole organization in a very, very positive way. And what's really critical about that is the 4 pillar leaders work super well together. They understand their success and we've aligned their goals to make sure not only they successfully individually, but as a team, and that's having a really good positive impact. So then what does that mean for us as we move forward? I think it would suggest that our strategic products should continue to do well. We're starting to see some growth in the pipeline that was highlighted in the prepared remarks. And and we're excited about what the possibility is. That's why we're -- we've built out these strategic products and -- and so I don't want to commit to that's going to be the new norm. But that said, we're bullish on the fact that we're starting to really get some good traction with these products in the marketplace.

Okay. Great color there, Owen. Mark, maybe one follow-up for you. If we look at kind of the implied fourth quarter operating margin, it's a bit below second quarter and third quarter. Is that just timing of beyond the black this year? Or anything in terms of increasing level of investments planned for exiting the year?

You got it. It's our large customer event that's going to take place in the fourth quarter this year, BTB. And so that actually creates some variability in quarter-to-quarter operating margin.

Our next question comes from Pinjalim Bora with JPMorgan.

Two questions for Mark Partin. It seems like the dollar churn has been stable, but you called out logo churn. I want to know if that's basically in the low end of the spectrum and any change in the dollar churn across mid-market and enterprise? And how should we think about the net retention through the rest of the year?

Pinjalim, yes, on the renewal rate, interesting Q2 was a pickup in the enterprise that actually improved to 95%. So enterprise got better, which was something we were looking for. The mid-market ticked down high 80s from what it had been in the low 90s. And this was intentional choice as we've talked about in terms of sharpening our are targeting and focus in the mid-market to go after the higher range. And so burning through some of that on the low end, created a bit of noise in the renewal rate. On the retention rate, that's a function, of course, of the lower renewal rate. But also, it is a macro driven number, our ability to expand and grow within the accounts, our ability to maintain the positive attrition in the accounts can be impacted by macro. Fortunately, in Q2, we saw some real improvements in the customers that did renew. We were able to extend their lifetime. We have one of the largest average duration of contracts that we renewed in the quarter. And we strengthened our relationships and are resolved in the customers that renewed in Q2 to step around. So from that standpoint, it was a positive. Driving that retention rate higher in the future isn't just a macro. It's our ability to upsell and cross-sell strategic products in these accounts. And we're demonstrating that the pillar operating model as well as our focus in product innovation is making a difference. We just haven't seen that show up in that number yet, and that will take a little bit of time.

Our next question comes from Adam Hotchkiss with Goldman Sachs.

Great. I just wanted to follow up on the consolidation and platform discussion. Now that you've cleaned up some of the near-term converts and have liquidity through 2029, I guess how are you thinking about with the most natural platform adjacencies you could potentially dig into from an M&A perspective? Just any color around capital allocation would be useful.

Yes. Adam, look, I think since Therese and I both came into the role, one of the things we thought about is how we continue to both deepen and broaden the platform with natural extensions of what the office I would expect and what our partners are seeing also in the marketplace. So we continue to look. We've been looking since the beginning about where best to put our capital. We're very diligent. I think 1 of things you probably could pick up in the way the operating model, operating margin is improving, is that neither Mark, myself or Therese, want to waste any money. So we'll keep looking. And if the right thing is there, then we'll pounce on it, but we're not going to do anything that doesn't make economic sense for our shareholders.

Our next question comes from Brent Bracelin with Piper Sandler.

I wanted to go back to SAP. SAP is clearly an important partner for you. They reported here a couple of weeks ago, we're starting to see finally an acceleration in their business and enterprise spend around the ERP modernization with that end of support coming here in 2027. Walk us through what are you seeing relative to that partnership and opportunity as customers move from ECC to S/4HANA. Is that -- are those opportunities that are percolating now? Or do you kind of have to wait until the end of the migration before you try to upsell them additional back line functionality?

Yes. A couple of points to that. So one is the relationship with SAP continues, gets stronger. Therese and I were exchanging messages with their CEO today trying to continue to get together and make sure that we keep the momentum that we have built. Obviously, we've talked about the fact that the relationships, you can have them at the top of the organization, but most important is in the field and out of the accounts. And I think that's where we're seeing maybe the most progress in the most critical markets with those relationships are, in fact, building. I think one of the interesting things that the SIs would tell us what we're seeing with SAP and with backline is that many of our customers are looking for early wins in their SAP migration and going with BlackLine first, actually shows to the organization that they can have success in their digital transformation. And so there's been many situations now since the beginning of the year. where there's going to be an S4 implementation, but BlackLine has been on the front end of that versus on the back end of it. And so we're seeing some positive signs in that regard. I think it's still very early innings for the SAP for migration, but we're well connected to it and are optimistic that it will show bear fruit in the months and years ahead.

Helpful color there. And then maybe, Mark, for you, just following up on a strategic product. category. I think that 28% mix was the highest we've seen in 2.5 years. It did come in below your plan last quarter, kind of above expectation range here towards the high end of this quarter. Do you think that's just timing of when some of those strategic deals closed, and we shouldn't read into it? Or are there early signs that suggest maybe you are seeing an inflection on the strategic product adoption front?

Yes. I think that's a really good question. I would say Q1 an anomaly on the low side. And I would say in Q2, what we saw was a very strong average deal size. We saw very strategic deals getting done. We didn't see the same slip deals that we saw in Q1. We brought things over the line. We meant to that had strategic products. In fact, every strategic pillar performed and performed well. and perform globally in the enterprise and the mid-market. So it was, from my standpoint, from the CFO's view that kind of diversity and breadth in strategic products looks very good, and it's in the pipeline that way. And I think this operating model is contributing to being able to bring these in and just as importantly, close them out at the end of the day. So it is early. It can be variable from quarter-to-quarter. We thought this year we could operate in the 25% to 30% range. That was sort of our intended target for the strategic portfolio. And it looks like in Q2, we were on the high end of that. So super pleased with it.

Our next question comes from Terry Tillman with Truist.

This is [indiscernible] on for Terry. Could you just elaborate on how you're collaborating with partners to develop enhance the accounting video? I'm also just curious if there are any specific regions or markets where we expect to see higher partner engagement?

We have had quite a bit of input from our partners. And if you think about it, our partners are really experts around the reengineering of processes to get some great efficiencies out of operations. And so the ability to take that expertise and actually visually represented in a work stream that can then be automated is a really powerful capability that studio brings Therefore, we have been getting quite a bit of feedback from our partners on the types of capabilities, the types of APIs types of things that they would want to see visually represented inside of studio. With that, over the longer term, totally losing my voice, one second -- over the longer term, we want this to become a repository where our partners can really put their very specific intellectual property around process engineering. So I think it's going to be a really nice way to showcase all the expertise that our partners bring, and they have been very helpful in developing the capabilities that we currently have.

I think on the geographic split of what are we seeing, it's pretty strong around the world. I think one thing I would just observe though because we haven't really given it credit, which is the teaming with BlackLine and with our partners, yes, it's on the sales force, but it's also with BlackLine's professional services team. And what we're seeing is tighter linkage there of working together to bring the best of both to our customers and driving more success. So we're very pleased with how it's evolving around the globe. Like I said, for our largest ones, in particular, they really have stepped up their efforts to make sure they have resources in the critical geographies that BlackLine is trying to drive, where there are people that are certified to serve, if you will, on implementing BlackLine.

Our next question comes from Koji Ikeda with Bank of America Merrill Lynch.

So I wanted to ask a follow-up on the medium-term targets and specifically about free cash flow and kind of the growth in free cash flow generation algorithm. With free cash flow, on the margin side, already above the medium-term targets. And we're getting close to being in the window for medium-term target. How do you think about maybe the potential for flexing free cash flow upside down or investing it back a little bit further to press on the gas a little bit for revenue growth? And I guess where I'm going with this is, could we come into a period where we're bringing down free cash flow margin a bit to drive that higher revenue growth?

Yes. Thanks, Koji. It's a great question. And obviously, the management team here is spending a lot of time looking at the opportunities. It's a large market. It's a new leadership team. We are constantly reviewing places where we can invest and put money to work to drive greater growth, to bring more capabilities to our customers. At the moment, the beginning of our sort of planning process with management, I don't want to get out in front of that. And so we'll come back at some point after evaluating and making some choices. But our guidance for this year we have high confidence that we can deliver the growth and the investment and the innovation that we talked about in our discussions with you with these ranges. We've always had a very elegant business model that can drive cash can drive margins, and we've turned it on this year. But also been very careful to invest in the go-to-market where today we have more capacity and capability than we've had maybe ever. We have the highest ramped group of salespeople tenured sales leaders around the company. We have a lean, efficient operating R&D model that has not just gone around the globe to find talent and to be more efficient but is also putting real money around new product innovation. So I'm optimistic that free cash flow can be a great asset for us in the coming years. But I'm also keen to drive growth, put money or wood behind the arrow and really drive greater growth towards our model. So let me kind of end it there, and we can come back to you guys another time.

Mark, that's super helpful. And just a follow-up here on kind of the demand environment, maybe a question for Therese or Owen. Just broadly within the office of the CFO, are you beginning to notice that wallets are beginning to open up a little bit more for technologies in the office of the CFO? Are you noticing any difference in sales cycles or maybe the number of acquired signatures or maybe some pent-up demand for the office of the CFO digital transformations is beginning to pick up right now?

Yes. So I spend a lot of my time talking to customers and prospects and now with our partners. I would say the additional sign-offs have not gone away. If anything, I would say, CFO is more often now seem to be refereeing between the CIO and the CIO as to what the decisions are going to be made I wouldn't say that there's an opening of the checkbook, but I think there's been more willingness if you can fully show demonstrate the value you're going to bring to that customer and that they're going to get an ROI in a pretty reasonable time period, then that has the opportunity to open the door. I think that's where we have gotten better as a team. is really demonstrating the value we can deliver to our customers and making sure it's going to get implemented the right way, and that's the combination of our partners and our BlackLine professionals to make sure the value of the BlackLine software delivers on the promise that we make to our customers. And so that's what we see is helping us to win, and we're going to keep driving that as we move forward. I wish the wallets were open, we're easily. But I would say we're still trying to pry open a little bit more than just people throwing out of them at this point in time.

Our next question comes from Daniel Jester with BMO Capital Markets.

Yes. Great. So in the prepared remarks, digital self-service was mentioned a few times. I guess, maybe can we expand on sort of what this means for BlackLine in particular? And how does -- you think you could influence your go-to-market from this? And then secondly, Mark, I apologize if I missed this earlier, but it does look like on the revenue guidance, the fourth quarter picks up a little bit. I think the comp is easier year-over-year, but is there anything else you'd call out about the seasonality of revenue this year?

On the self-service, what we're seeing is so many of the questions that our customers have sort of repeat. And so what we've been able to do is now really try to provide place or repository where they can have their questions easily responded to. And we think we're just going to continue to be able to build that kind of database. So it makes it easier for our customers and quite frankly, for our partners who are helping drive implementation. So that idea of self-service is something we've been asked more and more by our customers, and we're responding to that request. And I think we're just really even scratching the surface on that at this particular point in time. So let's stay tuned for a little bit more, and I'll turn it over to Mark.

Yes. Thanks, Dan. Our rest of year guide does pick up for the remainder of the year. However, it balances against some conservatism. So while there might be some minor uptick in Q4, that could be related to timing, it could be related to seasonality. And but there's not a material difference from here to the end of the year and what we think in Q3 and Q4 from a revenue. So the guide, it's just for us to continue sort of moving at this pace with an appropriate pragmatism in it.

Our final question comes from Jake Roberge with William Blair.

Great to hear about the improvement in close rates and pipeline during the quarter. If you had to stack rank what's driving that performance, is that more on the go-to-market verticalization in those new product leaders? Or is it really more on the recent kind of product and partner changes? If you could just parse out what's driving that improved execution, it would be helpful.

Can I give you answers on A, B and C? Because I don't know that they're 1 through 10. I think it's a combination of how the whole organization is really starting to gel together. And I think we've got a lot of new leaders who really seem to know how to work well together. They meet each other more than halfway to get things done. And so we're seeing that showing up in what our -- starting with the BDRs, reaching out into the marketplace and following up. Those are our account managers, are our net new reps being supported by marketing, the go-to-market team behind the scenes are working much more cooperatively. So that's all driving what we believe is really better execution. And again, we're still early in driving it. It's fantastic to have these pillar leaders. And like I said, they're working together very well. They're out there in the market, helping our teams close deals, take customers through the journey. We're doing a better job of articulating the platform and where BlackLine is going. So it's not just a big point solution, but it's a vision of what we think we can help you do. And then, of course, it's exciting when you can talk about your road map. And our customers can see not only the breadth of what we offer today, but how we're going to deepen that and then what Theresa is doing with the team to add adjacencies, the other things that our customers and our partners are asking for. And I think that it's a combination of all of it. We're -- again, it's still early. No one should leave this call thinking that BlackLine has done and we're finished. We got a lot of work still as an organization, but we are super proud of what the team is doing, the way they're collaborating and their understanding that our success is based upon the success of our customers' postal.

I'm showing no further questions at this time. I would now like to turn it back to Owen Ryan for closing remarks.

Thank you, and thank you, everyone, for listening today and for your questions. We certainly appreciate you spending time with us. We're excited about the future and look forward to talking with all of you later today and tomorrow. So thanks, everyone. Have a good night.

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