BlackLine, Inc. (BL) Q3 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the BlackLine Quarter Three 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 first speaker today, Matt Humphries, VP 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 the fourth quarter 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 any forward-looking statements made during the call are reasonable, actual results could differ materially as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Finally, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is available in our earnings release, which may be found on our Investor Relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now, I'll turn the call over to BlackLine's Co-Chief Executive Officer, Owen Ryan. Owen?

Thank you, Matt, and good afternoon, everyone. Thank you all for joining us on today's call. Before discussing our performance, I would like to address the 8-K filing we submitted along with today's earnings announcement. Mark Partin, BlackLine's Chief Financial Officer, will be retiring after 10 years of service. He will continue to serve as CFO through March 1, 2025, and transition to an advisory role for a short period afterwards. To ensure a smooth transition to his successor, Patrick Villanova, our Chief Accounting Officer. Patrick has been with BlackLine since 2015, reporting directly to Mark throughout that period. I am deeply grateful for Mark's contributions in all the roles he played in building us into the market leader. I am also excited to work more closely with Patrick as he steps into his new role as CFO. Now turning back to our results. BlackLine delivered solid financial results this quarter, exceeding our revenue and profitability guidance while delivering a record quarter of free cash flow generation. There were a number of highlights from the quarter, which reflect the ongoing changes we are driving within the organization, including our go-to-market motion, innovation agenda and how we are positioning with our brand within the office of the CFO. We continue to deliver operational improvements, drive higher levels of productivity and efficiency in our business while capitalizing on emerging growth opportunities. This is setting the stage with a strong foundation for sustained growth and value creation for our shareholders. We are focused on execution across the business, particularly in our go-to-market teams. In the third quarter, we saw larger deal sizes on new logo opportunities even with a muted demand environment. Our enterprise business was in line with expectations in the seasonal third quarter, while our mid-market business outperformed, driven by larger deal sizes in part due to our strategic focus on the ideal middle market customer. Let me elaborate on the strategic evolution in the middle market. We continue to sharpen our focus on large enterprises as well as mature our rapidly growing mid-market companies. This is where our platform demonstrates an exceptional value proposition for customers and prospects. Specifically, we are targeting organizations with the fact patterns such as sophisticated financial ecosystems, multinational operations and/or high-growth trajectory spanning both organic expansion and M&A activity. While our tighter focus on these middle market customers has temporarily impacted our headline customer count and retention figures, the economics are compelling. We believe these relationships generate substantially higher lifetime value and present significant expansion opportunities. Furthermore, this approach enables more efficient capital allocation, particularly with our R&D and go-to-market investments. We are developing advanced capabilities that address sophisticated use cases, which will drive deeper adoption and create a cycle of expansion with our customers. Early results of this strategy validate our direction, and we are seeing momentum building. For example, we signed a net new deal with a leading global fintech company. On the advice of one of our partners they approached us with complex needs, automation for high-volume data processing, intricate transaction matching scenarios, journal entry automation, sophisticated error handling and orchestration and visibility needs across these process areas. Our ability to meet these diverse requirements resulted in a multi-solution sale, including our new studio solution, that not only addresses the customers' needs, but also showcases the breadth and depth of our platform, far surpassing any competitor offering. Our partner recognized early on that this company had outgrown its legacy vendor and needed to leverage a platform that could scale with them as they continue to grow. Our targeted industry approach is also yielding favorable results as we displace legacy solutions as well as the status quo given our domain expertise and deep industry knowledge. We saw several wins as a direct result of our industry approach with large global brands in the U.S. and Europe this quarter, including a 7-figure expansion deal with a Fortune 50 life sciences company and new wins and competitive takeaways with a number of Fortune 100 and Fortune 500 companies. In the enterprise space, we signed a new entertainment and media company an industry where we have a strong track record of successfully delivering high-value automation for customers. This competitive replacement of two legacy vendors was driven by our deep industry knowledge and domain expertise along with relevant customer references. On retention specifically, we continue to move to a period of where we see signs of success at the higher end of our markets, offset by expected logo churn from lower ACV customers. impacting some of our key metrics. Our Enterprise segment, which represents our strategic focus and highest value opportunity, demonstrated strong performance with a 97% renewal rate consistent with historical levels, and steady improvement versus prior quarters. While our overall renewal rate was 92%, this reflects our intentional strategic shift. Specifically, we are seeing expected churn in the mid-market where renewal rates were in the 80s. We are continuing to concentrate on customers who benefit most from our comprehensive finance transformation solutions. Next, turning to market messaging. We have begun to finalize our broader repositioning of the BlackLine brand. Our message to the office of the CFO aligns with our platform, innovation road map and what is critical to their success. Logically, our evolution from a single solution company to a holistic platform, for the office of the CFO is the focus to unlocking and capturing the opportunity ahead. Our approach has been recently validated by third-party research firms like IDC and Ventana, where we were named leaders. These points of recognition continue to point to the value that BlackLine provides customers within the office of the CFO. In a few short weeks, expect to hear much more about our platform innovation and rebranding at our upcoming BeyondTheBlack User Conference and Investor Day. I want to emphasize our core value proposition and how it drives our market leadership at its heart, we are delivering future-ready financial operations that transform the office of the CFO. What we believe sets us apart is our platform's unique combination of flexibility, unified architecture and comprehensive functionality all of which can be implemented rapidly by our partners and by our team. This collaborative approach delivers compelling and measurable ROI for our customers through automation, reduce total cost of ownership and significant productivity gains. As our customers achieve these benefits, they gain confidence to expand their transformation initiatives, which in turn strengthens our competitive position and expand our market leadership. We are seeing this strategy create a virtuous cycle. As customers succeeded with our platform, they become strong references, driving new business opportunities and reinforcing our position as the partner of choice for organizations. This not only supports our current market position but opens multiple avenues for sustained growth ahead. Moving to distribution. I am extremely pleased with the progress we have made with our partner channel as we jointly position to capitalize on opportunities within the office of the CFO. But that is potential opportunities from ERP modernization or through regulatory initiatives like electronic invoicing and Pillar 2, we are continuing to invest in our partner channels to enable, train and jointly drive opportunities across our global footprint. As part of this, we have seen an increasing percentage of partner influence and partner source opportunities globally, which have contributed to higher win rates, particularly in our enterprise business. Our partner ecosystem is also accelerating global adoption of our combined closing consolidation offerings with notable traction in Europe and Japan, and finally, we are seeing encouraging early results from our partners' engagement with studio opportunities worldwide. Turning to broader deal activity this quarter. We saw a number of multi-pillar wins. For example, in Enterprise, we signed a net new multi-pillar deal with Kroll, a leading financial and risk advisory firm. Kroll has been rethinking their existing financial system landscape after a strong track record of organic and inorganic growth that outpaced what their legacy vendors could support at scale. This deal was the complete package with our close, consolidation and intercompany solutions jointly positioned and sold with strong partner validation to optimize, automate and support their broader record-to-report processes. In North America, we expanded our relationship with a leading Fortune 100 pharmaceutical customer who has historically leveraged our solutions for financial close processes. As their operations grew increasingly complex, they identified the need for real-time visibility across their multi-entity structure. This led to the adoption of our consolidation and financial analytics solution to enhance their pre-consolidation capabilities. Significantly, they also recognize the strategic value of our studio solution to orchestrate and visualize financial data across their systems landscape, supporting their broader finance transformation objectives. Next, our combined close and consolidation strategy continues to drive strong mid-market performance. replicating last quarter's success with higher win rates and larger deal sizes. Two recent wins highlight this momentum. First, we secured Kindevadd, a newly public pharmaceutical company who selected our platform, their choice reflects a broader trend we see with companies recognizing that public company reporting demands require more than basic close functionality. Kindevadd determined our comprehensive solution was uniquely positioned to support their long-term growth objectives. Additionally, in Japan, we won top in photomask, a semiconductor manufacturer preparing for their IPO. We continue to have a very strong record of serving publicly traded companies or those on their journey towards a public listing. They chose our integrated close and consolidation solution to automate their entire record-to-report process, ensuring they will exceed public company reporting requirements from day one. Last, while SolEx deal shows typical seasonal patterns, we secured several strategic wins. A highlight was a major competitive displacement with the North American 4Q 100 pharmaceutical company who selected our comprehensive close consolidation in intercompany solution ahead of their S/4 migration. This enterprise-wide deal demonstrates the power of our value proposition. The customer is consolidating multiple legacy systems onto our single platform to streamline their entire record-to-report process. Through our strong partnership with SAP and a global systems integrator, we demonstrated the compelling ROI of comprehensive finance transformation, ultimately winning this significant enterprise account. With that, I would like to turn the call over to Therese.

Thank you, Owen. The third quarter marked strong execution across our strategic innovation priorities, characterized by accelerating platform and product delivery that strengthen our leadership position within the office of the CFO. Our upcoming customer conference BeyondTheBlack and Investor Day will showcase a brand evolution that reflects our growing market opportunity and platform innovation. While full details are forthcoming, our third quarter achievements reflect successful execution against our strategic road map and position us to capture increased market share, supported by building digital finance transformation tailwinds. As noted, we're executing a transformative platform modernization strategy that we believe positions us for significant scale and accelerated innovation. Our cloud migration, the Google Cloud platform is over 80% complete, setting stage for meaningful scale and efficiency as we move forward. Beyond the immediate cost benefits to completing this migration, it unlocks additional value drivers, accelerated product development velocity and enhanced AI capabilities across our entire platform. Our new studio offering is gaining market momentum demonstrated by both customer adoption and partner engagement this quarter. As highlighted earlier, we've already secured several strategic customer wins, validating our multiyear investment into studio. As we integrate this and other capabilities into our broader platform, we're creating clear differentiation in the market for finance transformation. We look forward to showcasing this comprehensive platform vision in two weeks, which we believe will establish a new standard in our industry. Now turning to our solutions. We just launched an exciting new industry-specific financial close solution that solves a major pain point for banks and retailers tracking and reconciling millions of daily transactions in real time. Think about how many credit card swipes, online payments and bank transfers happening every day at a major bank or retail chain. Our new high-frequency reconciliation solution automatically reconciles all these transactions across different systems, lagging discrepancies that could signal fraud or errors. This is a game changer because traditionally, companies would typically review these transactions just once a month, creating delays and adding risk to their close processes. Early adopters are already using this solution, and we plan to roll it out rightly to customers in early 2025. In our consolidation and financial analytics pillar, we've strengthened our competitive position in the high-value enterprise consolidation market with two strategic enhancements. First, we've launched advanced financial statement attestation capabilities that enable organizations to validate results across multiple business entities, a critical need for both domestic and complex global enterprises. Second, we have deployed generative AI-powered analytics that automatically generate insights from financial data, helping CFOs and their teams understand significant changes in their balance sheet. These innovations address key pain points in the record-to-report process and help deepen and extend our capabilities further across the office of the CFO. In our invoice to cash pillar, we've launched a significant enhancement to our invoice to cash platform, introducing AI-powered payment prediction capabilities that directly impact our customers' bottom line. This new technology enables enterprises to forecast customer payment patterns with unprecedented accuracy giving them precise control over their cash flows and working capital. By leveraging advanced machine learning algorithms, companies can now optimize their working capital by predicting exactly when customers will pay a critical advantage in today's economic environment. We believe this innovation strengthens our end-to-end offering and supports an expanding opportunity set within this market. In intercompany, we further extended our market leadership with the launch of generative AI-powered predictive guidance. This technology automatically identifies errors and anomalies in intercompany transactions before they impact financial statements, a critical capability for global enterprises managing high volumes of intercompany transactions. Our AI innovation directly addresses a major pain point for multinational corporations, dramatically reducing compliance risk and eliminating thousands of hours of manual review. We believe this enhancement cements our dominant position in the intercompany automation market, where we continue to maintain significant competitive advantages in the market. Beyond our customer-facing AI innovations, we're also delivering internal AI tools for our employees. Our proprietary GenAI companion [indiscernible] which is trained on internal company data was released recently to our entire employee population and has achieved remarkable adoption metrics. In the first month since deployment, over 50% of our global workforce has actively used the tool, processing more than 11,000 unique queries across 50 languages in 19 countries. Most importantly, this technology has already generated measurable ROI, saving 3,000 to 4,000 employee hours in just the first month alone. We believe the rapid adoption and productivity gains from modern AI tools like [indiscernible] offer a pathway to enhance productivity and efficiency as we move forward. Moreover, our internal success with AI deployment serves as a powerful proof point for our customers, reinforcing our credibility and trust in this fast-moving market. Before turning the call over to Mark, I want to express my deepest gratitude for his exceptional service and partnership as BlackLine's CFO. His rare combination of strategic vision and financial acumen makes him truly one in 1 million. and is exactly the leader we needed to guide us on our journey from pre-IPO to the market leader we are today. Beyond his technical excellence, Mark's unwavering integrity and inspirational leadership have left an indelible mark on our company and our employees. We've been incredibly fortunate to have him as our partner and CFO. With that, I'll turn it over to Mark to cover our financials. Mark?

Thank you, Therese. Our third quarter results demonstrate solid execution against many of our key financial priorities, highlighted by meaningful margin expansion and strong free cash flow generation. While we continue to operate in a measured demand environment, our strategic investments in innovation and go-to-market initiatives are strengthening our competitive position. We believe this foundation, combined with our relentless operational discipline, positions us to accelerate growth as market conditions improve and drive enhanced financial performance. With that in mind, let's review our financial performance in more detail. Total revenue grew to $166 million up 10% with subscription revenue growth of 11% and services revenue growth of 3%. While services revenue was slightly better than expected, we still see services as an expected drag to overall revenue growth this year. Remaining performance obligations, or RPO, was up 12% and driven by account growth and longer contract terms from renewing customers. Current RPO was up 11%, with total annual recurring revenue, or ARR, of $638 million up 10%. Calculated billings growth was 4% with trailing 12-month billings growth of 9% due to a mix of seasonality, timing and incremental churn and attrition. Our customer count at the end of the quarter was 4,433, let me provide additional context on our customer metrics, while overall customer additions remain stable. Our strategic repositioning has led to expected churn among smaller accounts that fall well below our average contract value. This is aligned with our deliberate focus on the enterprise and the right customers in the mid-market segment, customers who can grow meaningfully with our platform over time. The success of this strategy is evident in our higher-value customer cohorts. We've achieved 27% growth in customers generating over $1 million and 12% growth in customers above $250,000 in ARR. These metrics validate our strategic shift toward higher-value relationships and demonstrate our increasing penetration in these market segments. Our revenue renewal rate in the second quarter was 92%, reflecting the customer trends just mentioned. While we see the effects of middle market churn play out here and serve as a near-term drag, what you aren't seeing is building strength within our enterprise customer base and its improvement. Specifically, our enterprise renewal rate in Q3 was 97%, back in line with our long-term historical levels. Net retention rate, or NRR, was 105% this quarter, reflecting these customer dynamics, combined with stable pricing and customer expansion, particularly in our enterprise business and the effects of FX. Strategic product performance was a highlight this quarter and represented 31% of sales above our target range. Performance this quarter was driven primarily by strength in financial reporting and analytics as well as transaction matching. Partners were involved in 81% of large deals this quarter with consistency across both new and existing opportunities. SolEx performance was seasonally soft this quarter primarily on the net new side despite some large customer wins. In Q3, SAP partnership represented 26% of total revenue. Turning to margins. Our non-GAAP gross margin was 79%, with non-GAAP subscription gross margin of 82%. Gross margin performance remains in line with our expectations as we focus on optimizing cloud spend and completing our multiyear migration to GCP. Non-GAAP operating margin was 23%, above our expectations, largely due to R&D efficiency from our location strategy at higher rates of innovation. Non-GAAP net income attributable to BlackLine was $44 million, up 17% and represented a 27% non-GAAP net income margin due primarily to operating income outperformance We generated $56 million in operating cash flow and $49 million in free cash flow in the quarter was a record free cash flow margin of 30%, driven by a combination of strong earnings and working capital management. And last, regarding our balance sheet, we have approximately $850 million in cash, cash equivalents and marketable securities versus $890 million in debt. Now on guidance. We are raising our full year revenue and non-GAAP operating margin guidance ranges based on Q3 performance and our views for the balance of the year. For the fourth quarter of 2024, we expect total GAAP revenue to be in the range of $167 million to $169 million, representing approximately 7% to 9% growth. we expect non-GAAP operating margin to be in the range of 18% to 19%, reflecting the cost of our large customer conference in Q4. And we expect non-GAAP net income attributable to BlackLine to be in the range of $36 million to $40 million or $0.47 to $0.52 on a per share basis. Our share count is expected to be approximately 77.1 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 $651 million to $653 million, representing 10% to 11% growth. We expect non-GAAP operating margin to be in a range of 19.4% to 19.6%. And finally, we expect non-GAAP net income attributable to BlackLine to be in a range of $164 million to $168 million or $2.5 to $2.21 on a per share basis. Our share count is expected to be approximately 76.1 million weighted average shares. Before I close, just a quick personal note, serving as CFO of this incredible company for the past decade has been a highlight of my career. When I reflect on our journey from where we started to where we are today, I'm filled with immense pride in what we've built together. Yet I'm even more excited about the Company's future. The depth of talent and the strength of leadership that we've assembled gives me complete confidence that our best chapters are still ahead. It's particularly meaningful to me that Patrick, who has worked alongside me throughout this journey will be stepping into this role. His deep understanding of our business and his proven leadership makes him the ideal person to help guide this company into the next phase of growth. To our employees who make the impossible possible every day and to our investors who have believed in our vision. Thank you for letting me be part of this remarkable story. With that, I'll now ask the operator to open the discussion to take your questions.

[Operator Instructions]. Our first question comes from Patrick Walravens of Citizens JMP. Your line is now open.

Great. Congratulations on the quarter. And Mark, really sad to see you go, but we'll discuss that later. So can we talk about sort of what the macro environment looks like as I was looking back at last quarter, I think you had a comment in your script about demand was below levels we would consider normal. And it seems like you didn't repeat that. And this time, I heard a measured demand environment. So, are things getting better?

Pat, it's always interesting to try to read the tea leaves. I think there's a couple of things that I think we could tell you from our experiences being out in the marketplace. The conversations are taking place. We're getting the meetings that we want to have. Our partners have been phenomenal at really trying to help us get a better position with -- and in front of customers and prospects. We're seeing some growth in opportunity starting to finally come into the pipeline. An interesting indicator for us is we have our BeyondTheBlack conference in 10 days or so is sold out. We're actually having to move people into a second hotel and the demand is really impressive in that regard. So, it feels a little bit better, but still, we're not ready to sort of say, hey, this is a real change. We are seeing our partners ramping up their hiring of BlackLine professionals. One of our partners has gone from having 10 people certified on BlackLine a year ago to now having 130 certified this year, and many of our partners are sold out. So, I think those are good signs that our customers are trying to do more with BlackLine, but I think it's still too early to declare any kind of victory.

Great. And if I could do a quick follow-up on the Fortune 100 pharmaceutical company that ticked all three products ahead of the S/4 migration. Could you tell us a little bit more about that because that sounds like a great road map and how long was that sales cycle? How long has that been going on?

Actually -- so it was a couple of years to get it done. But Pat, one of the things that we are, I think, really starting to hit our stride on is how we use our industry qualifications and experiences and make sure when we're talking to these customers, not only do we talk to them about the domain expertise of what BlackLine brings at its core foundation, but it's also those use cases and experiences that are very specific to particular industries and then being able to use our customer references in a way where they speak very confidently about their experiences. So, in this situation, as you've known, since the last 1.5 years, we've won a number of large global pharmaceutical companies, and they are quite comfortable in sharing their experiences with prospects. And that's a really compelling part of all this. So, it's what we're doing in domain expertise, it's the industry expertise, use cases, our partners being able to sort of vouch for it and then customers saying, yes, BlackLine is a real deal.

Our next question comes from Alex Sklar of Raymond James. Your line is now open.

Mark, I'd also echo my congratulations on the well-deserved retirement announcement. One, Mark, just starting off in the back of the deck, there's a new medium-term profitable growth framework. So, first question there, can you just help bridge some of the bigger opportunities you see in your seat today, specifically on the revenue piece kind of inflecting from that 11% outlook for this year to kind of a 13% to 16% range. Is there any incremental investments that you're looking to make to get there? Is it more of the same? And any color on kind of linearity thoughts?

Thanks, Alex. Yes, that's a great observation. And I think our upcoming Investor Day is going to be a really great place for the entire management team, Owen and Therese and all of us to lay out in detail our strategy and the opportunities that are in front of us for investing for that growth. And from the last, I guess, year that the management team has really been putting a lot of effort and work into our long-range plan and our sort of investment initiatives, they're pretty consistent with what we've been talking about. And it includes our ability to get the flywheel partner ecosystem moving. It is being a leader in raising our voice to the office of the CFO and CIO for really large digital transformation. It includes being able to bring our product set into a platform to allow our customers to move data and to see more information faster, it's a number of those initiatives, which we believe are the opportunities. They are the reasons we've invested in these companies. There is the reason that we've been innovating and the new leadership team is on board. So we're really excited about the opportunity at Analyst Day to share more of those details. So thank you for that question.

Okay. Great. We'll look forward to more details in a couple of weeks. Maybe one other growth factor, and we heard a lot of early success in studio, but you've kind of been talking about testing some new packaging and pricing studies broadly in the market. I'm curious what kind of some of the early learnings have been there so far? Any thoughts on kind of broader rollout of those over the coming years?

Yes. So, we are continuing to refine all the work we're doing around pricing, including, again, even just meeting today on some of the things we're trying to do. It's really more of a '25 event than it is '24. We spent a lot of time talking with our partners and with our customers and learned a lot about where they see the opportunity for us, and we see it with them. And I think that right now, we feel like we're going to be able to simplify our pricing as we move into 2025, bundle some things together to make it a little bit easier for customers. And so, we're pretty excited about what that opportunity presents.

Our next question comes from Daniel Jester of BMO Capital Markets. Your line is now open.

Great. Maybe to stick with the theme of asking questions off of the presentation. You've got a great one on the cohort analysis. And for the last couple of years, it feels like sort of back to the base opportunity there has stalled out a little bit relative to history. So, I guess maybe an update in terms of how you're seeing the sort of innovation pipeline and the go-to-market changes and sort of cumulatively all of the effects that you've changed on the business, how do you see that sort of translating to the ability to dive deeper with your customers as we go into next year?

Yes. Thank you. Look, a couple of things. That's a big question. There was a lot in there. So, I'll try to hit, I think, what the nature of the question is, and that is our growth opportunity within our customer base remains one of our largest growth vectors. We think there's a large embedded TAM for us to cross sell and upsell. We think some of the innovation that we're bringing to the table will capture the attention of the CFO and CIO to help us move these products into our really large, really invested customer base. And what I think you'll see from the cohort is over the years, we've landed larger. So, the growth profile will change from the very early profile of customers that we've had for some 5, 10, 15 years. And -- but it doesn't change the fact that the opportunity for expanding with the user base, expanding with our product portfolio. exists for us. We've invested in the account managers. And there are a couple of things that I think will help accelerate that upsell motion. First is all the investments and execution that we've made in that go-to-market motion. And second, I think to your point, is our innovation and the ability to raise the profile of BlackLine to the CFO and CIO where those big digital transformation decisions are being made.

Yes. Look, I think one of the things we shared a while back is we're for maybe the first time taking what we're seeing our customers do with the product and how well they're using it and seeing the opportunities to go aggressively talk to them and say, hey, there's still this opportunity for you to do this much more with what you've already purchased? And so, we've had what I'd consider to be good progress on that. So, moving our customers along from recs and tasks to matching in journals and Mark highlighted some of the success we had on the cross-sell see that in picking up in our FRA solution and intercompany. And so, we're beginning to do what we need to do around the cross-selling. Still early but our partners are also really helpful in this right now because they are trying to drive with our customers this whole digital transformation journey. And so, you're seeing what we wanted to do, started laid out a year ago now begin to take root. And I think the other thing that I got to give Therese and the rest of our product and tech team is they're out in the field all the time trying to learn and understand what else is it that our customers want. And so that co-creation of innovation is really beginning to resonate well. And so, I think it's those combinations of things. But there's no surprises. The thing that you should probably take from all of this is we are executing on the things we told you we would do. It's a maniacal relentless focus day after day to get this stuff done that we said we would get done, and we love what our team is doing. We love what our partners are doing, and we love the receptivity we're getting from customers and prospects about all this.

Our next question is from Rob Oliver of Baird. Your line is now open.

Great. A couple from me. First of all, I'll echo what others said, Mark. It's -- we're going to miss having you around. And really appreciate everything you've done in disclosure and focus and integrity and thank you very much for your service? And my question is, first, for any of you guys, and that's really just around that 27% growth in -- among customers over $1 million in ARR, a really impressive number. And I wonder if you could just talk a little bit about some of how the newer innovation, and Therese, this perhaps could bring you in here is helping to drive that number? In other words, you guys have always done really well with large enterprises. Some tremendous logos, but broadening out towards that office of the CFO and getting some of these new innovations like FRA into their hands is important. So, I was wondering if you can talk a little bit about where that growth is coming from? Is it just in the BlackLine core? Is it -- or is it also strategic products, which I know you guys called out as strong this quarter? And then I had a brief follow-up.

Rob, I agree or you're right. A lot of the growth in the upsell is around some of the newer things that we've been innovating on. And it really kind of highlights our return to customer centricity and what's going to deliver value to our customers. You might have noticed, I mentioned that we are approved with FRA on the SAP price list. We are seeing good traction in a number of clients there with our very comprehensive pre-consolidation workflows and process sort of streamlining for them. We are also starting to see some good uptake of the Studio platform. And so there's some very exciting things there. I get to present a lot of this at our user conference in two weeks, and I'm pretty excited to unveil some of the work that we've been doing because the receptivity in our client base to what we are delivering now is just so far improved over the last 1.5 years, I can't even tell you. I'm very pleased that we are delivering things that give our customers value.

Great. Well, looking forward to seeing that in Orlando. And then Mark, just one for you. Just perhaps if we could get a little bit more color on kind of that divergence between enterprise and mid-market or commercial. How much of this is kind of purposeful on your part? There's certainly competition in the mid-market, but you guys have also made changes, which are more reflective of kind of focusing on the enterprise and rallying the partners around that. So, when you look at, say, those renewal rates obviously, there's a drag coming from that lower end? And just any color you could provide there on that would be great.

Yes, of course. Look, the additions of customers in the quarter at both the enterprise and mid-market level was normalized. But as you mentioned, we lost a number of the mid-market customers, the smaller. And the majority of that is strategic. We are targeting higher end in the mid-market. We're really focused on customers that are making an investment in their future and that have an opportunity to work with BlackLine over a lifetime value that we think gives them the best value proposition. So, what we were particularly pleased with in the quarter is the enterprise renewal rate. For the third quarter in a row, ticking back up, we would call that stabilized and then see in our dollar-based retention rate also stabilized and even tick up a point on the back of that sort of strong renewal base of enterprise customers. and that we mentioned early in the year, this mid-market logo headwind was going to be a full year sort of situation, and it's continued to do that again in Q3.

Our next question comes from Ryan Krieger of Wolfe Research. Your line is now open.

So, I just wanted to follow on with one of Rob's questions. With the strategic portfolio as a percent of revenue ticking up again ahead of plan for the second quarter in a row, do you kind of expect these levels to be the new normal? Like have you seen an inflection in adoption here for the strategic portfolio that looks durable? Or is some of that strength still attributed to timing of deals and then just quickly on free cash flow. Obviously, near 30% in the quarter. Is there anything onetime in nature that we need to know about? And maybe how should we think about that for the rest of the year?

Yes. Great. Thank you for the question. I'll go backwards on that. The free cash flow, there was no anomalies or onetime events. It's just an increasing rate of cash flow generation and profitability over the year, incredibly proud of the team, the execution, doing more with less and fewer people driving this business forward. It's been a real journey that we've been on. And so it was a great quarter from that standpoint. And then going back a moment to the strategic products, we talked this year about that portfolio being in the 25% to 30% sales is the right balance for us with the strategic product portfolio that we have. And so each quarter this year, that's continued to pick up, and we've seen good sort of sell-through on that. But what's really the driver moving forward and into next year and whether or not we lift that rate is digital transformation in the office of the CFO and getting these large deals that are multiproduct, multi-solution, and we're talking to those customers today that will move the needle.

Yes. I think just to elaborate, again, I spend a ton of time in the marketplace with our customers and our partners. And our partners are really doing a good job. Our BlackLiners are doing a really good job of getting our customers back on the journey, right? So, they came to BlackLine with the idea that they were going to do some kind of transformation. And for whatever reasons, things haven't gone as quickly as we would have liked. So, they kind of do recs and tasks and then kind of paused a little bit or get sidetrack. And what we've done a good job now is getting the focus back again on the things that follow. So, the transaction matching the journals the great solution that Therese and the team have built around FRA. Intercompany is a really compelling part of this and then invoice the cash. I think you're going to -- we believe we're going to continue to see that trend as it's been going recognizing that the intercompany sales can be very large. So that may create a little bit of volatility when one of those is -- but I think we feel pretty good about the work we're doing to get our customers on the journey. And I think that's going to just relate to continuing to add to our strategic products.

Our next question comes from Chris Quintero of Morgan Stanley. Your line is now open.

Congrats on the solid execution here. And Mark, let me say it's been a pleasure to work with you and wish you all the best in retirement. I want to ask about the SAP business, really impressive to see that pick up. We've done a lot of work on the upcoming ERP super cycle and SAP results have been strong so far this year. So just curious what you're seeing there as it relates to the pipeline heading into 2025. I know there was some disruption in the first half of the year. But do you feel like you're at a tipped point there from the SAP side of things?

Yes, Chris, thanks for the question and good to talk with you. I think I still -- and we still believe that SAP is a bit of untapped potential for us we talk about 25%, 26% of our revenue, as we have been working with the very top leadership of SAP, we believe that, that number should be able to get much higher than where it is today. and we're trying to drive that. One of the great things that SAP has changed this year as they reenergized restaffing their office of the CFO, which they kind of got away from the meetings that we're having with the leaders of those folks all around the world is really beginning to sort of set up very nicely for the things that we want to do together in 2025. In a few weeks, Therese and I will be over there at their headquarters continuing to go through the product road map as well as what we're trying to do in go to market. So, I think we're pretty excited about that. We have some -- what we think will be some interesting changes to our business and how we're going to face off with SAP that we'll share at Investor Day. So, we look forward to sharing a bit more when we're together on that front. But again, I think we feel like -- we've got lots of opportunity. The partnership has never been healthier, never been stronger. I think the alignment of what we're trying to do together is incredible. It's just now for each of us going to get to execute. And when you're down at BeyondTheBlack, we have Corporate Controller from SAP is going to be there, the head of their offices CFO, who's going to be there, and we're very pleased to also remind everybody that SAP is now running on BlackLine.

Awesome. That's really helpful. And then I want to follow up on the competitive landscape and maybe how you're bearing today versus a year ago, given all the changes you've made and maybe which ones have been the most effective from a competitive landscape perspective?

Yes. Look, I think we -- and I think I've told you guys from the first call. I'm always paranoid, right? I'm always worrying and thinking about who's out there, how do we compete? I would say we're incredibly pleased with how we're competing against some of the more traditional competitors that you all might recognize. In fact, I think a number of the takeaways when you look back over the last nine months, from one of our so-called bigger competitors is remarkable. I couldn't be more proud of what the team has done, but we are going to continue to rip and replace every one of their customers out during 2025 as we try to move forward. And so that's really encouraging on that front. And then when you get to what we would consider the ankle biter that sort of competes against us at the lower end of the market. I think our approach to those customers, we're okay if they take some of the customers that really are not yet a good fit for BlackLine, but what we are keenly focused on is when those customers grow to a certain size and scale, we basically say it's now time to come to BlackLine, and we've had a number of nice successes, and we've got some more that we're going to share over the course of the fourth quarter because BlackLine is you come to BlackLine when you grow up. And I think that's the message that we're trying to deliver in the marketplace to these customers who have a journey. They know where they want to go. And I think we're being much more honest and candid about what it takes to come to BlackLine. So we've done a lot of work looking back at where we had success and where have we fallen short with our customers? And we sort of have triangulated about what we should expect and a customer should expect from us any deal as well as a partner. And when you get the alignment from the customer the right way, the partner and BlackLine and you agree at what you're going to do to drive a successful outcome and then stick to it, that's when you get the result you want. If you don't align all those things up front than the likelihood you're not going to be successful is much lower. And so when we talk about our ideal customer profile, it's -- yes, it's about the size and the sale scale and complexity, but it's also about commitment and executive leadership, don't sell to someone that you don't have the right relationships at the top of the house because all projects have hiccups. And what we want to make sure is our team to go talk to the CFO, CXO and say, look, this is not one where we need to. We need you to lean in to make sure this project is back on track because we want to deliver value. Therese said it before, we are customer-centric, that's what we're all about, and the customer success is how we measure our success. So that's what we're looking to do.

Our next question comes from Koji Ikeda of Bank of America. Your line is now open.

Mark, congratulations on the news for you, and Patrick to looking forward to working with you in the future. Just wanted to ask two questions here. Maybe on accounting center, first. I know you have BeyondTheBlack coming up here in a few weeks, but I want to try and tease out what we could potentially hear about accounting studio from a product perspective today from an early-look perspective? And then BlackLine absolutely has a lot of attractive growth levers, thinking about the medium term, but I wanted to focus on two here, specifically accounting Studio and SAP. How would you categorize those to as priorities for contributors to growth over the medium term?

you want to talk about Studio first?

Yes. So, I believe with Studio, we're seeing a very good reaction from our customers right now, combined with a willingness to pay for what we are delivering. So now I know that Mark Partin will always say, this isn't included in our longer-term [indiscernible]. He'll do the drug recusals, but I am pretty hopeful that this represents a completely new area of growth for BlackLine. It's really cool, the reactions to date.

Yes. I think when you see it, we've got five components that make up what we studio will share the rebranding of that next week. But again, a lot of feedback from prospects, customers and partners over the last 18 months. And I think it's been time and money well spent for getting this product to where it will be unveiled in a couple of weeks. As it goes to SAP, we still think that there's a lot of growth opportunity there, and we're committed to sort of building that out. And what's, again, really important is -- it's nice for us to want to go do that, but it's equally important, if not more important, for SAP to have the focus that they do. And so, when they talk about their strategy, the move to the cloud, the office of CFO and AI, which are their top three strategic priorities that aligns super well with what we're trying to do. And I think that, that's going to bode well for our relationship as we move forward. We always the complexity is they're a big organization. And I've been out on a couple of pitches now where you've got an SAP rep in the room who is excellent, but doesn't maybe always know everything that BlackLine does. And I think that's part of our activity and the reason we're going to sort of share some news in a couple of weeks about how we face off with SAP to make sure that people in the field on the front lines know everything they need to know about BlackLine, so they can drive success for their customers with SAP and BlackLine together.

Our next question comes from Terry Tillman of Truist Securities. Your line is now open.

This is Dominique Manansala on for Terry. So just wanted to take it back to studio for a bit. You all mentioned some promising results. So just wanted to get a quick update on maybe the plans to expand the CD solutions roll out later in the year. and see if the rollout time line is on track and maybe what your expectations are for adoption levels once it's available to a wider customer base.

Yes. We've got, I think, a pretty reasonable rollout plan. It's already being sold to a number of current customers and being implemented and being very well received. I think the sort of interesting thing that we're going to talk about at the user conference, Owen just mentioned, is the full breadth and depth of how this is playing into our platform strategy. And how it offers a set of capabilities that, frankly, nobody else is offering right now. So, it is generally available pretty much now. It's been sort of soft rolled out. We're getting very good implementations happening on it and very good reactions to it.

Great. And I also wanted to know if efforts to improve retention rates through those enhanced customer onboarding and digital self-service options have shown any early impact on renewal rates or maybe customer satisfaction?

Yes. So, it's definitely showing some impact on customer satisfaction. We can see that the feedback, the renewals from those customers, the uplift on that renewal is very real. It's very tangible. We are doubling down our efforts about how we go to specific customers, again, with our partners because I think one of the key things is when you have 4,400 customers you're trying to get to as many of them to make sure we have a thriving partner network that's in many of these customers every day. And so that's been a really key part of, again, getting these customers back on a journey. It's been a critical part of the success. And we're still early in sort of some of the self-service stuff. We'll share a little bit more about that at BeyondTheBlack, but it is a key priority how we do that and do that quite frankly, in offshore locations as well to continue to drive down costs. Thank you.

Our next question comes from Jake Roberge of William Blair. Your line is now open.

Congrats, Mark, I hope you enjoyed the last few quarters at the helm. Nice to see the uptick in NRR, especially with the headwinds you're still seeing on the mid-market base. Just curious, as we move into next year, do you feel like you will have officially lapped most of those down-market headwinds, and you can kind of pair stability in that base with the momentum you're seeing upmarket? Or will there's still going to be more headwinds to that as we head into next year?

Well, we will provide more guidance on that in February. And Q4 is a good -- I think it's a signal for us where budgets and buyers' heads are. I would say what we're seeing the best way to describe it at the moment is some stabilization in some of those key areas of renewal and retention. And so, whether it's the return we're seeing in our marketing and lead gen investments on the top of our pipeline or whether it's the conversations with the customers that are moving more fluidly or the attendance at our conference being sold out. There's there are signals but to convert that demand into buying next year is going to depend on a number of things for us. But what we're really confident in is that we're now more equipped than ever to be able to tell our story in a very cohesive way around how BlackLine operates at the level of the CFO and the CIO. And we think that those are places we've gotten some great traction that lead to better metrics like renewal rate and retention rate.

Our next question comes from George Kurosawa of Citi. Your line is now open.

I'm on for Steve Enders maybe to start following up on the conversation about SAP. I think one of the things that jumped out to me about the [indiscernible] you called out. Was that it came on the front end of the migration project? Is that typical for these type of deals that you'd see BlackLine go in maybe before the S/4HANA migration is completed? Or is it kind of vary on a customer-to-customer basis?

I can always pay you for having to ask that question. So, thank you very much. Actually, one of the biggest shifts over the last 12 months has been the realization as BlackLine and SAP and our partners have worked together is that BlackLine should come on the front end. It shows real tangible value for our customers. It gives quick wins. It builds confidence in the digital transformation journey. And as we've been talking with senior SAP leadership, where in particular, one very large customer is sponsored by their CEO and myself and they've done this and where BlackLine has gotten first and see the power of that. And so, you hear SAP also driving that message very importantly into the conversation. So, a year ago, BlackLine was sort of at the bottom of the bill of material, that's no longer really the case. I think people are recognizing the criticality of demonstrable wins and showing the art of the possible. And so, we're going to expect to see more and more of that as we move forward. And I think that will be some of the messaging that you'll hear at BeyondTheBlack.

Okay. That's great color. And then I did want to ask about the net new ARR came in pretty healthy, especially for Q3, but the billings number, at least a little below what we were forecasting maybe, Mark, if you could help us, was there anything kind of timing related or anything else we should keep in mind when we're kind of comparing and contrasting these metrics?

Yes, yes. Great. So, the billings, as you know, in any quarter can have some volatility. It's either seasonality or maybe timing or payment patterns, things like that, and we saw both of those in the quarter. And so, you're doing the right thing, which is look through to the RPO, the CRPO ARR, about -- those are up 10%, 11%. And in the quarter, which shows good healthy, renewing stronger and longer customers, landing customers with longer terms and putting them in the bucket for long-term customers. So yes, it's some seasonal variability in 12-month billings is the right way to look at it sort of a guide. And then looking through to these other metrics should give you a sense kind of how we feel about the quarter.

This now concludes the question-and-answer session. I would now like to turn it back to Owen Ryan for closing remarks.

Thank you, everyone, for asking the questions. And also thank you for recognizing all the contributions that Mark has made. He's been a special, special partner to resend myself and the whole organization. We feel very fortunate that he's done all the things and it's going to continue to be a key ally of ours as we move forward. So, with that, I want to thank everybody. We'll see you all in a couple of weeks, and we're excited what we have to share up BeyondTheBlack. Take care.

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