BlackLine, Inc. (BL) Q1 2026 Earnings Report, Transcript and Summary

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

Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan, Chief Executive Officer of BlackLine; as well with Patrick Villanova, Chief Financial Officer. With the Q&A portion of today's call, we'll also have Jeremy Ung, BlackLine's Chief Technology Officer, join us. Before we get started, I'd like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, in particular, our guidance for Q2 and full year 2026 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during this call are reasonable, actual results could differ materially, and these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic report filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make today on the call will relate to our corresponding period of last year, unless otherwise noted. Unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is available in our earnings release and presentation, which may be found on our Investor Relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now I'll turn the call over to BlackLine's Chief Executive Officer, Owen Ryan. Owen?

Thank you, Matt. Good afternoon, everyone. At our AI investor session in March, we shared our technology vision in detail and made our case for why BlackLine is positioned to be the trusted governance and control layer for CFOs deploying AI across their financial operations. Today is about sharing with you the momentum we are building as we translate that vision into reality. Our Q1 results demonstrated that our strategy is working, delivering solid top line growth and profitability. Revenue grew to 9.7% year-over-year and non-GAAP operating margin improved to 21.6%. These results are underpinned by progress on our key strategic initiatives. The adoption of our platform, Studio360 continues to build with the metric reaching 13% of eligible ARR up from 11% in Q4. More importantly, we are seeing this strategy translate into deeper customer commitments. This is best reflected in our remaining performance obligations, or RPO, which grew 18% and driven by the longer contract terms that are inherent to our new platform strategy. Let me go deeper into our platform strategy and commercial model. Platform adoption maintained a healthy pace following Q4 seasonality with 94% of the eligible new bookings landing on platform pricing, a strong signal that our commercial model is becoming the standard for how customers buy BlackLine. We also saw continued migration activity from existing customers in Q1. Our teams are actively engaged with customers preparing for platform conversion ahead of their upcoming renewals. This new model is also positively changing our deal economics. Average new deal size this quarter was up 85% to $162,000 driven by platform and strategic product sales. Our standard offering now includes a broader set of capabilities on Studio360, which naturally increases the initial land. Our platform model allows us to sell units of financial productivity rather than seats, which, over time, we believe opens access to labor and operational budgets beyond traditional software spend. It also creates the natural expansion path for our agentic AI offerings. The model works like this, as customers adopt our platform, they commit to a platform fee that provides access to the full breadth of our capabilities within a framework of governance, reliability and control that they and their auditors already trust. As they then deploy Verity agents and automate work that was previously manual, consumption-based pricing layers on top of that base, similar to how we price capabilities like matching today. That alignment between how our customers drive efficiency and how we capture value, all within a trusted control environment is fundamental to what we are building. When we look at the full picture, we believe that a platform that provides broad access, embedded AI driving deeper daily engagement and agentic offerings layering consumption on top meaningfully increases the lifetime value of a BlackLine customer. This brings me to what I believe is the most important topic on today's call, AI and our Verity portfolio. Last month at our BeyondTheBlack Conference in London, we introduced agentic financial operations, a new operating model that defines how the office of the CFO harnesses AI safely, strategically and at scale. The response from customers, partners and the broader market has reinforced our conviction that we are addressing the right problem at the right time and with the right approach. The opportunity is straightforward. As an enterprise deploys AI agents across their business in procurement, sales operations, accounts payable, they are creating new uncontrolled financial touch points that need to be governed. Every one of those AI-generated transactions eventually hits the general ledger. Everyone must be reconciled, validated and audited. For a CFO, who personally attest to the accuracy of financial statements, that is a responsibility that requires a trusted platform. Agentic financial operations is designed to close this governance and trust gap. Every action an AI agent takes within BlackLine leaves a digital footprint identical to a human user, full chain of thought, immutable audit trails embedded controls. This is what CFOs demand what audit committees rely upon and what auditors require. The market reaction from customers and partners since our London launch has been encouraging. Customers are telling us they want to leverage what we are building and provide input on our road map rather than try to build these capabilities themselves. Their ROI framework is clear, make their finance operations more durable and competitive and let a trusted partner handle their AI infrastructure so they can focus on running their business. Before I walk you through what Verity is delivering commercially, I want to spend a moment on how we build because the pace of our innovation is becoming a strength. We are using AI to fundamentally accelerate our own product development. Our engineering teams have adopted AI augmented coding practices across our development workflows and the results are measurable. The time from idea to production has decreased 22% versus last year. We are shipping capabilities faster with fewer resources and at a higher quality. This is a structural improvement in R&D productivity that we expect to compound over time. That increased velocity is translating directly into how we deliver value. Our customers have benefited from our foundational AI capability since last year. We are expanding further into Agentic AI. A year ago, Verity agents were a strategic vision. Today, we have multiple purpose-built agents in market in preview are launching in the near term. Combined with our new AI innovation hub and a fully integrated AI native acquisition, we are executing against our AI road map with clear deliberate focus. Now let me share what this engine is producing for our customers. Over the past year, we have been building and refining our embedded Verity AI capabilities like Verity Assist, Verity Narrate and Verity Flag and close collaboration with our customers, their auditors and our partners. That feedback loop has been critical, allowing us to validate not just performance, but the trust and governance framework around them. Even before we broaden access, adoption among early users was doubling every quarter. In Q1, with that validation in hand, we made these capabilities standard across most of our customer base. Over 2/3 of our customers are now actively using these tools, a 285% increase in adoption quarter-over-quarter. In Q1 alone, unique users grew 68% and total usage grew 183%. What this tells us is that AI is moving beyond experimentation for our customers and into their day-to-day workflows. As they embed these capabilities into how they operate, it deepens their relationship with BlackLine. Over time, we expect that to support both stronger retention and additional consumption under our platform pricing model. Verity Prepare, our AI-powered reconciliation agent is now available to customers and is deployed with several mega enterprise customers. The validated outcomes customers are seeing are significant, over 90% reduction in reconciliation processing time. One customer that had been spending 3 hours manually executing certain reconciliations has seen that fall to 10 minutes and 95% time savings. Based on their experience, they are now ready to enable Verity Prepare broadly across their business. That progression from pilot to enterprise-wide rollout is exactly the adoption pattern we are building toward. Early usage data shows the cost to serve is efficient at current scale with clear paths to optimize further as adoption grows. Our multi-model architecture allows us to deliver meaningful customer value at margins consistent with our financial targets. Verity Match is now in its early adopter phase. Our existing matching solution is a powerful capability as it handles high-volume, complex data sets across multiple ERPs and source systems and deliver strong automation rates for our customers. Verity Match builds on that foundation by applying AI to the long tail of complex exceptions like combined vendor payments, transposed invoice numbers, missing remittance details. Rules-based systems have historically left these for accountants to resolve manually. In early customer testing, we see a 64% reduction in transactions requiring manual investigation. And by running our models on NVIDIA GPUs, we can process matches up to 25x more cost efficiently and faster than on prior architectures, improving both the customer experience and unit economics as this scales. Verity Collect will launch this quarter and the demand signal has been stronger than expected. We had to close our early adopter program because customer demand exceeded our planned capacity. The value proposition is direct. Predicting payment delinquency before an invoice becomes past due and autonomously managing the collections outreach across voice, e-mail and digital channels. For CFOs, this translates directly to working capital improvement, which in the current macro environment is a top priority. While it is still early, we believe the initial proof points are compelling in one early adopter scenario our AI agent completed collections outreach activities in under 30 minutes that would have taken a human team of approximately 45 hours. That kind of efficiency gain, freeing collection teams to focus on high-value accounts and complex disputes is exactly what is driving the demand we are seeing. We expect Verity Collect to be a meaningful accelerant to our broader invoice to cash momentum as it scales. Verity Accruals has seen a significant acceleration in customer interest and pipeline growth as its value proposition resonates in the market anchored by initial successes including closed deals and proof of concepts with key targets in both the enterprise and mid-market. These are largely existing customers looking to expand their footprint, which validates the cross-sell motion we have been building. Customers land on Studio360 and then adopt additional Verity agents as they see results. One advantage worth highlighting is that our customers do not need to build a new governance framework to deploy Verity. BlackLine already is that framework. Verity agents operate within the same SOX compliant controls, audit trails and approval workflows our customers have relied on for years. Customers can begin deploying AI within a controlled environment today and their auditors already trust, which we believe lowers the barrier to adoption and supports a faster path from pilot to broader rollout. Turning to how this strategy aligns with our Q1 execution, our platform and AI approach is showing consistent progress in the enterprise. This sustained focus is reflected in our metrics. First, we saw an increase in customers with over $1 million in ARR. We closed the first quarter with 86 customers at this level, an increase of 9% year-over-year along 14% growth in our $250,000-plus customer cohort. Second, this strategy is driving deeper adoption and additional cross-sell across our portfolio. Our strategic products represented 37% of sales in Q1, up from 33% last quarter and 27% in the prior year. This proves that when we lead with value and outcomes, customers invest more deeply in BlackLine, adopting more solutions with less friction. And third, you can see the strategy in action and key wins from the quarter. Within our existing customer base, we saw a significant validation for our AI offerings, particularly Verity Accruals. We secured a major renewal and expansion with a leading billing company, demonstrating their deep loyalty to BlackLine and strong interest in our AI capabilities. We saw similar momentum with a leading global mobility and car sharing company, which also expanded its footprint with a strategic win for Verity Accruals. Our upmarket motion and governance thesis also continues to resonate strongly in highly regulated and complex environments. This quarter, we welcomed one of the nation's largest health care providers as a new logo replacing an ERP competitor, which is a powerful validation of our trusted control framework and innovation. We also saw significant expansion within our enterprise base, including a premier global construction services company that added our invoice to cash solution. Additionally, we executed a major rip and replace at a leading fintech provider, successfully displacing multiple competitors to consolidate their financial operations on to BlackLine, adopting Studio360, Journals, reconciliations and Transaction Matching. Last, we delivered highly strategic wins, particularly among companies at the forefront of the AI revolution. We secured a net new agreement with a global leader in memory and data storage for AI, successfully migrating their processes off an ERP competitor and on to BlackLine. Through that same channel, we also expanded our footprint with one of the world's premier data and AI platform companies. The fact that organizations building the future of AI rely on BlackLine for their own financial governance speaks to the strength and trust of our platform. We believe our customer base is healthier than our headline retention metrics suggest and it is getting stronger. The lower mid-market churn we have discussed in prior quarters is running through a finite and shrinking pool of at-risk accounts. At the same time, the changes we have made, platform pricing that creates stickier customer relationships, a broader solution footprint per customer, increasing multiyear renewal commitments and a redesigned customer success model are fundamentally improving the quality of our installed base. We expect the cumulative effect of these changes to become more visible in our retention metrics as we move throughout the year and into next. Finally, our partner ecosystem and our SAP relationship continue to be meaningful contributors to growth. Our integration with SAP's advanced financial close is now generating pipeline as we were able to sell into SAP's installed base of AFC customers. Our Joule, Verity proof of concept is also progressing toward a commercial framework, and we are actively working to launch platform pricing within SolEx. We are also seeing acceleration in our public sector business through SAP with several active deals in the pipeline. We see our partner ecosystem as a force multiplier across demand generation, delivery and customer success and is critical to scaling our growth. In closing, our path forward is clear. AI is creating more financial activity across the enterprise, not less. All of it must be governed, reconciled and audited. We are the system of record and control that makes this possible. Our customers are telling us they want to move fast with AI, but they also tell us that trust, reliability and security are nonnegotiables. This is exactly what 25 years of BlackLine expertise delivers. With that, let me turn it over to Patrick for a detailed review of our financial results and our guidance.

Thank you, Owen. As discussed, our strategy is building clear momentum, and our Q1 financial results reflect that progress. We delivered solid top line growth, demonstrate the quality and durability of that growth through our key strategic metrics and showed significant leverage in our operating model. Let me walk you through the details. Total revenue was $183 million, up 10% and with subscription revenue growing 10% and service revenue growing 11%. The acceleration in services reflects the faster implementation time lines and go-live activity we are driving through our delivery engine. ARR reached $712 million, up 9%, reflecting the bookings momentum we saw in Q4, carrying forward and continued strength in platform and strategic product adoption. Importantly, we believe the quality and predictability of our future revenue growth is strengthening. This is best illustrated by our RPO, which grew 18% to $1.1 billion fueled by larger deal sizes and longer contract terms inherent to our platform model. Similarly, the health of our near-term pipeline is also reflected in our current RPO growth of 12%, which underscores the solid market demand for our solutions. This momentum is directly linked to the steady adoption of platform pricing, which reached 13% of ARR at quarter end, up from 11% in Q4. Calculated billings growth was 9% in the quarter, our trailing 12-month billings growth, which helps normalize for quarterly variations, improved to 9%. Turning to the health of our customer base. Our key metrics remained solid across our 4,300 customers. Net revenue retention was 105%, which includes an approximate 1 point headwind from FX. Underlying expansion within our installed base remains solid, driven by 2 dynamics: customers migrating to platform pricing, which naturally expands the scope of their relationship with us and strong attach rates for our strategic products, which represented 37% of sales this quarter. Customers are investing more broadly in BlackLine and our platform model is making that expansion easier and faster. On retention, our revenue renewal rate was 93%. Enterprise renewal rates remained strong at 96%, consistent with the durability we have seen in this segment, the lower mid-market headwind we have discussed in prior quarters continue to weigh on the overall rate, though the remaining at-risk pool is finite and shrinking. We expect this drag to diminish as we move through the year. Our SolEx channel delivered one of its strongest new bookings quarters as our joint go-to-market with SAP continues to mature. SAP customers now account for over 26% of our total revenue, and we see further opportunity ahead as our broader platform strategy opens new avenues into SAP's installed base of commercial and public sector customers. Now let me turn to profitability and cash flow. Our non-GAAP subscription gross margin improved to 83%. Our non-GAAP gross margin improved to 80.2%, in line with our expectations. Non-GAAP operating margin was 21.6%, reflecting the continued productivity improvements we are driving across the business. We are seeing meaningful efficiency gains from our own adoption of AI and automation in areas like customer onboarding, implementation delivery and internal operations. This enables us to grow revenue faster than expenses while maintaining our investment in innovation. Non-GAAP net income attributable to BlackLine was $40 million, representing a 22% non-GAAP net income margin with adjusted earnings per share growing 14% to $0.56. We delivered operating cash flow of $46 million and free cash flow of $36 million or a 20% free cash flow margin. After paying off our 2026 convertible notes in March, we have approximately $525 million in cash, cash equivalents and marketable securities versus $667 million in debt. Finally, we continue to execute our capital allocation strategy. In the quarter, we returned approximately $47 million to shareholders through the purchase of 1.2 million shares. Before I get into guidance, I want to step back and frame where we are against our multiyear financial targets. We entered the year with a clear objective continue accelerating revenue growth toward double digits, expand operating margin and do both while increasing our pace of innovation. Q1 demonstrated progress on all 3 fronts. Revenue growth accelerated, margins expanded and the pace of our product delivery has never been faster. These results give us confidence to raise our full year outlook. On the specifics, I want to call out a few dynamics that are important for modeling purposes. The first quarter's top line performance included about a $1 million benefit from certain items related to specific customer deployments and timing. These are nonrecurring in nature. Looking ahead, we anticipate a modest revenue headwind of roughly $1 million to $2 million over the balance of the year due to FX. After accounting for both of these dynamics, our Q2 and full year guidance reflect continued acceleration in our underlying revenue growth rate as we move through the year. On the macro, we are not immune to the external environment, and we have built our guidance with that in mind. That said, the financial close is a regulatory obligation, not a discretionary spend item. Our customers cannot defer compliance and the complexity of their financial operations is increasing, not decreasing. Combined with our growing RPO strong multiyear renewal trends and an expanding enterprise pipeline, we have good visibility into the rest of the year. Our raised guidance reflects both that visibility at an appropriate level of prudence given the uncertainty in the broader environment. With that context, for the second quarter, we expect total GAAP revenue to be in the range of $186 million to $188 million, representing 8.1% to 9.3% growth. We expect non-GAAP operating margin to be in the range of 21.5% to 22.5%, and we expect non-GAAP net income attributable to BlackLine to be in a range of $40 million to $42 million, or $0.57 to $0.59 on a per share basis. Our share count is expected to be about 73.3 million diluted weighted average shares. And for the full year 2026, we expect total GAAP revenue to be in the range of $765 million to $769 million, representing 9.2% to 9.8% growth. We expect non-GAAP operating margin to be in the range of 24% to 24.5%. And finally, we expect our non-GAAP net income attributable to BlackLine to be $174 million to $182 million, or $2.42 to $2.53 on a per share basis. Our share count is expected to be 74.4 million diluted weighted average shares. Operator, we're ready for questions.

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

Owen, maybe first for you on Verity and some of the adoption you've seen there. You spoke to it being a big factor in the majority of the large deals in the last 2 quarters, what are you seeing in terms of adoption and usage from spend new customer cohorts, specifically as they've gone live on BlackLine? And Patrick, maybe can you remind us if there's any consumption revenue embedded in the 2026 outlook?

Yes, Alex, first of all, good to hear from you. Thanks for the question. I think whether it's a new customer or even an existing customer, things that we're hearing from our -- from that cohort is basically, one, is they want to move at a good pace with AI, move a little bit faster. But what they're also telling us is that they do not want to compromise anything on trust and governance. And so what they're trying to figure out with us when we go in and talk with them is they first tell us that the AI that we're rolling out needs to work within an existing controls environment, which is what we have and what they really appreciate. They want to make sure that the AI that they're deploying has actually been built by people in the business that understand their business. So they're not necessarily enamored with sort of generic AI. And so -- and we sit there and we can talk about the hundreds of billions of transactions that we processed over for all of our customers over all these years and can show the accuracy and effectiveness and efficiency with which that works and then the ability for their auditors to know and rely on it and trust it. That all becomes really important in all of the conversation. And the last thing that we hear from them, Alex, it's not like what we bought today on February 25 is the end all be all. So what they're really looking for is also trying to understand what is our road map? How does it align to their interest? And then how can they potentially weigh in with others in their industry to sort of move forward. And one of the examples of a big win we had this quarter was with a very, very large health care company. Well, if you look at the largest health care companies in the United States, we probably have 9 out of the 10 at this point in time. And so bringing that cohort together to show that experience because they all have those common issues and they're all trying to figure out how to use AI the right way in that environment. So those are the things that we sort of really hear. It's like yes, we wanted to be cutting edge, but more importantly or just as importantly, they want to be able to trust it. They want to make sure it's accurate. It's auditable, reliable and secure. And then emerging probably after the quarter, but there's a lot more conversation now about the total cost of ownership and cost certainty, because what's happening with AI and other parts of the market where people are consuming tokens at a very, very high level without really understanding what they're getting from an ROI perspective. That's what I'm seeing in those conversations. But Patrick, over to you.

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

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

So I think, Alex, just -- and I want to make sure I understood your question, which was what's driving the strategic product sales into the platform. And I mean, basically, it's the work that Jeremy and his team are doing with Stuart and his team to sort of make sure that the whole system works together seamlessly, that can be implemented by our partners. Our teams are sometimes jointly with our customers who are able to demonstrate faster time to value for what they're being -- what they're asking for. And then I think importantly, as we continue to innovate in those products, we're widening the gap, quite frankly, with anybody that would have been a competitor. So those are the things that I think we're seeing in the market so far. And hopefully, that was responsive to your question, Alex.

Great. Thanks, Owen.

Patrick, do you want to talk about the acceleration of 11% to 13%?

Yes, Alex, the second part of your question there, I think what I heard was, does our continual increase in the strategic product mix, is that derivative of our platform approach. And the short answer is, yes, they are related. We would expect to see a continued increase in mix of our strategic products versus nonstrategic because most, if not all of our strategic products are consumption based. Now the second part of that, as customers migrate to our platform, that enables a smoother sales motion of our strategic products. It is a connective tissue, connected fiber between all of our solutions, which allows data to flow seamlessly between them, and that allows us to sell into that customer base with less obstacles. So as we see more and more customers move to the platform, we would expect to see that mix of strategic products continue to increase as well.

Our next question comes from Chris Quintero of Morgan Stanley.

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

Yes. Look, I think, Chris, it's sort of what I just said at the beginning, right? So we've been -- we're in our 25th anniversary, actually officially June 2 for those who are paying attention to that. But I think it's when you've been a trusted partner for the world's leading companies for as long as we have been, there's a lot of safety and security and you think about the profile of our customer that buy. So there is a confidence in that. And then when you sit there and you think about the way BlackLine innovates amongst and between our customer base, our partners, staying close to what the auditors are requiring, what BPOs are trying to do. You bring all that together and you have that much more of a collaborative effort. That's why we announced the innovation hub that we said we were putting out, I guess, about a month ago, we announced that. But all of that is sort of giving them a high degree of confidence about what it is that we're doing. And again, I think we're hearing more and more frequently. We don't want to have to build this ourselves. We'd rather partner with a company like BlackLine. And so you're seeing that longer commitment because these things are not 1 year one-and-done kind of activities. The rollout, the building of AI isn't going to stop 12, 18, 24 months in the future. And so you're seeing a lot of that from a commitment perspective, as to our customers wanting to just partner and go on that journey with us. But Patrick, anything you'd add to that?

Yes, Chris, for all the reasons Owen just said, our RPO story is a very good story right now. Delivering 18% overall RPO growth, 12% CRPO growth year-over-year. It's indicative that our customers or new customers that we're landing, they're larger in nature. They're signing up for longer terms right out of the gates. And then coupling that with our existing customers that have been with us for years, they're coming up for renewal and they want to be with us for several more years. They want to continue the journey. They're intrigued by the innovation. They want to be part of this, so they want to partner with us. And not per se, go at it alone. So it's a very positive story underpinning our RPO growth rate and it's indicative that our existing and new customers want to be with us for several more years.

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

Jeremy, you want to take that question?

Yes. I think we are definitely seeing repeat engagement from customers using Verity. So that's extremely promising. And with the customers that are doing this, Owen mentioned the 90% time savings in things like preparations activities, that's really what's driving the repeat usage of these capabilities, the value being delivered. And so in the cohort, we definitely see people who are using Verity come back to use Verity again for risk analysis, for narration capabilities, for other analyses. And so that's what's really driving the usage and the transactions from these customers.

And our next question comes from Patrick Walravens of Citizens.

Congratulations to you guys on the progress here. Owen, I would love to talk a little bit more about SAP, in particular, when you talk about the public sector opportunity with SAP, there's a couple of things there. I mean, I guess I don't usually think about the public sector and BlackLine because the public sector has kind of different accounting. And then secondly, I did notice that one of your SolEx salespeople moved to SAP focusing on the public sector recently, so I figured there's some connection there. But I'd just love to hear your thoughts.

Yes. So first of all, the relationship with SAP, in my view, just continues to get stronger and better. I think the collaboration around product road map, customer success work that we're doing around AI together are all things that, from my vantage point, I just -- I couldn't be more pleased with that. Obviously, we all wanted to go faster, but that's just par for the course. But I will say to you, one of the privileges of working with SAP is they're very professional and they're very thorough in what they do. And so sometimes, you might give up a little bit of speed for that professionalism and the thoroughness with which it's done, but it works particularly well. As it relates to public sector. I think we've been signaling now for a couple of years, our move to becoming an IL-2 compliant than IL-4. We've had some wins now in the public sector space. We are going to continue to invest in. We've had a very nice growing pipeline of opportunities with various federal agencies. Those in many ways is a bit of a tailwind for us in the sense that the government is trying to modernize. And Pat, if you're as a taxpayer, I'm going to say this, the government really has a hard time producing any kind of "audited financial statements". And so no matter the basis of accounting, you still have to get it right. And so that's where we've been able to find a real opportunity to grow into that organization. And so yes, so we're excited about that opportunity.

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

There's always big deals, Pat. I got to just get them across the finish line. The government spends big when they spend. But they have their selling season, as you know. So that's not until the end of the third quarter.

And our next question comes from George Kurosawa of Citi.

I'm on for Steve Enders. Maybe you could talk about this move that you discussed on the Verity side from POCs into more scaled enterprise production. How hands-on is that transition process? Is there a component of forward deployed engineers or some similar construct that's required here? How turnkey is it? Maybe you could talk about what the learnings have been in customers making that migration?

Yes. So I can take that question. So in terms of adoption, obviously, with the earlier capabilities and in the agentic capability, we've been fairly hands-on with our customers. But we've always had a forward deployed engineered style motion in terms of how we've used customer engineering resources to customize solutions, to customize journal entry capabilities to fit the needs of businesses. And so we're taking the same hands-on approach with the earliest cohort of customers adopting these agentic capabilities, but we are set up well to expand this to a forward deployed engineer motion in the future based on what we already do today with our customers.

Okay. Great. And then I did want to touch on the platform pricing cadence here. I apologize if I missed this earlier in the call, but I think it was a 7% increase in percent of ARR in Q4 and 2% in Q1. I'm sure this is going to be a bit of a lumpy metric. I'm just wondering if you could just comment maybe there's some seasonality, just the number of at-bats you had and just the dynamics under the hood there and your confidence in doubling the ARR on that pricing model.

Yes. Thank you. We're very confident that we're going to reach 25-plus percent by the end of the year in terms of the amount of eligible ARR we have on the platform model. With that said, you hit the nail on the head. Our largest renewal cohorts are in Q2 and Q4, and Q1 is by far the lightest. So we did not expect it to be a linear path from 11% to 25-plus percent by the end of the year, and we're right where we thought we'd be coming out of what is traditionally a lighter quarter in this industry.

And our next question comes from Matt VanVliet of Cantor.

Maybe a follow-up on the SolEx partnership and then kind of a broader question on the overall go-to-market side I think coming into the year or BeyondTheBlack last year, you talked about maybe greater alignment with senior executives at SAP. Curious how much of that is sort of already coming through the pipeline versus being maybe a little bit back half weighted just given the seasonality of that business. And then wrapped around that, just sort of the execution that Stuart had talked about coming in to have more accountability on sort of a daily basis. How is that playing out on both sides of the SolEx and the rest of the go-to-market team?

Yes. A couple of things. So I'll say again, I think we're very pleased with the progress we're making in trying to team with SAP. As I think you know, I think they report something like their second and fourth quarter, they're very large, and I think 40% of their bookings come in the fourth quarter. So there is a bit of a tail to this, but you're not buying a big ERP systems for the moment. The sales cycles are even longer than ours, as I understand it. But there's great alignment. The teams are working really well. I think you would see it in presales, the incentives are aligned the right way. And there's just more and more success stories that are being created amongst and between SAP system integrators, BlackLine and customers. And so those stories become very compelling when you hear them together because when you're spending the kind of money you have to do an ERP upgrade and then implement BlackLine, you want to make sure the ROI is there. So I feel very, very good about that. I think the -- you look at the work that Stuart is driving on behalf of our team, I think it's going well. I think the one thing that we're learning from our own experience as our deal sizes get larger, there's a few more people around the table and making sure that we understand the different constituencies. So CIOs would be a place that a year ago, we're not necessarily as much of a focus, for us we're having to spend more time with CIOs. Some companies now have the equivalent of an AIs czar. And so we're having -- sort of learning how to work with some of that. And then obviously, the deal sizes are bigger. So it just takes a little bit longer to work your way through that. But I think Stuart is the right guy doing the right things with this team to drive the success that we want. So I feel quite good about that.

All right, helpful. And then as you look at customers that are either already on the platform pricing or maybe on the next list to potentially migrate over to that, is there any different margin structure that you're assuming in sort of year 1, year 2 of those deals that ultimately sort of maybe builds back up? Or how do those -- how does that pricing around both the usage of the platform, but also kind of encompassing the size of the organization and the complexity there, have a margin profile that maybe differs from the seat-based model?

Yes. So as we just talked about, we're about 13% of our way through. We look at our customer cohorts very carefully that are coming up for renewal in terms of who's eligible for the platform in terms of which customers are most likely to adopt and then which customers are going to consume the platform and at what rate. We've been looking at data for the last year, and early on, but right now, we are not seeing any margin compression as a result of adopting the platform. The cost of delivery on day 1 is not that significant. And so we see the immediate uplift and then we're now monitoring the secondary element of the revenue generation of the platform, which is consumption. So far, based upon what we're seeing, we are not seeing margin compression. In fact, I believe if you see in Q1, we had our highest gross margin in years, and that was as planned. That's part of our migration completion to GCP. We still had some redundancy in data centers in Q1. And for the time being, we expect gross margin to expand throughout the year, and we're not seeing any data points that are contrary to that. But we will continue to closely monitor the impact of AI.

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

This is Kyle Aberasturi on for Dan Jester. It sounded like a solid quarter for both Verity and for platform deals. I guess just how do you see customers allocating resources between pure AI products and more broader digital transformation trends?

So I would say our customers are not just looking to buy AI for the sake of AI. I mean I think for our customer base, it's about being part of digital financial transformation journey that happens to have more power being provided because of AI, but people are just not buying whip cream without wanting the cake, if you will. So there's got to be a real foundation underneath all of this is as we move forward. And so I think that continuing to underline everything we do will be the complete platform across record to report or invoice to cash and further powered by what the AI capabilities that Jeremy and the team are building. That's my experience with the market right now, but I'm going to -- I'm looking at both my other presenters here and seeing if they're hearing anything different from our teams in the field.

Yes. I think overall, AI, there's excitement about our road map and vision, but it needs to tie to their overall objectives as an organization. And so it's really in support of the transformation objectives BlackLine has always supported and accelerated. And AI is an accelerant to that. It enables that to happen more quickly and with less resources on their side. But ultimately, it ties to the transformation objectives we are already part of.

Thanks, Jeremy. It ties to being able to fit into the control environment as well, right? Our customers need to understand that there's not going to be anything introduced into the control structure that's going to create an issue for them.

Great. And just a quick follow-up. The Middle East was an area of investment last year. I guess, just has there been any impact today hitting the business?

As they like to say timing and life is everything, right? So we -- as for those of you who don't know, really sort of opened up operations at the tail end of last year in Saudi Arabia. We had our first nice win in February, if I remember correctly. And then obviously, the war broke out in Iran at the end of February. So it has had an impact on the environment in the Middle East. But we didn't have lots of big numbers built into our financial plan for this year. I think the thing that Patrick and the team and I are watching very closely is the impact on Europe. That's the one area where we saw some slowdown at the end of the quarter that we're watching to see if there's going to be much more of an impact in that part of the world as the troubles in the Middle East continue to unfold.

And our next question comes from Rob Oliver of Baird.

Great. You guys hosted a really cool AI event this quarter and some longtime customers that we've talked to over the years like Quest and others like Bristol-Myers were there. And as you talk about the usage ramp and Verity, maybe provide for us a sense or an update for -- as you think about the outlook for this year and the next couple of years, how that Verity usage ramps as you move towards your '27 targets. Within that call, it was fascinating because one of the customers was like, yes, we're all in on it. The other was like we're still dabbling. So just would love to get some more color around the customers that know you and love you, what they're doing with the AI components of the platform?

Yes. Rob, first of all, good to hear your voice, and thanks for your question. And listen, we have customers that run every end of the spectrum, right? So -- and whether they love it or not, there's still some governance that these companies have in place on how quickly they want to evolve with AI, partly just to their own ability to digest it, part of it, just making sure that every T is crossed, every I is dotted as they move through the alphabet, if you will. And so I think the thing that we saw out of the first quarter again, which was important from my vantage point, was we may have taken longer to get everything into the market. But when it went, we had very, very high confidence that it was going to work. It was reliable, it was trusted because our customers have already kicked the tires as many times as they possibly could. The auditors that sort of, I won't use the word blessed, but had a high degree of confidence in it. And so I think that's the approach that we're going to continue to see. There's going to be some customers that Jeremy and his team want to experiment with us. And I guess maybe the way I would sort of describe it is, we've got customers that want to ride in the Peloton, some of them want to be at the front of the Peloton. Some of them want to be at the back of the Peloton. They don't want to be in group too, right? So they don't want to have fallen away from the pack, but they're sort of, some of them want to drift for a little bit of time just to see how things are unfolding. And I think one of the things that we are trying to do is take advantage of our industry capabilities and get some of these customers to talk to one another, that are in the same industry sector so that they get a higher degree of confidence of what's being used, how it's being used and why they can rely on. But Jeremy, please add.

That's also part of why we launched that AI hub. The -- Owen alluded to the fact that we have some customers who really want to be designed partners with us and want to think about be forward leaning about how they expand usage of AI into their organizations, but also how they define it for finance and accounting discipline as a whole. And so that's really what's the intent behind that hub and builds upon our narrative from our AI day, but it's really about pushing the envelope with these customers in a safe, governed and trustworthy manner and being able to design together with them is part of what the leaders in these spaces are looking to.

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

Just a quick one for me. I wanted to ask about the mid-market churn? And maybe can you quantify the growth headwind attributed to that churn, both in the results and then maybe what's factored in the guidance? And then when that does subside, it sounds like towards the end of this year, how should we think about the potential for net retention to expand as we look into next year and beyond?

Yes, Patrick. So a couple of data points there. No surprises in terms of where we're going or the results from a customer account perspective in Q1. We've been signaling for well over a year now that there's going to be churn in the lower mid-market and we expect that to slow down in the second half of this year. We're tracking that cohort very carefully and feel very confident that, that number will trend down from a customer churn count perspective as this year evolves. It's a good data point to note that it is a headwind for lack of a better term that we've baked into the guide. There's no surprises there. We've baked it into the plan. We saw this coming. For every customer that we land, the average customer size for new logo is over 3x the size of a customer we lose. So that gives you -- that's a very key data point, not just in terms of our success of the nature and size of customers that we're landing and landing on the platform, but it also is a good indicator in terms of the general size and nature of the customers that are leaving us. So as the year evolves, we would expect some expansion on DBNRR as well as GRR as we work through that cohort and enter 2027.

And our next question comes from Billy Fitzsimmons of Piper Sandler.

I want to double click, I was going to ask about kind of the demand environment outside of North America and the opportunity there, it came up in one of the prior questions. And in the answer, there was a commentary kind of around Europe and some of the macro impacts there that -- can we please double-click on that? What was kind of the impact there, if any, in 1Q? And what are you kind of seeing positive or negative in 2Q since then? Because it's come up in investor conversations about the potential for maybe elevated push up relative to other geos?

So first of all, broadly, pipeline in the business continues to grow at a very healthy pace all around the globe. So we're not really seeing a significant difference between one geography versus the other. And so that bodes well for what we are trying to do in the marketplace. That said, as we said, the end of March was a little bit less than we would have expected. And so some pretty large deals did get pushed out. I would say to you that business throughout North America looks very solid. Asia-Pac, there's parts of it that look really good. So for Japan, it seems to be doing well for us. And then Europe is okay. I think the thing that I worry more about than the war because it will work its way through when businesses still need to implement BlackLine as we move forward is the tension, the geopolitical tensions between the U.S. and Europe and what that might mean for us for infrastructure we have to build in Europe compared to what we have in North America now. So I know Patrick and Jeremy have been sort of modeling that out. If data sovereignty becomes a bigger, more pressing issue, then we're ready to deal with it. We know how to deal with it. We just obviously built something in Saudi Arabia. But that is the one thing that I am watching. I think we can work our way through the macroeconomics pretty well. But I want to make sure we also don't lose sight of is the geopolitical issues that could have an impact on investments we would need to make in the business maybe later this year or to '27 or '28.

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

Our next question comes from Adam Hotchkiss of Goldman Sachs.

Patrick, I just wanted to start with you. I think you mentioned the $1 million nonrecurring benefit to Q1. Could you just maybe help us understand that a little bit better what that was and why that's not recurring?

Yes, Adam, it has a little bit to do with the timing of implementations, the timing of delivery, it's onetime in nature. But I think, Adam, the key takeaway is even though we had $1 million of onetime benefits in Q1 from a top line perspective, we're passing along all of that into the guide less FX headwinds. So overall, we did not view it as a headwind to the update and increase of the guide for the full year. And of the $2.1 million beat, we're passing about half of that into the full year guide. The other half being an FX headwind from where rates were at the time we established the guide for the year.

Okay. Yes, that's helpful color, Patrick. And then, Owen, just any updated thoughts on win rates or the broader competitive environment? I know way down market, there are some AI native full-stack ERPs that are getting a lot of funding that are probably serving companies nowhere near the size of where you are. But curious, just broadly for the enterprise players and sort of where you stand, how that's going?

Yes, I'm going to say this, and I'm probably going to regret it in some ways, but it feels to us like our ability to compete at the enterprise, we've distinguished ourselves even more from our traditional competitor set. I think the robustness of which Jeremy has built, the completeness of the road map, the work that we've been able to do to improve time to value, provide more certainty around cost of ownership, continuing to be viewed as a very collaborative player as to what we do has been good to see in the enterprise space. And you can see that in our pipeline as it's growing. The number of opportunities isn't necessarily growing very large, but the dollar size is increasing nicely, and that's in the enterprise space, and we're pretty encouraged by the number of 7-figure deals that we have in front of us for this year and next year.

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

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

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