BLACKLINE, INC. (BL) FY 2023 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set forth in Item 8, “Financial Statements and Supplementary Data.” The following discussion also contains forward-looking statements, which are based upon current plans, expectations, and beliefs. These statements involve risks and uncertainties. See Part I, “Special Note Regarding Forward-Looking Statements” for a discussion of the forward-looking statements contained below and Part I, Item 1A, “Risk Factors” for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for fiscal 2023 and fiscal 2022. For the comparison of fiscal 2022 and fiscal 2021, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2022 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 23, 2023.

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Overview

We have created comprehensive cloud-based solutions designed to transform and modernize accounting and finance operations for midsize and enterprise organizations in all industries globally. Our secure, scalable solutions transform critical processes, including financial close, intercompany accounting, invoice-to-cash, and consolidation. By introducing software that unifies critical data and enables process orchestration and automation, we empower accounting and finance professionals to improve the integrity of their financial reporting, reduce time spent on manual work, accelerate cash flows, and redeploy resources to focus on analysis and business partnership.

At December 31, 2023, we had 386,814 individual users across 4,398 customers. Additionally, we continue to build strategic relationships with technology vendors, professional services firms, business process outsourcers, and resellers.

We are a holding company and conduct our operations through our wholly-owned subsidiary, BlackLine Systems, Inc. (“BlackLine Systems”). On September 3, 2013, we acquired BlackLine Systems, and outside investors acquired a controlling interest in us, which we refer to as the “2013 Acquisition.” The 2013 Acquisition was accounted for as a business combination under GAAP and resulted in a change in accounting basis as of the date of the 2013 Acquisition.

Our cloud-based solutions include Account Reconciliations, Transaction Matching, Task Management, Financial Reporting Analytics, Journal Entry, Variance Analysis, Consolidation Integrity Manager, Compliance, Smart Close for SAP, BlackLine Cash Application, Credit & Risk Management, Collections Management, Disputes & Deductions Management, Team & Task Management, AR Intelligence, Electronic Invoicing & Compliance, Intercompany Create, Intercompany Balance and Resolve, and Intercompany Net and Settle. These solutions are offered to customers as scalable solutions that support critical record-to-report and invoice-to-cash processes.

We derived approximately 94% of our revenue from subscriptions to our cloud-based software platform and approximately 6% from professional services for the year ended December 31, 2023. Our subscription contracts have initial non-cancellable terms of one year to three years with renewal options. The majority of new contracts in 2023 and 2022 had an initial term of three years. We price our subscriptions based on a number of factors, primarily the number of users having access to the products and the number of products purchased by the customer. We typically invoice customers annually in advance for subscriptions, which is initially recorded as deferred revenue and recognized ratably over the term of the customer contract. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal.

Professional services consist primarily of implementation and consulting services. With the exception of our intercompany accounting solutions acquired from the FourQ Acquisition, our product offerings are available for immediate use on our platform after granting access to a new customer. We typically help customers implement our solutions, and we also provide consulting services to help customers optimize the use of our products. We invoice customers for our consulting services on a time-and-materials basis and recognize that revenue as services are performed. A limited number of our customers are provided professional services for a fixed fee which we invoice in advance and is initially recorded as deferred revenue and recognized on a proportional-performance basis as the services are rendered.

We sell our solutions primarily through our direct sales force, which leverages our relationships with technology vendors, professional services firms and business process outsourcers. In particular, our solution integrates with SAP’s ERP solutions, and SAP is part of the reseller channel that we use in the ordinary course of business. SAP has the ability to resell our solutions as SolEx, for which we receive a percentage of the revenues. We also have an agreement with Google Cloud in which we collaborate with them on joint selling and go-to-market activities and bring enhanced automation solutions for finance and accounting to new and existing customers.

Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of customers to purchase additional user licenses and products from us. We rely on our sales and customer success teams to support and grow our existing customers by maintaining high customer satisfaction and educating customers on the value all our products provide.

The length of our sales cycle depends on the size of a potential customer and contract, as well as the type of solution or product being purchased. The sales cycle for our global enterprise customers is generally longer than that of our midsize customers. In addition, the length of the sales cycle tends to increase for larger contracts and for more complex, strategic products like Intercompany Financial Management. As we continue to focus on increasing our average contract size and selling more strategic products, we expect our sales cycle to lengthen and become less predictable, which could cause variability in our results for any particular period.

We have historically signed a high percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year and usually during the last month of the

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quarter. This can be attributed to buying patterns typical in the software industry. As the terms of most of our customer agreements are measured in full year increments, agreements initially entered into during the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is minimal due to the fact that we recognize subscription revenue ratably over the term of the customer contract.

For the years ended December 31, 2023, 2022, and 2021, we had revenues totaling $590.0 million, $522.9 million, and $425.7 million, respectively. We generated net income attributable to BlackLine, Inc. of $52.8 million and incurred net losses attributable to BlackLine, Inc. of $29.4 million, and $115.2 million, for the years ended December 31, 2023, 2022, and 2021, respectively.

Global Macroeconomic Factors

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. General macroeconomic conditions, such as a recession or rising inflation rates, an economic downturn in the U.S. or internationally, adverse business conditions and liquidity concerns, or bank failures or instability in the financial services sector, has and could continue to adversely affect demand for our products and make it difficult to accurately forecast and plan our future business activities. In recent quarters, as a result of economic uncertainty, we have seen customers delay and defer purchasing decisions, which has adversely impacted our near-term demand.

Acquisition of Data Interconnect

On September 12, 2023, we completed the DI Acquisition for cash consideration of $11.4 million, which was paid at the closing of the acquisition. The DI Acquisition enhances our existing accounts receivable automation solution capabilities through EIPP. Transaction-related costs, which include, but are not limited to, accounting, legal, and advisory fees related to the transaction, totaled approximately $1.2 million and were expensed as incurred during the year ended December 31, 2023.

BlackLine accounted for the transaction as a business combination using the acquisition method of accounting. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The purchase price allocation was finalized as of the filing date of this Annual Report on Form 10-K.

Acquisition of FourQ

On January 26, 2022, we completed the FourQ Acquisition and paid with cash consideration of $160.2 million upon closing of the acquisition. In addition, upon certain earnout conditions being met, contingent cash consideration of up to $73.2 million is payable. During the years ended December 31, 2023 and 2022, and due to a revision of estimates, we decreased the fair value of the FourQ contingent consideration and reversed expense of $33.5 million and $22.4 million, respectively. Refer to “Note 16 - Contingent Consideration” for additional information.

With the FourQ Acquisition, we seek to enhance our existing intercompany accounting automation capabilities by driving end-to-end automation of traditionally manual intercompany accounting processes and further accelerating our larger, long-term plan for transforming and modernizing finance and accounting. This acquisition was not a significant acquisition under Regulation S-X, and the purchase accounting allocation is final.

Restructuring Costs

Fiscal 2023 Restructuring Program

On August 23, 2023, we announced a restructuring plan that is designed to support our growth, scale, and profitability objectives. As part of the restructuring, we reduced our global workforce by approximately 9.0%, or 166 total employee positions. Restructuring costs related to the August 2023 restructuring consisted of one-time termination benefits that were primarily incurred in the third quarter of fiscal 2023. Refer to “Note 12 - Restructuring Costs” for additional information.

We anticipate annual gross cost savings of approximately $28.0 million to be realized from the restructuring plan by year-end 2024. We expect to make selective investments designed to enable growth while balancing our efforts to drive cost efficiency.

Fiscal 2022 Restructuring Program

On December 7, 2022, we announced our decision to commit to a restructuring plan that was designed to focus on key growth priorities. Restructuring costs related to the December 2022 restructuring consisted of one-time termination benefits that were primarily incurred in the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023. Refer to “Note 12 - Restructuring Costs” for additional information.

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Key Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions.

Dollar-based net revenue retention rate. We believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time. We calculate dollar-based net revenue retention rate as the implied monthly subscription and support revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription and support revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription and support revenue for new customers added during the one-year period but does include the effect of customers who terminated during the period. We define implied monthly subscription and support revenue as the total amount of minimum subscription and support revenue contractually committed to, under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement. At December 31, 2023, our dollar-based net revenue retention rate declined marginally from the year ended December 31, 2022 due to a more moderate pace of acquiring customer accounts. Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of the customer to purchase additional user licenses and products from us. We rely on our customer success and sales teams to support and grow our existing customers by maintaining high customer satisfaction and educating the customer on the value all our products provide.

Number of customers. We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define a customer as a company that contributes to our subscription and support revenue as of the measurement date. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. However, where an existing customer requests its invoice be divided for the sole purpose of restructuring its internal billing arrangement without any incremental increase in revenue, such customer continues to be treated as a single customer. For the years ended December 31, 2023, 2022, and 2021, no single customer accounted for more than 10% of our total revenues.

Number of users. Since our customers generally pay fees based on the number of users of our platform within their organization, we believe the total number of users is an indicator of the growth of our business. While the fees for the majority of the products we sell are user-based, we are seeing an increasing volume of transactions for our non-user based strategic products, such as EIPP, Transaction Matching, Intercompany, and BlackLine Cash Application.

Key Components of our Results of Operations

Revenues

Subscription and support. Our subscription contracts have initial non-cancellable terms of one year to three years with renewal options. The majority of new contracts in 2023 and 2022 had an initial term of three years. Fees are based on a number of factors, including the solutions subscribed to by the customer and the number of users having access to the solutions. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal. We initially record the subscription fees as deferred revenue and recognize revenue ratably over the term of the contract. At any time during the subscription period, customers may increase their number of users and add products. Additional fees are payable for the remainder of the initial or renewed contract term. Customers may only reduce their number of users or subscription to products upon renewal of their arrangement. Revenues from subscriptions to our cloud-based software platform composed approximately 94% of our revenues for the year ended December 31, 2023.

Subscription and support revenues also include revenues associated with sales of on-premise software licenses and related support, but we no longer develop any new applications or functionality for our legacy on-premise software, and anticipate that this component of our revenues will continue to decline relative to total revenue.

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Professional services. We offer our customers implementation and consulting services. With the exception of our intercompany accounting solutions acquired from the FourQ Acquisition, our product offerings are available for immediate use on our platform after granting access to a new customer. We typically help customers implement our solutions, and we also provide consulting and training services to help customers optimize the use of our products. These services are considered distinct performance obligations. Professional services do not result in significant customization of the subscription service. We apply the practical expedient to recognize professional services revenue when we have the right to invoice based on time and materials incurred. A limited number of our customers are provided professional services for a fixed fee, which is initially recorded as deferred revenue and recognized on a proportional-performance basis as the services are rendered. Professional services revenues composed approximately 6% of our revenues for the year ended December 31, 2023.

For a description of our revenue accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates.”

Cost of Revenues

Subscription and support cost of revenues. Subscription and support cost of revenues primarily consists of amortization of acquired developed technology costs, salaries, benefits, and stock-based compensation associated with our hosting operations and support personnel, amortization of capitalized internal-use software costs, and data center costs related to hosting our cloud-based software. We also allocate a portion of overhead to subscription and support cost of revenues.

Professional services costs of revenues. Costs associated with providing professional services primarily consist of salaries, benefits and stock-based compensation associated with our implementation personnel. These costs are expensed as incurred when the services are performed. We also allocate a portion of overhead to professional services cost of revenues.

Operating Expenses

Sales and marketing. Sales and marketing expenses consist primarily of compensation and employee benefits, including stock-based compensation of sales and marketing personnel and related sales support teams, sales and partner commissions, marketing events, advertising costs, computer software-related costs, travel, trade shows, other marketing materials, transaction-related costs, and allocated overhead. Sales and marketing expenses also include amortization of customer relationship intangible assets and impairment of cloud computing implementation costs. We defer sales and partner commissions and amortize them over an estimated period of benefit of five years. We expect sales and marketing expenses to increase in 2024 primarily due to investments in strategic initiatives to support sales enablement, product, and partner initiatives.

Research and development. Research and development expenses are comprised primarily of salaries, benefits and stock-based compensation associated with our engineering, product and quality assurance personnel, and transaction-related costs. Research and development expenses also include third-party contractors and supplies, computer software-related costs and allocated overhead. Other than software development costs that qualify for capitalization, as discussed above, research and development costs are expensed as incurred. We expect research and development costs to increase in 2024 due to incremental headcount primarily to support our 2024 product roadmap and investments in strategic initiatives, including AI.

General and administrative. General and administrative expenses consist primarily of personnel costs associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional fees, other corporate-related expenses and allocated overhead. General and administrative expenses also include amortization of trade name intangible assets, the change in the fair value of contingent consideration, transaction-related costs, and impairment of cloud computing implementation costs. We expect general and administrative costs to increase in 2024 for strategic initiatives and for investments primarily in corporate IT to support scale and automation activities.

Restructuring costs. Restructuring costs consist of one-time termination benefits. Refer to “Note 12 - Restructuring Costs” for additional information.

Interest income. Interest income primarily consists of earnings on our cash and cash equivalents and our marketable securities.

Interest expense. Interest expense consists primarily of interest expense associated with our Notes issued in August 2019 and March 2021.

Provision for (benefit from) income taxes.

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. We use the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined

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based on the temporary differences between the financial statement and tax bases of assets and liabilities, using tax rates expected to be in effect during the years in which the bases differences are expected to reverse.

We record a valuation allowance against our deferred tax assets to the extent that realization of the deferred tax assets, including consideration of our deferred tax liabilities, is not more likely than not. For the year ended December 31, 2023, for both federal and state income taxes, we have recorded a valuation allowance against our deferred tax assets because of our cumulative operating losses since inception, as we believe that the realization of the deferred tax assets is currently not more likely than not. We have also recorded a valuation allowance against certain foreign deferred tax assets.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful to us and our investors in evaluating our business. These non-GAAP financial measures are useful because they provide consistency and comparability with our past performance, facilitate period-to-period comparisons of operations and facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Non-GAAP Gross Profit and Non-GAAP Gross Margin. Non-GAAP gross profit is defined as GAAP revenues less GAAP cost of revenue adjusted for amortization of acquired developed technology, transaction-related costs (including, but not limited to, accounting, legal, and advisory fees related to the transaction, as well as transaction-related retention bonuses), and stock-based compensation. Non-GAAP gross margin is defined as non-GAAP gross profit divided by GAAP revenues. We believe that presenting non-GAAP gross profit and non-GAAP gross margin is useful to investors as it eliminates the impact of certain non-cash expenses and allows a direct comparison between periods.

Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin. Non-GAAP income (loss) from operations is defined as GAAP income (loss) from operations adjusted for amortization of intangible assets, stock-based compensation, change in fair value of contingent consideration, transaction-related costs, legal settlement gains or costs, impairment of cloud computing implementation costs and restructuring costs. Non-GAAP operating margin is defined as non-GAAP income from operations divided by GAAP revenues. We believe that presenting non-GAAP income (loss) from operations and non-GAAP operating margin is useful to investors as it eliminates the impact of items that have been impacted by BlackLine’s acquisitions and other related costs in order to allow a direct comparison of income (loss) from operations between all periods presented.

Non-GAAP Net Income (Loss) Attributable to BlackLine and Diluted Non-GAAP Net Income (Loss) Per Share Attributable to BlackLine, Inc. Non-GAAP net income (loss) attributable to BlackLine is defined as GAAP net income

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(loss) attributable to BlackLine adjusted for the impact of the provision for (benefit from) income taxes related to acquisitions, amortization of intangible assets, stock-based compensation, amortization of debt issuance costs from our convertible notes, change in fair value of contingent consideration, transaction-related costs, legal settlement gains or costs, impairment of cloud computing implementation costs, restructuring costs, and the adjustment to the redeemable non-controlling interest to the redemption amount. Diluted non-GAAP net income per share attributable to BlackLine, Inc. includes the adjustment for shares resulting from the elimination of stock-based compensation. We believe that presenting non-GAAP net income (loss) attributable to BlackLine is useful to investors as it eliminates the impact of items that have been impacted by our acquisitions and other related costs to allow a direct comparison of net income (loss) between all periods presented.

Reconciliation of Non-GAAP Financial Measures

The following table presents a reconciliation of gross profit, gross margin, and net income (loss), the most comparable GAAP measures, to non-GAAP gross profit, non-GAAP gross margin, and non-GAAP net income:

(1) Beginning in 2023, includes amortization related to stock-based compensation that was capitalized in capitalized software development costs in previous periods and totaled $2.1 million for the year ended December 31, 2023.

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Results of Operations

The following tables set forth selected historical consolidated statements of operations data, which should be read in conjunction with Critical Accounting Estimates, Liquidity and Capital Resources, and Contractual Obligations and Commitments included in this Item 7, as well as Quantitative and Qualitative Disclosures About Market Risk and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

On August 23, 2023 and December 7, 2022, respectively, we announced our decision to commit to restructuring plans designed to focus on key growth priorities. Refer to “Note 12 - Restructuring Costs” for additional information on these events.

Consolidated statements of operations information was as follows:

Revenues

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The increase in revenues for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a net increase in the number of customers and users. The total number of customers and total number of users increased by 5% and 6%, respectively, during the year ended December 31, 2023.

Cost of revenues

The increase in cost of revenues for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following:

•$10.6 million net increase in computer software-related costs and data center expenses primarily due to higher spend on cloud hosting services related to the migration of new and existing customers to the Google Cloud Platform, as well as an increase in cloud hosting services;

•$5.5 million increase in amortization of developed technology due to net additions to software placed into service;

•$1.4 million increase in depreciation and amortization primarily due to the addition of developed technology from the FourQ Acquisition and DI Acquisition;

•$0.6 million increase in salaries, benefits, and stock-based compensation; and

•$0.4 million increase in travel and entertainment; partially offset by

•$0.9 million decrease in transaction-related costs related to the FourQ Acquisition; and

•$0.3 million decrease in professional fees.

Sales and marketing

The decrease in sales and marketing expenses for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following:

•$13.6 million decrease in salaries, benefits, and stock-based compensation;

•$3.4 million decrease from impairment of cloud computing implementation costs that were incurred in the prior year comparable period;

•$2.0 million decrease in transaction-related costs related to the FourQ Acquisition; and

•$1.0 million decrease in professional fees; partially offset by

•$5.7 million increase in marketing expenses due to an increase in-person events, as well as costs related to digital marketing, our BeyondTheBlack events, and other user conferences; and

•$1.0 million increase in travel and entertainment due to an increase in-person events.

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Research and development

The decrease in research and development expenses for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following:

•$4.9 million decrease in transaction-related costs related to the FourQ Acquisition;

•$1.8 million decrease in professional fees; and

•$1.7 million increase in capitalized software costs due to new significant and enhanced functionality of our solutions, as well as increased capitalized costs due to higher headcount. Collectively, these increases resulted in a decrease in net expenses; partially offset by

•$1.5 million increase in computer software-related costs driven by business growth;

•$1.1 million increase in depreciation and amortization; and

•$0.3 million increase in salaries, benefits, and stock-based compensation.

General and administrative

The decrease in general and administrative expenses for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following:

•$3.9 million decrease in transaction-related costs due to the FourQ Acquisition that occurred in the year ended December 31, 2022, partially offset by transaction-related costs incurred primarily for the Data Interconnect Acquisition in the year ended December 31, 2023;

•$3.5 million decrease in professional fees associated with recruiting, legal, outside consultants, and accounting;

•$3.0 million decrease due to net foreign currency gains due to the strengthening of the U.S. Dollar compared to multiple currencies;

•$2.0 million decrease from the impairment of cloud computing implementation costs that were incurred in the prior year comparable period;

•$1.7 million decrease from legal settlement costs that were incurred in the prior year comparable period;

•$0.6 million decrease in depreciation and amortization; and

•$0.4 million decrease in office expenses; partially offset by

•$3.8 million increase in salaries, benefits, and stock-based compensation;

•$1.6 million net increase from the change in fair value of contingent consideration attributed to the following:

◦$33.5 million decrease related to the FourQ Acquisition in the year ended December 31, 2023;

◦$35.1 million decrease due to $22.4 million related to the FourQ Acquisition and $14.4 million related to the Rimilia Acquisition, partially offset by an increase of $1.7 million for the 2013 Acquisition (refer to “Note 16 - Contingent Consideration” for additional information);

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•$0.6 million increase in travel and entertainment; and

•$0.5 million increase in computer software-related costs.

Restructuring costs

The increase in restructuring costs during the year ended December 31, 2023, compared to the year ended December 31, 2022, was due to one-time termination benefits related to the fiscal 2023 and fiscal 2022 restructuring programs. Refer to “Note 12 - Restructuring Costs” for additional information.

Interest income

The increase in interest income during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to increased average interest rates on our investments and cash balances.

Interest expense

Interest expense during the year ended December 31, 2023, compared to the year ended December 31, 2022, was essentially flat and consisted of interest expense on our Notes. We do not expect interest expense to fluctuate significantly over the next 12 months as the interest rates on our Notes are fixed.

Provision for (benefit from) income taxes

We are subject to federal and state income taxes in the U.S. and taxes in foreign jurisdictions. For the year ended December 31, 2023, our annual estimated effective tax rate differed from the U.S. federal statutory rate of 21% primarily as a result of state taxes, foreign taxes, and changes in our valuation allowance for domestic and foreign income taxes. For the years ended December 31, 2023 and 2022, we recorded $1.5 million in income tax expense and $13.5 million in income tax benefit, respectively. The increase in income taxes for the year ended December 31, 2023, compared to the year ended December 31, 2022, resulted primarily from the 2022 release of $14.2 million of U.S. valuation allowance associated with acquired FourQ deferred tax liabilities, as compared with the 2023 release of $1.7 million of existing UK valuation allowance associated with acquired net deferred tax liabilities from DI. The increase in 2023 tax expense is also associated with the increase in federal and state income taxes due to 2023 U.S. profitability and changes in the mix of profitable foreign jurisdictions. For the year ended December 31, 2023, we continued to maintain a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.

Liquidity and Capital Resources

At December 31, 2023, our principal sources of liquidity were an aggregate of $1.2 billion of cash and cash equivalents and marketable securities, which primarily consist of short-term, money market mutual funds, commercial paper, U.S. treasury securities, corporate bonds, and U.S. government agencies. We had $1.4 billion

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aggregate principal amount of Notes outstanding at December 31, 2023, of which $250.0 million is due within the next 12 months. We plan to and believe we are able to make all expected principal and interest payments in the next 12 months.

We believe our existing cash and cash equivalents, investments in marketable securities and cash from operations will be sufficient to meet our working capital needs, capital expenditures, and financing obligations for at least the next 12 months.

Contractual Obligations and Commitments

Notes Payable

In connection with the offering of the 2024 Notes, we entered into privately-negotiated capped call transactions (the “2024 Capped Calls”) with certain counterparties covering, subject to anti-dilution adjustments, approximately 3.4 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price. The 2024 Capped Calls have an initial strike price of $73.40 per share - subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes - and an initial cap price of $106.76 per share, subject to certain adjustments. As of December 31, 2023, all of the 2024 Capped Calls remained outstanding.

In connection with the offering of the 2026 Notes, we entered into privately-negotiated capped call transactions (the “2026 Capped Calls”) with certain counterparties covering, subject to anti-dilution adjustments, approximately 6.9 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price. The 2026 Capped Calls have an initial strike price of $166.23 per share - subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes - and an initial cap price of $233.31 per share, subject to certain adjustments. As of December 31, 2023, all of the 2026 Capped Calls remained outstanding.

Lease Liabilities

As of December 31, 2023, we have obligations totaling $20.6 million related to existing property and equipment leases.

Purchase Obligations

Purchase obligations represent our most significant contractual obligations in the ordinary course of business for which we have not received the related goods or services, in whole or in part. At December 31, 2023, we have $46.4 million of contractual obligations related to nine commitments, with $22.8 million payable within 12 months, and have additional contractual obligations with other vendors that are individually immaterial and which we can readily settle given our liquidity position and capital resources.

Contingent Consideration

We are potentially obligated to pay a maximum of $73.2 million of contingent consideration between January 2022 and January 2025 related to our FourQ Acquisition if certain financial performance milestones are met. During the years ended December 31, 2023 and 2022, and due to a revision of estimates, we decreased the fair value of the FourQ contingent consideration by $33.5 million and $22.4 million, respectively. Decreases in the fair value of contingent consideration are recorded as reversals of expense within general and administrative expenses in the consolidated statements of operations. Refer to “Note 16 - Contingent Consideration” for additional information.

Unrecognized Tax Liabilities

At December 31, 2023, while we have liabilities for unrecognized tax benefits of $7.1 million, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that extinguish these liabilities.

Letters of Credit

Commitments under letters of credit at December 31, 2023 were scheduled to expire as follows (in thousands):

Letters of credit are maintained pursuant to certain of our lease arrangements. The letters of credit remain in effect at varying levels through the terms of the related agreements.

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Off-Balance Sheet Arrangements

As part of our ongoing business, we do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, vendors, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have we been sued in connection with these indemnification arrangements. At December 31, 2023, we have not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Future Capital Requirements

Our future capital requirements will depend on many factors, including our growth rate, strategic relationships and international operations, the timing and extent of spending to support research and development efforts, future merger and acquisition activity, repurchase or refinancing of our existing indebtedness, and the continuing market acceptance of our solutions. From time to time, we have required, and may in the future require or opportunistically raise, additional equity or debt financing. Sales of additional equity or equity-linked securities could result in dilution to our stockholders. If we raise funds by borrowing from third parties, the terms of those financing arrangements would require us to incur interest expense and may include negative covenants or other restrictions on our business that could impair our operating flexibility. We can provide no assurance that financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us. If we are unable to raise additional capital when needed, we would be required to curtail our operating activities and capital expenditures, and our business operating results and financial condition would be adversely affected.

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated:

Net Cash Provided By Operating Activities

Our cash flows provided by operating activities are primarily influenced by our net income, as applicable, and cash generated from collections in accordance with our subscription-based revenue model wherein billings occur in advance of revenue recognition, as well as the substantial amount of non-cash charges that we incur. Non-cash activities primarily include depreciation and amortization, stock-based compensation, changes in fair value of contingent consideration, non-cash lease expense, amortization of debt issuance costs, accretion of premiums on marketable securities, and deferred taxes.

For the year ended December 31, 2023, cash provided by operating activities was $126.6 million, resulting from net non-cash expenses of $71.9 million and net income of $59.1 million, partially offset by a net cash outflow from changes in operating assets and liabilities of $4.4 million. The $4.4 million net cash outflow from changes in our operating assets and liabilities reflected the following:

•$20.9 million increase in accounts receivable due to increased sales, partially offset by customer payments;

•$7.2 million decrease in operating lease liabilities;

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•$6.6 million increase in prepaid expenses and other current assets primarily due to increased insurance and software subscriptions, higher accrued interest, and increased capitalized commissions, partially offset by amortization of prepaid balances and interest received;

•$5.1 million decrease in accounts payable due to timing of payments;

•$2.4 million paid for the 2013 Acquisition contingent consideration in excess of the acquisition date fair value (refer to “Note 16 - Contingent Consideration” for additional information);

•$2.3 million decrease in other long-term liabilities primarily related to the FourQ Acquisition; and

•$0.6 million increase in other assets due to increased prepaid commissions, partially offset by related amortization.

These changes in our operating assets and liabilities were partially offset by a $41.3 million increase in deferred revenue primarily due to customer and user growth and timing of collections.

For the year ended December 31, 2022, cash provided by operating activities was $56.0 million, resulting from net non-cash expenses of $75.4 million and net cash flow provided by changes in operating assets and liabilities of $14.5 million, partially offset by our net loss of $33.9 million. The $14.5 million of net cash flows provided by changes in our operating assets and liabilities reflected the following:

•$36.6 million increase in deferred revenue as a result of the growth of our customer and user bases, as reflected by greater billings for our subscription and support services;

•$5.9 million increase in accrued expenses and other current liabilities related to increased bonuses, commissions, and payroll taxes due to increased headcount and higher sales, as well as an increase in accrued restructuring;

•$5.8 million increase in other long-term liabilities primarily related to the acquisition of FourQ; and

•$4.4 million increase in accounts payable.

These changes in our operating assets and liabilities were partially offset by the following:

•$23.0 million increase in accounts receivable;

•$10.1 million increase in other assets due to increased prepaid commissions, partially offset by related amortization; and

•$6.9 million decrease in operating lease liabilities.

Net Cash Used In Investing Activities

Our investing activities consist primarily of investments in and maturities of marketable securities, capitalized software development costs, acquisitions of business entities, and capital expenditures for property and equipment.

For the year ended December 31, 2023, cash used in investing activities was $62.5 million as a result of the following:

•$23.5 million of purchases of marketable securities, net of proceeds from maturities;

•$21.6 million in capitalized software development costs;

•$11.4 million paid for the DI Acquisition, net of cash acquired; and

•$6.0 million in purchases of property and equipment.

For the year ended December 31, 2022, cash used in investing activities was $395.6 million as a result of the following:

•$207.7 million of purchases of marketable securities, net of proceeds from maturities;

•$157.7 million, net of cash acquired, paid for the acquisition of FourQ;

•$19.2 million in capitalized software development costs; and

•$11.0 million in purchases of property and equipment.

Net Cash Provided By Financing Activities

For the year ended December 31, 2023, cash provided by financing activities was $6.1 million primarily as a result of the following:

•$19.8 million of proceeds from exercises of stock options; and

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•$8.0 million of proceeds from the employee stock purchase plan.

These changes in our financing activities were partially offset by the following:

•$15.0 million of acquisitions of common stock for tax withholding obligations;

•$5.6 million paid for the 2013 Acquisition contingent consideration (refer to “Note 16 - Contingent Consideration” for additional information); and

•$1.0 million for finance lease payments.

For the year ended December 31, 2022, cash provided by financing activities was $1.4 million primarily as a result of the following:

•$7.0 million of proceeds from the employee stock purchase plan; and

•$4.7 million of proceeds from exercises of stock options.

These changes in our financing activities were partially offset by the following:

•$9.5 million of acquisitions of common stock for tax withholding obligations.

Backlog

We enter into both single and multi-year subscription contracts for our solutions. The timing of our invoices to the customer is a negotiated term and thus varies among our subscription contracts. For multi-year agreements, it is common to invoice an initial amount at contract signing followed by subsequent annual invoices. Backlog represents remaining revenue to be recognized under a non-cancelable contract with customers. At December 31, 2023 and 2022, we had backlog of approximately $842.7 million and $772.9 million, respectively. We expect backlog will change from period to period for several reasons, including the timing and duration of customer agreements, varying billing cycles of subscription agreements, and the timing and duration of customer renewals. Because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contract renewals and new customer contracts during the period, backlog at the beginning of any period is not necessarily indicative of future revenue performance. We do not utilize backlog as a key management metric internally.

Critical Accounting Estimates

Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the following critical accounting policies and estimates involve a greater degree of judgment or complexity than our other accounting policies and estimates, and are essential to a full understanding and evaluation of our consolidated financial condition and results of operations. Refer to “Note 2 - Summary of Significant Accounting Policies” of the accompanying notes to our consolidated financial statements for additional information.

Deferred Customer Acquisition Costs

We recognize an asset for the incremental and recoverable costs of obtaining a contract with a customer if we expect the benefit of those costs to be one year or longer. We have determined that certain sales incentive programs to our employees (“deferred customer contract acquisition costs”) and our partners (“partner referral fees”) meet the requirements to be capitalized. Deferred customer acquisition costs related to new revenue contracts and upsells are deferred and then amortized on a straight-line basis over the expected period of benefit that we have determined to be five years, based upon both the product turnover rate and estimated customer life, which involves some level of judgment in terms of the inherent assumptions used. Partner referral fees are deferred and then amortized on a straight-line basis over a period ranging from one year to five years. Deferred customer acquisition costs and partner referral fees are included within other assets on the consolidated balance sheets. There were no impairment losses in relation to the costs capitalized for the periods presented.

Capitalized Software Costs

We account for the costs of computer software obtained or developed for internal use in accordance with Accounting Standards Codification 350, Intangibles—Goodwill and Other. We capitalize certain implementation

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costs incurred in a hosting arrangement that is a service contract. These capitalized costs exclude training costs, project management costs, and data migration costs. We capitalize certain costs in the development of our SaaS subscription solutions when (i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the project will be completed and performed as intended. These capitalized costs include estimated personnel and related expenses for employees as well as costs of third-party contractors who are directly associated with and who devote time to internal-use software projects and, when material, interest costs incurred during the development. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements to our SaaS software solutions are also capitalized. Costs incurred for post-configuration training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized software development costs are amortized on a straight-line basis over an estimated useful life of three years.

Business Combinations

The results of businesses acquired in business combinations are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

We perform valuations of assets acquired and liabilities assumed and allocate the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires our management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in business combinations.

Contingent consideration payable in cash arising from business combinations is recorded at fair value as a liability on the acquisition date and remeasured at each reporting date. Changes in fair value are recorded in general and administrative expenses in the consolidated statements of operations. Determining the fair value of the contingent consideration each period requires management to make assumptions and judgments. These estimates involve inherent uncertainties, and if different assumptions had been used, the fair value of contingent consideration could have been materially different from the amounts recorded. The significant inputs used in the fair value measurement of contingent consideration were as follows:

•the likelihood that we would realize a tax benefit from the use of net operating losses generated from the stock option exercises concurrent with the 2013 Acquisition;

•the amount and timing of Rimilia ARR in the second year subsequent to the acquisition;

•the amount and timing of new and incremental combined bookings from FourQ and BlackLine, and revenues from a specified FourQ customer over a three-year period subsequent to the acquisition date.

Significant changes in these estimates and the periods in which they are generated would significantly impact the fair value of the contingent consideration liability. Due to a revision of estimates related to all contingent consideration payable, we decreased their fair values and reversed expense of $33.5 million and $35.1 million for the years ended December 31, 2023 and 2022, respectively. Refer to “Note 16 - Contingent Consideration” for additional information.

Transaction-related costs incurred by us are expensed as incurred and are included in general and administrative expenses in our consolidated statements of operations.

Recent Accounting Pronouncements

Refer to “Note 2 - Summary of Significant Accounting Policies” contained in the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K for a full description of the recent accounting pronouncements, and our expectation of their impact, if any, on our financial position and results of operations.