BlackLine, Inc. (BL) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you for joining us. My name is Stan Zlotsky from the Morgan Stanley software research team. And with us this afternoon, we have the pleasure of hosting the BlackLine team, Mark Partin and Alexandra Geller from IR. Thank you, guys, for joining us. So before we get started, quick note that, please note that all-important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear in the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. So with that, Mark, thank you again for joining us at the tech conference today.

Before we dig into the fundamentals of the company, maybe just a quick feedback, any kind of feedback on the coronavirus situation and how you guys are thinking about it?

Sure. So obviously, this is very top of mind for everyone. It's something that we're closely monitoring at BlackLine. We are -- we were a bit lucky, timing-wise, in the sense that our largest customer conference took place last September. So we did get the benefit of that. We do have the majority of our revenues come from our North American customer base. We do have some future smaller customer events in Europe and Asia Pac. We're currently evaluating the best way to essentially utilize the customer and partner time, whether it's in person or virtual. So we'll decide how that's going to turn out as this continues to unfold. But really, it's the safety of our employees, our customers and our partners is very top of mind. We put in place a number of precautions to ensure safety for all of those individuals. And really from a BlackLine customer perspective, the BlackLine tool enables our customers to essentially collaborate around the financial close without that in-person face-to-face interaction. So for customers that aren't using a BlackLine, they're printing out papers. They're sharing papers back and forth. They're on site. Auditors that are using BlackLine are essentially able to audit the companies without having to travel and be on-site as well.

That's great. And as far as just the actual momentum of the business. As far as you know, obviously, this all very, very much still in play, but anything to call out? Or is this...

It's business as usual right now.

Okay. Yes. Perfect. All right. So with that out of the way, Mark, just starting at a very high level, right? BlackLine competes in end market for financial close automation. And where you guys really thrive is on the complexity and then demands of repeating that process quarter in, quarter out and the chaos that comes with a -- on a quarterly basis. How does the solution help customers to deal with that complexity?

Yes. Great. Thank you, Stan. It's great to be at this conference. We love it. And we've gotten some really good feedback. And I think this is an essential part of the understanding of the BlackLine story is that for forever, actually, accountants have been closing their books in a very manual, repetitive way. And what our solution offers for CFOs and controllers and accounting departments of all types, sizes, geographies, industries, essentially, any company that needs to close their books is a faster, better, more seamless way to close in an environment where growing complexity, growing globalism in companies, growing ERPs and systems that are disconnected, where previously CFOs have solved their problem and are closing their books in Excel, we offer a solution to do that. And what it does as a cloud platform that is a workflow tool, that automates many of the functions that they do from account reconciliation to task management to transaction matching to variance reviews, all of the things that an accountant would do in their daily life to go from raw data to accurate, timely financial statements can and should be done on a digital core system like BlackLine. So we now have 3,000 companies. A lot of them are large enterprise with big, complex problems that are disconnected across continents and systems, but also mid-market companies that want to close faster, that want to have more accurate information. So think of us really as going in and providing a better solution for Excel, for paper, for what accountants, 90% of companies today still are closing their books using these kinds of tools in accounting.

Right. No, that makes a lot of sense. So considering that every mid-market, every enterprise company has to close their books, right? When you think about the companies that are really addressable by your solution, what do they look like? And maybe a different way of asking the question is, how far down market can you go with your solution, where maybe it's a little bit less relevant?

Sure. We target $50 million of revenue and up. And the reason for that is in the mid-market, it's $50 million to $500 million. And the reason for that is that you probably, if your $50 million have about 10 accountants and you have an ERP, and then you have other systems that are starting to come online, subledgers, cash systems, banking systems, and those things start to create a problem for you. So what you can do with BlackLine is implement it at that stage to start to automate many of the processes that previously you were doing with shared service models or outsourced or hiring people at a faster rate in order to do very manual transaction-based systems. So a mid-market can buy our system for that kind of efficiency, but they can also use it for accuracy. They can use it for faster reporting. And many of us, even BlackLine, even at our size, we operate in many countries around the globe, and you'll have multiple ERP instances. And people that don't always talk to each other or work together collaboratively, the way our system will mandate that you do that. So in the mid-market, it's a very powerful tool just for that kind of automation. But at the same time, you can also use tools like our Transaction Matching, which will drive automation across many of your ledger systems for things that you will either not do or -- and risk it or that you'll have to do with people, matching ledgers, matching data in order to get that into the accurate financial statements.

That makes a lot of sense. And I remember when we're watching your last user conference and Analyst Day, the way they kind of -- you guys really segmented your potential universe of users is really the reactive, defensive CEOs, right, versus the really proactive, innovative CFOs -- sorry, CFOs in both cases. You, yourself as a CFO, when you think about those 2 buckets, obviously, the proactive ones are the ones who are already using -- they're one of the 3,000 customers today. But how do you get some of those reactive CFOs, some of the guys who are still kind of still stuck there with Excel and whatnot, to start adopting solution, your BlackLine solutions?

Yes. This is a great question. BlackLine, because we pioneered this market and because we are the leader, we're the ones spending money on marketing and education. And there's not a lot of other companies doing that. So for us to really impact and drive faster adoption in our market, which is at the core of that question. There's a few things that have to happen on their end. First is, it's a -- think of employee mobility as being a catalyst because the more accountants move around and go from one company to the next, the more they demand for better tools, better systems, and they don't want to do Excel spreadsheets for important work-like reconciliation. So a lot of the employee mobility will bubble up into a buy. Second is we can see from a top-down audit committees and Board, consultancies like Deloitte and E&Y that are building practices around digital core in the CFO's office, they will help CFOs who are traditionally risk-averse, pragmatic, no budget kind of builders of the systems, they will help drive education as well. So they're helping us with that process. Surprisingly, we also see a lot of movement in catalysts when CFOs succeed and turnover, right, because when someone comes in new, they're willing to take the risk of unwinding existing systems of -- evaluating what currently is being done by a lot of people inefficiently across the world and putting in better systems. So you see a reinvestment that also is occurring because the CFO is in the executive office of the enterprise, who is the last person to invest in their systems. HR is doing it, sales is doing it, marketing has already done it. Digital transformation at the front end of the enterprise hasn't really even touched the back end. Many of you are investing in companies that are going into the CFO's office either for sales tax or billing or something else, right? Financial close is the biggest part of what those people in the CFO's office are doing, and they're still doing that in Excel as well. So we're really trying to -- in order to move the CFO, education helps. They're competitive, peer pressure. All of those things are starting to work towards getting CFOs to invest in their back end.

And I think that actually, another important element is where our existing customers fall on that spectrum of defensive and reactive to proactive. So actually, the majority of our customers sit probably squarely in the middle. And really, only 10% of existing BlackLine customers are really undergoing digital transformation. So the opportunity within the existing customer base is still pretty significant.

To that point, yes.

That's really a great perspective. Digging into the -- your overall market opportunity, right, one of the ways that you guys are going after these really large opportunities is through partnerships, right? And your biggest partnership is your partnership with SAP. Can you give us a bit of an update of where you are in that relationship? And how you're thinking about it going into 2020?

Of course, yes. SAP is a go-to-market partnership that we've been in for many years. But in the last year, we upgraded it from what had previously been a referral agreement to now a reseller agreement. So SAP sells BlackLine on their price list in their paper through their sales force. So they're taking BlackLine to market. This is about 1-year-old agreement. And the investment thesis behind this partnership is they have thousands and thousands of companies that are $1 billion of revenue and more, all over the world. They're one of the premier ERPs, and they're taking our solution into that installed base. We have a lot of SAP customers, but it's in the hundreds. So the opportunity is for them to use their brand, their power, their price list to go with their sales force and sell a cloud solution for accounting close into their existing base. And that is both on-prem and for the S/4HANA converting customers, where we have a great use case for SAP customers. So what we hope in this future of this contract with SAP is that they continue to drive their business. They're incented and motivated at the field level and at the enterprise level because this cloud revenue that they can take and this is a solution they can provide to their customer that they will be a big part of our go-to-market distribution opportunity in the future. And that's something that, like I said, we've had a multiyear relationship with SAP. This new economic model known as SOLEX gives us expanded distribution and reach end markets and the companies that we may have never seen without them.

Got it. And about 25% of your revenue base now comes from this SAP relationship. How much bigger do you think that can really get?

Yes. 25% of our customers were sold through one of our SAP partnerships, either the previous one or this one. And we think when we look at the markets where we operate today, globally, that SAP represents about 1/3 of the ERP market. Oracle is about 1/3. And then all others are in that other 1/3 bucket, and that includes Workday and NetSuite and all the others. So we think we would trend towards -- if we're successful, trend towards that 1/3. So we can continue to increase that rate or that percentage of our business with SAP as they continue to drive new business.

And although -- we obviously want the SAP partnership to be very successful, most of our customers are on multiple versions or instances of varying ERPs. That ERP neutrality is very important to BlackLine because it's so important to our customers.

Yes. So maybe just to put a finer point on it, right? Is the way to think about this opportunity, right, is if you divide up the market into 1/3, 1/3, 1/3, if you look at BlackLine, would -- in some point of maturity, would your relationship with SAP be 1/3 of your revenue? And then the 1/3 would be from -- and 2/3 would come from all the other vendors?

Yes. That's the way it is now. The way it is now is that, about 1/3 comes from each of those buckets. The 25% is just through the partnership. So we have additional SAP revenue that wasn't sold in partnership, which would take us the rest of the way. So the answer to that is yes, ideally, our business continues to be this neutral to any of the ERPs that we play nice, that we are -- it's part of our -- the Switzerland is part of our advantage as a standalone provider because ERPs are often -- you have a multi-ERP environment in large enterprises. And our ability to seamlessly integrate with all of those is important to serving each of those customers that has that.

Got it. And what is this specifically about the migration of customers to S/4HANA that makes it such a great event to bring in BlackLine?

Sure. So a lot of customers actually look at the S/4HANA upgrade, actually really any ERP upgrade, as a completely separate opportunity from implementing a BlackLine. And the beauty is that the 2 combined can really create a lot of value. So as of late, we've actually seen this use case in action. So we just announced on the Q4 call that we have a Japanese SOLEX customer. And essentially, they had an aggressive S/4HANA time line. And they were challenged by the fact that because that S/4HANA migration is so time-consuming, it requires so many resources, they essentially didn't have the appropriate number of resources to put towards this HANA migration, while they're also trying to manage their financial close process that's also mission-critical. So they were actually looking at BlackLine as a way to help them essentially take the appropriate resources away from the financial close to focus on the S/4HANA migration. So that's a big reason why they wanted to move forward with BlackLine. We're seeing that type of use case happening more and more. And as Mark was saying, we think this can be a really compelling piece of that SAP select partnership as they're seeing more of their customers moving towards S/4HANA within their time line.

So there's that technology and that data advantage that we provide as they bridge it over, but it's also just simply -- it's a pivot point for a customer who's making a decision to invest in a cloud and they're looking around, and it's a great time to really enter that process.

Right. That certainly sounds compelling. And Alex, you just mentioned the customer in Japan. But maybe looking from -- a little bit more broadly at your overall international business, right, that's been a really important vector of growth for you guys. And you noted that in Q4, it accelerates about 42% growth year-on-year. How are you thinking about international moving forward? And what role do partnerships play in your expansion internationally?

Great. We're about 80% U.S. and 20% outside of the U.S. It's been growing nicely, particularly in Europe, where we have invested for several years in people and in partnerships. And as Stan mentioned, what really can help us in markets like Japan and Germany, and Northern Europe and even in the U.K. is when Deloitte and E&Y help us go to market. They do that here in North America, but they're particularly active with us in Europe. Additionally, SAP, is really strong with us right now. We've had long-term relationships with them in Europe, and they've been helping us accelerate the European part of our growth.

And what role do you think -- maybe into 2020, are there any changes you're looking to make to these partnerships outside of SAP?

Yes. So let me talk about the main ones, which are these consulting partners. So Deloitte, E&Y as an example, they're building digital finance transformation practices, and BlackLine is a part of that. So we're sort of a core, digital core to the CFO's office, and they will go in. And what they want to do is invest their people and get with their customers on best practice, process and procedure at human capital and really driving the overall CFO's office. And so we're a piece of that. So our goal this year is to concentrate on a handful, not to build a really wide ecosystem, but in order to prime the pump, the consultants really get the CFOs ear. And that's important because we speak really well to the accounting buyer. And then when you get to the CFO, they want to speak with maybe a Deloitte or an E&Y or an SAP. Similarly, they're very good in the IT department, and they help us as we navigate the digital transformation, bring in the CFO, bring in the CIO or CTO and make this digital transformation a 5- or 6-figure deal into a 7-figure multiyear implementation as part of an overall transformation. So with the -- what we get from the consultants is a better experience for the customer, who not only have to close the books every month and not get distracted, they need those resources, but we get people who are properly engaging with our product and implementing it in a way that they get time to value a lot sooner. Deals are bigger. Deals are more successful if we can get the partners.

Got it. And you guys have also been really focused on building out your product portfolio, right? And your strategic products specifically are now about 22% of your business. Within the 3 product buckets that go into strategic products, which ones are you seeing the most demand for?

So we have this strategic product portfolio that has Transaction Matching, Smart Close, which helps you with your tasks when you're closing your books and then Intercompany Hub, which is transformational in an enterprise that helps you manage subsidiary intercompany allocations in goods and services. So those 3 products make up about 20% of sales, 15% to 20% each quarter. And we think that's a good balance because the core is 80%. We see a lot of demand there. The vast majority of companies can and should be using that. But that strategic product portfolio is really for companies that are ready for digital transformation and are investing and have a budget for it and are engaged. So we think that 80-20 is the right split in this next year. Where we get the most uptake is in Transaction Matching. That's a transformational project -- product for both mid-market and for enterprises. And so we have about 20% penetration in our existing customers that's hundreds. So there's still plenty of opportunity. But this product can turn a 5-figure mid-market deal into a 6-figure deal because it really changes the game in terms of their ability to match off a lot of manual labor and match it. The other 2 products are still nascent. They are between 1% and 2% in terms of our penetration in our customer base. Now what we're doing to help drive that in the future as we've built subject matter expertise inside, we have gotten our partners more engaged and trained and developed on how to sell and implement Intercompany Hub. We're starting to see expansions in deals that we already have sold and got -- and we have very good customer testimonials. So it's new. We're pioneering and building that market. It doesn't exist outside of BlackLine. You -- this is pioneering a market. And so we think about half of our customers could and should be using a product like Intercompany Hub, and that will just take time to drive that. So that in the near term, in the next several years, what's really driving our business is this core product, and these strategic products will continue to help us serve what we think is about 10% of our customer population that is truly digitally transforming.

Got it. And within those 3 products and by the people on the webcast couldn't see, but when Mark started talking about strategic products, he really sat up and he got excited. But the Transaction Matching and Smart Close, why wouldn't those be, over time, applicable as attached products to your entire customer base?

Transaction Matching is. You're absolutely right. Transaction Matching is from mid-market to enterprise a product that they should and be able to attach to all. So that is our goal in the long term. Smart Close is slightly nuanced today because it exists inside the ERP, an SAP ERP. So we have to do development to actually take that into the cloud and take that into other ERPs, which is a long-term goal. But for now, Smart Close is a very -- and the companies that do have it, love it. And they don't want to live without it. So it's a very high-sticky, high-retention product, but it's very specific to that group of customers. And that's why it will take time to actually make that technology and that capability for every customer.

And for Intercompany Hub, you mentioned that it's maybe half of your customers, 50% will be applicable for that. What's specific about Intercompany Hub that would only make it applicable?

Yes. So think of this product as being a forcing function for companies that have many subsidiaries with a lot of corporate allocations or goods and services transferring between. We see some of our customers who have a -- 5 or 6x of their revenue can be intercompany revenue. That's how much is moving between subsidiaries. Surprisingly, if you're on a paper industry or something, and you're vertically or horizontally integrated, you are moving these things throughout all of these global entities, and it gets really messy. And several years ago, many countries adopted some new regulations that if you don't reconcile your books in that particular subsidiary or that country, not only will you have to pay tax for it, but you'll be penalized for it. So now you have to clean up your books. And the intercompany account for accountants has always been the under-the-bed problem. Everything you focus on as an accountant is cash, liquidity, AR, things like equity, but you shove everything into intercompany because you believe, hey, that's between friends and family, so it's going to be okay. And that's where many problems, that's where fraud exists. That's where many problems existed on many companies' books. There's not a solution for that, except today, at the end of a month or period or year, there can be a lot of people trying to unwind and reconcile all of these transactions that may not be able to finally get to the answer, so they write it off, or they take a loss, or they get taxed and penalized on it. So that's the problem or the catalyst that exist out there for us to solve. What Intercompany Hub does is it provides a forcing function that doesn't allow any individual accountant to go in and put one side of the equation on to your ledger. And hope that the other guy in Germany with a different currency and a different timing gets it right, so that you can force that you won't have an intercompany out of balance. It's not easy to do that. You've got to have transfer pricing, and your legal, and your tax people, and your accountants and your finance people at the table. They're a part of this process. But when you do get it, it's an elegant solution that really works, particularly for companies that want to do acquisitions and are complex. So that's why I think we believe the right target is for the 1,500 or 1,600, very large enterprises that we serve that have that problem and have that penalty that can sometimes be 7-figure penalty if they don't get it done right.

Yes. And that's certainly a great forcing function for adoption of these modules. So the way that I think investors would be looking at these, and I'm going to throw out this question and we'll open up the floor to questions from the audience, but the way that these strategic products are showing up in the market, we would expect them to really drive your net revenue retention. And we saw a very impressive step up in 2019 to 110% from 108% in 2018. How are you thinking about the net revenue retention metric going into 2020 and beyond?

Sure. We have 110% net revenue retention rate that is driven by a 98% renewal rate, 99% enterprise renewal rate with the mid-90s for mid-market. So it's a really strong, sticky product, and our customers are loyal and we serve them, many of them, for a very long time. What's driving the retention rate is, first, a land-and-expand model that we've had for many years. About 50-50 of our business is land, and the other is expense. And that's typically user or global deployment. You buy, you set a time line and you roll out globally and to other divisions. And so it's user expansion. We also have price increases each year. But what really can move the needle in the future is the ability to sell more of those strategic products into those customers. And they're big-ticket items. They're 6-figure, 7-figure deals, they can really change the game within many of our customers that are digitally transforming. So that moves the needle on moving that number. In the near term, we're really happy with where it is. We think the range, based on our business model as we are building this, is about 108% to 109%, still strong, but mainly built on a very strong renewal rate. Our #1 focus. Once you get accounted, they can and will remain loyal as long as you deliver on your promise.

Perfect. All right. Well, let me see if there are any questions in the audience. Hopefully, quick ones.

Yes. Can you explain a bit about the benefits for the customer? So on average, how much faster do they close their books? What's sort of the payback time for them? What sort of ROI that they get on spending on BlackLine?

Sure. We have customers that will get on stage at our customer conference that is often talked about how they -- it's changed their life. They talk about returns that are hundreds of percent on what they've invested, and thousands of hours. We have customers that do 200,000 account reconciliations, used to do them manually, monthly, and now they've automated 90% -- close to 90% of them. So you could think about really compelling ROI. The ROI that's more difficult to capture is the risk mitigation. We believe that when you use our product, you get better visibility, better hierarchical control, better internal control environment than just the paper and Excel that you used to get. And so what we're really trying to do is to drive more accuracy into the financial statements, into the numbers that go into that. And we're trying to also make it faster, easier to use, better to recruit and retain people because they have this very elegant solution. And faster because that's what the CFO cares about ultimately, can you get your close done quicker and faster? And we see many, many examples of that. Unfortunately, legal departments never let accounting departments talk about improvements they make when it comes to financial statements. So it's hard to get anyone to put it in paper. But come to our customer conference, and you'll see companies with people whose lives have literally transformed using products like ours. We have a very loyal customer base. We're very proud of them.

Perfect. Mark, well, this is a great place for us to stop. Thank you so much. Mark, Alex, thank you so much for your time today.

Thank you.