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

Good afternoon, and welcome to the BlackLine fireside chat. Thanks so much for joining us today. Before we get started, a couple of housekeeping items. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. As we get going, I'm Brittany Skoda, global head of software banking. I'm joined by Mark Partin, CFO of BlackLine; and Alex Geller, Head of IR at BlackLine. If you have any questions during this session, feel free to submit them to the portal. I'll be keeping an eye on them and can raise them within the session. Thanks so much, Mark and Alex, for joining us. Excited to get going.

Thank you for having us. It's a pleasure to be here, Brittany.

So for those in the audience that don't know what BlackLine does, perhaps you can give a brief summary of the platform.

Yes, of course. Happy to do that. And if you are in the audience and you're not an accountant, I would ask you to speak to an accountant, a controller, a CFO, anybody and ask them about the problems that we solve. And that is, most of what accountants have been doing for so many years is manual. It's transactional. They're closing the books today using Excel. They're taking information out of the system of record, their ERP, and they're putting it in Excel, and they're doing their account reconciliations, matching transactions, ticking and tying, putting it on paper or on computer files, giving it to the auditor in order to get their books closed. And they're doing that in a very high-pressure packed environment of internal controls and timelines and important accuracy needs for financial statements. So BlackLine, over the years, has helped to solve that problem by our software cloud solution -- will allow a controller or an accountant to do account reconciliations, to do important financial close items inside our solution. You can take the data out of the ERP, put it in BlackLine systems, and you can manage your workflow and your data flows in a very seamless transparent way so that controllers and CFOs and audit committees can rely on this. You can move faster and more efficiently. And so today, 3,500 customers around the world, large and small, some of the most complex organizations in the world use our software platform to close their books and report based on the data that we help provide for them.

What's the right way to think about -- are you a platform for the controller? Or are you a platform for the CFO? Or for both?

Yes. Well, it's a really good question because while they both have the same need, that is accuracy and integrity and efficiency of their financial statements and their systems, quite frankly, the one who is on the line for this every day is the controller. And so for probably more than anyone else, BlackLine has really focused on solving the controllers' problem, and we speak to them and understand them better than anybody. And that is to help them through their monthly closing process, be efficient, be transparent, have integrity in systems, help their people manage their data and their workflows. And that is a controller's daily workflow. But at the same time, it's important to the company. It's important to the CFO that their back end is automated, is transparent and provides integrity in the financial statements that ultimately investors rely on. And so we're a key sort of core part of their monthly closing process. And the CFOs, while today, they don't necessarily spend as much time on accounting, and they might not make their career on accounting, CFOs can lose their career on accounting, so it's important to them. And it's the basis for ultimately what they need to report and forecast and use predictive analytics. All of that is based on the data and the integrity of the data that flows through BlackLine systems during the financial close.

I think it's also worth noting this audience certainly spends a lot of time with CEOs and CFOs, but they might not be as familiar with a controller. This is a bit of a plug, but we do have an Investor Day coming next week on March 9. We are going to be doing a deep dive into who the controller is and how BlackLine helps them. So I'd strongly recommend, this audience, anyone who's interested in learning more about BlackLine and certainly, this landscape, tune in.

Related to that, and pulling on that thread a bit, what is the right way to think about the competitive landscape? And when someone is choosing BlackLine, how are they ciphering through the ecosystem?

Yes. Well, it's a really large market today. It's an $18 billion financial close market that's still very early and very underpenetrated. There are a couple of pure-play competitors that we compete against and compete very well against. The ERPs are -- there's Oracle is -- can be a competitor to us. SAP, we partner with. But the #1 competitor in our space is, frankly, Inertia. Controllers and CFOs who have been doing something for a certain way, they're risk averse and they're change averse, and they have not always been given the attention to this part of their process because they solved it through the years with people or manual transactions. And that becomes increasingly more difficult for them in this globalization world with more data flows and more systems. And so the competitor, again, is that this is a large market. It's very early. It's a sustainable growth market, but it's really around changing the manual process from Excel to a cloud solution.

We've, of course, gone through an extraordinary time over the course of the last year with the pandemic. How has that impacted your business? And is that changing how businesses are performing, their financial close?

Yes. Look, I would say that under Therese Tucker and Marc Huffman's leadership that we feel really great about how the business did over this past year. We took care of our employees. We focused on health and safety. We really focused on how to help our customers continue to work on this product, irrespective of their industry or their damage. We provided customer relief and support so that they can continue on our platform through this difficult time. By the end of the year, we started to see that while the demand was returning and accountants and CFOs were starting to invest again in their back-end automation, the fact is we are all still closing our books remotely, and we were all still doing our audits remotely, many of us for the first time ever. And as we look forward, we find that it's still uncertain, still difficult to see how this returns to normal or what sort of hybrid environment we have. But what it's done for us and for our customers is that it's exposed this problem, which is so much as manual that in this environment, it becomes necessary to have more back-end automation so that you can continue to operate from anywhere. We've seen that for ourselves. We were lucky. We were able to close our books, operate our business, and BlackLine was a core component of that, as it was for many of our customers who also benefited and succeeded. So as we move forward, we tend to think that this is highlighted for the CFO and controller and even the executive level of the enterprise, the need for having a better back end investment for infrastructure and automation, the way they've been doing for so many years at the front end of the enterprise. So many budget dollars and investment has gone into the front end that the back end is still very much behind. And I think that's one of the areas where investors are -- maybe they sort of don't understand the level of manual transactional nature that goes into CFOs and the controller's life, and that's the big opportunity that we think this pandemic exposed and then could potentially accelerate.

Yes, there's certainly some pandemic-induced digital transformation opportunities. Are there other deals that you've noticed for the platform and the business over the course of the last year?

Look, tailwinds, yes. I think that there's -- and we see this increasingly in our conversations and the demand environment. And in our pipeline is that companies, executives and audit committees and boards really focused on not just risk management, but the fact that the back end, the need for back end automation, better digital core systems, more information in the cloud, more accessibility so that systems can connect and data and workflows are more seamless and more -- have more integrity. That's been a tailwind for enterprises at the front end, and we think that's moving into the back end. And we do see in a number of industries and parts of the world and customers that, that is accelerating. So our view is that tailwinds will continue to drive a long-term growth orientation for this space and that it can sustain growth because it is an important part of the enterprise. Enterprises are only getting more complex. More systems, more data, more globalization, more regulation, more compliance. And all of that really flows downhill and sits on the CFO to provide these systems and provide this data and this financial information quicker, faster, better and with a lot more accuracy probably than has ever been there before.

You recently acquired Rimilia. What was the driving force behind that? And how has it expanded your capability set or even the addressable market size?

Yes. This is a really important part of our growth strategy. And something that we're super excited about. I would say that if you're thinking about the controller space and how we really focus on solving the problems for the controller, think of record to report as a cycle -- as a process cycle management. You have procure to pay, you have order to cash and other cycles like that. AR management, cash application is in that order to cash, which is upstream from the financial close process. It's one of the most liquid, one of the most valuable and important assets on the company's balance sheet. And traditionally, one of the latest to get reconciled, one of the last to get dealt with, and it's become an increasingly bigger problem for enterprises as more companies upgrade and mature their payables and procurement systems. The downstream effect in that is on the other side of the equation -- is the accounts receivable. And so we see a growing trend in accounts receivable and cash management for companies to have more of a focus on automating that process. It is very similar to financial close. It's early in the market. It's a $10 billion market that still is very fragmented and very early. And we think that BlackLine's core capability, along with this company, Rimilia's great AR cash management product is a way for us to enter that market, provide better synergy in data flow and workflow and help the controllers solve problems as they digitally transform their back end. So the thesis remains for us that to grow, we provide greater areas of problem-solving and capability on our platform. That includes now AR automation. And we're optimistic that our customers, having talked to so many of them and done our research, will see that value as well.

And how should we think about M&A as a strategy for the company going forward?

Yes. Well, M&A is absolutely a part of our go-forward strategy. And it should be as we look to solve problems for the controller and build capabilities to help them and be an indispensable platform for them. Over the years, BlackLine built our platform, single source code and very -- only 1 acquisition in the last 4 or 5 years. And that platform has made us the leader in this space. And now we think there's an opportunity to add capabilities around digital transformation for the controller through building and investing, which we're doing. And now through acquisition, where we can find areas that we can make a difference and that will provide some strategic value for the controller.

Switching gears a bit to the go to market. Could you talk about the differences in terms of the go to market and strategy between mid-market and enterprise?

Sure. At its core, it's still a direct sales model. Our mid-market is a $50 million to $750 million revenue sized company, so there's a wide range. And our very talented mid-market team today is armed with a modern accounting protocol initiative that allows them to go to the mid-market company and tell them that we can lead them through their journey for buying and investing in automation because we have 1,500 or more mid-market companies. And we've seen this journey, and we know we can help them. So we lead them through a very standardized, quick time-to-value process. And that's helped us sell into the mid-market. At the very high end, we will see consulting partners that can help them. And we also see companies that are multiproduct buyers, that will buy more than just 1 or 2 of our products, buy into a long-term investment in the platform. At the other end, on the enterprise, which is where 80% of our revenue comes from, and the majority of our history has been solving very complex problems for the biggest global companies in the world. They're oftentimes multi-ERP. They operate in many countries and currencies and languages and what BlackLine solve and provides to them is the ability to close their books on a single consolidated cloud platform no matter where you are, what the time zones are and make your close accurate and efficient and transparent as you go through it. So that's sort of the key product value prop on both ends is very similar. It just gets bigger, the bigger the company gets. And we have partners who help us in the high end, on the direct sales model. We'll work with consulting partners like E&Y and Deloitte. They'll work with SAP, who sells into their installed base as a reseller for us. So there's a lot more of an ecosystem involved at the high end to help make that time-to-value and that experience for the customer much better.

What are some of the growth strategies the company is focused on in the near to midterm?

Yes. The growth strategy at that enterprise level that I just mentioned is a land and expand growth strategy. So the way a controller buys is they might just want to take a small bite of the apple first or they might want to roll it into a division and then do a global rollout over time. There's a very good reason for that. This is a mission-critical part of their journey, closing the books. And every month, they're closing the books. And so they have to have a very well-planned, well-timed rollout, and then they move through the organization. So their land and expand strategy is much greater. And we've seen today that our largest customers will be on a journey. Our retention rates are recently in the sort of 106%, 107% range. We have high renewal and high retention rate. And the reason for that is controllers are tough to buy. But once they do, they're loyal, and they will buy in a land and expand strategy, and we continue to upsell product and expand users on a global rollout. So the enterprise-class growth strategy is really around those 2 components and making sure that we have the people and the product and the talent to help them on that journey. On the mid-market, it is very much about being able to sell direct and provide a very quick and efficient time to value and drive velocity. And so we're working on both ends of that spectrum to build our growth profile, which over the years has been about half and half, land and half expand.

What about internationally? What are some of the trends in growth from an international perspective potentially on deck?

Yes. Our international mix today is about 26%, 27% comes from global companies. That includes Europe, primarily, and then some in Asia Pac as well. BlackLine, prior to the pandemic, has been investing in growing our EMEA footprint through talent acquisition, growing our teams and the acquisition of Runbook several years ago and Rimilia recently helps drive our international business. So we're very focused on building in the major European and major Australian and Asia Pac market in the near-term with an opportunity working with SAP and some of our partners to go into other markets as necessary. Here, in the U.S., we're, again, a little over 70%, and we'll continue to drive that business as well, both mid-market and enterprise. So the mix for us has been very healthy as we look to drive more of our international expansion in the future.

Going back to competition. What are some of the technological differentiations that you offer? And how is that uniquely positioned against existing players or potentially even new entrants?

Sure. I think you asked technological, but let me just back up a minute. Competitively, where BlackLine has really always succeeded is in our culture, our focus on the customer and our knowledge of the accountant and the controller and what problems we solve is probably greater than anybody. And so our view of what's made us successful so far has been that focus on solving the needs of the controller. And competitively, we've been able to build leadership and moat by working with the right partners. We're a great brand and reputation for controllers who are buying a mission-critical application. And then technologically, if you add to that, that we are single source code, a platform that allows you to move through our products very seamlessly, that the user interface, the integrity of this platform and system has always been very strong from security and safety in the early days to today, the ability to respond to customers and react quickly. So all of those things have helped sort of put us where we are. The other key to competition, too, is that we're a pure play. We're able to be neutral to any ERP system. And so a single ERP that wants to compete in this space has to work with every ERP because most companies today still remain multi-ERP environments either through acquisition or through a series of other things that they've built in their companies. So that provides a natural competitive barrier technologically, that we work very well with all of these systems within the controller's environment.

And it's also worth noting, and Mark did touch on this, but it's really about BlackLine's expertise with this buyer with who the accountants is, what their processes look like. Our solution is purpose-built by accountants. We've been in this space for nearly 20 years, and we've actually been able to develop this really strong track record of trust with this buyer. That's incredibly important as Mark was saying, this is a buyer, there's someone who's risk-averse, they're hard to capture. But once you get them, they tend to be very sticky. So again, just something that we view as a really strong differentiator for BlackLine.

Switching gears a bit to team and culture and leadership. You've undergone a CEO change recently from founder to a new CEO. What has that been like for the company?

Yes. I can tell you, I've worked with Therese Tucker for a number of years as our CEO, Founder, and then I've worked with Marc Huffman, our new CEO, for 3 years. He's been a part of our management team, a part of our ethos even now for that long. And I think, Marc, there are more things in common than there are different between the 2 of them and how they approach people, customers and employees and how they want to drive this business. So the transition was very thoughtful, planned out and Therese now is our executive chair, still part of the think tank around, which is fantastic because she's built this industry and pioneered this space. And then Marc is really driven towards a growth orientation. And he comes from NetSuite, where he spent many years driving that from millions of dollars to $1 billion. And our goal here at BlackLine is to continue to capture the demand, maintain our market leadership position and follow the controller and build for them the most indispensable platform that they have. And so with that comes investment in people and systems and acquisitions, and you've seen us execute on that already. And so the short answer is I think we're coming out of a pandemic as strong as we hoped we would be. We've retained our talent and invested in our customers and people. And so that positions us really well in this year to meet the demand as it begins to return.

One of the things I've always been struck by with BlackLine is just a really unique and special culture. Can you give us a glimpse into what that looks like? And how it is to live that today?

Yes. I guess I can. I mean, Alex is as good at that as I am. I think our culture really helps crystallize so much of the decision-making in this company that has to be done because you know what we stand for. If you're recruiting people or our customers are talking to one another, you know what will be said. Our reputation stands. What it stands for has helped really drive a loyal customer base. You, Brittany, probably have seen or even heard about our customers. They are loyal and just great fans of our company and what we do for them, and that really helps foster this sense of belonging and community with our employees. So it has been the greatest joy of my life having this job at BlackLine and watching Marc pick up that baton and run with it in a very consistent fashion is great. I can't underestimate the value of a good culture when you're selling software to accountants, and when what you do is mission-critical because it is not the most exciting part of the enterprise. It's accounting after all. But when your mission is to liberate and help accountants be more strategic, to be more thoughtful, to be more value-added by giving them a platform that should do what software does and then let them focus on the more important things they went to school for, then you're not just helping them close the books, you're helping them hire, you're helping your customers retain people and you're helping them become the people they were meant to be. So it's a great mission for us that starts with the culture that Therese built and Marc picked up.

The company has navigated tremendously well over this unprecedented year that we've all been living. And I'd be curious from both of you, what has been one of the key leadership lessons you've learned over the last year?

Yes. I'll start. And because I witnessed this firsthand is that you hear about how important communication is. And I thought that in the last year, the way that Marc and the executive team communicated to our employees and to the customers was as good as I had ever seen, and it was the critical part of moving successfully through the year. And it's not just talking. It is listening. It is speaking authentically and open and honestly, and that is hard to do if you go back and look at this last year, and I feel like that's the greatest leadership lesson that comes out of last year is -- was that.

Yes. I would definitely second the communication aspect. I was really impressed with how the leadership team was so communicative. Certainly, at the onset of pandemic, there was a lot of employee correspondence, and I really appreciated that. And I would say the other thing that I've noticed is adaptability. So I think that the entire organization has been really adaptable in the sense of figuring out how to be successful across a distributed team. I think people are getting really creative. So just thinking back to the culture, doing things like cooking lessons or cookie baking classes so that you can still feel that culture across the organization. I think those are important things that make people feel connected across a challenging time. So I've been really impressed with how we've been able to adapt, maintain that strong degree of communication and then just keep that sense of community alive within BlackLine.

Thank you both so much for joining us today. I know we're out of time. So have a great day.

Thank you.

Thank you, Brittany.