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

Hey, everyone. Thanks for attending the Annual Bank of America Technology Conference, and thank you for your continued support during the II season. For our next session, we are absolutely thrilled to be hosting a fireside chat with Marc Huffman, CEO; and Mark Partin, CFO of BlackLine. Marc and Mark, thanks again for taking the time, and welcome to the conference. For the audience out there. If you do have any questions, please use the Q&A functionality on the webcast, and I will ask the questions on your behalf.

So let's get started here. For -- let's just start at very high level. For those that are new to the story, out in the audience, Marc Huffman and Mark Partin, could you just give a brief background on yourselves, what is the opportunity that BlackLine is addressing? And how is BlackLine positioned to capitalize on the opportunity? And let's start with Mr. Huffman.

Good morning. Thanks for having us, Koji. Marc Huffman, I'm CEO of BlackLine and became the official CEO of BlackLine January 1 after a sort of really contemplated transition that we had gone through for the prior 12 months from our founder, Therese Tucker. We sort of created this category of closed process automation, which has matured into the modernizing of accounting processes some time ago out of a customer need that she saw in the marketplace, and that has grown into this company that we have now, driving growth company that's been public for several years. We think we have a great growth opportunity in the core market that we're in, the closed process automation marketplace that helps modernize accounting processes, the intercompany governance that we do for our clients. And then lastly, we've become -- we acquired our way into the accounts receivable automation space, another place that we think has got a large early innings TAM, that we can help modernize accounting processes. Mark?

Yes, Mark Partin, I'm the Chief Financial Officer, and I think I've got one of the greatest jobs in the world because for the first time, the cloud company is selling a solution to help millions of accountants do something to automate and improve their lives, liberating them from manual, intensive, repetitive work. And it's the first real chance, I think, when companies get into this to see that accountants go to school, not to do the things that they're doing. And so we, with our software, allow them to close efficiently. We help them with visibility, risk management, closing their books in a way that they've been doing it on Excel for years and years. So I've been with the company for a number of years and get a chance to be an ambassador for how we are really changing the lives of accountants across the world.

Got it. Got it. And I guess, first question here, let's start very, very high level, COVID state of the state, June 2021, sure seems like the world is heading in the right direction overall, probably a long way to go before we really get back to normal or whatever this new normal is going to be in the future. Reflecting back on the past 16 months, how did the pandemic affect the business? And what did you learn? And from your lens, is the pandemic still affecting the business? Or is it mostly behind the business today? And let's turn it over to Mr. Huffman.

Yes. I think that the -- I'll start with the tail end of that question. I still believe that pandemic is affecting our business and other businesses in just various dimensions. And so from the demand environment, it's -- I'd say we're close to what we would think is pre-pandemic demand levels. The demand has been strengthening month-by-month since the onset of the pandemic. After sort of some people came through this initial pause and shock phase of what was going on. And so the demand environment is one dimension. The human capital dimension, I think, were in a disruption for some time, and I don't think we're unique. I think most all businesses that have a lot of employees are in the same place. We've taken a whole population of people globally and sent them home to conduct the same work that they were doing previously and found ways through that. And that began to incorporate multi-dimensional living in some areas that were running schools and people's kitchens and all the other attributes that you have in running a family or other way that somebody lives their life. That now we're going to start to unwind and start to bring people safely, gradually back to the office, I think that's also going to be disruptive, and we're paying close attention to that with our human capital and our customers, how the customers adjust to that. In terms of the big lessons for me, the things -- and I think we did a nice job of this. It really, I would say, for people, really is important when these types of disruptive things happen, identify what your priorities are at the onset. And in our case, that was the health and safety of our employees and making sure we were empathetic in how we handled this disruption in their lives so that they could be successful, feel successful and cared about and be productive. And then that same sort of level of concern about how do we care for our customers. We've got 3,500 customers that we help to a very critical business process. And we've got this great relationship with them of serving them, how do we make sure they're cared for and how do we turn some of our knowledge over to them that will help them get through this disruptive time.

Got it. Got it. Marc, you alluded to a little bit in your commentary there about the future of work, and I wanted to ask you a question about that. And when you're talking with your customers and prospects and even thinking about BlackLine itself as an organization, what are you hearing out there? And I guess, how does Blackline think about the future of work? Is it work from home, work from anywhere? Is it everybody back in the office, kind of in the office, hybrid office, remote pods? I mean what are you thinking about broadly about the future of work?

Well, what we are thinking of may not be perfectly aligned with everyone else in the market. I think there's a lot of different opinions about it. And there's just sort of, I think, it's a reasonably good balance of decision-making that goes on now between employer and employee. And in the case of the employees, we're doing a lot of sampling and surveying, understanding what their needs and wants are. And like any other human being, they want a lot of optionality, they want the ability to come into the office because they want that colleague experience, and they want to be able to learn from one another. And there's a certain nature of productivity that when you can go into a really focused environment that may not be your home. On the other hand, I don't -- I think a lot of them realize they could be a lot more productive at times, working from the confines of their home. And so I think that they want that balance. There'll be other organizations that don't feel the same way, and it will be more prescriptive. We've taken the strategy for the interim that we're going with employee preference. And then we'll start to evaluate things as we roll into 2022, how much do we want to exert on employees that says specific roles or business processes at given times really require bringing people together. So we're trying to strike a balance towards the hybrid and not be boxed in one way or the other because I believe the situation over the next couple of years with employee-employer relations regarding work environment will be fairly fluid.

Got it. Got it. And a couple more high-level questions here before we really start to dig into the business is thinking about digital transformation, I mean, clearly a topic we hear over and over and over again. And likely, the pandemic has been a catalyst for digital transformation as we think about the future. BlackLine works with some of the biggest companies in the world across a very, very diverse set of industries. And what are you hearing out there? When we think about digital transformation trends and what does digital transformation mean for BlackLine?

Well, what we're hearing is the pandemic has caused people to evaluate and assess where they were. There was a sort of moment of truth when people had to distribute their workforce. And so in some pockets for our customers, let's call them highly adaptive and strategic, they felt a good confidence that they have the procedures and policies, the visibility and systems in place that they could distribute the work. And work would be conducted flawlessly, and that's largely true. Then there's other pockets of our customers who perhaps were in the midst of or not yet complete with gaining the visibility they want, and they're sort of accelerating some of their initiatives around visibility specifically. There's a whole other pocket of the marketplace that are not BlackLine customers that are still in, what we'll just call legacy systems, the way accounting has been done for the past 25 years. And we're seeing a rise in interest. The demand environment for those kinds of organizations moving away from status quo, who identified the pandemic is a reason that they would continue to look at digital transformation and accounting specifically. And when I say digital transformation accounting, these are large organizations with lots of human capital tied up doing very manual processes. That we feel we have a great ability to serve them to help free up that capacity to be much more strategic for a CFO or for your controller through the modernization of the work.

Got it. Got it. Let's talk about BlackLine's competitive differentiation. What do you see as BlackLine's primary competitive advantage out there? When you have a customer, a prospect coming to BlackLine, what is that catalyst that is really driving that conversation? And thinking from a big picture, you alluded to a little bit about what customers are coming from prior, but I mean, are other customers using technologies out there? Is it Excel spreadsheets? What is the process that people are using prior to adopting BlackLine today?

I think people would be really shocked. In fact, yesterday afternoon, I was on the phone with a senior executive from a very modern and well-respected tech company and call it the top 5 tech company in the world. And you would assume, based on the way that business operates and its prestige that they would have modern processes, modern technology across the entire business landscape. And categorically, across most parts of it, sales, marketing, distribution, service, commerce, really well-run operation. And we got to talking about the accounting organization and it's like it's stuck in time 20 years ago. And there is a -- so those types of environments, those very manual environments or just have taken one level of automation into accounting exist in a great number of companies out there still. And some of the largest and most prestigious modern companies that we see. So there's still a great opportunity ahead of us in that modernization effort. To answer your question, what I think that our protective moat and the sort of core differentiator is, it's the depth of our offering and the breadth of it. So the ability to provide visibility using greater automation across our entire platform to touch more complete business processes for a controller than any other solution in the marketplace right now. There are other solutions that can provide just this first level of control and visibility by taking what has been done very manually in a spreadsheet and moving that into the digital world. It doesn't provide a great deal of automation and doesn't free up any real capacity. Our depth of experience in these deep processes that we can help automate and then the overall experience being the category leader, having great brand and permission and love with our customers, having 3,500 of those is why a lot of large organizations come to us for this sort of modernization effort.

Got it. Got it. I've known the business for a while. I've spoken to many of your customers. Even looking at the customer list on the website, you can see really some of the largest global organizations out there. And so clearly, the technology works at the highest scale. I guess the basic, basic question is, why is what BlackLine does so hard to do out there?

Well, we sit at the intersection. Well, control and governance sort of came into play long after accounting processes were developed tens of hundreds of years ago. And so the ability to conduct the processes that need to be taken in place, to close the book, provide control and governance that is predicated in the modern world, puts us at the intersection of an ERP system where transactions are recorded and all the other subsystems necessary to provide a validation and substantiation activity. And that is a very complex orchestration of accounting process technology, human capital, et cetera. And I think that we do a very nice job in all 3 of those dimensions serving our customers.

Got it. Got it. Got it. And looking at the product set, maybe could you tell us what is the core product or lands, I guess, when customers come in to you? What do they take or buy right upfront? Is it a -- do they buy everything at once? Is it more of a land and expand? And I guess, aside from -- if there are core products that are the land, which are the products that you are most excited about from an expand opportunity out there?

Yes. So we try to land companies with what we know are the leading practices, the best way to move from legacy accounting processes towards a more modern accounting process. And because we have more experience than anyone else, we've created this modern accounting playbook, which sort of uses the data of our customers, 3,500 companies and says, this is sort of the best way to get from where you were to here in these base use cases that affect almost all accounting organizations. And so that's a combination of task management, which brings all of the tasks and accounting processes together and digitizes those and provides visibility across the entire landscape, which can be complex. That's not as simple as just taking a sheet of paper and uploading it and checking the box. When you're dealing with perhaps 30 to 40 global ERP systems and up to 10 or 12 shared service centers with thousands of accounts across the world. So that's one aspect. The second is the core balance sheet substantiation work that's done very manually in a lot of organizations still. We try to bring those 2 use cases together, driving automation linking those systems together that's required to do some of these core substantiations at high volume so that the machine processes those automation rather than the human being happen to go through a spreadsheet and tie these things up.

Got it.

Now there, the expand opportunity, Koji -- I'm sorry, I'm sort of...

No. No, go ahead, please.

You're going to have to get Mark Partin a question here. I'm running [indiscernible]. From there, our strategy, and it's really about serving the client still. There's a plethora of other accounting use cases that are ripe for automation. And so our strategy from there is to take and look at the completeness of those accounting processes, the payroll process, the reconciliation of payroll is a really hardly orchestrated and labor intensive, evolving multiple systems for an organization. But it touches a lot of BlackLine technology from task through reconciliation through our matching engine, which is a strategic product and our journal entry. And so the ability to automate an entire process like that for an accounting organization is where we start to introduce these use cases. And those use cases drive fairly dramatic customer expansion for us and great value for those customers.

Got it. No, that's super helpful. And let's go over to Mr. Partin here for a second, and let's talk about the pricing model. For those in the audience that may be new to the story, Mark Partin, could you just kind of go over the pricing model for the business? Is everything priced the same? Or is it a per seat per user basis, is there any sort of transactional component? Any sort of high-level commentary on how to think about the pricing model for BlackLine's products and services out there?

I can. Yes. And let me start, Koji, with a little bit of business model extract from Marc's commentary earlier on land and expand. So our buyer based on how Marc described it is sort of constantly in a batch process or period closing where they're closing a month or they're closing a quarter or they're closing a year or they're under audit internally or externally. And so the land-and-expand model for our buyer works really effectively, where you can build those use cases and grow with that customer over time. So 50% of our revenue comes from landing new logos and 50% comes from expanding within our own account. It's our view that even our 3,500 customers today aren't more than 1/3 penetrated with our products and with their global expansion of users because they have a life cycle that they grow, and that's been a tremendous source of growth and opportunity for us. When we price our core products, there are a number of them are on a more conventional model of ARPU, we price it based on the number of accountants that will be engaging and working in our platform. That drives users and user expansion over time. But we also have, like a lot of cloud companies, we have a strategic product portfolio, which drives high automation. And as a result, the pricing for that is not based on users. User optimization is the goal of high automation product. And so what we've been able to do is to bifurcate our pricing model such that there's a volume base, a transaction base, a complexity base for pricing, which is a very mutual and fair handshake with the customer for the value that will accrue to their business in their ROI business plan over time. So when you look at our growth metrics, you can see a number of different growth levers where our strategic product portfolio, which today is about 20% of our sales in any given quarter, allows us to drive greater and deeper automation inside our insider customer base.

Got it. Got it. Got it. That makes sense. I wanted to go back to the product set for a second here. You recently acquired Rimilia, well, not that recently. It's been actually more than half a year now, which is now your cash application. But I believe it also gave birth to a new product called AR Intelligence. So I guess first question for either Marc Huffman or Mark Partin, can you talk about that new cash application? How is it being received by the end market today?

Yes. Mark Partin, go ahead.

Yes. So we were super excited to be able to enter the AR automation space. We think much like financial close space was years ago, it's very early, it's unpenetrated. A lot of companies are struggling with at managing cash, selecting cash, applying it manually with so many different systems now being used on the payable side, on the banking side. And so AR and cash management has been and is becoming even a greater priority for companies to help manage their -- the cash on their balance sheet, the application and therefore, usage of it. Rimilia was an example of us going into a market with a great product, extending our brand permission and distribution to what we think is the best product in the market. It's a $10 billion market very early. What we've seen in the last 2 or 3 quarters since acquiring that is that there's tremendous demand and interest and optimism in driving that through our customer base. So we see strengthening and building pipeline. We see our sales team excited about it, and we've already seen sort of above expectation in terms of our plan when we acquired that. There are other products on the shelf to drive deeper into AR automation. The cash application was the first product that we're in market with. Insight, AR Insights is a way for our customers to look at their customer base and the payment streams and to manage cash flow and cash application using intelligence that's an AI-driven process. So if you want -- and many of our customers do, they are going into their order and cash systems to drive more efficiency and greater cash usage, they're looking for better intelligence, better ways to automate some of what's being done manually in offshore or existing customer base. So it's a very, very good start to our latest acquisition.

Got it. And I guess, from the investor standpoint and our standpoint, too, is that we hear a lot about the accounts payable opportunity. And maybe just a little bit less about the accounts receivable opportunity out there. I mean what are companies doing today in their AR functionality? I mean is that mostly paper-based too? Or are they coming from massively legacy system that's been extended over time and it's just clunky now. I mean what are people doing today with AR?

It's a bit of both. So this challenge is driven by a lot of change in the way that transaction is a process and people are paying one another. And so there's somewhat of a disruption going on due to the nature of changing digital payments. And the lack of being able to match up, clarifying and identification of information so that you can properly apply cash payment to a particular invoice. So that's one disruptor. The other disruptor, though, is that there was this very bank-focused and lockbox-focused payment processing style that has been going on for a number of years. And there was fairly fragmented globally. And so these large organizations trying to do business in all parts of the world didn't have one common standard to work through. So that's another disruption and change that's going on in the market that people are starting to centralize with the automation of that. And then, of course, this is another example where organizations sort of grow and then get stuck in these legacy processes where a lot of this work is actually done on Joe or Jill's spreadsheet, which has got thousands and thousands of rows, every shade of color that you could highlight it with and all the associated risk with it. And so it's all over the map, Koji. But again, it's an area that we're really excited about, top of mind for customers, and we think we've got a great opportunity there.

Got it. Got it. And then I also saw AR Intelligence, second part of the question, what is the potential opportunity with that new product?

Well, it's clearly in an upsell opportunity in the land-and-expand model. We've taken the strategy with the AR acquisition overall and said, our first and primary focus is going to be on trying to get this in our distribution organization, which adds significant capacity to what was their previous reach as an independent AR company highlighted that is our largest user conference in November beyond the Black, developed a lot of opportunities and get them focused on cash application, and then we had a robust pipeline of products coming in the future. The next one being AR Insights. So it's sort of a continuation of a land-and-expand strategy we have with our core products and our AR products as to the modeling and monetization of it, I don't know, Mark, how much detail you want to provide there, but again, I think we've got a great growth engine and a little bit more innovation and pipeline of products to come.

Yes, Koji. We've -- in our Analyst Day, we laid out what we thought was the embedded opportunity, the TAM within our existing customers of 3,500 customers of the strategic product portfolio that today is still very nascent inside our customer base. We've had good traction with some of the products. We're very early with others such as AR automation. So we think the opportunity for AR automation, AR Intelligence across our both enterprise and mid-market customer is very significant and cash application and cash management applies to every company. Every mid-market CFO and enterprise controller is going into their audit committee, explaining how quickly and efficiently and effectively can you close your books with integrity in this control environment; and second, why is your AR increasing? And why can you not drive down AR and improve the cash position, pay off our debt, use that cash for critical resource in the business. And those are things that the audit committee is spending time on and therefore, controllers and CFOs are looking for. So we think the opportunity to cross-sell into our customer base is vast around both enterprise and mid-market.

Got it. Got it. No, that is super, super helpful. And you mentioned the Investor Day, I thought you guys did a fantastic job at the Investor Day with the presentations that was -- I believe it was held in March. And one part that was very interesting from our perspective was a CTO, Pete Hirsch. I thought he gave a really nice presentation about the future strategy for the business. And clearly, there's been a big investment in R&D headcount, too, over the past year. So -- and also thinking about the transition to the Google public cloud. That's been ongoing, I think, for a while now. So what other innovations on the product or technology side is important to understand about the future strategy for the business, Marc Huffman or Partin, please feel free to chime in.

Yes. So we did increase the investment in the R&D and tech organization. We've looked at the pandemic as an opportunity that we had with a luxury of the business model and a great balance sheet that we could invest in the business for future growth. And so we've ramped that up. We've discussed that in our investor conference. The modernization, we're in the midst of right now, we think that's actually a real critical step for us, the modernization moving to the Google public cloud will allow us to turn on a number of services that will be value added, innovative for our customers. And so that's a big area of focus for us. In addition to that, we're focused on making our application, our core applications much easier to get in fintech accounting tech environment so that we can ingest many more deep accounting processes because I think this is a great area of differentiation for us, our ability to move beyond the spreadsheet and the workflow into the depth of this accounting process is makes us really, really replaceable for organizations that do a really good job of using our tech to automate. So that's another big area of focus for us. And then, of course, we're looking to innovate, open up additional addressable market to build our platform so we have the capability of seeing this company grow to its potential. And that could be the organic work that's going on in Pete's world through innovation that we're funding. It could be through partnerships. And it also could be through our core job function, which we've strengthened and then, of course, we raised some money recently as well. Whatever we do in 1 of those 3 dimensions, be it organic, inorganic, our partnership, will be around our strategy to serve the controller, help modernize those processes that are stuck in times that the controller really cares about and really affect the lives of accountants.

Got it. Got it. No, that's helpful. Wanted to switch gears a little bit and talk about the go-to-market strategy kind of coming out of the pandemic. As we slowly transition out, can you talk about how BlackLine is thinking about the go-to-market strategy? Any changes or investments that you need to make over the next year or 2 to really position the business for the post-pandemic future.

Well, we had just recently been making an engineering changes if we think of the last 2-ish years. And those pre-pandemic sort of longer-term growth initiatives that we had, things like our partnership with SolEx SAP. So that's a distribution partnership where the SAP sales distribution channel, which is vast, has the ability to sell BlackLine's products as a sort of a more complete solution on SAP paper to their customers. That's one example of our strategic growth initiatives. They were having great effect on us and we were sort of accelerating growth heading into the pandemic. It sort of allowed us to pull cord during the pandemic and still be successful and grow. And then we feel that those initiatives will help us grow thereafter. So you won't see dramatic changes. We serve the accounting world and that world doesn't really well adjust to these dramatic changes and that's sort of who we are. So a disciplined approach to how we make these investments to go to market. If there's any modifications, there'll be tweaks that will allow us to perhaps grow a little faster internationally, open up additional markets internationally and then continue to serve our land-and-expand model, optimizing the best way to land a new customer and then orchestrating that journey with that customer that involves all of our products. Again, that's the closed process automation at depth, intercompany governance and then helping companies modernize their AR processes.

Yes. Yes. No, that makes sense. And just a follow-up question on the SAP SolEx partnership. Clearly, an important part is partnership. Clearly, an important partnership for you. [indiscernible] up 25%. How has that ramp process been with the partnership there? Are all the sales reps at SAP now fully ramped on the product? How do we think about -- I guess, big picture, how do we think about any sort of potential channel conflict with SAP, maybe the other GSIs and the BlackLine direct reps out there, how do we think about that sort of dynamic within that partner channel and a strategic partnership with SAP?

Mark, can you jump in? I had a technical glitch. I think I missed half of Koji's question.

Yes. Let me start it out, and then I can leave you with a bit of the end of that because the SAP SolEx partnership we signed as a reseller distribution at the end of '18. So we're still in what we thought would be a multiyear partnership of driving education within the ground sales force, account executives across the globe in pockets of the world, we've been operating with SAP and their team as a referral source for many, many years successfully. SAP makes up almost 1/3 of our ERP customer base. So we've been successful selling direct and now under referral method. The combination of that transition, however, requires us to do a lot of education and work and partnering between our sales force in market with their sales force. Our ultimate goal is helping them -- helping the customer with their experience to get loaded and implemented and then moving in an expansion strategy with us. So we're really positive on the momentum we've seen in SAP, particularly over the last couple of quarters. They started out this year strong in Q1. And we also see great validation points. SAP has thousands and in fact, we estimate close to 10,000 companies that are doing $1 billion in revenue. And we today have hundreds of SAP customers. So we think there's a vast opportunity for them to sell into their installed base with our help. So the partnership is ramping still and has tremendous headroom to grow if we can continue to drive success. Marc, the last part of the question was around where we're seeing the interaction with SAP and sort of the work we're doing in the field with the reps.

Yes. I think you mentioned there's a ramp-up. There's sort of an activation and education that takes place over time. And we went into that knowing there would be some time to it and effort. And so we had to invest, and we invested 2.5 years ago in that. We're starting to really see that pay dividends. And it shows up in the regional success stories. SAP is a large organization, and it acts like a federation of businesses. Success in Canada doesn't translate to the guy or gal siting in Singapore. They want to know regionally that somebody else has been successful. Customers are receptive, BlackLine's products deliver on the value, and it's a great organization to help serve in a model where SAP products and BlackLine's products are really tightly coupled. And so now we've got that experience and success in virtually every major market that exists in the world, and that, we believe, is going to sort of be a catalyst for future growth. We're happy with the way that partnership performed at the end of last year, happy with the way it performed in Q1. And looking forward, from an activation standpoint and a pipeline standpoint, we're optimistic about that.

Got it. Got it. Mr. Huffman and Mr. Partin, we're out of time. So thank you very much for spending this morning with us and speaking with investors today. So thanks again. Appreciate it. Have a great rest of the day, guys. Thanks for the time. Appreciate it.

Thanks, Koji. Good to see you.

Thanks, Koji.

Thank you. Yes. Thanks.