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

I'm Ankur Luther. I'm Managing Director with the Tech banking group at Morgan Stanley. Joining me are 3 wonderful individuals. I'm going to let them introduce themselves. Why don't we start with Mark.

Mark Partin, CFO, I've been at the company 8 years, and here we are.

Owen Ryan, Chair of the Board and Co-CEO with my wonderful partner here.

Therese Tucker, CEO and Co-CEO and Founder of BlackLine back in 2001.

And Owen, why don't we start with you because maybe folks don't know you as much. What is your background?

Sure. I spent most of my career with a firm called Deloitte, probably about 30-or-so years. And the last 8 or 9 years or so, worked as the CEO, what they call their advisory business, which ran lots of consultative services, including things of services to the office of the CFO as well as the office of the Controller as well as dealing with a lot of strategic alliance partners. And I had responsibility for that all around the world, so in about 100 countries with about 30,000 people that I try to take care of every day. And so that's a little bit of the background.

Sounds good. I think, Therese, when you gave over the reins, you -- BlackLine was the largest female-founded, female-run public software company. And now you are back, it still is.

Thanks. okay. Well, that's kind of a sad thing. Isn't it?

It is. It is. But at the same time -- just talk to us a bit about how you started the company. I know there's some people who are maybe new to the BlackLine story. Why did you start BlackLine all these years ago? What are the problems you were trying to solve? How is the company positioned now? And then we talk a little bit about the next phase of growth.

Okay. BlackLine has had a really unique opportunity over the last 20-plus years and that -- I bootstrapped the company. I have a technology background. They do not let me program today, just to make sure those spears are not brought forward. But we've had a very unique opportunity in that we've pioneered a number of new markets in the accounting and finance space. Way back in 2006, we came out with the first account reconciliation project software -- commercial software. Prior to that, everybody was doing their reconciliations in Excel, okay? We have also pioneered [indiscernible] that was a slow go to get that going. If you've ever worked with accountants before, they're not big risk takers. And they're not -- they don't really love to...

Did I mention in my intro I was an accountant?

Subsequently, there have been other markets. We pioneered software for the intercompany financial management market. All right. And recently, we announced a new product called Financial Reporting Analytics, which is that step just pre-consolidation, where companies are -- the reporting teams are trying to actually validate their financials. So it's been really fun in that -- the beautiful thing about the market that we are in, despite the fact that I make fun of accountants all the time, is that much of what they do is still very manual, okay? It is just this incredible greenfield of opportunity for places where you can genuinely bring them a lot of value and a lot of improvements. And that has really been the history of our company is basically finding areas of need that our customers typically in finance and accounting are sort of struggling with a manual, error-prone spreadsheet and e-mail-driven process and building automated software that's centralized and streamlined and bringing that to them in a way that makes them really delighted. That has been our history. That has been our heritage. That is a tradition that we are continuing today. We have an additional new product coming out this year called the Accounting Studio. And that is so cool -- all right, sorry, I'll stop geeking out here.

Go for it.

The Accounting Studio is so interesting because what you don't see from the outside into all of these corporations is that their financial systems landscape is really fragmented, it's duct-taped together, and they don't have a way of sort of command and control of all of their different systems from any one place. And that's really what the Accounting Studio is designed to do. So we continue to just bring out some really innovative things and build new markets and delight our customers with the value that we bring to them.

So we skipped over one thing, which is the announcement yesterday with the change that happened. Can you tell us -- open to both of you, tell us a bit about what drove that and how you think about the next phase of growth for BlackLine?

So I'm sure everybody in here knows. If you don't, then you must live under a rock, okay? But yesterday morning, it was announced that Owen and I are the co-CEOs of BlackLine going forward. If you don't know the history of BlackLine, I stepped down as CEO just over 2 years ago and spent the last 2 years working in product and development. Owen and I have been working together on the Board for the last 5 years. And it was a series of discussions with Mark and with the Board over the last several months about the long-term direction of the company and how to maximize our growth and our strategic vision. Owen brings just an incredible set of skills that I'm very excited about. He, in his capacity at Deloitte and as a CEO, understands the nature of large enterprise business. It's complex. You will have companies that have 50 instances of SAP, a multitude of other ERPs, a multitude of other vendors a number of SI partners. How do you navigate that landscape in order to bring BlackLine to the front in a way that gives the most value to the customer and allows us to monetize that value? That's a set of skills that all is uniquely Owen's that I'm very, very excited that we're bringing into the business. I bring the skill set of the marketplace and how to direct these strategic products so that we get the best outcome. Do you want to add to that? Sorry, I'm monopolizing here.

No. No, no. It was good. Actually, I like listening to you. So look, I think from a boardroom perspective, because I think some people were surprised the company actually, just to be very clear, is in good shape. We've got a great balance sheet, a great team. The customer list is just an amazing. It's a who who, who so. I tell Therese, I went to my first BeyondTheBlack conference back in November, and I felt like I was like a cult revival. I mean, who amongst you has customers that create software where your customers actually love you and we do anything for you. That was so, so unique for me to experience. But I think what the Board really deliberated upon and got the ultimate conclusion is we wanted to reach back because of some of the things you just heard here. It's the creative juice, that engine that keeps moving this company forward. But also, BlackLine has changed. We've kind of went from, I'll call it sort of a single product, if you will, and then we move to multi-products. And now we have an even wider set of products. And that's changing who our customer buyer is a little bit because now we're moving a little bit further up in the organization and spending more time with more senior executives because they're buying a broader suite. And so when you start to think about that, that's really where she and I play very, very well together both domestically and, quite frankly, around the world. And so that's what was driving this. It's the nature of the change of our business and who our customers are going to be as we move forward.

Got it. Mark, why don't we give you one now.

Feel free, yes.

Just getting a bit more details, when you land a customer, what products are they typically starting with? And how do you go through the whole upsell motion?

Sure. So we do sell into the office of the CFO. Our primary buyer is a controller, who's trying to solve a legacy problem of disparate systems and Excel and people and files. And they will buy our financial close suite. That helps them close the books faster, more transparency. That's a great landing path. We have a strategic product portfolio on top of that, that can extend into account receivable and cash and liquidity management. We have a product in intercompany financial management that helps them manage their businesses and divisions and all the intercompany revenue that goes through that business. Both of those or all of these are high-efficiency, high-automation, a deep accounting automation that can expand. So the land-and-expand model for BlackLine is a -- over history has been a 50-50 proposition. We sell 50% of our sales in the quarter at land, new logos, and then we expand the other 50% of the growth profile. But over the last couple of years, some of our initiatives around new products and some of the innovation, some of the efforts and investment in driving customer engagement has now led to more of a 60-40, where we land is 40% and we expand to 60%. And that really speaks to the embedded opportunity within our customer base today. 4,000 customers: 2,000 of the largest enterprise businesses and the best-run companies in the world; 2,000 mid-market. And we have an opportunity to expand within those businesses continuing. We think we're 30% to 40% penetrated in any given average of those. So a real opportunity to expand.

Owen, just for you the partner ecosystem. Let's talk a bit about that. How do you leverage key partners? How do you envision the partnership strategy going forward for BlackLine as well?

Yes. I think it's very interesting having advised a number of companies as a consultant on their strategic alliance partnership business arrangements and now walking into BlackLine. I think some of the things that we'll have to sort of figure out is how do we make sure it's worthwhile for our strategic alliance partners to have us as a premier partner. Because you see some companies, they want to just partner with everyone then they have 100 partners, and that doesn't make any sense. And so what we'll do is evaluate what are those strategic alliance partners that are committed to BlackLine, we're committed to them, that their brand is as strong as ours, their commitments and values are very similar, and they have a footprint that aligns and allows them to deliver where our customers are around the world. And so I think we'll have to spend more time trying to think through which of those strategic alliance partners make the most sense for us going forward. But that will be a big evaluation process to make sure that our partners are doing what we ask of them, we're doing what they ask of us and that we're continuing to grow and prosper together. And I think that's really what we're looking for.

So Therese, for you, just your perspective is in the office of the CFO? People have heard about office of the CFO. This was like all the rage last year, especially with a lot of acquisitions happening in the space as well. How do you think about BlackLine's positioning? And just help maybe everybody understand about the competitive ecosystem as well from your perspective.

There's really not another company out there like BlackLine in our space. There are some point solutions. There are some point solutions that address the market at a much lower level than BlackLine. And apparently, they have a lot of big talk. There are some -- there's a consolidation solution out there that we simply do not see in terms of competition. But what we do see and continue to see, the ERPs have a goal that basically one company, one ERP. And they're all striving towards that, right? But it's probably never going to happen. And I'll tell you why. The second you do an acquisition, you've got 2 ERPs, all right? And these larger companies do acquisitions, they do divestitures all the time. And so the financial systems landscape that is out there, it's complicated. It's duct-taped together. It's ripe for transformation. Transformation is something that -- it started to get a bit fizzy for the last year or 2, but it is a very real trend, okay? Even if you have a CFO who doesn't like change at all, they're being pushed to look at how to transform their businesses because you can't have hundreds of different systems that have the same data kind of in them, okay? So it really is a great market to be in. If you provide a platform that people trust, that you can do a lot of different functions on, that actually pays for itself, that's got real ROI behind it, that you can utilize in a number of different situations, all right? Our matching product is a perfect example. We see all kinds of applications of just trying to reconcile data to data systems, all right, across things that are even outside of accounting. So we've got the right platform in place right now that gives a lot of value to the finance and accounting, the office of the CFO. We really do. And there's not anybody else out there that has that portfolio of products.

Yes. I just think everybody knows the CFO is the most selfless executive in the enterprise. And so all the investments over the years has gone into the front end or the people HR systems. And the underinvestment in the office of the CFO is why the capital markets are excited about it now. We've been in it for a long time. The office of the CFO is still very much unpenetrated, unautomated. And we -- as Therese said, solving this big problem for the controller and the accounting that's got heavy accounting, heavy regulation, difficult talent management. They're not making enough accountants anymore. So the automation is really about secular tailwinds. It's about some real opportunity, we think, for enterprises to invest in their back end. Margin enhancement, right, do more with less, these are the kinds of things that we're hearing at our customers, and we think it is the future for the office of the CFO.

Why don't we talk about customers? Maybe for you and for Owen, maybe just give us a couple of examples of customers using BlackLine and how they've transformed their processes.

Okay. I have one that's sort of interesting and fun. We have a customer who's implementing Financial Reporting Analytics right now, okay? Which builds a balance sheet and income statement from the ground up with all of your data that's coming out of the general ledgers. They found when they were putting in FRA that they were still reporting on a company that they had divested from a year ago, okay? Like take that moment for a minute and just go, "oh, my God". And that's basically what their CIO did. And then they found other things that they weren't reporting out at all, okay? And this is not something that you will ever hear about by company name unless they really screw up badly, okay? But that -- providing that level of visibility into their operations is so valuable to them. You will not ever really realize how valuable that level of visibility is until you work one-on-one with the customers. That's one example.

Owen or Mark, any other thoughts?

No. Look, I think this is interesting because this is a company that started their work when I was still with Deloitte. And now it's 6 years later, and they're still going through things. It gives you an idea of the magnitude of the change. But one of the world's largest pharmaceutical companies, probably with -- as your point before, 50 ERP systems, trying to figure out all around the world how to bring all of this together and then continually adding to their portfolio of BlackLine products for both users as well as new add-ons to what we bring. And I think one of the things that when Mark was talking before that I certainly have a greater appreciation for coming out of more of a consultative background is trust with your customer. And that because that's -- you can't have that and be successful. And if you don't have that in the consultant world, you're dead. And I think what's interesting to experience and see at BlackLine is that same kind of trust that our customers have, not only with the product but the team that supports them, it's a very unique combination. So I think that's what I've been seeing as we move forward.

My favorite customer example is this mid-market company, also known as BlackLine, that uses its own software, closes the books in 2 days. I have a finance officer here. She gets the numbers, she gets the data quicker, faster. She's able to provide her leadership and her insight quicker. It's just a simple example of what a closing software can do to help us close quicker with more visibility.

Yes. So I agree with you that CFOs are selfless. But they also do cost optimization, just like you have been recently. And can you talk a bit about what you've been doing there, what your plans are going forward?

Sure. For our own business model?

Yes.

Look, in our Analyst Day back in November, we laid out a multiyear strategy, the strategy and the target model. Our target model is a good -- we think, a very good balance of profitable growth, a revenue growth of 20% to 25% as the leader in a space with a $39 billion TAM and continued investment. Our profitability -- we've continued and sort of always generated profits and cash flow, and so driving to a 20% operating margin target. We have very good visibility into that path. And in this year, our guidance, we reiterated guidance on this change. And for the year, we feel very good about our ability to execute on that.

One of the things I like that you're communicating is if we're going to spend $1, we better get a return and try to build that into the mindset that we're fiduciaries for our shareholders' money. And I think you do that in a really nice way with the organization.

Yes. Well, I started with a bootstrap CEO, Founder, when I first got here. And I think our market has -- as a market leader, we are continuing to innovate. We're investing 16%, 17% in our R&D. But we have world-class gross margins. We have -- 95% of our revenue is in subscription recurring revenue. And I think that just gives us a lot of leverage to really invest and yet still be profitable.

So Owen, what are you most excited about in this new role and as you think about the next phase for BlackLine?

Oh, gosh, there's so many things. So when I think about it, what attracted to -- me to this more than anything else is the chance to work with Therese. And it's one thing to sit in the boardroom and partner for 5 years, but I've seen what she's capable of, and I'm amazed by it. I'm actually in awe. And I love the fact that we're going to be able to noodle together because we're in so many ways, so different. You might tell from the hair color. I've been asked why my hair are green. I realize take a poll on that, if we could. Somebody is thinking green go really nice to get. I'm like, I don't know, I kind of like gray. Well, actually, I like having any hair. So -- but I think it's the chance -- when you work in the Board and you see the management team when you come in with them every quarter and you're sort of like this is a really good leadership team, it's great to now be back inside with them to be able to help them. Because it's nice as a Board member, but you can't cross that line of the responsibilities of a Board member trying to be management. So now the chance to really work with them and then share my learnings and experiences and to build this practice around the world. One of the things I loved at my time with Deloitte was building businesses throughout Central and Western Europe and all throughout Asia Pacific, 2 primary areas that we're looking to grow. And so there's just tons of opportunity in front of us. And a sort of a little bit of a selfish note, I remember being an auditor in 1985, trying to do eliminations in one of the world's largest insurance companies intercompany, and we could never figure it out on spreadsheets that were probably could go from one end of this room to the other. And so to see what we've been building around IFM is just -- it's apple pie to me at this point in time. So very excited about the opportunity to do that. And honestly, one of the things that I really appreciate about what Therese has done is she's got this great way with people, and the culture of BlackLine is very infectious. It's a learning apprenticeship kind of model. And it's something that I think is incredible because ultimately, you're only as good as the people around you. And I know that Therese understands that, Mark understands that, and I certainly appreciate that.

I know, Therese, one of the reasons you're back is because you missed interacting with all the investors in the room.

Oh, yes.

But what else -- like why else are you excited about coming back, running the company again with Owen?

The last 2 years working with customers directly and building a new product really reaffirmed for me the potential of BlackLine. The TAM in front of us -- typically, what limits the company's growth is the TAM, right? And I see so many different places where we can add value for our customers. And I'm super excited about our growth potential. That's it in a nutshell.

Yes. Great. Any questions from the audience?

Exciting change. Congratulations on the setup. In terms of how the role will be split day-to-day, though obviously, you've got different strengths and weaknesses. So can you just give a little bit more detail around how you see that working?

Product and strategy, go-to-market and customer care. Not that we're not both very interested in both but...

Want to tell them. It only took us about 10 minutes to divvy up everything.

Yes, it did.

It really was very quick. I typically have consultants, unfortunately, still. Mike took out a sheet, made spreadsheet, listed everything we do in the company put one for primary, one for secondary, put her name next to a bunch, my name next to a bunch set it over to her, and 10 minutes later we were done. So we kind of understand what we each bring to the table.

Great. I think we're out of time, unless there any other last questions, anyone?

Thank you for joining us today.

All right. Thank you all.

Thank you.

Thank you very much.