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

All right. Let's go ahead and get started here. Thank you, everyone, for joining. My name is Chris Quintero. I am the office of the CFO software analyst here at Morgan Stanley. And really excited to be joined by the BlackLine team here. We've got Owen Ryan, CEO; and Patrick Villanova, CFO. Thanks for being here, guys.

Thank you.

Thank you.

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So Owen, Patrick, maybe for the investors that are less familiar with the BlackLine story, give us a quick overview of the business. What are some of your core products, your core customers?

Okay. So our core products are really financial closing consolidation and then invoice to cash. And that's all run on a platform called Studio360. We've been in business, it will be 25 years this year, shocking. We serve 70% of the Fortune 100 and about 60% of the Fortune 500. And if you go to any major capital market around the world, we tend to have about half of the publicly traded companies that are in those markets, the larger ones in particular. We continue to focus on growing mostly through organic activities. And most of our innovation really comes through the voice of our customers, our SI partners, the BPOs who tend to run BlackLine in a back-office way and then the auditing firms because what we do matters to all 4 of those constituencies as we move forward.

Got it. That's a helpful overview. Let's jump right into AI. Clearly, a lot of investors are concerned about the terminal risk for a lot of software vendors. So from the BlackLine perspective, what do you view as your competitive moat, your key defensibility against some of these AI start-ups, large language model risk here?

If you've got 20 minutes, so I can give you the answer to all of this. Look, I think -- and we're doing a special day in 2 weeks for our investors and the analysts because they wanted to understand at a deeper level what's different about BlackLine versus maybe a marketing company or something like that. So we start with first is BlackLine is a mission-critical system for our customers. We've got about $60 trillion of market cap runs through BlackLine every day, not an insignificant number by any stretch. But people talk about being a system of record. Yes, we are that. But maybe even more importantly, we're a system of control for our customers, which you cannot underestimate. We tend to do all our work through about 20-plus years, as we mentioned, the proprietary data that helps inform the decisions that our customers make. As Patrick will tell you, we live in a world of complete precision. Some people want to talk about deterministic versus probabilistic. All I know is we need to be 100% right. And that's really critical to our customers. Why does that matter? Because as a CEO, I sign a rep letter every quarter that says my financial statements are completely 100% right. My CFO does the same thing and the controller. You take on a tremendous personal financial liability, if anything is not correct. And so that's a big piece of reliability that matters for our customers. We've got 20-plus years of auditor trust and reliability. One of the things most people don't understand is many audits are conducted where our customers give the auditors licenses to use BlackLine in conducting of a financial statement audit. We've built the platform to be more extensible and configurable based upon feedback from customers in the last couple of years that allow them to do what they need to do to sort of get the reporting and information out that they're looking for. We've embedded AI pretty much across the platform in all of our solutions. We've been rolling that out in the marketplace, had some really good nice uptake in the fourth quarter, and that continues so far in the beginning of the year. And then you just get into sort of simple math, and I give an example of -- we have a customer that joins us last year. They got $65 billion of revenue. They pay BlackLine $0.5 million as a customer. And somebody walks in and says, well, we could do that for $300,000 or whatever and name your price. Well, okay, do you want to give up all the system security, reliability, the accuracy, the brand, the trust? We are both like an insurance policy and insurance policy for our customers and a CFO pretty quickly goes, yes, we're not going to mess with that no matter what a CIO might say that he or she can do pretty quickly. So I can keep going on and on and on, Chris, but I think we feel very comfortable and confident that we have the right people doing the right things based upon what our customers, partners, BPOs and auditors expect and want and have come to trust and rely on in the marketplace. And that makes us very different and unique than other companies in the office of the CFO.

Yes. So a really critical -- mission-critical system. You need to have the 100% accuracy, the auditability, the risk compliance, all that stuff needs -- is a must-have for your customers. Let's talk about the opportunity front for AI. How are you all bringing AI capabilities to your customers? Maybe talk a little bit about Verity and that launch and how it's going.

Yes. And we'll tag team on it. I mean, obviously, we've been working on AI for a number of years. Therese, our founder, she would sit up here on stage with me the last couple of years and talk about if there's a company with 20,000 accountants, I want to take out 18,000 of them, probably not the nicest way to sort of communicate that, but that was sort of the messaging. And so we've been on that journey. And we see that in the productivity from our customers over the last couple of years. It's why we've been moving so quickly to get away from sort of a user-based model to a consumption-based model because that attrition based on the way customers were using BlackLine more effectively. What's been interesting is when AI started to really get sort of mind share, we were very quick, we believe, to sort of try to figure out how to begin to embed that both from a generative perspective into our solutions. And so we've done that. We released a number of things over the last year or so, but then maybe the most critical thing was then moving into agentic capabilities, which we announced in the fourth quarter of last year. We've got some really big enterprises that are using some of our agentic capabilities, for example, around Verity Prepare, which helps you do lots of your reconciliations and things of that nature through Verity Collect, which will be out in the market very shortly. And so -- again, the things that we're doing are the things that our customers have asked for, and it meets their standards. It meets the standards of not only the CFO and the controller, but the CIO and increasingly the Chief Legal Officer, which is the other aspect that's been interesting with the advent of AI. But you live this much more closely every day.

No, I do. And something you touched on there, Owen. Let's talk about probably one of the most important things in the room, how are we monetizing all this. So I think we sat in this very room last year today, almost the same exact day, and we had just launched our new pricing model, our platform pricing model. We launched it in North America in Q1. We launched it in the rest of the world in Q2. And so an update as to how that's going and how that fits into the bigger AI picture is very important. So what we saw as proof points when we launched this model was an immediate uptake, a successful uptake with our new logos. For customers that weren't used to paying for software on a user base or seat-based licenses, they loved it. They said, "Oh, I can deliver this to the entire office of the CFO. I can deliver this to anybody within my organization, and it's the same price. I don't have to worry about adding accountants, subtracting accountants. I don't have to worry about taking 1 accountant out of California and putting 2 in India and getting charged more money." It was a great conversation, a great handshake with our new logo customers. Now as we messaged to the market over several quarters there, it was a little slower on the uptake with our existing customers. A lot of our existing customers were fully implemented, fully adopted. They didn't care about unlimited users. If anything, they were reducing users. This is why we launched this new pricing model. We saw a phenomenon long before AI that as customers became better adopted when they came up for a renewal and they faced a 3% to 5% CPI increase or whatever is in their contract, they would find a way to reduce their license count by 3% to 5%. It became a revenue-neutral transaction, which is obviously not something that we wanted. So we knew years ago, we had to move to a platform pricing model. We did a ton of work on it and launched it in 2025. Now what we saw second phase of this with our existing customer base, it really took off in the fourth quarter because it became not just unlimited users, but it became product-led. During our annual conference in September, we brought Studio360 to the masses. We showed it to everyone. There were thousands of individuals there, existing customers, new prospects, and they were really impressed by it. And the reason for that was Studio360 brought together our 4 primary solutions that Owen noted earlier. Our core financial close, invoice to cash are the 2 largest. You also have intercompany and financial reporting and analytics, pretty much our consolidation tool. But nevertheless, it brought a single source of truth, a single data layer to our -- all of our solutions. That was the first captivating moment. Then for AI to be successful, you have to release agents into an environment where you have a single source of truth. We know of customers out there or noncustomers that have 40 ERPs and they're trying to do it themselves. And they spend a lot of -- a lot of time and capital trying to build their own agents. And what happens when they release an agent into an ecosystem of 40 ERPs, they get 40 different answers. So there's the value of Studio360 as the platform, one single source of data, one single source of truth. And then we said, okay, if you want access to these agents, if you want to become even more efficient without compromising accuracy, which is paramount to our profession, then you got to move to the platform pricing model. And what we saw in the fourth quarter was that we had of eligible ARR, 4% of eligible ARR was on our platform model going into the quarter, 11% emerging from the quarter. And that was mostly from our existing customer base that wanted this new product, that wanted this innovation, that wanted to test it. So that's key. Now there's a second element to it. We said it on our earnings call in February. Where do we expect that number to go for 2026? Well, we expect it to be at least 25% by the end of '26, giving a range of 25% to 35% on our platform model, which yields at least a 10% uplift on average at least, and it's product-led, which is key. This is something that the customers want. This is a pull for AI. And when you're dealing with accountants and finance professionals that are risk averse, you need them to pull, you need them to adopt, you need them to want it. So we're very excited about that. And here's the key takeaway here. By the end of this year, we'll have at least 25% of our customers on a platform pricing model. Well, if you remember, 30% of our customers already are on a strategic product that is consumption-based. So by the end of 2026, at least 50% of all of our revenue and ARR will not be seat-based dependent whatsoever. It will be eliminated. And we're very excited about that. We know the industry is moving away from it. We are ahead of the curve. And by the end of this year, those seats will -- over half of our revenue will not be at risk for seats going away.

Yes. No, you guys have definitely been quite ahead of the curve on and move away from that seat-based model towards more of a hybrid type of pricing model here. Patrick, you mentioned a little bit 10% uplift on that kind of like-for-like switch from the old model to the new one. How should we think about the consumption element of that, how that ramps over time?

Yes. So there's 3 monetization events that occur here. Step one, you move to the platform pricing model. That's at least a 10% uplift compared to your standard inflationary uplift. That happens immediately, that's built in your subscription, and that only goes up if your revenue as a customer goes up, you move up in price. If you're successful, we're successful. That's monetization event, number one. Number two, before we even get to consumption, one of the encumbrances to cross-selling our 4 solutions was that they were in silos. They operated great and they automated great within themselves, but they didn't talk to each other. Studio360 eliminates that. It brings a data layer naturally flowing between our 4 solutions. And when you're a CFO, that's what you want to hear. You don't want 4 silos, you want a single source of truth. What you also want to hear is a CIO, which are becoming more and more prominent in our buying decisions. That CIO no longer has to support 4 solutions. They're supporting one platform. And that's key from an internal cost and effort perspective. So the second monetization event is it opens up and removes encumbrances to cross-sell. And then three, what you touched on, Chris. So our agents. We have a couple of agents out there in the ecosystem right now that we give away as part of the platform uplift, a small volume. It's de minimis in cost to us, but it's very important to our customers because for everything that Owen said, customers have to test those agents. They have to run them in parallel for multiple quarters against their current manual processes to make sure that the outcome is identical. They have to get sign off from their internal auditors. They have to get sign off from their Chief Legal Officer. They have to get sign off from their external auditors. They have to get multiple sign-offs and get comfortable with it themselves that, that agent is producing the same output as their traditional manual processes. Once that happens, which in a SOX world, I can say this, I used to be the Chief Accounting Officer, it takes a couple of quarters to do that. You got to see this happen several months, several closes in a row. Once that happens, you're now feeling comfortable like, "Oh, I'm using this agent on a test basis for a handful of transactions. Now I can release it into the entire ecosystem and let it perform for all of my transactions." And once that agent gets above a certain threshold, the giveaway threshold and start hitting transactional levels, we start charging for that. That's monetization event #3, which you'll start to see -- show up in our forward-looking metrics at the end of 2026 and appears revenue in '27 and beyond. And that is growth above just the platform price. That is predictable subscription revenue. And as they consume more, they move up those tiers.

Yes. A big concern from investors is when you move from that seat-based model to a new type of pricing model, is that really net positive? Is it net negative? Is it neutral? You all are talking about a 10% uplift here. So I'm just curious like why are customers willing to pay that extra 10%? What's the value they get from moving over to this new model?

Yes. I think it's a couple of things. Again, we can tag team on this. One is because everybody gets to use it now, right? So we're not fighting that constant battle, right, raise the price 5%, we're going to reduce 5% of the seats. Over the last couple of years, we have really found our innovation genes again. And so the amount of stuff that we're bringing out to our customers is something they really want. And so when they see what they can get and then what they see what's on the road map and then they see the collaboration we do to build more capability, that gives them a lot of confidence. I mean, that's the beauty when you've been around for 25 years, and you can -- you have a reputation of delivering what you promise. And so our customers are finding that very attractive. So the cost is not really the hurdle that you might be what you think it is. It's less of a battle than we had anticipated.

It's -- in addition to what Owen just said, why are our customers embracing this so far? It's 2 things, which in my mind are synonymous. It's delivery of value and it's delivery of outcomes and that's what customers ultimately pay for. They don't care what it costs to us. They call -- they care what they're willing to pay, what it's worth to them. So without compromising quality, precision and accuracy, these agents allow accountants to be more off the hands off the keyboard, more efficient, faster close. And then those professionals, those accounting and finance professionals internally that have so much talent, you're unlocking that talent to either scale better, potentially reduce headcount or repurpose them to do other things within the business that are more analytical that maybe AI can't do yet. So if you're a CFO or a CIO, you look at what these agents are capable of doing and how they deliver these outcomes and deliver this value so much more effectively and efficiently, while you pay more for that. And that's why they've embraced this new model.

Yes. No, it resonates with me because when I was at the conference, I was speaking with one of your customers, and she was telling me that she's the only one with a BlackLine license, but there are other people in the accounting group that basically tell her what to put into the system so that they don't pay for the additional seats. But now because of the new model, they're able to...

You figured it out...

I figured it out.

Like sharing a password and...

Yes, exactly my Netflix account until they figured that out. Great. Let's move away from the pricing model. Owen, you came into the CEO role 3 years ago with a clear mission to turn the company around. So maybe for those investors who aren't familiar with the strategic changes you've been making over the past 3 years, what have been some of those? And what's been the net impact of those today?

Yes. Look, it's hard to believe it's 3 years. Time goes fast when you're having fun. I think the key things that we really made a conscious series of choices on where we wanted to play in the marketplace. So we've been very clear that we wanted to move much more upmarket and get out of the lower end of the mid-market. So very focused on upper end of middle market, enterprises and mega enterprises. And again, an example of how that sort of played out is the move from 50% of the Fortune 100 to 70% running on BlackLine is sort of a testament to the sort of the focus that we've driven there. We made a lot of choices around industries and how we would approach that. So very successful in big places like an oil and gas industry or retail, banking, insurance, like we're really very focused now, much more by industry. We've made some very clear choices from a geographic perspective. So it's pretty much sort of like the G7 marketplaces and really making sure we can be successful there. We made choices around the ERPs that we would sort of work with and partner and then those that we wouldn't focus on. So it was a lot about, honestly, Chris, taking this company in what I would call choices out versus choices in. We were trying to be everything to everybody, and you can't do that. And so we've been very clear about the execution of how we would run the business. We wanted revenue growth to far outstrip the cost of people, and we've done, I think, a pretty good job of getting that disconnect finally in place. We made choices around using offshore capabilities versus onshore. California is an expensive place to operate. No criticism of those of you that reside in California. But man, it's expensive. And so moving to places like India and Poland, Romania, we have about 25% of our workforce there from just a few years ago when it was low single digits. So we've made sort of all those strategic choices. But maybe more than anything else, we got back to innovating around the product. And to Patrick's point before, I think we lost our way about what was most important, and that was outcomes for customers. And so I'd like to say, I know it upsets some of the investors, we're not in the business of selling software, we're in the business of delivering outcomes. And over the long term, that is the right thing for us to go do. And we've got that maniacal focus on customer success in a way that I think we had lost our direction on. And so we feel very good about that. And you'll start to see that not only manifest itself in gross bookings growth, but reducing that churn and attrition because we're really getting back to helping our customers be successful in achieving the value of what BlackLine brings. And so if we do that, keep doing that, we're going to drive the kind of success that we want for our customers and our shareholders.

Yes. It's Software as a Service. Everyone focuses on the software piece and forgets about the service piece.

Yes. Good point.

So a lot of that hard work has culminated now to this past quarter, seeing some really strong acceleration across your key metrics. ARR, 9%; CRPO, 13%; RPO, 23% year-over-year. And you're guiding next year to an acceleration on top line, 9% to 10%. So curious, what have been those key drivers that have really driven that acceleration you're seeing right now?

Yes. Look, I think it's a few things. When it comes to net new logos, it's being able to demonstrate the value of Studio360, the platform, what it can do, the interconnectedness of all the solutions that we have. It's the innovation road map and people are excited about that. Our partners are incredibly important to us. So it's nice for us to say how good we are and what we do, but it's even better when an Accenture or Deloitte or an E&Y or an IBM or KPMG advocate on your behalf. And so we're seeing sort of that. The pipeline, we have -- as you guys know, it's a long cycle. But we see the pipeline that started to build at the end of '24, build throughout '25. It's still building in '26. We saw the success of that finally closing in the fourth quarter. It gives us a lots of confidence of 20-plus percent gross bookings sort of in this upcoming year and continuing on that path. And then it's getting back to our existing customers and getting them to get back on that finance transformation journey. We've gone back to every customer we have and looked at how well are they using BlackLine. And if they're not using it to its potential, how do we get back in there either through our own teams or with our partners to reinvigorate that journey. So we're having what I feel like is pretty good success on that. And then, of course, we now have more to bring to them. So 2, 3 years ago, I think our quota-carrying reps and others would say, we don't have enough innovation. I think now they don't say that any longer. Now it's like, wow, how do we get everything? How can we be better and able to bring this to the market? So we've got all of that kind of coming together in the right way. And again, now taking a consulting mindset to this is so as a consultant, you don't get hired for your next project unless you've done the last one really well. And our organization is really, really fixated and focused on delivering the outcome. What did we say the ROI would be to that customer? And how well are we tracking on driving that for you? And that's what's giving them more confidence in the capabilities and buying bigger programs with us. I think the other thing, Chris, is we've been much more selective on the customers who we want to do business with. Very early on, I ask our teams to figure out when you're talking to a customer, are they really serious about doing a transformation? And the answer is no, get out. Because we don't want them because they're not going to be successful and stick. It's like finding the right customers with the right executive sponsorship and leadership and we sat here a few years ago, and we talked about we wanted to move up in the office of the CFO. Why? Because the CFO and the controller care about digital finance transformation much more than somebody that might just be a user. And so we've had a lot of success in that regard. So those are some of the things.

Yes. You also brought forward your medium-term target of 13% to 16% total revenue growth, now pointing towards 2027 versus 2028 before. So what really gives you the confidence to do that?

You want me dive in on this one?

Well, you can in a second, but one word, execution. Simple as that. We have a nice strategy. Now it's execute, execute, execute. We've got a really good leadership team doing what they need to do. They work very well together, and we understand what we're trying to drive. But you can go through the math of it.

Yes. Yes, no problem. So if you look at what we did in 2025, a lot of the building blocks were put in place in 2024 and strategically in terms of what was going to grow this company. And we entered 2025 at about a 7% growth rate. And we exited 2025 based upon the metrics that you just shared there, Chris, all triangulating around 10-plus percent growth, leading indicators. So we came into the year at 7%, we exited at 10%. And we were able to achieve that turnaround, that inflection point that we signaled to the market at this time last year by a lot of the platform pricing. That's great, but still only 11% of our eligible ARR. There's a ton of opportunity there. Our average selling price is up. We're landing bigger. We're landing with more products. We're landing with more mega and enterprise accounts. Those were some of the growth drivers, but those weren't all of them. And so that's why when we look at the investments we made in '25, just like we made investments in '24 around pricing and innovation and moving upmarket that benefited '25, we made investments in '25 such as FedRAMP, more innovation around agentic AI. Those things have not materialized yet, which is great because that's -- those are more growth levers for 2026. So if we took a 7% to 10% in 2025, that's how we take it from 10% to 13% plus going into 2027. And that's how we're going to go about doing this. We still have a ton of opportunity with that remaining 89% not on platform pricing. We have a ton of opportunity in monetizing agentic AI. FedRAMP, while we won a couple of accounts, there's much more opportunity in the future, much larger opportunities in the future. So we pulled a few growth levers in '25, but not all of them, and that's why we expect to see compounding growth through next year.

Yes. I wanted to ask on the new customer front. We've coined this term the ERP super cycle, talking about the companies that are on, on-premise SAP, for example, and are moving to the cloud over the next few years. Curious kind of what you see within that pipeline within SAP, which obviously you've had a closer go-to-market relationship with, but also the other players in the space, Oracle, Workday.

Yes. So our pipeline, we've been clear about this, I think, at our last Investor Day with SAP has grown very nicely. Again, going back to November '24, when we sort of went through a reset in that relationship, trying to figure out what the path forward. I couldn't be more pleased with the progress we've seen in the last 15, 16 months on what we've been trying to do, not only on the product side, but in the go-to-market and customer success, top-to-top leadership and things like that we're working on now with sort of a joint proof of concept around their jewel AI with BlackLine AI capabilities. And so we've definitely seen a nice large uptick in that pipeline. But interestingly, it's still proportional. We keep growing just as quickly in the rest of our portfolio, whether they're working with Oracle or Workday. Now we have been deepening that relationship with Workday. We expect that to continue to go forward. But of all the things we talked about of why BlackLine matters in the enterprise space, the mega enterprise space is our brand reputation is really strong compared to anybody else in that regard. And so if you want the best choice, first choice, safe choice, only choice, you come to BlackLine when it comes to that financial close capability. So we're very confident, as Patrick pointed out, about where we see the growth coming from, and it will be across all of the mega ERP players.

Yes. Let's shift over to margins. Operating margin expanded to 22% in '25 versus 19% a year ago. You're guiding to about 24% in 2026. So where do you expect to continue to get that additional operating leverage from?

So we can tag team this together. Look, I think the biggest cost in our P&L is people. We sort of shared at the end of the year, our revenue growth in the last 3 years is about 34%, 35%. The cost of the number of people that we've added was about 2%. We've made a significant shift of resources from high-cost geographies into lower-cost geographies. Every hire that happens in this company, I know some of you will smile when I say this, I approve every one of them. And it's a lot easier to figure out how to use AI than it is to come -- ask me to approve a hire. And then if you're going to do a hire, can we do that in a low-cost geography? And so we've been very thoughtful about making sure that we're walking the talk with AI. And every executive leader has specific goals that they need to achieve around their use of AI before adding people. And there are certain parts of the company like quota-carrying reps. We're not in the world where we can sell enterprise software without people going out there. But in every area that Patrick drives from a back-office perspective with all those other back-office leaders to what the marketing team is doing to what customer success is doing, to what engineering is doing, we are figuring out how to use more and more AI to drive that performance that we need. And if we need to add people before we put them in high-cost geographies, can we look at low-cost geographies. So that will drive some of the expansion, but you've got much more that you deal with on this.

Yes. No, I think you touched on a lot of it. I mean, at the end of the day, our P&L is mostly people costs. And so the more we can move to offshore low cost or the more we can replace with AI, we evaluate that on an ongoing basis. And that's something -- that's not new. In 2021, we were a breakeven company. And we've been evaluating this for years to get to a 24% margin already. And that there's definitely more opportunity in future years to continue to expand that margin. But if you think about it, AI, we're talking about in the realm of finance and accounting, but it was here from a customer service perspective years ago. It was here from an augmenting engineering and making them more efficient years ago. It was here from a case deflection standpoint years ago in terms of marketing and developing marketing material, and we did that. We embraced that. We were able to hold down headcount, hold down costs and inject technology in those areas to make our engineers more effective and more efficient to have a higher rate of case deflection, so we didn't need as many heads for customer support to be -- to generate more pipeline more aggressively with the same marketing spend by augmenting it with technology and AI. We've been doing this for years. Now we're just crossing that next threshold in terms of other opportunities to continue to expand our margins. One thing though that is not specific to people and AI is our Google Cloud migration. We've been up here talking about it for years. Happy to report as of the first quarter, we completed that migration. 100% of our customers are on the Google Cloud. The redundancy of server costs is gone -- will be gone starting in the second quarter. So you will see a gradual expansion of gross margin as well coupled with all the things that Owen and I talked about from a people cost perspective.

Last question here, a similar kind of topic, capital allocation, driving shareholder value. How do you guys think about that every day?

You didn't ask me how frequently just I want to know what we're doing. So look, we have ongoing conversations with the Board as what's the best way to deploy our capital. Right now, we still think our best deployment is investing in the business organically, those things that we need to do. If we can find attractive tuck-in acquisitions like we did with the WiseLayer, we'll certainly pursue that. And then we're going to continue to buy back shares in the marketplace. And all the things you would expect us to be doing on behalf of our shareholders, we're trying to drive that. And I don't think we'll ease up on any of that in the near term.

Awesome. I think we can end it there. Thank you, Owen. Thank you, Patrick.

Thank you so much. Great being with you again.

Thanks.