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

All right. Awesome. Well, thanks, everybody. Thanks, everyone, for joining us today for the afternoon of day 2 of Citi's Global TMT Conference. I'm Steve Enders, part of the software research team here at Citi. And here for this session, very glad to have the team from BlackLine here. So I want to thank you both for joining us today. Thank you. Thank you. Maybe just to start, I think there's been a lot of changes with BlackLine over the past couple of years. Maybe we can just start with kind of what the core story is today and how you're kind of viewing the opportunity to invest in BlackLine over the next 3 to 5 years.

Yes. So thanks, Steve. So we have been on a rapid journey to transform the business 3 years ago, roughly when I stepped into the role, we did a complete refresh of our strategy, where we wanted to go, focus on certain parts of the market to really be more selective about the customers we chose to do business with, the industries, the geographies, the ERP partners, the system integrators. And so we get a lot of what I would call choices in and choices out. That served us pretty well as we move through the last couple of years. We really got our innovation back in motion when we brought our founder back into the business that drove a lot of that, including stuff around Studio 360 and then expanding the platform to be even more complete around financial close. I think we were smart that we had some insight as to the possibilities of AI and what that could bring for us. And so in some ways, we were ahead of the curve. In other ways, the markets move so quick. We're still trying to make sure that we're the relevant player in that. And importantly, one of the big things that we'll be sharing are beyond the Blackline conference in November, and we sort of hinted at it already a little bit, is our financial control console, which will really provide sort of complete governance around AI in the office of which is something that our customers and our partners and the BPO partners have been talking to us about like how can we help to orchestrate and manage all that workflow, not only for what BlackLine builds, but for what maybe some of our partners and our customers also build. So that's some big things that are coming. We've got a lot to share, but we feel pretty good about the position that we have in the marketplace.

Okay. That's great to hear and definitely excited to see what comes comes out of that in November, I believe. So yes, definitely looking forward to that. Maybe we can dig a little bit into just the demand environment today. I think you called out some deal delays in the past quarter. I think there's more friction tied to evaluating AI. Can you just maybe give us a better sense of the dynamics that are at play here? How are you expecting or baking in the deal cycles into the guide for the rest of the year? And then, I guess, as we think about the other side of that, would you kind of feel like the levers that are in your control to try to improve deal cycles moving forward?

So there's a lot to unpack there. So first of all, our pipeline has never been more robust. And so -- and our pipeline is more robust at the upper end of the market. So mega enterprise, enterprise, upper end of the mid-market, which are the places that we're really trying to drive our success. So we feel good about the situation with opportunities. Our deal cycle has always been a relatively long 12 months is not uncommon for what we do. It has elongated in the first 7-plus months of the year. Part of that was driven first by build versus buy. All of a sudden, everybody had bought a lot of tokens last year at the end of the year, and they were trying to figure out, can I just buy code my financial close, preparation of my financial statement. And so there was a lot of what do we do around that. And so for us, we spent more time with CIOs and CFOs, controllers and their teams, talking about the pros and cons of trying to build versus buy. You've now seen a lot more in the marketplace around when you should build versus when you should buy, which stacks up well for us, because you shouldn't really be trying to build financial close and consolidation capability. So that certainly was a big piece. And then the other thing that's really happened is companies are afraid of AI at a certain level. They want to embrace it, but they're also a bit unsure of how to unleash it in their organization. And so CIOs certainly played a bigger role. Chief Legal Officer is much more involved in conversations beyond the normal sort of agreements that we get into. We've run into a number of bigger companies now have AIRs who are trying to figure out what that role is. We've been asked to provide much more clarity around our own AI governance, how we build things and making sure that -- we're not going to build something that gets unleashed in our customer systems and goes crazy. And so all that is added to the complexity of getting deals done. So then what do we do to try to respond to that, right? So again, the first quarter, we were sort of okay, what does this all mean? We did a lot of work educating our people on build versus buy. The second quarter, which is really now into the third quarter, much more work around talking to our customers early on, like hey, here's what we're seeing. Here's the question you should be asking because we have the answers for it, right? So don't wait for them to try to figure it out, be very proactive early on and talking about AI governance. So we now have much more standard answers that we go into proactively. We're trying to engage some of the people who come later in the deal cycle earlier because, again, the deal cycle, if we're going to shorten that we're going to go down we have to go down multiple parallel paths. We can't just sort of the linear typical procurement. You do this, check the box, you get to the next milestone, check the box. And so there's a lot of work that we've done to try to change that. Now that said, some of these big companies, they're not going to change their procurement processes just to accommodate BlackLine. And so there's some of that push pull that we're working our way through. But the things that we can do to shorten time to value we have focused on. We've gotten better. I think Patrick would say, in the first quarter, we had a fair number of deals that rolled into the second quarter, many of them closed sort of prior to the end of the second quarter. the second quarter deals that extended. Most of them have now closed. So we've shortened that up a little bit. And I think if we think about the first half of the year, we still have one really large deal that hasn't closed but basically all the other 7-figure deals at this point have closed. I think from our vantage point, we're not losing. It's just being delayed. So these questions of if versus when is good for us because it's just a timing issue.

Okay. And then Patrick, I guess, what are you kind of assuming in the outlook right now?

So everything Owen just said is factored into the current guide and still a little of my thunder there. But the way I'm looking at it from a data-driven fact-driven numbers-driven analysis is those large deals at the end of Q1 that slip took X number of months to close. It took several months towards the end of Q2, even some of them slipped into Q3. And the reason for that was education. It was our customers understanding what's the art of the possible of AI back in February when this all started or this narrative started at least. AI was the panacea for everything and companies are learning that's not true. And so they're getting smarter, but we're getting smarter, too. To Owen's point, our sales team is much more enabled on messaging, not just our sales team but our customer success managers -- in how they engage our customers and educate them. And so then we look at Q2. We had slipped deals again, but those deals closed in about a month or so, all but 1 of them. So the slippage is compressing. Now is the deal cycle the same as it was this time last year? No, but it's getting better. And so that's been factored into the guide. We think a couple of more quarters of this, education, getting the message out there, word of mouth, seeing what the art of the possible is in realizing that BlackLine is your first and only choice and trying to be code your financial close is not the path you want to go as a CFO. So that has been factored in, and that's how we're evaluating it from a data and days to close analysis.

Okay. And so it seems like the changes you've made are starting to have an impact and at least are starting to to change things. I guess any read-through, I guess, so far through 3Q, at least for net new things kind of extending or anything?

They never let me answer anything because I say things I'm not supposed to, so I'm going to look at him.

Go ahead, Patrick. -- keep me out of trouble.

Anything new we're seeing for Q3?

Yes, I guess asking like you saw the deals slip from -- like are you seeing the, I guess, the closure rates in 3Q or anything is -- are the changes you're having having an impact in terms of like sending the tide there?

Yes. It continues to improve. We're getting much sharper on build versus buy. We're getting much sharper in understanding the risk of trying to build -- and now we're putting some real numbers beyond it. There are studies out there saying where you should use AI, where you should not use AI as it RBC, Deloitte, a couple of other studies saying, "This is your total cost of ownership. If you try to build something like this, in your financial system ecosystem. And the short answer is for a CFO, the ROI doesn't justify trying to build something like this. So -- it's not just us out there messaging it. There's down third parties, there's experts in the field that are out there validating what we've known, and that's very important when we go out there and compress those deal cycles.

Okay. No, that's great -- that's great to hear and very clear there. Maybe just a good opportunity to talk about your own AI capabilities and what you're putting out there with Verity. I guess as you look across those agents and you look across what you're doing with 360, just what have you seen so far from adoption trends and customer interest and I guess what's kind of resonating at this time as you talk to customers with those solutions?

So a couple of things to -- that are important. So 1 is almost all of our innovation we do through the lens of our customer and our partners, right? So there's -- we talk to them about what they want to see built and we then build it sort of almost in conjunction with them. There's a lot of prototyping before we go to early adopter and then general release and then those customers become pretty good advocates for us. I think the thing that we saw as originally we had sort of an opt-in model for AI, we switched that to opt out, and we had conversations with all of our customers about that and very few customers have opted out of our AI capabilities. We're starting to see, and we saw certainly from the first quarter to the second quarter now early indications in the third quarter, really positive trends of our customers using things more and more. And so we feel really good and confident about that. It will be interesting to see when we cross those thresholds where they start paying for consumption because they're getting more productivity out of using our AI. All of our products now have -- all parts of the platform have our AI-enabled or AI native at this point in time. We'll have a lot more again to share and announce in November. But I am blown away by what our product and tech team has been able to do. I mean they really have taken the challenge to sort of reimagine rethink the way BlackLine builds its products, brings it to market. And our ability to innovate has been just shockingly good to me. I mean I am really been blown away by it.

Okay. I guess, great to hear that it's -- the products are resonating. When do we start to see that kind of flow into monetization? And when does that upside on the usage actually drive new revenue for you all? .

So we're already seeing it. The proof is always in the numbers, and we're just seeing Phase I right now. So let me explain what that means. You can't separate the AI story from the platform story. So we signaled at the beginning of this year, we ended 2025 at 11% of eligible ARR on the platform. We targeted and set a goal of 25% by the end of this year. And we have a very clear line of sight for that 25%. We feel very confident in that. And that is a product-led initiative. And so just to recap just a quick brief history here. When we launched this platform pricing initiative and start researching it in 2024, it was about unlimited users. That was the value proposition. And in 2025, we started with that. And we saw a great uptake, 90% plus with our new logos, but we didn't quite see that uptake in our existing customer base because most of them had already optimized the number of users that they needed. As we built Studio 360 and developed it and also then start building agents that operate within Studio 360. It went from an unlimited user story last year to a product-led story. And what I mean by that is, if you're a customer, and you want access to our agents, you have to be on the platform. That's why we're seeing the acceleration in terms of the percent of ARR on platform. We're going to go from 11% to at least 25%. That's 14% this year. We're going to enter what I would call the S-curve of adoption next year and see that accelerate even more. That's very important because that acceleration, that rate of conversion will generate at least 2 points of incremental ARR growth or revenue growth above and beyond our current run rate. So our current run rate is 9.5%-ish is add 2 points to that. We're at 11.5% next year on a guide of 13% before we even factor in FedRAMP, KSA, our other products, and several other growth levers that we have. So that's why we feel confident, not just about where we are now but where we're going for 2027. And that's step 1 of the monetization. Now step 2, each customer that adopts our platform gets a certain number of transactions for free. And that's very important. We don't sell tokens to customers because people like me, a CFO doesn't want to buy tokens. I have no line of sight on the amount of token usage. I don't know what outcome that generates. I don't know what that does for my business. I don't know how it affects my strategy. You need to sell people like me an outcome. What do I mean by that? Okay. How many reconciliations is an agent going to perform now on your behalf? How many journals is it kind of book? How many phone calls is it going to make to delinquent customers on your behalf. Those are metrics every CFO knows inside and out. That's an outcome. There's a real cost to that, there's a real value to that. That's what a CFO is willing to pay. So we give these agents in a small sample size as part of the platform uplift. And that allows CFOs and controllers to test the agents to make sure that they work. It's a requirement if you're a public company. That typically takes a couple of quarters to get your internal and external auditors comfortable, meaning you have the agent running over here. You have your historical manual process over here. The outcome has to be identical for all transactions. Once you prove that on a sandbox or a sampling basis then you can release that agent into your entire population, your entire ecosystem. That drives up consumption. That drives up transactions. That's when you go through that free tier of agents that we provide to our customers. Once you go through that, it becomes tiered pricing, and that's round 2 or level 2 of our monetization. First, you get the uplift, a couple of quarters later, you start driving AI-based consumption revenue that we've never done before. That's why we feel so good about 2027 and thereafter in terms of our AI story and our innovation.

I guess to your point there, I mean, as you worry about incremental costs coming through and, I guess, a consumption-based model. Like when you have these solutions, is this more about becoming an outcome-oriented model that is, I guess, underpinned by the consumption and you're selling 1 million reconciliations or whatever the number is, and that's the point of it versus driving the consumption?

It has to be. that's the only way you're going to effectively sell this because a CFO needs cost assure this. You have to have control over it. You have to have a line of sight of it. And selling somebody like me tokens does not work because I don't know what that means. I have no visibility into it. So every CFO knows how much time his or her team spends on booking journal entries, doing reconciliations, right down the line of all the financial close and financial reporting process. That time is money, that money is value. And so that's the outcome that you're selling when you sell these agents. I'm going to come in and this agent is going to perform these many reconciliations, et cetera, et cetera. I can immediately as a buyer associate a cost and value to that, and that's what I'm willing to pay for it. So that's how we're going to market, and it's really resonating.