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

Sure. Over the last several quarters, we view the office of the CFO as being the one who -- particularly inside the enterprise, who is acting with uncertainty in front of them. So we've seen our share of elongated sales cycles. We've seen our share of additional approvals and aging sales deals. And so coming into this year, that's how we guided, and that's what we know is sitting on a lot of our customers' minds as some of the economic uncertainty. Now having said that, we also see a lot of excitement at the top end of the funnel. We see customer conferences sold out across the globe, from the U.K., to Australia, to our own here in North America back in November. And so there's a lot of understanding that this is a when. When is this going to happen versus if. And so it's the conversion at the bottom end of the -- at the bottom end of the funnel. And that's what we have typically seen in the past around a macro issue. So they -- it is a headwind. It is in our guidance as a headwind. But the strength of the business, the customer conversation and energy exists for us, particularly in our customer base, 4,000 customers today, 2,000 large enterprises and 2,000 mid-market, many of whom are involved in their own digital transformation project where they're continuing to buy more of our product and expand. And we see that. And it's a big part of our growth profile. In fact, in the last couple of quarters has been a great driver of our growth, selling and cross-selling additional products into our own customer base.

Yes. Understood. Top of the funnel seems healthy. So going into this year, I think one of your strategic -- strategy is to lean in on strategic products, right? We have heard this in the Analyst Day as well that you had. Is there any particular product that you think might actually do better? I mean AR -- it seems like the attach rates on AR is a little bit higher than some of the other ones?

Pinjalim who are you looking at? Because you've got 3 people with -- all have great -- different opinions. Why don't we let Therese take that first. Yes.

Let's hear it then.

Well, look, I love the intercompany product because I started my career as an auditor back in 1985, and I still remember doing putting 4 pages of 16 column together, trying to eliminate all our -- my client's intercompany transactions, and fast forward to 2022, 2023, the world still hasn't changed much. In fact, it's just gotten more complicated in particular, because of the way intercompany transactions are now being viewed by regulators all around the world so that they can sort of track revenue and profit in a specific geography has become much more of a real issue with real tangible consequences. Because in the past, it used to be, "Well, let's just get to 0, and that's all that mattered with everything netted." Now it's about, "Have you got your revenue and your profits in the right geographies to make sure that you're paying only what you should be paying for taxes?" Because, guess what, the authorities come in and make an adjustment in jurisdiction A, you don't all of a sudden get to take a credit in jurisdiction B. So it's got real financial implications, and it touches so much more of an organization because it deals with legal, it deals with tax, it deals with finance, internal audit, you name it. And so that to me is, I think, a huge opportunity because these issues are very real for our customer base. Now you can say why it's the other product.

Yes. No, I think that's right. So for those that might be new to the story, we've got a number of strategic products. IFM is -- Intercompany Financial Management is the one that we think is leading the charge in this near-term year. And then just behind that Pinjalim would be transaction matching and accounts receivable, places where we've invested or acquired capabilities that we now have the -- can and are selling into our own customer base. And so our growth profile is 60% of our sales today come from our existing customers buying more from BlackLine because we are there, we have the relationship and have proven the value of these additional products. And so for us, that is a growth lever because these are deep accounting automation, high ROI that can sell into the teeth of a macro headwind. And so it's a big part of our growth profile with IFM leading the charge. And another one I'll add to that is that the intercompany really is a great opportunity for our partner ecosystem to get involved and to generate their own economy around consulting and implementation. And so, that's also a big part of this year's growth profile. Yes.

We're okay. Do you want me to talk about FRA?

I don't know what's your favorite.

Well, Financial Reporting Analytics is something our customers have been asking for, for years. The ability to generate a balance sheet or an income statement with the click of a button with drill down transparency into precisely how those numbers were arrived at. And we launched that -- it's an organic product. We launched it in mid-November, and it's had a faster uptake than anything else that we've ever released. So yes, it is a bit of my baby at the moment. I think Mark will tell you it's not meaningful to the bottom line in 2023, I'm trying to prove him wrong on that.

I actually have heard good things about FRA from your partners too.

It's so awesome.

And the fact that it actually pulls in variance module as well seems like resonating well. But I want to ask you maybe Mark Partin or anybody, I guess, this point about the strategic products as a percentage of your overall business has been pretty consistent at about, call it, 20% to 24%-ish. I think your target is 15% to 20%, you have been around that range somewhere, right? Do you expect that range to move higher as you lean in on it? When we had the Analyst Day, there was a slide in there, right, where you had shown some of the attach rate. Transaction matching was the highest at 26%, rest of them were single digits, right? AR, I guess, was the newer one, but it has, I want to say, 9%, I might be wrong completely, but I'm going my memory. But the rest of them were like 1%, 2%, 3%, right? What has to be done differently to drive that motion forward in a better kind of deliberate way?

Yes. A year ago, 15% to 20% of bookings was the target for the strategic product portfolio, this year, 20% to 25%. So we're moving up each year gradually. In our Analyst Day materials, we laid out what the embedded TAM is for the strategic portfolio in our own customer base, the 2,000 enterprise and the 2,000 mid-market, and we valued that or we sized that at over $1 billion to sell the products that we already have in market to the customers that we already have for BlackLine. So the opportunity is very large. And as Pinjalim stated, the penetration rate in most of those are in the single digits. So how do we leverage up? And I think you're looking at 2 of the ways that we do that. When Therese and Owen have started, part of what they've laid out is raising the level of conversation within the office of the CFO. If you think about these products as high automation, strategic, they really do raise the conversation to include IT, to include other areas of the office of the CFO beyond just the Controller and the accounts receivable and then the tax departments. And so being able to come to the table with the right messaging and the right solution to these very large problems is one of the ways that we are leveraging that up. The partners, the messaging and the ability to speak to the CFO at a much higher level, those are things that we are -- and they are focused on.

Yes. Understood. Therese, maybe I'd ask you this question. We are hearing a little bit of a growing level of noise around competition in the field, right? There is a set of companies, one particularly in the enterprise that is making a little bit of noise, then there are some companies in the mid-market as well. How do you view kind of the competitive landscape now that you're back versus when in maybe 2020 or before? And what has -- what does BlackLine need to do to kind of maintain that competitive edge?

Well, I think noise is the right word. You can say anything as a private company, all right? But that being said, the counter to that is you should always be paranoid. I mean that's very important. Our competitive landscape has not changed a great deal. Where we are at is we want to deliver value to our customers and give them a wide breadth of things that they can actually adopt and use as a platform for their digital transformation, I think that's our best approach to anything that's out there. And I don't know that anybody else out there has got a platform like we do that is built by accountants for accountants that can really take them through a true transformation process. Do you want to add anything to that, either of you?

Well, I -- so I come out of an industry where competition was brutal and fierce every day. So I'm thrilled that Therese and Mark and others in this organization are not going to get caught sleeping on where the competition moves to. I do think that for us, as I've watched our organization, learning how to compete a little bit differently because there's sort of a BlackLine way of what the value that we bring, but also being able to understand and articulate the differences between the value we bring and what others might be saying in the marketplace is something that's important. So I'm very confident in sitting here and telling you by what we believe is a wide margin, we have the best products in the marketplace. We believe that we have the best client roster, and we've got an exceptional team. But being able to demonstrate not only the strength of the product, but all the customer care that we've invested in to help our customers be successful, all the investments that we've made on the cyber side to protect our clients' information and data, I think again, that some of our competitors don't do it. In fact, we know we spend more, for example, on product development than some of our competitors you're referencing even having as revenue. So I think we feel pretty confident, but we won't be caught sleeping as we move forward.

Okay. Let me see if anybody else in the audience has any questions. Feel free to raise your hand. I think we have a mic at the back. Okay. I don't see any questions. So I want to ask you about accounts receivable automation, which is basically the Rimilia acquisition. We have heard from partners then matching cash payments to customer balances is a very manual process, and there's a need for automation in that space. Talk about that opportunity? Is that mainly an enterprise opportunity or a mid-market opportunity? Or would you say it's broad-based? Because I also hear that in the enterprise, some of the ERP companies might be having some of those capabilities already, so I'm not sure if it is -- how to think of that opportunity in broad terms?

The first part of the question was cash?

Yes.

Yes, for cash management.

Yes. Okay. So cash management, right? So we entered the cash management, liquidity management space a couple of years ago through an acquisition of a company called Rimilia. And think of the cash cycle that we operate in as being cash application, cash collection, cash intelligence, knowing how to speak to your customers, what you're collecting and then liberating that cash from the balance sheet through proper application. Very, very manual, still today. AR has been one of the most stubborn areas for software to automate, think of AP a much more mature market versus AR. And so we've got a couple of hundred very happy customers that have been able to improve their liquidity, been able to have a more efficient cash conversion cycle, which, as you know these days is much more important than ever. In this debt environment and in this interest rate environment. And so for us was sort of skating to where the puck is, the same way intercompany financial management is, right, in ethical accounting and in provincial accounting, we think these are places where accountants will eventually catch up. And so the enterprise today, most people would think the banks solve this or that it can be done by outsourced labor in other parts of the world, but globalization has an impact on that. And so what we see in our customers is the ability to have a greater, better, more efficient conversation with their customer through a greater liquidity management on the balance sheet. And we're just beginning in that market. We, through our own development and through the acquisition, have just begun to invest there. And we think we're one of the leaders in this space and over time, could want to continue to invest in that position.

Yes. Understood. Let me see if any hands are going up. No. So Mark Partin, since you are in the panel, I'll ask you an organic growth question. BlackLine is operating in a large market, which is gaining relevance. You have new products that are launching. You have the opportunity with your strategic products to sell within the base. There is a little bit of noise on the competition side. But taking all that into consideration, how do you kind of think of the organic growth profile of the business? Now this year, growth has taken a step down because of macro. But would you say there's an opportunity to kind of accelerate growth into the mid-20s at some point? Or do you feel like the maturity of the business is that maybe the sustainable zone is a little bit lower?

Yes. Yes. Thank you. Well, first, I'll start by saying that the 3 of us feel like that we are not happy with where revenue growth is today. And largely, that's a macro headwind. And so we're very focused on driving growth, and we've laid out back in November a number of growth initiatives. At the front end of that is the strategic portfolio. And this is a way we believe that we can really help our customers drive transformation in the office of the CFO. We have one of the best positions there. We're a leader in the office of the CFO, and we've got a number of products with great market opportunities. So that's one of our great growth initiatives. And the second is our partnership with one of the largest ERPs, SAP, who is a go-to-market partner for us that can help sell globally and expand our growth potential. So our view, as we laid out back in our Analyst Day, is that this, as a leader in the market with our growth levers, can achieve a 20% to 25% growth rate with a target operating model of 20% operating margin. And we've got good visibility towards that. We've got a number of growth initiatives that we are investing in. And we've got a very large market in the AR, intercompany and financial close space that we think can support a leader at that growth rate. So that's what we're all 3 here to do, to drive that growth, at that responsible growth, at that sort of profitable margin that we laid out.

So I guess the follow-up to that is, could this year be kind of the trough from a growth rate perspective given if macro kind of sorts itself out?

Yes, tough to grow in a straight line with this kind of a macro environment, frankly. Since the beginning of COVID, we saw a pullback in demand, and then a surge in demand. And we think in this macro environment, another pullback. We're in the office of the CFO, we think we're -- we think that's an extra sensitive place to be in the macro. But that needs to sort out. But the business is executing well. The leadership position is being maintained. And we're continuing to invest while being profitable. At a 10% operating margin, we're continuing to invest in scaling the business and growth initiatives. And so it's a nice -- we think it's the nice or responsible balance to get back to a 3- to 5-year midterm model that we laid out from the Analyst Day. That's sort of the timing that we wanted to give ourselves in this macro environment.

Awesome. I think we're almost done with the -- over with time. My asking another question will probably take 20 seconds. So thank you so much for all the insights.

Thank you.

Thank you, Pinjalim.