BlackLine, Inc. (NASDAQ:BL) Q3 2023 Earnings Call Transcript

BlackLine, Inc. (NASDAQ:BL) Q3 2023 Earnings Call Transcript November 2, 2023

BlackLine, Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.36.

Operator: Good day and thank you for standing by. Welcome to the BlackLine Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to turn the conference over to Matt Humphries, Vice President of Investor Relations. Please go ahead.

Matt Humphries: Good afternoon and thank you for joining us today. With me on the call are Owen Ryan and Therese Tucker, Co-Chief Executive Officers of BlackLine; as well as Mark Partin, Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, and expected performance, in particular our guidance for Q4 and full year 2023, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during this call are reasonable, actual results could differ materially, as these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic reports filed with the Securities and Exchange Commission, in particular our Form 10-K and Form 10-Q.

We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. All comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Finally, unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is currently available in our earnings release, which may be found on our Investor Relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now, I’ll turn the call over to BlackLine’s Co-Chief Executive Officer, Owen Ryan.

Owen Ryan: Thank you, Matt, and good afternoon. Thank you all for joining us today. To start today’s discussion, I want to comment on our high-level results before reviewing the key areas I am focused on, including the progress we have made and expectations going forward. We delivered on our revenue targets while exceeding our profitability targets this quarter, with $151 million in total revenue and $38 million in total non-GAAP net income. Approximately 71% of our sales in quarter were with existing customers, and we saw solid performance in our mid-market business and in the sell-through of our accounts receivable automation solutions. Additionally, the number of customers with $1 million or more in annual recovering revenue, or ARR, increased to 55 this quarter as large enterprises continue to move forward with their digital finance transformation journeys.

When reviewing our quarterly results and the broader progress since Therese and I assumed the Co-CEO roles in March of this year, it has been a case of steady forward strides disrupted by the occasional pothole. To demonstrate this and provide some more contexts, let’s walk through the key areas we are prioritizing as we drive the business forward with our long-term aspirations and opportunities in mind. As a reminder, these principal areas of focus are: one, relentless execution across our business operations; two, BlackLine’s market message and brand; three, ensuring customers receive the value of the BlackLine promise; four, building and optimizing our distribution network; and five, customer retention. With respect to execution, we are continuing to steadily make progress to drive better performance and deliver improved outcomes throughout the organization.

Some of this progress is the result of actions already taken and others of actions we are beginning to communicate and roll out in the coming months and quarters. In go-to-market specifically, we saw better than expected performance on new logo ads this quarter, particularly in our mid-market business with customers like Precisely and First Bank Richmond. We’re being increasingly disciplined in how we target customers in the mid market attaching ourselves to those we believe have the potential to grow into enterprise customers with BlackLine. Further, we saw strength in the sell-through of our accounts receivable automation solutions with customers like Global Excel and Wolseley Canada underscoring a very solid year so far. As you can appreciate, interest in accounts receivable automation is top of mind for CFOs globally, as working capital management and cash collections are under intense scrutiny.

Going a bit deeper on execution, we are seeing modest improvements in the productivity and efficiency of our sales force. While our workforce action in August does positively influence the productivity measures we track, we also saw improvement in our close rates and in our competitive win rates, particularly in the mid-market and in accounts receivable. While it is far too early to draw meaningful conclusions based on these quarterly metrics, I harbor no illusions that we need to compete even more across all the geographic, industry, and product markets we serve. Turning to our marketing message and brand, we are rapidly advancing our efforts to unify our global message to customers and partners alike. You may have seen this come through at our recent BeyondTheBlack conference, where our attendance was up 12% over the prior year.

At the event, we reinforced our aspiration to inspire, power, and guide digital finance transformation. As part of this, we unveiled new solutions that support our goal of becoming the accounting and finance platform for the Office of the CFO. Specifically, we announced that we are expanding the breadth of our offerings into consolidation and going deeper within the invoice-to-cash process via the acquisition of our partner, Data Interconnect. This acquisition, while financially immaterial to our business, brings a key component of our end-to-end accounts receivable automation solution in-house and completes it. The next area is on the value of the BlackLine promise and how we can ensure that customers understand the value our solutions provide and generate meaningful returns on their time and investment.

If you recall, we announced the five-day implementation program a few months ago. We are pleased to share this program is resonating well with customers and demand for this program is increasing. We have also seen customers in this program take their next steps with BlackLine by additional purchases of our solutions. At a high level, making it easier to do business with BlackLine while offering unparalleled level of automation and customer support remains a priority to further differentiate ourselves in the market and support the higher competitive win rates we expect. We are making considerable progress with our partners to deepen relationships and expand our distribution efforts, both in the field and with top-to-top alignment. For our global consulting partners, we are seeing a renewed interest in positioning BlackLine within their practices, especially as we introduce new solutions servicing a larger footprint within the Office of the CFO.

Additionally, we are seeing increased engagement from other channel partners, such as BPOs and managed service providers, to provide broad close and consolidation services to their clients. At our BeyondTheBlack event specifically, we hosted over 200 partner attendees across our top 40 firms. We also hosted multiple forums, executive sessions, and partner meetings to further deepen our engagement and collaboration. More than 50% of all BeyondTheBlack attendees attended a partner-run session highlighting the value of a partner-powered approach. In terms of other partner-driven results this quarter, much of our success in accounts receivable came via our partner channel, and four out of our five largest accounts receivable deals were won with a partner who recommended our solutions.

Finally, let’s discuss retention. As you saw this quarter, our revenue renewal rate declined sequentially to 94%. This is an unacceptable level of performance given the nature of our solutions and the value we place on our existing customer relationships. While there are certainly market-related impacts that are negatively influencing this metric, such as vendor consolidation initiatives and expense management efforts from customers, the effort we are placing here needs to intensify. Even in this environment, everyone on our team expects that we should have and will have better performance. To support and positively influence this going forward, we announced a number of customer-centric initiatives at BeyondTheBlack that we are currently driving with existing customers.

We are focusing our customer teams on end-to-end process optimization using standardized success plans including the BlackLine 9 optimization strategies, along with in-flight and operationalized customer blueprints. We are also consolidating to one joint customer engagement process within our account management teams and eliminating multiple, disparate programs. Finally, as Therese will speak to, we are expanding the breadth and depth of our solutions across the office of the CFO to become even more mission critical with customers and to support their digital finance transformation journeys. The end goal of this is simple: increase adoption, increased customer engagement and satisfaction and ultimately drive renewal rates higher. Turning to deal activity this quarter, we saw solid wins across both enterprise and mid-market with many being competitive wins or takeaways.

In North America, we signed Medline, the largest private manufacturer and distributor of medical supplies displacing the legacy incumbent. While the customer was initially looking at automation in a small part of their financial processes, the value and ROI of BlackLine resonated strongly, leading them to replace nearly all of their existing competitor solutions with BlackLine. In another example in North America, we signed a new global customized industrial control manufacturer replacing an existing consolidation and CPM provider that could not successfully manage key financial close activities. The customer was intent on moving away from manual processes while reducing the number of errors and time required to close. We were able to provide not just the value expected by replacing their legacy systems with BlackLine, but also the cost of an action to the customer that they stayed with the status quo.

In Europe, through close collaboration with an elite global partner, we signed one of the largest beverage distributors to a multiproduct deal displacing a long-term competitor. Further, we leveraged our relationships with existing BlackLine customers to provide real examples on the benefits of automation and modern accounting and have for this customer’s business. This deal is exactly what we are striving for longer term, leveraging our partner network and our domain expertise in key industries to drive multiproduct sales across large global customers. Finally, building on the partner powered and multiproduct sales motion, we signed a leading provider of IT infrastructure and security. The customer was seeking to transform their finance and accounting technology landscape while also strengthening their internal controls, streamlining their processes via automation and improve operational visibility.

They were also focused on a software partner that could solve challenges spanning multiple departments across the office of the CFO from close and consolidation to accounts receivable automation. Our partner position of BlackLine is the best software partner to achieve the customers’ goals and drive longer-term results for their business. On the expansion side this quarter, we also saw some great wins. Specifically, we grew our relationship with WEX, a global leader in financial technology solutions, replacing a legacy competitor that was handling many of their existing financial processes. We demonstrated how they were already seeing benefits from partnering with BlackLine and where they could extend this further to accelerate their finance transformation goals.

Further, we saw expansion wins via our SolEx partnership. For example, we deepened our relationship with a global telecommunications company that wanted to expand their process optimization efforts from core financial close activities to more advanced use cases like journals as they transition to S/4HANA. Partnering with SAP we were able to demonstrate how additional automation can be leveraged to drive more efficient results across their teams and ensure that critical financial processes are in place before customers commence their broader digital transformation. With that, I will turn it over to my fellow CEO, Therese to discuss our thoughts. Therese?

Therese Tucker: Thank you, Owen. In product and technology, while early, I am pleased with the results we are seeing. Our product road map is becoming laser-focused on customer centricity. Our workforce action in August not only caused very little disruption in our teams, but removed silos and allowed our teams to act with more agility and autonomy. This leaves us better positioned to execute across our vision and deliver more for our customers. Speaking of our vision at a high level, we are committed to creating and offering a comprehensive, unified and flexible platform for the office of the CFO that leverages AI and data-driven tools to maximize efficiencies. BlackLine has close to 20 years of experience within accounting and finance.

Incorporating this deep knowledge into a unified platform allows us to leverage those building blocks and expertise, whether we are innovating our own solutions or integrating acquired solutions. We expect to deliver market-leading innovations as we move forward that support our vision of being the platform for the office of the CFO. Our recent product announcements combined with the acquisition of Data Interconnect in September are benefiting from this approach. At our very successful BeyondTheBlack event, we made several exciting announcements. We were pleased to announce consolidation capabilities, which expands the depth and breadth of our office offerings across the office of the CFO. Through our financial analytics and reporting solution, we’ve extended further into the record-to-report process and now offer unprecedented end-to-end transparency to our customers.

We initially approached consolidation by looking at how legacy providers have served this market and where our modern solutions could differentiate themselves. Historically, the consolidation process has been batch-based and suffered from a lack of real-time visibility. For our users, the ability to drill all the way down to the individual reconciliation and track fluctuation analysis at the most granular general ledger level or all the way up to individual line items on the financial statements, is powerful and unique. Also, the attestation process we’ve developed validates numbers pre-reporting and delivers valuable time and cost savings for our enterprise customers. When we segmented the market opportunity, we saw that mid-market customers often lack a modern end-to-end consolidation solution and customers typically use a combination of manual processes and excel.

Sounds familiar? While not required when customers combine FRA with our existing financial close solutions, BlackLine can provide a complete end-to-end platform for close and consolidation, which is a very powerful value proposition and offers a real competitive advantage. Looking up market, we’ve already seen adoption by several large enterprise companies using BlackLine as a tool to assist with consolidation efforts. However, to be successful across both the enterprise and mid-market requires more than just a market-leading product. We need domain expertise, customer feedback and collaboration from our partners to succeed. So that’s where we’ve spent considerable time and effort running these efforts in parallel with our product development teams.

Through existing customer advisory boards, many who purchased FRA and are now using it for consolidation, along with partner groups, we are aligning our road map to evolving industry trends while ensuring that customer experience is top of mind. The enthusiastic reception from our customers as we extend further into the record-to-report process is validation of our efforts and our strategy. In accounts receivable automation, we announced the completion of a small technology acquisition that completes our vision of becoming the modern, integrated Invoice-to-Cash [indiscernible]. The acquisition of Data Interconnect, a former partner, brings Electronic Invoicing Presentment and Payment or EIPP functionality in-house and creates a fully end-to-end integrated accounts receivable solution.

The growing interest in our AR solutions, as demonstrated by our results this quarter reinforces our belief that working capital management and visibility on cash remains a high priority for CFOs globally. This is especially important in this market environment and as such, we remain committed on ensuring that we have the features and functionalities our customers need to power their success and our future growth in this market. We also recently announced that we expanded the connectivity and unification of our solutions with the Microsoft Ecosystem through the addition of a new Microsoft Teams integration, as well as new features and capabilities for our Microsoft D365 connector. These new announcements underscore our commitment to developing and deploying easy to use, quick time to value solutions, primarily for our mid-market customers that often rely on Microsoft for their operations.

Finally, on AI, we announced a number of innovative new capabilities and enhancements for our close AR and IFM solutions at BeyondTheBlack. One of the more interesting capabilities is specific to our IFM solutions, intercompany predictive guidance offers IFM customers the ability to prevent transaction failures before they occur, minimizing the time and resources spent across the entire intercompany transaction lifecycle. While still in its early adopter phase, we are seeing great interest in this capability from our largest IFM customers and look forward to moving to general availability in 2023 [ph]. Before closing and turning the call over to Mark Partin, I want to thank all of our customers, partners, investors and of course, employees who attended our recent BeyondTheBlack event and made it the premier finance and accounting event globally.

I want to offer my sincere congratulations to all of our Modern Accounting Award Winners. They demonstrate how companies achieve digital finance transformation when they fully utilize BlackLine. With that, I’ll turn it over to Mark Partin to discuss the details of our financial performance and our outlook.

Mark Partin: Thank you, Therese. As Owen and Therese mentioned, we remain focused on ensuring that we are positioning the business to drive higher levels of performance while deepening and extending our position within the office of the CFO. While our results this quarter demonstrate steady progress, we acknowledge that there are certain parts of the business that need to improve further. With that in mind, let’s review our financial highlights from the third quarter in more detail and provide you with additional insight. Total revenue grew to $151 million, up 12% with subscription revenue growing 13%. Services revenue grew 6%, in line with our expectations. Calculated billings growth was 12% up versus the prior quarter. Remaining performance obligations or RPO was up 12%.

We closed the quarter with total annual recurring revenue or ARR of $580 million, up 12%. We added 89 net new customers in the quarter, bringing our total customer count at the end of the quarter to 4,368. Our revenue renewal rate was 94% this quarter below our expectations. On renewal rate, what we saw was similar to what we experienced last quarter with a small group of customers deciding not to renew as they seek to lower near-term expenses either through technology landscape simplification or vendor consolidation. Net revenue retention was 105% influenced by lower account growth activity from existing customers. We continue to see customers being more thoughtful on their purchasing decisions and in the near-term driving the lower velocity of cross-sell activity and lower levels of user expansion.

. : Partners were involved in 76% of large deals this quarter across both net new and expansion globally. SolEx performance continues to show steady year-over-year sales growth despite being slightly below our expectations in the seasonal third quarter. In Q3, our SAP partnership represented 25% of total revenue. Turning to margin. Our non-GAAP gross margin was nearly 80% with non-GAAP subscription gross margin of 82%. Non-GAAP operating margin was 16%, driven by a combination of gross margin performance, our mid-August workforce action and further operating discipline and efficiency across our business. Non-GAAP net income attributable to BlackLine was $38 million, representing a 25% non-GAAP net income margin. Our operating income, performance and net interest income drove strength on the bottom line.

We generated $37 million in operating cash flow and $31 million in free cash flow in the quarter with a free cash flow margin of 21%. Finally, we ended the quarter with $1.2 billion in cash, cash equivalents and marketable securities inclusive of our purchase of Data Interconnect in Q3. As we look ahead to the fourth quarter and recent business performance, we are balancing our expectations against what we continue to see in the market. As such, we are narrowing our full year total revenue guidance range to reflect these views. Given the workforce actions we took in August, combined with further operating efficiency and incremental benefits from higher interest rates on our investment portfolio, we are raising our full year non-GAAP net income guidance.

Turning to guidance for the fourth quarter, we expect total GAAP revenue to be in the range of $153 million to $155 million, representing approximately 9% to 11% growth, compared to the fourth quarter of 2022. We expect to report non-GAAP net income attributable to BlackLine in the range of $39 million to $43 million or $0.52 to $0.58 on a per share basis. Our share count is expected to be approximately 74.6 million diluted weighted average shares. And for the full year 2023, we expect that total GAAP revenue to be in the range of $587.5 million to $589.5 million, representing 12% to 13% growth compared to full year 2022. On the bottom line, we are raising our guidance for non-GAAP net income attributable to BlackLine to $133 million to $137 million, or $1.79 to $1.84 on a per share basis.

Our share count is expected to be approximately 74.4 million diluted weighted average shares. To close, we are focused on delivering our commitment through the end of this year while positioning the business for long-term success. I would echo Therese’s comments that our customers, partners, employees and investors are vital to this long-term success, and we want to drive results that benefit all of these groups. I’ll now ask the operator to open the discussion to take your questions.

Operator: Thank you. [Operator Instructions] Our first question will be coming from Rob Oliver of Baird. Your line is open.

Rob Oliver: Great. Good afternoon, everyone. Thanks for taking my questions. Owen, one for you to start. So, of the five areas that you’ve laid out of focus areas for improvement, starting with execution and down to customer retention, could you perhaps maybe talk a little bit about where you guys have made the most progress within those five so far? And maybe looking into year-end here and now its 2024, where you still have maybe the most progress to make. And then I had a quick follow-up. Thanks.

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Q&A Session

Owen Ryan: Sure. I think the – when you think about the five things, everything from execution to the messaging to distribution, the promise of the brand and retention, I think probably the area we’ve made the most success is in the area of the distribution network, particularly with our partners, because we’re spending a lot of time with them, trying to make sure they understand our products all around the world, that they’re comfortable to bring those to the market. They understand why we’re the best choice. And we’ve been able to not only build those relationships sort of in the field, as we said in the prepared remarks, but also at the most senior levels of these organizations to make sure we have institutional support in the major markets where they operate, as well as with their global leadership.

So I think we feel very good about that. You’ve started to see some positive signs in some of the information that we’ve shared already. Therese and I just finished a trip through Europe and met with a number of our partners over there to again continue to try to drive those relationships forward. It’s really going to be critical to our success. I think the area where most opportunity and it’s really point of an area of focus for the team and myself is in the area of retention. We work so hard to bring a customer into the organization and the reality is that sometimes we have customers that have just not been as well adopted as we would like. And we’re working really hard right now with our own professional services team in house as well as with our partners and our account management leadership to make sure that customer is beginning to achieve the full value and promise of BlackLine has to offer.

So that’s the area, that is going to continue to be a focus for the team and I will only be happy when that churn and attrition is down to zero.

Rob Oliver: That’s really helpful. Appreciate all that color. And then just a quick follow-up on the AR product noted multiple times in the script that kind of traction you guys are seeing there, which is great to see. Just wanted to get a sense as you guys work with those distribution partners to try to grab a larger chunk of that spend within the office of the CFO. As you look at the pipeline today and I know you guys just made the tuck-in acquisition as well. But sort of stressing AR here is, there a sense that that is rising to the top of importance in terms of enterprises and could be something that could play a larger role among the strategic products here as we head into 2024? Thanks again.

Owen Ryan: Yes, sure. I think that the purchase of data interconnect really did allow us to complete from end to end the solution that we offer in accounts receivable. And we feel really good about what we’re doing around that product, because we think that there’s huge market opportunity there. But also the other thing that is important is the economic environment has changed. And so all of a sudden cash collection, working capital is that much more critical when you’re starting to pay 7%, 8%, 9% refinancing. And so I think it’s a combination of us being smart about the investments that we’ve made to build out our offering and also the macro change in interest rate and the importance on working capital that are really helping us to be better positioned. And again, I think we’re very excited about what the opportunities are in front of us in that product.

Rob Oliver: Much appreciated. Thanks, Owen. Thanks, team.

Operator: Thank you. Our next question will be coming from Alex Sklar with Raymond James. Your line is open.

Alex Sklar: Thank you. Owen, I want to follow-up on your answer to Rob’s first question there regarding some of the retention initiatives that you spoke to today. Can you help frame kind of the timeline you’re expecting some of those actions to take hold? Have you and the team kind of been able to identify some lower hanging fruit or are these kind of more and multi-quarter, multi-year efforts?