BlackLine Inc (BL) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2017 BlackLine Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

Now I would like to welcome and turn the call to Maria Riley with Investor Relations.

Good afternoon, and thank you for your participation today. With me on the call is Therese Tucker, Founder and Chief Executive Officer of BlackLine; and 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, 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 conference call. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially because the statements are based on our current expectations and are subject to risks and uncertainties. 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 laws.

Also, unless otherwise stated, with the exception of revenue, all financial measures discussed on this call will be non-GAAP. A discussion of why we use non-GAAP financial measures and a reconciliation schedule showing GAAP versus non-GAAP results is currently available in our press release, which may be found on our Investor Relations website at investors.blackline.com or on our Form 8-K filed with the SEC today.

Now I will turn the call over to Therese to begin.

Good afternoon, everyone, and thank you for joining us today. I want to begin by thanking all of you for your ongoing support and evangelism of BlackLine, which continues to bring us new referrals and customers. Please keep it up. We delivered strong third quarter results, achieving 42% revenue growth and outperforming on the bottom line. Our team has remained focused on executing our 2017 plan, and I am pleased to tell you that we are seeing progress against the customer service initiatives that we discussed last quarter. The dynamics in the quarter unfolded as we had expected. We added 113 net new enterprise and mid-market customers from multiple industries and geographies. I am thrilled to report that we now serve over 2,000 customers globally, and that's a new milestone for BlackLine. We continued to see strong demand globally. In particular, we were pleased with unseasonal strength in key European geographies. We continued to expand our business in APAC, where we signed our first customer in Hong Kong and secured our first Smart Close win for the region.

Now you know that I enjoy competition, and I love getting new customers. I'm happy to tell you that our win rates remained high this quarter and included our highest number of competitive takeaways. We also continued to see larger deal sizes driven by strengths from core products and growing sales of our strategic products. We saw improvements in sales productivity and pipeline conversion rates after we refocused and rebalanced between our core and strategic products to ensure that we have the necessary attention and resources to meet demand. And lastly, as you've heard me say before, our success at BlackLine is due to our focus on the customer. This is an area where we can improve and are constantly striving to get better. We implemented several changes in recent months to streamline and enhance our customers' experience with BlackLine. Overall, we have adopted a more tailored approach to meeting customer needs. And so far, customer feedback has been very supportive. We are pleased with how the team has come together to make progress in this area.

Throughout the quarter, we continued to make solid progress executing against our key 2017 initiatives. We saw strong demand for our strategic products, specifically Transaction Matching and Smart Close, with one of our strongest quarters to date with Smart Close. While the pipeline for Intercompany Hub remained strong, we did not close any ICH deals in this quarter. However, we made solid progress towards building the partner ecosystem, honing our internal skills and evolving our pricing strategy. It is still early days for this market, which means we have a lot of work ahead to develop and capitalize on this large growth opportunity.

We are continuing to work closely with partners who recognize the value BlackLine can bring to finance transformation projects. In fact, 7 of our 10 largest deals in the third quarter were signed in conjunction with a partner. I believe that all new customers are notable and would like to share with you a few recent customer wins that really stand out. First, a leading provider of digital banking products with annual revenue of $6 billion selected BlackLine to provide controls and structure, not only for account reconciliations, but for their entire global closing process. This company realizes that accountants need to be more than bean counters. They are committed to becoming a value-adding partner to the rest of their business, and BlackLine is a key part of that strategic vision. Ease of use was a major factor for this competitive switch, as was our unified cloud platform and deep partnership with SAP.

Second, a publicly traded pharmaceutical brand with annual revenue of over $21 billion selected BlackLine to modernize and automate the entire global accounting process. This customer is excited to leverage BlackLine's auto certification capabilities to drastically improve efficiency and reduce the days to close. A key factor in their decision was the flexibility that BlackLine would give them in managing their global rollout.

Third, BlackLine was selected by a Fortune 500 financial services provider with annual revenue of $24 billion to replace a competing solution. They were looking for ways to improve overall efficiency, and in particular, provide real-time visibility into their financial processes. The adoption of BlackLine is a key part of their CFO's overall strategic technology road map.

And finally, I would like to share with you an experience from a customer that I got to spend some time with personally. I met them at a marketing event in Europe, and they invited me to their offices. They were jazzed because they had gone live with both our core products and Smart Close in only 6 weeks.

The demand environment remains strong, and we are seeing tremendous enthusiasm for BlackLine's Continuous Accounting vision among customers, partners and thought leaders. As we continue to scale the business, we are building our team and bringing new expertise to the organization. Most recently, we appointed a new Chief Strategy Officer. We are thrilled that Tammy Coley has joined us from a longtime customer. Tammy has been an advocate of BlackLine for many years and has extensive experience with our products. In Tammy's new role, she will be instrumental in helping our customers achieve their full potential on their Continuous Accounting journey. We have also expanded our board with the addition of Kevin Thompson, the CEO of SolarWinds. Kevin brings valuable insight and expertise in scaling a cloud business. We are delighted to be able to tap into his experience.

As we approach year-end, we are pleased with our achievements in 2017 thus far, and we believe that we have made good progress on our newer initiatives in recent months. We appreciate your interest and support in our company and look forward to seeing many of you at our upcoming user conference in 2 weeks.

Now I'll turn the call over to Mark to discuss the financials.

Thanks, Therese, and good afternoon, everyone. As a quick reminder, with the exception of total revenue, all numbers mentioned during my remarks today are non-GAAP.

We delivered a solid third quarter performance, achieving better-than-expected revenue and bottom line results. Total year-over-year revenue grew 42% to reach approximately $46 million, driven by continued strong global demand for our solution. Strong international growth and timing of deals contributed to our better-than-expected top line results.

Key financial highlights include the following: We added 113 net new customers globally across both enterprise and mid-market. This brings our total customer count to 2,091 at September 30, representing 29% growth year-over-year. International revenue continued to grow in Q3, representing 21% of the total, up from 16% in the third quarter of 2016. The total number of BlackLine users grew to over 186,000, representing 19% growth year-over-year. We believe user growth is becoming increasingly less important as we drive other levers of growth in our business, including our nonuser-based strategic products like Transaction Matching, Smart Close and Intercompany Hub. That said, we are not entirely pleased with the rate of user growth this quarter, which was impacted by a higher level of attrition related to the customer-focused issues we identified last quarter. This also impacted our net dollar retention rate, which was 113% compared with 114% last quarter.

Now returning to the P&L. Gross margin of 81% remained strong. Total operating expenses improved to 82% of revenue. We continued to see the benefits of scale and operating leverage even as we increased investments in our global reach, software platform and demand gen and customer-engagement initiatives. While the timing of certain investments, such as office expansion, R&D projects and marketing events, to name a few, can fluctuate on a quarter-to-quarter basis, we expect to gain overall operating leverage on an annual basis as we continue to scale.

Our strong top line growth, solid gross margin and improved operating leverage allowed us to exceed our bottom line expectation. We narrowed our third quarter net loss to $0.6 million or $0.01 on a per share basis using 52.6 million shares. This compares to a net loss of $2.2 million or $0.05 per share using 48.8 million (sic) [40.8 million] shares in Q3 of last year. We ended the third quarter with approximately $110 million of cash and cash equivalents and marketable securities. We generated over $3.5 million in cash from operations. We invested a little under $4 million in CapEx, which included approximately $1.5 million for the build-out of our expanded corporate office space. This brings our free cash flow for the quarter to a negative $0.5 million.

Now I'll turn to our guidance for the fourth quarter and full year 2017, starting with Q4. Total GAAP revenue is expected to be in the range of $47 million to $48 million. This reflects a year-over-year growth rate of 33% to 36% compared to the fourth quarter of 2016. On the bottom line, we expect to be approximately breakeven for both non-GAAP net income and EPS. For modeling purposes, please note that if we report positive net income, our share count will be 56.5 million fully diluted shares versus 53 million basic shares if it is slightly negative. Additionally, we remain on track with our expectation to turn free cash flow positive in Q4. With our better-than-expected third quarter results, we are raising our outlook for the full year. Total GAAP revenue is expected to be in the range of $174 million to $175 million. This reflects a growth rate of 41% to 42% over last year. Non-GAAP net loss in 2017 is expected to be approximately $5 million. Utilizing a basic weighted average share count of 52.2 million, we expect non-GAAP net loss per share to be approximately $0.10.

Now Therese and I would be happy to take your questions.

(Operator Instructions) And our first question is from Bhavan Suri with William Blair.

Can you hear me okay?

Yes.

I wanted to touch on 2 areas. One was you've started shifting away from the first seat count -- first seat pricing basis for a host of reasons, obviously. In fact, obviously, because the efficiency you bring to the accounting department. Just a little bit more color on how that's progressing in Q3. What percentage of the mix was it? And then where do you think that ends up heading, say, over the next 2 to 3 years as a percentage of the overall revenue? And then one quickly on sales as a follow-up.

Sure. Thanks, Bhavan. Once again, in the quarter, Q3, we were pleased with the progress we saw in these strategic products, as you mentioned, the ones that we don't sell on a user base. It was one of our highest quarters yet in terms of dollar amount on the strategic products, so we're getting good uptake. We're getting good deal size and price increase or at least an increasing momentum in that. And then the user, it's just one of those growth toggles. So as we've said, we think the user becomes less important as a metric of growth. It just becomes one of those levers.

Got it, got it. We'll let you off the hook for not giving us long-term mix. And then Therese, turning to sales changes. You talked about some of the customer, some service issues being addressed. But you also addressed some of the sales impact, where you sort of said, "Okay, I'll have the sales force to sell some of the products every quarter while sort of maintaining some focus on some of the larger deals." I guess as you look at that, a, has that played out how you expect it to? And then, b, how is the pipeline for the larger deals, i.e. especially obviously Intercompany Hub?

Wow, that was like 6 questions, Bhavan. I would say that our approach to changing some of the processes within the sales organization is still ongoing, but I'm pleased with the results so far, okay. Large deals continue to make up a bigger share of our pipeline this quarter. And I think that we're getting better at handling those larger deals and the strategic deals, but I again -- you know me, I'm rarely happy with anything. I want it to get better. I want more improvements yet, all right? Now on the ICH, we continue to see a very strong pipeline. We continue to build demand with partners. We still think we're in a terrific position. We are evolving our price strategy further in order to make sure that we both maximize value and have it structured in such a way that people can get it done. So again, I think good improvements in all areas. I'm not happy with anything yet.

And our next question comes from the line of Brent Bracelin with KeyBanc Capital.

This is Alyssa on for Brent today. One of the things that was interesting is you said it was the highest number of competitive takeaways. Can you talk about what's driving that? Is it something to do with kind of your partnerships or some of your recent initiatives? Or help me understand what's going on there.

That's a really good question, Alyssa. I believe that the strategic nature of the BlackLine platform has played a big part in those shifts. The other thing that is very unique about what we're doing is we incorporate a number of different automation engines. And so in the one customer example that I spoke of, the ability -- the very sophisticated auto certification ability that we offer was a key point in that particular customer. And I think that our customers see our long-term thought leadership, our vision for where they can actually take their accounting and finance departments, and they like it. I mean, they've seen what Continuous Accounting is, and they bought into that. And so I really -- I regard it as more of a partnership than anything else.

Great. And then kind of similar question on the Smart Close. Obviously, you've been highlighting Transaction Matching and ICH. What was it that's driving the kind of inflection, I guess, in the Smart Close product?

Smart Close really is about automation inside of an ERP. I'm probably going to get cut off by my CFO here because I'm talking too much about the product, but it's really about automation inside of the ERP. And RPA, robotic process automation, has been quite hyped lately. So we see customers across the board looking for ways to actually utilize automation in a very concrete sense, and that's exactly what Smart Close gives them.

Yes. And I'd also add to that, it's 1 year from the date of the acquisition of Smart Close. And the sales motion, the partnering, the go-to-market, the training, all of those things are beginning to come together. We've seen it building in the pipeline. We know -- we knew there was demand. We were very excited about being able to put this product alongside our platform, and now we're starting to close some of those deals.

And our next question is from the line of Brian Peterson with Raymond James.

So wanted to follow up on the competitive dynamic and maybe from a different stance. So clearly, you referenced the competitive takeaways in a lot more deals. I'm just curious, what is displacing in those situations? Is that kind of a me-too product from an ERP? Or are you actually taking share from some of the pure plays? Just curious what you're displacing.

We have a policy of never bad-mouthing a competitor, and so we try not to name who the switches are from in any given situation. But I'm very happy about the switches.

Okay. And Mark, maybe a quick one for you. Just on the expense side, I would have thought that there might be a hit associated with the user conference that we're all looking forward to going to in a few weeks. But are there any offsets? Or just how should I think about some of the expenses in the fourth quarter?

Yes, yes. Great question. Thank you. We did target Q4 as our breakeven, and that marketing event is one of our most significant of the year. So we're still confident we can manage through that. Our Head of Marketing is listening. He's doing a great job. He's making sure that we have good sponsorship that's coming up in a couple of weeks. I think some of you might be attending, and we, again, remain -- that's our target for Q4, to break even.

And our next question is from the line of Rob Oliver with Baird.

First, I just wanted to ask about the SAP partnership and what sort of impact that had on the quarter and what kind of a driver that was. And then I had a very quick follow-up on ICH.

Yes. Again, we -- we're very happy with our partnership with SAP in the market. It ticked up in Q3 1 point to approximately 19% of our revenue through that partnership. And yes...

Okay. And then on ICH, Therese, I know on the last call, you spent some time talking about those sales changes, and you just, in response to Bhavan's question, did a good job on that. Just wondering, in terms of ICH, is it possible -- how much of the absence of deals there has to do with kind of the sales force being turned more towards the strategic products and less towards ICH? Or was it more just the natural market maturation after the reset last quarter? Just trying to understand that dynamic.

That's a great question. I think that, in general, it's a new market. And because of that, it's going to be a lumpy process. And it's less predictable than I would like, so I've sort of come to grips with that reality. Now on our sales force, we did do a rebalancing so that we made sure that we have the proper resources on our core platform where we have an enormous TAM, right? But we still allow all sales people to actually sell all products. And for right now, that's the right answer for us. We do have both internal experts and partners that we are collaborating with for the ICH deals. And so that is both the right approach because it's consultative, but it can also take longer to get all of the ducks in line.

And our next question is from the line of Terry Tillman with SunTrust.

Therese, I want to tell you something. If you're not happy, I actually am never happy, okay? So I just want to get that off of my chest, and it has nothing to do with you guys, either. I'll shut up now and ask my 2 questions. I'm going to be like the fourth person to ask about the competitive takeaways because it is an interesting dynamic, because enterprise software is supposed to be sticky, yet you're getting these competitive takeaways. I have a 2-part first question, Therese. It relates to, what is the sales cycle like? Does it end up taking longer? And secondly, does this say something about you'll see less greenfield opportunities in the future and it's going to be more rip and replace?

Oh, that's interesting. First off, I do not believe that the sales cycles are taking longer, okay, on competitive switches versus regular, all right. I have not seen that. Now what happens internally at a client before we get involved in a sales cycle might be a different issue, okay. Now in terms of greenfield opportunity, no. The greenfield is not lessened. But I will say that when somebody has a tool like BlackLine, right, they see the potential, right. And so they want the full potential of what a tool like this should do, and that makes it very easy for them to step up to BlackLine.

Okay, great. And Mark, not to leave you out of this. You did say something interesting in your prepared remarks about timing of yields that helped, so would this suggest maybe you had better-than-normal linearity? And if so, was some of that because maybe some deals -- a greater number of deals that didn't close last quarter that you got an early benefit from in this quarter?

Yes. Terry, as usual you asked and answered. So I think you got the gist of that. The quarter for us was exactly that. We got a good jump-start on some of the deals. We were happy with what we saw closed early in the quarter, so the linearity was a benefit to us, which generated slightly better results for the quarter.

Our next question comes from the line of Mark Murphy with JPMorgan.

This is Matt Coss on for Mark Murphy. And Therese, you mentioned earlier the tremendous enthusiasm for your Continuous Accounting vision. Maybe just asking here for a refresher. What's resonating with buyers? How are they implementing it? Is there sort of adoption of Continuous Accounting aligned with your vision of what it should be? And if you're able to, maybe in the examples, sort of ROI or anecdotal evidence of what customers are really seeing when they are sort of adopting decision?

That's a great question. That's almost like a soft pitch. Thanks, Matt. Okay. So Continuous Accounting is really about taking all the things that are rote and manual and applying a tool like BlackLine to make them go faster and make them essentially produce better results. And one of the things that we've really seen in our market is that every company out there knows that their close process is a horrible mess, all right. People work overtime. They're using spreadsheets. But the degree to which they connect that to the integrity of their financial results is the degree to which they immediately recognize the need for BlackLine, all right. So in other words, if a company has had a material weakness, they go, "Oh yes, we need that." If they think that closing their books is unrelated to the integrity of their financial results, then they don't see necessarily the need. And so number one, what Continuous Accounting does is it helps them connect the fact that they have all these processes that feed into their financial results. Then it's a story of timing, when you talk about bringing data in throughout the month and processing it as it becomes available so that you can start to look forward. You can process exceptions in real time. And then ultimately, when it's time to close the books, it's a much smaller set of things that have to be done at that. And ultimately, our customers would like to be able to have a point-in-time close. Now with some of the antiquated systems out there, that's not necessarily achievable in the near term, but it's the longer-term goal. Now should I stop there, Mark?

No, no, no. That's fine. Makes sense to me, yes.

Okay. So Continuous Accounting, all right, when you think about this, that ability to use software to automate anything that's available in real time is really what we're about. We're seeing an understanding and an adoption of this sort of idea and framework, not just from our customers and prospects, but also some of our partners. You may have seen some of SAP's marketing materials. They're starting to talk about Continuous Accounting. So as a framework for moving your operations into this century, it's really becoming sort of the go-to idea, and I'm excited about that.

Great. That's very helpful. And then just following up a little bit. So one of the reasons you acquired Runbook was to get -- it was a good acquisition. It was a good fit, and it also gave you some additional technical expertise. Are you seeing -- or what has been the benefit of that expertise, either to winning new deals or your R&D efforts or more interest in BlackLine from SAP clients? Just sort of how are those smart guys over there contributing? Help me understand a little more.

I like that. Smart Close, smart guys. That's good. They have deep expertise in the SAP development environments. And when you have software that actually automates the inner workings of an ERP, right, you need very ERP-specific expertise. And so that's been very good for us, both with the Smart Close product, but also for the interfacing that the core BlackLine platform does with the different versions of SAPs that are out there. So better interconnectivity is always good in any software project because it makes things move along faster, and it makes your customers go live more quickly. And then of course, that reduces project risk.

And our next question is from the line of Jesse Hulsing with Goldman Sachs.

This is Kevin on for Jesse. You talked about user growth being below your expectations. What's the level of user asset you would like to see going forward?

Well, yes. I don't want to give you that number for obvious reasons. I don't want to guide on it. But I will say that, for us, what's important are the growth drivers and users in the core, deal size, strategic products becoming more strategic to our clients and having a bigger footprint. All of those are important. So it's just one lever, and I'd rather not give you a forward number.

But I would like everybody in the world who's an accountant.

Yes, she wants 13.5 million of them.

Yes.

Got it. That makes sense. And can you just talk a bit more about your recent relationship with Deloitte? How is that progressing versus your expectations?

Well, actually, if you noticed in our earnings remarks that we actually worked with partners on 7 out of 10 of our largest deals this last quarter, okay, so that's essentially across all the partnerships. Now with Deloitte specifically, we have had some really good success in going to market with them. We recently did a 1-day seminar in New York that was for companies that were interested in how Deloitte and BlackLine can help them, all right, and help solve intercompany problems. And they have something called their digital finance transformation initiatives, right, the digital controllership. And we see that really creating a lot of buzz and being very well received. So we continue to go to market with Deloitte. We continue to build pipelines, and we appreciate all of our partners.

And our last question is from the line of Patrick Walravens with JMP Securities.

This is actually Natasha on for Pat. Could you tell us a little bit about how you're thinking about M&A?

Yes.

Yes, I can. So we were pretty vocal about this in the past, particularly in the IPO. We picked up the Runbook acquisition in 2016. We love the technology and the people. It was a good cultural fit, and we found that to be opportunistic for us. At the moment, we have no plans for M&A, but we're always...

We evaluate.

We evaluate, yes.

Great. I actually have one more question. Last quarter, when scaling your sales force, customer service took a hit. What were the gaps that you identified since then? Can you tell us a little more about the progress on that?

Yes, sure. We've made a number of changes in that area. And overall, I think it would be called a more tailored approach, all right. Number one is that we actually had -- we brought customer success managers into the customer relationship from day 1. We used to do that at the 1-year mark, all right. And the idea here is to have somebody involved with the customer for the entire lifespan of the customer, and that person's job is not to sell them something. It's to make sure that they're happy, all right. Number two is we sort of softened some of the rules around the transitioning of accounts. And if we have a situation where an account exec has built a terrific relationship with a company, understands their procurement process, understands their strategic road map, it doesn't make sense to transition that account away from that person and give it to somebody new that has to learn it all over. So we sort of softened those rules. And then number three, we're doing some nice specialization within the support department to make sure that we have experts across both different products and the deep technology questions that gets asked in order to better meet the needs of our customers.

And ladies and gentlemen, I would like to turn the call back to Therese Tucker for her final remarks.

Well, thank you, everyone, for joining us today. We hope that you continue to follow us and invest in us and be partners with us, and please send us all your referrals. We want them. Thank you.

And ladies and gentlemen, this concludes our conference. You may all disconnect. Have a wonderful evening.