Good day and thank you for standing by. Welcome to the Q3 2022 BlackLine Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today. Please go ahead sir.

Good afternoon and thank you for joining us today. With me on this call is Marc Huffman 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, in particular, our guidance for Q4 and full year 2022 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 we make are reasonable, actual results could differ materially because the 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. Also, 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 GAAP versus non-GAAP results is currently available in our earnings release, which maybe found on our Investor Relations website at investors.blackline.com or on our Form 8-K filed with the SEC today. Now, I'll turn the call over to BlackLine's Chief Executive Officer, Marc Huffman. Marc?

Thank you, Matt, and good afternoon, everyone. Thank you for joining us today. BlackLine delivered solid financial results this quarter with revenue growing 23% year-over-year to $134 million. Additionally, we saw continued margin and free cash flow improvement due to further operating efficiencies and disciplined expense management. Turning to the broader macro environment, while we are experiencing some elongation of sales cycles, we are seeing healthy demand signals across our pipeline as customer engagement and interest remains high. Our strategic product portfolio continues to generate positive momentum, as solutions that drive high automation and efficiency become even more top of mind for customers. Additionally, our competitive win rates remained strong in the quarter, reaffirming the fact that our solutions continue to differentiate us in the market. As noted, customer engagement and top of funnel activity remains healthy as customers and prospects look to leverage software and automation to help them operate successfully to ring periods of uncertainty. One of the more relevant topics of conversations today with customers is on cash management and automation particularly solutions that optimize working capital, reduce cash collection time and provide incremental revenue opportunities. A recent study conducted by the Hackett Group, found that the 1,000 largest public companies had nearly $1.7 trillion tied up in excess working capital, capital that could be deployed more efficiently and drive improved cash flow. BlackLine's powerful accounts receivable automation capabilities enable our customers to reduce collection times and unlock trapped working capital. We recently released the new AR intelligence capability that leverages customers' payment behavior to provide valuable data intelligence to organizations on both the opportunities and risks associated with their customer base. Our recently announced customer attractiveness scoring capability, enables companies to identify customers within their base that have minimal risk, allowing for potentially higher credit limits,…

Thank you, Marc and good afternoon, everyone. This was a solid quarter for BlackLine with progress on many fronts. We're seeing healthy momentum in customer account growth an area we've invested in over the past few years. Our strategic product portfolio is generating strong interest from customers with healthy upsell activity across our base. Our competitive win rate remains strong and consistent. And finally, we're driving more efficiencies and productivity across our business leading to healthy margin expansion and free cash flow generation. Furthermore, we're positioning ourselves to balance successful near-term execution and long-term growth. As part of this, we're ensuring that BlackLine employees stay focused on supporting our customers and enabling their success. We're driving deeper accountability across the organization in order to deliver on time and on budget and in scope. We've embedded further cost and investment rigor across the company. We're extending our competitive positioning through investments in innovation and infrastructure for scale. And finally, we're optimizing capacity and expected market demand. Now let's review some key results and highlights for Q3. Total revenue grew to over $134 million up 23% compared to the third quarter of 2021. Professional services revenue growth accelerated in the quarter up 26% versus the prior year highlighting customer desire to unlock the embedded value that our solutions provide. Calculated billings growth was 18% versus last year and was up three points sequentially despite a two-point headwind from FX. Additionally remaining performance obligations or RPO was up 29% with current RPO growing 23% year-over-year. We added 57 net new customers in Q3 bringing our total customer count to 4050. Lower new customer deal activity in the middle market was the primary headwind to new customer growth in the quarter. Strategic product performance remained solid and represented 23% of sales driven by healthy…

Thank you. [Operator Instructions] First question I have is coming from Alex Sklar of Raymond James. Your line is open.

Great. Thank you. Marc Huffman, I know fourth quarter is kind of your big selling quarter. I'm curious, if you can update us on what you're seeing through October in terms of late-stage pipeline and bookings. Any change in the trend versus what you called out last quarter in terms of kind of the one point headwind that you called out for the sales cycles?

Yeah, Alex thanks for the question. Thus far our sales activity in Q4 has been strong. The pipeline has remained robust throughout. We have some good examples of opportunities which were larger opportunities that had previously had slowed down receiving additional scrutiny towards closing, closing, including one of the largest deals in our pipeline through SolEx. So pleased with that thus far. As to your other question about a one point headwind.

Yeah, I think that we had talked about a 2-point headwind from FX and from elongated sales cycle our expectation is that might be closer to 2.5 points hence the revenue guide down. However, as Marc said, at this point in the quarter the sales are going well.

Okay. Great. I mean, this quarter you showed a really impressive ability to ramp margins quickly when kind of the environment calls for it. And I guess, just given what we saw in third quarter OpEx spend. How are you thinking about kind of overall investments heading into 2023? Are you happy with the kind of the team in place given the opportunities in front of you?

Yeah. Thanks. We – the first part of this year the end of last year we did some really strong hiring rehydrate the sales force and put some scale into the organization with the expectation to taper in the second half. So in large measure this improvement in operating efficiency was expected. And then in addition to that of course, we've talked about operating discipline and rigor. Going into the fourth quarter in our guidance, you'll see that we're expecting to continue this. This is where we spent last year in generating significant amounts of cash and margin. And this is where I think our business can operate for a while. So, the answer is yes.

Okay. Great. Thank you, both.

Thanks, Alex.

Thank you. One moment for the next question. I have the next question coming from Pinjalim Bora of JPMorgan Chase. Your line is open.

Hey. Thank you so much for taking the questions. Marc Huffman, I just wanted to drill a little bit on the macro environment. Would you say the environment has taken a step down or do you feel like it's more of a continuation of what you saw last quarter? And in terms of the customer discussions that you're having, are you seeing people kind of start reassessing their 2023 budgets down? Any color would be helpful.

Yes. Thanks, Pinjalim. Hey, I would say it's a continuation. We're yet to see anything in the macro picture, other than deals getting the extra scrutiny that we've described previously. So think of that as down funnel velocity. Extra steps to close remains the most notable macro impact, if you will. The top of the funnel still remains strong. And like I said before, we continue to close business in all segments. With regard to what the impact is on 2023, our team is out in the market right now talking about a variety of things, as it relates to planning next year's participation and budgets with our prospects and customers. As you know, we have products that are high value high automation that provide great value in all different types of climate. So we're having those kinds of conversations with people. We're also having conversations about some of the changing dynamics, the SEC put out a rule recently about executive comp being tied towards a recall against weaknesses in financial reporting data. So our teams are out highlighting that capability to people how we can provide answers to those things. And I think the message is really resonating with clients and we feel like we're going to get our fair share of dollars associated in 2023.

Okay. Understood. One question for Mark Partin. On the billings, which is everybody's favorite subject, the -- it seems like it was flat sequentially, which is stronger than we have seen in prior years in Q3. But, I guess, is it possible to understand if you happen to close the deals that slipped out of the last quarter? Any way to quantify that? And the core timing headwind that you kind of talked about in prior quarters is that starting to reverse at this point?

Yes. Billings in Q3 were 18% up from a year ago. And that's with a 2-point headwind from FX. And so, traditionally Q3 would be a seasonal quarter for us. Last year, Q3 was one of our strongest quarters and we called it out, as being able to sell through that seasonality, which was positive. I think this year we saw the seasonality. Nevertheless, we still finished with an 18%, 3 points up from Q2. So it was an increase from Q2. And then, when you look at RPO, which was a 29% increase and CRPO which was a 23% increase. What we did in Q3, we believe, was really add to the overall backlog, the commitment that customers are transacting particularly in the seasonal quarter where we saw some aspects of weakness that Marc talked about. And that puts us on a trailing 12-month billing of 19%, which is a number that we pay a lot of attention to as it works out the variability from quarter-to-quarter.

Okay. Understood. Thank you. I’ll get back in the queue.

Thank you. One moment while we prepare for the next question. The next question that I have, it is coming from Brent Bracelin of Piper Sandler. Your line is open.

Hi. This is Mauro jumping on for Brent here. Thanks for taking our questions. So I just had two questions. The first one being around customer preferences for certain payment timing schedule as you talk to customers, are you seeing any uptick in customers asking for changes to the way that they do billings maybe any preferences away from annual prepay or anything that we should just generally have on our radar? And then I have one follow-up.

Yes. Mauro, we're not. We're not. In fact Q3 was one of our best working capital quarters in quite some time. I think it's to the value proposition the importance of customers that rely on our platform that they're paying on time. And we've had little to no request for extended payment terms like would have had in the beginning of COVID. This is – we have not seen that yet.

Okay. Got it. Thank you for that. And then last one for me. I think you cited some weakness, particularly with your mid-market customers. Is there any chance you could dig into that a little more? What exactly are you seeing or what might be causing the dynamic there? Thank you.

Yes. We did call out performance in the mid-market as being something that affected our new customer acquisition data. And so what I see there is again that sort of down funnel velocity deals getting extra scrutiny being pushed off a quarter wait and see type of attitudes on buyers. Not going away, not losing to competitors. Our win rates remain high just sort of stalling, dumbing up if you will down in the lower part of the funnel.

Got it. Very helpful. Thank you.

Thank you. One moment, while we prepare for our next question. And we have our next question. It is coming from Patrick Joe [ph] of Baird. Your line is open.

Hey, guys. Thanks and congrats on a great quarter. It's great to see some operational improvement just with the margins and expense controls. Just one question on the partner channel. Just wondering if you could provide some additional color on the channel outside of SAP. I mean you've announced some great new relationships in recent quarters including Accenture just this quarter. So just curious to hear about how these have progressed relative to your expectations just in light of the macro environment?

Yes. I think the – well the data that we talk about oftentimes, we attribute the participation of partner on what we consider the larger opportunities that we closed in the quarter and it was 70%. I think that's right where we like it to be. The non-SolEx ecosystem is important from a referral standpoint, from an advisory standpoint and a process engineering standpoint for customers were really being identified as those that are ripe for digital transformation. We had been working with Accenture casually out in the marketplace for a number of quarters. That success has led to this global agreement that we announced recently. So I think it's a validation of us as a market leader. Their ability to create it with their customers and advise them on things that are super critical in our customers' accounting infrastructure. And then lastly, what we're seeing right now is a lot of excitement around intercompany financial management. These are going to be larger, more distributed and complex global enterprises who have these really deeply embedded relationships with these large providers like Accenture, like EY, like Deloitte and they're really ramping up to support what they think is a big opportunity in the intercompany.

Operator, can we go to the next question please.

Thank you. One moment, while we prepare for the next question. And our next question will be coming from Daniel Jester of BMO. Your line is open.

Operator, can we go to the next question please?

I shall. Thank you. One moment. The next question is coming from Fred Lee of Credit Suisse.

Hey good afternoon gentlemen. Thank you for taking my question. And very excited to pick up coverage and follow the company from here on out. Very nice quarter considering the overall environment. I was wondering -- I have a few questions here. I was wondering if you could discuss a little bit about the rise with SAP's initiatives. They called it out this quarter and we called out the progress across all of their back office solutions that they provide within their entire installed base. And I was wondering, how that has impacted your SolEx business year-over-year it seems pretty consistent. SolEx as a percent of your total revenues at 24%, I was wondering if it's filling up the pipeline if there's the down of velocity you seek to what the overall impact has been this year versus last year as it relates to that initiative.

Sure. So great question. The RISE initiative is a big priority for SAP. I think that we are well-positioned and closely aligned with their distribution organization on that priority. There's a lot of great positioning about how you would utilize BlackLine and modernizing the accounting processes as they bring people into S/4HANA through the RISE initiative. We have had some great examples of customer wins and customer case studies that prove those points that we utilize frequently in joint sales activities with SAP, and I believe that is filling up our pipeline. Performance in Q3 and was seasonal. That's how we would describe the SAP performance with SolEx. And then we I think have a positive outlook on its contribution in Q4, which is traditionally a nice uptick for us. In terms of the SAP performance as a part of our business, you mentioned SolEx contributes a certain portion. I hope -- I want to make sure that we aren't -- we don't have a misunderstanding on that.

No, no that's right. SAP partnership revenue is 24% of the business. We call that out on disclosure and that has been flat year-over-year. And our goal as we continue to partner with SAP and see success in that SolEx partnership would be to drive that number higher not to see it flat.

Got it. Thank you. And my second question is I was wondering if you could talk a little bit about the various verticals where you're seeing incremental strength and where -- maybe where you're seeing a little bit more uneven demand?

Yeah. So the solution itself, our complete solution applies to virtually all industries. So it's a fairly horizontal deliverable that we have. That said, we are seeing strength in parts of the business. I think transportation logistics, of late oil and gas, of late insurance, financial services of late. I don't believe there's any particular macro trends that are driving those things, just somewhat notable things top of mind based on my awareness of where we're having great success. Overall I think the dynamic that we're seeing right now is some slowdown again back low-funnel velocity extra scrutiny on deals. It's happening sort of across the board pronounced and mid-market. Otherwise still continue to be closing business in all segments all industries.

Okay. And my final question is with regards to your automation solutions what's the mix of those automation solutions in your pipeline? And how are those solutions priced relative to your core financial close? Thank you.

Yes. I think, you're talking about our strategic products. No those are our highest automation highest value drivers. They make up a great portion of the pipeline. In times when we see customer expansion and keeping in mind the land-and-expand model is really one of the valuable parts of our long-term strategy. They make up a great deal of our pipeline as you would imagine. Those are generally priced on a consumption or a volume-based business. So as we introduce new capabilities, new use cases that drives consumption within customers. The customer gets great value through that high automation and we in turn get an uptick in their ARR which is one of the reasons why we have seen such a significant growth in the customers that pay more than $1 million for BlackLine. We're up to 49 of those. That's 58% year-on-year growth.

All right. Thank you, gentlemen.

Thank you.

One moment for our next question. The next question is coming from Adam Hotchkiss of Goldman Sachs. Your line is open.

Good afternoon and thanks very much for the question. Just wanted to dig in a little more on the last answer you had on the strategic product front. I think the cross-sell opportunity there is pretty clear. But could you talk a little bit more about the opportunity to land with things like AR given the focus on cash flow and cash management across the market right now. Is that something that's going to be impacting -- is impacting or will impact your new customer wins? And then I just had a quick follow-up.

Yes. We've seen a nice bit of land new customer wins from the AR products, specifically, cash application. And increasingly we're seeing a broader land with the broader AR portfolio. Pleased with the performance of AR year-on-year both from a new customer volume as well as a growth perspective. And yes I think you're right. These type of environments right now I think that really cash management is really going to resonate with clients. Not only broadly for those who are going through some level of digital transformation but also those people who want to take a small guy to the Apple which is why this coming week beyond the Black we're really focusing one of the tracks on the release of our modern accounting playbook for cash application our leading practices based on our experience that have proven deliverables that get people great time to value -- and a great value in a short amount of time. And I think that sort of bite-size approach in cash management focused times is going to really resonate.

That's great. Really helpful. Thanks. And then on the profitability front I just wanted to check in. Is there anything to call out incrementally on the sequential gross margin improvement other than the improvement on the professional services side? Because it looked like it was a pretty broad-based improvement there and wanted to make sure we understood that.

Yes. Thanks. We've had consistently really high gross margins in subscription. And professional services is a relatively small part of our overall revenue stream. So in the quarter to hit 80% was the benefit of a really great team effort from the professional services to drive higher margins through utilization and higher revenue contribution. But also another aspect of that is that we are undergoing a transition to the Google public cloud and that migration is ongoing. So in any given quarter we're expecting a one to 1.5 even two-point drag until we get to the end of that migration, which we've currently suggested would be the end of next year early the following year. End of next year it was about 12 to 15 months away. And that's when we would get back that one point to two points and be materially on the new migration of public cloud. In this case in Q3, the team again did a great effort the level of migration the pace of play the efficiency that they operated in was very good. The accountability they had for driving down cost, while maintaining efficiency to drive over our customers was very positive. We will see in future quarters as we go through the migration plus or minus on that 80%. We would expect to continue to have a drag on gross margin around 79% to 80% until we can get to the end of the migration.

Really helpful. Thanks so much, Mark.

Thank you. Appreciate the question.

Thank you. One moment while we move -- prepare for our final question. Our final question is coming from Daniel Jester of BMO. Your line is open.

Hey, good afternoon. This is Kyle on for Dan. Thanks for taking our question. Could you maybe touch on the demand you're seeing in your AR and intercompany solutions? And then maybe how you're thinking about the integration of the intercompany product in 4Q?

Yes. You bet. Thanks for the question. So both of those areas, I would call out as strength from a strategic product contribution in Q3 performance-wise. So quite pleased of those both. As I mentioned previously, I think that cash management in these times is get a topic that will really resonate with clients of all sizes and all complexity. And so we'll be really focused on that. We've got a number of deliverables that have just come to market the modern accounting playbook for cash application as well as our customer attractive to this scoring, which I think will create some really great opportunities for real-time visibility into credit exposure risk and opportunities for clients. In terms of the intercompany solution, we're really excited about where this stands in the product pipeline and portfolio. We'll be highlighting that bunch next week at our conference beyond the black. We've traditionally had a great intercompany business that was focused on identifying and remediating out of balance transactions. We're now with the intercompany financial management bringing together the capabilities from 4Q and the acquisition with our existing intercompany capabilities. We'll be able to take people beyond that sort of concept of 0 just hitting the intercompany to balance out to zero and have them focus on how they can create value with the automation of the tax rules, the billing routes, et cetera. So, exciting innovation. I think it's going to really resonate with large complex multinational organizations who are under more pressure than ever right now to maintain compliance globally.

Thanks, guys.

Thank you. That concludes our Q&A session for today. I would like to turn the call back over to CEO, Marc Huffman for closing remarks. End of Q&A:

Just to close up, I want to thank you all for your interest and support of BlackLine on an ongoing basis. We know that you meet with a lot of executives, CFOs, et cetera. And when they're interested in learning about modernizing their accounting, we hope that you send them our way. Thank you all [Audio Gap] great evening.

Thank you all for joining the conference call today. That concludes today's conference. You all have a great evening.