Conference Transcript - BL 2026-06-02

Rob Oliver, Analyst — Baird

Great. Well, good afternoon. Thank you for joining us for the afternoon sessions, day one of Baird's Global Consumer Technology and Services Conference. I'm Rob Oliver. I follow software here at Baird, and it's my pleasure to have the management of Blackline with me to my far left is CFO, Patrick Villanova. And to my immediate left is Owen Ryan, CEO. Good to see both of you guys. Thank you very much for coming. be back. Matt Humphries is also here from IR and does a lot. He's actually in the hottest sector in America right now, aerospace and defense. So you grab him on the way out and learn about pipeline because it's got to be good. But I guess I'll start. Owen, you guys are an enterprise standard for large company accounting. You've established yourself as the leader and you've got an unbelievable customer base, some very, very loyal. Just to start, what's going on in accounting departments right now? Like what is, there's AI, are, you know, are, are, have people stopped hiring accountants? Are, is AI replacing accountants? Like just to level set the room, what, what's, what's the environment at your customers right now? So we can better understand

Owen Ryan, CEO

what you're selling into sure i think there's there's two pieces to this so every finance and accounting team right now is trying to get their arms around ai in their whole organization because the amount of spend that that is going on is is astronomical and the reality is almost nothing's delivering a real roi and i think that's become a bit of a challenge for cfos and controllers like why are we spending all this money how do we get real real return how do we get something that's sustainable and gonna you know last the way we would like it like it to last so you're certain to see some of that I think in in within the finance and accounting functions themselves I'd sort of probably split it a little bit between the finance side versus the accounting side in the accounting side which is where we spend you know most of our efforts with our customers we're not seeing layoffs we're not seeing a lot of the hiring I think people are trying to figure out what to do with ai where they can use it um obviously you know you as patrick likes to say you have to be 100 right in what what we do for our customers so that still is is top of mind and so what they're those customers are asking us for is to work with them on the art of the possible where they can use ai what are other big companies looking to do and then what can we co-develop together that makes sense, that we can bring to their organizations. Most of the companies are not looking to be on the bleeding edge. Everybody wants to know what everybody else is doing. Obviously, that's because of sort of the risks internally to the management team for what they would do, the internal auditors, the external auditors, and the regulators. There's a lot of constituencies that all want to make sure that the capital markets are producing accurate, reliable financial statements. I tell people today, $54 trillion of market cap runs through Blackline every day. Most people wouldn't know that, but that's a pretty big number. And so we're seeing an acceleration in conversations, but a thoughtful pacing of decisions in trying to move forward. And even where we have customers that have been on our early adopter program or have gone live with certain things, They still are sort of parallel testing to make sure that nothing goes the wrong way. They're keeping sort of backups for everything. And so I think it's going to be a nice, cautious rollout, but it's inevitable that it's going to continue to move forward.

Rob Oliver, Analyst — Baird

Patrick, maybe I'll ask you the question since you're in the extremely unique position of being at accounting and finance software company, but also being CFO yourself. And so you are managing this internally from your perspective. How are you, what's the environment like for you right now? Are you calling vendors? Are you consolidating vendors? Are you thinking about AI? Where are you in that trajectory?

Patrick Villanova, CFO

Yeah, Rob, so, I mean, we're obviously thinking about how we can use AI responsibly within finance and accounting. You know, currently, as we stand here today, there's probably a little more use cases in finance because that's more, that's a predictive model, and you don't have to be 100% accurate all the time. You've got to be pretty accurate, but not 100% accurate, because the future, it's forecasting. But when you look into an accounting department around the country, especially when you're a public company, you know, the quote that Owen just said that I use all the time, if you're 95% right in the accounting world, you're 100% wrong. Literally, that's a rule. I mean, if you're 5% off your financial statements, that's a restatement. That's a lawsuit. People lose their jobs. So there's asymmetric risk when you talk about using AI within my world, my field. And so the way I think through that from a risk aversion standpoint, trying to build it yourself or trying to go your own way just to save a little bit of money, it's honestly not worth it. So, Rob, when you ask what are we seeing, because I sit really tight with the GTM motion. I'm a user of our product for over 10 years. I'm an accountant by trade.

Rob Oliver, Analyst — Baird

Therese used to call you out as the person who knew more about the product within Black Lines, so more than anything.

Patrick Villanova, CFO

It's a high bar, but no, I appreciate that. But yes, I'm always out there trying to sell, talking to practitioners, explaining to them how to think through this, and they're looking to us. We've been doing this for 25 years to the day. Today's our anniversary. We have the brand recognition. We have the trust. They know our customers, our prospective customers, know that we're going to do this prudently with guardrails. But we also know that AI is the future. You have to just go about it in a way that's responsible and keeps the human in the loop.

Rob Oliver, Analyst — Baird

So I think what I'm hearing from you guys is probably not surprising because when I look at my career following the office of the CFO and the financial suite, it tends to be really risk-averse. and sometimes that can be frustrating to investors because it can be slow to move. They start to do the work and they're like, wait a minute, what's Cartesis? Was that 1997 and was that what bought by SAP? So people are trying to figure out why does this software still exist within a major organization which just tells you the barriers to change and how long it can take. Is that a positive right now for you guys? Is that an opportunity? Because you guys have done a lot of innovation with your Verity platform. Really impressive product, platform, really good early indicators and certainly some of the customer testimonials and sessions you guys have done to help educate us on it. Does that slower pace of uptake that is normally a headwind for your market become a positive because it gives you more time to innovate and be there and be the AI solution as opposed to be disintermediated?

Owen Ryan, CEO

Yeah, for me, it is a bit of a tailwind. I think the way the market is unfolding, we're seeing certainly much more, not just the finance and accounting teams being involved in the decision-making, but CIOs are much more involved in the conversation, and legal is much more involved in the conversation as well. And I think that plays to our strength, because we're used to dealing with mega enterprises, large companies, where we know we have to be able to talk to those different constituencies. and the ability to show what we're doing as a company with our customers, with our partners, and bringing that to bear in a thoughtful way resonates with our customers. They appreciate the fact, like, you know, I took a beating last year. Like, why are you guys not out further? Some of these other mid-market companies are out there and they're bragging about their AI. I'm like, yeah, but that's not the customer base. that we're serving, and we have to, we can never be wrong. I mean, I think, you know, that's probably the most important thing that we think about is we've got to make sure that whatever we put in the marketplace, our customers can rely on, the auditing profession can rely on, the regulators can rely on. And so that works to our advantage because we're a safe choice in the eyes of our customers.

Patrick Villanova, CFO

And, Rob, to build off of that, when you talk about AI, it's absolutely a tailwind for this company, and we're already seeing some of those proof points. This might be a segue into another part of this conversation, but last year, in January of last year, we launched a new platform pricing model. And at the time, the big selling point was you get unlimited access, unlimited users. And that really resonated with new logos. We're seeing now over 90% of all new logos go to the platform model. But in our Reynolds base at the time, the uptake was a little slow. In fact, we messaged it was a little bit behind where we thought it would be this time last year but what happened in the second part of last year we launched studio 360 and just for everybody that is uh pretty much the connective fiber that's the foundation of our platform that holds all the solutions together one source of truth one data set that's the basis for our innovation because to release an agent into this environment it can only work with one source of truth one source of data because every source of truth an agent will come back with a different answer, and there's only one right answer in this world. So when that was launched in the second half of this year, we saw an uptick in the amount of customers that moved to the platform because it went from an unlimited user's conversation to a product-led conversation, and that was a tailwind. And so we're already at 13% of our eligible ARR on platform pricing. We said we'd get to at least 25% by the end of this year, And when we achieve that, that will mean that over 50% of our customers, ARR, will be consumption only. It will have no linkage to user basis. So we're seeing this as a tailwind, and there's proof points already out there in terms of how we're performing.

Rob Oliver, Analyst — Baird

And when you look at Studio 360, I remember about a year and a half ago or so when you guys, maybe a year and a half ago, When you guys rolled out the targets, I grabbed one of your board members at the event and said, why does Blackline have the right to win in this broader office of the CFO if they're an expert in accounting? And he looked at me and said, we got the best data. We always have had the best data. And that's something that say the FP&A vendors don't have. And I heard you say something interesting a minute ago, Patrick, where you said on that probabilistic versus deterministic debate, which is in the market, which I don't think those were your exact words, But that's something you're hearing a lot of software bulls really posit out there is, hey, you're missing this, right? And so I guess the question is how important in the decision that your customers are making, current customers, to convert to the platform, how much of that is a realization that that data is important throughout the office of the CFO? In other words, are you gaining mindshare within that broader suite?

Patrick Villanova, CFO

So that's a huge part of the conversation, because that data that sits within Studio 360, it sits in the data layer, essentially, that has been audited, it has been reconciled, if you're a public company, it's SOX compliant, you can trust that data, you know that data is accurate, and that's when you can make that next step and release agents into that data that then can perform the accounting functions that you need to perform at levels of automation, this industry has never seen before. But it all starts there. And, Rob, you were highlighting earlier the easiest way to think through this. Probabilistic, you're looking forward. You're making a prediction. You're never going to be 100%. So you can use probabilistic AI in the finance forecasting world. Deterministic, you're looking backwards. It's already happened. There's only one right answer, and that's why deterministic AI, which is what we use, is necessary in the profession.

Rob Oliver, Analyst — Baird

I should have mentioned earlier, you can send in questions as soon as an email address there in front of you and I'll try to get any questions or if you want to raise a hand we're also gonna have a breakout session afterwards so you can feel free to come over to ask questions of Owen and Patrick so let's just just to put a final question on that platform model transition new customers really exciting overwhelmingly coming in on that which I think makes a lot of sense current customers it's been a little up and down but it sounds as if you guys are now at the point where you're having enough of a dialogue and showing enough of innovation where you feel pretty comfortable about that up into the right trajectory relative to those customers yeah I think that that's fair I think the the

Owen Ryan, CEO

interesting that we've seen so if you didn't know black line and we went out we talked to you for platforms we had a very high close rate where customers bought the platform is a good ninety four percent last quarter or something like that so companies are really coming on there what's been interesting is the better adopted a customer the harder it has been to convince them to switch to the platform because incrementally they're like we need to see more ROI on that so that's why the innovation and the roadmap has become so much more critical and the conversations about them not only for where we are but where we're going because our customers and we're talking about what we're doing that's why we're so focused on remaining performance obligation we're looking for customers that are committing for a longer term with us because then we know they're on that journey and will be part of the evolution of our business

Rob Oliver, Analyst — Baird

for what we're doing with them that's interesting so if so if you've got a customer that's like you know any of the Hershey's or whatever the companies that have been at your user events for years and that you know the quest they're all in on you those are harder to move but if you're if you've been battling to get someone to expand this is a moment to have that strategic conversation so that customer is biting first yes interesting and it's it's so

Owen Ryan, CEO

interesting right because these are the customers that run on blackline but use 20 of the platform instead of 90 and and but what's helped helped with ai and the move to platform is we've been able to raise the conversations higher in the organization and because of ai people have gotten much more attention accounting isn't the sexiest thing in the world sorry patrick um but it just doesn't resonate and i'm an accountant too but it's it's just um it doesn't have that same cachet is sort of what you might do from an fbna perspective so all of a sudden now though we're

Rob Oliver, Analyst — Baird

getting much more attention from cfos got it great um let's move to some of the economics of the this transition um you know the there's the potential for an uplift here on uh on on this as we've seen with many model transitions over the years. Can you maybe help us understand those economics and where customers are experiencing that uplift? They're not expanding seats. In some cases, maybe they are a little bit with the usage. How should we think about that? And is it because of just extended usage within the organization because the barriers to adoption have been reduced? What's the right way to think about that?

Patrick Villanova, CFO

So it's several fold in terms of why, you know, we feel so confident that this is a tailwind to growth. So let's just start with this platform story that we've been talking about. What we're seeing on day one when a customer moves to the platform is anywhere from a 10 to a 40% uplift in ARR. Now that does pull user ads forward, but we have done the math, we've done the modeling, and we know that whatever uplift that is, that more than offsets, you know, user ads in the future. And then that sets, as I said before, the baseline. That yields two benefits. One, our historical number one source of attrition, we're losing users. As you said earlier, when you have a very well-adopted customer that's been with us for a while, they over-rationalize their seats, they limit the number of users, so the better we get at serving that customer, the less users they have. We've taken that off the table with this platform story. Second fold, when you are sold the platform, you receive a minimum number of agents, basically enough to test that it works. That's intentional. It's part of the price. That allows a department, a finance department, to test those agents, to get internal audit comfortable with them, to get external auditors comfortable with them, to prove that they work, to run their current manual processes side by side with these agents and prove that the outcome is the same every time. That's intentional. You have to get them adopted on those agents, and they'll do that on a test basis or in a sandbox basis. Once they get comfortable with that, which in the public company sphere is about two to three quarters, they will take that testing and apply it to their entire population. That's when the tiered model kicks in. The more you consume of those agents, there are multiple tiers up, just like our current matching in journals products today, that's more revenue for us, that's higher ROI for the customer, and that's where we have the third monetization event. Day one uplift, user mitigation, your user attrition mitigation, and then increased consumption. That's why we feel so confident that this is a tailwind.

Rob Oliver, Analyst — Baird

And that certainty that, you know, my use, you know, help us understand how the customer can know, because we were talking a little bit beforehand, and knowing about some crazy token usage and people moving beyond tokens that are just in experiment mode. And obviously we're all hearing about token maxing and all that. But like, is there an element where Blackline as the AI, the vehicle for AI delivery and the platform for AI delivery within the accounting and financial suite also is your load balancer essentially around those token that token pricing and understanding of you know what your usage is and how it fits into so you don't get wildly out of skew yeah sure

Owen Ryan, CEO

but I think the thing that again just in talking to CFOs controllers I mean tokenization has become a four-letter word for a lot of CFOs and so what what they're seeing is sort of cost spiraling out of control without clear ROI I think what what they see with us we're able to demonstrate is pretty good cost predictability certainty which is what CFOs are looking for and I think that's been a really attractive part of the conversations we've had with customers we sit there a number of them say should we build this or should we buy it from you we walk through the math and then they pretty quickly figure out you know you want to you want to buy a purpose-built solution that has all the safeguards controls the continuing innovation the maintenance of it that you don't have to do at a much more certain cost price than you're going to get if you're trying to do this yourself. But I want to add to that.

Patrick Villanova, CFO

I mean, just to be very clear, Rob, we don't sell tokens. That's not what we're referring to. We sell an outcome. We sell the automation of a financial transaction. That's critical. You're not going to be able to sell to a person like me saying, we have no idea how many tokens you're going to use and we're going to charge you for it. That does not fly in a CFO's world. What I do know, though, or what controllers and CFOs do know, we know how many journal entries can be automated. We know how many reconciliations are done a month. We know how many match cases that you have on any given monthly close. We know that. So you sell that outcome, and the way we've designed our products is that, okay, we know that that outcome is worth that much more than what we currently offer in an adjunct world because it provides that much more speed, that much more savings in terms of the number of people it takes to exercise that transaction, and then you're willing to pay more externally as a CFO for that outcome. And so then we take that, and in conjunction with our product team, we say, how many tokens internally do we have to consume to drive that outcome? And that's how we ensure we don't see margin erosion, which we have not seen yet, and there's no indication that we will because we're very prudent about how we design these products to make sure that the revenue we get is in line with the underlying cost to us. We're multimodal, and if we ever get to a point, which we've had a couple times, token consumption goes up, the revenue doesn't justify it, we go back to the drawing board and say, let's redesign it in a more efficient way.

Rob Oliver, Analyst — Baird

Got it. Very helpful. So stepping back, it's interesting. I mean, ServiceNow was here before, and they talked about increased AI usage and increased seats. You guys are seeing increased adoption of users throughout the organization as well as, you know, that model of step up with AI, Atlassian's talking about that too. I think everybody's ultimately talking about down the road we're going to be less seat-based, but right now companies that are innovating and delivering to customers seem to be growing both their AI usage and their seats, if I may make a bold statement. So it's an interesting time, and it's certainly counter to the narrative that's out there in the market. We only have about seven and a half minutes left, so I wanted to touch on a few things. I think the day you guys get platform pricing announced at SAP with Solex, your stock's going to rip. So how should we think about that? You guys have this very powerful pricing model, which has been tested for success within the financial suite with other companies out there, and which clearly is getting adoption with your customers. You've got a big partner that knows you really well and that has been sourcing a lot of deals for you guys for years. and you guys have been delivering a lot of value for them. When you go to Sapphire, you see some of the best S4HANA success transition stories. They're black line customers. So how do you get, I'm not expecting a date here, but how does that process happen? How should we think about handicapping that timeline?

Owen Ryan, CEO

So those conversations are ongoing right now. So we have been working with them to sort of change the pricing. There's a whole bunch of things we do with SAP, as you can imagine. But this has been a big issue for customers. They want to go to the Blackline platform. Remember, right now, the AI that Blackline offers on the agentic side is not necessarily available to Solex customers. And the Solex customers are the ones that are going to force the change. So I've gotten notes. I've shared them with leadership over at SAP. But we're working very diligently together. They are a phenomenal partner. or I can't ask for any more than they try to do with us. And importantly, just as we're continuing to move forward, not only on...

Rob Oliver, Analyst — Baird

This is a webcast.

Owen Ryan, CEO

You can ask for platform pricing, too, Owen, if you want. Yeah, all right. Also, making a lot of good progress on the AI initiatives together, right? So they've got their Juul capabilities. We have our Verity capabilities. We have a memorandum of understanding we're working through. I think we've got three, four, you know, working sessions in the next six to eight weeks to continue to try to move the AI narrative forward together, making sure we're, you know, sort of in the right swim lanes, but also bumping up against one another to make sure we're not missing any opportunities out in the marketplace.

Rob Oliver, Analyst — Baird

got it Patrick you guys have been very clear there's been churn in your business but you guys have talked about that sort of like churn that has been purposeful to kind of you know and even Owen you articulated a few years ago there's some customers that that probably aren't the right fit for us I think your enterprise churn is your retention rates are still high 90s right so when but Street still hates it so when do we start what do we get we're moving past that when do we start to move past you know an anniversary that churn to the point where those numbers start to look better yeah i think you're referring to our

Patrick Villanova, CFO

lower mid-market churn yeah so you know during covet we sold to a customer cohort that was lower mid-market you know generally speaking five to ten accountants they weren't scaling they weren't growing they didn't have the infrastructure you know to partner with us or go on a multi-year finance transformation uh these aren't customers that are going to go public at any point in time or anything of that nature but we sold to them nevertheless and then when you know owen took over it was uh you know second quarter third quarter 2023 we made a strategic decision to stop selling to these customers they weren't implementing they weren't adopting they weren't growing well most of our customer contracts are three years so that cohort of customers have been working its way through the system over the last three years and that three-year anniversary is coming up this summer so we see in the numbers we track our customers by cohort we track them by region and we see this working its way through the system and that's why we feel confident that that arc of churn will turn downward for that lower mid-market uh in the second half of this

Rob Oliver, Analyst — Baird

year really helpful thanks um we've had a few questions come in we're going to be out of time but one is on capital allocation how should we think about patrick capital allocation for you guys um you know whether it be m&a obviously buying back stock what else you know how should

Patrick Villanova, CFO

we think about that yeah still our number one investment it's ourselves you know the innovation that we're doing everything we're talking about here in terms of our agents the investments that we're making internally uh how much we're putting into pnt how much more we're getting out of it from an innovation standpoint that is the most efficient way to drive the business that's going to drive the most growth uh per dollar spent from a capital allocation standpoint it all starts with product and innovation in terms of our number one priority. Number two, you know, we are always canvassing out there for potential M&A in terms of what we could tuck into our current tech stack, what we could tuck into our current platform to augment it, to offer more to the office of the CFO, to bring capabilities that maybe would be too costly or take too long to build, then we go buy it. And that's kind of the decision-making framework we use. You can almost always build something cheaper, but it takes time, and it requires a reallocation of resources, so we evaluate that internally. And then third, we have been buying back stock. That's a third use of our capital allocation. We continue to buy back stock, and we evaluate that on an ongoing basis and continue to be opportunistic as the market conditions. Great. Another, in the time wave

Rob Oliver, Analyst — Baird

remaining, another exciting, I think, potential unlock, and I don't know how meaningful it is, but feels to me like it's an unlock for you guys is around that FedRAMP opportunity because, you know, and talking to Matt over the years and also going down to D.C. twice a year to go to ServiceNow events and other events, we have come to appreciate over the years the opportunity there and particularly with you guys because you guys have a lot of big customers there but as I understand it, you only get half the business, right? Because you can't get the government side that's classified or whatever. So there's this unlock when you get FedRAMP. It's not just like most companies I follow get FedRAMP and have to go out there and start dry powder and start to pound within D.C. You guys have these customers already in some cases, if I understand correctly. So help us understand that potential unlock and how should we think about timing.

Owen Ryan, CEO

There's two pieces to it, and you've nailed it. One is we have a huge aerospace and defense business, both domestically as well as internationally. and because of the way government is set up we could only sell to half the organization if you will right the commercial side of the aerospace and defense but not into into the government so as we move through aisle two and on our way to aisle four that is going to open up that part of the marketplace we've had a couple smaller wins in their regard already but that should continue to accelerate and then one of the things we're really pleased about is the progress we've made with building a pipeline um in the federal government space obviously the third quarter is the quarter where it's you know you'll start to see some success but as we start to you know work with um the department of defense agencies um intel agencies that have to have that higher requirement we're seeing a lot of interest but government doesn't move at the speed of the commercial markets and that's the one thing that you know we'll see some progress i think later this year but our real bet for this is in 2027 when you're gonna see I think more progress and listen the government's at the point now for most these departments and agencies have to be quote auditable and they all fail their audits and what black line is going to do is help them solve that

Rob Oliver, Analyst — Baird

problem which we were excited about great no and Ryan Patrick Villanova from black line thank you guys both very much appreciate it thank you we also will have a breakout so if you want to come on over for the breakout session please do that.