Wednesday, January 2, 2019

A Current AIM Small Cap Equity Holding: BlackLine, Inc. (BL, $39.51): “Their Bottom Line Will Continue to Be Black” By: Nicholas Arco, AIM Student at Marquette University



BlackLine, Inc. (BL, $39.51): “Their Bottom Line Will Continue to Be Black”
By: Nicholas Arco, AIM Student at Marquette University

Image result for blackline

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

BlackLine, Inc. (NASDAQ:BL) is a leading provider in cloud-based software that automates and controls the companies’ financial close process. They operate in two segments: Subscription & Support and Professional Services. BL brings in 80% of their revenues from the United States.
• BL estimates their total core addressable market to be ~$18 billion.  

• BL recently announced that it expanded its partnership with SAP entering into a reseller agreement with the global giant.

• In Q3 the company reported a 109% dollar-based net revenue retention rate and has seen customers increase at a 25% CAGR since Q1 2015

• FY18 YTD gross margins are high at 82% driven by ~96% SaaS recurring revenues.

Key points: While company guidance puts FY2018 full-year revenues at about $227 million, BlackLine Inc. estimates its total addressable market to be ~$18 billion. Currently serving 2,500 companies, they believe there are 165,000 target companies with 13 million finance and accounting professionals that could greatly benefit from this software. These numbers suggest substantial growth potential for a company that pioneered this market.

In November, BL announced that they expanded their partnership with SAP in the form of a reseller agreement. SAP will now add BlackLine solutions to their pricelist, making it easier for their customers to benefit from BL’s product offerings. Part of BL’s growth strategy set forth by management is to focus on international expansion. SAP, a German based, multi-billion-dollar software company, offers BL increased access to SAP’s vast customer base and the potential to expand globally and further drive top line growth in foreign markets. They company also recognizes that this partnership will free up sales and marketing dollars to invest in further growth.

BlackLine reported a 109% dollar-based retention revenue rate in their last earnings report. Though this number has been slightly decreasing over the past couple of years, it is indicative of their ability to retain and grow existing customer relationships. Therefore, this strong number remains a significant financial highlight. BlackLine has seen their number of customers grow at a 25% CAGR since Q1 2015 and their number of users grow at a CAGR of 22% over the same time frame. On average, the company has added 95 new customers in each of the last three quarters. Additionally, customers generally pay fees based on the number of platform users meaning an upward trend in this metric indicates company growth. The upward trend in new customers and users should feed a continually high retention revenue rate, a good sign for investors.

Finally, BL experiences continually high gross margins. At 82% (Non-GAAP) YTD 2018, the company is able to realize the benefits low COGS due to a high rate of recurring revenues. It is noteworthy here that the previously mentioned SAP partnership is expected to have no impact on gross margin as the company will record revenue from that area at 100% of deal value.

What has the stock done lately?
Month-to-date we’ve seen the stock price drop 7.84%. While this may seem concerning, it is important to point out that over the last 30 days, the stock is up 1.2%. Therefore, the recent dip in its price can be attributed to a broader market selloff that especially hurt tech stocks.

Past Year Performance: BL has increased 13.73% over the past year. Furthermore, the stock is up 20.6% YTD. However, significant market volatility has continued to bring the stock down from its 52-week high in late September and it now sits closer to its 52-week low presenting investors with an opportunity to buy this high potential stock at a discount.





Source: Google Finance
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My Takeaway
BlackLine is a leader in cloud-based software to automate the financial close process, positioned well to take advantage of an $18 billion TAM and 165 thousand potential customer companies. BL has a laser focus on their growth strategy which has been expressed through their newly expanded partnership with SAP. This attitude will continue to drive top line growth in new markets. The types of products and services that they offer bode well for high gross margins as they are able to take advantage of high recurring revenues and expand their relationships with current customers at low costs of sales. Strong trends in customer and user growth indicate continued strength in their revenue retention rate. Overall, BlackLine has strong fundamentals that will continue to drive company growth. Due to recent stock market volatility, investors can buy this stock at a discount, with the expectation that it will rebound.




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