Thursday Deep Dive: Blackline
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This week for our deep dive episode we discussed Blackline (ticker: BL). The company is a cloud-based software company with products meant for enterprise customers. Its goal is to automate menial tasks in the accounting department and alleviate stress at the end of the quarter.
Here is a direct quote from its 10-K: “Our secure, scalable platform supports critical accounting processes such as the financial close, account reconciliations, intercompany accounting, and controls assurance.”
History
Blackline has an interesting history. It was founded by Therese Tucker in 2001 with the goal of replacing Microsoft Excel with specific accounting software. The company pivoted (probably rightly so) to work on improving the process of the financial close. This occurred because Tucker asked accountants what they hated most, and almost all of them said it was the end of the quarter when everything had to be finalized for the official financial reports.
Blackline had no outside funding until 2013 when Silver Lake backed the company. They IPO’ed in 2016.
Industry and Competition
Blackline plays in a large industry (accounting) but is focused on building out its own niche (automated account reconciliations) within that market. With that in mind, it is tough to identify specific competitors, or how large of a market Blackline is going after. It is essentially creating its own along the way.
This is an example of the Peter Thiel “zero-to-one” philosophy, which is the idea that if you don’t want any competitors, create a new market to go after.
Some competitors to Blackline include Oracle’s Hyperion software and Trintech. The accounting software market is estimated to be $12 billion and growing at close to 10% annually, giving Blackline a nice tailwind.
Management
Tucker is transitioning out of the CEO role after almost two decades at the helm. She is moving to executive chairman while Marc Huffman, the current COO, is going to start running the company. Huffman was a sales executive at Netsuite, so he has experience selling to enterprise customers, which is Blackline’s entire market.
The majority of Blackline is owned by institutions. It has 13.44% insider ownership, and Tucker still owns 9% of outstanding shares.
Valuation, Earnings, and Balance Sheet
Valuation (as of recording):
EV/sales of 16.2
EV/GP of 20.25
No dividend
Unprofitable
Latest Earnings:
TTM revenue of $321 million, up 26% YoY
Customers up 3% QoQ
TTM FCF of $44 million
Dollar-based net retention rate of 108%
Balance Sheet:
$626 million in cash and securities
$395 million in convertible senior notes
$185 million in goodwill
Does Blackline Have any Competitive Advantages?
Ryan discussed how accounting processes are a pain in the butt to switch. Blackline has a renewal rate of 97%, indicating the LTV of a customer is quite large. However, this also indicates CAC is high too.
Ian talked about trust among accounting software companies. It is something Blackline has been building over time, and is important because the industry is the backbone of all these giant companies.
I discussed how Blackline being cloud-based gives them an advantage in a remote work environment. Since the software can be accessed from any device, accountants likely enjoyed using it more than the legacy “on-premise” solutions during the pandemic. It is also likely every accounting software solution will be cloud-first in the future, following Blackline’s lead.
What are Blackline’s Future Growth Opportunities?
Ryan wants Blackline to try and appeal to more start-ups. The company has a strong relationship with giant enterprises but hasn’t made much traction in the small-to-midsize market. The argument was that start-ups won’t be high paying customers initially, but that it would be good for Blackline to get in the door early.
Ian talked about entering/acquiring businesses in adjacent industries. He argued they could be like what Salesforce was to CRM, but in the accounting department.
I talked about publicly displaying the high ROI customers achieve when using their products. One example is the Red Wing Shoe Company, which saved $1.2 million, had a 4.8 month payback period, and generated a 379% ROI when adding Blackline. That is an impressive value proposition.
What We Liked About Blackline
We agreed that the high switching costs of accounting software and low churn for Blackline’s products make revenue predictable. Blackline’s products also have strong ratings on G2, showing that people like the product.
Lastly, the three of us thought the value proposition was strong, and that industry tailwinds should increase the company’s market opportunity over the next decade.
What we Didn’t Like About Blackline
There was a lot to like about Blackline, and the real concern for investors is balancing the expensive stock with how much the company will grow into the future. However, we did come up with a few lowlights. These include:
100% of its cash flow coming from stock-based compensation.
The fact that 80% gross margins may be misleading if sales staff (operating expenses) don’t get leverage at scale.
Slow sales growth relative to valuation and dollar-based retention rate not strong.
Links to Further Reading/Learning
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.
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