This accounting solutions company is forecasted to grow at an annual rate of 50% over the next five years.
Blackline, Inc. (BL)
From Cabot Stock of the Week
BlackLine is a Software-as-a-Service (SaaS) company with products for finance and accounting departments. Companies use the software to perform a variety of processes, including account reconciliation, intercompany accounting and the financial close, a recurring process that takes raw financial data and turns it into the audited financials that senior management reviews, that gets submitted to the SEC, and that becomes available for investors like us to view.
Prior to BlackLine, much of this work was done manually, using spreadsheets. That is a cumbersome, inefficient and error-prone way to do it. BlackLine has come up with a better way. The company’s cloud platform helps automate the process, pulling in data from banks, ERPs (SAP, Oracle, NetSuite, etc.), transactional systems and more, then running it through the appropriate BlackLine products, which can be set up with internal controls.
The idea is to transform a quarterly, recurring process into a continuous one so that accountants, controllers, managers and auditors can have real-time visibility into the state of a company’s books.
BlackLine was founded by Theresa Tucker, who previously worked as Chief Technology officer for SunGuard Treasury Systems (acquired by FIS in 2015). In the early days the company sold on-premise software, then made the leap to cloud-based software in 2007. That was the year the first iPhone came out and it was good timing; companies wanted to move away from expensive desktop software toward software subscriptions, especially when the recession struck.
Private equity firms took note of BlackLine’s success, jumped in, and the rest is history. Today, BlackLine is going after a big opportunity with over 165,000 global companies that could use its software. It has been working on expanding internationally, where there are many untapped markets, growing a partner network, including with SAP, and developing new products, including an Intercompany Hub Product that helps streamline intercompany accounting.
In Q4 2019, reported on February 13, global demand was as strong as ever as the company added 153 net new customers, bringing total customer count up to 3,024. That translated to 267,621 users and a net revenue retention rate of 110%, meaning that current customers continued to increase their spending with Blackline in Q4.
The bottom line is that Blackline grew revenue by 27% in 2019 and by 29%, to $80.3 million, in Q4. Fourth quarter results beat expectations by $2.4 million, and that was the fourth consecutive quarter of accelerating revenue growth. Adjusted EPS in 2019 was $0.37 and Q4 2019 adjusted EPS was $0.14, which beat by a penny.
Looking forward, management issued 2020 guidance of $347 million to $352 million, implying just over 20% growth, and adjusted EPS of $0.45 to $0.48, implying growth of around 27%. The wild card, of course, is what the impact of the COVID-19 pandemic will be.
Guidance was released in the second week of February and the world has changed dramatically since. While BlackLine’s solutions should continue to be used, there is risk that new deals will get pushed back as companies scramble to conserve cash and address the immediate problems resulting from the virus.
Still, with the stock roughly 40% off its previous high and looking to try to get back into its trading range from 2019, now looks like a relatively attractive time to start a modest position. In terms of the stock’s history, BL went public in 2016 at 17 and, despite some pullbacks, rose steadily to 45 by late 2018. Shares then corrected and bounced around for most of 2019, ending the year near 50. It rose in the first two months of 2019, including a spike to 75 after a big earnings result. Since then it has fallen below 50. As with any stock right now it would be wise to start slow, maintain a tight stop, and average in if the chart continues to look constructive.
BlackLine originally recommended by Tyler Laundon in Cabot Early Opportunities, has now climbed above its 200-day moving average. Short-term, there’s a chance of a pullback, perhaps to the 48 area, so if you haven’t bought yet, I suggest waiting for that—but long-term, this provider of cloud-based automated accounting services has great prospects. BUY.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, March 23 & 30, 2020