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BlackLine (NASDAQ:BL) Beats Q2 Sales Targets, Stock Soars


Full Report / August 04, 2022
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Accounting automation software maker Blackline (NASDAQ:BL) reported Q2 FY2022 results topping analyst expectations, with revenue up 25.8% year on year to $128.4 million. However, guidance for the next quarter was less impressive, coming in at $134 million at the midpoint, being 1% below analyst estimates. BlackLine made a GAAP loss of $11.9 million, improving on its loss of $25.5 million, in the same quarter last year.

BlackLine (BL) Q2 FY2022 Highlights:

  • Revenue: $128.4 million vs analyst estimates of $126.5 million (1.52% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.01 ($0.06 beat)
  • Revenue guidance for Q3 2022 is $134 million at the midpoint, below analyst estimates of $135.3 million
  • The company reconfirmed revenue guidance for the full year, at $526 million at the midpoint
  • Free cash flow was negative $5.06 million, compared to negative free cash flow of $4.68 million in previous quarter
  • Net Revenue Retention Rate: 110%, in line with previous quarter
  • Customers: 4,003, up from 3,897 in previous quarter
  • Gross Margin (GAAP): 74.3%, down from 76.9% same quarter last year

Started in 2001 by software engineer Therese Tucker, one of the very few women founders who took their companies public, BlackLine (NASDAQ:BL) provides software for organizations to automate accounting and finance tasks.

Accountants still rely on spreadsheets to validate, reconcile, and close their books. At the end of the month, these spreadsheets are manually uploaded to a shared drive where the balance on each account is merged. This process is error prone and leads to rows and columns being deleted by mistake and also consumes a lot of time that can be spent doing more productive work.

To solve these problems, BlackLine provides cloud-based software as a service to automate routine accounting processes so that accountants can focus on more important tasks. The software provides a central place to unify data across multiple departments and business applications such as resource planning systems, making it faster to validate and reconcile financial transactions with customers and partners. It also gives organizations better visibility into their financial health by providing dashboards to quickly identify business risks and tasks to prioritize and this can be accessed by anyone from anywhere.

Book reconciliations are one of the most time demanding parts of accountant’s job and finance managers often hold multiple meetings in a week to close their accounts. With BlackLine, companies can automate more than 50% of the account reconciliation work and as a result, accountants can focus on analysis, risk mitigation, and exception handling.

The demand for easy to use, integrated cloud based finance software that integrates tax and accounting operations continues to rise in tandem with the difficulty workers find trying to use existing accounting tools like spreadsheets given the growing volume of finance data littered across a multitude of enterprise applications. A related demand driver is the secular increase of e-commerce and rising adoption of modern point of sales and payments platforms which easily integrate with backend financial software.

Competitors include large software vendors such as Oracle (NYSE:ORCL) and SAP (NYSE:SAP) as well as cloud software providers such as Workiva (NYSE:WK), Anaplan (NYSE:PLAN), and Workday (NASDAQ:WDAY).

Sales Growth

As you can see below, BlackLine's revenue growth has been strong over the last year, growing from quarterly revenue of $102.1 million, to $128.4 million.

BlackLine Total Revenue

This quarter, BlackLine's quarterly revenue was once again up a very solid 25.8% year on year. On top of that, revenue increased $8.24 million quarter on quarter, a very strong improvement on the $4.91 million increase in Q1 2022, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates BlackLine is expecting revenue to grow 22.4% year on year to $134 million, in line with the 20.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 22.5% over the next twelve months.

Customer Growth

You can see below that BlackLine reported 4,003 customers at the end of the quarter, an increase of 106 on last quarter. That is a little better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.

BlackLine Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

BlackLine Net Revenue Retention Rate

BlackLine's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 110% in Q2. That means even if they didn't win any new customers, BlackLine would have grown its revenue 10% year on year. Trending up over the last year, this is a decent retention rate and it shows us that not only BlackLine's customers stick around but at least some of them get increasing value from its software over time.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. BlackLine's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 74.3% in Q2.

BlackLine Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. BlackLine burned through $5.06 million in Q2, with cash flow turning negative year on year.

BlackLine Free Cash Flow

BlackLine has generated $15.3 million in free cash flow over the last twelve months, 3.24% of revenues. This FCF margin is a result of BlackLine asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from BlackLine's Q2 Results

With a market capitalization of $3.96 billion BlackLine is among smaller companies, but its more than $1.02 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by BlackLine’s very strong acceleration in customer growth this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 5.57% on the results and currently trades at $71.39 per share.

Is Now The Time?

When considering BlackLine, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that BlackLine is not a bad business. Its revenue growth has been solid, and analysts believe that sort of growth is sustainable for now. And on top of that, its strong gross margins suggest it can operate profitably and sustainably.

BlackLine's price to sales ratio based on the next twelve months is 6.9x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that BlackLine doesn't trade at a completely unreasonable price point.

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