Accounting automation software maker Blackline (NASDAQ:BL) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 15.6% year on year to $139 million. The company expects that next quarter's revenue would be around $144 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. BlackLine made a GAAP loss of $12 million, improving on its loss of $13.4 million, in the same quarter last year.
BlackLine (BL) Q1 FY2023 Highlights:
- Revenue: $139 million vs analyst estimates of $138.2 million (small beat)
- EPS (non-GAAP): $0.34 vs analyst estimates of $0.16 ($0.18 beat)
- Revenue guidance for Q2 2023 is $144 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $591 million at the midpoint
- Free cash flow of $14.3 million, down 29.4% from previous quarter
- Net Revenue Retention Rate: 106%, in line with previous quarter
- Customers: 4,236, up from 4,188 in previous quarter
- Gross Margin (GAAP): 74.6%, in line with 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).
As you can see below, BlackLine's revenue growth has been strong over the last two years, growing from quarterly revenue of $98.9 million in Q1 FY2021, to $139 million.
This quarter, BlackLine's quarterly revenue was once again up 15.6% year on year. But the revenue actually decreased by $973 thousand in Q1, compared to $5.69 million increase in Q4 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.
Guidance for the next quarter indicates BlackLine is expecting revenue to grow 12.1% year on year to $144 million, slowing down from the 25.8% 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 13% over the next twelve months.
You can see below that BlackLine reported 4,236 customers at the end of the quarter, an increase of 48 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing down.
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'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 106% in Q1. That means even if they didn't win any new customers, BlackLine would have grown its revenue 6% year on year. Despite it going down over the last year this is still 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.
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 74.6% in Q1.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop 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 have followed 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's free cash flow came in at $14.3 million in Q1, turning positive year on year.
BlackLine has generated $46.1 million in free cash flow over the last twelve months, a decent 8.5% of revenues. This FCF margin is a result of BlackLine asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
Key Takeaways from BlackLine's Q1 Results
With a market capitalization of $3.12 billion BlackLine is among smaller companies, but its more than $1.09 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 glad to see free cash flow turn positive year on year. On the other hand, it was unfortunate to see the slowdown in customer growth and gross margin deteriorated a little. Overall, it seems to us that this was an ok quarter for BlackLine. The company is up 8.14% on the results and currently trades at $55.19 per share.
Is Now The Time?
BlackLine may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that BlackLine is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. And on top of that, its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from BlackLine given its price to sales ratio based on the next twelve months is 5.0x. In the end, beauty is in the eye of the beholder. While BlackLine wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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