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BlackLine's (NASDAQ:BL) Posts Q3 Sales In Line With Estimates But Guidance Underwhelms


Full Report / November 03, 2022
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Accounting automation software maker Blackline (NASDAQ:BL) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 22.7% year on year to $134.2 million. However, guidance for the next quarter was less impressive, coming in at $139.5 million at the midpoint, being 2.12% below analyst estimates. BlackLine made a GAAP loss of $18.9 million, down on its loss of $9.71 million, in the same quarter last year.

BlackLine (BL) Q3 FY2022 Highlights:

  • Revenue: $134.2 million vs analyst estimates of $134.2 million (small beat)
  • EPS (non-GAAP): $0.21 vs analyst estimates of $0.09 ($0.12 beat)
  • Revenue guidance for Q4 2022 is $139.5 million at the midpoint, below analyst estimates of $142.5 million
  • Free cash flow of $16.5 million, up from negative free cash flow of $5.06 million in previous quarter
  • Net Revenue Retention Rate: 109%, in line with previous quarter
  • Customers: 4,060, up from 4,003 in previous quarter
  • Gross Margin (GAAP): 75.8%, down from 77.6% 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 two years, growing from quarterly revenue of $90.1 million in Q3 FY2020, to $134.2 million.

BlackLine Total Revenue

This quarter, BlackLine's quarterly revenue was once again up a very solid 22.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $5.79 million in Q3, compared to $8.24 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates BlackLine is expecting revenue to grow 20.9% year on year to $139.5 million, in line with the 20.4% 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 20.5% over the next twelve months.

Customer Growth

You can see below that BlackLine reported 4,060 customers at the end of the quarter, an increase of 57 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 a little bit.

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 109% in Q3. That means even if they didn't win any new customers, BlackLine would have grown its revenue 9% year on year. That 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 75.8% in Q3.

BlackLine Gross Margin (GAAP)

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. Significantly up from the last quarter, this is a good gross margin that allows companies like BlackLine to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

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's free cash flow came in at $16.5 million in Q3, up 68.9% year on year.

BlackLine Free Cash Flow

BlackLine has generated $22.1 million in free cash flow over the last twelve months, a decent 4.43% 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 Q3 Results

With a market capitalization of $3.31 billion BlackLine is among smaller companies, but its more than $1.04 billion in cash and positive free cash flow over the last twelve months give us confidence that BlackLine has the resources it needs to pursue a high growth business strategy.

It was nice that BlackLine improved their gross margin, even if just slightly. And it was good to see solid revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and there was a slowdown in customer growth. Overall, it seems to us that this was a mixed quarter for BlackLine. The company is flat on the results and currently trades at $49.02 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 customers spend noticeably more each year, which is great to see.

BlackLine's price to sales ratio based on the next twelve months is 4.9x, 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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