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Blackline (NASDAQ:BL) Posts Better-Than-Expected Sales In Q2, Next Quarter Growth Looks Optimistic


Full Report / October 13, 2021
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Accounting automation software maker Blackline (NASDAQ:BL) reported strong growth in the Q2 FY2021 earnings announcement, with revenue up 22.6% year on year to $102.1 million. Guidance also exceeded expectations with next quarter revenues guided to $107 million, or 1.02% above analyst estimates. Blackline made a GAAP loss of $25.5 million, down on its loss of $7.94 million, in the same quarter last year.

Blackline (BL) Q2 FY2021 Highlights:

  • Revenue: $102.1 million vs analyst estimates of $101 million (1.03% beat)
  • EPS (non-GAAP): $0.15 vs analyst estimates of $0.08 ($0.07 beat)
  • Revenue guidance for Q3 2021 is $107 million at the midpoint, above analyst estimates of $105.9 million
  • The company reconfirmed revenue guidance for the full year, at $421.5 million at the midpoint
  • Free cash flow of $7.96 million, down 65.6% from previous quarter
  • Net Revenue Retention Rate: 106%, in line with previous quarter
  • Customers: 3,598, up from 3,482 in previous quarter
  • Gross Margin (GAAP): 76.9%, down from 77.8% previous quarter

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.

Given the difficulty working with existing accounting tools such as spreadsheets and the growing volume of finance data across enterprise applications, more organizations are expected to adopt cloud-based finance software platforms which make it more efficient and transparent to manage accounting operations.

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 $83.2 million, to $102.1 million.

Blackline Total Revenue

This quarter, Blackline's quarterly revenue was once again up a very solid 22.6% year on year. Quarter on quarter the revenue increased by $3.26 million in Q2, which was in line with Q1 2021. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Analysts covering the company are expecting the revenues to grow 18.1% over the next twelve months.

Customer Growth

You can see below that Blackline reported 3,598 customers at the end of the quarter, an increase of 116 on last quarter. That is quite a bit better customer growth than last quarter and a fair bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 106% in Q2. That means even if they didn't win any new customers, Blackline would have grown its revenue 6% 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, licences, technical support and other necessary running expenses was at 76.9% in Q2.

Blackline Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still 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.

Key Takeaways from Blackline's Q2 Results

With a market capitalization of $6.98 billion Blackline is among smaller companies, but its more than $1.16 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.

We were very impressed by Blackline’s very strong acceleration in customer growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was a deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company currently trades at $118 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. We think Blackline is a solid business. Its revenue growth has been solid. On top of that, its impressive gross margins are indicative of excellent business economics, and its strong free cash flow generation gives it re-investment options.

The market is certainly expecting long term growth from Blackline given its price to sales ratio based on the next twelve months is 15.2. There are definitely things to like about Blackline and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the tech stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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