BlackLine (BL)

Accounting automation software maker Blackline (NASDAQ:BL) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 6% year on year to $166.9 million. The company expects next quarter’s revenue to be around $171 million, close to analysts’ estimates. Its non-GAAP profit of $0.49 per share was 28% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, BlackLine grew its sales at a 14% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, BlackLine grew its revenue by 6% year on year, and its $166.9 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 6.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 7.4% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

BlackLine’s ARR came in at $656 million in Q1, and over the last four quarters, its growth was underwhelming as it averaged 8.6% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

BlackLine reported 4,455 customers at the end of the quarter, a sequential increase of 12. That’s a little better than last quarter and a fair bit above the typical growth we’ve seen over the previous year. Shareholders should take this as an indication that BlackLine has made some recent improvements to its go-to-market strategy and that they are working well for the time being.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

BlackLine is very efficient at acquiring new customers, and its CAC payback period checked in at 23.2 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

BlackLine’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 104% in Q1. This means BlackLine would’ve grown its revenue by 3.8% even if it didn’t win any new customers over the last 12 months.

BlackLine has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

For software companies like BlackLine, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

BlackLine’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 75.3% gross margin over the last year. That means for every $100 in revenue, roughly $75.30 was left to spend on selling, marketing, and R&D.

This quarter, BlackLine’s gross profit margin was 75.5%, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

BlackLine has managed its cost base well over the last year. It demonstrated solid profitability for a software business, producing an average operating margin of 3.1%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, BlackLine’s operating margin decreased by 2.1 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, BlackLine generated an operating profit margin of 2.1%, up 1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

BlackLine has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 23.1% over the last year, quite impressive for a software business.

BlackLine’s free cash flow clocked in at $32.62 million in Q1, equivalent to a 19.5% margin. The company’s cash profitability regressed as it was 8.2 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict BlackLine’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 23.1% for the last 12 months will increase to 26.7%, it options for capital deployment (investments, share buybacks, etc.).

BlackLine reported $866.5 million of cash and $921.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $184.2 million of EBITDA over the last 12 months, we view BlackLine’s 0.3× net-debt-to-EBITDA ratio as safe. We also see its $33.53 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by BlackLine’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 7.2% to $50.01 immediately after reporting.

Updated: May 16, 2025 at 10:13 PM EDT

Before deciding whether to buy BlackLine or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

BlackLine’s business quality ultimately falls short of our standards. To begin with, its revenue growth was uninspiring over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its efficient sales strategy allows it to target and onboard new users at scale, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its declining operating margin shows it’s becoming less efficient at building and selling its software.

BlackLine’s price-to-sales ratio based on the next 12 months is 5.1x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $56.91 on the company (compared to the current share price of $54.54).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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