BlackLine: Strong Results Reinforce Long-Term Bullish View

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BlackLine (NASDAQ: NASDAQ:BL) recently reported a strong start to the year with revenue up 22% to $120 million, beating expectations by about 1%. Despite the difficult macro-economic environment and growing fears around a possible recession, BlackLine continues to prove the importance TAM opportunity ahead of them.

Prior to the pandemic, many back-office accounting functions were performed using often outdated legacy systems or manual processes. BlackLine aims to provide an integrated accounting software platform, making it easier for businesses to perform all of their accounting functions. With the company having only a 2% market share, largely untapped, revenue growth could remain above 20% for many years.

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Data by YCharts

The stock is down almost 30% since the start of the year, which is quite similar to the performance of NASDAQ. However, operationally, nothing has changed. Revenue growth remains impressive at over 20%, and operating margins and free cash flow remain healthy.

Valuation is still attractive at 9x FY22 earnings, although it will look even more attractive a few years from now. Using relatively conservative assumptions, we could see FY24 revenue reach $800 million, implying a current multiple of about 6x FY24 revenue, which isn’t bad for a company whose revenues are growing by 20% and more with long-term operating margins reaching 20% ​​and more.

For now, I think long-term investors should continue to accumulate stocks on weakness.

Financial review and advice

During the first quarter, BlackLine reported revenue growth of 22% year-over-year to $120.2 million, beating expectations by just under $1 million. Importantly, the company’s revenue growth actually accelerated by around 200 basis points from the 20% year-over-year growth seen in the fourth quarter, despite the still challenging macro environment. . So what is driving this strong growth? Well, there are a few factors.

First, the company added 72 net new customers in the quarter, ending with just under 3,900 customers and growing 12% year-on-year. On top of that, the total number of users grew 14% year-over-year to 338,000, which would imply that larger organizations with higher usages are starting to turn to BlackLine for accounting software.

Dollar revenue retention rate

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Second, dollar revenue turnover rates continue to remain extremely healthy at 98% in the quarter. This has generally moved between 97% and 98%, which means that very few customers actually leave BlackLine once they join the platform. With nearly 97% of the company’s overall revenue coming from subscription and support, BlackLine’s revenue stream is highly recurring and very sticky.

Additionally, the net dollar retention rate, which is a good measure of organic growth of existing users, was 110%, which was higher than the last quarters and years. In my opinion, this could be an early signal that companies that initially use BlackLine are finding rapid success and are ready to spend more with them.

Client Cohort

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This is further demonstrated by the company’s attractive land and expansion model. The chart above does a great job demonstrating that once BlackLine sets foot in the door of a new client, clients tend to grow quickly. In fact, there is a clear correlation between the longevity of customer cohorts and their willingness to spend more with BlackLine.

When looking at the company’s TAM, it seems that there is still a long avenue for growth. At first glance, you would think that every business in operation should have an integrated software platform that makes it easy to perform daily accounting and monthly/quarterly reporting functions for business owners. However, this is definitely not the case. In fact, the global pandemic has dramatically accelerated the transition to modern software platforms, especially within the back office.

TAM Opportunity

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Functions such as accounting still use legacy methods, which means there is plenty of room for penetration. BlackLine estimates it has a TAM opportunity of over $28 billion made up of 165,000 target customers. In the first quarter, the company had LTM revenue of $447 million and nearly 3,900 customers, representing only 2% of the total market.

Growth opportunities such as new customers (which grew 12% YoY in the first quarter), customer base expansion, expanding their partner ecosystem, international expansion and adjacent product development all remain growth levers that the company must explore over the next few years.

Target operating model

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Longer term, the company continues to expect improved margins. Unsurprisingly, the company’s software revenue stream generates gross margins consistently at or above 80%. This gives BlackLine significant leeway to invest in S&M and R&D, with these expenditures accounting for nearly 60% of 2021 revenue. Over time, the company will be able to better leverage these expenditures and it believes that it will be able to generate more than 20% non-GAAP operating margins, compared to 9% in FY21.

In the first quarter, non-GAAP operating margins were just 0.5%, down from around 7% a year ago. The main drivers of the margin contraction were due to the company’s increased investment in public cloud capacity and increased hiring. Yes, these are short-term headwinds that the company’s margins face, but additional investments like these will help both revenue growth and longer-term operational efficiencies.

The company also updated its guidance and expects FY22 revenue of $524 million to $528 million, reflecting 23 to 24 percent year-over-year growth. In addition, this forecast has also been raised from the company’s original expectations of $520 million to $525 million. Management also remains confident in the demand environment and is pleased with how it started the year.

We saw good and efficient execution across our teams, while continuing to invest in our growth initiatives. Coupled with the acceleration in our revenue growth in the first quarter, I am confident that we are moving the business in the right direction as we continue to invest in the demand opportunity that lies ahead.

Looking ahead, we intend to continue our planned pace of investment in 2022 as we remain focused on effectively investing in our go-to-market and customer success teams, as well as our public cloud infrastructure. We believe this will help accelerate long-term revenue growth, while strengthening our market leadership position.

So, despite the tougher macro-economic environment and fears of a possible recession, demand trends and the company’s pipeline have led it to raise its guidance for the year.

Evaluation

With the stock down nearly 30% year-to-date, much of this is due to the valuation reset we’ve seen in the tech sector. As investors fear rising rates and a possible recession, they have quickly withdrawn their funds from high-value stocks, as evidenced by the NASDAQ index’s decline of around 25% since the start of the year. Since the earnings release, the stock has risen 20% as strong growth trends remain attractive.

From an operational point of view, the company continues to show exceptional performance. Revenue growth is generally beating expectations and with the company’s long-term operating margin expecting non-GAAP operating margins to reach over 20%, this stock remains a clear buy.

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Data by YCharts

The stock currently has a market capitalization of approximately $4.4 billion and with net debt of approximately $0.4 billion, the company has an enterprise value of approximately $4.8 billion.

Given management’s FY22 revenue forecast of $524 billion to $528 billion, this reflects a FY22 revenue multiple of just over 9x. The stock has historically traded well above 10x forward earnings, although we are currently in a different environment where a multiple of 15x forward earnings is no longer appropriate for a company whose earnings constantly increasing by 20% and more and expanding operating margins.

My thesis is quite simple, the massive TAM opportunity could drive revenue growth of over 20% for many years to come. BlackLine is the undisputed leader in accounting software and the global pandemic has accelerated the company’s investments in digital, which could propel accelerated growth. Additionally, non-GGAP operating margins are expected to reach over 20% in the long term.

If FY24 revenue is around $650 million and FY24 revenue is around $800 million, both of which represent fairly steady years of growth for the company, the stock could have a lot of potential. Using my FY24 revenue estimate, that translates to a valuation of 6x FY24 revenue. its pipeline is strong.

I wouldn’t be surprised if 12 months from now the stock is trading near $100, which is a nice upside from the current $75.

About Dianne Stinson

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