BlackLine: Leading Accounting Software Player In Fast Growth Market – BlackLine, Inc. (NASDAQ:BL)

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BlackLine (BL) continues to be the leader in the rather underpenetrated accounting software market. The company reported another strong quarter with ~28% revenue growth, coming in ahead of expectations and guidance. The stock has traded up ~10% over the past few weeks since reporting earnings, however, I believe management will provide a solid 2020 revenue guidance during their upcoming quarter which could drive the stock even higher.

The company continues to trade at a premium multiple and rightfully so. During their recent analyst day, the company provided a long-term operating model which shows operating margins expanding from ~6% to 20%+. Revenue growth is poised to remain strong as the company expands further into Fortune 500 companies and internationally, as their TAM represents a $18.5 billion opportunity.

ChartData by YCharts

The stock has traded between $45-55 over the past several months and with the stock just above $50, I think now could be a good time to build a position in the name. Valuation remains reasonable at ~7.7x a 2020 revenue number, despite management history of conservative guidance and the company being a “best of breed” software name.

Analyst Day Recap

BL recently hosted an analyst day and reported strong industry trends and company momentum. One of the more interesting statistics around the accounting process was that 56% of accountants believe they need to automate more just to keep up with growth (Source: Company Presentation). This is part of BL’s basic thesis, that is the need to increase automation in the accounting industry.

The company also noted the total addressable market was close to $18.5 billion, which is comprised of ~165,000 target customers. For perspective, BL has a TTM revenue of $271 million, or only ~1.5% of their TAM. With ~2,900 customers, BL has penetrated less than 2% of the total customer base. There continues to be a lot of room for growth, both domestically and international.

Source: Company Presentation

Management also provided a preview of their long-term model, which looks very achievable. They see gross margins at the 80%+ level, something they have accomplished over the past five years. The more impressive long-term metric is their operating margin. YTD, BL’s operating margin ~6% and over the long term they see this expanding to 20%+, which I believe is highly achievable.

Source: Company Presentation

Q3 Earnings And Guidance

Revenue during the quarter grew 28% to $74.9 million, which showed a slight acceleration from the 26% growth during last quarter and also was ahead of expectations. The company continues to serve an underpenetrated market and has seen very consistent 25%+ revenue growth over the past several quarters. The company also achieved a 109% dollar-based net retention rate, relatively consistent with previous quarters (Q2 was 108% for comparison).

Source: Company Presentation

Given the software-based nature of the company’s operations, gross margins continue to remain strong, coming in at ~83% for the quarter. I believe over the long-term gross margins should remain around this area. As the company continues to gain scale, investors should start to see operating margin expand as well. During Q3, non-GAAP operating margin came in a ~6.1%, which was pretty stable compared to ~6.3% in the year ago period. However, over time as the company scales and reaps the benefits of operating leverage, I believe margins will continue to expand and meet the company’s target operating model.

Source: Company Presentation

Q4 guidance includes revenue of $77.3-78.3 million, which was a little bit above expectations. In addition, EPS guidance calls for $0.12-0.13.

For FY19, the company raised their revenue guidance to $286-287 million, up ~$4 million compared to their previous guidance of $281-284 million. With the recent raise larger than the Q3 revenue beat, I believe this implies an underlying strong Q4 than originally anticipated. As margins continue to expand, this led the company to raise their EPS guidance to $0.36-0.38, up from their previous guidance range of $0.22-0.25.

Valuation

Since reporting earnings about a month ago, BL has seen the stock go up over 10%. However, over the past several months, the stock has been range-bound from $45-55. I think part of this is investors trying to judge the best way to value a company where revenue growth will likely remain 20%+ for the next few years on top of operating margins starting to expand.

After Q2’s strong performance saw the stock pop over 30% initially, I advised investors to take some money off the table for the time being. However, even a month after the Q3 earnings report, I remain very confident in the company’s long-term operating model and think now is a good time to start picking up some shares. Heading into the final quarter of the year, I believe management left some room to the upside when it comes to Q4 guidance and I would expect their 2020 guidance to reflect another step closer to their long-term operating model. This could mean continued revenue strength on top of operating margins starting to expand.

The below chart depicts other industry-leading software names that are trying to further penetrate a relatively new market. I believe these are all “best of breed” names that will continue to deserve trading at a premium compared to the broader market and other software names.

ChartData by YCharts

With the stock price essentially flat over the past 6 months, investors have had some opportunities to jump in and out off the name. Over, with the stock still somewhat tame after their recent earnings and heading into 2020, I think now could be a good time to pick up some shares.

Management recently raised their 2019 guidance to $286-287, representing ~26% revenue growth for the full year. Given recent commentary around BL’s market opportunity and penetration, I believe the company could experience a few more years of 20%+ revenue growth in addition to margin expansion.

BL has a current market cap of ~$2.9 billion and with ~$530 million in cash and ~$380 million in debt, this results in a current enterprise value of ~$2.75 billion.

I think management’s 2019 guidance remains a little conservative but nonetheless, we can start to build out a 2020 and 2021 revenue projection. Assuming revenue growth naturally decelerates both years, we could see 2020 revenue grow 24% to ~$355 million and 2021 revenue grow 22% to ~$435 million. This would result in a 2020 revenue multiple of ~7.7x and a 2021 revenue multiple of ~6.3x.

Even though these multiples seem a little expensive compared to other software companies in the market, some of the “best of breed” software names are trading at much higher multiples. Even if revenue growth decelerates at a faster pace than my assumptions, investors will start to benefit from operating margins expanding and improved profitability.

Given the company’s recent bullish analyst day and strong Q3 earnings, I think this is a good name to own heading into 2020 and beyond. Over the long run, BL will remain the market leader in the accounting software industry and will ultimately trade at premium valuations until their operations begin to mature.

One of the bigger risks BL faces is new entrants into the market and their valuation approach. Over the long term, there will be other large competitors in this market, especially those companies which already compete in the accounting services and software industry. Due to their relatively expensive revenue multiple, if the market comes under pressure, these more expensive names are usually the first ones to self-correct.

Disclosure: I am/we are long BL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2019-12-08 18:32:00

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