Modernizing Finance & Accounting

Integrity of financial reporting, creating a more efficient process, real-time visibility into the company's operations. This is what BlackLine has set out to do. On January 14th, 2021, BlackLine took the TrustRadius award in 1st place for all financial close categories. They are the 'Best of Finance Software 2021 Awards'. This is where "alt data" comes into play with my analysis of companies I own, something as simple as an award (which a lot of companies pay for haha) can give you insight into customers and how they view the product. Traditional manual accounting processes will dissipate in my view, especially with working from home, to ensure financial integrity of the firm. More than 3,200 customers that depend on BlackLine and their software to close faster and automate the process with accurate results.


The company operates in 8 core cloud-based products:

  1. Transaction Matching

  2. Account Reconciliations

  3. Consolidation Integrity Manager

  4. Daily Reconciliations

  5. Journal Entry

  6. Variance Analysis

  7. Task Management

  8. Compliance

Customers of BlackLine usually purchase these products in packages, which is referred to as "solutions". Customers do have the option to buy the products individually, as they see fit for their company. One aspect of BlackLine I like from a strategic perspective is their integration with SAP. SAP has the ability to resell BlackLines solutions, and in return BlackLine gets a % of that revenue. It is called "SolEx", it is as solution-extension for SAP. BlackLine leverages every customer, partner, and reseller channel they have. In the Fourth Quarter of 2018, SAP has actually become part of the reseller channel BL uses for the ordinary course of business (This makes me think SAP may make a strategic move and acquire BlackLine at some point...).


Why I am Bullish in 2021+ on BlackLine:


Sales growth acceleration. In their recent 10-Q they have really highlighted COVID-19 and the impact it made on customer deal closings. BlackLine mandating the WFH style, definitely took a hit to sales, yet still grew 20%+. I want to spend some time and dig into their comments on the COVID-19 impact to their business. BlackLine responded with customer-relief programs to help their community of global accounting & finance professionals. This speaks volumes to me, as someone who puts so much emphasis on management that they are willing to take a financial hit (yes hurt returns in short-term), but customers see this and know that the company has their back and they can grow together. The company saw deals being deferred, especially in EMEA and North America mid-market, and expect further delays in deals arising from the SAP partnership. All bullish catalysts in my opinion. BlackLine has seen a decrease in travel-related expenses, advertising, and trade show, I wonder what they will use this capital for? They offered the Task management and Reporting modules complimentary for 6 months to existing customers, to help them enable a more effect close being remote, this ultimately impacted their FCF.


The acquisition of Rimilia is another bullish catalyst for 2021. Rimilia will expand BlackLines capabilities into adjacent areas such as accounts receivable automation for financial close, and accelerate their long-term plan for modernizing Finance and Accounting. This feels like the tip of the iceberg for this company sitting at slightly over $7b market cap The company saw weaker dollar-based net revenue retention rate in the latest quarter, this is a valuable metric when valuing SaaS companies. The reason for the weakness was primarily due to lower net growth in existing customers because of the reduced technology spending during COVID-19. This makes sense, and I will accept that reasoning.


What I find most important as I read, is no customer has accounted for more than 10% of revenue. As an investor, I can assume I do not have to worry about much customer concentration risk, but I do have to worry about the SAP Partnership. In the latest quarter, GAAP gross margins came in at 81.2%, non-GAAP gross margins came in at 83.4%. These are very impressive on both basis, BlackLine wants us to focus on the non-GAAP gross margins because "presenting non-GAAP gross margin is useful to investors as it eliminates the impact of certain non-cash expenses and allows a direct comparison of gross margin between periods". That makes sense. Another concept I like for fast growing companies, I want to see 50% of revenues spent on sales and marketing. So far BlackLine in 2019 same quarter and 9 months ending spent 55% of revenue on S&M and 2020 so far have spent 50.5% on S&M so you can see the slight pullback because of COVID-19. For the quarter, same quarter last year was 55.9% of revenue spent on S&M and this recent quarter is 47.2%.

 

Increasing workflow capabilities. The reconciliation process in a manual way is time-consuming, there is also risk involved with human error. Taking out the human error can result in a more efficiently run process, without hurting the integrity of the financial reporting. Between Oracle Hyperion, Trintech, and BlackLine, they are all competitors. BlackLine and Trintech have two levels of account grouping, there are individual and grouped reconciliations. Oracle, the big dog, is the only vendor that has ALL four grouping options including Drill Through (I recommend reading the link as cited down below and understand the four major account grouping functionalities).


Bottom Line:


After reading this article, I am very interested in seeing how BlackLine expands its capabilities to compete with Oracle. Having SAP partnership is useful, and they better be leveraging that to the fullest extent. I am excited for the next ER. Some stats through BL last investor presentation: 81% of organizations believe their finance automation is NOT operating at a level to transform into a strategic role within the corporation. 51% of finance leaders feel increased responsibilities and stretching their role. 1/3 of accounting teams spend majority of time on REPETITIVE tasks, that are low-value.



References:


Stal, K., Atos, M., & Malhotra, C. (2020). Account Reconciliation Tools Comparison. Retrieved 19 January 2021, from https://reconciliationtransformation.com/account-reconciliation-tools-comparison/


https://investors.blackline.com/static-files/9f50c8c5-85f4-4ad6-a00d-5b69bca63fc7


https://investors.blackline.com/node/9731/pdf

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