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Thursday, Mar 28, 2024

Analyst Sees Solid Returns Ahead for BlackLine

Morningstar Inc. initiated coverage of BlackLine Inc. this year, starting off with a fair value of $50 for its shares. The Chicago research and equity company also gave the Woodland Hills accounting software developer a narrow economic moat, or its ability to stay ahead of the competition, according to the first research report authored by analyst John Barrett on Jan. 9. “We believe that BlackLine’s strong dollar-based retention rates are indicative of a narrow-moat company,” Barrett wrote in the note. “Over the past several years, BlackLine has reported dollar-based revenue renewal rate (excluding upsells) of 97 percent to 98 percent, indicating a customer lifetime of over 20 years.” The firm believes that BlackLine warrants a narrow moat because of high customer switching costs, Barrett continued in the note. “With over 2,800 customers, including 36 percent of Fortune 500 companies, we believe that BlackLine’s importance in corporate finance workflows, including accelerating financial closes and automating account reconciliations, will allow it to generate returns well in excess of its cost of capital over the next decade,” he added. BlackLine develops software that reduces the need for human accountants by automating the process of closing out the books and reconciling accounts. Its customers include Dow Chemical Co., Coca-Cola Co. and Costco Wholesale Corp. BlackLine’s share price has increased by more than 14 percent since the start of the new year through Jan. 24 and has seen steady increases since Morningstar said it would initiate coverage. The share price closed at $59.67 on Jan. 29. For the third quarter ending Sept. 30, BlackLine reported an adjusted net income of $7 million (12 cents a share) compared with adjusted net income of $4.1 million (7 cents) in the same period a year earlier. Revenue increased by 28 percent to $74.9 million. BlackLine will release its fourth quarter earnings on Feb. 13. In discussing the third quarter results with analysts in early November, BlackLine Chief Executive Therese Tucker said that since pioneering the financial close market, the company has invested in educating chief financial officers, controllers and accountants to modernize their financial close function and drive greater efficiency and internal controls with less time and fewer resources. “In recent years, we have invested millions of dollars in global customer success teams and accounting transformation specialists to accelerate that pace of education and engagement,” Tucker said. “We believe these investments drive significant value for our customers as they look to transform their operations and anticipate continued investment in this area.” In coming up with the $50 fair value figure, the revenue model used by Barrett employed the number of new customers as the primary driver of growth and the revenue per customer as the secondary growth driver. BlackLine ended the third quarter with 2,871 customers and had added that quarter 87 new net customers. Barrett is projecting the company will add 330 net new customers per year through 2028. This is a drop off from the three prior years when BlackLine was adding an average 430 net new customers. “We expect BlackLine’s new customer additions is likely to slow as it attempts to move upmarket, especially through the recently announced SAP partnership, as sales cycles lengthen when targeting larger enterprises,” Barrett wrote in his research note. In November 2018, BlackLine announced an agreement with SAP SE, a German multinational software company, to allow it to resell BlackLine software around the world. The firm estimated the revenue per customer to have been $38,000 in 2018 and expects it to rise by an average of 6 percent compounded annually for the next 10 years, reaching $146,000 in 2028 as customers add more BlackLine products and bring more users onto the software. “These drivers combine to produce revenue growth of 15 percent on average over the next decade,” Barrett wrote. “With revenue growth split evenly between new logos and expansion by existing customers and a total addressable market of 165,000 companies (defined as greater than $50 million in revenue), we believe that BlackLine will have ample growth opportunities.” Chief Financial Officer Mark Partin said during the analyst conference call that the company had identified during its investor day in September five growth areas to capture the large and underpenetrated market in front of it. “These growth drivers include our initiative to lead our customers as a strategic partner to the CFO, the SAP partnership, upsell and cross-sell of the install base, a collaborative partner ecosystem and international expansion,” Partin said.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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