BL - BlackLine: Risk-Reward Isn't Sufficiently Attractive

Summary

• BL's most recent Q4 2022 results sent a mixed message, as the positives relating to profitability improvement were offset by negative expectations regarding revenue growth deceleration.
• BlackLine's valuations have corrected to more reasonable levels now, but this could potentially hurt BL's inorganic growth prospects.
• My rating for BlackLine is a Hold, as I don't view BL's current risk-reward profile as attractive enough to justify a Buy.

Elevator Pitch

I assign a Hold investment rating to BlackLine, Inc.'s ( BL ) shares. The risk-reward for BlackLine isn't sufficiently compelling to warrant a Buy rating. BL's price-to-sales multiple has de-rated to a considerable extent, but this is largely aligned with its top line growth outlook.

Company Description

BlackLine describes itself as an "accounting automation software" company whose products assist businesses with their "financial close, accounts receivable and intercompany accounting processes" in its media releases .

As of the end of last year, BL boasted approximately 366,522 users and 4,188 clients as disclosed in the company's recent fiscal 2022 10-K filing . Core subscription revenue contributed the bulk or 94% of BlackLine's top line for FY 2022, while the company generated the remaining 6% of its recent fiscal year revenue from professional services.

BL Stock Key Metrics

The key metrics for BlackLine in the most recent quarter as revealed in its Q4 2022 earnings press release sent conflicting signals.

On the negative side of things, BL's core subscription revenue and net revenue retention rate for Q4 2022, and its 2023 revenue guidance were disappointing.

Top line for BlackLine increased by +21.4% from $115.3 million in the fourth quarter of 2021 to $140.0 million for the most recent quarter. Although BL's total Q4 2022 revenue beat consensus marginally by +0.2% , this was driven mainly by higher than expected professional services revenue. In fact, BlackLine's actual core subscription revenue of $130.9 million in Q4 2022 turned out to be -1% lower than Wall Street's consensus estimate of $132 million.

BL's headline net revenue retention rate also decreased from 109% for Q3 2022 to 107% for Q4 2022. BlackLine highlighted at its fourth quarter earnings call that its adjusted net revenue retention rate would have been 108.5% if adjusted for foreign currency fluctuations. But BL's adjusted Q4 2022 net revenue retention rate will have still represented a QoQ decline, even after excluding the effects of foreign exchange.

Also, BlackLine is guiding for $591 million in revenue for full-year fiscal 2023 based on the mid-point of the company's guidance. This suggests that BL expects its top line growth to moderate substantially from +22.8% for FY 2022 to +13.0% in FY 2023. It is apparent that the weak economic environment will have a negative impact on BlackLine's short term growth prospects.

On the positive side of things, net new customer additions and margins were the bright spots for BlackLine in the recent quarter.

BL reported 128 net new customer additions for the final quarter of the previous year. In contrast, BlackLine achieved much lower net new customer additions of 57, 106 and 72 for Q3 2022, Q2 2022, and Q1 2022, respectively.

Separately, BlackLine delivered a meaningful improvement in its profitability and free cash flow generation for Q4 2022, which the company attributed to "operating efficiencies and disciplined expense management" at its most recent quarterly results briefing.

The normalized operating income margin for BL went up from 5% in Q4 2021 and 8% in Q3 2022 to 13% for Q4 2022. BL's free cash flow expanded by +32% YoY to $20.3 million in the fourth quarter of last year, and this translated into a healthy free cash flow margin of roughly 14%.

It is fair to say that this was a mixed set of results for BlackLine. It is encouraging to witness profit margin expansion for BL, but the weak top line growth outlook is a concern.

Valuation De-Rating Is A Double-Edged Sword

BlackLine's consensus forward next twelve months' price-to-sales valuation multiple has decreased significantly from its all-time peak of 22.0 times recorded on February 11, 2021 to a mere 7.0 times now as per S&P Capital IQ's valuation data.

There are both pros and cons associated with BL's valuation de-rating.

On one hand, BlackLine's valuations have become more reasonable, which indicates that further substantial share price corrections are less probable. The Wall Street analysts' consensus FY 2023-2026 revenue CAGR of +18.6% for BL is decent, and BlackLine's current high single-digit forward price-to-sales ratio doesn't seem to be very demanding.

On the other hand, it becomes much tougher for BL to engage in accretive acquisitions, considering how much its valuation multiple has compressed in recent times. At the company's Investor Day in November last year, BlackLine stressed that "the ability to create more TAM (Total Addressable Market) for our sales organization through strategic M&A (Mergers & Acquisitions) is vital."

If BlackLine's share price remains sluggish and its valuation multiple does not expand, BL will find it hard to seek new acquisition targets. The implied M&A deal valuation multiple needs to be lower than its current trading multiple for the transaction to be accretive. As such, BlackLine's inorganic growth outlook could be potentially affected by the valuation de-rating for the company's shares.

Bottom Line

I have a Neutral view of BlackLine's stock. I like the fact that BL's price-to-sales multiple is less demanding now and the company's profit margins have improved in the recent quarter. However, I am worried about BlackLine missing its 2023 top line guidance, and how the stock's valuations could potentially limit its inorganic growth opportunities.

For further details see: