blackline is an under the radar stock that has quietly doubled for its investors over the last
six years but this stock has been beaten down hard recently and is currently down about 60% percent
from its 52-week high here's why we've decided to become shareholders of Blackline today my name is
Brian Feroldi and my name is Brian stoffel thanks to commonstock for sponsoring today's video as the
time is recording I am a shareholder of Blackline and I am not yet a shareholder of Blackline Brian
Blackline is a true small cap company coming in at $3.5 billion dollars in trading under
the ticker Blackline's mission is to transform how accounting and finance departments operate this is
simple it's sort of inspirational but it does give the company options so how does it do that well
the process of closing the books on a company's month or quarter is long and arduous a process
called batch accounting what Blackline aims to do is take this long and confusing journey and
make it much simpler through something that they call continuous closing closing the books on any
given month or quarter is a critical business function but right now this process happens
manually through people emailing each other files on Excel Blackline dramatically simplifies this
process for accounting department which frees up resources to be used elsewhere critically all
of blackline's tools can be plugged in with the company's existing software so it's not replacing
any software vendors it is simply augmenting the finance department so how does Blackline
make money the company deploys a software as a service business model that receives recurring
payments for each user that's signed up the company is 110% dollar-based net retention
might seem somewhat low for a SAS company but it's worth remembering that black line caters
to small and medium-sized businesses as well so when they go Belly Up Blackline loses customers
through no fault of their own like many software service companies Blackline does have to spend a
lot of money on sales and marketing in order to get new customers and given the nature of
the company's business model the vast majority of the company's revenue is recurring in nature
when we look at blackline's moat that primarily comes in the form of high switching costs and
this Bears itself out in the numbers the company's dollar-based Revenue renewal rate which measures
how many customers stay in any given period is incredibly high and consistently coming in over
97% when we throw in upgrades at those existing customers make over time it is even higher at
110% if you look at a cohort analysis by year the data becomes crystal clear that Blackline does a
fantastic job at not only retaining its customers but convincing them to expend more over time this
is how the company has grown Its Top Line at a substantial rate since it was founded beyond
that we do think that the company's brand name is gaining value within the finance community and we
give it a little bit of credit for that overall we believe that this company's mode is stable
and is potentially even widening over time turning to the company's financials black lines Top Line
has grown at a 22% rate over the past few years it supports a very healthy gross margin nearing
80% but its net income has been negative over the past couple of years those net losses don't
concern us because this company has been free cash flow positive for many years its balance
sheet has more debt than cash but it has over a billion dollars in cash protecting it right
now the Returns on Capital are negative mostly due to the negative net income this company was
founded by Therese Tucker a number of years ago she was the CEO but has moved on to become the
executive chairwoman and handed the reins off to Mark Huffman as CEO Huffman gets great reviews on
Glassdoor and insiders as a group own almost 10 percent of shares outstanding that's worth more
than 340 million dollars at current prices giving this company lots of skin in the game turning
towards optionality Blackline does have a history of rolling out new products that companies can use
in their Finance departments it's also made use of Acquisitions to bolster its product offering
and increase those switching costs as you saw from the company's net income there is still a
lot of room for operating leverage to to occur moving forward the company pays its addressable
Market opportunity at around $28 billion of which it's captured only 1.6% and the company
has become acquisitive lately most of the growth in the past was organic but only some of that is
true now as those Acquisitions are adding to the Top Line so I was Blackline done for investors
so far the answer there is pretty good Shares are up 145 since this company's 2016 IPO that's
more than double the S P 500 return even over the last five years it's outpaced that number
and as far as meeting Eric seeing the bottom line black line has done so three out of the last four
quarters unsurprisingly Blackline is not focused at all on returning cash to shareholders through
BuyBacks Debt Pay down or dividends sounds good so far right let's turn to risks first and foremost
is competition the company has a handful of competitors out there most notably trintech
and Oracle that are taking the company head on WE view this as a medium level risk because there
isn't a tremendous amount of direct competitors but there are a handful that's right brain in
reality the biggest competition that Blackline has is the historical way of closing the books
for companies as soon as they can convince them to change Blackline probably has their business for
life beyond that we don't see a lot of business risk there is a little bit valuation risk that we
want to highlight in a little bit now let's take a peek at how Blackline performed in the second
quarter Revenue grew 25 percent and came in ahead of both Wall Street and Management's expectations
earnings per share on an adjusted basis were positive $0.07 cents while that was down from
the year ago period that exceeded Management's guidance and Wall Streets on Targets on a non-gaap
basis margins came down across the board yet still remained positive on the downside free cash flow
was positive but became negative and adjusted net income fell by almost half the balance sheet
remains in decent shape although it's far from perfect when Blackline came out with guidance
for the third quarter they called for 23 growth on the top line which is what Wall Street was
expecting but what investors were surprised by was that earnings per share on an adjusted basis
are expected to to reach as high as $0.10 Which is far ahead of what Wall Street was expecting
it's a similar story for the full year management is guiding for 23% Revenue growth about in line
with expectations earnings per share expected to come in about $0.26 Cents on an adjusted basis
also well past wall Street's targets so what will we as shareholders be watching moving forward the
first is growth in customers and users remember there's a huge addressable Market we want to see
Blackline grabbing it second keep an eye on retention rates that is one of this company's
strengths and we want to see the gross retention rate remain very high third keep an eye on margins
Blackline is spending to expand its business and yet remains free cash flow positive we want to
see that continue speaking of which keep an eye on free cash flow as long as this number remains
positive for the full year we'll be happy overall we believe that the moat for Blackline is at worst
stable and at best widening and the thesis is on track for owning shares so how about the company's
current valuation well we believe that Blackline is somewhere between phase two and three for that
reason when judge the company's income statement it's really only fully optimized for Revenue cost
of goods sold and gross profit that's why the price to earnings ratio the price to free cash
flow ratio are not the best indicators of value right now so how does the company stack up well
on a price to sales ratios trading for about seven times sales right now that's expensive
on an absolute basis but as you can see it's about the cheapest it's ever been blackline's
gross profit has consistently grown since this company came public and is currently at about
360 million dollars on a trailing basis given the company's market cap of about 3.5 billion
that gives us a price of gross profit ratio of about 10 high an absolute basis but not terrible
and finally because the company is free cash flow positive we can take a peek there but we see that
at 238 times trailing free cash flow this is not the best indicator to Value the company Blackline
also has an adjusted forward p e ratio which currently clocks in at 219 since the company is
not yet optimized for earnings this figure is inflated and will only become valuable within
a few years so how did Blackline score in our investing checklist the answer there is pretty
good on mine it got a 79 which is well into my investable category and on my framework it
got an 8 which is in the robust category and it can improve markedly if free cash flow improves
and the balance sheet has more cash than debt so there you have it we believe that Blackline is a
very compelling business at trading an attractive valuation so we'll be buying $250 worth of stock
for our public portfolio that you can track on common stock let us know what you think about this
decision by heading over to common stock you can see our portfolio in the returns there and leave
an opinion if you leave the most insightful opinion about our decision to buy Blackline
we will choose you and common stock will send you one hundred dollars if you want to follow
all the purchases that we've made so far you can do so by tracking our portfolio on common stock
there's a link in the video description to do just that we hope you enjoyed this video Brian's out
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