The period-end close is a time-consuming and frustrating process that accountants in nearly every business have to deal with on a regular basis. BlackLine (BL +4.25%) is a software-as-a-service provider that brings order to this chaotic affair through automation. Businesses everywhere have been flocking to the service in an effort to bring their accounting process into the 21st century.
In this segment from Industry Focus: Tech, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to discuss BlackLine's business model in more detail and share why this company continues to look poised for rapid growth.
A full transcript follows the video.
This video was recorded on June 8, 2018.
Dylan Lewis: Company No. 2 on your watchlist right now is another software pure play business, and that's BlackLine. I'm guessing this is a name that people aren't quite as familiar with. Why don't you walk us through what they do?
Brian Feroldi: This is a back-office software-as-a-service company that's focused on the sexy world of accounting software. If you're not in accounting, and I'm certainly not, you might not be aware that the accounting industry is basically boom or bust. I think people know, at tax time, accountants go crazy trying to get everything processed on time. But the reality is that every month and every quarter, the accountants have to go look back at what their company did and reconcile all that information to do a period end close. They take all of the internal financial transactions that have happened, and they have to basically translate that into financial statements that can be used by the senior management team.
This happens at public companies and private companies. It's almost like, things are generally quiet during the regular work week, and then, at the period close, it's crazy hours and a mad dash for them to grab all this financial information and then turn it into reports and records that are needed to produce the documents that are needed.
Lewis: This is the point where the entrepreneur goes, "But there's an easy solution." This is the turn in the pitch where it becomes, "This is what we do for you," right?
Feroldi: Absolutely. The founder of this company was actually an accountant herself, and she became so frustrated with the way that accounting was done that she built this business herself from the ground up. Their solution is to take that process, that boom or bust cycle, and to automate as much of it as possible and turn it into something which they call the continuous close.
Think of accounting basically, as it works right now, as batch, where data is aggregated and stored up, and then accountants race to turn that into the financial statements. BlackLine basically provides software that, in real-time, processes, analyzes, reports and confirms all transactions that happen in a company. That makes the monthly closing process far more efficient for CFOs and accountants. Really, it takes chaos and turns it into an easy, seamless process.
Lewis: For software businesses, that's where a lot of money seems to be made, when it's taking something that's incredibly complicated and making it easy. Brian, this company reminds me a little bit of a company you talked about last time, that was AppFolio. That was a business that worked within a small, defined space. For them, it was the legal field and the real estate management field. BlackLine works in accounting. But, I see a lot of similarities with these companies.
Feroldi: I think that's fair. Both of these companies are attacking what you would think would be niche, small markets. But I will point out that BlackLine is targeting much bigger companies. AppFolio was focused on really small players. AppFolio targets companies with $50 million and up in revenue. So, I would point that out as a little difference between the two.
Lewis: When you look at the books for this business, what specifically do you like?
Feroldi: This company checks almost every box with something that I look for in a great company. Their business model is software-as-a-service, which means that almost all of their revenue is recurring in nature. Their revenue retention rate, which means how much revenue they earn from a customer from one year to the next, was 110% last quarter. So, just within the customers that they already have, they grew 10%. So, when you add on new customers that come on to the platform, their total revenue growth last year was 34%.
Now, these guys are still pretty small. Their revenue last year was $190 million. But they've grown big enough that they recently reached where they generate positive cash flow and they generated positive non-GAAP earnings, which strips out stock-based compensation. And then, their balance sheet is squeaky clean, $112 million in cash, less than $1 million in debt. I really like that their CEO is the founder and still running the show, and she actually owns about 11% of all shares outstanding, so shareholders are extremely aligned with her.
Lewis: I want to go back to that revenue retention rate number for a second, because I think that this is an important concept when you're looking at software businesses and why they're so attractive to investors. You put it that way, as, if they didn't grow at all via new customers, they would still have grown 10%. It's also a testament to them doing something right and not having to have these blockbuster product releases to hit numbers for following quarters. It's basically, if they keep doing what they're doing, they're going to be able to post this growth.
Feroldi: Absolutely. The software industry calls this the land and expand strategy, where, as you get your foot in the door with a solution, and once you have a customer, it's very easy to upsell them new products or to have them roll out this solution from one office to multiple offices. That's a very, very easy way to post growth.
Lewis: You talked about the competitive risks a little bit with GrubHub. Is that something that's a concern for BlackLine? What are you worried about with this company?
Feroldi: This is the company that, when I was reading through the 10-K, there's always a section on competitors, and almost every 10-K you'll ever read always says, "We operate in an intensely competitive industry." Every industry will say that. What jumped out to me when I was reading BlackLine's annual report was, they literally list two competitors. One is a sort of direct competitor, and another is a small division within Oracle. These guys are basically the only ones that are doing what they're doing in this field that is built for growth. To me, the biggest risk with them is that their solution fails to get CFOs to switch over in time. But, from what I've seen thus far, and their revenue growth as it is, I'm very comfortable that they'll be able to continue doing that.
