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3 Reasons This Small-Cap SaaS Stock Is a Buy

By Matthew Cochrane – Updated Nov 14, 2018 at 8:10AM

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Large enterprise clients are finding value in this company's software services, as it eliminates the need for cumbersome tasks previously performed by manual labor. It's time for investors to realize the value of this high-growing tech company, too.

BlackLine Inc (BL 8.24%) shares have suffered from the recent market volatility as much as any company's, dropping about 29% since the stock price's peak in late September. The company's quarterly earnings report, released on the first day of this month, did little to stop the rout, even though the company continued to show strong top- and bottom-line growth.

In the third quarter, the company -- which provides cloud-based accounting software solutions to its enterprise customers -- saw total revenue rise to $58.7 million, a 29% increase year-over-year, while non-GAAP net income grew to $4.1 million, a 1,267% increase year-over-year (though it should be noted that was coming off an incredibly small base of just $0.3 million). After adding 92 net new customers in the quarter, BlackLine increased its total customer count to 2,494, a 19.3% increase over last year's third-quarter total.

Let's take a closer look at what the company does, its business model, and a big new partnership to see why it might be a good idea for investors to take advantage of this recent dip and add this fast-growing company to their portfolios.

Workers use calculators and spreadsheets to crunch numbers around a conference table.

BlackLine's software makes it possible for large companies to switch from batch processing to continuous accounting, freeing up precious manpower and giving companies real-time information on important business metrics. Image source: Getty Images.

What BlackLine does

BlackLine offers what is known as "continuous accounting" to corporations, which gives these businesses the ability to perform their accounting tasks in real-time as the data comes in. This replaces "batch processing," where companies must wait for large batches of data to come in at the end of a month or quarter before reconciling books and finishing other accounting processes.

The advantages to continuous accounting are numerous. First, it lets businesses divvy out workloads to accounting personnel evenly, eliminating the need for overtime and heavy workloads at the end of each period. It also gives companies access to real-time data and frees personnel for more productive tasks throughout the month.

BlackLine also provides its customers with additional support for things such as regulatory compliance, controls assurance, and intercompany accounting.

That BlackLine saves its clients from manually intensive, laborious tasks is evident from the new customers it added just this quarter. In the company's conference call, transcribed by S&P Global Market Intelligence, CEO Therese Tucker said one of its new customers was a multibillion-dollar audio equipment company that was still using "manual Excel-based reconciliation processes that were placing excessive demands on their accounting teams."

Another example given was a global materials solutions company that approached BlackLine during a three-year financial transformation project centered on "financial close automation." Tucker said:

This necessitated a technology solution that could not only deliver greater visibility, but also reduce the risk in their accounting processes. Ultimately, the breadth and depth of our functionality going beyond basic account reconciliations and extending into areas such as compliance, general entry management and fluctuation analysis is what positioned BlackLine ahead of the competition.

The advantages to BlackLine's subscription-based business model

BlackLine features what is known as a subscription-as-a-service (SaaS) business model, meaning that companies pay BlackLine for access to its cloud-based software in recurring fees rather than purchasing it with one-time large lump-sum payment. Because customers find such value in the amount of manpower that BlackLine saves them, these customers rarely leave, giving BlackLine a high-margin, recurring revenue stream over a long period of time.

Judging by the numbers, the SaaS business model appears to be working for BlackLine. In the company's 2018 second-quarter conference call, CFO Mark Partin said BlackLine's customer renewal rate for enterprise-level customers was in the high 90s-percentile, and for mid-market customers it was in the mid- to low-90s percentile. In Q3 BlackLine's revenue retention was 109%, meaning that BlackLine's customers from last year's third-quarter spent 9% more money this year on BlackLine's services.

While BlackLine still isn't profitable on a GAAP-basis, its adjusted gross margin was 81.4% this quarter. It has yet to turn a GAAP profit because it is spending money on landing new customers and developing new products. Given that each customer represents a high-margin recurring revenue stream for the future, this is absolutely the right approach for the company to be taking!

A new partnership

Finally, BlackLine announced a new partnership with SAP SE (SAP 2.96%) this quarter. Under the agreement, SAP will be able to directly sell BlackLine's products and services to its own customers across the globe. Tucker believes this comes with many advantages:

With this expanded partnership, SAP will add BlackLine solutions to its price list, enabling its sales team to sell BlackLine worldwide with the same processes, contracts, incentives and conditions as the rest of the SAP portfolio. Hundreds of SAP customers are already using our software, and this new agreement will make it even easier for SAP customers to adopt and benefit from BlackLine. As with any partnership, this will take time to build but we believe it creates a great long-term opportunity for us to expand our global footprint.

Tucker later added SAP had 8,000 enterprise customers with more than $1 billion in revenue that were not yet BlackLine clients.

An opportunity worth pursuing

BlackLine's long-term opportunity is huge, with each potential customer representing a possible recurring revenue stream for years to come. The company's customer and revenue retention rates are evidence that its customers are finding lots of value in its services and products. The new partnership with SAP should only help accelerate sales, as more companies will find it necessary to undergo financial transformation processes just to keep up with competition. The recent dip in share prices makes this an especially attractive time for investors to consider adding this fast-growing SaaS company to their portfolios.

Matthew Cochrane has no position in any of the stocks mentioned. The Motley Fool owns shares of BlackLine, Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

BlackLine, Inc. Stock Quote
BlackLine, Inc.
$60.43 (8.24%) $4.60
SAP Stock Quote
$81.46 (2.96%) $2.34

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