We recently hosted our quarterly client conference call. You can read a full transcript HERE.

Below is an excerpt from the call discussing our investments in Blackline and Home Depot and why we expect them to survive and thrive on the other side of COVID-related economic and business impacts.

Excerpt

Arif Karim:

Let’s talk about Blackline next.

Blackline supplies cloud-based software that enables the automation, management, and tracking of manual and repetitive accounting procedures, especially related to a process called accounting closing. This relies on collecting sales and expense transaction data from multiple IT systems within mid-size and large enterprises, matching and reconciling those transactions and posting them into a final ledger that is then used to construct the financial statements of a company.

This process has traditionally been manual with excel spreadsheets sent back and forth between multiple individuals and parties, leading to a process that can be error prone or worse. By automating the process, not only do enterprises increase the speed, efficiency, and transparency of their accounting close process, but they also have an auditable system of record and tracking for compliance and management purposes.

All this is to describe just how critical Blackline’s software is to customers. Just as an old adage goes that accountants are needed in good times and bad times to tell you which one you’re in, so it goes for Blackline’s software. In fact, its ability to automate processes means that it also reduces costs in those bad times while allowing companies to act faster in a changing economic environment.

With a 97% customer retention rate and about 110% revenue retention rate, the company’s software is clearly very sticky. But this is a young market and Blackline is the leader, so growth is an important value creation goal. As a result, it rationally invests heavily in sales marketing and R&D to both acquire new customers and grow its footprint of products within its customer base.

We expect that with a recently deepened partnership with SAP in its go-to market strategy, when customers are ready again to focus on faster speed, lower cost, and improved efficiency in the virus’ aftermath, Blackline will be ready to help them do just that with its software solution.

Sean Stannard-Stockton:

Home Depot is a newer addition to our portfolio. However, we’ve followed the home improvement space for many years and we’re particularly excited about the opportunity ahead for Home Depot. In the years since the housing bust, the company has managed to increase revenue by 60% and earnings by 240% even while only increasing their store count by just 2%. This sort of disciplined execution has led to the company exhibiting returns on invested capital far above most other established retailers, although Starbucks, another holding of ours also generates very high returns on capital.

As discussed during my comments on First American, we do expect housing activity to come to a standstill in the near term. However, Home Depot is deemed an essential business and their stores remain open. With ultra-low interest rates enabling cash out refinancing and with a home owner’s deck that needed repairs prior to Coronavirus still needing to be repaired after this is over, we expect an explosion of pent up demand to come back to the home improvement sector when the crisis has passed. Just as housing transactions were growing rapidly in January and February, most leading indicators of home improvement activity were also accelerating going into this period.

As anyone who owns a house knows, it is often easy to overlook cosmetic issues in a house you’ve lived in a long time or defer maintenance on small items. But after being stuck in their homes for a month or two, it would not surprise us at all if many homeowners emerge with a long list of items they want to fix. And while Home Depot is the leader in their category and we feel confident they can get through this crisis, the same cannot be said of the large number of local hardware stores which collectively still have a meaningful portion of home improvement market share.

2020 is going to be a highly unusual year. Exactly how it plays out is not knowable. But for those companies that can get through this year, and we think every one of our holdings is among that group, the years ahead will be unique in the degree to which weaker competitors have been swept aside and the opportunity for market share gains for the remaining, undamaged market leaders will be unprecedented.

You can read the full transcript here.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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