During our fourth quarter portfolio update, we profiled portfolio holding, Blackline (BL). Below is a replay of our live commentary on the company from our quarterly portfolio update webinar and an excerpt from our QUARTERLY LETTER.

Blackline

Blackline is a software company focused on bringing modern technology and automation to the accounting and finance departments of large and mid-size companies. Its software automates and brings visibility to critical accounting functions including financial close management, account reconciliation, intercompany accounting, compliance, and accounts receivables.

The software is sold to businesses’ finance and accounting departments where employees are the users of the software. As of September 30, 2021, Blackline had 3,700 companies as customers and over 315,000 users of its software. As result, it is expected to generate over $400 million in revenue in 2021 nearly double the amount it generated just three years ago and more than five times what it generated in 2016.

 

Blackline has grown so fast because it solves a critical pain-point at companies that relates to the multitude of systems across departments and subsidiaries (some of which are acquired business with their own legacy systems) that need to be integrated, in order to access the embedded transaction data, and reconciled to get a complete view of the financial results at the corporate level.

As a result, there is a lot of manual work involving accountants sending spreadsheets of critical data back and forth as they work through the financial close process, a fancy term for ensuring transactions across systems reconcile and finalizing the accounting records into an immutable record. The result of this are the financial statements that are then reviewed by third-party auditors before they are shared with shareholders, regulators, and partners as a company’s definitive record of activity for a given period.

Blackline’s software is based in the “cloud” as opposed to computers on the premises of customers, also known as Software as a Service or “SaaS,” which allows for several advantages for customers. One is that customers do not have to expend as much in labor resources to manage the software nor the hardware it runs on, which reduces the overhead IT burden and creates shared scale economics that result in lower overall costs. The second is that updates and new features added to the software are available simultaneously to all customers and at a higher frequency, which incorporate both suggestions from customers for improvement, new integrations with more systems as the customer base expands, and bug fixes. Lastly, it allows for easier, more secure, and auditable collaboration, both among employees in various departments inside the company and with outside collaborators such as auditors and partners. This also brings much improved visibility and control over collaborative team workflows and data as they head towards a period-close deadline.

Since accounting departments are considered “back office,” despite their critical nature in informing management and stakeholders of the state of the enterprise, investment in technology has lagged other higher priority front office and production areas in many industries. However, the accumulation of efficiency enhancing automation technologies accelerated by COVID-driven urgency towards a de facto work from anywhere solution has really helped drive increased demand for “Digital Transformation” solutions like Blackline’s.

Given Blackline’s leading position in this niche and its strong cultural focus on customer success, we believe Blackline has a long runway of growth ahead. Industry analysts and Blackline estimate the market for its targeted software solution is comprised of 165,000 businesses globally with a $28 billion total addressable market.  While we are always skeptical of large market estimates, we are certain that there are over a hundred thousand companies (customers) with millions of accounting/finance employees (users) for whom a more efficient and reliable solution to automate and manage their repetitive, but important, workload creates a very large market against which Blackline can execute.

As one would imagine, when a software solution is integrated into a critical, collaborative function within a company and partner ecosystem, it is hard to switch away from the vendor. That of course comprises Blackline’s competitive moat within its customer base. In addition, as it proves its value to customers and enables its users to succeed, it opens the door to new adjacent opportunities within that user-base. This adjacent opportunity is what drove its expansion into Accounts Receivables management with its acquisition last year of Rimilia from its initial footprint in Financial Close automation.  Evidence of that moat and success has been its average customer retention rate of 97% over the past 5 years and a revenue retention rate of 109%, i.e., the 97% of customers who renew their contracts with Blackline each year buy 12% more services when they do. The increase results from a combination of more users, more products, more subsidiaries, more geographies, and price increases.

While we have good evidence for the value that Blackline’s software brings to customers and users, it is still a relatively small company with a small but fast-growing footprint that is overshadowed by much bigger players in the Enterprise Resource Management (ERP) software space, who play in adjacent parts of the market into which Blackline integrates. This is why we categorize Blackline as an Emerging Moat company until it gets to a scale where the threats become less existential. In its favor in competitive bake offs is Blackline’s strong record of customer success and as the independent solution, Blackline’s software works much better among the disparate often competitive systems where the solution needs to be able to integrate into disparate systems (often with their cooperation) to be effective. Nevertheless, ERP players like Oracle are more likely to be used in single vendor standardized environments where the ERP provider could choose to “throw in” its own financial close system as an alternative to Blackline.

Having said that, the largest ERP vendor, SAP (Oracle is 2^nd), has chosen to partner with Blackline’s solution rather than develop its own, going as far as paying its own salespeople commissions on the Blackline sales they drive in its lucrative customer base of 425,000 customers, including 10,000 that generate over $1 billion in revenue. The SAP partnership alone drives about a quarter of Blackline’s new sales while other partners among the major consulting firms, like Deloitte, EY, KPMG, and Cap Gemini, play an influencing role in most all large deals, thereby bringing leverage to Blackline’s own sales efforts.

Importantly Blackline’s new CEO and former COO Mark Huffman, who was picked as her successor by founder Therese Tucker, led sales at NetSuite, where he helped grow sales from $3 million to $1 billion before its acquisition by Oracle. We believe the combination of Huffman’s leadership, Blackline’s culture of focusing on creating value and success for customers, and the deepening relationships with its partners will help Blackline continue to continue to scale its business globally and further enhance its competitive advantages over the next few years.

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.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.