Description

Description

BlackLine (BL) was written up as a long on VIC last December. Please refer to that writeup for additional details about the business. Our thesis offers a different perspective on the company’s prospects. As a quick refresher, BlackLine sells accounting software across three main categories: (1) financial close management, (2) accounts receivable automation, and (3) intercompany financial management. BlackLine occupies a niche position in the accounting software landscape as it sits “in between” customers’ internal systems and third-party software (e.g. ERPs), often replacing manual processes in which controllers collect and reconcile data from disparate sources.

Let’s first take a look at some interesting insider behavior. Director Mika Yamamoto sold 35% of her BlackLine holdings in November 2023 at $54/share ($269k), well below the February 2023 high of $78, and far from the 2021 peak of $149. Ms. Yamamoto has served on BlackLine’s board since April 2019 and had never previously made an open-market sale of the company’s stock. Why sell 1/3 of her stock – in her first ever sale – as it’s getting crushed?

Ms. Yamamoto is a long-time software executive, currently the Chief Customer and Marketing Officer at Freshworks, with similar roles at F5, Marketo, SAP, and Amazon in the past. Given the research we conducted, we believe she may be signaling that significant headwinds are forming on BlackLine’s horizon.

1. Growth Model

At a high level, BlackLine’s growth story has fallen off-track. At its 2022 Investor Day, BlackLine unveiled a medium-term (3-5 year) model targeting 20-25% annual organic growth, reflecting the company’s transition from a “multiproduct company” to a “unified financial operations management platform,” revolving around a new product called BlackLine Accounting Studio. The platform strategy involves BlackLine becoming a central hub to “orchestrate accounting processes,” “[unify] ERPs” and “automate end-to-end accounting processes” – quite a bold vision.

Yet just a few months later, in February 2023, the company guided for only 13% FY growth, a steep drop off from the 22% CAGR experienced over the prior three years. Soon thereafter, CEO Marc Huffman was fired and the CSO/CMO and CTO jumped ship. Why all the chaos? We believe it all comes down to BlackLine’s flagging growth runway in its core business – which makes those mid-term targets a pipedream and will result in nearer-term disappointment.

We believe the real reasons for BlackLine’s struggles – and evolving strategy – are (1) increasing competition in the financial close space and (2) a changing buyer for BlackLine’s products.

On the competition front, we see FloQast as a growing threat. It’s a known price aggressor that is taking share in the mid-market. As a field contact told us, “FloQast often wins against BlackLine…Customers say they pay a lot of money for BlackLine but don’t get that much out of it.” FloQast is seen in the market as more user-friendly, meant to be implemented by accountants. BlackLine, on the other hand, is more associated with an “army of consultants,” according to our contact. Furthermore, the threat of market entry by ERP players such as NetSuite is growing – more on that later.

On the point about changing buyers, as a former BlackLine director explained to us, the core financial close and adjacent accounts receivables products have different buyers within a corporate finance department. As the company continues to expand beyond the financial close, this complexity increases. This is surely part of the motivation to sell a “unified platform” – but doing so cements the BlackLine buyer as the CFO, selling to whom is outside of BlackLine’s traditional “land and expand” model and capabilities. CFOs also make for tough customers – as we heard in the field, “CFO-oriented software stacks are becoming commoditized and CFOs are very price sensitive, given increasing competition.”

2. ERP Insourcing Threat

As mentioned at the top, BlackLine occupies a narrow place in the market landscape, sitting between ERP systems and corporate customers’ internal systems. We believe the biggest risk to BlackLine is ERP providers pushing deeper into their market. BlackLine flags this risk in the 10-K, highlighting that (1) they already compete with ERPs and (2) BlackLine’s partners/resellers may start competing with them.

BlackLine’s top re-seller is SAP, through which BlackLine software is sold as an SAP solution-extension (“SolEx”); this relationship is responsible for ~25% of BlackLine’s sales. While we are not arguing that the SAP relationship is about to change, we mention it to highlight BlackLine’s vulnerability to ERP in-sourcing. As a field contact told us, “BlackLine is on an island. They’re dependent on SAP and Oracle.”

Speaking of Oracle, Ms. Yamamoto’s sale occurred three weeks after SuiteWorld, NetSuite’s annual event, where the Oracle-owned company unveiled a new product called NetSuite Enterprise Performance Management (EPM). This product, according to its webpage, “brings together planning, budgeting, forecasting, account reconciliation, financial close, and reporting processes from across the entire organization to help businesses improve the speed and accuracy of financial processes and gain the insights they need to enhance decision-making.” The product is intended for release in North America within the next year.

We spoke to a former senior sales director at NetSuite who still works in the industry and believes this product release is a game-changer for BlackLine. In the past, our contact explained, the NetSuite sales team was only able to sell Oracle FP&A software. But going forward, “this expands…into account reconciliation, consolidation, close management, etc. – which goes directly into [BlackLine’s wheelhouse].” NetSuite hasn’t been selling BlackLine directly, but Oracle customers go out and buy BlackLine on their own. Now, NetSuite salespeople will sell NetSuite EPM as an alternative to BlackLine.

The NetSuite/Oracle model is to hook companies on NetSuite while they’re small, then have them upgrade to Oracle Fusion as they grow. Getting customers on EPM while still in the NetSuite phase makes them more likely to stick with NetSuite (and eventually Oracle) from the onset, preventing BlackLine from getting its foot in the door to begin with.

Summary

In summary, we believe BlackLine’s mid-term targets are unrealistic as the company faces increasing competition in its core product areas, and its expanding product offering creates a significant GTM hurdle. BlackLine has not formally backed away from these mid-term targets despite the company’s internal chaos and budding market skepticism. We believe BlackLine will underperform in the near-term, leading to the forced pushout or cut of these targets, which will represent a significant negative event for the stock.

Risks

BlackLine is 9%-owned by Clearlake Capital, which has a history of building stakes in publicly-traded tech companies and eventually taking them private, which is a risk – see Cornerstone OnDemand and Blackbaud. We suspect this has kept BlackLine short-sellers on the sidelines, with SI approximately 4% of the float.

Valuation & Price Target

Valuation-wise, we see ~53% downside from here based on 15x our 2025E EBITDA of $146M (consensus: $172M). We assume 8-10% growth over the next three years compared to consensus’ 9-17%, with EBITDA margins reaching 22% over that timeframe vs. 26% for the Street. The stock currently trades at 71x LTM EBITDA and 30x 2023E EBITDA. We see 15x earnings, in-line with the likes of ORCL, as a generous valuation for a former SaaS high-flyer that, by our estimation, has matured into a HSD to LDD grower.

Catalyst

Disappointing results over the next several quarters; growing recognition of NetSuite EPM as a threat to BL’s core business; eventual revision or pushout of the company’s mid-term targets.