On Monday, Wolfe Research began coverage on shares of BlackLine (NASDAQ:BL), a leading provider in the office of the CFO market, with a Peer Perform rating. The research firm set a fair value range for the company's stock between $56 and $74, based on 5.4x to 7.0x CY25 enterprise value to sales (EV/S).
BlackLine, known for its comprehensive financial operations product suite, has been a dominant player, particularly with its financial close solution for mid-market and enterprise customers. The company boasts a strong customer base, with approximately 60% of the Fortune 500 and 50% of the Fortune 1000 companies utilizing its services. BlackLine's key differentiators are automation and reliability.
Despite nearly a decade of over 20% growth, BlackLine saw a shift in FY23 with approximately 13% year-over-year growth due to a challenging macroeconomic environment, changing buying patterns, and a trend towards solution consolidation. This change impacted new customer and user growth, expansion rates, and customer retention.
New customer and user growth slowed to 5% and 6% year-over-year in FY23 from 9% and 12% in FY22, respectively. Net revenue retention (NRR) dropped to around 106% in FY23 from approximately 109% in FY22, and gross retention rates decreased to the mid-90s from the high-90s.
In response to these headwinds, BlackLine's management adopted a proactive operating approach, achieving more than 1,000 basis points of operational leverage in FY23. This strategy is anticipated to result in 17.5% to 19.5% operating margins and 20.5% to 21.5% free cash flow (FCF) margins in FY24 and FY25, respectively, to help counterbalance the slowing revenue growth.
The company is also shifting to a new operating model that prioritizes solutions, leverages their partner ecosystem, and focuses on their Strategic Product portfolio, which could see a 20%-30% increase in average contract value (ACV). BlackLine is also reviewing its seat versus platform pricing strategy and introducing innovations like GenAI, although these may initially pressure seat numbers.
While these initiatives could potentially rekindle growth for BlackLine, Wolfe Research notes that such operational and strategic changes often require time and carry execution risks. The firm is awaiting evidence of traction before altering their stance on the stock.
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