STOCK | 12/4/20 FRESH LOOK

BLACKLINE INC. GREEN YELLOW RED LIGHT LIGHT LIGHT (TICKER: BL) LBIR Recommendation

Stock Price: $224.17 (12/5/20) Company Size: $6.8B Author: Janice Quek

Industry: Financial and Company Rank: 453 Sector: Technology Compliance ERP Software

Blackline is a leading cloud-based financial operations and accounting software provider.

IN THIS FRESH LOOK WE’LL COVER:

ä u Summary of the Business Grab-and-Go

Blackline’s range of financial operations solutions is THESIS offered on a subscription basis and applicable to a An investment in Blackline is a play wide range of companies across multiple industries. on demand for cloud-based u Recent Developments financial accounting and Positive Q3 performance indicate an improved management software. Blackline’s environment for Blackline and management is highly rated suite of solutions, optimistic of the outlook ahead. along with an underpenetrated market still operating on u Competitive Environment traditional, inefficient tools will The company is a leading vendor in a relatively drive growth for the company. benign competitive landscape. It has been Furthermore, its approach to acknowledged as one of the best available. pursuing high ROI partnerships to u Conclusions/Recommendations drive awareness and larger deals The company is leading provider in the industry will sustain the company on a and has an attractive and growing value strong growth trajectory in the proposition. It continues to be a steady performer medium term. for investors and we rate it a Green Light.

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0.94 STOCK: BL | 12/4/20 FRESH LOOK

Data as of 12/5/20 unless specified

Enterprise Revenue Fwd $348.0M 6.80B Market Cap: 6.91B Value: (TTM): ($336M) Fwd (TTM) 19.87x YTD Return: 134.21% RSI: 68.3 Price/Sales: (20.25x) Gross Margin Revenue Growth 80.70% 20.4% ROIC (TTM): -3.2% (TTM): (TTM, YoY): 200-day 52-Week High: 125.53 52-Week Low 38.32 79.07 Moving Avg.

EBITDA 8.3M CFO 48.1M FCF 33.0M

Insider Transactions (2020): Insiders sold 42,768 shares in the last three months

2% of its $28 billion total addressable market, SUMMARY OF BUSINESS û and the opportunity is large and untapped.

Blackline is a leading provider of a cloud-based Broad portfolio, high ROI and ERP-agnostic platform that modernizes accounting and traits make Blackline a leading choice for financial operations for organizations. It companies specifically targets mid to large companies. Blackline earns its revenue through subscription Blackline’s software fit current market needs fees for use of its software. and industry trends. It is built and designed for the cloud, and offers the broadest suite of Financial Close is chaotic, time consuming and financial accounting and management solutions expensive for organizations using manual in the market, all integrated on a single platform. processes Most companies begin with Blackline’s core products before moving to its set of strategic Employees have relied on manual methods, products (e.g. Intercompany Hub, Smart Close legacy software and spreadsheets for a long time etc), and Blackline’s broad portfolio enables for financial operations, and because they work clients to gradually expand their subscription sufficiently for their purposes, many continue with the company. The software has a high with status quo, even as work is becoming more Return on Investment (ROI), an important part complex with greater regulation and compliance of the buying decision. Another important requirements, changing accounting standards competitive advantage is that the Blackline and operations across geographical regions. platform is Enterprise Resource Planning (ERP) Increased complexity and tighter timelines can agnostic. As many of the midsized to large often result in chaos and mistakes, and organizations that it targets already use an ERP companies will need to consider using vendor, the cost of using an independent technology to automate work if they want to financial close software vendor that does not become more efficient and save resources and work well with the organization’s ERP, or only time. Blackline estimates that it serves less than integrates with a few ERP brands is high. This is

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

a crucial point, because most ERP solutions Microsoft Dynamics. Blackline also has a special despite their maturity in the software market, agreement with SAP where its financial close have not evolved their platforms to handle software is listed as a Solution Extension – an financial accounting and close processes well, exclusive arrangement for which Blackline is the compared to other business functions. Blackline only recommended financial close solution to is compatible with 161 ERP vendors which SAP’s 9,000 customers globally. includes commonly used ERP vendors such as NetSuite, Oracle, Workday, Sage Intacct and

Source: Blackline Investor Presentation

Financial and Operational Metrics Blackline currently has 54% of the Fortune 50 as its customers, and 35% of the Fortune 500. Blackline has grown rapidly in the last five years, with revenue expanding at a CAGR of From a profitability standpoint, the business has 36.1% between FY15 and FY19. This has been high gross margin in the low 80+%. Blackline is primarily due to success in the enterprise as the gaining operating leverage as expenses as a average deal size has grown over time. Dollar- percentage of total revenue are declining. The based net revenue retention rates are high – well company has a positive non-GAAP operating above 100%, indicating that customers are margin and free cash flow margin, and both purchasing more of Blackline’s products over margin metrics are expanding gradually as the time, while renewal rates remain in the high company scales. Blackline is profitable today on 90+%, reflecting customers’ overall satisfaction an adjusted basis. with the product and their desire to continue with Blackline. Size of deals are also getting larger, often involving a strategic product. The company has more than 3,200 customers today.

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

û RECENT DEVELOPMENTS Blackline announced good results in Q3, LB•LOGIC We do not think that the CEO change will impact Blackline’s reporting continued improvement in the performance adversely. Huffman has been demand environment, and increasing business heavily involved with the company’s activity and momentum throughout the quarter. operations since 2018, managing its sales, Sales exceeded the company’s expectations, partnerships and marketing aspects of the firm. Additionally, Therese Tucker’s new reflecting the importance of Blackline’s software role will create stronger emphasis on R&D, in the enterprise, especially as companies potentially accelerating new product roll- consider migrating certain functions to a remote outs, which we see as important to strengthen their competitive position. arrangement permanently. Management Tucker’s experience is highly technical, commented that some of its customers have having served as Sungard’s previous CTO already shifted to a permanent remote close, and and graduating with a B.S. in Computer it expects more to have similar work Science. arrangements in the future. The company also saw solid large deal momentum, a number of them were deal expansions into strategic solutions, and a very healthy pipeline for the LB•LOGIC Blackline’s success in enabling future. Its mid-market segment was also robust, customers to transition and work seamless remotely will be a strong testament for its achieving record volumes of new logos. Win software capabilities as more companies rates were strong against competitors, and the consider moving the financial close to a combination of these results gives Blackline the permanently remote function. This is a selling point and catalyst for new logos. confidence that it will continue to performance and potentially accelerate its business post- pandemic. Management also highlighted that Financial and Operating Results Covid-related relief programs offered to customers when needed have not impacted Q3 Blackline announced total revenue of $90.5 results materially, and the company believed million in Q3, up 21% from Q3 of FY2019, driven that it is now “out of the woods” on these by strong sales and record revenue from its programs, reflecting the optimism of recovery services segment. Contribution from ahead. international continued to increase in

proportion, reaching 25% of total sales in Q3, up Earlier in the quarter, Blackline also announced from 22% last year. Partners were also key to that its current CEO Therese Tucker will be securing deals, particularly its partnership with moving into another role, and Marc Huffman SAP, which made up 23% of sales in Q3, will be taking over as CEO from 1st January 2021. maintaining from FY19. More than half of its Marc Huffman is Blackline’s current president large deals (~60%) came from a partner. The and Chief Operating Officer. Following the company also reported strong renewal rates in change, Therese Tucker will provide strategic Q3 at 97%, while its dollar-based net revenue oversight and focusing on product innovation retention rate was at 107%, falling one and customer success, areas that she is percentage point due to the pandemic passionate about. environment. On the profitability front, margins

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

improved as expenses fell from lockdown based, primarily enterprise customers and high restrictions, which led to savings from rent, renewal rates. travel, operational costs and virtual marketing. As a result, the company reported non-GAAP operating income of $14.6 million, or a margin of Outlook and Estimates 16.2%, up from $4.6 million in Q3 FY19. Operating cash flow was a record $22 million, Blackline gave positive guidance for Q4, leading to free cash flow of $18 million, or a expecting to see demand returning to the market margin of almost 20%, the highest ever for the here on out. It guided for revenue in Q4 to be company. between $91 and $92 million, which will end FY20 with revenue in the range $347.4 to $348.4 Company and Product Expansion million, or growth of 20% at midpoint of the range. Growth investments are projected to Blackline’s acquisition of Rimilia during the continue, and extra spending to integrate quarter generated significant buzz at the Q3 Rimilia acquisition will lead to some margin and earnings conference call. Rimilia, an accounts cash flow contraction. receivable automation software provider, was purchased for $150 million, which was funded LB•LOGIC While Blackline has benefitted by Blackline’s cash. The addition of Rimilia to from work-from-home arrangements, the Blackline’s existing suite of capabilities is company’s sales velocity has also been expected to increase its total addressable market impacted. Revenue guidance for Q4 reflects the modest impact of the pandemic by $10 billion, further strengthening its overall to Blackline’s performance during competitive position. Rimilia’s software, the year, but also demonstrates its powered by AI, helps companies intelligently resilience for keeping sales deceleration to manage cash on balance sheets more efficiently, a minimum. We think the company has executed well under the current challenges optimizing collections, and improving working of the macro environment. capital management and allocation. They have more than 100 customers and other products in its portfolio that will enhance Blackline’s own solutions, providing customers with a more comprehensive value proposition in the office of the controller. According to management, the accounts receivable market is underpenetrated, and most of its potential customers are still using legacy manual processes to manage their order- to-cash process. The industry is also highly fragmented. Rimilia has a stronger presence in Europe and a good distribution network in that region, complementing Blackline’s market position in North America. The business model is also similar to Blackline’s – subscription-

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

û COMPANY MANAGEMENT û COMPETITIVE ENVIRONMENT

Therese Tucker is CEO of Blackline. Prior to Blackline competes with different categories of starting the company, she was CTO of SunGard vendors including point solution vendors such Treasury Systems where she led the Product and as Trintech and Floqast, ERP vendors that Development for SunGard’s five corporate provide a financial close and accounts treasury systems. At SunGard, she was also head management module, and legacy methods of of development of the Global Trader system, an using spreadsheets to complete the financial institutional trading and portfolio management close process. The competitive landscape is system that was purchased by SunGard. Tucker generally benign as Blackline’s largest also developed other software solutions before competitor is the inertia of organizations Blackline - Tax Answer Scenarios, a tax planning continuing with spreadsheets, which presents a software marketed to over 1,000 tax preparers and significant greenfield opportunity for the CPAs annually. Tucker built Blackline herself and company. Blackline is also one of two pure-plays has a B.S. in Computer Science and Mathematics offering a broad suite of financial accounting from the University of Illinois. and management solutions on a cloud-based

Blackline was founded in 2001 by Therese Tucker, platform with a highly visible market presence. a former CTO at SunGard Treasury Systems, who The other pure-play is Workiva that also is also Blackline’s current CEO. The company supports both midsize and large organizations, functioned with no outside funding until 2013 and received a positive review from Garter’s when an investor group, led by Silver Lake 2019 Magic Quadrant report for Cloud Financial Sumeru, invested more than $200 million in the Close solutions. Workiva was placed in the company. In September 2016, the company Leaders’ quadrant again in 2019, although the acquired its European competitor, Runbook for $34 report mentioned that its position worsened million. Runbook’s on-premise Smart Close slightly because competitors are enhancing their software was integrated to Blackline’s cloud-based offerings and adding advanced capabilities such platform. On September 30, 2016, the company as AI to their innovation roadmap. Workiva is filed for an initial public offering with the SEC. On also used more for its financial disclosure and October 28, 2016, BlackLine began trading on the compliance functions, rather than large financial Nasdaq market under the “BL” ticker symbol. ERP close deployments. The company’s customers vendor SAP announced in the fall of 2018 that are mostly based in North America or Blackline’s software would become a solution subsidiaries of North American companies. extension for its customers – a significant milestone Amongst ERP vendors, Oracle is the largest ERP for Blackline to be recognized by a leading ERP vendor that has its own financial consolidation vendor for its software performance and and close cloud module, and the company has Blackline’s future access to SAP’s large installed an extensive customer base, global reach and a user base. Blackline is headquartered in Woodland Hills, California, and has offices worldwide. As of strong ecosystem of implementation partners. December 31, 2019, the company has 1,055 However, user reviews of Oracle’s software do employees. Therese discusses Blackline’s indicate that it is not easy to deploy, maintain or differentiation and outlook in this interview here. upgrade and customer service is poor.

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

Source: Blackline Investor Presentation

System Integrators have proven fruitful in Blackline has been recognized as an industry growing the company’s visibility and traction in leader four years in a row in the Leader quadrant the enterprise as well as mid-market segment. of Gartner’s Magic Quadrant for Cloud Financial Blackline was also recently awarded the 2020 top Close solutions. Its market share has grown rated award in the Financial Close Category steadily, outpacing peers in revenue growth, as from TrustRadius, an independent vendor win rates continue to improve. Blackline’s review platform. exclusive partnership with SAP has also expanded its market presence and valuable partnerships with other ERP vendors and

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

Source: Gartner’s 2019 Magic Quadrant for Cloud Financial Close Solutions û TREND ANALYSIS: VALUATION As with many companies in the technology valuation has become more pricey, but not industry, Blackline’s stock has seen significant unreasonable considering its market position, upward price action and multiple expansion this benign competitive landscape and steady year. At a forward P/S ratio of 19.87x, the stock’s performance.

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

Revenue Fwd. Revenue Gross Margin Forecast Forward P/E Forward P/S Growth (%) (%) (Millions USD)

Blackline Inc. (BL) 20.40% 348.0 80.7 194.77 19.87

Workiva (WK) 16.90% 348.2 73.5 3759.00 10.41

Coupa Software (COUP) 28.50% 500.6 63.2 725.41 45.43

Workday Inc. (WDAY) 18.60% 4,302.0 71.9 83.33 11.75

Zendesk Inc (ZEN) 25.50% 1,024.0 74.8 241.23 15.39

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

win rates against rivals. Its recent acquisition of CONCLUSION / û Rimilia strengthen’s its value proposition and RECOMMENDATION expands its addressable market and geographic Blackline performed well in Q3, and its results presence further. Overall, we believe Blackline is reflect an improved and more positive demand steady performer and the outlook is optimistic environment for the company’s products. From for the company. We rate the stock a “GREEN a competitive landscape standpoint, industry LIGHT”. dynamics have not change and Blackline maintains a leading position, reporting strong n Stock Chart for Blackline Inc. (BL)

n Performance Data 2014 2015 2016 2017 2018 2019 RETURN ON INVESTED CAPITAL (%) N.A. -12.2% -16.1% -13.0% -9.0% -5.8% GROSS MARGIN (%) N.A. 65.7% 70.5% 72.9% 75.0% 77.7% EARNINGS (MILLIONS USD) N.A. -24.73 -39.16 -38.06 -27.80 -32.53 YoY Earnings Growth (%) N.A. -47.6% -58.3% 2.8% 26.9% -17.0% REVENUE (MILLIONS USD) N.A. 83.61 123.12 177.03 227.79 288.98 YoY Revenue Growth (%) N.A. 61.8 47.3% 43.8% 28.7% 26.9%

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK n Valuation Data 2014 2015 2016 2017 2018 2019 SHARE PRICE (USD) N.A. N.A. 28.10 32.84 40.11 52.06 SHARES OUTSTANDING (MILLIONS) N.A. N.A. 51.3 53.0 54.7 55.9 MARKET CAP (MILLIONS USD) N.A. N.A. 1417 1738 2239 2884 PRICE/SALES RATIO N.A. N.A. 9.5 9.7 9.7 9.9

A word about our Fresh Looks: These reports are meant to be produced quickly, giving our Portfolio Manager the information he needs to make an investment decision in a short timeframe, as markets often move quickly after earnings announcements. You will notice the “Traffic Light” at the top. This is a scale indicating the likelihood that we follow a name in future quarters, with the intention of producing a rating of Buy/Hold/Sell after we study the company further. “Green Light” is roughly equivalent to “Buy” after we study a company more than once. “Yellow Light” approximately means “Hold” and “Red Light” would indicate a “Sell” and an end to our continuing coverage of a company. By making these reports public, we intend to give the broader investing community a window into the Left Brain investment process. Since many of the names we cover lack Wall Street research, sometimes these Quick Looks will be some of the only publicly available analysis on a particular stock/bond. We believe that even our rapid-fire reports on certain names will provide great value for the reader. Given the time-sensitive nature of Fresh Looks, they are raw, unfiltered documents. You may see a typo here or there, or perhaps a note from an analyst written directly to our PM, Noland Langford. That is just part of the process. The methodology here is the analyst reads the most recent earnings call, along with the Management Discussion & Analysis section of the most recent Quarterly Report, along with compiling the key quantitative metrics that we value most at Left Brain. The result is a short report that gives us just enough information to take a position in securities where time is of the essence: sometimes the market doesn’t give us enough time to consider every angle before we take action. We hope you find these previously “internal use only” documents useful in your understanding of the investment markets.

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EQUITY 0.94 STOCK: BL | 12/4/20 FRESH LOOK

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