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Will SAP Acquire BlackLine?

Posted on Wednesday, May 15th 2019

According to a Market.Us report, the global accounting software market is estimated to grow at 7% CAGR from 2019-2028. The market was valued at $6.2 billion in 2018. Recently, cloud-based financial software provider BlackLine (Nasaq: BL) announced its fiscal first quarter results that surpassed market expectations.

BlackLine’s Financials

Revenues for the quarter grew 25% over the year to $64.13 million, compared with the Street’s estimate of $63.32 million. It ended the quarter with a net loss attributable of $8.6 million or $0.16 per share. On an adjusted basis, it reported a net income of $1.1 million or $0.02 per share. The market was looking for a loss of $0.01 per share for the quarter.

By segment, subscription and support revenues grew 26% to $61.27 million and professional services revenues grew 7% to $2.86 million.

Among other metrics, it added 76 net new customers in the quarter to end with over 2,700 customers. Net user base for BlackLine grew to 226,979 and it achieved a dollar-based net revenue retention rate of 108% at the end of the quarter.

For the current quarter, BlackLine forecast revenues of $67.4-$68.4 million with a non-GAAP net income of $0.00-$0.03 per share. The market was looking for revenues of $67.58 million with an EPS of $0.02 per share for the quarter. BlackLine expects revenues of $276-$281 million for the year with an EPS of $0.15-$0.18. The market was looking for revenues of $277.55 million with an EPS of $0.15 for the year.

BlackLine’s Growing Partnerships

BlackLine continues to focus on growing its partnerships with other tech services providers to drive market reach. Earlier this year, it had announced an extended partnership with SAP. The Solution Extension (SOLEX) partnership made SAP a reseller for BlackLine. During the current quarter, BlackLine closed “some” SOLEX deals in Europe and South Africa. The tie-up with SAP has helped SAP offer process improvements outside of their core ERP, improve transitioning to HANA, and has provided the joint customers with the ability to perform an optimized financial close with reduced risk and enhanced efficiency.

Recently, BlackLine entered into another agreement with Ellucian, a premier provider of software and services to the higher education market. As part of the agreement, the two companies will deliver best-in-class finance controls and automation software solutions to colleges and universities around the world. They will help automate critical accounting processes, strengthen internal controls, and provide near real-time transparency into financial data and transactions.

Traditionally, colleges and universities with smaller accounting staffs rely on Excel for balance sheet reconciliations. With the tie-up, together, they will provide a solution that not only automates and simplifies the reconciliations, but also provides these accounting teams with the ability to drive change with financial insights. Ellucian works with over 2,500 educational institutions in more than 50 countries. Its joint customers include names like Drexel University, Gonzaga University, and University of California, Davis (UC Davis).

BlackLine has done well for itself by building these tie-ups with other bigger vendors. But I believe that it could do even better if it were to open itself to a PaaS strategy. Currently, BlackLine offers an API-driven strategy offering connectors that can extract relevant data from ERP solutions. In addition to, if it were to focus on a PaaS strategy by opening its platform to third party developers, it could build a thriving ecosystem of financial activities focused applications. These applications could attract more customers to its platform and also provide BlackLine with acquisition opportunities.

BlackLine’s growth has made it a very attractive acquisition target for a player like SAP. Earlier this year, SAP announced that it was targeting to triple its value by 2023. The lofty plans would require growth through acquisitions. BlackLine has already built deep integrations, and a fruitful partnership with SAP. A merger with SAP will offer SAP with access to a cloud-based financial reconciliation service that can complement its financial ERP offering. With a healthy cash balance of Euro 7.3 (~$8.2 billion), SAP can afford to acquire BlackLine.

Its stock is trading at $47.75 with a market capitalization of $2.63 billion. It touched a 52-week high of $58.11 in September last year. It has recovered from 52-week the low of $34.01 it had fallen to in November last year.

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