BlackLine, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. BlackLine provides cloud-based financial accounting close software on a SaaS basis. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $69.7m | $55.5m | $133.8m | $106.7m |
| GAAP gross margin | 78.5% | 78.6% | 78.7% | 78.0% |
| Operating loss | $(6.0)m | $(8.8)m | $(15.3)m | $(16.4)m |
| Net loss attributable to BlackLine | $(5.2)m | $(8.5)m | $(13.8)m | $(15.6)m |
| Basic and diluted loss per share | $(0.09) | $(0.16) | $(0.25) | $(0.29) |
| Non-GAAP net income | $6.1m | $0.5m | $7.2m | $0.8m |
- Q2 revenue rose 26% year over year; subscription and support revenue increased 25%. For the first half, revenue grew 25%. Management attributed growth to more customers and users, expansion of products within existing accounts, and strategic-product sales.
- GAAP gross margin was broadly stable in Q2 and improved for the first half. Non-GAAP gross margin was 82.7% in Q2, versus 82.9% a year earlier; first-half non-GAAP gross margin was 82.7%, versus 82.6%.
- Operating losses narrowed despite increased investment in sales and marketing and research and development. Q2 sales and marketing expense was $37.2m and R&D was $10.8m. Stock-based compensation was $8.0m in Q2 and $14.5m for the first half.
- Cash provided by operating activities was $11.6m for the first half, up from $6.5m. Cash, cash equivalents and marketable securities totaled $145.2m at June 30, 2019; management said available resources and operating cash flow should cover working capital, capital expenditures and financing needs for at least 12 months.
- Current assets were $235.8m and current liabilities $174.7m, implying working capital of approximately $61.0m. Current deferred revenue was $144.3m. The company reported no interest expense for the first half of 2019 and no funded debt balance in the presented balance sheet; operating lease liabilities totaled $16.7m.
- Deferred revenue was $144.5m including noncurrent amounts. Contracted revenue not yet recognized was $302.3m; the company expected to recognize approximately 64% over the next 12 months.
Changes, outlook and notable items
- Customer count increased 17% year over year to 2,813 and users rose 13% to 236,802. Dollar-based net revenue retention declined to 108% from 111% a year earlier, continuing a multiyear downward trend that management associated with factors including churn, customer mix and slower expansion of existing accounts.
- International revenue represented approximately 22% of first-half revenue, compared with 21% in 2018. SAP became a reseller in late 2018, and BlackLine said it no longer owes SAP a percentage-based fee on revenue from new customers using SAP ERP systems.
- No formal revenue or earnings guidance was provided in the supplied filing text. Management noted that larger contracts and strategic products may lengthen and make sales cycles less predictable, and that customer buying patterns and seasonality can cause quarterly variability.
- Operating expenses reflected continued hiring and growth investments. Average headcount in cost of revenue increased 46% in Q2 year over year; sales and marketing expense benefited in part from lower partner referral fees. Management cautioned that growth investments may not produce expected revenue or profitability.
- BlackLine adopted the lease accounting standard on January 1, 2019, recording $14.9m of right-of-use assets and $18.3m of lease liabilities at adoption, with no reported impact on equity, earnings or cash flows. It also adopted hosting-arrangement implementation-cost guidance prospectively, capitalizing $0.4m in the first half.
- Contingent consideration related to the 2013 acquisition was valued at $6.5m, with a maximum cash payment of $8.0m tied to realization of tax benefits. The company reported no litigation expected to have a material adverse effect; potential indemnification payments were not estimable and no liability was accrued.
- Key risks include customer retention and expansion, competition, longer sales cycles, cybersecurity and service availability, reliance on third-party data centers and strategic partners, international and foreign-exchange exposure, privacy regulation, and the company’s history of losses. U.S. federal and state deferred tax assets remained subject to a full valuation allowance.
Investor verification points
- Track whether the 108% retention rate stabilizes or declines further, and whether customer and user growth translates into recurring-revenue expansion.
- Assess the sustainability of revenue growth alongside rising operating costs, stock-based compensation and continued GAAP losses; compare GAAP results with the company’s non-GAAP adjustments.
- Review operating cash generation, deferred-revenue trends, capitalized contract acquisition costs and the timing of contracted revenue recognition.
- Monitor strategic-product adoption, sales-cycle length and the contribution and terms of SAP’s reseller channel.
- Confirm the cash and investment position against lease commitments, contingent consideration and other contractual obligations; the filing lists $8.3m of purchase obligations.
- Review cybersecurity, data privacy, service continuity, foreign-exchange and international expansion risks, as well as any developments in tax contingencies or legal matters.