BlackLine, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparison is with the same 2017 periods. Unaudited results are prepared under U.S. GAAP. BlackLine provides cloud-based financial accounting close software, primarily as SaaS.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $58.7 | $45.4 | $165.5 | $125.6 |
| Revenue growth | 29% | 32% | ||
| Gross profit / GAAP margin | $45.2 / 77.0% | $34.6 / 76.1% | $128.5 / 77.6% | $95.1 / 75.8% |
| Operating loss | $(5.0) | $(12.3) | $(21.4) | $(26.2) |
| Net loss | $(4.5) | $(12.1) | $(20.1) | $(28.9) |
| Basic and diluted loss per share | $(0.08) | $(0.23) | $(0.37) | $(0.56) |
| Operating cash flow | $11.3 | $3.7 |
- Subscription and support revenue was $56.2 million in Q3, up 31%; professional services revenue was $2.6 million, up 7%. For the nine months, those categories were $157.8 million, up 32%, and $7.6 million, up 24%, respectively.
- Management-reported non-GAAP net income was $4.1 million for Q3 and $4.9 million for the nine months, versus $0.3 million and a $1.7 million loss in the comparable 2017 periods. These non-GAAP measures exclude specified items, including stock compensation and acquired-intangible amortization; they are not GAAP earnings.
- At September 30, cash and cash equivalents were $38.4 million and marketable securities were $86.7 million, totaling $125.1 million. Current assets were $204.5 million; total liabilities were $152.3 million. The filing reports no material conventional borrowings; it lists $23.3 million of future operating lease payments and $6.2 million of contingent consideration.
- Nine-month investing cash use was $13.9 million, including $4.6 million of capitalized software development and $4.6 million of property and equipment purchases. Financing cash provided was $9.8 million, mainly from stock-option exercises, partly offset by tax-withholding share purchases and lease payments.
Material changes and operating indicators
- Growth reflected more customers, greater user and product adoption by existing customers, pricing, and non-user-based product sales. Customers increased 19% year over year to 2,494; users increased 15% to 214,747.
- Dollar-based net revenue retention declined to 109% from 113% a year earlier and 111% at June 30, 2018. Management says the longer-term decline could reflect churn, customer mix, slower product adoption, or slower user expansion.
- GAAP gross margin rose 0.9 percentage points year over year in Q3 and 1.8 points for the nine-month period. Operating expenses increased 7% in Q3 and 24% for the nine months; nine-month sales and marketing, R&D, and G&A expenses rose 20%, 23%, and 36%, respectively.
- Q3 sales and marketing expense edged lower year over year, largely because Q3 2017 included substantial stock-based compensation from modifications to Australian employee options. The filing reports $5.8 million of compensation related to that modification and a further $1.1 million related to an employee termination award in Q3 2017.
- International revenue was $12.0 million in Q3 and $34.0 million for the nine months. Customers using SAP ERP accounted for 23% of revenue in both 2018 periods, versus 19% in 2017.
Outlook, management commentary, and risks
- The filing provides no specific revenue, earnings, or margin guidance. Management states existing cash, marketable securities, and operating cash flow are expected to fund working capital, capital expenditures, and financing needs for at least the next 12 months; future capital needs depend on growth, hiring, R&D, international expansion, and market acceptance.
- Contracted revenue not yet recognized was $257.8 million at September 30; the company expected to recognize approximately 64% over the following 12 months. Deferred revenue was $118.3 million current and $0.3 million noncurrent.
- On October 31, 2018, BlackLine amended its SAP agreement: effective October 1, it no longer owes SAP license royalties based on revenue from customers using SAP ERP. SAP became a reseller, with BlackLine receiving a percentage of reseller revenue. The commercial impact is not quantified in the filing.
- In October 2018, BlackLine contributed approximately $4.5 million for a 51% interest in a Japanese subsidiary, which it will consolidate.
- BlackLine adopted ASC 606 retrospectively in 2018. The standard changed accounting for sales commissions and certain on-premise license revenue, and restated 2017 comparisons. The company also expects the lease-accounting standard, to be adopted in January 2019, to materially affect its balance sheet.
- Key risks include continued GAAP losses, retention and renewal trends, longer and less predictable enterprise sales cycles, competition, dependence on a limited set of solutions and strategic partners, cybersecurity and service availability, international expansion and currency exposure, and privacy regulation. The company notes that its U.S. federal and state deferred tax assets remain subject to a full valuation allowance.
- Management reported effective disclosure controls at September 30, 2018 and no material change in internal control over financial reporting during the quarter. The company reported no pending or threatened litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether retention continues to decline and whether customer, user, and product expansion can sustain subscription growth.
- How the SAP royalty removal and reseller arrangement affect partner costs, channel sales, and margins.
- The conversion and timing of the $257.8 million contracted-not-recognized revenue balance into reported revenue and cash collections.
- The distinction between GAAP losses and non-GAAP profitability, including the size and persistence of excluded stock compensation and amortization.
- The balance-sheet impact of lease-standard adoption and the eventual timing and amount of contingent consideration and other commitments.