BlackLine, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a quarterly report; fourth-quarter results are included as unaudited supplemental data. Amounts are in U.S. dollars.
Business context
BlackLine provides cloud-based software that automates accounting and finance work, including reconciliations, financial close management, intercompany accounting and controls. Revenue is predominantly subscription-based. At year-end, the company reported 2,208 customers and 196,612 users, excluding on-premise software, across more than 150 countries. Enterprise customers generated 84% of 2017 revenue.
Key financial results
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $177.0 million | $123.1 million | +44% |
| Subscription and support revenue | $168.5 million | $117.5 million | +43% |
| Gross profit | $135.5 million | $92.9 million | +46% |
| GAAP gross margin | 76.6% | 75.5% | +1.1 percentage points |
| Operating loss | $(35.1) million | $(33.9) million | Loss widened |
| Net loss | $(38.1) million | $(39.2) million | Loss narrowed |
| Basic and diluted loss per share | $(0.73) | $(0.92) | Improved |
| Cash from (used in) operations | $6.4 million | $(4.8) million | Improved |
Non-GAAP gross margin was 81.1% versus 81.3%; non-GAAP net loss was $3.1 million versus $16.5 million. These company-defined non-GAAP measures exclude specified items, including stock compensation and acquired-intangible amortization, and should be considered alongside GAAP results.
Fourth quarter: Revenue was $50.2 million versus $35.3 million in Q4 2016. Gross profit was $39.3 million versus $26.7 million, and net loss was $5.8 million versus $15.7 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $31.1 million and marketable securities were $81.5 million at year-end, totaling $112.6 million; current assets were $194.0 million.
- Operating cash flow was positive $6.4 million, supported in part by a $25.1 million increase in deferred revenue as customer subscriptions were billed in advance. Accounts receivable increased $19.9 million.
- Investing activities used $7.0 million; financing activities provided $9.6 million, mainly from stock-option exercises.
- No long-term debt was reported at year-end. The credit facility and term loans had been repaid and terminated in November 2016.
- Deferred revenue was $106.9 million. Backlog, which the company says is not a key internal management metric or necessarily indicative of future revenue, was approximately $120.4 million versus $78.7 million.
- Contractual obligations totaled $24.1 million, principally $21.2 million of operating leases. Management said available liquidity and expected operating cash flow should cover needs for at least 12 months.
Changes versus prior year
- Revenue growth reflected more customers, user additions and broader product adoption. Customers increased 26% to 2,208 and users increased 18% to 196,612.
- Dollar-based net revenue retention declined to 112% from 116% (and 120% in 2015). Management attributed the decline primarily to lower expansion within existing accounts while emphasizing larger initial contracts.
- Sales and marketing expense rose 41% to $109.8 million; research and development rose 13% to $23.9 million; general and administrative expense rose 32% to $37.0 million. These expenses increased in dollars but each declined as a percentage of revenue.
- International revenue increased to $35.8 million, or approximately 20% of total revenue, from $20.2 million, or 16%, in 2016.
- Stock-based compensation increased to $16.0 million from $6.5 million, including $6.6 million associated with a modification of employee option vesting terms.
Outlook, commentary and notable items
- No specific revenue, earnings or cash-flow guidance is provided. Management plans continued investment in sales and marketing, research and development, international expansion, and strategic partner and reseller relationships; it expects near-term investment to weigh on profitability and expects certain expense ratios to decline over time as revenue grows.
- The company will adopt ASC 606 in Q1 2018 using the retrospective method. It estimated the change would reduce 2017 revenue by $1–$2 million and increase 2016 revenue by $3–$5 million, primarily from on-premise license timing; operating expenses for each year were expected to decline by $5–$7 million due to commission accounting. SaaS subscription revenue accounting was expected to remain substantially unchanged.
- The December 2017 U.S. Tax Act and related implementation guidance could affect future tax expense and financial results. The company maintained a full valuation allowance on U.S. deferred tax assets and reported federal and state net operating loss carryforwards of $122.3 million and $60.3 million, respectively, subject to potential limitations.
- Key risks include continued losses, dependence on subscription renewals and expansion, competition, lengthy and variable sales cycles, security or service interruptions, reliance on third-party data centers and strategic partners (including SAP), international and currency exposure, and compliance with changing privacy and data-protection rules, including the GDPR effective May 2018.
- At year-end, the Principal Stockholders held approximately 54% of common stock, with associated board designation and approval rights. The company reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the lower retention rate stabilizes or declines further, and whether larger initial contracts translate into durable customer expansion and renewals.
- The post-ASC 606 restated financial statements and the actual effects on revenue, commission assets, operating expenses and comparability.
- Whether revenue growth converts into sustained positive operating cash flow, given the net loss and growth in receivables.
- The scale and recurring nature of stock-based compensation and its effect on dilution and non-GAAP comparisons.
- Customer and revenue exposure to SAP-related business, and the terms and continuity of the SAP relationship.
- Execution of security, availability, privacy and GDPR requirements, plus any material changes in litigation, contingencies, lease commitments or tax positions.