BlackLine, Inc. — Q3 2019 Form 10-Q
Business context and period: BlackLine provides cloud-based financial accounting and close-management software. This unaudited report covers the quarter and nine months ended September 30, 2019; comparative periods are the corresponding 2018 periods. At quarter-end, the company reported approximately 2,871 customers and 244,515 users, excluding on-premise software.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $74.9 million | $58.7 million | $208.7 million | $165.5 million |
| Subscription and support revenue | $70.3 million | $56.2 million | $197.7 million | $157.8 million |
| GAAP gross margin | 79.6% | 77.0% | 79.0% | 77.6% |
| Operating loss | $(7.9) million | $(5.0) million | $(23.2) million | $(21.4) million |
| Net loss attributable to BlackLine | $(9.2) million | $(4.5) million | $(23.1) million | $(20.1) million |
| Basic and diluted loss per share | $(0.17) | $(0.08) | $(0.42) | $(0.37) |
For Q3, non-GAAP net income was $7.0 million and non-GAAP gross margin was 83.1%; the company’s non-GAAP measures exclude specified items, including stock-based compensation and acquired-intangible amortization. Nine-month non-GAAP net income was $14.3 million.
- Cash flow: Nine-month operating cash flow was $21.5 million, versus $11.3 million a year earlier. Investing activities provided $11.9 million, compared with $13.9 million used in 2018; financing activities provided $448.3 million, largely reflecting the convertible-note offering.
- Liquidity: At September 30, cash and cash equivalents were $528.2 million and marketable securities were $68.3 million, or $596.5 million combined. Current assets were $689.3 million and current liabilities $178.2 million.
- Debt: BlackLine issued $500 million principal amount of 0.125% convertible senior notes due 2024. Their net balance-sheet carrying amount was $378.9 million after discounts and issuance costs. The company also bought capped calls for approximately $46.2 million; their intended dilution offset is capped at a $106.76 share price.
- Other indicators: Contracted revenue not yet recognized was $312.0 million; approximately 64% was expected to be recognized within 12 months. International revenue was $16.3 million in Q3 and $46.2 million for the nine months.
Material changes versus prior periods
- Q3 revenue increased 28% year over year; nine-month revenue rose 26%. Management attributed growth to customer and user additions, expanded product purchases by existing customers, and strategic product sales. Customers increased 15% and users 14% year over year.
- GAAP gross margin improved by 2.6 percentage points in Q3 and 1.4 points for the nine-month period. Operating expenses rose 34% in Q3, including higher sales and marketing, research and development, and general and administrative spending; operating losses consequently widened.
- GAAP net loss attributable to BlackLine more than doubled in Q3 year over year, with new note-related interest expense contributing. For nine months, the loss widened modestly.
- Cash and cash equivalents rose substantially from $46.2 million at December 31, 2018, primarily because of the 2019 note issuance. Nine-month operating cash flow also increased year over year.
- Dollar-based net revenue retention was 109%, unchanged from September 2018 and up from 108% at June 2019. Management cautioned that retention had declined over prior years, citing factors such as churn, larger initial deals, slower product adoption, and slower user expansion.
Outlook, commentary, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management stated that existing cash, investments, and operating cash flow should cover working capital, capital expenditures, and financing obligations for at least the next 12 months.
- Management noted that larger contracts and strategic products may lengthen and make sales cycles less predictable; sales typically concentrate toward quarter- and year-end. Subscription revenue is recognized over contract terms, so changes in sales may affect reported revenue with a lag.
- The notes carry fixed coupon interest, but their conversion, repurchase, and maturity terms create future cash-funding exposure. Holders may require repurchase at par plus accrued interest following specified fundamental changes. The company’s stated intent is combination settlement of conversions, with principal paid in cash and conversion value above principal in shares.
- Key disclosed risks include customer retention and expansion, competition, execution of product and international growth, cybersecurity and service availability, reliance on third-party data centers and channel relationships, foreign-exchange exposure, and privacy regulation including GDPR and the upcoming California Consumer Privacy Act.
- BlackLine reported no material pending litigation and no accrued liability for indemnification arrangements; potential indemnification payments are indeterminable. Contingent consideration tied to a 2013 acquisition had a $6.6 million fair value, with a maximum possible payment of $8.0 million. A $0.4 million legal settlement gain was recorded in Q3.
- The company adopted lease accounting in 2019, recording operating lease right-of-use assets and liabilities. Management said adoption did not affect equity, results, or cash flows. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and customer expansion translate into sustained retention and lower operating losses as investment spending rises.
- The composition and expected timing of the $312.0 million contracted revenue balance, and how much is realized as revenue and cash.
- The notes’ conversion, settlement, and repurchase provisions, including the capped calls’ counterparty risk and limited protection above the cap price.
- Trends in stock-based compensation, which was $24.6 million for the first nine months, and the effect of the company’s non-GAAP adjustments on reported profitability.
- Exposure to customer churn, longer sales cycles, service disruptions, cybersecurity incidents, privacy-law compliance, and foreign-currency movements.