BlackLine, Inc. — Q1 2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018. BlackLine provides cloud-based financial accounting close software, primarily through SaaS subscriptions. Comparative 2017 figures below are as adjusted for the company’s retrospective adoption of ASC 606.
Financial and operating performance
- Revenue: $51.3 million, up 34% year over year. Subscription and support revenue was $48.6 million (+33%); professional services was $2.7 million (+64%).
- Profitability: Gross profit was $39.7 million and GAAP gross margin was 77.4%, compared with 75.9% in Q1 2017. Operating loss widened to $7.6 million from $7.1 million. Net loss was $7.2 million, or $0.13 per share, versus $7.7 million, or $0.15 per share. Non-GAAP net income was $0.3 million, versus a non-GAAP net loss of $1.6 million.
- Costs: Operating expenses increased 31% to $47.2 million. Sales and marketing rose 34% to $29.2 million; research and development rose 16% to $6.9 million; general and administrative rose 34% to $11.1 million.
- Cash flow: Operating activities provided $1.8 million, versus $1.7 million used in Q1 2017. Investing activities used $5.0 million, including $1.7 million in capitalized software development and $1.6 million in property and equipment purchases. Financing activities provided $3.0 million, primarily from stock option exercises.
- Liquidity and obligations: Cash and cash equivalents were $30.9 million and marketable securities were $83.2 million, or $114.0 million combined. Current assets were $186.7 million and current liabilities $131.5 million. The filing states existing liquidity and operating cash flows are expected to cover working capital, capital expenditures, and financing needs for at least 12 months. No material conventional borrowing balance is shown; interest expense was $4,000. Operating lease and purchase obligations totaled $23.7 million.
- Other metrics: Deferred revenue was $111.2 million, including current and noncurrent amounts. Contracted revenue not yet recognized was $233.3 million; approximately 63% was expected to be recognized over the next 12 months. The company reported 2,297 customers and 202,098 users. Dollar-based net revenue retention was 110%, down from 117% a year earlier.
Material changes versus the prior comparable period
- Revenue growth reflected more customers, user growth within existing accounts, and additional products sold to existing customers. Customers increased 24% and users 18% during the quarter, according to management.
- Gross margin improved 1.5 percentage points, but operating loss widened as spending increased, including higher sales headcount, commissions, partner referral fees, and public-company costs.
- Retention declined year over year. Management attributed this primarily to lower net growth in existing accounts while focusing on larger initial contract sizes.
- ASC 606 was adopted effective January 1, 2018 using the full retrospective method. It changed the timing of commission-cost amortization and recognition of certain on-premise software license revenue. For Q1 2017, adjusted revenue was $38.2 million versus $38.6 million as originally reported, and adjusted net loss was $7.7 million versus $9.0 million originally reported. Adoption increased December 31, 2017 stockholders’ equity by $22.7 million.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects liquidity to be sufficient for at least the next 12 months, while noting future capital needs depend on growth, hiring, international expansion, and product investment.
- Management cautioned that pursuing larger contracts and strategic products may lengthen and make sales cycles less predictable. Subscription revenue is recognized over contract terms, so changes in sales may affect results with a delay.
- Key risks include continued losses, retaining and expanding customer relationships, competition, cybersecurity and service availability, international and currency exposure, and compliance with data-protection rules. The EU GDPR was scheduled to take effect May 25, 2018.
- A contingent-consideration liability related to the 2013 acquisition was $6.0 million, with a maximum potential payment of $8.0 million; payment depends on realizing specified tax benefits. The company reported no pending litigation expected to have a material adverse effect.
- Principal stockholders sold 8.0 million shares in a March 2018 secondary offering under a shelf registration; 21.2 million registered shares remained available for sale. The company reported no issuer share purchases or unregistered sales in the quarter.
Important facts for investors to verify
- Whether customer and user growth can offset the decline in dollar-based net retention, and whether retention stabilizes.
- Whether revenue growth can translate into improving operating profitability as sales, R&D, and administrative expenses rise.
- Cash conversion, including the effect of deferred revenue, capitalized software costs, and ongoing capital expenditures.
- The assumptions behind the five-year amortization period for capitalized customer acquisition costs and the ASC 606 restatements.
- Potential share-sale overhang from registered secondary shares, and the timing and amount of contingent consideration and lease commitments.