BlackLine, Inc. — Q3 2017 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2017. BlackLine provides cloud-based financial accounting close software. At quarter-end it reported 2,091 customers and 186,461 users, excluding Runbook. All dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $45.9 | $32.2 | $126.8 | $87.8 |
| Gross profit / margin | $35.0 / 76.2% | $24.7 / 76.6% | $96.3 / 75.9% | $66.2 / 75.5% |
| Operating loss | $(13.2) | $(7.2) | $(29.4) | $(25.2) |
| Net loss | $(13.1) | $(6.6) | $(32.2) | $(23.5) |
| Basic and diluted loss per share | $(0.25) | $(0.16) | $(0.62) | $(0.58) |
- Q3 subscription and support revenue was $43.5 million, up 41%; professional services revenue was $2.4 million, up 79%. Management attributed revenue growth primarily to more customers, increased user adoption, and additional products purchased by existing customers.
- Nine-month operating cash flow was $3.7 million, versus $1.0 million in 2016. The increase in deferred revenue contributed $13.5 million, reflecting advance customer billings. Investing cash outflow was $9.2 million and financing cash inflow was $8.0 million. Cash and equivalents increased to $24.6 million from $22.1 million at year-end.
- Cash, cash equivalents, and marketable securities totaled $109.8 million at September 30. The company said these resources and operating cash flows should cover working capital, capital expenditures, and financing needs for at least 12 months.
- The company had no term loan outstanding after repaying and terminating its credit facility in November 2016. It reported $0.4 million of capital lease obligations and $23.9 million in total listed contractual obligations, principally operating leases.
- Non-GAAP Q3 net loss was $0.6 million, versus $2.2 million in Q3 2016; non-GAAP gross margin was 80.7%, versus 82.1%. These company-defined measures exclude specified items and should be considered alongside GAAP results.
Material changes versus comparable periods
- Revenue rose 42% in Q3 and 44% for the first nine months year over year, while GAAP net losses widened. Sales and marketing expense rose 75% in Q3 to $33.4 million, including a substantial increase in stock-based compensation.
- Q3 GAAP gross margin eased to 76.2% from 76.6%; nine-month margin was broadly stable at 75.9% versus 75.5%.
- Dollar-based net revenue retention was 113%, down from 118% in Q3 2016 and 114% in Q2 2017. Management linked the recent decline to sales-team alignment initiatives begun in Q2.
- Customer count increased 29% and user count 19% year over year, excluding Runbook. Weighted-average shares increased, contributing to the higher per-share loss.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expects longer and less predictable sales cycles as it pursues larger deals and more strategic products; it also noted that sales activity is seasonally concentrated late in quarters and in Q4.
- Management expects the new revenue recognition standard, to be adopted in Q1 2018 using the full retrospective method, to materially affect the financial statements. Expected effects include the timing of sales commission recognition and potentially the timing of revenue for certain on-premise arrangements; the impact was still being quantified.
- Q3 stock-based compensation was $9.1 million, including $5.8 million from modifying vesting terms for Australian employee options and $1.1 million related to an award modified upon an employee termination. The company recorded $3.5 million of nine-month expense from the change in fair value of warrants before their May 2017 net exercise; no further fair-value changes are expected for those warrants.
- Key risks include continued losses, the recent retention-rate decline, execution of sales-force alignment and growth plans, longer enterprise sales cycles, competition, cybersecurity and service interruptions, international and foreign-exchange exposure, and reliance on strategic partners including SAP. SAP-related customers represented 19% of revenue in Q3 and in the first nine months.
- Contingent consideration related to the 2013 acquisition was valued at $5.6 million, with a maximum potential payment of $8.0 million if specified tax benefits are realized. The company reported no pending litigation expected to have a material adverse effect and no material indemnification accrual. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether retention and customer expansion stabilize following sales-team realignment, and how the 113% retention rate develops.
- Whether elevated sales and marketing spending and stock-based compensation translate into sustained revenue growth and a path toward GAAP profitability.
- The eventual quantified impact and implementation of the 2018 revenue standard, including retrospective restatement effects.
- Customer growth, sales-cycle duration, and the contribution and economics of larger strategic deals and SAP-related revenue.
- Liquidity and cash conversion, including the dependence of operating cash flow on advance billings and deferred revenue growth.