BlackLine, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; amounts below are in millions unless otherwise noted. BlackLine provides cloud-based financial close and accounting automation software as a service.
Financial results
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $42.3 | $29.0 | $80.9 | $55.6 |
| Gross profit | $31.9 | $22.0 | $61.3 | $41.6 |
| Gross margin | 75.5% | 75.7% | 75.8% | 74.8% |
| Operating loss | $(7.9) | $(8.3) | $(16.1) | $(18.1) |
| Net loss | $(10.1) | $(7.5) | $(19.1) | $(16.9) |
| Basic and diluted loss per share | $(0.20) | $(0.19) | $(0.37) | $(0.41) |
- Subscription and support revenue was $40.2 million in Q2 and $77.3 million in H1; professional services revenue was $2.0 million and $3.6 million, respectively.
- Revenue grew 46% in both comparative periods, driven by new customers, additional users and expanded product purchases by existing customers. Excluding Runbook, customers increased 30% year over year to 1,978 and users increased 21% to 178,604.
- Operating expenses rose to $39.8 million in Q2 from $30.2 million, led by sales and marketing. Operating loss narrowed, but Q2 net loss increased, primarily reflecting a $2.5 million noncash charge from the change in fair value of the common-stock warrant liability and a smaller income-tax benefit than in Q2 2016. The warrants were exercised in May, eliminating future fair-value changes.
- Management-reported non-GAAP net loss was $1.4 million for Q2 and $4.3 million for H1, versus $4.5 million and $10.4 million in the prior-year periods. Non-GAAP gross margin was 80.2% in Q2 and 80.6% in H1. These measures exclude specified items and should be considered alongside GAAP results.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $23.5 million and marketable securities were $83.7 million, totaling $107.3 million. Current assets were $167.5 million and current liabilities $112.0 million.
- For H1, operating cash flow was positive $0.2 million, versus negative $3.1 million in H1 2016. Deferred revenue increased $8.5 million, substantially supporting operating cash flow; the company reported a net loss of $19.1 million.
- H1 investing cash outflow was $3.9 million, including $2.0 million of capitalized software development and $1.1 million of property and equipment purchases, net of marketable-security maturities. Financing cash inflow was $5.1 million, mainly from stock-option exercises.
- The filing reports no term-loan balance; the credit facility and term loans had been terminated or repaid in November 2016. Capital lease obligations totaled $0.4 million. Contractual obligations were $24.2 million, including $22.5 million of operating leases.
- Management said available cash, investments and operating cash flows should cover working capital, capital expenditures and financing needs for at least the next 12 months, while noting that additional financing could be needed depending on growth and investment requirements.
Material changes, outlook and notable items
- Dollar-based net revenue retention, excluding Runbook, declined to 114% in Q2 from 117% in Q1 2017 and 119% in Q2 2016. Management attributed the Q2 decline to sales-team realignment and highlighted customer retention and expansion as important growth drivers.
- Headcount growth and investment increased costs: total cost of revenue rose 47% in Q2 year over year, while sales and marketing expense rose 32%. Management cited a 44% increase in overall headcount, including growth in sales and marketing, research and development, and general and administrative teams.
- No specific financial guidance was provided in the supplied filing text. Management expects longer and less predictable sales cycles as it pursues larger deals and more complex strategic products; results can also be affected by seasonality and quarter-end deal timing.
- A July 21, 2017 option-vesting modification is expected to generate approximately $5.9 million of stock-based compensation expense in Q3 2017 and a further $1.3 million thereafter.
- The company expects to adopt the new revenue-recognition standard in Q1 2018. It anticipates effects on the timing of sales-commission costs and certain on-premise software revenue recognition, but had not quantified the impact or finalized its transition method.
- Contingent consideration tied to tax benefits from the 2013 acquisition had a fair value of $5.4 million; the maximum potential payment is $8.0 million. The company reported no litigation expected to have a material adverse effect and no accrued liability for indemnification arrangements.
Key risks and investor verification points
- Verify the trend in retention and customer expansion, particularly whether Q2’s lower retention rate persists after the sales-team realignment.
- Assess whether rapid revenue growth can translate into improved profitability and operating cash flow as sales, product-development and public-company costs rise.
- Track the $5.9 million expected Q3 stock-compensation charge and the remaining $1.3 million, and distinguish these items from recurring operating costs.
- Monitor the adoption and quantified financial impact of the 2018 revenue-recognition standard, including commission capitalization and on-premise arrangements.
- Consider execution and concentration risks: SAP-related customers represented 18% of revenue in Q2 and H1; management also identified competition, longer sales cycles, international expansion, cybersecurity, service availability and data-protection regulation as significant risks.
- Review contingent consideration, lease commitments, potential financing needs and stockholder-control and share-sale risks. Principal Stockholders collectively held approximately 68% of outstanding common stock at June 30, 2017.