BlackLine, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. BlackLine provides cloud-based financial accounting close software, primarily through SaaS subscriptions. Financial figures below are in U.S. dollars; amounts are in millions unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $38.6 | $26.6 | Up 45%; subscription and support revenue was $37.1 million. |
| Gross profit / margin | $29.4 / 76.1% | $19.6 / 73.9% | Margin improved 2.2 percentage points. |
| Operating expenses | $37.7 | $29.4 | Up 28%; sales and marketing was the largest category at $23.5 million. |
| Operating loss | $(8.3) | $(9.8) | Loss narrowed. |
| Net loss | $(9.0) | $(9.3) | Basic and diluted loss per share was $(0.18), versus $(0.23). |
| Non-GAAP net loss | $(2.9) | $(5.9) | Company-defined measure; excludes specified acquisition-related, noncash, and other items. |
| Operating cash flow | $(1.7) | $(4.7) | Cash use declined; deferred revenue increased $8.0 million, reflecting advance billings. |
Balance sheet and liquidity
- Cash and cash equivalents were $23.4 million and marketable securities were $77.9 million at March 31, 2017, totaling $101.3 million in liquidity sources.
- Current assets were $162.5 million and current liabilities were $110.3 million. Deferred revenue totaled $90.7 million, including current and noncurrent balances.
- The company reported no term-loan proceeds or interest expense in Q1; it said its credit facility and term loans were terminated and repaid in November 2016. Capital lease obligations included $0.4 million due within one year.
- Total liabilities were $131.9 million. Management said existing cash, marketable securities, and operating cash flows should meet working capital, capital expenditure, and financing needs for at least the next 12 months.
Changes, operating trends, and management commentary
- Revenue growth was attributed to more customers, additional users and products sold to existing customers. Customer count and users, excluding Runbook, rose 31% and 25% year over year, respectively, to 1,850 customers and 171,423 users.
- Dollar-based net revenue retention was 117%, compared with 120% a year earlier and 116% at December 31, 2016.
- Sales and marketing expense increased 29%, while research and development rose 13% and general and administrative expense rose 38%. Management cited hiring and sales expansion, third-party commissions, and public-company legal, accounting, and consulting costs.
- Q1 included a $1.0 million noncash expense from an increase in the fair value of the common stock warrant liability. The liability was $12.4 million at quarter-end.
- SAP-related customer revenue was $6.8 million, approximately 18% of total revenue. Enterprise customers generated 84% of revenue and mid-market customers 16%.
- No formal financial guidance was provided in the supplied filing text. Management noted that Q1 results are not necessarily indicative of full-year results and that future capital needs depend on growth, hiring, product development, international expansion, and market acceptance.
Risks, contingencies, and unusual items
- Key risks include sustaining customer additions, renewals and expansion; competition and pricing pressure; scaling operations and sales hiring; SaaS availability, cybersecurity, and data privacy; international expansion and foreign exchange; and achieving profitability while continuing to invest.
- BlackLine reported a $5.3 million fair value liability for contingent consideration tied to its 2013 acquisition. Up to $8.0 million may be payable if specified tax benefits from acquired net operating losses are realized; timing and amount remain uncertain.
- Operating lease, purchase, and capital lease obligations totaled $18.1 million, including $6.6 million due within one year. Indemnification exposure was described as indeterminable, with no liability accrued; the company reported no material pending litigation.
- The company adopted stock-compensation accounting guidance in Q1, including recognizing forfeitures as they occur. It expects the new revenue standard, effective for it in Q1 2018, to affect the timing of contract acquisition costs and potentially software revenue accounting; the impact had not been quantified.
- Principal stockholders held approximately 78% of shares as of May 1, 2017. In addition, 42.2 million shares subject to IPO lockups became eligible for sale beginning April 26, 2017, subject to applicable restrictions.
- Management concluded disclosure controls were effective as of March 31, 2017 and reported no material quarterly change in internal control over financial reporting. The company noted prior material weaknesses had been remediated by year-end 2016.
Important facts for investors to verify
- Whether revenue growth, retention, and customer expansion continue, and how the 117% net revenue retention trend develops.
- How operating expenses and cash use evolve as the company expands its sales force, product development, and international operations.
- The effect of the SAP relationship and associated revenue concentration, including the agreement’s termination provisions.
- The eventual accounting and cash impacts of the new revenue standard, contingent consideration, and warrant liability remeasurement.
- Whether newly eligible shares affect trading supply, and how concentrated ownership influences governance and stockholder rights.