BlackLine, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; dollar amounts below are in millions except per-share data. BlackLine sells cloud-based financial close and accounting automation software. At quarter-end, it reported 3,226 customers and 282,579 users.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $90.2 | $74.9 | $256.0 | $208.7 |
| Gross profit / margin | $73.2 / 81.2% | $59.6 / 79.6% | $206.2 / 80.6% | $164.9 / 79.0% |
| Operating loss | $(2.0) | $(7.9) | $(12.7) | $(23.2) |
| Net loss attributable to BlackLine | $(8.8) | $(9.2) | $(29.9) | $(23.3) |
| GAAP loss per diluted share | $(0.15) | $(0.17) | $(0.53) | $(0.42) |
| Non-GAAP net income attributable to BlackLine | $15.0 | $7.1 | $33.0 | $14.0 |
- Q3 revenue increased 20% year over year; nine-month revenue increased 23%. Subscription and support revenue grew 19% and 21%, respectively, while professional services revenue grew 36% and 56%.
- GAAP gross margin improved year over year. Operating expenses rose 11% in Q3 and 16% for the nine-month period, with higher staffing and compensation among the key drivers.
- Interest expense was $5.9 million in Q3 and $17.3 million for nine months, mainly from amortization of the convertible notes’ debt discount and issuance costs.
- Operating cash flow was $39.9 million for the first nine months, compared with $21.5 million a year earlier. Investing cash flow was $236.4 million, including marketable-security maturities and sales, offset by acquisition funding. Financing cash flow was $11.4 million; the prior-year period included proceeds from the notes issuance.
- At September 30, cash and cash equivalents were $408.1 million and marketable securities were $117.4 million, totaling $525.5 million. Current assets were $754.0 million versus current liabilities of $203.6 million.
- The company had $500.0 million principal amount of 0.125% convertible senior notes due 2024, carried at $401.2 million net of unamortized discount and issuance costs. Notes were not convertible at quarter-end. Management stated existing liquidity and operating cash flow should cover needs for at least 12 months.
Material changes and notable items
- Growth reflected more customers, user additions, product expansion within existing accounts, and sales of strategic products. Customer count rose 12% and users rose 16% from September 2019.
- Dollar-based net revenue retention declined to 107% from 109% a year earlier. Management attributed the decline mainly to lower expansion in existing accounts amid COVID-related reductions in customer technology spending.
- On October 2, 2020, BlackLine completed its Rimilia acquisition for $150 million in cash, subject to working-capital adjustments, including up to $30 million in earnout payments. The company funded the acquisition on September 30, before closing. Rimilia adds accounts-receivable automation; purchase accounting was incomplete at filing.
- BlackLine corrected prior-period errors involving income taxes and the carrying-value adjustment for its redeemable non-controlling interest. The 2019 interim financial statements were revised. The company also recorded a cumulative $1.5 million correction to the non-controlling-interest carrying value in Q3 2020, affecting attribution of net loss. Investors should use the revised comparative figures.
- Stock-based compensation was $13.3 million in Q3 and $35.4 million for nine months. The Q3 non-GAAP net-income reconciliation also adds back acquisition costs, debt-discount amortization, stock compensation and other items; non-GAAP results are not a substitute for GAAP losses.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management said COVID-19 had deferred purchasing decisions and affected the new-business pipeline and large deals, including in EMEA, North American mid-market, digital transformation, and the SAP channel. It expected such delays to affect fiscal 2020 results; the duration and financial impact remained uncertain.
- Remote work and virtual customer events continued, with travel and event restrictions expected to remain in place during Q4 2020. Reduced travel and event spending lowered certain expenses, while the company increased network-security investment amid elevated remote-work cyber risks.
- Key risks include prolonged economic weakness and slower customer spending or renewals, longer and less predictable sales cycles, competitive and pricing pressure, cybersecurity or service interruptions, dependence on hosting providers and strategic partners, and acquisition integration and execution risks.
- Marc Huffman was scheduled to succeed founder Therese Tucker as CEO effective January 1, 2021. The company identified transition management as a risk.
- BlackLine reported no litigation expected to have a material adverse effect and no material change in internal control over financial reporting during the quarter. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether retention, customer expansion and deal activity stabilize as COVID-related purchasing delays evolve.
- Rimilia’s final purchase accounting, earnout exposure, integration progress and contribution to revenue, costs and cash flow.
- The sustainability of GAAP margin improvement and operating cash generation, given continuing GAAP losses and substantial stock-based compensation.
- The notes’ cash, share-settlement and dilution implications, including the company’s ability to meet future conversion, repurchase or maturity obligations.
- The effects of the corrected tax and redeemable non-controlling-interest errors on historical comparisons and reported earnings attribution.