BlackLine, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. BlackLine provides cloud-based financial accounting close software, primarily through SaaS subscriptions. Financial statements are unaudited; 2017 comparatives were retrospectively adjusted for ASC 606.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $55.5m | $42.0m | $106.7m | $80.2m |
| Gross margin | 78.6% | 75.3% | 78.0% | 75.6% |
| Operating loss | $(8.8)m | $(6.8)m | $(16.4)m | $(13.9)m |
| Net loss | $(8.5)m | $(9.1)m | $(15.6)m | $(16.8)m |
| Operating cash flow | Not provided for quarter | $6.5m | $0.2m |
- Subscription and support revenue grew 33% in Q2 and in the first half; professional services revenue rose 12% in Q2 and 34% in the first half. Total revenue increased 32% and 33%, respectively.
- Q2 GAAP operating expenses rose 36% to $52.4m, led by sales and marketing (+34%) and general and administrative (+47%). Operating loss widened despite higher revenue. Net loss narrowed partly because Q2 2017 included a $2.5m warrant-liability fair-value charge; those warrants were exercised in 2017.
- Non-GAAP net income was $0.5m in Q2 and $0.8m for the first half, compared with non-GAAP losses of $0.4m and $2.0m in the prior-year periods. These are company-defined non-GAAP measures.
- At June 30, cash and cash equivalents were $28.7m and marketable securities were $86.2m, or $114.9m combined. Current assets were $192.5m against current liabilities of $141.2m. The filing reports no material conventional debt; it reports contingent consideration of $6.1m and operating lease obligations of $25.4m.
- First-half investing cash outflow was $11.3m, including $3.7m of property and equipment purchases and $3.1m of capitalized software development. Financing cash inflow was $2.4m, principally option-exercise proceeds, partly offset by tax-withholding share purchases.
Business changes and operating indicators
- Customers increased 21% year over year to 2,402 and users increased 17% to 209,550. Dollar-based net revenue retention was 111%, down from 114% a year earlier.
- Enterprise customers generated 84% of Q2 revenue; international revenue was $11.8m, about 21% of the quarter total. Revenue from customers using SAP ERP was 23% of revenue, up from 18% a year earlier.
- Management attributed revenue growth to new customers, customer expansion in users and products, pricing, and sales of non-user-based products. Higher sales and marketing spending reflected hiring, commissions, partner fees, and expanded marketing; G&A growth also included foreign-currency losses.
Outlook, accounting, and risks
- No specific revenue or earnings guidance is provided in this filing. Management stated that 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 future capital needs depend on growth and investment plans.
- Contracted revenue not yet recognized was $255.3m at June 30; the company expected to recognize approximately 63% over the next 12 months. Deferred revenue was $117.4m current and $0.4m noncurrent.
- ASC 606 was adopted January 1, 2018 using full retrospective application. It materially changed accounting for contract acquisition costs, including amortizing sales commissions over an estimated five-year benefit period, and for certain on-premise licenses. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Key risks include continued losses (accumulated deficit $118.4m), execution of growth and sales-force expansion, longer and less predictable enterprise sales cycles, customer retention and expansion, competition, reliance on strategic partners including SAP, cybersecurity and service availability, international and foreign-currency exposure, and evolving privacy regulation. The company reported no litigation expected to have a material adverse effect and stated disclosure controls were effective.
Important facts for investors to verify
- Whether customer growth and retention remain sufficient to sustain subscription revenue growth, particularly as retention eased to 111%.
- Whether operating-expense growth, especially sales and marketing and G&A, translates into improved operating leverage and eventual GAAP profitability.
- The composition and investment risk of the $86.2m securities portfolio, and the timing and cash requirements of leases and contingent consideration.
- The assumptions behind the $255.3m contracted-not-recognized revenue balance and the expected 63% recognition within 12 months.
- The effects of ASC 606 comparability and the company’s non-GAAP adjustments, including substantial stock-based compensation.