BlackLine, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; quarterly figures below are provided where relevant. BlackLine sells cloud software for accounting and finance processes, including financial close management and account reconciliation. It completed its IPO in November 2016 and acquired Runbook Company B.V. on August 31, 2016.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $123.1 million | $83.6 million |
| Subscription and support revenue | $117.5 million | $80.1 million |
| Gross profit / gross margin | $92.9 million / 75.5% | $60.9 million / 72.8% |
| Operating loss | $(33.9) million | $(34.8) million |
| Net loss | $(39.2) million | $(24.7) million |
| Net loss per share, diluted | $(0.92) | $(0.61) |
| Cash from operations | $(4.8) million | $1.0 million |
- Revenue grew 47.3%, mainly from new customers and expanded use by existing customers. Subscription revenue represented about 95% of FY 2016 revenue.
- Gross margin improved, while the operating loss narrowed slightly. Net loss widened, reflecting higher interest expense and a $5.9 million loss from the increase in fair value of the common-stock warrant liability, among other items.
- Operating expenses were $126.8 million, including $77.8 million in sales and marketing and $21.1 million in research and development.
- At year-end, cash and cash equivalents were $22.1 million and marketable securities were $83.1 million, totaling $105.2 million. Current assets were $163.8 million and current liabilities $108.5 million.
- BlackLine raised approximately $151.9 million in net IPO proceeds and repaid its credit facility in November, paying approximately $67.7 million including principal, interest and prepayment penalties. No term loan remained outstanding at year-end.
- Deferred revenue was $82.7 million, including current and noncurrent amounts. Backlog was approximately $78.7 million; the company cautions that backlog is not necessarily indicative of future revenue.
Material changes and quarterly context
- Compared with FY 2015, revenue increased $39.5 million; customer count rose 31.4% to 1,758 and users increased 29.7% to 166,903, excluding Runbook.
- Dollar-based net revenue retention was 116%, down from 120% in 2015 and 118% in 2014. Enterprise customers generated 85% of revenue, versus 86% in 2015.
- Reported gross margin rose from 72.8% to 75.5%. Management attributed the improvement primarily to revenue growth against largely fixed amortization costs, partially offset by Runbook-related amortization.
- FY 2016 sales and marketing expense increased 37.6% to $77.8 million; R&D increased 16.0% to $21.1 million. Management expects continued investment in growth, with sales and marketing and R&D expenses as a percentage of revenue expected to decline over time as revenue scales.
- In Q4 2016, revenue was $35.3 million and net loss was $15.7 million, compared with $24.5 million revenue and $7.2 million net loss in Q4 2015.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management plans further investment in sales, product development, strategic channels and international expansion, while noting these investments may weigh on near-term profitability.
- Runbook was acquired for approximately $34.1 million in cash consideration. It contributed $0.8 million of revenue and $1.7 million of net loss after acquisition in 2016; integration and migration of its on-premise customers to cloud offerings remain execution risks.
- The company has a history of losses: accumulated deficit was $87.3 million at year-end. Management says available cash, investments and operating cash flows should meet working-capital and other needs for at least 12 months.
- Key disclosed risks include customer renewal and expansion, competition, long and variable sales cycles, dependence on SAP and other partners, cybersecurity and service availability, international and foreign-exchange exposure, acquisition integration, and continued operating losses. SAP-related customers generated about 17% of 2016 revenue; the agreement can be terminated on six months’ notice.
- BlackLine says it remediated previously identified material weaknesses in financial reporting controls during 2016. Disclosure controls were judged effective, but management’s internal-control report and auditor attestation were not yet required under the new-public-company transition period.
- The effective tax rate was 14.4%, including a tax benefit despite continued losses; management recorded a valuation allowance against U.S. federal and state net deferred tax assets. Revenue recognition changes under Topic 606 were expected to affect commission accounting, but the impact had not been quantified.
- No litigation was disclosed that management expected to have a material adverse effect. The filing identifies potential indemnification obligations with an indeterminable maximum, but no liability was accrued.
Most important facts for investors to verify
- Whether customer retention, customer growth and expansion within existing accounts sustain revenue growth, particularly given retention declined to 116%.
- Whether the company can improve profitability and cash generation while continuing substantial sales, product and international investments.
- Runbook integration progress, including migration of on-premise customers and delivery of expected strategic benefits.
- Cash conversion and the drivers of negative operating cash flow, including receivables growth and reliance on advance billings and deferred revenue.
- Future effects of stock-based compensation, warrant valuation, tax valuation allowances and adoption of new revenue-recognition rules.
- Execution of control remediation and ongoing exposure to security, service continuity, partner concentration and post-IPO governance risks.