BlackLine, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. BlackLine provides cloud-based SaaS financial accounting close solutions. Results are unaudited. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $109.4 | $90.2 | $310.4 | $256.0 |
| Gross margin | 77.7% | 81.2% | 77.5% | 80.6% |
| Operating income (loss) | $6.0 | $(2.0) | $(22.4) | $(12.7) |
| Net loss attributable to BlackLine | $(13.7) | $(8.8) | $(78.2) | $(29.9) |
| Non-GAAP net income attributable to BlackLine | $15.1 | $15.0 | $31.8 | $33.0 |
| Cash from operating activities | — | $58.0 | $39.9 |
- Q3 revenue rose 21% year over year, led by subscription and support revenue, up 23% to $102.9 million. Professional services revenue increased 3% to $6.5 million. Nine-month revenue also grew 21%.
- Q3 gross profit was $85.0 million. Gross margin declined 3.5 percentage points year over year, primarily reflecting higher cloud-hosting costs and employee-related costs, including costs associated with migration to Google Cloud Platform and the Rimilia acquisition.
- Q3 operating income improved from a $2.0 million loss to $6.0 million of income. The company nevertheless reported a larger attributable net loss, with interest expense rising to $16.1 million from $5.9 million, largely due to amortization of the 2026 convertible notes’ debt discount.
- Nine-month operating cash flow increased to $58.0 million. Cash, cash equivalents and restricted cash totaled $379.4 million at period-end; marketable securities were $799.0 million. Cash and marketable securities together were approximately $1.18 billion.
Balance sheet, debt and liquidity
- Total assets were $1.75 billion; current assets were $1.30 billion and current liabilities were $256.2 million. Deferred revenue totaled $209.6 million current and $0.3 million noncurrent.
- Convertible notes had $1.40 billion aggregate principal outstanding: $250 million of 0.125% notes due 2024 and $1.15 billion of 0% notes due 2026. Their combined net carrying value was approximately $1.10 billion.
- In March 2021, BlackLine issued the 2026 notes and used proceeds in part to repurchase $250 million principal of its 2024 notes; the repurchase generated a $7.0 million extinguishment loss during the first quarter. The company also spent $102.4 million on capped calls related to the 2026 notes.
- Management said available cash, marketable securities and operating cash flow should be sufficient for working capital, capital expenditures and financing obligations for at least the next 12 months. The company stated it intended to settle note conversions using cash for principal and shares for any excess conversion value.
Material changes and operating indicators
- At September 30, customers numbered 3,704, up 15% from a year earlier; users numbered 315,144, up 12%. Dollar-based net revenue retention was 108%, versus 107% a year earlier.
- Sales and marketing expense rose 15% in Q3, while research and development expense rose 27%. General and administrative expense fell 36%, largely because of a $10.3 million reversal and revaluation benefit on Rimilia contingent consideration and the absence of prior-year acquisition-related costs.
- For the nine months, research and development expense increased 47% and general and administrative expense increased 17%. Stock-based compensation expense was $48.8 million for the nine months, versus $35.4 million.
- Nine-month investing cash flow was a $640.1 million use, principally reflecting net purchases of marketable securities. Financing cash flow was $593.9 million provided, mainly from the 2026 note issuance, net of the 2024 note repurchase and capped-call purchase.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management highlighted a longer, less predictable sales cycle as it pursues larger contracts and strategic products, as well as seasonal concentration of sales late in quarters and in the fourth quarter.
- Contracted revenue not yet recognized was $531.0 million at September 30; the company expected to recognize approximately 59% over the following 12 months and the remainder thereafter.
- The 2024 notes’ conditional conversion feature was triggered; holders could convert during the quarter ending December 31, 2021. No conversion requests had been received through the filing date. Cash settlement obligations and potential dilution remain relevant risks.
- Management cited continuing uncertainty from COVID-19, including effects on customers, purchasing decisions, sales cycles, employees and cybersecurity. Other highlighted risks include competition, customer renewals and expansion, reliance on cloud providers, service interruptions, data security and privacy regulation, foreign exchange, and hiring and retention.
- Rimilia did not meet specified ARR thresholds in Q3, reducing some contingent consideration and producing a $10.3 million expense reversal/revaluation benefit. BlackLine reported no pending or threatened litigation expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether subscription growth and customer expansion can sustain revenue growth while gross margin remains below prior-year levels.
- How much of reported GAAP losses and interest expense reflects convertible-note discount amortization, stock compensation and other adjustments, and how non-GAAP exclusions affect comparability.
- The conversion, cash-settlement and dilution implications of the 2024 and 2026 notes, including capped-call coverage and counterparty exposure.
- Whether the cloud-platform migration, hosting costs, cybersecurity controls and service performance develop as expected.
- Progress toward management’s stated liquidity needs and the timing and collectability of contracted revenue not yet recognized.