BlackLine(BL) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents BlackLine, Inc.'s unaudited condensed consolidated financial statements as of September 30, 2023, and related notes Condensed Consolidated Statements of Operations Highlights (Unaudited) | Indicator | Quarter Ended Sep 30, 2023 (in thousands) | Quarter Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $150,708 | $134,268 | $434,266 | $382,981 | | Gross Profit | $113,914 | $101,842 | $325,085 | $286,959 | | Income (Loss) from Operations | $(1,074) | $(21,419) | $1,533 | $(59,476) | | Net Income (Loss) Attributable to BlackLine, Inc. | $11,923 | $(20,019) | $30,764 | $(40,695) | | Diluted Net Income (Loss) Per Share | $0.19 | $(0.34) | $0.49 | $(0.68) | Condensed Consolidated Balance Sheets Highlights (Unaudited) | Indicator | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $1,319,140 | $1,249,567 | | Total Assets | $2,016,135 | $1,943,656 | | Total Current Liabilities | $605,857 | $367,821 | | Total Liabilities | $1,772,598 | $1,807,893 | | Total Stockholders' Equity | $215,731 | $111,868 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Indicator | Nine Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $84,444 | $30,259 | | Net cash used in investing activities | $(58,296) | $(378,490) | | Net cash provided by (used in) financing activities | $9,399 | $(195) | Note 1 – The Company BlackLine provides SaaS-based financial accounting close solutions, recently expanding through acquisitions like Data Interconnect to enhance accounts receivable automation - On September 12, 2023, the Company acquired Data Interconnect (DI), a cloud-based Invoice-to-Cash automation vendor, to enhance its existing accounts receivable automation solution[50] - The company provides financial accounting close solutions primarily as Software as a Service (SaaS), enabling customers to manage processes like account reconciliations, variance analysis, and data matching[50] Note 4 – Business Combinations BlackLine acquired Data Interconnect (DI) for $11.4 million cash, recognizing $5.1 million in goodwill and allocating the purchase price to enhance accounts receivable automation Data Interconnect Acquisition Purchase Consideration (in thousands) | Item | Amount | | :--- | :--- | | Total cash purchase consideration | $11,394 | | Intangible assets, net | $8,800 | | Goodwill | $5,126 | | Deferred tax liabilities, net | $(2,159) | - The goodwill from the DI acquisition is primarily attributed to increased customer offerings and opportunities for growth and innovation, and it is not tax deductible[114] Note 8 – Convertible Senior Notes As of September 30, 2023, BlackLine has $250.0 million of 0.125% convertible notes due 2024 and $1.15 billion of 0.00% notes due 2026 outstanding, neither of which was convertible Convertible Senior Notes Outstanding (as of Sep 30, 2023, in thousands) | Note Series | Principal | Net Carrying Amount | | :--- | :--- | :--- | | 2024 Notes (0.125%) | $250,000 | $248,904 | | 2026 Notes (0.00%) | $1,150,000 | $1,139,539 | - The company intends to settle conversions of both the 2024 and 2026 notes through a "combination settlement," repaying the principal in cash and any excess value in common stock[160][161] Note 9 – Restructuring Costs BlackLine initiated two restructuring programs, including an August 2023 plan to reduce its workforce by 9%, incurring $8.7 million in Q3 2023 termination benefits and resulting in a $6.3 million total liability - On August 23, 2023, the company announced a plan to reduce its global workforce by approximately 9%, or 166 positions, to support growth, scale, and profitability objectives[162] Restructuring Charges (Nine Months Ended Sep 30, 2023, in thousands) | Program | Restructuring Charges | Cash Payments & Adjustments | Accrual Balance (Sep 30, 2023) | | :--- | :--- | :--- | :--- | | Fiscal 2023 Program | $8,664 | $(2,386) | $6,278 | | Fiscal 2022 Program | $1,149 | $(2,831) | $55 | | Total | $9,813 | $(5,217) | $6,333 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, including revenue growth, key metrics, operating results, liquidity, and the impact of macroeconomic uncertainty and restructuring programs Overview BlackLine provides cloud-based finance and accounting software, serving 4,368 customers and 381,892 users as of September 30, 2023, with 94% of revenue from subscriptions - As of September 30, 2023, BlackLine had 4,368 customers and 381,892 individual users[190] - For the nine months ended September 30, 2023, approximately 94% of revenue came from subscriptions to its cloud-based software and 6% from professional services[190] - The company notes that due to economic uncertainty, it has seen customers delay and defer purchasing decisions, which has adversely impacted near-term demand[197] Key Metrics Key metrics include a 105% dollar-based net revenue retention rate, 4,368 customers, and 381,892 users as of September 30, 2023, with increasing transaction volume for strategic products Key Performance Metrics Trend | Metric | Sep. 30, 2022 | Dec. 31, 2022 | Mar. 31, 2023 | Jun. 30, 2023 | Sep. 30, 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | | Dollar-based net revenue retention rate | 109% | 107% | 106% | 106% | 105% | | Number of customers | 4,060 | 4,188 | 4,236 | 4,279 | 4,368 | | Number of users | 354,924 | 366,522 | 369,493 | 377,585 | 381,892 | Results of Operations Q3 2023 total revenues grew 12% to $150.7 million, with gross margin at 75.6%, and reduced operating expenses leading to a $1.1 million operating loss and $11.9 million net income Revenue Performance (Quarter Ended Sep 30) | Revenue Type | 2023 (in thousands) | 2022 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription and support | $142,054 | $126,081 | $15,973 | 13% | | Professional services | $8,654 | $8,187 | $467 | 6% | | Total revenues | $150,708 | $134,268 | $16,440 | 12% | - The decrease in sales and marketing expenses in Q3 2023 was primarily due to a $5.3 million decrease in salaries, benefits, and stock-based compensation from lower headcount[219] - General and administrative expenses for Q3 2023 decreased by $13.0 million (42%) year-over-year, mainly due to a $12.9 million decrease in the fair value of contingent consideration related to the FourQ acquisition[229] Liquidity and Capital Resources As of September 30, 2023, BlackLine had $1.2 billion in liquidity and $1.4 billion in convertible notes outstanding, with $84.4 million net cash from operations for the first nine months of 2023 - At September 30, 2023, principal sources of liquidity totaled $1.2 billion in cash, cash equivalents, and marketable securities[237] - The company has $1.4 billion in aggregate principal of Notes outstanding, with $250 million of the 2024 Notes expected to become due within the next 12 months[237] Summary of Cash Flows (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $84,444 | $30,259 | | Net cash used in investing activities | $(58,296) | $(378,490) | | Net cash provided by (used in) financing activities | $9,399 | $(195) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate, foreign currency, and inflation risks, with $1.4 billion in fixed-rate convertible notes and potential $2.9 million impact from currency fluctuations - The company's $1.4 billion in convertible notes have fixed interest rates, so there is no economic interest rate exposure, but their fair value is subject to market interest rate changes[262] - Foreign currency risk exists due to international operations; a hypothetical 10% change in foreign currency exchange rates would impact cash balances by approximately $2.9 million as of September 30, 2023[263] - The company does not believe inflation has had a material effect on its business but acknowledges that significant inflationary pressures could harm results if costs cannot be offset by price increases[266] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2023, the company's principal executive and financial officers concluded that disclosure controls and procedures were effective at a reasonable assurance level[267] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[268] Part II. Other Information Item 1. Legal Proceedings The company states that it is not currently a party to any legal proceedings that would be reasonably expected to have a material adverse effect on its business, financial condition, or results of operations - As of the report date, BlackLine is not a party to any litigation that is expected to have a material adverse effect on the company[271] Item 1A. Risk Factors This section details significant investment risks, including dependence on customer acquisition, economic uncertainty, historical losses, intense competition, security breaches, and risks related to convertible notes Risks Related to Business and Industry Business risks include dependence on customer acquisition and retention, economic uncertainty, security breaches, intense market competition, reliance on key personnel, and challenges in managing growth - Growth depends on attracting new customers and expanding sales to existing ones, but macroeconomic trends have resulted in increased price sensitivity and delayed purchasing decisions[276][279] - The business is at risk for security breaches and incidents, which could lead to loss of business, reputational damage, and significant liabilities; the company is increasingly dependent on third-party cloud infrastructure like Google Cloud Platform[285][287] - The market for accounting and financial software is highly competitive and rapidly evolving, with competitors that may have greater name recognition, resources, and ability to respond to market changes[1][3] Risks Related to Financial Performance Financial risks include a history of net losses, fluctuating quarterly results due to long sales cycles and seasonality, foreign currency exposure, and potential impairment charges for goodwill and intangible assets - The company has a history of losses, with an accumulated deficit of $238.8 million at September 30, 2023, and expects costs to increase in areas like R&D, sales and marketing, and international expansion[27] - The sales cycle generally varies from four to nine months and is lengthening as the company focuses on larger contracts and more strategic products, which could cause variability in operating results[31] - As of September 30, 2023, the company had goodwill and intangible assets with a net book value of $533.3 million, which are at risk of impairment if market conditions change adversely[37] Risks Related to Dependence on Third Parties The company relies on strategic relationships with technology vendors like SAP and public cloud providers such as GCP, Azure, and AWS, exposing it to service disruption and contract termination risks - The company depends on strategic relationships, particularly its reseller arrangement with SAP, which can be terminated by either party with six months' notice[39] - The company relies on Google Cloud Platform (GCP), Microsoft Azure, and Amazon Web Services (AWS) to deliver its solutions; any disruption from these public cloud providers could negatively impact operations[41] - The business also relies on SaaS applications from third parties for critical functions like billing, ERP, and financial accounting; interruptions in these services could adversely affect operations[44] Risks Related to Legal and Regulatory Environment Legal and regulatory risks include compliance with foreign laws, tax complexities, evolving global privacy and data protection regulations, U.S. export controls, and changes in internet-related laws - International sales accounted for approximately 28% of revenues in the first nine months of 2023, exposing the company to risks associated with foreign laws, taxes, and economic climates[150] - The company faces risks from a complex and evolving global regulatory landscape for privacy and data protection, including GDPR in Europe and CCPA/CPRA in California, with non-compliance potentially leading to significant fines[10][11] - Changes in laws related to the internet, such as net neutrality, could decrease demand for the company's products or increase operating costs[13] Risks Related to Intellectual Property Intellectual property risks involve protecting its limited patents, defending against infringement claims, and potential obligations from open-source software usage - The company has two patents and primarily relies on copyright, trade secret, and trademark laws to protect its intellectual property, which may be inadequate[15] - The company may face lawsuits from third parties for alleged infringement of their proprietary rights, which could be costly and time-consuming, even if the claims are unsuccessful[17] - Use of open-source software in products could subject the company to litigation or, under certain licenses, require the release of proprietary source code[18] Risks Related to Ownership of Common Stock Risks related to common stock ownership include market price volatility, anti-takeover provisions, the absence of cash dividends, and exclusive forum provisions for stockholder disputes - The market price of the company's common stock is subject to wide fluctuations due to various factors, including operating results, analyst projections, and overall market volatility[19][126] - Anti-takeover provisions in the company's charter and bylaws, such as a classified board and supermajority voting requirements, could discourage or prevent a change in control[127] - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future, limiting stockholder returns to potential stock price increases[129] Risks Related to Outstanding Convertible Notes Risks from outstanding convertible notes include significant cash requirements for servicing and repayment, potential liquidity impact from conditional conversion, and counterparty risk on capped call transactions - As of September 30, 2023, the company had $250.0 million of 2024 Notes and $1.150 billion of 2026 Notes outstanding[131] - The company may not have enough available cash to repurchase the Notes upon a fundamental change or to repay them in cash at maturity, which would constitute a default[133] - The company is subject to counterparty risk on its capped call transactions; a default by a counterparty could result in more dilution than anticipated[137] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities During the reporting period, the company had no unregistered sales of equity securities, no use of proceeds from such sales, and no issuer purchases of equity securities - There were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities during the period[21][22][23] Item 5. Other Information Chief Revenue Officer Mark Woodhams adopted a Rule 10b5-1 trading plan on September 14, 2023, for the potential sale of up to 25,554 shares of common stock - On September 14, 2023, Chief Revenue Officer Mark Woodhams adopted a Rule 10b5-1 trading plan for the sale of up to 25,554 shares of common stock[64] Item 6. Exhibits This section lists the documents filed as exhibits with this Quarterly Report on Form 10-Q, including certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL documents - The Exhibit Index lists all documents filed with or incorporated by reference into the Form 10-Q, in accordance with Item 601 of Regulation S-K[58][60]