Blackline Safety has 70 per cent upside, says Beacon

Blackline Safety (Blackline Safety Stock Quote, Chart, News, Analysts, Financials TSXV:BLN) has hit a rough patch lately but Gabriel Leung of Beacon Securities still sees the stock as a boon for investment portfolios as he maintained a “Buy” rating, though he slashed his target price from $10/share to $6/share for a projected return of 70 per cent in a recent update to clients.

Calgary-based Blackline Safety is a hardware-enabled SaaS company that develops, manufactures and markets worker safety monitoring products and services in Canada, the United States and internationally.

Leung’s latest report on Blackline comes after the company released its second quarter financial results for the 2022 fiscal year. Blackline’s quarter was headlined by $16.7 million in revenue for 6.3 per cent sequential growth and a 42.7 per cent year-over-year increase, though it was a slight miss in relation to the consensus projection of $17.7 million. 

Blackline’s product revenue stream jumped 71.9 per cent year-over-year to $7.9 million, with 14 per cent of total product sales coming from Blackline’s G7 EXO offering. However, the company’s service revenue stream still accounted for more than 50 per cent of revenue at $8.8 million, good for a year-over-year increase of 24 per cent.

According to Leung, the company had approximately $800,000 worth of orders pushed into its upcoming third quarter to help explain the majority of the revenue miss, while also noting that delayed deployments of large orders received in the previous two quarters reduced the growth rate of service revenue in this quarter. However, Leung said the company expects the delayed deployments to be completed in the second half of 2022, though Blackline did delay the launch of its G6 product from July to October as part of the NSC Safety Congress & Expo, with supply chain challenges being cited as the reason for the delay.

“We continued to deliver for our customers despite difficult operating conditions, including the ongoing global supply chain challenges, which has temporarily driven cost increases and extended sales cycle times,” said Cody Slater, CEO and Chair of Blackline Safety, in the company’s June 14 press release.

On the margins, Blackline reported negative adjusted EBITDA of $6.4 million in the quarter to miss in relation to the consensus expectation of a $5.2 million loss, though the loss would have been $12.3 million if the company did not account for research and development in the EBITDA figure.

Blackline’s gross margin also produced a miss at 42 per cent compared to the 51 per cent margin reported in the same quarter of 2021, with the lion’s share of the difference coming from the product gross margin being 13 per cent (25 per cent in the same quarter of 2021), while the service gross margin was relatively flat at 69 per cent compared to 68 per cent at this point in 2021.

“The year-over-year decline in gross margins reflect ongoing global supply challenges, which has prompted the company to source components from alternative suppliers at higher prices, as well as incur higher than normal freight charges,” Leung said in his June 14 report. “The company noted that it is planning to implement price increases, which should help with gross margins.”

Blackline also reported a slight uptick in its operating expenses at $21.5 million compared to $19 million sequentially and $14.2 million in the same quarter of 2021, with the sequential increase reflecting continued investments, along with the acquisition of Swift Labs, which closed on March 31. Leung noted the company’s expectation that operating expenses to be flat to down from current levels by the fourth quarter of 2022.

All told, the company ended the quarter with $30 million in cash available with a $15 million credit facility, with a free cash flow burn of $11.8 million and an operating cash flow loss of $8.7 million, along with lease liabilities of $239,000 and capital expenditures of $2.9 million.

“The company noted that revenue growth, better working capital management and moderation of expenses should help with overall cash burn, although we believe a cash infusion may be required over the mid-term,” Leung said.

Looking ahead, Leung maintains a 2022 revenue estimate of $72.8 million for a projected year-over-year increase of 34.1 per cent, with an EV/Revenue multiple forecast drop from the reported 3.4x in 2021 to a projected 2.5x in 2022.

Meanwhile, Leung continues to forecast EBITDA losses going into 2022, setting a loss forecast of $46.9 million with the EV/EBITDA multiple listed as nmf.

With a market capitalization of currently about $184 million, Blackline Safety’s stock price is now down by about two-thirds over the past 12 months. Year-to-date, BLN is currently down about 52 per cent.