Blackline Safety keeps Buy rating with Beacon Securities

It’s been a tough year for fans of Blackline Safety (Blackline Safety Stock Quote, Charts, News, Analysts, Financials TSX:BLN), but there should be better days ahead, according to Gabriel Leung, analyst for Beacon Securities. On Wednesday, Leung delivered an update to clients on the Calgary-based tech hardware and software company, saying a recent equity financing should give Blackline some breathing room heading into 2023.

Blackline, which has employee safety monitoring solutions involving wireless location technology including both hardware and cloud-hosted applications, has seen its share price plummet over the past 12 months. The stock is down about 77 per cent since last September, while year-to-date BLN is currently down about 70 per cent.

But Leung pointed to the upcoming launch of its G6 single gas detection product, coming next week at the US National Safety Council (NSC) Safety Congress and Expo, as reasons to be positive. Leung said the G6 should be a high-volume product for Blackline Safety and help its growth profile over 2023.

“With new product launches, price increases (which are being accepted by customers), along with cost cutting and cash flow improving initiatives underway, we believe BLN is now better positioned to reach breakeven / positive EBITDA results (possibly in the latter half of CY23 / early CY24),” he said.

Blackline released its third quarter fiscal 2022 results on Wednesday for the three-month period ended July 31, 2022. The company reported $18.6 million in revenue, up 46 per cent year-over-year, with Service revenue up 30 per cent to $9.7 million and Product revenue up 69 per cent to $8.9 million.

In terms of geographic area, the company’s US business experienced a 75 per cent year-over-year increase in revenue, in Canada it was 68 per cent, in the Rest of the World it was 64, while for its European business, revenue was down six per cent. Blackline said the drop in Europe was related to a realignment of its business and a leadership transition.

On earnings, the company said its Q3 net loss was $16.3 million compared to a loss of $10.3 million a year earlier and the quarterly EBITDA was negative $14.6 million compared to negative $8.9 million a year ago. Blackline said the larger net loss was due to increases in general and administrative expenses, sales and marketing and product R&D, while the drop in EBITDA come from an increase in total expenses and other non-recurring transactions over the quarter.

“Revenue growth was primarily driven by another robust quarter of product growth at 69 per cent and service growth accelerated to 30 per cent, our highest quarterly growth of the last two years, as we delivered on numerous deployments during the quarter and our rental business continues to ramp,” said CEO and Chair Cody Slater in a press release.

“This service growth demonstrates the attractiveness of our hardware-enabled software-as-a-service business model as our growing customer base deploys more of our devices that utilize our high-margin services. This led to Blackline exiting the quarter with annual recurring revenue of $32.9 million,” he said.

Looking at the quarterly numbers, Leung noted that operating expenses of $23.3 million were up from $21.5 million for the previous quarter and that Blackline is expecting its fiscal Q3 operating costs to be the high-water mark, with the benefits of its restructuring efforts and operating leverage to follow.

“BLN is implementing a number of initiatives to improve margins and to reduce cash flow burn. These include a 15 per cent price increase in both hardware and services (started August 15th in North America and September 15th in RoW) and reducing headcount, which should help to drive over ~$10 million in annual cost savings from FQ2’s operating expense level of $21.5 million (we expect FQ3 operating expenses to be at or below $21.5 million and for it decline again in FQ1). BLN is also targeting order fulfillment within 30 days, which should help reduce inventory carrying costs and improve cash flow,” he said.

Leung also pointed to Blackline’s recent capital raise of $24.9 million in gross proceeds ($23.9 million net) through which it issued 11.3 million shares at $2.20 per share. The company also secured a $15 million operating facility with a $5 million accordion feature.

With the update, Leung maintained a “Speculative Buy” rating on Blackline Safety while lowering his target price from $6.00 to $4.50 per share, which at the time of publication represented a projected one-year return of 134 per cent. His target is based on a 4x multiple of his fiscal 2022 EV/Sales projection. Leung is expecting Blackline to generate full fiscal 2022 (year end October) revenue and adjusted EBITDA of $71.5 million and negative $46.7 million, respectively.