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Blackline Safety Provides Business Update, Positioning for Improved Financial Strength

  • Hardware and service pricing increase coupled with cost reductions to improve Blackline’s cash generating capabilities

Blackline Safety Corp.a global leader in connected safety technology, provided a business update announcing a pricing increase on its hardware and services along with cost reductions that are collectively expected to significantly enhance Blackline’s financial strength and ensure long-term stability.

As we discussed in our fiscal second quarter 2022 earnings release and conference call, we are taking proactive measures to further improve our top-line performance while also having lowered operating costs to further strengthen the financial performance of our business,” said Cody Slater, CEO and Chair of Blackline Safety. “An increased emphasis on the financial durability of Blackline is paramount in an uncertain world and we are confident that these measures will allow us to operate in a position of strength while still allowing us to continue executing on our strong growth opportunities in the connected industrial worker market, where we have expanded revenue at a compound annual rate of 48% over the last five years.

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“While we expect our fiscal third quarter cash burn to remain elevated as we flow through these margin enhancements and cost reductions, these actions, when applied to our trailing twelve-month revenues would have collectively allowed us to capture upwards of $20 million of incremental cash flow. With continued top line growth, the impact to these changes will be even more significant in the coming year. These actions make us a stronger and more competitive company while putting us on an accelerated path to generating free cash flow.”

Hardware and Software Pricing Increase

Blackline is implementing an approximate 15% pricing increase in both hardware and services. This will represent the first pricing increase on the G7 since its launch five years ago and the first service pricing increase in five years. The Company has been in communication with customers regarding the pricing increase and given global inflation and similar pricing increases from competitors, Blackline is confident the pricing increase will not impact its competitive positioning.

The hardware pricing increase will take immediate effect on any sales beginning August 15, 2022 in North America and Rest of World, and September 15, 2022 in Europe, providing an expected step-function improvement in gross margin and cash generation. While the service pricing increase will also take effect that same day for all new customers entering into service contracts, this price increase will also flow through to existing customers as they renew their contracts.

For context, a 15% hardware pricing increase applied to trailing twelve-month product revenue would have driven product revenue from $31.6 million to $36.3 million and gross margin percentage from 18% to 29%, equating to a $4.7 million improvement in gross margin. Any future relief in global supply chain challenges would represent additional upside to product gross margins and profit. Similarly, a 15% service pricing increase applied to all trailing twelve-month service revenue would expand service revenue from $32.7 million to $37.6 million and gross margin percentage from 69% to 73% with a $4.9 million improvement in gross margin. Note, these calculations assume no other changes outside of the pricing increase and are presented only as an illustrative example.

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Cost Reductions

As discussed in the Company’s fiscal second quarter 2022 earnings release, operating expenses in the fiscal fourth quarter of 2022 are expected to be at or below the fiscal second quarter 2022 level of $21.5 million. Part of the cost savings is being driven by a workforce reduction that was implemented during the fiscal third quarter of 2022 following a review of Blackline’s organizational structure, which resulted in opportunities for greater efficiency and lower costs without impacting growth. The major impact of the workforce reduction will be the delay of the launch of G5. These measures allow Blackline to conserve liquidity and maximize resources towards products and services expected to deliver near-term revenue including the upcoming launch of the G6 in October. Additionally, the Company has been actively reducing operating costs related to consultants, contractors, recruitment and other business expenses. The impact of these changes will be seen in the Company’s fiscal fourth quarter 2022. Collectively, these reductions put Blackline on track to surpass its initial goal with more than $10 million of annualized savings compared to Q2’s operating costs. Note that Blackline expects to record severance and redundancy costs of over $0.6 million in the fiscal third quarter 2022 due to these reductions.

Inventory Management

Blackline has been significantly increasing inventory the last several quarters above historical trend levels as a proactive strategy in light of ongoing global supply chain challenges and to build sufficient inventory for the upcoming launch of the G6. Blackline’s historical strategy of maintaining inventory to meet next day fulfilment of any possible customer order has been a competitive differentiator as the Company established itself in the market. While this strategy was beneficial in the early stages of growth, it was also a significant driver of material costs and inventory levels. This led to the Company carrying higher levels of inventory including growth of $7 million in the past year, a trend which continued into Q3 2022. In today’s challenging supply chain market, Blackline is now targeting order fulfilment within 30 days which allows the Company to maintain its customer service advantage while reducing inventory carrying costs. These measures, along with the launch of the G6, will allow the Company to transition from having inventory as a significant use of cash to a source of cash as it achieves more efficient inventory turnover.

Blackline Lease Model

Blackline provides the option for customers to purchase outright its devices or to lease through its G7 lease program. Blackline has seen an acceleration of adoption of its lease program this fiscal year with finance leases at April 30, 2022, totalling $23.1 million, up from $16.3 million at October 31, 2021. This acceleration has continued in fiscal Q3 2022 driven by the recovery in the oil & gas markets, which traditionally favour this model–as seen in the Company’s August 2 announcement.

Blackline views the lease model as an attractive offering for its customers as it provides strong retention and healthy margins to the Company. However, there is a significant impact to cash flow with a lease generally taking 1.5-2 years for the cash flow to breakeven with a standard purchase of hardware and services where initial payment is made up front. In addition to margin improvements associated with the previously mentioned pricing increase, the Company will be raising the interest rates implicit in its lease agreements in response to the current interest rate environment and to help offset the cash flow impact.

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[To share your insights with us, please write to sghosh@martechseries.com]

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