Blackline Safety is still a buy, Beacon Securities says

Record third quarter numbers from Blackline Safety Corp (Blackline Safety Corp Stock Quote, Chart, News TSXV:BLN) have Beacon Securities analyst Gabriel Leung maintained his “Buy” rating on the stock.

On September 26, Blackline Safety reported its Q3, 2019 results. The company lost $2.24-million on revenue of $8.1-million, a topline that was up 73 per cent over the same period last year. The performance was led by European sales, which were up 115 per cent.

BLN’s Q3 was its 10th consecutive quarter of double-digit year-over-year revenue growth.

“Similar to last quarter, a prominent order for G7 wearables from another water utility resulted in a strong European finish. With 12 water/waste water authorities in the United Kingdom, this is Blackline’s second major water industry win, displacing conventional monitoring equipment,” CEO Cody Slater said. “In the second quarter, Yorkshire Water adopted our G7 Insight gas detection program with the option to add real-time monitoring at a later time. This quarter, Welsh Water purchased G7 safety wearables for lone worker monitoring, with the option to add gas detection cartridges at a future point. Together, both orders highlight our G7 product line’s versatility, supporting current customer needs while presenting an upgrade path as their needs evolve over time. No other gas detection vendor in the world is able offer this level of field-expandable capability. In addition to our continued strong revenue growth, we finished the quarter with a strong position in cash and short-term investments of $32.2-million. With our ongoing momentum, the benefits and economies of scale of manufacturing in-house helped to increase our gross margin from 44 per cent in Q2 to 49 per cent this quarter. This is also our third consecutive quarter where we achieved a positive adjusted EBITDA, a non-GAAP metric that we use to track our performance. As we near the completion of G7 EXO area gas monitor development, we will see not only an expansion of our product lines but an evolutionary shift in our business as we expand beyond the employee wearable market, into the overall workplace. With tens of thousands of live-connected safety wearables already deployed around the world, our cloud-hosted infrastructure has recorded 97 billion data points, 1.2 billion live-reported gas readings, 5.0 million live-monitored alerts and 795,000 voice calls and messages. This deep base of experience proves Blackline’s leading position in the connected workplace — we have emerged not only as a connected safety company but also as a value-added data partner. In addition to keeping hard-working personnel safe in the field and throughout industrial facilities, we are delivering consulting and integration services with Fortune 500 companies, helping them find efficiencies within their business through data integration, visualization, machine learning and artificial intelligence.”

Leung notes that BlackLine reported revenue that bested his expectation of $6.6-million, while EBITDA matched the negative $1.6-million he had modeled. The analyst summarized the key data from the quarter.

“Drilling down into revenues, product was $3.4M versus our $2.1M, while services (i.e. recurring) were $4.6M versus our $4.6M,” Leung noted. “Services revenues, which comprises monitoring, support and leasing services were up 64% y/y. BLN also disclosed that Blackline Complete leasing contributed $1.1M in service revenues in fiscal Q3, versus $702k last year. At the end of Q3, contracted future revenues, which represents future lease and associated service revenue commitments in place over a 3-year period stood at $7.4M, which was up from $5.3 last year, but down from $8.2M last quarter. In the quarter, an existing Blackline Complete customer opted to end their leasing contract early and instead purchase upgraded G7 hardware devices with the net contract change of $443k in the period reflecting this modification (which helps to explain the q/q drop in contracted future revenues). FCF was negative $1.5M, including operating cash flow of negative $234k ($1.3M was positive working capital-related) and capex of $1.3M. The company ended the quarter with working capital of $38M, which includes cash of $32M and inventory of $6.2M.”

In a research update to clients today, Leung maintained his “Speculative Buy” rating and one-year price target of $8.25 on Blackline Safety, implying a return of 38 per cent at the time of publication.

Leung thinks BLN will post EBITDA of negative $6.4-million on a topline of $29.6-million in fiscal 2019.

“We continue to view an acceleration in deal flow (which appears to be taking place) and competitive displacements as the key catalyst for this stock,” Leung concluded.