Blackline Safety Corp. (TSX: BLN), a global leader in connected safety technology, today 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.
“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.
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.
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.
About Blackline Safety
Blackline Safety is a technology leader driving innovation in the industrial workforce through IoT. With connected safety devices and predictive analytics, Blackline enables companies to drive towards zero safety incidents and improved operational performance. Blackline provides wearable devices, personal and area gas monitoring, cloud-connected software and data analytics to meet demanding safety challenges and enhance overall productivity for organizations with coverage in more than 100 countries. Armed with cellular and satellite connectivity, Blackline provides a lifeline to tens of thousands of people, having reported over 185 billion data-points and initiated over five million emergency responses. For more information, visit BlacklineSafety.com and connect with us on Facebook, Twitter, LinkedIn and Instagram.
Advisory Regarding Forward-Looking Statements
In the interest of providing Blackline's shareholders and potential investors with information regarding Blackline, including management's assessment of Blackline's future plans and operations, certain statements in this press release are "forward-looking statements" within the meaning of applicable Canadian securities legislation. In some cases, forward-looking statements can be identified by terminology such as "anticipate", "believe", "continue", "could", "estimate", "expect", "forecast", "intend", "may", "objective", "ongoing", "outlook", "potential", "project", "plan", "should", "target", "would", "will" or similar words suggesting future outcomes, events or performance. The forward-looking statements contained in this press release speak only as of the date thereof and are expressly qualified by this cautionary statement. Specifically, this press release contains forward-looking statements relating to: actions that are expected to materially enhance Blackline’s financial strength and ensure long-term stability; Blackline's expectation that its fiscal third quarter cash burn will remain elevated and that through revenue enhancements and cost reductions, Blackline may capture upwards of $20 million of incremental cash flow when looking at its trailing revenue with no benefit to future growth; that Blackline will implement an approximate 15% pricing increase in both hardware and services; Blackline's assessment that pricing increases will not impact its competitive positioning; the effects of any price increases on Blackline's trailing twelve-month product revenue and gross margins; Blackline's expectation on operating expenses for the fourth quarter of 2022; Blackline's estimate of annual costs savings and severance costs as a result of certain past and planned corporate actions; Blackline targeting order fulfilment within 30 days which, along with the launch of the G6, is expected to allow the Company to transition from having inventory as a significant use of cash to a source of cash as it achieves improved inventory turnover; our business strategies and other plans and objectives. In addition, information and statements relating to reserves are deemed to be forward-looking statements, as they involve implied assessment, based on certain estimates and assumptions, that the reserves described exist in quantities predicted or estimated, and that the reserves can be profitably produced in the future.
These forward-looking statements are based on certain key assumptions regarding, among other things: planned product and service price changes; estimated operating and other costs; capital expenditure levels; the receipt, in a timely manner, of regulatory and other required approvals for our operating activities; the availability and cost of labour and other industry services; the availability and cost of financing and our ability to access capital; the effects of inflation and supply chain; interest and foreign exchange rates; the continuance of existing and, in certain circumstances, proposed tax regimes; and current industry conditions, laws and regulations continuing in effect (or, where changes are proposed, such changes being adopted as anticipated). The reader is cautioned that such assumptions, although considered reasonable by Blackline at the time of preparation, may prove to be incorrect.
Actual results achieved during the forecast period will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors. Such factors include, but are not limited to: inflation and cost increases and distribution of supply chains; variations in interest rates and foreign exchange rates; access to external sources of capital; increases in operating costs; changes in government regulations that affect our industry; changes in income tax or other laws or government incentive programs; changes in environmental, health and safety regulations; competition in the technology and safety industry for, among other things, skilled personnel and related materials, equipment and services; or key personnel and information systems; risks associated with the ownership of our securities, including changes in market-based factors; and other factors, many of which are beyond the control of Blackline.
The above summary of assumptions and risks related to forward-looking statements in this press release has been provided in order to provide shareholders and potential investors with a more complete perspective on Blackline's current and future operations and such information may not be appropriate for other purposes. There is no representation by Blackline that actual results achieved during the forecast period will be the same in whole or in part as those forecast and Blackline does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities law.
This press release also contains future-oriented financial information and financial outlook information (collectively, "FOFI") about Blackline's prospective results of operations including, without limitation, expectations with respect to future cash flows, which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth above. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on FOFI. Blacklines actual results, performance or achievement could differ materially from those expressed in, or implied by, these FOFI, or if any of them do so, what benefits Blackline will derive therefrom. Blackline has included the FOFI in order to provide readers with a more complete perspective on Blacklines future operations and such information may not be appropriate for other purposes.
In addition to the foregoing, any references herein to trailing twelve-month figures are based on the Company's financial results for the twelve month period ended April 30, 2022, as if the changes to the pricing for the Company's products and services described herein had been implemented at the beginning of such twelve-month period.