Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management platform for securely managing, sharing, collaborating on and governing enterprise content. This unaudited Form 10-Q covers the three months ended April 30, 2021, the first quarter of fiscal 2022, with comparison to the three months ended April 30, 2020.
Financial and Operating Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $202.4 million | $183.6 million | 10% increase |
| Gross profit | $141.5 million | $129.6 million | 9% increase |
| Gross margin | 70% | 71% | Down 100 basis points |
| Operating loss | $10.3 million | $24.2 million | Improved by $14.0 million |
| Operating margin | (5%) | (13%) | Improved by 8 percentage points |
| Net loss | $14.6 million | $25.6 million | Improved by $11.0 million |
| GAAP net loss per share | $0.09 | $0.17 | Loss reduced |
| Net cash from operations | $94.8 million | $61.9 million | Increase of $32.9 million |
| Free cash flow | $75.9 million | $39.9 million | Increase of $36.1 million |
| Billings | $159.4 million | $128.1 million | 24% increase |
| Remaining performance obligations | $864.8 million | $722.7 million | 20% increase |
| Net retention rate | 103% | 107% | Down 4 percentage points |
Cash and cash equivalents were $561.5 million at April 30, 2021. Including restricted cash and short-term investments, liquidity was $612.3 million. Total debt consisted principally of $345.0 million of 0.00% convertible senior notes due January 2026 and $30.0 million outstanding under the secured revolving facility. Management stated that existing liquidity, finance leases and credit facilities should be sufficient for at least the next 12 months.
Deferred revenue was $423.2 million at April 30, 2021, compared with $465.6 million at January 31, 2021. The company expects to recognize 62% of its remaining performance obligations over the following 12 months, with the substantial majority of the balance expected within 24 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by expansion within existing customers, increased attach rates for add-on products, new customers and higher international revenue. Paying organizations increased 6% year over year.
- Non-U.S. revenue increased to 31% of total revenue from 27%, with Japan revenue representing 17% versus 13% in the prior-year quarter.
- Cost of revenue increased 13%, causing gross margin to decline to 70%, principally due to higher hosted data service costs, software and maintenance costs, stock-based compensation and amortization of acquired technology.
- Research and development expense declined 4% and sales and marketing expense declined 4%, reflecting lower headcount, reduced travel and marketing activity during COVID-19, and efficiency initiatives.
- General and administrative expense increased 11%, primarily due to higher stock-based compensation, acquisition-related fees and outside professional services.
- Interest and other expense increased to $4.0 million from $1.1 million, primarily due to $2.2 million of foreign-currency losses and lower interest income.
- Operating cash flow and free cash flow improved substantially, although cash declined by $33.3 million during the quarter because of acquisitions, investment purchases and financing outflows.
- Net retention declined to 103% from 107%, indicating slower expansion from existing customers despite remaining above 100%.
Guidance, Outlook, Commentary and Unusual Items
- The filing does not provide a clear quantitative revenue or earnings forecast for fiscal 2022. Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in dollars over time, while generally declining or remaining stable as a percentage of revenue.
- Management expects continued investment in Box Sign, advanced security and compliance, workflow automation, integrations, infrastructure and customer success. Box acquired SignRequest for $54.3 million and acquired selected Cloud FastPath assets for $14.8 million during the quarter.
- Box early adopted ASU 2020-06 effective February 1, 2021. The adoption increased non-current debt by $68.0 million, reduced additional paid-in capital by $68.6 million and reduced accumulated deficit by $0.6 million, without a material effect on current-quarter operations or cash flows.
- Stock-based compensation was $41.8 million, or approximately 21% of revenue, compared with $40.0 million, or 22% of revenue, in the prior-year quarter. Non-GAAP operating income was $34.4 million and non-GAAP net income was $30.6 million, but these measures exclude substantial stock-based compensation and other items.
- COVID-19 had no material adverse effect on first-quarter financial results, but management reported customer churn, delayed sales cycles and customer budget reductions. Remote work also created demand opportunities for Box’s platform.
- Subsequent to quarter-end, Box closed a $500 million Series A convertible preferred stock investment led by KKR on May 12, 2021. The preferred stock carries cumulative dividends at 3.0% per year, subject to the terms disclosed in the filing, and provides voting and specified approval rights.
- On June 2, 2021, Box announced a modified Dutch auction tender offer for up to $500 million of Class A common stock at $22.75 to $25.75 per share. The company expected to use substantially all preferred-stock proceeds to fund the offer.
- Key risks include intense competition, declining net retention, customer renewals and expansion, cybersecurity and service availability, privacy regulation, foreign-currency exposure, COVID-19 effects, acquisition integration, convertible-debt obligations, preferred-stock rights and shareholder activism.
- Management concluded that disclosure controls and procedures were effective at the reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the strong free cash flow and operating cash flow with the continued GAAP net loss and the significant non-cash stock-based compensation expense.
- Assess whether the decline in net retention from 107% to 103% stabilizes or continues, particularly as customer churn and budget pressure remain risks.
- Review the composition, conversion terms, cash-settlement requirements and maturity risks of the $345.0 million convertible notes.
- Evaluate the liquidity and capital-allocation effects of the $500 million preferred-stock financing and the subsequent $500 million share tender offer, including preferred dividends, voting rights and potential dilution.
- Monitor integration progress and returns from the SignRequest and Cloud FastPath acquisitions, including goodwill and acquired-technology amortization.
- Review the company’s infrastructure commitments, including $227.0 million of present-value operating lease liabilities, $97.0 million of finance lease liabilities and $262.0 million of undiscounted purchase obligations.
- Consider the potential effects of cybersecurity incidents, data-privacy regulations, service outages, litigation, foreign-exchange losses and COVID-19-related changes in customer demand.