Business Context and Reporting Period
Box, Inc. provides a subscription-based cloud content management platform for secure storage, access, sharing, collaboration, workflow, security and compliance. This unaudited Form 10-Q covers the three and nine months ended October 31, 2019, the third quarter of fiscal 2020, with comparisons to the corresponding 2018 periods.
As of October 31, 2019, Box reported 13.2 million paying registered users and more than 97,000 paying organizations. U.S. customers represented 75% of revenue; Japan represented 10% of third-quarter revenue.
Financial Highlights
| Metric | Three months ended October 31, 2019 | Three months ended October 31, 2018 | Nine months ended October 31, 2019 | Nine months ended October 31, 2018 |
|---|---|---|---|---|
| Revenue | $177.2 million | $155.9 million | $512.7 million | $444.7 million |
| Revenue growth | 14% | — | 15% | — |
| Gross profit | $120.9 million | $111.2 million | $353.8 million | $318.3 million |
| Gross margin | 68% | 71% | 69% | 72% |
| Loss from operations | $(39.2) million | $(39.5) million | $(110.9) million | $(112.5) million |
| GAAP net loss | $(40.9) million | $(40.2) million | $(114.0) million | $(114.9) million |
| GAAP net loss per share | $(0.28) | $(0.28) | $(0.78) | $(0.82) |
| Net cash from operations | $8.9 million | $6.8 million | $29.7 million | $24.0 million |
| Free cash flow | $(1.7) million | $(4.1) million | $(7.2) million | $(7.2) million |
- Third-quarter non-GAAP operating loss was $0.5 million, compared with $7.7 million in the prior-year quarter. Nine-month non-GAAP operating loss was $3.0 million, compared with $23.4 million.
- Third-quarter non-GAAP net loss was $2.2 million, or $0.01 per share, compared with $8.4 million, or $0.06 per share. Nine-month non-GAAP net loss was $6.1 million, or $0.04 per share, compared with $25.8 million, or $0.18 per share.
- Stock-based compensation was $37.8 million in the quarter and $106.9 million for the nine months, up from $31.8 million and $89.1 million, respectively.
- Remaining performance obligations were $636.0 million, up 5% year over year; Box expects to recognize 68% within the following 12 months.
- Billings were $171.9 million in the quarter and $463.2 million for the nine months, representing year-over-year growth of 10% and 6%, respectively.
- Period-end retention rate was 105%, compared with 108% in the prior-year period. Customer churn was below 5% of prior-period total account value.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $200.9 million at October 31, 2019, compared with $217.5 million at January 31, 2019. Restricted cash was zero.
- Total debt under the secured credit facility was $40.0 million. The facility was amended in July 2019: commitments increased from $85.0 million to $100.0 million and maturity was extended to July 12, 2022. Box was in compliance with its financial covenants.
- Finance lease liabilities totaled $131.9 million on a present-value basis. Operating lease liabilities totaled $253.7 million on a present-value basis.
- Total contractual obligations were $714.5 million, including $306.4 million of operating lease payments, $141.8 million of finance lease payments and $222.9 million of purchase obligations.
- Management stated that existing cash, finance leases and credit facilities should be sufficient for working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing may be required in the future.
Material Changes Versus the Prior Comparable Period
- Revenue increased 14% in the quarter and 15% year to date, driven by new customers, an 8% increase in paying organizations, add-on product adoption, renewals and expansion within existing accounts.
- Cost of revenue rose 26% in both comparable periods, reducing gross margin by three percentage points to 68% for the quarter and 69% year to date. Higher data-center rent, redundant colocation costs, depreciation, headcount and related expenses were primary drivers.
- Research and development expense increased 20% in both periods, reflecting higher headcount and stock-based compensation. Sales and marketing expense declined 2% for the quarter and increased only 2% year to date, lowering its revenue ratio from 54% to 47%.
- Operating losses improved modestly on a GAAP basis and materially on a non-GAAP basis, primarily due to revenue growth and improved sales and marketing efficiency.
- Operating cash flow improved year to date, but free cash flow remained negative after capital expenditures, capitalized software costs and finance lease principal payments.
- Box adopted ASC Topic 842 on February 1, 2019. The adoption materially increased reported assets and liabilities through recognition of operating lease right-of-use assets and liabilities, but management stated that it did not materially affect earnings or cash flows.
Outlook, Management Commentary, Risks and Unusual Items
- Management does not expect to be profitable for the foreseeable future because of continuing investments in sales and marketing, research and development, infrastructure and professional services.
- During data-center migration, Box expects increased costs from operating multiple facilities and stated that cost of revenue as a percentage of revenue may increase slightly in fiscal 2020. The migration is intended to lower infrastructure costs over time and was substantially completed by the end of the third quarter, although additional activities continue.
- Management expects research and development expense to increase in dollars but remain relatively stable as a percentage of revenue, while sales and marketing and general and administrative expenses are expected to decline as percentages of revenue over time.
- Box launched Box Shield in October 2019 and continues to invest in security, workflow, intelligence, compliance and international capabilities.
- Box entered into a five-year interest-rate swap with a $30.0 million notional amount to hedge a portion of variable-rate debt exposure.
- Box entered into multiple infrastructure and IT software contracts during the quarter, increasing purchase obligations; management stated these contracts support long-term gross-margin objectives.
- A purported securities class action was filed in June 2019, and a shareholder derivative action was filed in October 2019. The company considers the claims without merit and intends to defend them. The derivative action was too early to estimate a reasonably possible loss; no material loss was considered reasonably possible for disclosed contingencies as of October 31, 2019.
- Principal risks include sustained losses, intense competition, declining retention, cybersecurity and data-loss events, service outages, data-center migration execution, privacy and regulatory requirements, international operations, dependence on third-party providers and partners, intellectual-property claims, contractual commitments and the need for future capital.
Important Facts for Investors to Verify
- Whether revenue and billings growth reaccelerate, particularly after the unusually high prior-year multi-year prepayments and reseller fee.
- Whether retention remains above 100% and whether the decline from 108% to 105% continues.
- Progress and total cost of the data-center migration, including the timing of expected gross-margin benefits.
- Conversion of positive operating cash flow into sustainable positive free cash flow after lease and infrastructure commitments.
- Magnitude and potential dilution of stock-based compensation, which represented $106.9 million for the nine months.
- Compliance with credit-facility leverage and liquidity covenants and the availability of the $100.0 million revolving commitment.
- Potential financial or operational effects of the securities class action, derivative action, service outage, cybersecurity risks and data-protection requirements.
- Impact of ASC Topic 842 and future accounting changes on reported leverage, assets, liabilities and comparability.