Business Context and Reporting Period
Box, Inc. provides a subscription-based cloud content management platform for secure storage, access, sharing, collaboration, workflow automation, content intelligence, security and compliance. This Form 10-Q covers the three and six months ended July 31, 2019, the second quarter of fiscal 2020, with comparisons to the corresponding 2018 periods.
As of July 31, 2019, Box reported 12.5 million paying registered users, more than 95,000 paying organizations and service availability in 24 languages. Approximately 75% of quarterly revenue and 76% of year-to-date revenue came from U.S. customers.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | Six Months Ended July 31, 2019 | Six Months Ended July 31, 2018 |
|---|---|---|---|---|
| Revenue | $172.5 million | $148.2 million | $335.5 million | $288.7 million |
| Gross profit | $118.7 million | $105.6 million | $233.0 million | $207.1 million |
| Gross margin | 69% | 71% | 69% | 72% |
| Operating loss | $(36.3) million | $(37.2) million | $(71.7) million | $(73.1) million |
| Operating margin | (21)% | (25)% | (22)% | (25)% |
| Net loss | $(36.2) million | $(38.1) million | $(73.1) million | $(74.7) million |
| Net loss per share | $(0.25) | $(0.27) | $(0.50) | $(0.54) |
| Cash flow from operations | $(4.7) million | $(1.3) million | $20.8 million | $17.2 million |
| Free cash flow | $(19.0) million | $(10.3) million | $(5.5) million | $(3.1) million |
| Billings | $172.9 million | $162.8 million | $291.3 million | $279.6 million |
| Remaining performance obligations | $640.5 million | $587.2 million | $640.5 million | $587.2 million |
Non-GAAP operating income was $0.5 million for the quarter and a loss of $2.5 million for the six-month period, compared with non-GAAP operating losses of $6.5 million and $15.8 million, respectively, in the prior-year periods. Non-GAAP results exclude primarily stock-based compensation.
Stock-based compensation expense was $36.8 million in the quarter and $69.2 million year to date, compared with $30.7 million and $57.3 million in the comparable 2018 periods.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $201.5 million at July 31, 2019, compared with $217.5 million at January 31, 2019. Box reported no restricted cash at quarter end.
- Total debt outstanding was $40.0 million. The amended secured revolving credit facility has $100.0 million of total commitments, a $45.0 million letter-of-credit sublimit and a maturity date of July 12, 2022. Box was in compliance with its financial covenants.
- Finance lease liabilities totaled $98.5 million, including current and non-current portions. Operating lease liabilities totaled $260.0 million.
- Total assets were $827.3 million and stockholders’ equity was $22.3 million at July 31, 2019. The accumulated deficit was $1.207 billion.
- Box stated that existing cash, finance leases and credit facilities should meet working capital and capital expenditure needs for at least the next 12 months, subject to operating performance and other factors.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16% in both the quarter and first six months, driven by new customers, customer expansion, renewals and stronger attachment of add-on products.
- Paying organizations increased 10% year over year. The retention rate declined to 106% from 108%, but remained above 100%, reflecting net expansion of existing accounts.
- Gross margin declined to 69% from 71% for the quarter and to 69% from 72% year to date. Cost of revenue rose 26%, faster than revenue, primarily because of data-center rent, redundant facilities during migration, depreciation, hosting costs and personnel.
- Sales and marketing expense increased only 4% in the quarter and 3% year to date, declining to 47% of revenue from 52% and 53%, respectively, reflecting improved sales efficiency and product simplification.
- Research and development expense increased 19% in the quarter and 20% year to date, while general and administrative expense increased 3% and 7%, respectively.
- Year-to-date billings grew 4%, substantially below revenue growth, partly because of a prior-period enhanced developer fee, unusually high prior-period multi-year prepayments and reduced use cases by a large customer.
- Operating cash flow improved year to date, but free cash flow declined because of higher finance lease principal payments and increased capitalization of internal-use software costs.
Guidance, Outlook, Risks and Unusual Items
- Management does not expect Box to be profitable for the foreseeable future because it plans to continue investing in research and development, sales and marketing, infrastructure, international expansion and professional services.
- Box expects cost of revenue as a percentage of revenue to increase slightly in fiscal 2020 while it operates redundant data-center capacity. Primary data-center migration to lower-cost regions is expected to continue through approximately the middle of fiscal 2021.
- Management expects research and development and general and administrative expenses to increase in dollars but remain stable or decline as percentages of revenue over time. Sales and marketing expense is also expected to decline as a percentage of revenue as renewals and expansion represent a larger share of business.
- Remaining performance obligations were $640.5 million at July 31, 2019, with 67% expected to be recognized as revenue during the following 12 months.
- Box adopted ASC Topic 842 lease accounting on February 1, 2019. The adoption added approximately $206.6 million of operating lease right-of-use assets and $255.0 million of operating lease liabilities to the opening balance sheet, materially increasing reported assets and liabilities without a material effect on operating results or cash flows.
- A purported securities class action was filed on June 6, 2019 against Box and certain officers and directors. The company believes the claims are without merit, but cannot estimate any reasonably possible loss or range of loss because the matter is in an early stage.
- Key disclosed risks include intense competition and pricing pressure, customer renewal and expansion dependence, cybersecurity and data loss, service outages and third-party hosting dependence, privacy and data-protection regulation, data-center migration execution, international and foreign-currency exposure, continued operating losses, stock-based compensation dilution and potential need for additional capital.
Most Important Facts for Investors to Verify
- Whether revenue growth, billings growth and remaining performance obligations remain aligned, particularly after the unusually strong prior-year prepayments.
- Whether the 106% retention rate stabilizes or declines further and whether add-on product adoption continues to support expansion.
- Progress, costs and margin effects from the data-center migration and operation of redundant facilities.
- The company’s path from non-GAAP operating break-even in the quarter to sustainable GAAP profitability and positive free cash flow.
- Cash consumption, finance lease obligations, operating lease commitments and continued compliance with credit-facility covenants.
- The potential financial and reputational impact of the securities class action, cybersecurity incidents, service outages and privacy-regulatory changes.
- The effect of substantial stock-based compensation, including $319.0 million of unrecognized expense related to outstanding restricted stock units, on future earnings and share dilution.