Box, Inc. Form 10-Q Summary
Business context and reporting period
Box provides a cloud content management platform for secure storage, access, sharing, collaboration, workflow automation, and compliance. This unaudited Form 10-Q covers the three and nine months ended October 31, 2018, within fiscal 2019. The comparable periods ended October 31, 2017. Box reported more than 63.5 million registered users, more than 90,000 paying organizations, and services offered in 24 languages as of October 31, 2018.
Key financial metrics
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Revenue | $155.9 million; up 21% | $444.7 million; up 20% |
| Gross profit / margin | $111.2 million / 71% | $318.3 million / 72% |
| Operating loss / margin | $39.5 million / (25%) | $112.5 million / (25%) |
| Net loss | $40.2 million | $114.9 million |
| Net loss per share | $0.28 | $0.82 |
| Operating cash flow | $6.8 million | $24.0 million |
| Free cash flow | $(4.1) million | $(7.2) million |
| Billings | $155.6 million; up 10% | $435.2 million; up 14% |
| Retention rate | 108% | 108% |
Cost of revenue increased to 29% of quarterly revenue from 27% in the prior-year quarter and to 28% for the nine-month period from 27%. Operating expenses were $150.7 million in the quarter and $430.8 million year to date. Stock-based compensation was $31.8 million in the quarter and $89.1 million year to date, equal to approximately 20% of revenue in each period. Non-GAAP operating loss was $7.7 million for the quarter and $23.4 million year to date, compared with $17.0 million and $48.5 million, respectively, in the prior-year periods.
As of October 31, 2018, cash and cash equivalents were $200.1 million, and cash, cash equivalents, and restricted cash totaled $200.3 million. Total debt was $40.0 million, excluding capital lease obligations of $58.3 million on a present-value basis. Box had an $85.0 million secured revolving credit facility, including a $30.0 million letter-of-credit sublimit, and was in compliance with its financial covenants. Total deferred revenue was approximately $301.2 million, including $19.95 million classified as non-current.
Material changes versus the prior comparable period
- Revenue increased 21% in the quarter and 20% year to date, driven primarily by new customers, customer expansion, add-on product adoption, and higher paying organizations.
- Paying organizations increased 13% year over year. International revenue increased to 25% of quarterly revenue and 24% of nine-month revenue from 21% in the prior-year periods.
- Retention declined to 108% from 112%, although customer churn was below 5% of prior-period total account value and management attributed retention to seat expansion and add-on products.
- Billings growth slowed to 10% quarterly and 14% year to date, compared with 26% and 29%, respectively, in the prior-year periods. Management cited payment-frequency changes, seasonality, and a prior-period enhanced developer fee from a reseller.
- Sales and marketing expense increased in dollars but declined to 54% of revenue from 63% in the quarter and 61% year to date, partly because of ASC Topic 606 commission accounting and productivity improvements.
- Gross margin decreased by approximately two percentage points quarterly and one point year to date as Box expanded data center capacity, infrastructure, employee support, and hosted services.
- Operating cash flow improved to $24.0 million year to date from $12.9 million, but free cash flow worsened to negative $7.2 million from negative $4.6 million because of higher capital expenditures, capital lease payments, and capitalized software costs.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that Box does not expect to be profitable for the foreseeable future because it plans continued investment in sales and marketing, research and development, infrastructure, international operations, and professional services.
- Management expects cost of revenue to increase in dollars and as a percentage of revenue during the remainder of fiscal 2019. Research and development is expected to rise in dollars but remain broadly 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.
- Management believes existing cash, cash equivalents, capital leases, and credit facilities will satisfy working-capital and capital-expenditure requirements for at least the next 12 months, but notes that additional financing may be required in the future.
- Box adopted ASC Topic 606 on February 1, 2018 using the modified retrospective method. The standard changed revenue timing and substantially increased capitalized deferred commissions. Reported fiscal 2019 revenue was $2.5 million lower for the quarter and $8.0 million lower year to date than it would have been under the prior standard; operating loss was reduced by $2.8 million and $7.2 million, respectively. Cash flow from operations was unchanged.
- Box adopted ASU 2016-18 for restricted cash, which materially changed presentation of prior-period cash flows. Prior-year cash flow figures in the filing are adjusted and are not directly comparable to previously reported amounts.
- During fiscal 2019, Box acquired teams from three private technology companies for aggregate consideration of $2.4 million, primarily allocated to goodwill. Goodwill increased to $18.7 million from $16.3 million.
- Box had approximately $462.0 million of contractual obligations, including $283.3 million of operating leases net of sublease income, $60.7 million of capital leases, $74.8 million of purchase obligations, and $43.2 million of debt-related payments including interest and fees.
- The company disclosed a February 2018 data center outage involving loss of power and failure of backup generators; customer credits were issued. It also disclosed that a third-party software bug caused partial corruption of a very small subset of files uploaded during a period from mid-December 2017 to early January 2018.
- Primary risks include continuing losses, intense competition and pricing pressure, retention and customer expansion, cybersecurity and data loss, service outages and third-party hosting dependence, privacy and regulatory requirements including GDPR, international operations and foreign exchange, intellectual-property claims, employee retention, and compliance with credit-facility covenants.
- One reseller/customer represented more than 10% of revenue and accounts receivable in the periods disclosed, creating customer and channel concentration risk. No material loss was considered reasonably possible from disclosed legal contingencies as of October 31, 2018.
Most important facts for investors to verify
- Whether revenue and billings growth continue to converge after ASC Topic 606 effects, payment-frequency changes, and seasonal fourth-quarter concentration.
- Whether retention remains above 100% and whether the decline from 112% to 108% continues.
- Whether infrastructure investment causes further gross-margin pressure and whether free cash flow turns positive.
- The pace of progress toward profitability, given continuing GAAP losses and substantial stock-based compensation.
- Liquidity, leverage, and compliance with the secured facility’s minimum-liquidity and maximum-leverage covenants.
- Exposure to service outages, cybersecurity incidents, data corruption, customer credits, indemnification claims, and third-party hosting failures.
- The future balance-sheet impact of operating leases when the new lease standard becomes effective on February 1, 2019.