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 content-based applications. This unaudited Form 10-Q covers the three and six months ended July 31, 2017, the second quarter and first six months of fiscal 2018.
- More than 56 million registered users and more than 76,000 paying organizations at July 31, 2017.
- More than 17% of registered users were paying users.
- Revenue geographic mix was 79% United States and 21% outside the United States, compared with 83% and 17%, respectively, in the prior-year periods.
Financial Performance
| Metric | Three Months Ended July 31, 2017 | Three Months Ended July 31, 2016 | Six Months Ended July 31, 2017 | Six Months Ended July 31, 2016 |
|---|---|---|---|---|
| Revenue | $122.9 million | $95.7 million | $240.2 million | $185.9 million |
| Revenue growth | 28% | — | 29% | — |
| Gross profit | $90.2 million | $68.1 million | $174.7 million | $130.4 million |
| Gross margin | 73% | 71% | 73% | 70% |
| Operating loss | $(39.0) million | $(37.9) million | $(79.0) million | $(76.5) million |
| Operating margin | (32)% | (40)% | (33)% | (41)% |
| Net loss | $(39.3) million | $(38.1) million | $(79.4) million | $(76.7) million |
| Net loss per share | $(0.30) | $(0.30) | $(0.60) | $(0.61) |
Revenue growth was driven primarily by new customers, a more than 15% increase in paying organizations, increased sales of additional products, and expansion and renewals within existing customers.
- Billings increased 31% year over year to $239.0 million for the six-month period.
- Period-end retention rate was 113%, compared with 115% in the prior-year period. Customer churn was below 5% of prior-period annual contract value.
- Six-month operating expenses increased 23% to $253.6 million. Sales and marketing remained the largest expense at $143.9 million, or 60% of revenue.
- Stock-based compensation was $47.0 million for the six months, up from $35.2 million. It represented approximately 20% of revenue.
- Non-GAAP operating loss was $31.5 million, or 13% of revenue, compared with $40.6 million, or 22%, in the prior-year period. Non-GAAP net loss was $31.9 million, or $0.24 per share, compared with $40.8 million, or $0.32 per share.
Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $165.3 million at July 31, 2017, compared with $177.4 million at January 31, 2017. Restricted cash was $26.5 million.
- Six-month cash used in operating activities improved to $1.0 million from $9.1 million in the prior-year period.
- Six-month free cash flow was negative $10.7 million, compared with negative $24.1 million in the prior-year period.
- Six-month investing cash outflow was $1.8 million, primarily for fixed assets. Financing cash outflow was $9.5 million, including capital lease payments, employee tax withholding, and contingent acquisition consideration.
- The company had $40.0 million of outstanding debt under a revolving credit facility amended to mature in December 2018. The facility is secured by substantially all U.S. assets, carries floating interest rates, and includes financial and operating covenants. Box reported compliance with all financial covenants.
- Capital lease obligations totaled $43.3 million on a present-value basis. Total contractual obligations, including debt, operating leases, capital leases, and purchase commitments, were $428.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 28% in the quarter and 29% year to date, while billings increased 31% year to date.
- Gross margin improved by two percentage points in the quarter and three percentage points year to date, reflecting revenue growth outpacing data-center and infrastructure spending.
- Operating and net losses increased modestly in absolute dollars, but operating margins improved substantially as revenue grew faster than operating expenses.
- Sales and marketing expense increased 20% year to date, primarily from higher personnel, commissions, facilities, marketing technology, and demand-generation costs; the expense ratio declined from 64% to 60%.
- Research and development expense increased 22% year to date, while its revenue ratio declined from 30% to 28%.
- General and administrative expense increased 31% year to date, partly reflecting investments in systems and consultants for adoption of the new revenue-recognition standard.
- Cash flow improved due to lower capital expenditures, better working-capital management, and completion of the Redwood City headquarters, partly offset by increased capital-lease payments.
- Prior-year results included a $1.7 million net benefit from the settlement of the Open Text patent litigation; no comparable item affected the current period.
Outlook, Commentary, Risks, and Unusual Items
- Management expects continued investment in sales and marketing, research and development, data-center infrastructure, international operations, and professional services. The company does not expect to be profitable for the foreseeable future.
- Management stated that existing cash, cash equivalents, and credit facilities should satisfy working-capital and capital-expenditure needs for at least the next 12 months, but additional financing may be required in the future.
- Management expects billings and revenue growth to correlate more closely during the remainder of fiscal 2018, with quarterly billings increasingly concentrated in the second half and particularly the fourth quarter.
- Management expects retention to remain above 100% for the foreseeable future, although expansion growth may trend lower as customer accounts become more deeply penetrated.
- Box expects to adopt ASC 606 revenue guidance beginning February 1, 2018 using the modified retrospective method. The expected effects involve capitalization and amortization of sales commissions, the scope of capitalized commissions, and the timing of revenue recognition for certain contracts; the ultimate impact remained under evaluation.
- Key risks include continued operating losses, intense competition, customer renewal and expansion rates, security breaches or data loss, service outages and dependence on third-party data centers, international and privacy regulation, pricing pressure, rapid growth, employee retention, intellectual-property claims, covenant compliance, and the need for future capital.
- The company reported no material litigation loss contingency as of July 31, 2017. Customer service-level and intellectual-property indemnification obligations had not resulted in material costs to date.
- Disclosure controls and procedures were determined to be effective at the reasonable-assurance level, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether revenue and billings growth can continue while the company maintains improving gross and operating margins.
- The sustainability of the 113% retention rate and the pace of customer expansion versus churn.
- The effect of ASC 606 adoption on revenue timing, deferred revenue, commissions, and accumulated equity.
- The company’s ability to reduce cash burn and fund substantial lease, capital-lease, infrastructure, and purchase commitments.
- Exposure under the floating-rate, asset-secured credit facility and compliance with its financial covenants.
- The magnitude and recurring effect of stock-based compensation, which was $47.0 million in the first six months.
- Risks relating to cybersecurity, data privacy, regulatory compliance, service availability, and third-party hosting providers.
- The implications of the dual-class share structure: Class B holders collectively controlled approximately 72.6% of voting power as of July 31, 2017.