Box, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2016. The filing also provides fourth-quarter results for the three months ended January 31, 2016. Box operates a cloud-based enterprise content management and collaboration platform delivered primarily through subscriptions.
Business Context
- More than 44 million registered users, over 57,000 paying organizations, and service availability in 22 languages at January 31, 2016.
- Approximately 88% of registered users were non-paying and 12% were paying users.
- Enterprise customers, defined as organizations with at least 1,000 employees, generated 61% of subscription order value from new enterprise customers and expansion within existing enterprise customers during the year.
- Revenue is recognized ratably over subscription terms, while billings reflect invoicing activity and can be affected by payment frequency and contract duration.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $302.7 million | $216.4 million | Up 40% |
| Billings | $369.1 million | $246.4 million | Up 50% |
| Gross profit | $215.6 million | $169.2 million | Up 27% |
| Gross margin | 71% | 78% | Down 7 percentage points |
| Operating loss | $(201.0) million | $(166.7) million | Loss increased |
| Operating margin | (66)% | (77)% | Improved 11 percentage points |
| Net loss | $(202.9) million | $(168.2) million | Loss increased |
| Net loss per share | $(1.67) | $(11.48) | Improved due primarily to post-IPO share count |
| Retention rate | 117% | 126% | Down 9 percentage points |
FY2016 operating expenses were $416.6 million, including research and development of $102.5 million, sales and marketing of $242.2 million, and general and administrative expense of $71.9 million. Stock-based compensation increased to $59.5 million from $31.9 million in the prior year.
Fourth-Quarter Results
| Metric | Three months ended January 31, 2016 | Three months ended January 31, 2015 |
|---|---|---|
| Revenue | $85.0 million | $62.6 million |
| Gross profit | $59.3 million | $47.9 million |
| Gross margin | 70% | 77% |
| Net loss | $(50.4) million | $(46.7) million |
| Net loss per share | $(0.41) | $(2.64) |
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $185.7 million at January 31, 2016; marketable securities were $7.4 million and restricted cash was $28.0 million.
- Net cash used in operating activities was $66.3 million, compared with $84.9 million in FY2015.
- Net cash used in investing activities was $80.9 million, including $72.9 million of capital expenditures, principally related to the new Redwood City headquarters and infrastructure.
- Net cash provided by financing activities was $2.5 million. The prior year included significant IPO and preferred-stock financing proceeds.
- Total debt was $40.0 million. In December 2015, Box replaced its prior facility with a $40.0 million revolving credit facility maturing in December 2017 and drew the full amount to repay the prior facility.
- Management stated that existing cash, cash equivalents and credit facilities were sufficient for working capital and capital expenditures for at least the next 12 months, while noting that additional financing may be required in the future.
- Contractual obligations totaled $346.3 million, including $271.8 million of operating lease obligations, net of sublease income, and $20.7 million of purchase obligations.
Material Changes Versus the Prior Comparable Period
- Revenue increased 40%, while billings increased 50%; management attributed growth to new customers, renewals and expansion within existing accounts.
- Paying organizations increased 25% year over year.
- Gross margin declined from 78% to 71% as data-center, customer-support, consulting, depreciation and headquarters costs grew faster than revenue.
- Sales and marketing expense declined from 96% to 80% of revenue, reflecting improved marketing efficiency and a higher contribution from expansions and renewals.
- Research and development increased from 31% to 34% of revenue as Box continued investing in product scalability, security and functionality.
- Retention remained above 100% but declined from 126% to 117%, indicating continued net expansion but slower growth in customer deployments.
- Cash used in operations improved by $18.6 million, although the company remained significantly cash-flow negative.
- Capital expenditures increased substantially to support the new headquarters and infrastructure; management expected FY2017 capital expenditures to decrease considerably.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a clear GAAP revenue or earnings guidance figure in the filing. It expected continued revenue growth, ongoing investment and losses for the foreseeable future.
- Box expected billings growth to decelerate faster than revenue growth in FY2017 because of a shift toward annual billing and fewer multi-year prepayments. Quarterly billings were expected to remain concentrated in the second half of the fiscal year, particularly the fourth quarter.
- Management expected gross-margin pressure to continue as it expanded data-center capacity, customer support, professional services and international operations.
- Key risks include intense competition from Microsoft, Google, Dropbox, EMC, Citrix and others; customer renewal and expansion risk; cybersecurity and data-loss incidents; service outages; privacy and data-transfer regulation; pricing pressure; international expansion; dependence on highly skilled personnel and partners; and continued operating losses.
- Box had an accumulated deficit of $732.3 million and stated that it did not expect to be profitable for the foreseeable future.
- Open Text litigation resulted in an approximately $4.9 million judgment plus pre-judgment interest related to patent infringement claims. Box appealed the judgment; the outcome could materially affect the business.
- Box recorded $1.6 million of FY2016 expenses related to the legal verdict, including amortization of the settlement-related asset and accrued interest.
- The company maintained effective disclosure controls and internal control over financial reporting, and Ernst & Young issued unqualified audit opinions.
- Box had no dividend policy and did not expect to pay cash dividends in the foreseeable future.
Important Facts for Investors to Verify
- Whether revenue growth and billings growth remain durable after adjusting for billing-frequency changes and enterprise deal timing.
- Whether retention remains above 100% and whether customer expansion offsets churn and pricing pressure.
- Whether gross margin stabilizes as headquarters, data-center and customer-support investments moderate.
- The pace of operating cash-burn reduction and the adequacy of $185.7 million of cash and cash equivalents relative to expected losses and capital expenditures.
- The terms, covenants and renewal or refinancing requirements of the $40.0 million revolving credit facility.
- The ultimate outcome and financial exposure from the Open Text patent litigation.
- The magnitude of future stock-based compensation, dilution and remaining equity awards.
- The effect of privacy, data-localization and international regulatory requirements on operating costs and customer adoption.