Business Context and Reporting Period
Box, Inc. provides a cloud-based, mobile-optimized enterprise content management and collaboration platform. This unaudited Form 10-Q covers the three and six months ended July 31, 2015, compared with the corresponding 2014 periods. Box reported approximately 39 million registered users, more than 50,000 paying organizations and operations in 22 languages.
Financial Performance and Position
| Metric | Q2 FY2016 | Q2 FY2015 | Six Months FY2016 | Six Months FY2015 |
|---|---|---|---|---|
| Revenue | $73.5 million | $51.4 million | $139.1 million | $96.8 million |
| Gross profit | $52.8 million | $40.6 million | $101.3 million | $76.7 million |
| Gross margin | 72% | 79% | 73% | 79% |
| Loss from operations | $(49.8) million | $(38.3) million | $(96.4) million | $(76.1) million |
| Net loss | $(50.2) million | $(37.6) million | $(97.5) million | $(76.1) million |
| Net loss per share | $(0.42) | $(2.71) | $(0.81) | $(5.51) |
| Billings | $79.6 million | $55.1 million | $149.4 million | $99.3 million |
- Operating expenses were $102.6 million in Q2 and $197.7 million for the six-month period. Six-month expenses included $27.4 million of stock-based compensation and $2.7 million of intangible-asset amortization.
- Cash used in operating activities was $21.7 million in Q2 and $53.8 million for the six months. Excluding $25.0 million of restricted cash used to secure a headquarters-related letter of credit, management characterized six-month operating cash use as $28.8 million.
- Investing cash outflow was $130.1 million for the six months, including $112.5 million of marketable-security purchases and $27.8 million of capital expenditures.
- At July 31, 2015, cash and cash equivalents were $140.1 million, marketable securities were $102.1 million, and total liquidity from these sources was $242.2 million.
- Total debt was $40.0 million, with $20.0 million of remaining availability under the secured revolving credit facility. Box was in compliance with its financial covenants.
- Accumulated deficit was $626.9 million. Management stated that existing cash, marketable securities and credit facilities should fund working capital and capital expenditures for at least the next 12 months, although additional financing may be required in the future.
Material Changes Versus the Prior Comparable Period
- Revenue increased 43% in Q2 and 44% for the six months, primarily from subscription growth, more than 20% growth in paying organizations and expansion within existing customers.
- Billings increased 45% in Q2 and 50% for the six months. The retention rate declined to 121% from 133% a year earlier but remained above 100%; enterprise customer non-renewals were approximately 4% of prior-period annual contract value.
- Gross margin declined to 72% in Q2 and 73% for the six months from 79% in both prior-year periods, reflecting increased datacenter costs, server depreciation, Box Consulting investments and the new Redwood City facility.
- Sales and marketing expense increased 18% in both Q2 and the six-month period, but fell to 80% and 82% of revenue from 96% and 101%, respectively, reflecting improved marketing efficiency and operating leverage.
- Research and development expense increased 62% in Q2 and 59% for the six months, reaching 36% of revenue, as Box expanded product, security and scalability investments.
- Cash and cash equivalents decreased from $330.4 million at January 31, 2015 to $140.1 million at July 31, 2015, partly offset by the addition of $102.1 million of marketable securities. Investing cash use rose substantially because of security purchases and capital expenditures.
- Box completed its initial public offering in January 2015; the resulting substantially higher share count reduced reported loss per share despite larger absolute net losses.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued significant investment in sales and marketing, research and development, datacenter infrastructure, international operations and professional services, and does not expect profitability for the foreseeable future.
- Management expects revenue from non-U.S. customers to grow faster than U.S. revenue over time. No specific revenue, earnings or margin guidance is provided in the filing text.
- Box acquired Verold for $5.4 million in common stock and acquired assets from two other companies for $0.8 million during the six months. These transactions added developed technology and goodwill but were not material to reported operations.
- The Open Text patent litigation resulted in approximately $4.9 million of damages. On August 19, 2015, after quarter end, the court entered judgment for Open Text on infringement and validity of the asserted File Synchronization patents, plus pre-judgment interest; Box prevailed on invalidity of the Groupware patents and no willful infringement. Box accrued $569,000 of related interest at July 31, 2015 and intends to continue defending the matter.
- Contractual commitments totaled approximately $351.2 million, including $276.5 million of operating leases, $41.6 million of debt-related payments, $5.4 million of capital leases and $27.7 million of purchase obligations.
- Principal risks include continued operating losses and negative cash flow, intense competition and pricing pressure, customer renewal and expansion, security breaches or service outages, dependence on third-party datacenters, rapid growth and headquarters relocation, intellectual-property claims, privacy and international regulatory requirements, and possible future capital needs.
- The filing states that disclosure controls and procedures were effective as of July 31, 2015, with no material change in internal control over financial reporting during the period.
Important Facts for Investors to Verify
- Whether billings growth and the 121% retention rate remain sustainable as expansion rates moderate.
- Whether datacenter, infrastructure and headquarters-related costs stabilize sufficiently to restore gross-margin improvement.
- The timing of operating-cash-flow breakeven and the amount of additional financing that may be required.
- The ultimate outcome, interest exposure and possible business impact of the Open Text litigation and appeals.
- The effect of substantial stock-based compensation, future equity issuance and the dual-class share structure on dilution and voting control.
- Execution of the Redwood City headquarters relocation and the company’s ability to scale its platform while maintaining service reliability and security.