Box, Inc. Q1 Fiscal 2020 Form 10-Q Summary
Business context and reporting period
Box provides a cloud content management platform for secure storage, access, sharing, collaboration, workflow automation, security, compliance, and related enterprise applications. The filing covers the three months ended April 30, 2019, compared with the three months ended April 30, 2018. The interim financial statements are unaudited and presented under U.S. GAAP.
Box reported 12.2 million paying users and more than 95,000 paying organizations as of April 30, 2019. The company operates as one reporting segment, with 76% of revenue attributable to U.S. customers.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $163.0 million | $140.5 million | 16% increase |
| Gross profit | $114.3 million | $101.4 million | 13% increase |
| Gross margin | 70% | 72% | Down 2 percentage points |
| Operating loss | $35.4 million | $35.9 million | Improved $0.5 million |
| Operating margin | (22%) | (26%) | Improved 4 percentage points |
| Net loss | $36.8 million | $36.6 million | Essentially flat |
| Net loss per share | $0.25 | $0.26 | Improved $0.01 |
| Cash flow from operations | $25.5 million | $18.4 million | Increase of $7.1 million |
| Free cash flow | $13.4 million | $7.3 million | Increase of $6.2 million |
Cost of revenue increased 25% to $48.7 million, or 30% of revenue, reflecting higher employee costs, data center and hosted service costs, depreciation, rent, and allocated facilities and technology costs. Research and development increased 21% to $46.2 million, while sales and marketing increased 2% to $78.8 million and declined to 48% of revenue from 55%. General and administrative expense increased 12% to $24.6 million.
Stock-based compensation was $32.4 million, equal to approximately 20% of revenue, compared with $26.6 million, or approximately 19% of revenue, in the prior-year quarter. Non-GAAP operating loss improved to $3.0 million from $9.2 million, and non-GAAP net loss improved to $4.5 million from $10.0 million, primarily because of higher revenue and the exclusion of stock-based compensation.
Cash and cash equivalents were $231.4 million at April 30, 2019, with no restricted cash. Total debt was $40.0 million under an $85.0 million secured revolving credit facility maturing November 27, 2020. Box was in compliance with its financial covenants. The company stated that cash, finance leases, and credit facilities were sufficient for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue grew 16%, driven by new customers, an 11% increase in paying organizations, add-on product adoption, renewals, and expansion within existing customers.
- Billings increased only 1% to $118.4 million, versus 17% growth in the prior-year quarter. Management attributed the slower growth to a prior-period enhanced developer fee, unusually high multi-year prepayments in the prior period, and a large customer reducing use cases in the current period.
- Remaining performance obligations increased 16% to $637.4 million; approximately 66% was expected to be recognized over the following 12 months.
- Retention rate declined to 107% from 109%, but remained above 100%; customer non-renewals represented less than 5% of prior-period total account value.
- Operating cash flow and free cash flow improved, primarily because of higher non-cash charges, lower capital expenditures, and favorable collections, partially offset by increased finance lease payments and capitalized software costs.
- Box adopted ASC Topic 842 for leases on February 1, 2019. The adoption added approximately $220.8 million of operating lease right-of-use assets and $269.5 million of operating lease liabilities at April 30, 2019, materially increasing reported assets and liabilities without a material effect on earnings or cash flows.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific quarterly or full-year revenue or earnings guidance in the filing text. Management expects continued investment in research and development, sales and marketing, infrastructure, international operations, and professional services, and does not expect to be profitable for the foreseeable future.
Data center migration to lower-cost regions is expected to continue through approximately mid-fiscal 2021. During the migration, Box expects increased costs from operating redundant facilities and expects cost of revenue as a percentage of revenue to increase slightly in fiscal 2020. Longer term, management expects infrastructure efficiencies to reduce cost of revenue as a percentage of revenue.
Material contractual commitments included approximately $329.1 million of operating lease payments, $90.4 million of finance lease payments, $47.6 million of purchase obligations, and $42.8 million of debt payments including interest and unused commitment fees. The company also had $26.2 million of letters of credit primarily related to operating leases.
Box reported an accumulated deficit of $1.17 billion and stated that it has incurred losses in every period since inception. Key risks include intense competition, customer renewal and expansion rates, pricing pressure, data security and service interruptions, dependence on third-party data centers and hosting providers, data privacy and regulatory compliance, international operations and foreign exchange, intellectual property claims, dependence on skilled personnel and partners, and the need for additional capital if operating requirements increase.
Management stated that no material loss was reasonably possible with respect to disclosed litigation contingencies as of April 30, 2019. Customer service-level commitments and indemnification obligations could require credits, refunds, damages, or other payments, although Box had not incurred material costs under these obligations to date.
Most important facts for an investor to verify
- Whether revenue growth can remain near the 16% level while billings growth remains substantially lower at 1%.
- Whether the 107% retention rate stabilizes or declines further and whether large customers continue expanding deployments.
- The effect of ongoing data center migration and redundant infrastructure costs on gross margin and cash flow.
- The sustainability of positive operating and free cash flow given continuing GAAP losses, finance lease payments, and substantial stock-based compensation.
- The company’s ability to manage approximately $420 million of present-value lease liabilities and other contractual commitments.
- Compliance with the secured credit facility’s liquidity and leverage covenants through its November 2020 maturity.
- Exposure to cybersecurity, service availability, privacy, regulatory, intellectual property, and third-party hosting risks.
- The impact of ASC Topic 842 and future accounting standards on reported assets, liabilities, and comparability.