Box, Inc. Form 10-Q Summary
Business context and reporting period
Box provides a cloud-based, mobile-optimized Enterprise Content Collaboration platform for managing, sharing and collaborating on content. This unaudited Form 10-Q covers the three months ended April 30, 2015, compared primarily with the three months ended April 30, 2014. Box reported 37 million registered users and more than 47,000 paying organizations as of the reporting period. More than 10% of registered users were paying users, and approximately 80% of revenue was attributed to the United States.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $65.6 million | $45.3 million | Up 45% |
| Gross profit | $48.5 million | $36.1 million | Up 34% |
| Gross margin | 74% | 80% | Down 6 percentage points |
| Operating loss | $(46.6) million | $(37.8) million | Loss increased |
| Operating margin | (71)% | (83)% | Improved |
| Net loss | $(47.3) million | $(38.5) million | Loss increased |
| Net loss per share | $(0.40) | $(2.81) | Improved due primarily to higher share count |
| Billings | $69.8 million | $44.2 million | Up 58% |
| Net cash used in operating activities | $(32.2) million | $(23.5) million | Higher use of cash |
- Operating expenses were $95.1 million, or 145% of revenue, versus $73.9 million, or 163% of revenue, in the prior-year quarter. Sales and marketing declined to 86% of revenue from 105%, while research and development increased to 35% from 33%.
- Stock-based compensation was $12.7 million, up from $5.8 million, and intangible-asset amortization was $1.1 million, up from $0.7 million.
- Cash and cash equivalents were $180.0 million at April 30, 2015, supplemented by $104.0 million of marketable securities and $28.4 million of restricted cash.
- Outstanding debt was $40.0 million under a secured revolving credit facility. Borrowing capacity was $60.0 million, leaving $20.0 million available; Box was in compliance with its financial covenants.
- Net cash used in investing activities was $113.3 million, primarily reflecting $106.3 million of marketable-security purchases and $9.9 million of capital expenditures.
- Cash used in operating activities included $25.0 million placed in restricted cash to secure a letter of credit for the new Redwood City headquarters. Excluding that restricted-cash use, management characterized operating cash use as $7.2 million.
Material changes versus the prior comparable period
- Revenue growth was driven by more than 20% growth in paying organizations, new customers, and expansion within existing customers.
- Retention rate declined to 123% from 135%, but remained above 100%; enterprise customer non-renewals approached 4% of prior-period annual contract value.
- Cost of revenue increased 86%, faster than revenue, primarily because of higher datacenter costs, server depreciation, employee costs, allocated facility overhead and stock-based compensation.
- Headcount increased to 1,213 employees from 1,? The filing states growth from 369 employees at January 31, 2012 to 1,213 at April 30, 2015; specific company-wide prior-year comparable headcount was not provided in the summarized text. Functional headcount increased in datacenter and support, research and development, sales and marketing, and general and administrative departments.
- Box acquired two companies during the quarter for an aggregate purchase price of $0.8 million, recording $0.3 million of developed technology and $0.4 million of goodwill. In May 2015, it acquired certain Verold assets and employees for $5.4 million in common stock.
- Deferred revenue increased to $124.2 million from $120.1 million at January 31, 2015, supporting future revenue recognition.
Guidance, outlook, commentary and risks
Management stated that it expects continued substantial investment in sales and marketing, research and development, datacenter infrastructure, international expansion and professional services. Box does not expect to be profitable for the foreseeable future. Management believes existing cash, marketable securities and credit facilities will fund working-capital and capital-expenditure needs for at least the next 12 months, but noted that additional equity or debt financing may be required depending on growth, renewals, billing frequency, spending and acquisitions.
- Key operating priorities include expanding enterprise deployments, increasing customer adoption of products such as Box Enterprise Key Management, scaling infrastructure and growing internationally.
- Gross margin may remain pressured by datacenter investment and infrastructure costs, although management expects research and development, sales and marketing, and general and administrative expenses to decline as percentages of revenue over time.
- Box faces intense competition from Microsoft, Google, Dropbox, Citrix, EMC and other providers, creating pricing, customer-retention and market-adoption risks.
- Material operating risks include cybersecurity incidents, data loss, service outages, reliance on third-party datacenters and software providers, privacy and data-protection regulation, international expansion, lengthy enterprise sales cycles, employee retention and rapid technological change.
- Open Text litigation resulted in a February 2015 jury verdict finding infringement of certain patents and awarding $4.9 million in damages and a fully paid-up royalty. No permanent injunction was issued. Open Text appealed, and Box accrued the liability; $0.2 million of related amortization was recorded in the quarter.
- Box had $266.5 million of future operating-lease payments, $29.2 million of purchase obligations and $3.5 million of capital-lease payments as of April 30, 2015.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether billings growth and deferred revenue continue to translate into sustainable revenue growth as the company scales.
- The trajectory of retention rate, enterprise renewals, customer expansion and customer-acquisition efficiency.
- Whether gross-margin pressure from datacenter and infrastructure spending moderates as scale increases.
- The pace of operating cash burn, capital expenditures, restricted-cash requirements and potential need for additional financing.
- Remaining exposure and ultimate resolution of the Open Text patent appeal and any related royalty or litigation costs.
- 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 lease, long-term operating commitments and integration of acquisitions.