Business Context and Reporting Period
Box, Inc. provides a subscription-based cloud content management platform for secure content storage, sharing, collaboration, workflow, security and integrations. This unaudited Form 10-Q covers the three months ended April 30, 2020, Box’s fiscal first quarter, compared with the three months ended April 30, 2019.
- As of April 30, 2020, Box had 72.2 million registered users and more than 98,000 paying organizations.
- Revenue from customers outside the United States represented 27% of total revenue; Japan represented 13% of revenue.
- The company operated as a single reporting segment.
Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $183.6 million | $163.0 million | Up 13% |
| Gross profit | $129.6 million | $114.3 million | Up 13% |
| Gross margin | 70.6% | 70.1% | Up approximately 0.5 percentage points |
| Operating loss | $(24.2) million | $(35.4) million | Improved $11.1 million |
| Operating margin | (13.2)% | (21.7)% | Improved |
| Net loss | $(25.6) million | $(36.8) million | Improved $11.3 million |
| Net loss per share | $(0.17) | $(0.25) | Improved |
| Cash flow from operations | $61.9 million | $25.5 million | Up $36.4 million |
| Free cash flow | $39.8 million | $13.4 million | Up $26.4 million |
- Cost of revenue was $54.0 million, or 29% of revenue, compared with $48.7 million, or 30%, in the prior-year quarter.
- Research and development expense increased 15% to $53.1 million, while sales and marketing expense declined 8% to $72.8 million. General and administrative expense increased 14% to $27.9 million.
- Stock-based compensation expense was $40.0 million, equal to approximately 22% of revenue, compared with $32.4 million, or approximately 20% of revenue, in the prior-year quarter.
- Non-GAAP operating income was $17.2 million, compared with a non-GAAP operating loss of $3.0 million in the prior-year quarter. Non-GAAP net income was $15.9 million, or $0.10 per diluted share, compared with a non-GAAP net loss of $4.5 million, or $0.03 per share.
Liquidity, Debt and Contractual Obligations
- Cash, cash equivalents and restricted cash totaled $268.4 million at April 30, 2020, including $268.0 million of cash and cash equivalents.
- Total debt had a carrying amount of $70.0 million, including a $30.0 million borrowing under the secured November 2017 Facility drawn in April 2020. The facility has $100.0 million of revolving commitments, matures July 12, 2022, and is secured by substantially all of Box’s assets.
- Box had $353.9 million of current deferred revenue and $14.4 million of non-current deferred revenue. Remaining performance obligations were $722.7 million, with 65% expected to be recognized as revenue over the next 12 months.
- The company reported total future contractual obligations of $760.2 million, consisting primarily of debt, operating and finance leases, and infrastructure and information-technology purchase commitments.
- Management stated that existing cash and cash equivalents, finance leases and credit facilities should be sufficient to meet working capital and capital expenditure needs for at least the next 12 months. The company was in compliance with all financial covenants at April 30, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased $20.6 million, primarily from new customers, customer expansion, add-on products and renewals. Paying organizations increased 4% year over year.
- Remaining performance obligations increased 13% to $722.7 million, while billings increased 8% to $128.1 million.
- Retention rate increased to 107% from 106%, reflecting seat growth and add-on product adoption among existing customers.
- Sales and marketing expense declined $6.1 million, primarily due to restructuring-related headcount reductions and lower travel and marketing costs, including COVID-19 effects. Sales and marketing expense declined to 40% of revenue from 48%.
- Operating cash flow benefited substantially from collections and a $110.4 million decrease in accounts receivable, partly offset by a $55.5 million decrease in deferred revenue related to seasonal billing patterns.
- Interest expense increased to $1.4 million from $0.1 million, primarily because of finance lease costs, the credit facility and lower interest income.
Guidance, Outlook, Commentary and Risks
- The filing does not provide clear quantified revenue, margin, earnings or cash-flow guidance for fiscal 2021.
- Management expects continued investment in research and development, infrastructure, international operations and professional services, and does not expect GAAP profitability in the near future.
- Management expects cost of revenue as a percentage of revenue to decline slightly in fiscal 2021 as the data-center migration to lower-cost regions progresses. Sales and marketing expense is expected to decline as a percentage of revenue over time through greater sales productivity and a higher mix of renewals.
- COVID-19 resulted in office closures, suspended business travel and virtual-only customer and marketing events. Management stated that the ultimate impact on demand, collections, customers, vendors, employees and operating results remained uncertain.
- Key risks include intensifying competition, customer renewal and expansion rates, security breaches or service outages, data-center migration execution, third-party hosting dependence, privacy and data-protection regulations, foreign currency exposure, economic deterioration and the company’s continued history of losses.
- Box recorded $1.4 million of shareholder activism fees in the quarter. The filing also includes a March 2020 agreement with Starboard Value LP.
- The company reported no material loss contingency from litigation as of April 30, 2020 and no material costs from customer service-level or indemnification commitments to date.
Investor Verification Checklist
- Verify whether the improvement in operating cash flow is sustainable after seasonal accounts-receivable collections and deferred-revenue movements normalize.
- Track whether revenue growth, billings growth and remaining performance obligations remain aligned, particularly under COVID-19-related economic pressure.
- Assess the effect of the $40.0 million quarterly stock-based compensation expense and substantial remaining unrecognized equity compensation on long-term shareholder dilution and profitability.
- Monitor progress, costs and service-continuity risks associated with the data-center migration.
- Review the terms and implications of the Starboard agreement, shareholder activism fees and any related governance or strategic changes.
- Evaluate liquidity against the $760.2 million of disclosed contractual obligations, lease commitments and debt maturities.