Box, Inc. Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2017, with fourth-quarter results for the three months ended January 31, 2017. The filing is an annual report, not a quarterly filing.
Business context
Box operates a subscription-based cloud content management platform that enables secure content storage, sharing, collaboration, workflow automation, custom application development, and compliance. As of January 31, 2017, Box reported more than 52 million registered users, over 71,000 paying organizations, availability in 22 languages, and 1,495 employees. No customer represented more than 10% of annual revenue.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $398.6 million | $302.7 million | +32% |
| Gross profit | $286.5 million | $215.6 million | +33% |
| Gross margin | 72% | 71% | +1 percentage point |
| Operating loss | $150.7 million | $201.0 million | Improved by $50.3 million |
| Operating margin | (38%) | (66%) | Improved by 28 percentage points |
| Net loss | $151.8 million | $202.9 million | Improved by $51.2 million |
| GAAP diluted loss per share | $1.19 | $1.67 | Improved |
| Billings | $454.2 million | $369.1 million | +23% |
| Free cash flow | $(24.8) million | $(116.3) million | Improved by $91.4 million |
| Cash used in operating activities | $(1.2) million | $(66.3) million | Improved by $65.1 million |
Fourth-quarter revenue was $109.9 million, compared with $85.0 million in the fourth quarter of fiscal 2016. Fourth-quarter net loss was $36.9 million, or $0.28 per share, compared with a $50.4 million loss, or $0.41 per share, in the prior-year quarter.
Revenue growth was driven by new customers, a 25% increase in paying organizations, renewals, and expansion within existing accounts. The retention rate was approximately 115%, down from 117% in the prior year but still above 100%, reflecting net expansion after churn.
Cost of revenue was 28% of revenue versus 29% in the prior year. Research and development was $115.9 million, or 29% of revenue, versus 34%. Sales and marketing was $253.0 million, or 64%, versus 80%. General and administrative expense declined to $68.2 million from $71.9 million, primarily due to lower litigation and legal settlement costs.
Stock-based compensation was $78.4 million, or approximately 20% of revenue, compared with $59.5 million in fiscal 2016. Non-GAAP operating loss improved to $70.6 million from $134.3 million, and non-GAAP net loss improved to $71.7 million from $136.3 million.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $177.4 million at January 31, 2017; restricted cash was $26.8 million. Box had no marketable securities at year-end.
- Total debt was $40.0 million under a secured revolving credit facility. The facility was amended in February 2017 to extend maturity from December 2017 to December 2018.
- Working capital was $24.2 million, down from $69.5 million, primarily reflecting higher deferred revenue and other current liabilities.
- Deferred revenue increased to $242.0 million from $186.4 million, and non-cancelable backlog increased to $258 million from $184 million.
- Total contractual obligations were $396.4 million, including $272.0 million of net operating lease obligations, $36.6 million of capital leases, $46.1 million of purchase obligations, and $41.8 million of debt obligations including interest and fees.
- Management stated that existing cash, cash equivalents, and credit facilities were sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
Material changes and unusual items
- Operating and net losses narrowed materially despite continued investment in sales, product development, infrastructure, and customer success.
- Free cash flow improved mainly because of lower operating cash usage, reduced capital expenditures after completion of the Redwood City headquarters, and tighter working-capital management.
- The Open Text patent litigation was settled in March 2016 for $3.75 million. Reversal of prior accruals and interest, net of recurring amortization, produced approximately $1.7 million of income in fiscal 2017.
- Box acquired or licensed assets and personnel from Wagon Analytics in August 2016 for $2.0 million, recorded entirely as goodwill; the transaction was not material to consolidated results.
- The company changed the estimated useful lives of certain data-center assets from three to four years effective September 1, 2016. The impact on fiscal 2017 net loss and earnings per share was not material.
- Box maintained effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions.
Outlook, management commentary, and risks
Management expected continued investment in research and development, sales and marketing, international expansion, infrastructure, professional services, and new functionality. The company explicitly stated that it did not expect to be profitable for the foreseeable future.
Key risks include intense competition from larger providers such as Microsoft, Google, Dropbox, and OpenText; customer renewal and expansion risk; pricing pressure; cybersecurity incidents, service outages, and data loss; dependence on third-party hosting providers; privacy and data-residency regulation; longer and more costly enterprise sales cycles; reliance on highly skilled personnel; intellectual-property claims; foreign exchange exposure; and continued negative cash flow.
Box planned to adopt the new revenue recognition standard, ASC 606, beginning February 1, 2018 using the modified retrospective method. Management was evaluating potential effects on sales-commission capitalization, amortization periods, revenue timing, and disclosures. The filing does not provide a final quantified impact.
Important facts for investors to verify
- Whether revenue growth, billings growth, and the 115% retention rate remain durable as the customer base matures.
- The path to positive operating and free cash flow, given the $151.8 million GAAP net loss and substantial stock-based compensation.
- The effect of ASC 606 on reported revenue, deferred revenue, billings, and deferred commissions.
- Liquidity after considering the $40.0 million secured debt facility, capital leases, long-term headquarters lease, and other contractual commitments.
- Exposure to cybersecurity, service availability, data privacy, and third-party datacenter risks.
- Competitive pressure and the company’s ability to maintain pricing, gross margin, customer retention, and enterprise expansion.
- Potential dilution from outstanding options, restricted stock units, employee purchase plans, and the dual-class capital structure, under which Class B holders held approximately 90.2% of voting power.