Box, Inc. Fiscal 2023 First Quarter Summary
Business context and reporting period
Box provides a cloud content management platform for secure storage, sharing, collaboration, workflow, security and compliance. This unaudited Form 10-Q covers the three months ended April 30, 2022, compared with the three months ended April 30, 2021. Box reported one operating segment.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $238.4 million | $202.4 million | 18% increase |
| Gross profit | $176.2 million | $141.5 million | 25% increase |
| Gross margin | 74% | 70% | 400 basis-point improvement |
| Operating income (loss) | $0.6 million | $(10.3) million | Improved by $10.9 million |
| Operating margin | 0.3% | (5.1)% | Improved by 540 basis points |
| Net loss | $(4.7) million | $(14.6) million | Loss narrowed by $9.9 million |
| Net loss attributable to common stockholders | $(8.9) million | $(14.6) million | Includes $4.2 million of preferred dividends and accretion |
| GAAP loss per share | $(0.06) | $(0.09) | Improved |
| Non-GAAP operating income | $49.2 million | $34.4 million | 43% increase |
| Non-GAAP operating margin | 20.6% | 17.0% | 360 basis-point improvement |
| Net cash from operating activities | $107.7 million | $94.8 million | 14% increase |
| Free cash flow | $90.9 million | $75.9 million | 20% increase |
| Billings | $172.2 million | $159.4 million | 8% increase |
| Remaining performance obligations | $1.005 billion | $864.8 million | 16% increase |
| Net retention rate | 111% | 103% | Improved by 8 percentage points |
Liquidity, capital resources and balance sheet
- Cash and cash equivalents were $391.4 million, short-term investments were $127.9 million, and total cash, restricted cash and short-term investments were $520.2 million at April 30, 2022.
- Total liabilities were $1.167 billion, including $367.9 million of non-current debt and $458.4 million of deferred revenue.
- Box had $345.0 million principal amount of 0.00% convertible senior notes due January 15, 2026, with a net carrying amount of $337.9 million. The notes were not convertible based on the stated conditions as of April 30, 2022.
- The secured revolving facility had a $65.0 million commitment, a $45.0 million letter-of-credit sublimit, and $30.0 million outstanding. The facility matures July 26, 2024; Box was in compliance with its financial covenants.
- Financing activities used $162.2 million of cash, primarily for $117.2 million of common-stock repurchases, $41.8 million of employee payroll taxes related to net share settlement, $11.5 million of finance lease principal payments and $3.8 million of preferred dividends.
- The company repurchased 4.2 million shares for approximately $109.9 million during the quarter. Approximately $147.7 million remained available under the authorized repurchase program as of April 30, 2022.
- Management stated that existing cash, investments, finance leases and credit facilities should meet working-capital and capital-expenditure needs for at least the next 12 months and beyond.
Material changes versus the prior comparable period
- Revenue growth was driven by more large deals, increased adoption of multi-product Suites, new customers and stronger expansion within existing accounts. The number of paying organizations increased 2% year over year.
- International revenue increased to 34% of total revenue from 31%; Japan represented 19% of revenue versus 17% in the prior-year quarter. Foreign currency movements partially offset growth.
- Cost of revenue increased only 2% while revenue increased 18%, producing a 400 basis-point gross-margin improvement. Public-cloud infrastructure and subscription software costs increased, while employee costs, depreciation and data-center rent declined.
- Research and development expense increased 21%, principally from higher headcount and costs associated with the Poland engineering center. Sales and marketing expense increased 19%, reflecting higher personnel, stock-based compensation and commissions.
- General and administrative expense declined 1%, partly due to lower shareholder-activism and acquisition-related fees.
- Operating cash flow and free cash flow improved, but cash declined by $24.6 million after substantial share repurchases, preferred dividends, lease payments and employee tax settlements.
- Stock-based compensation was $47.1 million, or approximately 20% of revenue, compared with $41.8 million, or approximately 21% of revenue, in the prior-year quarter.
Guidance, outlook, commentary and risks
- The filing does not provide a clear quantitative revenue or earnings forecast for the remainder of fiscal 2023.
- Management expects cost of revenue, research and development and sales and marketing expenses to increase in absolute dollars but generally decline as a percentage of revenue over time, supported by infrastructure efficiencies, lower-cost development regions, customer-base expansion and improved sales productivity.
- Management expects net retention to remain above 100% for the foreseeable future, while noting that billings may increasingly concentrate in the second half of the fiscal year, particularly the fourth quarter.
- Box launched or expanded offerings including Box Sign and announced Box Canvas, expected to be released later in 2022. Management continues to emphasize security, compliance, workflow, integrations and enterprise adoption.
- COVID-19 had not materially adversely affected first-quarter financial results, but management reported possible longer sales cycles, customer churn, delayed spending and budget reductions. The company was transitioning to a hybrid workforce.
- Foreign exchange volatility, particularly involving the Japanese yen, British pound and euro, negatively affected results. Foreign-currency losses were $3.0 million in the quarter.
- Principal risks include intense competition from Microsoft, OpenText, Google and Dropbox; customer renewal and expansion risk; cybersecurity, privacy and data-transfer requirements; reliance on third-party data centers and cloud providers; service outages; international and foreign-exchange exposure; employee retention; intellectual-property claims; and the effects of economic uncertainty and the Russian invasion of Ukraine.
- Preferred stockholders hold senior economic rights, cumulative dividends at 3.0% annually, conversion rights and certain approval rights. Future conversion, redemption or change-of-control obligations could dilute common stockholders or reduce liquidity.
- Box reported no material loss contingency from litigation as of April 30, 2022 and no goodwill impairment during the quarter. It had $422.3 million of future non-cancellable purchase obligations, primarily for infrastructure and IT services, plus operating and finance lease liabilities.
Most important facts for investors to verify
- Whether revenue growth, 111% net retention and $1.005 billion of remaining performance obligations persist as billings growth was only 8% and was affected by foreign exchange and renewal timing.
- The sustainability of positive GAAP operating income and free cash flow, particularly after excluding $47.1 million of quarterly stock-based compensation.
- The pace and financial effect of continued share repurchases, preferred dividends and potential preferred-stock conversion or redemption obligations.
- Liquidity available for the $345.0 million convertible notes due in 2026, the $30.0 million secured facility and significant lease and infrastructure commitments.
- Exposure to cybersecurity incidents, service interruptions, data-privacy regulation, third-party hosting providers and indemnification or service-level claims.
- The impact of foreign-currency movements, COVID-19-related customer behavior, economic conditions and geopolitical events on renewals, sales cycles and margins.