Box, Inc. 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management platform for secure content storage, access, sharing, collaboration, workflow, security and compliance. This filing covers the three and nine months ended October 31, 2021, Box’s fiscal third quarter of fiscal 2022. Results are unaudited and should be read with the fiscal 2021 Form 10-K.
- Box reported that 67% of the Fortune 500 were customers.
- New offerings and initiatives included Box Sign, Box Enterprise Plus, Box Shuttle migration tools, expanded Microsoft integration and enhanced Box Shield malware protection.
- Revenue attributable to customers outside the United States increased to 33% in the quarter and 32% for the nine-month period, compared with 28% in each comparable 2020 period.
Financial Performance and Liquidity
| Metric | Three Months Ended October 31, 2021 | Year-over-Year Change | Nine Months Ended October 31, 2021 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $224.0 million | 14% | $641.0 million | 12% |
| Gross profit | $161.0 million | 16% | $456.2 million | 12% |
| Gross margin | 72% | Up from 71% | 71% | Flat |
| Operating loss | $(11.1) million | Compared with $(2.6) million | $(27.5) million | Compared with $(34.4) million |
| Operating margin | (5)% | Down from (1)% | (4)% | Up from (6)% |
| Net loss | $(13.9) million | Compared with $(5.3) million | $(37.1) million | Compared with $(38.5) million |
| Net loss attributable to common stockholders | $(18.2) million | Compared with $(5.3) million | $(45.2) million | Compared with $(38.5) million |
| GAAP loss per share | $(0.12) | Compared with $(0.03) | $(0.29) | Compared with $(0.25) |
| Net cash from operating activities | $46.1 million | Up from $45.1 million | $185.6 million | Up from $139.3 million |
| Free cash flow | $31.2 million | Up from $26.2 million | $136.9 million | Up from $79.4 million |
- Remaining performance obligations were $948.1 million at October 31, 2021, up 25% from $755.9 million a year earlier; 62% was expected to be recognized over the following 12 months.
- Billings were $231.5 million in the quarter and $604.0 million for the nine months, increases of 25% and 20%, respectively.
- Net retention rate was 109%, compared with 103% a year earlier. Paying organizations increased 6% year over year.
- Stock-based compensation was $45.6 million in the quarter and $131.5 million for the nine months, compared with $37.8 million and $115.4 million, respectively.
- Cash, cash equivalents, restricted cash and short-term investments totaled $708.9 million at October 31, 2021, including $568.3 million of cash and cash equivalents and $140.0 million of short-term investments.
- Total debt carrying value was approximately $367.0 million, comprising $337.0 million of convertible senior notes and $30.0 million drawn under the secured credit facility. The notes have $345.0 million principal, bear 0% regular interest and mature in January 2026.
- Management stated that existing liquidity, finance leases and credit facilities should satisfy working capital and capital expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 14% in the quarter and 12% for the nine months, driven by large deals, Suites attach rates, new customers, international growth and expansion within existing accounts.
- Operating performance improved for the nine-month period, but the quarterly operating loss widened because of higher spending and $10.1 million of shareholder-activism fees.
- General and administrative expense increased 58% in the quarter and 32% for the nine months, primarily due to shareholder-activism fees, stock-based compensation, acquisition-related costs and cloud-computing arrangement impairment charges.
- Research and development and sales and marketing expenses increased in dollars, while their nine-month percentages of revenue declined to 25% and 34%, respectively.
- Operating cash flow and free cash flow improved substantially for the nine-month period, despite a $41.5 million decrease in deferred revenue related primarily to seasonality.
- Box acquired SignRequest for $54.3 million and Cloud FastPath for $14.8 million, recording goodwill and acquired technology to support Box Sign and Box Shuttle.
- Box issued $500 million of Series A convertible preferred stock to a KKR-led investor group in May 2021. The preferred stock carries a cumulative 3% dividend and preferential redemption, liquidation and voting rights.
- Box repurchased 9.2 million common shares for $238.2 million through a June 2021 tender offer and repurchased an additional 7.8 million shares for $188.2 million under a subsequent plan through October 31, 2021.
Guidance, Outlook, Commentary and Risks
- The filing does not provide clear numerical revenue, margin or earnings guidance for the full fiscal year.
- Management expects cost of revenue and operating expenses to increase in dollars but generally decline as a percentage of revenue over time, reflecting infrastructure efficiency, scale, sales productivity and operating leverage.
- Management expects net retention to remain above 100% for the foreseeable future, but notes that churn, customer budget reductions, delayed sales cycles and lower renewal levels could negatively affect results.
- COVID-19 had no material adverse impact on third-quarter financial results, but management continued to identify risks from customer churn, delayed sales cycles, reduced budgets, remote work and future variants or government responses.
- Management identified competition from larger providers such as Microsoft, Google, OpenText and Dropbox, as well as pricing pressure and the risk of customer reliance on bundled or internally developed solutions.
- Material operating risks include security breaches, ransomware, privacy and data-transfer regulation, service outages, third-party hosting dependencies, international expansion, foreign currency volatility, intellectual-property claims and the ability to retain skilled personnel.
- The company recognized $3.4 million of foreign-currency exchange losses during the nine months, compared with $1.6 million of gains in the prior-year period.
- A Delaware stockholder action related to the KKR investment agreement was dismissed as moot. Box agreed to pay a $1.3 million mootness fee; management stated that it did not believe the underlying allegations had merit.
- At October 31, 2021, the company reported no material probable legal loss and stated that it was in compliance with the credit facility’s financial covenants.
- After quarter-end, the board authorized a $200 million expansion of the share repurchase plan, increasing total authorized repurchases to $460 million through the earlier of February 28, 2023 or completion of the authorized amount.
Important Facts for Investors to Verify
- Whether revenue, billings, remaining performance obligations and net retention continue to grow after the quarter, particularly as large-enterprise renewals and seasonality affect results.
- Whether the improvement in operating cash flow and free cash flow is sustainable and how much is affected by working-capital timing.
- The recurring versus nonrecurring nature of shareholder-activism costs, acquisition expenses, impairment charges and other excluded items in non-GAAP results.
- The dilution and liquidity implications of the Series A preferred stock, including its 3% cumulative dividend, conversion rights, redemption provisions and KKR governance rights.
- The company’s ability to fund the January 2026 convertible-note maturity or cash settlement of any conversions while continuing share repurchases and investments.
- Progress and monetization of Box Sign, Box Enterprise Plus, Box Shuttle and other acquired or newly launched products.
- Exposure to cybersecurity incidents, service outages, privacy regulation, third-party hosting failures and related customer indemnification obligations.