Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management platform for secure storage, collaboration, workflow, security and compliance. This unaudited Form 10-Q covers the three and six months ended July 31, 2021, Box’s fiscal second quarter and first half of fiscal 2022. Box reported one operating segment.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2021 | Year-over-Year | Six Months Ended July 31, 2021 | Year-over-Year |
|---|---|---|---|---|
| Revenue | $214.5 million | Up 12% | $416.9 million | Up 11% |
| Gross profit | $153.7 million | Up 12% | $295.2 million | Up 11% |
| Gross margin | 72% | Up from 71% | 71% | Flat |
| Operating loss | $6.1 million | Improved from $7.5 million | $16.4 million | Improved from $31.8 million |
| Operating margin | (3%) | Improved from (4%) | (4%) | Improved from (8%) |
| Net loss | $8.7 million | Worse than $7.7 million | $23.3 million | Improved from $33.2 million |
| Net loss attributable to common stockholders | $12.5 million | Worse than $7.7 million | $27.1 million | Improved from $33.2 million |
| GAAP loss per share | $0.08 | Versus $0.05 | $0.17 | Versus $0.22 |
| Operating cash flow | $44.8 million | Versus $32.3 million | $139.6 million | Versus $94.2 million |
| Free cash flow | $29.8 million | Versus $13.3 million | $105.7 million | Versus $53.2 million |
Revenue growth was attributed primarily to expansion within existing customers, add-on product adoption, higher price per seat and a 6% increase in paying organizations. The net retention rate was 106%, unchanged from the prior-year period. Remaining performance obligations were $922.4 million, up 27% year over year, with 61% expected to be recognized over the next 12 months.
Liquidity, Capitalization and Debt
- At July 31, 2021, Box had $779.4 million of cash and cash equivalents, $50.0 million of short-term investments and $0.8 million of restricted cash, or $830.2 million in total liquidity as defined by management.
- Total debt included $345.0 million principal amount of 0.00% convertible senior notes due January 2026, carried at $336.5 million net of issuance costs, and $30.0 million outstanding under the secured credit facility.
- The credit facility was amended to extend its maturity to July 26, 2024, with a $65.0 million revolving commitment and a $45.0 million letter-of-credit sublimit. Box was in compliance with its financial covenants.
- Management stated that existing cash, cash equivalents, finance leases and credit facilities should fund working capital and capital expenditure needs for at least the next 12 months.
- Operating and finance lease liabilities had present values of $219.2 million and $85.0 million, respectively. Additional non-cancellable purchase obligations totaled $253.0 million, primarily for infrastructure, software and support services.
Material Changes and Unusual Items
- KKR-led investors purchased $500 million of Series A convertible preferred stock on May 12, 2021. The preferred stock carries a cumulative 3% annual dividend, senior liquidation and dividend rights, conversion rights and redemption provisions. Box recorded $3.3 million of preferred dividends and $0.5 million of accretion during the quarter.
- Box repurchased 9.2 million common shares for $238.2 million through a modified Dutch Auction and repurchased an additional 2.1 million shares for $50.1 million under a new $260 million authorization. These transactions reduced common equity and cash but were partly funded by the preferred-stock issuance.
- Box acquired SignRequest, an e-signature provider, for $54.3 million, including $44.3 million of cash and $10.0 million of common stock, and acquired Cloud FastPath assets for $14.8 million. The acquisitions added $56.6 million of goodwill and $20.4 million of developed technology.
- General and administrative expense increased 29% in the quarter and 20% for the six-month period, substantially reflecting $4.8 million and $4.4 million, respectively, of shareholder-activism fees, along with higher stock-based compensation.
- Stock-based compensation was $44.1 million in the quarter and $85.9 million for the six-month period, representing approximately 21% of revenue for the six months.
- Box adopted ASU 2020-06 effective February 1, 2021. The adoption increased non-current debt by $68.0 million and reduced additional paid-in capital by $68.6 million, without a material effect on current-period operations or cash flows.
- On July 20, 2021, Starboard Value filed a proxy statement seeking election of three director candidates, creating additional governance, expense and execution risks.
Outlook, Management Commentary and Risks
Management expects cost of revenue, research and development, sales and marketing and general and administrative expenses to increase in absolute dollars over time, while generally declining as percentages of revenue, reflecting infrastructure efficiency, sales productivity and operating leverage. Management expects continued investment in Box Sign, security, compliance, collaboration, workflow automation and integrations. No specific GAAP revenue or earnings guidance is provided in the filing text.
Box launched Box Sign broadly in July 2021, introduced the Box Enterprise Plus subscription plan and expanded Box Shuttle migration tools. Management stated that COVID-19 had not materially adversely affected second-quarter financial results, but continued to create risks involving customer churn, delayed sales cycles and reduced customer budgets, while also supporting demand for secure remote work.
- Key business risks include intense competition, reliance on renewals and expansion, customer churn, longer enterprise sales cycles and pricing pressure.
- Cybersecurity incidents, data loss, service outages, third-party hosting failures, privacy regulation and data-transfer restrictions could result in customer losses, service credits, indemnity claims, penalties or reputational damage.
- The convertible notes require cash settlement of principal upon conversion, maturity or specified fundamental changes. Preferred-stock dividends and future redemption rights could also reduce liquidity.
- Box has a history of cumulative losses, including a $1.3 billion accumulated deficit at July 31, 2021, and does not assure future GAAP profitability.
- Foreign-currency losses were $2.5 million for the six months ended July 31, 2021, compared with foreign-currency gains of $2.2 million in the prior-year period.
- Management reported no material loss exposure from legal contingencies as of July 31, 2021, but litigation, shareholder activism and related advisory costs remain potential sources of volatility.
Investor Verification Checklist
- Verify the sustainability of 12% quarterly revenue growth, 106% net retention and 27% RPO growth as COVID-19 effects and enterprise sales cycles evolve.
- Assess whether reported free cash flow remains strong after considering $85.9 million of stock-based compensation, lease obligations, infrastructure commitments and acquisition spending.
- Review the economic, voting, redemption and dividend implications of the $500 million Series A preferred stock issued to KKR-led investors.
- Evaluate dilution and future cash requirements associated with the convertible notes and preferred-stock conversion or redemption provisions.
- Monitor the $260 million remaining repurchase authorization, future capital allocation and the effect of repurchases on liquidity.
- Track integration and commercialization of SignRequest, Box Sign and Cloud FastPath, including goodwill and acquired-technology impairment risk.
- Follow the Starboard proxy contest and related fees, board changes and potential effects on strategy, customers and employees.
- Compare GAAP results with non-GAAP measures, particularly given significant stock-based compensation and the exclusion of activism and acquisition-related costs.