Box, Inc. Fiscal 2019 Form 10-K Summary
Business context and reporting period
Box provides a cloud content management and collaboration platform delivered primarily through subscription contracts. The filing covers the fiscal year ended January 31, 2019, including fourth-quarter results for the three months ended January 31, 2019. Box reported one operating segment and served more than 92,000 paying organizations and 64.5 million registered users at year-end.
Fiscal 2019 results reflect adoption of ASC Topic 606 using the modified retrospective method. Prior-year results were not recast and remain under ASC Topic 605, which limits comparability for revenue, sales commissions, deferred revenue and related margins.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $608.4 million | $506.1 million | 20% increase |
| Gross profit | $434.8 million | $370.9 million | 17% increase |
| Gross margin | Approximately 71% | Approximately 73% | Down 2 percentage points |
| Operating loss | $(134.2) million | $(154.0) million | Loss narrowed |
| Operating margin | Approximately (22)% | Approximately (30)% | Improved |
| Net loss | $(134.6) million | $(155.0) million | Loss narrowed by $20.3 million |
| Net loss per share | $(0.95) | $(1.16) | Improved |
| Billings | $672.9 million | $585.1 million | 15% increase |
| Free cash flow | $13.8 million | $7.5 million | Improved by $6.3 million |
| Cash flow from operations | $55.3 million | $35.4 million | Improved by $19.9 million |
Fiscal 2019 operating expenses were $569.0 million, including research and development of $163.8 million, sales and marketing of $312.2 million, and general and administrative expense of $93.1 million. Stock-based compensation was $119.3 million, or approximately 20% of revenue, and materially reduced GAAP profitability.
At January 31, 2019, cash and cash equivalents were $217.5 million, and cash, cash equivalents and restricted cash were $217.8 million. Working capital was negative $34.6 million, primarily reflecting $353.6 million of current deferred revenue. Total assets were $650.2 million and total stockholders’ equity was $31.4 million.
Debt outstanding was $40.0 million. Box had an $85.0 million secured revolving credit facility, including a $30.0 million letter-of-credit sublimit, maturing November 27, 2020. Capital lease obligations totaled $72.9 million. The filing states that Box was in compliance with its financial covenants at year-end.
Fourth-quarter results
| Metric | Q4 Fiscal 2019 | Q4 Fiscal 2018 |
|---|---|---|
| Revenue | $163.7 million | $136.7 million |
| Gross profit | $116.5 million | $101.4 million |
| Gross margin | Approximately 71% | Approximately 74% |
| Operating loss | $(21.7) million | $(32.5) million |
| Net loss | $(19.7) million | $(32.7) million |
| Net loss per share | $(0.14) | $(0.24) |
Quarterly revenue increased sequentially throughout fiscal 2019. Management noted that the fourth quarter is historically the strongest period for contracting activity because of large-enterprise buying patterns.
Material changes versus the prior comparable period
- Revenue grew 20%, driven by new customers, a 12% increase in paying organizations, renewals and expansion within existing customers, and adoption of add-on products.
- Billings growth slowed to 15% from 29% in the prior year. Management attributed the change partly to prior-period multi-year prepayments and a prior enhanced developer fee from a reseller.
- Gross margin declined to approximately 71% from 73% as data center, hosting, personnel, depreciation and facility costs increased faster than revenue.
- Sales and marketing expense increased only 3% in dollars and declined to 51% of revenue from 60%, partly because ASC Topic 606 changed the timing and capitalization of commission costs and because of greater sales efficiency.
- Research and development expense increased 20% but remained approximately 27% of revenue, reflecting continued investment in security, workflow automation, intelligent content and platform capabilities.
- Retention rate declined to 108% from 110%; customer loss was below 5% of prior-period account value, while expansion and add-on products continued to produce net dollar retention above 100%.
- Deferred commissions increased substantially, including a $37.6 million increase during fiscal 2019, due to ASC Topic 606 and new and expanded customer deployments.
- Box generated positive operating cash flow and free cash flow despite continuing GAAP losses. Cash flow benefited from deferred revenue growth and non-cash stock-based compensation.
- All outstanding Class B shares automatically converted into Class A shares in June 2018, eliminating the Class B share class and its superior voting rights.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical fiscal 2020 revenue or earnings forecast. Management expects revenue, research and development, sales and marketing, and general and administrative expenses to increase in dollars. It expects sales and marketing and general and administrative expenses to decline as percentages of revenue over time, while research and development is expected to remain relatively stable as a percentage of revenue.
Box stated that it does not expect to be profitable for the foreseeable future because it intends to continue investing in sales, product development, infrastructure, international operations and professional services. Management believes existing cash, capital leases and credit facilities will fund working capital and capital expenditure needs for at least the next 12 months.
Box planned to migrate primary data centers during fiscal 2020 to lower-cost regions. During the migration, management expected temporarily higher costs from operating multiple data centers and a slight increase in cost of revenue as a percentage of revenue. The company also reported a February 2018 data center outage caused by loss of power and failure of backup generators, resulting in customer credits.
- Principal risks include continued operating losses, dependence on subscription renewals and customer expansion, intense competition from Microsoft, Google, Dropbox and OpenText, and pricing pressure.
- Security breaches, data loss, service outages, data center migration problems and failures by third-party hosting providers could result in customer credits, indemnification claims, contract terminations and reputational damage.
- Privacy and data-residency requirements, including GDPR, evolving U.S. privacy laws, Brexit-related uncertainty and industry-specific regulations, may increase costs or limit adoption.
- Enterprise sales cycles may be longer and more expensive, and larger customers may require additional customization, integration and support.
- Debt and credit facilities are secured by substantially all assets and contain minimum liquidity, leverage and other restrictive covenants.
- Contractual commitments totaled approximately $475.9 million, including $278.9 million of operating lease obligations, $76.6 million of capital lease payments, $77.4 million of purchase obligations and $43.0 million of debt payments including interest and fees.
- U.S. federal, state and foreign net operating loss carryforwards totaled approximately $692.3 million, $713.2 million and $268.0 million, respectively, but utilization may be limited by ownership-change rules.
Important facts for investors to verify
- Reconcile fiscal 2019 revenue, commission capitalization and deferred revenue under ASC Topic 606 against prior-year ASC Topic 605 results before assessing growth or margin trends.
- Assess whether the improvement in operating cash flow and free cash flow is sustainable after considering deferred revenue seasonality, capital lease payments and stock-based compensation.
- Monitor gross margin during the fiscal 2020 data center migration and verify whether expected infrastructure savings are realized.
- Track retention rate, paying-organization growth, billings growth, add-on product adoption and the contribution of large enterprise customers.
- Review liquidity and covenant compliance in light of negative working capital, $40.0 million of debt, $72.9 million of capital lease obligations and substantial lease commitments.
- Evaluate dilution and non-cash compensation, including $119.3 million of fiscal 2019 stock-based compensation and $254.8 million of unrecognized restricted stock unit expense.
- Investigate the operational and financial effects of service outages, cybersecurity incidents, data-center migration, privacy regulation and customer indemnification commitments.