BOX INC annual report, FY2018

Box, Inc. Form 10-K Summary

Reporting period: Fiscal year ended January 31, 2018. The filing also presents fourth-quarter results for the three months ended January 31, 2018. Box provides a subscription-based cloud content management platform for secure content storage, sharing, collaboration, workflow automation, compliance, and custom application development.

Business Context and Scale

More than 58 million registered users and more than 82,000 paying organizations at January 31, 2018.
Approximately 83% of registered users were non-paying and 17% were paying users.
Approximately 60% of subscription revenue came from customers with more than 1,000 employees.
Non-U.S. customers represented 22% of fiscal 2018 revenue, compared with 18% in fiscal 2017.
The company had 1,784 employees and operated as a single reporting segment.

Financial Performance

Metric	FY2018	FY2017	Change
Revenue	$506.1 million	$398.6 million	27% increase
Gross profit	$370.9 million	$286.5 million	29% increase
Gross margin	73%	72%	Up 1 percentage point
Operating loss	$154.0 million	$150.7 million	Loss increased $3.4 million
Operating margin	(30%)	(38%)	Improved 8 percentage points
Net loss	$155.0 million	$151.8 million	Loss increased $3.2 million
Net loss per share	$1.16	$1.19	Improved
Billings	$585.1 million	$454.2 million	29% increase
Free cash flow	$8.9 million	$(24.8) million	Improved $33.8 million

Fourth-quarter revenue was $136.7 million, compared with $109.9 million in the prior-year quarter. Fourth-quarter net loss was $32.7 million, or $0.24 per share, compared with a $36.9 million loss, or $0.28 per share, in the prior-year quarter.

Cost of revenue was $135.2 million, or 27% of revenue, compared with 28% in fiscal 2017.
Research and development expense increased 18% to $136.8 million, but declined to 27% of revenue from 29%.
Sales and marketing expense increased 20% to $303.3 million, but declined to 60% of revenue from 64%.
General and administrative expense increased 24% to $84.8 million, while declining to 16% of revenue from 17%.
Stock-based compensation was $97.5 million, equal to approximately 19% of revenue, compared with $78.4 million in fiscal 2017.

Liquidity, Cash Flow, Debt, and Balance Sheet

Cash and cash equivalents were $208.1 million at January 31, 2018, compared with $177.4 million a year earlier. Cash, cash equivalents, and restricted cash totaled $208.4 million.
Cash provided by operating activities was $61.8 million, compared with $1.2 million used in fiscal 2017. This was supported by $97.5 million of stock-based compensation, $40.1 million of depreciation and amortization, and a $78.9 million increase in deferred revenue.
Free cash flow benefited from working-capital improvements and included a $25.0 million release of restricted cash; management’s non-GAAP free cash flow definition excludes that release.
Total debt was $40.0 million at year-end. Box replaced its prior facility with an $85.0 million secured revolving credit facility maturing November 27, 2020, including a $30.0 million letter-of-credit sublimit.
Capital lease obligations totaled $45.8 million at present value, and contractual obligations totaled $435.4 million, including operating leases, capital leases, debt, and purchase commitments.
Working capital declined to $5.2 million from $24.2 million, largely reflecting higher deferred revenue and other current liabilities.
Management stated that cash, cash equivalents, and available facilities should meet working-capital and capital-expenditure needs for at least the next 12 months.

Material Changes Versus the Prior Period

Revenue growth accelerated in dollars, increasing by $107.5 million, while paying organizations increased 17% year over year.
Retention rate declined to 110% from 115%, but remained above 100%; customer churn was below 5% of prior-period annual contract value.
Billings increased 29%, driven by new large deployments, expansion within existing customers, new-product attach rates, and an enhanced developer access fee from a reseller.
Gross and operating margins improved as revenue growth exceeded growth in cost of revenue and operating expenses, although the company remained substantially loss-making.
Operating cash flow and free cash flow turned positive, aided by improved working-capital management and lower capital expenditures following completion of the Redwood City headquarters.
Restricted cash declined from $26.8 million to $0.4 million after letters of credit were brought under the new credit facility.
The company recorded no acquisitions in fiscal 2018 and reported no significant impairment charges.

Outlook, Commentary, Risks, and Unusual Items

Management expects continued investment in sales and marketing, research and development, data-center infrastructure, international expansion, and professional services, and does not expect profitability for the foreseeable future.
Management expects cost of revenue to increase as a percentage of revenue in fiscal 2019 because of investments in new capabilities, infrastructure, and customer support. Research and development expense is expected to increase in dollars but remain stable as a percentage of revenue; sales and marketing and general and administrative expenses are expected to decline as percentages of revenue over time.
Key risks include intense competition from Microsoft, Google, OpenText, Dropbox, and others; customer renewal and expansion risk; pricing pressure; security breaches, data loss, and service outages; reliance on third-party data centers and cloud providers; privacy and data-residency regulations; international and foreign-currency exposure; and dependence on key personnel and partners.
Box disclosed a recent outage caused by a data-center power loss and generator failure, resulting in customer credits. It also disclosed a third-party software-library bug that caused a small subset of files uploaded during a short period to be partially corrupted.
The company had $278 million of non-cancelable backlog at January 31, 2018, compared with $258 million at January 31, 2017, but stated that backlog is not a key internal management metric and may not reliably indicate future revenue.
Adoption of ASC 606 beginning February 1, 2018 was expected to increase deferred commissions by approximately $28 million to $30 million and reduce accumulated deficit by that amount. Revenue-recognition changes were expected to reduce deferred revenue by approximately $9 million to $11 million and reduce accumulated deficit by the same amount.
The Tax Cuts and Jobs Act resulted in a provisional $89.7 million tax expense related to remeasurement of deferred tax assets, offset by a valuation allowance with no material effective-tax-rate impact. Final adjustments were expected by fiscal 2019.
Legal proceedings were not expected to result in a material loss as of January 31, 2018. A prior OpenText patent dispute was fully settled in fiscal 2017, producing a net $1.7 million benefit in that year.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Investor Verification Checklist

Verify the sustainability of positive operating cash flow and free cash flow after excluding restricted-cash releases and considering ongoing capital-lease payments.
Assess whether retention remains above 100% as expansion rates moderate and large customer contracts renew.
Review the effect of ASC 606 on reported revenue, deferred revenue, deferred commissions, contract assets, and comparability with prior periods.
Monitor the path toward profitability given the $155.0 million GAAP net loss and $97.5 million of stock-based compensation.
Evaluate liquidity and covenant compliance under the secured credit facility, including $26.4 million of letters of credit and minimum-liquidity requirements.
Investigate the operational and financial effects of security incidents, service outages, data corruption, customer credits, and third-party hosting dependence.
Consider dilution from stock-based compensation, options, restricted stock units, and the dual-class voting structure.