Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud-based enterprise content platform for secure content management, sharing, collaboration, workflow, and custom applications. This unaudited Form 10-Q covers the three and nine months ended October 31, 2016, Box’s fiscal third quarter of fiscal 2017. The company reported more than 50 million registered users, over 69,000 paying organizations, and services offered in 22 languages.
Financial Performance and Key Metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Revenue | $102.8 million | $78.7 million | $288.7 million | $217.7 million |
| Revenue growth | 31% | — | 33% | — |
| Gross profit | $75.7 million | $55.0 million | $206.1 million | $156.3 million |
| Gross margin | 74% | 70% | 71% | 72% |
| Operating loss | $(37.8) million | $(55.0) million | $(114.3) million | $(151.4) million |
| Operating margin | (37)% | (70)% | (40)% | (70)% |
| Net loss | $(38.2) million | $(55.1) million | $(114.9) million | $(152.6) million |
| Net loss per share | $(0.30) | $(0.45) | $(0.91) | $(1.27) |
| Billings | $112.4 million | $89.4 million | $294.9 million | $238.8 million |
| Free cash flow | $(10.9) million | $(37.8) million | $(35.0) million | $(95.0) million |
Operating expenses for the nine-month period were $320.4 million, including $55.1 million of stock-based compensation. The nine-month retention rate was approximately 115%, compared with 119% in the prior-year period. Non-U.S. customers represented 17% of nine-month revenue, compared with 20% previously.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $167.8 million at October 31, 2016, compared with $185.7 million at January 31, 2016.
- Cash, cash equivalents, and restricted cash totaled $194.9 million. Restricted cash of $27.1 million primarily collateralized letters of credit.
- Net cash used in operating activities was $15.9 million for the first nine months, including a $3.8 million legal settlement payment.
- Capital expenditures were $13.6 million, and capital lease payments were $5.4 million during the first nine months.
- Debt outstanding was $40.0 million under a revolving facility maturing in December 2017. The facility is collateralized by substantially all U.S. assets, and Box was in compliance with its financial covenants.
- Contractual obligations totaled $365.0 million, including $283.5 million of operating lease obligations, net of sublease income, $26.2 million of capital leases, and $14.4 million of purchase obligations.
Material Changes Versus the Prior Comparable Period
- Revenue increased 31% in the quarter and 33% for the nine-month period, driven primarily by new customers, renewals, and expanded deployments. Paying organizations increased more than 28% year over year.
- Gross margin improved to 74% in the quarter, primarily because revenue growth outpaced data-center and infrastructure costs. Nine-month gross margin declined one percentage point to 71% as Box continued investing in infrastructure and professional services.
- Sales and marketing expense increased 4% for the quarter and 4% for the nine-month period, but declined to 65% of revenue from 82% and 83%, respectively, reflecting improved marketing efficiency and lower costs supporting free users.
- General and administrative expense declined 14% for the quarter and 7% for the nine-month period, primarily due to lower litigation, legal settlement, and rent costs.
- Operating cash burn and free cash flow improved substantially year over year, aided by lower capital expenditures following completion of the Redwood City headquarters and improved working-capital management.
- Deferred revenue increased to $192.6 million at October 31, 2016 from $186.4 million at January 31, 2016.
- Box acquired technology and employees from Wagon Analytics for approximately $2.0 million, recorded entirely as goodwill.
Outlook, Management Commentary, Risks, and Unusual Items
Management stated that it expected continued significant investment in sales and marketing, research and development, data-center infrastructure, and professional services. Box did not expect to be profitable for the foreseeable future. Management believed existing cash and cash equivalents, together with available credit facilities, would fund working-capital and capital-expenditure needs for at least the next 12 months, while acknowledging that additional financing may be required in the future.
Box was shifting customers toward annual rather than multi-year payment frequencies. Management expected this to cause billings growth to decelerate faster than revenue growth and expected billings to be increasingly concentrated in the second half of the fiscal year, particularly the fourth quarter. The filing did not provide a clear numerical revenue or earnings forecast.
The Open Text patent litigation was settled in March 2016. Box paid $3.75 million, reversed prior settlement accruals and interest of $5.6 million, and recorded a net benefit of approximately $1.7 million for the nine-month period. Management stated that it did not believe a material loss was reasonably possible for other legal contingencies as of October 31, 2016.
Key risks include continued operating losses and cash burn, intense competition and pricing pressure, customer retention and expansion risk, cybersecurity and data-loss exposure, service outages and dependence on third-party data centers, international privacy and data-transfer regulation, foreign-exchange exposure, long enterprise sales cycles, execution risk from rapid growth and acquisitions, and possible future capital needs. The company also highlighted the impact of seasonality and the absence of a full live failover test of its disaster-recovery arrangements.
Important Facts for Investors to Verify
- Whether revenue growth and the 115% retention rate remain durable as the customer base expands and billings growth decelerates.
- Whether gross-margin improvement can continue despite higher data-center, infrastructure, and professional-services investments.
- The pace of improvement in operating cash flow and free cash flow, excluding unusual legal and headquarters-related items.
- The company’s ability to fund continuing losses and contractual obligations before the December 2017 debt maturity.
- The effects of stock-based compensation, which totaled $55.1 million for the first nine months, on dilution and economic profitability.
- Potential effects of cybersecurity incidents, service outages, privacy regulation, international data-localization requirements, and competitive pricing pressure.
- The integration and business impact of the Wagon Analytics acquisition and any future acquisitions.