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 automation, and data protection. This unaudited Form 10-Q covers the three and six months ended July 31, 2016, compared with the corresponding 2015 periods. Box reported more than 48 million registered users and more than 66,000 paying organizations at July 31, 2016.
Financial Performance and Key Metrics
| Metric | Three Months Ended July 31, 2016 | Three Months Ended July 31, 2015 | Six Months Ended July 31, 2016 | Six Months Ended July 31, 2015 |
|---|---|---|---|---|
| Revenue | $95.7 million | $73.5 million | $185.9 million | $139.1 million |
| Revenue growth | 30% | — | 34% | — |
| Gross profit | $68.1 million | $52.8 million | $130.4 million | $101.3 million |
| Gross margin | 71% | 72% | 70% | 73% |
| Loss from operations | $(37.9) million | $(49.8) million | $(76.5) million | $(96.4) million |
| GAAP operating margin | (40)% | (68)% | (41)% | (69)% |
| Net loss | $(38.1) million | $(50.2) million | $(76.7) million | $(97.5) million |
| Net loss per share | $(0.30) | $(0.42) | $(0.61) | $(0.81) |
| Operating cash flow | $(4.9) million | $(21.7) million | $(9.1) million | $(53.8) million |
| Free cash flow | $(8.0) million | $(39.8) million | $(24.1) million | $(57.1) million |
- Billings were $106.5 million in the quarter and $182.5 million for the six-month period, up 34% and 22%, respectively, year over year.
- Retention rate was approximately 115%, compared with 121% in the prior-year periods. Enterprise customer churn based on prior-period contract value was below 5%.
- Non-GAAP operating loss was $17.9 million for the quarter and $40.6 million for the six months; non-GAAP operating margins were negative 19% and negative 22%, respectively.
- Stock-based compensation expense was $19.1 million for the quarter and $35.2 million for the six months.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $173.3 million at July 31, 2016, compared with $185.7 million at January 31, 2016. Cash, cash equivalents, and restricted cash totaled approximately $200.5 million.
- Restricted cash was $27.1 million, primarily securing $27.0 million of letters of credit related to facility leases.
- Total assets were $432.2 million and total stockholders’ equity was $100.8 million. Accumulated deficit was $809.0 million.
- Debt outstanding was $40.0 million under a secured revolving credit facility maturing in December 2017. The company was in compliance with all financial covenants at July 31, 2016.
- Capital lease obligations totaled $18.8 million on a present-value basis. Future operating lease payments, net of expected sublease income, totaled $288.1 million.
- Management stated that existing cash and cash equivalents, together with available credit facilities, were sufficient for working capital and capital expenditure needs for at least the next 12 months, but noted that additional financing could be required in the future.
Material Changes Versus the Prior Comparable Period
- Revenue increased 30% in the quarter and 34% for the six months, primarily due to new customers, renewals, and expansion within existing accounts. Paying organizations increased more than 32% year over year.
- Gross margin declined from 72% to 71% for the quarter and from 73% to 70% for the six months, reflecting continued investment in datacenter infrastructure, customer support, and Box Consulting.
- Operating losses narrowed materially as revenue growth outpaced expense growth. Sales and marketing expense increased 3% in the quarter and 4% for the six months, while declining as a percentage of revenue from 80% to 63% and from 82% to 64%, respectively.
- Research and development expense increased in dollars but declined from 36% to 30% of revenue in both the quarter and six-month period.
- Operating cash burn improved substantially from the prior year, partly because of lower capital expenditures and working-capital benefits. Six-month investing cash use fell to $4.4 million from $130.1 million.
- The six-month 2016 results included a $1.7 million net income benefit from settling the Open Text patent litigation for $3.75 million, reversing prior accruals and interest, and recording related amortization.
- Cash decreased by $12.4 million during the six months, compared with a $190.3 million decrease in the prior-year period, which included substantial purchases of marketable securities.
Guidance, Outlook, Commentary, and Risks
- Management did not provide a clear quantitative revenue or earnings forecast in the filing. It stated that Box did not expect to be profitable for the foreseeable future because of continued investments in sales and marketing, research and development, datacenter infrastructure, international expansion, and professional services.
- Management expects billings growth to decelerate faster than revenue growth as it emphasizes annual rather than multiyear prepayments. Billings are also expected to become more concentrated in the second half, particularly the fourth quarter, because of enterprise sales seasonality.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in dollars but generally decline as percentages of revenue over time. Cost of revenue may increase as a percentage of revenue as infrastructure and customer-support investments continue.
- A subsequent event disclosed after quarter-end was an agreement to hire certain Wagon Analytics personnel for approximately $2.0 million in cash and Class A shares; closing was expected in the quarter ending October 31, 2016.
- Principal risks include continuing losses and negative cash flow, dependence on customer renewals and expansion, intense competition and pricing pressure, rapid growth and execution challenges, cybersecurity and data-loss risks, service outages and third-party datacenter dependence, privacy and international regulatory changes, intellectual-property claims, foreign-currency exposure, and the potential need for additional capital.
- The company’s dual-class structure gives Class B holders approximately 93.2% of voting power as of July 31, 2016, concentrating control and limiting the influence of Class A stockholders.
- Management concluded that disclosure controls and procedures were effective at the reasonable assurance level and reported no material change in internal control over financial reporting during the period.
Important Facts for Investors to Verify
- Whether revenue growth and the 115% retention rate remain durable as enterprise expansion rates moderate.
- The effect of annual payment-frequency changes and seasonality on billings, deferred revenue, accounts receivable, and future revenue growth.
- Progress toward improving gross margins and achieving positive operating cash flow despite continuing infrastructure investments.
- Cash runway, utilization of the $40.0 million revolving facility, covenant compliance, and the potential need for additional financing.
- The recurring impact of substantial stock-based compensation, which was $35.2 million for the six months ended July 31, 2016.
- Exposure to cybersecurity incidents, service interruptions, privacy regulation, international data-transfer requirements, and intellectual-property litigation.
- The economic and accounting effects of the planned Wagon Analytics transaction once purchase accounting is completed.