Box, Inc. 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management and collaboration platform delivered primarily through subscription contracts. This Form 10-Q covers the three months ended April 30, 2017, compared with the three months ended April 30, 2016. The interim financial statements are unaudited. The filing refers to this period as the first quarter of fiscal 2018.
- More than 54 million registered users and more than 74,000 paying organizations as of April 30, 2017.
- Over 16% of registered users were paying users.
- Revenue from non-U.S. customers represented 22% of total revenue, compared with 17% in the prior-year period.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $117.2 million | $90.2 million | Up 30% |
| Gross profit | $84.5 million | $62.3 million | Up 36% |
| Gross margin | 72% | 69% | Up 3 percentage points |
| Operating loss | $40.0 million | $38.6 million | Higher loss by $1.4 million |
| Operating margin | (34%) | (43%) | Improved 9 percentage points |
| Net loss | $40.1 million | $38.6 million | Higher loss by $1.5 million |
| Net loss per share | $0.30 | $0.31 | Improved by $0.01 |
| Billings | $99.6 million | $75.9 million | Up 31% |
| Free cash flow | $4.0 million | $(16.2) million | Improved by $20.2 million |
Cost of revenue increased 17% to $32.7 million, but declined to 28% of revenue from 31%. Research and development increased 25% to $33.5 million, sales and marketing increased 19% to $70.7 million, and general and administrative expense increased 40% to $20.3 million.
Stock-based compensation was $22.9 million, or approximately 20% of revenue, compared with $16.1 million, or approximately 18% of revenue, in the prior-year period. Non-GAAP operating loss was $16.6 million, compared with $22.7 million, and non-GAAP net loss was $16.7 million, compared with $22.7 million.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $183.7 million at April 30, 2017, compared with $177.4 million at January 31, 2017.
- Restricted cash was $26.8 million, primarily certificates of deposit securing letters of credit.
- Net cash provided by operating activities was $8.5 million, compared with $4.2 million used in operating activities in the prior-year period.
- Investing cash outflow was $0.8 million, principally for property and equipment, compared with $4.4 million in the prior-year period.
- Financing cash outflow was $1.5 million, primarily reflecting capital lease payments and employee payroll tax payments related to net share settlement of restricted stock units.
- The company had $40.0 million of non-current debt outstanding under its revolving credit facility. The facility was amended in February 2017 to extend maturity to December 2018; borrowings are secured by substantially all U.S. assets.
- Box stated that it was in compliance with all financial covenants and believed cash, cash equivalents and available credit facilities were sufficient for at least the next 12 months.
- Total liabilities were $404.0 million and stockholders’ equity was $59.8 million at April 30, 2017. Accumulated deficit was $924.2 million.
- Contractual obligations totaled approximately $402.4 million, including operating leases, capital leases, purchase obligations and debt-related amounts.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 30%, supported by more than 18% growth in paying organizations, new customers, larger deployments, product expansion and renewals.
- Billings growth increased to 31%, driven by larger initial deployments, expansion within existing customers and an enhanced developer access fee from one reseller.
- Retention rate declined modestly to 114% from 116%, but remained above 100%; customer losses were below 5% of prior-period annual contract value.
- Gross margin improved as revenue growth outpaced data center infrastructure spending.
- Operating margin improved despite a slightly larger GAAP operating loss, primarily because operating expenses declined as a percentage of revenue.
- Free cash flow turned positive due to improved operating cash flow, lower capital expenditures following completion of the Redwood City headquarters and greater use of capital leases.
- General and administrative expense increased partly because of investments related to implementation of the forthcoming ASC 606 revenue standard and because the prior-year period included a $1.7 million benefit from the Open Text litigation settlement.
Guidance, Outlook, Commentary and Risks
Management expects continued investment in research and development, sales and marketing, data center infrastructure, international operations and professional services. Box stated that it does not expect to be profitable for the foreseeable future and expects data center capital lease obligations to increase in the near term. Management also expects quarterly billings to become more concentrated in the second half of the fiscal year, particularly the fourth quarter, as enterprise activity increases.
- Management expects operating expenses to increase in absolute dollars but generally decline as a percentage of revenue over time.
- The company expects retention to remain above 100% for the foreseeable future, while acknowledging that expansion growth may trend down as customer accounts become more penetrated.
- ASC 606 is expected to affect the capitalization and amortization of sales commissions, the timing of revenue recognition for certain contracts and related disclosures. Box anticipated adoption using the modified retrospective method, but stated that its assessment could change.
- Key risks include continued cumulative losses, dependence on renewals and customer expansion, intense competition and pricing pressure, security breaches or service outages, reliance on third-party data centers and hosting providers, privacy and data protection regulation, international expansion, intellectual property claims, personnel retention and potential future financing needs.
- The company has significant lease and purchase commitments and its credit facility includes financial and operating covenants.
- Box reported no material probable and estimable litigation loss as of April 30, 2017. Customer service-level, data security and intellectual property indemnification obligations could nevertheless create material liabilities under adverse circumstances.
- Dual-class voting rights concentrate control: Class B holders collectively held approximately 87.5% of voting power as of April 30, 2017.
Most Important Facts for Investors to Verify
- Whether 30% revenue growth and 31% billings growth are sustained after considering seasonal enterprise billing patterns.
- Whether retention remains above 100% and customer expansion offsets churn and competitive pricing pressure.
- Progress toward positive and sustainable GAAP profitability, given the $40.1 million quarterly net loss and $924.2 million accumulated deficit.
- The quality and sustainability of positive free cash flow, including the effects of working-capital seasonality, capital leases and stock-based compensation.
- The impact of ASC 606 on revenue timing, deferred revenue, deferred commissions and reported results beginning with the planned adoption period.
- Liquidity requirements associated with $402.4 million of contractual obligations, the $40.0 million secured credit facility and continuing infrastructure investments.
- Cybersecurity, service availability, data privacy, regulatory and intellectual property exposures, including customer indemnification obligations.
- The effect of stock-based compensation and potential dilution, including $193.8 million of unrecognized restricted stock unit expense and substantial outstanding options and awards.