Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud-based, mobile-optimized enterprise content management and collaboration platform. This unaudited Form 10-Q covers the three and nine months ended October 31, 2015, compared with the same periods in 2014; the balance-sheet comparison is October 31, 2015 versus January 31, 2015.
- More than 41 million registered users and over 54,000 paying organizations as of October 31, 2015.
- Over 11% of registered users were paying users; the service was offered in 22 languages.
- Revenue was primarily generated from subscription and premier support services.
Financial Performance and Key Metrics
| Metric | Three Months Ended October 31 | Nine Months Ended October 31 |
|---|---|---|
| Revenue | $78.7 million, up 38% | $217.7 million, up 42% |
| Gross profit | $55.0 million | $156.3 million |
| Gross margin | 70%, versus 78% | 72%, versus 79% |
| Loss from operations | $(55.0) million | $(151.4) million |
| GAAP net loss | $(55.1) million | $(152.6) million |
| GAAP net loss per share | $(0.45) | $(1.27) |
| Non-GAAP operating loss | $(37.9) million | $(103.2) million |
| Non-GAAP net loss | $(37.9) million | $(104.3) million |
| Billings | $89.4 million, up 37% | $238.8 million, up 45% |
| Retention rate | 119%, versus 130% | 119%, versus 130% |
- Operating expenses were $110.1 million for the quarter and $307.7 million for the nine months, including sales and marketing of $64.0 million and $178.9 million, respectively.
- Stock-based compensation was $15.4 million for the quarter and $42.8 million for the nine months, compared with $8.5 million and $22.3 million in the prior-year periods.
- Cash used in operating activities was $17.3 million for the quarter and $71.2 million for the nine months. Excluding $25.0 million of restricted cash used to secure a headquarters letter of credit, nine-month operating cash use was $46.2 million.
- Capital expenditures were $20.0 million for the quarter and $47.8 million for the nine months.
- Cash and cash equivalents were $189.7 million, and marketable securities were $25.2 million, for total cash, cash equivalents and marketable securities of $214.9 million at October 31, 2015.
- Total debt was $40.0 million, with $20.0 million of remaining borrowing capacity under the August 2013 secured revolving facility at October 31, 2015. Capital lease obligations totaled $7.6 million.
- Accumulated deficit was $682.0 million; total liabilities were $308.1 million and stockholders’ equity was $171.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by more than 20% growth in paying organizations, new customer deployments, renewals and expansion within existing customers.
- Gross margin declined because cost of revenue increased faster than revenue, primarily from data-center service costs, server depreciation, personnel growth, Box Consulting investments and overlapping headquarters expenses.
- Research and development increased 53% for the quarter and 57% for the nine months, reflecting greater headcount, stock-based compensation and infrastructure investment.
- Sales and marketing increased in dollars but declined as a percentage of revenue to 82% from 97% for the quarter and 83% from 99% for the nine months, reflecting improved marketing efficiency and a greater contribution from renewals and expansions.
- Retention declined to 119% from 130%, although it remained above 100%. Enterprise customer non-renewal was less than 4% of prior-period annual contract value for the trailing twelve months.
- Property and equipment increased to $113.5 million from $58.4 million, largely due to servers, infrastructure and construction in progress for the new Redwood City headquarters and data centers.
- The company completed its initial public offering in January 2015, resulting in substantially higher weighted-average shares and making prior-year per-share comparisons less comparable.
- Box acquired Verold and certain assets of two other companies during the nine months for aggregate consideration of approximately $6.2 million, primarily in common stock, adding developed technology and goodwill.
Guidance, Outlook, Commentary and Risks
- Management expects continued significant investment in sales and marketing, research and development, data-center infrastructure, international expansion and professional services. Box stated that it did not expect to be profitable for the foreseeable future.
- Management expected existing cash, marketable securities and credit facilities to fund working capital and capital expenditure needs for at least the next 12 months, while noting that additional financing could be required depending on growth and spending.
- In December 2015, after the reporting date, Box repaid the $40.0 million August 2013 facility and entered a new $40.0 million revolving facility maturing in December 2017. The new facility was drawn at closing and secured by substantially all U.S. assets.
- Future contractual commitments totaled $345.9 million, including $273.8 million of operating lease obligations, $22.9 million of purchase obligations, $7.9 million of capital leases and $41.1 million of debt obligations including interest and fees.
- Box was appealing an approximately $4.9 million Open Text patent judgment, plus prejudgment interest. The court found infringement of certain file-synchronization patents but no willful infringement and no permanent injunction. The company had accrued the verdict-related liability and recorded additional interest expense.
- Key risks include continuing losses and negative operating cash flow, intense competition, declining retention or expansion rates, pricing pressure, security breaches or service outages, dependence on third-party data centers, international and privacy regulation, intellectual-property claims, execution of rapid growth and headquarters relocation, and potential need for additional capital.
- Management concluded that disclosure controls and procedures were effective as of October 31, 2015, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether revenue and billings growth can continue while retention remains above 100% and paying organizations continue to expand.
- Whether data-center, infrastructure, personnel and headquarters costs improve gross margins as the business scales.
- The pace of operating cash burn, capital expenditures and potential need for additional financing.
- The status and ultimate cost of the Open Text litigation appeal.
- The terms, covenants and collateral requirements of the December 2015 revolving credit facility.
- The economic impact of substantial lease commitments, including the approximately $273.8 million of operating lease obligations.
- The effect of stock-based compensation, which totaled $42.8 million for the nine-month period, on dilution and non-GAAP performance.
- Progress on security, regulatory compliance, international expansion and the transition to the new Redwood City headquarters.