Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management platform for secure storage, access, sharing, collaboration, workflow automation, security and compliance. This unaudited report covers the three and six months ended July 31, 2018, Box’s fiscal second quarter and first six months of fiscal 2019. Comparisons are primarily with the corresponding periods ended July 31, 2017.
- As of July 31, 2018, Box had 61.6 million registered users, more than 87,000 paying organizations and 18% paying users.
- Revenue was geographically diversified 76% from the United States and 24% internationally, compared with 79% and 21%, respectively, in the prior-year periods.
Financial Performance and Key Metrics
| Metric | Three Months Ended July 31, 2018 | Three Months Ended July 31, 2017 | Six Months Ended July 31, 2018 | Six Months Ended July 31, 2017 |
|---|---|---|---|---|
| Revenue | $148.2 million | $122.9 million | $288.7 million | $240.2 million |
| Revenue growth | 21% | — | 20% | — |
| Gross profit | $105.6 million | $90.2 million | $207.1 million | $174.7 million |
| Gross margin | 71% | 73% | 72% | 73% |
| Operating loss | $(37.2) million | $(39.0) million | $(73.1) million | $(79.0) million |
| Operating margin | (25)% | (32)% | (25)% | (33)% |
| Net loss | $(38.1) million | $(39.3) million | $(74.7) million | $(79.4) million |
| Net loss per share | $(0.27) | $(0.30) | $(0.54) | $(0.60) |
| Non-GAAP operating loss | $(6.5) million | $(14.9) million | $(15.8) million | $(31.5) million |
| Billings | $162.8 million | $139.5 million | $279.6 million | $239.0 million |
| Free cash flow | $(10.3) million | $(15.0) million | $(3.1) million | $(10.9) million |
- Cost of revenue increased 30% year over year in the quarter and 25% for the six-month period, reducing gross margin by two percentage points and one percentage point, respectively.
- Sales and marketing expense increased in dollars but declined to 52% of revenue from 60% in the quarter and to 53% from 60% for the six-month period.
- Research and development remained 28% of revenue for the six-month period, while general and administrative expense declined to 16% from 18%.
- Stock-based compensation was $30.7 million in the quarter and $57.3 million for the six months, representing approximately 21% and 20% of revenue, respectively.
- Retention rate was approximately 108%, down from 113% at July 31, 2017. Customer non-renewals represented less than 5% of prior-period total account value, according to management.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $17.2 million for the six months ended July 31, 2018, compared with $1.2 million used in the prior-year period.
- Investing cash outflow was $7.8 million, primarily for facilities and infrastructure capacity in Austin, London and Tokyo.
- Financing cash outflow was $13.5 million, primarily reflecting $25.3 million of payroll taxes on net share-settled restricted stock units and $12.9 million of capital lease payments, partly offset by stock-option and employee stock purchase proceeds.
- Cash, cash equivalents and restricted cash totaled $204.0 million at July 31, 2018; cash and cash equivalents alone totaled $203.7 million.
- The company had $40.0 million of non-current debt and an $85.0 million secured revolving credit facility, including a $30.0 million letter-of-credit sublimit. Box had $26.8 million of letters of credit outstanding and reported compliance with all financial covenants.
- Capital lease obligations totaled $53.1 million at present value. Contractual commitments included $294.0 million of net operating lease obligations, $82.9 million of purchase obligations and $475.6 million of total listed debt, lease and purchase commitments.
- Management believes available cash, capital leases and credit facilities will meet working-capital and capital-expenditure needs for at least the next 12 months, but notes that additional financing could be required depending on growth and spending.
Material Changes Versus the Prior Comparable Period
- Revenue increased 21% in the quarter and 20% for the six months, driven by new customers, a 15% increase in paying organizations, add-on product adoption, and expansion within existing customers.
- Billings growth moderated to 17% from 31% in the prior-year periods. Management attributed the change partly to payment-duration normalization, multiyear prepayment timing and an enhanced developer access fee from a reseller.
- Operating and net losses narrowed despite continued investment. The improvement reflected revenue growth and lower sales and marketing expense as a percentage of revenue, partly offset by higher infrastructure, personnel and research and development costs.
- Box adopted ASC Topic 606 on February 1, 2018 using the modified retrospective method. The adoption reduced reported revenue by $2.7 million for the quarter and $5.5 million for the six months versus amounts that would have been reported under ASC Topic 605, while reducing sales and marketing expense and improving reported operating and net losses by $2.9 million and $4.4 million, respectively.
- ASC Topic 606 materially increased deferred commissions and changed the timing of revenue recognition. Fiscal 2018 comparisons remain under ASC Topic 605 and are not directly comparable without adjustment.
- All outstanding Class B common stock automatically converted into Class A common stock on June 14, 2018, and the Class B authorization was retired.
- Box entered into transactions to hire employees from three private technology companies for aggregate consideration of $2.4 million, primarily recorded as goodwill. The company also described the joining of teams from Progressly and Butter.ai.
Guidance, Outlook, Commentary and Risks
- Management expects cost of revenue, research and development, sales and marketing, and general and administrative expense to increase in dollars as the company continues investing in infrastructure, products, international expansion, sales capacity and customer success.
- Box does not expect to be profitable for the foreseeable future. Management expects sales and marketing and general and administrative expenses to decline as percentages of revenue over time, while research and development should remain broadly stable as a percentage of revenue.
- For the third quarter of fiscal 2019, management expected revenue growth to outpace billings growth because of prior-period multiyear prepayments and the prior-year enhanced developer access fee. Billings were expected to be increasingly concentrated in the second half of the fiscal year, particularly the fourth quarter.
- Remaining subscription performance obligations totaled approximately $587.2 million at July 31, 2018; 66% was expected to be recognized over the following 12 months.
- Key risks include persistent losses and a $1.1 billion accumulated deficit, intense competition and pricing pressure, customer retention and expansion, cybersecurity and data loss, service outages, dependence on third-party datacenters and cloud providers, international privacy and data regulations, including GDPR, foreign exchange exposure, intellectual-property claims, acquisition integration, execution of international expansion and compliance with debt covenants.
- Box disclosed a February 2018 service outage caused by a datacenter power loss and failure of backup generators; customer credits were issued. The filing also notes a third-party software-library bug that caused a small subset of files uploaded during a limited period to be partially corrupted.
- Management reported no reasonable possibility of a material loss from disclosed legal contingencies as of July 31, 2018. Customer service-level, data-security and intellectual-property indemnification obligations could nevertheless expose Box to uncapped or difficult-to-estimate costs.
- The company was evaluating the impact of the Tax Cuts and Jobs Act’s GILTI provisions and had not recorded related adjustments because a reasonable estimate was not yet available.
Important Facts for Investors to Verify
- Reconcile reported revenue, deferred revenue, deferred commissions, billings and margins under ASC Topic 606 with prior periods reported under ASC Topic 605.
- Assess whether 17% billings growth, 108% retention and the seasonal concentration of enterprise billings support the company’s revenue-growth outlook.
- Monitor progress toward positive free cash flow and profitability, including the effect of $57.3 million of six-month stock-based compensation and continuing infrastructure investments.
- Review liquidity after contractual commitments, capital-lease payments, letters of credit and the secured facility’s minimum-liquidity and leverage covenants.
- Evaluate the financial and customer effects of service outages, cybersecurity incidents, data-corruption risks and third-party hosting dependencies.
- Track international growth and associated GDPR, privacy, data-localization, Brexit, tax and foreign-currency exposures.