Box, Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
Box provides a cloud content management platform for secure storage, sharing, collaboration, workflow, security and compliance. This Form 10-Q covers the three months ended April 30, 2018, the first quarter of fiscal 2019. The financial statements are unaudited and prepared under U.S. GAAP.
- Over 60 million registered users and more than 85,000 paying organizations at April 30, 2018.
- Over 17% of registered users were paying users.
- Revenue mix was 76% United States and 24% international, compared with 78% and 22%, respectively, in the prior-year quarter.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $140.5 million | $117.2 million | 20% increase |
| Gross profit | $101.4 million | $84.5 million | 20% increase |
| Gross margin | 72% | 72% | Stable |
| Operating loss | $(35.9) million | $(40.0) million | Improved by $4.1 million |
| Operating margin | (26%) | (34%) | Improved by 8 points |
| Net loss | $(36.6) million | $(40.1) million | Improved by $3.4 million |
| Net loss per share | $(0.26) | $(0.30) | Improved |
| Cash flow from operations | $18.4 million | $8.5 million | Increased by $9.9 million |
| Free cash flow | $7.3 million | $4.0 million | Increased by $3.2 million |
| Billings | $116.7 million | $99.6 million | 17% increase |
Operating expenses were $137.3 million, or 98% of revenue, versus $124.5 million, or 106% of revenue, in the prior-year quarter. Research and development was $38.2 million, sales and marketing was $77.0 million, and general and administrative expense was $22.1 million.
- Cash and cash equivalents were $217.1 million at April 30, 2018; cash, cash equivalents and restricted cash totaled $217.5 million.
- Total debt was $40.0 million, with an $85.0 million secured revolving credit facility maturing November 27, 2020. The filing does not clearly state the amount drawn under the facility beyond the $40.0 million debt balance.
- Capital lease obligations totaled $50.4 million on a present-value basis.
- Deferred revenue was $286.9 million, including $264.4 million current and $22.5 million non-current.
- Total assets were $528.5 million and total liabilities were $481.9 million at April 30, 2018.
Material changes versus the prior comparable period
- Revenue growth was driven by new customers, a 15% increase in paying organizations, product attach rates, renewals and expansion within existing customers.
- Billings growth slowed to 17% from 31% in the prior-year quarter. Management attributed the increase primarily to large initial deployments, existing-customer seat expansion and new-product attach rates, partly offset by an enhanced developer access fee from one reseller.
- Retention rate declined to 109% from 114%, but remained above 100%; customer non-renewals represented less than 5% of prior-period total account value.
- Sales and marketing expense increased 9% in dollars but declined to 55% of revenue from 60%, reflecting productivity efforts, lower free-user support costs and the accounting impact of ASC Topic 606.
- Research and development declined to 27% of revenue from 29%, while general and administrative expense declined to 16% from 17%.
- Cash flow benefited from collections of accounts receivable and non-cash expenses, partially offset by decreases in deferred revenue and accrued liabilities.
Accounting, outlook and risks
- Box adopted ASC Topic 606 on February 1, 2018 using the modified retrospective method. The standard changed revenue recognition and capitalization and amortization of contract acquisition costs. Q1 FY2019 results reflect ASC 606, while Q1 FY2018 results were prepared under ASC 605; management stated that revenue growth would have been 22% rather than 20% absent the adoption.
- ASC 606 reduced reported Q1 FY2019 revenue by $2.7 million and increased reported operating income and net income by $1.5 million versus amounts that would have been reported without adoption. It had no impact on operating cash flow.
- Remaining subscription performance obligations were approximately $547.9 million at April 30, 2018, with 69% expected to be recognized over the following 12 months.
- Management believes cash, cash equivalents and available capital lease and credit facilities will fund working capital and capital expenditure needs for at least the next 12 months. Management also expects to continue investing in infrastructure, research and development, sales and marketing, international operations and professional services, and does not expect profitability for the foreseeable future.
- Contractual commitments totaled $448.5 million, including $290.9 million of operating lease obligations, $52.2 million of capital leases, $62.1 million of purchase obligations and $43.2 million of debt-related payments.
- Key risks include intense competition, declining retention or slower customer expansion, cybersecurity and data loss, service outages and reliance on third-party datacenters, privacy and data-protection regulation including GDPR, international expansion, pricing pressure, dependence on key personnel and continued operating losses.
- Management reported no material legal loss contingency as of April 30, 2018, and stated that disclosure controls were effective at the reasonable-assurance level.
- The company disclosed a recent service outage involving loss of power and failed backup generators, resulting in customer credits. It also disclosed that a third-party software-library bug caused a small subset of files uploaded from mid-December 2017 to early January 2018 to be partially corrupted.
Most important facts for investors to verify
- Whether revenue, billings and retention rates continue to grow as enterprise deployments and new products scale.
- The amount actually drawn, interest cost and covenant headroom under the $85.0 million revolving credit facility.
- Whether operating cash flow remains positive despite continuing GAAP losses, capital expenditures and capital lease payments.
- The effect of ASC 606 on future revenue growth, deferred revenue, deferred commissions and comparability with prior periods.
- Progress toward reducing sales and marketing costs as a percentage of revenue while maintaining customer acquisition and expansion.
- Exposure to cybersecurity incidents, service outages, customer credits, data-protection regulation and third-party hosting or software failures.
- The eventual accounting impact of the Tax Cuts and Jobs Act and the company’s unresolved GILTI accounting election.