Box, Inc. Form 10-Q Summary
Business Context and Reporting Period
Box provides a cloud content management platform for secure content storage, sharing, collaboration, workflow, integrations, and compliance. This unaudited Form 10-Q covers the three and six months ended July 31, 2020, compared with the corresponding 2019 periods. The company reported 74.0 million registered users, over 100,000 paying organizations, and service availability in 25 languages as of July 31, 2020.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 |
|---|---|---|---|---|
| Revenue | $192.3 million | $172.5 million | $375.9 million | $335.5 million |
| Gross profit | $137.0 million | $118.7 million | $266.5 million | $233.0 million |
| Gross margin | 71% | 69% | 71% | 69% |
| Loss from operations | $(7.5) million | $(36.3) million | $(31.8) million | $(71.7) million |
| GAAP net loss | $(7.7) million | $(36.2) million | $(33.2) million | $(73.1) million |
| GAAP net loss per share | $(0.05) | $(0.25) | $(0.22) | $(0.50) |
| Net cash provided by operating activities | $32.3 million | $(4.7) million | $94.2 million | $20.8 million |
| Free cash flow | $13.3 million | $(19.0) million | $53.2 million | $(5.5) million |
As of July 31, 2020, Box had cash and cash equivalents of $271.9 million and cash, cash equivalents, and restricted cash of $272.4 million. Total debt was $70.0 million, compared with $40.0 million at January 31, 2020. Finance lease liabilities totaled $129.7 million and operating lease liabilities totaled $254.6 million on a present-value basis. Management stated that existing liquidity, finance leases, and credit facilities were sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
- Remaining performance obligations were $726.7 million, up 13% year over year; 65% was expected to be recognized as revenue over the following 12 months.
- Six-month billings were $316.9 million, up 9% year over year.
- Net retention rate was approximately 106%, compared with 105% in the prior-year period.
- Non-GAAP operating income was $30.1 million for the quarter and $47.3 million for the six months, versus $0.5 million and $(2.5) million, respectively, in the prior-year periods.
- Stock-based compensation expense was $37.6 million for the quarter and $77.6 million for the six months, representing approximately 20% and 21% of revenue, respectively.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 11% and six-month revenue increased 12%, primarily due to new customers, a 5% increase in paying organizations, add-on product adoption, renewals, and expansion within existing customers.
- Gross margin improved by approximately two percentage points to 71% in both comparative periods, aided partly by lower hosted data service costs and infrastructure optimization.
- Sales and marketing expense declined 16% for the quarter and 12% for the six months. The company attributed the reduction to restructuring, lower headcount, reduced travel and marketing activity during COVID-19, and increased sales efficiency.
- Research and development expense increased 1% for the quarter and 8% for the six months, reflecting continued investment in product features, infrastructure, security, integrations, APIs, and workflow automation.
- Operating and net losses narrowed substantially, but Box remained loss-making under GAAP and stated that it did not expect to be profitable in the near future.
- Operating cash flow and free cash flow improved significantly, primarily reflecting collections of accounts receivable, non-cash stock compensation, depreciation and amortization, and seasonal billing and collection patterns.
- Box drew an additional $30.0 million under its secured revolving facility in April 2020, increasing debt outstanding to $70.0 million. The company remained in compliance with its financial covenants.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide a clear numerical revenue or earnings forecast in the filing text. It expected revenue growth to continue, cost of revenue to increase in dollars but decline slightly as a percentage of revenue, research and development expense to increase while remaining relatively stable as a percentage of revenue, and sales and marketing expense to decline as a percentage of revenue over time. Box also stated that it expected to continue investing in infrastructure, product development, international operations, sales, customer success, and professional services.
The COVID-19 pandemic caused most offices to close temporarily, business travel to be suspended, and customer and marketing events to move to virtual formats. Management noted that Box may benefit from customers' need to support remote work, but emphasized that the ultimate effects on demand, renewals, collections, sales cycles, employees, vendors, and operating results remained uncertain.
- The secured credit facility provides $100.0 million of revolving commitments, matures July 12, 2022, is collateralized by substantially all assets, and includes maximum leverage and minimum liquidity covenants.
- Interest-rate exposure is partly hedged through a five-year swap with a $30.0 million notional value. The swap had a $1.4 million unrealized loss at July 31, 2020.
- Contractual obligations totaled $736.9 million, including $300.4 million of operating leases, $138.1 million of finance leases, $226.0 million of purchase obligations, and $72.4 million of debt payments including interest and fees.
- Letters of credit totaled $27.2 million. The filing identified $226.0 million of additional non-cancellable purchase obligations, primarily for infrastructure and IT services.
- Management reported no material loss contingency that was reasonably possible as of July 31, 2020, although ordinary-course litigation, intellectual property claims, service-level credits, indemnification, and data-security liabilities remain potential risks.
- Major risks include COVID-19 effects, continued cumulative losses, intense competition, customer renewal and expansion rates, cybersecurity and data privacy obligations, service outages, third-party hosting dependence, international regulatory requirements, foreign currency exposure, personnel retention, and the need for additional capital.
- The filing disclosed that disclosure controls and procedures were effective and that no material change in internal control over financial reporting occurred during the period.
Important Facts for Investors to Verify
- Confirm the sustainability of revenue growth, billings growth, 106% net retention, and the $726.7 million remaining performance obligation balance.
- Assess whether gross-margin improvement and lower sales and marketing spending are durable or partly driven by temporary COVID-19 reductions and restructuring.
- Reconcile positive free cash flow with continued GAAP losses, including the impact of $77.6 million of stock-based compensation and seasonal working-capital movements.
- Monitor liquidity, debt covenant compliance, the July 2022 credit-facility maturity, variable-rate exposure, and substantial lease and purchase commitments.
- Evaluate whether COVID-19, customer credit conditions, renewal rates, sales cycles, and international privacy or data-transfer requirements could weaken future results.
- Review the effect of ongoing equity compensation and the increase in shares outstanding from 150.6 million at January 31, 2020 to 156.4 million at July 31, 2020.