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 automation, application development, and compliance. This unaudited Form 10-Q covers the three and nine months ended October 31, 2017, within fiscal 2018, with comparisons to the same periods of 2016.
As of October 31, 2017, Box reported more than 57 million registered users, approximately 80,000 paying organizations, and services offered in 22 languages. Customers outside the United States represented 21% of revenue, compared with 17% in the prior-year periods.
Financial and Operating Metrics
| Metric | Three Months Ended October 31, 2017 | Three Months Ended October 31, 2016 | Nine Months Ended October 31, 2017 | Nine Months Ended October 31, 2016 |
|---|---|---|---|---|
| Revenue | $129.3 million | $102.8 million | $369.5 million | $288.7 million |
| Revenue growth | 26% | — | 28% | — |
| Gross profit | $94.8 million | $75.7 million | $269.5 million | $206.1 million |
| Gross margin | 73% | 74% | 73% | 71% |
| Operating loss | $(42.6) million | $(37.8) million | $(121.5) million | $(114.3) million |
| Operating margin | (33)% | (37)% | (33)% | (40)% |
| Net loss | $(42.9) million | $(38.2) million | $(122.3) million | $(114.9) million |
| Net loss per share | $(0.32) | $(0.30) | $(0.92) | $(0.91) |
| Cash flow from operations | $14.1 million | $(6.8) million | $13.1 million | $(15.9) million |
| Free cash flow | $6.3 million | $(10.9) million | $(4.4) million | $(35.0) million |
| Billings | $141.5 million | $112.4 million | $380.5 million | $294.9 million |
| Retention rate | 112% | 115% | 112% | 115% |
Operating expenses for the nine-month period were $391.0 million, including $102.4 million of research and development, $225.6 million of sales and marketing, and $63.0 million of general and administrative expense. Stock-based compensation was $72.5 million for the nine months, up from $55.1 million in the prior-year period.
At October 31, 2017, cash and cash equivalents were $172.9 million, restricted cash was $26.5 million, total debt was $40.0 million, and capital lease obligations totaled $44.7 million on a present-value basis. Total liabilities were $440.5 million and stockholders’ equity was $26.3 million. The accumulated deficit was approximately $1.0 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased 26% in the quarter and 28% year to date, primarily from new customers, expanded deployments, and additional product offerings.
- Paying organizations increased 16% year over year. Billings increased 26% in the quarter and 29% year to date.
- Retention declined to 112% from 115%, although customer churn remained below 5% of prior-period annual contract value and expansion continued to exceed customer losses.
- Gross margin declined one percentage point in the quarter but improved two percentage points year to date, reflecting continuing infrastructure investments and revenue growth outpacing infrastructure spending.
- Operating and net losses increased in absolute dollars, but operating margins improved because revenue growth exceeded the growth of research and development and sales and marketing expenses.
- Operating cash flow improved from a use of $15.9 million to cash provided of $13.1 million year to date. Free cash flow improved by $30.6 million but remained negative.
- Sales and marketing headcount increased from 659 to 859 employees, while research and development headcount increased from 304 to 333 employees and general and administrative headcount increased from 220 to 276 employees.
Guidance, Outlook, Risks, and Unusual Items
Management stated that it expects continued investment in research and development, sales and marketing, data center infrastructure, international operations, and professional services. Box does not expect to be profitable for the foreseeable future and expects capital lease obligations to increase as it expands data center operations. Management believes existing cash and credit facilities will be sufficient for working capital and capital expenditures for at least the next 12 months, although additional financing could be required in the future.
On November 27, 2017, after the reporting date, Box replaced its $40.0 million December 2015 revolving facility with an $85.0 million Wells Fargo revolving facility maturing November 27, 2020. As of November 29, 2017, $40.0 million was drawn and $26.0 million of letters of credit had been issued. The new facility includes maximum leverage and minimum liquidity requirements and is secured by substantially all U.S. assets.
The new credit facility also enabled Box to release $26.0 million of restricted cash previously supporting letters of credit. This release is expected to materially affect the balance sheet and cash-flow statement for the quarter and year ending January 31, 2018.
Box expects to adopt the new revenue recognition standard, ASC Topic 606, beginning February 1, 2018 using the modified retrospective method. Management expects material changes to the capitalization and amortization of sales commissions, including an expected five-year benefit period, and possible changes to the timing of revenue recognition for certain contracts. The ultimate revenue impact had not been finalized.
Key risks include continuing cumulative losses, intense competition from larger providers, customer renewal and expansion risk, pricing pressure, cybersecurity and data-loss exposure, service outages and reliance on third-party data centers and hosting providers, privacy and international regulatory requirements, longer enterprise sales cycles, dependence on skilled personnel and strategic partners, intellectual-property claims, potential financing needs, and compliance with the new credit facility’s covenants. Management reported no material loss contingency that was reasonably possible as of October 31, 2017 and stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether revenue and billings growth can be sustained as enterprise sales become a larger portion of the business and billings increasingly concentrate in the fourth quarter.
- Whether retention remains above 100% and whether customer expansion offsets churn and pricing pressure.
- The path toward positive operating cash flow and free cash flow, excluding the benefit of non-cash stock-based compensation and changes in working capital.
- The effect of ASC Topic 606 on revenue timing, deferred revenue, capitalized commissions, amortization expense, and retained earnings after adoption.
- Compliance with the new facility’s maximum leverage and minimum liquidity covenants, including the impact of the $40.0 million borrowing and $26.0 million of letters of credit.
- The effect of the $26.0 million restricted-cash release on reported liquidity and cash flows.
- The scale and future dilution implications of stock-based compensation, which totaled $72.5 million year to date and represented approximately 20% of revenue.
- Exposure to cybersecurity incidents, service interruptions, third-party hosting failures, privacy regulation, intellectual-property claims, and international currency and regulatory risks.