U.S. Markets close in 3 hrs 10 mins

Box's Financial Model Is Starting to Bear Fruit

Asit Sharma, The Motley Fool

Cloud-based content management platform Box Inc (NYSE: BOX) is gaining small but noticeable traction in its business model. The company reported on the second quarter of its fiscal 2020 year on Aug. 28, and notably, Box recorded slight improvements in its perennial quarterly losses -- in both reported and adjusted number terms. Below, we'll review highlights of the last three months as well as management's perspective on scaling the business in a profitable manner. Note that all comparative numbers in the discussion that follows refer to those of the prior-year quarter.

Box: The raw numbers

Metric Q2 2020 Q2 2019 Change
Revenue $172.5 million $148.2 million 16.4%
Net income (loss) ($36.2 million) ($38.1 million) 5%
Diluted EPS (loss) ($0.25) ($0.27) 7.4%

Data source: Box Inc. EPS = earnings per share.  

What happened with Box this quarter?

  • Remaining performance obligations (essentially, deferred revenue plus earnings backlog) increased by 9% to $641 million.
  • Deferred revenue, a vital indicator of future revenue recognition, grew 10% to $311 million.
  • Gross margin decreased by 240 basis points to 68.7%, as cost of sales rose at a faster pace than sales.
  • Operating loss as calculated according to generally accepted accounting principles (GAAP) of $36.3 million improved slightly against the comparable quarter's loss of $37.2 million. On a non-GAAP basis, the company managed positive operating income of $0.5 million, versus a non-GAAP operating loss of $6.5 million in the second quarter of fiscal 2019.
  • Box signed two deals during the quarter with a value over $1 million, similar to the prior-year quarter. It scored three deals in the $500,000-plus range versus 11 such deals in the second quarter of 2019, and inked 68 $100,000-plus deals, in comparison with 50 $100,000-plus transactions in the same period last year.
  • Management extolled the evolving use cases of the Box platform, noting that the company sold add-on services in 80% of six-figure deals completed in the second quarter.
  • The company announced the upcoming availability of "Box Shield," a layer of security controls with advanced threat protection, which is intended to promote secure collaboration and workflows across enterprises.
  • Box recorded a net use of operating cash flow of $4.7 million, in comparison to a net use of operating cash of $1.3 million in the second quarter of fiscal 2019.
A transparent acrylic box on a luminous grey background.

Image source: Getty Images.

What management had to say

As Box's product line matures and it reaches critical mass with recurring customer revenue, its red ink is slightly shrinking. During the company's earnings conference call, co-founder and CFO Dylan Smith discussed Box's expense discipline in conjunction with its rapidly scaling business:

In Q2, we continued to see our business model and improved efficiencies drive leverage across the business. Sales and marketing expenses in the quarter were $70.4 million, representing 41% of revenue -- an improvement from 45% in the prior year. Looking ahead, we expect to generate additional leverage in sales and marketing, as more of our revenue comes from renewals and up-sells, which are more profitable, and as we simplify our product offerings and standardize our sales motion to achieve more consistent execution globally.

Next, research and development expenses were $34.4 million, or 20% of revenue; flat with a year ago, even as we significantly enhanced our cloud content management product offerings, including the general availability of Box Relay and the continued development of Box Shield. Our general and administrative costs were $17.7 million, or 10% of revenue, compared to 12% in Q2 of last year. We expect to drive continued leverage in G&A, as we benefit from greater operational excellence and scale.

Growth-stage technology companies tend to run consistent losses in the service of customer acquisition and new product development. But the most viable organizations of this type eventually focus on converting top-line expansion into net earnings. Smith's comments illuminate Box's ambition to hold expenses in control as it amplifies its top line -- a first step toward sustained profitability.

Looking forward

In the upcoming third quarter, Box expects revenue to land between $174 million and $175 million, while diluted net loss per share is anticipated to fall in a tight range of $0.27 to $0.28.

The organization unboxed minor tweaks to its full fiscal 2020 outlook in its earnings release. Revenue is chalked in at $690 million to $692 million, versus a previous band of $688 million to $692 million. Net loss per share is anticipated to settle between $1.03 and $1.01; previously, the company had advised investors that the full-year loss would range from $1.05 to $1.03. In sum, a strong quarter has resulted in minor, though positive revisions to the company's overall fiscal-year outlook. 

More From The Motley Fool

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Box. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com