Technology is changing fast, and if businesses expect to succeed, they have little choice but to adapt to the digital transformation taking place in today's marketplace. One company hoping to capitalize on this trend is Box Inc. (NYSE:BOX), a cloud-based digital content manager. Box stores data in the cloud -- including documents, images, and videos -- allowing customers to access them from anywhere at any time. The company's platform can now be integrated with more than 1,400 different applications and programs and features a variety of security and workflow automation solutions. Box now counts 70% of the Fortune 500 as part of its 92,000-plus customer base.

When the company reported its 2019 fourth quarter, revenue rose to $163.7 million, a 20% increase year over year, and non-GAAP earnings per share (EPS) of $0.06, its first-ever quarter of non-GAAP profitability. Box's gross margin in the fourth quarter came in at 73.5%, down from last year's gross margin of 76.2%. The company guided for full-year 2020 revenue of between $700 and $704 million, the midpoint of which represents about a 15% increase year over year. 

Check out the latest earnings call transcript for Box.

The Box Inc. logo in blue lettering against a white background.

Box Inc. is projecting a slowdown in revenue growth for the year ahead. Investors need to hope the company's deep product pipeline can help grow its ecosystem. Image source: Box Inc.

The quarterly revenue represents a notable decline in the company's growth rate, with the guidance implying a further slowdown in the year to come. Combined with the decrease in margin, the results were not what the market wanted to see, and shares sold off sharply after the company reported. Let's take a closer look to see what's causing the slowdown in growth and whether this marks a buying opportunity or is a larger cause for concern.

The million-dollar deals

Early in the company's conference call, the reason for the slowdown was evident: a lack of large deals. Box only signed two deals more than $1 million in the quarter versus nine such deals in last year's fourth quarter. Founder and CEO Aaron Levie stated: "While we saw strong continued momentum in the $100,000 plus deal segment, and we were encouraged by the strength of the seven-figure deals in our pipeline ahead of Q4, we ultimately underperformed against our seven-figure deal expectations in the quarter. These more complex enterprise deals are taking longer to close and as a result, a few moved out of the quarter and into pipeline throughout this year."

Levie and CFO Dylan Smith explained that the data of most of these larger customers are in heavily regulated industries, such as banking or life sciences, where there are a number of legal and compliance issues that must be settled before such deals close. Levie believes these companies will ultimately become customers and that these deals will close throughout the coming year.

The million-dollar products

What gives Levie such confidence in the customer pipeline is the product pipeline that Box has in the works. The company continues to innovate, introducing new products designed to solve customer pain points in data sharing and storage, giving Box a more holistic ecosystem.

During the conference call, Levie discussed two new products that Box is working on, Box Relay and Box Shield. The company describes Box Relay as "a simple way to accelerate business practices." It gives users the ability to automate and structure workflows, such as adding, editing, and approving content, asking assigned personnel to complete tasks, and providing feedback.

Box Shield will provide users with content classifications and intelligent threat detection, two increasingly necessary features in a world fraught with digital risks. "We're already hearing from prospective customers," Levie said, "that Shield will be transformational to their security and risk posture in protecting critical intellectual property."

These products will be available separately from the rest of Box's platform but will also be available as a part of a bundled package at premium price points. Levie said: "I think that those products are absolutely more premium in nature than even sort of the data governance module. However, again, given the Box suites that we're looking to introduce, I think you'll see a collection of these add-on products that are sold to customers, which will obviously be more than any individual add-on product sale."

The million-dollar questions

The quarter raised a few concerns for Box shareholders. First and foremost, if larger, more complex deals did get pushed back into the upcoming year, why does this year's guidance call for a further slowdown in revenue growth?

The larger, more important question for Box shareholders is whether the products in its pipeline, such as Relay and Shield, will help it develop a holistic data management platform, one that will ultimately prove to be sticky and extremely difficult for customers to leave. Despite the lowered guidance, I believe Box's results are encouraging for investors willing to take a long-term view.

Customer churn for Box is only 4.3%, meaning nearly 96% of customers stay with the platform; net expansion is 12%, meaning existing customers from a year ago spent 12% more this year than last. Both of these numbers point to a growing and sticky ecosystem. While there might be speed bumps along the way, including lengthening sales cycles, as more and more businesses look to digitally transform their existing models and structures by turning to the cloud, Box should benefit in due course.