Is Box Inc. (NYSE:BOX) a commoditized data storage service for enterprises or a differentiated digital content management platform? Given that Box's stock is down about 32% over the trailing 12 months and is now below its IPO price from over four years ago, which side the company falls on is something potential investors need to determine before making an investment.
Box's recent first-quarter results didn't help clarify the situation for shareholders, as Box's top- and bottom-line growth exceeded expectations, but management slashed full fiscal year guidance. In Q1, Box's revenue rose to $163 million, a 16% year-over-year increase, and non-GAAP earnings per share improved to a loss of $0.03, after a loss of $0.07 in last year's first quarter. Free cash flow grew to $13.4 million, a whopping 116% year-over-year increase. Despite the solid results, shares were punished after the quarter, probably because of the drop in guidance.
Let's take a closer look at what's causing these anticipated problems and what Box management is doing to rectify the situation.
Is something fundamentally amiss?
While the quarter's numbers were all good, what spooked investors was the lowered guidance. Box now expects 2020 full-year revenue to come in between $688 million and $692 million, down from its previous guidance of between $700 million and $704 million. Far more disturbing, however, is that management removed its target date of 2022 to achieve $1 billion in annual revenue. Any company can miss one quarter's number or analyst target. Far more disturbing is a company that changes its long-held guidance, a sure sign that something is fundamentally amiss.
What caused the drop in guidance after the first quarter's solid results? Co-founder and CFO Dylan Smith blamed a familiar culprit for investors: a longer sales cycle resulting from larger deals and more products.
"As we've seen and communicated," Smith said in the company's conference call, "our larger enterprise deals are more complex with longer sales cycles."
A commoditized product or a data management ecosystem?
It's true that Box is introducing more products to its core data storage and integration solutions. Co-founder and CEO Aaron Levie talked about how the company was attempting to transform itself into a more holistic, cloud-based data content management ecosystem:
Enterprises need a cloud content management platform that powers business process automation, secure collaboration across best-of-breed apps, and easy custom development for creating new digital experiences and replacing legacy enterprise content management systems. To address this demand, we've been evolving our product to extend our cloud content management capabilities. Simultaneously, we've been advancing our go-to-market strategy to focus more on customer-oriented solution selling. Together, these two initiatives are aimed at transitioning our customers to leveraging Box as a complete platform for secured content management workflow and collaboration.
Later in the conference call, Levie highlighted some of these new products and how they were being incorporated into client workflows. He mentioned that an unidentified large bank was using Box Platform (Box's cloud-based sharing platform for apps) to share crucial data with third parties such as regulators and auditors. Box Governance is the company's solution for sensitive data management for companies operating in highly regulated environments, such as the financial or healthcare industries. Box Shield is the company's answer to digital security, verifying users and devices.
A new sales solution?
To help with this longer sales cycle, Box is turning to the bundle. By bundling its services, creating one line item for suites of solutions, Levie hopes to create "a more streamlined sales process and higher average contract value." These bundles will create value for Box's customers as well, Levie maintained, because they will be cheaper on a product-by-product basis. They will still be available separately, Levie said, because there are some cases where it's clear that customers may only need single add-on products.
Thinking outside the Box
These products are Box's attempts to expand the revenue stream flowing in from its existing clients through a "land-and-expand" sales strategy. Now that it provides services, to some extent or another, to 70% of the Fortune 500, it wants to increase the average contract value of these customers. The new services also have the effect of making Box's products stickier, making it less likely that customers will leave the Box platform in the future.
Box shares are also currently cheap, especially for a software-as-a-service (SaaS) stock. Based on its updated guidance for the full fiscal year, Box sells at a price-to-sales ratio of about 3.7, while other higher growth SaaS names sell for closer to 20 times sales. With the company's strong free cash flow growth and a gross margin over 70%, there is definite potential for shares to pop if the company stops lowering its guidance and shows there is high demand for these new products. Until that time, I'll be watching from the sidelines.