Box (BOX 0.11%) may not be a familiar name to many investors. This company specializes in cloud content management, and despite the support of venture capitalist Chamath Palihapitiya, who called Box his favorite AI investment, the stock has performed poorly of late. After peaking in 2018, the share price has trended steadily lower and currently sits 21% below its all-time high.

However, Box recently beat Wall Street's estimates on both the top and bottom lines, and it might be time to give this company a second glance. In this Backstage Pass video, which aired on Aug. 26, 2021, Motley Fool contributors Jon Quast and Brian Withers discuss Box's second-quarter earnings.

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Brian Withers: I remember when this company came IPO with just gangbusters, everybody was excited about this company and what it could do. I remember using it and it was a super easy, a great way to share files and keep things backed up to date and communicate, and share files among teams and whatnot. But it's not had the greatest run as of late. I'd be interested to see what you think about how the quarter went.

Jon Quast: You're absolutely right, this was a very much height stock for a little while. Part of that is Chamath Palihapitiya.

Brian Withers: There you go.

Jon Quast: Very famous investor. He was very high on Box as a stock, pitched it to the Sohn Conference, I believe it's called. This generated a lot of buzz right out of the IPO gate in 2015 and never really has found its stride. Yesterday, it reported earnings for the second quarter, again, of its fiscal 2022, just make sure we're all on the same page here. The stock was down today, but let's keep it in perspective, it's up 40% year-to-date and beating the market, so it has been doing very well this year. Let me cut to the chase. If you look at the top line and the bottom line, it was a beat on both. It beat management guidance on both the bottom and the top, and it beat analyst's expectations also on the bottom and the top, and it raised guidance on both as well. If you're looking at top line revenue, $214.5 million, that was up 12% year over year. Seated the high end of guidance by about $2 million, analysts were expecting about the same. Now, if you look at full year revenue guidance, they were forecasting $853 million on the high end, now, they're forecasting $856 million to $860 million, so raise about $3 million to $7 million.

Bottom line, again, this is non-GAAP. The reason I'm sharing non-GAAP numbers, I don't normally like to share these, but these are the numbers that management gave guidance for and these are the numbers that analysts have also put out expectations. They reported non-GAAP earnings per share of $0.21, that was up better than revenue. That was up 17%. It beat guidance by a lot, beat guidance by $0.11 per share, beat analyst expectations, and they wound up raising their full year guidance on that as well. Full year, they expect $0.79 to $0.81, up about $0.03 to $0.05. What's important about this to me. When you talk about companies that beat expectations, raise guidance, see, management is developing a track record with investors.

Over Box's time, as a public company, really haven't been all that dependable on the forecasting side. There was a while that they were forecasting a billion in annual revenue, and I believe it was by 2018, they said they were going to reach this. Then it got pushed back, "No, we're going to reach a billion annual run rate." and then it finally got suspended all entirely. They kept not hitting the guidance that they are putting out. For me, I was an early shareholder of Box. After years of underperformance and not hitting guidance, I wound up selling the stock. But what Box is starting to do and, hey, let's be tentatively hopeful, five straight quarters of beating their guidance, so it's almost as if they're reestablishing a track record here with investors. Now, I'm going to try to share my screen again here. I want to keep some things in context. I think I did it.

If we look at, Trevor was talking about this, RPO, Remaining Performance Obligations. This is basically the revenue that's under contract, but they haven't recognized yet. You look right here, this is for this quarter. As of this quarter, they have $922 million remaining performance obligations, up 27% year over year. Now, that is much better than the 12% revenue growth that they have forecasted. What this does is it really makes their revenue a little bit more predictable for them, having all that already on the books. There's two reasons why you can start to trust management's guidance a little bit more. One, they've hit five quarters in a row, and now they have all of this RPO on the books that should give them great visibility. Now if you look at this slide here, Box is pretty complicated the way that they forecast things going forward. If you look at this right here, revenue growth plus free cash flow margin. They're saying that these are a combination of the two. That can be a little bit tricky here, but you can see they have fiscal year 2024. Excuse me, one-and-a-half years out. They're saying 40% revenue plus free cash flow margin, so 14% revenue growth at the midpoint here. If you forecast this out, basically what they're envisioning over the next couple of years for their business. They foresee basically by fiscal 2024, they should be having about $1.1 billion in revenue, and that should translate to about $290 million in free cash flow. That would be very much a positive step in the right direction.

Now, one final thing though that I will mention, it's not so much about generating cash flow, it's how you use cash flow. This most recent quarter, they spent $308 million in share buybacks. Part of their guidance seems to assume that they're not retiring all those shares. It wasn't real clear, but I want to show you this chart right here from YCharts here. This is the outstanding shares from Box over the last five years. As you can see, they continue to dilute shareholder value over time. Normalized here, share count is up 26% over the last five years. Buying back shares is fine, but if they're not retiring those shares, it's not as good. You know what I'm saying. [inaudible 03:43:19] to have the shareholder value creation.

Brian Withers: They may be buying back, but they're allocating to employees more than they're buying back, so that's what you're seeing as a result there.

Jon Quast: How do I unshare my screen? Oh, there it is.

Brian Withers: [laughs] You get it, it's hard to find.

Jon Quast: Good now?

Brian Withers: Yeah.

Jon Quast: Okay.

Brian Withers: You make an interesting case for Box. It's coming around and look at the last five quarters, it's right around a 10% average year-over-year growth. It is exciting to see the RPO growing at a higher number. I don't know how well you know the products of this company does. Are they expanding their product line, because I always just thought they were the store your files in the Box, right?

Jon Quast: This was the big thesis originally with this company was that they were going to have all this data. I believe it's something like 80% of the Fortune 500 is among customer or something like that, and they have all these files on the Cloud. The idea was they were going to be able to monetize those with more products over time. It is true that they have launched new products over time. It hasn't translated into a ton of incremental revenue. For example, they have a cyber security offering for the data. They also just launched an e-signature thing that's integrated natively into Box. They do have these other products. If you look at their churn rate in the most recent quarter, it was 5%, so they lost a few customers there, but net retention is 106%. They were able to successfully upsell some existing customers to some more products. It's pretty low right now, but it is increasing. This long-held dream of this thesis may actually be starting to play out.