Here's How Box Is Making a Comeback

Cloud storage specialist Box (BOX 0.51%) has historically lagged the market, but the company has been on the upswing as it reformulates its strategy.

In this segment of "Beat and Raise" recorded on Dec. 1, Fool contributors Jon Quast and Brian Withers discuss Box's third-quarter results and how the company is shifting its focus.

Brian Withers: Well, let's move on to Box, who's competing against unfortunately, a free product called Google Docs. [laughs]

Jon Quast: Yeah. For those who don't know, Box is Cloud storage and ancillary services for companies, not really for you and me Brian, but more for their customers like McDonald's, Visa, PayPal. These are all Box customers who use Box's services to store their documents and do other things. Let's just keep it simple at that. They just reported their third quarter results yesterday after the market closed. We're coming in timely here. I think if you look at the market today, everything was down except for Apple and Box. Box up about 11 percent today because this is a stock that was almost left for dead in a lot of ways because of just years of missed expectations. They are starting to turn the tide a little bit and change the narrative and I think that it's really starting to catch on with the market.

They reported revenue of $224 million for the quarter. That's up 14 percent year-over-year. That beat management guidance of $280 million to $219 million, it also beat Wall Street's expectations. Fourteen percent might not sound a whole lot, but this is the third consecutive quarter of accelerating revenue growth for the company. That's not something that it has done in quite some time. They said that the sales team did a very good job of getting people to upgrade and getting new customers. Hat's off to them, they're making a lot of progress there in those fronts.

When it comes to earnings-per-share, management actually gave Generally Accepted Accounting Principles, GAAP, earnings-per-share guidance. They were guiding for a loss of $0.12 per share, they did miss this guidance, so they reported a loss of $0.12-excuse me. They had guided for eight to $0.09 loss. They had a $0.03 loss last year. The last widened there on the GAAP basis now on the non-GAAP basis, a guided for $0.22 earnings per share. They guided for $0.21. They beat it with $0.22, that also came in ahead of what analysts were hoping for on the non-GAAP basis. It's a miss on one front on the bottom line on the other hand, it's a beat and it's a beat of the expectations because analysts were more looking at the non-GAAP. When you go for their outlook, they raised their full-year guidance. They're in fiscal 2022 right now, this is another very odd thing. The fourth quarter of the fiscal 2022 is what's coming up. When you look at the full fiscal year, they raised that guidance to $868 million to $870 million at the midpoint, that's 13 percent year-over-year growth. It is a raise, so if you look at their beat in the third quarter and you look at what they raised guidance by it, that's pretty much it. Not much of a raise, its pretty much accounting for their beat in the third quarter.

What's there to like here with Box? Here are some highlights. Like I said, three quarters in a row of accelerating revenue growth. Based on their fourth-quarter guidance, if they hit it, it will be the fourth quarter of accelerating revenue growth. This is a trend in the right direction. Part of this is their net retention rate, 109 percent in the third quarter. This is the fourth consecutive quarter of accelerating growth in the net retention rate. This is significant because Box has released new products and services over the last two years, which they said really filled out and completed their product suite. They thought that those new products, having those in place, having filled the hole so to speak in what they were offering their customers, they thought that that was going to turn into revenue growth and so far it has. Give them a lot of credit for that. Customer growth as well. One of the things that they highlighted was they had 97 new deals with customers over $100,000. They only had 62 of those new deals in the same quarter last year. That is a big increase on the higher end of the market. That's very interesting to see as well.

Concerns, if any, my question here with Box, everything in the business looks as good as it has looked in probably five or six years as far as executing on a business plan and showing that growth, they are free cash-flow positive. All of these things look good. They added 200 million to their stock buyback plan. Here's my question, is this a market beating investment with the growth that they have? So 15 percent is what they're guiding for next quarter. Is that enough to beat the market? If you play that out over five, six years is it still going to be beating the market. What are they going to do with that cash? If the product suite is complete, where are they deploying some of that cash flow to create the next revenue stream? They are buying back shares. I guess that is good in one sense, but I do want to share one chart here. This is the total shares outstanding over the last five-years, up 24 percent. They have bought back something like 500 million in stock in recent quarters, and adding another 200 million to that announcement, but they're not retiring those shares so the share count is still going up. That's my question with Box. The businesses is solid as it's ever been, but is it enough to beat the market going forward? That's what I am not sure about.

Withers: Yeah, Jon. I haven't looked at Box in a long time and it seems like they're getting their stuff together. You mentioned the whole product stuff they have. You looked at their investor presentation. They're getting into more than just storage. They're trying to have an end-to-end the ecosystem here for their large enterprise customers. As you point out, it's been left for dead. As you think of SaaS companies in the double-digit price to sales ratio, these guys are at a five price to sales ratio. This could be, if you believe in management and they're turning things around, this could be an interesting play.

Quast: Yeah. This is a company that I actually held for somewhere really close to the IPO for about five years I held shares. The reason I finally sold in 2020 or maybe it was 2019 was because management routinely didn't live up to their guidance and that was a problem for me. This seems to be something that is actually changing. I don't know if it's maturity, I don't know if it's the pressure that they're getting from activist investors, but there does seem to be a lot more of this is what we're going to go do and they're doing it. That part of the story I think that investors need to take notice of and note that this is turning around on that front, so it's going to turn around the stock.