Box beats on Q2 FY2017, looks solid going forward

Profile picture for user gonzodaddy By Den Howlett August 31, 2016
Summary:
Box posted a good result for Q2 FY2017 with plenty of promise for the remainder of the year

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Box did well in Q2 FY2017, posting a slight beat on revenue at the record level of $95.7 million up 30% year over year. From my point of view, the significant narrowing of GAAP operating loss from $49.8 million to $37.9 million was a far more significant achievement.

Equally impressive was Q2 billings which came in at $106.6 million, a 34% growth from last year. CFO Dylan Smith noted that the company benefitted from early renewals amounting to $3 million. On deals, Smith reported 45 yielding more than $100,000, up from 31 last year and five deals north of $500,000, up from four.

While these numbers are small in the scheme of enterprise spending, it looks like Box's expanded product strategy of becoming a content platform that sits at the center of services like Office 365, Docusign, Salesforce, Google Apps, Slack and others is resonating well with its target audience. I expect we'll hear a lot more about this at BoxWorks next week.

Operational efficiency

On the operations side, Smith addressed an ongoing concern of mine, the nose bleed high cost of sales and marketing. In the last year or so, Box has embarked on a program that sees the company exercise far more discipline over costs. That is reflected in the fact that S&M costs have been drastically pared back to $53.8 million, or 56% of revenue. That's still a very high number but Smith emphasized the ongoing efficiency plans and the impact of self service, which yielded 3,000 new customers in the quarter.

While analysts will always point to the competitive nature of the marketplace from the likes of Dropbox, Microsoft and others, customer retention was 115%, including churn of 3% and expansion. That is a solid achievement. The question now is whether these results are sustainable.

Turning to the outlook, Box is forecasting a modest Q3 but for the year, is raising the outlook slightly to a range of $394-396 million with total GAAP loss in the range $162-165 million. Those latter numbers still leaves me a tad uncomfortable but I am comforted by the fact Box believes it will get to cash flow break even by the end of the year.

One nugget - Box is able to maintain the balance of per seat pricing, even where there are more volume discount deals in large deals. This from Smith:

So overall we've been really pleased to see a very stable price point in the $9 to $10 per user per month rates. That's excluding universities and ELAS and that's been a pretty consistent trends over the past several quarters and we actually saw an increase in price per seats on the core and overall in those Q1 and Q2 of this year. So, while there are some puts and takes and we offer volume discounting for larger deals, we've been really pleased with our ability to hold pricing and to offset the downward pressure from volume discounting with our newer products like governance and zones which have been introduced only recently.

The IBM thing

Box got into bed with IBM earlier, which helps with credibility in larger deals. That's now starting to pay off although the number of deals is relatively small. Aaron Levie CEO Box is bullish on this element but I would caution. IBM needs partners in newer technologies as its much hated Notes business continues to ebb away. But IBM partners with many companies, so keeping the focus and attention of the teams in those deals is always a challenge.

Smith nodded in that direction:

...we would expect to see a more backend loaded billings than we’ve seen in the past due to our continued success moving up market, selling to larger enterprises, which tend to buy later in the year, as well as our partnership with IBM.

My guess is that analysts will be cautious about taking too much notice of these statements but that could easily change if the mood at BoxWorks is upbeat among customers and if the anticipated product announcements are sufficiently exciting. To that broader point, Levie added:

I think for just a little bit of context, what we're seeing is, customers that have a whole mix of solutions in their environment, they have enterprise constant management technology from one set of vendors, they have file sync or sharing technology from another set of vendors, they have traditional storage technology. Only Box can actually allow you to replace all of those solutions with one platform. Even if you buy it from Microsoft you're really going to be buying two or three different products to be able to let you manage your content in a modern way.

In short, Box believes it is creating the one stop content management shop that even the mighty Microsoft has to acknowledge as attractive. Ad as if to cap that off, Levie said:

So, we're seeing the strengths of products like Governance, Zones, KeySafe. Our overall platform really bolster the value of the platform and with integrations like Microsoft and with Office 365, our customer can successfully deploy both of our products together and get value out of both of those. So that's why we’re continuing to see an increase in performance in our win rates continuing to go up and that’s what we would expect to see in the future.

Fighting words but then the results do speak for themselves at this point.

International

It will be interesting to see how Box concept of Zones, a take on ensuring data compliance across geographic regions and now generally available, impacts the international business. Again, on the call, Levie talked to the fruits of two plus year investments made on that topic:

We're seeing demand pick up in the key markets that we've launched in. Again kind of sort of London, Germany, kind of key regions of Europe and the first wave and then now with Australia and Canada coming on board, Japan which also went out in the first wave. So, I think you’re going to see a pretty strong pick up of big deals happening internationally especially with the IBM partnership where we have channel partners that can kind of help us enter those markets where we may be don't have feet on the ground, where we are building up a bigger presence.

See, there's IBM again. For myself, I'd like to see more talk about how Shuttle is helping customer transition from legacy systems, which systems see the most success and how this impacts deals.

My take

Box's focus on operational discipline while also expanding the platform footprint is commendable. In that sense Box Q2 FY2017 was a win and while the full year outlook is marginally up, I like that the company recognizes the importance of its channel relationships.

As Levie says, the company is at something of a juncture but the test of how well the product set and Levie's enthusiasm resonate can only be judged by the reception he gets next week at BoxWorks.