Box focuses on pipeline as Q2 earnings stay on trend

The overall message was 'steady as she goes' when content collaboration vendor Box reported its Q2 results after market close yesterday. Whereas Q1 had had to contend with the tumult of COVID-19 lockdowns, Q2 was more a case of emerging from the storm pretty much on course. Revenue growth continues, while the company's strategy to improve operating margins remains on track.

But there may be a lot more going on behind the scenes than meets the eye — just as there was more going on in the Levie household than yesterday's call with Wall St analysts, as this tweet from Box CEO Aaron Levie revealed:

A big factor in the improving margins was due to a reduction in total operating expenses for the quarter at 58% of revenue, significantly down from 71% in the same quarter a year ago. Free cash flow also continues to improve as a result. While some of the reduced expense comes from spending less on travel and marketing due to COVID-19 restrictions, it also reflects solid progress on the cost and productivity initiatives introduced at the end of the last financial year, says CFO Dylan Smith.

The story behind the numbers

Meanwhile, looking past the headline numbers from the earnings report, there was a hint that, while the volume of large deals fell slightly during the quarter, their average value is growing and there may be more to come later in the year:

• Q2 revenue came in at $192.3 million, up 11% from the same quarter a year ago.
• 64 deals worth more than $100,000 were closed in the quarter, slightly down from 68 a year ago. Three deals were over $500,000 (same as a year ago) but there were no deals over $1 million (versus two a year ago). However the average value of those six-figure deals was up 10% year-over-year and the pipeline for larger deals remains strong, said Smith.
• Net retention rate was 106%, essentially flat. slightly up from a year ago but a little down from Q1, while churn remained at 5%, both on an annualized basis.
• GAAP operating loss was $7.5 million, or 4% of revenue, improved from $36.3 million, or 21% of revenue, a year ago. The non-GAAP equivalent consolidated its prior move into positive territory at $30.1 million, or 16% of revenue, up from $0.5 million a year ago.

The company slightly lifted guidance for FY21 total revenue to just shy of $770 million, keeping projected growth for the year a touch above 10%. There was another 1% lift in guidance for non-GAAP operating margin, which is now forecast to come in at 12-13%.

Product highlights in the quarter included the launch of new workflow templates for the Box Relay process automation tool and general availability of a new look-and-feel and other updates. Q2 saw several notable updates to industry partnerships, with deeper integration to products from Google, Adobe, Cisco Webex and Atlassian. Box is already putting the integration with Atlassian to good use internally.

Automating content workflows

When it came to discussing customer highlights, equal emphasis was put on expansions with existing customers, with Levie citing several cases where organizations were using Box to replace fragmented legacy content landscapes in search of greater efficiency and security. The list of named wins and expansions included Hitachi High-Tech, Lord, Abbett & Co, San Diego Zoo Global, Sanki Engineering Co, and Stanley Black & Decker.

The Relay workflow automation product was a particular focus during the call, with Levie citing longstanding customers such as executive search agency Heidrick & Struggles and State Street bank making use of Relay to automate processes as they adjust to remote working. Having workflow automation built into the Box environment is an attractive option, says Levie:

Our initial thesis that we had going back a couple years now, why we got into the workflow space, is playing out. The core idea and premise was, you have so many workflows right now that are happening inside of e-mail, they're happening in paper-based processes, they're happening in legacy document management systems. There really hasn't been a simple, highly usable, scalable solution for being able to automate those types of processes — things like document review and approval, digital asset review and approval, being able to onboard customers or partners in a very streamlined way ...

Our whole strategy really revolves around this idea that companies are going to want to have one platform that brings together their content management, their collaboration, their workflows, in a secure way, integrated with all their apps. And we're now seeing more and more we've invested in begin to play out, as customers zoom out from just the initial remote workforce push and focus more on the long-term business process optimization and workflow automation, that then you're able to drive in their enterprises.

My take

I'm going to stick my neck out here and speculate that Box has encountered a slight case of large-scale deal timelines extending as a result of those couple of months when a lot of plans got put on hold because of COVID-19. On the other hand, the value of those deals does seem to be trending higher, as Box continues to expand adoption within existing customers, both in terms of seats and functionality. Across both existing and new customers, I imagine there's also a heightened awareness of the need to digitize all kinds of workflows for a distributed workforce. Put all that together, and there certainly may be grounds for expecting both the volume and value of enterprise deals to grow in future quarters.

As with all the leading digital teamwork players, Box's fortunes are closely tied to the progress of its customers and prospects through the maturity curve of digital teamwork. Content workflows in particular, because they mostly have their roots in paper-based processes, benefit significantly from going digital. Freshly imposed distributed teamwork is now forcing digitalization of many of those workflows, opening up a rich seam of prospects for Box to mine.