Box Q3 earnings and why it pays to solve hard problems over the long run

Enterprise content management vendor Box turned in a pleasing set of Q3 results yesterday, showing accelerating growth driven in large part by increased commitments from existing customers.

Box's Q3 results are a vindication for the company's leadership, which successfully fought off a shareholder challenge by activist investor Starboard Value LP during the quarter. Its current performance owes much to decisions taken almost two years ago, when Box refocused its sales teams and emphasized upsells to add-on products such as its Box Shield security and governance offering, which added AI-powered anti-malware scanning during the quarter.

Those decisions are now translating into improved revenues, with almost three-quarters of new business in Q3 coming from an expansion in bookings from existing customers, according to CFO Dylan Smith. There were 97 deals closed in the quarter worth more than $100k in new annual revenue, which is a 56% increase on a year ago, and 61 of these were multi-product suite deals, almost double the number in the same quarter a year prior. These metrics mean that almost a third of Box's revenue now comes from customers who have purchased multi-product suites, and the overall net retention rate in Q3 was 109%, up from 103% a year ago and from 106% in Q2.

Accelerating revenue growth

Q3 revenue came to $224.0 million, up 14% over the same quarter a year ago. This was the third consecutive quarter of accelerating revenue growth, with billings and Remaining Performance Obligations (RPO) also rising fast, which bodes well for future quarters. GAAP operating loss rose to $11.1 million or 5% of revenue in Q3, compared to 1% a year ago, while on a non-GAAP basis, operating income improved to $46.4 million, or 21% of revenue, up from 18% a year ago. Free cash flow improved to positive $31.2 million.

Box lifted its revenue guidance for the full year by another $10 million at the top end, to a range of $868-870 million. If achieved, this will improve on last year's growth, at 13% compared to 11%. Non-GAAP operating margin guidance is also slightly up, to approximately 20%.

Box Sign, the latest addition to the company's portfolio, has already produced some significant wins from incumbent signature solutions, with what CEO Aaron Levie called "a premier commercial real estate finance company" signing a six-figure deal in Q3, while a service provider to the US Government replaced an incumbent with Box Sign for its partner and contractor onboarding process. Integration to Salesforce also features strongly in both these use cases, with the real estate customer using Box to create its own deal management portal with deep integrations to both Salesforce and MuleSoft. Another win for Box Sign is the General Services Administration, which will use it to digitize formerly paper-based manual workflows.

My take

A couple of days ago, Levie posted several tweets with advice for entrepreneurs. Given this was the quiet period in the run-up to the earnings release, he wasn't commenting on Box specifically. But one tweet in particular I think sums up Box's story:

Enterprise content management in the digital era has been an especially hard problem to solve, and the more that Box has sought to master the space, the more opportunity it has found to differentiate its offering. The capabilities built into Box Shield, for example, provide much-needed protections at a time when sensitive content is increasingly being passed around in digital workflows, often crossing enterprise boundaries or accessed remotely from home and mobile computers. Meanwhile, adding Box Sign alongside Box's existing workflow automation capabilities meets the growing demand to implement those digital workflows as simply and effectively as possible. Box has also ensured that it plays well in a best-of-breed landscape, integrating tightly to key applications such as Slack and Salesforce, Microsoft Teams, and Zoom.

Playing a long game doesn't always sit well with the short-term sightlines of Wall Street, but the stock market is happy enough when those strategies are vindicated. Levie and his colleagues didn't choose the easy path, but the odds now seem to be coming under their control.