Box reports strong Q2 and raises guidance as critical shareholder meeting looms

Derek du Preez Profile picture for user ddpreez August 26, 2021
Box is facing increased pressure from activist investor Starboard Value, which has said the firm is underperforming and is making poor executive decisions.

Aaron Levie Box CEO in screengrab from Zoom call 2020-06
(Screengrab from Zoom call)

Box has beat analyst expectations, reported a strong set of Q2 results and raised its full-year guidance, as it faces an imminent showdown with activist investor Starboard Value at the upcoming shareholder meeting on 9th September. 

The results may help to sway stockholders decision-making, as a vote is held on the company's future directors. Earlier this year Starboard, which owns 8.4% of Box, nominated four directors to Box's 10 person board - saying that the company had failed to aggressively take advantage of distributed work since the COVID-19 pandemic hit, that it is underperforming and also making poor executive decisions. 

Box is urging stockholders to vote ‘FOR ALL' on the Blue proxy card, which would see Box's director nominees remain in place, including CEO Aaron Levie, Peter Leav and Dana Evan. The company is being backed by independent proxy advisory firm, ISS, which having conducted a review of Box is also making the same recommendation. 

Commenting on the experience and engagement of the current Box Board, ISS stated:

The company collaborated with the dissident in 2020, and has given the two board members directly chosen by the dissident prominent roles on the board. Between the two directors placed on the board last year by the dissident, and the three candidates it is nominating this year, if successful, the dissident would have a direct tie to five out of 10 directors (or 11, if CEO Levie were added back). At this stage, despite the room for improvement, in light of the progress made over the past several quarters since the settlement, such a significant presence by the dissident at the board level does not appear necessary.

The company reported a significant improvement in operating margin and Revenue Growth + FCF in FY21, and recently raised its FY22 guidance to incorporate an acceleration in revenue and better-than-expected improvements in operating margin and Revenue Growth + FCF. These improvements have driven significant share price gains since the settlement, driving meaningful TSR outperformance vs. the median of the peer set, as well [as] Dropbox and Open Text.

Making gains

Given the storm that is brewing and the imminent shareholder meeting, CEO Aaron Levie used this week's earnings call to highlight Box's strengthening position in the market - stating that the company has the right product mix, is selling more ‘Suite' packages to customers, and is well placed to integrate across the broader enterprise landscape. 

This week's Q2 numbers include: 

  • Revenue of $214.5 million, up 12% year over year

  • Remaining performance obligations of $922.4 million, up 27% year over year

  • FY22 revenue guidance has been raised from $856 million to $860 million

CEO Levie said: 

From our business performance and building momentum, it's clear that enterprises are increasingly making strategic long-term decisions on how to support a remote workforce and digital processes while still maintaining a high level of security and compliance policies. As a result, more customers are turning to the Box content cloud to deliver a secure content management and collaboration built for this new way of working.

He also pointed to the size of the deals Box secured during Q2, pointing to the growing popularity of the Suite of products. Levie said: 

Our strong momentum is best illustrated by our customer deal metrics in the second quarter. Our net retention rate was 106% up from 103% in the prior quarter. We had 74 new deals over $100,000 up 16% year-over-year and we had a 73% attach rate of suite deals over $100,000 in the quarter up from 49% in the prior quarter and up from 31% in Q2 fiscal '21. 

We view these strong customer metrics as evidence that we are executing on the right product, one that is well aligned with the three major changes happening around the future of work in the enterprise.

Important trends

Levie said the Box is well positioned to take advantage of a number of market trends over the coming months. Firstly, he pointed to hybrid work being a "necessity". Secondly, the company is seeing evidence of increased digital transformation investments from buyers. And thirdly, cyber security and privacy threats are increasing at a growing rate. Levie said: 

These trends have major implications for how companies work with their content. Content is at the heart of how leading life sciences firms discover, develop and deliver new drugs and treatments, how banks collaborate with and onboard new clients or close deals and how consumer product organizations ideate on manufacturer and scale new products, whether it's a CAD design, a sales presentation, marketing asset, research study, legal contract or financial data, content is our customer's business.

As part of Box's ongoing product development, Levie is aggressively pursuing wide-ranging integration with other enterprise platforms across the SaaS landscape. He referenced partners such as Slack, Microsoft and ServiceNow, claiming that interoperability is key to Box deployment at scale. The enterprise nature of these partnerships also goes some way to counter the claims made by Starboard that Box isn't doing enough to win over big business. Levie said: 

We also announced new and deepened integrations with Box for Cisco Webex to make it easier for customers to work securely and effectively in the cloud and we're just getting started. To address our $50 billion plus market opportunity, we're building the end to end platform for managing the life cycle of content and continue to be regarded by customers and analysts as the leading independent vendor for cloud content management.

Today enterprises have to purchase and integrate a mix of solutions from disparate vendors to solve the entire content management life cycle. This leads to broken processes for users, security risks due to the gaps between tools, fragmented data and increased costs for enterprise customers. 

Our vision for the Box content cloud is to integrate and power the complete content lifecycle from the moment content is created through the entire content workflow. By leveraging our product leadership and content management, our content cloud will continue to extend into key elements of this lifecycle, including e-signature, content publishing, deeper content workflows, new collaboration experiences, analytics, data privacy and advanced security.

Finally, Levie noted that Box's sales strategy is focused on a ‘land and expand' approach, with the aim of delivering the full Box platform to customers - which in turn will lead to higher recurring revenue per customer. Levie said: 

To accelerate growth, over the past couple of years, we've been actively implementing a number of strategic go-to-market initiatives, including optimizing pricing and packaging, improving sales segmentation and territory planning, driving efficient marketing programs and pipeline generation, increasing sales enablement and doubling down our focus on key verticals, such as life sciences and financial services in the federal government and the success of our go-to-market initiatives and the growing demand for our more advanced capabilities to have our strong suites adoption in the second quarter.

This is why we've been working aggressively to sell the full Box platform through our suites offering to bring all the Box has to offer to our customers. We know that when a customer adopts our multi-product offerings, we see greater total account value, higher net retention, higher gross margin and a more efficient sales process.

My take

An interesting period for Box, as Levie & Co seek to not only calm market concerns, but also push back on Starboard's aggressive approach. It's clear from Levie's comments to investors that the company is laser focused on product development and ensuring that when it sells in to a customer, that the customer has their eyes on all of what Box has to offer. Ultimately, the market trends are certainly in Box's favour, so the opportunity is there for the taking. Hopefully, whatever the outcome of the shareholder meeting on 9th September, the company can move forward with its plans to take advantage of that. Distractions at this time are wholly unhelpful. 

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