Box tightens its grip on the suite spot of content teamwork in FY23 Q2 results

Cloud content platform Box reported earnings at the half-year mark of its current fiscal year after markets closed last night. The Q2 results show revenue and earnings at the high end of guidance and matched analyst predictions, despite FX headwinds from the strengthening US dollar, which has muted the impact of international revenue growth. Those headwinds meant that Box is holding its guidance unchanged for the full year at just below the $1 billion revenue mark, while slightly raising projected net income per share on a non-GAAP basis (the GAAP guidance remains just below breakeven).

The highlight of the results was a further climb in Box's net retention rate (NRR), a key SaaS measure of the increase in revenues from existing customers, less any impact from churn. NRR climbed to 112%, compared to 106% a year ago and up from 111% in Q1. Reduced churn played a part, with the annualized full churn rate falling to a very low 3%, from 5% in the prior year, and expected to remain close to this level for the rest of the year. But the main contribution comes from increased purchasing of multi-product suites, including the all-you-can-eat Enterprise Plus license. That contribution will continue to expand, according to CFO Dylan Smith, speaking to Wall Street analysts:

While we've been really pleased the momentum that we're seeing in suites, we're still at about 40% of our revenue attributable to suite customers, so quite a bit of room to run. In the coming years, we'd expect that to be the significant majority of our revenue.

I'd also note that even once customers are on suites, we tend to see a pretty significant expansion opportunity, in fact, of the net retention rate, driven by both the strongest relative expansion and the strongest relative retention is higher than any other category of customers. So we do have both room to improve [revenue] and overall average contract values, by converting more and more of our customers into suites, and then even once on suites, quite a bit of headroom there too.

Helping customers reduce overheads

That 40% of revenue attributable to suites is a huge rise from the 28% figure reported at the same point in the last fiscal year. Aaron Levie, CEO of Box, reflects that suites have changed sales conversations from simply offering secure storage and collaboration to helping customers reduce overheads by retiring disparate technology products. He explains:

Today, with e-signature, with workflow, with advanced data security and compliance, we become a much more strategic and broader vendor for our customers, in some cases being able to replace dozens of different technologies inside of their organization ...

If you just add up the technology stack that a customer would have to have, if they didn't use Box, you'd have to have an e-signature vendor, a workflow vendor, a few different collaboration tools, oftentimes multiple different content management systems. That could be three or five times more dollars spent on that technology, than the licences that would go into Box.

Earlier in the call, Levie cited two examples of customers that had realized value in this way. These were:

• A leading homebuilder who has completely standardized on Box for cloud content management, eliminating an estimated $1 million in process costs by utilizing Box Workflow across on-site teams, vendors and sales reps.

• A Fortune 500 financial services group [who] purchased a six-year, seven-figure Enterprise Plus ELA in Q2, as Box has become a more strategic and integral part of its business. With Box, this customer anticipates saving more than $4 million in annual storage costs, including hardware, software and maintenance, as they eliminate on-premises servers and disparate systems.

Larger deal sizes

All of this continues to drive larger deal sizes. There were 86 new deals in the quarter valued at over $100,000 annual revenue, up from 60 in the prior quarter, and from 74 in the year ago period. 62 of these $100,000+ deals were on multi-product suites, up from 44 suite deals in the prior quarter and 54 suite deals a year ago in this segment. Enterprise Plus accounted for more than 80% of those suite deals. Other key figures in the results include:

• Revenue for Q2 was $246.0 million, up 15% from the same quarter a year ago, despite a 3% negative FX impact.
• Remaining performance obligations (RPO) as of July 31, 2022, were $1.05 billion, up 14% and despite a 7% FX impact, while billings for Q2 were $235.0 million, up 10% and despite a 6% FX hit.
• GAAP operating income in Q2 was $3.1 million, or 1.3% of revenue, compared to a GAAP operating loss of $6.1 million, or 2.8% of revenue, in the same quarter of the previous financial year. The non-GAAP equivalent was $53.3 million, or 21.7% of revenue, compared to a non-GAAP operating income of $44.2 million, or 20.6% of revenue, in the year-ago quarter.
• Free cash flow in Q2 was $18.0 million and totaled $108.8 million for the first half of fiscal year 2023. Last financial year, free cash flow was $29.8 million in Q2 and the first half total was $105.7 million.
• Cash, cash equivalents, restricted cash and short term investments at the end of the quarter totaled $394 million, even after spending $118 million on a planned share buyback.

First GAAP quarter profit

The GAAP operating profit recorded in Q2 is a first for the company, a point celebrated by CFO Smith:

Once again, we've demonstrated the leverage in our business and our commitment to delivering higher profitability, with a 21% increase in Q2 operating income to 53 million. Our 21.7% operating margin was up 110 basis points from the 20.6% we recorded a year ago. We're also proud to have achieved our first quarter of positive GAAP net income of 1 million, up from negative 9 million a year ago.

The healthy cash balance leaves headroom for further acquisitions, which Levie doesn't rule out but says would be "incredibly selective" if they took place. He cites Box Sign, the e-signature offering launched last year following an earlier acquisition, as a reference template for the future. He elaborates:

Box Sign, for us, is the case study acquisition for how Box wants to be able to drive and integrate M&A into the company — looking at our roadmap, having a sense of customer demand in a market, ie e-signature in this case, and then being able to rapidly identify a technology that we can incorporate into Box that accelerates our entry into that space. Box Sign was a fantastic example of that.

Our appetite remains, I think, fairly strong for repeating that success. Our bias is still, you know, generally to do organic development of many of these new capabilities. However, when we do identify a market trend that we need to accelerate entry into, we will be very surgical, and do again, highly disciplined, measured M&A, where appropriate.

My take

Playing a long game seems to be working out well for Box.