Box shares tumbled after last night’s earnings report despite the in-line losses and better-than-expected revenue. Today the stock declined by as much as 12.36% to $12.41 per share even though management also raised their full year guidance.
Box a victim of tech skepticism?
Box reported adjusted losses of 31 cents per share (as mentioned above, in line with expectations) and revenue of $78.7 million compared to the analyst estimates of $76.76 million in revenue. It’s possible the company needs to establish a track record of success before Wall Street will be convinced that it’s able to stand up to behemoths like Microsoft and Amazon Web Services in the cloud storage space.
Investors have become increasingly skeptical of new(ish) tech companies immediately following their initial public offerings, especially those that can’t quickly begin showing profits rather than losses and demonstrating outperformance in the area of user growth. Box’s problem is that its expenses relating to the setting up of another data center and moving into new headquarters are growing quickly relative to its sales growth.
Because of rising expenses, the company’s gross margin has declined steadily throughout the year, presenting a problem, according to Stifel analyst Aaron Rakers and his team. He maintains his Hold rating on Box stock although all in all, he doesn’t seem to think last night’s earnings results were too bad.
“Impressed” by Box
Rakers said in his Dec. 2 report that he continues to be “impressed by Box’s ability to add large enterprise customers. The cloud storage firm added 54,000 registered paying enterprise organization during the third quarter, marking a sequential increase of 4,000. Also management announced a new partnership with IBM, and the analyst was encouraged by their commentary on that partnership, as they reported that they have more than 100 deals through that partnership in the pipe.
Also Box said it had three contracts worth more than $500,000 in total, which is a decline from the previous quarter’s four deals and last year’s six deals worth more than that. Also it had 27 deals worth more than $100,000, another decline from the previous quarter’s 33 and last year’s 48 deals. Further, management said they had “a couple” contracts in the seven figures that were signed during the third quarter. Another positive customer-related metric is Box’s 119% retention rate, which reflects customer expansion of 23% and a “strong sub-4% churn rate,” according to Rakers.
He remains on the sidelines on Box right now because the company continues to post operating losses and burn cash (Note that these same two things don’t give most analysts pause on other companies, particularly in the area of new technologies like solar power).
Box’s gross margin in focus
He adds, however, that the company’s gross margin was at 73.4% during the quarter and believes that this metric will remain in focus for some time. In the previous quarter, the company’s gross margin was at 75.3%, while in last year’s third quarter, it was at 80.6%, showing a steady downward decline, which is usually a concern for tech companies, although for those in their early stages of build-out, like Box is, this metric could indeed be worse than it is.
The company saw negative impacts on operating expenses and continues to burn cash because it added a fourth data center and is in the process of moving to its new headquarters located in Redwood City. Box did have $174.9 million in net cash on its balance sheet at the end of the quarter, compared to $244 million at the end of the first quarter and $202.2 million at the end of the second quarter.
Box’s guidance is solid
Management guided for fourth quarter revenue to be between $81 million and $82 million, which represents a year over year increase of 29% to 31% and is ahead of the consensus estimate at $80.7 million. They expect a non-GAAP EBIT percentage of -43% to -44% for the quarter and maintained their expectation to reach breakeven free cash flow in the fourth quarter of fiscal 2017 (note that the quarter reported last night is Box’s third quarter of fiscal 2016, which puts breakeven about a year away).
Rakers notes that the company’s BoxWorks conference added incremental expenses that amounted to about 6% of total revenue or about $5 million. He let his estimates for fiscal 2017 and 2018 unchanged. The Stifel analyst believes Box’s ability to leverage its partnership with IBM might be important but expects other similar partnerships with major cloud platform providers might develop throughout calendar year 2016.