Box: A winning formula for a shaky market


justin sullivan

Given the renewed volatility in rates and the ensuing risk aversion attitude in the markets this week, it’s not a bad idea to start pegging again for safety. In the world of growth tech stocks, few stocks are more stable and reliable as Box (NYSE: BOX), the enterprise file storage and collaboration company that was one of the first consumer SaaS names.

As a deep value stock, for starters, Box’s performance this year relative to other SaaS peers was quite admirable. Year-to-date, Box shares have actually gained around 4%, while many other SaaS competitors have lost 40% or more in value. Box may not be the most exciting stock in the market as it no longer develops like a lightning rod, but its consistent margin gains may be the biggest draw in today’s market. In my view, this outperformance is set to continue.

Box shares, however, have been down since the release of second-quarter results – despite maintaining its full-year guidance despite currency headwinds and even increasing its EPS outlook. This is the right time, in my opinion, for investors to continue to nibble on this stock.

BOX data by YCharts

I’m staying bullish on Box, especially in times of volatility. In particular, I think Box’s steady march toward profitability is admirable.

We can take a look at Box’s long-term plan in the chart below. Box’s primary growth/profitability goal is revenue growth plus FCF margin, which has grown steadily every year (unlike most other maturing tech companies, Box actually has accelerated the revenue growth of this formula as well as enriched FCF margins). In FY22, the company achieved 33% + margin growth in FCF. This figure is expected to reach 37% this year and reach 44% in two years (fiscal year 25).

Long term goals

Long-term box goals (Q2 box results box)

Most of these gains are expected to come from increased gross margin (thanks to lower infrastructure costs as Box’s revenue grows), as well as operational efficiencies in sales and marketing – one of which much of it has already been achieved in FY23.

Here’s a comprehensive look at what I see as the key long-term bullish drivers for Box:

  • Expanding Box’s Product Portfolio Led to $74 Billion Market – Despite the competition, Box cites a whopping $74 billion market for storage, content collaboration, and data security. That’s a big enough space for multiple incumbents, and it also suggests that Box is currently only about 2% penetrated in that overall market. Recent additions to the portfolio like Box Sign have greatly expanded Box’s potential.
  • Led by Founder – Although many Silicon Valley startups have passed from their founders to professional CEOs, Box remains led by its co-founders Aaron Levie and Dylan Smith as CEO and CFO, respectively.
  • Business orientation – Of all its well-known competitors, Box is the only enterprise-focused company. The company touts its security features as well as advanced features like Box Skills as key distinguishers from Dropbox.
  • Growth and profitability in one package – Box touts “growth + FCF margin” as a key metric for balancing revenue and profitability; and this has steadily increased to 33% in FY22. Box hopes to reach 44% by FY25.
  • Possibility of acquisition – Takeover speculation began brewing for Box in 2021, and Dropbox chatter also picked up in 2022. While a deal isn’t imminent, the company’s product fits neatly into one of portfolios of other software giants (Salesforce (CRM) or Oracle (ORCL)) and its free cash flow also makes it an accretive target.

From a valuation perspective, Box remains a real bargain. At the current share price near $27, Box trades at a market capitalization of $3.94 billion. After deducting $393.5 million in cash and $368.4 million in debt from Box’s most recent balance sheet, the company’s bottom line the enterprise value is $3.92 billion.

For the current fiscal year, Box maintained its revenue guidance between $992 million and $996 million, representing 14% year-over-year growth. This is despite currency headwinds and macro-related selling pressure, which is causing many other SaaS stocks to revise their forecasts for the year downwards. Additionally, Box even raised its pro forma EPS forecast slightly to $1.13-$1.16, up from a previous view of $1.11-$1.15.

Box Outlook for FY23

Box Outlook for FY23 (Box Q2 Earnings Record)

This puts Box’s valuation multiples at:

  • 3.9x EV/FY23 turnover
  • 23.7x P/E front

Given the expectation of steady teen revenue growth and multiple levers for expanding margins, I’d say this is still a great entry point for Box. Stay here long and use all the dips to buy.

Download Q2

Now let’s take a closer look at Box’s latest Q2 results. The second quarter revenue summary is shown below:

Results of Box T2

Q2 sidebar results (Q2 sidebar win deck)

Box grew second-quarter revenue at a 15% year-on-year pace to $246.0 million, in line with Wall Street expectations for the quarter. Now, on an as-reported basis, it looks like Box’s revenue has slowed markedly from an 18% year-over-year growth in the first quarter. However, the company noted that FX headwinds accounted for three points of growth this quarter; at constant exchange rates, growth would have been 18% y/y.

Ditto here for invoicing. Billings for the quarter were $235.0 million, up 10% year over year – but there were six points headwind FX here. Importantly, despite these severe revenue and billing headwinds, the company still expects 14% year-over-year growth to top the 13% year-over-year growth rate of the ‘last year.

Strong customer growth was another highlight of the quarter. Net dollar retention rates reached 112% in the quarter, significantly higher than 106% in the prior year quarter. Box Suites makes up a larger portion of the company’s New Wins, encompassing a range of Box products. Attachment rate for Box suites in new offers is now 72%, and the number of suite offers above $100,000 in the second quarter is 62, up 15% year-on-year.

Remember that Box is no longer just a simple file storage service, but also a content management, electronic signature and security solution. Here are some additional anecdotal comments from CEO Aaron Levie on the company’s traction across multiple product lines, taken from his prepared remarks during the second quarter earnings call:

In Q2, we rolled out additional functionality for Box Relay, Box Sign, and API enhancements. These features are included in basic Box subscriptions and bundles, allowing customers to instantly benefit from the new value of the Box platform and providing additional benefits as customers upgrade to higher-tier plans. for more features.

We are very pleased with the momentum we are seeing in customer adoption and usage of Box Sign. Q2 customers include; a property development and management company that bought Box in a six-figure deal as a key technology in its content management strategy. As part of this strategy, the company purchased Box Sign Premier Services to support signing and collaboration around new development properties. […]

As we look to the second half of fiscal year 2023, we will continue to rapidly expand our platform by doubling down on security and compliance with key advancements in Box Shield and governance, workflow and collaboration with Box Sign, Relay, Notes and the roll-out of Box Canvas, and our open platform and partner integrations.

Most importantly, we will continue to evolve our cloud infrastructure so that we can continue to help customers around the world with their most complex use cases. At BoxWorks in October, we’ll be making a number of major product update announcements and sharing more of our vision for the direction of Box Content Cloud. »

Box’s increased revenue and multi-product customers are helping the company increase margins. Pro forma gross margins jumped 170 basis points to 76.2% in the quarter, only partially offset by a one point increase in R&D opex:

Box Margin Trends

Box margin trends (Q2 box results deck)

It should also be noted that Box is one of the few software companies to actually to improve operating margins in this inflationary and challenging foreign exchange environment. Box increased pro forma operating margins in the quarter by 110 basis points to 21.7%, while pro forma operating profit increased 21% year over year to 53, $3 million.

Fund operating margins

Box Operating Margins (Box Q2 Results Box)

Key points to remember

When market sentiment is this nervous, a company like Box that continues to grow steadily while increasing its margins is a great asset to hold on to. Stay here long and use any dips as buying opportunities.


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