April 21, 2017 - 2:16pm EST by
2017 2018
Price: 16.84 EPS -.560 -.464
Shares Out. (in M): 143 P/E -30.07 -36.29
Market Cap (in $M): 2,406 P/FCF -118 -162
Net Debt (in $M): -192 EBIT -71 -59
TEV (in $M): 2,213 TEV/EBIT -149 -109
Borrow Cost: Available 0-15% cost

Sign up for free guest access to view investment idea with a 45 days delay.

  • Dropbox
  • SaaS
  • Cloud
  • Slowing growth


1 Executive Summary


Company Overview

Box provides a cloud content management platform that enables organizations of all sizes to securely manage cloud content while allowing easy, secure access and sharing of this content from anywhere, on any device. The company trades at $17 a share, or 5.6x LTM revenue / 5.8x LTM subscription revenue today, with a user base of 52MM (84% free / 16% fee paying). Total revenue growth for the most recent quarter was 29.4%, with growth of 26.4% guided to for next qtr. On 2018 revenue Box trades at 4.5x and 3.8x 2019.


Investment Thesis

Box is currently shifting from a FSS (File Sync & Share) company to an ECM (Enterprise Content Management) by migrating its products from the traditional cloud storage offering due to FSS pricing pressure and new entrants, to ECM products such as a new cloud based e-discovery product (Box Governance), a data migration product (Shuttle) and a work flow product (Relay).


Box’s revenue growth is likely to slow (beyond estimates) as it enters this new market due to existing entrenched ECM competition and ECM specific requirements that make a pure cloud based entrant difficult. This slowing in growth is apparent in various billings metrics the report explores and suggests an acceleration of the revenue growth slowdown despite Box’s best intentions.


As such Box’s revenue / billings will slow and will re-rate closer at the low end of the SaaS Cloud peers, or $10 a share, where Box traded in February 2016 as concerns grew on BOX’s growth slowing pressured by Open Text and Dropbox, and in July 2016 where Box again traded to $10 on billings deceleration. At $10, Box is valued at 3x LTM Revenue (a turn below recent M&A deals with a similar growth profile BUT just above Open Text's acquisition of EMC/Dell's ECM product at 2.7x LTM revenue ), or 2.5x 2018 projected revenue and 2x projected 2019 revenue. This is compared to the current price of $17 a share


Given the numerous headwinds Box faces, from a risk reward basis, upside / downside is skewed in the favor of a short sell with only 10% of short interest and a comparable case study of Microsoft attempting (and failing) a similar product transition in 2010 with its Sharepoint product.   


Situation Overview

Box is a company in transition. The company started in 2005 an early entrant in the CFSS space (Consumer File Sync & Share) with its core Box product allowing consumers to store files in the cloud, access / modify them from any location. Box opened its product offering to the EFSS space (Enterprise File Sync & Share, or Box for corporations).  The FSS space has been commoditized and as such Box is focusing on ECM (Enterprise Content Management) with new product launches such as Relay (a work flow product, currently in Beta, late Fall 2017 release), Box Governance (a eDiscovery product, Summer 2015 release), Shuttle (a data migration product, Fall 2016 release), Zones (an in-region Box product for local cloud access, Spring 2016 launch) and KeySafe (encryption key management, early 2016 launch).


A successful transition is at risk as Microsoft failed at a similar maneuver with its SharePoint product in 2010. Other indications that show BOX is at risk of not making a successful transition are listed below, most importantly is y/y declines on new $ billings per sales rep:

Consensus (Buys / Holds / Sells)

Buys         64.3%            9

Holds        35.7%           5

Sells          0.0%             0


Pre-Mortem / Signposts

7/17/15 to 10/6/15 – BOX decreased 40.8% ($18.74 to $11.09) on insider selling as the IPO lockup expired.

1/4/16 to 2/9/16 – Box decreased 36.5% ($14.36 to $9.12) on concerns BOX’s growth slowing pressured by Open Text and Dropbox.

4/22/16 to 7/6/16 - Box decreased 24.8% ($13.37 to $10.06) on first quarter billings deceleration.

7/6/16 to 10/4/16 – Box increased 62.4% ($10.06 to $16.34) on strong reported earnings on 8/31, workflow product developed with IBM.

12/28/16 to 2/17/17 – Box increased 30.3% ($13.91 to $18.13) on raised 2017 guidance for sales.

Return Potential

$19.75 Up [6.6x Revenue, high case of SaaS M&A peers]

$10.00 Down [3x Revenue, one turn lower than the low case of SaaS M&A peers, near July 2016 low]

$2.75 Up / $7.00 Down / Or 2.5:1 for a short



Short position.  

2 Investment Details

Reps having trouble generating new billings & growth slowing

Pressure on total $ billings per sales rep (reported)                                                    

Pressure on new $ billings per sales rep (estimated)                             

Total $ billings / sales rep is simply the total billings for the quarter divided by the number of sales rep per quarter. The recent measure of sales rep productivity clearly shows that Box is having trouble expanding its revenue. The rate of revenue increase has declined despite the majority of Box’s new products already live for several quarters.


See new $ billings / sales rep calculation (an estimated value) explained later in the model discussion. The decline in new $ billings per sales rep is concerning as new billings is a key value that drives deferred revenue, which in turn converts into revenue, with a lag. As new $ billings per sales rep declines, revenue growth in subsequent quarters will suffer.


Note – this is total sales reps, not a weighted average sales dependent on ramp time for new sales rep hired. Projections for 2018 and 2019 will depend on an weighted average ramped sales rep as a sales rep from day one is not 100% productive.   

Higher COGS to impact near term gross margin


“However, with the new data center, we've previously discussed now live, we expect our gross margin to stabilize around 74% for FY 2018 with the low point coming in Q1 before improving over the course of the year.”

Dylan C. Smith CFO, Q4 2017 Earnings Call


Q1’18 consensus as of 4/19/17 on Bloomberg reads as 73.278%, potential for a shortfall given color from management.


Management has given concern for near term gross margin pressure as they have shifted from leasing servers to their own data center. The company will be pressured to ramp sales staff to fully utilize the new data center, especially in light of slowing billings / rep metrics as new products have failed to take hold.

Transition into ECM


BOX’s ECM business will not grow as fast as its historic FSS due to:

This is a repeat of SharePoint in 2010.

o    In 2010 SharePoint was seen as an ECM industry disrupter.  Despite ties to Microsoft, enterprise customers, links to Microsoft Office, competitive pricing (almost giving it away) and financial backing, SharePoint’s results had the effect of pushing ECM users away from their applications.

o    Lots of other collaboration efforts by the ECM vendors themselves, including multiple Documentum efforts with eRoom (ended by SharePoint) and Syncplicity (competitor to Box that has been since sold off from EMC to PE, then to another PE) have confirmed that collaboration/sync and share doesn’t always tie to serious ECM.

o    ECM is more than the ability to store documents with searching and meta-data.  Many complex systems include integration into a variety of other applications, an area where BOX is nascent.  


§  SOP (standard operating procedure) systems typically have a tie to training and configuration management.

§  Contract Management will have ties to Vendor Management.

§  Insurance ECM will have integration ties to Policy and Claim systems.

§  Accounts Payable ECM will have ties to SAP or other accounting systems.


·         Box partnering with IBM is not going to inspire other development partners to pick up Box where they know they will be competing with IBM sales and consulting.


·         Most ECM tools currently exist behind the company firewall.  Box will have difficulty replacing these systems.


·         On Premise – Certain industries (insurance for one), have requirements, PII (personally identifiable information) concerns or other regulations (documents can’t leave the state for some insurance) that require on-premise. As a cloud only solution, Box can never take the market-share from the ECM vendors that include clients that continue to support their own data centers.


·         Multi-Tenancy – While Box is/will be able to offer more private clouds, it’s DNA is all about leverage from a multi-tenancy approach in both hosting and software.  Box does offer private cloud solutions to remove multi-tenancy from the infrastructure but the core Box capabilities are for a multi-tenancy approach


·         Cloud Alternatives – Box, by maintaining their own infrastructure, cannot offer (and competes with) Amazon, Azure or other cloud based alternatives to on-premise. Clients that have committed to Amazon for other infrastructure will look to extend that infrastructure with ECM that can run in their private Amazon or Microsoft cloud.


·         Box is pricing three to four times higher than many clients on-premise maintenance costs for their existing ECM solutions.



Commoditized base market (FSS)


Via Gartner, the space has over 100 vendors ranging from upstarts like Box and Dropbox to large players like Google and Microsoft.


There is "fierce competition" causing the simple file-storage functionality to become commoditized and offered at almost no cost. That would cause smaller players with no differentiating features or bigger companies that see little reason to expand to entirely back out of the industry.


The FSS space is pressured by lower prices from new entrants as well as upgrades to Google’s and Microsoft’s current products.


Opposing Case


BOX’s revenue base is relatively sticky due to the inconvenience of companies / individuals migrating their data off the BOX platform.


Limited hard catalysts (i.e. clean balance sheet - no issues of bankruptcy, no hidden liabilities).


BOX’s ECM push is real and will succeed. In pursuing ECM, Box added two notable Documentum veterans since 2011. Whitney Bouck joined Box as SVP and GM in October of 2011 (left in December 2015).  Whitney was with Documentum from 1995 to 2011 in a variety of roles ending as Chief Marketing Officer at EMC/Documentum. Jeetu Patel joined box in August of 2015. Jeetu has been at EMC/Documentum from 2011 to 2015 ending his role as GM of Syncplicity (direct competitor to Box).  


3 Company Overview


Corporate Overview

Box started out as a go-to storage cloud company and provides a cloud-based, mobile-oriented content management platform that enables customers to easily and securely manage their content and collaborate internally and externally. With a platform available in more than 20 languages, Box's customers include about 60% of the Fortune 500, Box users upload about a billion files per month.


"Anywhere, anytime, on any device"


Corporate History


o    Publicly launched platform


o    Introduced a free version of our product in order to rapidly grow user base

July 2007

o    Surpassed one million registered users


o    Enhanced platform to serve businesses and large enterprises - expanded business functionality with features such as our administrative console, identity integration, activity reporting and full-text search.

o    Box Embed framework to encourage developers and independent software vendors (ISVs) to build powerful applications that connect to Box, furthering the reach of the Box service.

o    Began to build an enterprise sales team.


o    Launched iPad application


o    Launched Box OneCloud platform

o    Enables customers and partners to build enterprise apps using the Box Platform.


o    Box for Industries


Product / Offering Summary

Box Platform

o    Content management and collaboration API services for custom Box apps.


Relay (Beta, late 2017 release) - workflow

o    Track Progress. You'll never write another dreaded 'checking in' email again. View the status of each workflow and receive notifications when workflows are complete.

o    Identify Bottlenecks and Take Action. Alert the team of any issues by flagging steps in a workflow, ensuring those in your team can take immediate action.

o    Analyze Audit Logs. Know who is taking what action on which content so you can fulfill compliance and project requirements.

o    Comps:

§  Private

·         TrackVia, dapulse, BP Logix, inMotionNow, Wrike, PerfectForms, Integrify, Clubhouse, Widen, Clarizen, ProWorkflow, FunctionFox, Workfront, Workgroups DaVinci,

§  Public

·         Agilysys, Inc. (AGYS) - DataMagine product (document management to the hospitality industry, also provides workflow analysis).  Asure Software Inc. (ASUR) -  NowSpace™ mobile scheduling, employees can easily find, reserve, and use workspaces and meeting rooms directly from their mobile devices. HealthStream, Inc. (HSTM) - HealthLine Systems workflow product, acquired via a 2/13/15 transaction. HealthLine Systems


Governance - data retention and classification

o    Gives customers a better way to comply with regulatory policies, satisfy e-discovery requests and effectively manage sensitive business information.

o    Provides a single, secure and scalable cloud-based platform that allows organizations to implement data retention rules, support defensible eDiscovery and enforce content security policies.

o    Comps:

§  Private

·         Deloitte Discovery, Kroll Ontrack (acquired), FTI Technology, kCura, AccessData, Exterro, Guidance Software, Nuix, Epiq Systems (acquired), KPMG, Lexis Nexis

§  Public

·         HP, Symantec, EMC, IBM, CommValut


Shuttle - data migration (Fall 2016 launch)

o    Moving massive amounts of sensitive data to the cloud

o    Comps

§  Public

·         Microsoft Azure, Accenture Cloud Solutions, Amazon Web Services (AWS)

·         Zones - in-region data

o    Gives global customers the ability to store their data locally in certain regions; and


KeySafe - encryption key management

o    Gives customers greater control over the encryption keys used to secure the file contents that are stored with Box.


Core Box – cloud based storage

o    Enterprise

o    Comps

§  Public

·         EMC, IBM and Microsoft (Office365 and SharePoint);

o    Consumer

o    Comps

§  Public

·         Citrix (ShareFile), Dropbox, Google (Drive), EMC (Syncplicity), Microsoft (OneDrive for Business) and Amazon (Zocalo).

Product Evolution

Business Model


Business Strategy

·         Offers a limited version for free to promote additional usage, brand and product awareness, and adoption

·         New customers - sales and marketing expenses exceed the first year revenue.

·         Expanding BOX customers - higher revenue than sales and marketing expenses.

·         Renewing Box customers - sales and marketing expenses significantly less than revenue.

·         Higher compensation given to the sales force for new customers and customer expansions vs for routine subscription renewals.

·         Q4 historically the strongest quarter for large enterprises purchasing BOX products.


Contract Structures

·         Annual and multiple-year subscription contracts for our cloud content management services.

·         Recognize revenue from customers ratably over the terms of their subscription agreements, which are typically one year, although offers services from one month to three years or more.

·         Increased focus on annual payment frequencies for multi-year contracts in the twelve months ended January 31, 2017 compared to the twelve months ended January 31, 2016.

·         Multi-year contracts - invoice an initial amount at contract signing followed by subsequent annual invoices. Until amounts are invoiced, they are typically not recorded in revenue, deferred revenue, billings or elsewhere in consolidated financial statements.

·         Once future invoicing is determined certain, consider those future subscription invoices to be non-cancelable backlog.

·         Subscription model - recognize revenue ratably over the term of the subscription period, which commences when all of the revenue recognition criteria have been met.



Class A 1 vote

Class B 10 votes

As of January 31, 2017, including executive officers, employees and directors and their affiliates, collectively held approximately 90.2% of the voting power of outstanding capital stock as of such date


Compensation Structure (Annual Meeting June)


o    Key Targets:

§  Revenue

§  Non-GAAP Operating Income

Recent Changes

o    Modified compensation peer group.

Prior to June 2015

Existing Compensation Peer Group Entering Fiscal 2016

Cornerstone OnDemand Inc.


Marketo, Inc.


ServiceNow, Inc.

FireEye, Inc.


Netsuite, Inc.


Splunk Inc.

Gigamon Inc.


Nimble Storage, Inc.


Tableau Software Inc.

Imperva Inc.


Palo Alto Networks, Inc.


Workday, Inc.

Infoblox Inc.


Proofpoint Inc.


Yelp Inc.

Jive Software, Inc.


Rocket Fuel, Inc.




Post June 2015

Compensation Peer Group Revised in Fiscal 2016

Barracuda Networks, Inc.


Infoblox Inc.


Splunk Inc.

Cornerstone OnDemand Inc.


Marketo, Inc.


Tableau Software Inc.

Demandware, Inc.


New Relic, Inc.


Yelp Inc.

FireEye, Inc.


Nimble Storage, Inc.


Zendesk, Inc.

Gigamon Inc.


Proofpoint Inc.



Imperva Inc.


SolarWinds, Inc.



Company’s Key Metrics

·         Billings

o    Revenue plus the change in deferred revenue in the period

o    We typically invoice our customers at the beginning of the term, in multiyear, annual, quarterly or monthly installments. If the customer elects to pay the full subscription amount at the beginning of the period, the total subscription amount for the entire term will be reflected in billings. If the customer elects to be invoiced annually or more frequently, only the amount billed for such period will be included in billings.


 Free Cash Flow

o    Cash used operating activities less purchases of property and equipment, principal payments of capital lease obligations and other non-recurring.


Retention Rate

o    Annual contract value (ACV) from customers with contract value of $5,000 or more as of 12 months prior to such period end (Prior Period ACV) and a subscription term of at least 12 months.

o    BOX then calculates ACV from these same customers as of the current period end (Current Period ACV).

o    Finally, we divide the aggregate Current Period ACV for the trailing 12 month period by the aggregate Prior Period ACV for the trailing 12 month period to arrive at our retention rate.

o    Retention rate was approximately 115%, 117% and 126% as of January 31, 2017, 2016 and 2015, respectively.

o    Retention rates consistently exceeded 100% and were primarily attributable to an increase in user expansion, from both enterprise and small and medium business customers.

o    Real retention / expansion not broken out


4 Industry Overview



As defined by the company

Source: BOX slide 25, current investor deck

While the above would suggest a $45bn addressable market by 2019 according to the company. An investor relations call on April 17, 2017 suggests that the above is an exaggeration and BOX’s true TAM is the file sync ($2bn) and 50% of the enterprise content management & collaboration market ($8bn).


Growth within the file sync and sharing market is expected to moderate in the next few years.