August 13, 2020 - 2:33pm EST by
2020 2021
Price: 17.15 EPS 0 0
Shares Out. (in M): 162 P/E 0 0
Market Cap (in $M): 2,778 P/FCF 0 0
Net Debt (in $M): -63 EBIT 0 0
TEV (in $M): 2,715 TEV/EBIT 0 0

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I believe Box will improve its profits significantly or be acquired.  Since activist Starboard Value’s initial 13D filing in September 2019, Box has proactively catered to shareholder demands by increasing margins and refreshing its board of directors. Box has steadily improved its operating margins with a year-over-year increase from (-1.9%) to 9.4% in the most recent April-ending quarter. However, the profitability gap remains wide compared to software peers of similar size and growth profile who consistently deliver 35-40% operating margins. Box’s management team is under pressure from Starboard to raise its margins significantly or pursue strategic alternatives. At its current share price of $17.15, I believe Box offers an asymmetric payoff profile of at least 4:1, with $15 in a downside scenario (3x revenue) and $25-30 in an upside scenario (5-6x revenue).


Company background

Box offers cloud content management and file sharing services for businesses. The company was founded in 2004 by CEO Aaron Levie and CFO Dylan Smith. Box is one of the original SaaS unicorns and a pioneer in file sync and share. This software category took off with many competitors but has since consolidated with four main players: Box and Microsoft focusing on the enterprise, and Google and Dropbox targeting SMBs and consumers. Box went public in January 2015 at $14 per share.


Why has the stock languished?

At 3.5x revenue, Box trades at a significant discount to the SaaS industry. Not counting hypergrowth SaaS companies, many “slower growth” SaaS peers are trading at 7-10x. Box is shunned by Wall Street for a variety of reasons:

·       Commoditization threat: This is the biggest overhang on the stock. Google and Dropbox compete more effectively on the low end, but Microsoft is Box’s biggest threat in the enterprise. Microsoft offers a compelling value proposition to its large installed base of Office 365 users by bundling it with OneDrive. As a result of intense competition, Box has seen its revenue growth decelerate from 30% in fiscal 2017 to the low teens today.

·       Low profitability: Like most SaaS companies, Box spent heavily and generated operating losses.  But as growth slowed, Box continued to show losses and occasional meager profits. Even as annual revenue scaled to over $700 million, management did not optimize its cost structure for operating leverage.

·       Inexperienced CFO: Dylan Smith is a first-time CFO, having joined Box right after college. He has essentially been learning on the job. Until recently, Box has had a track record of disappointing earnings reports. Box’s bloated cost structure and poor communication with Wall Street can be attributed to Dylan’s lack of experience.


Why Box is valuable?

Despite the issues cited above, Box remains a valuable asset.

·       Enterprise focus: Unlike Dropbox, Box is focused on large enterprise customers. Box has security and compliance features that enterprises demand. As such, Box faces less competition from Google and Dropbox. This is also the reason IBM partners with Box to sell cloud content management solutions instead of developing its own. Box has routinely attracted CEOs of leading technology companies, such has Apple, Cisco, Adobe and Nvidia, to keynote its annual user conference.

·       Category leader: Box is ranked as a leader in Gartner’s Magic Quadrant for Content Collaboration Platforms. In fact, Box is rated better than Microsoft in terms of completeness of vision (see Figure 1).

·       Sizable revenue: Box is one of the larger SaaS companies with well over $700 million in annual revenue. The scale of this revenue base offers attractive operating leverage potential. If the current management team fails to execute on this operating leverage, I believe another team will.

·       Sticky customer base: If Box were in a commodity business, customer churn would be elevated.  Yet churn has consistently been below 5%, demonstrating the stickiness of Box’s enterprise solutions.

·       Upsell opportunity: Box has a large customer base with over 90,000 companies and 14 million paying users. Management has only recently realized that it is more cost-effective to upsell add-on products to its existing base rather than pursue new logos. In the most recent quarter, net expansion ticked up for the first time since its IPO.

·       Sellable asset: Unlike Dropbox, Box does not have dual voting share classes or controlling shareholders. Therefore, insiders cannot block a potential sale. Box collapsed its dual class structure in mid-2018, a fact I believe some investors still have not picked up on.


Figure 1: Gartner Magic Quadrant for Content Collaboration Platforms



Starboard involvement

Activist Starboard Value filed its initial 13D in September 2019 with 7.5% stake in Box and a cost basis of approximately $14/share. Starboard worked largely behind the scenes, and Box’s management team quickly responded by taking the following actions to appease a disgruntled shareholder base:

·       At its Analyst Day in October 2019, Box introduced a profit improvement plan that targeted revenue growth plus free cash flow margin to expand from 16% to 35% over the next three years. Box aspires to achieve 12-18% revenue growth and 15-20% operating margin during fiscal 2023.

·       Pursuant to an agreement with Starboard in March 2020, Box appointed two new board directors – Bethany Mayer and Jack Lazar – and replaced three directors due for re-election. Importantly, CFO Dylan Smith stepped down from the board. Jack Lazar is a well-respected veteran CFO in the tech industry.

·       On its fiscal Q1 call in April 2020, Box raised its operating margin guidance for fiscal 2021 from 9-10% to 11-12% even as it lowered revenue guidance due to the impact of COVID-19.

Clearly, the management team has caved in to Starboard’s demands and is under pressure to deliver on profit improvements or face strategic alternatives. Starboard has a strong record of forcing companies to accomplish either or both.


Ways to win

I believe Box will improve its profits significantly or be sold. 

·       Scenario A (profit improvement): Box has a bloated cost structure that was haphazardly built when the company was growing quickly. The lack of discipline has led to a wide gap in Box’s operating margin compared to adjacent peer Open Text and best-in-class margin peer Aspen Tech (see Table 1). I do not believe Starboard is satisfied with Box’s target of 15-20% operating margin by fiscal 2023/calendar 2022. I expect Starboard to apply additional pressure to elevate margins. As such, I have modelled operating margin reaching 30% in fiscal 2023.  I have also projected 12% growth in fiscal 2022 and 2023, at the low end of management’s target of 12-18%. Applying 15x multiple to fiscal 2023 operating profit yields $27/share value for Box (see Table 2).

·       Scenario B (strategic alternative): I believe Starboard may have already forced the board to consider strategic alternatives in parallel to profit improvement. If management were less aggressive in margin expansion, I would expect Starboard to force a sale of the company. Outside of private equity, the most likely strategic acquirers are IBM (its current reselling partner) and Oracle. Recent SaaS transactions by private equity have been valued at 6-7x revenue (see Table 3).  Applying a slight discount of a 5-6x multiple of forward revenue would yield $25-30/share value for Box.

Obviously, scenario B would yield a quicker time to value than scenario A.


Table 1: Select software margins


Revenue ($mm)

Operating margin

Open Text (OTEX)




Aspen (AZPN)





Table 2: Box Financial Projection

FYE Jan, $mm
























Gross margin












Op profit






Op margin







Table 3: Recent SaaS Transactions



Value ($mm)


Date announced

Instructure (INST)

Thoma Bravo



December 2019

Ellie Mae (ELLI)

Thoma Bravo



February 2019

Ultimate Software (ULTI)




February 2019

Mindbody (MB)




December 2018




·       Continued pressure from Microsoft

·       Management’s inability to execute on margin expansion

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Continued margin improvement

Growth re-acceleration

Strategic alternatives

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