Why money-losing Box is finally ready for IPO
Aaron Levie is the quirky public face of software developer Box. But in the company's online IPO roadshow, the more important commentary came from the lesser-known co-founder Dylan Smith.
Smith, the 29-year-old chief financial officer, is responsible for telling investors how the business, which has been burning capital at a high rate even by Silicon Valley standards, can eventually turn profitable.
Box, a provider of cloud software for file sharing, collaboration and document security, is scheduled to debut on the New York Stock Exchange on Jan. 23. That's a full 10 months after the Los Altos, California-based company first filed publicly with the Securities and Exchange Commission.
In the meantime, Box raised $150 million in a private financing round in July.
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Part of the reason for the delay was that the stock market hit multiple rough patches in the months that followed the prospectus filing. More troublesome though were Box's financials. The company was coming off a quarter in which it lost more money ($43.4 million) than it generated in revenue ($38.8 million).
The company's still losing money, but the trendlines have changed. Sales in the period ended Oct. 31 jumped 70 percent to $57 million from a year earlier, while Box's net loss narrowed to $45.4 million from $51.4 million. Box has over 44,000 customers, including General Electric, which is in the process of rolling the product out to 300,000 employees.
At the end of October, Box had $165.3 million in cash, up from $108.9 million at the end of January 2014. Speedy revenue growth, shrinking losses and improving cash flow allowed Smith to tell Wall Street what it wanted to hear.
"We feel confident that our cash position will more than cover our cash needs through profitability," he said in the recorded roadshow.
Box last week filed to raise as much as $186.9 million in a share sale that would value the company at up to $1.55 billion.
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Investors have grown accustomed to betting on money-losing tech companies, particularly those selling software subscriptions. Workday lost $60 million in the latest quarter and ServiceNow lost $41.1 million. Even Salesforce.com, which went public over a decade ago and is valued at more than $36 billion, lost $38.9 million in the most recent period.
The reason is simple: Companies have to record the costs to acquire customers right away, but they can only recognize the revenue as it comes in the door. In other words, if a vendor spends $1 million in marketing and other costs to land a three-year $3 million contract, the $1 million cost is counted immediately, but revenue in the initial quarter only amounts to $250,000.
Customers initially cost money to attract, but they become more profitable over time, especially if they renew their contracts and add more licenses. Box says that 95 percent of its customers renew, and enough of them increase spending that the company's retention rate—which factors in the higher amount of money that retained customers spend—is effectively around 130 percent.
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"We make significant upfront investments to acquire new customers, because once customers adopt our solution, our strong customer retention and expansion rates" lead to better margins, Smith said.
Box's gross margin, or the profit that's left after subtracting the costs of goods sold, was 78 percent in the latest quarter, compared with 70 percent for Salesforce and 65 percent for Workday.
Levie, 29, and Smith co-founded the company in 2005 as college students. Smith graduated from Duke University, while Levie left the University of Southern California after starting Box.
Even with its improving financial outlook, Box is by no means in the clear. It faces stout competition from large business software vendors like Microsoft and Citrix as well as from consumer file-sharing service Dropbox. Box has over 1,100 employees, including high-priced enterprise salespeople, so costs will continue to be lofty, especially in Silicon Valley.
The company is also in the early stages of developing new products for highly regulated industries like health care and finance that have been slow to trust the cloud. And while the stock market broadly has recovered since mid-2014 and reached new highs by year-end, there's no telling how long the good times will keep rolling.
Vineet Jain, CEO of file-sharing software provider Egnyte, expects the timing to be better for Box this time around. The market has recently been receptive to Hortonworks and New Relic, two business software companies that went public in December despite lacking profit.
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"Their delay ended up working to their benefit," said Jain, whose Mountain View, California-based company competes with Box. "It was prudent of Box and Levie to take some time to get their financials in order for a discerning investor market."
A Box representative said the company couldn't comment beyond an e-mailed statement because of the quiet period.
"We're incredibly excited for the coming year and the next phase of Box's growth," the statement said. "Our goal is to deliver amazing technology that transforms the way individuals and businesses work."
Box's initial IPO price range is $11 to $13 a share. The company will trade on the NYSE under ticker symbol "BOX."