What Box’s Recent Earnings Tell Us About The Current Value Of ARR

Yesterday, following the bell, Box reported the financial results of the third quarter of its fiscal 2018. Shares in the company immediately dropped.

Continuing our never-ending investigation into the changing value of ARR, we’ll explore what Box reported, what the market wanted, the gap between the two, and what ratios can tell us.

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But first, why are we spending time unpacking Box’s results and not those of another company?

Box is a nearly pure-SaaS play that raised buckets of money while private. In the process of picking up its unicorn status, Box spent heavily on customer acquisition. The resulting firm, with nine-figure revenues and improving profitability, is, therefore, a good measuring stick for both private and public SaaS companies.

Let’s get into it.

Results

Box reported revenue of $129.3 million in its most recent fiscal quarter, up 26 percent from its year-ago tally of $102.8 million. That percent growth was matched in the firm’s billings result, boosting the metric from $112.4 million in the year-ago fiscal period to $141.5 million in the most recent quarter.

Box lost two cents per share more in the quarter, on a GAAP basis than the year prior. That $0.32 per-share deficit is inclusive of all costs, cash-based or not. GAAP, for the curious, simply means “all costs considered, and no messing about with what counts as revenue.” On an adjusted basis (non-GAAP), Box lost 13 cents per share, one cent better than the year prior.

And, lastly, the company’s cash flow. In its year-ago fiscal third, Box’s operations consumed $6.8 million in cash, and the firm’s free cash flow summed to a negative $10.9 million. In its most recent quarter, Box instead generated $14.1 million in operating cash. After paying for non-operating cash expenses, it still kicked off $6.3 million in free cash flow.

So that’s a lot of numbers. How did they stack up against expectations? Great question.

Expectations

TechCrunch’s Katie Roof covered Box’s results, posting a picture of my shoe in the process. Happily, she did the lifting required to understand how the company’s earnings measured up against the market’s expectations:

The cloud management business reported $129.3 million in revenue, up 26 percent from last year. This beat analyst estimates of $128.64 million.

The company also reported an adjusted negative 13 cents per share, in line with Wall Street estimates. This compares to negative 14 cents from last year.

So Box managed to beat on revenue and meet on profit while improving its cash performance. You might think that that would sum to a positive share price movement after the numbers came out.

You would be mistaken. Box shares fell both ahead of earnings and after the fact.

Understanding Box’s Share Price Movement

In regular trading ahead of earnings, Box fell 3.73 percent. That decline was not surprising, given that tech stocks had a rough day on the public exchanges. However, when it did report earnings, Box fell over 5 percent (Google Finance).

This morning, after playing with a deeper deficit and a surge, the firm held onto a 4 percent decline as of the time of writing. And it remains down amidst a market rally.

Given that the firm met or beat expectations, why the declines? There is never a single reason for this sort of price change, but we don’t have to work too hard to come up with a workable hypothesis.

Box’s value fell as investors bid its share price down, but it fell only so far. Indeed, Box’s recent share-price rally sent the value of its equity to 52 week and all-time highs. To understand the context of Box’s post-earnings corrections, we’ll have to lean on the historical record. Luckily, Nasdaq has every single Box open, high, low, and close on file.

Box’s 2015 all-time intraday high was $24.73, set just after it went public. It never closed above $23.23 that year, and it didn’t come close to those figures again until the last few weeks. On the 24th of this month, Box closed at $23.82, its all-time best, off just a bit from its all-time intraday high of $23.93 set the same day.

The firm is worth around $21 per share as of the time of writing. So all Box lost in the earnings correction was a few days of recent gains. Overall, it’s still up sharply on the year.

Is there another company that has undergone a similar correction? Why yes there is.

Lessons

Square is a company that we all know, and like Box, it’s had a big year—until recently. Its recent declines follow a long run that saw the firm worth single digits in early 2016, mid-teens at the start of 2017, all the way up to a 52 week high of $49.56 this quarter. The company has since dropped around $10 per share. (For context, the firm went public for just $9 per share.)

Regardless, what happened? See if this sounds slightly familiar: “Square Stock Falls on Earnings After a ‘Great’ Quarter.”

It should. Like Box, Square had picked up huge momentum but hit turbulence after managing to mostly meet expectations. (A sample headline from the other camp: “Box Drops 5% on Merely In-Line FYQ4 View.)

It’s almost, and here I am over my skis, like the market overbought growing tech companies and their valuations got a bit ahead of their earnings. In that case, reporting largely in-line earnings becomes similar to a miss when the numbers are compared to the inflated value of the company.

So you get a bit of your top cut off in terms of per-share pricing. Square is still worth over three times its 52-week low. Box is up over 50 percent over its own. And that’s with both sets of losses factored in.

P/S As Destiny

But perhaps we could have seen all this coming, at least in the case of Box. Previously, we reported that the former startup had settled into a stable price-sales range, implying that the market knew how it wanted to value the company.

You can read the full download if you want, but Box had found stability in the price-sales range multiple of 5. As the company’s revenue went up, its share price rose as well, but it wasn’t enough to break out of that ratio’s bounds. Until recently, that is.

Today, however, Box is up over a price-sales multiple of 6. So after the correction, the company is a bit out of range, a bullish indicator.

But Box would have had to blast past top-line expectations to defend the price-sales multiple that the market had awarded it going into earnings, it seems.

So tech companies are expensive, public investors aren’t efficient, and Box’s recent declines are mostly it giving back some recent gains that, in retrospect, look a bit enthusiastic. That’s about it.