Why Box Fell 5% After Reporting Earnings Today

Today, after the bell, Box reported its fiscal first quarter, 2019 earnings. The company, which sells online file storage and cloud collaboration tools, beat expectations but saw its shares sink in after-hours trading from near-record levels.

What went wrong for the SaaS bellwether? It’s worth taking a moment to understand.

As regular readers will know, Box is more than just another SaaS company. It serves as a decent benchmark for maturing SaaS companies, and also for the bet that venture capitalists made far earlier in the current boom on companies of its ilk.

Box rode the raise big, burn a lot method of growth that came to popularity earlier in the unicorn era.

Let’s take a minute to scroll through the good and the bad from Box’s quarter and work out what might be the matter with its shares.

Results

Box reported revenues of $140.5 million and billings of $116.6 million. The firm’s GAAP net loss (loss inclusive of all costs) came to $36.6 million in the fiscal period.

The firm’s provided adjusted metrics include its non-GAAP operating loss of a slimmer $9.2 million deficit. Staying with augmented metrics, Box’s adjusted earnings per share came to negative $0.07.

What was expected? MarketWatch’s Max Cherney has the numbers:

“Analysts surveyed by FactSet had estimated adjusted losses of 8 cents a share on revenue of $139.6 million. For the second quarter, analysts model adjusted losses of 7 cents a share on sales of $146.1 million.”

Box generated $18.4 million in cash from its operations during the three month period and $7.3 million in free cash flow in the same timeframe.

So Box managed to best expectations while generating quite a lot of cash. Not bad for a SaaS company comfortably over the $500 million ARR mark. And yet its shares fell. We’ll need to keep exploring.

Next Quarter’s Results

Often when a company reports earnings, it’s now-dated results will meet or best expectations, only to see that same firm’s stock dive after forward guidance comes up short. So let’s see if projections are at fault for Box.

According to its earnings report, Box expects second quarter (F2019) revenue between $146 million and $147 million and adjusted losses per share between $0.06 and $0.05.

Analyst estimates compiled by Thomson Reuters and published by Yahoo Finance peg expectations for the firm’s next quarter revenue at $146 million. So Box is bang-on there. The same group of analysts expected a $0.07 per share adjusted loss. Once again, Box is fine.

The same set of analysts expect Box’s fiscal 2019 revenue to total $605.8 million. Box, in its most recent report, indicated that it will turn in top line between $603 million and $608 million. So, there Box is a bit light. What that implies is that analysts are expecting Box’s growth rate to decelerate slightly less than the company is projecting itself.

But that doesn’t really seem to be enough of a disconnect to cost Box a full five percent of its value.

Onwards we march.

SaaS And What Not

After Box’s earnings report, we updated our Box Historical Data Tracker Sheet, which you can find here. There are a few things worth noting in it.

First, Box’s churn rate has reached another local maximum. There is a single quarter that we know of in which Box’s stated churn rate was higher. It was the fourth quarter of its fiscal 2015, back when Box was a fraction of its current size.

Since its calendar 2016 run of three percent churn rates, Box has seen that critical slippage metric slowly worsen. It is now up 50 percent to 4.5 percent in the most recent quarter. At the same time, Box’s net expansion rate tied its lowest-ever result at 14 percent. Subtract the two, and you get 109 percent, Box’s lowest-ever net retention rate.

That’s less than good. What we’re seeing, therefore, is Box continue to pour over half its revenue into sales and marketing to grind out slower and slower revenue growth, coupled with declining SaaS vitals. That’s not wildly enthralling.

Of course, Box, which generates lots of cash, can keep doing this forever. You can’t kill a company that generates cash—or, at least, it’s very hard to.

Box is still trading near historic highs. This is good for the SaaS company, and good for the private companies that use it as a public comp when they raise money at new valuations. But for Box, its run to new heights has been clipped by investors who are not impressed by a modest beat, mostly in-line guidance, and rising churn.