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Checking In On SaaS Multiples After Box Earnings

Morning Markets: Box’s earnings, the state of cloud stocks and what they say about SaaS startups.

On Nov. 28, Box, an enterprise-focused cloud storage and productivity company, reported its fiscal third quarter, 2019 earnings after the bell. The Bay Area-based company beat expectations regarding revenue ($155.9 million, versus $154.6 million anticipated), and per-share losses ($0.06 adjusted, versus $0.07 anticipated).

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Shares of Box were up during the day before the report and rose further in after-hours trading. Box also raised the top end of its forecast for its current fiscal year (2019) “to $609.2 million, from $608 million,” IBD notes. And its CEO reiterated that the company is on its way to “$1 billion in revenue.”

Notably, Box isn’t alone in seeing its value appreciate. The surprisingly dynamic Bessemer Cloud Index that was recently remade into a daily ticker shows a similar rebound in cloud stocks in recent days. The Cloud Index fell into the 780s (it started at 1,000) in the middle of November, before rebounding to nearly 890 before the start of trading today. That’s quite a jump in about 10 calendar days.

So, after a somewhat dispiriting decline that matched what other stocks in the market were doing, more or less, cloud is nearly back to where it was earlier in the year. Which is to say a bullish position.

So What?

Why are we looking at a public company’s earnings report, and an index of public cloud companies? After all, we focus on private companies here at Crunchbase News. We are examining Box as it’s an important example of an SaaS startup that raised lots during the unicorn era and went public on the strength of its recurring revenue growth, rather than its profitability. The firm has since started generating cash quite often (measured quarterly) and expects to turn in non-GAAP per-share profit in the period roughly aligning with calendar Q4.

So, it makes for a good example. If Box does normal SaaS things, and the markets bid its shares down, it’s an indicator of where sentiment is heading; that impacts private companies as public comps impact private valuations.

The same principle applies to the basket of cloud stocks we mentioned before. If they fall sharply, private investors take note that public investors are revaluing the sort of company that they are putting capital into; if analogous stocks go bearish, startups grow fur.

So! All that said, let’s think about what Box is worth today, compared to its current revenue. We’ll get a workable revenue multiple out of the exercise, which we can then use as a general metric for thinking about what sort of recurring revenue modern software companies (which nearly all uses software-as-a-service as a business model, like Box) need to grow into to make their trailing valuations fit.

Cool? Great.

Box’s revenue figure doesn’t break out recurring incomes (its core products) from non-recurring services income. As such, we generally treat its revenue as a single lump when we want to calculate a recurring revenue figure. This distorts the resulting figure somewhat, but don’t let it worry you, we’re shooting for close here, not exact.

With $155.9 million in top line, our analog for Box’s annual recurring revenue figure comes to $623.6 million. Box was worth $2.57 billion before the start of trading today, per Yahoo Finance. Simple division gives us a current ARR multiple of 4.12.

That’s a somewhat low multiple, compared to other companies and figures that we have seen this year. However, with Box growing just over 20 percent year-over-year in its most recent quarter, the company is likely paying a revenue-multiple tax. The faster your ARR growth, mostly, the higher your revenue multiple will be.

Returning to our notes on Box’s public market performance, Box is trading lower than it did at the start of the year, and far under its early-summer highs. If that is attributable to its slowing growth I can’t say for sure, but I suspect it’s at least a few pieces of the puzzle. The lesson in this earnings report is that growth remains as critical to SaaS valuations as it has been; Box’s slowing growth rate’s impact wasn’t sufficiently erased by rising profitability at the company. Its value has therefore fallen in revenue-multiple terms.

And that brings me to my final point. I’ve thought about retiring Box as our regular ARR benchmark a few times, mostly because Box is now so much larger than private market SaaS companies that its maturity makes it an increasingly poor comp. But what we didn’t have, until recently, was something good to use in its place.

But the new Cloud Index probably fits the bill, even though it doesn’t provide similarly granular multiples. Still, given that it is a basket of SaaS stocks, it’s probably a healthier way to stack public sentiment against private companies.

So, I hereby commit to not covering Box’s next earnings report, at least here. It’s probably no longer sufficiently pertinent.

Illustration: Li-Anne Dias

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