Clouds On The Tech Horizon, Earnings Edition

Morning Markets: Several tech companies took a hit yesterday after the bell, let’s quickly examine what happened.

While the world watched farce and whatever this was, several tech companies reported earnings after the bell yesterday. And then immediately afterwards their valuations were cut by the market.

It’s worth considering why two tech companies, in particular, had issues yesterday, as they have cognates in the private market that we care about quite a lot.

So, let’s take the briefest of peeks at what happened to Box yesterday and how it might impact SaaS startups. And then we’ll glance at what happened to Square, as startups in the payments, social transaction, and crypto spaces care about their comps and relative valuations.

Box

Every reporter winds up with companies that they cover more obsessively than other writers. Box is one of mine, and I’m almost sorry to drag everyone through another Aaron Levie earnings report.1 As always, however, I’ve convinced myself that I have good reason to do so.

My conscience assuaged, here are the key figures from the file storage and productivity company via CNBC: Revenue of $163.7 million, under expectations of $164.2 million, and a $0.06 per-share loss using adjusted figures, four cents better per share than expectations.

So, a mixed report. What caused Box to shed between a fifth and a fourth of its value right after the figures dropped? This:

Box’s guidance for the full-year fiscal 2020 also fell below analyst expectations of $713.9 million to $749.9 million, per Refinitiv. For its full year 2020, the company said it’s expecting revenue to fall between $700 million and $704 million.

Box managed better-than-expected profitability (and things like positive free cash flow during its fiscal year, and 20 percent year-over-year revenue growth), but its quarterly revenue miss and forecast miss were devastating.

What’s the lesson? I think in this case it’s that SaaS multiples are still predicated nearly solely on growth; investors elided Box’s improving profitability metrics (first quarter of positive non-GAAP net income, strong cash flow from operations, sharply falling sales and marketing spend as a percent of revenue, etc.) to instead focus on its slowing growth.

Box’s self-reported, expected growth in its new fiscal year works out to 15 percent to 15.7 percent compared to its recently-completed fiscal year. That’s too slow for Wall Street. And, thus too slow as well for startups looking to reach Box-like scale in terms of valuation (billions) and level-of-maturity (public).

Square

Square started off its public life somewhat flat. Its share price hung around the teens in 2016, before finding lift in 2017, ending that year around $40. In 2018, however, Square took off, nearly reaching $100 per share. The other half of Jack’s attention (our Cher-equivalent tech mononym) put on one hell of a show.

The back half of last year saw Square shed nearly half its value. And then Square picked up again in 2019, skating close to $80 per share. Until yesterday, when the firm dropped just over four percent of its value on the ground after reporting earnings.

Why did it fall? It’s slightly hard to tell. Square’s adjusted per-share earnings beat expectations ($0.14, ahead of $0.13), and its adjusted revenue of $464 million was $13 million above expectations. Next, check this:

For the first quarter, Square expects adjusted EPS of 6 cents to 8 cents on adjusted revenue of $472 million to $482 million. The FactSet consensus called for 12 cents in adjusted EPS and $474 million in revenue. The company’s full year outlook calls for 74 cents to 78 cents in adjusted EPS and $2.22 billion to $2.25 billion in adjusted revenue. Analysts surveyed by FactSet had been projecting 70 cents and $2.25 billion, respectively.

That’s actually pretty good, right? But Square still fell. I think that the payments and processing and now crypto company missed expectations from the public market that it will post superlative growth. Not merely strong growth, but something surprisingly good (hence why coming close to forecast wasn’t enough).

Those high standards from investors are likely why Square has around an 11x trailing revenue multiple according to Yahoo Finance. That’s high for a payment processor.

The lesson for startups is that if you are using Square as a comp in any capacity, make sure you are matching the market demands (growth, profitability) that come attached to its market accolades (strong revenue multiple, $32 billion valuation).

And that’s that. I suppose this is the sad moment in which earnings season concludes. Earnings will be back before you know it!

Top Image Credit: Li-Anne Dias.