Inside Box’s Updated S-1

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After much ado and pomp, Box released its updated S-1 document yesterday, revamping some of its usage statistics, and detailing the results of its fiscal first quarter. The company posted revenue of $45.3 million in the period, up 93.6 percent year-over-year. Its net loss totaled $38.5 million in the quarter, up a slimmer 13 percent.

Box burned through $29.58 million in cash during the period, ending its fiscal first quarter with $79.26 million (calculated using the delta of its quarter-on-quarter cash and equivalents line item). The company recently raised another $150 million. Presuming that the company has burned through another $10 to $15 million since the end of its first quarter, Box has a comfortable stack of more than $200 million on hand.

The company spent more on sales and marketing, $47.44 million, than it had in total top line in the period.

In its updated S-1, Box indicated that its number of registered users rose by 2 million in the quarter to 27 million. It also reported 5,000 new “paying organizations,” ending the quarter with 39,000.

So where does that put Box? If it isn’t clear, don’t worry. We’ll do this in steps.

Burn

Box’s calendar 2013 was an on-purpose financial bloodbath. Losses outstripped its revenue by more than 100%, and the company tore through cash with something approaching glee. It more than doubled its revenues — we’re saying calendar 2013, which is roughly commensurate with Box’s fiscal 2014, but let’s not be too taxing in the morning — but it notched another year of nine-figure loss, calculated using generally accepted accounting principles (GAAP).

Why was Box content to ignite huge sums of cash? It was betting on its own unit economics, buying recurring revenue by sustaining huge sales and marketing costs.

Whether Box’s bet will bear out isn’t too hard to vet. If its revenue growth remains quick, and its losses stall, and begin to retreat, the company has a way out of the woods. It won’t be profitable any time soon, but the most recent period may indicate the start a new trend of loss deceleration far quicker than inevitably slowing revenue growth.

Margins

Fans of SaaS-based accounting will tell you that if you have solid margins — 80 percent is a commonly cited gross margin target — and a customer acquisition cost (CAC) to lifetime value of that customer (LTV) ratio of less than a third, spending oodles on getting more customers isn’t risky. In fact, in their view, to not burn quickly is to be too conservative. (Your unit economics are great, why aren’t you stomping on the gas pedal?)

That’s fine, but to grow in that fashion you are going to consume mountains of cash, because, as SaaS kids will tell you again and again, you incur full marketing a sales costs to land a deal, and then enjoy the ensuing revenue in small pieces. So you deal with losses up front, and profits down the road.

So why isn’t Box profitable, given that it has spent heavily and thus, presumably, built a mountain of annual recurring revenue (ARR), that pixie dust of long-term cash flows? Well, Box is still spending on growth, so it continues to lose money.

Crossing Lines

Forever? No. In fact, over time we should see the company’s losses decline as its marketing spend as a percentage of its revenue declines — all that piled up ARR, born out of past losses may allow Box to keep its marketing spend steady, or on a gentle incline, while its net loss shrinks.

You don’t get to negative net loss declines until you reach a point in which your net loss stalls, and you don’t get there without seeing your net loss growth rate decline. Box may be a that initial point.

So, looking ahead, Box will lose more than $100 million this year. That’s certain. But it should lose less than last year’s epic $168.9 million deficit, and its revenue should be north of $200 million.

Box with top line of more than $200 million and losses close to the $100 million mark makes far more sense than Box’s 2013 — again, fiscal 2014, roughly — $124 million in revenue, and $168.9 million in losses.

At issue is when the lines cross. How long can Box afford to burn to grow, and when does its past burn help its growth by easing losses? Do you value Box on its top-line growth, or on its potential future profits? You can’t do it on both.

The campari in this particular negroni is churn, which for Box is at least partially driven by hell-bent sector competition. The core presumption of SaaS accounting is that churn won’t eat away at your CAC/LTV ratio. If churn increases, your ratio gets borked, harming your unit economics, and perhaps making your burn not an investment in future revenue, but instead a great effort to sell quarters for dimes.

The Future

Box has enough cash to last for perhaps two years without an IPO. And it will IPO this year, all signs indicate. So Box will have, presuming that it raises the $250 million it indicated in its initial S-1 that it wants to, even more space to grow.

It’s time for a wager: In which forthcoming quarter will Box post a net loss decline, on a year-over-year basis?

What’s the bear case? That Box won’t be able to sustain its growth rates in an economically feasible fashion. That’s to say that it could become more expensive than Box can afford to acquire new customers, making its growth cycle unprofitable on a SaaS basis.* If your view is that sector competition will reduce Box’s enterprise niche, you could foresee Box’s future cash flows impaired. It’s fair to say that if that is the case, Box would be quite troubled.

That’s enough for now. We’ll check in around 90 days when Box has new numbers. Lay your wagers in the comments.

*SaaS: Not The New GAAP.