Box reported earnings today for the first time as a public company. In the wake of the news, the company’s shares dropped sharply, and are currently down in after-hours trading down a sharp 13.10 percent. So did Box have a bad quarter? Not in the way that was originally reported by the media, your humble servant included.
Box’s profitability is currently vetted on a non-GAAP basis, which is a fancy way of saying that investors are applying a slightly looser set of financial rules for the newly public company. Among quickly growing technology firms, non-GAAP, or adjusted profit is a standard metric. It allows firms to discount certain non-cash costs to provide an alternative look into the performance of their business.
Today, Box reported adjusted profit of -$1.65 per share. While that might seem steep, the figure is calculated using a constrained share count, due to the company’s recent IPO. So the per-share loss is higher than it might be, compared to a more dilutive share count for Box, keeping the company’s net loss in place.
This is where things went off the rails: Some analysts, whose earnings forecasts were counted in calculating the market’s consensus, did not use the smaller share pool to calculate earnings per share. So, the “consensus” kicked out an adjusted profit guess of -$1.17. Box lost more than that.
The company wasn’t enthused. On its earnings call, Box CEO Aaron Levie noted that, using a proper share count, estimates for Box’s recent-quarter adjusted profit came to -$1.99.
What that means is that Box actually beat on adjusted profit. And given that Box also beat expectations on revenue, the company had a functional quarter.
The company’s shares were down north of 16 percent during after-hours trading, having now recovered slightly from session lows. Why are investors acting so negatively when Box actually beat profit and revenue expectations?
From reading the company’s financial documents, listening to its earnings call, and chatting with its CEO after the report, a few things stand out as possibilities:
- Box is forecasting modest growth in its current fiscal year. Stating that it expects revenue to expand around 30 percent is fine, but in the face of sustained losses that are accumulated in the name of growth makes the figure implicitly smaller than it might otherwise appear. Oddly, Box’s estimates are currently ahead of what appears to be early analyst consensus (this, again) of its current-year revenue. That implies that the slightly improved guidance, and its delta to more optimistic estimates, might only have a small impact on the company’s share price.
- The company is not forecasting operating margin improvements in its current fiscal year. It expects its non-GAAP operating margin for its fiscal year to land between -52 percent and -50 percent. That’s in-line with the company’s most recent quarter’s non-GAAP operating loss of 51 percent. This implies that Box’s ramp to profitability isn’t something that will take place in the short term.
- The company expects to be cash-flow break-even in its fiscal 2018. We are currently in the first quarter of the company’s fiscal 2016. That puts cash declines 8 quarters out.
- And finally, increasing dollar losses, even as the company has posted improving ratios. Box’s GAAP net loss attributable to shareholders grew in its most recent quarter to $52.921 million, from a year-ago score of -$43.457 million.
Box will have an easier time of it when it can point to shrinking non-GAAP and GAAP losses in raw-dollar terms. For now, its improving ratios are useful, if incomplete, pictures of how the company’s financials operate.
Every newly public company manages to chop when it kicks itself into the marketplace. If Box can put up a strong quarter in three months, the earnings per share kerfuffle will shrink into memory. For today, however, Box had a nasty bit of bad luck that clouded a quarter that might have otherwise enjoyed a slightly warmer reception.