Box Inc. Is Gaining Momentum But Don't Jump In Yet

  • Box shares have rallied strongly over the past one month.
  • Part of the rally has been fueled by the company's decent fourth quarter results.
  • Is Box, Inc. a suitable long-term investment at this point?.

Shares of enterprise cloud storage company Box (NYSE:BOX) are up more than 17% over the past 30 days as an air of optimism continues to develop around the company. Some of that optimism was rewarded when Box recently posted healthy Q4 2015 results that beat both top and bottom line expectations.

30 Days Box Stock Returns

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Box delivered fourth quarter revenue of $85M, good for 35.7% Y/Y growth and $3.23M higher than Wall Street consensus. Meanwhile EPS of -$0.26 topped the consensus by $0.03. That compared favorably with EPS of -$1.65 the company posted in the previous year’s comparable quarter.

It was Box’s billings, however, that got the market excited. The cloud company reported customer billings of $130M during the fourth quarter representing 59% Y/Y growth. That was markedly higher than billings growth during the third quarter which clocked in at 37%. It’s likely that the surge in billings during the final quarter of the year was driven by Box landing major year-end deals. Box managed to add 3,000 paid customers during the quarter thus taking its paid customer base to more than 57k. The company now has 59% of Fortune 500 companies as its customers up from 55% during the third quarter. The new customers include the likes of Home Depot, Intuit, Gentech, The Gap, and AIG.

Particularly encouraging was the fact that Box’s operating expenses grew considerably slower than the company’s top line. Operating expenses increased 16% Y/Y to $108.9M, at a considerably slower clip than the third quarter growth rate of 23%. Sales and marketing expenses, the company’s biggest line item representing 58% of operating expenses and 74% of revenue, increased just 14% to $63.3M. Many tech startups frequently struggle with high S&M expenses which place their bottom lines under a lot of pressure. The current trend where Box’s marketing expenses are moderating will therefore allow the company’s margins to gradually improve and probably allow the company to eventually become profitable.

IBM and Microsoft Partnerships Paying Off

Box attributed the healthy top line and robust billings growth to its ongoing partnerships with IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT). Box entered a global partnership with IBM in 2015 that integrates the company’s solutions with IBM’s content management, analytics, security products, social, and collaboration products. The partnership gives Box access to IBM’s global customers, and this appears to have started paying off. Box netted more than 13 deals worth more than $500k each and another 66 deals worth at least $100k during the fourth quarter that the company chalked up to the IBM partnership. The company extended the IBM partnership:

Based on overwhelmingly positive interest from customers and prospects for the joint solutions we brought to market to-date and the many to come in the future, we extended the duration of our partnership agreement and gained additional sales commitments from IBM.

Box added that Microsoft’s popular enterprise products were driving new business. The company said that many of its largest deals during the quarter came from customers rolling out Office 365 alongside its storage solutions with customers realizing great value in being able to deploy Office 365 and Box together. Box announced that it was moving to deepen its Microsoft partnership:

We also deepened our partnership with Microsoft, following our initial launch last summer this January Microsoft announced real-time co-authoring of Office files from Box, the ability for users to access and edit their files from within Office on iOS and a native integration of Box into

So Box has been using its tie-ups with the giants in the tech world to validate its position as the enterprise content management of choice, and this seems to be paying off. There is no denying that Box now appears to be on the right path and is executing well. The company’s operating expenses have started moderating while its losses have narrowed considerably. Further Box managed to top consensus estimates, though that doesn't say much given how low the expectations for the company were.

Despite this progress, Box’s worth as a long-term investment choice still hangs in the balance. The company continues to burn through too much cash and has so far not succeeded in building a defensible position against the cloud giants. Box finished the year with cash flow of -$66.3M and $40M in debt. After a whole year of ceasefire, the cloud leaders recently fired off a new round of cloud price cuts which will make it difficult for smaller players like Box to improve their margins. I think investors should wait for maybe another two quarters to see if Box can sustain its current momentum and narrow down its losses further before building a long-term position in the shares.

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