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Why Box may not be a hot initial public offering in the long term

Part 3
Why Box may not be a hot initial public offering in the long term (Part 3 of 8)

Overview: Box’s financial history and growth model

Box’s history and growth model

One of the biggest negative’s about Box (BOX) is that the company has yet to generate positive earnings or operating cash flow.

Box - Summary Financials - 6.30.14Enlarge Graph

Operating income has been significantly negative over the last three fiscal years, though the metric has improved over time as percentage of revenue.

Box’s “cost of revenue” expenses represent the cost of providing its enterprise storage and collaboration services to customers, including data center costs, customer support and professional services personnel, costs for outside infrastructure service providers, depreciation of servers and equipment, and some allocated overhead. Management states that it expects the cost of revenue to increase on an absolute basis, and possibly as a percentage of revenue as it invests in data center operations, customer support, and international expansion.

“Research and development” (or R&D) expenses represent employee compensation and some allocated overheard. R&D is directed towards scaling the platform, adding new features, and generally making improvements to the service. Box expects R&D to increase in dollars but decrease as a percentage of revenue.

“Sales and marketing” expenses represent employee compensation related to sales efforts, sales commissions, marketing programs, and allocated overheard. Sales and marketing expense also includes datacenter and customer support costs related to services provided to non-paying users. Box expects sales and marketing expenses to increase in dollars but decrease as a percentage of revenue over time.

“General and administrative” (or G&A) expenses represent employee compensation related to finance, legal, human resources, and other administrative services, as well as allocated overheard. Box expects G&A expenses to increase in dollars but decrease as a percentage of revenue over time.

Over the past three fiscal years, Box has generated significant operating losses. The operating cash flow has yet to be positive. Over its life, the company has funded its growth mostly through outside capital, the majority of which has been private equity. Now it’s looking to hit the public equity markets with an initial public offering (or IPO) led by Morgan Stanley (MS), Credit Suisse (CS), JPMorgan (JPM), and BMO Capital Markets (BMO), among other investment banks, which are part of finance exchange-traded funds (or ETFs) such as the SPDR Financial Select Sector Fund (XLF).

Continue reading the next sections in this series for a SWOT (strengths, weaknesses, opportunities, threats) analysis of Box.

 

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