Box IPO

On 24th March 2014, Online storage company Box filed for an IPO and unveiled its plans to raise US$250 million. The company is in a race to build the largest cloud storage platform and it competes with larger companies like Google Inc and its rival, Dropbox.

I quickly browsed through Box S1 Filing and when I was hoping to see a Cool Blue Box, it turned out to be a diffused “Black Box”. I also prepared a quick and dirty Box Financial Model to further access the gravity of the situation and realized that Box Financials were full of horror stories. You may also want to download the Box IPO Financial Model for further details.

Risk Factor also mentioned in the Prospectus of Box Inc scares me even further.

We do not expect to be profitable for the foreseeable future

If you are planning to invest in Box, then you may also want to read Box IPO – To Buy or Not to Buy?

Top 10 Risk Factors of Box IPO

#1 OMG – Box Revenue <<< Losses!

Box’s topline growth trend of more than 100% each year, which I believe is very impressive, however, the bottom line is in a real mess. I initially thought it was a typo, but realized soon that Box revenues were significantly less than losses.

Revenue of $124 million vs Net Loss of $168 million looks a bit scary

Further adding to the woes, Box has an accumulated deficit of $361 million.

#2 Box Sales & Marketing Costs is 3 times the average

The biggest cost is the Sales and Marketing costs which at $171 million grew by nearly 73% y-o-y.

Box has maintained an aggressive pace of expanding into several vertical industries and it is unlikely to come by significantly over the next couple of years.

The average Sales & Marketing (S&M) costs are approx. 45% of Revenue for the SaaS companies.

However, Box’s S&M costs are 137% of Revenue, representing 3 times the average of SaaS companies (this makes me nervous!)

#3 – Box operating exp to increase from $31m/month to $233m/month (yes, it is per month!)

The company recorded the operating expenses of $257 million in FY2014, which comes out to approximately $21.5 million per month.

Even if we remove the R&D expenses, the per month expenditure comes out to be $17.5 million per month.

Also, note that operating expenses disproportionately every year and it increases from $31 million per month in FY2015 to $233 million per month in FY2019!

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#4 – Box Inc will require $1.25 billion dollars in the next 5 years to survive

Box had only $108 million in cash and cash equivalents and this was due to late year-end funding of $100 million. Looks like Box received this funding in just a nick of time!

It can be seen from the Box Financial Model that $250 million would last a little less than a year at its current cash burn rate. You can learn more about Enterprise Valuations of the box here.

In fact, I note in Box Inc Financial model template that they would require another $1 billion dollars if they wish to “survive” for the next 5 years!

I have assumed that they would raise debt, however, private investments can also be a reasonable option to look at.

#5 – Management Owns Less than Expected

Aaron Levie owns only 4.1% of Box Inc (vesting portion), however, if additional grants that he got are included, his stake is actually closer to 6%. With such a small stake in Box, the founder’s interest and the company’s interest may not be totally aligned. Also, to put things into perspective, you may note that post-Facebook IPO, Mark Zuckerberg owned 22% of Facebook.



#6 – Mark Cuban – I would combust if I was responsible…

Mark Cuban, the billionaire investor, and entrepreneur was one of the first angel investors in 2005. However, a change in strategy by the company led him to sell his stake in about a year. He may have missed the gains that his investment would have made, however, Cuban seems unperturbed and warns investors with his tweet on 25th March 2014.

I wish @BoxHQ the best but I would combust if 8 years in I was responsible for $169mm in losses against less revs.I hope IPO gets them going

#7 – OpenText seeking $268 million in damages in a patent infringement lawsuit

On 30th March 2014, OpenText, Canada based largest software company that produces and distributes Enterprise Information Management software filed a patent infringement suit against Box asserting that Box infringes 200 claims across 12 patents in 3 different patent families. Open Text is seeking preliminary and permanent injunctions halting the sale of Box’s products, as well as damages exceeding $268 million. Compare this number with $250 million Box Inc is raising through IPO!

Open Text v. Box et. al.

#8 – Competitors

The market for cloud-based Enterprise Content Collaboration is competitive and fragmented. Though, this segment is rapidly evolving, Box Inc acknowledged Citrix, Dropbox, EMC, Google and Microsoft as competitors.

A look at the competitor’s balance sheet provides a glimpse of how deep-pocketed these companies are and how competitive the business environment may get going forward.

#9 – NSA Struggles could be bad for business

National Security Agency (NSA) intelligence gathering tactics may scare international businesses out of working with US-based technology companies.

Essentially when the core business lies on data sharing and collaboration, it becomes even more problematic as data security becomes a question mark for an international firm.

Aaron Levie suggested that if this occurs, then as a cloud provider they have to build a business country by country with completely different operations and facilities and services.

Levis acknowledged that this will basically curtail the ability to go international and Box Inc may lose out an opportunity of the growing cloud market.

#10 – Box may get acquired after the IPO

The box needs to raise around $1.25 billion in the next 5 years. IPO of 250 million would contribute only 20% of the overall fund requirement. However, the company may have to arrange for funds to an extent of $1 billion. Either they can look for private funding or raising debt. Another option that cannot be totally denied is that Competitors with deep pockets may look at acquiring Box Inc. Box may have to oblige going forward as they may look for aggressive growth and consolidation beyond their core capabilities.

Next Steps? Anything I missed? Let me know what you think, your feedback by Leaving a Comment

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p.s. – I do not represent any brokerage firm. The above views are my own assessment of Box IPO. I have tried my best to ensure the factual accuracy of the analysis, however, please feel free to provide me with corrective measures if you spot any errors.