Box Inc. (BOX, Financial), the enterprise-focused cloud storage and file-management company, reported the results of its second fiscal quarter yesterday, beating revenue and earnings consensus.
Revenue grew 20.5% year-over-year to reach $148.2 million during the quarter. Analysts were looking for revenue of $146.5 million. The California-based storage company reported a net-loss of 5 cents per share, better than the expected net loss of 6 cents a share.
For the third fiscal quarter of 2019, Box is targeting midpoint revenue of $154.5 million, slightly below the Street’s consensus of $155 million. The company is guiding for a non-GAAP loss of 7.5 cents per share for the third quarter, which is 25% higher than the Street’s consensus. For the full year, the enterprise cloud storage company is looking at midpoint revenue of $607 million, in line with the Street’s consensus. Box is expected to lose 17 cents on a share during its full fiscal year of 2019. Due to weak guidance, Box plunged in the afterhours yesterday, shedding 7% of its market cap.
What drove the top-line growth?
Revenue growth was supported by billings, which increased 17% year-over-year. Moreover, the paying customer base increased to 87,000, which also helped the revenue growth of the company during the quarter. However, the management was not specific enough about the growth of its revenue during the earnings call.
Positive takeaways from earnings
Box delivered a double-digit growth quarter, with expansion in its paid users, billings, revenue and deferred revenue. The company is now serving 69% of the Fortune 500 companies, including big names like Amazon (AMZN) and Cisco (CSCO). During the third fiscal quarter, Box expanded its deployments across several companies including Canon, Lionsgate and Societe Generale U.S. As a matter of fact, the net account value of some existing customers increased 12% during the quarter, indicating that not only is the company retaining customers, it’s getting additional business from existing customers.
It’s worth mentioning that Box has again been named a leader in Gartner’s magic quadrant of content collaboration platform during 2018. In short, Box continues to gain traction on the enterprise front of cloud storage due to its differentiated products.
Negative takeaways from earnings
Despite revenue growth and high quality enterprise products, Box is reporting strong losses. The company posted a worse-than-expected net-loss during the quarter. Gross margin also went down from 75.5% in the second fiscal quarter of 2018 to 73.7% during the second fiscal quarter of 2019.
Moreover, the annual revenue run rate is also expected to go down if the full-year guidance is to be believed. Box is set to add $102 million in incremental revenue during 2019, compared to $107 million added during fiscal year ended 2018. Consequently, the rate of growth is slowing down.
The chart shows that growth is slowing down for Box. Second quarter revenue growth is hardly in line with the growth rate of the first quarter. As Box is yet to report positive earnings, slowing growth rate doesn’t bode well for the enterprise cloud storage company.
Moreover, investors are also generously pricing the stock. Box is trading at a forward price-sales ratio of more than 6.
A price-sales ratio of more than 6 isn’t warranted for a stock that’s struggling to turn profits, not to mention the declining top-line growth.
Final thoughts
Box is exposed to the growth prospects of cloud collaboration market, especially the enterprise collaboration market. Slowing growth and declining margin indicate that Box might be struggling at acquiring additional customers, though. Couple that with a high price-sales ratio, and box starts to look like a risky bet at current valuation.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
