Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing.
Profitability seems very very very far away, and in my opinion Box is not a buy for the average Joe. It seems to me that revenues are extremely dependent on marketing, as per "50% of the net proceeds in sales and marketing activities". Now that we can hear cloud storage war drums from afar I don't see this expense item going down any time soon. This IPO isn't going to be cheap, at whatever valuation CS, MS and JP come up with.
On the VC/Tech industry's double standards:
Funny how an investors ask and drill down startups on their customer acquisition costs, customer lifetime value, user & customer numbers, etc. and none of that information is made available on the S-1, the document that should really be the "bible" for any investor. I guess the public market is going to get the short end of the stick again.
Sales & marketing for enterprise software is still the largest expense item for most enterprise software companies.
Even though more software is self-serve and provides zero-day value, the biggest enterprise customers still need the Sales & Marketing machine, from front-loading marketing which generate leads for sales people/sales engineers to customer success, etc.
For the longest time, the guys driving the best cars coming out of Oracle's parking lot were the sales people. That's changing, but not as quickly as we expect.
As a point of comparison:
Box
R&D: 37% of revenue
S&M: 138% of revenue
Salesforce (based on last SEC filing)
R&D: 15% of revenue
S&M: 53% of revenue
Oracle (based on last SEC filing)
R&D: 14% of revenue
S&M: 21% of revenue
Interesting exception is Workday (based on last SEC filing)
R&D: 39% of revenue
S&M: 42% of revenue
This is still a winner-take-all business because a typical enterprise customer is still 2-3 years at the minimum (depends on the product; ERP tends to be much stickier). Box is encouraged to spend expensive investor capital to focus on growth (and in the process, limit their tax exposure).
I think it'll be interesting as Dropbox moves more towards the enterprise how much of the typical "enterprise sales" playbook would they adopt?
Yeah, the gross margins are telling just part of the story - the sales & marketing scaling with revenue looks scary. I don't think a company with a p&l looking like that would necessarily want to go public. I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable or 2) they see this as very close to a market top and are rushing to take the company public before the music stops. I don't like either very much.
edit: I should make it clear, I'm just repeating your point for emphasis in my first sentence. I'm in agreement with your whole post.
We have incurred significant losses in each period since our inception in 2005.
We incurred net losses of $50.3 million in our fiscal year ended December 31, 2011,
$112.6 million in our fiscal year ended January 31, 2013, and
$168.6 million in our fiscal year ended January 31, 2014.
As of January 31, 2014, we had an accumulated deficit of $361.2 million
Granted the risk section is usually the absolutely worst case scenario, but it's interesting that they're losing more money at a faster pace each year.
Enterprise salespeople are very expensive. Probably because for most of their existence they have been selling very expensive products. Not sure where this all shakes out. Does the enterprise salesperson of the future get paid less b/c he/she is selling cheaper products, or do we just employ less enterprise salespeople? i.e. only use them for the biggest contracts and have the rest of the leads handled by sales engineers/customer service types who work off of funnel scripts?
For the past few years we've had it had beaten into us that a start-up is an organization searching for a scalable (and implicitly, profitable) business model.
Some businesses are always going to need a ton of capital up front: space travel, medical, semiconductors, etc. Also, social networks for obvious reasons, twitter doesn't counter this argument. There isn't a huge amount of utility gained by you when the company your friend works for is using Box.
I see Box need would need some capital, but I can't remotely put it in the capital intensive category.
Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage.
I get the argument that Enterprise sales is a long process and there's a race against the likes of Dropbox.
Let's say the sales cycle is 2 years. If I have 500 sales people in year 4 and 800 in year 6, I expect those original 500 to be earning twice their wages, at a minimum, at year 6. If they're not doing that after 2 years, why do I keep recruiting at such a rate? I also expect some proportional contribution from sales after 3-4 months, up to 2 years.
Let's call that roughly 600 people-worth of sales, that's a minimum of 1,200 salaries of income. Looking at their numbers they'd have to have gone from (normalise this to their actual numbers) 500 to 1,700 sales people in 2 years (or 250 to 850, etc). In that actually the case?
Note that sales and marketing accounts for 66.6% (yes really) of total operating expenses and "Sales and marketing expense [includes] datacenter and customer support costs related to providing our cloud-based services to our free users." (p55).
Their Net Loss, as a % of revenues, is decreasing year-on-year:
13 months to 31 January 2012: -227%
12 months to 31 January 2013: -191%
12 months to 31 January 2014: -135%
You can project that curve forward and predict that they'll be cash-flow positive by the end of 2015.
I think that, if you were to ask Levie off the record (i.e. with the restrictions imposed by the SEC), he'd say that they've found a repeatable and scalable business model and that the company could become profitable in the not-too-distant future.
They could slow their expenses' growth rate further by ceasing to offer free storage to new users. If they really started running out of money, they could cut expenses significantly (and increase revenue a bit) by saying to existing users "No more free storage! Pay us $x/GB from next month or you'd better download your files because we'll delete 'em!"
I doubt they'll do that, though. I expect they'll simply keep selling and marketing and growing bigger and bigger, in the same way that Amazon studiously avoid profitability in order to keep growing and expanding.
Interesting, by the way, that Andreessen Horowitz don't show up in the list of >5% shareholders.
> Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage.
Quite the opposite. They do have a scalable and profitable business today.
The biggest component of their operating cost is Sales & Marketing. The Sales organization was the main cause for the costs increase in 2014, but it won't continue to grow linearly with revenue for much longer. Maybe a couple of years more, as they ramp up sales teams outside the US, and then it'll flatten out.
On the other hand, the cost of Marketing is not really marketing. It's infrastructure + customer support for the free users. For now it's an investment, and they are hoping to monetize by converting into paying customers, or some indirect way in the future (e.g., advertising).
Let's do a quick thought experiment. Turn it off its free users, and focus only on the 34K paying companies. Plus, to keep existing paying customers you don't need an army of 600+ salesmen, so you could get rid of them too. What is left is a company that is extremely profitable and cashflow positive, with a nice and sustainable business.
Naturally pre-IPO companies are better-off by focusing on exponential growth, instead of profitability. The enterprise cloud storage market is a gold rush. Dropbox, Box, Amazon, Google, Microsoft and EMC all fighting for the same corporate dollars, so there's no time to waste.
The next couple of years are pretty clear for Box and Dropbox. I think the interesting challenge will be in 2-3 years, with the upcoming commoditization of this market. When everyone has a Storage-as-a-Service product, and their apps and web interfaces became good enough, how to you convince IT folks to justify tens of thousands of dollars per year?
They don't have a scalable business model when measured annually, that is clear. But enterprise customer LTV accrues over years, not months. It might take $5 to generate $1 of income this year, but then only take $0.25 to maintain that $1 of income for the next 10 years.
I don't know for sure, but I'd say there are probably enough smart people who understand the dynamics of enterprise software involved with Box for this to make sense.
Not having a 'scalable' business model (or having to prove that the model is indeed scalable) hasn't deterred other companies from going public and having an awesome final exist (from Investors' perspective).
Example: Successfactors.
Here is the excerpt of their S-1 from IPO and their last 10-K as an independent company:
http://mark.ly/KgA6PO/
The point being that as long as Box's bankers can convince the investment managers that there is an eventual buyer, box will have a decently oversubscribed order book at IPO. Of-course roadshow can't and won't mention this.
That's actually a very interesting point. I know Mark Zuckerberg owned a really big chunk (~30%) of FB when they IPO'd. Anyone with insight know if the norm is closer to Zuckerberg or Levie?
I've used Box extensively in the Enterprise and never really "got" it - it was cumbersome and often confusing. It just seems like another layer on top of what could be used as a first-party integration in something like Onedrive or Google Drive.
Perhaps where some of the "big" wins are its integration with other enterprise products like Salesforce, but we just didn't understand it because it felt like another layer on top of our office suite that wasn't necessary.
I spent 6 yrs bootstrapping a sales & services startup to $12M rev / 7-fig net. I watched every $ and plowed My Own Profit back into growth.
How easy it must be to get huge VC checks & spend more on sales than company top-line! And all we've heard in the ecosystem is how brilliant Levie is.....
Aaron is the CEO and his Salary is only about $155K, seems too less as compared to other executives. I know that their majority of the compensation comes in the form of Stock but can anyone explain why and how it works for executives?
It's typically discouraged for startup founders to pay themselves very high salaries. Box isn't a startup any more, but compensation of $189k (not $155k, notice the cash bonus) doesn't seem bad for a young company losing over $100M per year. As others have said, he may have cashed out options along the way as well.
Keep in mind, he was paid ~$2M in stock options in 2013, and owns 4% of shares overall. The IPO will make the other executives/shareholders very wealthy. Box likely had this IPO in its sights for a while, so that probably made it easier to take home "just" $189k.
As a startup CEO your salary is there to provide for your "essentials," such as housing, food, etc. It is not designed as an income that you can get rich off of. That ways your personal success is tied to the success of the company, which incentivizes you to have the investors best interests in mind.
To his credit, it looks like he was there from the beginning as a co-founder. Being a sub 30 CFO seems to be the exception rather than the norm. I, too, am jealous though.
This is all coming from a salesman at a different SaaS company.
Answering some questions about how companies may use Box and the key 2 differences (in my mind) between Box and a competitor like Dropbox:
Someone below said that their company of 50 doesn't see the value add that Box would bring over Google Drive. In response, Box definitely isn't for all businesses. They try to tap into companies that use other cloud softwares like Salesforce, Workday and NetSuite. Box offers these integrations that make it simpler for businesses running these tools to access data. The goal here is increasing efficiency and decreasing time spent transferring content from one place to the next. They also try to tap into industries with complex and stringent security needs like healthcare. Point here being that Box has certification and is compliant to securely store certain types of private information.
Finally 2 key differences:
1. The rich integrations I mentioned above. Dropbox really doesn't have that and by many industry reports is not considered a real competitor of Box (yet) due to improper infrastructure to support common needs of a business looking to go cloud.
2. http://www.citeworld.com/cloud/23090/box-aaron-levie-sxsw
It seems Box's goal isn't just to go cloud; it's turning into a platform for developers to build off of. This seems like a highly profitable pivot to me.
My company is up to about 50 people now with a good amount of people in each department (sales, marketing, hr, engineering, etc) and we've never come across a dire need to spend money on something like box nor has anyone internally expressed the desire for us to look into it. Google drive has fit our needs for sharing documents, powerpoints, excel, etc.
Can someone explain the actual value proposition for box? Just google drive with better features?
Well maybe your company is lean and smartly frugal.
Many Enterprisey customers aren't, many are as un-lean and un-frugal as they can "get away with".
So if there's one tiny little thing a user thinks they need they'll proclaim to their team "Google doesn't provide this little trinket and for us it's really mission-critical or it's all for naught" -- with no one budget-owner challenging that with a good ol' lean&frugal "do we really need it, as in need or perish?". Instead it'll be "OK look for alternatives and put it on expenses".
The bigger they are compared to your 50-people shop, the more "inefficiencies" they can afford. If they're on the S&P500, they're auto-propped-up. If they're directly or indirectly close to big-gov or mil or finance contracts, they can simply overcharge "the biggest spending debtor entity in human history" who won't bat an eye. If they are a big "NGO" or UN or EU institution, they'll ask for a nominal discount and pretend to be tight-budgeted but are essentially same-same.
That's not to say that box is useless, overpriced or that such customers hand out unlimited money freely to any and all. But they may well be slightly less "lean & frugal" than your shop, in fact most of them are guaranteed to be, and if their "urgent necessary needs" (even if they change their minds about their importance half a year later) are met, they pay up.
I wish the product wasn't so intolerable to use. It's a ten-year-old approach to syncing two folders with a minimal amount of collision detection.
Why does everything have to live in their folder?
Why do I have to use my boss's crappy organization structure?
Why is everything (sharing, permissions, history, changes) done through their website instead of on my local machine?
It's amazing to me they've spent as much time and energy on marketing as they have and haven't spent time getting a product that's usable in an enterprise in a serious way. It just becomes a bin that marketing throws a bunch of documents into and no one else in the company uses.
I think I speak for many that we like Aaron but don't know if Box can become that iconic enterprise software company that Aaron or others in the company would like us to believe.
- It had a net loss of $168 million over that period, compared to a loss of $112 million the year before.
- Revenue for the year ended January 31, 2014 was $124 million, which is up 111%.
- Sales and marketing expenses were $171 million. Note that this is higher than its revenue.
- Box has $109 million in cash on hand, and it just raised $100 million in December.
Like most initial S-1s, there's a lot of information left out (the number of shares being offered, the price, etc). You can get alerts on the updated filing at http://www.wellreadinvestor.com/companies/105975
Anyone care to speculate on when the IPO will happen? I know from the JOBS act that the S-1 must be made public no less than 21 days before the roadshow. Beyond that, the roadshow itself would likely last at least a week. That puts us at end of April at the earliest?
25M registered users but I wonder how many of those are active? Box has been quite active with their promotions of free storage space, but the actual limitations on the service made this free space not very useful.
I loved having 50GB for free, but couldn't stomach using the product. Their absurd process for selecting a custom location for the Box folder, from their own website, included uninstalling the software and doing some registry magic by hand. With that kind of attention to detail, I couldn't have any trust in their engineering or product teams.
The idea that actual enterprises would entrust their data or operations with a company I wouldn't use for casual syncing of unimportant data is something I'm still trying to stomach.
[+] [-] antr|12 years ago|reply
Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing.
Profitability seems very very very far away, and in my opinion Box is not a buy for the average Joe. It seems to me that revenues are extremely dependent on marketing, as per "50% of the net proceeds in sales and marketing activities". Now that we can hear cloud storage war drums from afar I don't see this expense item going down any time soon. This IPO isn't going to be cheap, at whatever valuation CS, MS and JP come up with.
On the VC/Tech industry's double standards:
Funny how an investors ask and drill down startups on their customer acquisition costs, customer lifetime value, user & customer numbers, etc. and none of that information is made available on the S-1, the document that should really be the "bible" for any investor. I guess the public market is going to get the short end of the stick again.
[+] [-] dpcheng2003|12 years ago|reply
Even though more software is self-serve and provides zero-day value, the biggest enterprise customers still need the Sales & Marketing machine, from front-loading marketing which generate leads for sales people/sales engineers to customer success, etc.
For the longest time, the guys driving the best cars coming out of Oracle's parking lot were the sales people. That's changing, but not as quickly as we expect.
As a point of comparison:
Box R&D: 37% of revenue S&M: 138% of revenue
Salesforce (based on last SEC filing) R&D: 15% of revenue S&M: 53% of revenue
Oracle (based on last SEC filing) R&D: 14% of revenue S&M: 21% of revenue
Interesting exception is Workday (based on last SEC filing) R&D: 39% of revenue S&M: 42% of revenue
This is still a winner-take-all business because a typical enterprise customer is still 2-3 years at the minimum (depends on the product; ERP tends to be much stickier). Box is encouraged to spend expensive investor capital to focus on growth (and in the process, limit their tax exposure).
I think it'll be interesting as Dropbox moves more towards the enterprise how much of the typical "enterprise sales" playbook would they adopt?
[+] [-] 3am|12 years ago|reply
edit: I should make it clear, I'm just repeating your point for emphasis in my first sentence. I'm in agreement with your whole post.
[+] [-] tcas|12 years ago|reply
Just to add, right on their S1 risk factors:
Granted the risk section is usually the absolutely worst case scenario, but it's interesting that they're losing more money at a faster pace each year.[+] [-] jgalt212|12 years ago|reply
[+] [-] davidjgraph|12 years ago|reply
Some businesses are always going to need a ton of capital up front: space travel, medical, semiconductors, etc. Also, social networks for obvious reasons, twitter doesn't counter this argument. There isn't a huge amount of utility gained by you when the company your friend works for is using Box.
I see Box need would need some capital, but I can't remotely put it in the capital intensive category.
Which leaves me thinking that Box simply hasn't yet found a scalable and profitable business model, it's a large company to still be in the search stage.
I get the argument that Enterprise sales is a long process and there's a race against the likes of Dropbox.
Let's say the sales cycle is 2 years. If I have 500 sales people in year 4 and 800 in year 6, I expect those original 500 to be earning twice their wages, at a minimum, at year 6. If they're not doing that after 2 years, why do I keep recruiting at such a rate? I also expect some proportional contribution from sales after 3-4 months, up to 2 years.
Let's call that roughly 600 people-worth of sales, that's a minimum of 1,200 salaries of income. Looking at their numbers they'd have to have gone from (normalise this to their actual numbers) 500 to 1,700 sales people in 2 years (or 250 to 850, etc). In that actually the case?
[+] [-] jackgavigan|12 years ago|reply
Their Net Loss, as a % of revenues, is decreasing year-on-year:
13 months to 31 January 2012: -227%
12 months to 31 January 2013: -191%
12 months to 31 January 2014: -135%
You can project that curve forward and predict that they'll be cash-flow positive by the end of 2015.
I think that, if you were to ask Levie off the record (i.e. with the restrictions imposed by the SEC), he'd say that they've found a repeatable and scalable business model and that the company could become profitable in the not-too-distant future.
They could slow their expenses' growth rate further by ceasing to offer free storage to new users. If they really started running out of money, they could cut expenses significantly (and increase revenue a bit) by saying to existing users "No more free storage! Pay us $x/GB from next month or you'd better download your files because we'll delete 'em!"
I doubt they'll do that, though. I expect they'll simply keep selling and marketing and growing bigger and bigger, in the same way that Amazon studiously avoid profitability in order to keep growing and expanding.
Interesting, by the way, that Andreessen Horowitz don't show up in the list of >5% shareholders.
[+] [-] guiambros|12 years ago|reply
Quite the opposite. They do have a scalable and profitable business today.
The biggest component of their operating cost is Sales & Marketing. The Sales organization was the main cause for the costs increase in 2014, but it won't continue to grow linearly with revenue for much longer. Maybe a couple of years more, as they ramp up sales teams outside the US, and then it'll flatten out.
On the other hand, the cost of Marketing is not really marketing. It's infrastructure + customer support for the free users. For now it's an investment, and they are hoping to monetize by converting into paying customers, or some indirect way in the future (e.g., advertising).
Let's do a quick thought experiment. Turn it off its free users, and focus only on the 34K paying companies. Plus, to keep existing paying customers you don't need an army of 600+ salesmen, so you could get rid of them too. What is left is a company that is extremely profitable and cashflow positive, with a nice and sustainable business.
Naturally pre-IPO companies are better-off by focusing on exponential growth, instead of profitability. The enterprise cloud storage market is a gold rush. Dropbox, Box, Amazon, Google, Microsoft and EMC all fighting for the same corporate dollars, so there's no time to waste.
The next couple of years are pretty clear for Box and Dropbox. I think the interesting challenge will be in 2-3 years, with the upcoming commoditization of this market. When everyone has a Storage-as-a-Service product, and their apps and web interfaces became good enough, how to you convince IT folks to justify tens of thousands of dollars per year?
[+] [-] stanleydrew|12 years ago|reply
I don't know for sure, but I'd say there are probably enough smart people who understand the dynamics of enterprise software involved with Box for this to make sense.
[+] [-] vagarwa|12 years ago|reply
Here is the excerpt of their S-1 from IPO and their last 10-K as an independent company: http://mark.ly/KgA6PO/
The point being that as long as Box's bankers can convince the investment managers that there is an eventual buyer, box will have a decently oversubscribed order book at IPO. Of-course roadshow can't and won't mention this.
[+] [-] jackgavigan|12 years ago|reply
[+] [-] Oculus|12 years ago|reply
[+] [-] Matt_Mickiewicz|12 years ago|reply
[+] [-] OWaz|12 years ago|reply
[+] [-] unknown|12 years ago|reply
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[+] [-] owenwil|12 years ago|reply
Perhaps where some of the "big" wins are its integration with other enterprise products like Salesforce, but we just didn't understand it because it felt like another layer on top of our office suite that wasn't necessary.
[+] [-] rsync|12 years ago|reply
If only...
[+] [-] joeyd|12 years ago|reply
[+] [-] suyash|12 years ago|reply
[+] [-] freyr|12 years ago|reply
Keep in mind, he was paid ~$2M in stock options in 2013, and owns 4% of shares overall. The IPO will make the other executives/shareholders very wealthy. Box likely had this IPO in its sights for a while, so that probably made it easier to take home "just" $189k.
[+] [-] jdavis703|12 years ago|reply
[+] [-] Nicholas_C|12 years ago|reply
[+] [-] mikemac|12 years ago|reply
[+] [-] suyash|12 years ago|reply
[+] [-] jsm28|12 years ago|reply
Someone below said that their company of 50 doesn't see the value add that Box would bring over Google Drive. In response, Box definitely isn't for all businesses. They try to tap into companies that use other cloud softwares like Salesforce, Workday and NetSuite. Box offers these integrations that make it simpler for businesses running these tools to access data. The goal here is increasing efficiency and decreasing time spent transferring content from one place to the next. They also try to tap into industries with complex and stringent security needs like healthcare. Point here being that Box has certification and is compliant to securely store certain types of private information.
Finally 2 key differences: 1. The rich integrations I mentioned above. Dropbox really doesn't have that and by many industry reports is not considered a real competitor of Box (yet) due to improper infrastructure to support common needs of a business looking to go cloud. 2. http://www.citeworld.com/cloud/23090/box-aaron-levie-sxsw It seems Box's goal isn't just to go cloud; it's turning into a platform for developers to build off of. This seems like a highly profitable pivot to me.
[+] [-] dantiberian|12 years ago|reply
[+] [-] capkutay|12 years ago|reply
Can someone explain the actual value proposition for box? Just google drive with better features?
[+] [-] dualogy|12 years ago|reply
Many Enterprisey customers aren't, many are as un-lean and un-frugal as they can "get away with".
So if there's one tiny little thing a user thinks they need they'll proclaim to their team "Google doesn't provide this little trinket and for us it's really mission-critical or it's all for naught" -- with no one budget-owner challenging that with a good ol' lean&frugal "do we really need it, as in need or perish?". Instead it'll be "OK look for alternatives and put it on expenses".
The bigger they are compared to your 50-people shop, the more "inefficiencies" they can afford. If they're on the S&P500, they're auto-propped-up. If they're directly or indirectly close to big-gov or mil or finance contracts, they can simply overcharge "the biggest spending debtor entity in human history" who won't bat an eye. If they are a big "NGO" or UN or EU institution, they'll ask for a nominal discount and pretend to be tight-budgeted but are essentially same-same.
That's not to say that box is useless, overpriced or that such customers hand out unlimited money freely to any and all. But they may well be slightly less "lean & frugal" than your shop, in fact most of them are guaranteed to be, and if their "urgent necessary needs" (even if they change their minds about their importance half a year later) are met, they pay up.
[+] [-] jmathai|12 years ago|reply
http://www.sec.gov/Archives/edgar/data/1372612/0001193125141...
[+] [-] nathancahill|12 years ago|reply
[+] [-] calciphus|12 years ago|reply
Why does everything have to live in their folder? Why do I have to use my boss's crappy organization structure? Why is everything (sharing, permissions, history, changes) done through their website instead of on my local machine?
It's amazing to me they've spent as much time and energy on marketing as they have and haven't spent time getting a product that's usable in an enterprise in a serious way. It just becomes a bin that marketing throws a bunch of documents into and no one else in the company uses.
[+] [-] ycmike|12 years ago|reply
[+] [-] unknown|12 years ago|reply
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[+] [-] sgy|12 years ago|reply
[+] [-] cheriot|12 years ago|reply
</shameless-self-promotion>
[+] [-] dmourati|12 years ago|reply
[+] [-] jpalomaki|12 years ago|reply
[+] [-] Jare|12 years ago|reply
The idea that actual enterprises would entrust their data or operations with a company I wouldn't use for casual syncing of unimportant data is something I'm still trying to stomach.
[+] [-] josephjrobison|12 years ago|reply
[+] [-] ycmike|12 years ago|reply
[+] [-] unknown|12 years ago|reply
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[+] [-] npalli|12 years ago|reply
[+] [-] billiam|12 years ago|reply