VSnoisy storage specialist Box (NYSE: BOX) historically lagging behind the market, but the company is booming as it reformulates its strategy.
In this segment of “Beat and Raise” registered on December 1, Fool contributors Jon Quast and Brian Withers discuss Box’s third quarter results and how the company is changing direction.
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Brian Withers: Well, let’s move on to Box, which unfortunately competes with a free product called Google Docs. [laughs]
Jon Quest: Yeah. For those who don’t know, Box is cloud storage and ancillary services for businesses, not really for you and me Brian, but more for their customers like Mcdonalds, Visa, Pay Pal. These are all Box customers who use Box’s services to store their documents and do other things. Let’s keep it simple. They just released their third quarter results yesterday after the market closed. We are timely here. I think if you look at the market today everything was down except for Apple and Box. Go up around 11% today, as this is a stock that has been almost left for dead in many ways due to a few years of missed expectations. They’re starting to turn it around a bit and change the narrative and I think it’s really starting to take hold in the market.
They reported revenue of $ 224 million for the quarter. That’s up 14 percent year over year. It topped management expectations by $ 280-219 million, but also exceeded Wall Street expectations. Fourteen percent may not seem like much, but this is the third consecutive quarter of the company’s revenue growth accelerating. It’s not something he’s been doing for quite some time. They said the sales team did a really good job of getting people to level up and getting new customers. Hats off to them, they are making a lot of progress on these fronts.
Regarding earnings per share, management actually gave generally accepted accounting principles, GAAP, earnings per share forecast. They were aiming for a loss of $ 0.12 per share, they missed that indication, so they reported a loss of $ 0.12 – sorry. They had guided for eight to $ 0.09 loss. They suffered a loss of $ 0.03 last year. The latter has broadened out there on a GAAP basis now on a non-GAAP basis, a target of $ 0.22 in earnings per share. They guided for $ 0.21. They beat him with $ 0.22, which is also higher than analysts expected on a non-GAAP basis. It’s a failure on a front on the bottom line on the other hand, it’s a beat and it’s a beat of expectations because analysts were looking more at non-GAAP. When you look at their outlook, they’ve raised their forecast for the entire year. They are currently in fiscal year 2022, which is another very strange thing. The fourth quarter of fiscal 2022 is just around the corner. When you look at the full year, they raised that forecast to $ 868 million to $ 870 million midway through, which is 13% year-over-year growth. That’s an increase, so if you look at their pace in the third quarter and what they lifted, that’s about it. Not much of an increase, that pretty much explains their beat in the third quarter.
What’s there to love here with Box? Here are some highlights. As I said, three consecutive quarters of income growth acceleration. Based on their forecast for the fourth quarter, if they hit it, it will be the fourth quarter of accelerating revenue growth. It is a trend in the right direction. Part of that is their net retention rate, 109% in the third quarter. This is the fourth consecutive quarter of accelerated growth in the net retention rate. This is important because Box has launched new products and services over the past couple of years which they believe have really filled and completed their product line. They thought that these new products, having them in place, having pretty much filled the void in what they were offering to their customers, they thought that was going to turn into revenue growth and so far that is the case. Give them a lot of credit for it. Customer growth too. One of the things they pointed out was that they entered into 97 new deals with customers over $ 100,000. They only had 62 of these new deals in the same quarter last year. That’s a big increase on the high end of the market. It is also very interesting to see.
Concerns, if any, my question here with Box, everything in the business looks as good as it has been in probably five or six years when it comes to executing a business plan and demonstrating of this growth, they are positive free cash flow. All of these things look good. They added 200 million to their share buyback plan. Here is my question, is this an investment that beats the market with the growth they have? So 15 percent is what they’re heading for the next quarter. Is it enough to beat the market? If you play this over five years, six years will they still be beating the market. What are they going to do with this money? If the product suite is complete, where do they deploy some of that cash flow to create the next revenue stream? They buy back shares. Guess that’s good in a way, but I want to share a graphic here. This is the total number of shares outstanding over the past five years, up 24%. They have repurchased around 500 million shares in the last few quarters and added another 200 million to this announcement, but they are not removing those shares, so the number of shares continues to increase. This is my question with Box. The companies are as strong as ever, but is it enough to beat the market in the future? This is what I am not sure.
Withers: Yeah, Jon. Haven’t watched Box in a long time and it looks like they’re gathering their stuff. You mentioned all of the products they have. You watched their presentation to investors. They go beyond simple storage. They’re trying to have an end-to-end ecosystem here for their large business customers. As you point out, he was left for dead. If you think of SaaS companies with a double-digit price-to-sales ratio, these guys have a price-to-sales ratio of five. It could be, if you believe in management and they make a difference, it could be an interesting play.
Quarter: Yeah. This is a company that I owned in a location very close to the IPO for about five years, I owned shares. The reason I finally sold in 2020 or maybe 2019 was because management consistently failed to follow their guidelines and that was a problem for me. It seems to be something that is changing. I don’t know if it’s maturity, I don’t know if it’s the pressure they are under from activist investors, but there seems to be a lot more of what we’re going to do and they’re ‘doing it . This part of the story, I think investors need to take heed and note that it’s changing on that front so it’s going to reverse the share price.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Brian withers has no position in any of the stocks mentioned. Jeremy bowman has no position in any of the stocks mentioned. Jon quest owns PayPal Holdings. The Motley Fool owns and recommends Alphabet (A-shares), Alphabet (C-shares), Apple, Box, PayPal Holdings and Visa. The Motley Fool recommends the following options: $ 75 long calls in January 2022 on PayPal Holdings, $ 120 long calls in March 2023 on Apple, and $ 130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.