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 access the gravity of the situation further and realized that Box Financials were full of horror stories. You may also want to download the Box IPO Financial Model for further details.
The 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, 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 lineThe Bottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its 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 LossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet. 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 three times the average
- The highest 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 three times the 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 expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. of $257 million in FY2014, which is approximately $21.5 million per month.
- Even if we remove the R&D expenses, the per month expenditure will 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 in the next five years to survive
- Box had only $108 million in cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. , and this was due to late year-end funding of $100 million. It 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 hereHereThe analysis of the Box IPO valuation can be done using various methodologies which are Relative Valuation – SaaS Comparable Comps, Comparable Acquisition Analysis, Using Stock-Based Rewards, Valuation cues from Private Equity Funding, Valuation cues from Dropbox Private Equity Funding, and Discounted Cash Flow Approach for Box IPO Valuation..
- I note in Box Inc Financial model templateFinancial Model TemplateYou can download many financial modeling templates, including the Alibaba IPO model, Box IPO model, Colgate financial model, free cash flow to firm model, sensitivity analysis model, comparable company analysis model, PE and PE band chart. that they would require another $1 billion if they wish to “survive” for the next five 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 closer to 6%. With such a small stake in Box, the founder’s interest and the company’s interest may not be aligned. 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 were responsible…
Mark Cuban, the billionaire investor, and entrepreneur, was one of the first angel investorsAngel InvestorsIndividuals who invest in new firms and start-ups are known as angel investors. In exchange, they demand equity or debt. It's more of an informal investing approach in which the company doesn't have to go through a lot of compliances. 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 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!
#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 from 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 entirely different operations and facilities and services.
- Levis acknowledged that this would 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 five years. IPO of 250 million would contribute only 20% of the overall fund requirement. However, the company may have to arrange for funds to the extent of $1 billion. Either they can look for private funding or raising debt. Another option that cannot be 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.
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This has been a guide to Box IPO Risk Factors. You may learn more about Investment Banking from these suggested articles below –
p.s. – I do not represent any brokerage firm. The above views are my assessment of the 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.