Box IPO Risk Factors

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 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?

Box IPO Risk Factors

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Source: Box IPO Risk Factors (wallstreetmojo.com)

Top 10 Risk Factors of Box IPO

#1 OMG – Box Revenue <<< Losses!

Box IPO - Revenue is less than Losses

#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!)
Box SG&A Costs

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

Box IPO - Operating Expense Per Month

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

Box Inc $1.25 billion required in next 5 years

 #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.
Box IPO - Aaron Levie Ownership

#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.read more 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!

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.

Box IPO - Competitive Environment

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.

Box Inc Competitors - Deep Pockets

#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.

Next Steps?

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

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.

Reader Interactions

Comments

  1. T SRIDHAR SASTRY says

    Thank Very Much sir, for providing this knowledge resources for us.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. Andrew Kiwelu says

    Competition is fierce in the cloud computing business. with google and microsoft topping the list i doubt if Box Inc will ever break even. Time will tell.

  3. Arpita says

    Tech stocks have crashed since the beginning of April. It will be interesting to see Box IPO. Thanks for this scary post :-)

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