Box (BOX)

Cloud content storage and management platform Box (NYSE:BOX) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 4.4% year on year to $276.3 million. Guidance for next quarter’s revenue was optimistic at $290.5 million at the midpoint, 2.6% above analysts’ estimates. Its non-GAAP profit of $0.30 per share was 17.2% above analysts’ consensus estimates.

Company Overview

Founded in 2005 by Aaron Levie and Dylan Smith, Box (NYSE:BOX) provides organizations with software to securely store, share and collaborate around work documents in the cloud.

The catch phrase "digital transformation" originally referred to the digitization of documents within enterprises. The growth of digital documents has spurred an explosion of collaboration within and between businesses, which in turn is driving the demand for e-signature and content management platforms.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Box’s 6.6% annualized revenue growth over the last three years was weak. This fell short of our benchmark for the software sector and is a poor baseline for our analysis.

This quarter, Box reported modest year-on-year revenue growth of 4.4% but beat Wall Street’s estimates by 0.6%. Company management is currently guiding for a 7.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.7% over the next 12 months, similar to its three-year rate. This projection is underwhelming and implies its newer products and services will not catalyze better top-line performance yet.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Box’s billings punched in at $242.3 million in Q1, and over the last four quarters, its growth slightly outpaced the sector as it averaged 11.7% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Box is very efficient at acquiring new customers, and its CAC payback period checked in at 28 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Box more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Box, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Box’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 79.1% gross margin over the last year. Said differently, roughly $79.08 was left to spend on selling, marketing, and R&D for every $100 in revenue.

Box’s gross profit margin came in at 78% this quarter, in line with the same quarter last year. On a wider time horizon, Box’s full-year margin has been trending up over the past 12 months, increasing by 3.5 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Box has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 6.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Box’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Box generated an operating profit margin of 2.3%, down 4.5 percentage points year on year. Since Box’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Box has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 27.2% over the last year.

Box’s free cash flow clocked in at $118.3 million in Q1, equivalent to a 42.8% margin. The company’s cash profitability regressed as it was 3.7 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Box’s free cash flow margin of 27.2% for the last 12 months to remain the same.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Box is a profitable, well-capitalized company with $790.4 million of cash and $725 million of debt on its balance sheet. This $65.45 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Box blew past analysts’ billings expectations this quarter. We were also glad its EPS guidance for next quarter trumped Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 10.9% to $34.90 immediately following the results.

Updated: June 19, 2025 at 10:20 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Box, you should also grasp the company’s longer-term business quality and valuation.

Box doesn’t top our investment wishlist, but we understand that it’s not a bad business. Although its revenue growth was weak over the last three years, its growth over the next 12 months is expected to be higher. Plus, Box’s bountiful generation of free cash flow empowers it to invest in growth initiatives.

Box’s price-to-sales ratio based on the next 12 months is 4.4x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $36.78 on the company (compared to the current share price of $35.01).