Box (BOX)

Cloud content storage and management platform Box (NYSE:BOX) met Wall Street’s revenue expectations in Q4 CY2024, with sales up 6.3% year on year to $279.5 million. On the other hand, next quarter’s revenue guidance of $274.5 million was less impressive, coming in 1.8% below analysts’ estimates. Its GAAP profit of $1.12 per share was significantly 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.

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Box grew its sales at a weak 7.6% compounded annual growth rate. This was below our standard for the software sector and is a poor baseline for our analysis.

This quarter, Box grew its revenue by 6.3% year on year, and its $279.5 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 3.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months, similar to its three-year rate. This projection is underwhelming and suggests its products and services will face some demand challenges.

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 came in at $398.6 million in Q4, and over the last four quarters, its growth was underwhelming as it averaged 4.7% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in acquiring/retaining customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Box to acquire new customers as its CAC payback period checked in at 103 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

Box’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 102% in Q4. This means Box would’ve grown its revenue by 1.8% even if it didn’t win any new customers over the last 12 months.

Box has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

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. That means Box only paid its providers $20.92 for every $100 in revenue.

Box produced a 79% gross profit margin in Q4, marking a 2.8 percentage point increase from 76.1% in the same quarter last year. Box’s full-year margin has also been trending up over the past 12 months, increasing by 4.2 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 7.3%. 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 rose by 2.4 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Box generated an operating profit margin of 6.4%, down 1.6 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was recently less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

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 that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging 27.9% over the last year.

Box’s free cash flow clocked in at $91.27 million in Q4, equivalent to a 32.7% margin. This result was good as its margin was 1.5 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Box’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 27.9% for the last 12 months will increase to 29.2%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

Box is a profitable, well-capitalized company with $722.8 million of cash and $721.3 million of debt on its balance sheet. This $1.5 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.

Revenue was just in line and operating profit missed in the quarter. Looking ahead, its revenue guidance for next quarter missed significantly. Overall, this quarter could have been better. The stock traded down 8.3% to $30.75 immediately following the results.

Updated: May 16, 2025 at 10:17 PM EDT

Before investing in or passing on Box, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Box isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months.

Box’s price-to-sales ratio based on the next 12 months is 4.2x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $34.44 on the company (compared to the current share price of $32.01).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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