Unpacking BoxWorks 2019
We attended BoxWorks 2019, Box’s (BOX) annual customer conference, and an investor breakout session held in conjunction with the event on Thursday, October 3. Both the conference and the investor session were well attended, which was not especially surprising given that Box boasts over 95,000 customers, including 69% of the Fortune 500, and hosted the event in San Francisco. We came away with the view that Box has the hallmarks of a compelling investment opportunity, including a large total addressable market, a highly differentiated technology platform, a plausible go-to-market strategy to reaccelerate growth, ample room for margin expansion, and an attractive valuation relative to peers.
Our knowledge of the company prior to the event was admittedly limited with our perception being that Box was one of several well-known vendors offering enterprise file synchronization and sharing (EFSS) software and had hit a wall with respect to growth, perhaps due to a highly competitive landscape in which pricing power appears limited. An early morning conversation with a mid-market customer operating in over 30 countries quickly altered that view, however, as we were told that Box’s platform is uniquely architected such that the IT team has complete visibility and access to all of the content stored in each user’s folder, providing robust data governance and compliance capabilities unmatched by competitors. Moreover, the open platform and out-of-the-box integrations with over 1,400 third-party applications enhance usability from an end user perspective in contrast to competing solutions from Microsoft (MSFT), which we heard tends to be Box’s primary competition given the bundling of OneDrive with Office 365. A cloud platform with an enterprise-grade architecture featuring numerous pre-built integrations suggests Box has the technological leadership to potentially win the market, in our opinion.
Although Box began as an EFSS solution, the company is well on its way to becoming a full-fledged platform for content management, collaboration, and compliance. In this regard, management estimates the addressable market opportunity for end-to-end cloud content management (CCM) platforms at approximately $45 billion, comprised of legacy on-premise enterprise content management solutions, a host of collaboration and workflow tools, and data security products. The imminent launch of Box Shield, which helps prevent data leakage and identifies potential access misuse and threats by enabling users to easily apply permissions and policies to content shared with internal and external collaborators, and the revamped Box Relay, a native workflow solution enabling enterprises to streamline content-oriented business processes, leverage the company’s strengths in governance and security while positioning Box to capture greater wallet share with customers.
From a macro standpoint, we believe Box stands to benefit from tailwinds arising from data security and privacy concerns as enterprises grapple with reducing their attack surface area to avoid data breaches and seek solutions to ensure compliance with evolving consumer privacy and data localization regulations across the globe. Per management, the company has seen strong adoption in highly regulated industries like finance and healthcare as a result of these challenges. More broadly, management also believes this is Box’s first time in market when significant workloads for content management and collaboration are moving to the cloud. To capitalize on these trends, management outlined a go-to-market strategy predicated upon expansion with existing customers via add-on products, which have contributed approximately 28% of new bookings to date and are expected to comprise as much as 50% of new bookings in FY ’23; increasing the volume and velocity of deals valued at $100,000 or more that have the potential to grow into larger accounts; and improving sales productivity.
Near-term targets include increasing the net retention rate to over 106% and increasing sales productivity by 15% in FY ’21. Over the next three years, the favorable unit economics arising from up-selling existing customers is expected to result in the sum of revenue growth and free cash flow margin more than doubling from 16% in FY ‘20 to 35% or more in FY ’23. Management anticipates achieving at least 25% for this metric in FY ’21 with margin expansion likely to account for the majority of the increase. For reference, FY ’20 guidance reflects revenue growth of 14% and a free cash flow margin of approximately 2%. At the midpoint of management’s 12%-18% longer term growth target, this implies revenue of approximately $1.05 billion in FY ’23 with free cash flow in excess of $200 million.
Considering that BOX shares trade at a FY ’21 EV/Sales multiple of 3x based on current consensus forecasts, we see significant opportunity for multiple expansion should growth reaccelerate and management deliver upon its longer term targets. The presence of an activist investor, Starboard, which has acquired a 7.5% stake in the company, provides added incentive for the company to execute and may prompt an evaluation of strategic alternatives should improved sales execution prove elusive in the near-term. In this regard, we believe Box is a unique asset given its differentiated platform for content management and myriad of integrations with both systems of record and systems of engagement. In other words, the company is likely to be of interest to strategic acquirers. With all this in mind, we believe investors would be well served in diving into the Box story.