Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing.
Profitability seems very very very far away, and in my opinion Box is not a buy for the average Joe. It seems to me that revenues are extremely dependent on marketing, as per "50% of the net proceeds in sales and marketing activities". Now that we can hear cloud storage war drums from afar I don't see this expense item going down any time soon. This IPO isn't going to be cheap, at whatever valuation CS, MS and JP come up with.
On the VC/Tech industry's double standards:
Funny how an investors ask and drill down startups on their customer acquisition costs, customer lifetime value, user & customer numbers, etc. and none of that information is made available on the S-1, the document that should really be the "bible" for any investor. I guess the public market is going to get the short end of the stick again.
Sales & marketing for enterprise software is still the largest expense item for most enterprise software companies.
Even though more software is self-serve and provides zero-day value, the biggest enterprise customers still need the Sales & Marketing machine, from front-loading marketing which generate leads for sales people/sales engineers to customer success, etc.
For the longest time, the guys driving the best cars coming out of Oracle's parking lot were the sales people. That's changing, but not as quickly as we expect.
As a point of comparison:
Box
R&D: 37% of revenue
S&M: 138% of revenue
Salesforce (based on last SEC filing)
R&D: 15% of revenue
S&M: 53% of revenue
Oracle (based on last SEC filing)
R&D: 14% of revenue
S&M: 21% of revenue
Interesting exception is Workday (based on last SEC filing)
R&D: 39% of revenue
S&M: 42% of revenue
This is still a winner-take-all business because a typical enterprise customer is still 2-3 years at the minimum (depends on the product; ERP tends to be much stickier). Box is encouraged to spend expensive investor capital to focus on growth (and in the process, limit their tax exposure).
I think it'll be interesting as Dropbox moves more towards the enterprise how much of the typical "enterprise sales" playbook would they adopt?
Curious, why doesn't anyone here mention SAP when the topic of enterprise software comes up? SAP is the enterprise software company (bigger than Oracle in business software). That being said:[0]
- SAP has 15,000 s&m employees (second only to it's 17,000 R&D employees)
- Of it's €11B in gross profit, it spends €4B on s&m, or 25% of it's revenue (€16B). It spends roughly the same €4b on software development (Cost of software + R&d)
I'd love to see the accounting on that (see it; not do it). It makes sense since they're not customers and free accounts are part of their lead-gen strategy. Good pick-up.
Yeah, the gross margins are telling just part of the story - the sales & marketing scaling with revenue looks scary. I don't think a company with a p&l looking like that would necessarily want to go public. I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable or 2) they see this as very close to a market top and are rushing to take the company public before the music stops. I don't like either very much.
edit: I should make it clear, I'm just repeating your point for emphasis in my first sentence. I'm in agreement with your whole post.
"I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable or 2) they see this as very close to a market top and are rushing to take the company public before the music stops. I don't like either very much."
They (Box) just raised ($100MM, Dec/13) a month or two before this was filed. The market, however, is very ripe[1] and the IPO marketers are likely advising them to take it public. The Last round is basically a mezz round ($2B valuation) and if they flip this thing for 1.5x to 2.0x in 6 months those guys are going to be happy. The cash burn on the P&L is $14/month and $350MM would last 24 months, enough to inflect if its a real biz. Closer to inflection, a Secondary raise will generate liquidity for the remaining insiders. Given the uncertainty with the FED's propping up of QE, its not a bad idea if you are the #N player to not wait (risk of backwash/turbulence if the others take all investor appetite), given that its a two-stage exit for most IPOs these days.
I agree on the S&M expenses. What's scarier is that this is a very competitive fairly undifferentiated market, which means you can't live without salespeople. Which means they're going to hit the wall at some point, because as it stands right now, they are spending about $1.40 in sales ALONE to bring in $1 of revenue. Now that's scary.
#1 sounds like Ben Horowitz's last ditch IPO of Loudcloud (except market conditions today are much more favorable). The story goes that Loudcloud was unprofitable, headed towards bankruptcy, & couldn't raise VC capital, so they went public. http://www.businessweek.com/stories/2001-04-15/the-last-days...
"When Loudcloud first filed to go public 164 days earlier, it was valued at $1.15 billion, in spite of losing $107 million on only $6 million in revenues in the three quarters ended Oct. 31."
> Full context is useful.
== $1B+ val vs. $10MM LTM rev = 100x rev multiple.
I'd be much more scared if they were NOT ploughing money back into the business in order to grow. IPOs are fundraising events first and foremost. Virtually all companies that IPO are operating at a loss (ie, nearly synonymous with "growth company"). The sooner HNers recognize this, the sooner they will get involved with multi-billion companies.
Growth companies come at a discount (execution risk, growth is not given, growth industries = plenty of competitors), I doubt Box's valuation will support its financials and road ahead. One comment on "virtually all companies that IPO are operating at a loss", unfortunately this is the opposite case, companies that IPO tend to be profitable.
To be fair, most companies going public lately have been unprofitable. Yes, not true historically; but the desire for savings yield/strategy funds that will buy no matter what/success of flipping ipos has lowered the bar. And the P/S metrics .. well, Box would be stupid _not_ to ipo right now. I expect they'll play the same trick as others and sell a small percentage of the fully diluted share count to create a sellers market for the shares, and target a 50-100 multiple on revenue. When the market gets used to their price they can file a secondary.
edit: I should clarify again based on sibling/nephew comments... I think it's too far off topic to go into this in depth, but clearly running at a loss is expected and appropriate for companies at a certain stage of their growth profile. Even big companies (like Amazon, like someone noted) can do this if they prefer to invest in pursuing large enough growth opportunities out of cash flow vs selling debt or shares. Regardless, the revenue growth has to show up at some point, and spending in sales has to show ROI.
of course, i'm 100% with you. if i were box i'd be wanting to ipo on a hot market to avoid dilution/raise as much cash as possible. this is a good move for box. all i'm saying is that this isn't (imho) a good investment for ipo investors.
A company can be spending more than they make, and still be profitable (a la Amazon) - hence the "plowing money back into the business" comment above. A company in its growth stage believes there is significant profits to be made by spending on customer acquisition, and generally is making an informed decision not to pad the coffers and horde money (a la Apple).
Discretionary spending is different than fixed costs and contractual liabilities. I am saying that you should think of costumer acquisition as an upfront expense that leads to future profits - if the business is growing, and has reasonable margins.
For example, Amazon has 'razor thin' margins and is operating at a slight loss. Does anyone really argue that they are not 'Profitable'?
Loss per share was $14.68 in 2013 and grew slightly to $14.89 in 2014. It's ok to lose money at IPO, but those losses need to be narrowing. Otherwise, you're plowing money back into a hole.
I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable
That's what an IPO was originally supposed to be for, right? Raising capitol, rather than cashing out?
We have incurred significant losses in each period since our inception in 2005.
We incurred net losses of $50.3 million in our fiscal year ended December 31, 2011,
$112.6 million in our fiscal year ended January 31, 2013, and
$168.6 million in our fiscal year ended January 31, 2014.
As of January 31, 2014, we had an accumulated deficit of $361.2 million
Granted the risk section is usually the absolutely worst case scenario, but it's interesting that they're losing more money at a faster pace each year.
At the same time, while they spent $1.7 of S&M expenses to generate $1 in revenue in 2012-13, they decreased this to just $1.37 in 2014, so that's an improvement given that S&M is 2/3rds of their operating expenses.
Enterprise salespeople are very expensive. Probably because for most of their existence they have been selling very expensive products. Not sure where this all shakes out. Does the enterprise salesperson of the future get paid less b/c he/she is selling cheaper products, or do we just employ less enterprise salespeople? i.e. only use them for the biggest contracts and have the rest of the leads handled by sales engineers/customer service types who work off of funnel scripts?
I don't disagree with "salespeople are very expensive", but they are clearly not bringing in enough revenues to make the business profitable. Is it the sales people fault for not bringing in enough revenues or the company's for spending too much on sales and marketing? Time will tell, but a $170m loss is no joke.
"they are clearly not bringing in enough revenues to make the business profitable"
I didn't read anything thoroughly, but there are times when more revenue does not take you closer to profitability. Wasn't that the big downfall of pets.com? The more they sold, the faster they lost money. Could be that Box has sacrificed revenue to conserve some cash (i.e. if their costs per customer were higher than they charge).
Enterprise salespeople may be expensive - but they are usually making a significant amount of their total compensation from commissions - which ideally means they are being paid some % of new $$$'s they are bringing in.
So, yes the pricing model/ value proposition of a company's products will effect how many & what type of salespeople they employ, but salespeople should never be a significant fixed cost without a corresponding revenue stream (greater than their costs).
The answer is inside sales. Sharefile, one of the leaders in this space for enterprise, has a well-oiled inside sales machine(50+ reps cold calling all day long). When Citrix failed to acquire Box, they acquired Sharefile.
Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing.
Profitability seems very very very far away, and in my opinion Box is not a buy for the average Joe. It seems to me that revenues are extremely dependent on marketing, as per "50% of the net proceeds in sales and marketing activities". Now that we can hear cloud storage war drums from afar I don't see this expense item going down any time soon. This IPO isn't going to be cheap, at whatever valuation CS, MS and JP come up with.
On the VC/Tech industry's double standards:
Funny how an investors ask and drill down startups on their customer acquisition costs, customer lifetime value, user & customer numbers, etc. and none of that information is made available on the S-1, the document that should really be the "bible" for any investor. I guess the public market is going to get the short end of the stick again.