Box Earnings: Content Collaborator Kicks Off Fiscal 2024 as Customers Optimize Spending

We are maintaining our $30 fair value estimate for no-moat-rated Box BOX after the company clocked in a strong quarter to kick off fiscal 2024. The firm’s financials were marginally above our estimates for both sales and profitability. While the firm’s financial results have been solid over the last few quarters, we hold our opinion that Box faces an intense competitive landscape. We have previously highlighted Box’s strong upselling activity which has buoyed the firm’s net retention metrics despite lacking an economic moat. However, Box’s net retention rates for the first quarter contracted 500 basis points year over year due to client spending optimization against a turbulent macroeconomic backdrop. With shares trading up after hours, we believe that Box’s shares are fairly valued.

First-quarter sales came in at $252 million, up 6% year over year. Spearheading this top line expansion was a steady growth in the number of large customers (customers with spending of more than $100,000 per year). This customer segment count grew 14% year over year. Box’s multiproduct approach is also bearing fruit with 47% of the firm’s top line coming from multimodule Suites customers, up from 37% a year ago.

On the other hand, we were disappointed with the firm’s contracting net retention rate which was 106% for the quarter, down 500 basis points year over year and 200 basis points sequentially. We believe as Box’s customers navigate the current macroeconomic turbulence, they are cutting additional spending on Box’s solutions, driving the net retention metric down. While Box’s churn has remained steady at 3%, we remain concerned by the sharp decline in Box’s ability to upsell its customers.

On the profitability front, Box’s adjusted margins for the quarter finished at 22.8%, up 220 basis points year over year. We trace this uplift to Box prioritizing operational discipline during a time of macroinduced uncertainty.