Box Earnings: Macro Pressures Continue To Hamper Results as Customers Dial Down Spending

We are maintaining our $30 fair value estimate for no-moat Box BOX after the firm closed out its second quarter with mixed financial results. The company’s results for the quarter and outlook for the remaining half of fiscal 2024 were slightly below our expectations on sales and in line with our prior estimates on profitability. Zooming out, we continue to view Box as a small fish in a large content collaboration pond with the firm facing a tough competitive landscape. This thesis also underpins our no-moat rating for Box as we lack confidence in the firm’s ability to generate returns above its cost of capital in the long run. With shares trading down sharply after hours, we view Box’s shares as fairly valued and currently trading in the 3-star range.

Second-quarter sales came in at $261 million, up 6% year over year (up 9% in constant-currency terms). The continued deceleration on the top line was largely due to ongoing budget optimizations Box’s clients are enacting, hampering the firm’s upselling motion. As a result, Box’s net retention rate slipped to 103%, down 900 basis points year over year and 300 basis points sequentially. On a positive note, Box’s churn remained stable at 3%, indicating that while customers are slowing their additional spending with Box, they’re not letting go of Box as a vendor for their content collaboration needs. We partially ascribe this stickiness that Box has garnered among its client base to its multimodule Suites offering which now constitutes 48% of Box’s top line, up from 40% a year ago.

On the profitability front, Box’s adjusted operating margins for the quarter clocked in at 24.8%, up 310 basis points year over year. We see this margin expansion as a result of Box’s emphasis on profitability and operational discipline during a time of macro-induced uncertainty with investors keeping a keen eye on profitability measures.