Macro Pressures Land a Solid Punch on Box As 2024 Outlook Is Weaker Than Expected; Maintain FVE

We are maintaining our $30 fair value estimate for no-moat Box BOX after the firm reported fourth-quarter results largely in line with our estimates but provided a disappointing outlook heading into its fiscal 2024. 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 marred by legacy ecosystems. We have previously been encouraged by Box’s ability to consistently increase its net retention rate despite lacking an economic moat. However, Box’s net retention rates contracted 300 basis points year over year as a result of slower headcount growth and budgetary conservatism. With shares trading down to $30.50 after market close, we believe shares are fairly valued.

Fourth-quarter revenue clocked in at $256 million, up 10% year over year. Box’s top line was buoyed by new deal wins and upselling activity. We were notably impressed by the 16% growth in the firm’s $100,000-plus customer count, indicating the firm’s ability to land larger clients, which are characteristically stickier than small ones. Box has long demonstrated an ability to consistently retain and upsell existing customers, successfully entrenching its services in its clients’ business flows. A large disappointment this quarter was the net retention rate of around 108%, with management expecting that figure to further contract in fiscal 2024 to 106%, driven by a difficult macroeconomic environment. Remaining performance obligations, or RPO, finished at $1.245 billion, up 16% year over year. We see the firm’s RPO growth as a signal of healthy expansion in the near term as management expects to fulfill about 60% of the RPO within the next year.