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Four Reasons Why the Box Debate is Over

By January 23, 2015Article


Image of an Aaron Levie tweet on Twitter

Maybe that did take longer than expected, but in a couple of years all the hand-wringing over Box’s IPO will look as ridiculous as the arguments about Salesforce’s public debut.  

There are opinions, and then there is math. Here are the four key metrics that are driving Box’s growth towards a billion-dollar run rate and beyond.  

Box has grown significant annual recurring revenue

For subscription-based businesses, the real revenue benchmark is the difference between receiving a one-time payment versus getting paid over and over.  As long as you keep your customers happy (and businesses generally tend to stick with what works), that recurring revenue is the gift that keeps giving. 

According to their updated S-1, for the quarter ended October 31, 2014, Box generated $57.05 million in total revenue (compared to $33.59 million during the same quarter in 2013). Making an educated guess that Box’s consulting revenue is inline with’s five percent (we know it can’t be more than 10 percent, or they’d have to declare it), we can annualize that amount to an estimated Annual Recurring Revenue of approximately $234 million. 

Compared to an approximate ARR of $140 million the year before (based on their exiting October 2013 quarterly revenue of $33.59 million), that represents a 68 percent ARR increase year over year. Again, that’s revenue that is likely to keep happening. New Relic just went to market with an ARR of $110 million. Those numbers also track with the debuts of Salesforce, NetSuite, and ServiceNow. 

Box is managing that recurring revenue efficiently

Now let’s compare Box’s quarterly costs of revenue against its ARR to arrive at a Gross Recurring Margin. Comparing expenses to ARR better approximates how Aaron Levie and his executives are investing in growth against a long-term, predictable revenue stream.

To do this accurately, you have to take out the cost of goods sold that are tied to the professional services, and you have to take out the stock option expenses that are reported in the filings. 

Taking the estimated ARR at the start of the last quarter of $208 million and subtracting the estimated annualized subscription-related cost of sales of $41 million, we arrive at a healthy gross margin of 80 percent, which is competitive with Workday (83 percent), ServiceNow (78 percent) and Salesforce (85 percent). 

What’s more, Box is spending less than 75 percent of their entering ARR on non-growth (COGS/G&A/R&D) expenses, meaning they have an impressive 25 percent recurring profit margin. As I mentioned in my last piece on Box, they could stop spending on sales and marketing today (which if I were an investor, which I am not, I’d slap them for) and be firmly in the black. 

But if you believe that we are in the very early stages of a broad, systemic shift in how large enterprise companies deploy software, and you have a predictable future revenue stream to invest against, you are going for scale. 

Box’s recurring revenue is mathematically guaranteed to grow

Here’s the kicker:Box’s recurring revenue is not just going to continue, it’s actually growing organically. 

Last year Box reported that their negative churn (which they call retention rate) was 130 percent. (New Relic declared a net churn rate of 115 percent.) Why is this so important?  

chart showing recurring revenue for Box

Here I’m borrowing a chart from the always-excellent Tomasz Tunguz of Redpoint Ventures to demonstrate the positive cohort effects of negative churn. This illustrates a hypothetical company that signs up 100 clients a month and loses five percent of its total client base a month, but the remaining 95 percent of its customers grow their spend by 10 percentage points. So the total revenue from the cohort is equal to 105 percent of the revenue from the previous month. 

Lost customers matter, particularly in the enterprise, but that overall cohort growth demonstrates the true equity value of subscription-based businesses. As Tunguz notes: “Like a savings account, each month every cohort becomes more valuable.” 

Concerns over Box’s lack of profitability completely miss the point

The crux of the naysayer argument is that Box is losing money, and in a big way. But that misses the point. There’s a big difference between losing money and making an informed decision to spend money on growth. 

Box currently has a Growth Efficiency Index of roughly 1.60, meaning for every $1.60 they spend in sales and marketing (or growth expense) they are acquiring $1 of ARR (which is net of churn). That’s the number that has been causing all the concern. 

But that is not the same as spending $1.60 to get only one dollar. If Box keeps investing in their product and keeps their big enterprise clients like GE happy, that one dollar will keep showing up every year – in bigger and bigger increments. 

Box gets it. Zendesk gets it. New Relic gets it. And an increasingly more sophisticated investor community gets it as well. Learn more

Tien Tzuo is founder and CEO of Zuora. He is recognized as a thought leader in the SaaS industry and founded Zuora in 2007. As Zuora’s CEO, Tzuo has evangelized the shift to subscription-based business models and the complex billing structures they inherit, coining the phrase Subscription Economy. Tzuo was employee number 11 at Salesforce, where he built’s original billing system and held a variety of executive roles in technology, marketing and strategy organizations.

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