UPDATED 17:05 EDT / AUGUST 25 2021

CLOUD

Box reports higher revenue growth as it faces investor showdown

As Box Inc. battles an activist investor’s demands for changes to the company, its earnings report today may provide a bit of ammunition for the content management firm to keep control ahead of its Sept. 9 annual meeting when investors will essentially vote on its strategy and management team.

Since buying about an 8% stake a couple of years ago, hedge fund Starboard Value LP has pushed for changes such as new board members, management changes widely seen as targeting Chief Executive Aaron Levie (pictured), and even a potential sale of the company.

While adding two new board members and improving financial results over some but not all quarters since then, Box and Levie have pushed back strongly against Starboard’s additional demands for more board members and insisted they’ve gotten Box on a more consistent growth trajectory.

The company reported revenue for the second quarter rose 12% from a year ago, to $214.5 million, at the top end of its revised forecast made earlier this month and above the consensus estimate of $211.7 million. This was the fifth consecutive quarter of revenue and adjusted earnings above its forecast, though it did report a net loss of $8.7 million or 8 cents a share, up slightly from a net loss of $7.7 million or 5 cents a share a year ago.

“We think we’re well-aligned to the megatrends of the future,” Levie told SiliconANGLE in an interview just ahead of the earnings report. “Customers are moving to a cloud-based way to manage their entire content lifecycle. We think this quarter is another validation of that.”

Investors weren’t quite so sure about the quarter, as shares were falling about 1.5% in after-hours trading ahead of an analyst conference call, on top of a nearly 1% decline in the regular session, to $25.64 a share.

Still, on Monday Box got a vote of confidence, if one with caveats, from Institutional Shareholder Services Inc. The proxy advisory firm said shareholders should vote for current Box directors Levie and Peter Leav, saying the board has made positive changes and deserves more time to turn the company around.

ISS did suggest withholding a vote for current director and governance committee member Dana Evans, citing some issues with governance such as Box’s deal with the investment firm KKR & Co. Inc. to provide $500 million in financing. But its recommendation, which is considered highly influential to investors, essentially backs up Box’s strategy and management team at least for now.

Following up its early release of earnings on Aug. 12, Box reported improved results on several fronts. Besides the 12% revenue growth, second-quarter billings rose 13% year-over-year, to $213 million. Operating margin before costs such as stock compensation rose five percentage points from a year ago, to 21%. The company also confirmed higher full-year revenue guidance, to between $856 million and $860 million, above the $849.6 million consensus.

In particular, Levie touted a net retention rate of 106%, up three percentage points from the first quarter, an indication that existing customers are buying more of Box’s offerings. He also pointed to 133 new deals over $100,000 in the first half of the fiscal year, up 28% from a year ago.

Levie said Box has been more successful at promoting add-on products to companies that buy subscriptions to its platform’s core features, resulting in a solution “attach rate” of more than 70% in deals worth more than $100,000, up from a 49% attach rate in the first quarter. “It’s a lot of customer expansion,” Levie said, in particular its suite that includes file storage, as well as its Box Shield security offering and its Box Relay workflow software.

Still, Starboard has remained critical of a $500 million preferred equity financing from KKR and another financing earlier this year, in addition to its dissatisfaction with revenue growth and, along with that, the stock price. However, at its closing price today, it’s up significantly from a low of under $11 a share in early 2020 and up 38% since the start of 2021.

“We strongly believe that Box had no need for the capital and that the transaction was specifically designed as an entrenchment mechanism meant to ‘buy the vote,’” Starboard Value Managing Member Peter Feld wrote in a July 20 letter to shareholders.

The hedge fund doubled down in an Aug. 9 followup, calling for investors to vote for its slate of directors over Box’s incumbent directors. And on Tuesday, Starboard added in another release that “now is not the time to remove that pressure. The current Board needs greater independence and common stockholder representation in light of a poor track record of execution, highly questionable recent decisions regarding capital allocation, and serious issues with executive compensation practices.”

Levie declined to address the investor vote or Starboard directly. But all this will come to a head at the Sept. 9 annual meeting when investor votes will be tallied. It’s not yet clear if Box’s progress and other moves will be enough to win most investors, though ISS’ recommendation seems likely to persuade a majority of them to back Box. Any significant level of votes to the contrary, however, could indicate investors think there’s more to do.

Box needs to come up with an even more compelling and more comprehensive vision of the future of work,” Constellation Research Inc. analyst Holger Mueller told SiliconANGLE. “Companies are using ServiceNow for workflow around documents, which should be their domain.”

But Mueller said it’s not too late for Box to fulfill its ambitions. “Enterprises want a large third-party vendor to own their document automation destiny,” he said. “Box is large enough for it. It comes back to whether Aaron can build this, hire a great product visionary or does someone else need to do that?”

Levie conceded Box isn’t home free. “There’s still plenty more for us to do and execute,” he said.

Photo: JD Lasica/Flickr

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