Morningstar | Longer Sales Cycle Results in Lowered Top-Line Fiscal 2020 Guidance for Box; Lowering FVE to $13
No-moat Box began its fiscal 2020 by posting its first ever quarter-over-quarter revenue decline and lowering its full-year revenue guidance by 2% or $12 million. Box continues to struggle due to a lengthening sales cycle as the firm transitions toward solution selling. Notably, Box management also backed away from the fiscal 2022 revenue target of $1 billion, which seemed ambitious heading into the quarter.We are lowering our fair value estimate to $13 per share from $15, due to the decreased revenue guidance this year as well as increased uncertainty around its longer-term revenue growth trajectory. With shares down 13% to below $16 in post-market trading, we suggest investors wait for a better entry point.
First-quarter 2020 revenue was $163 million, above management guidance of $161 million to $162 million. While first-quarter revenue was up 16% over the same quarter last year, it marked the company’s first sequential drop in revenue. While we are surprised to see a company with 97% recurring revenue and 4% churn rate experience a sequential revenue decline, management did call out a $5 million headwind on the prior call due to 3 fewer days in the first quarter. Net retention rate came in at 107%, down slightly from 109% in the first quarter of 2019. Paid users were up 200,000 in the quarter to 12.2 million.
Management provided second-quarter revenue guidance of $169 million-$170 million. Meanwhile, it lowered its full-year revenue range from $700 million-$704 million to $688 million-$692 million. As a result of the updated guidance, we are decreasing our revenue outlook for fiscal 2020 to $690 million from $703 million. The company expects non-GAAP EPS to be ($0.02) to ($0.01) for the second quarter and slightly above breakeven for the full year. Management indicated the lower guidance was due to a slower than expected start to the year, weakness in closing of deals over $100,000, and an elongated sales cycle due to focus on strategic solution selling.
Management decided it would no longer set a date for when it expected to surpass $1 billion in revenue. Management had long targeted fiscal 2022, and the removal of a target date increases the uncertainty in Box’s long-term growth outlook. Despite the decreased revenue outlook, management is hoping to achieve 6%-7% non-GAAP operating margins in fiscal 2021, up from (2%) in fiscal 2019.
Box had mixed results in reported deal closings over $100,000 for the quarter. Total closed contracts over $100,000 was down to 33, compared with 35 in the same quarter last year. The firm did better in larger deals, however, closing three $1 million-plus deals, compared with one in the first quarter of fiscal 2019. Around 90% of the over-$100,000 deals closed in the quarter included an add-on product, up from two thirds in the first quarter of fiscal 2019. Add-on product revenue now accounts for 14% of revenue, up from 10% from first-quarter fiscal 2019. Management also disclosed that customers who adopt an add-on product have four times higher average contract value than those who do not.
Lastly, Box announced a management departure in Tom Addis, the former global sales head. Addis had been with the company since 2012 and had been in his most recent role since January 2018. Management indicated it is in the later stages of hiring a replacement for the role.
Box provides a cloud content management platform that enables organizations to manage their content. With the company's Software-as-a-Service cloud content management platform, users can collaborate on content internally and with external parties, automate content-driven business processes, develop applications, and implement data protection, security and compliance features to comply with legal and regulatory requirements, internal policies and industry standards and regulations. The company's platform enables a set of business use cases across an enterprise and various file formats and media types. The company also provides offerings that address business needs via technology, services and marketing programs.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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