Story Stocks^®

Data storage and sharing company Box (BOX) is the latest tech company to report that it's experiencing heightened budget scrutiny among its customers, resulting in the company lowering its FY24 revenue and operating margin outlook, while also issuing downside EPS and revenue guidance for Q3. Pricing improvements driven by ongoing customer conversions to the Enterprise Plus product and tight cost controls helped BOX to edge past Q2 EPS expectations -- a feat it has accomplished in every quarter except for one in the past five years. However, the focal point for market participants is the softening demand environment and accompanying deceleration in BOX's growth.

• Billings, a key metric for BOX that's viewed as a good gauge for cash flow generation, decreased by 1% yr/yr to $232.5 mln, adding to investors' concerns. BOX stated that billings were impacted by a high volume of early renewals in Q1. For context, billings grew by 11% in Q1, preceded by growth of 6% in Q4. Cash flow from operations was up by 15% to $33 mln, compared to growth of 16% in Q1 and 87% in Q4.
• Due to macroeconomic factors that are causing customers to tighten their budgets, BOX's net retention rate came in slightly below its expectations at 103%. Seat expansion within the company's existing customer base has slowed, although its churn rate of 3% is solid, indicating that enterprises are still prioritizing investments in secure data management and collaboration tools.
• The midpoint of BOX's Q3 revenue guidance of $261-$263 mln equates to yr/yr growth of just 4.8%, which would represent its lowest top-line growth rate in over five years. BOX also slightly cut its FY24 revenue guidance to $1.04-$1.044 bln from its prior forecast of $1.045-$1.055 bln, creating a domino effect that led to it reducing its operating margin outlook to approximately 4.5% from 5.0%. Lower sales translate into reduced sales leverage, impacting margins and profitability.
• The good news is that BOX is mitigating the bottom-line impact by keeping a tight lid on costs. In Q2, General and Administrative expenses were virtually flat yr/yr at $32.6 mln. Combined with a 70 bps yr/yr bump in non-GAAP gross margin to 76.9%, the cost containment efforts helped BOX generate EPS growth of 28.5%.
• Another positive is that BOX announced a $100 mln expansion to its stock repurchase program, providing it with another lever to pull to create EPS growth. 

The bottom line, though, is that BOX's already tepid revenue growth rates are poised to slip even lower as enterprises are once again becoming more conservative with their spending. Once economic conditions improve, BOX is confident that its growth will reaccelerate -- especially as its Box AI platform gains traction -- but in the near term, the stock seems to be missing a meaningful catalyst.