Is Aaron Levie building the next Salesforce or just spending too much cash?
Ten years after Salesforce's IPO brought "on demand" enterprise software to primetime, Box is now filing for its own public offering. In the intervening years, CIOs have become more comfortable with actually moving significant parts of their businesses to the cloud, and the mobile/tablet revolution has modernized cloud apps all over again.
Salesforce's Marc Benioff was a high-energy, quotable front man for the earlier wave who dramatically made enterprise apps more usable, while still respecting the laws of gravity of enterprise software. Aaron Levie is even more high-energy, possibly more quotable, and has distinguished himself from the rest of the nouveau consumer-turned-enterprise crop by similarly respecting the laws of gravity of enterprise software.
But beyond these surface level similarities, does Box have the chops to become the next Salesforce? And can it challenge Salesforce’s crown as the next $35 billion enterprise software business?
The immediate reaction to Box’s S-1 was that the company is spending too much and earning too little. It’s a complaint that Wall Street has lobbed since the beginning of the SaaS era, when it became clear that the heady days of Oracle-like margins were no more.
For all the promise of the cloud, companies like Salesforce have proven that there’s no circumventing the need for a large enterprise-grade sales organization. And even a decade later, Salesforce isn’t generating runaway profits like software companies of old. In fact, Marc Benioff has taken an Amazon-like approach, gobbling up market share rather than profit in the hopes of building a true powerhouse that can stand the test of time.
The question, then, is whether Box is simply in the early days of building its sales machine, or whether there’s something fundamentally different-- in a bad way-- about its business. For some context, let's compare Box's trajectory to that of Salesforce at the time of each company’s S-1 filing. (For an unadulterated apples to apples comparison, fiscal year end data is used.)
The simplest metric is top-line revenue. Investors love a company with a strong market footprint and growth prospects. Although seemingly straightforward, this comparison is nuanced by the fact that Box waited longer to file and had more revenue. The best comparison is Box's revenue growth last year, where it grew 163 percent off $22.4 million in revenue vs Salesforce pre-IPO growth of 128 percent off the same base of $22.4 million.
(Editor's note: "Year 0" is each company's most recent fiscal year preceding its IPO.)
Although not yet a decisive victory, Box is, in fact, demonstrating faster growth – more than 27 percent faster.
Going down the income statement, we look at gross margins.
This is a pretty clean comparison and virtual tie, although professional services revenue tends to contribute lower gross margin and, unlike Salesforce, Box didn't break that information out. If that portion of Box's revenue outpaces the rest as it sells to more large companies, it's margins will likely fall.
Revenue and gross margin are two metrics where SaaS companies are famously strong. However, investors would liken picking a winner based on operating margins of two pre-IPO enterprise software companies to picking the tallest midget, and it shows in the numbers:
Although Salesforce posted a sizable negative operating margin it was on the cusp of hitting profitability and trounces Box's whopping -162 percent figure.
This is such a handed victory for Salesforce, we have to looking to where Salesforce achieved this relative "operating leverage".
The answer is, Box is spending 4X on Research & Development and 2X on Sales & Marketing relative to Salesforce. Box's spending was arguably necessary to achieve its top-line revenue growth – and thus its lofty IPO valuation target – but given that it only slightly outpaced Salesforce’s growth at the same stage despite more than twice the proportional cost, it remains hard to defend.
The above metrics are all interesting but as any self respecting SaaS investors knows the real juice is in the Deferred Revenue and Cash Flow. That said, at the time of filing neither company had huge Deferred Revenue coffers or positive Operating Cash Flow:
These are new metrics that summarize the same story.
Certain investors will surely be able to spin a story that Box is the next Salesforce. And not all investors will view that as a compliment: Salesforce has long been shorted by value investors and bought by growth investors, as it spends heavily grab the greenfield enterprise software opportunity in front of it. On the bull side, sure, Box may be spending more for its growth, but it's a far more competitive market now, and Box arguably needs to spend up to distance itself from competitors and grab the market more aggressively.
Whether Wall Street will give it the necessary leeway and whether Levie and team can execute accordingly will determine whether or not Box can become the next enterprise hero. The other option, of course, is that the slog becomes too great and Box decides to sell as was rumored in the run-up to the S-1. We’ll see if Levie has the stomach for another decade of this.(Additional writing by Michael Carney.)