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Box's Big Spending on Cloud to Lead to Another Loss in Q1

CEO Aaron Levie expects profits someday, but not today.

Sumit Kohli

Box’s expected first-quarter loss is a reminder of just how tough it is to take on better-financed rivals such as Dropbox and Microsoft in the cloud storage and software business.

The company’s losses are expected to continue for some time, and CEO Aaron Levie has made no secret of it. In an interview in April at our Code/Enterprise event in San Francisco, Levie reiterated how now is the time to spend big on winning new business from companies throwing out their old IT gear while they are embracing new cloud technologies.

“In every industry you still have a lot of incumbent technologies that the world is going to move away from,” he told Walt Mossberg. “What we’re doing is spending on the marketing and the go-to-market and the partnerships to bring all those enterprises into our model and our way of doing things.”

One key metric to watch is marketing costs, which is where Box accounts for customers who take advantage of its free tier of service. As of last quarter, marketing costs had risen 17 percent to more than $55 million, but declined as a percentage of overall sales to 88 percent from 97 percent a year ago.

Box uses free accounts as a means to attract customers to its paid tiers of service. As of the end of January it said it had 34 million users at 280,000 companies and organizations. Of those, 45,000 of those companies were paying subscribers, while 90 percent of its individual users were using the free tier of service.

Other expenses to watch are research and development spending which last quarter rose 33 percent to $18 million and sales and administrative costs, which doubled to north of $20 million. All together, expenses added up to $94 million.

Levie has argued that, over time, Box’s spending will become more efficient as the number of total customers increases while existing customers add more individual users and take advantage of more features, and pay Box more. About that, last quarter Box said that nearly all of its biggest customers — those paying $5,000 a year or more — renew their contracts, and about a third of them opt to pay more for additional services.

The company is also facing stiff competition primarily from rival Dropbox which is steadily building out a version of its service aimed at corporate customers, as well as Microsoft which offers file sharing and collaboration along with the cloud-based version of its Office 365 software.

Analysts surveyed by Thomson Reuters expect Box to report a loss of 31 cents a share on revenue of $63.7 million and to give guidance for a 30-cent loss on revenue of about $67 million in the quarter ahead.

It will be Box’s second quarterly report as a publicly held company. When it reported its fourth quarter in March, its shares fell by more than 14 percent after it appeared to miss the consensus that had been skewed by one analyst’s error.

Its share price hasn’t recovered since then. Before that report, Box shares peaked at $20.65. As of today, Box shares were trading down about 16 percent at $17.34 and even further from the height they reached on the day of the company’s January IPO.

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