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One Number to Question in Box's IPO

Updated from 12:13 p.m ET to include additional information throughout.

NEW YORK (TheStreet) - Cloud storage startup Box prominently features its 25 million registered users in its prospectus for an initial public offering, but the company provides no insight as to why investors should care about that figure.

Box highlights three metrics at the opening of its initial public offering prospectus: It has 34,000 paying organizations, 25 million registered users and 2.5 billion content interactions every three months. It is unclear why investors should pay any attention to the company's oft-emphasized disclosure of 25 million registered users, given a lack of context to that figure in Box's IPO prospectus.

Box Files for $250 Million IPO

Box Is a Feature and Not a Company

Here are the facts: Box has 25 million registered users - or unique Box user ID's -- across 225,000 businesses. The company also discloses that it has 34,000 paying organizations which generated most of the company's $124.1 million in annual revenue. Box doesn't state its total paying users. However, Box does say that 93% of total registered users are non-paying users, indicating that 7%, or 1.75 million customers, pay for the company's services.

It is easy to get a sense of how much money Box makes from its paying users. However, a major question left un-addressed in Box's prospectus is what investors should make of the company's 25 million total registered users, 93% of which aren't paying customers.

One disclosure on pg. 86 of Box's prospectus indicates active users may be far less than registered users.

"Of the registered users who accessed Box in the three months ended January 31, 2014, over 2.5 million did so via a mobile device, compared to the more than 1.5 million registered users who did so during the three months ended January 31, 2013, representing year-over-year growth of 73%," Box said.

While year-over-year mobile access figures look positive, it is concerning that only 10% of total registered users accessed Box via mobile device in its most recent quarter.

Are those 25 million registered accounts really indicative of Box's ability to grow in coming years? After all, were Box to convert every registered user to a paying subscriber, the company's revenue might grow greater than ten-or-twenty-fold. Increasing users through new free trials, or conversions of existing free trials is likely one of the more important issues investors will focus upon in Box's IPO. 

"We offer a limited version of our service to users free of charge in order to promote additional usage, brand and product awareness, and adoption. Some users never convert from a free version to a paid version of our service. Our marketing strategy also depends in part on persuading users who use the free version of our service to convince decision-makers to purchase and deploy our service within their organization," Box states in its S-1.

Box also features its free customer acquisition channel as the second bullet point when discussing its "growth strategy." Clearly, free accounts are important to Box.

"To the extent that these users do not become, or lead others to become, paying customers, we will not realize the intended benefits of this marketing strategy, and our ability to grow our business and revenue may be harmed," the company warns.

Will Registered Users Pay Up?

A key question is whether Box's 25 million registered users will turn into paying users? Box doesn't appear to give the context investors need to make that judgment.

The company doesn't disclose figures on conversion from registered users to paying users. Because the company appears to count every subscriber in its near 10-year history as a registered user, there is also a lot left to investors' imaginations. Have those accounts been active in the past 12-months? Is the growth rate of registered users rising or falling year-over-year?

There simply isn't any detail. Other disclosures are confounding, at best. 

"[Our] 25 million registered users include employees from 99% of Fortune 500 companies, including companies in highly regulated industries such as healthcare and life sciences, telecommunications, energy and financial services," the company states.

Why that is important for investors is unclear. Box is stating that among its 25 million registered users, there is at least one employee from 99% of Fortune 500 companies... Not that 99% of its registered users are employees of Fortune 500 companies. Budweiser (BUD) could probably make a similar claim if it wanted.

A Social Media Metric in a Cloud IPO?

Box's disclosure of its 'registered users' is reminiscent of the Facebook's (FB - Get Report) 800 million monthly active users (MAUs), Twitter's (TWTR - Get Report) 215 million MAUs, and King Digital Entertainment's 324 million monthly unique users (MUUs), all disclosed in each of those company's prospectuses.

In the case of Facebook and Twitter, MAUs have been used by investors as a proxy for each company's engagement and consequently, the prospects of their respective social networking platforms. MAUs have also been used as a simple means to derive a valuation.

In other words, each Facebook and Twitter user is worth a certain dollar figure given the respective $165 billion and $29.2 billion market caps of both companies. Declines or acceleration in user activity on desktops and mobile devices are a key data point that investors follow when assessing Facebook and Twitter's earnings and the value of both firm's user bases.

Box, in contrast, won't present any direct insight on the activity or conversion of the its 25 million registered users. Investors would be hard pressed to put a dollar value on total registered users.

Crystal Clear on Box's Paying 7%

To provide investors an understanding of the company's ability to generate revenue from paying subscribers, Box describes its total billings, its billings growth rate, and the company's retention rate on paying subscribers. Those disclosures are easy to understand.

Billings grew by 103% between Box's fiscal 2013 to its fiscal 2014 results. Billings grew from $85.7 million to $174.1 million, a deceleration in growth from the previous year's 182% billings growth rate. Retention rate, which Box defines as the year-over-year change in the company's annual contract value (ACV) for customers with contract value of $5,000 or more, rose 136% year-over-year.

Box doesn't disclose figures such as average revenue per paying user (ARPU) or average revenue per paying account (ARPA), but, back of the envelope math would put ARPU for paying users at about $70 a year, and ARPA per organization at about $3,650.

The median paying account might be higher or lower, and it is worth noting that Box counts organizations as prominent as The BBC, Eli Lilly (LLY), Molson Coors (TAP), Gap (GPS), eBay (EBAY) and Chevron (CVX) as customers. No single customer accounts for 10% of Box's total revenue, the company said in its S-1.

"Our paying business customers include more than 40% of Fortune 500 companies and 20% of Global 2000 companies," Box also states.

Those details provide a solid picture the earnings Box derives from its 34,000 paying organizations and approximately 1,750,000 paying users. They say virtually nothing about Box's overall 25 million registered users.

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