Box IPO Filing Shows It's a Feature, Not a Company

Updated from 9:05 a.m. to include line about profitability from the S-1 in the twelfth paragraph.

NEW YORK (TheStreet) -- Monday, cloud storage startup Box unveiled itself to the financial world, filing its S-1, as it gets ready to go public. That's all well and good, except it's not a company -- it's a feature, and likely always will be.

As the company gets set to debut on the New York Stock Exchange and raise $250 million or more from the filing, investors need to be acutely aware of the risks of the file sharing and content collaboration company, as it seeks to compete with larger companies, like Citrix (CTXS), Microsoft (MSFT), Google (GOOG) and others. The cloud computing and file hosting and sharing space is growing ever more crowded, and the Los Angeles-based company realizes that.

"With the introduction of new technologies and market entrants, we expect competition to continue to intensify in the future," the company noted in the filing. Not only did the company list the aforementioned publicly traded companies as competitors, but it also listed Dropbox, the other cloud computing company that's received quite a bit of attention, and is expected to go public later this year.

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By listing Dropbox as a competitor (which isn't news to anyone), the company has opened itself up for criticism that it really isn't a company, but more of a feature set of a larger company. In 2009, then Apple (AAPL) CEO Steve Jobs approached Dropbox and co-founder Drew Houston about buying the company for a nine-figure sum. Houston turned down the offer, and Jobs later avowed to go after their market, which Apple did, with the introduction of iCloud.

The company also lists parts of Microsoft  (MSFT) (Office365, SharePoint and Skydrive Pro, since renamed Onedrive), Google  (GOOG) (Drive) and Citrix (ShareFile) as competitors, thus continuing to press the thesis that Box is probably best suited as part of a larger company.

Box even says that it expects consolidation in its industry, due to fragmentation and the fact that there are low barriers to entry to its main market. "The market for cloud-based Enterprise Content Collaboration services is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry for certain applications and services. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do."

There were rumors earlier this month that HP (HPQ) was sniffing around Box, but tech Web site CBR cited a source close to Box saying the transaction would not occur.

The cost of storage is rapidly approaching $0, with Box recently giving away 50GB worth of free storage for iOS users earlier this year. That's not a secret to anyone who follows the storage industry.

"We offer users a free version of Box in order to promote additional usage, brand and product awareness, and adoption," the company said in the filing. "Our free offering allows users to invite anyone to collaborate on Box, enabling faster content collaboration across employees, vendors, clients, contractors and other parties while exposing more potential users to our solution and helping our solution grow virally."

What is concerning is that while only 7% of the company's 25 million registered users are paying customers, it's increasingly costing more to keep those paying customers, by selling them on additional services and features.

For the 12 months ended Dec. 31, 2011, Jan. 31, 2013 and Jan. 31, 2014, the Aaron Levie-led company company's revenue was $21.1 million, $58.8 million and $124.2 million respectively, representing year-over-year growth of 179% and 111%. However, the company's losses grew during the same time. "We have invested and continue to invest heavily in our business to capitalize on our large market opportunity," the company said. As a result, Box incurred net losses of $50.3 million, $112.6 million and $168.6 million for the 12 months ended Dec. 31, 2011, Jan. 31, 2013 and Jan. 31, 2014, respectively.

What's driving those operating losses is the company's heavy spending on sales and marketing. For the year ending Jan. 31, 2013, Box spent $99.2 million on sales and marketing, only to see that increase to $171 million for the year ending Jan. 31, 2014. The company continues to hire at a frenetic pace, noting it had 972 employees at the end of fiscal 2014. Though not unlike other growing technology companies, Box said it doesn't expect to be profitable anytime soon."We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future," the company said in its filing.

Despite the seemingly overwhelming negatives listed above, there are some positives for Box. Billings increased 103% in the year ended Jan. 31, 2014 over the year ended Jan. 31, 2013, and 182% in the year ended Jan. 31, 2013 over the year ended Dec. 31, 2011. (The company changed its financial year to end Jan. 31, but doesn't note why in the initial S-1). The increase in billings was primarily driven by the addition of new customers with larger initial deployments and expansion with respect to the number of users within existing customer base.

The company also caters more toward enterprise, noting that of its paying customers (which only amount to around 1.75 million), more than 40% of them come from Fortune 500 companies, and 20% come from Global 2000 companies. This is indicative of a customer base that's stickier, since enterprises are less likely to swap services than consumers, a risk that the consumer-facing Dropbox will have to address when it ultimately goes public.

Box has increased cash burn as it continues to build out its business, ending fiscal 2014 with just over $108 million in cash, despite having raised $100 million in late 2013, a sign the company was dangerously low on cash. The company is likely going public earlier than it wanted to, given it's growing losses and the continued pressure from competitors in its space.

Despite listing several features, such as a Modern Cloud Architecture, Mobility, Elegant, Intuitive and User-Focused Interface, Simple and Rapid Deployment, and a host of other features as being answers to the solution for file sharing and content collaboration, Box is probably best off as part of a larger company. Investors will realize that, sooner or later.

-- Written by Chris Ciaccia in New York

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