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Box IPO: Freemium Pioneer

box-logoBox (NYSE: BOX), the operator of a cloud-based collaboration platform, is a recent addition to the Software sector coverage of our Battle Road IPO Review. Box was founded in Mercer Island, Washington in 2005 by Aaron Levie, Dylan Smith, Sam Ghods and Jeff Quesisser, following research conducted by the group, which examined corporate cloud requirements. Levie is currently the CEO, Smith is CFO, and Dan Levin is COO and president of the company. Today, Box is based in Los Altos, California. Consensus estimates call for calendar year 2015 (fiscal year ending January 31, 2016) revenue of $290 million, up from $216 million in calendar 2014. The company’s loss per share is expected to narrow from $4.96 to $1.18 in the same time period.

The Box IPO was originally filed in March of 2014, but was postponed, presumably due to market conditions. The stock debuted on the New York Stock Exchange on January 23, 2015, at a price of $14.00 per share. Box offered 12.5 million Class A shares, with an underwriters’ option of another 1.9 million shares which was fully exercised. Morgan Stanley, Credit Suisse and J.P. Morgan were book-running managers for the transaction, BMO Capital markets was the lead manager, and Canaccord Genuity, Pacific Crest, Raymond Jones, and Wells Fargo were co-managers. At a recent share price of $17.80, Box’s market cap is roughly $2.1 billion.

Box is a pioneer of the “freemium” business model, in which it offers a free basic version of its software product to allow customers to get a feel for its service. In doing so, the company believes that it offers ease of use akin to Facebook, and other consumer facing internet applications. With Box, users can invite people to view or edit their files, as well as share their documents and photos. This allows employees to collaborate across different divisions of the same company regardless of geography, as well as with clients and partners in one secure place, anywhere, anytime, in 15 different languages. The company monetizes use through paid subscription fees to its more feature-rich service, as well as through premium support services, and professional services.

Box boasts over 32 million registered users, including users in nearly 100 percent of the Fortune 500. However, the sub-set of paying users is 47,000, which includes users in about half of the Fortune 500. As a free to use service initially, Box entices users throughout a company with its easy to use functions, security and scalability, which are designed to work for all files, locations, platforms, devices and operating systems, boasting features such as online storage, and custom branding.

Data from cloud apps developed by the likes of Salesforce.com (an investor in Box), as well as NetSuite and Googles Apps can be integrated into Box as well. Over 1,300 iOS and Android Apps have been developed by software developers certified by Box, and the company’s mobile version works with the Android, Windows Phone, iOS, Blackberry and WebOS platforms.

From a business model standpoint, Box has not come close to generating operating income since its founding. Echoing the results of many venture capital-backed internet and software IPOs of the last couple of years, Box has been generating losses at an increasing rate. Between 2012 and 2013, the company’s revenue more than doubled from $59 million to $124 million, yet its operating loss grew from $109 million to $159 million. Through the first nine months of 2014 the company generated revenue of $154 million, with an operating loss of $120 million. We note that Consensus estimates for 2015 call for a dramatic reduction in the company’s operating losses. An open question remains how quickly the company can achieve profitability. As a venture-backed IPO, our sense is that the company’s pre-IPO investors are sure to push for a secondary offering, thus expanding the float of the stock, we suspect sooner rather than later.

To see how Box screens against its cloud software peers which have come public in the last seven years, contact info@battleroad.com.

GoDaddy research, independent internet stock research, independent stock research on GoDaddy, independent stock research on IPOs, internet stock research, recent IPO research

GoDaddy: Web Domain Guru

gd_rebrand_ogGoDaddy (NYSE: GDDY), based in Scottsdale, AZ, provides internet services including website creation and hosting, internet domain registration, and software applications such as email marketing to businesses and consumers. Consensus estimates call for revenue of $1.6 billion in 2015, which implies 15 percent growth over 2014, and EPS of $0.97 in 2015. By way of contrast the company recorded a seven percent operating margin in 2014, exclusive of depreciation, amortization, and stock-based compensation.

GoDaddy came public on the New York Stock Exchange on April 1, 2015 in a 26 million share IPO priced at $20 per share, in which the company netted roughly $500 million. Importantly, all proceeds from the IPO went to GoDaddy, which placed a priority on reducing its more than $1 billion debt load at the time of the transaction. Post-IPO, GDDY has roughly $243 million in cash and $850 million in total debt. GoDaddy’s IPO was led by an army of investment banks, both large and small, which included Morgan Stanley, J.P. Morgan Securities, Deutsche Bank, RBC Capital Markets, Citigroup, Stifel Nicolaus, KKR Capital, JMP Securities, as well as Oppenheimer and Piper Jaffray and Company. At a recent share price of $27, GoDaddy’s market cap is roughly $4.2 billion.

Founded in 1997, GoDaddy worked hard to develop a presence in website domain registration, largely in the shadow of Network Solutions, a company which VeriSign purchased in 2000 for $21 billion in stock, in a deal which redefined the definition of “goodwill.” VeriSign sold Network Solutions to Pivotal Private Equity for just $100 million three years later. Network Solutions and GoDaddy had the good fortune of having been one of only one of a few Internet registrars accredited by ICANN, a non-profit group that monitors and to some extent polices the registration of internet domains, under the auspices of governments around the world. GoDaddy’s aggressive advertising and pricing, enabled it to gain market and mind share in the registrar market, which has not been blunted, as far as we can tell, by Web.com (NASDAQ: WWWW), through its purchase of Network Solutions for $560 million in 2011. GDDY currently has over 60 million internet domain names under registration, which make it the largest accredited registrar in the world.

GoDaddy explored the idea of an IPO with Lehman Brothers in 2006 and went as far as filing an S-1 before cancelling the deal. In 2011 the company sold a 65 percent stake to a group of private equity investors, which include KKR and Silver Lake Partners. At the time, the transaction was thought to value GoDaddy at roughly $2 billion.

GoDaddy benefits from a diversified business mix, including web domains, which account for about 53 percent of sales, and are growing by 10 percent; website hosting and presence, 37 percent of sales, and growing in excess of 15 percent, and business applications, including email marketing, which account for 10 percent of sales and are growing faster than 15 percent per year. GoDaddy continues to make numerous acquisitions which requires patience to ascertain its organic growth rate.

We note that the company currently operates at a roughly 64 percent gross margin (exclusive of depreciation expense), and a six percent operating margin, exclusive of SBC. We consider these margins sub-par relative to other internet services providers, and would be reluctant to recommend the stock in the absence of some understanding of how the company intends to improve its operating margins. We note that KKR (which was involved in the IPO), as well as SilverLake Ventures, and Technology Crossover Ventures control a combined stake exceeding 50 percent, post-IPO, and we would be surprised were there not a secondary offering down the road.

To see how GoDaddy screens against a comparable group of over 40 Internet IPOs of the last seven years, please contact Battle Road Research.