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On the IPO: Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing. Profitability seems very very very far aw

by antr 13y ago

On the IPO: Nice gross profit margin growth from 67% to 79%, but now we know where vc money went: sales & marketing. Profitability seems very very very far away, and in my opinion Box is not a buy for the average Joe. It seems to me that revenues are extremely dependent on marketing, as per "50% of the net proceeds in sales and marketing activities". Now that we can hear cloud storage war drums from afar I don't see this expense item going down any time soon. This IPO isn't going to be cheap, at whatever valuation CS, MS and JP come up with. On the VC/Tech industry's double standards: Funny how an investors ask and drill down startups on their customer acquisition costs, customer lifetime value, user & customer numbers, etc. and none of that information is made available on the S-1, the document that should really be the "bible" for any investor. I guess the public market is going to get the short end of the stick again.

jgalt212 13y ago
Enterprise salespeople are very expensive. Probably because for most of their existence they have been selling very expensive products. Not sure where this all shakes out. Does the enterprise salesperson of the future get paid less b/c he/she is selling cheaper products, or do we just employ less enterprise salespeople? i.e. only use them for the biggest contracts and have the rest of the leads handled by sales engineers/customer service types who work off of funnel scripts?
- zaidf 13y ago
  The answer is inside sales. Sharefile, one of the leaders in this space for enterprise, has a well-oiled inside sales machine(50+ reps cold calling all day long). When Citrix failed to acquire Box, they acquired Sharefile.
- antr 13y ago
  I don't disagree with "salespeople are very expensive", but they are clearly not bringing in enough revenues to make the business profitable. Is it the sales people fault for not bringing in enough revenues or the company's for spending too much on sales and marketing? Time will tell, but a $170m loss is no joke.
  - JonFish85 13y ago
    "they are clearly not bringing in enough revenues to make the business profitable" I didn't read anything thoroughly, but there are times when more revenue does not take you closer to profitability. Wasn't that the big downfall of pets.com? The more they sold, the faster they lost money. Could be that Box has sacrificed revenue to conserve some cash (i.e. if their costs per customer were higher than they charge).
- btrautsc 13y ago
  Enterprise salespeople may be expensive - but they are usually making a significant amount of their total compensation from commissions - which ideally means they are being paid some % of new $$$'s they are bringing in. So, yes the pricing model/ value proposition of a company's products will effect how many & what type of salespeople they employ, but salespeople should never be a significant fixed cost without a corresponding revenue stream (greater than their costs).
3am 13y ago
Yeah, the gross margins are telling just part of the story - the sales & marketing scaling with revenue looks scary. I don't think a company with a p&l looking like that would necessarily want to go public. I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable or 2) they see this as very close to a market top and are rushing to take the company public before the music stops. I don't like either very much. edit: I should make it clear, I'm just repeating your point for emphasis in my first sentence. I'm in agreement with your whole post.
- not_that_noob 13y ago
  I agree on the S&M expenses. What's scarier is that this is a very competitive fairly undifferentiated market, which means you can't live without salespeople. Which means they're going to hit the wall at some point, because as it stands right now, they are spending about $1.40 in sales ALONE to bring in $1 of revenue. Now that's scary.
  - aswanson 13y ago
    Yeah, that 1.40 to 1.00 ratio is eerily similar to the points dhh made on this interview about another infamous tech ipo :http://www.youtube.com/watch?v=jzERXJgi5vQ http://www.youtube.com/watch?v=jzERXJgi5vQ
- pbreit 13y ago
  I'd be much more scared if they were NOT ploughing money back into the business in order to grow. IPOs are fundraising events first and foremost. Virtually all companies that IPO are operating at a loss (ie, nearly synonymous with "growth company"). The sooner HNers recognize this, the sooner they will get involved with multi-billion companies.
  - antr 13y ago
    Growth companies come at a discount (execution risk, growth is not given, growth industries = plenty of competitors), I doubt Box's valuation will support its financials and road ahead. One comment on "virtually all companies that IPO are operating at a loss", unfortunately this is the opposite case, companies that IPO tend to be profitable.
tcas 13y ago
Profitability seems very very very far away Just to add, right on their S1 risk factors: We have incurred significant losses in each period since our inception in 2005. We incurred net losses of $50.3 million in our fiscal year ended December 31, 2011, $112.6 million in our fiscal year ended January 31, 2013, and $168.6 million in our fiscal year ended January 31, 2014. As of January 31, 2014, we had an accumulated deficit of $361.2 million Granted the risk section is usually the absolutely worst case scenario, but it's interesting that they're losing more money at a faster pace each year.
- elwell 13y ago
  Hmm... does anyone know how many employees they had in each year?
  - vtail 13y ago
    > we grew from 369 employees as of January 31, 2012 to 972 employees as of January 31, 2014
- jliptzin 13y ago
  If you just multiply by -1 their earnings acceleration is fantastic!
- vtail 13y ago
  At the same time, while they spent $1.7 of S&M expenses to generate $1 in revenue in 2012-13, they decreased this to just $1.37 in 2014, so that's an improvement given that S&M is 2/3rds of their operating expenses.
- deleted 13y ago
  [deleted]
dpcheng2003 13y ago
Sales & marketing for enterprise software is still the largest expense item for most enterprise software companies. Even though more software is self-serve and provides zero-day value, the biggest enterprise customers still need the Sales & Marketing machine, from front-loading marketing which generate leads for sales people/sales engineers to customer success, etc. For the longest time, the guys driving the best cars coming out of Oracle's parking lot were the sales people. That's changing, but not as quickly as we expect. As a point of comparison: Box R&D: 37% of revenue S&M: 138% of revenue Salesforce (based on last SEC filing) R&D: 15% of revenue S&M: 53% of revenue Oracle (based on last SEC filing) R&D: 14% of revenue S&M: 21% of revenue Interesting exception is Workday (based on last SEC filing) R&D: 39% of revenue S&M: 42% of revenue This is still a winner-take-all business because a typical enterprise customer is still 2-3 years at the minimum (depends on the product; ERP tends to be much stickier). Box is encouraged to spend expensive investor capital to focus on growth (and in the process, limit their tax exposure). I think it'll be interesting as Dropbox moves more towards the enterprise how much of the typical "enterprise sales" playbook would they adopt?
- mbesto 13y ago
  Former enterprise guy here. You're 100% right. Curious, why doesn't anyone here mention SAP when the topic of enterprise software comes up? SAP is the enterprise software company (bigger than Oracle in business software). That being said:[0] - SAP has 15,000 s&m employees (second only to it's 17,000 R&D employees) - Of it's €11B in gross profit, it spends €4B on s&m, or 25% of it's revenue (€16B). It spends roughly the same €4b on software development (Cost of software + R&d) Here's the funny thing. The argument for why cloud is taking over is that the Cost of Sales is supposed to go down. Ya...... (my thoughts on this: http://www.techdisruptive.com/2012/11/28/how-are-we-going-to-make-enterprise-cloud-profitable/ http://www.techdisruptive.com/2012/11/28/how-are-we-going-to...) [0]http://global.sap.com/corporate-en/investors/pdf/sap-2013-annual-report.pdf http://global.sap.com/corporate-en/investors/pdf/sap-2013-an...
- 5avage 13y ago
  It's worth pointing out that they count the datacenter and support costs for their free accounts under Sales and Marketing.

by antr 13y ago

jgalt212 13y ago

Enterprise salespeople are very expensive. Probably because for most of their existence they have been selling very expensive products. Not sure where this all shakes out. Does the enterprise salesperson of the future get paid less b/c he/she is selling cheaper products, or do we just employ less enterprise salespeople? i.e. only use them for the biggest contracts and have the rest of the leads handled by sales engineers/customer service types who work off of funnel scripts?

zaidf 13y ago
The answer is inside sales. Sharefile, one of the leaders in this space for enterprise, has a well-oiled inside sales machine(50+ reps cold calling all day long). When Citrix failed to acquire Box, they acquired Sharefile.
antr 13y ago
I don't disagree with "salespeople are very expensive", but they are clearly not bringing in enough revenues to make the business profitable. Is it the sales people fault for not bringing in enough revenues or the company's for spending too much on sales and marketing? Time will tell, but a $170m loss is no joke.
- JonFish85 13y ago
  "they are clearly not bringing in enough revenues to make the business profitable" I didn't read anything thoroughly, but there are times when more revenue does not take you closer to profitability. Wasn't that the big downfall of pets.com? The more they sold, the faster they lost money. Could be that Box has sacrificed revenue to conserve some cash (i.e. if their costs per customer were higher than they charge).
btrautsc 13y ago
Enterprise salespeople may be expensive - but they are usually making a significant amount of their total compensation from commissions - which ideally means they are being paid some % of new $$$'s they are bringing in. So, yes the pricing model/ value proposition of a company's products will effect how many & what type of salespeople they employ, but salespeople should never be a significant fixed cost without a corresponding revenue stream (greater than their costs).

3am 13y ago

Yeah, the gross margins are telling just part of the story - the sales & marketing scaling with revenue looks scary. I don't think a company with a p&l looking like that would necessarily want to go public. I see it that they've either 1) exhausted venture money, aren't an acquisition target, and see the public offering as funding of last resort because they're nowhere close to being profitable or 2) they see this as very close to a market top and are rushing to take the company public before the music stops. I don't like either very much. edit: I should make it clear, I'm just repeating your point for emphasis in my first sentence. I'm in agreement with your whole post.

not_that_noob 13y ago
I agree on the S&M expenses. What's scarier is that this is a very competitive fairly undifferentiated market, which means you can't live without salespeople. Which means they're going to hit the wall at some point, because as it stands right now, they are spending about $1.40 in sales ALONE to bring in $1 of revenue. Now that's scary.
- aswanson 13y ago
  Yeah, that 1.40 to 1.00 ratio is eerily similar to the points dhh made on this interview about another infamous tech ipo :http://www.youtube.com/watch?v=jzERXJgi5vQ http://www.youtube.com/watch?v=jzERXJgi5vQ
pbreit 13y ago
I'd be much more scared if they were NOT ploughing money back into the business in order to grow. IPOs are fundraising events first and foremost. Virtually all companies that IPO are operating at a loss (ie, nearly synonymous with "growth company"). The sooner HNers recognize this, the sooner they will get involved with multi-billion companies.
- antr 13y ago
  Growth companies come at a discount (execution risk, growth is not given, growth industries = plenty of competitors), I doubt Box's valuation will support its financials and road ahead. One comment on "virtually all companies that IPO are operating at a loss", unfortunately this is the opposite case, companies that IPO tend to be profitable.

tcas 13y ago

Profitability seems very very very far away Just to add, right on their S1 risk factors: We have incurred significant losses in each period since our inception in 2005. We incurred net losses of $50.3 million in our fiscal year ended December 31, 2011, $112.6 million in our fiscal year ended January 31, 2013, and $168.6 million in our fiscal year ended January 31, 2014. As of January 31, 2014, we had an accumulated deficit of $361.2 million Granted the risk section is usually the absolutely worst case scenario, but it's interesting that they're losing more money at a faster pace each year.

elwell 13y ago
Hmm... does anyone know how many employees they had in each year?
- vtail 13y ago
  > we grew from 369 employees as of January 31, 2012 to 972 employees as of January 31, 2014
jliptzin 13y ago
If you just multiply by -1 their earnings acceleration is fantastic!
vtail 13y ago
At the same time, while they spent $1.7 of S&M expenses to generate $1 in revenue in 2012-13, they decreased this to just $1.37 in 2014, so that's an improvement given that S&M is 2/3rds of their operating expenses.
deleted 13y ago
[deleted]

dpcheng2003 13y ago

Sales & marketing for enterprise software is still the largest expense item for most enterprise software companies. Even though more software is self-serve and provides zero-day value, the biggest enterprise customers still need the Sales & Marketing machine, from front-loading marketing which generate leads for sales people/sales engineers to customer success, etc. For the longest time, the guys driving the best cars coming out of Oracle's parking lot were the sales people. That's changing, but not as quickly as we expect. As a point of comparison: Box R&D: 37% of revenue S&M: 138% of revenue Salesforce (based on last SEC filing) R&D: 15% of revenue S&M: 53% of revenue Oracle (based on last SEC filing) R&D: 14% of revenue S&M: 21% of revenue Interesting exception is Workday (based on last SEC filing) R&D: 39% of revenue S&M: 42% of revenue This is still a winner-take-all business because a typical enterprise customer is still 2-3 years at the minimum (depends on the product; ERP tends to be much stickier). Box is encouraged to spend expensive investor capital to focus on growth (and in the process, limit their tax exposure). I think it'll be interesting as Dropbox moves more towards the enterprise how much of the typical "enterprise sales" playbook would they adopt?

mbesto 13y ago
Former enterprise guy here. You're 100% right. Curious, why doesn't anyone here mention SAP when the topic of enterprise software comes up? SAP is the enterprise software company (bigger than Oracle in business software). That being said:[0] - SAP has 15,000 s&m employees (second only to it's 17,000 R&D employees) - Of it's €11B in gross profit, it spends €4B on s&m, or 25% of it's revenue (€16B). It spends roughly the same €4b on software development (Cost of software + R&d) Here's the funny thing. The argument for why cloud is taking over is that the Cost of Sales is supposed to go down. Ya...... (my thoughts on this: http://www.techdisruptive.com/2012/11/28/how-are-we-going-to-make-enterprise-cloud-profitable/ http://www.techdisruptive.com/2012/11/28/how-are-we-going-to...) [0]http://global.sap.com/corporate-en/investors/pdf/sap-2013-annual-report.pdf http://global.sap.com/corporate-en/investors/pdf/sap-2013-an...
5avage 13y ago
It's worth pointing out that they count the datacenter and support costs for their free accounts under Sales and Marketing.