Box Refocuses on Hunt for Growth After Winning Starboard Fight

(Bloomberg) -- Box Inc. Chief Executive Officer Aaron Levie won his struggle late last year with an activist investor to retain control of the company. Now, he’s fighting to fend off software rivals seeking to undermine his plan to turn Box’s technology into the central platform for corporate document management.

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“I’ve never been more excited about the opportunity ahead of us,” Levie said in an interview. “We believe that we are in a really good spot to invest in the product and platform.”

As Box looks to expand beyond cloud-based file storage, the competitive landscape is growing more crowded. Microsoft Corp., Alphabet Inc.’s Google, ServiceNow Inc. and DocuSign Inc. offer competing products or services, either as standalone features or as part of larger software packages. A customer using any one of those vendors in other areas of the business may be inclined to, for example, use OneDrive from Microsoft for file storage or ServiceNow to help automate how documents flow from person-to-person in an organization.

The company’s shares gained as much as 2.8% Friday in New York and have soared 42% in the past year, benefiting from changes that activist Starboard Value LP helped implement. Yet even with sales projected to increase as much as 13% for the current fiscal year, Box lags well behind many software peers such as DocuSign and ServiceNow that more quickly capitalized on evolving customer needs during the pandemic.

Box was “overconfident about the moats they thought they had built around documents. But it wasn’t moats, it was little streams,” said Constellation Research principal analyst Holger Mueller. “The reality is the market has passed them on the growth side, so they have to come up with a vision of how Box is going to change the future of work. The sooner for them the better.”

That's the key challenge. Box’s signature offering is no longer the unique selling point it was in 2005 when the company helped establish a new market. Now Box needs a more compelling product portfolio to stand out in an increasingly crowded industry in which under-performance is punished by dramatic stock selloffs or proxy fights.

Levie's plan for contending with this widening gaggle of rivals is a classic one in enterprise technology: Offer more products to persuade customers to devote a bigger share of their spending for information technology to his company. Last year, for example, Box acquired e-signature software provider SignRequest for $55 million, propelling the company into a sector already dominated by DocuSign and Adobe Inc. It also introduced Box Shuttle, a service that helps businesses move files from hosted systems to the cloud.

Levie declined to elaborate on what other products or features Box would roll out in 2022 to help support this strategy, except to say the company would focus on security, collaboration and making it easier to link Box's tools to other software. Overall, he said the market for document lifecycle management may be worth as much as $55 billion.

“We are a small fraction of that market,” he added. “We are driving healthy new logo growth, but the magnitude of the dollars are still weighted to existing customers that are expanding.”

Box’s overarching strategy isn’t novel. For example, while the two aren’t in a full head-to-head competition, DocuSign is pursuing a similar plan to own document management within businesses. The difference is in the numbers. DocuSign increased sales an average of 48% the past eight quarters, while Box’s grew just 12%. Some of that gap is attributable to Box’s central document storage market, which despite the increasing need from businesses to move software like file repositories to the cloud, didn’t grow over the last two years at the same explosive pace as electronic signatures.

Box was also navigating a proxy battle with Starboard that forced Levie to vacate his position as chairman and led the Redwood City, California-based company to appoint two of the activist investor’s hand-picked independent directors to the board.

“We set our business up very well to be able to now actually take advantage of the opportunity,” said Levie. “We are not trying to go head-to-head with DocuSign or any signature player. Our strategy is to simply add more value to our customers.”

The company’s revenue grew 14% in the three months through October. While in other industries that may be applauded, software companies viewed as necessary for hybrid work, such as DocuSign, Zoom Video Communications Inc. and Smartsheet Inc., are increasing sales at double that rate.

Levie, however, sees Box’s more muted growth as par for the industry when compared with vendors like Adobe Inc., which generated $15.8 billion in annual revenue and has a market value of $244 billion to Box’s $870 million in sales and $4 billion market cap.

“The market finds a way to value each of these stories a little bit differently,” he said. “If you look at an Adobe, or a Salesforce, or an Autodesk, these are at-scale software companies, you can see that rough range that is more sustainable than looking at Zoom growing 200% in a single quarter.”

With about 100,000 reported customers, Box is a sizeable force with enough potential to remain relevant. The question is whether it can tackle the challenges ahead fast enough to fend off rivals like DocuSign, Microsoft and Google.

“Box has been able to demonstrate a pretty good feature set beyond what those large-scale solutions, broad solutions can really offer,” said JMP Securities analyst Erik Suppiger. “In their segment, they are doing well enough. But that’s just not a hyper-growth segment.”

(Updates with Friday’s trading in the fourth paragraph.)

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