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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.

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"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."

They (Box) just raised ($100MM, Dec/13) a month or two before this was filed. The market, however, is very ripe[1] and the IPO marketers are likely advising them to take it public. The Last round is basically a mezz round ($2B valuation) and if they flip this thing for 1.5x to 2.0x in 6 months those guys are going to be happy. The cash burn on the P&L is $14/month and $350MM would last 24 months, enough to inflect if its a real biz. Closer to inflection, a Secondary raise will generate liquidity for the remaining insiders. Given the uncertainty with the FED's propping up of QE, its not a bad idea if you are the #N player to not wait (risk of backwash/turbulence if the others take all investor appetite), given that its a two-stage exit for most IPOs these days.

[1] http://www.cnbc.com/id/101425809

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.

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

#1 sounds like Ben Horowitz's last ditch IPO of Loudcloud (except market conditions today are much more favorable). The story goes that Loudcloud was unprofitable, headed towards bankruptcy, & couldn't raise VC capital, so they went public. http://www.businessweek.com/stories/2001-04-15/the-last-days...

"losing $107 million on only $6 million in revenues"

Is this what the 2000 bubble was?

"When Loudcloud first filed to go public 164 days earlier, it was valued at $1.15 billion, in spite of losing $107 million on only $6 million in revenues in the three quarters ended Oct. 31."

> Full context is useful.

== $1B+ val vs. $10MM LTM rev = 100x rev multiple.

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.

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.

To be fair, most companies going public lately have been unprofitable. Yes, not true historically; but the desire for savings yield/strategy funds that will buy no matter what/success of flipping ipos has lowered the bar. And the P/S metrics .. well, Box would be stupid _not_ to ipo right now. I expect they'll play the same trick as others and sell a small percentage of the fully diluted share count to create a sellers market for the shares, and target a 50-100 multiple on revenue. When the market gets used to their price they can file a secondary.

edit: I should clarify again based on sibling/nephew comments... I think it's too far off topic to go into this in depth, but clearly running at a loss is expected and appropriate for companies at a certain stage of their growth profile. Even big companies (like Amazon, like someone noted) can do this if they prefer to invest in pursuing large enough growth opportunities out of cash flow vs selling debt or shares. Regardless, the revenue growth has to show up at some point, and spending in sales has to show ROI.

of course, i'm 100% with you. if i were box i'd be wanting to ipo on a hot market to avoid dilution/raise as much cash as possible. this is a good move for box. all i'm saying is that this isn't (imho) a good investment for ipo investors.

A company can be spending more than they make, and still be profitable (a la Amazon) - hence the "plowing money back into the business" comment above. A company in its growth stage believes there is significant profits to be made by spending on customer acquisition, and generally is making an informed decision not to pad the coffers and horde money (a la Apple).

>A company can be spending more than they make, and still be profitable

What?

Anyway, Amazon has razor-thin margins on some products but they're not loss making.

Discretionary spending is different than fixed costs and contractual liabilities. I am saying that you should think of costumer acquisition as an upfront expense that leads to future profits - if the business is growing, and has reasonable margins.

For example, Amazon has 'razor thin' margins and is operating at a slight loss. Does anyone really argue that they are not 'Profitable'?

this

Loss per share was $14.68 in 2013 and grew slightly to $14.89 in 2014. It's ok to lose money at IPO, but those losses need to be narrowing. Otherwise, you're plowing money back into a hole.

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

That's what an IPO was originally supposed to be for, right? Raising capitol, rather than cashing out?

>That's what an IPO was originally supposed to be for, right? Raising capitol, rather than cashing out?

Perhaps, in a time prior to companies "routinely" raising massive sums (like $410MM) pre-IPO.

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