By Douglas MacMillan, Corrie Driebusch and Telis Demos
Investors in Box Inc.'s initial public offering Thursday are
betting the software maker can grow beyond the commodity business
of online storage and into a suite of tools tailored for industries
such as health care and retail.
The company's shares priced at $14, ending a year-long process
amid tepid demand for cloud-computing stocks.
The pricing pegs Box's market capitalization at roughly $1.6
billion and raised $175 million in proceeds that will help the
company support a high-cost business model dependent on sales and
marketing.
The company, which will begin trading Friday on the New York
Stock Exchange under the symbol BOX, had been looking to sell
shares in the $11 to $13 price range.
Box's success as a public company will hinge on its ability to
differentiate its offering amid increasing competition from tech
giants like Microsoft Corp. and Amazon.com Inc., who have used
their heft to offer online storage at lower and lower prices.
To do that, the 10-year-old company has built and acquired new
tools to make it easier for employees within an organization to
retrieve files and collaborate on documents. As it builds more of
these tools, Box can go out to its customers and sell them more
advanced services, said Forrester Research analyst Rob
Koplowitz.
"That's a perfectly viable model, assuming you get the upsell,"
said Mr. Koplowitz.
Box hopes to specialize in areas such as medicine. Last year it
acquired MedXT, an imaging technology that lets customers render
and annotate medical images. Box has poached veteran executives
from industries such as health care, law, retail and media to lead
the company's expansion in those areas.
Chief Executive Aaron Levie said in December that his company is
"just a couple months" into its strategy of building different
services that cater to the unique needs of several different
industries.
"We're starting to see that in each industry, the way you use
data, the way you use information, the really transformational ways
you use the cloud tend to be fairly different," Mr. Levie said.
The glare of Wall Street and growing pressure from competitors
will challenge Box to move quickly.
Microsoft is going after Box with a beefed-up offering for its
file-storage service OneDrive for Business, which offers enough
storage space for roughly 200 high-definition digital movie
downloads--at a lower monthly cost than Box. Amazon.com last summer
also made available a Boxlike service called Zocalo that the
Seattle company has offered free for companies that buy Amazon's
"virtual" computers for employees.
Some portfolio managers considering purchasing Box in its IPO
cite competition as one reason they remain somewhat hesitant.
David Rudow, a senior equity research analyst at Thrivent Asset
Management who looked at the deal, says while he believes Box has a
first-mover advantage in the cloud storage space, he worries about
the pressure the company could get from bigger players.
"It will be critical for Box to see how they differentiate
themselves from everyone else and how they get out of the Microsoft
shadow," he said.
Box will also need to show it can rein in costs over time
without eating into growth. The company's loss in the third quarter
ended Oct. 31 narrowed to $45.4 million from $51.4 million a year
earlier, partly because of lower sales and marketing costs. But
revenue growth slowed to 70% from 81% in the previous quarter.
Despite the concerns, investors may be enticed to buy Box at a
relative discount to its earlier valuation. The company's financing
round over the summer valued Box at about $2.4 billion, according
to Box's filings.
Box is also proposing a price at a far lower valuation than its
peers, according to people familiar with the deal. Some of the
analysts at the underwriting banks expect Box to generate about
$280 million in revenue in 2015, which means the stock is priced at
about 6 times forward revenue, they said. That compares with a
group of online software firms, including Workday Inc. and
ServiceNow Inc., which trades at nearly twice that multiple,
according to FactSet.
Already one hedge fund that bought in before the IPO at $20 a
share in July, Coatue Management LLC, purchased shares in the IPO,
as outlined in a filing on Thursday, according to a person familiar
with the deal. It wasn't clear whether Coatue bought the full
allotment of 10% of the deal that the filing said the fund might
buy. That will reduce the cost basis of their stake. Coatue and
other funds that participated in the July round also received more
stock in Box, as compensation for the deal coming below $20,
according to the filing.
The largest investor in Box is venture-capital firm Draper
Fisher Jurvetson, which will own a 19.2% stake valued at $322.5
million. Mr. Levie's stake after the offering is 3.4%, worth about
$57.2 million.
Box's IPO is being led by Morgan Stanley, Credit Suisse Group AG
and J.P. Morgan.
Shira Ovide contributed to this article.
Write to Corrie Driebusch at corrie.driebusch@wsj.com
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