The Curse Of A Silicon Valley Midcap

Bloomberg Businessweek|October 14, 2019

The Curse Of A Silicon Valley Midcap
Cloud company Box is stuck in a sales rut, and activist Starboard just walked in.

Even in Silicon Valley, it’s tough to be the middle child. Wedged between hot new startups and technology giants, midcaps must prove their mettle when the pace of growth dips and competition intensifies. Such is the dilemma of Redwood City, Calif.-based Box Inc., whose revenue growth lags those of its cloud- computing peers and is slowing, compounding investor concerns that the 14-year-old company has yet to turn a profit.

Chief Executive Officer Aaron Levie’s answer has been to diversify Box away from its roots as a single-product file-sharing provider and position it in the cloud content management market, with offerings to help businesses secure data and automate workflows. But he’s yet to show the strategy revamp is bearing fruit. Box’s shares are down more than a quarter since its 2015 initial public offering. Shareholder advisory firms have been raising concerns about the structure of the company’s board. And in the biggest blow to Levie yet, activist investor Starboard Value LP disclosed a 7.5% stake in Box— calling the shares “undervalued” in a September filing and saying it could seek changes, including business combinations, asset sales, and a board revamp.

Starboard’s entry could distract Box from dealing with its problems, according to John Barrett, an analyst at Morningstar Inc. “Sales execution remains the biggest issue for the company,” he says, pointing to Box’s difficulties delivering consistent revenue results. The company’s sales have been growing more slowly than its consumer-focused file-sharing rival Dropbox Inc. While two years younger than Box, Dropbox has more than double the revenue: It boosted sales by 26%, to about $1.4 billion, in the fiscal year ended Dec. 31, with Box’s revenue rising 20%, to $608 million, in the fiscal year ended Jan. 31. Box forecasts sales growth of 14% this year.

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October 14, 2019