A Year After IPO, Aaron Levie's Box Is Showing Signs of Growing Up

As hard as it may be to believe, Aaron Levie has been running Box, the cloud data storage and collaboration company he started with a batch of high school friends in suburban Seattle, for 11 years.

As recently as two years ago he still fit — almost too perfectly — the archetype of the young startup CEO on a messianic mission to blow up a once-sleepy corner of the tech industry with a laundry list of fresh ideas about how companies use their day-to-day information, new business strategies and a big dose of cloud computing know-how.

The Aaron Levie of 2016 is different from the previous Aaron Levie. He’s now 31, his once-wild mop of dark hair is noticeably graying at the sides, his bearing has matured.

You might attribute at least some of that gray hair to the performance of Box’s share price since its closely watched IPO on the New York Stock Exchange 14 months ago. When Box shares opened for trading in January of 2015, they were priced at $20.20. Today they were trading at $12.24, or more than 47 percent lower.

And yet he’s untroubled by the share price itself, but rather thankful Box finished its IPO when it did. “We’re happy to be a public company,” he said during an interview with Re/code at Box’s branch office on Manhattan’s Park Avenue South. “In light of what’s happening in the private markets now, we’re happy we did get out when we did. Now there’s a very different kind of market. I’m happy to be through that gate.”

And while the share price may be solidly in the red, Box has met or exceeded its forecasts in all five of the quarters it has reported. Box finished 2016 with revenue up 40 percent year on year, and though the size of its annual loss increased by nearly 12 percent to $203 million, operating expenses as a percentage of sales decreased.

Before it was public, Box was burning cash at a rate of $17 million a month after backing out research and development costs. In the quarter ended in January, Box had a $5 million positive cash flow from operations, and it was on track to reach a sustainable positive cash flow by the end of this fiscal year.

“The business model is working,” Levie said. “When people were shocked by the numbers they saw, like the sales and marketing costs, we were still fairly early in the process of scaling up the business. Now we’re seeing the benefits of the scale we’ve achieved so far.”

The sales and marketing costs — $242 million last year — work like this: In fiscal 2016 (which ended Jan. 31), Box basically spent about 80 cents to bring in every dollar of revenue. Most of that was tied up in the cost of carrying its free users, who try Box — sometimes for years — before their employers become paying customers.

The freemium model is fundamental to Box’s ability to land deals with large companies, Levie says, and will never change. “We don’t talk about it much, but there are plenty of examples where we’ll go into a company with 500 or 1,000 free users, and we’ll end up doing a deal with the company for 10,000 seats,” he said.

Bigger companies are signing on: Insurance giant AIG, the Campbell Soup Company, retailer Gap Inc. and life sciences company Genentech all signed on as Box customers in the last several months. A new Box service called Box Zones is aimed at landing business with more large companies in Europe and Asia by offering the ability to store data on locally-located servers while still taking advantage of Box’s service.

Also, big tech players have also signed on as Box partners. Both IBM and Microsoft, the very sorts of companies Levie would have once considered targets for disruption, are now deeply in Box’s camp, their products and services closely intertwined.

It’s an example of a growing new reality to which large tech players who sell to equally large customers are having to adapt. “IBM and Microsoft and other large tech companies are realizing that for the benefit of their customers, they’re going to have to partner first and compete second,” he said. “The customers we’re dealing with are using Box and they want to use their iPads and Office 365. And so it’s on Box and Apple and Microsoft to figure out how to make things work rather than fight over that customer.”

Still, Box still bumps up against Microsoft when trying to win deals: When the prospect is a large customer, the main rival is Microsoft Sharepoint, a product Levie has disparaged regularly from Box’s earliest days. “It’s a bad habit I have to break,” Levie said. “Box is integrated in 90 percent of Microsoft’s products, and we only compete in this one small area.”

But there’s not a major enterprise application that Levie doesn’t want Box to connect with. He turns to a slide showing Box as the central spoke in a wheel connecting it to Office 365, Salesforce.com, IBM, Google Apps, Docusign and Slack. “There’s room on the wheel — almost infinite room — for a lot more important business applications,” he said.

“Our long-term strategy is ensure that Box gets embedded into every key enterprise application out there.”

What’s missing? SAP, he says, referring to the German business software giant best known for its software used by large companies to run their operation soup-to-nuts, a market segment known as Enterprise Resource Planning, or ERP. “If there’s one thing that’s missing here, it’s an ERP company. I don’t have a way to get ERP documents into Box.” The same is true of Oracle, another ERP player. “We want to work with everybody.”

Everybody, that is, except one: Dropbox. The consumer-facing file-sharing and storage company that has, in recent years, made the enterprise a strategic imperative is not on his list of potential partners. “That’s the only one I can’t see us working with,” he said with a laugh. “But certainly everyone else.”