Box CEO Aaron Levie

When cloud storage company Box revealed its financials in 2014, the tech community was aghast.

Although it was growing fast, Box was spending about $2.50 to generate each dollar of revenue. Its sales and marketing cost alone outstripped the amount of revenue it was generating.

Many questioned Box's business model. Some called it a "house of horrors"; early investor Mark Cuban saying he'd "combust" if he was running Box. Investors wondered whether 31-year old CEO Aaron Levie was experienced enough to lead a public company, and the company had to delay its IPO for almost a year.

Fast forward two years and Levie is proving the skeptics wrong. Box's business is growing at a healthy clip, passing $300 million in annual revenue for the first time last year. Box's stock popped 12% in after-hours trading last Wednesday on a beat-and-raise quarter that wrapped up its first full year as a public company. And it's scaling back all that spending.

"It’s something that we told the market that we were going to be doing, and now you’re finally starting to see it show up in the numbers," Levie told Business Insider. "We think that’s really proving our core business model and the strength of our product and offering."

Proving skeptics wrong

Investors found a lot to like about Box's most recent results. Besides passing the $300 million annual revenue threshold, Box was also operating cash flow positive for the first time, meaning its core business is now generating cash — an important part of the business tracked closely by Wall Street.

"We are done fundraising. We have a pretty strong cash flow story," Levie said, reiterating Box's plan to be free cash flow positive (operating cash flow, minus capital expenditures) by early next year.

Sales and marketing costs are now down to about 68% of total revenue, which is still relatively high, but closer to the 40% to 50% range most high-growth cloud software businesses spend. It signed thousands of new businesses, including big names like AIG and Home Depot, while losing only 3% of its customers last quarter, a record-low churn rate that's significantly better than the industry average of 7% to 10%.

All that is leading to robust growth, including a 40% year-over-year jump in revenue, and 59% increase in billings, an important proxy to measure future sales of cloud software companies.

"Growing at this scale is hard but it makes sense Box should be able to continue to scale handsomely to $1 billion in recurring revenues and beyond," Jason Lemkin, a venture capitalist who runs the annual software event SaaStr, told us. "Levie has found a way to win in a hyper-competitive space."

Box cofounders Aaron Levie (R) and Dylan Smith

Not a commodity

Perhaps the biggest knock on Box's business has been that its cloud storage product is becoming a commodity service. Cloud storage has long-been considered to be in what's called a "race to zero," in which companies keep cutting its prices even while offering more storage space.

But Box has launched a number of new solutions that can be sold on top of its storage platform, which is adding a lot more value than just dumb storage to its service. The new solutions add more security and flexibility to Box's core storage product, and diversifies its revenue channels. In fact, its existing customers spent 20% more on Box's services last quarter, according to its earnings.

"With new enhancements and products like security and healthcare, Aaron Levie is blowing up the 'storage is commodity' line of thinking," Anshu Sharma, an investor from Storm Ventures, told us. "Levie keeps delivering an app that users love and a platform that CIOs seem to love – the numbers are now proving him right."

"First mile marker of a marathon"

Box is on a clear growth trajectory that's starting to resemble some of the largest cloud software players. Both Salsforce and Workday, two of the biggest enterprise software makers, also crossed the $300 million revenue mark only a year after going public.

But Box still has a lot of work to do to convince the market of its long-term sustainability. It's still burning a lot of money and its losses are growing. Its stock is still priced below its $14 IPO price, or the $23 price it hit on the first day of trading. It's why some analysts think Box still needs to prove its long-term profitability.

"While the company remains on track to reach free cash flow breakeven in F4Q17 (which should be a key positive for investors)…we’re not convinced that we’ll see material multiple expansion until the profitability profile has a more near-term line of sight to breakeven," Raymond James analyst Terry Tillman wrote in a note.

Levie is aware of it and admits this is a long term battle. "We believe our strategy is the right one for the long run. In many ways we’re at the first mile marker of a marathon."

And that means his fight to prove skeptics wrong is far from over.

"There were certainly a lot of rocky moments on the way here," he said. "You have to have conviction about your long term strategy even if there are skeptics, or even if there are doubts in the market about that."

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