Box Inc (BOX) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Box, Inc.

Third Quarter Fiscal 2020 Financial Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Alice Lopatto, Head of Investor Relations.

Thank you.

Please go ahead.

Good afternoon.

Welcome to Box's Third Quarter Fiscal 2020 Earnings Conference Call.

On the call today, we have Aaron Levie, our CEO; and Dylan Smith, our CFO.

Following our prepared remarks, we will take questions.

Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investors.

Our webcast will be audio only.

However, supplemental slides are now available for download on our website.

We'll also post the highlights of today's call on Twitter at the handle @boxincir.

On this call, we will be making forward-looking statements, including our Q4 and FY '20 financial guidance and our expectations regarding our financial performance for fiscal 2020 and future periods, our timing of and market adoption of our products, our markets and market size, our operating leverage, our expectations regarding maintaining positive free cash flow, gross margins, future profitability and unrecognized revenue and remaining performance obligations, our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets and expected timing and benefits of our new products, pricing and partnerships.

These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially.

Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements are being made as of today, November 26, 2019, and we disclaim any obligation to update or revise them should they change or cease to be up to date.

In addition, during today's call, we will discuss non-GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our GAAP results.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website.

Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.

With that, let me hand it over to Aaron.

Thanks, Alice, and thanks, everyone, for joining the call today.

Q3 was an exciting quarter for us as we significantly expanded our cloud content management product offering with the release of Box Shield.

We hosted our 9th annual customer conference, BoxWorks, where we received overwhelming demand for our new products.

And this past quarter, we delivered solid financial results.

In Q3, we achieved revenue of $177.2 million, up 14% year-over-year.

Non-GAAP EPS improved to negative $0.01 versus negative $0.06 a year ago.

And we delivered wins and expansions with thousands of customers, including the NHL, Los Angeles World Airports, D.C. Office of the Attorney General, Epic Games and Impossible Foods.

This past quarter, we closed 3 deals worth more than $1 million, in line with Q3 last year, 7 deals over $500,000 versus 11 a year ago and 64 deals greater than $100,000 versus 57 a year ago.

While our 6-figure metric was impacted by slower-than-expected growth in EMEA, we are continuing to see progress in selling the full power of cloud content management to our customers broadly.

As we laid out at our Investor Day in October, we're focused on driving a higher volume of deals with our existing customers.

As such, a key metric that we look at internally are the number of customers with total account value over $100,000, which has now surpassed 1,000 customers, up nearly 20% year-over-year.

Further, in this past quarter, more than 80% of our $100,000-plus deals included at least one add-on product, showing continued momentum of customers leveraging Box's advanced capabilities.

A few examples of long-time customers expanding their usage of Box to the full product platform and purchasing add-on products through our bundled offering at Box Suites include a 6-figure deal with a Fortune 500 insurance and financial services company where Box will replace a legacy ECM technology as part of the company's claims and collaboration project.

Box will integrate with its field adjuster mobile app and claims center, working to improve capabilities for viewing, searching and retrieving important content.

A 6-figure Suites expansion with an energy company that will now bring more regulated content in the Box, and they will start implementing additional use cases with Box Relay, KeySafe and Shield.

Their use of Relay specifically will allow them to retire instances of SharePoint and other legacy ECM systems.

And finally, we got a 6-figure Suites deal with a financial services organization that expanded their deployment of Box by adding Box Relay, Platform and Shield to address new use cases with the goal of retiring Documentum.

We are building the category-defining cloud content management platform.

And in Q3, at BoxWorks, we announced several major updates that deliver on our 3-product differentiators: frictionless security and compliance, collaboration and workflow and best-of-breed integrations.

Starting with Box Shield, we showcased our breakthrough security products that help enterprises prevent accidental data leaks through intelligent classification policies and threat detection for content in Box.

Unlike traditional data loss prevention tools, Box Shield is natively integrated into the flow of work that happens on Box, delivering an unparalleled user experience and greater level of security controls.

While we only released Shield at the end of last month, we are already seeing more early sales traction than any other add-on product in Box's history.

For example, one of the top hospitals in the U.S. purchased Box Shield in Q3 to monitor all sensitive content in Box including PHI data as it moves across their organization, and a global professional services firm that handles highly sensitive client information purchased Shield to make its business units more productive while adding a layer of security and control.

Next, we unveiled new features in Box Relay, including the ability to add custom metadata values to workflows, download activity history and approve and reject to complete tasks from any mobile device.

These new features enable enterprises to better streamline routine collaborative business processes in Box.

And finally, our third major focus area is building upon our open platform and deep integrations with third-party applications.

The future of work relies on being able to seamlessly connect applications and data together from disparate platforms, and we're building the most open and interoperable cloud content platform in the world.

This is why we were excited at BoxWorks to share that we made significant product and integration updates with Microsoft Teams and Slack.

Given the growing popularity of both of these platforms for real-time communication and work, we want to ensure that customers can get access to their mission-critical content from anywhere, especially these applications.

These new integrations, along with enhanced partnerships with Adobe, Splunk and IBM, will provide an enhanced and more tightly integrated experience for our customers to ensure seamless and secure collaboration across their entire IT stack.

Overall, our full cloud content management product suite is gaining more and more traction in the market, and we've made it incredibly easy for our customers to adopt these products via our multiproduct suites.

We are seeing an enthusiastic response from our sales teams and customer base, and we're confident that selling Suites will be one of the primary ways we go to market in the future.

Finally, as a result of our continued product innovation, Box has been recognized by independent industry analyst firms as an undisputed leader in cloud content management.

Most recently, Gartner and IDC named Box as a leader in their evaluation of our execution and vision.

We are consistently recognized for our unique position to help our customers transform how they run their businesses in the cloud.

Before I conclude, I wanted to take a moment to build on our new financial framework that we laid out at our investor breakout session at BoxWorks.

As we shared in October, we are focused on driving a balance of long-term growth and improved profitability as measured by the combination of revenue growth plus free cash flow margin.

On this combined metric, we expect to deliver a significant increase in FY '21 to at least 25% and eventually reaching at least 35% in FY '23.

To drive efficient and consistent revenue growth going forward, we are focused on our multiproduct strategy and driving substantially more repeatability in our sales motion.

We have an incredibly large market opportunity within our existing customer base alone.

For example, just within our Fortune 500 customers where we have less than 10% seat penetration, we have a tremendous ability to upsell and cross-sell our product portfolio.

While we continue to drive new logo growth, we are prioritizing our sales efforts to support existing customers and maturing their use of Box's full platform.

This will result in stronger customer economics with lower customer acquisition costs.

To accelerate the sales motion, we are adjusting our sales focus toward renewals and expansion, targeting the sale of Suites and add-on products to existing customers.

In FY '21, with a simplified and repeatable sales motion in place, we will be able to drive greater sales productivity as well as conduct sales performance management with more rigor.

We plan to keep overall sales head count roughly flat and invest resources in higher-performing regions such as the U.S. and Japan while reducing expense in underperforming international regions.

To drive greater profitability, we are focused on 3 initiatives.

The first is optimizing our workforce expenses by focusing on our most impactful initiatives and further optimizing our location strategy, improving gross margin through our public cloud strategy and improved infrastructure utilization efforts and taking on an ongoing rigorous ROI-based approach to all areas of spend, including greater cost discipline across the business.

Dylan will provide more detail on these efforts shortly.

In summary, while we have more work to do, we are in a stronger position to advance our leading product, expand our customer base and ultimately create a vastly more profitable company.

With that, I'll hand it over to Dylan.

Thanks, Aaron.

Good afternoon, everyone, and thank you for joining us today.

Before I go into our results for the quarter, I want to expand on the strategy that Aaron just outlined to deliver more profitable growth.

This represents an important change to how we will invest in and run our business on an ongoing basis, taking a more disciplined ROI-based approach to all areas of spend.

As we announced at our Investor Day, we're committed to achieving a combination of at least 25% in revenue growth plus free cash flow margin in FY '21, with roughly half of that 25% coming from each measure.

We expect non-GAAP operating margin to be at a minimum of 8% next fiscal year compared to the slightly over breakeven we expect to deliver this year.

We'll be driving these profitability improvements with a focus on 3 key areas of our business.

The first area is our overall head count expenses.

We expect to gain leverage as we streamline our sales overlay model and scale back in underperforming regions outside of the U.S. At the same time, we will be optimizing our workforce locations to improve productivity and reduce costs.

As we drive these changes across the business, we do not expect to grow total head count in FY '21.

Second, we will improve gross margin by optimizing our data center footprint, public cloud infrastructure and the cost to serve our customers.

In addition to the data center migration that we've discussed over the past year, we'll be driving efficiencies in various aspects of delivering our service such as storage, search and conversion.

We also expect more of our business to come from add-on products, which will naturally drive higher margins.

And finally, in line with our more focused strategy, we will be driving increased cost discipline across the business to identify and eliminate low ROI spend.

Examples include rationalizing our marketing programs and events, reducing our outside consulting spend, streamlining T&E and further leveraging systems and automation to drive efficiencies as we scale.

We're on track to execute on these critical initiatives, which will enable us to focus our resources on our highest-performing growth areas and to maintain our investments in R&D to further differentiate our product in the market.

Let's now move on to our quarterly results.

Q3 was another solid quarter of demonstrating momentum in our cloud content management strategy as we continue to see strong add-on product attach rates while driving improved operating leverage.

We delivered revenue of $177.2 million in Q3, up 14% year-over-year and above the high end of our guidance.

25% of our Q3 revenue came from regions outside of the United States, with Japan now exceeding 10% of worldwide revenue.

Our remaining performance obligations, or RPO, are consistent with GAAP accounting and represent noncancelable contracts that we expect to recognize as revenue in future periods.

This metric consists of deferred revenue and backlog, offset by contract assets.

Our RPO ended Q3 at $636.0 million, up 5% year-over-year.

We expect to recognize roughly 68% of this RPO over the next 12 months.

As we stated last quarter, we expected to see some pressure on our RPO in Q3 due to the timing of large multiyear renewals, and we still expect RPO to rebound in Q4.

Third quarter billings came in at $171.9 million, representing 10% calculated and 11% duration adjusted billings growth year-over-year.

As we mentioned previously, Q3 was the last quarter that comparisons were impacted by the enhanced developer fee, which created a headwind to our calculated and adjusted billings growth.

In Q4, we expect calculated billings growth to track more closely to revenue growth.

Turning to margins.

Non-GAAP gross margin came in at 70.70% versus 73.6% a year ago and in line with expectations as we delivered optimizations to our data center infrastructure.

As we migrate our data center footprint to more scalable, lower-cost regions, this is leading to temporarily duplicative costs.

As such, we expect gross margin in Q4 to be roughly in line with Q3, for FY '20 to be roughly 71% and for gross margin to trend upwards starting in the back half of FY '21.

In Q3, we continued to see our business model and improved operational efficiencies drive leverage across the business.

Sales and marketing expenses in the quarter were $73.7 million, representing 42% of revenue down from 48% in the prior year.

As a reminder, in Q3, we held our annual user conference, BoxWorks, which accounted for approximately $6 million of our Q3 spend.

Looking ahead, we expect to generate additional leverage in sales and marketing as more of our revenue comes from renewals and upsells, which are more profitable, and as we standardize our sales motion to achieve more consistent execution globally.

Research and development expenses were $34.0 million or 19% of revenue, flat with Q3 of last year even as we significantly enhanced our cloud content management product offerings, including the general availability of Box Shield.

Our general and administrative costs were $18.1 million or 10% of revenue, a reduction of 1 percentage point from a year ago.

We expect to drive continued leverage in G&A as we benefit from greater operational excellence and scale.

Total Q3 operating expenses represented 71% of revenue compared to 78% a year ago.

So despite the temporary pressure on gross margin, we were able to drive our Q3 non-GAAP operating margin to a 5 percentage point improvement year-over-year, coming in just shy of breakeven versus negative 5% a year ago.

Non-GAAP EPS came in at negative $0.01, an improvement from negative $0.06 a year ago and in line with our guidance.

This result was impacted by an FX headwind of $0.004.

Note that the previously mentioned initiatives to improve profitability will show up more fully in our results beginning in Q1 of next year.

In Q3, our full churn rate was 4.4% on an annualized basis.

As customers increasingly adopt additional products, either in their initial purchase or as a cross-sell over time, they become significantly stickier.

Our net expansion rate was 9% on an annualized basis.

As such, we ended Q3 with an annualized net retention rate of 105%, down from 106% last quarter.

As a reminder, this is a trailing 12-month metric.

So in Q4, it will fully incorporate the impact of the single large customer that reduced its footprint in Q1 of this year.

With respect to pricing, for the 6th consecutive quarter, we saw an improvement in our price per seat on a year-over-year basis.

We now have 13.2 million paid users.

Let me now move on to our balance sheet and cash flow.

We ended the quarter with $200.9 million in cash, cash equivalents and restricted cash.

Cash flow from operations was $8.9 million compared to $6.8 million a year ago.

In Q3, total CapEx was $1.1 million versus $5.2 million a year ago.

Capital lease payments, which we factor into our free cash flow calculation, were $7.1 million versus $4.3 million a year ago.

We expect CapEx and capital lease payments combined to be roughly 8% of revenue in Q4.

As a result, free cash flow was negative $1.7 million compared to negative $4.1 million a year ago.

Note that in Q4, we will be making a $6 million prepayment to a public cloud provider for a revised contract as part of our efforts to improve our future gross margin.

With that, let's now turn to our guidance.

For the full year of fiscal 2020, we expect revenue to be in the range of $693.7 million to $694.7 million.

We remain committed to delivering our first year of non-GAAP profitability this year, and we now expect our FY '20 non-GAAP EPS to be approximately positive $0.01 on approximately 154 million diluted shares.

Our GAAP EPS is expected to be approximately negative $1.01 on approximately 148 million shares.

For the fourth quarter of fiscal 2020, we are setting revenue guidance in the range of $181 million to $182 million.

We expect our non-GAAP EPS to be in the range of positive $0.04 to positive $0.05 and for our GAAP EPS to be in the range of negative $0.22 to negative $0.21 on approximately 155 million and 150 million shares, respectively.

In summary, this past quarter, we made significant progress across our key strategic initiatives.

This included successfully launching Shield, increasing momentum in the adoption of Suites and amplifying our focus and rigor on renewing and expanding our existing customers to sustain long-term growth.

In addition, we are continuing to develop clear initiatives that will deliver significantly higher profitability.

These foundational changes will enable us to more effectively drive both growth and profitability going into FY '21 and to continue building on our leadership position for the long term.

With that, I would like to open it up for questions.

Operator?

(Operator Instructions) And your first question comes from the line of Phil Winslow from Wells Fargo.

This is Rich Hilliker on for Phil.

Congratulations on the quarter and thanks for the details on the three-pronged initiative that you both outlined.

Aaron, in particular, you mentioned that Suites will be a primary way that Box goes to market in the future.

And Dylan, on kind of a similar note, you mentioned that with an increased focus on efficiency, there's going to be more business from add-on products.

So just putting these 2 things together, I'm wondering, a, you highlighted a couple of Suite-related deals in the quarter.

Wondering how customers -- new customers, in particular, are feeling about Suite.

And also, in light of these -- the three-pronged initiative, kind of wondering how should we think about this impacting your efforts to land new logos moving forward because it sounded like there was an emphasis on add-on sales and efficiency.

And then I have a follow-up.

Awesome.

Yes.

So firstly, we are -- because of the positioning of Suite as really the full complete platform of Relay and Governance and Platform and obviously now Shield, in our new customer conversations that we're having, customers get to see the full power of CCM right at the beginning of the conversation.

And some customers will elect to get started with maybe not the complete package because they want to be able to really get their feet wet and start using it really quickly.

But more and more right up front in the initial conversation with customers, we're able to position the full value of Box because of our complete suite.

So we're really happy about that.

It's going to improve our win rates and competitiveness in the market because you're going to get the full value of Box right upfront.

Going forward in terms of really driving that greater efficiency and focus across the sales force, as we noted on the call, we are going to be really focused on making sure that we go into our current installed base of 97,000 customers and drive a significant amount of cross-sell and upsell, which really just further pushes our land and expand sales motion.

At the same time, obviously, we see great opportunities to bring new customers on board.

We're going to do that.

So you're going to see new logo growth in markets or regions or segments where we have a lot of potential still of new clients to bring on board.

But then in more mature markets or segments, you're going to see a lot of upsell of our existing customer base.

Yes.

And this is Dylan.

And to build on that, not driving any real org structure change but rather expect that greater emphasis and greater proportion of our bookings to be coming from our installed base more as a result of that focus that Aaron mentioned and incentives that we're driving around growth from within our installed base.

That will be combined with reallocating our go-to-market resources to more productive regions, which tend to have a larger footprint of existing customers.

And so historically, just to put it in context, about 2/3 of our overall new bookings tend to come from existing customers.

And for next year, we'd expect that to be a little north of 70%.

So certainly a shift because of where we're focused, but not a dramatic difference versus what we've been seeing.

Got it.

That's really helpful, guys.

And then one last one for Dylan here pretty quick.

Dylan, I think on the last call, you mentioned that second half bookings should better align with revenue growth.

I'm wondering if that's still the case.

And given that you executed on that in Q3, I'm wondering what your confidence looks like regarding that statement.

Sure.

So we do still expect our overall billings growth to align pretty closely to our revenue growth in Q4.

And we did see certainly much closer correlation in Q3 of this year versus the first half.

But as a reminder, we did still have the final impact of the enhanced developer fee a year ago showing up in those year-on-year compares in Q3.

So normalizing for that, it would have been even slightly higher than you saw reported in the quarter.

Your next question comes from the line of Melissa Franchi from Morgan Stanley.

Dylan, thanks for giving us the outlook for flat head count growth in sales.

But if you're looking at your revenue growth, you do have to assume a good amount of improvement in sales productivity.

So I'm just wondering if there's something that you're seeing already in Q3 or what you're seeing in the pipeline for Q4 that gives you confidence in that.

Sure.

So as we highlighted at our recent Investor Day, we are expecting to see an overall blended sales productivity improvement of about 15% year-on-year.

Some of that is coming through the momentum and the things that we've talked about around add-on products, continued strong execution and improvements in some of our more mature markets and the like.

While at the same time, as we've talked about, we expect to drive improvement to that blended outcome as well because of where we're allocating our resources to those more productive regions and as we work through some of the sales force turnover that we've seen related to increased performance measurement.

So there are a few different factors driving that.

But overall, the kind of pipeline and adoption that we're seeing, particularly around our newer products and Suites, is what's kind of driving that confidence in the higher top line growth.

Okay.

Got it.

And then I just wanted to follow up on your comments on the international business.

I believe you said that EMEA was underperforming again this quarter.

Japan seems to be doing very well.

But just wondering if you could just update us particularly in what's happening in EMEA, whether you're seeing any macro impacts there.

Or do you feel like you need to make some improvements from a sales execution perspective?

Yes.

We're not seeing too much on the macro front, so we more attribute this to just our own kind of productivity and performance within the broad region.

I think more of the impact is on a subsegment basis.

So it's -- in some regions within EMEA, we're seeing way higher performance than other areas.

And so consistent with what Dylan talked about in terms of reallocating our investment to the highest productivity areas, that will be a very global view that we take.

So in some areas of EMEA, we'll maybe invest less in one space and more so in places like U.K. and Ireland, where we're seeing pretty consistent performance.

And then on a global basis, making investment allocation decisions going more in the U.S. and Japan, where we are seeing really consistent improvement in performance.

And your next question comes from the line of Mark Murphy from JPMorgan.

This is Pinjalim on for Mark.

I just wanted to dig on the sales changes that you have been making.

Maybe could you talk about if some of the changes that Mark Wayland wanted to introduce, is that already rolled out?

Or is it going to take 1 or 2 quarters?

And do you see any kind of disruption related to that?

Yes.

Great question.

We do not see any disruption related to that.

As Mark laid out at our Investor Day at BoxWorks, he has a few key focus areas that really continue on the framework that we've been building for the past year or so.

First is on a greater degree of repeatability and velocity.

So really driving this land and expand motion on making sure more of our customers can reach that $100,000-plus level.

So a lot of upsell happening in the current installed base and really expanding the total size of our customers.

So that is a huge focus, and that's again driving a very repeatable sales motion.

Another big area of focus is really kind of customer centricity.

So making sure that we get the sales team really focused on existing accounts and driving that land and expand motion, and then finally is on productivity overall.

And I think we all want to see productivity improvements across sales, and he's already been driving that fairly aggressively.

So we're really happy about how quickly he came on board and is really kind of taking the baton and continuing to improve our execution, but no disruption whatsoever.

It's been a very smooth transition with Mark.

Yes.

So to add to that, this is Dylan.

Most of these efforts are already underway, and Mark's come in and driven those changes really quickly and really effectively, and that's already been showing up in areas that we had highlighted as challenges earlier, such as the deal cycles, which have now stabilized.

We're seeing much better deal management and greater forecast accuracy really across the board other than in EMEA.

So most of that has already kind of rolled through the sales force, and that's been clear.

There are still some things such as some of the tweaks we're making in the comp plans that hasn't yet been put into place as those will go effective at the start of our next fiscal year.

But for the most part, these are -- these initiatives that Mark has been driving are well underway.

Good.

So in terms of the comp plans, I mean as you lean more and more into the Suites approach, should we expect basically a big change in the comp plan next year, incenting more of the Suites selling as such?

It will be more of an incremental improvement to the comp plan to align to things like Suites and add-on products as well as driving expansion within the customer base.

So obviously, we want to make sure that there's no disruption to how we go to market, but you're going to see just greater emphasis on driving add-on product and multiproduct selling and more expansion of the -- both greater retention and expand of the current customer base.

Understood.

And lastly, Dylan, it seems like the RPO number kind of declined sequentially in Q3, which seems a bit unusual.

Do you know what is causing that exactly?

Sure.

So as we had expected and communicated previously, in Q3, we saw some pressure on RPO, which we expect to rebound in Q4.

So RPO has 2 main components, each making up roughly half of that outcome, and both of which saw a bit of a headwind in the quarter, which is why we had kind of given that notice, the first of which is backlog, which is impacted by contract durations and the seasonality of large multiyear deals.

So we saw a high volume of those deals in FY '19, which creates a headwind in the current period, but we do have a higher volume of those large multiyear deals set to renew in Q4, which is what gives us confidence in that rebounding.

And then the second component of RPO is deferred revenue where the total deferred revenue balance was up about 8% year-on-year but short term was up 11% year-on-year and long term was actually down 33% or about $7 million because of the impact of the enhanced developer fee that we had previously mentioned.

So both of those factors should normalize as we move into FY '21 and expect that outcome to be at a healthier level ending Q4.

Your next question comes from the line of Brian Peterson from Raymond James.

So maybe a bit high-level question here on some of the sales changes that you're making.

But if we think about hunters and farmers and the typical SaaS-oriented sales model, they're typically very different athletes with different pay structure.

So it sounds like there's going to be an increased emphasis on the hunter and expansion with the existing customers.

Are we going to see significant changes to the comp plans?

And how do we think about any potential changes to sales force retention as we go through those changes?

Yes.

So as Mark mentioned at our Investor Day -- Mark Wayland mentioned at our Investor Day, the -- a primary component of the SaaS business model, especially with Box being a very land and expand-oriented product but also equally what he experienced and led at Salesforce, is really making sure that your sales reps are as close to your existing customers as possible and driving continuous expansion and deployment of new products and more seats.

So we think this is very consistent with the SaaS model of making sure that our current sellers are really going after expansion and cross-selling within the installed base.

We feel like we've been able to already hire a significant portion of our sales force as individuals that are able to go and drive that.

So no major change again across the sales force as we go into next year.

More continued improvements to our compensation philosophy that will align to how do we make sure that we get close to our customers, drive expansion using our add-on products and the full product suite, and we'll have more to share as we go into the Q4 call.

Got it.

Maybe just on Shield.

Obviously, that ramped up pretty quickly here.

Any commonality in what you're hearing from customers?

And any thoughts on expectations for that product, especially as it gets lumped into Suites over the next few years?

Yes.

So Shield is -- we've been working on this for nearly 2 years now.

So this has been long in the works strategically for us.

And essentially, the thesis was that as customers put more and more of their mission-critical or highly sensitive data into Box and into the cloud, in particular, they're going to need better ways of protecting that information, especially because they're fundamentally collaborating on that data with other people and other organizations.

And there really is a role for an all-new security model as you're thinking about internal and external corporate collaboration of data.

So whether this is a global manufacturer that's sharing sensitive IP across their supply chain or if it's a financial institution that is collaborating around financial documents with our clients.

So we see Shield as really a breakthrough new category in security to really deliver frictionless security around those collaborative workflows built natively on Box so customers don't have to have these bolt-on technologies.

And so already, the repeatability in the sales motion, in the customer conversations is very high.

It's -- the great thing that we're seeing is it's across all sorts of industries.

We've already seen deals in health care, in energy, in financial services.

So it's going to be pan-industry.

But really, any kind of use case where you have data that's flowing in and outside of an organization where you need a tailored security product to just that problem, Box Shield is going to be able to really drive that solution.

And then obviously, given it's built on Box, it automatically works with all of the data and all of the collaboration that you're already doing within the platform.

So we think this is going to be able to both go after existing security budget where customers might not be getting the right level of user experience from some of their vendors, but I think more importantly, also carve out a new security category of -- that customers are going to be really excited about.

Your next question comes from the line of Brett Knoblauch from Berenberg Capital.

Just one on maybe stock-based compensation going for next year and maybe as a percentage of revenue and what you expect that to be given that now that you expect the head count to be flat.

And then maybe just on what we should be looking forward for price per seat for fiscal year 2020.

Do you mind repeating which spend category, sorry, in the first part of the question?

Say it one more time.

We're just curious, the first part of your question, which area of spend were you referring to?

Just overall stock-based compensation.

Okay.

Sure.

And then -- yes.

So in terms of that, we would expect that to trend down over time and certainly take a very mindful look at where we are relative to peers and ISS recommendations, and they have generally been pretty in line kind of given our profile of the company.

That said, the combination of getting more leverage and efficiencies out of head count growth as well as everything we're doing around our workforce location strategy, in particular, because we see -- we tend to see the highest volumes of equity here in the Bay Area where we're headquartered, combined with just our overall scale, we would expect all of those factors to bring stock-based comp down steadily but gradually over time.

Okay.

And then just a follow-up on what you guys think -- or how we should think about looking at price per seat for fiscal year 2020.

Yes.

So I'd say we've been really pleased with the overall trends we've been seeing, as we mentioned, put up 6 quarters in a row now of year-on-year improvements.

And we'd expect that as our product capabilities and offerings are only getting more robust and with Suites beginning to ripple through the customer base, we'd expect the same trends that have been driving that to continue at least in the near to medium term.

Is it safe to assume we should think that could accelerate given the focus on existing customers rather than new logos?

Don't know that I would say that it should accelerate because of that.

In fact, in some cases, it's built off of kind of an upsell to what customers are paying.

So the overall price per seat improvement shouldn't necessarily be changed significantly whether selling to a new or existing customer.

Your next question comes from the line of Rishi Jaluria from D.A. Davidson.

First, I just want to kind of circle back to questions that have been asked on RPO, bookings, billings because I think from our standpoint, all the forward-looking metrics at least that we have access to on our side of the equation, right, seem to kind of be pointing towards deceleration, and I get the moving parts, right?

But if you look at current RPO, it was maybe up a little bit sequentially.

If you do short-term billings or if you look at current bookings on an RPO basis, pretty big deceleration.

Just maybe help us understand from your perspective, given those, given the kind of pressure on the retention rate again sequentially, what is it that you can point to that gives you confidence that things are, at the very least, going to stabilize and not just continue to decelerate further from here?

And then I've got a follow-up.

Sure.

So I would say a lot of this comes down to the actual bookings numbers.

Now that flows through the model as it relates to revenue, which I think is what you were asking at -- about, and would say that while normally, RPO and billings are both and should both be pretty meaningful leading indicators of our future revenue growth, as you noted, there were a handful of kind of tough comparison items this year, everything from that enhanced developer fee to that single large customer downgrade to the multiyear prepay component.

So when you normalize for those, you can see some of those forward-looking and more traditional leading indicators of growth being fairly in line with the revenue expectations that we've laid out for next year.

I would also note that just in terms of our business, as a reminder, Q4 tends to be the biggest driver of growth for the following year.

And in Q4 a year ago, we had a fairly disappointing outcome.

And so everything that we're seeing that most of which we've talked about previously for the business, both in Q4 and going forward, is what's driving the commentary that we've given around top line growth for next year.

Okay.

Got it.

And then just if I think about the buying behavior from customers, have you seen any changes in buying behaviors?

I know we've seen a few other high-profile SaaS companies talking about customers not wanting to do prepay and instead kind of wanting to go from annual to quarterly.

And I mean, especially in your model, where you're not really doing discounts for annual versus quarterly, at least on list price, it seems like if that's a trend that would apply in other places, it may apply to you.

So maybe any commentary you can give us around that would be really helpful.

Yes.

I don't think we're necessarily seeing any of that show up in the numbers, at least in the past quarter.

Overall, I mean given the volume of business that we do, we have a really healthy, high repeatability, high velocity sales motion.

And so we're seeing pretty strong consistency across our customer base.

So no impact or kind of change in the quarter, in the customer buying behavior.

Yes.

And this is Dylan.

So that comment holds, to add to that, for both our payment durations and our contract duration.

So we're not seeing pressure on either of those measures.

We do highlight the adjusted billings outcome, which factors in payment durations, and that has been higher than our calculated billings outcome, but that's not because of any kind of trend we're seeing from customers.

That's more a function of previous multiyear prepays.

And as we no longer give any incentive either to our sales force or our customers to prepay for multiple years in advance, that has gone down to pretty minimal levels this year.

Your next question comes from the line of Chad Bennett from Craig-Hallum.

So just to be, I guess, clear on the Q4 billings commentary.

So in order to -- let's just say the midpoint of the revenue range is roughly 11% growth year-over-year, give or take.

In order for -- to get there on a -- from a billing standpoint, deferred revs would have to increase sequentially, call it, 25%, and I understand seasonally, that's what the norm has been.

It's been mid- to upper 20s the last couple of years.

But if we look at deferred revs seasonally the first 3 quarters, they've underperformed.

So I just want to make sure we're thinking about deferred revs being up 25% sequentially to get to where you need to be on the billing side.

Yes.

So without getting into the specific kind of commentary around kind of the deferred revenue, but touching on that, we do expect billings growth to be roughly in line with revenue growth.

And then as a reminder, because of the kind of pacing and the seasonality of business last year versus this year, we are -- in any kind of year and even more pronounced this year versus last year because of where that outcome was, we do expect to see a pretty significant jump in the deferred revenue outcome from Q3 to Q4.

Got it.

And then since we're going to be more focused on the base in terms of cross-sell, upsell Suites and all of the above, I guess the secondary metrics like churn and net retention -- or sorry, retention rate and net expansion, I assume starting in Q1, those should start to improve based on the new go-to-market focus.

Is that a fair characterization?

Yes.

So I think you're thinking about it the right way.

The net expansion kind of pressure we've seen has come largely from that single large customer reducing its footprint back in Q1 that will work its way through the model.

And then to your point, as we move into next year, we do expect to see a tailwind due to the focus on expanding and renewing our existing customers, and that should also be aided by the more robust set of product capabilities that we now have.

So I think you're definitely thinking about that impact the right way, and that ties back to the comment and commitments that we made at our Investor Day that Mark laid out in terms of seeing an improvement in that net retention rate by the end of next year.

Okay.

And then maybe one last one real quick.

If long term, we believe, and maybe this is my words, not yours, this is a low teens to maybe even slightly below that revenue growth business, how do you guys think about where sales and marketing should be as a percentage of revenue in that scenario over the next 3 years?

I'll hop off.

Yes.

So I'll let Dylan build on this, but what we articulated at analyst -- at our Financial Analyst Day was not that.

So I would say that the numbers that we put out at our analyst presentation is what we're currently focused on delivering over the next few years.

And so happy to kind of reiterate what those numbers look like but certainly more mid-teens or higher growth and then obviously driving operating margins very significantly, improvements in operating margins over the subsequent few years from here.

And your next question comes from the line of Erik Suppiger from JMP Securities.

First off, can you discuss the magnitude of the restructuring on head count?

How much -- have you had layoffs?

Or what has been the nature of the restructuring?

And then have you seen any change in voluntary turnover since you've gone through some of these changes?

Yes.

Great question.

We're taking a very focused approach as we think about our investments going into next year.

And in some areas where, again, we're maybe seeing underperformance in a specific region or segment, we're looking at pulling those dollars back and making sure that we're investing in areas of higher productivity or output.

And so that is -- that's how we're approaching this across the business right now, really taking an ROI-focused approach.

And I think you're going to see us drive, again, greater degrees of efficiency as we execute on that and in the 3 categories that we laid out in this analyst call.

So the first area is really, again, streamlining the total head count, making sure that we're putting the dollars into the highest impact areas.

Second is making sure that we really take an ROI-based approach to everything from marketing campaigns, travel and event expenses.

And then finally, massive focus on driving more efficiency on our infrastructure and our total technical operations.

Yes.

And then this is Dylan to speak to the retention question or the attrition question.

This has been a year of transition for us.

And as part of our efforts to improve sales force productivity, for example, we've been very focused on performance management and have seen an uptick in turnover.

That said, we've seen very strong and stable retention in areas such as engineering.

And at the same time, we've also been pleased with the talent that we've been able to bring on this year to lead us through our next phase of growth.

So I think you see certain differences depending on how much change or need for increased performance management based on the area that we're talking about but overall has been pretty closely aligned with our expectations.

Very good.

And then one last question.

I think you're looking for mid-teens growth longer term.

Does that apply to fiscal '21 as well?

Or given that you're looking at flat head count, I think you had said you do not expect any disruption.

Is it fair to assume that you're looking for mid-teens type growth in that range?

Yes.

So for -- what you may be referring to on -- if you're talking about that range that we provided at Investor Day, the time frame around that, that model and different outcomes and commitments was FY '23, so 3 years from now.

And as it relates to next year, in FY '21, what we have said is that we're committed to achieving a combination of revenue growth and free cash flow margin at or exceeding 25% and that roughly half of that would come from revenue growth and the other half from free cash flow margin.

So you can think about that, I mean just mathematically, half of that is 12.5% on each metric.

And your next question comes from the line of Terry Kiwala from First Analysis.

Wanted to ask -- clearly understand the emphasis on the expansion model, but want to ask about the new business.

In terms of the pipeline, just if you could make some comments on the relative health of the pipeline.

And now that you say the time line is relatively stabilized, whether we should be looking for some of these larger deals over $500,000 and over $1 million to start to tick up sequentially.

Yes.

So we are seeing definite improvements to the pipeline overall.

With the addition of Shield and then the addition of Relay this summer, the robustness of the product story has definitely improved dramatically, and it's giving us a lot more, especially compared to maybe a year ago or 2 years ago, for our sales team to really go out and have conversations with both new and existing customers.

So the health of the pipeline, the kind of deals and use cases that we're talking about really across the board in financial services, life sciences, public sector, health care, has been improving substantially.

And I think that's only going to continue to be the case going forward.

And in terms of the larger deals, this is definitely an area where we're putting greater emphasis in really driving that 6-figure deal range on up.

I think some of the breakout points that we gave out a couple of years ago are maybe a little bit less important to us than just really driving high velocity of those 6-figure-plus deals.

And then maybe more importantly than that is getting as much of our customer base into that 6-figure on up category as possible.

So what we broke out this -- in this call is that we have over 1,000 customers paying over $100,000.

That's a really important metric to us because it might be -- it might include a $50,000 upsell of a $50,000 customer, and so we want to make sure that more and more of our customers are reaching that threshold.

And that's obviously going to drive -- continue to drive strong growth rates going forward.

So definitely, still very focused on the $500,000 or $1 million deals.

But I think overall, when you look at the shape of the business, it'll show up in things like the 6-figure-plus metric and then the total number of customers that pay over $100,000.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.