Box Inc (BOX) 2020 Q1 法說會逐字稿

Good afternoon.

My name is Josh, and I will be your conference operator today.

At this time, I would like to welcome everyone to Box, Inc.'s First Quarter Fiscal 2020 Financial Results Conference Call.

(Operator Instructions)

Alice Lopatto, Head of Investor Relations, you may begin.

Good afternoon, and welcome to Box's first quarter of 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 Q2 and FY '20 financial guidance and our expectations regarding our financial performance for fiscal 2020 and future periods; timing of and market adoption of our products; our markets and market size; our operating leverage; our expectations regarding maintaining positive free cash flow, future profitability and unrecognized revenues and remaining performance obligation; our planned investments and growth strategies; our ability to achieve our long-term revenue and other operating model targets; and expected timing and benefits from our new products 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 in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements are being made as of today, June 3, 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.

Before we talk about Q1 results, we want to take the time today to give you some additional insight into how our business has been evolving and how we are seeing our strategy play out in our results this year.

Enterprises need a cloud content management platform that powers business process automation, secure collaboration across best-of-breed apps and easy custom development for creating new digital experiences and replacing legacy enterprise content management systems.

To address this demand, we've been evolving our product to extend our cloud content management capabilities.

Simultaneously, we have been advancing our go-to-market strategy to focus more on customer-oriented solution selling.

Together, these 2 initiatives are aimed at transitioning our customers to leveraging Box as a complete platform for secure content management, workflow and collaboration.

When our customers use the full suite of our cloud content management solutions, we see dramatically higher average contract value and better retention, leading to greater lifetime value for Box.

The key indicator of our success in driving this transition is the adoption of our add-on products, which is why we focus on the attach rates and the growth of products like Box Governance, Platform and Relay, and in the future, Box Shield.

We're seeing tremendous success from our add-on products, and in the past quarter, and our add-on product revenue grew by 57% year-over-year.

The demand for Box remains strong and continues to grow.

While our larger, more complex deployments do tend to have longer deal cycles, we believe that our go-to-market initiatives in combination with our expanded product portfolio will enable us to improve sales productivity and meet the growing demand for cloud content management.

Even as our strategy remains focused on driving long-term revenue growth, we will increasingly look to balance our growth with greater profitability.

Now turning to Q1.

We delivered wins and expansion with major customers, including BT Group, Blackboard, Nintendo Europe, Rémy Cointreau Group and Dignity Health.

Revenue was $163 million, up 16% year-over-year.

Non-GAAP EPS improved due to negative $0.03 versus negative $0.07 in the same quarter a year ago, and free cash flow was positive $13.4 million, an improvement of $6.2 million versus Q1 last year.

In the quarter, we closed 3 deals worth more than $1 million versus 1 a year ago, 6 deals over $500,000 versus 4 a year ago, and 33 deals greater than $100,000 versus 35 a year ago.

While we closed slightly fewer $100,000 deals than we anticipated, we are encouraged by the fact that we saw a record 90%-plus of these deals include at least 1 add-on product.

This result compares to 2/3 of $100,000 deals, including multiple products in Q1 a year ago.

We are building the category-defining cloud content management platform, and this year, we have the most exciting product road map in our company's history.

In May, we announced the all-new Box Relay, our workflow automation solution and one of the most critical capabilities for our customers as they begin to leverage Box to drive and automate critical business processes.

Relay will power content-centric processes across the enterprise, ranging from customer and employee onboarding to document review and approval in sales, marketing, finance and more.

Today, these use cases are either not served at all or are being served poorly by rigid costly legacy systems.

With the all-new Box Relay, we are the only solution that delivers secure content management workflow and collaboration in a single cloud platform.

Further, because Box Relay is now built natively on Box, it benefits from our infrastructure security, compliant features and our deep integrations with other business process management tools as well as best-of-breed applications like Okta, Slack, Zoom and Salesforce

Customers recognize our increasing ability to improve critical business processes that are not solved today by legacy ECM systems like SharePoint, Documentum and OpenText.

Several big deals closed in Q1 were direct replacements of SharePoint and other legacy systems.

For example, BT Group purchased Box to power business processes for the company's BT global division.

Box will act as the content layer to BT's bid management process, integrating with Salesforce and centralizing content across BT global.

Box will enhance the way the organization works internally and improve the digital engagement experience for their customers.

A central bank purchased Box Platform to build applications that will enable them to engage with third-party stakeholders such as auditors, other government entities and commercial parties.

With the implementation of Box Platform, the bank will replace SharePoint in an effort to shift critical processes to a modern technology stack.

And finally, a large global investment bank purchased Box in a 7-figure deal to replace a homegrown legacy content management system.

Box Platform will serve as the company's content layer for developing new engagement experiences for regulators, managing M&A deals and onboarding new clients.

In addition to Platform, the firm also purchased Box Governance, KeySafe and Box Zones.

Based on this traction and the new capabilities coming with Box Relay and the other new products like Box Shield later this year, we are excited to drive continued innovation in cloud content management and go after the $40 billion-plus market for content and collaboration.

Also in Q1, we made good progress on the evolution of our go-to-market efforts, enabling us to accelerate our customers' digital transformation through our solution-selling strategy.

As we have discussed, we are working to further improve our execution through hiring and promoting world-class sales leadership around the world, updating sales compensation plans tied to solution selling, improving sales training and operational rigor, and introducing our first enterprise suites.

Now in addition to selling our advanced cloud content management products like Box Platform, Governance and Relay as separate product add-ons, we will be offering new digital workplace and digital business suites that can consolidate these and other offerings into simple bundles that are aligned to our customers' cloud content management use cases.

We are seeing increasing demand from our strategic customers to buy our full suite of solutions, and we expect these suites to be an enabler for a more streamlined sales process and a higher average contract value.

Overall, with our combination of a large install base of enterprise customers, strong product road map of advanced capabilities and a focus on improved sales productivity, we feel confident in our ability to meet the opportunities ahead.

Before I hand it over to Dylan, I'd also like to briefly talk about the continued evolution of our Board and leadership team.

First, Tom Addis, who joined Box in 2012 and who has led global sales since January 2018, will be moving on from the company.

We'd like to thank Tom for his many contributions to Box over the years.

We are in the late stages of hiring a strong candidate to be our new global sales leader who will report directly to our COO, Stephanie Carullo.

Next, as we announced a few weeks ago, Peter Leav will be joining the Board of Directors later this month.

Peter was most recently President and CMO of BMC Software, and prior to that, served as the President and CEO of Polycom.

Peter's experience scaling and leading multibillion enterprise technology businesses will be a fantastic addition to our Board.

Also, over the past 12 months, we have added Sue Barsamian and Kim Hammonds to our Board.

Together with Peter, their collective expertise leading global companies, driving strategic vision and executing with operational rigor is invaluable to Box as we continue to scale our business.

Lastly, we were thrilled to congratulate Dana Evan, who has been an independent director on our Board since December 2011, on being named 2019's Director of the Year by the National Association of Corporate Directors.

Congratulations, Dana.

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

Thanks, Aaron.

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

Q1 was a solid start to the year as we closed a record percentage of large deals with add-on products while delivering continued leverage in our bottom line results, including strong improvement in operating margin and free cash flow generation.

While we still have work to do, we're seeing good traction in our solution-selling initiatives, and we're very focused on improving our sales efficiency and overall growth rate over time.

We delivered revenue of $163.0 million in Q1, up 16% year-over-year.

24% of this revenue came from regions outside of the United States, and in Q1, we saw continued strength in Japan and improvement in certain regions in EMEA.

A year ago, we adopted the ASC 606 accounting standard, and as part of our adoption, we've begun disclosing our remaining performance obligations, or RPO, which represent noncancelable contracts that we expect to recognize as revenue in future periods.

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

Moving forward, we'll be emphasizing our RPO which we believe is a more comprehensive indicator of our momentum and growth potential than billings and is consistent with GAAP accounting.

Our RPO ended Q1 at $637 million, up 16% year-over-year.

We expect to recognize roughly 66% of this RPO over the next 12 months.

First quarter billings came in at $118.4 million, representing 1% calculated and 4% adjusted billings growth year-over-year, in line with the expectations we referenced in our last earnings call.

As we discussed on that call, our Q1 billings faced a very difficult year-over-year comparison, including an unusually high volume of multi-year prepays and billings for the nonrecurring enhanced developer fee in the year ago period as well as a reduction from a single large customer that we mentioned on our last call.

In the second quarter, we expect calculated billings growth to be in the mid-single-digit range, which reflects a roughly 2 percentage point headwind from the developer fee that we billed in Q2 of the prior year.

We expect calculated billings in the second half of this year to track more closely to revenue growth, noting that after Q3, the prior year's enhanced developer fee will no longer impact our year-over-year comparisons.

Turning to margins.

Non-GAAP gross margin came in at 72.3% versus 74.4% a year ago.

As a reminder, we're in the midst of a multi-year migration of our data center footprint to lower-cost regions as part of our hybrid hosting strategy.

We plan to complete this migration by the middle of next year, so during this migration, we'll be occupying redundant co-location facilities resulting in temporary lower gross margins.

As such, while we achieve continued efficiencies from our hosting architecture and the timing of new data centers coming online, we continue to expect gross margin for the remainder of FY '20 to range from 70% to 71%.

Once we complete this migration and as we continue to drive efficiencies in our infrastructure, we expect our gross margin to trend upwards starting in the back half of FY '21.

In Q1, we continued to see our business model and economies of scale drive greater efficiency and leverage across the business.

Sales and marketing expenses in the quarter were $69.4 million, representing 43% of revenue, a significant reduction from 49% in the prior year.

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 improve sales productivity by executing on larger strategic solution sales.

As a reminder and to provide some context, we grew our sales force by 12% last year.

This year, we will focus our sales hiring in segments where we've been executing well and seeing strong productivity trends, and we now expect to grow our sales force in the mid-single-digit range in FY '20 versus our prior target of 10% to 15%.

With our existing sales force and planned hiring, we believe we have the right quantity and quality of sales capacity to deliver on our growth targets.

Next, research and development expenses were $33.3 million or 20% of revenue, flat with a year ago even as we see significantly enhanced our cloud content management product offerings, including the continued development of Box Relay in Box Shield.

Our general and administrative costs were $18.2 million or 11% of revenue compared to 12% in Q1 of last year.

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

Total Q1 operating expenses represented 74% of revenue compared to 81% a year ago.

So despite our temporarily lower gross margin, we were able to drive our Q1 non-GAAP operating margin to a strong 5 percentage point improvement year-over-year, coming in at negative 2% versus negative 7% a year ago.

As a result, non-GAAP EPS came in at negative $0.03, an improvement from negative $0.07 a year ago and above the high end of our guidance.

We ended Q1 with a net retention rate of 107%, down slightly from last quarter.

This result was impacted primarily by the single large customer reducing its footprint that we mentioned previously, which will continue to impact our net retention rate for the next several quarters as a result of how we calculate this metric.

In Q1, our full churn rate was 4.2% 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 12% on an annualized basis, stable with the prior 2 quarters and primarily driven by strong seat growth in existing customers and cross-sells of our add-on products.

For the fourth consecutive quarter, we've seen an improvement in our price per seat on a year-over-year basis, mainly as a result of the higher product attach rates we mentioned earlier.

We now have 12.2 million paid users.

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

We ended the quarter with $231.4 million in cash, cash equivalents and restricted cash, up from $217.5 million (sic) [$217.8 million] a year ago.

We delivered cash flow from operations of $25.5 million compared to $18.4 million a year ago.

In Q1, total CapEx was $1.6 million versus $4 million a year ago.

Capital lease payments, which we factor into our free cash flow calculation, were $9.2 million versus $7.2 million a year ago.

We expect CapEx and capital lease payments combined to be roughly 6% to 7% of revenue both in Q2 and for the full year of FY '20.

Finally, we generated $13.4 million of free cash flow in the first quarter or 8% of revenue.

This was up more than 80% compared to $7.3 million in free cash flow generation a year ago.

Before turning to our guidance, as Aaron mentioned, I wanted to discuss the progress we've made in selling multiple products and the strong economics of those customer segments.

As we've noted in the past, our customers are increasingly choosing to augment our core product capabilities with add-on products, enabling them to more fully realize the value of Box as a cloud content management platform.

We're in a strong position to capitalize on our cloud content management opportunity as we build on the early momentum we've delivered in our solution-selling efforts.

The revenue we generated from of our add-on products was up 57% year-over-year, now representing 14% of our revenue run rate in Q1 versus 10% a year ago.

Looking at our total recurring revenue base, in Q1, 89% of this revenue was generated by customers paying $5,000 or more annually.

Of this base, customers who have purchased add-on products to support higher-value use cases now account for just over half of our annual recurring revenue, up from mid-30% a year ago and mid-20% 2 years ago.

These customers have average contract values that are 4x larger and churn rates that are 2/3 lower than the customers who have not yet purchased any add-on products.

In the future, we expect the launch of the all-new Relay and Shield to drive further adoption of more sophisticated use cases and improved customer economics.

With that, let's now turn to our guidance for the full year of fiscal 2020.

In light of our anticipation of longer sales cycles across our larger deals, we now expect revenue to be in the range of $688 million to $692 million.

We are focused on delivering our first year of non-GAAP profitability this year, and we now expect our FY '20 non-GAAP EPS to be in the range of $0.00 to positive $0.02 on approximately 155 million diluted shares.

Our GAAP EPS is expected to be in the range of negative $1.05 to negative $1.03 on approximately 148 million shares.

For the second quarter of fiscal 2020, we are setting revenue guidance in the range of a $169 million to $170 million.

We expect our non-GAAP EPS to be in the range of negative $0.02 to negative $0.01, and for our GAAP EPS to be in the range of negative $0.29 to negative $0.28 on approximately 147 million shares.

As we have seen and communicated, our larger enterprise deals are more complex with longer sales cycles.

However, these deals result in higher-value, stickier customers which are becoming a larger proportion of our total revenue base.

This mix shift gives us confidence that we can achieve revenue growth rate improvements in FY '21 and beyond on our path to achieving $1 billion in revenue.

Given we are in the midst of driving this cloud content management evolution, we believe it is no longer prudent to pinpoint a specific time frame for achieving this $1 billion millstone.

As we think about shaping our business model, we will increasingly look to balance growth and profitability.

While our strategy remains focused on long-term revenue growth, we will continue to drive margin expansion across the business.

Based on this principle of taking a balanced approach to growth, we are committing to deliver a non-GAAP operating margin of 6% to 7% in FY '21.

From a longer-term point of view, we expect that in FY '23, 3 years from now, the sum of our revenue growth and non-GAAP operating margin will be roughly 30%.

We remain confident that our market opportunity and leadership position in cloud content management set us up nicely for profitable growth.

We are very excited by this year's product road map, which will allow us to build on the CCM momentum.

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

Operator?

(Operator Instructions) And your first question comes from Ittai Kidron with Oppenheimer.

First of all, congratulations to you, Aaron, on your -- the recent addition to your family.

Thank you.

Maybe we can dive into the crux of what's going on.

I guess in a way, you're kind of shifting to going deep, rather going -- rather than going wide with customers.

Help us think about as you look at this past quarter, you certainly have some expeditions heading into the quarter.

What has kind of worked to your expectations in the quarter and what has not?

This elongation of sales cycles, given the complexity of the deal, how much of that is you still selling the solutions siloed?

Is the bundle approach already in effect and is impacting the sales cycle?

Is that going to help or not?

Is that ahead of us or behind us?

Help us -- help me understand that.

Yes.

So I think Q2 was certainly a great example of our add-on products overall contributing heavily to our big deals, especially if you look at kind of the $1 million and $500,000-plus categories.

And this is before we even had the bundles and the product suites that you just mentioned.

So what we are seeing is that more and more of our strategic customers that are spending more than $100,000 with us are using multiple -- 1 or more add-on products like Box Governance, Box Platform, and that is enriching their use cases.

It is obviously dramatically expanding their average contract value.

It's improving their customer retention.

And so our introduction of product suites, which goes live this month in June, is meant to accelerate and streamline the adoption of those add-on products.

So we have 2 suites that are going to be coming live in market.

One is a digital workplace suite, which includes Box Governance as well as the core product, and then we have a digital business suite which includes Box Platform and Box Relay.

And customers now on a single line item are going to be able to buy those multiple products all together, and we think that's going to dramatically streamline how customers are driving these add-on products.

We're seeing pretty significant amount of demand already internally from our sales force, which we think is representative of the demand that we're seeing outside from customers for those suites.

So we're very excited about what that momentum looks like.

And I think -- as you think about the commentary on this call, we are seeing that as you do these much bigger deals that does lengthen the sales cycles.

Although at the end of that the results is much larger deals, much stickier customers, way greater retention.

And that's obviously a really good thing for the business.

So this is going to -- this is a mix shift that's playing out in the business, but we see that there's a tremendous amount of upside as a result of that.

Very good.

Help me think about the suites.

I guess when you think about the guidance for the year, I mean is there an assumption there that the suites help accelerate transactions?

Or that assumption is still not worked into your expectations?

And also, help me think about the price discount that's implied in the suite approach.

Yes.

So the -- to the extent possible, the suites are obviously baked into our guidance.

Although because they don't exist yet, we only have a certain amount that we've been able to simulate.

But because they launch in the first half of the year in our Q2, it won't have any impact really on our first half results.

And so that's sort of tied to our guidance, and we do think that they'll become a big contributor to the growth, especially at the tail end of this year.

So -- but there does remain some upside on that, but we want to wait for that to play out a bit more.

But again, we're seeing a lot of really kind of good demand within the sales force internally and then generating some of that demand directly from customers as well as we've been starting investing in these suites to customers.

In terms of discounting, there's a sort of marginal discount when you -- on a kind of per-product basis when you buy the suite of all of our solutions.

However, the -- we expect that the average price per seat to actually be positive as a result of customers buying these suites.

So we would actually expect on a like-for-like basis that the price per seat for customers that purchase these suites will be much higher when a customer buys the suite.

So you'll get a discount on a per-product basis versus list price of those products, but the customer will be paying more per user within their organization as a result of buying into 1 of our product suites.

Got it.

And just to clarify, when someone -- would customers still be able to buy the product siloed?

Or suites is the only way for them to buy products going forward?

For now, they can still buy the products siloed.

We do know plenty of cases where a customer might want a very specific add-on, especially something like Box Platform.

Although, we do expect that this will continue to help improve and evolve our sales motion.

We'd like to be showing up to customers with a full range of solutions in our sales motion as opposed to kind of a much more piecemeal approach in the sales process.

And so the ability to be able to sell the full suite of capabilities all at once to customers and ensure that they can get the full value of Box, we think, is going to be really impactful to sales productivity activity.

And again, the demand that we're seeing internally from our sales force, I think, is quite indicative of how important this is going to be to our sales motion overall.

Your next question comes from Phil Winslow with Wells Fargo.

Just wanted to focus on a couple of items.

First, you made a commentary about you growing the sales force this year mid-single digit.

And then the next one, you talked about next year, a 6% to 7% operating margin.

And then beyond that, you're hitting a 30% op margin plus revenue growth.

I guess if you think -- help me through the progression there and kind of walk me through the process of why you sort of lowered the sales force headcount for this year, and then I guess kind of extrapolate that through how you think of sort of your comment to that accelerating growth next year and beyond.

Kind of just walk me through the thought process and I guess the path there.

Sure.

So this is Dylan.

As a reminder, and as we've said on the call, we grew our sales force last year by about 12% with a focus in terms of expanding our sales force in the field.

Many of those reps are still ramping through this period and will be throughout the year.

And then we had initially targeted growth in the 10% to 15% range, which gave rise to that mid-single-digit range.

And really, the focus there is on driving more in terms of sales productivity and really doubling down on a lot of the efforts there.

As we mentioned, we've been very focused on only increasing hiring and really focusing in the regions where we have seen strong productivity trends and improvements.

And so depending on how especially some of these newer products play out and some of the leadership changes that we made in certain key regions around the world, as we start to see pipeline generation and sales kick into gear, we would modify the hiring plans accordingly.

But at this stage, we think that growth rate, based on some of the trends that we're seeing in the various sales regions that we have is the right kind of balance of growth and profitability and allows us to generate pretty significant leverage in that line item over time as well.

Got it.

Okay.

And then in terms of just the change that you're making to the go-to-market, obviously, you talked about some of the personnel changes there.

Anything in terms of process that's changing now, call it, quarter end of the fiscal year that you'd highlight and how you think about sort of that playing out over the course of this year into next year?

Yes.

So we've been making a bunch of changes around just the overall operational rigor, especially with our big deals.

While that didn't yet show up in the $100,000 results, obviously, we saw a healthy improvement on the $500,000 and $1 million results in Q1.

And we actually are seeing a pretty significant pipeline of the $100,000-plus deals overall, especially in Q2 and beyond.

So we're feeling pretty good about a lot of the operational rigor that has been put into place.

Additionally, I would say that there's been pretty significant improvements in sales training and in the enablement function around solution selling.

So again, this ability to take our horizontal platform and the capabilities that are on that platform and ensure that it is aligned to our customers' biggest pain points, which is obviously what solution selling is all about.

And I think as a result of that, you're seeing actually more and more wins and takeouts against legacy enterprise content management players.

So especially in Q1, we saw an increase in being able to go and take out products like SharePoint, Documentum and other legacy ECM systems.

So as we move upmarket, what that's going to result in is obviously much larger deals but being able to drive these much more strategic transactions for our customers.

So that's really what the sales operations efforts have been all about, and I think we're seeing some really good signs early on in the year that it's playing out in a very fruitful way.

And just to build on that and kind of circle back to the question you had about the growth rate, Phil, is why we remain confident in targeting in our ability to improve our revenue growth rate even with this sales hiring plan is that the foundational components are all there.

So we've talked through the sales leadership up-level that we've seen in key regions.

And we do have with our current planned hiring sufficient sales capacity as well as pipeline coverage this year to deliver against those growth targets and to make that happen.

So as mentioned, that, combined with a solid cloud content management traction that we've been seeing that has better growth rates and overall economics, those are some the key drivers that lead us to that level of confidence.

Your next question comes from Melissa Franchi with Morgan Stanley.

Aaron, when we spoke last quarter, you talked about elongating sales cycles and some deals that had slipped from Q4.

Coming into Q1, did the sales cycle elongate further than what you saw last quarter?

And if so, what gives you confidence that it's simply because you're doing more strategic selling versus maybe something more fundamental or execution-driven?

Yes.

So overall, I think we're seeing a really strong pipeline buildup throughout the year with pretty clear kind of close dates in a very measurable way across the business.

So I don't know that we're seeing an increase in the sales cycle length from where we were 3 months ago.

I think we're just getting a better sense for it overall, though, as it relates to the financial model this year.

And then of course, things are ultimately tilting a little bit more back-end oriented just given the deal sizes that we're working on aligning to customers' budget in the second half of the year.

So overall, we do feel pretty confident in the predictability of these bigger deals, but it has -- overall, the sales cycles have lengthened from maybe where we were 1 or 2 years ago.

And that's been the shift in the model that we're seeing.

Got it.

And then Dylan, thank you for the operating margin target in FY '21.

I know that you're not going to guide for the top line likely in that period, but I'm just curious how sensitive is that guidance to the top line, such that if you're seeing better growth opportunities?

Is there the potential that you might want to kind of more reinvest in the business and deprioritize that leverage target?

Yes.

So as we've said in the past, we do think about certainly one of the components of our overall expenses that is mapped pretty closely to the success we're seeing and sort of the top line drivers as well as outcomes is our AE hiring, our sales force hiring.

But based on the things that we're putting in place this year to drive additional efficiencies, we feel good about that operating margin target, depending -- even with various kind of top line scenarios.

Also, although the ultimate hiring goals with the sales force may move up or down depending on that success and productivity we're seeing and how will some of those initiatives are working, there are a bunch of other things that are driving efficiencies in the business that lead us to be confident in that operating margin target even with the range of top line outcomes.

And that's everything from things like beginning to see those gross margins improve as we move through next year and as we complete the data center migration to continuing to drive natural business model leverage as we expect more of our customers are going to be -- you have a larger renewal base and expansion base relative to this year, which are inherently more efficient sales, not to mention the sales productivity and beginning to move more of our future hiring in lower-cost locations.

So there are a number of things that we're doing across the business to drive efficiencies, and I think we can achieve those goals even if the top line growth plays out as we're targeting.

Your next question comes from Rob Owens with KeyBanc Capital Markets.

I guess if we focus on the velocity base sales, I understand the economics of going upmarket.

But has there been a change either in market dynamics and competitive dynamic and just market maturation that would bifurcate the market and suggest Box moves upmarket?

Help me understand kind of the corollary in the other side of this, just what's happening in that velocity base business, and if it's becoming more fungible or something of that nature.

Yes.

So actually, I think we're still seeing really strong results in the velocity business.

It's a really strong run rate business overall.

And in fact, we're even starting to see higher average contract values within that segment with the addition of our add-on products.

So on a pretty regular basis, we're seeing now record kind of breaking deal sizes within our SMB and commercial segments, which really is evidence that if you're smaller investment bank or you're a law firm or you're a professional services organization or a marketing agency, you have the same level of security and governance and workflow needs as a large enterprise, and we might be an even more complete solution for your entire enterprise.

So that allows us to actually capture, in some cases, a higher price perceived in those organizations.

So I think we're very well positioned from a competitive standpoint in that kind of velocity business in the commercial segment.

Of course, we want to layer on the enterprise business on top of that because of the strategic nature of Fortune 500 logos, and of course, the IT budgets that are out there and obviously the disruption that we can go drive within the legacy ECM space.

But it is a balanced portfolio of our revenue mix, everything from self-serve happening completely online with no touch all the way up to the world's largest enterprises.

So I think we're going to continue to see that balanced mix of revenue and drive on growth in those key segments.

Aaron, can -- cloud is nothing new and nor is enterprise cloud content management.

Are you surprised that just this point in the life cycle of the company to see these sales cycles extending?

I would think that it'd somewhat coming down just because people understand the value proposition, understand what Box can add on top of that.

Yes, it's a really good question, and we spend a lot of time thinking about this internally, strategically.

I think what's happening is if you look at the kind of first maybe decade-plus our growth, it was really -- Box is a tool for secure file sharing and collaboration.

It was very easy to adopt just by an IT department or some other department within the organization.

As we built out things like Box Governance, Box Relay, obviously, for workflow, Box Platform for developers to be able to build applications on top of the platform, this has involved a broader set of constituents in the organization, which is fortunately driving more standardization around Box within an enterprise.

But it comes certainly with some increased rigor on behalf of the customer and the stakeholders that have to be involved in the sales transaction.

So I think what's occurring is it's less about cloud as a kind of macro technology architecture and much more about Box as a platform for content management and security compliance governance developer buy-in that goes on into one of these sales, especially if you think about a very large, regulated bank or pharmaceutical company or government agency.

So the good news is operationally, internally, we're very prepared for those types of deal cycles, but what it is having the impact on is extending those deal cycles.

I think what we're certainly working on as well is driving again an ongoing, very healthy run rate business of those kind of $100,000-plus deals that maybe won't be as susceptible to those cycle increases and really trying to drive a balanced mix of that.

But overall, I think as you see this mix shift of revenue more toward add-on products and customers buying the full suite of our capabilities, that will become pretty normalized in terms of how you see the business grow.

Your next question comes from Brian Peterson with Raymond James.

Kevin here on for Brian.

In regards to the new Relay offering, can you talk about how you see positioning that product with a paid and a free version?

And I guess how do you see that driving customer economics versus some of your other product launches?

Yes.

So Relay is going to be fundamental to our continued evolution as a cloud content management platform.

In the history of the company, customers have had to purchase other add-on -- separate products from other vendors to be able to drive workflow around their content within Box.

And in many cases, we see a huge opportunity to make that a much simpler experience and one that is much more streamlined and much more kind of intuitive for our customers.

So we've seen a significant amount of demand for Relay, the natively built product that we did just announce and will become generally available in June.

So a pretty significant and healthy pipeline is building, and this is again going to increase the retention rate of customers that's going to drive much stickier use cases within customers, and then overall, especially when bundled in with our add-on product suites, drive up average contract value.

As Dylan mentioned, we're seeing a 4x greater average contract value of customers that have 1 or more add-on products from Box, which is obviously a pretty material difference in what customers are spending and buying from us when they do have these add-on products.

And we think Relay is going to be a significant contributor to that overall mix.

That's helpful.

And then maybe just a point of clarification.

I think your updated full year billings outlook would imply a growth rate that's below your updated revenue outlook.

So I just wanted to come back to your comment about what's giving you confidence in the pipeline that growth for the business will reaccelerate going into fiscal '21?

Yes.

So you're right in terms of the overall map as we do expect billings growth and revenue growth to track more or less in line in the back half of the year.

But due to some of not just the kind of deal cycle lengthening time dynamics but also some of the kind of onetime or kind of items that have impacted billings in the first half of the year, that's what's causing that -- those kind of headwinds.

Which is why we'd also point to and I think we'll increasingly be pointing to RPO as a pretty good indicator of the underlying momentum in the business.

But overall, as we think about the confidence, as we think about the year as a whole, which will show up to a certain extent in the billings growth, it does relate to a lot of the same things that we've started to talk about in the past and on this call, specifically around everything from the traction that we're seeing in our cloud content management use cases and the economics and growth associated with not just the specific add-on products but the customers who are using those more broadly now making up about 50% of our revenue and growing pretty steadily.

So those trends continue, and we believe they will, especially as our product offering is going to become a lot more compelling.

We think with the introduction of Relay and suites in the near term and then Shield later in the year, combined with a lot of the inputs and the things we look at around sales capacity and pipeline coverage and things like that are a lot of the underlying components that lead us to be feeling good about the year as a whole.

Your next question comes from Mark Murphy with JPMorgan.

This is Matt Coss on behalf of Mark Murphy.

You mentioned you saw some improvement in certain regions in EMEA.

What were the regions that did improve?

And what was the improvement that you were able to observe?

And then in the regions that are still transitioning, what do you expect to see from those as the year progresses?

Sure.

So the most notable region where we saw a big improvement over prior quarters is in the U.K. and Ireland, which is our largest region of EMEA having a very strong outcome and better than planned.

And that was where we closed one of our $1 million deals in the quarter as well.

So that would be probably the main highlight that I'd call out in terms of materiality.

Still seeing kind of a lower contribution from some of the areas where we've been rebuilding the team and uploading leadership like Germany, for example, has not been contributing materially to the business.

And we've been building out the sales capacity and some of the pipeline there and hopefully see that start to contribute more materially as we move through the year.

But those are probably the 2 regions I'd call out in terms of both positive and still building.

And sorry if I missed this, did you mention the number of registered and paying users?

We did.

We have now in terms of total registered users just shy of 66 million, so 65.9 million.

And in terms of overall paying seats, 12.2 million.

Your next question comes from Chad Bennett with Craig-Hallum.

I guess the large deals that slipped from last quarter, did we recoup any of those deals in the large deal metrics that you cited?

Yes.

We did close a few of those within the quarter, and a majority are still in the pipeline throughout this year.

So still kind of in control of all those deals.

Okay.

And then on a net new basis, do you think -- and I guess even more broadly, the net new customer wins, do you believe you've lost share over the last 12 to 18 months in the next-generation cloud content management space?

Sorry.

One more time, sorry?

Do you believe you've -- either your win rates on a net new basis have went down or overall you've lost share in your space?

No.

No.

I would actually say, from a cloud content management standpoint, we are still in a pretty clear leading position as the only cloud-native platform that customers can move to.

So when we look at most of our competition, it's primarily legacy ECM vendors like OpenText or Documentum or products that are having to be positioned through a kind of on-prem-to-cloud transition like SharePoint.

And overall, what we're seeing from customers is that the functionality, the user experience, the lack of internal or external collaboration, the lack of developer experiences or integration with other best-of-breed tools, all of those kind of deficits are causing customers to really rethink their content management environment, which is actually driving a lot of demand for Box overall.

Yes.

And as it relates to the win rate, specifically, we have seen stability, and in many cases, especially per add-on deals, actually slight improvements in the win rates over the past several quarters.

And so absent -- and you can think about that in a couple of ways.

There is kind of what amount of the pipeline do we ultimately close as new bookings relative to what's entering the quarter, and then what percentage of the pipeline is ultimately closed, either won or lost comes in, in the latter categories how we typically think about and describe win rates.

And that, as I mentioned, has been slightly improving and is significantly better in deals that have at least 1 of our add-on products attached as it relates to what we close out of the entering pipeline coverage that has similarly been pretty stable and strong as well, absent Q4, where we had a higher volume, as we've discussed, of large deals pushing out of the quarter that led that metric to go down.

Okay.

One last one real quick if I may.

I think it should be straightforward.

So if you're moving up in terms of enterprise selling into -- from a sales standpoint and then also bundling in more suite-based selling or solution selling and you're going to see the benefits of this in the second half, we should expect net expansion and retention rates to accelerate?

Well, I'd say a couple of things there is we would expect seeing one of the things that has been contributing positively to the net expansion rate is -- and that retention rate is the cross-sells of add-on products which has offset some of the kind of counter-pressures of things like the customer base maturing and such.

However, this year, as we talked about, we are going to see some pressure because of that 1 customer who reduced its use cases and footprint with us in the fourth -- first quarter.

So that's going to show up, and we'll call out the impact as we move through the year.

So I think ultimately, we could see and think that we -- based on the product portfolio that we increasingly have, especially as we think about toward the end of the year and heading into next year, some upside in that metric.

But because of the offsetting pressure from that 1 large event, about $8 million, that's going to make it pretty challenging compare this year.

Your next question comes from Michael Turrin with Deutsche Bank.

Just one for me.

You mentioned some of the revenue headwinds heading into this year on the Q4 call, but revenue sequentially down is not something we're used to seeing given you have a 97% recurring revenue model.

You also saw an uptick in $1 million deals during the quarter.

So was hoping we could talk more around -- given what appears to be a conservative backdrop and some of those incremental deals showing up in some form, what are some of the offsets that are bringing the full year guide lower today versus what you were seeing last quarter when you set that initial guide?

Sure.

So I'd say, first, specifically as it relates to the sequential revenue outcome, a couple of things just to keep in mind -- or maybe 3 things.

First of all, the sequential increase or decrease or change is a function of the bookings that we closed in Q4, where, as mentioned that outcome was certainly worse than our expectations in our typical Q4 performance.

We also had, at the very beginning of this quarter, that customer downgrade which had a couple of million dollar headwind.

And then finally just from -- purely optically, there's 5 -- sorry, 3 fewer days in Q1 versus Q4 which leads to a roughly $5 million headwind.

So that's sort of the sequential setup there.

And as it relates to the overall kind of guidance and what has changed, a couple of things and we've probably said this, but to sort of clarify, we did get off to a bit of a slower start in Q1 than we would have hoped as billings landed at the low end of the range we'd expected to due to the $100,000-plus deal counts coming in a bit below our expectations.

And we have seen a bit more pronounced lengthening in those larger deal cycles versus what we had expected a few months ago are really the 2 main things in terms of what's changed over the past few months.

And your next question comes from Erik Suppiger with JMP Securities.

Just on the sales organization, has there been any change in terms of sales turnover?

And then secondly, can you give us a sense for the tenure of your average salespeople?

How much of your sales organization has been with the company for a year or more?

Yes.

So we haven't seen a significant change in terms of sales force turnover.

So as mentioned, especially now as we have a much better sense of what it takes to be successful selling these more strategic solutions sales, we have increased our focus on performance management, which had a bit of an impact but not material as it relates to the overall number.

And then as it relates to the overall dynamic in terms of tenure is -- what I'd say is, entering this year, we had about 2/3 of our field sellers fully ramped entering the year, which is both about the same as last year and also roughly correlates to how many folks have been around for a year as that's about how long it takes to achieve fully ramped quotas.

So about 2/3 of our sales force heading into the year was in that category.

There are no further questions at this time.

Thank you very much for joining us for the call today.

You may now disconnect.