Box Inc (BOX) 2016 Q1 法說會逐字稿

Welcome to the Box Incorporated first quarter FY16 earnings conference call. This call is being recorded today, Wednesday, June 10, 2015.

(Operator Instructions)

It is now my pleasure to turn the floor over to Jennifer Ceran, Vice President of Finance, Treasurer and Investor Relations. You may begin.

Good afternoon, everyone, and welcome to Box's first quarter FY16 earnings conference call. On the call today we have Aaron Levie, our CEO, Dan Levin, our COO, and Dylan Smith, our CFO. Following our prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. The webcast replay of this call will be available for the next 90 days on our company website, under the Investor Relations link, www.box.com/investors. During portions of today's call we will be referring to presentation materials posted on our Investor Relations 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 FY16 financial guidance and our expectations regarding our financial results, market adoption of our solutions, our market size, our operating leverage, our path to and our expectations regarding achieving profitability, our planned investments, our growth strategies and expected benefits from our new products. 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 from those set forth in such statements. These forward-looking statements are being made as of today and we disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information.

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. And with that, let me hand it over to Aaron.

Thank you, Jenny. Good afternoon, everyone. We had a great start to the year. Revenue in Q1 was $65.6 million, up 45% year-over-year. Billings were $69.8 million, a 58% increase year-over-year. This quarter, we added more than 2,000 customers and had great wins at Deloitte, Chevron, HP, Nationwide Insurance, Chipotle and Cedars Sinai Medical Center.

Underlying our top line growth was continued improvement in operating margin and operating cash flow. Non-GAAP operating margin improved 19 points year-over-year, and operating cash flow was negative $7.2 million, compared to negative $23.5 million in the prior year quarter. This excludes a nonrecurring restricted cash deposit of $25 million for the build out of our newly leased Redwood City headquarters. As we continue to scale, we're strengthening our financials and progressing on our path to profitability. Overall, the investments we've made in focusing on the enterprise market are paying off in a big way.

Since our last earnings call, we made significant progress on several key strategic priorities. Today, I'd like to talk about four of these areas. First, we grew our customer relationships and differentiation through Box for Industries, including just recently announcing that the Department of Justice will be using Box for secure collaboration. Second, we extended our product leadership with major security and compliance updates, including Box EKM, our customer managed encryption key technology.

Third, at Box Dev, our annual developer conference, we introduced a new product offering that dramatically expands our market opportunity through the Box platform. And finally, we continued to strengthen our competitive position by expanding our partnerships with Microsoft, Google and Apple, allowing us to deliver integrated customer experiences that extend our go-to-market reach.

Let's look at each of these areas in more detail. First, let's start with our Box for Industries initiative. Since announcing Box for industries at BoxWorks last year, we've been incredibly successful in growing our footprint in several industries. For example, we're helping retailers like Gap, Neiman Marcus and Sephora support their omni channel experiences. We're helping pharmaceutical companies, like AstraZeneca, Eli Lilly and Jazz Pharmaceuticals speed up collaboration in drug discovery and research. And we're enabling healthcare providers, like Cedars Sinai and MD Anderson, to collaborate with patients while staying secure and remaining HIPAA compliant.

In Q1, in addition to announcing Box for Financial Services, we made significant progress in bringing Box to the public sector by hiring Sonny Hashmi, the former CIO of the General Services Administration, to lead our federal efforts; and most recently, we announced that the US Department of Justice had selected Box for a secure collaboration. This is a very important strategic early deal for us in the federal space and it's already driving many new conversations in this sector. The DOJ's selection of Box is further reinforcement of how our enterprise focus uniquely enables us to serve security conscious and regulated industries.

Second in the quarter, we continued to innovate with new technologies that separate us from the competition. Two standout examples were Box Enterprise Key Management, or EKM, and retention management. Box EKM, which became generally available at the end of Q1, is a patent pending solution that enables organizations to collaborate in the cloud while maintaining full control over their encryption keys that protect their content. The initial response from both existing customers and new customers has exceeded our expectations. For example, we closed a deal with a major global professional services firm who will use Box with EKM to collaborate on client projects securely.

Retention management is a new solution in beta with more than 65 customers. It allows enterprises to manage how long business documents are retained in Box, as well as to automate the expiration, archiving and deletion of those documents. It's a key feature that allows our customers in financial services to configure their Box accounts in a manner that's compliant with FINRA requirements. It's also essential in other industries that have complex compliance standards like healthcare, legal, and oil and gas. Retention management will be made generally available to customers in Q2.

We also continued to augment our core technology with the acquisition of Verold, which closed in early Q2. Once integrated into Box, Verold will enable customers in industries like retail, manufacturing, and consumer products to work with their 3D content in the cloud. We will continue to pursue targeted acquisitions like Verold that strengthen our core content management and enterprise technology differentiation.

During the quarter, we also held Box Dev, our annual developer conference. We now have nearly 50,000 developers building on Box and interest in building enterprise apps has never been stronger. The most significant announcement at Box Dev was the introduction of Box Developer Edition. Box Developer Edition is a new licensing model that enables both our enterprise customers and third-party developers to bring the full power of Box's platform directly into their applications. This is a major innovation for Box and the industry and allows Box to now be run as a seamless back end service for any type of app.

Box Developer Edition will expand Box's addressable market in two major ways. First, our enterprise customers will be able to more easily build custom apps that leverage Box's technology to connect with their own customers in new ways. For example, we are working with a major financial services firm to create a new digital experience that connects their financial services advisors directly with their wealth management clients. Through this new app, advisors will be able to share highly personalized content, like prospectuses, authorization forms and other relevant information on investment opportunities with their clients. Other industry use cases include hospitals using Box's platform to power patient portals and educational publishers pushing content directly to students and teachers.

Second, Box Developer Edition provides the growing community of enterprise software vendors and startups with full access to the technology stack we developed over the past 10 years. This means that apps built on Box are enterprise ready from day one, greatly shortening the time to market for startups and enhancing their ability to sell to enterprises. Box Developer Edition is currently in limited beta. We expect to announce pricing and general availability later this year.

Finally, we made great advancements with major partnerships in Q1. We announced important integrations with Microsoft that make working with Box and Office 365 easier and more powerful than ever, and we have an exciting road map in place to further deepen our collaboration with Microsoft in the future. On the heels of our integration with Google's Android for Work this quarter, we also announced a partnership with Google to allow people to seamlessly access their documents and files in Box from Chromebooks.

And as Apple mentioned on their most recent earnings call, we are working with them to extend the reach of iOS in the enterprise. We're thrilled to be a part of Apple's opportunity to transform the way so many people work. All of these relationships reinforce our role as a strategic platform for the enterprise.

To wrap it all up, we made tremendous progress in Q1. We continued to execute on Box for Industries, hiring key talent and securing major customer wins in the public sector, financial services, and other priority industries. We enhanced the differentiation of Box by delivering value-added features and services with the rollout of Box EKM and other enterprise capabilities.

Through innovations like Box Developer Edition, we are expanding our market opportunity and making it easier than ever for customers and developers to build on Box, and we strengthened our ecosystem of partners with several strategic alliances. As a result, we are winning bigger deals and extending our reach into the most highly regulated industries and security conscious segments of the market.

Our Company is energized and executing on our mission to transform the way people and organizations work. We are going after an addressable market of $25 billion annually and we're just getting started. Thanks for your time. I'll now hand it over to Dylan to review our financial results in more detail before Q&A. Dylan?

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us on our call. Before I get started, please note that I'll be using a presentation to accompany this call, which you can find on our Investor Relations website, at www.box.com/investors. Unless specified otherwise, all comparisons are to the same period a year ago.

As Aaron highlighted, we had a great start to our fiscal year, exceeding our Q1 revenue and non-GAAP operating margin guidance, as we closed more large deals with new customers, expanded our penetration within existing customers and drove continued progress toward profitability. For the first quarter, GAAP revenue was $65.6 million, representing year-over-year growth of 45%. Billings were $69.8 million, up 58% from the prior year and a strong reacceleration of our growth rate compared with Q4 of last year.

Non-GAAP operating margin was negative 50%, an improvement from negative 69% a year ago. Cash flow from operations was negative $7.2 million, compared with negative $23.5 million in the prior year. This excludes $25 million in restricted cash that was set aside to secure a letter of credit for our newly leased headquarters.

Our total registered users reached 37 million. Of those, paid users now represent more than 10% of the total, up 70% compared to a year ago. Finally, our retention rate continues to be strong, at 123%.

Let me now provide a deeper look into our results, beginning with revenue. We generated revenue of $65.6 million in Q1, up 45% year-over-year. We continue to experience success moving up market, with our sales force closing more enterprise deals, including some that we have been working on for several quarters. We closed 20 deals over $100,000 in annual account value versus 16 a year ago. Of these, we closed five deals over $500,000 versus two a year ago.

Box Consulting revenue was $1.9 million, up 34% year-over-year and representing about 3% of total revenue. This compares to $2.2 million in Q4 of last year, a seasonally strong quarter for us. We anticipate this business continuing to grow as we sell to larger, more complex enterprises and as we roll out new value-added services.

Let me now turn to billings. First quarter billings were $69.8 million, representing 58% growth over the same quarter last year. This strong result was driven by closing large deals and generating longer average billing terms. As a reminder, our customer billing terms range from monthly to multiple years, which results in some quarter to quarter variability, as the duration of these terms impacts our billings outcome. Applying the same average billing terms from Q1 of FY15 would have generated 53% billings growth versus the reported 58%.

Turning to deferred revenue, we ended the first quarter with $124.2 million, up 40% year-over-year. We were very pleased with the performance in both deferred revenue and billings during the quarter.

Now let's take a look at gross margin. As you may recall from our Q4 call, we noted that gross margins were expected to decrease slightly over the course of FY16. Non-GAAP gross margin came in at 76.8%, down from 78.9% in the prior quarter, as we continued to make investments in data center infrastructure to support our anticipated user growth. Approximately 1 point of our gross margin decline was due to higher rent expense associated with our new headquarters, which we began incurring this quarter. For the remainder of FY16, we still expect our gross margin to trend towards the mid-70% range before beginning to trend back upward in FY17, as we scale into our infrastructure investments. Over the long term, we expect our gross margin to remain in the 75% to 80% range.

Next let's move to non-GAAP operating expenses. Sales and marketing expenses were $52.2 million, representing 80% of total revenue, compared with 100% in the prior year. We also saw a year-over-year decrease in the cost to support our free users to 14% of revenue in the first quarter, from 18% in the same quarter a year ago. We expect to drive continued improvements in sales productivity as we enhance our online sales efforts, improve the ROI of our marketing initiatives, and as we enable our sales team to sell additional services, such as EKM.

Research and development expenses were $17.9 million, 27% of total revenue, compared with 28% in the prior year. As Aaron highlighted earlier, we continued to invest heavily in new features and functionality and announced several important products this quarter, including Box for Financial Services, Box EKM, and the Box Developer Edition.

Finally, our general and administrative costs were $12.9 million, or 20% of total revenue, compared with 22% in the prior year quarter. This was driven primarily by lower legal expenses associated with our OpenText litigation, partially offset by increased costs related to being a public company.

All together, our Q1 non-GAAP operating loss of $32.6 million was negative 50% of revenue, compared with negative 69% in the prior year. This reflects our focus on driving leverage in our business model and we expect this positive trend to continue.

Let me now move on to our cash balance and cash flow. We ended the first quarter with $284 million in cash, cash equivalents, and short-term marketable securities. Our operating cash flow was negative $7.2 million, excluding $25 million of restricted cash that we set aside for a letter of credit associated with our newly leased Redwood City headquarters. This is a significant improvement from negative $23.5 million in Q1 of last year, driven by tighter working capital management and seasonally high customer collections coming off of our peak Q4 billings.

CapEx was $9.9 million, made up primarily of the data center investments I mentioned earlier. Finally, the remaining $4.3 million in other cash was used primarily to cover taxes associated with our first major vesting tranche of RSUs. These RSUs vest quarterly and we expect to use, on average, approximately 3 million each quarter to cover employee taxes for the remainder of FY16.

Turning to other Q4 business metrics. We added more than 2,000 paying customers in the quarter. Today, more than 51% of the Fortune 500 and more than 27% of the Global 2000 are paying customers of Box. Our annual retention rate was 123%. Net expansion was 27%, reflecting strong paid seat expansion from existing customers. As we previously indicated, our rate of expansion has been declining as our recurring revenue base grows and as we are signing larger initial deployments with enterprise customers. However, we expect the rate of decline in the coming year to taper off as new products and services, such as EKM and the Box Developer Edition, provide incremental expansion opportunities.

Our churn rate continues to trend very positively, and landed at 4% on a dollar weighted basis, a full point better than the same quarter last year. We have consistently seen improving churn rates from our customers who are choosing to stay with Box for the long term.

Let's now take a look at how our financial model is evolving. Looking at the past three fiscal years, we have been making steady progress on our path to profitability and our first quarter results continue to demonstrate this positive trend. We remain committed to delivering positive free cash flow by the fourth quarter of next year.

I will now provide our initial guidance for the second quarter and updated guidance for the full year of FY16. For the second quarter of FY16, we expect revenue to be in the range of $69 million to $70 million, representing year-over-year growth of 34% to 36%. We expect our non-GAAP operating margin to be negative 49% to negative 51%. The weighted average share count used to calculate GAAP and non-GAAP net loss per share is expected to be approximately 120 million shares.

For the full year of FY16, we are raising our full year revenue guidance by $5 million, to $286 million to $290 million, representing year-over-year growth of 32% to 34%. We are also updating non-GAAP operating margin guidance and now expect it to improve by 1 percentage point, to a range of negative 49% to negative 51%. We'll be investing a portion of our revenue out performance to fuel future growth. And finally, our weighted average share count used to calculate GAAP and non-GAAP net loss per share is expected to be approximately 122 million shares.

We are just starting the build out of our new headquarters in Redwood City. Our current HQ is at capacity and this new facility should accommodate our growth for the next five to six years. We plan to complete this move in the fourth quarter. In Q1, we spent less than $1 million on tenant improvements related to this new facility and we still expect the build out to have a net free cash flow impact of negative $35 million this year. Of that, we expect the impact of these tenant improvements to be roughly $10 million in the second quarter, and the remainder to occur in the back half of the year. Actual spend will depend on the timing of invoices received, and we will update you next quarter on our progress. Other CapEx for the remainder of FY16 should be in the range of 10% to 12% of revenue.

In closing, we had a great start to the year, adding over 2,000 customers, including major new deployments with marquee brand names, such as Deloitte, HP, Nationwide Insurance, and Chevron. We made a number of important product announcements, including deeper integrations with partners like Microsoft and Google, robust enhancements to our security offerings, including EKM, and new acquisitions focused on end point security and 3D model viewing and editing. We also added Box for Financial Services to our Box for Industries offering, and recently announced important customer relationships with the Department of Justice in the US, and the Government Digital Service in the UK.

Our platform efforts also continued to expand. We launched Box Developer Edition to make it easier for developers to build third-party applications on top of Box, adding another dimension to drive our user growth. These accomplishments demonstrate our continued progress in building out our partner ecosystem and releasing differentiated products and services to leading enterprise companies. We are pleased that our efforts are helping us deliver strong top line growth, while we continue to drive operating scale on our path toward profitability. With that, I would like to open it up for questions. Operator?

The floor is now open for questions.

(Operator Instructions)

Our first question comes from Jason Maynard with Wells Fargo.

Hello. Good afternoon, guys. I actually had a couple questions. The first one, I'd like to maybe have Aaron touch a little bit more on the Developer Edition and get some color from you on how you think this might play out in terms of customers actually delivering services that leverage Box, and then also what you see from a software vendor standpoint, and just maybe if you can, a little bit of quantification around what you think this can contribute, maybe this year or next year, and how it will roll out. And then I have a follow-up for Dylan.

Great. Thanks, Jason. So we only kind of briefly touched on it in the main call, but essentially the idea is today when we sell our platform, it's primarily used by the employees of the organizations that we already sell to. So most seats of Box that we already sell are getting that ability to use our platform. What our Box Developer Edition is allowing for and what our new platform model allows for is our customers to build applications that will then touch their own customers.

So the example I mentioned was a financial services firm that is building a new way that they can interact with their wealth management clients. The impact of that is that there will then be seats that are just associated with that application for all of the customers of that financial services customer. So this has the potential impact to bring on millions and millions of more users, but in the form of what we're calling app users.

So it will be priced a little bit differently, but it expands the kind of impact that we can have for our customers, because we can now help them not only with their internal collaboration, but also the sharing and work flows around content that will touch their clients, their suppliers, their partners. So we think it's going to have a pretty significant impact. I don't believe we're changing the model this year. We sort of already expect to have some of this contribute, but it won't be material this year/ But we're going to be scaling it out throughout the year, working with a number of our beta customers and partners right now, and then as it goes more generally available.

So that's on the customer side. And then we also see this as opening up a new set of partners we can work with, where all of the technology that our engineering team builds can now be exposed via APIs into the applications that third-party software developers are building as a completely seamless back-end service. So we think we can take a lot of the heavy lifting away from developers if they want to build applications that deal with content or information that we store. So we think it's dramatically helpful for both customers and developers, thus increasing our stickiness and differentiation as a platform.

Great. The platform commentary is helpful. Maybe just one quick follow-up for Dylan. You clearly had a strong reacceleration in billings, even short-term billings. I'd be curious to maybe just get a little bit of color from you in terms of what you thought some of the underlying drivers were, and maybe help us understand if there's just going to be some inherent volatility around the timing of calculated billings, given that invoicing and contract duration is something that you probably can't always control and it could perhaps maybe drive a little bit more randomness in terms of seeing where these growth rates would land on a 90-day basis. Thanks.

Sure, Jason. So as a reminder, our billings outcome in a given quarter is influenced both by the volume of large deals closed in the quarter, as well as our customer payment terms. And those are what drive the variability. In Q1, we closed five deals that were greater than $500,000, compared to just two deals a year ago. So we had a particularly strong outcome, especially given that it was our Q1.

And then in addition to that, the payment terms were also strong. That's where adjusting for that, our pro forma billings growth would have been 53% in Q1, compared with 37% in Q4. So to your point, there will be some variability quarter to quarter; but overall, Q1 was a very strong quarter for us.

Great. Thanks, guys. Appreciate it.

Our next question is coming from Phil Winslow with Credit Suisse.

Hello. Thanks, guys. Congrats on a great quarter. Just got two questions here, starting first with Dylan. Obviously, you guys had very strong billings growth this quarter. I know that sales force growth and quota carrying headcount growth was going to be a focus coming into this year. Obviously, that didn't necessarily contribute to this quarter. But where did you end this quarter at, what are your plans for this year? Going back to the quarter itself, wonder if you could touch on just the trends you saw in terms of new customer acquisition, particularly in terms of pricing and win rates. And then I just have one follow-up to that.

Sure, Bill. I'll actually turn that over to Dan Levin, our COO, for that question.

Good afternoon, Phil. In terms of our sales force, as we mentioned in our Q4 call, we ended last year with 170, roughly 170 quota carrying reps. And we remain committed to growing that number by approximately 20% over the course of this year. As to win rates in the quarter, Dylan, do you want to make a comment there?

Sure. So we didn't see any sort of new trends emerging in terms of the competitive landscape and our success against a broad range of competitors. There's nothing notable in terms of those trends. So we remain very confident in our strong win rates against competitors in all segments.

Got it. And then just a follow-up for Aaron on the vertical strategy. Obviously, you mentioned some deals that are in the pipeline in financial services and a big win with the government. Wondering if you could provide us more detail about what the feedback has been from customers, particularly potential customers in these as you roll out the verticals, the specific functionality.

Yes. So what's happening is we, especially in financial services, we had been building technology for a couple of years, both the retention management capabilities that drive our ability to be FINRA compliant and Box EKM, obviously, the customer managed encryption keys, as well as a number of services that were all going toward serving more regulated and much more security conscious organizations. And that has certainly focused the financial services space.

Because they all kind of came together over the past couple of quarters, we've seen a really solid positive rise in the conversations we're having with large financial services institutions, so investment banks, retail banks, asset managers, insurance firms, insurance companies. And it's really just driven, again, by the differentiation of our technology, and that ability to balance great end user experience and a comprehensive platform while keeping customers secure and compliant. So we have a number of great conversations right now going on. We closed a handful of key deals in the quarter, as well back in Q1. But we expect this to be an area that ramps up over the next couple of quarters.

Great. Thanks.

And then just as an example in the public sector side, the DOJ deal, I think, is just a great underscoring of how differentiated the technology is. So for the Department of Justice to be able to have that stamp of approval with our platforms has not only caused a lot of other federal and public sector customers to be extremely interested, but it's actually a great sign for a lot of our private sector clients, as well.

Our next question is coming from Rob Owens with Pacific Crest Securities.

Great. Thank you very much. As you guys are adding these new capabilities like EKM, can you talk about pricing? Is this allowing you to raise price on a relative basis? Hold price?

Yes, so this is Aaron. So you can think about the different capabilities that we have as functioning to support different kinds of goals. So our EKM service, as an example, is an add-on that gets applied to the entire enterprise deployment. What that is allowing us to do is sell more seats into customers and deploy more broadly, as well as sell an add-on solution.

We have some upcoming launches that will drive the additional packages that will also increase the per seat price for customers that are either heavily security conscious or need a lot of our advanced enterprise capabilities. And so both in serving the ability to sell more seats in a customer, as well as have additional value-added modules that allow us to raise seat price, our new functionality contributes to both of those goals.

Great. Appreciate the color. And then second, on the free offering, I think you mentioned some economies of scale and how you're paying less for that effectively as a percentage of revenue. But given your push into the enterprise and moving up market, is that still strategic to the business, at this point?

Yes. So we do see it as being extremely strategic. And again, our free users are very focused on users that bring the product into enterprise environments. So that ability to have instantaneous access to our product and see and be able to use it for secure file sharing and collaboration.

One example is we did an ELA in Q1 with a Fortune 500 company. And before we had sold that ELA, with had 1,000 free users in that organization. So that free user population ended up being a really great proxy for the kind of potential impact we could have for that customer, and was one of the indicators, one of the leading indicator as to why they would go with Box, in addition to all of our security technology and advanced functionality.

So we do continue to see this as strategic, and we're going to both continue to drive down the cost to support free users, but also continue to sell into large enterprises where those free users have brought the product in.

Great. Thank you.

Our next question is coming from Mark Murphy with JPMorgan.

Hello, guys. This is actually Albert [Shi] on for Mark. Great job on the quarter. So actually wanted to ask about the public sector. And it sounds like you made some solid progress, given the DOJ deal and a large recent hire. And I know you that mentioned that the FedRAMP status is actually on the horizon. Could you talk about how that dynamic is going to shift once that certification is here, and how have conversations been going without that? Can you help us understand the before and after?

Yes. And just to clarify, so FedRAMP is essentially a standard that the federal agencies have used to determine the ability to adopt cloud services within the federal government. So all the controls that cloud services have, all the security controls that they offer. What the DOJ did to evaluate us is essentially at the same level as FedRAMP, just the certification process for FedRAMP takes a little bit longer because there's more steps to go through. So already with the DOJ deal, we have established a level of performance and robustness, from a security standpoint, that is going to get a lot of federal agencies comfortable.

That said, we do expect to go through the FedRAMP certification process fully in the next couple of quarters. But I would say that's not slowing down our ability to sell into the public sector right now. It will only add to the acceleration and, again, reduce the friction in these conversations. We see a big opportunity in this market, simply because Box has a universally applicable solution for essentially every public sector organization and agency that needs to be able to share, collaborate and secure their content, and we're seeing just a lot of great demand for the service right now.

Okay. Great. That's helpful. And maybe one more for Dylan. It sounds like you guys had some pretty large deals in the quarter. Are you able to characterize or talk about maybe the one or two large deals, the biggest deals that you had in terms of number of seats and maybe the upsell or the opportunity around that?

Sure. So without naming some of the specific deal sizes, we did name some of those highlights that we closed in the quarter, specifically Deloitte, Halliburton, HP, Chipotle and Cedars Sinai Medical Center, as a handful of those larger deals. I'd say that what characterized some of those deals, one of the big drivers, as we've been talking about, was really that conversation around Box EKM which, as Aaron mentioned, is opening up the opportunity to go much bigger with Box and secure an entire company's information because of that technology. And so that was really the biggest net new thing in the conversation that we had seen.

I would just say in general right now -- this is Aaron -- the product and our solution is being seen as a more enterprise-wide type of product. So our initial conversations with organizations are often brought up to the CIO level; and with that purview, Box is now having more conversations around being adopted enterprise-wide.

Great. Thanks, guys.

Our next question is coming from Terry Tillman with Raymond James.

Good afternoon. Thanks for taking my questions. It's kind of related to the last question, but in terms of some of the list of impressive logos that you talked about, and some of this may not be available yet in terms of hearing from the customers that have contracted, but anything related to how much of that business with these logos is related to replacing existing footprint, whether it's like an ACM tool, or it's replacing a low end sync and share, file sync and share tool, or would you consider it more new greenfield workloads?

Terry, this is Dan. As we've said in the past, many deployments of Box are for greenfield workloads especially focused on mobility and external collaboration. But we are seeing an increasing number of our large enterprise customers retiring legacy technologies, both in the file server space and in the enterprise content management space, as a way to increase their return on investment in Box and, in many cases, as a way to speed delivery of their products and services to their customers and increase their competitiveness in the marketplace.

Okay. Got it. Thank you for that. And I guess, Dylan, maybe a question as it relates to as we move into the second quarter, anything you can talk about in terms of how we should think about seasonality as it might impact billings, and/or anything we should think about in terms of was there any extraordinarily large deals last year that we have to deal with as we think about comparables year-over-year? Thank you.

Sure. So we'd say that wouldn't be mindful or thinking about any sort of anomalies from Q2 of last year, so should be a fairly normalized comp as it relates to the year-over-year billings growth. Would say in terms of the overall billings outcome for Q2 that there's nothing particularly notable about the quarter. Would expect to see that same variability based on large deal outcomes and payment terms that we've seen in the past. And would note that the substantial majority of those large deal outcomes from this most recent quarter in Q1 were paying annually, so that wouldn't have an impact on the Q2 billings outcome.

Okay. Thanks. Nice job.

Our next question is coming from Richard Davis with Canaccord. Your line is now open.

Thanks. Most of the questions have been asked, obviously. With regard to the developer count, have you guys said how many people are developing on your platform? And so, A, if you've done that, B, how long should it take to -- I don't know what growth rate you'd like to expect -- but how long until it doubles? Or how do you think about growing that figure?

And just to be clear, you're referring to the new licensing model that we just announced?

Yes, yes, yes.

It's extremely early days for that product. We're rolling it out right now in a beta form. We expect to announce general availability later this year, as well as pricing over the next couple of months. So hard to talk about the growth rate at this point, but we are seeing a dramatic increasing demand for the capabilities. And we have 50,000 developers that already are familiar with our APIs and our platform, so there's a great base to already start with. A lot of those API keys are within our customers' environments.

And just to play on what Dan said a few moments ago around what use cases customers are solving, a lot of the greenfield use cases that we're starting to be exposed to, or that customers are coming to Box for, are scenarios where the customer wants to create a new digital experience for their reaching out to their clients, so again, in healthcare, in financial services, in retail, in education. So we're just now starting to have those conversations because of this new licensing model and this new platform model, and we'll absolutely keep everyone updated as we see more progress on that front. So this is going to become a very important component of our business model going forward.

Great. Thank you very much.

Operator, I think this is the last question.

Our last question is from Melissa Gorham with Morgan Stanley.

Great. Thank you for taking my question and squeezing me in. I just have a follow-up on Box for Industries. You're talking about financial services, government, healthcare. I'm just wondering what inning we're in in terms of investment around that verticalization strategy. And is it that you have most of the pieces in place and now it's about execution? Or is most of the work still ahead of us?

Yes, so it's -- we're pretty early, actually. We've brought on managing directors for essentially five industries, at this point. Their job is to go build out the partnerships, the go-to-market strategies, and some of the solution development and design for these key industries. But this was just announced as a strategy and as a program for the business in September at Box Works. So I would say we're in the early innings, but we're already seeing incredible success when we go look at customers in the healthcare segment, as an example. That's our most mature industry with this strategy. And we're just continuing to see increased demand from large healthcare providers for Box as a secure platform for their content.

Financial services, we expect to grow again pretty rapidly, because of our investments in security and a lot of these technologies. And we're just getting a lot of visibility into the advanced use cases in these industries. And that's allowing us to go continue to develop our core platform to support multiple industries at once from a security standpoint or with our retention capabilities or enterprise capabilities. So it's early, but already showing tremendous signs of success.

Okay. Thanks. And then just one quick follow-up for Dylan. You talked about gross margins being lower in the quarter and you said there was increased infrastructure spending and higher rent. But should we assume that you eventually get some scale from those investments? And then related to that, can you maybe just provide some commentary on what you're seeing in terms of pricing on a per seat basis?

Absolutely. So as mentioned earlier, in terms of those investments that we've been making that you highlighted in the data center infrastructure, earlier this year we embarked on a project to reconfigure our US data center footprint. So in connection with that, we will temporarily be operating in an additional fourth data center this year, which will again then streamline back to three data centers next year, once we complete the project. And so that is sort of a short-term thing that's driving some of this change.

And also mentioned that on the call that one point of the gross margin impact and decline was due to higher rent expense associated with our new headquarters, as right now we are paying rent on both our current and future headquarters. And so once we make that move, that will then reverse out, as well. So we are pretty confident in terms of the trajectory of our gross margin and our ability to turn that around, although we do expect it to trend down into the mid-70s over the course of this year.

And as it relates to the price per seat, if you look at price per seat across all segments, both in the field and on our inside sales team, if you exclude universities and enterprise license agreements, our average price per seat has been very stable, at about $10 per user per month. And so when we compare customers of like sizes, we have seen very stable pricing and that's held up over the past several years, and any sort of impact to the overall number would stem from our selling increasingly numerous deployments across larger enterprises, where these enterprises are choosing to go wall to wall far more often than they had been in the past.

Great. Thank you.

I believe that's it.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day.