Box Inc (BOX) 2016 Q4 法說會逐字稿

Good day, and welcome to Box, Inc. fourth-quarter and full-year FY16 earnings conference call. This call is being recorded today, Wednesday, March 9, 2016.

(Operator Instructions)

It's now my pleasure to turn the floor over to Alice Lopatto of Investor Relations. You may begin.

Good afternoon, everyone, and welcome to Box's fourth-quarter and FY16 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.

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 highlights of today's call on Twitter, at the handle @boxincir.

On this call today, we will be making forward-looking statements, including our Q1 and FY17 financial guidance, and our expectations regarding our financial results. Market adoption of our solutions, our market size, our operating leverage, our expectations regarding achieving positive cash flow and future profitability, our planned investments and growth strategies, and expected benefits from our new products and partnerships.

These statements reflect our best judgments 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 quarterly report on Form 10-Q, 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, March 9, 2016, 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 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 webpage of our website. With that, I'll hand it over to Aaron.

Cool, thanks, Alice. 2016 was a monumental year for Box, as we achieved more than $300 million in revenue, and finished with a remarkable fourth quarter. Enterprise IT is experiencing a once-in-a-lifetime shift to the cloud. And as businesses everywhere make this transition, they are increasingly recognizing the value of Box's enterprise content management platform, and our ability to make their organizations more collaborative, productive, and secure.

In Q4, we delivered record revenue of $85 million, an increase of 36% year over year, and billings of $130 million, up 59% year over year. Also, we continued to drive improved operating margin, and achieved positive cash flow from operations of $5 million. Our strong financial performance across the board demonstrates the leverage in our business model as we scale, and improved operational discipline continues to be a key area of focus for us.

More than 3,000 new customers chose Box in Q4. We now have over 57,000 total paying customers, including 59% of the Fortune 500, as compared to 55% in Q3. We had major wins and expansions with leading companies, like AIG, Bain Capital, Campbell Soup Company, The Gap, Genentech, The Home Depot, Intuit, Unilever and USIA.

We also closed a record-breaking number of large deals in Q4, including 13 deals over $500,000, and 66 deals over $100,000. These results are a testament to our strong competitive differentiation. We continue to consistently win deals in the Enterprise, against both legacy players and newer sync-and-share focused competitors. I'm proud of our remarkable execution across the Company, and I want to take a moment today to thank our employees for all their hard work over the past year.

Our opportunity at Box is massive. Companies in every industry are going digital, adopting new mobile work styles, and re-imagining their business processes. To be successful in this transition, enterprises need new platforms and a new approach to IT.

We believe that in this future, content needs to be centralized and secured, in a platform that underlies all of the applications that a company's employees, partners and customers use on a daily basis. We've been focused on solving this specific challenge for more than 10 years, and we are uniquely positioned to capture this $40 billion market opportunity.

In Q4, we continued to lay the foundation for our long-term growth by executing against three key strategic objectives. As I mentioned in our last earnings call, we are focused on, first, becoming a multi-product company, with new offerings that differentiate Box as the modern content platform for enterprises.

Next, expanding our addressable market through Box Platform, our new developer-focused offering. And finally, by building a world-class partner ecosystem, to create deeper interoperability and new go-to-market channels through partners.

I want to call out a few significant wins in each of these areas from Q4. On product innovation, we drove further momentum with Box Governance, and launched our second Box KeySafe offering, formerly known as Enterprise Key Management. Box Governance continues to see tremendous traction with new and existing customers.

The added benefit of meeting legal and compliance requirements for data retention has enabled Box to become the system of record for critical corporate data. In Q4, we doubled the number of Box Governance deployments to almost 200. Organizations like Genentech, Bain Capital, and The Home Depot all adopted Box Governance as part of choosing Box.

As one example, a Fortune 500 financial services company adopted Box Governance as part of its decision to deploy Box across its entire organization. The company is moving forward with an aggressive innovation agenda, to modernize how they work and collaborate across their workforce, and Box is one of the key elements in this strategy.

In general, we are seeing growing interest from our customers who want to use Box Governance to meet legal and compliance requirements for data retention. By satisfying the required holding patterns -- periods for regulations like FINRA, which mandates seven years of document retention, Box is well positioned as a strategic long-term part of our customers' IT strategies.

We also launched our second Box KeySafe offering, which enabled our customers to manage their own encryption keys. In partnership (technical difficulty).

So to all sites on hold, please stand by as we work on our technical difficulties. Please stand by.

To all participants online, please continue to stand by. Your call will resume shortly. Thank you so much.

Our speakers have rejoined. Speakers, you may continue your program.

Thank you, sorry about that. Apologize for that delay. The good news is, Box does not make phone systems, so this was a weird outcome. Sorry about that.

So, just where I left off, in Q4, KeySafe drove multiple customer wins with leading companies in the entertainment, technology and insurance industries. KeySafe itself added more than six figures in annual contract value in those deals, and in many cases, it enabled deals that exceeded seven figures. On average, deals where customers purchased either Box KeySafe or Box Governance had a 20% to 30% price uplift.

Q4 was also a productive quarter for our second strategic objective, Box Platform. Box Platform only became generally available last October, but we continue to be encouraged by the interest in the market. Companies in every industry are building digital experiences that connect them with their employees, customers and partners in new ways.

Box Platform will power the content and collaboration elements of these new applications, adding hundreds of millions of users to our addressable market. This is an important expansion of our business model. Several new deals in Q4 included Box Platform as part of a larger Box rollout, and there was significant traction in multiple industries, including financial services, legal and healthcare.

As just one example, LegalZoom will be leveraging Box Platform to build a secure, collaborative portal for its customers. Given the confidential nature of legal documents, it's essential that LegalZoom create experiences that are not only customer-centric and personalized, but also highly secure.

With Box Platform, LegalZoom customers will access, edit and store their legal documents digitally, as well as share them securely with attorneys, accountants and partners. We're seeing similar use cases emerge in almost every industry where secure collaboration around content, from medical images to documents, is an essential part of every day work flows.

Our third strategic objective is building a world-class partner ecosystem. This past year, market-leading technology companies offered their endorsement of Box, by striking significant strategic partners with us, and Q4 was no exception. With IBM, we continued to enhance our go-to-market effort, with a couple of our largest customer wins in the quarter driven by this partnership. Based on overwhelmingly positive interest from customers and prospects for the joint solutions we've brought to market to date, and the many to come in the future, we extended the duration of our partnership agreement, and gained additional sales commitments from IBM.

We also deepened our partnership with Microsoft. Following our initial launch last summer, this January, Microsoft announced realtime co-authoring of office files from Box, the ability for users to access and edit their files from within Office on iOS, and a native integration of Box into Outlook.com. Nothing validates Box as the enterprise content management platform of choice more than the fact that the world's largest software maker is integrating Box into two of its most important products, Office and Outlook, to enable robust cloud and mobile productivity.

In fact, many of our largest deals in Q4 came from customers rolling out Office 365 alongside Box. Customers see incredible value in being able to deploy Box and Office 365 together. For example, in the quarter, Flex, previously known as Flextronics, a global supply chain solution provider, needed a content management platform that would make it easy for 200,000 employees to share files and collaborate globally on any device. Together, Box and Office 365 provided a seamless user experience, with enterprise scale and security, enabling Flex to solve their collaboration needs.

Finally, we announced a major update to our partnership with Salesforce, which will provide Box customers an all new set of ways to access and share files from within the Salesforce experience. As more companies move to the cloud, and use applications like Office 365, Salesforce, among others, they need a single central platform to manage all of their content securely. Box's content management platform solves this need, enabling customers to leverage our deep integration, and manage all of their most important information across the core business applications they use today and in the future.

We are deeply proud of our accomplishments in our first full year as a public company. Looking ahead, we are focused as ever on capitalizing on the massive market opportunity before us, while achieving positive free cash flow in our January 2017 quarter. This coming year, we will continue to make Box indispensable to people and organizations, including the largest companies in the most regulated industries, by delivering the most advanced security, content management and compliance features in the market.

We will drive the growth of Box Platform, to enable customers to create new digital experiences that connect them with their employees, customers and partners in all new ways. And we will continue to focus on leveraging our strategic partners, including IBM, Microsoft, and Salesforce, to capture more market share faster. Importantly, we will also remain committed to achieving positive free cash flow by the fourth quarter of FY17, through the natural leverage in our business model, and an increased focus on operational efficiency.

Finally, we are proud to have accomplished the goals we've set out for ourselves when we first went public a little over a year ago. We are in a strong position for continued growth and future profitability. Now, I'd like to hand it over to Dylan Smith, our CFO.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. As Aaron noted, Q4 was a milestone quarter for Box, on multiple fronts. Strong customer momentum drove record revenue and accelerated billings growth that exceeded our expectations. We also achieved positive cash flow from operations, our first quarter of doing so since becoming a public company.

For the full year of FY16, we achieved record revenue of $303 million, up 40% year over year, and billings of $369 million, up 50% year over year. Our cash flow from operations also improved by $19 million over the prior year. Our ability to realize strong growth while delivering meaningful improvements on our bottom line reaffirms that we are well positioned to grow quickly and sustainably, as we scale toward profitability.

Now, let me begin with some highlights from our fiscal Q4. We generated revenue of $85 million in Q4, well above our guidance, and up 36% year over year, driven by our expanding enterprise customer base, our solid retention rate, and a growing contribution from our partnership channels. Our best-in-class churn rate was particularly strong this quarter, and improved to slightly over 3% annualized, a 120 basis-point improvement from the same quarter last year.

This demonstrates the stickiness of our technology, as it becomes a core part of our users' daily work, and provides our customers with clear ROI. Our expansion rate was 20%, primarily driven by strong seat growth in existing customers.

We are also beginning to benefit from cross-sell opportunities with our new Governance, KeySafe and Platform products, which were crucial in closing some major customer expansion wins this quarter. As Aaron noted, in these deals, our average price point was 20% to 30% higher, as our customers value the increased security and business value of these offerings.

As a result, we ended the quarter with a retention rate of 117%, which includes full churn and expansion. We would expect this retention rate to stabilize in the near term, as we expect to benefit from growth in cross-sells, offset by natural pressure as our customer base expands and matures.

Billings was another outstanding highlight. Fourth-quarter billings were a record $130.2 million, representing 59% year-over-year growth. Adjusted billings growth came in at 45% year over year, when we normalized for this quarter's longer payment durations. While this was primarily driven by strong execution, I will note that we closed several large deals this quarter, with multi-year prepayment terms, and we also renewed a couple of large customers in Q4 that we had expected to renew in Q1.

As we have noted on prior calls, customer payment durations range from monthly to multi-year, which can materially impact our billings results, and create fluctuations in our quarter-to-quarter billings growth rates. As indicated by our Q4 results, customer demand continues to be very strong. And given our clear path to positive free cash flow, we believe it is the right time for us to standardize on annual payment durations, which, over time, should mitigate these fluctuations.

Please note that this change, along with the benefits I just discussed, will naturally cause billings growth to trend below revenue growth for the year, particularly in the first quarter, as we book fewer multi-year prepaid deals. And as we continue to gain more traction with large enterprise customers, we expect our quarterly billings to be somewhat more back-end loaded toward Q4. Therefore, calculated billings will not be an accurate indicator of the growth of our business in the coming year.

Our significant billings outperformance was a result of our overall success and expansion with our existing customers, as well as winning major new customers. This is evidenced by our record-setting number of big deals, as we move to larger deployments, which included 13 deals over $500,000 in annual account value, compared to 90 a year ago, and 66 deals over $100,000, compared to 57 a year ago.

We ended the fourth quarter with a record $186.4 million in deferred revenue, up a very strong 55% year over year. We exited the year with a backlog of $184.8 million, up 38% year over year, representing committed contracts that had not yet been billed. These healthy balances provide us with strong visibility and predictability in our business model.

Now, let's take a look at non-GAAP gross margin. Non-GAAP gross margin came in, as expected, at 73.2%. As you'll remember from our last earnings call, we highlighted that we expected gross margin to decrease slightly in the short term.

In anticipation of strong customer demand, which drives greater data center capacity needs, we plan to make continued infrastructure investments over the course of FY17. These investments will allow us to extend our best-in-class service quality, security and reliability. As such, we expect gross margin to stabilize near current levels in FY17. Over time, as we grow into our expanded data center footprint, and achieve greater economies of scale, we expect non-GAAP gross margin to trend back upward.

Box's business model has inherent leverage, and as we scale, this is beginning to show in a significant way. Sales and marketing expenses during the quarter were $57.8 million, representing 68% of revenue, a notable improvement from 83% in the prior year, demonstrating greater efficiency in our sales and marketing efforts. This includes a year-over-year decrease in the cost to support our free user base, at 10% of revenue in the fourth quarter, an improvement from 15% in the same quarter a year ago.

We remain very focused on improving sales and marketing efficiency, which is a key driver of leverage in our business model. As our customer base grows, we will naturally benefit from more efficient expansion and renewal sales. We are also focused on improving efficiency through a more productive sales force, increased sales of our newer products to new and existing customers, and growth in our partner and online distribution channels.

Next, research and development expenses were $19.9 million, or 23% of revenue, flat on a percentage basis from the prior year, while we made significant investments in our new Governance, KeySafe and Platform products. Over time, we do anticipate some leverage in research and development, and we are also committed to furthering our leadership position with the most innovative offerings and best-in-class product development, and thus expect continued investment here.

Our general and administrative costs were $15.7 million, or 18% of revenue, a significant improvement from 24% in the prior-year quarter. We will continue to drive leverage from greater operational efficiencies and scale in this area.

Finally, we're pleased that we drove our Q4 non-GAAP operating margin to a 14 percentage-point improvement, at negative 37%, from negative 51% a year ago. On a dollar basis, non-GAAP operating losses narrowed, both year over year and sequentially, demonstrating our improved operational discipline and focus on operational efficiency. Our business model provides us with the opportunity to drive sustainable operating leverage.

Our existing customers have strong renewal rates, and declining costs to support them, making them more profitable over time. And these customers are steadily becoming a larger proportion of our revenue base. Our growing list of new Fortune 500 customers is proof that we are broadening our reach, as more and more organizations recognize the need for digitization, security and collaboration for their business processes. Our Q4 performance gives us even greater confidence in our ability to achieve sustainable positive free cash flow in the January 2017 quarter, and expansion in the years that follow.

Let me now move on to our cash balances and cash flow. We ended the year with $221 million in cash, equivalents, short-term marketable securities, and restricted cash, of which roughly $28 million was restricted. Cash flow from operations in the quarter was positive $4.9 million, a significant improvement from negative $15.6 million a year ago. While some of the upside was driven by the reimbursement of tenant improvements on our Redwood City headquarters, this is a major milestone for us on our way to becoming sustainably free cash flow positive.

In Q4, total CapEx was $25.1 million. Of this, approximately $20 million was related to our new Redwood City headquarters, and the remaining $5 million was related primarily to data center investments. With respect to our Redwood City headquarters, we expect to incur the final remaining $7 million of net cash spend for tenant improvements in Q1.

Now, let's turn to our guidance. Before I begin, I'd like to note that for this next fiscal year, we will be transitioning to a new guidance metric of non-GAAP EPS, in place of non-GAAP operating margin, in order to provide better visibility into our bottom-line forecast.

For the first quarter of FY17, we expect revenue to be in the range of $88 million to $89 million. We expect our non-GAAP EPS to be in the range of negative $0.23 to negative $0.24, on approximately 124 million shares. For the full year of FY17, we expect revenue to be $390 million to $394 million, which represents roughly 30% growth at the midpoint of this range. We expect our non-GAAP EPS to be in the range of negative $0.83 to negative $0.85, on approximately 127 million shares.

In closing, we are proud to have delivered a strong finish to FY16, with healthy customer growth, product innovation, and an expanded partner ecosystem. We have built a solid foundation for continued rapid growth across the Company, positioning us for improving operating leverage as we scale. We continue to be focused on building upon our competitive differentiation, while delivering operating efficiency on our path to achieving sustainable positive free cash flow in the quarter ending January 2017.

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

(Operator Instructions)

We'll take our first question from Phillip Winslow with Credit Suisse.

Hi, thanks, guys, and congrats on a great quarter. Obviously, you were dropping the mic, and must have hit the mute button. (laughter) All joking aside, congrats on a huge billings and operating cash flow. Let's see. Just two questions.

First, starting with Aaron, obviously, you (inaudible). You had the large deal for the expand side of the equation. When you start to roll this forward, and you think about the levers to pull here, whether it be AST, (technical difficulty) just units or the expansion? But how are you thinking about this coming fiscal rear? And [the key] leverage points? And then to Dylan, as a follow on, on that -- sorry, the expand side, (technical difficulty) how are you thinking about that, in terms of the sales productivity and (technical difficulty)?

Yes, so I think we caught the first part of that question. Certainly, going into next year, we have a lot of momentum around our multi-product strategy. So we're seeing a couple key trends, from Q4 and Q3, frankly, that we expect to continue pretty consistently throughout the year. Which is, customers are now buying not only the core solution of Box, and our core product, but now layering on things like Box Governance, KaySafe, Platform licenses.

And that mix of solutions is increasing our ASP that we're seeing from customers, as well as our ability to sell across larger and larger Enterprises, as you saw in the number of deals that we had with large Enterprises in the quarter. So 13 deals over $500,000, we are beginning to sell to much larger Enterprises, and do much larger initial deployments, as well as up-sells. So all of that, I think, will drive more expansion revenue, and as well as bigger deals up front with customers, which will continue to reinforce the ASPs that we're seeing.

Got it. And then as far as the second question, in terms of (inaudible), and as far -- instead of the marketing raise, you added billings, sales market revenue. How are the dynamics that Aaron just talked about affect how think about the leverage and the scale in the model?

Yes, o we definitely see a lot of the leverage highlighting just a more efficient expansion renewal sales that we see. As we continue to build out our multi-product strategy, we are expecting to see even more opportunities to drive expansion within our existing install base that's a lot more efficient. Aaron highlighted some of those, and we're also seeing the partner channel relationships maturing, as well. So both of those are opportunities for our sales force to continue both increasing ASPs, as well as overall productivity.

And then one more leverage point that I'd call out is, the major effort that we talked about in the past, around revamping our website and online sales experience, to focus on serving smaller customers more efficiently. And we've seen great progress there. We've actually been able to move up more than 10 of our sales reps up-market, to focus on larger customers, and actually serving the customers they had been, closing business with fully online. So that's another leverage point that we're seeing play out nicely.

Great. Thanks, guys, and congrats again on a great quarter.

Thanks, Phil.

We can go next to Rob Owens with Pacific Crest.

Great, and thanks for taking my question. Want to focus a little bit on pricing. And I appreciate the comments, as you've up-sold some of the different compliance versions, and the key management capability. But if we look at core Box, what type of pricing are you experiencing, either sequentially or on a year-over-year basis? And with the gross margin compression, how much of that relates to the incremental capacity, versus additional depreciation of some legacy data centers or the new headquarters? Thanks.

Sure. So I'd highlight that we continue to see stable pricing in the core services our customers are continuing to value, our differentiated offerings. And if you look at the price per seat across all of our segments, and excluding the universities, as we've mentioned in the past, and ELAs, our average price per seat has been very stable, at around $9 to $10 per user per month. So although we are seeing, in certain use cases, in parts of our business, we are seeing some pricing pressure, particularly for very basic use cases, we've actually seen an increase in price in other areas, even before laying on the -- layering on the additional products.

And so that's not really the factor that's driving some of the decline in the gross margins. As you mentioned, that's really related to the new gear that we've been buying and depreciating, as we build out our data center footprints. And just to get a sense of things, for the impact of the new headquarters, if you look at thing on a year-on-year basis, the non-GAAP gross margin impact of facilities, combined with consulting spend, which is another one-time area, is driving a combined roughly 1% negative impact to gross margin. So most of the impact is coming through building out our data center footprints, but there is a little bit of the new facility in there, as well.

Great, and helpful color, thanks. And following up on Phil's question, on the sales and marketing leverage, you obviously saw a big uptick in billings sequentially outpacing expectations. But your sales and marketing was down, and I know you're going to get partner leverage as IBM ramps. Curious how much of that, versus the maturation of the install base, versus better performance out of the sales force? If you can help us with just a little bit more color on that front?

Sure. So a couple of our largest deals were driven by IBM, but the majority of our business, and the strength that we saw in Q4, was really the execution of the core business, and just a really strong quarter, from an overall new bookings standpoint, in new and existing customers. So really, across-the-board, just a great quarter for us. Would say that -- and that shows up in the rep productivity metrics that we've been tracking, as well.

All right, thank you both.

Thank you.

Our next question comes from Mark Murphy with JPMorgan.

Yes, thank you. I'll add my congratulations. Aaron, I'm wondering if you can clarify -- you touched on this a little -- but just to what extent are you attaching to Office 365 deployments? I think you talked about going in, in parallel, but I notice you'd lifted the storage caps. And I'm wondering if that boosted the attach rates? And also, could you just describe those usage patterns? And maybe give us an example of how Box is most commonly being used to compliment Office 365?

Yes, yes, so we're finding a couple different trends within the Office 365 ecosystem. The first is, customers that have deployed Office 365 maybe a year ago, a year and a half ago, are starting to recognize that there's still major deficiencies, from a content management and a file sharing and collaboration standpoint. And so some customers, post Office 365 deployment, come to us, as soon as they recognize that need, and that gap.

But a more exciting trend for us, that we're starting to see, is at the point of deploying Office 365, when a customer is really trying to think through their long-term content management strategy -- and again, they do that in the context of their overall IT architecture, not just Office 365. They tend to recognize that they need something that's going to sit between Office 365, salesforce.com, Net Suite, any one of our third-party partners. As well as solve a lot of the expanded content management capabilities that we offer.

So we're seeing a trend where the teams that are driving the deployments of Office 365 are doing that alongside a Box deployment, where Box comes as the file sharing collaboration and content management capability, and Office 365 is powering the Office suite, Outlook, end user productivity services, and we're going in together as a single deployment. So it's really about solving for a much broader set of problems than what Office 365 solves, and then this, we believe, will only be amplified by the fact that, just in January, we had another set of major integrations go live with Microsoft. And we have a pretty solid road map of future integrations to come.

So we expect this trend to continue. It's something that we're seeing a lot of excitement around in the market, and we don't really see an end in sight on this.

Yes, so Aaron, that's a perfect lead-in for my second question. I wanted to ask you about this concept of Box sitting at the center of all your SaaS applications, which I do view as an interesting angle of the story. And so we're aware that you've expanded with Salesforce and IBM and Microsoft and others. I guess I'm wondering what else you might see on the horizon there?

Because I recall, a couple of years ago, you mentioned, at the conference, that you saw Office 365 as the product seeing the fastest adoption across your customer base. And so I guess I'm wondering, what does your window look like into that today? What's evolving? For instance, are you seeing something with Slack or AWS platform usage? Is there something on the horizon that you feel you can capitalize on there?

Yes, so it's a key insight on that end, which is, as Enterprises have 10 or 20 or 30 different SaaS applications, they don't want to have silos of files in each of those applications. They need a single model for governing that content, for encrypting it, for searching it, for sharing it. And you can't do that if you have 20 or 30 different systems that all have completely different approaches to dealing with files. So you can think about our growth trajectory as going alongside the more SaaS that an Enterprise has, and the more heterogeneity of the vendors that they work with, the more that they will need a singular content management platform.

So products like SAP's cloud solutions, Oracle's cloud solutions, you can imagine the human capital management vendors, you mentioned Slack. So any place where you want to have access to content or documents or media, but you don't want to store that in a siloed approach, you're going to want to have a universal or agnostic back end, from a content management standpoint. And so we have a very long road map of partnerships. You're going to see more of those partnerships be announced this year. But we are -- our core goal is to make sure we are everywhere that our customers need to be able to access and share files. So that's pretty fundamental to our strategy.

Great. One last one. I appreciate that, Aaron. So Dylan, could you repeat the headcount number at year-end? I guess I was wondering -- I think you round those numbers off, and I'm not sure if I had the right number from Q3. But did that flatten out, or maybe decline a little bit, from Q3? And maybe could you walk us through, what is the headcount plan that you're looking at for FY17?

Sure. So we ended the quarter and the year with 1,370 employees, which is up about 210, or 18% growth, year on year, and down slightly, quarter on quarter. So in the coming year, we do expect to see a slower headcount growth rate than the 18% we saw in the past year, as we expect to drive a lot of leverage, especially in sales and marketing, but really across the board. And we've invested in building out a really solid foundation to grow off of. So we do expect to grow that over the coming year, but just at a slower rate than we've seen over the past year.

Great, thank you very much.

Our next question comes from Melissa Gorham with Morgan Stanley.

Great, thanks for taking my question. Aaron, I just wanted to follow-up on the commentary you had on your IBM relationship. So you noted a number of large deals from IBM. Can you maybe provide some more color on what those deals looked like? Were they sourced from the IBM sales force or Box? And then, any kind of commentary on the relative size of those deals?

Yes, so we saw -- we did see multiple deals that were above our six-figure threshold, and a couple of our largest deals in the quarter came in because of the IBM partnership, as well. It's a mix of context. In a couple cases, we would have a deal where we got brought into a much larger strategy that IBM was deploying at the customer, and Box came in as the file sharing collaboration technology introduced in that solution set. And that would be considered a brand new, net new opportunity for us.

And in some cases, we were benefited by the IBM partnership for an existing prospect, where we could come up with a much more comprehensive or strategic approach to the customer, and land a deal that might have been outsized, because of the IBM partnership. So a much bigger transaction, or happening sooner in the pipeline, than maybe it otherwise would have. So both our joint prospects, as well as completely net new customers, we were able to land pretty significant deals in the quarter, because of the IBM partnership.

Okay, that's helpful, thanks. And then a question for Dylan. Can you just -- I want to dig into the dynamics happening with billings for next year. So I'm wondering if you could just tell us what, today, is coming from multi-year versus annual versus monthly billings? And then, based on your commentary, should we just assume that there's going to be no multi-year contracts, moving forward? And then, any way that you can help us size how much billings will under-pace revenue growth next year? Would be helpful.

Sure. So if you turn to the balance sheet, you can see our long-term deferred revenue grew by $6 million, year over year and sequentially, which highlights some of the impact of just the multi-year prepays we saw in the fourth quarter. What we've seen, historically, has been roughly 70% in dollar-weighted terms of our billings coming in annually or better. And somewhere between the mid- to high-single-digit percentage points of that is coming in multiple year. So that's driving, especially on larger numbers, a pretty significant impact to the billings.

And, to your question, would expect to see virtually none of that in the coming year, which is what's going to create the tough comparison, and a less meaningful calculated billings metric, going forward. And the only thing I'd highlight, just to give a little bit of color on the seasonality of billings, as well, is -- and just to speak to the changing dynamic of the business -- is over the past three years, Q1 and Q4 have represented an average of 18% and 34% of our total annual billings, respectively. But as we're seeing more and more traction with large Enterprise customers, we would expect to see an even more back-heavy billings distribution in the coming year.

So that's -- in addition to the multi-year impact, just wanted to give a bit of color on the seasonality, as well. But I would highlight that, although that's changing the payment terms, the payment durations for our customers, we don't expect to see any sort of impact to the contract length. In fact, increasingly, as we're dealing with these larger Enterprise customers, their desire is to sign longer contracts, and lock in, as a core technology, for multiple years. So it's really just a function of the payment duration, and not the actual contract lengths.

Okay, got it. Thank you.

We'll take the next question from George Iwanyc with Oppenheimer.

Thank you for taking my question. When you look at the traction you're seeing with Box Platform, can you give us an idea which verticals are seeing the fastest traction? And how long the sales cycles are right there?

Yes, so we are seeing the traction across multiple industries. So I don't think we're at a stage where we have a heavy concentration emerging in any particular industry. One of our bigger deals in the quarter was a major real estate -- commercial and residential real estate organization. Another deal was with a legal technology company. The quarter prior, our biggest deal was with a large financial services firm. So essentially, any business that is trying to digitize its collaboration and sharing of content to its customers, or to its partners, is a very relevant potential customer of our platform.

So as a reminder, our core Box product will solve internal sharing and collaboration, and even external sharing collaboration. But if you want a branded experience that is inside of your application, that's where our Platform comes into play. So we're seeing early traction, and early signs of a lot of early reception across multiple industries, but I think any use case where there's a large portion of clients that an Enterprise has, where they want to digitize the collaboration of documents and content with those clients, that's going to be a great use case for us.

So you can imagine hospitals that are delivering tele-medicine experiences, financial services firms that want to digitize a paper-based process with its clients, any kind of retailer that's digitizing its supply chain or its collaboration with partners. All of those use cases represent great platform opportunities.

All right. And when you look at the Salesforce partnership, can you go over the go to market there? And the type of traction you expect to come from that relationship?

Yes, so this partnership is probably more in the category of deep technical interoperability, and less so on any sort of concerted go to market approach. That could certainly happen in the future. We've done lots of joint sales and joint marketing and press with them, but it's not at the level of what we're doing with IBM, so -- where IBM is reselling Box. But I would say, on the technology side, it's a -- we think it's a pretty amazing partnership.

So from within salesforce.com, if you're looking at a Salesforce record, whether that's a customer or a prospect, or if you're in the Salesforce file chatter stream, anywhere where you see documents or files in those experiences, Box will be available as a native experience, to let you store and share files from the Salesforce interface. So it's a deep technology partnership, and it's one we that think customers are going to be quite excited about, as it rolls out, in the next couple of quarters. And then from there, we'll certainly see how the go to market partnership evolves.

Okay, and just one last question, and I'm sorry if I missed it. Did you give the total registered users, and the number of paying users?

We did not. We did on the total number of paying Enterprise customers is now 57,000, and on the total users, we did not.

Okay, thank you.

We'll go next to Joyce Yang with Bank of America Merrill Lynch.

Great, thank you so much for taking my question, guys. Congratulations on the quarter. I have two questions. One, I just -- quickly, Dylan, could you please quantify the billings that are coming from pull-forwards renewals from Q1? I think you mentioned that was also part of the reasons for the strength?

Sure. So those deals that we renewed ahead of schedule were incremental to the deferred revenue growth that I had mentioned earlier, and incremental to the multi-year dynamic. And those represented roughly $4 million of billings that moved up from Q1 into Q4.

Got it, great. And then, so I have -- I think this quarter has been great, and so far, I think some companies in the software sector have seen their Q4 results impacted from the macroeconomic weakness. So I was just curious, how was the close process for you guys, in terms of sales productivity, and the number of salespeople who hit their quotas? And how do you guys think about sales targets for this year, and the quota and the comp lines for the FY17?

Sure. So we saw a very strong performance in Q4, and didn't see any signs of slowdown related to macro factors. We don't talk about the specific quota achievement. But what I can say is that, as you can see from our Q4 results, it was very strong across-the-board. And on a year-on-year basis, because of some of the improvements and things we've been doing across the business, we've seen overall sales rep productivity improve by nearly 10%, year on year. So really proud of the progress we're making in that area.

Got it. And in terms of -- if you could talk about the 13 deals over seven digits? Can you give us some kind of profile about what they are like? And what kind of verticals they are in?

Yes. And just to clarify, that was over $500,000, not seven digits, although many of them were over seven figures. But (multiple speakers) really, again, across-the-board, in terms of industries. Major retailers, major financial services firms, insurance companies. So we saw a really great pattern, across many industries, of adopting Box. And probably, maybe, the most consistent trend of anything among that customer base is, again, Enterprises that are using Office 365, and moving in the direction of really digitizing their workforce, and moving to the cloud in a more aggressive way.

Got it. Great. Thank you, Aaron. Thanks, Dylan.

Thank you.

We'll go next to Richard Davis with Canaccord.

Thanks. You guys are doing interesting stuff with previews, and at least basic editing functionality. Could you talk about how we should see this scale out over the next, whatever, 18 to 24 months?

Yes, so -- and you were referring to our previewing and editing experiences?

Yes, exactly.

Yes, so our whole approach is, as you move from the desktop world, where you're primarily operating at a desktop application, and as you move more and more of your content and documents and media to the cloud, you need to be able to have a similar level of interactivity. And importantly, a more collaborative set of capabilities, as we move to the cloud. So our whole approach is to really unlock the ultimate value, and unlock what you're really trying to do with your information when you're in Box.

And so, for us, we really see this as the modern approach to organizing and sharing and working with your content in the cloud, where you'll be inside of the Box experience, you might open up a Word document, and you want to press edit. That will take you into Office Online. You might make a bunch of changes. If somebody else joins you in that document, and they will be able to edit in realtime, as well, all of that data gets saved back to Box securely. Maybe you open up a CAD file, and it opens up into AutoDesk 360, or you work on a PDF, and you want to be able to get an E-signature from it.

So our job is to sit at the center of all the different services that let you interact with or share or edit or manipulate your content. So we are investing in a bunch of those capabilities natively. We render about 120 different file types on Box, everything from HD media content to PowerPoint files to PDFs. We do native watermarking capabilities, and length management capabilities, but we know that there's going to be a set of features where we can get even more value by leveraging partners.

And that's where the partnership with Microsoft happens, and where you're going to see other partnerships with other major document and media companies in the future.

Great. Thank you so much.

We'll go next to Brian Peterson with Raymond James.

Thanks, and I'll echo my congratulations on the quarter. Dylan, maybe a couple quick ones for you. I wanted to talk about your level of revenue visibility. Just looking at the FY17 guidance, obviously, there's a 1%, or $4 million, range on that, which is the same that you gave last year, despite a much bigger revenue base. So can you speak to some of the variables that are changing your revenue visibility there?

Sure. So in terms of the level of visibility, not a whole lot has changed, just based on, that's the nature of the model, where 95% or more of our revenue is recurring. We have very, very strong retention rates of roughly 97%, and also have, even within our new business, the new bookings have a pretty good degree of visibility and predictability there. As about 60% of our new business is driven from our existing install base, where we tend to have a lot more visibility of just the likelihood to close, as well as timing.

So all three of those components lead us to be pretty confident, and have a lot of visibility in the revenue forecast. Other than the retention rate improving year on year, not a whole lot has changed, relative to last year, but we still have a lot of confidence, and a lot of predictability in our model.

Okay, good to hear. And just real quick, did you give the cost of the free user base this quarter? And maybe how that should play out in 2017?

What was the first part of the question, about the free user base?

Yes, sorry, it's loud here. The cost of the free user base this quarter, as a percent of sales?

Sure. So in Q4, that was 10% of revenue, which is down pretty significantly from 15% in Q4 of last year. And so, as we talked about, we continue to focus on serving these users more efficiently, and would expect the trend of that rate decreasing as a percentage of revenue, or that spend decrease as a percentage of revenue, to continue, and move into the single-digit range fairly soon.

Great, thank you.

We'll go next to Greg McDowell with JMP Securities.

Great, thank you for taking my question, and it's also great to see a strong end to the year. I'm going to try to pin you down a little bit on the billings guide, especially for Q1. Because if I take the $4 million that you got from the early renewal in Q4, and the midpoint of your revenue guidance implies 35% growth, I get to maybe a mid 20%s billings growth rate. And I just want to make sure I'm thinking about it correctly.

Because I know, when you had talked about Q4 billings, it was going to be about 5 percentage points above the revenue growth rate, and you guys obviously outperformed there. But I was wondering if I could just maybe pin you down? Are we talking 5 to 15 points below the Q1 revenue growth rate? Any additional color you could give us there? Thanks.

Yes, so I'd also reiterate the seasonality point of, historically, about 18% of our annual billings coming in Q1. And due to a combination of that $4 million in early renewals that you mentioned, as well as just the shift away -- or shift toward becoming more of an Enterprise-focused business, could actually see a more back-heavy outcome this year. Other than that, those are the two big factors that are weighing in on this.

So in terms of the overall specific rate, although we don't give the specifics around billings, what I would say is, you nailed a lot of the dynamics that are impacting that. And then, a lot of it comes down to just that assumption around what the billings we are assuming and obtained historically, versus what we would expect to see this year, and how that impacts things. So as I mentioned, we tend to see anywhere from mid- to high-single-digit percentages of our new sales coming in, as multi-year prepays. And we're not expecting to see that in the coming year.

And just to get a sense of things, if you look at Q1 of last year, we ended up seeing -- we saw billings growth of 58% on calculated billings, but 53% adjusted. So we had, actually, a particularly strong year, as it related to payment durations last year. So there are a number of headwinds, as it relates to the Q1 billings outcome. But overall, the overall trajectory of the business, and the strength, has been very, very strong. And I just wanted to separate out some of these payment durations and renewal mechanical issues, versus the underlying strength of the business.

That's helpful, thank you, Dylan. And Aaron, just bringing it a little more high level for you, you talked about your three strategic objectives: multi-product, platform, through expanding addressable market, and ecosystem. I was wondering, just compared to when you were kicking off FY16 and as you kick off FY17, how different are your objectives this year versus last year? And how are you prioritizing some of your objectives?

Yes, I think -- so last year was a pretty symbolic year for us. It was the first time that we introduced additional services to sell, on top of the core Box offering. And so for us, last year was really building some of the early methodologies, and this is based on technology we've been working on for two or three years, in many cases. Now, it's all about accelerating and amplifying those efforts.

So not only taking the three new products that we have, so Box Platform, our KaySafe technology, our Governance solution, and making sure we're growing those aggressively. But potentially introducing other solutions, now that we are starting to build this rhythm. And I think that what you're seeing is a bigger emphasis on our platform and partnership strategy. As we're starting to see a bigger acceleration toward the cloud, and customers using 3, 5, 10, 15, 20 different cloud applications to run their business, its never been more important for us to be the back end system for content management in those applications.

So I think you're going to see that amplified, as well. But largely, the core thrusts of the business are very similar in nature. It's all about Box building out the modern content management platform. And we're just continuing to hone and optimize the products that we're building, the ways that we're selling those to customers, and our partnerships that allow us to do that. And then operationally, of course, it's all about driving our leverage in the business, so we can achieve cash flow positive in Q4. So those are really the two major themes this year.

Thank you.

And it appears we have no further questions. I will return the program to our speakers for closing comments.

Thank you, everyone, for joining us on our call today, and we look forward to speaking with you next quarter.

And this does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.