Box Inc (BOX) 2017 Q4 法說會逐字稿

Good afternoon. My name is Shantel and I'll be your conference operator today. At this time I would like to welcome everyone to the Box fourth-quarter FY17 earnings conference call.

(Operator Instructions)

Stephanie Wakefield, Vice President of Investor Relations, you may begin your conference.

Good afternoon, and welcome to Box's fourth-quarter and FY17 earnings conference call. On the call today we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks we will take questions.

Today's call is being webcast and will also available for replay on our investor relations website at www.Box.com/investor. Our webcast will be audio only, however, supplemental slides are now available for download on our website. We'll also post the headlights of today's call on Twitter at the handle @Boxincir.

On this call we will be making forward-looking statement including market adoption for our products, our market size, our operating leverage, our expectations regarding achieving and maintaining positive free cash flow and future profitability, our planned investments and growth strategies, expected benefits from our new products and partnerships and our Q1 and full-year 2018 financial guidance and our expectations regarding our financial results. These statements reflect our best knowledge based on factors known to us currently, and our actual events or results may differ materially. Please refer to the press release and the risk factors in documents we filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are made as of today March 1, 2017 and we disclaim any obligation to update or revise these statements should they change or cease to be up to date.

In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, but not as a substitute for or in isolation from, our GAAP results. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation which can be found on the investor relations page of our website. Unless otherwise indicated, all reference to financial measures are on a non-GAAP basis.

With that, let me hand it over to Aaron.

Thanks Stephanie, and thanks everyone for joining the call. FY17 was another incredible year for Box, we achieved annual revenue growth of 32%, strengthened our leadership in cloud content management, and in Q4 generating quarterly positive free cash flow for the first time. In the fourth quarter we delivered revenue of $109.9 million, an increase of 29% year over year, and a record positive free cash flow of more than $10 million, demonstrating significant leverage across all expense lines and the inherent operating leverage in our business model. We also continued our streak of exceeding our guidance since we have gone public, and feel confident that the improvements we made in the business over the past year set us up well on the path to our long-term goal of $1 billion in revenue.

This quarter we grew our leadership in the market and now have over 71,000 paying customers, including new or expanded deployments with Discovery Communications, John Deere Health, Volkswagen Group and Spotify. Our focus on enterprises drove major wins in Q4 with 64 deals over $100,000, a record 16 deals over $500,000, and a record 8 deals over $1 million. These results reflect strong execution from our entire team, healthy demand from enterprises wanting to move their information from legacy solutions to the cloud, and most importantly Box's leading position in cloud content management.

Throughout FY17 our focus on new product innovation, building out our platform strategy and developing our strategic partner ecosystem strengthened our lead in this market. As we look to FY18, we are going to build on this success by further focusing on two major objectives. First, we will continue to innovate in cloud content management with additional products and platform capabilities that help enterprises move more of their workload to the cloud. Second, we will continue to invest in and advance our global go-to-market efforts so we can reach more enterprises all around the world.

In Q4 we made solid advancements on both of these fronts. As a pioneer in cloud content management, we continued to separate ourselves in the competition. Unlike others, Box delivers against the needs of end users, enterprise IT buyers and application developers.

For end users in Q4 we launched a significantly enhanced and expanded version of Box Notes, our real-time collaboration tool for teams. Box news is for teams to share knowledge and information and collaborate on projects, all within the secure Box environment. More than one-third of the Fortune 500 are already using Box Notes as part of the overall Box deployment.

In Q4 we also announced new ways that Box works with Office 365, enabling round-trip editing and deep integration for Office on Android. We want our users to be able to seamlessly access and work with their content in Box from any application they need.

Microsoft continues to be a key partner in our strategy to provide a single secure platform for cloud content management. The new Box Notes and our deep Microsoft Office integration are just two examples of the continued innovation for end users that make Box the best place for people to work together.

Next, to support the needs of enterprises, security compliance and scale remain critical differentiators for Box. Q4 was no exception with solid momentum for our Box Governance, Box Zones and Box KeySafe products.

For Box Governance, which allows enterprises to meet retention and compliance requirements in the cloud, we added more customers in Q4 than any previous quarter. We now have more than 700 Governance customers, up from over 500 customers last quarter.

Roughly half of our Governance deals in Q4 came from customers that are new to Box. Customers place a high value on Box Governance, with the average price per seat uplift of over 30% on top of the core Box licenses.

Additionally Box Zones, which enables global enterprises to store their Box data locally, is now available in seven countries including Germany, Ireland, Japan, Singapore and Australia. While we are seeing good traction for Zones in Europe, one of the biggest Zone deals in Q4 was our new Australia Zone, highlighting the global opportunity for this product.

Our leadership in delivering these new advanced services are key differentiators for customers to make the move to the cloud and are defining why the Box offering is so unique. For instance, KeySafe was an essential part of a $1 million-plus deal this quarter helping a customer choose Box its first ever enterprise-wide cloud software purchase.

Leveraging multiple products from Box, a large financial services company signed a multi-year, multi-million-dollar deal to modernize their content management stack. Given the rigorous regulatory environment financial services players operating in, Platform, Governance and KeySafe made Box the only vendor capable of solving all of their needs. They are now using Box Shuttle to migrate content to the cloud and retire OneDrive, Simplicity and other legacy solutions. While these products appeal especially to large enterprises, they are also driving significant average contract value growth in the commercial and small business segments.

Finally, for developers and ISVs, Box aims to be the most partner- and developer-centric Company in enterprise software. There's a massive opportunity for Box to power applications that digitize industry workflows and connect to businesses with customers, partners and employees in all new ways.

This quarter alone more than 40% of Box's 58 billion API calls came from third-party applications. In Q4 we added and grew our relationships with several ISV and system integrator partners building on the Box platform, including Medidata and Cognizant.

Medidata, a leader in cloud-based solutions and data analytics for clinical research, announced it will be leveraging Box Platform to create the industry's first integrated end-to-end system for regulated content management in life sciences. We are incredibly excited for Medidata to leverage our technology in their effort to transform this industry. We also made significant enhancements to the Box developer experience including a new developer console and API navigator and interactive documentation and updates to our most used software developer kits.

Our additional products and our platform are all important differentiators and significant growth drivers for Box. This past quarter just over half of our deals of more than $100,000 included of at least one of these offerings.

In FY18 you will see us put significant emphasis on growing these product lines. We also have a roadmap for continuing innovation of these product areas, include launching new solutions such as our workflow tool, Box Relay, which we co-developed with IBM and will be available later this year.

Our second major objective for FY18 is advancing our global go-to-market efforts including enhancing our distribution through a world-class partner in channel ecosystem and driving efficiency in scale in our direct sales operations both online and in the field. Partners contribute to our lead gen, awareness and product and sales efforts all around the world.

In Q4 partners such as AT&T, IBM, and (inaudible) in Japan played a role in over half of our deals over $100,000. As we anticipated, our strategic IBM partnership continue to ramp in Q4. As we previously mentioned, IBM contributed to our record pipeline earlier in the year, and in Q4 that effort resulted in IBM being part of 18 of our 64 deals above $100,000.

We also continue to deepen our product partnership with IBM. This quarter we integrated Box with IBM Cloud Connections, IBM's integrated suite of collaborative solutions. Box is now embedded within 10 IBM products that IBM sales reps sell.

Our online channel was also a big focus this year. We drove significant efficiency and freed up sales capacity to service bigger accounts by enabling smaller customers with less than 25 employees to move entirely to self-service in FY17. Finally, in FY18 we will be investing in sales capacity by adding more direct and indirect sales reps, as well as layering leading edge marking technologies to drive more efficient lead generation nurturing and close capabilities.

In summary, Q4 was an incredible quarter for Box closing out a record year of financial performance. As promised, we delivered on our commitment to reach positive free cash flow in this quarter while consistently achieving strong growth.

We are excited to enter FY18 in a strong position. Over the coming year you will see us build amazing products that power how people work together.

Our vision of cloud content management fits a major customer need, and our product innovation will further drive enterprise adoption of Box. We will also advance our global go-to-market efforts to extend our reach to enterprises all around the world. Lastly, we remain committed to our goal of being free cash flow positive on a full-year basis for FY18 as we drive towards a long-term revenue target of $1 billion.

Now, I'll hand over to Dylan to review the financial results in detail. Dylan?

Thanks, Aaron. Good afternoon everyone, and thank you for joining us today. As Stephanie noted, GAAP to non-GAAP reconciliations are in the presentation that is available on our IR website. The financial measures I will be discussing on this call are non-GAAP unless otherwise noted.

In Q4 we achieved a record financial performance, delivering our highest revenue and billings results ever and achieving quarterly positive free cash flow for the first time. These results were driven by strong momentum with our additional products, increased traction with our strategic partners, and our best-in-class retention rate.

We realized record revenue of $109.9 million in Q4, above our guidance and up 29% year over year. Fourth-quarter billings came in at $159.3 million, representing 22% calculated billings growth and 28% adjusted billings growth year over year.

Over the past year we have made great progress in standardizing our customers on annual versus multi-year payment durations. With more normalized payment durations going forward, we expect billings growth and revenue growth to track roughly in line for the full year of FY18.

We continue to win large enterprise deals including 64 deals over $100,000 versus 66 a year ago, 16 deals over $500,000 versus 13 a year ago, and 8 deals over $1 million versus 5 a year ago. Our additional products are an important differentiator and growth driver force. Just over half of our six-figure deals included at least one additional product, and 18 were attributable to IBM.

Deferred revenue was $242 million, up a solid 30% year over year. Backlog was $258 million, up 40% year over year. Both deferred revenue and backlog included an enhanced developer access fee from one of our resellers. These results provide us with strong revenue visibility going forward.

Turning to margins. Non-GAAP gross margin came in at 75.8% versus 73.2% a year ago and 76.1% last quarter. Over the past year we have made several optimizations to our infrastructure that drove the substantial majority of this improvement.

However, with the new data center we previously discussed now live, we expect our gross margin to stabilize around 74% for FY18 with the low point coming in Q1 before improving over the course of the year. We continue to see stable pricing in the market with price per seat coming in at roughly $100 per user per year throughout FY17.

Q4 was another successful quarter of driving greater operational efficiency while continuing to significantly grow our top line. Sales and marketing expenses during the quarter were $58.8 million, representing 54% of revenue, a notable improvement from 68% in the prior year.

This past year we achieved significant leverage by moving customers to our online sales channel, nearly doubling this channel's contribution to our business, while also allowing us to move several sales reps up market. This coming year we will be accelerating growth in sales headcount and also investing for scale in our marketing infrastructure. These investments will allow us to achieve continued leverage in sales and marketing over time.

We are entering this year with 211 quota-carrying reps, up 10% year over year, with billings per rep increasing by 12% year over year. These trends give us the confidence to continue investing in additional sales capacity. In the coming year we plan to increase our global quota-carry sales headcount by roughly 25%.

The ongoing cost to support our free user base, which is a sales and marketing expense, continued to decrease to 5% of revenue in the fourth quarter, an improvement from 10% in the same quarter a year ago. We continue to see leverage in this expense while continuing to grow our free user base.

Next, research and development expenses were $21.9 million, or 20% of revenue, down from 23% a year ago. We drove this improvement even as we made significant enhancements to our products, including expanding Box Zones into new regions, launching a new version of Box Notes and making several enhancements to our Microsoft integrations and our platform developer experience.

Our general and administrative costs were $15.3 million, or 14% of revenue, an improvement from 19% in Q4 of last year as we benefited from greater operational excellence and scale. We are extremely pleased that these improvements in operational efficiency drove our Q4 non-GAAP operating margin to a significant 25 percentage point improvement year over year, coming in at negative12% versus negative 37% a year ago. This focus on leverage drove non-GAAP EPS to negative $0.10, a substantial improvement of $0.16 from a year ago and well ahead of the high end of our guidance.

One of the key elements that makes our business model so powerful is our strong customer retention. Our best-in-class churn rate continues to be roughly 3% on an annualized basis. As Box becomes an increasingly critical part of our customers' business processes over time, features such as our platform APIs, data retention, and workflows should continue to drive overall customer stickiness.

Our net expansion rate was 18%, primarily driven by strong seat growth in existing customers. As we benefit from cross-sells with our additional products, we are seeing this offset the natural pressure on this metric from our maturing customer base.

As a result we ended the quarter with a retention rate of 115%, in line with our past two quarters. This metric demonstrates the compounding effect of our land-and-expand business model.

Let me now move onto our balance sheet and cash flow. We ended the quarter with $204 million in cash equivalents and restricted cash, of which roughly $27 million was restricted. Our cash flow from operations was a highlight at $14.7 million compared to $4.9 million a year ago, an improvement of nearly $10 million.

In Q4 total CapEx was $1.3 million compared to $25 million a year ago, which included roughly $20 million in headquarters costs. We expect CapEx and capital lease payments combined to be roughly 5% of revenue for the foreseeable future as we continue to finance certain data center costs under capital leases.

As we committed, we achieved positive free cash flow of $10 million this quarter, reaching this milestone for the first time in our history. Although we will see fluctuations on a quarterly basis, we expect to generate positive free cash flow for the full year of FY18. We believe that the discipline that we have showed in becoming free cash flow positive sets us up nicely to achieve the operating margin and $1 billion revenue targets that we outlined at our most recent Analyst Day.

With that, let's now turn to our guidance. For the first quarter of FY18 we are setting revenue guidance in the range of $114 million to $115 million. We expect our non-GAAP EPS to be in the range of negative $0.14 to negative $0.15 and for our GAAP EPS to be in the range of negative $0.32 to negative $0.33 on approximately 131 million shares.

For the full year of FY18, we expect revenue to be in the range of $500 million to $504 million, which represents 26% growth at the midpoint of this range. We expect our non-GAAP EPS to be in the range of negative $0.45 to negative $0.49 and for our GAAP EPS to be in the range of negative $1.23 to negative $1.27 on approximately 134 million shares.

In summary, our fourth quarter yielded tremendous success across all financial metrics as we continue to widen our competitive differentiation through product innovation and key partnerships while delivering significant leverage in our business model. We are well positioned to maintain our rapid growth rate and to deliver on our commitment to achieve positive free cash flow for the full year of FY18.

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

(Operator Instructions)

Rob Owens, Pacific Crest Securities.

Thank you, guys, for taking my question. Dylan, as we think about the convergence in growth between billings and revenue for FY18 which you mentioned, are there any puts and takes relative to difficult comps or things you might have seen seasonally in FY17 that could offset that from one quarter to another?

We did see -- we made great progress in terms of really moving those multi-year prepays that created some difficult comps in FY17 relative to FY16. Those prepays, multi-year prepays, were very consistent in the 1% to 2% range of overall billings for the full duration of the past year.

You would expect to see revenue growth and billings growth tracking roughly in line throughout the year, and would also expect the same general billing seasonality that we saw last year as well. In the past year in terms of how the billings for the year broke down by quarter, that was about 17%, 23%, 25%, and then 35% in Q4. While we may see some variability there depending on really large deals, we aren't expecting to see really different seasonality from an overall billings standpoint in FY18 versus what we just saw in FY17.

Great. Then second regarding additional the sales capacity. Will you front-load most of these hires, or how many, or will there be throughout the year? Could you remind us what the typical sales ramp looks like for your reps? Thanks.

Sure. Definitely given the pipeline, the momentum we are seeing in the business we are focused on adding the majority of these sales reps in the early part of the year so they can make a contribution to the business within the year. We would expect to see that headcount growing throughout the year.

Typically we see from an inside sales point of view is about a nine-month period to become fully ramped. Then for certain of our field segments it may take about a year to achieve their full quotas.

Thanks for the color.

George Iwanyc, Oppenheimer.

Thank you for taking my question. Can you expand on the type of work you are doing with IBM? It sounds like the pipeline remains very robust. How does that look for the coming year?

This is Aaron. The pipeline is certainly building nicely, better than the start of last year. We would expect still a ramp-up in the first part of this year.

Certainly the partnership will lead to more back-half heavy types of deals given these larger enterprises that we are closing, larger organizations. But as I think we highlighted in the call, the partnership has done incredibly well, especially in Q4 where we did a number of our large enterprise transactions with IBM, alongside IBM.

We are beginning to build more and more joint integrations, as well as our joint solution, Box Relay. I think you will see more success from the partnership this year and then even last year.

It is going incredibly well. Importantly, it is a very strong template for success that we have with partners broadly. I think you're going to see us be able to drive more partnerships like this in the future as well.

Are you seeing multiple products in most of those wins with IBM, or is it usually a single product?

We are seeing certainly the core Box licenses. I think Box Governance in general is showing up in a lot of the accounts, particularly because it is larger enterprises often in risk-related industries are very security conscious organizations. We are seeing Box Governance being attached to many of those transactions, and then occasionally Zones or KeySafe depending on the customer.

Finally, for the additional products like KeySafe, Zones, Governance, is it usually consistently 30% for each of them or how much of a variability are you seeing on a product basis?

It has been pretty consistent. We are seeing some variability, but we have on time -- actually over time actually seeing a little bit of an increase in the average uptick.

That is why originally we were talking about a 20% to 30% uplift on average and now is over 30% pretty consistently as we continue to communicate and be known for the value that these products are driving in the market. So generally it is a pretty consistent uplift that we are seeing for both Governance and KeySafe.

Thank you.

Richard Davis, Canaccord.

Thanks. I think you have said that you have about maybe only 6% penetration of the full count of the knowledge workers at your existing customers. When you say, we can get 70% of our path to $1 billion through effectively same-store sales, that makes sense.

Two questions come from that, is one, what was the mix of revenues between new and upsell in Q4? More importantly, how do you think about evolving the selling methods to ensure that that transition is seamless?

Because you [didn't] talk about inside sales, but are you building out customer success, et cetera? How do get people to upsell? Thanks.

So we are now just over 7% penetrated in the Fortune 500 Companies where we do have paying deployment so that has continued to trend upward over time but we still have a pretty substantial amount headroom in those customers. In terms of the breakdown of the new bookings that we have been driving of late, it tends to be about two-thirds coming from existing customers, and that is a combination of additional seats and additional products, and then about one-third of those new bookings coming from customers buying Box for the first time.

Overall the way that we support our customers throughout their lifecycle and really working with a combination of sales, customer success and marketing, we try to be very on top of those additional use cases and opportunities to drive additional expansion. I would say that as we've continued to evolve, and especially evolve our product portfolio over the past couple of years, there has been much more of a focus on really educating our customers as well as our team on identifying the use cases and where there may be a good opportunity for products like KeySafe or Governance. Certainly a process that we are continually evolving, but given the traction that we are seeing in some of these additional products, we are pretty pleased with the results.

Great. Thanks so much.

Philip Winslow, Wells Fargo Securities.

Thanks, guys, for taking my question, and congratulations on a great close of the year. Aaron, a question for you. Then a follow-up for Dylan.

If I rewind the clock back to 2014 and you back to the IPO, obviously there are a lot of questions on file sync and share, so to speak, and the basic Box offering. But I think about what you have added over the years, and you touched on some of these, KeySafe, Governance, et cetera.

If I just listening to your commentary over the past 18 months, we are hearing about more of why I call traditional ECM replacement type deals that you talk through. Wondering if I am reading too much into that, or has the product evolved to the point where this really is increasingly just an ECM replacement, especially with those new features, especially with Platform? I will let you talk on that. Then I have a quick follow-up for Dylan.

Sure, sure. Yes, I don't think you are reading too much into that. I think that is actually what we are seeing in the market broadly.

Now, each customer that leverages traditional ECM could be anywhere on a spectrum of level of maturity or sophisticated use cases that they are using that traditional ECM provider for. But what we are finding is the traditional market of Enterprise File Sync and Share has been a natural wedge in changing customers' perception around what the future of content management should look like.

We have been building out a cloud content management platform that has all of the security, the governance, the compliance, the metadata, the platform capabilities that can solve ECM, but that first use case is usually around employees wanting to share and collaborate and be able to get their work done. What tends to happen is then ultimately customers are seeing more and more opportunity to retire and replace legacy systems with Box by leveraging solutions like Box Governance, Box KeySafe, Box Zones and other capabilities that are embedded into our product. That's allowing them to go and use us as a true cloud content management system.

One great example this past quarter is we did a large transaction, a seven-figure transaction, with a financial services firm that replaced document -- is in the process of replacing document as well as using Box to solve all of their end-user file-sharing collaborations use cases. One cloud content management deployment that's going to solve everything from that end-user use case all the way to more traditional ECM capabilities in the cloud.

We are seeing this more and more along in our customer base. When you look at the size of our transactions, especially 16 deals above $500,000, eight deals above $1 million, those are the kinds of customers where categorically they're using Box more as a platform for managing their content well beyond the use case of File Sync and Share. We see this as a multi-year secular shift from legacy enterprise content management solutions and storage technology in the on-premises environment to the cloud. We believe we are best positioned to take advantage of that migration.

That is great. Then Dylan, a follow-up on that. Obviously as you get bigger deals, more seats, better pricing, if it is an ECM replacement there is probably, let's call, it a longer duration in terms of the lifetime value of those customers.

How do you see this flowing through in the sales and marketing line, R&D in terms of what you've built right now versus what you still need to do to continue to target the space? Maybe help us to flow through that as the walk-through and leverage going forward?

Sure. Certainly as we start to land some of these deployments that then have the opportunity to both add more seats as well as some of these additional products and increasing value as the complexity and the cost replacement benefits that we're providing the customer expands, we do see a lot of that showing up in expansion and deal sizes as well, some of which you have been seeing in the numbers.

As we've talked about in the past, both the expansion relative to signing up a Box customer for the first time as well as especially renewals once we have a customer signing up with those longer term commitments with very sticky use cases are much more efficient than the lands net new customer motion that we are seeing.

The evolution of the way that we are increasingly working with some of these large enterprise customers, we expect and have already seeing it absolutely drive leverage on the sales and marketing line over time. In R&D you've seen that continue to decrease as a percentage of revenue, although I would say given the types of problems that we are solving for customers and our continued focus on innovation and building out on this best-in-class enterprise technology, we probably expect to see at least in the coming years the least amount of leverage in R&D, at least relative to sales and marketing and G&A.

Great. Thanks, guys.

Thank you.

Mark Murphy, JPMorgan.

Thank you. I'll add my congrats on the finish of the year. Aaron, I wanted to ask you how the Fujitsu partnership is evolving, I should say relationship, in terms of their resale activity and also their plans for their internal rollout on Box? Are you able to comment on whether there were any bookings or billings related to that in Q4?

The Fujitsu relationship is still very, very early. We expect that that will start performing this year in Japan, and we'll certainly show you and make sure to highlight some of those updates. We are not fully in market with them yet, although we announced the relationship at the tail end of last year with them. Then in terms of internal use cases, we're not talking about anything specifically yet but we will certainly share anything as it can be made public around some of our expectations around how Fujitsu would use Box.

What we are seeing more broadly, though, is a lot of success in Japan. Over the past year the growth rate has been incredibly successful for us through partnerships like [Makmika] and even IBM Japan. We are driving significant penetration into a diverse array of industries, everything from manufacturing conglomerates to major entertainment companies all the way to major banks and other service providers. We are very happy about Japan broadly and certainly we expect Fujitsu to drive even further growth as that partnership rolls out in the market.

Thank you. Dylan, you had commented in the script that, you said something about backlog included in enhanced developer access fee from a partner. I am not sure if I completely digested that accurately, but could you explain that?

Is there something unusual about that? Are you able to comment on the magnitude at all?

Sure. So due to the contractual limits I won't be able to give too much color on this, but at a high level I would say that a good partner of ours is using our platform to develop products for their customers. This fee does show up in both backlog and deferreds.

Since it's a large transaction, in the mid-seven-figure range, we wanted to call it out, and was baked into our guidance. Not material to revenue in the quarter. It is certainly not a standard transaction for us which is why I wanted to highlight it, but definitely given the use case and the increasing importance and value that our platform can provide for some of our resellers may not be the last time we see something like this.

Okay. Aaron, I wanted to go back to you. In terms of Box Zones, you're leveraging these cloud providers, I believe IBM and AWS, so they can store data in region for customers. You mentioned that you are now in seven countries with that offering. Can you talk about how broad-based is the adoption of Box Zones, and maybe how many additional countries you think you'd plan to bring online over time?

Yes. The adoption is certainly picking up. We had a number of our key European deals require Box Zones.

I mentioned the very large Australian transaction which was a massive new customer and win in Australia that leverage Box Zones. Our anticipation is over the medium and long run there are probably not going to be a security conscious or regulated international customer that doesn't leverage Box Zones.

We expect that over time customers will both prefer the local performance benefits that Box Zones offers as well as the data security compliance and privacy benefit that it offers as well. From a regional standpoint, right now as we mentioned, our partners are IBM and AWS.

The technical architecture supports the ability to run Box Zones in any region where those two partners have a large public cloud deployment that we believe meets the reliability and redundancy requirements of our customers. There is literally no limit to the number of locations that we will be deploying this in, but it will certainly be driven by market adoption and market penetration of our service.

Long run I would expect you to see locations in South America and more broadly throughout Asia and other regions over time. We are very excited about the growth opportunity that Box Zones offers.

One last one, if I may. Dylan, at a very high level what caused you to decelerate the growth in quota-curing reps last year, and then conversely what is causing you to re-accelerate it this year as opposed to perhaps maybe having had a plan of just more consistent growth in the quota-carriers?

Relative to the growth in FY16, two years ago our growth in AE last year was pretty comparable, I think within two or three percentage points year on year. The one thing I would highlight there is, if you recall, is the shift that we've made in terms of moving a greater percentage of our customers online.

We were able to move several of our reps up market, so able to expand the actual coverage across our larger customers as well as our smaller customers with fewer quota-carrying reps. I think the actual growth in AEs over this past year understates the capacity and reach that we were able from our direct salesforce.

And with the ramp of many of the channel partners that we have been onboarding and the success we are seeing over the past year, that gave us quite a bit of leverage as well. So pretty pleased with the way we were able to expand quota capacity and reach over the past year, even with the growth that we saw which was a lot lower than our overall top-line growth.

Then as we turn to FY18, we really pay a lot of attention to the momentum we are seeing in the market, the pipeline we're building and the overall demand. I would say that really pleased with all of those trends, particularly internationally.

Aaron highlighted the growth we are seeing in Japan. We also see now with a combination of some of the compliance initiatives issues and with Box Zones a much bigger opportunity in Germany, for example. We are seeing the same trends play out globally. Heading into FY18, we are much more optimistic in terms of the international potential that we are going to be hiring sales reps to go after.

Thank you.

Aaron Rakers, Stifel Nicolaus.

This is Joe Quatrochi on for Aaron. Thanks for taking the questions. Just a couple, if I could.

First, I was just wondering if you could give a little more color on the gross margin. You talked about the 74% for the full fiscal year.

How do we think about 1Q? It sounds like it was going to be a step down. Do we think about flat year over year relative to 1Q?

Yes, we think about being about 74% for the year with Q1 being the low point. The reason for that is we've talked about moving into our expanded data center footprint which came a little bit later than we had originally expected, but as of the end of Q4 we had fully moved. That will be bearing the full cost of that from the start of Q1.

The reason why Q1 is a bit lower is these are largely fixed expenses and we are going to see the lowest revenue in Q1, plus there are fewer days in the quarter. That just creates a little bit of a headwind. Then over time we are going to grow into that expanded footprint and continue to gain infrastructure efficiencies and economies of scale there.

Really the expectation and the overall trends are in line with what we have been talking about over the past couple of quarters. We just expect to see that to move down into the 74% range happening a little bit later than we had originally anticipated.

That's helpful. Then one for Aaron. Maybe you could just give us some comments on what you are seeing from the initial beta program for Box Relay. Maybe any color there, how many customers you have in the beta program, anything like that?

The beta is still in the roll-out process right now. It is mostly still in an internal alpha phase within our own internal environment in both within Box and IBM. I think we can provide more color on the beta going into next earnings call.

In general the feedback that we have heard from the market as they have seen the product, as some customers have taken a look at the product, is really, really positive demand and overwhelming response around the desire to have more of their business process and more of their workflows being able to be tied to the content that they have in Box. We see a massive opportunity to take the legacy approach of very, very complex workflow systems and be able to deliver a very simple end-user-driven experience on top of the content in Box.

That will be a major driver to helping customers replace their legacy ECM systems. Both Relay specifically, but Box workflow solutions and capabilities broadly, some of which you'll see us be able to have enabled in our platform and other parts of our technology stack.

Overall you're going to see us invest more in workflow and being able to deliver business processes in an intelligent way through the Box platform over the coming quarters and coming years. We are very excited about that.

Great. Thank you.

Terry Tillman, Raymond James.

Good afternoon, gentlemen. Thanks for taking my questions, and nice job on the progress. Aaron, first question is an update on the platform business. How material is it?

How is the pricing model working? If I am not mistaken, it was going to be somewhat tethered to API calls.

The pricing model was initially more tethered to active users on the platform, the ability to have partners or developers be able to create user accounts and then we would charge on a per-user basis based on the level of activity of those users. What we have realized is that there's opportunities to have non-user based pricing as well that better reflect the value that customers are receiving.

You're going to see this year some updates to our pricing model on our platform to overall better match the use cases and activity level that our customers have, which will still include the app user construct for applications and use cases that are very user oriented. Overall what we have seen is a pretty significant rise in API usage and platform usage over the past year.

More and more our customers are seeing that as just a core part of cloud content management and their deploying of Box overall. So many times platform, again, you do get free API usage. You can use API against any existing seat you purchase in the Box deployments. We're seeing a pretty significant growth in end usage of the core API as a part of deploying Box as a cloud content management solution, as well as still pretty steady traction in be able to sell the platform separately.

What we have realized is that there is a big opportunity to be able to sell these solutions together more and more as opposed to having them be as separated as they were the past year. That's positively impacting our go-to-market integration efforts coming into this year. I think you're going to see more platform traction. We will certainly try and break out some -- what those use cases our customers are looking like, but this is a fundamentally core to our cloud content management strategy.

Okay. In terms of the crystal ball in terms of the vision on the $1 billion aspirational revenue goal, it sound like maybe the lines could blur a little bit in terms of quarter Box usage and then platform utilization. If you have to think that what is more pure platform use case, when you get to that $1 billion revenue milestone, how much of the mix of the business could you see that is more platform-centric as opposed to just Box usage?

At $1 billion in revenue I think it will be material, but the significant majority of the revenue will still look like our blended core business, not necessarily File Sync and Share or Governance but the overall usage of Box as a cloud content platform. I think what we are finding is that customers actually really deeply want the synergy between the custom applications that they are building and the internal usage of Box, which means that we are often pricing the two products together in some cases in an all-you-can-eat way.

So in some areas it is harder to break out, but we believe it is going to be significant driver of both Box's differentiation as well as growth in average contract value. Then ultimately our ability to capture more market share.

Then one other final point I would make is our platform will also be the major driver of differentiation in key verticals. So as you saw with the Medidata use case, we have a major ISV that is a leader in software in the life sciences industry and data analytics, and they are building a pretty critical application on top of Box to better serve that industry. You are going to see over time that platform will not only show up obviously with customers building their custom applications, but partners and ISVs that are developing industry-specific solutions where the only way we could be solving that industry problem is through our platform and our APIs.

Got it. My final question is for Dylan. In terms of -- appreciate you calling out the developer fees and how that impacted billings. What I'm trying to understand is the mechanics of this. If they are successful with reselling the solutions, will we see other quarters where it can be quite lumpy or an outlier? Or did they basically buy up a bunch of seats or usage, if you will, and it would take some time for them to eat through it before we'd see another pop in billings from that partner? Thank you.

We would expect to be pretty smooth. In terms of the impact was from a billing standpoint, mid-seven-figure range for this year, but not material to revenue as it was -- began to be recognized at the very tail end of Q4. Would not expect this to cause significant, if any, volatility.

It is a long-term partnership and reoccurring revenue. So would expect to see a pretty smooth path there and we would highlight if that were to change.

Thank you.

Greg McDowell, JMP Securities.

Hi, guys. This is Rishi Jaluria dialing in for Greg. Thank you for taking my questions, and it is nice to see you deliver on that free cash flow promise. Two quick ones.

Aaron I wanted to follow up on the Medidata partnership and on platform. What needs to happen for a partnership like this to be a needle mover on revenue?

Are there maybe any other verticals, especially considering the highly regulated verticals, that you see for similar potential for partnerships like this with platform? Then I have one follow-up for Dylan.

In terms of it being a needle mover from a revenue standpoint, obviously traction of the product that Medidata has been building out, that obviously takes on a bunch of forms but ultimately as it scales up we will generate more revenue from that application using our standard platform revenue licensing model. I think importantly, though, this is a way, and similar partnerships will be a way, that we can complete the story that we are driving into different industries and into different customers.

Where Box is well adopted in companies like Eli Lilly, Astra Zeneca, Allergan, Amgen, Pfizer and other life sciences companies, this partnership will allow us to solve these and more use cases. In some cases strong revenue growth that gets driven by this kind of application, but also further fortifies our position in that industry.

I think where you're going to see the most significant opportunities are industries where there are advanced workflows around content, where our core functionality can be extended into a third-party application and solve an industry workflow that we aren't already solving. Oftentimes those will look like the workflows that maybe were done in an on-premises environment with something like Documentum or OpenText or other solutions, but are much more naturally built on top of Box when you are looking at a cloud model.

Industries like healthcare, financial services, government, manufacturing, I think you will see leading ISVs in each of these markets that over time will be able to build up their content-oriented solutions or workflow-oriented solutions on top of the Box platform. Our industry differentiation will certainly be a mix of both our product, our compliance and security efforts as well as new partners like the Medidatas of the world that can build on top of Box.

Okay, great. Dylan, I know in your prepared remarks you discussed being free cash flow positive for the full year next year. I just want to understand, how should we think about the trends and seasonality of cash flow in FY18 putting aside the headquarter build-out?

Sure. FY18 we actually should not have anything related to the headquarter build-out. We've now fully moved into that space.

In terms of the overall seasonality we see, it tends to be pretty closely tied to the seasonality in billings, which I had highlighted earlier, where based on that seasonality Q2 tends to be the weakest quarter from a cash from operations point of view coming off of the combination of Q1, and to a lesser extent the Q2 billings, just because of the way that the billings ramp up in the quarter. Would not expect any unusual one-time events to swing the cash from ops seasonality in the year, but really just a function of the overall billings outcomes that we see.

Okay, great. That is helpful. Thank you so much, Aaron and Dylan.

Thank you.

(Operator Instructions)

Jane Wang, Bank of America Merrill Lynch.

Thanks for taking my question. You gave a stat that half of the six-figure deals this last quarter included one of the add-on products. I am just trying to get a sense of the opportunity within the install base as well for the add-on products. Are you able to quantify the penetration versus the opportunity within the install customer base that would be interested in the add-on products?

A couple key highlights. We have now achieved 700 customers that have bought Box Governance, which has certainly been our best performing add-on product. It has the most universal applicability.

Really any size business in any industry can find value in Box Governance because it really deals with document retention or legal use cases around content. So with over 70,000 customers on the platform, we still have 99% of the customer base is still an opportunity that we will be able to sell Box Governance to. We are very excited about the scale of that opportunity.

Things like Box Zones really is applicable to international customers as well as multinational customers, so that is a proportionately smaller base of customers within our landscape. Then Box KeySafe is really for the most regulated or most security conscious organizations. That is a bit of a narrower audience.

We think that the every one of our customers could potentially buy an add-on product. Some of our most significant deals and highest average contract value deals have actually bought multiple Box products. You can see the power of combining these solutions together.

From here for us it is just about making sure that we are able to continue the repeatability of our sales model to ensure that all of our customers have the opportunity to buy these products, understand their differentiation, understand the power of these capabilities, that the joint effort between sales, marketing and customer success. We see the upside of these new products as being pretty considerable, as well as the new solutions that we are working on right now that we will be launching both this year and beyond.

Then the only thing I'd clarify, this is Dylan, is that of those 64 new six-figure deals that we signed in the quarter, those were not all necessarily new customers to Box. That was a mix of existing customers expanding their deployments as well as customers buying Box for the first time. We saw in both of those populations a very healthy uptick in the attach rates of those newer products.

Thank you.

There are no further questions at this time. I will now turn the call back over to the presenters.

Thank you for joining us today.

This concludes today's conference call. You may now disconnect.