Box Inc (BOX) 2018 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Box, Inc.

First Quarter Fiscal 2018 Conference Call.

(Operator Instructions) I will now turn the call over to Stephanie Wakefield, Vice President of Investor Relations.

You may begin your conference.

Good afternoon, and welcome to Box's First Quarter Fiscal Year 2018 Earnings Conference Call.

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

Following our prepared remarks, we will take questions.

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

Our webcast will be audio only.

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

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

On this call, we will be making forward-looking statements, including our Q2 and fiscal year '18 financial guidance and our expectations regarding our financial results, market adoption of 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, our ability to achieve our long-term revenue and other operating model targets and expected benefits from our new products and partnerships.

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

Please refer to the press release and the risk factors in the documents we file with the SEC, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements are being made as of today, May 31, 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 references 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.

The first quarter was a strong start to our fiscal 2018.

We delivered year-over-year revenue growth of 30%, grew billings 31% and generated positive free cash flow.

These results demonstrate the significant need for cloud content management in all industries and the inherent leverage in our business model.

We also continued our streak of exceeding our guidance since we've gone public and feel confident that the improvements we made in the business over the past year set us up well to reach our goal of $1 billion in revenue in the coming years.

This quarter, we grew our leadership in the market and now have more than 74,000 paying customers, including new or expanded deployments with McDonald's, Unitedhealth Group, Komatsu, Morningstar and the United States Forest Service.

We saw particularly strong traction in our international markets, including in Japan and Canada; growth in new products like Box Governance and Zones; and further momentum with our strategic partnerships like IBM.

As the pioneer in cloud content management, we continued to separate ourselves from the competition by uniquely delivering against the needs of 3 audiences simultaneously: end users, enterprise IT buyers and application developers.

In fiscal 2018, we're focusing on 2 major objectives: number one is innovating in cloud content management with additional products and platform capabilities to help move enterprise workloads to the cloud; and number two, advancing our global go-to-market efforts so that we can reach more enterprises all around world.

In Q1, we made solid progress on both fronts.

Let's start with innovation in cloud content management.

We introduced significant new capabilities to drive continued adoption of our Box KeySafe, Zones, Governance and Platform products.

Our product innovation and new products are key competitive differentiators and significant growth drivers for Box.

In fact, this past quarter, 60% of our deals of more than $100,000 included at least one of these new products, and they're also a major reason why Forrester recently named us a leader in their enterprise content management, Wave.

First, in April, we launched Box KeySafe for GovCloud, which is our unique enterprise encryption key management software now enabled for the U.S. government's dedicated AWS cloud instance.

Additionally, we achieved Department of Defense Level 4 authorization to allow Box to manage the government's sensitive, unclassified content.

Box joins only a small handful of companies to have achieved this level of authorization.

Second, for our multinational and international customers, we partnered with IBM to develop and launch the first IBM-supported Box Zone in the U.K. The U.K. becomes the third country in Europe and the eighth country globally where customers can choose to store their data.

Next, Box Governance, which allows enterprises to meet retention and compliance requirements in the cloud, continues to gain traction with new and existing customers.

For example, one deal this past quarter over $100,000 included the purchase of Box Governance and enabled the customer, one of the largest regional public accounting firms, to expand from using Box on select teams to an enterprise-wide deployment.

Box Governance will also enable them to start replacing their current enterprise content management system with Box, providing both employees and consultants with the single content collaboration platform.

With Box Platform, we saw almost 30 billion API calls from third-party applications, and we now have over 3,500 active applications.

This quarter, we introduced a new resource-based pricing model to support new use cases and make adoption even easier.

And in our partnership with Amazon, we announced that customers can leverage our APIs and pay for usage of the Box Platform to the AWS Marketplace, making it easier than ever to build on Box.

One of our significant customer wins for Box Platform this quarter was with Morningstar, a global leading provider of independent investment research.

Morningstar will be leveraging Box Platform to deliver content to clients in their new financial advisory application.

They also purchased Box KeySafe and Governance.

Our new products are also opening up opportunities for Box to replace legacy enterprise content management systems.

We're seeing increasing momentum from customers looking to move to Box and retire their legacy content management solutions over time.

For example, in North America, a large financial services institution selected Box as their cloud content management platform for all of their unstructured data.

We will be replacing Documentum, migrating more than 10,000 SharePoint sites to Box and will integrate with a variety of existing on-premises and cloud applications.

The legacy ECM category is a multibillion market annually, and we are steadily adding the technology, partners and capabilities to transfer in this space and move it to the cloud.

Our second major objective for FY 2018 is to reach and enable every business in the world through our global go-to-market efforts.

As we discussed on our last call, we are investing in marketing technology and sales and marketing headcount to seize our growing market opportunity.

We have been making significant progress in hiring enterprise sales reps for our large enterprise and international segments, and we expect they will ramp up to full productivity over the next few quarters.

We are also layering in bleeding-edge marketing technologies to drive more efficient lead generation, nurturing and close capabilities as well as driving better awareness for our brand around the world.

We are seeing these efforts beginning to have an impact as we generated our largest early-stage pipeline to date in Q1.

Another critical component of our go-to-market efforts is to continue to enhance our ecosystem with channel and technology partners.

Overall, in Q1, our channel partners, such as AT&T, IBM and NTT, play a role in 1/3 of our deals over $100,000 and contributed to our lead generation awareness, product and sales efforts around the world.

Specifically, with IBM, we continue to see strong traction.

While they influence just 4 of our deals over $100,000, this included 2 of our largest deals outside of the United States.

Based on this template this quarter, we announced that Fujitsu is now reselling Box in the Japanese market.

Like IBM, we're also exploring additional ways to partner in the cloud content management space, including developing Fujitsu solutions that deeply integrate with Box.

Additionally, earlier this month, Medidata, an OEM partner, announced the availability of the only content integrity and collaboration platform for both regulated and nonregulated content for clinical research by leveraging Box Platform.

The OEM relationships with companies like Medidata and Ipreo, which we announced last fall, are prime examples of how vertical experts on ISVs are building on top of the Box Platform to deliver value in new markets.

Finally, over the past year, we've enhanced our relationships with leading technology partners, including Microsoft, where Box is now integrated across Office 365 experiences; and best-in-class workplace productivity apps like Google, Slack and Facebook Workplace.

In fact, recently at F8, Facebook announced that Box is now available as a content management platform within their new enterprise social network, Workplace by Facebook.

By bringing in content from Box into Workplace, the 14,000 corporate teams that already use Workplace can share files more easily and collaborate on projects in real time, all while keeping their content securely stored in Box.

Additionally, we have a comprehensive slate of partners we're working with to create enhanced experiences and ensure customers can get access to their Box content from just about every application they work in.

In summary, Q1 was an incredible quarter for Box.

Over the coming year, you will see us continue to build amazing products that power how people work together.

We will execute on a road map and further grow our leading cloud content management.

We'll advance our global go-to-market efforts to extend our reach to enterprises in new markets and industries around the world, and we will drive these growth strategies while remaining committed to our goal of being free cash flow positive on a full year basis for fiscal 2018 as we head towards an annual revenue target of $1 billion revenue in the coming years.

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

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.

We delivered another strong quarter in Q1 with revenue, billings and deferred revenue all growing at least 30% while also generating positive operating cash flow and free cash flow.

These results were driven by strong momentum with our core products, international sales and continued traction with strategic partners.

We realized record revenue of $117.2 million in Q1, well above the high end of our guidance and up 30% year-over-year.

First quarter billings came in at $99.6 million, representing 31% calculated billings growth and 32% adjusted billings growth year-over-year.

With normalized payment durations going forward, we expect billings growth and revenue growth to continue to track roughly in line for the full year of fiscal '18.

We maintained our momentum with large enterprise customers, including 25 deals over $100,000 versus 17 a year ago; 2 deals over $500,000 versus none a year ago; and 1 deal over $1 million.

We sustained the strong traction we've been seeing with our newer products, including Governance, Zones, KeySafe and Platform.

We doubled year-over-year bookings for all 4 products, and in Q1, more than 60% of our 6-figure deals included at least one of these newer products.

Deferred revenue was $224 million, up a solid 30% year-over-year.

The growth in deferred revenue was again positively impacted by an enhanced developer access fee from one of our resellers.

These results provide us with strong revenue visibility going forward.

Turning to margins.

With stable pricing in the market and continued infrastructure efficiencies, non-GAAP gross margin came in at 74.5% versus 72.4% a year ago and 75.8% last quarter.

We still expect our gross margin to come in at roughly 74% for the full year of FY '18.

Q1 was another successful quarter of driving greater operational efficiency while significantly growing our top line.

Sales and marketing expenses in the quarter were $62.9 million, representing 54% of revenue, a notable improvement from 60% in the prior year.

We continue to drive leverage with more sales coming to our online channel and continued improvements in rep productivity.

As we discussed on our last call, this year, we're accelerating our growth and sales capacity as well as our marketing technology stack to drive more efficient lead generation, nurture and close capabilities.

We are already starting to see this pay off with strong growth in rep headcount and a record quarter for pipeline generation in Q1.

These investments will allow us to drive top line growth and realize additional leverage in sales and marketing over time.

The ongoing costs to support our free user base, which is a sales and marketing expense, decreased to 4% of revenue in the first quarter, an improvement from 8% in the same quarter a year ago.

We now have just over 54 million registered users, of which 8.7 million are paid.

Next, research and development expenses were $24.4 million, or 21% of revenue, down from 23% a year ago.

We drove this leverage even as we made significant enhancements to our products, including launching KeySafe for GovCloud, a new Zone in the U.K. and improvements to our developer experience and pricing model.

Our general and administrative costs were $16.7 million or 14% of revenue, an improvement from 15% in Q1 of last year, as we benefited from greater operational excellence and scale.

G&A includes investments in processes and consultants to prepare for the new ASC 606 revenue standard, which will continue through the remainder of this year.

We're extremely pleased that these improvements in operational efficiency drove our Q1 non-GAAP operating margin to a significant 11 percentage point improvement year-over-year, coming in at negative 14% versus negative 25% a year ago.

The investments we are making today should set us up to achieve the target model that we've laid out at our Analyst Day last fall.

This focus on leverage drove non-GAAP EPS to negative $0.13, a solid improvement from negative $0.18 a year ago and 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 churn rate remained best in class, though it ticked up slightly to 3.5% on an annualized basis.

Our net expansion rate was 17%, primarily driven by strong seat growth in existing customers and cross-sales of our newer products.

In Q1, we also saw an unusually high percentage of new bookings from net new Box customers.

As a result, we ended the quarter with a retention rate of 114%.

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

We ended the quarter with $210 million in cash, equivalents and restricted cash, of which roughly $27 million was restricted.

Our cash flow from operations was a highlight at $8.5 million compared to negative $4.2 million a year ago, an improvement of more than $12 million.

Over the trailing 12 months, our business has generated positive cash flow from operations.

In Q1, total CapEx was $800,000, compared to almost $11 million a year ago, which included roughly $9 million in headquarters costs.

We expect CapEx and capital leases combined to be roughly 5% of revenue for the foreseeable future as we continue to finance certain data center cost under capital leases.

We achieved positive free cash flow for the second consecutive quarter, generating $4 million of free cash flow in Q1.

As a reminder, due to the seasonality of billings, Q2 is typically our weakest quarter for cash flow.

Though we will see fluctuations on a quarterly basis, we expect to generate our first full year of positive free cash flow in fiscal 2018.

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

For the second quarter of fiscal 2018, we are setting revenue guidance in the range of $121 million to $122 million.

We expect our non-GAAP EPS to be in the range of negative $0.13 to negative $0.12 and for our GAAP EPS to be in the range of negative $0.32 to negative $0.31 on approximately 132 million shares.

For the full year of fiscal 2018, we expect revenue to be in the range of $502 million to $506 million.

We expect our non-GAAP EPS to be in the range of negative $0.48 to negative $0.44 and for our GAAP EPS to be in the range of negative $1.25 to negative $1.21 on approximately 134 million shares.

In summary, we outperformed across all financial metrics in Q1 as we continued to widen our competitive differentiation through product innovation and key partnerships.

We are well positioned to maintain our rapid growth rate to deliver positive free cash flow for the full year of FY '18 and to achieve $1 billion annualized revenue run rate by Q4 of FY '21.

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

Operator?

(Operator Instructions) Your first question is from Philip Winslow from Wells Fargo.

Congratulations on a great start to the year with cash flow, billings across the board.

I really wanted to focus on the upsell of the add-ons.

I mean, you talked about a very strong attach rate of 60% of your larger deals having some of the newer products on there, and then obviously, the big deal metrics are quite strong as well.

And you talked about the -- those beings were more ECM style.

I wonder if you could just talk about sort of what do you think is driving that?

What do you see in the pipeline as you start to get into more of these sort of the ECM-style deals?

Are they replacements?

Are they extensions?

How should we think through that?

Yes.

So I think what we're generally seeing is, first of all, there's an overall kind of maturation happening of this space.

And so what's occurring is customers are recognizing that as they move more and more of their file sharing and collaboration and content management to the cloud that they're going to need to really choose a system of record for their content management.

And obviously, that's -- our whole mission is to be that leader in cloud content management.

And as customers put more data into Box and they start to use it in more structured workflows or more regulated use cases, our capabilities around document governance with Box Governance, international data residency with Box Zones or our privacy encryption solutions, Box KeySafe, start to become very, very relevant for those kinds of customers.

And so it's just aligning really nicely where the adoption of Box more broadly within organizations is also happening at the same time, where we now have a number of these new product capabilities for them to begin to use Box more of that system of record.

And additionally, what's extremely exciting is because of these solutions and because of the position we're building in cloud content management, it's actually beginning to really help customers replace and retire some of their legacy ECM systems.

So while usually, the day 1 use case of Box for a new customer coming on board, like a Komatsu or a McDonald's or a new large organization, they might start to -- first of all, roll Box out as really end-user collaboration and content management but then over time, really begin to retire legacy systems, as we've seen with examples of some large financial services firms and health care providers and life sciences providers where they're actually shutting down products, like Documentum, OpenText and others, and using Box really as their system of record.

But this is going to be a multiyear effort to really get customers to retire their legacy systems completely.

But in the meantime, they're certainly buying our additional products and rolling Box out really as their system of record for the next set of content in their organization.

The next question is from Greg McDowell from JMP Securities.

I want to dig a little bit into the pipeline generation commentary and maybe tie that to your sales hiring because I think last quarter, you discussed a little bit about a 25% increase in quota-carrying sales reps.

So if you could just talk a little bit about maybe where you are on that ramp of hiring sales people if you're ahead of that plan or on track with that plan.

And second part of the question, it just has to do with gross margins.

I know you're getting a lot of leverage on the gross margin line, and yet for the full year, we're still at 74%.

So if you could just talk through a little bit on as we model our gross margins coming down for the rest of the year sort of what are some of the puts and takes we should be thinking about on the gross margin line.

Sure.

So on the pipeline in just kind of the overall go-to-market progress, we're very bullish about the momentum we're seeing in the business, really continuing the strong trends that we are seeing particularly in the back half of last year.

So continuing on that, we are really pleased with and actually at a record quarter in terms of hiring for sales reps in Q1.

A lot of that was in the field as well as in international markets where we're seeing opportunities that are emerging especially as a result of some of the newer products that have come to market, particularly Zones, so really pleased with the progress there.

And that combined with the record pipeline that we generated in Q1 really sets us up nicely for growth and continued rep productivity improvements later in the year.

And in Q1, bookings per rep were up a little more than 10% year-on-year, so overall, very pleased with the progress we're making there.

On the gross margin front -- so there are a few puts and takes.

And again, do expect, as you noted, that to be roughly 74% for the full year.

So we talked about some of the puts and takes in the past, but we'd say that overall, some of the big drivers of that are we are going to be continuing to invest in building out the expanded data center footprint that we're now moved into.

One of the big initiatives, especially given the growth that we're seeing internationally, is to make sure that Box's performance is possible.

So we are going to be lighting up some additional -- what we call our global edge network sites to really drive that international improvement.

And we're going to be continuing to scale out those data centers I mentioned.

I would also note that our Q1 results did benefit a bit from very strong Box Consulting margins, which we don't expect to see persist throughout the year, although we do expect those margins would be positive.

So overall, again, expect the margins to be fairly stable throughout the year, although they may move around a bit but kind of settling in around that 74% rate for the year.

Your next question is from George Iwanyc from Oppenheimer.

Dylan or Aaron, would you give us a sense of competitive environment, what you're seeing like -- for a like-for-like basis on pricing?

Yes.

So on the pricing specifically, that continues to be very stable, has trended over the past several quarters now on average at about $100 per user per year.

We actually saw that quite a bit higher in Q1.

That's largely due not just because of the really strong attach rate of some of our newer products but also because due to seasonality.

We typically don't see many very large deals associated with volume discounting versus Q4, for example, but overall, as it relates to the competitive environment, hasn't changed at all as it relates to the pricing dynamic.

Okay.

And I know it's a really slight increase, but was there anything unusual with the churn that you saw this quarter?

No, nothing too unusual.

We've been trending to get the kind of 3% rate tick up a bit to 3.5%.

One of the dynamics that we do see, a slightly higher churn rate in deals that are sold through our resellers, and as that becomes a more substantial part of our business, that has a bit of an impact.

And then we also did see a bit of an increase in M&A activity in our customer base, and that, in some cases, does lead to churn as well, so no kind of material drivers but a couple of little things that combined to have that kind of tick up from about 3% to about 3.5%.

Your next question is from Melissa Gorham from Morgan Stanley.

This is Josh Baer on for Melissa.

Have the adoption trends and use cases of Box Platform changed over the last year?

And have you seen any impact from the recent changes in pricing?

Or how do you expect that the pricing changes will impact adoption of Box Platform?

Yes.

So this is Aaron.

We -- when we first initially started to monetize Box Platform, we did so purely on the dimension of the number of active users, the number -- and the number of kind of app users that the customer was utilizing on the platform.

And that solved for a set of use cases that we had seen in the customer base that were super-powerful, like health care providers or financial services providers that wanted to create external portals or external applications for their client base.

And we continue to see healthy adoption of Box Platform for some of those use cases, and it's still something where we're rolling that out into the customer base.

We did want to update our pricing model though to be supportive of a broader range of use cases.

So if a client wanted to just replace some of their legacy enterprise content management capabilities and use Box as a back-end system for some of the applications that they had developed, we wanted to ensure that there's a little bit more flexibility in the different ways that Box was able to be supporting those use cases.

And so we're moving over time to a little bit more of a broader usage or a resource-based pricing model that will support all the varied use cases that our customers have, especially those where they're replacing legacy content management systems with Box, so we can support that broader range of use cases while at the same time, we're actually still seeing some really kind of great examples of that same user-based pricing model be very powerful for a number of customers.

We're working with a large financial services firm right now that's working on a customer-facing financial advisory experience.

We are seeing that example really kind of be replicated across the financial services ecosystem and in a number of other industries as well.

So I think we're going to continue to see pretty healthy use cases across a very wide spectrum of applications being built.

Your next question is from Mark Murphy from JPMorgan.

Dylan, I think you had commented that the deferred revenue growth was once again impacted by an enhanced developer access fee from one of your partners.

Just curious, I think that's happened a couple of times now.

Is that maybe becoming more of a sustainable trend?

And could you just comment on the magnitude of that amount?

And I'm curious whether that landed in the current deferred revenue or the long-term deferred revenue.

Sure.

So it's the same kind of fee that was -- that we called out on our Q4 call as well so it is a recurring note where we're not recognizing all of the revenue in the period, which is why it's still sitting in deferred revenue and it is short-term deferred revenue, again kind of as a reminder -- it's basically that a good partner of ours is using our platform to develop products for their customers.

So that shows up in both backlog and deferred and we call that -- it's a fairly large transaction with respect to the magnitude.

It's kind of in the mid-7-figure range, and that was sort of baked into our expectations as we have some pretty good visibility heading into the year with respect to how that was going to play out this year.

Okay.

And as well on the -- you commented on the deferred revenue.

The drawdown in the current deferred revenue was a little larger than I maybe would have expected.

Just comparing it to prior years, it was drawn down by about $20 million.

I'm just curious what was the underlying dynamic there.

And do you think that, that would bounce back to a more seasonal kind of sequential growth rates in fiscal Q2?

Sure.

So it was largely just due to the seasonality or the trends we're seeing, with Q4 typically being our strongest billings quarter and Q1 being the weakest seasonally.

And short-term deferreds were up by 34% year-on-year, so actually a higher growth rate than our overall deferred revenue, which was up 30% year-on-year.

But yes, we would expect the same types of trends that we've seen in past years with respect to the sort of seasonality and growth of deferred revenue throughout the year.

Okay.

And then the last one, Aaron, I wanted to ask you regarding the Fujitsu partnership.

Is there any way to compare and contrast that to the IBM partnership at this point of time just in terms of how quickly it's ramping?

And I think many of us are just curious whether you think that Fujitsu partnership has potential to be as successful in Japan as IBM has been in the U.S. and elsewhere.

Yes, I think it's -- so we're using the -- we've been incredibly happy and found the IBM partnership to be very effective and successful in terms of growing especially in markets where we don't have people on the ground or the same level of relationship with the client as IBM.

And so we've -- IBM is a little bit different in that there is so much technology that we're either embedding into or kind of codeveloping with them, but we are taking the kind of template of success that we saw with IBM and trying to bring that to other major strategic partners in different regions all around the world.

So I think that there are a lot of similarities in terms of how we're going to execute and go to market with Fujitsu to IBM.

I would also note that in Japan, we already have a lot of success with our channel ecosystem broadly.

It's a very kind of channel-oriented environment, and so the very sort of core way that we go to market within Japan is largely through channel partners with our own set of individuals that are sort of experts in the sales process.

So I think we would expect to see Fujitsu as just one of the largest kind of Japanese partners that we work with in going to market over time.

And so we're learning from the IBM partnership on a global basis, but we also have success that we can replicate within Japan specifically.

And I think what we kind of touched on briefly is overall, across the international markets that we're serving, we are seeing just really, really exciting opportunities that had -- when we look at Germany, when we look at Australia, when we look at Canada, Japan, broadly throughout Europe, we are seeing a lot of interest and excitement around Box.

And so I think you will see us have these sort of regionally specific partners that do help us sort of accelerate growth in these regions as appropriate.

The next question is from Rob Owens from Pacific Crest Securities.

This is Mike Casado on for Rob.

Can you provide some more color on any Box Relay traction as it comes out of internal beta?

Yes.

So it's still pretty early in terms of how it's rolling out.

I think we've wanted to get a little bit earlier, but we have no kind of revenue associated with that.

So there's no impact from a guidance standpoint, but we're certainly -- we were looking forward to kind of accelerating the feedback that we see with customers.

I'd say the excitement and interest in the product is pretty overwhelming.

So it definitely represents a pretty clear direction that our customer base wants to see us go into.

So as we are more and more the system of record for enterprise content within an enterprise, they really want to ensure that they can secure and manage and organize and govern as well as drive the workflows around that content.

And we were really pleased to see the level of interest and excitement when we both announced the product as well as we're starting to expand into the beta program.

And we'll certainly keep the market pretty clear on the updates from that as it continues to roll out broadly, but we'll certainly share more in the next earnings call in that front.

Aaron, and then just given the recent announcement...

And then maybe actually if I can just add one more quick thought just for helpful context also.

I think what we have seen in the process of both building out Box Relay and talking with customers, there is really a dearth of modern workflow systems that deal with the range of sort of content and use cases that we're solving for with Relay.

So the vast majority of enterprise workflow technology around content, whether that's invoice processing, whether that's HR onboarding, whether that's contract review really [was] in legacy systems that aren't working for customers.

So I think we will see this as a pretty significant market opportunity and kind of potential for more growth over time.

So we're pretty excited about that.

Aaron, and then just given the recent announcements middle of the month out of Microsoft on SharePoint at their summit and all of your recent announcements with Microsoft integration enhancements, where do we stand, I guess, in terms of the core functionality for Office 365 users that tend of prioritize the Microsoft productivity suite?

Yes.

So obviously, Microsoft is a very significant partner of ours when you look at all of the applications and user interfaces that either interact with content or deal with communicating around content with Microsoft Outlook or Microsoft Office.

At the same time, they do have some products that are marginally, in some cases, competitive with Box; in other cases, more so.

And I think we have a fundamental different sort of view of how companies need to manage their information and content in the cloud or digital era.

We think that enterprises need a single source of truth for their enterprise content, whereas I think other providers in this market are building more siloed solutions or fragmented solutions depending on the use case.

So in the case of Microsoft, there is SharePoint, which is really for enterprise content management and team site.

There is Microsoft OneDrive, which is really for personal file sharing and file synchronization.

There's Microsoft Teams, which is really for team collaboration.

Each of these products sort of service out of use cases in their own right.

But when we work with customers, they're really looking for a single place to be able to secure, govern, manage, organize and work with their information.

And they want that content to be connected into the different applications that they're using.

And I think importantly, they want that platform to be neutral so it can work across all the different applications and experiences that they're using.

So obviously, we see phenomenal adoption of Office 365.

It's probably the single most adopted product alongside Box in our enterprise customers.

At the same time, when you expand out the aperture of all the applications our customers are using, there's products from Slack.

There's products from Salesforce.

There's now products from Facebook, obviously IBM, Amazon, Google and others.

And so our job is to really be an open platform that connects to all the different applications and experiences that our customers are using.

And we've always found that the large enterprises that we're working with and certainly even beyond that are looking for a neutral, best-of-breed platform for cloud content management.

And that's what's been driving the growth of the business.

And we're going to remain as competitive as we can in terms of just driving the innovation of our products and our platform while still making sure we have a great relationship and great set of partner integrations with Microsoft.

The next question is from Brian Peterson from Raymond James.

So I just wanted to hit on your channel partnership efforts where you really had a lot of success.

If you think about the sales cycles for those -- broadly or those deals broadly, how are those compared to maybe 6 to 12 months ago and versus your expectations?

Yes.

So we've seen a lot of consistency in terms of the sales cycles.

I would say that a little bit of it depends on the nature of the deals.

So for example, there are some cases, just to use IBM as an example, where there -- they might have an ELA that they are negotiating with a customer and then in the final months or stages of that negotiation, Box is brought in and fills a critical need for the customer, and those deals materialize fairly quickly.

But otherwise, I would say that both over time as well as relative to our direct sales efforts, we generally see a lot of consistency in terms of what those buying cycles look like.

And in most cases, we are pretty involved in those sales cycles as well, whether it is an opportunity that's being generated by one of our resellers directly or generated by the Box team that then leverages the partner in some way to help get that deal across the finish line.

We tend to stay pretty close both to our partners and to those prospects when closing those deals.

So we see pretty traditional selling cycles, whether that's an inside deal or in the field.

Got it, Dylan.

And maybe one more from me.

Just on the outperformance this quarter, was there 1 -- I mean, obviously, there's a lot of factors, but any 1 or 2 things that you'd call out specifically?

And if I think about the $2 million to $3 million in upside this quarter, how should we think about that relating to only a $2 million increase to the guidance for the fiscal year?

Sure.

So on the Q1 performance, I would say driven by largely very strong growth just in a lot of those large deal outcomes, so our 6-figure deals growing roughly 50%, booking 25 of those versus 17 a year ago, including a couple of $500,000-plus deals versus none a year ago.

So those certainly helped and in especially, those larger transactions, selling much more comprehensive set of solutions than we had in the past.

And that shows up in some of the newer product attach rates.

I'd also call out international growth as being a pretty strong contributor.

So that's been above 20% of new bookings for the past several quarters now and was particularly strong in Q1 with a couple of our largest transactions coming internationally, and then finally saying just overall rep productivity increases across the board, mentioned bookings per rep going up by a little more than 10% year-on-year so that combined with the rate in which we've been growing the sales force, although a lot of those directs that we've hired this most recent quarter aren't contributing a lot to the business.

All of those factors were probably the biggest drivers of that outperformance.

And then in terms of kind of looking forward, just as a reminder, again, as much as we're very confident because the growth in that sales capacity as well as the record pipeline that we generated in the quarter, most of that pipeline as well as for when we expect most of those reps to really start contributing to the business are going to come later in the year, so one of -- as large of a revenue impact in FY '18.

We feel pretty good about the guidance for the year and raising guidance to that $502 million to $506 million range.

And certainly, if some of these factors that led the outperformance in Q1 continue, we feel pretty good about the growth prospects for the remainder of the year.

The next question is from Kash Rangan from Bank of America Merrill Lynch.

One question I had for you was what is the play, in your opinion, to make this more of an enterprise-wide play.

And granted, you continue to score deals with large enterprises.

One of the trends in this industry has been that the deployment sizes tend to be generally small.

However, as you look at a company like a Workday or whatnot, the wall-to-wall Workday, human resource automation, what, from your perspective, does the company need to do or to educate the market that this can actually be an enterprise-wide, wall-to-wall type of proposition?

And I was curious when I heard you talk about the usage-based approach doing deals as opposed to user base.

Do you think that's what it takes to make this more of an enterprise-wide play going forward?

Yes, great.

This is Aaron.

On the -- just one thing to clarify.

On the usage base, that was -- I think, as you know, that was specific to our platform pricing.

And so we -- no change obviously to the core user-based model for the core product, which will continue to be a seat-based pricing model.

But I just wanted to make sure to point out that clarification where the platform pricing is really just to expand the number of use cases of people being able to buy API licenses not on Box.

On the enterprise-wide point, it's a really great question.

It's something that we certainly are trying to drive through the business.

We have incredible examples, companies like General Electric and Coca-Cola and many others, where Box is really seen more as an enterprise-wide content management and collaboration platform within both the employee base as well as powering some of the more critical business processes.

At the same time, we benefit from the fact that Box can be deployed unlike some enterprise-wide SaaS companies where we can be deployed for specific departments or groups within an organization.

So on one hand, we have this huge benefit where a marketing team can start using Box, and then over time, we can expand that to the entire customer base or the entire employee base or can be -- start being used up by the sales team and then overall -- over time expand to the entire organization.

I think the single biggest thing that describes the difference between environments that are just using us in some set of departments versus company-wide is really our relationship and our strategic position within the sort of senior IT leadership of the organization all the way up to the CIO.

And so where we have great CIO sponsorship and where we have great IT leadership sponsorship, we tend to be see -- we tend to see that they think of Box as really an enterprise-wide solution and system of record.

In areas where we are working in more functional areas or within departments, we sometimes can remain there until we obviously broker that broader relationship.

So it's something that we're training and more broadly deploying throughout our sales organization, our marketing and engagement efforts, but we have 74,000 customers.

So that represents a pretty significant opportunity to go out and expand with those customers over time, but it is absolutely mission-critical that our entire customer base does start to see and deploy Box throughout their entire organization, but we see that as major upside within our business model right now.

The next question is from Aaron Rakers from Stifel.

This is Joe Quatrochi on for Aaron.

Just a quick question.

In terms of the hiring activity, I know you talked about a record level of sales adds this quarter.

How do we think about the linearity throughout this fiscal year?

Yes.

So I would think about it generally as being fairly linear.

We do see and have seen over past years kind of some quarters being stronger than others.

Typically, in Q1, just as reps kind of close up their year, there tends to be more movement in terms of reps coming onboard just based on the kind of comp plans and all of those things but don't see a huge difference between the other quarters, typically slows a little bit in Q4 for that same reason as most companies being on either calendar, fiscal year or January 31 fiscal year-end.

A lot of the -- especially reps in the field will be working on some pretty large transactions later in the year so they want to kind of close those out.

So while there's a little bit of seasonality in kind of the early part of and later part of the year, what we've seen in past years is that doesn't have a huge impact on the seasonality.

So we will continue to kind of give progress in terms of how we're doing on the overall kind of company headcount growth as well as [A heads] and productivity, and then we'll break out the specifics and what we're seeing in the markets at the end of the year.

Okay.

That's helpful.

And then just a quick follow-up for Aaron.

What are the -- talk about the opportunity that you see for KeySafe for government.

I think you guys had announced the SRG Level 4 recently.

Just curious of the opportunity there.

Yes.

So we are seeing actually pretty strong government traction that was really kind of catalyzed by our initial FedRAMP certification that came last year.

And what we're seeing is over time, there's more and more -- both levels of classification that we can get to as well as additional security functionality.

So in the example of KeySafe, that's really about letting our government clients manage their own encryption keys within Amazon's GovCloud facility, which is super important for highly sensitive content that goes through federal agencies.

So we see a pretty significant opportunity within the federal government.

The use cases are quite similar to what we see within the private sector, so a lot of collaboration between departments externally with different constituencies, a lot of need for obviously secure content management to protect pretty mission-critical data.

So we see that as a pretty big opportunity across both civilian as well as defense agencies but we -- more broadly, as we kind of expand the aperture, this is just a part of our overall effort to make sure we're building the most secure and compliant cloud content management system.

So as we look at industries like life sciences, health care, international data residency requirements as well as international governance, we are looking to build the broadest portfolio of both certification as well as compliance capabilities that allow any customer anywhere around the world to be able to deploy Box.

So very broadly, we see regulated industries and companies or organizations of highly sensitive information requirements and security requirements as a massive opportunity for Box.

(Operator Instructions) The next question is from Brian White from Drexel.

Aaron, how is Box thinking about AI capabilities in your product portfolio?

Is this something you can develop internally?

Or are you going to need some acquisitions in this area?

Yes.

We are incredibly excited about the opportunity for AI very broadly within the enterprise.

But specifically, certainly within our context, if you think about how much information Box manages for our customers, all of the different workflows, all the different ways that content is interacted with, all the amount of information that's in Box where customers today can't search or discover because it's unstructured data like images and videos and audio content, we see an unbelievable opportunity for AI to increase the productivity of our users and help provide the insights around information that wasn't otherwise discoverable through manual processes or were so just inefficient or cost-prohibitive to do it without artificial intelligence.

So I think throughout this year, you're going to start to see both product announcements as well as more direction from a road map standpoint that really brings intelligence into Box.

I can't mention many of the specifics right now, but we think this is going to be fundamental to the future of our company and our product.

And the really exciting thing is that some of our biggest technology partners, companies like Google, Microsoft, IBM and others, are some of the biggest providers and developers of the technology where we can plug certain capabilities into Box and provide sort of a force multiplier for our customers, leveraging some of those capabilities.

So we're very, very excited about what this is going to mean for our product and for our customer base, and we think it can truly transform the way that people and organizations are working with their information and working together.

And we expect to have some exciting updates throughout this year on this front.

And any takeaway here from the Facebook relationship and where you see this going?

I mean, can this be an important opportunity from a financial standpoint or just expands into another ecosystem?

Yes.

I think core to our mission, we have to be everywhere, where users are looking to access or share or work with their content and their information.

We can't be a cloud content management platform for customers if their data is in lots of different silos and not able to be secured and governed within Box for all the different applications that they're working with.

So sort of just the fundamental premise of our entire company is that we need to integrate with the different applications that our customers are using.

So with that said, I think Facebook does represent a new set of use cases that enterprises didn't necessarily have before with modern sort of cloud-based experiences and in this case, communication and sort of social networking within the enterprise in a very broad, consumer-oriented way.

So we're excited to be the -- one of the leading options for managing content within that Facebook experience.

I don't think that we would ascribe a specific financial kind of measurement to that as much as ensuring that any customer that's using Facebook Workplace is choosing to use Box as their cloud content management platform that's embedded into Facebook.

So that's really how we think about that just as we do with any of our other partners that we're working with.

There are no further questions at this time.

I will turn the call back over to Stephanie Wakefield for closing remarks.

Thank you for joining us today.

We look forward to speaking with you again next quarter.

And if you have any questions in the meantime, please feel free to contact us here in Investor Relations.

We're happy to help.

Thank you.

This concludes today's conference call.

You may now disconnect.