Box Inc (BOX) 2019 Q1 法說會逐字稿

Good afternoon.

My name is Christine, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Box First Quarter Fiscal 2019 Conference Call.

(Operator Instructions) Thank you.

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

Good afternoon, everyone, and welcome to Box's First Quarter Fiscal 2019 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 FY '19 financial guidance and our expectations regarding our financial performance, including revenue and billings for the remaining quarters of fiscal 2019, timing of end market adoption of our products, our market size, our operating leverage, our expectations regarding 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 timing and benefits from our new products and partnerships.

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

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

These forward-looking statements are being made as of today, May 30, 2018, and we disclaim any obligation to update or revise these -- revise them should they change or cease to be up to date.

In addition, during today's call, we will discuss non-GAAP financial measures.

These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our GAAP results.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website.

Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.

Also, please note, we updated our financial disclosures to reflect our adoption of the new ASC 606 revenue recognition standards under the modified retrospective transition method.

Please refer to our press release and the supplemental financial deck on our Investor Relations website for a reconciliation of our financial results under ASC 606 compared to ASC 605.

With that, let me hand it over to Aaron.

Thanks, Alice, and thanks, everyone, for joining the call.

We had a solid start to fiscal 2019.

We landed wins and expansions with leading organizations like the Coca-Cola Company, DARPA, Blackboard and Dignity Health and in Q1 with more than 85,000 total paying customers globally.

We generated strong cash flow from operations of $18.4 million and positive free cash flow of $7.3 million, demonstrating our focus on profitability.

Revenue was $140.5 million, up 20% and ahead of our guidance, and billings grew 17% year-over-year to $116.7 million.

As we discussed last quarter, our focus is on driving deeper, more strategic relationships with our customers, resulting in higher growth and big deals.

In Q1, we closed 35 deals over $100,000 versus 26 a year ago; 4 deals over $500,000 versus 2 a year ago; and 1 deal over $1 million in line with a year ago.

Importantly, our new products continue to drive growth with new products attached to 2/3 of our 6-figure deals.

When you look at the wide range of industries and size of companies adopting Box, it's clear that our cloud content management strategy and our vision for artificial intelligence is resonating.

We are primed to power the digital workplace of the future for the world's largest and most regulated enterprises.

To achieve this vision, we continue to make great progress on our 2 major objectives: number one, innovating in cloud content management to power our company's work and run in the digital age and advancing our global go-to-market efforts so we can reach more enterprises around the world and make them wildly successful with Box.

Starting with product innovation, we made several enhancements to our product portfolio that support our continued differentiation and leadership in cloud content management.

Looking first at our core content management and collaboration experience, Box Drive became generally available in Q1.

Box Drive offers an extremely simple way to stream all of your files in Box right to your desktop, eliminating the need for legacy on-premises network file shares.

And to make working with Box and other productivities as -- productivity tools as seamless as possible, we kicked off the beta for our new Google Suite integration and the general availability of our new integration with iWork, Apple's productivity suite.

Box now integrates with all of the major productivity suites, including Office 365, ensuring that Box is the secure content layer underlying the work employees are doing and the tools of their choice.

We're also seeing significant demand from our customers to automate business processes around their content.

Workflow is becoming a large part of our value proposition and addresses additional use cases for the ECM market.

Beyond our Workflow product, Box Relay, codeveloped with IBM, we are excited to develop additional automation features that streamline repeatable business processes for customers within Box.

Moving on to our advanced enterprise-grade security and compliance capabilities, we introduced several updates to help even the most regulated industries move to the cloud.

For our administrators, we released our new Box Admin Insights Dashboard, which now offers visibility into key collaboration and security insights such as where people are working, how they're collaborating on content and what other integrations they use to work with Box.

We also released metadata-driven retention as a part of Box Governance, giving enterprises increased flexibility and control over their data and enabling them to transfer -- transform their governance strategies.

Box Governance was included in over half of our 6-figure deals and continues to be our most popular add-on product line.

We also continued to gain traction with Box Zones.

Last week at Box World Tour Europe in London, Jeetu and I announced multi-zone support for Box Zones to 500 customers at the event.

Now global organizations have the ability to store data in and collaborate seamlessly across any of Box's existing 7 zones.

Our customers at Box World Tour expressed significant enthusiasm for the new multi-zone storage capabilities, especially in light of GDPR, which took effect last week.

With these regulatory changes and an ever evolving security landscape, the demand for security and compliance in the cloud will only continue to grow.

Products like Box Governance and Zones or KeySafe for encryption help protect information, keeping our customers secure and compliant in nearly every industry while driving the success of our multi-product strategy.

In addition to helping our customers with GDPR readiness, our support for regulations and compliance such as GxP, HIPAA, FedRAMP and European Binding Corporate Rules continue to be significant differentiators for Box.

Overall, our Workflow and collaboration capabilities, clear security and compliance advantages and our new products continue to drive demand for Box from the most regulated industries.

This past quarter, for example, we closed a deal with DARPA, who will be leveraging Box to collaborate on projects with their global research agencies.

We also won a 7-figure deal with 1 of the world's largest banks in South America in partnership with IBM.

The bank purchased Governance and KeySafe in addition to taking advantage of our integrations with Salesforce, IBM Services and Office 365.

Lastly, our neutral and open platform architecture allows us to partner strategically with a wide range of technology partners and leverage their advanced innovation.

Nowhere is this more important than in the application of AI and machine learning with Box Skills.

Box Skills is unique because it allows customers to mix and match different AI capabilities from a variety of our partners like IBM, Google and Microsoft to ensure that they get the most value from their content when it's in Box.

For example, a video file can be automatically transcribed and augmented with indexing and sentiment analysis simultaneously with each skill coming from a different partner.

Demand for Box Skills has been strong as we have hundreds of customers signed up for the beta.

We're also in a private beta for Box Skills Kit, which enables third parties and Box customers to develop their own custom skills to power specific business processes.

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

As we've said before, our focus is on growing average contract value, driving deeper relationships with our customers and adding new logos through international growth in our partner ecosystem.

To help grow average contract value, we're focused on more strategic solution selling.

In Q1, we had well over 60% growth year-over-year of new product sales, reflecting the changes we made to our sales compensation to prioritize solution sales that include multiple products.

We are also seeing higher attach rates for new products in our pipeline as our strategic solution sales motions start to gain real momentum.

Q1 was another strong quarter for Box Consulting.

As Box becomes a broader platform for enterprises, our aim is to be a trusted adviser in helping our customers transform their digital workplace and digital business processes.

And Box Consulting, including our new service, Box Transform, will be critical in leading the charge.

In Q1, The Coca-Cola Company purchased Box Transform to drive implementations of advanced cloud content management use cases and projects across their organization.

Box Consulting also is supporting Coca-Cola as the company integrates Box into business processes and key applications.

As for international, we saw significant growth and strength in Japan with major wins like Mitsubishi Motor Corporation, Hitachi Technologies and one of my personal favorite brands, Pokémon.

Finally, our reseller, channel and technology partners are a critical component of our go-to-market strategy.

In Q1, we better aligned our internal teams to achieve greater leverage from our partnerships.

With IBM in particular, we closed 6 $100,000-plus deals.

Mitsubishi Motors Corporation was sold through IBM and is deploying Box as a part of its digital transformation strategy.

And looking ahead, we expect to broaden our joint innovation with IBM further, extending beyond our codeveloped product, Box Relay, to work together on several Box Skills and custom solutions powered by IBM Watson.

With Fujitsu, while still early, our reseller partnership expands our reach in Japan, and as we announced earlier this month, in Q4 of last year, Box was deployed to more than 80,000 Fujitsu employees globally.

Earlier this month, we joined with Workplace by Facebook and Okta to form the Future of Work Council, along with a group of leaders and enterprises like American Express, NIKE, Pfizer and Farmers Insurance, who are focused on rethinking the culture, skills and technology required for the digital workplace.

Our inaugural meeting was a huge success, and we're thrilled to be working with some of the most innovative enterprises in the world on defining the future of work.

This August, we will also share our vision for the future of work and showcase our latest product developments and strategy at BoxWorks.

This year will be another incredible event with speakers including Patty McCord, author and former Chief Talent Officer at Netflix; Stewart Butterfield, CEO of Slack; and Jensen Huang, CEO of NVIDIA; as well as IT leaders from Morgan Stanley, NASA and SunTrust Banks and many more.

Before we conclude, we're excited to announce that we have appointed Sue Barsamian to our Board of Directors.

From her leadership roles, including Chief Sales and Marketing Officer at HPE Software and VP global go-to-market at Mercury Interactive, Sue brings a wealth of experience that centers around enterprise software sales and global go-to-market strategy.

As we scale, we will continue to add board members in the areas that are critical for our business.

To wrap up, we are excited about the future of cloud content management, and as we grow into a $1 billion revenue company and beyond, we are putting the right building blocks in place to ensure that we grow with strong economics.

The market for cloud content management and collaboration is more than $40 billion.

And by continuing to innovate on core Box products, expanding our partner ecosystem and building strategic relationships with our customers, we're in a tremendous position to help enterprises in every industry transform in the digital age.

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

Thanks, Aaron.

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

As Alice 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.

Also, having adopted ASC 606 for this fiscal year under the modified retrospective transition method, all Q1 year-over-year comparisons are made against Q1 results a year ago, which were under ASC 605, unless otherwise stated.

In Q1, we drove solid top line growth while also delivering significant cash flow improvements and driving operational efficiencies.

We achieved revenue of $140.5 million in Q1, up 20% year-over-year, which would have been roughly 2% higher using like-for-like comparisons under ASC 605.

24% of Q1 revenue came from regions outside of the United States compared to 22% a year ago.

This quarter, 40% of our 6-figure deals came from international markets with particular strength in Japan, demonstrating our increasing global penetration and market opportunity.

First quarter billings came in at $116.7 million, representing 17% calculated billings growth year-over-year and 14% growth year-over-year when adjusting for billings payment durations.

If we look at our billings without any impact from the enhanced developer fee, year-over-year billings growth would have been in the low 20% range compared to the reported 17%.

As Aaron mentioned, our deeper focus on solution selling in Q1 has been yielding positive initial results.

We're seeing higher new product attach rates in our pipeline associated with increasingly robust Box implementations.

While it's still early in the year, given what we're seeing in our current pipeline, we expect many of these larger deals to close later in the year.

As such, we expect Q4 billings to come in a couple of points higher as a percentage of total FY '19 billings relative to last year's billings distribution.

Deferred revenue was strong at $287 million, up 28% year-over-year, which includes a headwind from the adoption of 606 of roughly 3%, driven mainly by the enhanced developer fee.

As Aaron noted, we continue to win large enterprise deals, including 35 deals over $100,000 in annualized contract value versus 26 a year ago; 4 deals over $500,000 versus 2 a year ago; and 1 deal over $1 million in line with the year-ago quarter.

Of these 6-figure deals, 2/3 included at least 1 new product, and our partners played a role in more than 50% of our 6-figure deals, of which 6 were attributable to IBM.

In addition, to highlight the recent traction in our professional services business, we closed 9 6-figure Box Consulting transactions versus 5 a year ago as we're seeing strong early adoption of Box Transform and increasingly strategic engagements with our enterprise customers.

Turning to margins.

Non-GAAP gross margin came in at 74.4% versus 74.5% a year ago and 76.2% last quarter.

As planned, we're making some upfront investments in our data center footprint this year based on the demand we are seeing, and we expect gross margin this fiscal year to be in the 73% to 74% range.

We saw continued strength in our price per seat outcomes in Q1, coming in well north of $100 per user per year.

Q1 was another successful quarter of driving operational efficiency, generating leverage across all areas of the business.

Sales and marketing expenses in the quarter were $68.9 million, representing 49% of revenue, an improvement from 54% in the prior year, which includes a roughly 2% benefit related to the adoption of ASC 606.

The ongoing cost to support our free user base, which is a sales and marketing expense, came in at just under 3% of revenue in Q1, an improvement from roughly 4% in the same quarter a year ago.

We now have 59.9 million registered users, of which 10.4 million are paid.

Next, research and development expenses were $28.1 million or 20% of revenue, down from 21% a year ago, even as we made significant enhancements to our products, including the continued development of Box Skills and the general availability of Box Drive.

Our general and administrative costs were $16.8 million or 12% of revenue compared to 14% in Q1 of last year.

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

Our focus on operational efficiency drove our Q1 non-GAAP operating margin to a solid 7 percentage point improvement year-over-year coming in at negative 7% versus negative 14% a year ago.

As a result, non-GAAP EPS came in at negative $0.07, an improvement from negative $0.13 a year ago and above the high end of our guidance.

One of the key elements that makes our business model so powerful is our strong customer retention.

Our full churn rate was roughly flat with Q4 and remains best in class at 4% on an annualized basis.

Our net expansion rate was 13% primarily driven by strong seat growth in existing customers and cross-sells of our newer products.

As such, we ended the quarter with a retention rate of 109%.

As we've discussed previously, we continue to see larger initial deployments as well as a higher contribution of new sales coming from new Box customers, particularly in international markets.

These trends create downward pressure on our net retention rate, but set us up nicely for future growth.

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

We ended the quarter with $217 million in cash and cash equivalents.

We delivered very strong cash flow from operations of $18.4 million versus $8.5 million a year ago.

In Q1, total CapEx was $4.0 million versus $800,000 a year ago, and capital lease payments were $7.1 million versus $3.7 million a year ago.

Roughly $3.2 million of this CapEx was related to facilities build-outs.

We still expect CapEx and capital lease payments combined to be 6% to 7% of revenue for the full year of FY '19.

Finally, we generated $7.3 million of free cash flow in the first quarter, an improvement from $4 million a year ago.

As a reminder, we deduct capital lease payments in our free cash flow calculation.

With that, let's now turn to our guidance, which we are providing under ASC 606.

For the second quarter of fiscal 2019, we are setting revenue guidance in the range of $146 million to $147 million.

We expect our non-GAAP EPS to be in the range of negative $0.06 to negative $0.05, and for our GAAP EPS to be in the range of negative $0.28 to negative $0.27 on approximately 141 million shares.

For the full year of fiscal 2019, we expect revenue to be in the range of $603 million to $608 million.

We expect our non-GAAP EPS to be in the range of negative $0.19 to negative $0.16.

Our GAAP EPS is expected to be in the range of negative $1.07 to negative $1.04 and reflects the recent increase in our stock price on approximately 140 million shares.

Before I conclude, I want to remind everyone of our annual user conference, BoxWorks, taking place on August 29 and 30.

As in prior years, this conference will have an impact on sales and marketing expenses in Q3 of roughly $8 million, in line with last year.

We expect to experience our typical non-GAAP EPS seasonality, and we remain committed to delivering our first quarter of non-GAAP profitability this year.

Please also note that our Q2 earnings announcement will be on Tuesday, August 28, and we will be hosting an Analyst Day session, including Q&A with our executives, at BoxWorks on August 30.

In summary, Q1 was a solid start to the year, demonstrating strong bottom line improvements and continued momentum in our new product and international sales.

Our large market opportunity and enterprise focus position us nicely for long-term growth on our path to $1 billion and beyond.

Before we take questions, I'd like to thank Stephanie Wakefield for everything she's helped us accomplish in leading our IR function with Alice Lopatto over the past couple of years.

Stephanie will be moving on from Box and spending more time with her family.

We're excited to announce that Alice, who has been driving Box's IR efforts since before our IPO, will be taking on Box's Head of IR role going forward.

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

Operator?

(Operator Instructions) Your first question comes from the line of Rob Owens from KeyBanc Capital Markets.

Wanted to focus a little bit on the velocity business.

Clearly, with the solution selling, you guys are able to show pretty good metrics on a year-over-year basis with regard to larger deals.

But if I look at customer acquisition at roughly 3,000, and I realize that these numbers have rounding, but it's roughly flat with where it was on a year-over-year basis.

And so just curious kind of where the velocity business is and how customer acquisition is trending overall.

Yes.

This is Aaron.

I think the -- from a velocity standpoint, we still consider it to be a really core part of our business model.

It provides a smoothing effect.

From a revenue standpoint, we still see pretty strong retention rates for our smaller business customers although, obviously, the retention rates are a little bit lower than the larger enterprise segment.

But we consider it to be still very strategic to be able to have businesses of all sizes as a part of Box.

What we are trying to do is drive up the efficiency of serving the small businesses, so you're going to see continued -- just focus on ensuring that our online channel, self-service channels and experiences are as efficient and powerful as possible, and that will continue to lower the cost of sale.

But we are certainly spending more of our sales rep time, whether that's in the commercial segment of small businesses or the enterprise segment in the field, on selling larger and larger deals, which will have the effect of growing our contract values among these segments, but not necessarily increasing the logo volume as considerably on a year-over-year basis.

So we expect still a pretty good run rate of new logos coming in, but the bigger focus is on contract value via selling additional add-on products and selling more seats to those customers.

So I think we're happy about the current volume we're seeing, and it's now really all about making sure that we're doing bigger and bigger deals amongst all of our segments.

Great.

And then with regard to churn and renewal rates and understanding Dylan's comments around some of the pressure you see with some of the international deals, can you talk about when that effectively anniversaries and maybe flattens out or starts to move the other way based on what's in the model?

Sorry.

So to clarify, when you say the renewal rates on international deals...

No, I'm sorry.

The increased churn overall since modestly increasing and you've seen a little bit of degradation then in your net renewal rates.

So talk about maybe when those things start to anniversary and move the other direction.

Sure.

So as we highlighted throughout last year, that's really where we saw a pretty healthy uptick in the international business, and so a lot of those contracts and customers are going to be coming up for renewal throughout the course of this year.

And so -- and that's really kind of we continue to see the trend of larger initial deployments and a higher percentage of new bookings coming from new customers, which is what creates that downward pressure you're mentioning.

One thing I would note is that our overall net retention rate is a trailing 12-month metric.

So we do have pretty good visibility into that metric, and we are seeing it stabilize in the current period.

So we feel pretty good that, over the medium term, that that net retention rates should stabilize in the 108% to 110% range based on what we're seeing in the business today.

Your next question comes from the line of Melissa Franchi from Morgan Stanley.

Aaron, you talked about the increased focus on cross-selling and you gave a few metrics that highlight you're seeing some traction so far in Q1.

Just wondering if you could maybe drill down on some of the initiatives that you've implemented, thus far, this year that's helping you drive that better cross-selling opportunity.

Yes.

So the cross-selling is obviously pretty core to our focus right now and is much more aligned with the solution sales orientation of where we're taking the sales efforts, so being able to help a customer not just with the secure storage and sharing and collaborating around their content but ultimately, the full content management life cycle.

So everything from information governance to international data residency to, obviously, our Workflow solution with Relay.

So that's the overall strategic push, and this year is obviously -- that is the single biggest focus that we have as a company this year.

Some of the efforts that we're driving, we've had some sales compensation changes that better incentivize our multi-product selling.

We have done a much greater degree of integration between our marketing, our sales and our customer success efforts, and we're going to continue to see even more of that as we drive this multi-product strategy.

We're driving more bundling of our solutions.

So being able to go into a customer and have that complete conversation either right upfront or at least via an upsell path oftentimes at renewal.

So I think we have a handful of initiatives that are really driving the year-over-year growth in add-on product sales, and then that's converting into the volume of big deals that we're closing or large deal segments of $100k and $500k plus.

And so really, it's compensation, bundling and ensuring that we are more integrated in our go-to-market execution than we ever have been.

Your next question comes from the line of Richard Davis from Canaccord.

So one of the things that's interesting with a content management system is just the challenge is always kind of like finding the right data or having the data kind of -- and the content kind of get to you or get to you in one way or another.

Can you kind of talk a little bit about -- you've done some things in that area, but where do you feel like you are on the technology road map to make it almost organic?

I know you have the bots and stuff like that, but walk us through that because I feel like that's a big opportunity for you guys.

Yes.

So our -- core to our strategy is obviously being able to bring in as much information and content from an enterprise as possible, and we're seeing more and more of our customers actually standardize on Box as their system of record for critical content.

So the first priority is make sure that you have all the core functionality, whether that's security or Workflow or metadata or platform features that cause customers to want to be able to move their information into Box, and that's obviously the core of our product road map.

And then secondarily, we have to have either the features or the services to help customers move and migrate their data into Box.

So couple of examples of how we've been doing this and some of the recent innovations, Box Drive for instance, which became generally available just in Q1, is a way that customers can actually have a client connection on every desktop in their enterprise that acts as a network file share equivalent, but store -- where the data is in the cloud, so their ability to then go and retire storage infrastructure and network file shares, move that data into Box.

We also have Box Shuttle, which is a services initiative from our Box Consulting division, which actually helps customers with large-scale migration of data.

And then we have a number of other ways that customers are moving in data into the platform overall.

We're seeing a pretty significant growth in content that's coming into the system.

So we're seeing really, really solid traction of customers moving more and more of their information into Box.

And obviously, the power of that gets even more considerable when we think about AI, machine learning and being able to extract more insights from that information, so helping customers then with their business processes, begin to automate the kinds of things that previously were very manual in nature, so tagging or classifying images, detecting text inside of a video or inside of an image, being able to extract metadata fields from a document.

So once the information's in Box, once we have all the functionality to secure it and manage it, now we want to be able to deliver more and more insights and intelligence on top of that content.

And that's where, obviously, our focus is with Box Skills and the broader AI and machine learning efforts we have.

Your next question comes from the line of Mark Murphy from JPMorgan.

So continuing on that theme, Aaron, how broadly applicable do you think your AI offerings are going to be with Box Skills and those other initiatives when that product does become available?

I guess, I'm curious whether you see a revenue opportunity where maybe that product contribute -- could contribute 1% or 2% to revenue in the next couple of years.

Or do you think that the contribution is maybe going to be more subtle or kind of materialize over a longer time frame than that?

Yes.

So we think that the power of Box Skills is very horizontal.

So it will be able to help us and help customers really in every industry.

Some of the initial skills that are most applicable are those that work with images, videos, audio files, but we are working on ones with documents as well, which is obviously critical for financial services, for life sciences, for insurance, et cetera.

So we think it's broadly applicable.

From a pricing standpoint, as it relates to revenue uplift, we are -- we're still finalizing the ultimate pricing model.

We wanted to really go out with our private beta customers and see where the market was from a pricing standpoint.

I would say that this will be accretive to revenue, but we are very, very focused on ensuring that customers can use it at a high volume to be able to work against their data.

So we are much more focused on ensuring Skills is a reason that customers will bring more of their content into Box and run more of their business processes on Box.

And so we think it's much more around stickiness, differentiation and allows us to command a higher price through other additional services like Box Governance, like our Workflow capabilities.

So we aren't yet modeling what Skills will be as a discrete revenue driver, but we do know that it's going to be significant for enhancing the differentiation and the strategic use cases that Box can deliver to customers, all of which, obviously, end up driving revenue and our retention rates.

And we've already -- just as an example, we've already seen this play out in a number of pretty significant 6- and 7-figure deals with customers where they're beginning to redesign their business processes on Box using Platform, our metadata functionality and other capabilities because of the ability to layer on Skills in the future.

So it's causing customers to really think about reengineering how they're working with their content, taking what used to be manual processes and beginning to automate them.

And again, the revenue's going to show up really as platform revenue or seat revenue or add-on product revenue in the form of Governance or other features, but Skills is really the catalyst for causing that customer to reengineer or reimagine that business process.

Okay.

So Aaron, AI as a category for Box would have more of an indirect longer-term impact around differentiation for the business as opposed to sort of an immediate very material revenue uplift.

Is that fair?

Yes.

We don't -- again, we're not kind of calling out what the number is at this stage, but we wouldn't consider it to be an immediate revenue uplift as a discrete sort of line item.

We think AI is going to be very akin to sort of security or mobile in the future, which is it's so core to why you would move to the cloud and reimagine your business processes.

And how it gets monetized, obviously, is going to be based on how much you're using AI directly.

But ultimately, it is the reason you end up moving your information en masse to Box and our Box Platform.

Okay.

Well said and that makes sense.

So Dylan, just a quick one for you.

I think you mentioned some billings benefit from payment durations in Q1.

I'm curious just by how much did billings duration change.

And maybe what are you assuming for duration this year?

When we think about modeling, billings helped through the remainder of the year, and I understand more of that will be loaded into Q4 than what we saw last year.

But are you assuming that there would be some net benefit on the year from payment durations?

No.

So we'd expect payment durations to be pretty consistent with what we saw last year, which, for the full year, we were not pushing either with our customers or our sales force, securing multi-year prepaid deals.

So we saw and would expect to see that, that multi-year prepay rate to be in the low single-digit range and for overall payment durations to be pretty consistent.

Actually, one of the big drivers in Q1 around that delta that we highlighted and did kind of quantify the different billings growth rates, both adjusted and calculated, was a couple of large multi-year prepaid renewals.

So those were deals that we had seen kind of coming down the pipe and then customers, who several years ago decided to prepay for multiple years and then did so again when they came up for renewal, so that was not kind of new customers that had the impact on payment durations there.

Your next question comes from the line of Ittai Kidron with Oppenheimer.

Not to beat a dead horse here, or maybe I am going to beat a dead horse here.

But trying to dig again into the dollar expansion, Dylan, you've talked about it stabilizing here between the 108% to 112% -- or 110% if I remember correctly.

Still, help me think about the contribution of new product revenue outside of your core platform in that net retention number.

It still feels that all of the new products have introduced, and by now and there's a good 5, 6, 7 of them are -- not any of them are broadly adopted or priced in a way that can drive massive revenue growth.

Correct me if I'm wrong.

So I'm trying to understand how much of the growth going forward for you guys is going to be raising attach rate of new products versus [still] seat expansion within customers.

Sure.

So I would say that we would expect the majority of our growth for the foreseeable future to be more weighted toward seats versus newer products.

But as we highlighted on our Q4 call, we set the high-water mark there with about 1/4 of our total new bookings coming from those newer products, and we would expect, over time, both that the products that we do have mature in the market as well as we introduce newer products for a greater and greater percentage of overall sales to be coming from those newer products.

And that's what we're seeing and one of the biggest drivers of why, as mentioned, we are seeing in the current period that net retention rate stabilize.

We said if you fast forward a few years, we'd actually expect to see kind of comparable or even higher contribution to bookings from our newer products.

But at this stage, it is still primarily being driven by seat sales and seat expansion.

Okay.

And with that being the case, and I'm looking at your net customer additions this year versus last year, net paying customers also this year versus last year, the net addition numbers are declining on a year-over-year basis quite strongly actually.

So I understand that you're maybe redirecting or refocusing your efforts on trying to get deeper penetration within accounts.

But help me think about -- how do you think about the incremental dollar of investment?

Is this a permanent change where you say, at this point, we've probably got as many as new customers as we can get, and right from here right now, it's going deeper rather than going wide, go deep?

Is that the long-term strategy here?

I would say that we still see a pretty significant opportunity with new logos in certain industries and as well as in most international markets.

We still have relatively low penetration there, so we think that a kind of new customer opportunity is still pretty significant.

But would expect that between now and when we get to $1 billion just to -- run rate to just get the kind of the medium-term view, would expect about 70% of those new bookings to come from existing customers so -- but there is still a lot of net new opportunity in areas like financial services, the public sector, Germany, Canada, Australia, some of the other places we've been making investments.

And then just to speak to the overall comment on the rate of user growth or customer growth, I would note that, in a lot of cases, those metrics aren't necessarily representative of the overall health we're seeing in the core markets that we serve.

So for the customer growth, that's largely driven, as Aaron mentioned, by online sales.

We'll also from time to time see a churn for some of our kind of high-value but low-volume -- or sorry, low -- excuse me, high-volume but low-value customers, so the net impact in terms of overall seat growth might not be huge.

But as we mentioned, we're seeing very strong price per seats, and we're selling those newer products not just to new customers, but to our existing customer base as well.

And so we'll give color in terms of how that's evolving and especially as new products become more and more material, can get more granular about how that's contributing to the net retention rate.

But overall, the trends that we're seeing are pretty strong.

And despite the kind of natural headwinds for the reasons that we mentioned, we do feel pretty good about that stabilization in the net retention rate going forward.

Okay.

And then lastly for Aaron, just from more of a bigger picture standpoint.

Clearly, you've got a very large base of loyal customers, and I think a lot of the concerns that investors might have had 1 or 2 or 3 years ago with regards to Google and Microsoft are kind of slowly fading away.

I mean, you clearly have established yourself as a good leader here in the market.

I guess, my question is, is there an opportunity.

Do you see a scenario by which you actually start raising prices on your customers?

And I'm talking about in more in the context of the fact that, again, you've got a sticky base and by now you have also a very broad portfolio of capabilities that your competitors simply don't have.

And if someone is to take a modern approach to enterprise content management, you would be it, no?

Yes.

I mean, we certainly obviously agree with you on strategically and our position in the market.

I think we're still certainly trying to drive as much traction and volume on the platform as possible.

And I think that when we look at -- when we talk around the table at our executive team and look through our strategy, I think the #1 focus is still market share, bring as much data into the platform as possible and ensuring that we have as many seats within our customers as possible as well as the ability to sell as many of these add-ons to our customers as possible.

So both of those have the impact of growing in terms of contract value size but not necessarily the -- a massive focus on just price per seat, although add-on products obviously drive up price per seat.

So I think you're going to continue to still see steady execution and on the overall price per seat, although there might be room for that to go up certainly.

But right now the focus is definitely on ensuring that Box is deployed as broadly as possible within customers, so we have as many seats as possible and then that customers are buying more and more of those add-on products, which will have the net effect of, on an apples-to-apples basis, increasing the price per seat.

So I think we're kind of doing what you're talking about in effect, but still going for as much market share as possible as well.

Your next question comes from the line of Brian Peterson from Raymond James.

So I wanted to hit on the billings and some of your comments on the large deal timing.

So the large deal numbers looked pretty good this quarter, and obviously, the pipeline and what you're seeing for ACV there is pretty positive.

So I wanted to understand what's driving the commentary that the larger deals are being pushed more into the fourth quarter.

Is that due to some of these deals slipping?

Or is that the new normal for seasonality?

Or how should we think about that?

Yes.

So we're definitely seeing early success in the solution selling motions that we talked about, and that's showing up not just in the traction that we saw in the quarter in the add-on products and the larger deal outcomes as you mentioned, but also the nature of the pipeline that we're building for later in the year is much more representative of the types of use cases and sales that we are looking to drive.

In terms of the timing, wouldn't describe it as necessarily pushing as in there are deals that had been earlier in the year that are getting pushed out for whatever reason, but more just the timing of kind of the deal cycles and the conversations that we're having now and when we expect those to close.

And as we look at the pipeline and run the analysis, we are seeing just in terms of, especially on a year-on-year comparison basis, stronger outcomes and larger volumes of those larger deals falling later in the year, which is why we gave the commentary and the color around expecting to see a couple percentage points more of the FY '19 overall billings to fall in Q4 versus what we've seen in the past couple of years.

So our confidence in FY '19 as a whole hasn't changed, and as mentioned, we are really seeing the solution sales motion starting to work.

But it's really more about the sales distribution within the year because of those dynamics.

And maybe just one clarification.

Are you able to give us a fiscal first quarter of '18 figure for revenue and deferred revenue under 606 just for a comparability's sake?

So that is -- I think in the press release, we do highlight what the year-on-year growth is under both 605 and 606.

Your next question comes from the line of Rishi Jaluria from D.A. Davidson.

This is Rishi Jaluria.

I guess, first, Aaron, let's -- I wanted to start on GDPR, right, kicked in.

I think everyone's been paying attention and top of mind for a lot of people.

Just curious, have you seen any kind of inbound interest beats in terms of lead generation, pipeline generation as a result of GDPR?

And maybe can you talk about what that opportunity looks like for Box?

And then I have a follow-up for Dylan.

Yes.

So I think -- so we've been certainly having GDPR-esque conversations with our customers really for the last couple of quarters now.

So we have seen kind of good awareness and traction on the sales front because of that.

We were coincidentally in London last week, which is obviously when GDPR went into effect.

We announced our multi-zones data residency solution, which is not required for customers to be GDPR compliant, but certainly continues to increase the strength of a customers' ability to stay and commit to GDPR compliance.

So we are seeing pretty good tailwinds from just a conversation momentum standpoint.

We think it's going to cause customers to have to reevaluate their existing or legacy IT architectures.

And in general, when you zoom out for GDPR into just the broad set of cybersecurity, region-specific regulatory as well as global privacy and industry-specific compliance requirements, all of these things act as tailwinds for causing customers to need to modernize their architecture.

And so to the earlier question about cloud content management really becoming then the answer and Box being the leader in cloud content management, we think this sets us up really nicely where the more the customers need to build a modern IT architecture for managing, securing and ensuring the compliance around their content, the more that's going to inevitably lead customers to move into cloud content management and Box specifically.

So we're really excited about that, and we're going to continue to invest aggressively in all areas around cybersecurity protection for our customers, compliance features and enhanced data privacy functionality, of which Box Governance and other capabilities help our customers with pretty significantly.

So it is helping at a macro level.

Okay, great.

Helpful.

And then, Dylan, as you talked a little bit about, in the prepared remarks, about some of the success you're seeing with Box Consulting and in terms of the large deals, as Box Consulting scales up, would -- should this -- should we expect this to have any impact on gross margins?

Or should it be relatively neutral from that perspective?

Yes.

So we would expect it, depending on what percentage of the business, our consulting business ultimately scales to, could have some impact.

So we wouldn't expect a dramatic increase in terms of consulting revenue as a percentage of our overall revenue, but we would expect that to increase over time, particularly as the nature of the deployments and complexity of the use cases and strategic nature of those does increase.

We typically see consulting margins in the 10% to 20% range versus our subscription margins that are pushing 80%.

So certainly, as that mix shift changes, that would be a headwind to gross margin.

But at the same time, there's a lot of things we're doing to offset that and drive efficiencies across the business.

And we don't expect to see a step function increase, so the overall impact should be fairly muted.

Your next question comes from the line of Brian White from Monness, Crespi, Hardt.

Great.

Aaron, I'm wondering if you could talk a little bit more about the dynamics in Japan.

You called it out as a strong geography.

Maybe just go through what you're seeing there.

And also, Box Platform, if you can update us on what's happening in Box Platform.

Sure.

Yes.

In Japan, we're seeing really strong traction, I think a great combination of incredible team on the ground, great channel partners that we launched in early with and just the sort of geographic-specific network effects of more and more large enterprises standardizing on Box, thus, causing more and more of their peers also to move to the cloud so -- and move to Box.

So we had Mitsubishi Motors, Hitachi.

We announced in the quarter that last quarter Fujitsu is doing a very significant deployment of Box, over 80,000 employees.

So that's indicative of, again, the performance that we're seeing in this market.

And again, it's really about the team and just the alignment of our technology with a lot of the business transformation and digital transformation that large Japanese businesses are driving.

But those same trends we're seeing in a lot of our kind of Tier 1 IT markets when we look into U.K., some of the early conversations we're having in Germany.

We've doubled down our efforts in Australia, having similar kind of focus in Canada.

So when we look at our new emerging markets and really kind of Tier 1 IT markets, we are seeing early signs of similar types of momentum, and now we're just obviously needing to make sure that we're putting the right efforts together in those areas.

We don't necessarily expect the same level of growth as we've seen in Japan just because there are fewer channel partners, and so we'll take a little bit longer.

But we are seeing a little a lot of great momentum overall.

As for our Platform, what we've seen and what we talked about coming into this year is Platform is becoming a core part of every sales conversation that we're having.

So we see Platform less as a discrete product that we're selling.

We do literally monetize it as an add-on product.

But similar to Skills, it's becoming a core reason why customers are going to move their information and move their content to Box.

Whether they're building custom applications or integrating us into third-party applications that they're using or having Box embedded in their customer or client facing experiences, we're seeing Platform experience very, very considerable traction, again, both directly monetize traction but also reasons why customers are coming onboard to Box in general, whether or not they paid for Platform discretely.

And this is happening in a range of industries, everything from financial services to the technology sector to insurance and health care, and we're continuing to see that traction grow.

There are no further questions at this time.

Ms. Alice Lopatto, I turn the call back over to you.

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

This concludes today's conference call.

You may now disconnect.