Box, Inc.

Thank you for standing by, and welcome to Box Inc. Fourth Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to the speaker today, Alice Lopato. Please go ahead.

Good afternoon and welcome to Boxer's fourth quarter and fiscal year 2021 earnings conference call. On the call today, we have Aaron Levy, 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 forward slash 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 at Boxing IR. On this call, we will be making forward-looking statements, including our Q1 and FY22 financial guidance and our expectations regarding our financial performance for fiscal 2022 and future periods, timing of and market adoption of our products, our markets and the size of our market opportunity, and our expectations regarding our free cash flow, gross margins, operating margins, operating leverage, future profitability, unrecognized revenue, remaining performance obligations, and billings. Our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets, the timing of and benefits from our new products, pricing, and partnerships, the impact of our acquisitions on future box product offerings, and the impact of the COVID-19 pandemic on our business and operating results. 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 quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today, March 2, 2021, and we disclaim any obligation to update or 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. With that, let me hand it over to Aaron.

Thanks, Allison. Thanks, everyone, for joining the call today. As always, we hope you and your families are staying safe and healthy. i'm incredibly proud of the team at box and the milestones we achieved in fy21 this was a substantial year of progress across all facets of our business strategically operationally and financially we exceeded our commitment to achieve a revenue growth rate plus free cash flow margin of 25 percent ultimately delivering 26.3 percent versus 13.4 percent just a year ago In addition, we drove significant margin expansion with a 15% non-GAAP operating margin up from 1% a year ago. This year, we delivered the category-defining cloud content management platform to the market by making significant product enhancements in security and compliance, collaboration and workflow, and strengthening our ecosystem of partner integrations. and to further expand our product portfolio at the start of this new fiscal year we just recently announced box sign our native e-signature product offering that will be coming out later this summer In a year of immense market uncertainty, we delivered both revenue growth and improved profitability, advanced our long-term strategy, brought on three new amazing independent directors onto our board, and maintained a relentless focus on enabling our customers to work in an all-new, modern, and digital way. With this foundation in place and the momentum we are seeing across the business, we are confident in our ability to achieve accelerated growth and higher operating margins in the years ahead. Turning to our Q4 results, we delivered revenue of $199 million, up 8% year-over-year, non-GAAP operating margin of 18%, up significantly from 7% a year ago, and non-GAAP EPS of 22 cents, up from 7 cents a year ago, and well above our guidance. We also generated more than $41 million in positive free cash flow, a substantial improvement from breakeven last year. Growing demand for our more advanced capabilities such as Box Shield and Box Relay drove further suite adoption, including a record 45% attach rate for suite, as well as a 60% attach rate for Box Shield in our six-figure deals. Over 100,000 customers now rely on Box to power secure content management and collaboration in the cloud. In Q4, we closed wins and expansions with leading organizations like Arena Pharmaceuticals, Asahi Group Holdings in Japan, Pan American Life Insurance Group, Twilio, and UPS. Our customers are choosing Box to power high-value use cases that are integral to how they run their businesses. Here are just a few examples from Q4. An innovative biopharmaceutical company purchased a six-figure ELA with Box's GXP and KeySafe offerings to help power its mission to transform the way that drugs and therapies are manufactured in the U.S. A global leader in the insurance sector who has been a Box customer since 2016 purchased Box Governance to support claims processes while meeting critical compliance requirements. And a Japanese manufacturing company moved to Box to address their need for a content platform to facilitate remote work, as well as integrate with applications such as SAP, Salesforce, and Google Workspace. 2020 was a dynamic year for all enterprises, and we are now seeing IT strategies shifting to support the long-term trend of virtual and distributed teams, digital operations, and an increasingly complex and high-stakes security and compliance landscape. In this context, how organizations manage and collaborate on content is at the center of how they operate, whether it's a life sciences company sharing highly regulated IT with their partners and regulators around the world, an insurance organization automating workflows around confidential claims and records, or a government agency's need to digitize paper-based processes. All of these organizations across all industries run on content. To power these processes, the days of fragmented on-prem content storage and enterprise content management systems no longer works. Customers fundamentally need a single content cloud connected across all their apps to power their end-to-end content workflows on a single platform. As the experts in content, our vision is to power the entire content journey, giving enterprises a secure platform for managing all of their content from the moment it's created to when it's uploaded, shared, edited, published, approved, signed, classified, and retained. This is our vision for the Box Content Cloud. Having dramatically improved our overall balance between growth and profitability in FY21, the next chapter for Box is to continue building on our leadership position and transform how enterprises work in the digital age. To accelerate this strategy, just last month we acquired SignRequest, a leading cloud-based electronic signature company, to develop Box Sign, our new e-signature capability that will be natively embedded into Box. every day more and more transactions are moving from paper-based manual workflows to the cloud e-signature is already a multi-billion dollar market and it's still in the earliest days with digital transactions just beginning to become critical in every industry when we surveyed hundreds of our customers in 2020 e-signature was the most requested For example, legal teams will be able to create and finalize contracts within Box, from drafting and co-editing to signing and retaining the agreement with Box governance. HR teams will be able to initiate and complete offer letters using Box Relay together with Box Sign. Sales teams can initiate digital customer contracts for signature right from Salesforce. And compliance teams will be able to retain and protect executed agreements while securing sensitive content with Box Shield. BoxSign is expected to be generally available in the summer of 2021. It will be integrated into Box's existing subscription plan with additional levels of functionality being available in our enterprise plans and suite offerings. We want to ensure all of our customers have access to the value of BoxSign while also enabling us to monetize the higher-end signature use cases that leverage advanced functionality and APIs. Adding eSignature is a significant step in building out the complete content cloud. Another exciting announcement we made last month was the availability of the all-new Box Shuttle. For many organizations, moving to the cloud has been a priority, but the cost of content migration, especially in complex content management environments, has been a major impediment to cloud adoption. The new Box Shuttle can migrate some of the most complex and large-scale content management environments at a lower cost and faster than ever. We want it to be simple, fast, and cost-effective as possible to retire legacy systems and move information from source platforms like network file shares, SharePoint, OneDrive, Documentum, and OpenText to the Box content cloud. And with more high-value content in Box, our customers can empower their teams to collaborate more effectively and accelerate their digital transformation initiatives. In Q4, we also continued to stay at the center of our customers' digital experiences by deepening our integrations with Google Workspace, Slack, and WebEx. As more organizations use multiple applications such as Slack, Salesforce, Teams, WebEx, and Zoom to get their work done, they need to access their content from these applications securely and seamlessly. Box connects to these applications, and with over 1,500 integrations, we create a seamless experience for our customers to work in new ways. Overall, we're more excited than ever to continue to build out the complete content cloud. FY22 will be our singular biggest year for product innovation as we expand into new market adjacencies like e-signatures, while continuing to double down on product areas like Box Shield and Box Governance for advanced security and compliance, Box Relay for workflow automation, and our open platform to connect to all of our customers' applications. This product innovation will enable us to build on our leadership position, which has been validated by IDC, Gartner, and Forrester. Next, to bring all of this value to our customers in FY22, we're focused on continuing our land and expand strategy to drive growth with new and existing customers. In Q4, we saw tremendous success with box suites, our ELA licensing model, and a significant improvement to our $100,000 plus deal growth. We continue to see significant headroom and expanding within current accounts. As just within our current customer base today, Box has a 7x potential increase in seats from upselling existing customers. To drive continued logo growth and customer expansion, we are focused on a number of priorities across our go-to-market engine. First, we are continuing to double down on our digital channels. This remains an area we will continue to invest in as we scale to efficiently bring in new logos and drive upsells across enterprises of all sizes. Second, we know that driving strong partnerships with leading technology companies and system integrators is key to our success at scale. This is why we are excited to continue to partner with IBM, Google, Salesforce, Slack, Zoom, Cisco, Okta, Microsoft, as well as many others, including leading system integrators, to ensure we're delivering our content cloud solution to our customers at scale. Third, we will continue to double down in key verticals like life sciences, federal government, financial services, media, consumer products, and the technology sector, among other markets, where we continue to see substantial upside and a significant need for secure content management in the cloud. Finally, we see continued opportunity for efficient expansion in key international markets, especially in Japan, EMEA, Canada, and Australia. To ensure that we're building a stronger precedent and consistent execution in EMEA, we've just filled our previously vacant EMEA GM role with a world-class go-to-market leader. We're excited to share more about this new leader when we formally introduce this individual to our internal teams and public stakeholders. As we look to FY22 and beyond, we are focused on innovation and further opening new areas of growth while reinforcing our gains and profitability. As we shared at our most recent analyst day, we are committed to driving a revenue growth rate between 12% and 16% with operating margin in the mid-20s by FY24. Our FY21 results demonstrate that our strategy is working and that we are making tremendous progress toward achieving our long-term goals. We are confident in our ability to achieve these results based on the customer momentum we're seeing, our product roadmap, and the total market opportunity ahead. We are going after one of the largest markets in software, attacking a total addressable market of over $55 billion in spend on content management, collaboration, storage, and data security annually. And with the new addition of e-signature capabilities, our market is only getting larger. We have built the leading content cloud with well over 100,000 customers on our platform, and we have an exciting roadmap to continue pioneering in this industry going forward. With that, I'll hand it over to Dylan. Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. In fiscal 21, we are proud to have delivered a strong balance of growth and profitability, achieving a non-GAAP operating margin of 15%, up significantly from 1% a year ago. We also exceeded our 25% commitment for revenue growth plus free cash flow margin, delivering 26.3%, a strong improvement from the 13.4% we recorded a year ago. In Q4, we delivered revenue of $199 million, up 8% year-over-year. Importantly, 29% of this revenue came from regions outside of the United States, up 400 basis points from 25% a year ago. Our remaining performance obligations, or RPO, represent non-cancellable contracts that we expect to recognize as revenue in future periods. We ended Q4 with RPO of $897 million, up 17% year-over-year, comprised of 10% deferred revenue growth and 21% backlog growth. Average customer contract durations have continued to lengthen, driven by a higher volume of longer-term strategic deals, which contributed to the strength we saw in our backlog growth. We expect to recognize approximately 61% of our RPO over the next 12 months. Fourth quarter billings came in at $310 million, representing 10% year-over-year growth and ahead of our revenue growth. This acceleration was driven by strong sales execution in the quarter, reflecting continued momentum in our enterprise business and a clear recovery in our SMB business. As Aaron mentioned, we were extremely pleased to achieve a record 45% attach rate for our suite offerings across six-figure deals in Q4. This quarter, we closed 121 deals worth more than $100,000 versus 112 a year ago, 21 deals over $500,000 versus 14 a year ago, and $4 million deals in line with a year ago. Our success in cross-selling our product portfolio is driving higher-value use cases across our largest customers, improving the average contract value of our six-figure deals in both Q4 and the full year. Our Land and Expand strategy is generating momentum and large customer growth. We now have 1,216 customers paying more than $100,000 annually, up 10% year-over-year, and $99 million customers up 24% year-over-year. Going forward, we will be reporting these cumulative customer counts on an annual basis in addition to the number of 100K-plus deals that we close in each quarter. In Q4, we drove very strong bookings from net new customers, up more than 25% year-over-year, which isn't reflected in our net retention rate. We ended Q4 with an annualized net retention rate of 102%, down slightly from 103% in Q3 due to the trailing 12-month nature of this metric. Note that the net retention rate of customers who have adopted at least one of our add-on products is approximately 20 points higher than the rate of our core-only customers. So as our customers increasingly implement higher value use cases and adopt our add-on products, this will create a tailwind to our overall net retention rate. As such, we expect our net retention rate to stabilize in Q1 and improve by a couple of percentage points over the course of this year. In Q4, our full churn rate was 5% on an annualized basis in line with Q3 and the prior year. Turning to margins. Non-GAAP gross margin came in at 73.2%, up 170 basis points from 71.5% a year ago and roughly in line with Q3. Our focus on reducing infrastructure costs and gaining economies of scale is paying off. Q4 gross profit of $146 million was up 11% year-over-year, outpacing our revenue growth. We expect gross margin to continue improving in the coming years and to land in the 74% range this year. Total Q4 operating expenses represented 55% of revenue, representing a significant 900 basis point improvement from the 64% recorded a year ago, demonstrating our commitment to efficient growth. As a result of our emphasis on revenue growth, gross margin expansion, and operating expense leverage, in Q4 we generated an 1,100 basis point improvement in our non-GAAP operating margin year over year, coming in at 18% versus 7% a year ago. Sales and marketing expenses in the quarter were $57.5 million, representing 29% of revenue, down 600 basis points from 35% in the prior year. Our go-to-market improvements enabled us to deliver efficient and consistent revenue growth, and we generated a 13% year-over-year improvement in Salesforce productivity, primarily driven by our enterprise Salesforce. We plan to grow our quota-carrying Salesforce and the load teams in FY22, focusing on our higher-performing geographies and segments. We will also continue investing in our customer success organization to help our customers adopt higher-value use cases. Research and development expenses were $33.6 billion, or 17% of revenue, down 200 baseless points from 19% in the prior year. We have now opened our first offshore engineering center of excellence in Poland, where we expect to have more than 100 boxers located by the end of the year. Going forward, this distributed development strategy will enable us to generate additional leverage from our R&D investments. This past year, we drove both innovation and enhancements to our product portfolio, generating strong momentum in our customers' adoption of higher-value use cases. 59% of our revenue is attributable to customers who have adopted at least one of our add-on products, up from 52% a year ago. Strong Suites adoption is evidenced by the 36% of our revenue attributable to customers who have adopted multiple products, up from 24% a year ago. Our general and administrative costs were 18.2 million, or 9% of revenue, down from 10% a year ago. We expect to drive leverage in G&A through greater operating discipline and by evolving our workforce location strategy as we scale. Non-GAAP EPS came in at $0.22 and well above the high end of our guidance. This represents an especially strong improvement from $0.07 a year ago. Let me now move on to our balance sheet and cash flows. We ended the quarter with $596 million in cash, cash equivalents, and restricted cash. This includes net proceeds of $309 million raised through our Q4 offering of convertible notes. We delivered very strong cash flow from operations of $57.5 million in Q4, a $42.5 million, or 280%, improvement from the $15.0 million recorded a year ago. Combined CapEx and capital lease payments were 8% of revenue in Q4. Total CapEx was $1.7 million, and capital lease payments, which we factor into our free cash flow calculation, were $13.9 million. We expect capital lease payments to be lower, both in dollar terms and as a percentage of revenue, versus this past year's payments. We expect CapEx and capital lease payments combined to be roughly 8% of revenue in Q1 and roughly 7% of revenue for the full year of FY22. Finally, we delivered exceptionally strong free cash flow in the fourth quarter of $41.0 million, meaningfully from essentially break-even a year ago. Before we turn to our guidance, I want to remind you that, as we noted at our most recent Investor Day, we're committed to delivering FY24 revenue growth in the range of 12% to 16% with non-GAAP operating margin in the mid-20% range. We're confident in achieving these targets as more of our customers continue to adopt multiple products, resulting in significantly higher contract values, price per seat, and net retention. Salesforce productivity will continue to improve as customers increasingly adopt these solutions and as we focus our investments in higher-performing regions and segments. Q4's results demonstrate that the strategy is working with strong sweep sales and big deal metrics and with both RPO and billings growth exceeding our revenue growth. As we continue to drive revenue growth, we will also continue to generate operating leverage across the business, driven primarily by our lower cost location strategy, continued gross margin improvements, and maintaining a rigorous ROI-based approach to all areas of our spending. With that, let's now turn to our guidance. We're well positioned to stabilize our revenue growth rate in FY22 and to re-accelerate growth next year. While we remain prudent in our growth expectations given the macroeconomic environments, we anticipate continued strength in our enterprise business, a recovery in SMB demand, and accelerated growth in our international markets. While we do expect certain COVID-related expenses to partially return over time, we don't expect our spend in these areas to return to pre-COVID levels even after we return to an office-based environment. For the first quarter of fiscal 2022, We anticipate revenue of 200 to 201 million, up 9.5% at the high end of this range, and an improvement from the revenue growth that we delivered in Q4. We expect our non-GAAP EPS to be in the range of 16 to 17 cents, and GAAP EPS in the range of negative six cents to negative five cents on approximately 166 million and 161 million shares, respectively. for the full fiscal year ending January 31st, 2022. We expect our FY22 revenue to be in the range of 840 million to 848 million, representing 10% year-over-year growth at the high end of this range. We expect our FY22 non-GAAP EPS to be in the range of 76 to 81 cents on approximately 169 million diluted shares. Our GAAP EPX is expected to be in the range of negative 25 cents to negative 20 cents on approximately 164 million shares. For the full year of FY22, we expect billings growth to be slightly above revenue growth. We do expect variability in our billings growth rate on a quarterly basis, including in Q1, where we expect billings growth to be in the high teens, up from 10% this past quarter. we will provide further color around our upcoming quarter's billing expectations on future earnings calls. As we shared at our most recent analyst day, we remain committed to achieving a combined revenue growth rate plus free cash flow margin of 30% this year. In summary, In FY21, we delivered strong financial results, balancing both growth and profitability, and capped off the year by exceeding our commitment to achieve revenue growth plus free cash flow margin of 25%. We are well positioned to deliver strong revenue and profitability growth as we continue to build on our leadership position in cloud content management. With that, I would like to open it up for questions. Operator?