Box, Inc.

Good afternoon and welcome to Box's third quarter fiscal year 2022 earnings conference call. I'm Cynthia Hiponia, Vice President of Investor Relations. On the call today, we have Aaron Levy, Box co-founder and CEO, and Dylan Smith, Box co-founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will be available for replay on our Investor Relations website at 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 calls on Twitter at the handle at VoxIncIR. On this call, we'll be making forward-looking statements, including our Q4 and fiscal 22 financial guidance, our expectations regarding our financial performance for fiscal 2022 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, unrecognized revenue, remaining performance obligations and billings, and our expectations regarding the size of our market opportunity, our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models, and partnerships, the impact of our acquisitions on future box product offerings, the impact of COVID-19 pandemic on our business and operating results, and any potential repurchase of common stock. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10Q for information on risk 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, November 30, 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 our 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'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, 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, Cynthia, and thank you all for joining the call today. We achieved strong third quarter results. marking yet another quarter of delivering both revenue and non-GAAP EPS above our guidance. We produced third quarter revenue growth of 14% year over year, a third consecutive quarter of accelerating revenue growth, operating margin of 21%, and RPO growth of 25%, which is well in excess of our revenue growth and an important leading indicator of the strength of our business. Our results show the success of our growth strategy which is aligned with the three major trends that are driving the future of work. These trends are hybrid work styles, the pressures of digital transformation on businesses, and the ongoing importance of data security, compliance, and privacy. The old way of managing content just doesn't work anymore, and that's where the content cloud from Box comes in. With Box, users are more productive, enterprises are more secure, and IT management is simplified and less expensive. Our strong customer metrics are key indicators of the success of our product and platform strategy as more customers are turning to the Box Content Cloud to deliver secure content management and collaboration built for the new way of working. In the third quarter, our net retention rate was 109%, up from 103% in the prior year, and up from 106% in the second quarter. We had 97 deals over $100,000 up 56% year over year, including a record number of multi-product suite sales, which now includes our enterprise plus plan with 61 suite deals in Q3 deals over $100,000 up 177% year over year. We had a 63% attach rate of suites over $100,000 in the quarter. up from 35% in Q3 fiscal 21. In North America and EMEA, Swedes' attach rates were in the mid-70s in Q3. While our Swedes' attach rate declined sequentially in Japan, we are continuing to educate our channel partners around our multi-product plans in order to improve the attach rates in this region. We expect our overall attach rate number to improve in Q4. We continue to leverage our leadership position in core content management and collaboration to expand the full content lifecycle by focusing on our three key product pillars, which are enabled by our highly scalable enterprise-grade infrastructure. These three pillars are focused on one, delivering the best security and compliance around content, two, enabling seamless collaboration and workflow in the cloud, and three, integrating into every app our customers leverage, including the ones that they build themselves. We embarked on our expanded vision for the content cloud over two years ago and have advanced major parts of the entire content lifecycle. The launch of Box Shield and Box Relay broadened our reach into the data security and workflow automation markets. This year, we expanded our content ingestion and migration services with Box Shuttle, and integrated more deeply with Microsoft, Salesforce, Slack, and Zoom, as well as other leading platforms. Building on the success of these offerings, we launched BoxSign to bring native e-signatures to Box. e-signature is one of the fastest growing markets Box has ever entered, and we are seeing great momentum with customers already. Our initial US-based rollout in October was followed quickly by the global launch of BoxSign, which also included new security and admin features. These new features include password protection for documents sent for signature, SMS-based two-factor authentication to identify the signer, localized box sign user interfaces to enable senders and signers to transact in over 20 languages, and robust admin reporting to provide enterprise-wide visibility and tracking of documents sent for signature. After launching our offering, we were pleased to be named a major player in the IDC MarketScape Worldwide eSignature Software 2021 Vendor Assessment, which we view as a validation of our BoxSign solution. In this report, Box was recognized as one of the first multi-tenant SaaS vendors to offer a cloud content management solution, delivering continuous innovation and continuous deployment of the content lifecycle capabilities, in addition to its feature-rich collaboration and file sharing. Since our GA rollout in October, we have seen early success in customer adoption and use of BoxSign. Third quarter customers include a premier commercial real estate finance company that expanded its use of Box with a six-figure ELA and purchase of Enterprise Plus with additional Box API and BoxSign services. With Box, the organization has centralized all of their content and built a custom deal management portal that deeply integrates with Salesforce and MuleSoft. BoxSign will be replacing their incumbent signature solution, allowing them to digitize more of their paper-based use cases and expand e-signature use to the broader organization. A leading IT services vendor to the US government rolled out the BoxSalesforce integration to power their onboarding use case. They previously used an incumbent signature vendor, but to help reduce spend and streamline the onboarding process for their contractors and partners, they have now enabled BoxSign enterprise-wide. And earlier this month, we announced that the General Services Administration has selected BoxSign technology for its native e-signature capability. Contracts and business agreements are critical to the work that the GSA oversees. So deploying e-signature technology was necessary to digitize their paper-based manual workflows for enhanced productivity and security. And we're just getting started with our e-signature product roadmap. We plan to continue rolling out advanced e-sign capabilities over the next several quarters to our customers. As we have been discussing over the last several quarters, security remains a critical driver of our biggest deals. customers are increasingly focused on Box's security capabilities. To that end, in October, we announced new malware deep scan capability in Box Shield to combat ransomware, as well as enhanced alerts and auto classification updates. Box Shield will be able to help customers reduce the risk of ransomware by scanning files in near real time as they're uploaded to Box. Our natively embedded malware detection in the Box content cloud delivers a seamless user experience real-time alerts for it security teams while helping them avoid multi-solution multi-vendor complexity finally an integral part of our product strategy is our ability to integrate deeply across the staff landscape and we are pleased that our interoperability has enabled us to build strong partnerships with leading technology companies at foxworks in early october Kurt Koenigsbauer, CVP and COO of the Experiences and Devices Group at Microsoft, spoke about the importance of openness and interoperability and Box's ongoing collaboration with Microsoft, which included strengthened integrations with Microsoft Teams, Office, and more. Further, in the third quarter, we enhanced integrations with Slack that will help enable Box to be a content layer within the Slack environment. We launched our integration between BoxSign and Salesforce and announced our Box app for Zoom to make it even easier for our users to work together securely and effectively across distributed teams. We believe that our neutral platform will remain a critical reason customers select Box, especially as they want to work across Microsoft, Salesforce, Google, and many other platforms. We are incredibly focused on bringing innovation and in-demand features to our platform rapidly, and we will continue to double down on the product capabilities and investments that we know are working. Going into next year, we see significant opportunity to expand our content cloud platform into differentiated and important areas that continue this strategy, like further ransomware protection features, new ways to publish content to teams and departments, content analytics, improved native collaboration features, enhanced workflow automation, further integrations with products like Salesforce, platforms like Microsoft, Google, IBM, and many others, further platform enhancements, and much more. Switching to go to market, the strength in our third quarter results is also the result of a number of initiatives that we have implemented over the past several quarters. Our land and expand go-to-market model delivers optimized pricing and packaging offerings as we continue to double down on key verticals such as life sciences, financial services, the federal government, and other sectors. Since rolling out our new simplified suites offering called Enterprise Plus, we have seen even more new and existing customers recognize the full value of the Box platform. As we have discussed on previous calls, we know that when a customer adopts our multi-product offerings, we see greater total account value, higher net retention, higher gross margin, and a more efficient sales process. You can see the success of our go-to-market efforts clearly reflected in our Q3 customer expansions. For instance, a large bank in the United States did a six-figure expansion with the purchase of Enterprise Plus to replace their core security system and take advantage of Box's security posture, integrations, and user experience. With Box, the organization can now securely collaborate on critical content with customers, vendors, and partners. An agency of the US government expanded its use of Box with a six-figure ELA and the purchase of Enterprise Plus. They selected Box to reduce threat exposure, through a greater network of controls and to deploy Box Relay to streamline approval processes for new official policy and governance documents. And finally, a multinational pharmaceutical and biotech company purchased a three-year ELA with Box and expanded its use of Box governance to power secure collaboration company-wide and with external parties as they continue groundbreaking research of COVID-19. Our strategy is to continue to optimize our land and expand model to bring the full power of the content cloud to our customers, driving wider seat adoption, higher price per seat, and greater stickiness and retention by making our customers wildly successful with Box. Internally at Box, we kicked off fiscal 22 as our year of growth. It is a testament to our employees' hard work and dedication that Q3 was yet another strong quarter, with continued sequential revenue growth reacceleration and operating margin improvements. As a result, we have raised our revenue and operating margin guidance for the full fiscal year 2022. The confluence of remote work, digital transformation, and cybersecurity challenges is causing enterprises to rethink how they work with their content and we believe Box is uniquely positioned to gain from this shift. With that, I'll turn it over to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Q3 was a particularly strong quarter for Box across all metrics, marked by accelerating revenue growth, improvements in our net retention rate, and record gross and operating profits. Revenue of $224 million was up 14% year-over-year, a third consecutive quarter of accelerating growth and above the high end of our guidance. Customer demand for our expanded content cloud offerings and strong sales execution are driving results, with 100K-plus deals up 56% year-over-year and 100K-plus suites deals growing 177% from the prior year. As our customers are increasingly adopting products with more advanced capabilities, roughly 30% of our revenue is now attributable to customers who have purchased suites, a significant increase from the high teens a year ago. We ended Q3 with remaining performance obligations, or RPO, of $948 million, a 25% year-over-year increase, and exceeding our revenue growth by a full 11 percentage points. Q3's RPO growth demonstrates the increasing value we're delivering to customers, leading to longer-term agreements to support our customers' content strategies. We expect to recognize more than 60% of our RPO over the next 12 months. Q3 billings of $231 million grew 25% year-over-year and well ahead of our expectations to deliver a Q3 billings growth rate roughly in line with revenue growth. This outcome reflects the continued strong sales execution that we've been seeing in our enterprise and SMB markets. Our net retention rate at the end of Q3 was 109%, up from 106% in Q2 and up significantly from 103% in the year-ago period. StrongSuite's momentum is accelerating customer traction and adoption, driving an improvement in our customer expansion rate and a strong and stable annualized full churn rate of 5%. We are proud of the increase in net retention that we've achieved this year, and we expect to deliver continued improvements in this metric on an annual basis. Turning to margins. Gross margin came in at 74.7%, up 130 basis points from 73.4% a year ago. Q3 gross profit of $167 million was up 16% year over year, exceeding our revenue growth rate by 200 basis points. Our strategy to optimize our data center footprint and public cloud infrastructure continues to deliver hardware and software efficiencies, and we're well positioned to deliver additional gross margin expansion over time. We continue to improve our profitability, and we are steadfastly committed to unlocking further leverage in our operating model. We are increasingly focusing our hiring in lower-cost locations to expand our talent pools and generate additional leverage. Most notably, we're steadily scaling our engineering center of excellence in Poland, where we're now approaching 100 full-time employees. Q3 operating income increased 32% year-over-year to $46 million, for 20.7% operating margin, a 270 basis point improvement from 18.0% a year ago. We delivered 22 cents of diluted non-GAAP EPS in Q3 above the high end of our guidance and up from 20 cents a year ago. Our Q3 GAAP EPS result included a one-time seven cent impact from costs related to shareholder activism fees in the quarter. I'll now turn to our cash flow and balance sheet. In Q3, we delivered cash flow from operations of 46 million, up 2% from the year-ago period, and up 33% year-to-date. We also generated free cash flow of 31 million, a year-over-year improvement of 19%, and a significant increase of 73% year-to-date. Capital lease payments, which we include in our free cash flow calculation, were 12 million, down from $15 million in Q3 of last year. For the full year of FY22, we continue to expect CapEx and capital lease payments combined to be roughly 7% of revenue as compared to 9% of revenue last year. Let's now turn to our capital allocation strategy. We ended the quarter with $709 million in cash, cash equivalents, restricted cash, and short-term investments. Over the last couple of years, we've been able to significantly improve our profitability and cash flow generation while continuing to make prudent investments to extend our leadership position and re-accelerate growth. We remain committed to opportunistically returning capital to our shareholders. As such, our board of directors recently authorized a new 200 million common stock repurchase program. Combined with our previously announced 500 million buyback authorizations, We now intend to opportunistically return $700 million to our investors in the form of stock buybacks. Including shares repurchased to date, we have approximately $260 million of remaining buyback capacity. In addition to a robust stock repurchase program, we intend to leverage our strong balance sheet and consistent cash flow generation to invest in key growth initiatives and to fund strategic M&A opportunities that will enhance and accelerate our product roadmap. Our sign request acquisition earlier this year highlights our disciplined approach to M&A as it accelerated our product innovation and enabled us to more rapidly deliver highly demanded features to our customers. With that, I would like to turn to our guidance for Q4 and fiscal 2022. For the fourth quarter of fiscal 2022, we anticipate revenue of $227 to $229 million representing 15% year-over-year growth at the high end of this range, and a fourth consecutive quarter of revenue growth acceleration. We expect our non-GAAP operating margin to be approximately 21%, representing a 270 basis point improvement year-over-year. We expect our non-GAAP EPS to be in the range of 22 to 23 cents, and GAAP EPS to be in the range of negative six to negative five cents, on approximately 158 million and 150 million shares, respectively. We expect our Q4 billings growth to be in the high single-digit range. Q4 billings will be negatively impacted both by currency exchange rates, as well as one of our largest customers moving from annual billings to semi-annual billings upon their Q4 invoicing. Combined, we expect these factors to result in a cumulative one-time downward impact of roughly four percentage points of billings growth. We continue to expect to deliver FY22 billings growth at a rate above our revenue growth rate with roughly 15% year-over-year billings growth in FY22, a full six percentage point improvement from the prior year. For the full fiscal year ending January 31st, 2022, As a result of our strong Q3 results, we are raising our revenue, operating margin, and EPS guidance for the full fiscal year. We expect FY22 revenue to be in the range of $868 million to $870 million, up 13% year over year at the high end of this range. This is an increase from last quarter's full year guidance of $856 to $860 million, and represents a 200 basis point acceleration from last year's revenue growth. We expect our non-GAAP operating margin to be approximately 20%, representing a 460 basis point improvement from last year's results of 15.4%, and an improvement over our previous guidance of 19.5%. We now expect our FY22 non-GAAP EPS to be in the range of 83 to 84 cents, on approximately 164 million diluted shares and up from 70 cents in the prior year. Our GAAP EPS is expected to be in the range of negative 35 to 34 cents on approximately 156 million shares. Finally, we continue to expect our FY22 revenue growth rate combined with our FY22 free cash flow margin to be at least 32%, a significant 600 basis point improvement from last year's outcome of 26%. Our strong Q3 performance clearly demonstrates that our content cloud platform is resonating with customers as we execute on our strategy to drive long-term profitable growth. This year, we're on track to deliver four consecutive quarters of revenue acceleration while generating operating leverage across the business. We are well on our way to deliver against our target of generating revenue growth plus free cash flow margin of 40% in FY24 two years from now. Before we conclude, I'll hand it back to Aaron for a few closing remarks.