Box, Inc.

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box first quarter fiscal 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Cynthia Haponia, you may begin your conference.

Good afternoon and welcome to Box's first quarter fiscal 2023 earnings conference call. I am Cynthia Haponia, Vice President, 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 also 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 call on Twitter at the handle at boxincir. On this call, we'll be making forward-looking statements, including our Q2 and full year fiscal 2023 financial guidance, and our expectations regarding our financial performance for fiscal 2023 and future periods, including our free cash flow, gross margin, operating margins, operating leverage, future profitability, net retention rates, unrecognized revenue, remaining performance obligations, revenue and billing, 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 our capital allocation strategies, including M&A and potential repurchase of our 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 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 from statements made on this earnings call. These forward-looking statements are being made as of today, May 25, 2022, 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 and 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 results in our earnings press release and in the related PowerPoint presentation, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand the call over to Aaron.

Thanks, Cynthia, and thank you all for joining the call today. We are off to a strong start in fiscal 23, delivering first quarter revenue growth of 18% above our guidance and representing a fifth consecutive quarter of accelerating revenue growth. Our continuous focus on profitability resulted in non-GAAP operating margin of 21%, up 360 basis points from 17% a year ago. Because of this strong momentum, and even with the impact of FX, which Dylan will describe in more detail shortly, we are raising the midpoint of our revenue range and raising our operating margin guidance and EPS guidance for the full fiscal year. In Q1, we continued to execute on our product roadmap as we address a $74 billion market opportunity. We announced Box Canvas, our native virtual whiteboarding and visual collaboration solution, while also launching significant product enhancements with Box Sign, workflow with Box Relay, and security and compliance with Box Shield. We deepened integrations across several of our key technology partners, and we expanded our customer relationships while continuing to add new customer logos. The success of our platform strategy is shown in our strong customer metrics as customers are leveraging our content cloud platform to transform their businesses and power new ways of working. In the first quarter, our net retention rate was 111% up from 103% in the prior year, driven by strong customer expansion rates. And for our large deals, over $100,000, we had 60 new deals, and we had a 73% attach rate of suites, up from a 49% attach rate in Q1 of fiscal 22. We continue to see healthy attach rates in the US and EMEA with improvements of our attach rates in Japan. Our strong Q1 fiscal results and customer metrics underscore that our growth strategy is working. and that we are aligned to the key trends that are driving the future of work. Companies today are dealing with a more and more distributed and hybrid workplace as they implement the digital transformation of their business processes and face increasing security challenges across their organization. Our content cloud addresses these trends by building out capabilities to power the full lifecycle of content in a single platform. As we continue to double down on these product capabilities and investments, we will add more value to our customers and expand Box's TAM. In Q1, we announced a major new element of our content cloud with Box Canvas, allowing us to enter an additional fast-growing market with our platform. With the prevalence of remote and hybrid work now a permanent part of nearly every business, the ability to seamlessly collaborate on any type of content is critical. Over the past couple of years, we've seen a huge increase in companies looking to collaborate on visual content, from product design, storyboards, and project plans, to flow charts, diagrams, and more. Fox Canvas is an intuitive visual collaboration and whiteboarding experience that powers free-form collaboration while leveraging all of the strengths of the security, governance, and compliance built directly into Box. With Box Canvas officially launching later this year, it will be included across all of our product plans, adding even more value and enabling our customers to benefit from Box in new use cases across their organizations. With products like Box Canvas, Box Sign, and Box Notes delivered as included capabilities in Box's core subscriptions and bundles, Customers benefit from getting new value from Box instantly, especially as companies look to consolidate IT spend from various point solutions. Box remains in a strong position to help retire disparate e-signature technologies, collaboration tools, enterprise content management systems, and much more. It's a win-win that drives ROI for our customers, as well as providing additional upside as customers move up to higher tier plans for more features. Since our launch of VoxSign this fall, we have announced major new enhanced capabilities, integrations, and developer tools to power even more advanced signature-based processes, helping customers move more of their transactions to the content cloud. We are pleased with the momentum we are seeing in customer adoption and use of VoxSign. First quarter customers include a global legal services provider that moved to Box with a six-figure deal in order to provide its network of lawyers who work on the most sensitive matters with secure internal and external content collaboration along with BoxSign for secure and affordable e-signature options for boilerplate agreements. A U.S.-based real estate investment trust purchased Box in Q1 and deployed BoxSign across its organization to support the signing and collaboration around commercial leases. And finally, a global biopharma company who has been a Box customer since 2018 moved to Enterprise Plus in Q1 with plans to use Box Sign, which will be critical as the company continues to scale and they release new drugs to market. Box's security capabilities also remain a critical driver of why customers choose our content cloud. Data security, compliance, and privacy remain more important than ever. In Q1, we launched new capabilities for Box Shield, our advanced security solution for protecting content in the cloud, including the ability to apply malware deep scan to Microsoft Office files and adding automatic watermarking to classified documents. Throughout this year, we will continue to extend our leading security, compliance, and data governance capabilities. Finally, the ability to integrate deeply across the SaaS landscape is an integral part of our product strategy. We recently announced a deepened integration with Zoom with the launch of the Box app for Zoom chat channels to make it even easier for users to work seamlessly together across the two platforms. In Q1, we also announced the all-new Box App Center, a destination for users, admins, and developers to easily discover and access the more than 1,500 applications that integrate with Box, highlighting the power of Box's deep partnerships with Microsoft, Google, Slack, Zoom, WebEx, ServiceNow, IBM, and many other major technologies. As we look forward in FY23, we believe it will be Box's biggest innovation year ever. We will continue to focus on our three core differentiators of frictionless security and compliance, seamless collaboration and workflow, and an open platform that's integrated into every application. And we'll continue to build products that reinforce each other, powering the full lifecycle of content and empowering our customers to save money by retiring other tools. Above all, we will ensure that our customers derive more and more value from Vox, as they move more of their data onto our platform. This is a virtuous flywheel that drives our business model, and we're only in the early innings of what's possible. Turning to go-to-market, as we discussed during our analyst day in late March, our strength and business momentum is a result of a number of initiatives that we have undertaken to scale our land and expand go-to-market motion. These have included optimized pricing and packaging, with our latest multi-product offering, Enterprise Plus. In Q1, Enterprise Plus accounted for more than 80% of our multi-product suites deals, a remarkable achievement since the launch of E-Plus in July of last year, and a much quicker ramp than we saw when we launched our first suites. Our Q1 customer expansions and new wins with Enterprise Plus include an agency of the United Nations that purchased Enterprise Plus and Keysafe as they looked to use Box with other cloud apps, including Salesforce, to build a modern digital platform for the approval of new vaccines and medicines from across the globe. Their process now is currently carried out via email, paper, USB sticks, and DVDs. A leading biotech company that invents life-transforming medicines for people with serious diseases moved to Box in a six-figure Enterprise Plus deal. This new customer will be using Box for regulated content and high-value use cases. The fact that Box supports GXP compliance and that our offering provides a better experience to both internal and external parties as they work together on clinical trials was critical for the selection of Box with the decision makers at this company. And finally, a major automotive company purchased Box with a seven-figure Enterprise Plus deal, enabling them to eliminate on-premises file servers, and solve key security issues. By replacing file servers with Box, they will centralize content management and simplify secure collaboration internally and externally with partners. Our strategy aims to bring the full power of the content cloud to our customers. And we know that when a customer adopts our multi-product offerings, we see a greater total account value, higher net retention, higher gross margin, and a more efficient sales process. We are also continuing to double down on all of our efforts around deployment, adoption, and truly helping our customers transform with Box. As such, in Q1, we launched our new Box Consulting Portfolio, a completely redesigned program that makes it easier to position, sell, and deliver these critical customer success services to empower any organization to achieve their Content Cloud goals. In summary, our strong first quarter results and the continued momentum we are seeing in our business is the direct result of the execution and focus of the team at Box. Despite macro trends and currency impacts, we have continued to execute on our content cloud platform to ensure that we will continue to drive further annual revenue acceleration. At the same time, we remain steadfastly committed to expanding our operator margins by focusing on the highest ROI initiatives across the business, scaling in lower-cost locations, improving gross margins, and more. The future of work is here, and the Content Cloud platform has never been better positioned to capitalize on these trends of hybrid, distributed, and digital-first work. With that, I'll hand it over to Dylan. Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In fiscal 2023, we have three key financial objectives, accelerating year-over-year revenue growth, expanding operating margins through our focus on operational excellence, and prudently allocating capital to optimize shareholder returns. We had a strong start to FY23, delivering against all three of these objectives. As a result, we are raising the midpoint of our revenue guidance and raising our operating margin guidance and EPS guidance for the full fiscal year. In Q1, we delivered revenue of $238 million, up 18% year over year, a fifth consecutive quarter of accelerating growth, and above the high end of our guidance of $235 million. This outperformance was driven by strong deal pacing and higher-than-expected non-recurring revenue. Our Q1 revenue growth rate includes an incremental impact of negative one percentage point from FX versus our initial expectations. We continue to see strong demand for our content cloud platform. In Q1, we closed 60 100K plus deals of which 73% were sweep deals. As our customers are increasingly adopting products with more advanced capabilities, Roughly 37% of our revenue is now attributable to customers who have purchased suites, an exceptional 12 percentage point increase from 25% a year ago. We ended Q1 with remaining performance obligations, or RPO, of 1.0 billion, a 16% year-over-year increase. Our RPO growth was negatively impacted by six percentage points from FX. We expect to recognize more than 60% of our RPO over the next 12 months. Q1 billings of $172 million grew 8% year-over-year. Our billings growth was negatively impacted by an incremental 4 percentage points versus our initial expectations due to currency headwinds. Our net retention rate at the end of Q1 was 111%, up 800 basis points from 103% in the prior year. We continue to see strong customer expansion and a stable annualized full churn rate of 4%. We still expect our net retention rate to remain roughly consistent throughout FY23. Gross margin came in at 76.3%, up 330 basis points from 73.0% a year ago. Q1 gross profit of $182 million was up 23% year over year, exceeding our revenue growth rate by a full 500 basis points. We are delivering material profitability leverage via our public cloud migration strategy, and we remain focused on unlocking additional leverage to improve our long-term gross margin profiles. Q1 operating income increased 43% year-over-year to $49 million, and our 20.6% operating margin was up 360 basis points from the 17.0% we recorded a year ago. We delivered $0.23 of diluted non-GAAP EPS in Q1, up from $0.18 a year ago. Q1 non-GAAP EPS includes a negative impact of $0.03 from currency headline. I'll now turn to our cash flow and balance sheet. In Q1, we delivered cash flow from operations of 108 million, up 14% from the year-ago period. We also generated free cash flow of 91 million, a year-over-year improvement of 20%. We generated record cash flow from operations and free cash flow in Q1, driven by very strong collections including several large payments that we had expected to collect in Q2. Capital lease payments, which we include in our free cash flow calculation, were $12 million down from $13 million in Q1 of last year. For the full year of FY23, we continue to expect CapEx and capital lease payments combined to be roughly 5% of revenue in Q2, and roughly 5% of revenue for the full year of FY23 as compared to 6% of revenue last year. Let's now turn to our capital allocation strategy. We ended the quarter with $520 million in cash, cash equivalents, restricted cash, and short-term investments. As we've been doing, we expect to use our strong balance sheet and our increasing free cash flow generation to execute a disciplined M&A strategy to enhance and accelerate our product roadmap while also generating shareholder returns via additional stock repurchases. In Q1, we repurchased 4.2 million shares for approximately 110 million. As of the end of Q1, We had approximately 148 million of remaining buyback capacity, and we remain committed to opportunistically returning capital to our shareholders. With that, I would like to turn to our guidance for Q2 and fiscal 2023. As you know, since our prior earnings announcements on March 2, 2022, the U.S. dollar has strengthened versus the currencies in which Fox transacts our international business, resulting in a larger-than-expected FX headwind to both Q2 and the full year of FY23. As a reminder, approximately one-third of our revenue is generated outside of the U.S.