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spk11: Good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Box Incorporated fourth quarter and 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 star 1. Thank you. Cynthia Japonia, Vice President of Investor Relations, you may begin your conference.
spk10: Good afternoon, and welcome to Box's fourth quarter and four-year fiscal 2023 earnings conference call. I'm Cynthia Japonia, Vice President, Investor Relations. On the call today, we have Aaron Levy, Box's co-founder and CEO, and Dylan Smith, Box's 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 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 calls on Twitter at the handle at boxincir. On this call, we will be making forward-looking statements, including our Q1 and full-year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 24, fiscal 25, and future periods, including free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings, and the impact of foreign currency exchange rates, and our expectations regarding the size of our market opportunity, our planned investments, future product offerings, headcount targets, and growth strategies, our ability to achieve long-term revenue, operating margins, and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models, and partnerships, our ability to address enterprise challenges and deliver cost savings for our customers, the impact of the macro environment on our business and operating results, and our capital allocation strategies, including 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 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 1st, 2023, and we disclaim any obligation to update or revise them should they change or cease to be up to date. In addition, today's call, we will be discussing 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 will 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 our 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.
spk15: Thanks, Cynthia, and thank you all for joining the call today. We had a strong year at Box. exceeding a $1 billion annual revenue run rate on a quarterly basis and delivering a healthy balance of revenue growth and increased profitability. For the full year, we achieved 13% annual revenue growth. Our operational excellence drove significant margin expansion as we achieved 23% non-GAAP operating margins, up more than 330 basis points from 20% a year ago. Our continued execution and our sharp focus on profitability allowed us to deliver on our revenue growth plus free cash flow margin target of 37%, a 400 basis point improvement from last year's outcome of 33%. We delivered these results in the midst of a challenging macro environment, and our ability to execute on delivering bottom line performance, even with a slowing demand environment, is a testament to the strategies we put in place several years ago to lower our cost structure while still investing for long-term, durable revenue growth. Turning to Q4, we achieved revenue growth of 10% year-over-year while delivering record quarterly operating margins, gross margins, and EPS. As expected, our Q4 net retention rate was down year-over-year, impacted by pressure from customers' lower headcount growth and greater budget scrutiny on internal transformation initiatives. In some cases, These dynamics impacted our customers' IT decisions and priorities across their business. And this dynamic included some deals pushing out or deals getting incrementally smaller than anticipated, leading also to a softening in billings as we exited FY23. Even with this added macro pressure, our platform remains top of mind and extremely relevant for customers as they look to secure their most important data, drive up productivity, or retire legacy IT systems and simplify their IT stack. Examples of Box delivering this value to our customers in Q4 include a global logistics company that upgraded to Enterprise Plus through a six-figure deal to leverage Shield Governance and Sign and the unlimited Salesforce and Sign integrations. With Box's additional security and e-signature capabilities, the company expects to see significant cost savings while improving employee productivity by eliminating the need for multiple solutions. The medical research center that purchased Enterprise Plus in Q4 will be retiring their legacy share file environment, as well as other systems to reduce cost and complexity while increasing their security posture with Box. This move also sets up Box for additional expansion when a new research facility opens next year. As I continue to speak with CIOs and CEOs in a wide range of industries, Their digital transformation imperatives remain focused on enabling productivity across their business, especially in a hybrid work environment. They're working to optimize their spend and simplify their IT stack as they move more to the cloud, and most importantly, ensure they're dealing with a number of challenges in data security and compliance, ranging from ransomware threats to data leak challenges. At the center of these challenges is how enterprises work with their content. Fragmented content architectures have led to greater security risks, lower productivity due to complex tools, and limited ability to automate anything, and too many overlapping or legacy solutions with significant IT management overhead. We know that our content cloud is best positioned to help customers solve this challenge. Our platform enables our customers to drive up productivity in their organization, simplify their IT stack and optimize spend, and protect their most important data from a wide range of threats. And we continue to solve these challenges for customers with even more innovation in Q4, such as releasing key enhancements to Box Shield, adding new authentication and verification controls to our platform to provide customers with greater protection against unauthorized account access. We launched the public beta version of Box Canvas, our virtual whiteboarding solution, and we continue to integrate deeply across the SaaS landscape with the delivery of new enhancements to the Boxer Salesforce integration on the Salesforce AppExchange. And we're just getting started. As I look forward into FY24, we will be going deeper on our three major pillars of differentiation. To help protect our customers' most important data, we will be dramatically enhancing our core security and admin features for all customers, building up further Shield features to support an evolving threat landscape, expanding governance capabilities to support more complex lifecycle requirements, and continuing to maintain our high compliance standards. To help customers drive up productivity with seamless internal and external collaboration and workflows, we will be continuing to improve our core product experiences and usability, focusing on adoption and awareness of products to all users and admins, doubling down on sign and relay for advanced workflows, building out our modern collaboration experiences for the hybrid workplace with Notes and Canvas, expanding to help our customers disseminate content to internal and external audiences more easily, enhancing our content insights capabilities to offer richer visibility into what's happening with your content, and more. With our platform, we will continue to focus on connecting content across all our customers' IT systems, making Box the single source of truth for content in the enterprise, and we'll continue to enhance our critical partner integrations like Cisco, Google, IBM, Microsoft, Salesforce, ServiceNow, Zoom, and many others, while also further building out the tools for customers to build applications on Box. We will also be further building out our security ecosystem, driving enhanced partnerships across the wide range of security partners like IBM, Okta, Palo Alto Networks, and Splunk. With our content cloud, we have built the defining company that helps enterprises store, secure, automate, collaborate, sign, digitize, analyze, and gain insights from their most important information. We know that our customers' most important data resides in their content. It's their contracts, their movie scripts, their marketing campaigns, critical research reports, project plans, and more. The recent breakthroughs in AI and large language models enable a new universe of use cases that we can also solve for customers. Building on box skills, our framework that applies best-of-breed AI technologies from leading providers to our customers' content inbox, we see all new use cases for enterprises to generate more value from their content when it's in box. As an example, being able to query box for the risky clauses of a particular contract, synthesize a research report for key insights or summarization, quickly find the answer to a sales prospect's question from a document, extract key metadata from an invoice without any pre-training and much more. This vision will take time, but we expect the digitization of content combined with AI will bring us exciting new product opportunities in the future. Now, turning to go-to-market. We continue to enable more new and existing customers to recognize the full value of the Box platform with increased adoption of our multi-product offerings in Q4. Enterprise Plus, our latest suite offering, was over 90% of our suite sales in large deals, with suites now representing 72% of deals over $100,000, up from 65% a year ago. We saw continued solid suites attach rates in large deals across all geographies. Our Q4 customer expansion and new wins with Enterprise Plus include a multinational healthcare company, that became an Enterprise Plus customer through a six-figure upsell, enabling them to use Box zones to meet in-region EU storage compliance requirements, roll out Shield to safeguard their collaboration with partners, and leverage Box's GXP compliance to accelerate validation of complex use cases. A leading global manufacturer that chose to go wall-to-wall with Box with a six-figure Enterprise Plus deal as well. With Box, they will be able to integrate across their current tools like Microsoft Teams, O365, and RingCentral, and execute some of their most mission-critical business operations, including contract management in R&D and sales approval workflows, while also fulfilling regulatory compliance requirements. We recently held our global go-to-market kickoff, and the team is fully energized to go tackle the opportunity ahead of us. Throughout FY24, we plan to continue to focus on ensuring our over 100,000 customers get the most value out of Box and continuing to focus on moving more of the customer base into Enterprise Plus. Our programs across go-to-market are all about doubling down on our land, adopt, expand, retain motion through our digital engine, inside and field sales efforts, working with key strategic system integrators and technology partners, applying more focus to our key international geographies, as well as going deeper in key industries like financial services, life sciences, healthcare, public sector, and more. Finally, over the past year, we have been executing on our strategy to drive long-term sustainable growth while also delivering continued operating margin improvements. As we began to see the impact from the challenging macro, we adapted to the environment and continued to deliver significant growth and operating margin expansion. Even amidst the ongoing macro dynamics, which may pressure top line results at times, we remain focused on continuing to deliver bottom line improvements. We are driving efficiency across the business, making ROI-based decisions across every area of investment from product to go-to-market initiatives, continuing to improve our gross margin by fully moving into the public cloud, and driving operational excellence in everything we do. Our resilient financial model allows us to respond dynamically to the market environment, which is even more important as we enter into a period of incredible change throughout the world of business and technology. There has simply never been a more exciting time for what we can now do with content, and our business strategy will ensure that Box is at the very center of how customers work. With that, I'll hand it over to Dylan.
spk06: Thanks, Aaron.
spk04: Good afternoon, everyone, and thank you for joining us. As Aaron stated, FY23 was a strong year for Box as we delivered on the three key financial objectives we laid out at the beginning of the year. We accelerated annual revenue growth on a constant currency basis, expanded operating margins significantly, and optimized shareholder returns through a well-executed capital allocation strategy. Additionally, we are very proud of the strong cash flow margin expansion we delivered in FY23. In FY23, we delivered annual revenue of $991 million, up 13% year-over-year or 17% in constant currency, and in line with our initial full-year guidance, despite experiencing significantly greater currency and macroeconomic headwinds than we initially anticipated. FY23 also marked our first year of achieving GAAP profitability, a significant milestone for us. We expanded our non-GAAP operating margin by 330 basis points to deliver 23% operating margin, a full percentage point ahead of our initial expectations. We generated $238 million in free cash flow, a 40% increase year over year. Finally, we achieved our target of delivering revenue growth plus free cash flow margin of 37% in FY23, demonstrating the resiliency of our financial model amidst a challenging macroeconomic environment. Turning to Q4, revenue of $256 million increased 10% year-over-year or 15% in constant currency. We ended Q4 with remaining performance obligations, or RPO, of $1.2 billion, a 16% year-over-year increase, or 21% growth on a constant currency basis and once again growing faster than revenue. We expect to recognize roughly 60% of our RPO over the next 12 months. Q4 billings of $357 million grew 6% year-over-year or 9% in constant currency. Q4 billings were partially impacted by the early renewals we experienced in the prior quarter and continued scrutiny of larger deals. In Q4, we had approximately 1,650 total customers paying more than $100,000 annually, representing a 16% year-over-year increase. Our suite's attach rate was 72% in deals over 100K, up from 65% in the year-ago period, and in Q4, we saw consistent attach rates globally. Suites customers now represent roughly 46% of our revenue, up a full 11 points from 35% a year ago, demonstrating that customers are increasingly adopting Suites to support high-value use cases and to reduce cost and complexity for their organizations. Our net retention rate at the end of Q4 was 108%, in line with the expectations we set on our Q3 call. Our annualized full churn rate was 3% and improvement from 4% in the prior year, demonstrating continued product stickiness with our customers. In FY24, we expect full churn to remain at roughly 3% and our net retention rate to be roughly 106% as we anticipate continued pressure on seed expansion rates due to the macroeconomic climate where certain customers are reducing headcount and lowering IT budgets. We expanded gross margin by 340 basis points year-over-year to 78.5%, driven by continued efficiencies for our infrastructure strategy and the impact of higher price per seat due to strong suites adoption. Q4 gross profit of $201 million was up 15% year-over-year, exceeding our revenue growth by a significant 500 basis points, demonstrating the continued leverage in our business model. As I discussed on our last earnings call, we are completing the transition to running fully in the public cloud in FY24, and we'll see our redundant public cloud and data center expenses peak during Q1 and Q2. We expect gross margin to be approximately 76% in Q1 and Q2 before improving in the back half of this year. For the full year, we expect gross margin to be roughly 77%, positioning us with an even more efficient underlying cost structure to expand gross margin in the following year. In FY23, we achieved our Salesforce headcount target, growing our Salesforce by roughly 15% year over year. In FY24, we intend to grow our quota-carrying Salesforce in the mid-single-digit percentage range with a continued focus on our higher-performing geographies and segments. We continue delivering on our commitment to drive profitable growth with a 37% increase in Q4 operating income. Our record 26.0% operating margin was up an exceptional 520 basis points from the 20.8% we delivered in Q4 of last year. We delivered 37 cents of diluted non-GAAP EPS in Q4 above the high end of our guidance and up 54% from $0.24 a year ago, despite a negative impact of $0.05 from currency headwinds. I'll now turn to our cash flow and balance sheet. In Q4, we generated strong free cash flow of $75 million, representing 124% growth from $33 million in the year-ago period. In Q4, we delivered cash flow from operations of $92 million versus the 49 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were 11 million, down from 12 million in Q4 of last year. Let's now turn to our capital allocation strategy. We ended the quarter with 462 million in cash, cash equivalents, restricted cash, and short-term investments. In Q4, we repurchased 300,000 shares for approximately $9 million. For the full year, we repurchased 10.2 million shares for approximately $267 million. As a result, we have reduced our total diluted shares outstanding by more than 3% since last Q4. Our disciplined equity management approach and location strategy are paying off, enabling us to reduce stock-based compensation as a percentage of revenue by roughly 200 basis points year-over-year in fiscal 23, despite significant headwinds from foreign exchange rates. We will continue to be prudent in our equity compensation practices. We remain committed to opportunistically returning capital to our shareholders and leveraging our strong balance sheet and increasing free cash flow generation to to invest in key growth initiatives to drive long-term sustainable growth. As of the end of Q4, we had approximately 140 million of remaining buyback capacity under our current plan. With that, I would like to turn to our guidance for Q1 and fiscal 2024. We continue to see significant volatility in the FX environment even more recently. Given our international exposure, particularly in Japan, we expect FX to remain a headwind for us in FY24. At current spot rates, we expect a roughly 300 basis point headwind to revenue growth for the full year of FY24 on an as-reported basis. Due to the timing of when the dollar strengthened versus other currencies in which we do business over the past year, We expect to experience a 500 basis point headwind in Q1 with the impact becoming smaller throughout the course of the year. With respect to our FY24 expectations, we have factored in the current macroeconomic challenges into our guidance and our current expectations are for this environment to persist throughout FY24 for the first quarter of fiscal 2024. As a reminder, there are three fewer days in Q1 versus Q4, which we estimate creates a sequential headwind of approximately $9 million to revenue and 250 basis points to operating margin versus the fourth quarter of FY23. We anticipate revenue of $248 to $250 million, representing 5% year-over-year growth. This includes an expected FX impact of approximately 500 basis points to our Q1 revenue growth rate. We expect our Q1 billings growth rate to be in the mid single digit percentage range on an as reported basis, including an expected FX impact of approximately 500 basis points. We expect our Q1 RPO growth to once again be slightly higher than our anticipated Q1 revenue and billings growth rates. We expect our non-GAAP operating margin to be approximately 21% representing a year-over-year improvement despite an approximately 200 basis point headwind from FX and our temporarily duplicative data center expenses. We expect our non-GAAP EPS to be in the range of 26 to 27 cents representing a 17% year-over-year increase at the high end of the range and GAAP EPS to be in the range of negative four cents to negative three cents. Weighted average basic and diluted shares are expected to be approximately 145 million and 154 million respectively. Our Q1 GAAP and non-GAAP EPS guidance includes an expected impact from FX of approximately six cents. Our Q1 EPS guidance also includes a roughly one penny headwind due to a one-time write-off related to real estate consolidation. For the full fiscal year ended January 31, 2024. We anticipate our FY24 revenue to be in the range of $1.05 billion to $1.06 billion, representing 7% year-over-year growth at the high end of this range, or 10% on a constant currency basis.
spk06: We expect...
spk04: FY24 non-GAAP operating margin of approximately 25%, representing a 190 basis point improvement from last year's result of 23.1%. We expect our FY24 non-GAAP EPS to be in the range of $1.42 to $1.48, up from $1.20 in the prior year. Our GAAP EPS is expected to be in the range of 17 cents to 23 cents. Weighted average basic and diluted shares are expected to be approximately 145 million and 153 million, respectively. Our FY24 GAAP and non-GAAP EPS guidance includes an expected annual impact from FX of approximately 14 cents. Our FY24 billings growth rate is anticipated to be roughly in line with revenue growth on an as-reported basis. We expect FX to have a negative impact of roughly 100 basis points on our FY24 billings growth based on current spot rates. Finally, we expect our FY24 revenue growth rate combined with our increasing FY24 free cash flow margin to be approximately 35% based on today's current spot rates. As a reminder, this includes the combined 400 basis point headwind from FX to revenue and billings we discussed previously. As we look forward to FY24 and beyond, it is important to note that our ability to navigate through a slowing demand environment while expanding profitability is the result of a multi-year strategy we began years ago to lower our cost structure while investing for long-term durable growth. We saw the benefits of these initiatives in our FY23 results, and our outlook once again calls for operating margin and free cash flow expansion in FY24. While we expect our revenue growth to continue to be pressured by the economic environment, in FY25, we expect to deliver a revenue growth plus free cash flow margin of 40% to 42% with a greater weighting toward profitability improvements versus our prior expectations. We look forward to providing further details on our long-term financial model at our annual Financial Analyst Day in New York City on Tuesday, March 14th. The continued execution of our content cloud platform strategy and the discipline and focus of our boxers will drive a healthy balance of revenue growth and margin expansion in the years to come. With that, Erin and I will be happy to take your questions.
spk07: Operator?
spk11: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the question and answer roster. Your first question comes from the line of Steve Enders from Citi. Your line is open.
spk12: All right, great. Thanks for taking the question here. I guess I just want to ask a little bit and start on the outlook and how you're thinking about both 24 and 25. I guess within the assumptions that you're seeing currently, I mean, are you expecting for things to get worse here, or is it pretty much as expected? And then can we get a little bit more kind of details on, you know, how much things have changed from a duration and maybe, you know, deal size impact versus, you know, kind of what you're expecting before?
spk15: Yeah, thanks. This is Aaron. I think I'll maybe just first comment on the general way that we think with the outlook, and then Dylan can hop in on the second part. So, We want to be appropriately prudent just given the trends that we see in the market. I think that's reflected in our FY24 outlook and our initial commentary on FY25 around the kind of rebalancing a little bit more to profitability, though, with still a meaningful improvement on the rule of basis. So I think without sort of getting too much in the dynamics that we expect to see in the I think what we are trying to do is, again, drive a prudent set of expectations around what we see, particularly from a top-line standpoint, and then obviously make up as much of that delta in the form of bottom-line improvements. So for this year, again, it's somewhat of a continuation of what we saw in Q4 and just putting the right level of conservatism into the plan.
spk04: Yeah, and then to address kind of what we're seeing in some of these customer deals, You asked about durations where we have seen a continued lengthening in contract duration. So customers are continuing to make and more regularly making long-term commitments with Box. That's one of the big drivers of the very strong backlog growth that we saw of 24% and fueling a lot of the strength and the RPO growth as well. Deal cycles overall have remained relatively stable And what we have seen, talking about the average contract values, as we mentioned on our last call, this environment is leading to pressure on deal sizes for certain customers, as they might elect to go with the smaller initial deal, but the overall customer economics have remained very strong, and price per seat is actually up about 5% on a year-on-year basis.
spk12: Okay, that's very helpful context there. I guess maybe as we think about, you know, the deal environment again and the execution that you're seeing from sales reps, I guess any kind of further details that you can provide on, you know, how they perform versus the expectations and how you're thinking about, you know, productivity rates kind of moving forward given, I think you called out mid-single digit kind of investments on the sales side there.
spk15: Sure, yeah, I'll cover again some of the color commentary from the quarter, and then if Dylan wants to build on some of the productivity piece. But, you know, it's an interesting environment because, you know, if you look across the biggest deals, you know, across the period, they really do come from a wide range of industries, you know, tech, life sciences, healthcare, public sector. So I think, you know, there's sort of broad-based participation across industry, across segment. And there's just sort of this overlay of whatever the percentage may be of budget pressure, which means a deal that would have been X is maybe now 0.9X. Or in some cases, you might have a situation where a company is not growing their head count as quickly. And so obviously, that's going to put pressure on the total seat count that we would get from a normal expected upsell from that customer. So overall, I think an environment where we saw performance across the business, but just at a, you know, moderately muted level from maybe the expectations we would have had six months prior or whatnot. And then I think we're flowing through some of that prudence into the plan this year.
spk04: Yeah, and so as you'd expect, these macroeconomic dynamics do have a direct impact and, you know, provide some headwinds to the Salesforce productivity. And while we aren't expecting the environment to get better through the course of FY24, as a reminder, because of the ramp times that we see in our sales force, typically about six months for our SMB reps, nine to 12 months to become fully ramped on the enterprise side, the hiring that will be more metered this year, about 5%, kind of mid-single-digit range versus 15%, that really shows up in capacity for the following year and FY25. So really thinking about building that durable, longer-term growth despite some of the challenges that we're seeing this year.
spk07: Okay, perfect. Thanks for taking the questions.
spk11: Your next question comes from the line of George Iwanek from Oppenheimer. Your line is open.
spk08: Thank you for taking my question. You know, maybe building on the overall environment. Aaron, can you give us some perspective on what you're seeing in Japan and Europe with respect to deal engagement, you know, and, you know, channel support?
spk15: Yeah, so taking Japan first, you know, still a very kind of healthy environment for us. Great, great kind of channel support Overall, you know, we've gotten a lot better participation rate, for instance, on our suites deals in Japan, so we're very happy about that. You know, that number could still come up more over time, but we're just happy with the momentum there. And I called this out on the last earnings call, but I was in Japan in Q3. You know, just a lot of great kind of customer interactions, a lot of upsell potential from that customer base, as well as a bunch of new logos that we'd see in the mix as well. So very happy with the Japan performance. Again, all things considered with some of these macro dynamics. And EMEA, less of a channel-centric approach there, just picking up on your question specifically. But overall, working across a range of industries and segments within EMEA, driving that execution with, again, that slight added element of the macro environment still being in the mix. So that's how I'd kind of characterize it.
spk08: Maybe looking at your net expansion rate, the 180% that you had in the fourth quarter, how are you accounting for that for the coming year? Do you expect relatively stable expansion or are you pulling back expectations a bit from the fourth quarter level?
spk04: Yeah, so for the coming year, we expect that net retention rate to be roughly 106%. So we do expect to have a very strong and stable 3% full churn rate, but that seed expansion that we had called out earlier, we do expect that to put some downward pressure driven by the economic environment, which is really what impacts the net retention rate going forward.
spk07: Operator, next question.
spk11: Your next question comes from the line of Josh Bayer from Morgan Stanley. Your line is open.
spk09: Great. Thanks for the question. So I'm hoping that you could just help bridge the gap between the 15% constant currency billings growth from this year and the 10% constant currency revenue growth for next year.
spk04: Sure. So there are a handful of factors that can create a delta between the two on a quarterly basis. So especially, you know, things like, you know, early renewal volumes can fuel billings. We had called out there was a large multi-year prepay in Q3 that, you know, fueled billings this past year at kind of a disproportionate amount and things like that. But then part of it is also just thinking through, we saw prior to some of the economic environments dynamics kicking in, in the first half of the year, saw stronger billings outcomes on that side as well, kind of adjusting for those unusual factors that don't flow into revenue. So while the two are fairly closely correlated, if you look at deferred revenue growth ending the year in constant currency was 10%. And that tends to be more closely aligned to the following year's revenue growth.
spk09: Okay, that's helpful. And then I wanted to ask in regard to the step down and some of those rule of targets, I mean, I guess FY24 may be a little bit more straightforward given the revenue growth guide. the macro, and FX. Just wondering if you could add some more context for what that's saying about FY25 stepping down. Just thinking through growth prospects that might be more positive in FY25 off of the lower FY24. Are you sort of incorporating macro into FY25? And really just wondering if there's other changes sort of beyond macro that's embedded in that rule of change for FY25?
spk15: Yeah, so great question, and I'll kind of kick off and then let maybe Dylan build. But, you know, as we're navigating this environment, I think, and as everybody, I think, is talking to other teams on this, you know, it's always dangerous to sort of get into a position where you're guessing when a macro is is going to, you know, change for the better. And so we're trying to, you know, sort of not be in a position where we're, you know, largely baking in too many assumptions on that front as opposed to really putting out a framework that says, you know, there's obviously a range of revenue growth rate outcomes. A lot of that will be seen this year in terms of what billings look like and what, you know, what we see on the RPO front throughout FY24 that obviously flows into FY25. And then as a result of that, you know, we think that the operating margin rate and then thus free cash flow margin will be kind of functional somewhat to, you know, to the outcome on the revenue side. And so we wanted to just call out that that was, you know, going to be, you know, really in that kind of 40 plus range, 40 to 42 with a greater weighting on the profitability front. And so just calling that out from, you know, some prior models that have been out there. And so we still think that it's going to be a pretty meaningful uplift on a rule of basis, obviously getting us above the 40 mark. But that's the kind of current expectation we're trying to lay out.
spk04: Yeah, and just to build on that a bit in terms of how it all works together is, as we had mentioned, we are expecting to see a pretty challenging macroeconomic environment throughout the duration of FY24. And it's really that performance and the bookings in this coming year that's going to drive the revenue for FY25. So that's kind of how it fits together is we are expecting that revenue pressure to persist in FY25 versus what our expectations had been a year ago. But to reiterate what Aaron had said, we are expecting to deliver a greater profitability than our prior expectations. And we'll get into a lot more of the details into the dynamics and how we're thinking about the years ahead in just a couple weeks at our analyst day.
spk09: Great, thank you.
spk06: Cool, thanks.
spk11: Your next question comes from the line of Rick Hilliker from Credit Suisse. Your line is open.
spk14: Hi, thanks for taking my question. Dylan, I was wondering if you can just go through the trajectory of gross margin as we think about the coming year? I think you gave us some comments last quarter, but I thought it might be helpful to just hit on those again to make sure we're on the same page as we progress through the year and maybe where the exit rate looks like.
spk04: Sure. So we're expecting our gross margins driven by, you know, combination of the kind of peak duplicative data center expenses as well as FX impacts to be lower in the first half of the year, about 76%, and then in the back half to be in the high 70s, so kind of 77% for the full year next year. But then exiting in that high 70s range, we do expect to deliver higher gross margins in the kind of upper 70s as we move into the following year. So really all about that trajectory heading into FY25 is where you'll really see the impact of the data center migration.
spk14: Awesome. That's really helpful. And then last one on my side, was wondering if you can give us any comments or maybe we can also talk about it at the analyst day, but your sense of where multi-year bookings start to shake out, how that's looking for the coming year and Basically how that's trended would be really helpful.
spk04: So we don't tend to see a very high volume at all in terms of multi-year prepayments. So from a contract duration standpoint, it's increasingly the norm, especially for enterprise customers, that they're signing up for multi-year commitments with Boxx. typically three years, but billed annually. We don't incentivize either customers or our sales force to sign multi-year prepaid deals. So we don't see those very often. We do see them from time to time, such as the one that we called out in Q3 where a large customer elected to do that for dynamics on their end. But we don't expect that to change in the coming year. So I would say the trend of seeing it being the standard that customers are signing multi-year agreements prepaid annually is what we continue to expect. So don't expect multi-year prepayments to be much of a factor in the coming year.
spk14: Okay. Thank you so much.
spk11: Your next question comes from the line of Noah Herman from JP Morgan. Your line is open.
spk02: Hey, guys, thanks for taking our questions. Just, you know, any other incremental color you could provide on the global go-to-market kickoff you briefly mentioned, just to get a better sense of some of the key go-to-market initiatives heading into this year? And then just a quick follow-up. Thank you. Sure.
spk15: Yeah, so we'll definitely kind of expose a little bit more on the overall go-to-market strategy at our analyst conference. But yeah, the kickoff was super strong. We had our whole global set of go-to-market as well as the broader Boxer population kind of tune in and attend. And I think it's really all about aligning our go-to-market organization to the biggest trends and conversation that we're seeing with customers right now. And so when I talk to CIOs and CEOs and the broader team does, You know, we tend to, you know, still see that these digital transformation initiatives are still very, very much kind of front and center in every organization. Every CIO and CEO is looking at, you know, how do they drive productivity in particular in this kind of hybrid work environment and with, you know, kind of a greater degree of automation or AI. We're seeing, you know, customers really, really focused on how do they get more leverage for their IT spend. And so how do they simplify their IT stack? How do they make sure they have more integrated platforms? And then finally, just data security remains very front and center for all of our customers. And so the kickoff, it's all about how do we align that set of conversations with our message and our strategy as we take that to our customers. So a lot of effort around how do we drive our Enterprise Plus deal motion, so getting more and more customers into our Enterprise Plus package. We have great internal initiatives around new logo generation, in particular in larger enterprise segments. So we've been seeing a lot of great success there. You know, how do we continue to drive the greatest amount of adoption on our product, whether that's, you know, kind of, you know, the core foundation product or even some of the newer initiatives that we've had and newer products. So really kind of a lot of the just, you know, kind of blocking and tackling and enablement of our going-to-market teams, but making sure that our message and our strategy is very, very tuned and very aligned to what we're seeing with customer conversations right now.
spk02: Got it. That's really helpful. And then, you know, it was touched on this a little bit briefly, but, you know, how can you sort of use large language models to really drive value for customers? And should we expect something in the near term? Thanks.
spk15: Yeah, thanks. Obviously, a topic I'm personally very excited about. Can't get in any timing at the moment or else, obviously, a bunch of teams internally will kind of, you know, freak out. But what I would say is, You know, the general way to think about it is, you know, if you take something like ChatGBT, that's learned, you know, basically all of the words across all of the Internet, and it ends up being this incredibly helpful assistant, you know, using the language that's learned from everything. Well, one of the amazing use cases is, well, what if you could prompt that kind of model with existing data? And obviously we... We happen to help customers manage tens of billions of files and, in particular, a large amount of documents. And we think there's a lot of potential for what happens when you can begin to synthesize the information in those documents. And I call that a couple examples in the prepared remarks. But if you can summarize content or be able to probe it for important insights or be able to generate content in the future. So we think there's a wide range of use cases that are going to be very relevant for enterprises And we think we're highly differentiated because of our focus on data security, on privacy, on compliance. And so we can really kind of work with customers to ensure that when we bring AI to their content, it's done in a way that keeps their data extremely private. And then the other major differentiator we have is we can play really the role of a neutral platform or a Switzerland approach where I think there's going to be a lot of leapfrogging of model advancements between OpenAI and Microsoft and Google and Amazon and maybe other vendors. And so our ability to offer a range of technologies to customers, we think, puts us in a very advantageous position over the long run as customers think about having a future-proof architecture. So we're very excited. It's extremely kind of early, at least in this new wave. It's one that we're very prepared for because of our efforts around box skills. But stay tuned as we expose more about our plans here.
spk07: Thank you. Operator, next question.
spk11: Your next question comes from the line of Rishi Jaluria from RBC Capital Markets. Your line is open.
spk13: Hi, this is Richard Poland on for Rishi Jaluria. Thanks for taking my question. Just kind of given the expectation around retention rates coming down a couple more points, Can you help us kind of bridge where some of that contraction is coming from? Is it mostly on the seat side or are you expecting to bake in some slower overall kind of upsell and cross with the suites motion?
spk04: So it really is primarily on the seat side. So fewer seats from an expansion point of view. We've seen, as mentioned, both very strong and stable retention of seats, as well as the kind of cross-sells, the adoption of suites and Enterprise Plus in particular. As we had noted, that was up a very strong 11 points year over year. So, really pleased the momentum there, and that's having a nice impact on the pricing as well. So, when we think about the net retention rate, that kind of reduction is really coming primarily from seat volumes.
spk13: Got it. That's very helpful. And then if we were just to kind of break apart the demand trends between the SMB side and the enterprise side of the business, are there kind of any things that you would call out that, you know, are signaling differences between the two or is it kind of pretty similar across the business?
spk04: Yeah, it's actually been pretty consistent. So, you know, both across the different segments of the business as well as industries, you You know, for the most part, we've seen just kind of general, you know, softening related to the macro, but no particular parts of the business that we'd call out that are seeing any kind of outsized pressure.
spk07: Got it. Very helpful. Yeah. Thank you. Thanks.
spk11: Your next question comes from the line of John Messina from Raymond James. Your line is open.
spk03: Hi. Thanks for taking my question. This is John. I'm for Brian. I'm just curious if you could talk about the puts and takes you're seeing as we head into FY24 and into FY25. Because on one hand, I understand the headcount reduction. But with your expanded platform in areas like sign and Canvas, I'd imagine you'd be in a prime position to be a beneficiary of vendor consolidation. So I'd just love to get some color there.
spk15: Yeah, I think that's a great way to kind of think about it, which is on one hand, we've seen, and Dylan just kind of articulated this, If you have a kind of slower headcount growth across various industries that we're more used to, faster growth, that kind of creates some normal seat pressure from an expansion standpoint. At the same time, we have a broader value proposition, and I think we've increasingly become more strategic for our customers as a result of things like sign and workflow and Canvas and Shield. And that's letting us, in some cases, and Dylan noted this, drive our seat prices up as customers expand into things like Enterprise Plus. So it's definitely an interesting market because we still see very, very healthy momentum in a broad set of industries, broad set of segments, but you just have that sort of added pressure on maybe some of the normal seat growth you would see in some segments. But overall, I think the message of consolidation and simplifying your IT architecture, being able to bundle Box in such a way with these add-on products in a much more streamlined approach where a customer can go and replace three or five other technologies is extremely compelling. And I've been having a number of conversations with customers that now kind of start the conversation with, hey, I'd love to get rid of this legacy document management system or storage infrastructure or maybe an e-signature tool that is only used by one part of the population, and I can fold all of that into Box. So that's been definitely an increased conversation in the past couple of quarters that we've seen in light of this macro environment.
spk03: Okay, great. That was a really helpful color there. And then can you guys also talk about linearity in the quarter? I think you guys mentioned more deal scrutiny. I'm curious if it was similar to last quarter focused on larger deals, and I'm also curious if the scrutiny was focused on any particular region. Thank you very much.
spk04: Yeah, so I'd say that the linearity was fairly similar to what we typically see. We would describe the macro pressure kind of building over the back half of the year incrementally, but no significant differences, especially in terms of the inter-quarter linearity that we typically see in a fourth quarter. And then, you know, in terms of the scrutiny, I would say that's kind of same general trend as, you know, kind of overall, you know, macro impacts, which was, no, there really weren't any particular areas that saw heightened scrutiny. I think it's just a more cautious IT spending environment kind of across the board.
spk07: Thank you.
spk11: Your next question comes from the line of Nick Mattiacchi from Craig Hallam. Your line is open.
spk01: Hi, this is Nick on for Chad Bennett. Thanks for taking our questions. So at the analyst day last year, you talked about targeting more than 50% of your revenue coming from suites in FY25. So with that penetration rate already up to 46% in the past year, Is there a reason why SWEETS penetration should level off here as we near the 50% level, or have your thoughts changed where that penetration rate can go over the next couple of years?
spk04: Yeah, so that's an area that we have been very pleased with the momentum. So certainly SWEETS adoption, where we are at the moment, is ahead of what we had expected a year ago. So certainly from a timing standpoint, you know, we would expect to reach that kind of 50% plus milestone sooner than we thought a year ago. And we'll certainly provide more details, you know, as we get into the longer term thinking at our analyst day. And then in terms of where we see suites headed, you know, as optimistic as ever that, you know, steady state, the significant majority of our revenue is going to be coming from suites customers.
spk07: Awesome. Thank you.
spk11: This concludes our question and answer session. Ms. Cynthia Japonia, I turn the call back over to you.
spk10: Great. Thank you, operator. Thank you, everyone, for joining us on the call. We look forward to seeing many of you at our New York Analyst Day on March 14th, and we look forward to updating everyone at that time. Have a good day.
spk11: This concludes today's conference call. You may now disconnect.
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