Box, Inc.

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Box, Inc. First Quarter 2024 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 that 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 Hiponia, Head of AR. You may begin your conference.

Good afternoon and welcome to Box's first quarter fiscal year 24 earnings conference call. I'm Cynthia Hiponia, 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 second quarter and full-year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 2024 and future periods, including our 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 opportunities, our planned investments, future product offerings, and growth strategies, our ability to achieve our 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 the factors currently known to us and actual events or results made differ materially. Please refer to our earnings press release filed today and the risk factors and documents we filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K 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 made as of today, May 30, 2023, 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 can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and the related supplemental slides, which can be found on the investor relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-debt basis. With that, let me hand it over to Aaron.

Thank you, Cynthia, and thanks, everyone, for joining us today. We are pleased to deliver first quarter operating results above our guidance. This includes revenue growth of 6% year-over-year and 10% on a constant currency basis, in addition to a strong focus on profitability resulting in operating margins of 23% up 220 basis points from a year ago. Achieving these results in a challenging macro environment is a testament to the value of our content cloud platform and the operational discipline of our boxers as we deliver substantial year-over-year bottom line improvements. While the dynamic macro economy continues to pressure IT spend and headcount growth expectations from our customers, trends we've seen continue to play out most notably in EMEA and smaller businesses in the U.S., We are also seeing strong traction and stickiness of our platform and customers, and our message is well aligned to the challenges they are facing today. Over the last quarter, I've had the opportunity to speak with hundreds of business and technology leaders, and it's clear that the dynamics enterprises face today are fully aligned with the pillars that underpin our strategy. Enterprises are focused on simplifying their IT environments, driving productivity across their businesses, and protecting their most sensitive data. And across nearly all of my conversations in the last quarter, business leaders everywhere are looking to leverage the power of AI to help transform how they work and get even more value out of their data. Box's content cloud platform is best positioned to help these customers solve these challenges. And our Q1 customer wins illustrate how we will remain mission critical for them. These wins include a global manufacturing company that collaborates with defense and federal government agencies, who is a new customer who purchased Box in Q1 in order to meet FedRAMP and ITAR compliance for content management. Also realizing the value to streamline its tech stack and integrate Box with its Salesforce instance to power the underlying compliant content layer for their customer portal. A multinational retailer expanded its use of Box with a six-figure ramped enterprise license agreement and purchase of Box Shield to protect the vast amount of personal identifiable information that is stored inside of Box. And critical to our success is our continued execution of our product roadmap, which expands our TAM and adds value to our core platform with new product innovation. In Q1, we were pleased to announce the general availability of Box Canvas, which delivers a powerful new way for teams to unleash their creativity to take brainstorming and ideation to a new level while leveraging the enterprise-grade security, compliance, and workflow automation capabilities of Box. Box customers now have access to unlimited canvases included in their plans, which enables us to disruptively enter this market And we're already seeing amazing use cases emerge across our customers. Since we launched BoxSign, Box customers are taking advantage of unlimited e-signatures included in their plans and have migrated use cases over from costly incumbents. In Q1, we released advanced e-signature features such as a dedicated BoxSign policy for BoxShield to provide users with the ability to seamlessly request signatures on documents subject to BoxShield's access policies, We also launched a box sign relay integration that specifically enables post signature actions to be orchestrated and enables our customers to build end-to-end e-signature workflows in the content cloud. We also announced the next generation of Box's content migration solution, Box Shuttle, now built directly into the Box admin console. With Box Shuttle, content migration is a simple, accessible process and that organizations of all sizes can take full advantage of the many features and capabilities that the Content Cloud has to offer. Finally, an integral part of the product strategy is our ability to integrate deeply across the SaaS landscape, including with products like Microsoft Teams and Office, WebEx, Zoom, Google Workspace, ServiceNow, IBM's technology solutions, and much more. In Q1, in addition to delivering integration enhancements with Slack and Salesforce, we were pleased to announce a number of new technology partners that extend the value of Box, including Notion, Sana, Nowwarebytes, and Cloudflare. As we look forward into FY24 and beyond, our pace of innovation continues to accelerate. We are at the beginning stages of a new era of software. Similar to how cloud and mobile change the technology landscape forever, AI has the opportunity to completely change how work gets done. As highlighted by the meteoric rise of ChatGPT, we've recently begun to see a huge breakthrough in the potential of large language models, or LLMs, which are now capable of bringing human-level reasoning to a large number of tasks. However, the real power of these new AI models is when you use their intelligence to help you work securely with your own proprietary data set. For years, we've been able to ask questions about our structured data, like the information that's in a database ERP system or CRM system. You can ask those systems for financial forecasts, sales pipeline results, inventory levels, supply chain details, and more. But we've had limited ability to ask questions of our unstructured data, like content, which is 80% of corporate data. And now we can. By safely bringing leading AI models to enterprise data, enterprises can truly unlock the value that lies in their content. To do this, we need a way to connect these models safely, securely, and compliantly to our enterprise content. As we announced just earlier this month, With Box AI, we're taking the power of the world's leading AI models, starting initially with OpenAI's ChatGPT 3.5 and GPT-4, and securely letting customers leverage them for their enterprise content. With Box AI, customers can ask questions of their content or generate new information leveraging Box Notes. Imagine being able to instantly ask things like, How many days of parental leave can I take on an HR document? Or please summarize this report and provide five key takeaways on a quarterly earnings document. Or how would you pitch this product to a customer in the automotive industry when looking at a product overview document? But this is just the beginning. Ultimately, as a core platform capability, Box AI will be used throughout the product to continue to transform how we work with our content in a variety of ways. We can imagine in the future being able to use AI to automatically classify content in even more specific ways, automatically extract data using a relay workflow, use platform APIs to interact with AI models from a variety of providers, and being able to ask questions of a larger set of documents on a specific topic. And as a platform neutral vendor, we will also be AI neutral. which means as new AI breakthroughs emerge for more vendors over time, we'll be in a position to bring the full power of their technology to Box and our customers. In addition to our collaboration with OpenAI, we recently announced that we are building on our strategic partnership with Google Cloud to integrate Google's advanced AI models into Box AI to create new ways for joint customers to work smarter and more productively with generative AI. Like any new technology era, our approach with BoxAI is to execute on this opportunity with a high degree of thoughtfulness. Initial customer access will be granted through a design partner program, and we are excited to keep you updated as we continue to innovate with BoxAI to capitalize on the exciting new product opportunities this technology shift has created. Now, turning to go to market, as we discussed at our analyst day in March, Our optimized pricing and packaging initiatives have allowed us to see a greater total account value, higher net retention, higher gross margins, and a more efficient sales process. Our strategy is to continue launching new multi-product offerings over time, increasing the value to our customers by bringing them the full power of the Content Cloud. Our latest multi-product offering, Enterprise Plus, continues to be well over 90% of our suite sales in large deals, with suites comprising 69% of deals over $100,000 in Q1. We saw consistent suites attach rates in large deals across all of our geographies. Our Q1 customer expansions and new wins with Enterprise Plus include a US company that develops and produces Building materials and services expanded its use of Box with a six-figure renewal and purchase of Enterprise Plus to gain the benefits of Shield and Box governance. As more and more data is migrated into Box from old SharePoint sites and file servers, it was necessary for the company to implement the advanced security and compliance controls that Enterprise Plus provides. A leading US hospital system and research institute expanded its use of Box in Q1 with an upgrade to Enterprise Plus in order to enable BoxSign for their clinical trials. Box's security posture is also a critical component to their technology ecosystem. In summary, our ability to deliver first quarter results above our guidance is a direct result of the compelling value of our content cloud platform and the execution we have been driving as a company. And with our latest BoxAI efforts, we're building a powerful platform neutral approach for companies to securely bring AI to their content and transform how they work. I'm proud of the work that our Boxers do globally, and at Box, our employees are critical to our ability to serve our customers successfully and innovate rapidly. In addition to being named number two best place to work by Glassdoor last quarter, Box was recently recognized by Fortune magazine as number 27 in the 100 best companies to work for in 2023. Finally, along with continuing to build out a strong culture, we remain steadfastly committed to driving a continued balance of growth and increased profitability in this very dynamic market, while investing in growth drivers for the future, like BoxAI. While currency headwinds and the IT spend environment are putting pressure on our top-line results for this year, we continue to drive improved bottom-line results through a culture of operational excellence and focused discipline on our spending while doubling down on new product development that will lead us to increasing long-term revenue growth. And with that, let me hand it off to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Q1 was another strong quarter for Box with revenue, EPS, and operating margin results all above the high end of guidance despite the challenging macroeconomic environment. We continued investing in profitable growth while optimizing our underlying cost structure, resulting in a resilient long-term financial model. Our balanced business model allows us to invest in innovative new products, such as Box Canvas and Box AI, generate continued gross margin and operating leverage, and consistently return capital to our shareholders. In Q1, we delivered revenue of $252 million, up 6% year-over-year, above the high end of our guidance, and representing 10% year-over-year growth on a constant currency basis. We now have nearly 1,680 total customers paying more than $100,000 annually, an increase of 14% year-over-year. Our Suites attach rate of 69% in large Q1 deals demonstrates the value our content cloud platform is delivering to our large customers. 47% of our revenue is now attributable to Suites customers, a significant 10 point increase from 37% a year ago. Even in this dynamic environment, Box's value proposition is resonating with customers as they look to Box to transform, simplify, and secure their IT environments. We ended Q1 with remaining performance obligations, or RPO, of 1.2 billion, a 17% year-over-year increase, or 19% growth on a constant currency basis. This strong growth was driven by continued lengthening in customer contract durations as well as an uptick in the volume of early renewals in recent quarters as customers look to more quickly adopt the full value of our suites offerings. We expect to recognize roughly 60% of our RPO over the next 12 months. Q1 billings of $192 million grew 11% year-over-year, ahead of our guidance of a mid-single-digit growth rate and representing 15% growth in constant currency. Our strong billings outcome in Q1 was due in large part to a high volume of early renewals, pulling forward billings of roughly 6 million that had been scheduled to renew later in the year. Our net retention rate at the end of Q1 was 106% in line with our expectations. Our annualized full churn rate was 3% versus 4% in the prior year, demonstrating the criticality and stickiness of our product offerings even in the current environment. We expect full churn to remain at roughly 3% throughout this year. For the remainder of FY24, we expect our net retention rate to stabilize in the range of 104% to 105% as we manage through the macroeconomic environment, resulting in lower seed expansion rates, particularly in our U.S. commercial and EMEA customers. Gross margin came in at 77.9% in Q1, up 160 basis points from 76.3% a year ago and well above the 76% range we had expected for the first half of this year. Our Q1 gross margin reflects the optimizations we're delivering as we execute on our public cloud migration strategy. We expect our duplicative public cloud and data center expenses to peak in Q2, leading to our gross margin expectations in the 76% range for Q2. As we look to the second half of the year, we fully expect gross margins to rebound to the high 70s. Q1 gross profit of $196 million was up 8% year over year, exceeding our revenue growth rate by 200 basis points. We once again delivered leverage across the entire business in Q1, with a 17% increase in operating income to $57 million. Our 22.8% operating margin was up 220 basis points from the 20.6% we delivered a year ago. We delivered diluted non-GAAP EPS of 32 cents in Q1, up 39% from 23 cents a year ago, and a full 5 cents above the high end of our guidance, which includes an impact of negative five cents from FX. I would also note that Q1 marked the third consecutive quarter in which we delivered GAAP profitability. I'll now turn to our cash flow and balance sheet. In Q1, we generated free cash flow of 108 million, a 19% increase from 91 million in the year-ago period. We delivered cash flow from operations of 125 million, a 16% increase from $108 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were $10 million, down from $12 million in Q1 of last year. Let's now turn to our capital allocation strategy. We ended the quarter with $518 million in cash, cash equivalents, restricted cash, and short-term investments. In Q1, we repurchased 1.7 million shares for approximately $44 million. As of April 30th, 2023, we had approximately 97 million of remaining buyback capacity under our current share repurchase plan. We remain very committed to returning capital to our shareholders through stock repurchases, and we expect to actively repurchase additional shares in Q2. With that, I would like to turn to our guidance for Q2 and fiscal 2024. The US dollar has continued to strengthen, resulting in a larger than expected FX headwind for Q2 and the second half of the year versus our initial FY24 guidance. As a reminder, approximately one-third of our revenue is generated outside of the US, primarily in Japanese yen. The following guidance includes the expected impact of FX headwinds assuming current exchange rates. For the second quarter of fiscal 2024, we anticipate revenue in the range of $260 to $262 million, representing 7% year-over-year growth at the high end of this range, or 11% in constant currency. We expect our Q2 billings growth rate to be in the low single-digit range on an as-reported basis, reflecting an expected 100 basis point headwind from FX, as well as the impact of the early renewals that contributed to our exceptionally strong Q1 billings results. We once again expect our Q2 RPO growth to be higher than our anticipated Q2 revenue growth rate. We expect our non-GAAP operating margin to increase to approximately 24%, representing a 230 basis point improvement year over year. We expect our non-GAAP EPS to be in the range of 34 to 35 cents, representing a 25% year-over-year increase at the high end of the range, and gap EPS to be in the range of $0.01 to $0.02. Weighted average diluted shares are expected to be approximately $150 million flat with Q1. Our Q2 gap and non-gap EPS guidance includes an expected headwind from FX of approximately $0.05, primarily due to fluctuations in the yen, as discussed previously. for the full fiscal year ending January 31st, 2024. We now expect FY24 revenue in the range of $1,045,000,000 to $1,055,000,000 representing 6% year-over-year growth or 10% on a constant currency basis. This revised range reflects both the recent strengthening of the U.S. dollar versus the yen and the IT spending environment we discussed earlier. We now expect FX to have a negative 350 basis point impact to our FY24 revenue growth rate versus our prior expectation of 300 basis points. We expect FY24 gross margin to be roughly 77.5%, 50 basis points above our previous expectations. As we continue to execute on our important transition to the public cloud and unlock additional leverage in our model, we will be exiting FY24 with an even stronger gross margin profile. As a result, we are raising our FY24 non-GAAP operating margin guidance by 50 basis points to approximately 25.5%, representing a 240 basis point improvement from last year's results of 23.1%. We are also raising our FY24 non-GAAP EPS expectations to be in the range of $1.44 to $1.50, representing a 25% increase at the high end of the range versus $1.20 in the prior year, and we expect FY24 GAAP EPS to be in the range of 17 cents to 23 cents. Weighted average diluted shares are expected to be approximately 151 million. Our FY24 GAAP and non-GAAP EPS guidance includes an expected annual impact from FX of approximately 20 cents. For the full year of FY24, we now anticipate currency headwinds to impact our billings growth rate by a little more than 100 basis points. We expect our FY24 billings growth rate to be in the mid-single-digit range on an as-reported basis. In summary, we are pleased with our execution in Q1. We once again demonstrated our disciplined and balanced model of investing for long-term growth while expanding both operating and free cash flow margins. We remain committed to achieving our FY24 revenue growth plus free cash flow margin target of 35% or 39% in constant currency. In this dynamic macroeconomic environment, The Box Content Cloud is the platform that enterprises need to transform their business while lowering their costs. With that, Erin and I will be happy to take your questions. Operator?

As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question today comes from the line of Steve Enders with Citi. Your line is open.

Oh, great. Thanks for taking the questions here. I guess I just want to ask a little bit more on just the macroeconomic and what you're seeing out there. And I guess what specifically is it in the EMEA and SMB business that's being impacted here? And I guess maybe how has that changed versus what you're seeing in the prior couple quarters?

Yeah, thanks. This is Aaron. So I'll take that question. You know, I think overall the general trends were pretty similar to kind of Q4 and what we were already seeing at the tail end of Q3 of last year. We did want to call out, you know, kind of an incremental element of softness on the SMB front in the U.S. and what we're seeing in EMEA. But as you can kind of see in the general guidance as well as because of the FX impact, it really is just incremental. But we did want to kind of note that. You know, overall, I think as we've kind of talked about in the past couple of quarters, the general dynamic is you just sort of see that there's more scrutiny on larger deals, especially in those segments of the business where, you know, maybe previously, you know, we'd be doing a $100,000 deal and that would be, you know, in this day's environment, maybe fewer seats would be transacted and that would come under that level as an example. But overall, I think when you look at the kind of Q1 results, Q2 guide, I think we're seeing some healthy trends across the business, but we did want to just call it that incremental softness.

Okay, that's helpful there. I mean, anyone else on the AI side, you know, in terms of the announcements that you've come out with already, but I guess, how do you think about the potential for monetization and maybe how you're thinking about bundling and kind of going forward? I guess, what's kind of the early read on how you're thinking about that aspect of the AI strategy?

Yeah, so I do want to note, obviously, it's still pretty early in our overall journey with the latest wave of our Box AI efforts. Obviously, we've been in this space for a while and deeply understand the kind of potential and the use cases. But with what we're seeing with large language models as a pretty new frontier of use cases that we are unbelievably excited about, we want to make sure that we drive the right kind of product UX, the right kind of pricing and packaging, which is why we are taking a kind of measured approach as we roll this out. I think philosophically the way that we think about it internally from a product and company standpoint is there are some use cases that we believe are just going to be kind of fundamentally table stakes for a product like ours. Some of those table stakes might be generating content with AI. Some of them might be asking questions of some amount of data leveraging AI. And in those cases, we want to try and ensure that we can broadly make that set of capabilities available. That's philosophical, obviously, as we go through our design partner program and beta programs We'll continue to evolve that. And then there are some maybe more either advanced capabilities or capabilities that have a high consumption dynamic related to them, often through our platform or maybe in workflows, where we will want to have incremental monetization via either our kind of platform API business or through our multi-product suites packaging. And that will be really driven by some of the use cases that we see from customers, again, especially through this design partner program So I'd say in the coming quarter or two, stay tuned as we continue to evolve the ultimate pricing and packaging decisions. I think you've seen pretty similar dynamics in either peer companies or big tech companies as they roll out beta programs of their products, trying to figure out what's the right kind of pricing model. We're basically doing the same. But I think the thing that we've already shown and are very public about now is we're going to be building this technology full force and we think it's transformational in how we can work with our unstructured data and our content.

Perfect. Thanks for taking the question. Yeah, thank you.

Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is open.

Thanks for the question, and congrats on a nice quarter. I wanted to ask a few on use cases for Box, whether it's Positioning for AI or cost cutting in this environment, are there any use cases for Box that are really resonating around some of these themes today? And then separately or related, just wondering if you could talk a little bit about the mix of your customers that are using Box to collaborate in some way externally, like the external use case with partners or suppliers or customers or clients.

Yeah, so maybe just in reverse order, I'd say the significant percentage of our, especially our larger deals, so they make up, you know, increasingly the bulk of our revenue, there's a heavy degree of internal and external collaboration going on with our product. It's one of our key value propositions is if you're a defense, you know, kind of, if you're in the defense industry, you need to collaborate with the government or other kinds of manufacturing partners, You need something that is both going to be compliant for FedRAMP, let's say, and have advanced security controls and allow you to kind of move data in and outside the boundaries of your organization in a very secure, compliant, reliable way. So whether it's financial services, life sciences, healthcare, defense, the tech industry, external collaboration is certainly kind of a core part of our overall value proposition. In terms of some of the near-term deals, it's pretty broad-based in terms of the industries that we're seeing in a business and across everything from life sciences and healthcare, great deals in the retail sector, even in tech, seeing some healthy deals as well. And I think the use cases are really kind of centered around our three core pillars of improving the security posture of the organization by protecting their most important data, helping drive better collaboration and workflows around content, and then our platform which connects to all of their software, so really being a hub for content that connects into ServiceNow and Slack and Salesforce and Microsoft Teams, Office, and many more applications. So I think those three kind of core areas of focus remain extremely alive and well. And then our conversations, which I wouldn't necessarily attribute any major kind of deals in Q1 tied to this, but the conversations have increasingly been about what is the AI strategy of any given customer and enterprise It's driving certainly a lot of conversations that we're now having about Box AI. I've had more CIOs and even CEOs in some cases reach out around our strategy in AI than we've seen in prior technology trends. And I think everybody's trying to figure out their strategy of how do they bring generative AI to their enterprise use cases, which requires a substantial amount of work in the abstraction layer between AI models, customer data, and cloud infrastructure, and that's exactly what we're building out. So we think we're in a really strong position to help customers with that.

Thanks, Aaron. If I could sneak one in for Dylan, just wondering on the six million in early renewals, if you could provide some more color on what type of customers, what's driving that behavior, and then I guess in regard to Q2 billing's guidance, does that assume that the early renewal trend stops? Thanks.

Yeah, so in terms of what's driving those early renewals, tends to be a handful of larger customers, And the main dynamic that would cause a customer, and similarly in Q1 what we saw, to decide to renew early is typically to move into suites and be able to support some of the higher value, newer use cases that they want to get into rather than, for example, waiting for the natural renewal cycle the following quarter to begin to adopt suites and those capabilities. So that tends to be You know, what we see is just, you know, the clear buy-in and understanding the value proposition from customers and just wanting to move more quickly to take those on. And most of that $6 million did come out of Q2. And we always, you know, tend to take a fairly conservative approach, kind of the baseline of early renewals that we see. And that's baked into our kind of billing expectations. in any given quarter, so we're not necessarily expecting to see the same, you know, type of volume that we saw in Q1, but we would expect to see some customers elect to early renew in the second quarter as we tend to see in any given quarter.

Great.

Thank you.

Your next question comes from the line of Panjal Mbora with JP Morgan. Your line is open.

Great. Hey, thank you so much for taking the questions. Congrats on the quarter. Aaron, on AI, I understand you can't really talk about the monetization at this point, but as you're talking to your customers, what are you hearing from them in terms of uptake of these AI functionalities? And do you overall see kind of AI as an accelerant to the growth rate, maybe in the medium term?

Yeah, so... You know, with conversations with customers, I would say that this is certainly probably the fastest amount of concerted energy that I've probably seen in the decade and a half plus of doing Box on one single topic from an IT standpoint. So cloud computing, I mean, we were for five years at least really just doing the very basics of educating enterprises on... why the cloud was useful and what efficiency they could get from the cloud. And then it was still another decade until you had the kind of mainstream adoption of cloud across the enterprise base. With AI, I think you have such a rapid alignment of customers testing new use cases, trying out new products and capabilities. Obviously, things like ChatGPT have been front and center. Some companies are fully banning that. Some companies are enabling that. And what I think companies are trying to figure out is where is the productivity gain going to most come from? Is it going to come from going into an AI interface and just like a chat GBT and asking a question and getting an answer back? Or is it going to come from AI reasoning over existing data and existing workflows in an enterprise and then becoming a productivity boost for those kinds of use cases? With Box AI, actually, we're going to help customers do both because with Box Notes, you'll be able to generate content instantaneously directly from the AI model. And with Box Preview and with future products that we haven't announced yet, you'll be able to start to ask questions of the existing data you have. And so we think we can meet both of those use cases, but it's incredibly early for customers overall. I'll give you just a kind of sense of the types of conversations we're having where companies are saying, hey, I have I have hundreds or thousands or tens of thousands of documents of a specific topic. Could be contracts. Could be life sciences research data. Could be very kind of bespoke content types in a specific industry. And they're saying, you know, we have all this content. We want to be able to understand what's in it. We want to correlate trends across it. We want to ask questions of this data set. And right now we have to have kind of humans manually go through this content. to understand what's inside of it and apply metadata and to be able to actually kind of reason through it. And so they often don't get to the actual use cases that are super exciting because they just don't have enough either humans or it would be too costly and so they never get around to it. And so with AI it starts to actually unlock and kind of tap into all of this value of the underlying data that they already have inside of Box or if they move more data into Box it can it can certainly provide even more value. And so those are the kind of conversations that we're having with customers. We have some companies that are saying, hey, we think we can identify new life sciences breakthroughs if we could correlate research across multiple research documents. Or we have a company in the advertising industry that believes that they could generate more revenue if they could quickly identify what projects to put certain advertisers on that wouldn't be known by any single individual inside their organization. It would only work if they actually collected all the data across their organization to understand what kind of projects would make sense for certain advertisers. And so these are the really exciting kind of use cases which can drive productivity. They can drive new revenue opportunities for our customers. And so that's what we're certainly going to be pretty focused on. In terms of accelerating our revenue, I think because of how early it is, we want to be really thoughtful about that dynamic. I think to some extent, AI is going to become cable stakes for all of modern software. And so we think it's going to be a huge driver of companies trying to get their data and their content into a really good logical architecture, one that is secure, one that's compliant, one that's in the cloud. We think we'll stand to benefit from that, certainly, and kind of the moving off of legacy fragmented systems. But at the same time, we recognize that companies in general will have a fixed amount of net new budget that they can bring to AI. And so there's going to be a lot of kind of vying for that budget. And so we want to be thoughtful about leaning in too hard on that.

Got it. Very, very helpful. Thank you. And one for Dylan. Dylan, maybe the macro situation, the softness in the SMB and EMEA, maybe talk about the linearity of the quarter. How did that kind of fall through the three months in the quarter? Was it towards the end, towards the beginning? And also, if you can touch upon kind of the sequential revenue decline, is that largely because of Box Consulting?

Sure. So starting with the linearity, we saw pretty normal linearity in the first quarter. both in those segments you mentioned as well as the rest of the business, like our enterprise segments. So nothing unusual from that standpoint. And then in terms of the sequential revenue decline, that was primarily driven by the number of days that we had, that there are in Q1 versus Q4, which has about a $9 million impact to the quarter's revenue versus Q4. And then there was also a couple million dollars from a very strong box consulting revenue outcome in the fourth quarter. So those combined add up to about $11 million. And then the first of those, the days dynamic, that's something that is not unique to this year, but usually doesn't show up as pronounced of a way as we typically have a stronger and higher volume of bookings in the fourth quarter to offset that. But that was the main driver of the sequential change in revenue.

Got it. Very helpful. Thank you.

Your next question comes from the line of Jason Adder with William Blair. Your line is open.

Thank you. Erin, I wanted to continue down the AI thread, shockingly. First, I guess I just wanted to, let's look at it in two different ways. First, at a very high level, what does this mean for knowledge worker seats and do you worry about that? Secondly, just on more on the kind of devil's advocate side, how does this, how does the Microsoft competitive risk change or not? Just because Microsoft's been at the forefront of a lot of this stuff. And then more on the kind of positive side, we talked about monetization. I don't want to go there, but how are you using this internally maybe to improve your cost structure? And what are some of your thoughts there? Dylan, you can chime in there as well. I'm sure you've thought a lot about that.

Yeah, great. We'll try and cover those. So on the first one, and just so I clarify, that was sort of like a meta kind of philosophical question on seed changes over time?

Yeah, just a pool of knowledge workers potentially not growing as fast as it would have otherwise.

Yeah. This is a personal opinion and even from a corporate financial standpoint, we're so early in our kind of total seat population that this would be a corporate view as well in terms of what the potential is for Box overall. But I strongly believe that this is going to be a net positive impact to just knowledge worker productivity as opposed to a net replacement to kind of large swaths of knowledge work. If you look at the actual tasks that any one of us do in any of our jobs across our roughly 2,500 employees or anybody that we interact with, the vast majority of work that we're actually doing is a collection of many subtasks, hundreds, thousands of subtasks that require us to have a large degree of context that we maintain. I think AI... is going after those individual subtasks and in some cases collections of subtasks, but really in a way that will just make us more productive overall. Maybe some roles will be 5% more productive, some roles maybe 50% more productive, but I think the net result of that is that we just accelerate into the future faster as opposed to we kind of like do less work or that a company wouldn't want to grow faster if they could with AI and making their employees more productive. So in general, I think whether it's, you know, we'll produce more graphic designers and there'll be more engineers and our sales reps will be more efficient in working with customers. I see there's only a sign that we'll be able to either, you know, over time globally more people will be able to do those jobs and there'll be more demand for those skills overall because companies can then, you know, be more efficient instead of having, you know, maybe a sales rep or an engineer waste time trying to search or find information. They can be doing the more fun, productive parts of their job of working with a customer or getting code released and building a feature. And so I think that's the kind of impact on the total knowledge worker population. So I'm firmly in the optimist camp on this one in terms of what it does to jobs. So two things to note. One, we're partnering with OpenAI, which by virtue leads you to partnering more broadly over time with Microsoft as well, given the OpenAI models generally running on Azure. So there's, I think, a lot of exciting potential on that collaboration and an area that we're going to cooperate with them, we think, pretty meaningfully. And so customers will be able to basically leverage the exact same AI that they would be seeing in any Microsoft products but within Box as well. So that kind of adds a bit of benefit to our relationship there. With Copilot, Copilot already has the ability to drive integrations with third-party software. And so Box was kind of announced at a high level last week at the Build conference as one of those integrations. And so we are going to deeply integrate across Copilot in the various API endpoints that they create. So you'll see a lot of interoperability where maybe you go to Copilot and you ask a question that needs to pull data from Box and Atlassian or Box and Salesforce or any of the supported products. And so we think that will kind of be a very clear way that we can integrate. And overall, strategically, I think what you're going to see us do is go deeper specifically in content than what we believe any other player is going to be building out from an AI standpoint. And so understanding the content AI use cases is core to our value proposition and our expertise. And then I think the secondary element is our neutrality ends up being a huge benefit for customers. So today obviously OpenAI has many of the leading models. We announced a partnership with Google where we will certainly be working with Google's technology. There are other great players in the market like Anthropic and others. Our ability to be neutral to some of those kind of battles we think put us in a very strong position as well where customers can leverage wherever the various breakthroughs are coming from. And then in terms of cost structure, I'll let Dylan talk about it. But in general, we want to certainly ensure our employees are being as productive as possible And we want to leverage technology to do that.

And to build on that, I think our approach internally is pretty similar to what Aaron described on the overall knowledge worker dynamic. And it's a bit early to tell just exactly how this impacts everything and how AI ends up being embedded in the various tools that we use as boxers. But broadly, we absolutely view it as a way to boost productivity And so, you know, automating, you know, basic questions that the boxers would be answering is one example of that. You know, an assistant to those subtasks that Aaron mentioned. And then there's just a lot of other cool ways for specific functions where, for example, can really supercharge the capabilities of our security instant response team and kind of identify, you know, anomalous activities on Box to be able to flag certain threats earlier. So I think it's really a lot of different jobs are going to be impacted in different ways, but we view it more as supercharging productivity and getting as much value out of the different tools that we're using as possible. Great. Thank you.

Your next question comes from the line of Tom Blakey with KeyBank. Your line is open.

Hey, great. Thanks for taking my question, everyone. I have a few questions, actually, just kind of bulleted here. Could you just comment on the longer duration and deals? Just interesting, you know, given the current macro, if you could just highlight why this might be happening, whether it be strategic reasoning or possibly even maybe discounting. Secondly, you mentioned quickly, Dylan, there are weaker bookings at the end of fiscal 4Q. Could you just maybe comment on booking trends in fiscal 1Q and into fiscal 2Q? That would be helpful. And third and lastly, my AI question would be more around on the, you know, the usage of it from your business model. You know, I've seen some, we've seen some impact on companies' gross margins, or at least modeled to have an impact on gross margins over time, especially the consumption-based modeling could maybe impact gross margin. It'd be helpful just to get a comment on you, from you, Dylan, on a longer-term look there with regard to AI and the model and the margin would be very helpful. Thanks for taking my questions.

Sure. So we'll start and chime in if I missed something or forgot the question. But no, all good. So I would say on the duration component, first of all, that is something that we've actually been seeing pretty consistently for several quarters now, where while it is a challenging macroeconomic environment, we are seeing for our customers increasingly viewing Box as a long-term strategic partner. And so especially with suites deals, Enterprise Plus, and our larger customers, those tend to be multi-year renewals. And when you combine that with the dynamic of more customers early renewing, so extending the average kind of contract durations out there, that's what's led to the outside backlog growth. So that's up 22% year-on-year. And it's not because of any unusual or different approach to pricing or discounting that we're doing. It's more just customers having that long-term confidence and electing to sign longer contracts with us. In terms of the booking trends, comparing kind of what we saw in Q4 of last year versus Q1 of this year, would generally describe it as pretty similar with most parts of the business kind of steady and delivering against our expectations. The areas that we called out where we did see some incremental softening were their U.S. commercial and EMEA customers. And then, you know, I would say it's a bit early to comment on Q2, but certainly our expectations and what we're seeing in the business is baked into the guidance that we provided. And then to clarify on the gross margin question, was that more about how we think AI will impact that specifically?

No, with regard, we've seen some companies, for example, offering AI functionality to customers where that's adversely impacted their business model from a gross margin perspective. I was wondering if you wanted to make a comment on that.

Yeah, this is Aaron. I'll just jump in on that one. Kind of goes back to the first part of, we think some of the basic use cases, we do want to try and make more broadly available. And by virtue of those being kind of lighter weight, we see less of a meaningful gross margin impact on that. And then for more of the advanced and kind of higher end use cases, we expect to charge customers in either moving them up to higher tier plans or through consumption models via our platform. And so in general, we're working to counteract any of the potential pressures. We're very confident in our long-term gross margin improvements, and we believe that some of these capabilities will just get built in as a baseline, but overall not in a way that we think will show up to the numbers we're reporting.

Very helpful. Thank you.

Your next question comes from Chad Bennett with Craig Hallam. Your line is open.

Great. Thanks for taking my question. So just to follow up on the duration question. Just in terms of how we think about the kind of economics you've laid out on moving from kind of a single seat kind of point product to suite in Enterprise Plus and whatnot that you've laid out over a couple analyst days, are those economics or uplift, are they still intact with the longer duration deals? I'm assuming these longer duration deals kind of lean more suite-driven than anything else, just any commentary on how those economics are playing out.

Yeah, those economics specifically, you know, kind of the difference and the higher, you know, kind of stronger customer economics top to bottom, including the pricing uplift. If you're comparing, you know, a typical suite slash enterprise plus customer versus a similarly sized customer just using the basic service, we are still seeing roughly a doubling in price per seat. And actually on the contract duration, it's always been the case since we rolled out suites and then Enterprise Plus that those have tended to be longer multi-year deals. And it's just as more and more of our revenue is coming from those customers, it's part of that mix shift that's actually driving the higher average contract durations. So not even a big change. In the last quarter or very recently, we have been seeing backlog growing significantly. you know, faster than revenue or deferred revenue for quite some time now.

Okay. And then just maybe for a little bit of a look back on net retention, just considering, you know, your churn rate just continues to, full churn continues to get better or stay at kind of, you know, record levels in a good way. Just, you know, from net retention from 112 to, I think you said 106, today, can you rank order, whether it's seat growth or suite adoption or what's really the main drivers of that deceleration?

Yeah, sure. It's actually, and maybe the level set for everyone's benefit, there are really three components of our net retention rate. There's the seat expansion. There's the impact of pricing changes, historically for us pricing improvements, and then the full churn rate comes out of those two expansion levers. And the stack rank in this case is pretty straightforward in that virtually all of it is attributable to lower seed expansion rates. So we've continued to see consistent, steady improvements in price per seat, largely driven by the impact of more and more customers moving into suites at a higher price point. And then to your point, full churn has remained stable and very strong as well. So it really is entirely being driven by the pressures on the seat expansion rate.

Okay. And then maybe one last one, if I could, real quick. I might have missed it. Did you comment, Dylan, on how to think about billings growth for the year relative to revenue growth? And then I'll hop off. Thanks.

Yeah. So we expect our reported billings growth to be in the mid-single-digit percentage range, and that does include a little more than 100 basis points headwind from FX, So, you know, in the, you know, general range of our expected reported revenue growth of 6% is how we describe that. Great. Thanks much.

Your next question comes from Rishi Jalaria with RBC. Your line is open.

Oh, wonderful. Hey, Aaron. Hey, Dylan. Thanks so much for taking my question. Two for you. First, I'll toss in another generative AI question just because it's so top of mind for everyone. But I want to think about the opportunities for you to maybe verticalize gen AI, especially given you are targeting a lot of verticals like healthcare, financial services, public sector, where in many cases you are a system of record. So it feels like there's some potential benefit there. But maybe if you could walk us through how you're thinking about the verticalization opportunity, that would be helpful. And I've got a quick follow-up.

Yeah, so you're spot on that the value in AI certainly increases the closer to the business process and the business domain that you can get to. Kind of the general productivity horizontal elements are super exciting, very flashy, but the real business value is going to come when you can go to a healthcare provider and say we can automate critical workflows of health record reviews or authoring. When you go to a talent agency and say we can review movie scripts and get them routed to the right talent agent to take a look at, or where you can go to finance and have earnings reports being read and kind of key insights being pulled out. So I think over time we'll find these sort of pockets of specialization based on critical use cases that we see either being repeatable or where there's heavy kind of customer concentration. And either things like our professional services organization or through partners or through our sales motion really try and make it easy for customers to adopt those kind of capabilities. And then over time establish, for instance, workflow patterns in Box Relay that might leverage AI through templated approaches that make sense on a pervertical basis. I think you have a lot of ways that this will start to show up within the product that we're just at the earliest stages of kind of scratching the surface of. But I do think the vertical use cases will be one of the ways that this gets really delivered from a value standpoint.

Wonderful, really helpful. And then really quickly, apologies if I missed this, any color on momentum in Japan and how we should be thinking about that going forward for the rest of the year? Thanks.

Yeah, I think just the high-level color would be still very resilient for us. A lot of great customer wins in the quarter across everything from government agencies to manufacturers, to financial services, so kind of strong quarter in Japan. And we think reasonable and kind of healthy expectations for their results this year. All right, wonderful. Thank you so much. Yeah, thank you.

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

Thanks, guys. And I'll keep it to one. In shocking ways, it's an AI question. But Aaron, you've mentioned in the past that content on box is more valuable than content on legacy solutions. There's a lot of megatrends that are driving growth for your business, cloud security, et cetera. How do you view these LLM use cases as like a tipping point in terms of facilitating movement off of these legacy solutions? Is it one of the many or is it Is it game changing? I just want to understand, you know, I know it's early, but how significant could this be at a high level? I guess maybe taking a five to 10 year outlook. Thanks.

Yeah, great question. So it's actually it's probably two components. One is sort of the legacy element. You know, I can't I can't imagine a. a product architecture, technical architecture where you could take like a legacy network file share or legacy ECM on-premises system and somehow connect that to GPT-4 and reasonably get any kind of experience that would work or be operable. that customers would drive value from. So on that standpoint, it should be the nail in the coffin of kind of legacy on-prem content management and infrastructure to the extent that you want the use cases that AI delivers. There's another element which is pretty exciting as well that we're starting to see customers just incrementally, but we'll obviously push on this more just incrementally start to really understand is fragmented data is just as much of a problem as content and legacy systems. And the reason for that is let's say you wanted to solve this problem of you want your sales reps in your company to be able to instantly get answers to questions about all of your product catalog. And you want them to be able to go to an interface and just ask a question of what's the latest pricing for this product. Well, if your data is across lots of different systems, you will run into a bunch of challenges, which is the access permissions of that content might be different across each product, which makes it very, very hard to then reason through that data and ensure that the right people have access to that information. The individual interfaces for those products are going to be totally different for interacting with that data. And so you just won't be able to solve the problem of helping you reason through or understand your unstructured content at scale. And so we think this increasingly is going to cause enterprises to really start to pay attention to their content architecture. How is their content managed? Where is it managed? How fragmented is it? How do they get it into a spot with access controls and security and privacy that works in a modern way that they can bring AI to. And so even beyond the legacy element, the fragmentation element of content today, we think customers are going to pay a lot more attention to. I happened to do a couple sessions with two groups of about 20 or so CIOs from Fortune couple hundred companies. you could see their sort of eyes light up to the challenge that they are about to run into with content architecture. And a significant portion of these customers were not Box customers. They were just across the industry. And for the first time they realized both simultaneously how much value was in their content, because you could start to ask all of these unstructured data questions and at the exact same time that they don't have the architecture that will let them get value out of that data based on the current course and speed that their infrastructure is running on. So we think it's going to bring up a really compelling, exciting conversation for companies, and we're going to pound the table pretty hard on the message and then make sure that we have the best platform for working with content and AI. Great color. Thanks, Aaron. Yeah, thank you.

This concludes our question and answer session for today. I now would like to turn the call back to Cynthia Hiponia.

Great. Thank you everyone for joining us this afternoon and we look forward to updating you on our next earnings call. This concludes today's conference. You may now disconnect.