Box, Inc.

Q2 2024 Earnings Conference Call

8/29/2023

spk06: Good afternoon. My name is Emma and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I will now turn the call over to the box team.
spk00: Good afternoon, and welcome to Box's second 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 IR 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 the X platform handle at boxincir. On this call, we'll be making forward-looking statements including our third 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 applications, 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 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, the timing of our public cloud migration efforts, 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 in documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on the 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 today as of August 29, 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 non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as substitute for, or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and in the related supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all reference to financial measures are on a non-GAAP basis. With that, let me hand the call over to Aaron.
spk04: Thank you, Cynthia, and thanks, everyone, for joining us today. In Q2, we delivered revenue growth of 6% year-over-year or 9% in constant currency. Our 25% operating margins were up 310 basis points from a year ago. reflecting our operational discipline in a continued challenging macro environment. Over the last few months, I've spoken with customers across nearly every size business, geography, and industry. While customers are still facing various macro pressures that impact IT spend and seek growth in the near term, Box is still being prioritized in the areas where our unique value proposition is aligned with the IT decisions they are making in the near and long term around digital imperatives and the role of AI. In my conversations with CIOs, it's clear that they're looking to advance their digital strategies to help drive growth in their business, improve productivity across their organization, leverage integrated platforms that can provide them more value, and keep their enterprises secure from threats. At the same time, they have more content than ever before and are looking to leverage AI to accelerate their business processes and how they work. The Box Content Cloud is in a unique position to enable enterprises to drive productivity across the business, simplify IT environments, and protect an enterprise's most important data. And with our platform-neutral approach to AI, we're bringing the full range of large language models to enable customers to transform how they work with their data in the cloud. Recent customer wins in Q2 that validate our strategies working and that we are aligned to the key trends facing our customers include a federal institutional system who purchased Box with a six-figure deal to enable the organization to move to the cloud for secure document collaboration and workflow. With Box, they will be able to conduct necessary audits and exams of other government agencies by collaborating effectively and seamlessly internally, as well as with external parties, while also securely managing documents in a single platform. An international law firm that expanded its use of Box with a seven-figure upsell. As the company adopts Box enterprise-wide as its single content layer, it will eliminate storage costs from other platforms. remove costs from legacy file servers, as well as eliminate e-signature solution costs by moving to BoxSign. And a large global video game and digital entertainment company, who has been a Box customer for more than 10 years, expanded its use of Box with a six-figure upsell to Enterprise Plus for access to Box's Shield capabilities. In Q2, we delivered meaningful updates to our platform, to help customers drive their productivity and automate workflows, secure their most important content, and integrate Box into more of their IT stack. To advance Box's security and compliance capabilities, we introduced a new retention policy integration for Box Shield classifications, added zero trust 2.0 enhancements for admins, and Box governance reporting enhancements as well. To streamline workflows and productivity, We delivered new advanced signature request management in BoxSign, continued rolling out Box Canvas to all customers, as well as launched new enhancements to our end user app. And across our platform, in Q2, we released updates to BoxSign for Salesforce, Box for Slack, Box for Salesforce, as well as Box for NetSuite. Finally, we launched additional enhancements to the Box for Microsoft 365 integrations. including new enhancements to Box for Teams and Box for Microsoft Office on the desktop. And consistent with our platform neutral approach to AI innovation, in July, we announced Box AI for Microsoft 365 Copilot, a new plugin for Microsoft's next generation AI workplace tool. The plugin will enable our joint customers to use Microsoft 365 Copilot to make the Box files inside of an organization more useful and valuable than ever. Now, looking forward, we continue to drive substantial innovation for our customers to deliver the best way for them to manage their full lifecycle of content in the cloud. In security and governance, we're advancing Box Shield to help customers stay protected against their most daunting threats around losing sensitive data. We're expanding our governance capabilities to help customers with their content lifecycle management, and we're making continued progress on delivering the most compliant content platform. On the productivity front, we'll be adding important feature updates to make collaborating with Box Canvas and Box Notes more powerful, and enhance box sign and relay capabilities to automate our customers' most important workflows. And in our platform, we're advancing our integrations with leading external platforms as well as delivering enhanced experiences and reporting for developers building on Box. And with Box AI, we're bringing intelligence to enterprise content. We've seen an incredible response to Box AI in the first couple of months since our announcement. We know that AI is going to transform how enterprises work with their data, and organizations are going to need a secure way to connect their most important data to leading AI models. And with Box AI, we're building the leading platform neutral approach to connecting enterprise content to AI, starting with OpenAI's leading large language models. In our early customer conversations, including in our design partner program, we are hearing valuable feedback on use cases from customers that are looking to automatically extract metadata from their documents to drive workflows, ask questions of large sets of documents to find things no human would be able to answer, or intelligently protect their content with more advanced data classification. And this is just the start of what's possible. Our customers are excited about the new possibilities for productivity and insight they will gain from using Box AI with their content. We'll be sharing even more news at Boxworks around how we're advancing Box AI and bringing it into the hands of even more customers. At Boxworks this October, we're excited to share updates from across the entire product platform to our customers and lay out our vision for the future of work with AI. This year's Boxworks is set to be our best one yet, and we've just announced headliners like Sam Altman, the CEO of OpenAI, Dustin Moskovitz, the CEO of Asana, and Lidiane Jones, the CEO of Slack, all discussing the future of work and AI. Further, we'll also be hosting our first in-person CIO Works post-pandemic in Palo Alto on October 24th, where we will host our top customers with some of the key leaders in AI and technology. Finally, I'd like to note a critical milestone that in Q3 we will be fully running our production environment in the cloud. This has been a major multi-year effort to move our infrastructure from our data centers to the cloud to gain better performance, scalability, and gross margins. Dylan will discuss the impact to our gross margins more fully in his comments. But given the complexity of this migration, I'm incredibly proud of our execution on this critical initiative. Now, turning to go-to-market. Our Salesforce and go-to-market programs delivered continued results in the quarter, including healthy new logo growth as well as key customer expansions. We also continued to see the successful adoption of Enterprise Plus, our multi-product suites offering that brings the full value of the Box Content Cloud to our customers. In Q2, Enterprise Plus was well over 90% of suite sales in large deals, and suites comprised over 78% of deals over $100,000. Notably, in Q2, we achieved record suites attach rates in large deals in Japan. Earlier this month, I spent time in Japan speaking with our largest customers, and those conversations reinforced the continued upside we have in this market. We have never been more excited about the opportunity available to us. Our Q2 Enterprise Plus customer expansions and wins include one of Japan's largest institutional investors, who expanded its use of Box with the purchase of Enterprise Plus to enable secure content sharing and collaboration with external parties for the entire organization. They also plan to integrate Box with their existing tech stack, including Microsoft 365 and ServiceNow. And one of the leading hospitals in the United States, who has been a Box customer since 2013, signed an Enterprise Plus upsell to get access to additional resources needed to support the growth and expansion of the hospital and school of medicine. They'll be leveraging Shield to protect the sensitive content that they have stored today, which includes research content, and they plan to integrate Box into their Microsoft applications to help with consolidation efforts. Overall, we're focused on expanding our go-to-market programs and leveraging our land and expand motion to drive the progression of our customers into higher tier product plans and enabling them to leverage the full breadth of the Box platform. We remain focused on building healthy pipeline across the business, and this year we have doubled down in our field marketing programs, digital marketing engine, system integrators and distribution partners, vertical sales efforts in key markets like life sciences, financial services, and the public sector, and much more. Before I turn it over to Dylan, I'd like to briefly comment on the current business climate we're seeing. It's clear that the macro environment has resulted in lower seat growth than anticipated. Despite this, our best-in-class full churn rate remains at 3% as enterprises are prioritizing use cases to areas where the Box content cloud delivers the most value in delivering secure content management workflow and collaboration. I'm confident that with the strongest product portfolio and roadmap we've ever had, a world-class go-to-market team, and a healthy customer base of well over 110,000 customers that we set the stage for future accelerating revenue growth as economic conditions improve. And we remain relentlessly focused on operational excellence, allowing us to deliver year-over-year gross margin and operating margin expansion in FY24. The opportunity in front of us is massive. We're going after a more than $74 billion market with the leading content cloud platform to power the full lifecycle of content in the enterprise. In a joint report we recently released with IDC, IDC found that 90% of a company's data is in unstructured information, and that number is growing by 28% to over 73,000 exabytes in 2023. And with Box AI, we will transform our customers' ability to gain productivity and insight from their data. The need to manage, secure, automate, collaborate, and bring intelligence to this information is more important than ever before. And Box is uniquely positioned to help enterprises solve these challenges and transform how they work. With that, I'll hand it over to Dylan.
spk03: Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In Q2, our balanced business model allowed us to invest in profitable growth while continuing to optimize our underlying cost structure. Revenue landed in line with our guidance, and we delivered operating margin and EPS above our guidance despite a challenging macroeconomic environment. We are also pleased to have delivered innovation across our product portfolio, generated significant operating leverage, and continued our prudent return of capital to our shareholders. In Q2, we generated revenue of $261 million, up 6% year-over-year, and representing 9% year-over-year growth on a constant currency basis. We now have nearly 1,700 total customers paying us more than $100,000 annually, an increase of 11% year-over-year. Our Suites attach rate of 78% in large Q2 deals, a notable improvement from 72% in the year-ago period, demonstrates the value that our content cloud platform is delivering to our large customers. Suites customers now account for 48% of our revenue, up 20% from 40% of revenue a year ago, and after introducing Suites just four years ago. Our suite's value proposition continues to resonate with our customers in this dynamic environment, enabling them to transform, simplify, and secure their IT environments. We ended Q2 with remaining performance obligations, or RPO, of $1.1 billion, an 8% year-over-year increase, or 11% growth on a constant currency basis. We expect to recognize roughly 60% of our RPO over the next 12 months. Q2 billings of $233 million were down 1% year-over-year and up 1% on a constant currency basis. As anticipated, our Q2 billings result was impacted by a particularly high volume of early renewals in Q1. Q2 billings were also impacted by incremental FX headwinds from the US dollar to Japanese yen exchange rate of approximately $2 million or 100 basis points. Our net retention rate at the end of Q2 was 103%, slightly lower than our expectations. This was driven by heightened budget scrutiny putting pressure on seat expansion within existing customers. However, In Q2, we continued to achieve year-over-year price-per-seat improvements driven by customers continuing to convert to Enterprise Plus. Additionally, our annualized full churn rate remained strong and stable at 3%, demonstrating Box's overall stickiness and criticality in our customers' IT environments. We expect both our full churn rate and our net retention rate to remain roughly flat with our Q2 results throughout the back half of this year. As seat growth returns to more normalized levels and as we continue driving pricing improvements, we're confident that our best-in-class full churn rate and expanding our suite of innovative products will enable a higher net retention rate over time. Gross margin came in at 76.9% in Q2, up 70 basis points from 76.2% a year ago, and above our guidance of 76%. As Aaron mentioned earlier, our public cloud migration strategy is a critical driver of gross margin expansion. We began this complex undertaking several years ago, and we expect to be running fully in the public cloud by the end of Q3. As our data center expenses wind down and we continue optimizing our public cloud architecture, we're confident in our ability to continue expanding gross margin in the back half of FY24 and beyond. Q2 gross profit of $201 million was up 7% year over year, exceeding our revenue growth rate by 100 basis points. We once again delivered leverage across the entire business in Q2 with our ongoing efforts around infrastructure optimizations, low-cost location strategy, and overall cost discipline all paying off. This resulted in a 21% increase in operating income in Q2 to $65 million. Our 24.8% operating margin was up 310 basis points from the 21.7% we delivered a year ago and 80 basis points ahead of our guidance. As a result, we delivered diluted non-GAAP EPS of 36 cents in Q2, up 29% from 28 cents a year ago and one cent above the high end of our guidance. On a constant currency basis, our underlying profitability improvements are even stronger as Q2 EPS includes a negative 4 cent impact from FX. Importantly, Q2 marked our fourth consecutive quarter of achieving GAAP profitability. I'll now turn to our cash flow and balance sheet. In Q2, we generated free cash flow of 21 million, a 15% increase from 18 million in the year-ago period. We delivered cash flow from operations of $33 million, a 15% increase from $28 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were $9 million, up slightly from $8 million in Q2 of last year. As our public cloud migration will be fully completed by the end of this quarter, we expect capital lease payments to wind down over the next few quarters. Let's now turn to our capital allocation strategy. We ended the quarter with $446 million in cash, cash equivalents, restricted cash, and short-term investments. In Q2, we repurchased 2.2 million shares for approximately $62 million. As of July 31, 2023, we had approximately $35 million of remaining buyback capacity under our current share repurchase plan. Our board of directors recently authorized an additional $100 million common stock repurchase plan. With that, I would like to turn to our guidance for Q3 and fiscal 2024. As a reminder, Approximately one-third of our revenue is generated outside of the U.S., primarily in Japanese yen. The following guidance includes the expected impacts of FX headwinds, assuming current exchange rates. For the third quarter of fiscal 2024, we anticipate revenue in the range of $261 to $263 million representing 5% year-over-year growth at the high end of this range or 7% in constant currency. We expect our Q3 billings to be roughly flat year-over-year, which includes an expected 200 basis point benefit from FX and accounts for the continued pressure on seat growth that we anticipate due to the macroeconomic environment. I would note that in Q3 of last year, we delivered a billings growth rate of 20% in constant currency, driven by unusually strong payment durations, including one large multi-year customer prepayment. This creates a particularly difficult year-over-year comparison, and normalizing for payment durations and FX, our expected Q3 billings growth would be roughly 3%. Q4 of last year had more normal payment durations, and we expect our reported Q4 billings growth to be in the mid single digit range. We expect our Q3 RPO growth to be higher than our anticipated Q3 revenue growth rate. We expect our Q3 gross margin to be roughly 77%. As data center expenses and capital lease payments trend down, We expect our Q4 gross margin to be roughly 79%. We expect our Q3 non-GAAP operating margin to increase to approximately 25.5%, representing a 150 basis point improvement year over year. We expect our Q3 non-GAAP EPS to be in the range of 37 to 38 cents, representing a 23% year-over-year increase at the high end of this range, and GAAP EPS in the range of 3 to 4 cents. Weighted average diluted shares are expected to be approximately 149 million, slightly lower than Q2. Our Q3 GAAP and non-GAAP EPS guidance includes an expected year-over-year headwind from FX of approximately 4 cents. For the full fiscal year ending January 31st, 2024, we now expect FY24 revenue in the range of $1.04 billion to $1.044 billion, representing 5% year-over-year growth or 8% on a constant currency basis. This revised range reflects the impact of the challenging macroeconomic environment which also results in lower professional services revenue versus our prior expectations. We expect FX to have a negative impact of roughly 300 basis points to our FY24 revenue growth rate. For the full year of FY24, we now anticipate currency headwinds to impact our billings growth rate by approximately 200 basis points. We expect our FY24 billings growth rate to be roughly 4% on an as reported basis. We still expect our FY24 gross margin to be roughly 77.5% up from 76.9% in FY23. We are also reiterating our FY24 non-GAAP operating margin guidance of approximately 25.5% representing a strong 240 basis point improvement from last year's results of 23.1%. We are raising the low end of our FY24 non-GAAP EPS expectations to be in the range of $1.46 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 21 cents. Weighted average diluted shares are expected to be approximately 150 million. Our FY24 GAAP and non-GAAP EPS guidance includes an expected full year negative impact from FX of approximately 17 cents. As a result of the FX headwinds we've experienced throughout this year, our revised FY24 revenue growth outlook, and the impact of billings on free cash flow, we are revising our revenue growth plus free cash flow margin target for FY24 to be in the low 30s on an as reported basis, which includes a roughly 400 basis point headwind from FX. We will continue to maintain a rigorous approach to cost savings while investing in long-term growth and navigating the near-term impacts of this difficult macroeconomic environment. We remain committed to delivering against the long-term financial targets that we outlined at our most recent analyst day. We are reiterating our revenue growth target of 10 to 15 percent, our gross margin target of 80% to 82%, our operating margin target of 32% to 35%, and our revenue growth plus free cash flow margin target of at least 45%. Despite the challenging macroeconomic environment, this year we continue to deliver against the core initiatives to achieve these long-term financial targets. We are making significant enhancements to our innovative product offerings, expanding both operating margin and free cash flow margin, and are consistently returning capital to our shareholders. As we capitalize on these initiatives and as the macroeconomic environment improves, we are well positioned to create significant long-term shareholder value. With that, Aaron and I will be happy to take your questions.
spk02: Operator?
spk06: 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 comes from the line of Brian Peterson with Raymond James. Your line is open.
spk12: Hi, thanks for taking the question. So Aaron, I just wanted to double down on the cost savings component. I know that's come up in the past as a value proposition to the platform. You know, as customers may not be looking to expand seats as quickly, are they delaying cost savings for themselves or is there a functionality dynamic there? I'd just maybe love to understand a little bit on the cost side and if that has any correlation to what you guys are seeing on the seat side of the equation.
spk04: Yeah, so that message is still resonating. And it doesn't always lead to an upsell only because it might be that the customer already has licenses for the capabilities that would drive cost savings. So if you think about a customer that has Enterprise Plus as an example, they have access to BoxSign, BoxShield, BoxGovernance, you know, certain platform utilization. And so that is, when we talk about cost savings, that platform approach allows customers to go retire up to maybe half a dozen other systems or a dozen other systems, depending on the environment. But they might be fully licensed for that within the Enterprise Plus plan that they have. So that message and that momentum is alive and well. Almost every customer I'm talking to is retiring something beyond just the kind of core legacy storage infrastructure. They're looking at box sign for something. They're looking at box canvas for their white boarding solution. So that's going great. But you also still need that additional seat dynamic to really drive the net retention rate historically. And so that's maybe the part that's more muted. But overall, the momentum around data security, cost consolidation by leveraging the full breadth of the box platform, and then obviously AI have provided good counterbalances to some of the macro headwinds that we've seen.
spk03: Yeah, and just to put a finer point on that, that's why even in this challenging and pretty heavily scrutinized IT budget environment, we are still seeing a healthy adoption of our suites and Enterprise Plus offerings as that value proposition really is resonating. So that is showing continued momentum in order to bring in these capabilities that do help enable the cost savings even for customers who aren't on Enterprise Plus or weren't previously. But it really is the seat growth that has been more impacted as in many cases you don't necessarily need to expand the number of seats in order to capture those cost consolidation opportunities as a customer.
spk12: Got it. That makes sense. And Dillon, maybe a follow-up for you, just understanding on the second half outlook, I know you mentioned some changing dynamics on the seat expansion side, but I'd love to understand qualitatively, what did you change for kind of the second half outlook in the new guidance versus the old guidance? Thanks, guys.
spk03: Sure. So at a high level, I would say that this guidance takes into account, you know, certainly the Q2 results and the continued macroeconomic challenges, including all the dynamics that go into the net retention rate and the pressure on seat count. So while our customers are still dealing with macroeconomic challenges and scrutinizing that IT spend, as we mentioned, we are encouraged by the stabilization that we're now seeing in the demand environment to and we're also starting to see pipeline building at healthier levels than earlier in the year, but that typically takes several quarters to close, given our enterprise sales cycles. So I would say, you know, big picture, it's primarily driven by the actual and expected business performance due to macroeconomic impacts through senior to date, which also includes a little bit of a reduction in our professional services box consulting expectations, as we noted.
spk02: Thank you.
spk06: Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is open.
spk05: Great. Thank you for the question. Wanted to dig in a little bit more on the lower seat growth. Just wondering if it's widespread, if it's across both SMB and enterprise, anything to note on geographies? And then I have a follow-up.
spk04: Yeah, I think as we noted in the last call, while the general macro headwind, I think, does affect companies across a range of sizes and geographies, I think there's incremental pronounced impact in some of the smaller business customers, some of the international non-Japan segments, where we haven't necessarily had as strong of a of an engine in the past. And so that's probably where we see a little bit of incremental, you know, kind of headwind relative to other areas, but very, you know, kind of similar to the call that we had in the last quarter.
spk05: Great. Thanks, Aaron. And then I was hoping you could sort of walk through month to month on the linearity from May to June to July and then into August. Just wondering how the seat contraction dynamic has trended month to month. Thank you.
spk03: Sure. I would say that in terms of the overall seasonality, didn't see anything too different from what we typically see in a quarter. So we do see kind of back-ends loaded bookings, but that's pretty standard for us in pretty much any environment. And then as mentioned, kind of expecting to see more of the same based on how the current quarter is shaping up And as noted, we are seeing stabilization in that demand environment. So that kind of linearity has been fairly consistent.
spk04: And yeah, the only thing I would note is just more of the same being just from a linearity standpoint.
spk02: Yes, from a linearity standpoint, correct. Okay, got it. Thank you.
spk06: Your next question comes from the line of Chad Bennett with Craig Hallam. Your line is open.
spk13: Great. So just thinking about kind of the conditions and headwinds you're seeing right now, both macro and otherwise, and it seems like, rightfully so, you kind of assume the conditions will persist in the second half of the year and net retention in turn will remain relatively consistent. As we head into next year, and I know you talked about the free cash flow revenue growth formula kind of being in the low 30s. But if the kind of macro persists and the seed headwinds persist, is there a plan or potentially an alternative to even accelerate operating margin leverage more? I don't know if that's in the form of cost actions or obviously you're seeing some gross margin improvement with the move to the cloud here. Any commentary there?
spk03: Yeah, I mean, what I would say is certainly the way that we ultimately set the plan and we'll share more as that gets closer to the new year very much will be dependent on the demand signals we're seeing in the environment, our confidence and our ability to drive growth, what the macro economic environment is looking at, and that most notably kind of impacts our overall sales and marketing levels of investment. So that's what I would describe as The biggest variable in the model, and certainly that could create some additional operating margin expansion if we decide to take a more prudent approach to those investments. And then secondly, the big area, and you noted it, that would call out as an area for an accelerated level of margin expansion is on the gross margin line, especially because we'll more fully realize the benefits of the public cloud migration that we're wrapping up this year.
spk04: Yeah, and I just build on that. I think while we do see headwinds from a macro standpoint, as Dylan called out, healthy pipeline build, the customer conversations we're having I think would definitely lead us to still making sure we're driving the top line growth side. So as we just think about these toggles, whether it's our product roadmap, the strength of our suite offering, the momentum we're seeing as a result of the AI conversations that are, albeit early, I think we're certainly much more focused on going into next year, keeping a healthy level of driving demand. So I would just make sure that we're thoughtful about that.
spk13: Okay. And then just maybe a quick follow-up. So just in terms of, you know, we've had a lot of transition or cross sell up, sell the enterprise plus, it's now kind of approaching the majority, you know, almost 50% of revenue, I think. It's seen a huge improvement year over year. So I'm just trying to figure out from a driver standpoint, if we believe this is a you know, potentially a double-digit growth, revenue growth business again. You know, I don't know if there's another enterprise plus-plus, so to speak, ahead or another kind of packaging price uplift, but it seems like we've monetized a lot of that already, and now really that growth acceleration will be dependent upon seat growth. Is that a fair characterization?
spk04: I think, you know, what we've called out is as, you know, we think about the maturity of the enterprise plus, you know, kind of tailwind coming to a head, and we're still seeing, you know, healthy growth year on year as we've called out on customers matriculating to that plan. But as we kind of see that, you know, stabilize at a certain, you know, kind of rates, and our product portfolio expands, we have called out that I would anticipate additional higher tier plans in the future. So we haven't exactly talked about timing because some of that relates to our product roadmap of unannounced products and whatnot. But we're very thoughtful about making sure that we time that with a point where we have a strong strong new or multiple new offerings that we can bundle for customers. And again, that will, I think, be another driver of price per seat growth when that happens. And then obviously seat count growth becomes an additional lever. And then our platform kind of API consumption is another growth driver. So we're extremely confident and and feel very, very, you know, just overall bullish on the portfolio of growth drivers we have between, you know, seeds, platform consumption, price per seed, you know, kind of the vertical expansion efforts, and various kind of go-to-market engine optimizations. So multiple levels of levers of growth going forward.
spk02: Appreciate the color. Thank you. Yeah, thanks.
spk06: Your next question comes from the line of Jason Ader with William Blair. Your line is open.
spk07: Yeah, thank you. Good afternoon, guys. Just wanted to try to make sense of some of your commentary on macro and maybe can we look at it, you know, as historically just how it's changed from, let's say, end of last year until today. Do you feel like it has improved over the last, you know, eight months from, you know, just the demand signals? You talked about pipeline. You talked about you know, good traction with some of your large customers. You talked about interest in AI. But maybe just if you can kind of give us a punchline in terms of whether you feel the demand environment is actually improved at all or it sort of just continues to be, you know, muted. Yeah.
spk04: Yeah, I think, you know, at a more qualitative level, and this is backed up by, you know, our guild trends, when I look at our big customer wins, you know, the verticals, expansion, et cetera, I think we saw, you know, sort of the added and increased pressure go from last year's Q3 and Q4 coming into the year. That was sort of the ramp up. as we headed into this year was, you know, sort of where the macro started to flow into the business that we saw. I think we're, and I'll let Dylan build on this as he sees fit, but I think we're at the more stabilization period of that. We're now lapping that year of that initial impact, and so we see some positive signs of, you know, when you kind of look on the year-over-year basis coming into the second half of the year, you know, multiple metrics start to improve as a result of that. You know, obviously the nature of the SaaS model and just the fact that, you know, you, you know, both the SaaS dynamics, but also just this, you know, the seat dynamic of the business. You sometimes have a macro trend that can be offset a little bit from where it shows up in the numbers. But, but I think we're at a point where when I look at the, the pipeline build, the, the kind of, you know, color in the, in the customer conversations that we're having, the industry's, You know, across our 100K plus wins, it's really every single industry is represented, financial services, healthcare, technology, you know, kind of really across the board. So I think there's a bunch of positives in the data, but just at a more muted level because that seat count growth that is obviously corridor engine has been more muted as a result of the macro.
spk03: Yeah, and just to build on that a bit, would say that to clarify that over the earlier part of the year, so if you're saying, you know, comparing, you know, when we enter the year versus what we've seen, would certainly call out and have called out that there have been some incremental headwinds and impacts related to the macroeconomic environment. But, again, optimistic that we're seeing that stabilization now. And everything we were talking about, you know, it's true around the AI excitement, the pipeline that we're starting to see build at healthier levels. But that's not going to show up in this year's top line outlook just because of the timing. And, you know, with AI, for example, we're not monetizing that as of yet. So that's more of a, you know, next year type impact.
spk07: Okay. So fair to say that things kind of have dipped a little bit since the beginning of the year, but now instead of continuing to dip, they sort of seem to be stabilizing.
spk03: That's exactly right.
spk07: Okay. All right. And then on AI, Aaron, just from a monetization standpoint, is it right to think there's sort of two main methods for you to monetize? One is, you know, kind of a seed price uplift and, where you add this AI functionality where people can ask questions of their box content. And then secondly would be kind of API consumption where some external app wants to leverage the box content cloud for some external app and they use an API to kind of talk to the box content. Is that correct?
spk04: Yeah, that's the right way to think about it philosophically. On the former part of the pricing component, I'll just note that we haven't announced yet what that will look like and, you know, where that may or may not be included. But those dynamics of, you know, there's a per-seat component of Box AI that will have some set of functionality, and then there's a platform component of Box AI that will be more consumption-driven. Those are the right ways to think about how the product will manifest from a pricing packaging standpoint.
spk07: And have you given any specific timing or any kind of general timing around – when any of these things will be material or start to contribute to revenue?
spk04: Yeah, we haven't given that timing only because I think even as we looked at the rest of the market and, you know, where other, you know, kind of enterprise software platforms are, I think the dynamic is, you know, generally this is the year where a lot of the technology is getting built. I think customers are starting to think about how they're going to, you know, incorporate this into their workflows and organizations. as well as get expanded budget from an IT standpoint. So I think as Dylan just called out, probably this would be more of an element for next year's plan. But right now, it's certainly a driver of the vast majority of CIO conversations that we're having just because everybody's really figuring out, you know, what is their AI strategy going to look like? And as a platform that houses a significant portion of their most important data, you can imagine customers are coming to us, you know, quite excitedly, you know, trying to work out what are the different use cases that they can be solving with Box AI.
spk02: Thank you. Yeah, thanks.
spk06: Your next question comes from the line of Pinjalam Bora with JP Morgan. Your line is open.
spk09: Oh, great. Thanks for taking the question. Aaron, I want to ask, on the macro headwind that you're seeing, in your conversations, do you feel like it is part of kind of a reassessment of budgets by companies to fund their own AI projects? Is that coming up in conversations at all?
spk04: We haven't seen that impact at any of the near medium-term deals that we look at in the pipeline, only because we tend to have very direct use cases that a customer is expanding for. And sort of, you know, the sort of maybe general AI budget would be maybe a bit orthogonal to that. I could see that showing up, you know, maybe against somebody's infrastructure budget or, you know, maybe some of their platform services they use. But for the content management collaboration workflow dollars that we tend to be getting, I haven't seen that happen. That's not to say it's impossible, but that has not shown up to me.
spk09: You don't think there's a portion that's going to, I don't know, Microsoft co-pilot that is not going to box at this point or something like that?
spk04: Oh, sorry. If it's more directly in that sense, then I would say definitely not, just because those products are simply too new and also still orthogonal in terms of the use cases that we're solving. We just announced as an example our integration with Copilot, so I think you'll see a lot of strong interoperability there. Our customer conversations on this subject are very much focused on how can they be leveraging Box AI either through the end user interface or as a platform component to help customers with their business processes in a range of industries. So I don't think we're sort of competing for budget in those other domains right now.
spk09: Got it. And Dylan, one question on the reduction in the constant currency growth rate from I think 10% to 8%. How much of that two-point delta would you say is driven by professional services?
spk03: It's a minority, but to size it, you know, it's kind of more than a million dollars, but the bulk of it is on the recurring side.
spk09: Got it. Thank you.
spk06: Your next question comes from the line of Atai Kidron with Oppenheimer. Your line is open.
spk08: Hi, it's George Iwanek. Maybe, Aaron, digging into the competitive environment, can you give us a sense of, you know, are you seeing some positive gains from a consolidation standpoint and then, you know, on a pricing standpoint for a like-for-like basis? Are you holding or seeing any increases?
spk04: Yeah, so when I look at, again, kind of top deals, customers over $100,000, there's a lot in there that are consolidation of other vendors in the box. Often legacy systems and technologies where box is increasingly becoming the common standard of that organization. You know, we're seeing a number of deals where box sign is a core component and customers are able to save money on maybe an e-signature vendor. You know, we're seeing this with Canvas and kind of whiteboard technology. So that's folding more into box. And so we're definitely very happy to see those trends. On the pricing side, we did see, you know, kind of pricing improvements in the quarter and have, you know, over the past year. And that's been helpful, again, sort of offsetting some of that more, you know, some of the seat dynamic. And we're going to just, as we move more customers into Enterprise Plus, I think we'll continue to see that. And then future product plans would obviously have that same dynamic as well.
spk08: Dylan, maybe one for you. Can you give us some sense of how you're looking at hiring? I know you're continuing to be very mindful with your OpEx, but are you looking at still adding to both the sales and R&D headcount at this point?
spk03: We are, but certainly more moderate growth and very much focused, especially on the R&D side, in scaling in Poland and certainly hiring everywhere, but that is the emphasis in terms of number of people. And then on the AE front, we are on track and still expect to achieve that initial target of quota-carrying AE growth in the mid-single-digit percentage range. Thank you.
spk06: Your next question comes from the line of Rishi Jaluria with RBC. Your line is open.
spk11: Thanks. This is Rich Paul, and I'm for Rishi. Thanks for taking my question. Aaron, you mentioned a little bit about doubling down on key verticals and geographies on the go-to-market side. If we were to just peel that back a little, are there any particular areas where you feel that you're currently underpenetrated and you see some low-hanging fruit to go after or anything around that?
spk04: Yeah. I mean, where we... Where we do, I would say, maybe disproportionately well are areas that actually have the greatest amount of security, compliance, data privacy concerns within the customer base. And so if you think about large global multinational corporations, manufacturers, financial services providers, life sciences, You know, we did a major deal, a seven-figure deal at a major law firm. So anywhere where customers have highly sensitive data, where they have to collaborate on that data in and outside their enterprise, and they often have a layer of compliance requirements within their organization, Those are where we do really well. And I would say in every market, there's massive untapped upside. And so that leads you to, again, a lot of upside in public sector. We're seeing healthy traction in state and local. Obviously, a lot of upside on the federal side. We have quite a bit of upside in life sciences, health care, financial services, and insurance. So those are a few of the verticals where I think you'd see disproportionate upside over time.
spk11: Got it. That's very helpful. And then just to follow up, I know that the SEITs aspect seems to be seeing a little bit more pressure. But if we just look at, you know, the SEITs contribution to total revenue and the 100K deals, obviously it seems like there's a bit of broad-based pressure as well. So I'm just curious, are there any particular aspects of Sweets that are harder to sell in this environment or anything you would call out there?
spk04: I think I wouldn't call out Sweets in that sense. I mean, I think Sweets is maybe in the converse, it's actually a major driver of our sales motion because customers get even more value when they purchase from Box. So I'd say overall, it's actually one of our primary differentiators, if anything.
spk03: Yeah, and maybe also just to clarify, because you talk about some of the other impacts, like on the large deal growth, that is not separate from, but is actually directly related to seat growth. When you have customers who are not expanding at their typical rates, especially existing customers, those two are actually pretty closely correlated. So that's not a separate dynamic, but actually largely a function of the seat growth dynamics.
spk11: Got it. Very helpful. Thank you.
spk06: Yeah, thank you.
spk11: Thanks.
spk06: Your next question comes from the line of Steve Enders with Citi. Your line is open.
spk10: Okay, great. Thanks for taking the question. I guess I want to ask this a bit more on the AI angle. As you're talking to customers about it and have, you know, shown some things, I guess, how do you view, you know, the right to win within Citi? some of those use cases you're going after and I guess where would you kind of, how are customers thinking about their own AI investments at this point in utilizing Box versus other players out there that are talking about AI?
spk04: Yeah, so I think this won't be a surprise to anybody on this call, but we almost have to assume if you're in enterprise software, you're also in AI. So at this point, you kind of have to think about, you know, AI is almost, it's mobile, it's cloud in its pervasiveness. So it's a platform architecture that is going to exist in all technology. And then there's kind of almost like a heat map or sensitivity of, you know, what kind of data and workflows does that enterprise software company have and how much does AI relate to, you know, that set of data and workflow. And so, you know, we've talked about this in the past, but by definition, large language models do really, really, you know, powerful things to large amounts of text, and you see large amounts of text in documents. And so that kind of right to win question, you know, we house, you know, tens and tens of billions of files that are very ripe for AI helping customers understand within that content, helping automate workflows around it, helping extract metadata from those documents. And so I think our right to win is extremely strong in anything that is sort of content related from an AI use case standpoint. And so just to rattle off a few of the examples just in the past maybe two weeks of customer conversations, you could have a large real estate organization or private equity firm or insurance company where they have invoices or contracts or leasing documents that come in, those today have to be read by a human, processed by a human, somebody has to extract all the data in a very manual way, and large language models, either again through our interface or APIs, can do a lot of that heavy lifting automatically using AI. So just by the nature of our business model, because we already manage that content and in many cases orchestrate the workflows around that content, we became the natural place for plugging in the AI models to that content as well as opposed to shipping around that data to other platforms. So I think in that sense, our right to win is sort of like right in the very center of the target zone. And now it's the journey of getting customers educated on how to implement it, you know, building out all of the platform components necessary, and then ultimately having a business model where, you know, we can share some of that upside of the performance with customers, you know, from a pricing standpoint.
spk10: Okay, helpful context there. I do want to ask also on some of the investments that sounds like you're making in go-to-market, there's an expanded marketing initiative, maybe some more vertical focus, and the partner side. Is there some, you know, signal that you're seeing out there that is leading to those incremental investments, or how are you doing, I guess, the efficacy of those expanded initiatives at this time?
spk04: Yeah, so, you know, I think, you know, to add that macro color, you know, now down on the, into the, you know, daily conversations that we tend to have with customers, you know, if you kind of look at six or nine months ago in customers planning their budgets and their cycle, maybe at the start of this year. That's where you saw, again, that initial ramp up of pressure of customers not having as many strategic initiatives because they didn't know where the macro was going to go and how it was going to affect their industry or business. I think you've had the past six months of of starting to see some degree of stabilization from, again, like capital M macro, like we're talking inflation rates and interest rate dynamics of where is that going to trend. And so now I think the customer conversations we're having have the ability to be more long-term oriented where customers are talking about, okay, what is their IT strategy going to look like next year? Not dollars necessarily, but what kinds of programs and initiatives are they going to do? That gives us the signal that, okay, we can now put more emphasis on really making sure we're in every major city with the right kind of field events, driving the right kind of digital marketing campaigns to drive more conversations. And it's been a steady ramp up throughout the year to be clear. But I was, you know, calling it out because this is going to be a continued focal point for us. I mean, we're planning on having the biggest digital BoxWorks yet. We're bringing back Box's CIO conference. CIO works in person, you know, this October. And so I think we're seeing enough signal in the conversations that warrant, you know, making sure we're driving the right level of demand and pipeline.
spk02: Okay, perfect. Thanks for asking the questions. Yeah, thanks.
spk06: This concludes today's Q&A session. I will now turn the call back to Cynthia for closing remarks.
spk00: Great. Thank you, everyone. As Erin mentioned, we are holding BoxWorks on October 11th, and we'll be hosting a virtual investor product briefing at 1 p.m. Pacific time. We'll be sending out more details shortly. Again, thank you, everyone, for joining us today.
spk06: This concludes today's conference call. You may now disconnect.
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