Box, Inc.

Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to Bucks Inc's second quarter fiscal 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star followed by the number one on your telephone keypad. I would now like to turn the call over to Cynthia Hiponia, Vice President, Investor Relations. Please go ahead.

Good afternoon, and welcome to Box's second quarter fiscal 2026 earnings conference call. I am 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. Hello. 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. Our webcast will be audio only. However, supplemental slides are now available for download from our website. On this call, we will be making forward-looking statements, including our third quarter and full year fiscal 2026 financial guidance and our expectations regarding our financial performance for fiscal 2026 and future periods, including gross margins, operating margins, and operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billing, and the impact of foreign currency exchange rates and deferred tax expenses, 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, our ability to address enterprise challenges and deliver cost savings for our customers, the impact of the macro environment on our business and operating results, and our capital allocation strategies, including potential repurchase of our common stock. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors and documents we filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially for statements made on this earnings call. These forward-looking statements are being made as of today, August 26, 2025, and we disclaim any obligation to update or revise them should they change or cease to be up to date. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these 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 references to financial measures are on a non-GAAP basis. Thank you. With that, let me turn the call over to Aaron.

Thank you, Cynthia, and thanks, everyone, for joining us today. We delivered a strong second quarter with results above our guidance, reflecting continued growth in customer adoption of Box AI and our advanced workflow capabilities. This includes revenue growth of 9% or 7% in constant currency and RPO growth of 16%. Operating margins in the quarter were 29% with EPS of $0.33, $0.02 above the high end of our outlook. We had strong momentum in Q2 in customer adoption of Enterprise Advanced, which brings together our most powerful, intelligent workflow capabilities in one plan. Examples include a prominent U.S. law firm became a new customer to Boxx. driven by Enterprise Advanced AI-powered metadata extraction capabilities and intelligent no-code apps to power its business processes. This is an enterprise-wide agreement replacing both an existing cloud-based platform vendor and an e-signature company. In partnership with a systems integrator, a Fortune 500 hospitality chain upgraded from a non-suites plan into Enterprise Advanced as they move away from a manual process with multiple systems to manage global projects The company is looking to use AI-powered metadata extraction, box hubs, doc gen, and relay in design and planning workflows to scale projects and streamline execution. And a global industrial automation company upgraded from Enterprise Plus to Enterprise Advanced and expanded seats as they look to centralize their contract management solutions, automate quote generations, and enhance cross-entity document searchability. The company will use AI-powered metadata extraction to capture contract renewal dates and legal obligations to inform decision-making and ensure compliance. In addition to the accelerating momentum in Enterprise Advanced, Enterprise Plus continues to drive customer demand and remains a strong revenue growth driver for Box. In the second quarter, we saw customer upgrades and new logo wins driven by our enhanced Box AI solutions, such as AI-driven multi-doc queries, Box AI content generation using advanced models, AI-powered content portals with intelligent hubs, and automated controls and protections against threats and data leaks. These Q2 wins demonstrate what I have heard from the hundreds of customer engagements that we had in the quarter. Enterprises know that AI agents are going to bring a new level of automation and deliver deeper business insights to their businesses. Software has historically been good for automating processes that deal with structured data. Think payroll, CRM systems, accounting, HRIS, or supply chain workflows. This is where data fits neatly into rows and columns in a database. But the vast majority of enterprise workflows revolve around unstructured data, which actually represents about 90% of our corporate information. These are the workflows that drive client onboarding at a bank, M&A deals that get closed, contracts getting agreed on, clinical research advances, movings getting made, and so much more. We've never been able to bring automation to these areas of work because they've been human-based manual processes dealing primarily with unstructured data. Now, for the first time ever, we can bring automation to this work with AI agents. With AI agents operating on unstructured data, enterprises can now accelerate product development processes, automate end-to-end hiring and training workflows, surface insights and automate clinical studies, and speed up loan applications for better client engagement. We can imagine a future where there are over 100x more agents than people inside of an organization, where any task you want done in a company is only a matter of how much compute you want to throw at the problem. You'll have agents running in the background and in parallel for any workflow around content that you can imagine. However, most companies can't tap into the full power of AI agents on their unstructured data because their enterprise content is fragmented or stuck in legacy repositories. And with this fragmentation, it means that AI agents have no core source of truth from which to answer questions about critical topics. It also means There's a risk that access controls are unmaintained, which can lead to AI agents leaking data to the wrong users asking a question. And finally, it becomes a massive nightmare integrating systems that don't play nice with one another in the AI era. With the Box intelligent content management platform, customers have a single source of truth to power the critical workflows for their most important content. And with an AI platform that delivers agents built right in and integrated with all of our customers' agentic ecosystem. Importantly, Box AI agents work directly on top of the workflows that customers have already built on Box. And we're only accelerating what these combined capabilities can deliver going forward. We're already seeing the power of AI agents with customers building Box AI agents that can review and summarize documents, answer questions from a large data set, and extract critical details from enterprise documents like contracts or invoices to orchestrate processes in legal, finance, healthcare, and more. Now, to build on this continued momentum, in Q2, we announced all new updates to Box AI capabilities, including the general availability of Box's new enhanced extract agent and the beta launch of Box's MCP server. These releases, along with key updates to the Box AI Admin Console, the Box AI Studio, and AI Units, empower users to operationalize AI with the confidence and control that businesses demand. Our flexible and interoperable platform has been a major differentiator for Box and is just as important, if not more critical, in the age of AI. We partner with the broader AI model ecosystem to ensure customers have the choice of any model provider they want to work with. Being neutral to the AI models means that our customers get access to the best AI capabilities applied directly to their content. We have announced support for OpenAI's GPT-5, Anthropix's Clod 4.1, and XAI's Grok 4 in the Box AI Studio. often on the day of the launch of this new model. In addition to supporting these new models on our platform, we've integrated with the broader product and partner ecosystems. OpenAI has integrated Box directly into ChatsVT for content access. Box partnered with Anthropix Financial Analysis Solution. We've served as a launch partner for Snowflake's OpenFlow capability, collaborated with AWS Bedrock Agent Core Runtime, and partnered with Salesforce as a part of their MCP partner network. We had a strong quarter of execution on our product roadmap and technology partnerships, but what I am most excited about is our journey ahead. We have quite the roadmap in store for the second half of the year. First, we will be delivering all new workflow and no code app capabilities to help customers automate their most critical workflows around content enhanced by the power of AI agents. We are making it easier than ever for companies to leverage Box to power their business processes, whether that is automating how they work with their contracts and digital assets or leases and clinical research. Next, we are continuing to enhance productivity by bringing the full power of Box AI to Box's core collaboration features. We will introduce all new AI features within Box Notes, continued improvements for leveraging Box Hubs as an intelligent knowledge portal, and all new core Box AI experiences to make it easy for customers to interact with AI agents and find information across their Box accounts, no matter what they're looking for. And all of these AI agent capabilities will be available via our API, so customers can take full advantage of summarizing, analyzing, and extracting data from their content in any partner application, like Salesforce AgentForce, ServiceNow Agent Fabric, Google's Agent Space, ChachiBT, Cloud, Copilot, IBM's Watson X Orchestrate, and more. And with our newly GA'd remote MCP server, customers can interact with the full Box API and AI agents as tools within their own AI-oriented applications. Finally, all of this is only possible because customers entrust Box with their most sensitive and important enterprise data. Especially in a world where AI agents can accidentally leak corporate data when security permissions are not maintained, Box's security functionality will become even more important for our customers. To continue to maintain and build that trust, we will advance our powerful security, governance, compliance, and data protection capabilities with all new features, core security improvements, archive updates, and more. We'll be sharing much more at this year's Boxworks in San Francisco, and it's gearing up to deliver our biggest set of launches as a company. Now, turning to go to market. We will be continuing to focus on driving the adoption of Enterprise Advanced. In Q2, we nearly doubled the amount of deals we closed over the prior quarter, exceeding our internal goals, and our pipeline continues to build nicely. Our pricing improvements for Enterprise Advanced over Enterprise Plus remains at or above our target of 20 to 40%. As we've discussed, going to market with partners remains a critical part of our go-to-market strategy as we power more advanced solutions for customers. We continue to see notable partner-led wins with Enterprise Advance as we go deeper into our customers' critical business processes. As we continue to grow our relationship with important partners worldwide, we are pleased to announce that Deloitte will be a title sponsor for Boxworks 2025. Other notable sponsors include AWS, Google Cloud, IBM, Salesforce, Slalom, and more. Finally, I want to share that our current CRO, Mark Wayland, has announced his retirement. We are incredibly grateful for Mark's role in scaling Box to over $1 billion in annual revenue during his tenure, helping us navigate the launch of Suites, Enterprise Advanced, and much more. I'd like to share my deepest thanks to Mark for his incredible contributions over the past six years to Box and for leading a smooth transition of the CRO role. With that, we are excited to welcome Jeff Newsom to Box as our new Chief Revenue Officer, heading our global sales org. Jeff is a highly regarded go-to-market executive with over two decades of experience leading sales organizations in enterprise software, cloud infrastructure, and AI. Jeff is joining us from Google Cloud, where he spent over six years as a key leader driving the business's rapid growth and scale, driving new logo growth and significant customer expansions of their portfolio of cloud infrastructure and AI services. Jeff has also held various senior leadership roles at Oracle, SAP, and Workday. Jeff is a perfect fit for the next chapter of Box's growth to $2 billion in revenue and beyond. He is joining us at a foundational moment for Box as our platform evolves to deliver intelligent content management into our customers' most important workflows and processes, all powered by AI. Now, before I turn it over to Dylan, I want to share how we're operating as an AI-first company. The objective of going AI-first is simple, move faster and deliver more value to customers. We want to make decisions more effectively and quickly, drive more output, accelerate our roadmap, and better serve customers. To that end, we're equipping every Boxer with the skills and tools to be productive with AI, encouraging experimentation, scaling best practices across the company, and adding AI-first expectations in our hiring process. Across all of Box, we are using Box AI Agents to augment our work in every area of the business. from how we train and enable new sales or support reps to how we write product requirements or generate rapid account research with industry insights for each customer we sell to. AI agents are being used all across Box to help accelerate our workflows and drive increased productivity. We are incredibly excited about the opportunity ahead of us, and we will be discussing many more of our advanced features and the future of Box and our Intelligent Content Management Platform at our upcoming Customer Conference Boxworks 2025 on September 11th and 12th in San Francisco. With that, let me turn the call over to Dylan.

Thanks, Aaron. Good afternoon, everyone. Q2 marked another quarter of strong execution as we exceeded guidance for all metrics and delivered both double-digit short-term RPO growth and a sequential improvement in our net retention rate. We also made significant progress against our FY26 priorities. We advanced our leading intelligent content management platform by enhancing our AI and agentic capabilities while investing in key go-to-market initiatives to drive enterprise advanced momentum. Finally, we're generating efficiencies across the business and we continue to execute on our disciplined capital allocation strategy. As Aaron discussed, We have a significant opportunity to transform how enterprises work with their content and our Q2 results demonstrate the power of our balanced financial model. We delivered Q2 revenue of $294 million above the high end of our guidance. This accelerating growth was up 9% year over year and up 7% in constant currency. We now have nearly 2,000 customers paying us at least $100,000 annually, up 8% year over year. Suites customers now account for 63% of our revenue, up from 58% a year ago. This improvement was driven by momentum in Box AI and Enterprise Advanced, which enable more of our customers to adopt Box for higher value use cases. We ended Q2 with remaining performance obligations, or RPO, of $1.5 billion, a 16% year-over-year increase both as reported and in constant currency. Short-term RPO grew 12% year-over-year as reported and in constant currency. These results reflect the impact of Box AI adoption on our business, which is driving strong underlying business momentum and giving our customers the confidence to increasingly commit to multi-year contracts. We expect to recognize roughly 55% of our RPO over the next 12 months. Q2 billings of $265 million were up 3% year-over-year and up 6% in constant currency. This growth exceeded our expectations of flat year-over-year billings even as we absorbed an FX headwind of approximately 320 basis points versus our prior expectations. Q2 billing strength was driven by a combination of Q2 bookings, early renewals, and outperformance in our box consulting business. We ended Q2 with a net retention rate of 103%, an improvement from 102% in Q1 and in the year-ago period. Our annualized full churn rate remains steady at 3%. We've been pleased to see customers upgrade and expand into our Enterprise Plus and Enterprise Advanced plans to gain access to our enterprise-grade AI and advanced workflow capabilities. As a result, our net retention rate continues to benefit from consistent price per seat increases, and we're now seeing net seat growth contribute more materially as well. We continue to expect a net retention rate of 103% exiting FY26. Q2 gross margin was 81.4%. Excluding the tailwind from data center equipment sales in Q2 of last year, this represents an increase of 40 basis points year-over-year. Q2 gross profit of $239 million was up 9% year-over-year, consistent with our revenue growth rate. We delivered Q2 operating income of $84 million and operating margin of 28.6%, both above guidance and an improvement year-over-year, despite the tougher comparison due to data center equipment sales. In Q2, we delivered EPS of $0.33, $0.02 above the high end of our guidance. I'll now turn to our cash flow and balance sheet. In Q2, we generated free cash flow of $36 million and cash flow from operations of $46 million, up 9% and 27% year-over-year, respectively. We ended Q2 with $760 million in cash, cash equivalents, restricted cash, and short-term investments. In Q2, we repurchased 1.2 million shares for approximately $40 million. As of July 31, 2025, we had approximately $112 million of remaining buyback capacity under our current share repurchase plan. We remain committed to opportunistically returning capital to our shareholders through our ongoing stock repurchase program. With that, let me now turn to our Q3 and FY26 guidance. As a reminder, Approximately one-third of our revenue is generated outside of the U.S., with roughly 65% of our international revenue coming from Japan. Before providing guidance, I wanted to remind you of the tax impacts we mentioned on our last call. We expect that the non-cash deferred tax expenses will be a non-GAAP EPS headwind of 58 cents in FY26. For the third quarter of fiscal 2026, We expect Q3 revenue to be in the range of 298 to 299 million, representing approximately 8% year-over-year growth. This includes an expected tailwind from FX of approximately 80 basis points. We anticipate our Q3 billings growth to be approximately 10%. This includes an expected tailwind from FX of approximately 200 basis points. We expect Q3 gross margin to be approximately 81%. We anticipate our Q3 non-GAAP operating margin to be approximately 28% versus 29.1% a year ago. Note that in Q3 of last year, operating margin included a 70 basis point benefit from data center equipment sales. As a reminder, this year our annual customer conference, BoxWorks, has moved from Q4 to Q3. This shifts approximately 3 million in expenses into Q3, representing an additional 100 basis point headwinds to operating margin when comparing to the year-ago period. We expect our Q3 non-GAAP EPS to be in the range of 31 cents to 32 cents, which includes an expected tailwind of approximately 1 cent from FX. Weighted average diluted shares are expected to be approximately 150 million for the full fiscal year ending January 31st, 2026. We are proud to have delivered strong first half results driven by customer demand for our enterprise-grade AI capabilities, translating into the momentum we're seeing in Enterprise Plus and Enterprise Advanced. As a result, We are raising our revenue expectations for the full year by $5 million to $1.170 to $1.175 billion, an increase of approximately $8 million adjusting for currency movements since our prior guidance. This represents approximately 8% year-over-year growth or 7% in constant currency. We now expect a tailwind of approximately 90 basis points from FX, 30 basis points lower than our previous expectations. We still expect our FY26 billings growth rate to be approximately 9%. This includes a tailwind of approximately 230 basis points from FX down from our previous expectations of a 340 basis point tailwind. We expect FY26 gross margin to be approximately 81%. When adjusting for the impact from data center equipment sales last year, which also flows through to operating margin, this represents a year-over-year improvement of 40 basis points. We expect our FY26 non-GAAP operating margin to be approximately 28%, including a tailwind of approximately 10 basis points from FX. We now expect FY26 non-GAAP EPS to be in the range of $1.26 to $1.28, including an expected tailwind of approximately $0.04 from FX. This represents an increase of $0.03 versus our prior expectations and an increase of $0.06, adjusting for currency movement since our previous guidance. Weighted average diluted shares are expected to be approximately $150 million. Our Q2 results demonstrate the strong business momentum we're seeing driven by customer demand for Box AI and Enterprise Advanced. This year, we will continue to invest in our intelligent content management platform and key go-to-market initiatives, and our balanced financial model positions Box to capitalize on the AI-driven transformation ahead in enterprise content. With that, Aaron and I will be happy to take your questions. Operator?

This time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Ambers with Citi. Your line is open.

Okay, great. Thanks, Jerome. Thanks for taking the questions here. I guess maybe just to start on the momentum you're seeing in Enterprise Advanced, I mean, How much of the billing upside should be kind of attributed to that, or is the deal environment getting better? Can you just help us think through what actually grows the outperformance here?

Yeah, so I would say it's hard to parse out exactly how much is coming from enterprise advanced and enterprise plus, as those are really the core drivers here. given the demand for AI around our overall business momentum, and has an impact on really all of the factors that we called out as what's driving the outperformance. So for Billings in particular, came down to a combination of strong bookings overall, strong outcome in our box consulting professional services business, as well as some impact from early renewals And all three of those factors are really influenced by the types of deals that we're increasingly selling because of our AI capabilities and enterprise advanced. And so we'd really point to that momentum as the biggest change in what we're seeing around the business and really not a function of anything that we're seeing from an overall macroeconomic or deal environment standpoint.

Okay, that's helpful. And then I guess maybe... Justin Delacruz, Thinking through some of the pipeline dynamics and in you know, thinking through the enterprise advanced. Justin Delacruz, You know opportunities you're seeing just how is it maybe expanding the kinds of use cases. Justin Delacruz, Or if you look through the pipeline and what's coming through, however, maybe the sizes of the opportunities, they be different from what you've seen historically here.

Yeah, so I think the unique thing that we're seeing kind of across all of the enterprise advanced deals is really a core focus on being able to use some combination of AI agents and workflow automation together. And the first big use cases are really around things like data extraction. So you want to be able to take in a large amount of documents, invoices, contracts, lease agreements, and extract data. critical metadata from that and then be able to run some kind of workflow or have dashboards that let you go in and look across or analyze that data. So that's been a big use case. There's been another kind of increasing use case around using the AI studio to create custom agents for employees to be able to interact with knowledge or be able to interact with their data with those agents. And then what those have in kind of combination or as an effect of those two capabilities is really things like the deals are now getting bigger in segments maybe where we wouldn't have even seen as large of deals. So we had some great examples of deal sizes that were multiples of what they could have been kind of pre-enterprise advanced because the customer wouldn't have had the types of use cases be solved in a prior plan. So we talk a lot about, obviously, the 20% to 40% price per seat uplift, but that doesn't fully even capture the fact that we might be doing deals that capture more users or that we wouldn't have even sold previously without enterprise advance as functionality. So customers buying Vox to be able to power, again, a contract management lifecycle, digital asset management, being able to process medical information and extract critical data from that, So it's really going to get us into, I think, a much broader set of use cases, where Box obviously traditionally has been for secure collaboration and document management. Now we can drive much more into intelligent workflows and automation as well.

OK, perfect. That's great to hear. Thanks for taking the questions.

Your next question comes from the line of with DA Davidson. Your line is open.

Great. Thanks for taking my questions, and congrats on the quarter. Maybe to start, it was interesting to hear that net seat growth is starting to contribute more materially, especially in this environment. Is that really just because enterprise advances is more relevant to more users across your customers? Or help me kind of understand what's driving that seat growth here this quarter.

Yeah, that's exactly right. Just as Aaron hit on, it really is the use cases and types of users and departments now that have really high value use cases on Box because of both Enterprise Advanced as well as Enterprise Plus, both of which have pretty robust AI capabilities. So that's really the biggest dynamic we've been seeing recently that is causing a bit of a rebound in that net seat growth metric.

Awesome. And then the upgrade straight to Enterprise Advanced was also interesting to hear. Is that... Better than you expected? Like, how common are you seeing that? And are you able to provide any color on maybe the pricing uplift there when that happens?

Yeah, so when you have a straight upgrade to Enterprise Advanced, you know, we tend to see relative to just using the kind of core service non-suites. You know, called a rough doubling, you know, sometimes a little more, a little less, based on, you know, relative to what they'd be paying versus that 20% to 40% uplift when going from Enterprise Plus to Enterprise Advanced. And we have been pretty pleased with the momentum there, especially given how early we are in the overall, you know, rollout of Enterprise Advanced. having just made that generally available back in January. So we certainly expected and had seen the significant majority of those deals to be with existing successful Box customers who already had a lot of data and a sense of the types of workflows they'd put onto Box, but certainly pleased the momentum that we're seeing from customers who are going straight into Enterprise Advanced.

Great. Thanks for taking my questions.

Your next question comes from the line of Taylor McInnis with UBS. Your line is open.

Taylor McInnis Yeah. Hi. Thanks so much for taking my question. When we think about the outperformance in 2Q, can you comment how much of that might have been related to some of these early renewals? Because if I'm doing some of the math right, it looks like the implied constant currency guide assumes a bit lower of like buildings growth on a constant currency basis in the second half. So just given the momentum that we've seen, you know, in the first half of like this year and some of the strength you guys are seeing on the AI side, maybe you could just walk us through then, you know, how we should think about that momentum as we head into the second half and what's implied in the guide, especially in 4Q where it seems like there's a little bit more of a drop off. Thanks.

Sure. So looking at those three factors that we had mentioned in terms of what's driving the outperformance, the good thing about them is they're all having a roughly similar size impact, a few million dollars each in terms of the outperformance. And then as it relates to the back half, I would say, as always, we want to be prudent with respect to the expectations we set as much as we're really pleased with the momentum that we're seeing in the business. and you see some of that flowing through to our increased expectations for the full year, there's still a lot of moving pieces out there and a pretty challenging environment. So I wanted to be prudent there, especially as we're always going to see some quarter-to-quarter variability with respect to overall billings.

Perfect. Thanks. And then just a follow-up would just be on the like point uptick in NRR and, you know, some of the comments that you made earlier about seeing it sounds like a little bit of like recovery on the seed expansion side. So just curious, like, you know, as you think through the momentum, you know, that you're seeing on that front and how, you know, that could build as we move throughout the year and impact NRR, like any color you can get there. Like when you look at, you know, going from 102 to 103, was that largely driven by an uptick in seed expansions and You know, how do we think about that as we move throughout the year? Thanks so much.

Yeah, so the change, as mentioned, was driven by the seat growth and the recovery we're seeing there. We continue to see steady improvements in our pricing, especially given the momentum that we're seeing with customers upgrading to our premium suites. And then over time, we do expect, you know, once we get through this year, for that net retention rate to continue to improve as we march down the path toward double-digit overall growth.

Thank you so much. Your next question comes from the line of Matt Balik with Bank of America. Your line is open.

Great. Excellent. Thanks for the question. Um, it sounds like the metadata extraction capabilities are really resonating well with some of those enterprise advanced early adopters, but curious if you could comment a little bit more, you know, understanding it's early, you know, how are, you know, the use cases evolving as, as users of enterprise advanced get more comfortable? What do you see in kind of as the next natural step, um, as, as, as customers get comfortable with metadata extraction, et cetera?

Yeah. So, um, Some of this we're going to kind of have some and share some major announcements at Boxwork. So I'll have to kind of keep it a little bit high level. But if you think about all of the unstructured data that an enterprise has, and you can kind of almost just think about every job function, you know, in a business as a way to kind of quickly understand the scale that we're talking about. It's, you know, in the legal team, it's contracts. In finance, it could be invoices and any, you know, collections data and financial documents. In product management and engineering, it's product specifications, code, in sales and marketing, it's marketing assets and sales pitches. Well, all of that data has an immense amount of underlying value to the enterprise, but they can really only tap into it over and over again if they understand what's inside that information. And so, so many customers are coming to us and saying, okay, We'd like to be able to run AI agents on that data to extract the critical details from those contracts or those invoices or healthcare data that might be coming in. And then we want to be able to automate some kind of workflow or business process that's tied to that data. So this could be a client onboarding process. It could be a lease agreement review process. It could be a loan origination process. So the first step is get and extract the metadata from those documents and put that into a structured database or data store, which is something that Box has had for many years, and then be able to go and automate a workflow. So the first step of that workflow automation is usually things like building a Box app to be able to view all that data and then have users that can go and kind of consume and analyze the information through the Box app. But more and more, you're going to expect to actually run and automate the full workflow with agents running in the background moving documents through the various steps in that workflow, reviewing documents, probably making recommendations of what's the next step or what's the next best action for that document. And those are the next set of capabilities that we'll be sharing a bit more about later. But you can kind of see how it's all coming together within this full ecosystem of AI agents plus workflow automation around all of your unstructured data.

Really helpful. And then one just quick follow-up, if I could, here. It seems like you're doing a lot of great work on the MCP server side. Maybe just help us understand the broader vision for that in the medium term.

Yeah, so we kind of imagine a future where you might have dozens, if not on the upper end of a large enterprise, hundreds of different AI systems that people are going to be working from. We obviously want to be the absolute best place to have you work with agents and unstructured data and content, but there's going to be just a tremendous number of other AI systems. You might have some users in ChatGPT. You might have some users in Quad. You might have some users in Copilot. Some users might be in IBM Watson X Orchestrate. And so there's a very real chance of, again, dozens or hundreds of these systems inside of organizations. So then you, as an enterprise, have a decision. Do you replicate your data, your unstructured data across all of those systems, which is not only an incredibly costly problem, but it's also one that would lead to security risks and you have outdated information across those technologies? Or do you have a central repository that has your most important information and unstructured data that people can tap into from across all of those other environments? And so the MCP server is basically this really compelling abstraction layer that makes it easy for the AI agents or AI systems on those external products to tap into the data that's within Box or the agents that are within Box. And so we just launched it, GA'd in August. But the core idea is that you can be inside of the quad and you could say, please summarize my meeting note from that one meeting or a contract that I was working on. And again, instead of you having to upload your data to Quad, it will just tap into the Box MCP server, find the information you're looking for, and then right in line where you're doing your work, you can access your data. And so this really just reinforces the power of your unstructured data and highlights how many different platforms you're going to want to access that information from. So we are just in the very early stages of what this looks like, but super excited about MCP and making sure that it's available to all developers.

Fantastic. Thank you.

Again, if you would like to ask a question, press TAR 1 on your telephone keypad. Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is open.

Hey, Erin. Hey, Dylan. This is Chris Candero on for Josh here. There was a controversial report that came out last week from MIT that said about 95% of Gen AI pilots at companies are failing. due to flawed enterprise integration and misalignment in resource allocation. But it seems like you all are having some early success here with Box AI and clearly some good momentum with enterprise advanced adoption. So curious if you have a take on that and maybe what are some of the early lessons you all have learned at Box as you've driven this adoption of Box AI in advance so far?

Yeah, so a couple of interesting things. So I think One of the, it was actually interesting, in that same report, it actually called out the delta between when customers adopted a sort of a best of breed or pre-built solution versus when they tried to build their own homegrown AI system from scratch. And that's sort of one thing that we've been trying to politely educate the market on for for kind of a year or two now, which is the idea that an enterprise with all of their data is going to get their data in a storage environment, do the vector embeddings on all that data, put that into a vector data store, manage the permissions across every single user that needs access to that information, then have a user interface that is incredibly modern and up to speed with all of the latest breakthroughs in different UX paradigms, and then be able to stay on top of all of the different AI model breakthroughs across the four or five top model vendors, you know, you're talking about a very small number of enterprises that have the technology teams to be able to do that kind of, you know, and be able to, you know, sort of justify the underlying ROI of making that work. Whereas with something like the Box AI platform, we just handle every single one of those capabilities in our platform. You know, we obviously handle all the storage, we handle all of the getting the documents ready for AI, putting them into a vector data store, doing the vector embeddings, working with every major lab for the latest AI model breakthroughs. And then we make that all available to you as an API or even more importantly as a simple end user interface that anybody can interact with. So you can just think about all of the different projects that are going on in enterprises where you have so many where people are trying to kind of build up a lot of that infrastructure themselves. or where you're deploying AI potentially at not particularly kind of high ROI use cases, where then the adoption might not be there and people stop using it. We have been very focused on being hyper-targeted on things where we can either make end users just immediately more productive, so asking questions across your data in a box hub, being able to summarize information very easily, or increasingly importantly, being able to extract metadata at scale where we have customers obviously that are now beginning to do that at massive scale. So we've been very targeted. And again, our solution out of the box really kind of de-risks most of the reasons why AI projects will fail in an enterprise. And so I think that's led to certainly better, healthier conversations and early adoption rates on the platform. But I do think that enterprises are going to spend quite a bit of time trying to figure out what is the right AI architecture solution What are the AI solutions that are working? Which ones actually are driving ROI? And our core focus is to make sure that we're continuing to partner with our customers on all of that.

That's super helpful. Thanks, Aaron. And I also wanted to ask on the federal side, you all got the high authorization somewhat recently and you had a federal summit. So I'm curious kind of what you're seeing within the public sector, the opportunities, how the pipeline is looking like.

Yeah, so I think things have, you know, our feeling is that things have, let's say, you know, kind of settled down for maybe the first quarter or so of all of that broader transformation that we tended to hear about in the federal government. I think things are now aligned more toward a path of federal agencies being focused on IT modernization and You saw with the AI action plan from the federal government that there's a huge focus on bringing AI into the government. Box AI as an approved service with FedRAMP high support and working with all of the major model providers to be able to bring those models to work with enterprise content in the federal government I think is going to be extremely key. So we're happy about the momentum and the conversations that we're having We partner with the GSA to support their mission even further and make sure that we can make Box AI and the Box platform available across our Enterprise Plus and Enterprise Advance plans really specifically tailored to the federal government. And so I think we're in a good spot from a momentum standpoint from here, and we'll keep folks updated as that continues.

Excellent. Thank you so much.

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

Thanks for taking the question and congrats on the strong performance this quarter. Aaron, I think you said that deals doubled sequentially. I'm curious, how did that normally compare second quarter to first quarter? And if we think about that step up, any perspective on how much of that was net new versus expansion, partner versus correct, any perspective there?

Yeah, and just to clarify, that was the number of enterprise advance deals that doubled. Ah, okay. So, yeah, just early innings, but just the fact that we're seeing a nice compounding rate of growth, we're super happy about. And, again, it's across new logos and upsells, but we're just driving as much focus on enterprise advance as possible.

Understood. I'll grab a coffee. Sorry about that. No, no, all good. As you think about adding to the platform in AI where single is adoption, I'm just curious if there's anything that's changed about your appetite for M&A. Thanks, guys.

Yeah. You know, we continue to always be super thoughtful about the product roadmap and where might there be opportunities for additional M&A. As you know and everybody else on the call knows, we're very focused on being product-led as we think about our overall corporate strategy, but then even especially our M&A strategy. So we think about what's our product roadmap, where do we believe we're better off with organic development doubling down on our core architecture versus where do we really have a time-to-market requirement that necessitates doing M&A. And at the moment, I think we've largely been focused on that kind of core doubling down. We've got a great AI platform architecture that we're building off of. Even when we look at maybe startups in the space, we tend to find that our approach to the architecture is as modern as a startup that would be well-funded or getting started just today. So we have a very modern architecture for our AI agents. We're obviously partnered with all the major AI labs, we're building on a set of kind of core workflow and automation scaffolding that will only get better and better. So we're pretty happy about the core platform that we're building on, and M&A would just be in areas, again, that we think we need to double down on or need extra support in. So no change in strategy or appetite, and we'll keep you posted as things kind of become relevant there. Thanks, Aaron. Thank you.

This concludes our Q&A session. I will turn the call over to Cynthia Hiponia for closing remarks.

Great. Thank you, everyone. As a reminder, in conjunction with BoxWorks, our annual user conference on September 11th, we are hosting an IR virtual investor product briefing from 1 to 2 p.m. Pacific time. This will feature Erin and our senior product execs doing a deep dive on our product announcements from the day. And then we're hosting a live Q&A session directly after the presentation. Just go ahead and email Elaine or myself at irbox.com for further details, but we look forward to hearing from you there and talking again on our next call. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.