Boxed, Inc.

Hello everybody and welcome to today's Boxed Inc second quarter 2022 earnings call. My name is Drew and I'll be coordinating your call today. If you would like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad. If you change your mind please press star followed by two. I'm now going to hand over to Chris Mandeville, Investor Relations to begin. Please go ahead.

Good afternoon, and thank you for joining us on BOC's second quarter 2022 earnings conference call. On the call today are Che Wong, co-founder and chief executive officer, and Mark Zinowski, chief financial officer. By now, everyone should have access to the earnings release for the period ended June 30th, 2022, that went out this afternoon at approximately 4 p.m. Eastern time. The press release, as well as supplemental slides, can be found on the company's website. And shortly after the conclusion of today's call, A webcast will also be archived and available for replay. In the course of this call, management may make forward-looking statements within the means of the federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events in those described in these forward-looking statements. Please refer to boxed reports filed from time to time with the Securities and Exchange Commission and its press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Management remarks today will include non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release. And now, I'd like to turn the call over to Chet.

Thanks, Chris, and it's great to be with everyone again. For today's call, I'll start by providing some exciting updates on our business. Then I'll turn it over to Mark to go over Q2 financial results. We'll then discuss how we intend to prioritize our investments in our highest margin businesses and accelerate our path to profitability while continuing to deliver growth. After that, we'll open the call up for questions. Let me first start with Spresso. So if you remember in July, we announced the expanded product offering of our software and services platform and the introduction of that business segment's branding at Spresso. Spresso is an advanced technology platform consisting of a world-class suite of e-commerce services based upon advanced analytics, machine learning, and the know-how we've procured through nine years of tailing box. We've been consistent in our messaging and plan on this exciting business. In previous calls, we've discussed our intention to first start with an end-to-end platform. We'd then continue our expansion through Southeast Asia with this end-to-end solution. In the background, we'd modularize the platform and break it into more bite-sized pieces for clients who may first want just a piece of the platform, thereby expanding the market of potential customers. I'm happy to now say that with the Launch Espresso, we not only have that end-to-end offering that we started with, But clients who need a more tailored approach can now select from a suite of individual technology modules featuring solutions across storefront, marketplace, B2B, ad platform, and fulfillment optimization. Some of the many challenges that Spresso software products now solve include increasing the profitability of a product catalog without hurting conversion rates, improving conversion rates through price optimization without sacrificing profitability, identifying high-risk customers at an optimal time in their life cycle to reduce churn, identifying high value customers at the onset of customer engagement, recommending relevant items at optimal points in the user experience to increase batch sizes, and optimizing packing and shipping functions to reduce weight and deliver cost savings. It may be obvious, but again, by allowing companies the option to choose not just the entire end-to-end system, but from these individual modules, Spresso can suit the needs of an even broader set of potential customers, really furthering supporting our mission of e-commerce enablement across the globe through our technology. I just mentioned how our plan for Spresso has been to one, start with end-to-end, two, expand geographies, and three, modularize. On the expand geographies front, I'm thrilled that we're expanding Spresso's partnership with Eon into Vietnam, an important growth market for Eon and a country which is expected to be the fastest-growing economy in Southeast Asia over the next two years. We're in the process of our initial scoping, and we expect deployment of the platform in Vietnam over the next six to nine months. Following Espresso's successful implementation in Aeon Malaysia, we believe this Vietnam expansion demonstrates our ability to cultivate our existing partnership, as well as implement and execute a non-English-speaking international market. We recently announced our first US-based espresso partnership with Jeffers Pet, which is one of the largest privately held animal health companies in the US. This also demonstrates that espresso can extend beyond just groceries, and that we offer solutions for a wide range of customers across various industries. It really is exciting stuff for us, and I want to thank the entire team for their hard work. Now, let's discuss B2B. We've previously shared how we believe that our B2B business would benefit from a post-COVID reopening. I'm happy to say that we continue to see positive momentum from our B2B customer base. For three consecutive quarters in a row now, B2B GMB has grown 55% to 65% year over year, with second quarter B2B GMB growth of 55.6% compared to the second quarter of last year. We're continuing to see strong return to office catalysts supporting this B2B growth. and high customer engagement is yielding B2B average order values at all-time highs, with the latest quarter AOVs coming in at $267. These high AOVs are also supporting the strong unit economics we continue to see in this channel, which, as we've discussed, remains much more profitable than our B2C customer channel. Another exciting business we've spoken about before is Max Delivery. We've rebranded Max Delivery at Fox Markets support further integration of the brand into the broader box ecosystem as a reminder box market offers over 10 000 products including fresh and frozen foods delivered in under an hour i'm pleased to announce that we recently signed leases in westchester and brooklyn new york to establish additional box market micro fulfillment centers with both new markets expected to launch by the end of 2022. We remain excited about the potential of this business, as active user count grew by 44% year over year in the second quarter. We look forward to expanding our box market channel to new locations and providing an enhanced assortment of fresh and frozen products to more of our box customers. Finally, as an organization that walks the walk when it comes to ESG, we're proud to announce a partnership with TerraCycle, a global leader in recycling hard-to-recycle materials. Through this partnership, we're providing our customers with a unique opportunity to responsibly recycle their packaging and divert waste from landfills. We plan to share more details on this innovative recycling program in the coming days. As you can tell, we have a lot of incredible things happening at Vox, and we're executing against many of these initiatives that we've discussed in our prior calls. Our espresso business is a key differentiator for us as we expand the potential market there, and we continue to see strong momentum in retail especially within our B2B and box market customer channels. With that, let me hand it over to Mark, and then I'll be back to talk about how we can accelerate our passive profitability on the back of some of these updates.

Thank you so much, Che. I will start off by reviewing our financial results for the second quarter, and later on, I will provide an update on our 2022 outlook. Beginning with the retail segment, net revenue is $43.6 million, or an increase of 11.2% or 4.4 million compared to the prior year. During the quarter, we saw strong year-over-year increases in both retail active customer counts as well as average order values, which increased 9.3% and 7.1% respectively. We ended the quarter with 167,000 active customers and achieved AOV of $132, which was an all-time quarterly high for the company. The positive momentum across these metrics supported strong double-digit net revenue growth, occurring amidst the summer season where travel spend is expected to hit all-time record highs, which could have also meant households were less likely to be stocking up on bulk goods. Turning to the software and services segment, we generated $0.1 million in net revenue in the second quarter. In the second quarter, we did not recognize implementation services or upfront license fee revenue. which resulted in both the year-over-year decline and the lower revenue results compared to other recent quarters. As a reminder, we generally derive revenue from our enterprise software contracts in three ways. Implementation fees, which are recognized as the work is performed, upfront software licensing fees recognized upon platform delivery, and ongoing revenue share and maintenance fees over the course of the contract term. As we previously discussed, revenue within the software and services segment is expected to remain variable from quarter to quarter in the near to medium term, as revenue recognition is sensitive to timing of exact implementation and deployment of these large enterprise contracts. Over the long term, as we add more customers to the Spresso portfolio, we expect the recurring revenue mix will increase and help support greater revenue predictability. Combined for the total enterprise, net revenue is 43.7 million, an increase of 3.1% or 1.3 million compared to the prior year period. The double-digit revenue growth within retail was somewhat offset by lower software and services revenue this quarter. Turning to our profitability, retail gross profit of 3.2 million was up 20% versus prior year. with gross margin of 7.5% having increased by 53 basis points year-over-year. The year-over-year margin increase was supported by ongoing pricing optimization efforts, as well as shipping cost savings enabled by our new FedEx alliance, which began in May. We continue to manage the business against broad inflationary headwinds, which are impacting product, transportation, and labor costs across the industry. Between our differentiated data analytics and machine learning capabilities, and the flexibility of the end-to-end rental platform that supports our retail business, we believe we are well-positioned to continue to manage retail margins effectively during this current inflationary environment. Total gross profit for the second quarter was $2.9 million, a decrease of $2.3 million, or 44% versus the prior year period, with total gross margin at 6.6%. The total gross profit and margin results were unfavorably impacted by the decrease in software and services revenue, which, as I noted, remained clumsy. Looking at operating expenses, during the second quarter, we spent $8.1 million on advertising, which supported the strong retail active customer growth, up by 14,000 year-over-year and 6,000 quarter-over-quarter. Looking to the second half of 2022 and going forward, our advertising investments will be increasingly focused across B2B, boxed-up loyalty, and boxed market to help support enhanced growth of our highest-profit customer channels. We expect this investment allocation will also yield a meaningful reduction in advertising compared to the first half, all part of the exciting update to our strategic vision, which Che will discuss in further detail in just a few minutes. Our second quarter net loss was $31.8 million, of which $9.4 million related to non-cash, one-time transaction-related costs. This compared to a loss of $10.2 million in the prior year. Adjusted EBITDA was a loss of $22.5 million compared to a loss of $8.2 million in the prior year period. Decline was primarily due to increases in growth-related and public company-related investments across advertising, staff, insurance costs, and IT costs. On the KPI side, the second quarter saw good momentum across our key metrics. Gross merchandise value was $52.7 million, an increase of $8.6 million or 19.4% versus the prior year period. GMB results were supported by the growth in retail active customer counts and retail average order values. For AOV specifically, I mentioned earlier that we reached an all-time high of $132, which was an increase of $9 or 7.1% compared to the prior year. There are several factors helping support this increase, including an increase in B2B order mits, a customer channel which showcased AOVs of $267 during the quarter, ongoing pricing optimizations, along with broader price inflation. Turning to our balance sheet, at the end of the second quarter, we had a combined total cash and marketable securities balance of $49.6 million, which is inclusive of $2.8 million in restricted cash. With approximately $50 million on the balance sheet, combined with strategic initiatives designed to meaningfully improve profitability and reduce cash burn, we believe we have the capital on hand to support our strategic plan in the near term. In addition, as announced last quarter, we entered into a three-year, $100 million committed equity financing facility with Jones training. To date, we have raised a total of $6.5 million through the facility. Finally, we are actively exploring additional capital markets opportunities to help support future growth initiatives and working capital needs. With that, before I wrap up with the discussion on guidance, I'm going to turn it back to Che to provide some exciting updates around our strategic vision and how they will support an accelerated path to profitability.

Che? As we've been operating the business and updating you on our progress over the last several quarters, you may have noticed some key themes and trends emerge. To date, we've seen many positive developments, and we're happy and fortunate that a lot of the developments are in our highest margin businesses. We've demonstrated our ability to execute the rapid growth in our B2B customer channel, the acquisition, integration, and expansion of box markets, and the growth and improvement of the Spresso platform with new partnerships across several markets. To take advantage of these trends that have emerged, much of our investment and resources at the company will now be focused on these key areas. building on the momentum that we're seeing today and helping support enhanced growth in those units, thereby meaningfully accelerating our path to adjusted EBITDA and cash flow profitability. So what makes these businesses special and why are we concentrating our resources on them? Of course, as I mentioned, these are some of our highest margin businesses, but it's more than that. When we look at the macroeconomic landscape, which is experiencing generational inflation, and increasing challenges across the retail industry, advanced software technology, analytics, and machine learning capabilities are exceedingly critical. We believe under this backdrop, our Espresso solutions are well positioned to deliver outsized value for our customers, and we intend to capitalize on that. As I mentioned earlier, we're really excited about the unveiling of Espresso's new product offerings and the momentum we've seen with recent customer wins. We're focused on delivering a successful deployment of Spresso's end-to-end platform to Eon Vietnam over the next six to nine months. We're also leveraging the modularization of the platform by expanding the universe of potential customers, including through integration with partner marketplace channels like Google. Now turning to B2B. It's no secret that the country and businesses are opening back up, which is creating a great opportunity for this channel. As I mentioned earlier, we're seeing very strong momentum with three consecutive quarters of year-over-year growth in the 60% range. Compared to our B2C customer, on average, our B2B customers spend over three times more per quarter. And on top of that, they're a sickier and more profitable customer. For these reasons, we believe it's the right time to dedicate additional resources to the expansion of our B2B customer base. We will prioritize our marketing investments towards this customer segment actively expand our dedicated B2B team and deploy more product and technology focus around enhancements for B2B customers to capture this increasing demand. For BoxMarket, I mentioned earlier that we're seeing strong active customer momentum this year, with year-over-year pro forma active customer growth of 44% for the quarter. We've also recently executed leases for micro-fulfillment centers in two new markets and are aiming to launch those markets by the end of 2022. Box market's history of high AOVs in the $100 range and strong margins give us confidence in pursuing rapid expansion here to support long-term profitable growth. So to sum up, by focusing our efforts and resources to enhance growth in these highest margin areas of our business, we expect to improve our return on investment. If we can continue to build on the momentum that we're already seeing here and execute against the vision, we believe the outcome will yield substantial value for our shareholders. The increased focus is expected to meaningfully accelerate our path to profitability to the point where we're now targeting positive adjusted EBITDA by the time we exit fiscal year 2024. This naturally means we expect to consume less cash to get to that point, and in our view, we'll have built a healthier business poised for long-term growth acceleration. With that, I'm going to turn it back to Mark one more time to outline how this will impact our 2022 outlook and longer-term financial results.

Thank you, Chad. As just noted, we are making a strategic push to drive enhanced growth in our highest-profit business areas, expected to support improved profitability and a meaningful reduction in the total cash consumption required to have positive free cash flow. On that point, we are now targeting to achieve adjusted EBITDA profitability by the end of 2024. This strategic focus is yielding lower revenue expectations for 2022, but we will continue targeting total company year-over-year growth rates of greater than 20% over the next several years. Turning to our 2022 outlook, we are updating guidance as follows. We now expect net revenue in the range of $165 to $180 million. with an adjusted EBITDA loss in the range of 65 to 80 million. For software and services, we remain confident in our ability to deliver a world-class product to retailers across the globe and believe that recent commercial contract momentum and expanded product offering will support a strengthening position in the second half of 2022 and moving forward into 2023. For the year, we expect to deliver total contract value bookings in line with our initial guidance But as discussed previously, the timing of revenue recognition in this segment remains difficult to predict. These timing considerations mean that there is a chance that a portion of the 2022 software and services revenue we were expecting could be recognized in 2023 due to circumstances that are largely outside of our control. We believe these are temporary forecasting dynamics that will abate as we further diversify the customer base and add additional recurring revenue to the business. Before I finish, I wanted to take a moment to further detail how these business updates should support increasing profits by deploying capital toward areas of the business with the highest potential and ROI. Taking the second quarter as an example, GMV for the non-boxed up B2C customer grew 7% year over year, with each active customer spending on average $169. Comparing that to the areas we are dedicating more resources go forward, B2B, boxed market, and boxed up, combined, those channels grew 56%, with each active customer spending $460 on average, or a 2.7x premium to B2C. Comparing the same splits within the customer base, there was a 12 percentage point margin advantage with this latter grouping as well. All this to say, by focusing our investment toward the channels which are the fastest growing, the stickiest and the most profitable. We are supporting the most promising areas of our business. Thank you all. With that, we're now available to take your questions. Operator?

Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Thomas Fort from DA Davidson. Your line is now open, Thomas.

Great. Thank you. So I recognize it's still early, but can you talk about the difference in marketing for the B2B effort versus the B2C effort? For example, does that mean that you're going to use different advertising medium to market it? How should we think about the difference in marketing spend there? And then I have a follow-up after that.

Thanks for your question, Tom. You got Shay here. So when we think about the opportunity ahead of us, it really is pouring more fuel on the fire. So you look at three straight quarters of consecutive 55% plus year-over-year growth. When we just think about that business and some of the other segments that we outlined, we just thought it was the exciting and the right thing to do as we think about the long-term for the business to really feed that business appropriately. So your question directly about how we intend to market against it, There will be some overlap in channels that we use. So for example, digital ads, SEM, SEO, all those different kind of levers that we have traditionally fooled, don't go away simply because you're marketing to a business. At the end of the day, we are a digital business. These business owners and the decision makers are also most likely online as well. So much of the prospecting will be quite similar. At the same time though, there are different, played within the playbook that we will employ. So we're going to build out the B2B team. There might be a few more outbound folks really helping us with prospecting for new clients, additional marketing channels, for example, content marketing, all those different things I think will bring you there. So to sum it up, there's going to be some overlapping channels. There's going to be some new channels, but overall, marketing will decrease because of some of the focus efforts that you just heard before.

Great. Thank you for that, Che. So on box markets, can you give me at a high level how the model or what about the model convinces you that's going to have a high return on investment?

Sure, Tom. I will take that one. So as a reminder, when we initially did the acquisition back in December of 2021, one of the things that we really loved about the box market playbook, B2B, what we were seeing in the market from other fast delivery services, was the strong unit economics that we saw in that business. As a reminder, today that business is doing more than $100 in terms of average order value, so very similar to what we see on our own B2C business. But in addition to that, it's actually quite a bit in terms of a margin advantage compared to what we see even within B2C today. And that's really been built over a 15-year sort of playbook that they have deployed with max delivery. And so we're excited to be able to expand on that offering and basically drive that into other additional markets where we think we'll have similar unit economics. So overall, we feel good about the investment there. When we look at the overall customer acquisition and the ability to acquire customers as well, and we compare that to sort of the stickiness, the AOVs, and the order frequency of that customer base, we're seeing really strong results there, which is why, again, as Shane mentioned, we're pouring more fuel into investing into that area.

Thank you, Mark. Thank you, Shane. I might get back in the queue. It's a couple more. Thanks.

Thank you. Our next question comes from Ron Josie from Sea City. Your line is now open.

Great. Thanks for taking the question, guys. Two, please. First is, you know, just given the current, the renewed guidance, Shay, can you just talk about the trends you're seeing in the business from a broader macro environment, specifically just on the retail side? Totally heard you on B2B and seeing average order values, but just more details on maybe the demand side would be helpful. And then on the B2B recovery side, I think I heard 55% growth, which is great, and also prioritizing B2B growth by expanding the team and building out the product suite. Have you already started the expansion of the team? I'm just trying to understand where that is and the progress. I think pre-COVID, B2B was 25% of the business and wondering if that's the ultimate goal or we get bigger than that. That could be bigger over time. Thanks, Gus.

Hey, Ron, thanks for the question. So overall, let me address the question surrounding retail first. So overall, I also want to be very clear, even though we're providing additional guidance, our long-term growth targets continue to be in that 20% range. When you look at our results, despite, I think by all accounts, a very difficult world for retail at the moment, we posted up close to 20% GMB growth year over year. Retail net revenue was up double digits. So the trends themselves, we believe are trending in the right direction. When you break it down into the individual key performance indicators that we've shared in the past, we definitely wanted to highlight the trends that we're seeing there as well. So in the slides, I know it's all coming kind of really quickly because we just posted the slides, but you'll see the KPIs that we shared in the past are all trending in the right direction. So we do feel like overall we're pleased with the direction of where that business is headed. which brings us to a really good point. This sharpening of our strategy and this focus is not because any one of those KPIs were dipping in the wrong direction or that there were really severe headwinds that we were seeing and we were just saying, hey, this is not going to work. It's actually the opposite. Over the last three quarters, as we've been announcing results, these really key trends have emerged. Espresso, B2B, box market. And so we felt it was prudent to build a really great business over that long term to double down on these businesses, which are fortunately some of our highest margin businesses within box. And so that's the step that we're taking. Specifically within B2B, again, you're absolutely right. So it's three straight quarters of 55 plus percent growth year over year. So of course, there's some tailwinds. over the entire industry in that side of the house as the country opens up. But at the same time, I also don't want to downplay the hard work and the execution that our team really puts in day in and day out over that last year. I remember, Ron, between kind of having you guys at our analyst day last year, we said these days would come about and we're really happy to say, hey, we said a B2B could be a strong growth catalyst for us going forward. And we've now delivered three straight quarters of that. With regards to investment, we have invested and we have ramped up that investment over the last few quarters and into the last quarter. So this is not, hey, let's suddenly invest into it. We have been sharpening our strategy. We have been investing into it. You're just going to see additional investment being poured onto that buyer.

Got it. Thanks, Jack.

Thank you. Our next question comes from Brian Fitzgerald from Wells Fargo. Your line is now open.

Thanks, guys. Shane, Mark, in the retail business, it looks like active customers were down a bit, probably in response to lower marketing spend sequentially. It also looks like you saw a bit of lower order frequency down mid-single digits both year-to-year and quarter-to-quarter. Can you talk through any seasonal factors or anything else that you saw influencing frequency in the quarter? And then I have one other one.

Yeah, I'll go ahead and take that one, Brian. So great to hear from you. So when we look at the overall active customer base, so we did continue to see both quarter-over-quarter and year-over-year trends there. Year-over-year, we were up about 9% or around 14,000 users. When we look at quarter-over-quarter, up about 6,000 users. So the customer base definitely continued to expand throughout the quarter based on, again, those year-to-date marketing investments that we were making. When we look at, of course, average order values, those also continue to expand. Frequency was down a little bit in terms of the total, if you look at the total enterprise on retail. But when you zoom into the specific customer channels, we actually saw frequency growth across both B2C and B2B. The dynamics on the frequency side were that some of those third-party channels that we discussed, which are generally non-core to the overall business, those were actually down and that's what's causing some of the dynamics you're seeing on the underlying sort of total order frequency trends. But overall, as we entered the summer months, when you think about seasonality quarter over quarter, Q1 is always going to be a little bit stronger than Q2 from a seasonality perspective. And I think what you saw, especially during this quarter is, you know, when you look at the overall travel trends over the course of the summer, you know, travel spend is at all time highs, right? I definitely think there is a little bit of that dynamic, and you're hearing it from other e-commerce players as well. The good thing is I think our business actually sustains despite some of those things, both from a KPI perspective and an overall growth perspective.

Got it. And then my next question was just around the accelerated push to profitability, the question there being you have liquidity in place, but I think you also have some debt covenants to be mindful of. With the push to break even by 24, could you share thoughts on whether you need to raise additional capital before then and what options you might be considering if needed? Thanks.

Yeah, Brian, absolutely. I'll take that as well. So, yeah, overall, when you look at the cash on the balance sheet today, you know, a little less than $50 million, we feel really good about where that takes us from a year perspective in order to continue to run the business and execute against a strategic plan. Now, obviously, very importantly, when you look at overall the cash consumption over the first half of the year, I don't think that's a great representation of what you should come to expect over the back half of this year. And so I just wanted to make note of that, especially as we start to improve on some of these profitability initiatives that we've discussed. You're definitely going to see cash consumption on a run rate basis also begin to come down. In addition to that, as we noted, of course, we have access to this $100 million committed capital on demand facility. We will and can continue to leverage that to the extent we do need additional capital to put on the balance sheet. And of course, on top of all that, we're continuing to explore additional capital markets opportunities to raise capital in the future to really support us until we reach that sort of escape velocity or positive cash flow.

Got it. Thanks, Mark. Appreciate it. Thanks, Mark. Appreciate it.

Our next question comes from Marvin Fong from BTIG. Your line is now open.

Great. Thanks for taking my questions. I just like to start with, you know, I don't mean to put words in your mouth, but it sounds like you're somewhat de-emphasizing the B2C channel, you know, in favor of boxed up B2B, et cetera. And I just wanted to just get your take. I'm sure you guys went through a lot of strategic analysis and thought about this. I mean, you know, it would seem at some level that, you know, the B2C is, you know, a growing a customer base who eventually will become boxed up customers, who will have some synergies with boxed markets. So just talk about that trade-off that we might be making in terms of potentially somewhat de-emphasizing the B2C channel in terms of your long-term growth.

Hey, Marvin. Thanks for the question. To be very clear, we're still bullish on the B2C business, right? When you look at that slide that we put up with regards to our KPIs, when you look at kind of, as Mark mentioned, quarter over quarter active user trends, active customer growth trends, we still feel very good about it. What you're basically finding is that over about a year now, three undeniably very bright spots in our business have emerged. So given their margin profile especially when it comes to espresso when it comes to b2b and when it comes to box markets i think it would be wise for any operator to really take advantage of those trends and that's what we're seeing here so it's not that we're completely de-emphasizing b2c it's really prioritizing resources for the brightest parts of our business going forward and as we think about building an incredibly strong business over the next two, three, four, five years that gets to EBITDA profitability even faster than we originally projected. I think it's really the right call because one, obviously there's a customer need for it or else it'd be very difficult for us to grow at those speeds or see the kind of pipeline growth that we're seeing. But two, once we get to that escape velocity when it comes to EBITDA profitability, I think things could get really, really interesting. So bringing that data in is really what this is about. And to do so, we're doubling down on some of those key parts and some of the highest margin businesses that we have today.

Great, great. That's great color, Che. And my follow-up, just on the B2B side, it sounds like you'll be doing a combination of hiring some additional people personnel and deploying some new products and technology and tools. So will this sort of be a gradual process or is there sort of a seasoning where some of your hires will start like a step function up in terms of bringing in new clients? And also on the technology side, are there any timelines that we should be aware of that you think you'll be releasing some some technology that could really get the B2B GMV accelerating.

Hey, Marvin, I can take the first part of that question. So when you look at the client base that we have right now, it will be a little bit of both of what you just mentioned. So there will be a bit of land and expand. So we have some really loyal clients today as they expand their business across multiple locations. Our technology platform, as we've demonstrated to you guys in the past, it sets us up really well to grow with them. We can build those procurement portals. They have multiple controls of who's able to see what and who's able to buy what. So expanding with them is really important for us. Two, as our assortment expands, we hope that our sales with them expand as well. So they're coming to us with needs of saying, hey, it's great. I already get my cookies with you guys, but I've got this problem when it comes to beverages. Can you help service beverages? Can you help service other items as well for us? So there's land and expand. But then there's also additional verticals that we're seeing really light up for us. Now, we haven't shared exactly what verticals those are, obviously for some competitive reasons. But we're really seeing that B2B channel not only grow from the current customers, but also from the addition of new customers in different industries. So I wish I could just point to one, but it really is both. And when you think about the kind of strong growth that we put up on that side of the house, you could probably tell that it is a bit of both to create such high levels of growth over the last few quarters on that side of the business. On the product side, I know Mark has spent some time with that team as well. So Mark?

Yeah, absolutely. So maybe just talking about the investment side of the business first, when we think about overall investments, today, you know, really what we're doing is taking a look at the current resources we have in place and making sure to redeploy those resources and focusing in these key areas. So I don't think there's going to be this massive sort of increase in overall staff costs as a result of sort of that redeployment. It's really going to be about finding the right resources within the organization and putting their focus and effort around some of these more exciting channels for us as we think about the future. When it comes to the product side, certainly we're continuously building on the overall user experience, testing sort of our entryway funnels, all of our gate funnels, et cetera, to help really support more and more lead generation on the B2B side. And even more recently, we've really begun to start to hone in there and test on that entry point to make sure, hey, is B2B as much of a focus when you land on the website as B2C is? Are there opportunities to shift that or change that so more and more B2B customers are finding the company? And then we can take those leads and really convert on them with even the sales folks that we have in place today. A lot of it is very much ongoing, but I think there's some exciting updates that we're continuously making on the B2B side. And of course, we're going to start to focus more and more of our product resources in releasing new B2B features as well.

That's great. Really appreciate the color. Thanks a lot.

Our next question comes from Oliver Chen from Cohen. Your line is now open.

Hi, Che and Mark. On the espresso business, it sounds very exciting. You were early in artificial intelligence, and it offers that end-to-end solution. So there's a lot of products within that end-to-end suite. Which ones do you see as having the greater opportunities in the nearer versus longer term? And then as we think about the B2C business, what are the major catalysts and levers for profitability and areas of focus there as well. Thank you.

Hey Oliver, you got Che here. Thanks for joining the call and thanks for the question. So you're right, we were very early in using some of these advanced tactics and advanced technologies to power our in-house business. And so now that really bodes well for our special business. And so, um, as a reminder, we have two sides of the house, right? We have, um, uh, of course the box retail business, as well as espresso business within the espresso business. You're exactly right. We now have several products. One of those products is that end to end software system, that entire monolith of basically white labeling, almost everything you see that powers box.com today and the box apps and all the different properties. airlifting that to anywhere in the world and licensing the entire thing. That's a very big business in the sense that a lot of our revenue, in fact, all of our revenue to date or just about all of our revenue today has been driven by that side of the house, that end-to-end white label business. With that said though, as we pitch all these different clients, sometimes you hear, you know what, I can't take the entire end-to-end system, but geez, two out of those three modules or this functionality I would buy that yesterday if I could just take that. And so taking that to heart, we've guided everyone that that was our medium-term plan, and now we've actually launched that. So you're seeing a bunch of different modules, and those modules represent some of the, I guess, the most poignant pieces of feedback that we've got from current customers, as well as potential customers in the pipeline. Some of the things that I'm particularly excited about would be price optimization, fulfillment optimization. These are all things that folks will see real savings from if they use these modules. So it's not like, hey, we'll allow you to do your job, but it will actually allow you to not only do your job, but do it more efficiently so that as you save money, I think you'll be more and more bullish on the rest of the stack. There also is a chance over time that as we look at some of these clients of just the modules, that they take more and more modules over time, that overall they eventually almost look like an end-to-end client. but really providing a different funnel into that espresso business is what we're doing now with the modularization of espresso.

And then just in terms of your second question, with regards to margin enhancement opportunities within B2C, so I think it's a few fold. I think it's a lot of the things we've continued to discuss over time. All the things that we've been executing on really since day one across the business. So when you think about vendor negotiations and continuing to scale the business and get leverage out of the cost structure, well, it's things like what we did with FedEx. We're creating this larger alliance where we can guarantee, you know, as part of that, that we are able to reduce our overall cost on each package that we ship out the door. It's expanding into new fulfillment centers and being closer to the end customer. So as box market expands over time, leveraging their facilities to basically lower our transportation costs to our end customer as well. It's things like expanding the assortment base to even if it's B2B type assortment where we're bringing on third party marketplace partners. That is the channel that we continue to invest behind in terms of third party marketplace. And that's a high margin revenue stream for us overall. So all those dynamics are ways we'll continue to look to expand margin on the retail business, of course, within B2C. But then on top of that, as we've noted previously, due to the underlying unit economics of the businesses like B2B and box market, as the revenue mix starts to shift more and more to those areas, you'll start to see a natural catalyst around retail gross margin improvement as a result of that. So lots of initiatives to improve the underlying unit economics, plus the revenue mix shift is really going to help drive that long-term profitability overall.

Thank you very much. And the rebranding of box markets is also very exciting. What are your thoughts on how you'll progress to different markets here as you expand and other locations, and also what was the catalyst behind, you know, rebranding it as well?

Hey, Oliver, I'll take that. So the catalyst was just bring that business closer to the entire box ecosystem. So really helping with the brand recognition of box. And as we deploy marketing, you know, hopefully they're going to see some tailwind as that logo looks familiar to folks that are already shopping the main box properties. When you look at our expansion plan there, it was driven by just looking at the KPIs that Mark just went through, high AOVs, high margin, high customer satisfaction and retention rates. So when you're looking at the additional fulfillment centers, hopefully you'll notice that we didn't build an additional one here in the heart of Manhattan. We're really starting to branch out. So you're seeing Westchester, you're seeing Brooklyn. Now, Westchester and Brooklyn, I will be the first to admit, is not in rural America where a lot of our B2C customers are, but it is one small step towards really proliferating this business out into the suburbs and out into less dense areas. So you might be thinking, well, what gives you the right to really expand that far away from urban areas where a lot of these express delivery services are clustered around right now? It goes back to the high AOVs. So a lot of the other express delivery services from what we've heard anecdotally have much lower AOV. And so you just don't have that many kind of gross profit dollars to play with so that if you're not batching an order, if you're not delivering in such a densely packed location, you're never going to be able to make that business contribution margin positive. Now with $100 plus AOV, you have some flexibility there. And so it's the reason why we originally acquired it because the high AOV, high basket value mentality is very similar to our home business here. And so our thesis is that as we explore areas outside of Manhattan, that would carry us into those areas in a profitable way.

Okay, that's very helpful. And last question on the espresso product. Sometimes selling cycles can be quite long. Also, selling talent can be difficult to find great tech talent. And also, you have a very good global dimension. So, we'd love any color on as you build out that business, you know, from that angle and the organization and doing what you'll prioritize. Thank you.

That's actually a great question, and it's a perfect kind of way for me to highlight one of our key hires over this last quarter. Anna Meyer is our chief revenue officer, helping us with the proliferation of espresso around the world. And when we look at Anna's background, she has specific experience living in Asia, building businesses across Southeast as well as Eastern Asia. And so she has a lot of great experience there that we're currently leveraging at the moment. We're also beginning to build out local resources because again, when you're going to places like Vietnam, Malaysia, culturally, both from a business pipeline standpoint, as well as from an ability to engage their customer standpoint, we need local resources to really help bridge that cultural gap. So you're seeing us build out not only the home office here with some talent, with experience selling internationally, but also local talent as well. You're exactly right. Talent and who we hire, where they are, it's going to be critical for the expansion of that business, but we're already on top of it.

Yeah, one of the things I just wanted to know, something we're really excited about with the expansion of the product offering within Espresso is we can start to really move down market towards sort of that bid level retailer, and they're still going to get a ton of benefits from the system. So, you know, historically, because we operated in this ultra enterprise, Obviously, you know, the sales cycles there do tend to be longer. And so this really gives us an opportunity to now target, you know, folks who are maybe, you know, doing anywhere from $25 million plus in revenue per year. In terms of the product offering and the benefits they'll get out of that, I think it just expands the overall customer base and the opportunity for targeting additional retailers across the globe, including here in the US as well.

Very helpful and exciting. Thank you. Best regards.

Our final question today is a follow-up from Thomas Fort from DA Davidson. Your line is now open.

Great. Thanks. Two quick follow-ups for me. The first one is, how should we think about your CapEx spend when you emphasize B2B stats and box market versus prior? Does this change your long-term fulfillment center build-out plan? And then one more follow-up.

Yes, Tom, it's a great question. So the short answer is it really doesn't. If anything, I think, you know, when you look at the box market fulfillment center, remember these are micro fulfillment centers, so quite a bit smaller on average than what we have traditionally used at Box, you know, going from around 75,000 square feet to, you know, somewhere in the range of 10,000 to 20,000 square feet. So a little bit smaller in nature, but as a result of that, also, you know, a reduction in CapEx per facility in terms of rolling those out. So I think when you look at the medium to longer term model, we still think we'll remain a very CapEx-like business. We still are going to continue to leverage our automation and our own robotics to help support that automation. And so over time, I don't think there's much of a change there in terms of how we're thinking about the capital intensity of growing that business segment.

Great. Thanks, Mark. And then last follow-up, how do you think about the competitive set B2B versus B2C?

Yeah, Tom, I can take that question. So in some ways, they're similar. So some of these B2B folks, if they have a club close to them, they perhaps would just go to a club to pick some of these items up themselves. But at the end of the day, remember, you know, All the other warehouse clubs out there, they're generally ubiquitous in name, but not ubiquitous in location. So that's where we think we can really have a competitive advantage as we're digitally native. When you go outside to some of the new competitive sets that we would go up against as we now shift resources into more B2B, those folks I think have traditionally built their customer funnels through the procurement of or through the need of laser toner, inkjet cartridges, as well as paper, pens, general stationery. And so when the folks that are now being led by pantry, that office manager, when he or she is looking to have pantry items like coffee, snacks, other things delivered, oftentimes you're not first thinking about those traditional office suppliers. And so I think that's why, that's a big part of the reason why we've been able to, we feel like, have some success when it comes to servicing these B2B clients. So you'll also see us kind of venture into some of that direct kind of B2B office supplier source of product as we think about the competitive set.

Thank you, Jay. Thank you, Mark.

That concludes today's Q&A session. I'll now refer you back to Che Huang for closing remarks.

Thanks, everyone, for dialing in today. So a lot of exciting stuff happening here at Box. We're looking forward to welcoming you on our next call. In the meantime, thanks again for dialing in.

That concludes today's call. You may now disconnect your line.