Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the box Inc. third quarter fiscal 2020 financial results Conference call.
At this time, all participants are any listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press star one in your telephone. Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your speaker today, Ms. Allison <unk> head of Investor Relations. Thank you. Please go ahead.
Good afternoon, and welcome to boxes third quarter fiscal 2020 earnings conference call on the call today, we have Aaron lobby, our CEO and Dylan Smith, our CFO following our prepared remarks, we will take question.
This call is being webcast and will also be available for replay on our Investor Relations website at Www Dot dot dot com forward slash investors or webcast will be audio only however, supplemental slides are now available for download on our website also post the highlights of today's call on Twitter handle outbox Inc. IR.
On this call, we will be making forward looking statements, including our Q4, and that's why 20 financial guidance and our expectations regarding our financial performance for fiscal 2020 in future periods, our timing of in market adoption of our product our markets and market size, our operating leverage our expectations regarding maintaining positive free.
Cash flow gross margin future profitability and unrecognized revenue and remaining performance obligation our planned investments in growth strategies.
Our ability to achieve our long term revenue and other operating model targets unexpected timing and benefits of our new product pricing in partnership.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
Please refer to the press release on 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 risk and uncertainties that may cause actual results to differ materially.
These forward looking statements are being made other today November 26, 2019, and we disclaim any obligation to update or revise I'm sure they change or seems to be up to date.
In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to not as a substitute for or an isolation from our GAAP results.
You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, and then the related Powerpoint presentation, which can be found on the Investor Relations page of our web site.
Unless otherwise indicated all references to financial measures our non-GAAP basis.
With that let me hand, it over to Aaron.
Thanks, Alex and thanks, everyone for joining the call today Q3 was an exciting quarter for us as we significantly expanded our cloud content management product offering with the release of box Shield, we hosted our ninth annual customer conference Boxworks, where we received overwhelming demand for our new products and this past quarter, we delivered solid financial risk.
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In Q3, we achieved revenue of $177.2 million up 14% year over year, non-GAAP EPS improved a negative one cents versus negative six cents, a year ago, and we delivered wins and expansions with thousands of customers, including the NHL Los Angeles World Airport DC office of the Attorney General Epic games.
Impossible foods.
This past quarter, we close three deals worth more than $1 million inline with Q3 last year seven deals over $500000 versus 11, a year ago, and 64 deals greater than $100000 versus 57 year ago Waller six figure metric was impacted by slower than expected growth in EMEA, we're continuing to see progress in selling the full.
Power of cloud content management to our customers broadly.
As we laid out at our Investor day in October we're focused on driving a higher volume of deals with our existing customers as such a key metric that we look out internally or the number of customers with total account value over $100000, which has now surpassed 1000 customers up nearly 20% year over year.
Further in this past quarter more than 80% of EUR 100000 dollar plus deals included at least one out on product showing continued momentum of customers leveraging boxes advanced capabilities.
A few examples of long time customers expanding their usage of box to the full product platform.
Purchasing out on products through our bundled offering box suites include.
Six figure deal with a fortune 500 insurance and financial services Company, where box were placed a legacy you see I'm technology as part of the company's claims and collaboration project box will integrate with its field adjuster mobile app and claimcenter working to improve capabilities for viewing searching and retrieving important content and six figure suites expansion.
It's an energy company that will now bring more regulated content in the box and they will start implementing additional use cases with box relay keysafe and shield their use of relates specifically will allow them to retire instances of share point in other legacy you see I'm systems and finally, we got a six figured suites deal with a financial services organization.
Then expanded their deployment of box by adding box relay platform in shield to address new use cases with the goal of retiring document.
We are building the category defining cloud content management platform and in Q3 at Boxworks, We announced several major updates that deliver on our three product Differentiators frictionless security and compliance collaboration and workflow and best of breed integrations, starting with box shield, we showcased our.
Our breakthrough security products that help enterprises prevent accidental data leaks through intelligent classification policies and threat detection for content in box. Unlike traditional data loss prevention tools box shield is needed really integrated into the flow of work that happens on box delivering an unparalleled user experience and greater level of security controls.
Well, we've only really shielded by end of last month, we're already seeing more early sales traction than any other out on product in boxes history. For example, one of the top hospitals in the U.S. purchase box shield in Q3 to monitor all sensitive continent box, including P.H.I. data as it moves across the organization.
On a global professional services from the handle highly sensitive client information purchase shield to make its business units more productive, while adding a layer of security and control.
Next we unveiled new features in box relay, including the ability to custom medidata values to workflows download activity history and approved and reject to complete tasks on from any mobile device. These new features enable enterprises to better streamline routine collaborative business processes in box and finally, our third major.
Focus area is building upon our open platform in deep integrations with third party applications. The future of work relies on being able to seamlessly connect applications and data together from disparate platforms and we're building. The most open interoperable cloud content platform in the World. This is why we were excited at Boxworks to share that we've made.
Significant product in integration updates with Microsoft teams and slack given the growing popularity of both of these platforms for real time communication and work we want to ensure that customers can get access to their mission critical content from anywhere, especially these applications. These integrations along with enhanced partnerships with Adobe stock.
Along and IBCM will provide enhanced in more tightly integrated experience for our customers to ensure seamless and secure collaboration across their entire I T stack.
Overall, our for cloud content management product suite is gaining more and more traction in the market and we've made it incredibly easy for our customers to adopt these products via our multi product suites. We're seeing an enthusiastic response from our sales teams and customer base and we're confident that selling suites will be one of the primary ways. We.
Go to market in the future.
Finally, as a result of our continued product innovation box has been recognized by independent industry analyst firms as an undisputed leader in cloud content management, most recently Gartner and I'd see named box as a leader in their evaluation of our execution envision we're consistently recognized for our unique because.
Addition to help our customers transform how they run their businesses in the cloud.
Before I conclude I wanted to take a moment to build on our new financial framework that we laid out at our investor breakout session at Boxworks as we shared in October we are focused on driving a balance of long term growth and improved profitability as measured by the combination of revenue growth plus free cash flow margin on this combined metric we expect.
Deliver a significant increase in F. Why 21 to at least 25% and it eventually reaching at least 35% and that's why 23.
To drive efficient and consistent revenue growth going forward, we're focused on our multi product strategy and driving substantially more repeatability in our sales motion, we have an incredibly large market opportunity within our existing customer base alone. For example, just within our fortune 500 customers, where we have less than 10%.
She penetration, we have a tremendous ability to upsell and cross sell our product portfolio.
While we continue to drive new logo growth, we're prioritizing our sales efforts to support existing customers and maturing their use of boxes full platform. This will result in stronger customer economics with lower customer acquisition costs to accelerate the sales motion, we're adjusting our sales focus toward renewals and expansion targeting the.
Sale of suites, and add on products to existing customers and that's why 21 with a simplified and repeatable sales motion in place, we will be able to drive greater sales productivity as well as conduct sales performance management with more rigor we plan to keep overall sales head count roughly flat and invest resources and higher performing regions, such as the U.S. in Japan, while reducing.
<unk> expense in underperforming international regions.
Drive greater profitability, we are focused on three initiatives. The first is optimizing our workforce expenses by focusing on our most impactful initiatives and further optimizing our location strategy improving gross margin through our public cloud strategy and improved infrastructure utilization efforts and taking on an ongoing rigorous are.
Why based approach to all areas of spend including greater cost discipline across the business.
Don't will provide more detail on these efforts shortly in summary, while we have more work to do we are in a stronger position to advance our leading product expand our customer base and ultimately create a vastly more profitable company with that I'll hand, it over to Dillon.
Thanks, Aaron Good afternoon, everyone and thank you for joining us today.
Before I go into our results for the quarter I want to expand on the strategy that Aaron just outlined to deliver more profitable growth. This represents an important changed how we will invest in and run our business on an ongoing basis, taking a more disciplined ROI based approach to all areas of spend.
As we announced at our Investor Day, we're committed to achieving a combination of at least 25% in revenue growth plus free cash flow margin in flight 21, with roughly half of that 25% coming from each measure.
We expect non-GAAP operating margin to be at a minimum of 8% next fiscal year compared to the slightly over breakeven we expect to deliver this year.
We will be driving these profitability improvements with a focus on three key areas of our business.
The first area is our overall headcount expenses.
We expect to gain leverage as we streamlined our sales overly model and scaled back an underperforming regions outside of the U.S. at the same time, we will be optimizing our workforce locations to improve productivity and reduce costs as we drive these changes across the business. We do not expect to grow total head count in flight 21.
Second we will improve gross margin by optimizing our datacenter footprint public cloud infrastructure and the cost to serve our customers. In addition to the data center migration that we've discussed over the past year will be driving efficiencies in various aspects of delivering our service such as storage search and conversion we also.
We expect more of our business to come from add on products, which will naturally drive higher margins.
And finally inline with our more focused strategy, we will be driving increased cost discipline across the business to identify and eliminate low ROI spend.
Examples include rationalizing, our marketing programs and events, reducing our outside consulting spend streamlining t. any and further leveraging systems and automation to drive efficiencies as we scale.
We're on track to execute on these critical initiatives, which will enable us to focus our resources on our highest performing growth areas and to maintain our investments in R&D to further differentiate our product in the market.
Let's now move on to our quarterly results.
Q3 was another solid quarter of demonstrating momentum in our cloud content management strategy as we continue to see strong add on product attach rates, while driving improved operating leverage.
We delivered revenue of 177.2 million in Q3, 14% year over year and above the high end of our guidance, 25% of our Q3 revenue came from regions outside the United States with Japan, now exceeding 10% of worldwide revenue.
Our remaining performance obligations are ARPO are consistent with GAAP accounting and represent noncancelable contracts that we expect to recognize as revenue in future periods.
This metric consists of deferred revenue in backlog offset by contract assets.
Our RPL ended Q3 at 636.0 million up 5% year over year, we expect to recognize roughly 68% of this ARPO over the next 12 months.
As we stated last quarter, we expected to see some pressure on our ARPO in Q3 due to the timing of large multiyear renewals and we still expect ARPO to rebound in Q4.
Third quarter billings came in and a 171.9 million, representing 10% calculated an 11% duration adjusted billings growth year over year.
As we mentioned previously Q3 was the last quarter that comparisons were impacted by the enhance developer fee, which created a headwind to our calculated and adjusted billings growth.
In Q4, we expect calculated billings growth to track more closely to revenue growth.
Turning to margins.
non-GAAP gross margin came in at 70 point, 70% versus 73.6% a year ago and inline with expectations as we delivered optimizations to our datacenter infrastructure.
As we migrate our datacenter footprint to more scalable lower cost regions. This is leading to temporarily duplicative costs.
As such we expect gross margin in Q4 to be roughly in line with Q3 for F. Why 20 to be roughly 71% and for gross margin to trend upward starting in the back half of F. why 21.
In Q3, we continued to see our business model and improved operational efficiencies drive leverage across the business.
Sales and marketing expenses in the quarter were 73.7 million, representing 42% of revenue down from 48% in the prior year.
As a reminder, in Q3, we held our annual user conference Boxworks, which accounted for approximately 6 million of our Q3 spend.
Looking ahead, we expect to generate additional leverage in sales and marketing as more of our revenue comes from renewals and Upsells, which are more profitable and as we standardize our sales motion to achieve more consistent execution globally.
Research and development expenses were 34.0 million or 19% of revenue flat with Q3 of last year, even as we significantly enhanced our cloud content management product offerings, including the general availability of box shield.
Our general and administrative costs were 18.1 million or 10% of revenue a reduction of one percentage point from a year ago.
We expect to drive continued leverage and Gionee as we benefit from greater operational excellence and scale.
Total Q3 operating expenses represented 71% of revenue compared to 78% a year ago. So despite the temporary pressure on gross margin, we were able to drive our Q3 non-GAAP operating margin to a five percentage points improvement year over year coming in just shy of breakeven versus negative 5% a year ago.
non-GAAP EPS came in at negative one cents an improvement from negative six cents a year ago and inline with our guidance. This result was impacted by an FX headwind of 0.4 cents.
Note that the previously mentioned initiatives to improve profitability will show up more fully in our results beginning in Q1 of next year.
In Q3, our full churn rate was 4.4% on an annualized basis as customers increasingly adopt additional products either in their initial purchase or as a cross sell overtime. They become significantly stickier, our net expansion rate was 9% on an annualized basis.
As such we ended Q3 with an annualized net retention rate of 105% down from 106% last quarter.
As a reminder, this is a trailing 12 month metric. So in Q4, it will fully incorporate the impact of the single large customer that reduced its footprint in Q1 of this year.
With respect to pricing for the sixth consecutive quarter, we saw an improvement in our price per seat on a year over year basis. We now have 13.2 million paid users.
Let me now move onto our balance sheet and cash flow.
We ended the quarter with 200.9 million in cash cash equivalents unrestricted cash.
Cash flow from operations was 8.9 million compared to 6.8 million a year ago.
In Q3, total Capex was 1.1 million versus $5.2 million a year ago.
Capital lease payments, which we factor into our free cash flow calculation were 7.1 million versus 4.3 million a year ago.
We expect Capex and capital lease payments combined to be roughly 8% of revenue in Q4.
As a result free cash flow was negative 1.7 million compared to negative $4.1 million a year ago.
Note that in Q4, we will be making a 6 million dollar prepayment to a public cloud provider for a revised contract as part of our efforts to improve our future gross margin.
With that let's now turn to our guidance.
For the full year of fiscal 2020.
We expect revenue to be in the range of 693.7 to 694.7 million.
We remain committed to delivering our first year of non-GAAP profitability. This year and we now expect our Fytwenty non-GAAP EPS to be approximately positive one cents on approximately 154 million diluted shares our GAAP EPS is expected to be approximately negative one dollar in one sense on approximately 148 million share.
Yes.
For the fourth quarter of fiscal 2020.
We are setting revenue guidance in the range of 181 to 182 million.
We expect our non-GAAP EPS to be in the range of positive four cents deposit to five cents and for our GAAP EPS to be in the range of negative 22 cents to negative 21 cents on approximately a 155 million and 150 million shares respectively.
In summary, this past quarter, we made significant progress across our key strategic initiatives. This included successfully launching shield increasing momentum in the adoption of suites and amplifying our focus in rigor on renewing and expanding our existing customers to sustain long term growth.
In addition, we're continuing to develop clear initiatives that will deliver significantly higher profitability.
These foundational changes will enable us to more effectively drive both growth and profitability going into F., why 21 and to continue building on our leadership position for the long term.
With that I would like to open it up for questions.
Operator.
As a reminder to ask a question you will need to press star one in your telephone to withdraw your question press the pound key.
And your first question comes from the line of Phil Winslow from Wells Fargo. Your line is open.
Hi, guys. This is for telegraphed fulfill congratulations on a quarter and thanks for the details on three pronged initiative that you both outlined.
Aaron in particular, you mentioned that suites will be a primary way that box goes to market in the future and doing on kind of a similar note you mentioned that with an increased focus on efficiency. So it's going to be more business from add on products. So I just putting these two things together I'm wondering a you how you highlighted a couple of of suite related deals in the quarter wondering how customers.
Customers particular are feeling about suite and also in light of these the three point initiative kind of wondering how should we think about this impacting your efforts to Atlanta do logos moving forward because it sounded like there was an emphasis on add on sales and efficiency and then I have a follow up thanks.
Gotham Yeah.
So so so firstly we are.
Because of the positioning of suite as really the full complete platform of relay and governance and platform and obviously now shield.
In our new customer conversations that we're having customers get to see the full power of CCM right at the beginning of the conversation and some customers will elect to get started with maybe not the complete package because they want to be able to.
Really get their feet wet and start using it.
Really quickly, but more and more right up front in the initial conversation with customers were able to position the full value of box because of our our complete suite. So we're really happy about that it's going to improve our win rates and competitiveness in the market because youre going to get the full value of box right up front.
Going forward in terms of really driving that greater efficiency and focus across the salesforce.
As we noted on the call we are going to be really focused on making sure that we go into our current installed base of 97000 customers and drive a significant amount of cross sell and upsell.
Really just kind of.
Further.
You know pushes on our land to expand sales motion at the same time, obviously, when we see great opportunities to bring new customers onboard we're going to do that so you're going to see new logo growth in end markets or regions or segments, where we have a lot of a lot of potential still have of new clients to bring onboard, but then more mature markets or segments, you're going to feel lot upsell of our existing customer base, yes.
This is doing and to build on that not driving any real work structure change, but rather expect that a greater emphasis and greater proportion of our bookings to be coming from our installed base. More result of that focus that Aaron mentioned and incentives that were driving around growth from within our installed base that will be combined with reallocating our go to.
Market resources to a more productive regions, which tend to have a larger footprint of existing customers and so historically just put it in context about two thirds of our overall new bookings tend to come from existing customers and for next year, we'd expect that to be a little north of 70%. So certainly a shift because of where we're focused but not a drew.
Majdic difference versus what we've been saying.
Got it that's really helpful guys and then one last one for don't here pretty quick.
I want I think last call you mentioned that second half bookings should better align with revenue growth I'm wondering if that's still the case and given that you executed on that in Q3, I'm wondering what your confidence looks like regarding that statement. Thanks.
Sure. So we do still expect our overall billings growth to align pretty closely to our revenue growth in Q4, and we did see certainly much closer correlation in Q3 of this year versus the first half, but as a reminder, we did still have the final impact.
Of the enhance developer fee a year ago, showing up in those year on year comparison Q3, so normalizing for that would have been even slightly higher than you saw reported in the quarter.
Awesome. Thank you got so much congrats.
Thank you Sir your next question comes from the liner Melissa Frenchie from Morgan Stanley . Your line is open.
Great. Thank you for taking my question and thanks for all the detail on Dylan.
Thanks for giving us the outlook for flat and head count growth in sales, but if you're looking at your revenue growth you do you have to assume a good amount of improvement in sales productivity. So I'm just wondering if there's something that you're seeing already in Q3 or what you're seeing in the pipeline for Q4 that gives you confidence in that.
Sure. So as we highlighted at our recent Investor day, we are expecting to see an overall blended sales productivity improvement about 15% year on year. Some of that is coming through the momentum and the things that we've talked about around add on products continued strong execution and improve.
Vince in some are more mature markets and the like Walt the same time as we've talked about we expect to drive improvement to that blended outcome as well because of where we're allocating our resources to those more productive regions that as we work through some of the Salesforce turnover that we've seen related to increased performance management. So there are few to.
Front factors driving that but overall, they kind of pipeline and adoption that we're seeing particularly around our newer products and suites.
Is whats kind of driving that confidence and the higher topline growth.
Okay got it and then I just wanted to follow up on your comments on the international business. I believe you said that EMEA with underperforming again this quarter on Japan seems to be doing very well, but just wondering if you could just update us, particularly in what's happening in EMEA and whether you're seeing any macro impacts there or on India.
Like you need to make some improvements from a sales execution perspective. Thanks.
Yes, yes, we're not seeing too much on the macro front. So we more attribute this to just our own kind of productivity and performance.
Within the broad region I think.
More of the impact is on a sub segment basis. So.
It though in some regions within EMEA, we're seeing way higher performance and other areas and so consistent with what Don talked about in terms of reallocating our investment to the highest productivity areas that will be.
Very global view that we take so in some areas of EMEA will will maybe invest less than one space and and more so in places like UK, Ireland, where we're seeing in a pretty consistent performance and then on a global basis, making.
Investment allocation decisions going more into U.S. in Japan.
Where we are seeing really consistent improvement in performance.
Got it thank you very much.
Your next question comes from the line of Mark Murphy from JP Morgan Your line is open.
Oh, Thank you Hey, guys. This pendulum on for Mark. Thanks for taking my questions I just wanted to dig on the sales changes that you have been making.
Maybe could you talk about if some of the changes that Mark Whelan wanted to introduce has done already rolled out or is it going to go one or two quarters and do you see any kind of disruption related to that.
Yes. Good question, while we do not see any disruption related to that as mark laid out at our at our Investor day at Boxworks. He has a few key focus areas that really continue on the framework that we've been building for the past year or so first is on a greater degree of repeatability and velocity, so really driving this land and expand motion.
Making sure more of our customers can reach that $100000 plus level. So a lot of upsell happening in the current install base and really expanding the total size of of our customers.
So that is a huge focus and that's again driving a very repeatable sales motion.
Another big area of focus is really kind of customer centricity, so making sure that we get the sales team really focused on existing accounts and driving that land and expand motion and then and then finally is on on productivity overall and I think we all want to see productivity improvements across sales.
And and he has already been been driving that fairly aggressively. So we're really happy about how quickly. He came onboard and is really kind of taking the baton and continuing to improve our execution, but no disruption whatsoever. It's been a very very smooth transition with mark yes would add to that this is still in most of these efforts are alright.
The underway and marks come in and driven those changes really quickly in really effectively and thats already been showing up.
In areas that we had highlighted as challenges earlier, such as the deal cycles, which have now stabilized we're seeing much better deal management in greater forecast accuracy really across the board other than other than in EMEA. So most of that is already kind of rolled through the salesforce and that's been clear there are still some things such as some of the tweaks we.
Making the comp plans that hasn't yet been put into place as those of go effective at the start of our next fiscal year, but for the most part views are these initiatives that marks and driving are well underway.
Good so in terms of the comp plans I mean, as as you as you lean more and more into the suites approach.
Should we expect basically a big change in the complex next year.
Consenting more of the suites.
Selling as such.
It will be more of an incremental improvement to the comp plan to align to things like suites and add on products as well as driving expansion within the customer base. So obviously, we want to make sure that.
That there's no disruption to to how we go to market, but you're going to see just greater emphasis on driving out on product multi product selling and more expansion of the.
Both greater retention and expansion of the current customer base.
Understood and lastly, doin' seems like the ARPU number kind of decline sequentially in Q3, it seems a bit unusual.
Do you know what is causing that exactly.
Sure. So as we had expected and communicated previously in Q3, we saw some pressure on ARPO, which we expect to rebound in Q4. So ARPO has two main components, each making up roughly half of that outcome and both of which saw a bit of a headwind in the quarter, which is why we add kind of given that that.
That notice the first of which is backlog, which is impacted by con contract durations and the seasonality of large multiyear deals. So we saw a high volume of those deals in F. Why 19, which creates a headwind.
In the current period, but we do have a higher volume of those large multiyear deals set to renew in Q4, which which which is what gives us confidence in that rebounding and then the second component of our BPO is deferred revenue where the total deferred revenue.
Balance was up about 8% year on year, but short term was up 11% year on year and long term was actually down 33% or about $7 million because of the impact of the enhance developer fee that we had previously mentioned so both of those factors should normalize as we move in the F. why 21 and expire.
That outcome to be at at a healthier level ending Q4.
Understood. Thank you.
Your next question comes from the liner Brian Peterson from Raymond James Your line is open.
Hi, Thanks for taking my question, so maybe but high level question here on some of the sales changes that you are making but if if we think about hunters and farmers in the typical SAS oriented sales model, they're typically very different athletes with with different pay structure. So it sounds like there's going to be it increased emphasis on the hunter and.
Expansion with existing customers.
Are we going to see significant changes to the comp plans.
How do we think about any potential changes to salesforce retention as we go through those changes.
Yes, so as as.
Mark Mark mentioned at our Investor Day, Mark Whalen mentioned at our Investor Day.
The primary component of the SaaS business model, especially with with box being a very land and expand oriented product, but also equally what what you experienced and let at Salesforce is really making sure that your sales reps are as close to your existing customers as possible and driving continuous expansion and deployment of new products and more seats. So so we.
I think this is very consistent with with the SaaS model of making sure that.
Our current sellers are really going after.
Expansion and cross selling within the installed base, we feel like we've been.
Able to already higher a significant portion of our of our salesforce as as individuals that are able to go and drive that so so no major change again across the Salesforce as we go into next year more continued improvements to our compensation philosophy that will align to how do we make sure that we get close to our customers drive expansion.
Using or add on products and and the full product suites, and we'll have more to share as we go into that Q4 call.
Got it thanks, Aaron maybe just on shield, obviously that that ramped up pretty pretty quickly here any commonality in what you're hearing from customers and any thoughts on expectations for that product, especially as it gets lumped into suites over the next few years. Thanks guys.
Yes shield is.
We've been working on this for nearly two years now. So this has been long in the works.
Strategically for us and and essentially the the thesis was that as customers put more and more of their mission critical are highly sensitive data into box and into the cloud in particular.
They are going to need better ways of protecting that information, especially because they are fundamentally collaborating on that data with other people in other organizations. In there. There are really has a role for an all new security model as you're thinking about internal and external corporate collaboration of data. So whether this is a global manufacturer that sharing sensitive IP across.
Their supply chain or if it's a financial institution that is collaborating around financial documents with our clients. So we see shield is really a breakthrough new category and security to really deliver frictionless.
Security around those collaborative work flows built natively on box. So customers don't have to have these bolt on technologies and so already the repeatability in the in the sales motion in the customer conversations is very high it's the great. The great thing that we're seeing is it's across all all sorts of industries, we have already seeing deals in healthcare in energy in financial services.
So it's going to be pan industry, but really any kind of use case, where you have data that's flowing in and outside of an organization, where you need a.
Tailored security product to just that problem box shield is going to be able to really drive that that solution and then obviously given its built on box. It automatically works with all the data and all of the collaboration that you're already doing within the platform. So we think this is going to be.
You know able to both go after existing security budget, where customers might not be getting the right level of user experience from some of their vendors, but I think more importantly, also carve out a new security category of of the customers are going to be really excited about.
Thanks.
Your next question comes from a line of Brett Knobloch from Berenberg capital. Your line is open.
Hi, guys. Thanks, taking my question.
One on the stock based compensation going forward next year.
I guess percentages revenue.
Thats being given that.
Flat then maybe just on.
What we should be looking for price per se.
That's right.
Do you mind, repeating which spend category sorry.
For the question Yep.
So over time.
We're just curious the first part of your question, which area of spend were you referring to.
Just overall stock based compensation.
Okay sure and then yes.
So in terms of that we would.
I expect that to trend down overtime, and certainly take a very mindful look at where we are relative to peers and ISS recommendations.
And they have generally been pretty in line kind of given our profile as a company that said the combination of getting more leverage and efficiencies out of head count growth as well as everything we're doing around our workforce location strategy in particular, because we see we tend to see the highest.
All kinds of equity here in the Bay area, where we are headquartered.
Combined with just our overall scale, we would expect all those factors to bring stock based comp down.
Steadily but gradually overtime.
Okay, and then just a follow up on.
I think or how we should think about looking at price received for fiscal year.
Yes, I would say we've been really pleased with the overall trends we've been seeing as we mentioned put up six quarters in a row now of year on year improvements and we'd expect that as our product capabilities and offerings are only getting more robust and with suites beginning to ripple through the customer base.
We'd expect the same trends that have been driving that to continue at least in the near to medium term.
Is it safe to assume we should think back could accelerate given that focus on existing customers rather than others.
Don't know that I would I would say that it should accelerate because that in fact in some cases, it's built off of kind of and up sell the what customers are paying so the overall I think our seat.
Improvement shouldn't necessarily be changed significantly weather selling to a new or existing customer.
Okay, great. Thanks.
Your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.
Hey, guys. Thanks, so much for taking my questions first I just wanted to kind of circle back to two questions that I've been asked on RPL bookings billings, because I think from from our standpoint, all the forward looking metrics at least that we have access to.
On our side of the equation right seemed to kind of I'd be pointing towards deceleration and I get the moving parts right, but if you look at current RPL. It was it was maybe up a little bit sequentially.
If you do.
Cash short term billings or if you look at current bookings on RPL basis.
Pretty big deceleration, just maybe help us understand from your perspective, given those given the kind of pressure on the retention rate again sequentially. What what is it you can point to that gives you confidence that things are are at the very least going to stabilize and not just continue to decelerate further from here.
Eric that I've got to follow.
Sure. So would say a lot of this comes down to the actual bookings numbers now that flows through the model as it relates to revenue, which I think is what you were asking us about and would say that well normally ARPU on billings are both and should both be pretty meaningful leading indicators of our future revenue growth.
As you noted there were a handful of.
Kind of tough.
Comparison items this year everything from that enhance developer feed to that single large customer downgrade to the to the multiyear prepay component. So when you normalize for those you could see some of those forward looking and more traditional leading indicators of growth being fairly in line with the revenue expectations that we've laid out for next year.
I would also note that just in terms of our business.
As a reminder, Q4 tends to be the biggest driver of growth for the following year end in Q4, a year ago, we had a fairly disappointing outcome and so everything that we're seeing the most of which we've talked about previously for the business both in Q4 and going forward.
Is what's driving the commentary we've given around topline growth for next year.
Okay got it thanks for not just if I think about.
The buying behaviors from customers have you seen any any changes in buying behaviors I know we've seen a few other high profile SaaS companies talking about customers not wanting to do.
Prepay and instead kind of wanting to go from annual to quarterly and I mean, especially in your model, while you're not really doing discounts for annual versus quarterly at least on list price. It seems like that's a trend that would apply other places may apply to you. So maybe any any commentary you can give us around that would be really helpful. Thanks.
Yeah, I don't think were necessarily seeing any of that show up in the in the numbers at least in the past quarter overall, I mean, given the volume of a business that we do we have a really healthy hi, repeatability high velocity sales motion and so.
So we're seeing pretty pretty strong consistency across that a across our customer base, so no no impact or or or kind of change in the quarter and the customer buying behavior and this is don't sorry that comment holds.
To add to that for both our payment durations and our contract durations. So we're not seeing pressure on either of those measures.
We do highlight the adjusted billings outcome, which factors in payment durations and that has been higher than our calculated billings outcome, but thats not because of any kind of trend we're seeing from customers that's more a function of.
Previous multiyear prepays and as we no longer give any incentive either to our salesforce for our customers to prepay for multiple years in advance that has gone down to pretty minimal levels. This year.
All right great. Thanks, so much has.
Your next question comes from the line of Chad Bennett from Craig Hallum. Your line is open.
Great. Thanks for taking my question. So I just to be I guess clear on the Q4 billings commentary.
So in order to let's just say the midpoint of the revenue ranges is roughly 11% growth year over year give or take.
In order for to get there on a bit from a billing standpoint deferred revenues would have to increase sequentially.
25% did I understand.
Finally, that's what.
The norm has been it's been mid to upper Twentys last couple of years, but if we look at deferred revs seasonally the first three quarters.
We've underperformed so I just wanted to make sure we're thinking about deferred revs being up 25% sequentially to get to where you need to be on the billing side.
Yes, so without getting into this specific.
Kind of commentary around.
Kind of the deferred revenue, but touching on that we do expect billings growth to be roughly in line with revenue growth and then as a reminder, because of the kind of pacing in the seasonality of business last year versus this year, we are in any.
Kind of year, and even more pronounced this year versus last year because of where that outcome was we do expect to see a pretty significant jump.
In the deferred revenue outcome from Q3 to Q4.
Got it and then since we're going to be more focused on the base in terms of cross sell up sell suites in all the above.
I guess, the secondary metrics like churn in net retention or sorry retention rate in net expansion.
I assume starting in Q1, those should start to improve based on the new go to market focus is that a fair characterization.
Yes, so would I think I think you're thinking about it the right way the net expense expansion that kind of pressure we've seen has come.
Largely from that single large customer reducing its footprint back in Q1 that will work its way through the model and then to your point as we move into next year, we do expect to see a tailwind.
Due to the focus on expanding and renewing our existing customers and that should also be aided by the more robust set of product capabilities that we now have so.
I think you're definitely thinking about that impact the right way and that ties back to the comment and commitments that we made at our Investor day that Mark laid out in terms of seeing an improvement in that net retention rates by the end of next year.
Okay, and then maybe one last one real quick if long term we believe in maybe this is my words not years. This is a.
Low teens to to maybe even slightly below that.
Revenue growth business.
Well, how do you guys think about where sales and marketing should be as a percentage of revenue in that scenario for the next three years. Thanks I'll hop off.
Yes so.
Ill idled bolt on this but what we articulated at analyst at our financial Analyst Day was was not that so.
So I would I would say that the numbers that we put out at our analyst presentation is what we're currently focused on delivering over the next few years and answer happy to kind of reiterate what those numbers look like but certainly more mid teens.
Or higher growth and then obviously driving operating margins.
Very significantly improvements on operating margins over the over the subsequent few years from here.
Great. Thanks.
Thank you and your next question comes from the line of Erik Suppiger from JMP Securities. Your line is open.
Yeah. Thanks for taking the question first off.
Can you discuss the.
Magnitude of the restructuring on on head count.
How much.
Had layoffs or what what is.
And the nature of the restructuring.
Have you seen any change in voluntary turnover since since you've gone through some of these changes.
Yes. Good question, we're taking a very focused approach as we think about our investments going into next year and.
And in some areas, where again were maybe seeing underperformance in a specific region or segment. We're looking at at pulling those dollars back and making sure that we're investing in areas of higher productivity.
Or or output and so on so that is that's how we're approaching this a across the business right now really taking an ROI focused approach and and I think you're going to see us drive again greater degrees of efficiency as we as we execute on that.
And and the into three categories that we laid out in this and this analyst call. So.
The first areas really again streamlining the total head count, making sure that we're putting the dollars into the highest impact areas second is making sure that we.
Really taken ROI based approach to everything from marketing campaigns travel and and event expenses.
And then finally massive focus on driving more efficiency on our infrastructure.
And our total technical operations, Yeah, and then this is going to speak to be the retention question of the attrition question. This has been a year of transition for us and as part of our efforts to improve Salesforce productivity. For example, we've been very focused on performance management and have seen an uptick in turnover that said we've seen very.
The strong and stable retention.
Areas, such an edge engineering and at the same time. We've also been pleased with the talent that we weren't able to bring on this year to lead us through our next phase of growth. So I think you see certain differences depending on how much change or a need for increased performance management based on the area that we're talking about but overall has been pretty closely aligned with our expectations.
Good to then one last question.
I think you're looking for mid teens growth longer term does that apply to fiscal 2000 fiscal 21, as well or given that you're looking at flat head count.
I think you'd said not expect any disruption is it fair to assume that you're looking for mid teens type growth in that range.
Yes, so for what you may be referring to on if you're talking about that range that we provided at investor day, the timeframe around that and that model and different outcomes and commitments was flight 23. So three years from now and as it relates to next year and Thats why 21, where we had said is that we're committed to achieving.
A combination of revenue growth and free cash flow margin.
At are exceeding 25% and that roughly half of that would come from revenue growth and the other half from free cash flow margin.
So you can think about that I mean, just mathematically.
Half of that is 12.5% on each metric.
Very good thank you.
And your next question comes from a line of Terry Koala from first analysis. Your line is open.
Hey, good afternoon, and thanks for taking my question I wanted to ask I clearly understand the emphasis on on the expansion model, but want to ask about the new business.
In terms of the pipeline just if you could make some comments on the relative health of the pipeline.
And now that you say the timeline is relatively stabilized.
Whether we should be looking for some of these larger deals over 500000 and over $1 billion to start to tick up.
Sequentially.
Yes, so we are seeing.
Definite improvements to the pipeline overall with the addition of shield and then the addition of relay. This summer the robustness of the product story has definitely improved dramatically.
And and it's giving us a lot more especially compared to maybe a year ago or two years ago for our sales seem to really go out and have conversations with both new and existing customers. So so the health of the pipeline the.
The kind of deals and use cases that were talking about really across the board and financial services life Sciences public sector healthcare.
Has has been improving.
Substantially and I think.
That's only going to continue to be the case going.
Going forward and in terms of the larger deals. This is definitely an area, where we're putting greater emphasis and really driving that six figure.
Hi, Joe range on up I think some of the breakout points that that we that we gave out a couple of years ago or maybe a little bit less important to US then just really driving high velocity of the six figure plus deals and then maybe more importantly, then then then that is getting as much of our customer base into that six figure on up categories.
Possible. So what we broke out this in this call is is that we have over 1000 customers paying over $100000. That's a really important metric to us because it might be it might include a $50000 up sell of a $50000 customer and so we want to make sure that more and more of our customers are reaching that threshold and and that's obviously going to drive continued.
Drive strong growth rates going forward, so definitely still very focused on the 500 K or the million dollar deals, but I think overall when you look at the shape of the business it.
It will show up in things like the six figure plus metric and then the total number of customers the pay over $100000.
That's great. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.