Q2 2021 Box Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the boxing second quarter fiscal 2021 earnings Conference call.
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.
Require any further assistance please press star zero.
Like Dan the conference over to your Speaker today <unk> head of Investor Relations. Thank you. Please go ahead.
Good afternoon, and often about the second quarter fiscal 2021 earnings conference call.
Now at the bottom head of Investor Relations and on the call with me today I have Aaron let me, our CEO and Dylan Smith, our CFO.
We are prepared remarks, we'll take questions.
Today's call is being webcast on our Investor Relations website at Www Dot box Dot Com Board Sosh investors were supplemental slides are now available for download. We'll also post the highlights of today's call on Twitter handle boxing IR.
On the call, we'll be making forward looking statements, including our tier three enough by 21 financial guidance and our expectations regarding our financial performance for fiscal 2021 in future periods timing urban market adoption of our products are markets and market size, our operating leverage our expectations regarding maintaining positive free cash flow.
Gross margin operating margin future profitability, and unrecognized revenue and remaining farms obligation.
Planned investments congrats strategies.
Our ability to achieve our long term revenue and operating model targets expected timing and benefits of our new products pricing and partnerships and our expectations regarding the impact of because the 19 pandemic on our business and operating results.
These statements reflect our best judgment based on factors currently known to US an 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 could differ materially.
These forward looking statements are being made up of today August 26, 2020, or we disclaim any obligation to update or revise and should be changed or CPR for great.
In addition, during todays call, we will discuss non-GAAP financial measure. These non-GAAP financial measures should be considered in addition to not as a substitute for or isolation from our GAAP results.
You can find additional disclosures regarding these GAAP measures, including reconciliations with comparable GAAP results in our earnings press release, and then the related Powerpoint presentation, which can be found on the investor relations page ever website.
Unless otherwise indicated all references to financial measures are on a non-GAAP.
With that let me hand, it over to Aaron.
Thanks, Alan Thanks, everyone for joining the call today, let me begin by saying that I Hope you and your families are all staying safe and healthy many months into cobot 19, the environment continues to be a challenging and unprecedented time through it all we continue to provide support for our employees and their families our communities and our customers.
I'm proud of all the teams at box globally, who strive to provide tremendous support for our customers and for continuing to drive our product innovation. During this time.
We delivered a strong quarter in Q2 with revenue of $192.3 million up 11% year over year more than 15% non-GAAP operating margin compared to zero percent a year ago.
And non-GAAP EPS of 18 cents compared to zero cents, a year ago, both well above our guidance.
He also generated more than $13 million and positive free cash flow and improvement of more than $32 million versus a year ago over 100000 customers now rely on box to Powersecure cooperation and critical processes across their businesses and in Q2, we close wins and expansions with a leading organizations such as Hitachi High Tech.
Lord Abbott and company and Stanley Black <unk> Decker.
More customers are leveraging the full power of box and we're very happy with our second quarter results and the stability. We've had in this highly uncertain time, our Q2 results were driven by expansion within our existing enterprise customers, which has remained consistent through the cobot 19 environment and growing demand for products like shield and realize the drug.
More suite adoption, including a 30% attach rate of suites in our six figure deals.
We were proud to deliver strong revenue growth significantly expanded operating margins of more than 15% and substantially improved cash flow.
The world today, it's fundamentally different than it was just a few months ago as I see strategies are evolving from only thinking about remote work to now managing their entire future of operations and work in this new normal our opportunity has never been greater the vast majority of enterprises are still dealing with content that's fragmented across.
I guess you systems like share point, ASCII piece, I documentation and many other technologies more and more enterprise are seeing the productivity security and cost challenges that exist with this legacy approach to managing content.
And as enterprises look to modernize how their employees work securely share with our partners and enable secure content access across all other cloud application boxes building. The only platform that can pines could secure content management collaboration and workflow in one place.
Q2 highlighted another quarter of great customer wins.
Just to give you a few examples medical school in hospital, who has been a box customers. Since 2013 made the decision to expand their use of box through our email a program to support their collaboration and communication with external parties around their cobot 19 research.
And enterprise Technology company selected box to help them standardize on a single content platform to replace Sharepoint and various consumer tools as their primary content repository for teens.
In American multinational investment bank in an effort to consolidate many disparate content silos selected box with the goal to replace the legacy systems like Alfresco document and unregulated FTP sites.
Over the past few years Weve methodically been building the category defining cloud content management platform focused on three key Differentiators first frictionless security and compliance second seamless external and internal collaboration workflows and third world class integrations and <unk> that extend the value of box.
Any application.
In Q2, we delivered more product innovation than ever to ensure our customers have the most secure and collaborative experienced when working remotely the all new box, which featured an updated simplified design and much faster performance became available to our customers in Q2 and includes enhancements such as collections, which provides the ability to.
Organize files and folders run the topics and work streams important to that individual user.
And we released annotations, which allows users to lead free form markups and text comments directly in box on all of their content.
Then sanitation became available to customers in late July the feature has been used to increase productivity on everything from marketing campaign, the legal contract reviews.
With box Shield, we announced auto classification, which Leverages advanced machine learning to automatically scan files in classify them based on their content, helping businesses detect unsecure sensitive data.
Today, some of the world's most security conscious and highly regulated organizations like NASA Sierra oncology are using box shield to secure their data in the cloud.
And with box relay, we significantly expanded our library of templates to simplify workflows and sales marketing HR legal finance more and added an integration with bio request with remote worked driving the need for more digital business processes, we're doubling down on workflow to automate and digitized content centric processes.
Across the enterprise.
One longtime customer heidrick <unk> struggles a global executive search firm recently deployed relate to transform their manual processes for rolling out new applications.
For candidates.
By using really they've been able to decrease cycle times with the automated approval process.
And state Street, another long time box customer recently rolled out relate to their employees to enable them to digitize workflows as the company move to are not work environment with three way less trying to spend on manual workflows that were difficult to manage out into the office.
I was organizations are adopting more cloud systems customers are emphasizing the need for more integrations across applications with our over 1500 integrations. We continue to expand on our open interoperable platform by creating a seamless experience for our customers last month, we announced the strategic partnership with go.
Google cloud to further expand upon our existing integration with G suite, including additional features to create a seamless customer experience between our apps.
Our seamless integrations with applications, such as Microsoft teams Slack Zoom Salesforce I B M. G suite and all the cloud applications and our customers you stack remain critical in strengthening our remote work strategy. Looking ahead, we have an exciting road map of innovation and enhancements that will continue to drive adoption and enable our customers.
As to work in all new ways.
And we'll be sharing some of these advancements at this year's Boxworks on September 17, which will be an all digital event for the first time ever this year will be our biggest event with tens of thousands of attendees, who will be hearing from an incredible slate of speakers, including Arvind Krishna the CEO by the end Chuck Robin to CEO, Cisco Cheryl Mckinnon, a principal analyst at Forrester.
The Ceos from zoom, octa, and flock and customers, including Nike Schneider Electric USA Patel straight Street and net hope.
Now turning to our business model last year, we laid the foundation to improve our balance between growth and profitability for F. Why 21 and beyond our focus was on delivering growth more efficiently and implementing significant cost discipline in the business in the first half of this year, we've clearly delivered on this commitment.
The future macro can economic impact of covert 19 remains uncertain. We believe we're in a strong position to continue delivering long term healthy growth with increased profitability to drive efficient and consistent revenue growth. We will continue to execute on our multi product strategy and drive more efficiency into our go to market initiatives.
We're going after one of the largest markets and enterprise software and our focus is on growing existing accounts by driving out on product adoption and seat expansion with box week as well as efficiently driving new logo acquisition in key markets.
To drive greater profitability, we are focused on three key initiatives optimizing workforce expenses.
Improving gross margin and taking an ROI based approach to all areas that.
We have implemented greater cross cost discipline across the business and this is evident in our significant operating margin and cash flow improvements.
With our rigorous approach to overall cost discipline, we're now committed to delivering 12% to 13% operating margin versus our previous goal of 11, 12% for the full fiscal year up significantly from 1% and that's why 20.
We laid the foundation to significantly improve our margins a year ago.
And we're confident that our focus on efficient growth and cost discipline will continue to be an advantage in today's uncertain environment and in the future. When coven 19 is behind us.
Before I conclude I want to take a moment to share some of our recent environmental social and corporate governance initiatives, which has always been an important area for us. Some recent areas of focus for US include enabling our customers business continuity is there moved to remote work doubling down on our employee resource groups and events as well as values based.
Professional development courses by moving them virtual giving to organizations that are working to make progress toward racial equality through our box I'd worked fund and evolving our board and management and maintaining strong corporate governance practices to enable us to drive accountability.
To conclude our strong Q2 results further demonstrates the significant progress we've made in delivering increased value to our customers. Even during this time of uncertainty I powering a new way to work for enterprises of all sizes. We are confident we will deliver increased value to stakeholders in both fiscal 2021 and beyond.
With that I'll hand, it over does Ellen.
Thanks, Aaron Good afternoon, everyone and thank you for joining us today.
As Aaron mentioned, we had a strong quarter with both revenue and non-GAAP EPS exceeding the high end of our guidance, we're seeing healthy expansion within our existing enterprise customers stable customer retention rates and continued momentum in suite sales.
At the same time, we delivered significant operating margin improvements as we continue to focus on driving long term profitable growth.
Forever 21, we are raising our expectations for non-GAAP operating margin to be 12% to 13% of revenue 100 basis points higher than our previous expectations and up considerably from 1% in F. Why 20.
Let's now move onto our quarterly results.
We delivered revenue of 192.3 million in Q2 up 11% year over year.
20% of this revenue came from regions outside the United States up from 25% a year ago and driven by continued strength in Japan.
Our remaining performance obligations for arpino represent non cancelable contracts that we expect to recognize as revenue in future periods. This metric consists of deferred revenue in backlog offset by contract assets. We ended Q2 with our IPO at 726.7 million third.
10% year over year.
We expect a recognized approximately 65% of our RPL over the next 12 months.
Second quarter billings came in at a 188.8 million representing 9% year over year growth.
As we mentioned on our last call, we still expect billings growth touch lighten glad revenue growth for the remainder of acquired 21.
As a reminder, our billings outcome is impacted by a variety of factors, including payment durations and the timing of large renewals.
Due to cope with 19 headwinds. This year. We also expect to see continued softness in our professional services bookings and our small business segments customer contract duration have remained stable and even in the current environment. Our customers continue to view box as a critical component of their long term I'd strategies.
In Q2, we closed 64 deals worth more than $100000 versus 68 year ago, three deals over $500000, which is in line with a year ago and no deals over a million dollars versus two years ago.
Looking at our pipeline, we are seeing stronger demand for six figure enterprise deals and we expect to see solid year over year growth in our large deal counts in the third quarter.
We ended Q2 with an annualized net retention rate of 106% versus 105% than year ago and 107% in Q1.
As you might expect Kobin 19 related dynamics, particularly in our smaller customers could cause this metric to fluctuate over the course of this year.
In Q2, our full churn rate was 5% on an annualized basis in line with Q1, and an improvement from 6% in a year ago period.
Turning to margins.
Non-GAAP gross margin came in at 73.5, percents up from 71.3% a year ago and 73.1% in Q1.
Our focus on reducing infrastructure costs and gaming economies of scale is paying off.
Q2 gross profit of 137.0 million was up 15% year over year outpacing our revenue growth by 400 basis points.
While the timing of certain infrastructure projects will create some quarterly variability. We expect this upward trend in gross margins to continue over the next couple of years.
During Q2, we once again successfully drove increased leverage across the business by executing on several of the cost and productivity initiatives that we identified entering this year.
Total Q2 operating expenses represented 58% of revenue a substantial improvement and reduction from 71% a year ago.
As a result in Q2, we generated a 1500 basis points improvement in our non-GAAP operating margin year over year coming in at 15.6% versus roughly zero percent than year ago.
Sales and marketing expenses in the quarter were 57.1 billion, representing 30% of revenue significantly down from 41% in the prior year.
We are seeing success in achieving higher overall sales productivity driven by improvements in our enterprise segment and the reallocation of resources into higher performing regions. We're also generating increased marketing leverage by shifting our focus toward more efficient digital channels.
Research and development expenses were 35.8 million or 19% of revenue down from 20% in the prior year, even as we continued to further differentiate our platform in Q2 with offerings, such as automated malware detection capabilities and controls and box shield and an all new box experience.
We're on track to open our first engineering center of excellence outside the U.S. in the back half this year in Poland, which will contribute to our ability to scale, our R&D investments more efficiently going forward.
Our general and administrative costs were 18.4 million or 10% of revenue in line with a year ago.
We expect to drive leverage in DNA through greater operating discipline and automation as we scale.
Non-GAAP EPS came in at 18 cents compared with zero cents, a year ago, and well above the high end of our guidance.
17 cents of this year over year improvement came from the 1500 basis points improvement that we delivered in our non-GAAP operating margin with the remaining one cent coming from foreign exchange rate benefits.
Let me now move onto our balance sheet and cash flow.
We ended the quarter with 272.4 million in cash cash equivalents unrestricted cash.
Cash flow from operations was very strong at 32.3 million in Q2, a 37 million dollar improvement from negative 4.7 billion a year ago.
Combined capex and capital lease payments were 9% of revenue in Q2.
Total Capex was 2.7 million versus 1.6 million a year ago.
Capital lease payments, which we factor into our free cash flow calculation were 14.2 million versus 10.0 million a year ago.
This year over year increase reflects higher capital lease liabilities from a migration to lower cost data center locations.
We expect Capex in capital lease payments combine to be roughly 8% of revenue in Q3, and we still expect this to be roughly 8% of revenue for the full year of F. why 21.
As a result, we delivered free cash flow in the second quarter of 13.3 million a significant 32 million improvement from negative 19.0 million a year ago.
With that let's now turn to our guidance.
Our revenue guidance reflects our expectations I've seen continued strength within our enterprise customers will also accounting for the softness we expect from smaller business customers and our professional services business in this uncertain environment.
For the third quarter of fiscal 2021.
We anticipate revenue of 193 to 195 million, representing approximately 10% year over year growth at the midpoint of this range.
We expect our non-GAAP EPS to be in the range of 13 to 15 cents and GAAP EPS in the range of negative 10 cents to make it an eight cents on approximately 163 million and 157 million shares respectively.
For the full year fiscal 2021.
We are raising our full year revenue guidance, we now expect our ask why 21 revenue to be in the range of 767 million to 770 million, representing roughly 10% year over year growth at the midpoint of this range.
We are also raising our full year EPS guidance by 15% at the midpoint of the range. We now expect RF why 21, non-GAAP EPS to be in the range of 56 to 60 cents on approximately 163 million diluted shares.
Our GAAP EPS is expected to be in the range of negative 39 cents to negative 35 cents on approximately 156 million shares.
We expect our non-GAAP operating margin to be in the range of 12% to 13% of revenue.
Based on our revenue guidance and strong free cash flow generation, we remain committed to achieving a combined revenue growth rate plus free cash flow margin of 25% enough why 21.
In summary in Q2, we delivered strong financial results in a dynamics in challenging environments highlighted by operating margin of more than 15%.
Our product innovation around remote work large market opportunity and resilient business model put us in a strong position could deliver healthy long term revenue growth and profitability improvements as we continue to build on our leadership position.
We look forward to further describing our strategy and our resilient business model during our virtual investor breakout session at Boxworks digital on September 17, 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 a line of Josh Bear from Morgan Stanley. Your line is open.
Thanks for the questioning congrats on the strong quarter.
Cash flow was very strong this quarter I'm, just wondering if you're still seeing a shift toward quarterly billings from customers and if so if there is anyway to quantify that impact for either this quarter or expectations for the year.
Sure. So as we mentioned on our last fall, we do expect to see.
A bit of a shifts.
Which drives the commentary we expect billings growth the slight lag revenue growth for the remainder of flight 21, So our expectations have been pretty consistent with we laid out on our last call.
I would note that we are seeing that dynamic a bit in terms of the payment durations, particularly with some of our smaller customers. Although it was not a material impact to our overall payment durations in the second quarter and would also note that.
Primarily the free cash flow outcome that this strong free cash flow outcome in cash from operations performance. So we put up in the second quarter was more driven by a lot of the renewals and a customer payment duration, but we've seen in in earlier begins.
Got it if I can just sneak in one one more I've I believe you touched on this I'm a little bit talking about the med school customer, but was wondering if you have any additional insights in Q2 and the performance of the new sales program for the enterprise wide license agreements.
That that should help customers expand a wall to wall. Thank you.
Yes, just as Aaron.
We are starting to see more momentum with the lay program. It's as something that we've had kind of renewed interest in from the customer base right now, especially as companies want to be able to go more wall to wall Q2 is really when we kind of kick that off in earnest and and so it's becoming a greater focus of our sales motion.
Both to be able to sell suites.
Across the enterprise as well as being able to sell core core box as well but.
But the ULAE program is really more than anything a a way for customers to be able to deploy box across their enterprise and us to simplify the sales notion and contracting notion to be able to do that so we're seeing emerging momentum, it's still pretty early days, but but we call at one of the examples we had many others in the quarter, but it was great to see one of.
Whenever a longtime customers who elect to go to and ULAE with us.
Great. Thanks.
And your next question comes from the line of Phil Winslow from Wells Fargo. Your line is open.
Hi, Thanks for taking my question on your restaurant.
Great quarter don't Aaron you last where do you called out record upward volumes are just activity trends on the platform. What did we give some color just sort of what you saw this quarter and also well I think you did talk about in Q1 was.
Sort of extended burst capacity for some customers that needed to that but needed sort of.
Extra seats to handle the shift.
Work from home when did you give us a sense of conversion of those users are still in the pipeline just for what you're saying at an one quick follow up after that.
Yeah, Great Great question. So I think from activity standpoint that initial first wave of everybody moving to remote work.
Really kicked off in the middle part of Q1. So by Q2, I think we saw kind of normal.
You know kind of seasonally.
Driven activity levels. So just sort of steady I came down the platform that was off that new baseline from that that increase and.
Healthy activity overall in terms of product adoption.
Usage of of our new collaboration features as I mentioned on the in the in the earlier.
Conversation, we launched a bunch of new features that really help customers better collaborate better organized better share their content on box. So we're now focused on really driving the adoption of the all new box, which.
We're seeing early signs of of having some very very kind of sticky and enhanced features that we're super excited about so.
So that's on the activity front in terms of monetizing that first of of usage as we kind of targeting last call that was sort of modeled into our guidance of where we thought the deals would come from.
And on an overall I mean, I think we've been very happy about the customers that have elected to expand their usage of box over the past quarter, So definitely quarter, driven by a expansion of seats as well as our suites within existing customers.
Number 100, K deals up about 60% quarter over quarter, so showing kind of just healthy volume of customers electing to go abroad broader with box.
Got it and then also just follow up on and go to market. Obviously, you've had some new leadership there over the past past year whatever it is just an update on how you feel about just gaudier go to market capacity.
Just a fuel efficiency or just any sort of update every great.
Yeah, I think in general we're really happy with the leadership team that we haven't place. It has evolved over the last couple of years to to make sure that we are well aligned with the model that we're pursuing right now and both however, I want to drive of really efficient engine as the quarter the businesses, while this drive a land and expand motion within customers of all sizes.
So I think we've got an incredible team on the field right now at all layers of management across go to market and and then what we did kind of at the tail end of last year that we obviously you talked a lot about and coming into this year with making sure that when we looked at territories. When you looked at sales segments that we felt like we are making the right investments in markets that we're gonna be most.
Productive where we had.
Healthy existing customer traction that we can go drive up sell as well as regions are territories, where we felt very confident in the demand in box and so a lot about shifting happened in the early part of the you're obviously you know well timed kicking off this year, where we can go and drive a lot of expansion within the customer base and Don and I think that motion is now playing out you know really nicely across.
The salesforce.
Yeah and adds that we are certainly seeing this about pretty significant impacts on the overall leverage that we've been able to drive across go to market with sales and marketing spend can take down 11% year on year.
As a result of a lot of the changes we've talked about at the same time, we've been pretty pleased in terms of the sales productivity improvements that we've seen particularly with enterprise sales productivity, which in the first happened. This year was up about 10% year on year, and that's been driven by strong customer expansion as well as the reality.
Occasion of resources into higher performing regions. So that segment of the business is performing very well for us even in this environment and another area that we've been really pleased with both the productivity as well as the efficiency is around the efforts and the investments we've made in our digital selling across the customer base really.
Revamping that edge and that's allowed us to generate increased marketing leverage by shifting a lot of our focus and the energy and needs more efficient digital channels as well.
Great. Thanks, guys give a burger works.
Thanks, I think so.
Our next question comes from the line of Brian Peterson from Raymond James Your line is open.
Hi, gentlemen, and I'll Echo my congratulations on these strong results. So Dillon you made a comment on the third quarter in expectations that on the pipeline that the enterprise numbers are Lisa deals look pretty favorable at least for the third quarter potentially the back half any color on what keeps you guys the the confidence or not.
Sure.
So as mentioned we are seeing healthy pipeline.
And do you expect to deliver solid growth in terms of theirs that six figure deal counts in the third quarter and really seeing that strength across all of the categories of yield that we talk about and a lot of it has just some of the because of some of the do kind of additional rigor and process improvements will be put.
In place over the last several quarters, we had been able to drives a much more predictable.
Got it kinda forecasts and and pipeline management and so that's what gives the confidence already seeing some of the deals that are coming in throughout this quarter as well as just the general conversion rates and predictability that we see.
And on top of that would note and most of that is driven by the helpfully enterprise demands that we called out and then the other note I'd make just as it relates to the big you'll counts and big deal dynamics, even though there is overall counts in the second quarter Werent.
Where we would have like we have seen an increase in the average contract value of their six figure deals. So in the second quarter that was up more than 10% year on year, which helped drive the Q2 Rpos billings outcomes.
Got it that's great color and maybe one for air and just on relay I know that's been a big product for you guys.
Any feedback or any usage I know that can be used for a lot of different processes, but I'd be curious what you wrong and what you've seen from customers as they look into the for the problem. Thank you [noise].
Yes, so so I think as we.
As our initial thesis that we had going back a couple of years out why we got into the workflows space is playing out the core IDN premise was you have so many workflows right now that are happening inside of emails are happening in paper based processes that are happening on legacy document management systems, and there really hasn't been a simple.
Highly usable scalable solution for being able to automate those types of processes. So things like document review and approval digital asset review and approval being able to onboard customers are partners in a very streamlined way so that the launch of relay now about a year ago as well as the addition of that in our suites as well as some of the new features between our template gallery as well as some of our.
On file request features.
Customers and partners submit content to our clients in a very simple and automated fashion. Those types of used cases are now really playing out in a a in a healthy way. So we're seeing customers and highly regulated industries begin to adopt a box relay because they want to be able to have auditability of their workflows. We're seeing customers that previously maybe you wouldn't have.
Normally gone out and purchased a separate BPM solution or kind of heavy duty workflows solution, but because it's built directly in the box. They can now go and automate more of their processes. So I think as we go into the second half of this year in next year.
Our whole strategy really revolves around this idea that companies are going to want to have one platform that brings together their content management there collaboration their workflows and a secure way integrated with all of their apps and we're now seeing more and more about demand begin to play out as as customers sort of zoom out from just the initial remote.
Worked push and focus more on the long term business process optimization and workflow automation that then you'd be able to driving their enterprises.
Good to hear thanks Aaron.
Your next question comes from a line of Mark Murphy from Jpmorgan. Your line is open.
Hi, guys, it's Adam your share on for Mike Congratulations on another great quarter on so my first question is is there any commentary you guys can provide on upsells versus selling to new customers.
And I believe last quarter. You mentioned this was I think 70% of bookings came from existing customers.
Yes, so I mean overall I'll give you that kind of customer dynamic in general and.
I think we are we're certainly benefiting in this environment from now reaching 100000 customers globally on the platform, where we have a significant installed base.
But that's still has in many cases limited penetration of box, where they are using us.
Certain departments, they are using us for secure file share or collaboration but now they want to be able to automate workflows are they want better data security. So we're seeing a very very healthy increase in our and our existing customer expansion.
Especially in the enterprise segments, but now coming into the second half the pipeline is looking strong on our kinda SMB business overall and this is really happening across across the board certainly more predominantly in industries that maybe there are less impacted by covert but financial services healthcare life Sciences.
Certain digital technology companies, and and some select retailers and consumer brands, but overall, just very healthy expansion rates.
Again from the customers that.
That are growing right now and we're seeing nice pipeline in the second half as well for that.
And then she is the detailed there and just as a quick housekeeping question is there any update on how the number of user of paying users trended this quarter. Thank you.
Yes, we did see a healthy growth in the number of paying users I believe we added about a half million dollars of paid users.
In the quarter and you're talking about feeds that is where that was up about 500000 to 14.5 million over.
Overall paying users and then from a paying customer counts, we now have more than 100000 paying customers, which is up about 2000 quarter on quarter.
Awesome. Thank you guys.
Your next question comes from light every she jewelry up from D.A. Davidson and company. Your line is open.
Hey, guys. Thanks for taking my questions nice to see some some continued strong execution and margin expansion.
Wanted to maybe talk a little bit into the margin expansion that you saw both on the operating margin and on the gross margin.
And that is.
As to what extent or how much of a benefit are you getting from effectively having zero dollars of tenant knee and maybe looking forward to post pandemic when when hopefully things are backed and all of the ability to get on planes at travel is there how long lasting deal.
These cost savings do you expect more of a shift to kind of you know remote and virtual selling and I think kind of same question applied to the gross margin line right I'm sure you're getting some benefit from from infrastructure improvements as he mentioned and I'm sure a little bit of benefit from not having to do on site professional services.
So maybe it kind of walk through a philosophical thoughts there and then I've got a follow up.
Sure. So I'd say in terms of the expense side and the overall impact as a reminder, prior to Kobin we had.
Expected our operating margins for this year to be in the 9% to 10% range of revenue. We now expect that to land in the 12% to 13% range. So of this 3% improvement annualized a little less than half of that is driven in the areas directly impacted by coated.
That includes any facilities and marketing events, primarily whereas a little more than half is coming from strong execution against the cost and productivity initiatives that we've been focused on particularly around.
Workforce expenses gross margin and overall cost discipline.
And so while we do expect some of these areas they come back once we get through the current environment I.
I think because of the results we've seen even on a go forward basis. Once we get into the new normal we don't anticipate traveling events or some of the areas around marketing spend to fully returned to the pre kobin level. So we do expect to see durable savings I, just given how effective a we've been able to run.
In the current environment.
And then in terms I think from a duration and all of those things for when battle start to show up is probably largely dependent on the overall macro environment and then as it relates the gross margin there actually has not been any sort of material impact in terms of those expenses.
Because of the current dynamics in the pandemic.
Okay got it that that's helpful.
And just to go back to the six figure deals so down slightly.
Year over year I know John you said, you would want to that number to be higher but but also expect Q3 to come up year over year versus Q3 of last year.
Was there any impact on that number being down year over year because of a shorter duration of deals in this environment versus in Q2, a year ago, and maybe help us understand what does it that's giving you confidence that number is gonna you know increase in Q3, both year over year and haven't sequentially. Thanks.
Yes. This is out there and again I think.
In General I think we're very happy about the 100, plus deal metrics, 60% growth quarter over quarter, which I think is more reflective of I'm kind of the current environment and kind of comparing the demand that started the year to where we are now obviously on a year over year basis. The the years are completely different in terms of just the environment and and.
Various industries and segments that that have different dynamics at play, but overall, we're seeing very strong pipeline. There are some specific instances where you might have.
On a customer decision, making dynamics of in AI and involve way and so some of those deals kind of coming from Q2 into Q3. So we're seeing.
Some of those deals to close and play out nicely, but overall I think when you look at the pipeline for the second half of the year when we look at the year over year growth even.
Okay, great. Thanks.
Your next question comes from a line of Chad Bennett from Craig Hallum Capital. Your line is open.
Great. Thanks for taking my questions. So.
It looks like and you guys indicated that churn stabilized.
Roughly five percentage points this quarter in last quarter.
And you talked about healthy expansion in the base, probably like you said due to circumstances, we are in right now and suite adoption.
Yes, you know if you look at and I realize everything's kind of trailing 12 months, but if you look at net retention.
At that ticked down a touch I guess, you know to 106 from 107 sequentially.
I guess should we expect that number in the second half two kind of re accelerate as again, we monetize you know kind of the users and suite adoption becomes more prevalent and like deal in said you know your six figure counted in third quarter you know.
Gross healthy.
Just kind of how you think about both churn going forward and net expansion going forward or retention. However, you want to put it for the second half of the year would be great. Thank you.
Sure. So we'll start with the on the churn fronts as.
As you noted that that's a remained strong and stable even in this environment.
Coming in consistent with 5% on an annualized basis will be a lot were last quarter and a bit better than where we were a year ago at 6%.
But we do expect that metric to be continue to be stable going forward, but as you might expect with E cobot and 18 related dynamics, particularly in our smaller customers.
That is having a somewhat of an impact on the expansion rate.
That could cause the overall net retention metric to fluctuate over the course of this year. So that is has created some pressure, particularly in those customers and ultimately in terms of where things shake out. This you really need is going to be more a function of that expansion.
So we do expect that our net retention rate is going to ended this year above where we ended at white 20, but at a 104% where we were so north of that but ultimately the dynamics around expansion and it's kind of the timing of the recovery that we see in some of these segments that are more challenge as well as the.
Tailwinds on the enterprise or what's going to drive that net retention metric for the balance of this year.
Okay, and then maybe one quick follow up just on that deal in is it's so it maybe this is an obvious answer also but should suite adoption be a tailwind for your net retention rate.
Oh, so what do you think is yes, absolutely to the extent that the adoption of suites drives customer expansion and in a lot of cases as Aaron mentioned, we see that actually kind of streamline and in many cases increase.
The Upsells, who we see with our customers suite adoption alongside just general adoption of especially in some of our newer products like shield and relay will absolutely be a factor in that customer expansion rate.
Great. Thank you much.
Again, if you like to ask a question and start wondering your telephone and your next question comes from the lineup retinal block from Berenberg capital markets. Your line is open.
Hi, guys. Congrats on a quarter I'm just one question for me here I know you guys increase your non-GAAP operating margin target from or acute 12% to 13% when I look at the first half margin profile, there got around 12, and a half 12.6% I mean, you're not really expecting any sequential improvements for the remainder of the or I guess.
Is there any anything in that are you guys paying on any incremental investments.
Maybe just help me with that dynamic thank you.
Oh, I'm, sorry, I know there that.
Same dynamics that we've been seeing that allowed us to increase and make those significant increases and improvements in operating margin and non-GAAP EPS throughout the course of of the first half year, particularly in the second quarter Oh, we do expect the home so as mentioned.
For those to hold true for the balance the year would note that there is some seasonality that we see in certain line items of expenses. So you look at historically, we generally do you see slightly lower margins in the third quarter versus the second quarter. For example, and then there are other dynamics around.
Different components of of areas like.
Salesforce compensation. So the the expenses do certain categories expenses do fluctuate a bit but overall, we would expect to see that continued improvements in our bottom line.
Trajectory and while we will be making investments, particularly in the in the go to market areas that have really been performing well.
And showing productivity gains as well as continued investments in areas like our engineering team you can expect to see us make those investments throughout the back half of the year, but at the same time continuing to drive leverage through all the different areas that we've mentioned so.
We do expect to continue that trajectory of strong operating margin improvements as we move through the back happened this year and into next year.
Perfect. Thanks, so much.
And there are no further questions at this time, Alice I turn the call back over to you for some closing remarks.
Thank you everyone for joining our call today, we look forward to speaking with you again on her investor breakout session at Boxworks digital on September 17.
Please note our start time for the event will be at two P.M. Pacific and Boxworks digital will be an all day event.
Thank you again pair time today, and we look forward to speaking with you again sand.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].