Q3 2021 Box Inc Earnings Call
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At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
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Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Alice the Pato head of Investor Relations. Thank you. Please go ahead.
Good afternoon, and welcome the box and third quarter fiscal 2021 earnings conference call on the call today, we have Aaron money, our CEO and Dylan Smith, our CFO following our prepared remarks, we will take questions.
Today's call is being webcast and will also be available for replay on our Investor Relations website at Www Dot box Dot Com Board Flash and Busters and webcast will be audio only however, supplemental slides are now available for download from our website.
And I suppose highlights of today's call on Twitter and handle and boxing IR.
On this call, we will be making forward looking statements, including our Q4 and half by 21 financial guidance and our expectations regarding our financial performance for fiscal 2021, and future period timing and market adoption of our products and markets and the size of our market opportunity, our operating leverage our expectations regarding maintaining positive free.
Cash flow gross margins operating margin feature and profitability and unrecognized revenue remaining performance obligations and billing our planned investments and growth strategies, our ability to achieve our long term revenue and other operating model targets.
The timing and benefits from our new products pricing and partnerships and our expectations regarding the impact of the Cove and 19 and on that on our business and operating results.
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 and the risk factors and documents, we file with the Securities and Exchange Commission, including our most recent quarterly report on form 10-Q for information on risks and uncertainties and may cause actual results to differ materially.
These forward looking statements are being made as of today December 1st 2020, and we disclaim any obligation to update or revise and should they change or Steve you have today.
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 in isolation from our GAAP results.
You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results and our earnings press release, and and the related Powerpoint presentation, which can be found on the Investor Relations page of our website unless otherwise indicated all references to financial measures are on a non-GAAP basis with that let me hand, it over to Aaron.
Thanks, John and thanks, everyone for joining the call today, we hope you and your families are all staying safe and healthy I continue to be proud of our teams and box globally, who strive to provide tremendous support for our customers and for continuing to drive our product innovation during a challenging year, our cloud content management product suite is gaining momentum with energy.
Right and that are prioritizing digital transformation and building around best of breed applications. This growing demand was evident at our 10th annual Boxworks conference, where thousands of customers joined us virtually to learn about our innovations and security compliance collaboration and work flow and a growing network of partner integrations, including Microsoft.
Teams slack and many more.
In Q3, we delivered revenue of 196 million up 11% year over year non-GAAP operating margin of 18% up significantly from just zero percent a year ago and non-GAAP EPS of 20 cents up from negative one cents, a year ago and well above our guidance.
We also generated more than $26 million and positive free cash flow and improvement of $28 million versus a year ago gross.
Growing demand for products like box shield and box relay drove more sweet adoption, including a 35% attach rate per suite and our six figure deals.
Over 100000 customers now rely on box to power secure collaboration and critical business processes and in Q3, we close wins and expansions with leading organizations, including into it and brought on manufacturing nationwide insurance USAA and the U.S. Air Force.
To share just a few examples of the use cases, we saw in Q3 deals.
One of the country's league leading financial services companies, who has been a box customer since 2014 purchased the seven figure la support new use cases for box, including claims processing and a more secure virtual environment.
And multinational technology company also expanded its use of box and purchased and the away along with boxes gxp offering to support the manufacturing efforts of a COVID-19 vaccination currently in development.
And and government agency selected box to replace legacy systems like share point and several of its own on premises solutions to support a variety of use cases, including secure internal team collaboration records management secure mobile access to content and external collaboration with the agencies customers and partners.
These challenging times I've highlighted the strength of our full product suite IC strategies are shifting from focusing primarily on secure file sharing which is critical early and the pandemic can now more broadly rebadging and migrating major business processes to the cloud so they can better fit and new normal characterized by more virtual teams.
At work and digital operations.
While this has created tailwinds for our business, especially and enterprises that have large room for expansion, we're not immune to the adverse effects of an uncertain macro environment that our customers face and as we mentioned earlier. This year, we expected to see softness from our professional services business and smaller business customers, both of which were evident and Q3.
Looking forward, we believe the differentiation of our full product suite is well positioned to drive improved growth and our profitability initiatives will put us and an even stronger position in the coming years.
Over the past few years, we've methodically built the category defining cloud content management platform focused on three key Differentiators frictionless security and compliance seamless internal and external collaboration and work flow and world class integrations and that extend the value of box and to any application.
And as I mentioned in Q3, we hosted our 10th annual Boxworks conference fully hold true virtual this year, which brought together thousands of attendees with an incredible slate of speakers, including the Ceos of Cisco IBM Octa service now slack and zoom and the box customers like Patel.
International Rescue Committee, Nike Schneider electric and USA.
We also announced new capabilities and integrations to help customers bring content and business processes together on box.
Reducing risk improving collaboration and making it easier than ever to get work done securely.
For example to make it easier to collaborate across distributed teams and content and real time, we introduced all new annotations capabilities for the web and mobile.
Per box relay, we expanded the custom built tablet users can create and announce apiay extensibility that enables customers connect workflows and box to applications like Salesforce or service now as well as their own custom applications per box shield, we announced a new policy exception capability and and integration with Microsoft information protection.
And to protect the flow of information between Microsoft 365, and boxes ecosystem and finally, we expanded our partnership with IBM integrating more deeply with Q radar importantly.
Importantly, we announced enhancements to box from Microsoft teams, including New features that make it easier for users to find share and access content from box within the Microsoft teams App. This integration enables users to unify content across teams and all their other apps into a single content platform a key.
Peter for box this.
This integration follows the increased integration work that we've been doing with slack to ensure that customers can have access to any of their content securely from their slack channels seamlessly where.
We're incredibly excited about the momentum in this industry, where customers are going to use multiple applications such as black sales force teams Webex and zoom to get their work done.
And they're going to need access to their content from those applications securely.
Enterprises, more and more than ever before and need a single source and true for their content across their IP stack and box is the singular content layer that connects to these applications.
With over 1500 integrations, we continue to expand on our open and interoperable platform by creating a seamless experience for our customers.
As a result of our continued product innovation last month, we were named a leader and the Gartner Magic quadrant for content services platforms and once again out of 18 vendors evaluated and the market index.
In the past three years box has quickly taken market share from legacy systems and is now recognized by Gartner as having the highest growth rate of all content services platform vendors.
In October box was also recognized as Gartners customer choice vendor for the content collaboration tools market with 97% of customers willing to recommend box look.
Looking ahead, we have and exciting roadmap of innovation and enhancements that will continue to drive adoption and enable our customers to work in all new ways.
Now turning.
Turning to our business model last year, we laid the foundation to improve our balance between growth and profitability for F Y 21, and beyond our focus was on delivering growth more efficiently and implementing significant cost discipline in the business. We continued to deliver on this commitment.
To drive efficient and consistent revenue growth, we continue to execute on our multi product strategy and drive more efficiency into our land and expand strategy.
We're focusing on landing new customers with a repeatable sales motion by leveraging our enhanced digital experiences, which has benefited us in this current environment and through our robust partnerships with key resellers.
Our expand strategy is focused on growing existing accounts by driving add on product adoption and seat expansion with box suites as well as efficiently driving new logo acquisition and key markets.
To drive greater profitability, we are focused on three key initiatives continuing to optimize workforce expenses, improving our gross margins by shifting more toward the public cloud and taking and ROI based approach to all areas of spend we.
We have implemented greater cost discipline across the business and this is evident and our significant gross margin operating margin and cash flow improvements throughout the year.
As you can see from our operating margin of 18% and Q3, we have been executing well on these efficiency efforts with our rigorous approach to overall cost discipline. We are now committed to delivering at least 14% operating margin versus our previous goal of 12% to 13% for the full fiscal year up.
Currently from the 1% operating margin, we reported and Fytwenty before I conclude I want to take a moment to talk about our commitment to TSG, whether we are enabling our customers business continuity as they work remotely and powering nonprofits through box side or implementing diversity and inclusion programs or conducting companywide gender pay analysis.
US to commit to pay equity, we hold ourselves accountable to a high standard of social responsibility.
Most recently, we hired a vice president of communities and Pat who will lead SG improvements in partnership with the Investor Relations and legal teams and our progress will be reviewed by our nominating and governance Committee.
We also recently launched our SG web site that highlights the progress we are making on this front, which you can find in the about us section of our corporate website.
To conclude in Q3, we continued to execute on our strategy to drive long term profitable growth and further demonstrated the significant progress we've made and strengthening our competitive differentiation in the cloud content management market, while also delivering increased value to our customers and box, we're going after one of the largest markets and software attacking and.
Total addressable market of $55 billion and spend on content management collaboration storage and data security with the leading cloud based platform I've never been more excited about the market opportunity in front of us and the power how the world works together with that I'll hand, it over to Dylan.
Thanks, Aaron Good afternoon, everyone and thank you for joining us today.
In Q3, we delivered strong revenue growth driven by momentum from our full cloud content management offering.
We also achieved significant improvements in operating margin EPS and cash flow driven by workforce expense optimization improved gross margin and the overall cost discipline.
We delivered revenue of 196.0 million in Q3 up 11% year over year, 28% of this revenue came from regions outside and United States up from 25% a year ago fueled by continued strength in Japan.
Our remaining performance obligations or ARPO represent non cancelable contracts that we expect to recognize as revenue in future periods.
This metric consists of deferred revenue and backlog and offset by contract assets.
We ended Q3 with ARPU of $755.9 million up 19% year over year, driven by strong growth and our backlog from longer term strategic deals.
We expect to recognize approximately 64% of our ARPU over the next 12 months.
Third quarter billings came in at $185.5 million, representing 8% year over year growth. Our billings result was impacted by greater pressure and our professional services bookings than we expected.
This pressure was driven by a greater proportion of sales coming from customer expansion, which tend to require less consulting services versus new deals as well as the economic challenges that many of our customers are facing due to the current pandemic note that customer contract durations have been increasing slightly and even in the current environment our customers continued.
And you box as a critical component of their long term IP strategies.
In Q3, we closed 62 deals worth more than $100000 versus 64 year ago, seven deals over $500000, which is in line with a year ago and three deals over $1 million also in line with a year ago and.
Importantly, and as Aaron mentioned, we were extremely pleased to achieve a robust 35% attach rate per suites across our six figure deals.
We ended Q3 with an annualized net retention rate of 103% down from a 104% a year ago and 106% in Q2 in.
In Q3, our full churn rate was 5% on an annualized basis in line with Q2, and an improvement from 6% in the year ago period.
Turning to margins.
Non-GAAP gross margin came in at 73.4% of 270 basis points from 70.7% a year ago and roughly in line with 73.5% in Q2.
Our focus on reducing infrastructure costs and gaining economies of scale is paying off Q.
Q3, gross profit of $143.9 million was up 15% year over year outpacing our revenue growth by 400 basis points.
In Q3, we once again drove significant leverage across the business by executing on several cost and productivity initiatives, primarily around optimizing our workforce or infrastructure expenses.
Total Q3 operating expenses represented 55% of revenue, a 1600 basis point improvement and a reduction from 71% a year ago.
As a result in Q3, we generated and 1800 basis points improvement and our non-GAAP operating margin year over year coming in at 18% versus roughly zero percent a year ago.
Sales and marketing expenses and in the quarter were 56.5 million, representing 29% of revenue down 1300 basis points from 42% and the prior year no.
Note that this includes roughly $5 million in year over year savings from hosting our annual customer conference Boxworks digitally vs in person we.
We are seeing success and achieving higher overall sales productivity driven by improvements and our enterprise segment and the reallocation of resources and the higher performing regions were also generating increased marketing leverage by shifting our focus towards more efficient digital channels.
Research and development expenses were $34.9 million or 18% of revenue down 100 basis points from 19% in the prior year.
We achieved this leverage even while continuing to further differentiate our platform in Q3 with offerings, such as custom built tablets and box relay and policy exception capabilities and box Shields. We recently established our engineering center of excellence, and Poland, which will contribute to our ability to generate additional leverage from our R&D investments go.
Going forward.
Our general and administrative costs were $17.3 million or nine percentage of revenue down 100 basis points from 10% a year ago.
We expect to drive leverage and Gionee through greater operating discipline and evolving our workforce location strategy as we scale.
Non-GAAP EPS came in at 20 cents and well above the high end of our third quarter guidance. This represents a very strong improvement from the negative one cents of non-GAAP EPS reported a year ago.
Let me now move onto our balance sheet and cash flow.
We ended the quarter with $275.8 million in cash cash equivalents and restricted cash dirt.
During the quarter, we paid back $20 million on our revolving line of credit, which impacted Q3 cash from financing activities.
Cash flow from operations was very strong and at $45.1 million in Q3, a 36 million per 400% improvement from $8.9 million a year ago come.
Combined and Capex and capital lease payments were nine percentage of revenue in Q3.
Total capex was $3.3 million versus $1.1 million a year ago.
Capital lease payments, which we factor into our free cash flow calculation were $14.6 million versus $7.1 million a year ago.
This year over year increase reflects the impact of higher capital lease liabilities related to last year's migration and for lower cost data center locations.
As we head into next year, we expect to see minimal new capital lease payments as our older capital lease liabilities gradually roll off the balance sheet, we expect capital lease payments to be lower both in dollar terms and as a percentage of revenue versus this year's payments.
We expect Capex and capital lease payments combines can be roughly six percentage of revenue in Q4, and roughly eight percentage of revenue for the full year of appetite 21.
Finally, we delivered free cash flow and the third quarter of $26.2 million.
Year over year free cash flow improvements was exceptionally strong up $27.9 million and from the negative $1.7 million recorded and year ago.
With that let's now turn to our guidance.
For the fourth quarter of fiscal 2021.
We anticipate revenue of $196 million to $197 million. This.
This guidance factors and the revenue impact of the lower professional services bookings that we noted previously which creates a roughly 2 million dollar headwinds to our overall revenue expectations and the fourth quarter.
We remain prudent and our growth expectations, given the macroeconomic challenges that our customers are facing and as the headwinds we experienced this past year and our professional services business may persist.
That said, we are seeing continued strength and our enterprise business and a recovery and SMB demand both of which should benefit from the strong momentum were seeing and suites and our newer products.
As a result, we expect our Q4 revenue growth rates and stabilize and begin the improving throughout the course of our upcoming fiscal year.
We expect our non-GAAP EPS to be in the range of 16 to 18 cents and GAAP EPS and the range of negative eight cents to negative six cents on approximately 165 million and 159 million shares respectively.
For the full year of fiscal 2021, ending January 31 2021.
We expect our alkali 21 revenue to be in the range of $768 million to had 769 million, representing roughly 10% year over year growth at the midpoint of this range.
We expect our flight 21, non-GAAP EPS to be in the range of 64 to 66 cents on approximately 162 million diluted shares.
Our GAAP EPS is expected to be in the range of negative 32 cents to make and 30 cents on approximately 156 million shares.
We now expect our non-GAAP operating margin to be at least 14% of revenue and improvement from the 12% to 13% range that we provided on our last earnings call.
We remain committed to achieving a combined revenue growth rate plus free cash flow margin of 25% this year and 30% next year.
Going forward, we will continue to improve on our strategy to deliver long term profitable growth by executing against several initiatives to deliver efficiencies and cost savings.
To drive efficient and consistent revenue growth, we expect to further improve sales productivity by driving continued momentum and suite sales building on the enhancements, we've been making two and product offerings.
We will continue to take a rigorous ROI based approach to how we allocate sales head count by focusing our investments and higher performing geographies and segments. We also expect to benefit from the investments, we've been making and our revamped digital channels to drive efficiencies.
To drive greater profitability, we will be increasing hiring and lower cost locations and we expect the and next year with more than 100 full time employees, primarily engineers in Poland.
We expect and deliver continued gross margin improvement as we scale into our new more efficient data center infrastructure, while also increasingly leveraging our relationships with public cloud providers as you move additional workloads to the cloud.
Lastly, we will continue to apply a rigorous approach to all areas of spend and we expect to benefit from the investments we've been making this year and system automation.
In summary in Q3, we delivered strong financial results highlighted by operating margin of 18%.
Our product innovation around remote work large market opportunity and resilient business model put us and a strong position to deliver healthy long term revenue growth and profitability improvements as we continue to build on our leadership position.
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 and your telephone to withdraw your question press the pound key.
And your first question comes from the line of Josh Baer from Morgan Stanley. Your line is open.
Great. Thanks for taking the question.
My question is on.
Growth and demand that you're seeing so obviously there is some pro serv impacts.
Current billings grew low single digits billings grew 8% revenue, 11% with the.
The pro Serv impacts, but then our PEO grew 19% bookings based our Pos grew 31%.
So I'm just wondering how you think about the growth and the underlying demand that you're seeing for box and your business.
Yes, all day.
Okay, and that off and and I'll, let bill and chime in as well.
Overall, I think as as we've talked about this year.
This has been and super unusual environment for us because.
Because it you just have different kind of kind.
And puts and takes or headwinds and tailwinds and the model overall I think the biggest hail and we have is we see a lot of especially larger mid size or larger enterprises that.
Our continuing to adopt and expand with box there obviously buying into our sweet when you look at the 35% attach rate on hundred K plus deals we did a number of big deals within the quarter. So we are seeing really healthy kind of expansion from from especially customers and areas like life Sciences financial services Federal government at the same time.
Obviously as as Weve noted and as you can see from the Q4 guidance.
Professional services has created a bit of a headwind for us.
Simply because those customers are expanding with box that theres less of a need for some of the more advanced services that we have from a consulting standpoint, we have seen zone.
Different segment based challenges and and a little bit from international standpoint, So thats moderated the growth.
That that obviously, we would have wanted to put up this year, but but overall I think when we look at the demand environment and especially the broad shift to cloud content management from legacy systems, we feel very very confident.
Confident that.
But youre going to able to drive a lot more growth. So so that that setting the macro view that we're seeing and the business right now, but I'll let.
Bill and kind of further build on that.
Yes, so simple that a bit.
And our mentions a lot of the trends that we're seeing and the underlying demands and the business are pretty similar to what we saw over the last couple of quarters with continued strength in enterprise customers, we are especially over kind of through the midpoint of this year, we mentioned that at the tail end of Q2, which continued into this most recent quarter and Q.
Three we are seeing a recovery and demand from our smaller business customers. Although that's still at pre book coded levels and been re weekly is the momentum that we're seeing in sweep and new product sales, so particularly around suites.
35% of our six figure deals.
We're suite sales, which is a new high watermark.
Up from about 30% last quarter, and and that kind of low to mid twentys prior to that and then the only other note and make it you asked about the Archeo dynamics that is up a very healthy 19% year on year and.
Thats driven primarily by strength in our backlog and long term backlog in particular due to the volume of long term strategic deals that we either signed or renewed in the third quarter. So if you kind of key set apart backlog was up about 30% year on year with deferred revenue up about 9% year on year.
That's great and if I could just kind of follow up connecting the dots between some of that strengthen our PEO and bookings with.
Yes, I think relatively flat large deal number metrics.
When you factor in the really strong attach rate of suite are those deals with and those back and getting larger like that the deal size and yes.
That's exactly right, so and so while the overall Q3 big deal counts Werent quite as strong as we would have liked we are seeing average contract values of those larger deals come in higher this year and that was again the case and in Q3, we see what supports those solid ARPU and billings outcomes.
Great. Thank you very much.
Your next question comes from the line of Brian Peterson from Raymond James Your line is open.
Hey, Thanks, guys, Kevin year on for Brian as I think about your longer term margin framework I think you've talked in the past about having some room to flex day expense structure, regardless of the revenue growth rate to meet those targets. So I guess can you remind us how you think about the mix of more variable expenses and your cost structure and what are the key areas that you could see flexing.
Up or down as you work towards those targets.
Sure, so and so thats exactly right and we remain committed to and confident in our ability to achieve the targets that we laid out and at our analyst day, just a few months ago.
And as it relates to the areas of flex and kind of dial and we have.
The majority of those are going to be on the go to market side and in particular, the growth rate and where we're investing from a sales head count point of view, which is going to be.
Closely tied to what we're seeing and from the underlying demand the performance and productivity trends and so thats. The biggest lever I mean, there are lot of other things that we're doing and certainly things like what we're spending on infrastructure is going to scale up or down depending on the size of the customer base and what they are buying.
But the biggest lever that's going to be related directly to growth as we think about that balance between putting up healthy growth and that continue to improve our profitability is going to be around the rate and and location of where we're growing our sales force.
Okay. Thanks for that and just a quick follow up as we look to the fourth quarter can you remind us of the typical mix for renewal activity between the enterprise and SMB segments and would you expect to see any changes for that ratio here in the near term.
So.
If you think about the overall volume typically or if you think about the revenue composition.
We have a little more than 70% of our business coming from enterprise customers, and then a little less than 30% coming from SMB and and online and that's a little bit more pronounced in terms of the real dynamics and the proportion and the enterprise in Q4, just given the seasonality, but not drew.
Medically different from the overall size of those businesses and we don't expect that to change or be very different in terms of the volume and mix of the types of customers that are up for renewal this Q4 versus historical periods.
Great. Thanks, guys.
Your next question comes from the line of attack and drunk from Oppenheimer and company. Your line is open.
Thanks, Hey, guys.
Few from me and when you've talked about a little bit of a change and should do you just curious from a secure file sharing true migration to the cloud.
Help me understand from a go to market standpoint does this potentially extend sales cycles or the motion needs to be unchanged.
Yes, I think the motion is is low.
Largely unchanged I think that more of a point of what we saw in the first couple months of the pandemic environment was sort of that initial burst of of just secure remote work and obviously people have been able to settle into that way of working throughout this year with obviously more of the attention being on video and communications sort of infrastructure that they had to set.
So now I think what we're doing is actually moving back to more of our traditional sales motion, which is having a broader conversation with customers around the the broader push toward digital transformation and their business. If I look at the deals that we did at a large financial services provider or the multiple large transactions, we did and life Sciences and these were not.
About sort of urgent standing up of remote worker users. This is really about being able to move off from legacy content management systems be able to move to the cloud so a bit more of our actual classic sales motion and I think the the particular unique headwind in this environment is really just around.
The budget environment, and and the fact that we.
We can't necessarily go serve all of the same industries.
And the same way. So we are obviously much more concentrated and.
Some of the higher growth industries that are spending.
On on operating expenses right now financial services Life Sciences Federal government on professional services. So those are really where we're getting more of the growth from and and obviously seeing less less demand on a relative basis and.
Some consumer sectors.
Obviously, net almost nothing and hospitality travel et cetera, So and so I think similar sales cycles, and probably what we had and the business maybe non.
Nine or 12 months ago, obviously with a much stronger product portfolio than what we had then and and really just dealing with those headwinds and tailwinds based on the kind of macro environment.
Got it.
And then regarding day, 35% attach rate.
Suites to six figure deals.
I guess, it's a good number but.
And we also I don't know if it's a good number you need to tell me like it sort of I need to think about what's your internal target relative to this or are you willing to put a stake in the ground as to the end of fiscal 2000 and to what do you think the attach rate of suites at the end of next year and used to be.
Yes, and a great question I think Oh, sorry deferred don't go ahead and now that are.
I think we.
Good day in general we want the majority of our 100, K. plus deals coming in through suites, and so obviously I hesitate to give the specific timeframe, but you can imagine that that's the that's the push that we have especially going into next year.
In terms of the reason why that number is not not large right now I think it is just because in some cases, we do have customers that are expanding into some of the existing use cases that they have which which means that they obviously are going to stay on the current kind of product lineup, just purchasing more and more users within those plans.
But overall I think we I would say that we've been incredibly encouraged and and happy with the results of suite that has changed the sales motion to a positive bye.
By really helping customers see the full value of our platform and we are going to continue to incrementally drive up that.
That percentage of large deals coming in through either sweets or that multi product bundling motion and I would I would certainly want to have the majority of those those larger deals having that multi product.
Characteristic going into next year.
That's right.
A bit earlier.
It was filled on that that would say that.
We are certainly pleased with the kind of traction that we're seeing with sweets and and with our newer products as mentioned a shield has continued to perform as.
It kind of seeing the strongest momentum and tracks and weve ever seen out of any of our add on products and another metric that we've talked about in the past that we really pay a lot of attention to is just how much of our business is coming from customers who are using these more sophisticated and stickier solutions, how much is actually coming directly from the sale of these newer add on.
Products, which is clearly a pretty high percentage of the overall deal value. One we're selling suites and just to give a sense of that trajectory and how it's kind of fueling the growth if you will.
Look at the kind of total revenue generated by all of our kind of add on products collectively that's up about 33% year on year and now about 23% of our total revenue directly coming from those products versus 19% a year ago. So as Aaron mentioned, it's still early days and certainly expect those numbers to continue increasing.
But we are very pleased with the the kind of trajectory that weve put up drug force this year.
Thats, great Thats, great and maybe last one from me on the.
On the investment side.
Help me understand.
From a higher margin is completely understandable and you've done a very good job and doctrine.
We.
The quarterly and concern would be is that you're potentially under investing somehow somewhere so help me understand what is it that you look at internally to figure out if you're under investing or not what is GAAP metric that you watch how close are we to.
To fully exploit the medicine.
Yes, I think.
[laughter] I'd say the biggest thing that we focus on is around a lot of the trends that we're seeing and in sales productivity and take a very granular view.
Kind of what the how successfully how quickly our sales force is ramping you're looking at on a segment by segment geography by geography basis.
And how they're performing relative to other regions.
Our targets and and all of those things is the biggest thing that we look at and then certainly and some of the other supporting areas and spend such as marketing programs and we also think a pretty program by program and rigorous ROI approach in terms of how efficiently we're able to generate and then ultimately closed demand and so those are a couple of the categories that we watch most closely as we're kind of.
Deciding what the right investment levels are in that and the key areas of our sales and marketing expense.
Okay cool thanks.
Thanks, guys. Good luck.
Thanks and.
And surprise, we didn't talk about sales force locked, but I'll, let somebody else bring that up.
Your next question comes from the line of Rishi Jaluria from da Davidson and company. Your line is open.
Hey, this is Phil brig beyond per issue. Thanks for taking the question.
So, let's see continued improvements and operating margin appreciate the color on further expansion initiatives.
Can you help us think through how much the benefits you saw and Q3 are long lasting structural changes to the business versus maybe short term coated driven benefits like virtual so and or proserv mix.
Yes, so I would say that most of the benefits that we're seeing as we kind of talk to our customers.
And and all the dynamics and their environments.
Do seem like they're more durable tailwinds, especially when you think about the enterprises and how they are increasingly accelerating their adoption of remote work solutions given all of the kind of needs that box service from security to workflow automation integration capabilities as I think more and more companies are increasingly both enabling disturbed.
And Workforces, but also introducing best of breed.
To platforms and.
And so as we look forward and they were very confident and the resiliency and the underlying demand and additional strength of our business model and so these trends that we saw kind of beginning to pick up from a from a tailwind point and enterprise in particular has continued throughout the course of the year and given just the overall deal cycles and kind of visibility.
And to that we have and kind of how close we are to various customers. We are increasingly confident that this is not going to be a one time shift and then the sorts of Tailwinds. Some side one thing is get back a little bit more to normal.
All right. Thank you.
Your next question comes from the line of Matt cost from JP Morgan Your line is open.
Hi, good afternoon guys.
Can you provide an update on some of your partnerships like again fewer 18 key.
Particularly has their contribution to changed or increase or waned.
And then do you see additional opportunity or a similar type of.
Reseller partnership there all right then.
Or something Thats you.
Moving on to.
Yes, we are we're continuing to see I think strong momentum from key partners like IBCM and obviously in Japan, we have a number of very large channel and resellers in the in the U.S. its a little bit of mix environment, a lot of customers prefer to go direct.
Box and but we have had success with with other kind of key channels, especially those that they can add value on top of the deployment of box. So.
Some of your classic system integrator type relationships.
And and idea and obviously is is one of the strongest and that mix, where we have both technology solutions that we have.
In market with and between cloud infrastructure key radar their advanced security capabilities into Stan for data classifications that were able to co sell with with I'd and very successfully and then obviously on and on an international basis, we do that with them as well so overall I think healthy.
Healthy volume on the on the channel front, but we expect that to remain relatively stable from a percentage standpoint, so no shift in the strategy in terms of doing more or less on the on the channel side.
Great. That's helpful. Thank you and then maybe can you help us.
Temper expectations for margin expansion next year, and you've clearly laid out sort of the opportunities for improving it further.
Yes, and we won't see a step function next year like we saw this year, so maybe help us and.
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Quarter model should look like in terms of operating margin expansion going forward.
Yes, so choice and say, we'll certainly get to provide a lot more color and kind of granularity and both kind of growth as well as margin details on our Q4 call.
And I would say and that is that we remain committed to delivering that combined outcome of revenue growth plus free cash flow margin above 30% for next year. So a 5% kind of solid improvement year on year, although certainly not as much of a step function on the bottom line that we saw this year.
And in terms of how where we where we are going to be driving net profitability very confident and the kind of trajectory that we're on and the things we've been doing in order to support the those kind of higher margin targets first of which we talked about and we just kind of a new lever for us than weve not leverage as much in the past is around low.
So cost locations for our full time employees.
Again mention that we expect that at least 100 people on a full time employees on the ground and Poland by the end of next year.
Do you expect to continue improving gross margins as well throughout the course next year as we scale and you are more efficient datacenters and increasing and leverage the public cloud partnerships that we have and and moving more and more service and the cloud.
And then the final thing I'd note is that while it will be kind.
Kind of seeing the same sort of step function increase up from a bottom line point of view because the dynamics of coated I would say that if you look at the improvements.
That we've driven and our op margin this year bridging from the 9% to 10% expectations, we laid out entering the year to the 14% plus expectations that we're giving now.
Under half of that was driven by things that are related to coated so less than kind of 2% and be operating margin improvement this year.
Coming from areas like PD facilities marketing programs and such and then even once the worlds and kind of returns a bit more to it to a normal state. We don't expect those areas the fully returned to pre cobot levels.
So we do expect to continue driving leverage across all those areas of the business.
Thanks very much.
Your next question comes from the line of Chad Chad Bennett from Craig Hallum. Your line is open.
Great. Thanks for taking my questions deal and maybe just a real quick one for you. It was great that you quantified the professional service impact in the fourth quarter Guide can you give us the impact on and the actual billings dollar amount this quarter or if it was meaningful enough.
Yes, I would say that it's roughly in the ballpark of the Q4 revenue impact was the impact they kind of bully billings and the bookings in the third quarter. So it was a couple of million dollars GAAP.
Got it. Thank you and then maybe one follow up just on on the six figure deal count performance in the quarter.
I know and last quarter.
The performance of six figure deals wasn't up to your expectations and and I think you indicated in this quarter it was and either.
And I think you mentioned in the last call that you expected six figure deal count to improve pretty materially year over year.
Because of some slip deals or deals that were done in the second quarter and actually I think you indicated you made made headway on some of those deals early in the third quarter. So just help me understand kind of what what kind of happened from a close rate and.
And kind of linear already of the quarter and in any any type of color there behind the six figure deal count.
Yes sure.
And.
Overall, we are seeing.
Well as I think I mentioned I think we're seeing healthy.
Healthy demand, especially in sectors like financial services life Sciences, some of the larger enterprise and that drives more more existing expansion from box, we have seen some softness and in other categories and even the kind of high end of the SMB market, where we might normally see those hundred Kate duchene or deal come volume come in.
And and in some cases, we didn't see that and level of volume and then and then on an international basis. There has been a little bit of a mixed performance depending on the particular international region and so on so I would say that while we're overall how happy about the the general demand trends just in terms of the kind of customers that are expanding that.
Has the logos that that were able to expand with their hasn't and softness on that big deal count realm.
Relative to our expectations, we are continuing to drive pipeline, especially as we look at Q4. This is obviously a massive massive quarter for us and obviously shaped the kind of year going into next year, but but overall, we still remain very committed to driving growth on that hundred tape plus deal category.
In the next year and that and obviously this year, we haven't gotten the performance levels that we wanted.
Given some of the macro.
Macro environment headwinds and then as Bill mentioned, we did see the benefit of at least higher average contract value in those hundred Cableless deal that was.
Only a positive that.
That was in the quarter.
Yes, and then just one thing to chime in that I'd add.
Addressing a couple of things you asked about we did in the third quarter see both stable close rates. So we've not seen any sort of deterioration in terms of what we actually win when were working through different opportunities nor do we see any sort of unusual pacing in terms of when those deals actually fell in the third quarter.
Okay, then maybe one last one quick if I may for deal and just from.
From a seasonality standpoint in the fourth quarter here deal and do you see any any difference historically in the sequential increase that you typically see in terms of billings and and deferred and.
In this fourth quarter. Thanks.
No. So in terms of the overall seasonality of the business and kind of relative amount of the business, Let me close and the fourth quarter I don't expect the anything to different versus the kind of historical weighting of billings and bookings and the fourth quarter.
Thank you much.
Your next question comes from the line of Erik Suppiger from JMP Securities. Your line is open.
Yes, thanks for taking the question.
Couple of questions. One did you can you comment on just what you saw with your business.
Fiscal year end strength and.
And secondly.
In some of the areas, where you saw some softness and your.
Larger deals.
That driven more by demand was there a healthy pipeline.
Or was that driven more by logistics and.
And in procurement cycles with.
If any challenges with from.
Employees being at home.
I have a I think healthy Q3, obviously with the September.
Year end and in the federal government and and I called out at least one of the large transactions that we did in the in the quarter with a very large government agency that is replacing a lot of.
On premises solutions specialty share point, and and plugging into other software like Salesforce et cetera. So so we did some pretty meaningful transactions within that within that in the quarter that we were very happy about in terms of the overall kind of number of large deals I.
I think the way I would characterize it is that we we definitely had a healthy amount of demand. So so it's a little bit less of an advantage has obviously and we always want more pipeline. So clearly more and more pipeline would have would have been even better but.
But we are seeing greater degrees of scrutiny on budget, which just means you have to have much more of the.
ROI proven out you have to be able to work through more of the.
The different stages.
That said that a customer goes through and some of the more accelerated purchases that that maybe happened at the start of Covance.
We're obviously not happening and the same way and I would I would say that's less about the remote worked aspect of.
How business is getting done and much more of just the budget environment and and the level of.
The steps and scrutiny that the deals tend to half and half through and that's not something that is unusual for us.
Obviously, we did over 60 transactions above $100000 and the quarter. So we have that rhythm down, but but there can always be different and different things that maybe are unexpected and that process or.
In non.
And one of our one of our markets, we saw because of the code and wave.
And in their region, we saw.
A bit of a slowdown just because companies were trying to evaluate how long would like and Alaska and.
How is that going to impact their businesses, so and that's a that's an area, where we expect to see a return and demand and Q4 based on how that region is doing from.
From that macro standpoint, and so I think it this has been a year, where we've had to obviously have a lot of a lot rolling with the different punches that we're seeing with obviously just continue to drive strong performance in the process.
Very good thank you.
Your next question comes from the line of Brett and novel from Berenberg Capital markets. Your line is open.
Hi, guys. Thanks for taking my questions I have two.
First and I'm sure you guys said this but what was the paying user growth and the quarter and then secondly regarding the 35% revenue growth and free cash flow margin target has that mix changed at all as you kind of got closer to fiscal year 20, and 22 or is that has or has that remained relatively constant.
Yes, so and things that we estimate the total number of users are paying customers. The total.
Hey answers.
Yes, so it now.
Now 15 million paid users, which is up sequentially from about 14.6 million in Q2 in terms of the overall number of and paying businesses.
Its users and then as it relates to the kind of shifts and we have certainly seen.
A bit of a slowdown largely for the cobot driven reasons and we've been talking about on the top line and sort of outperformance from a bottom line and some of the margin expansion, we've been able to deliver so I'd say that the overall mix shifts.
It has not changed materially and from the how we're thinking about delivered against that target recently, although we'd say versus where we were several quarters ago. Prior to the pandemic can expect to see a bit more of that to come from the from the bottom line from the free cash flow margin versus on the revenue growth side.
Perfect. Thanks, so much guys.
Ladies and gentlemen, this concludes box Inc.'s third quarter fiscal 2021 earnings conference call. Thank you for participating you may now disconnect.
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