Q4 2022 Box Inc Earnings Call
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[music].
Good day and thank you for standing by welcome to the box incorporated fourth quarter fiscal year 2022 earnings conference.
Call at this time, all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your first speaker today Ms. Cynthia He Puntilla ma'am. Please go ahead.
Good afternoon, and welcome to box as fourth quarter and full year fiscal 2022 earnings Conference call. I think you have on your Vice President of Investor Relations on our call today, we have Aaron Levie box co founder and CEO and Joe Smith Fox co founder and CFO . Following our prepared remarks, we will take your questions.
Today's call is being webcast and will be available for replay on our Investor Relations website at <unk> Dot com forward slash investors, our webcast will be audio only however, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle <unk> box, Inc. I R.
On this call, we will be making forward looking statements, including our Q1 and full year fiscal 2023 financial guidance.
And our expectations regarding our financial performance for fiscal 2023 and future periods.
Including our free cash flow gross margins operating margins operating leverage future profitability net retention rate unrecognized revenue remaining performance obligations revenue and billing and our expectations regarding the size of our market opportunity our planned investments and growth strategy, our ability to achieve our long term revenue and other.
Operating model target.
Timing and market Optionality and benefits from our new products pricing models and partnerships the.
The impact of our acquisitions on future box product offering.
The impact of the COVID-19, pandemic on our business and operating results and our capital allocation strategy, including M&A and potential repurchases of our common stock.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors and documents, we file with Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause.
Actual results to differ materially from statements made on this earnings call.
These forward looking statements are being made as of today March <unk> 2022, and we disclaim any obligation to update or revise them should they change or cease to be up to date.
In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to 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 in our.
Our earnings press release and in the related Powerpoint presentation, which can be found on our investor relations page of our website.
Otherwise indicated all references to financial measures are on a non-GAAP basis.
With that let me hand, it over to Aaron.
Thanks, Cynthia and thank you all for joining the call today, we had a phenomenal year at box, we delivered 13% annual revenue growth well above our original guidance of 9% to 10% we drove significant margin expansion to deliver a 20% non-GAAP operating margin up more than 400 base.
At this point from 15% a year ago.
And we exceeded our commitment to achieve a revenue growth rate plus free cash flow margin of 30% ultimately delivering 33% versus 26% a year ago.
In FY 'twenty, two we continued to bring advancements in our category defining content cloud platform to the market with the worldwide launch of box side, our native esignature product offering.
We made significant product enhancements in security and compliance collaboration and workflow and strengthened our ecosystem of partner integrations, we've built the leading content cloud with well over 100000 customers on our platform and we have an exciting roadmap to continue our industry leadership going.
Forward.
Turning to Q4, we delivered strong results, marking yet another quarter of delivering both revenue and non-GAAP EPS above our guidance.
We grew fourth quarter revenue, 17% year over year, our fourth consecutive quarter of accelerating revenue growth and delivered operating margin of 21% and <unk> of 19%, which is greater than revenue growth and is an important leading indicator of the strength of our business.
Additionally, we saw strong results in the makeup of our customer wins and expansions in Q4.
Our net retention rate was 111% up from 102% in the prior year and up from 109% in the third quarter driven by the continued stickiness of our platform and customer expansion rates.
We had 128 deals over $100000 and nine deals over $1 million up from 121, and four respectively and for the full fiscal year, our $100000 plus deals grew 25% year over year.
Finally, we had a record number of our multi product suite sales, which now includes our enterprise plus plan with 83 suite deals in Q4 over $100000 up 51% year over year.
And for the full fiscal year, our sweet skills over $100000 were up 110% year over year.
Our strong Q4, and FY 'twenty two results underscore that our focus on growth and profitability is working and our strategy is aligned with the key trends that are driving the future of work.
Dynamics around Covid forced a broad digital shift overnight and accelerated the necessity for the cloud to become the foundation of all work.
In this new digital first era employees need to be able to work from anywhere every business process to interact with a customer or partner is going fully digital and companies need to ensure their most important information is kept safe and secure.
At the center of all of this work is our most important content.
Content is how a movie studio create and distribute blockbuster hits to consumers, how life sciences companies discover and produce new vaccines.
Consumer product companies designing their next breakthrough product and how base securely onboard and collaborate with clients in.
In short content is our customers' business.
Yes, most enterprises are dealing with fragmented unsecured complex and overly costly systems to manage this content.
These systems are only growing overtime as new use cases emerge around E signature workflow automation collaboration content publishing business insights and more.
Boxes content cloud delivers a platform oriented approach that powers. The full lifecycle of an enterprise's most important content, including creation classification collaboration workflow automation E signatures publishing analytics retention and more all it is.
<unk> platform.
And we differentiate our offering by focusing on three key product pillars that are delivered through our highly scalable enterprise grade cloud infrastructure.
Delivering the best security and compliance around content.
Abeline seamless collaboration and workflow and integrating in every app, our customers leverage including the ones they build themselves.
As I stated earlier in FY 'twenty, two we advanced major parts of the entire content lifecycle, most notably with the global launch of box sign in the fall.
Since this launch we have announced new and enhanced capabilities integrations and developer tools around bauxite.
These new capabilities include workflow features that automate processes. Once a document that's been executed and API is the tower E signatures in third party and custom applications with these new capabilities box signed can now power, even more advanced signature based processes, helping customers move more of their transactions to the cloud.
We are pleased with our customer adoption and use of bauxite and fourth quarter customers include a leading provider of insurance services throughout the Americas that expanded their use of box sign with a six figure box sign epi deal in Q4, adding unlimited access to bauxite for their processes.
A U S based financial services company expanded their use of box with a new three year enterprise license agreement and move to enterprise plus <unk>.
Enabling box line access company wide and they will be standardizing on box sign as their E signature solution, which will help cut costs and since they are already using box it will allow for easier change management.
Finally in global marketing agency, who has been a box customer since 2013 move to enterprise plus in Q4 with plans to use box sign in their HR department for employee on boarding contract renewals and to manage employee policies and contracts and hybrid work environment.
We're just getting started with box sign and we can't wait to share more about our product roadmap at our upcoming financial analyst day.
In the past year, we also made several enhancements to our box security capabilities as data security compliance and privacy remain more important than ever.
We've added new features within box shield to help protect the flow of content with advanced machine learning based security features and new malware deep scanning capabilities to combat ransomware as well as enhanced alerts and auto classification updates.
We also made meaningful updates to our governance functionality to help support customers legal hold and document retention needs.
With security compliance data governance, and privacy capabilities for many one of the most critical reason customers choose the box content cloud, we will continue to make prudent investments to extend our leadership position and reaccelerate growth in this area.
A critical part of our product strategy is to leverage our interoperability to build on strong partnerships with leading technology companies across the south landscape in FY 'twenty to these enhanced partnerships included service now Cisco Webex IBM zoom, Microsoft and many others.
More recently, we announced an enhanced box for slack integration that enables customers to use box as their native content cloud in their slack environment.
And in January we announced the general availability of an enhanced box for Microsoft teams integration that enables customers to select box as the default cloud content management solution and the teams environment.
Included in the release, our new features that further improve the box experience and Microsoft teams further reducing content fragmentation and making it easier than ever for customers to collaborate across the box content cloud and their Microsoft environments.
As we look forward into FY 'twenty, three and beyond we will continue to double down on the product capabilities investments that add more value to our customers and expand boxes total addressable market.
In FY 'twenty, three we're going to advance our content cloud by building capabilities to power the full lifecycle of content focusing on our three core Differentiators frictionless security and compliance seamless collaboration and workflow and open platform that's integrated into every application.
Now turning to go to market our strong FY 'twenty two results were driven by our scale land and expand go to market motion.
Our focus is entirely on ensuring we bring the full power of the box platform to all of our customers as we know this drives more value for our customers.
And this results in greater stickiness higher average contract values and increased net retention rate.
To drive these efforts over the past couple of years, we've worked to optimize our customer renewal and expansion motion.
High value and repeatable use cases that differentiate box.
Spanned our ecosystem of system integrators and partners to bring box to market for larger enterprises.
And double down in key regions and segments as well as leveraging our digital channel for growth.
And to ensure we bring the most relevant offerings to market for our customers. We've expanded our focus on key industries, such as life Sciences financial services Federal government and more.
Finally, our pricing and packaging strategy is all about ensuring our customers can take advantage of the full power of the box platform in their enterprise.
Our latest multi product offering called enterprise plus has driven more new and existing customers to access boxes full suite of capabilities.
You can see the success of our go to market efforts clearly reflected in Q4 customer expansions for instance, major.
A major biotech company that has been a box customer since 2015 expanded its use of box with a six figure enterprise plus upgrade this deal represents a shift at the customer to use box for regulated content and higher value use cases, as we become a more strategic partner for them.
The increased value and simplicity of enterprise plus was critical to box being prioritized with the decision makers in various teams at the company.
The department of the U S. Federal government expanded its use of box with a seven figure enterprise plus deal, enabling them to provision box to all service members requiring up to date training and the ability to manage mission critical content from anywhere.
A global financial services group moved to enterprise plus in a six figure expansion box will be central to their banking ecosystem and will be used alongside salesforce as the primary content management platform.
They also plan to use box for merger and acquisition external collaboration and client Onboarding.
Overall, we're very happy with our go to market execution in FY 'twenty, two and we will continue to invest and optimize our go to market efforts to bring the full power of the content cloud to our customers in FY 'twenty three.
In summary, the future of work is here and at box, we are helping define it.
Our strong results in FY 'twenty, two are a testament to our execution and delivering to customers the platform they need to meet the demands of this new age I couldnt be more confident in our ability to achieve our FY 'twenty three goals and further our mission of powering how the world works together with that I'll turn it over to Dylan.
Thanks Erin.
Good afternoon, everyone and thank you for joining us.
In fiscal 2022, we had three key financial objectives.
To deliver accelerating revenue growth to expand margins through our focus on operational excellence and to prudently allocate capital in order to return value to our shareholders.
We're proud to have delivered against all three of these objectives.
For the full year of FY 'twenty, two we delivered annual revenue growth of 13%, which includes a roughly 60 basis point tailwind from foreign exchange rates.
In constant currency, our strong results came in well above our initial guidance of 9% to 10% growth and represented an acceleration from the prior year's growth rate of 11%.
We also delivered revenue growth plus free cash flow margin of 33% exceeding our initial 30% target and achieving a significant improvement from the 26% we recorded in the prior year.
Turning to Q4.
We are pleased to have delivered exceptionally strong results marked once again by accelerating revenue growth continued improvements in our net retention rate and record operating margin.
Q4 revenue of 233 million was up 17% year over year, our fourth consecutive quarter of accelerating growth and above the high end of our guidance our.
Our revenue outperformance was driven by suites momentum and by very strong deal pacing within the quarter.
We ended Q4 with remaining performance obligations or <unk> of one point <unk> 7 billion, a 19% year over year increase and once again growing faster than revenue.
Over the past year average customer contract durations has continued to lengthen driven by a higher volume of long term strategic deals, which contributed to the strength we saw in our backlog growth.
We expect to recognize more than 60% of our RP O over the next 12 months.
Fourth quarter billings of 338 million represented 9% year over year growth and was at the high end of our Q4 expectations of high single digit growth.
For the full year of fiscal 2022, we delivered billings growth of 16% above.
Above our revenue growth rate and the full seven percentage point improvement from the prior year.
As Aaron mentioned in Q4, we closed a 100 2800, K plus deals versus 121, a year ago, and 9 million dollar plus deals versus four a year ago.
Due to our strong customer expansion momentum throughout the year. We now have 1400 20 customers paying more than $100000 annually up 17% year over year, and 119 customers paying more than $1 million annually up 20% year over year.
In Q4, or 100, K plus suites deals increased 51% from the prior year.
Suites momentum has been a key catalyst and accelerating customer adoption and enabling stickier use cases in turn driving improvements in our customer expansion and retention rates.
As our customers are increasingly adopting products with more advanced capabilities.
35% of our revenue is now attributable to customers, who have purchased suites, a significant increase from 24% a year ago.
Our net retention rate at the end of Q4 was 111% up from 109% in Q3, and a 900 basis point improvement from 102% in the year ago period.
We've continued to improve our net expansion rate and in Q4, our annualized full churn rate improved from 5% to 4%.
We expect our net retention rate to remain roughly consistent throughout FY 'twenty three.
Yeah.
Gross margin expanded by 190 basis points year over year to 75, 1%.
Q4 gross profit of 175 million was up 20% year over year exceeding our revenue growth rate by 300 basis points.
In Q4, we continued to optimize our datacenter footprint and public cloud infrastructure.
We expect gross margin to continue to improve going forward and the land and the 76% range and that's why 'twenty three.
Q4, operating income increased 33% year over year to $48 million.
Q4 operating margin came in at a record 28%, representing a 250 basis point improvement from 18, 3% a year ago.
Sales and marketing expenses in the quarter were $65 million, representing 28% of revenue down 100 basis points from 29% in the prior year.
In FY 'twenty, two we benefited from our enhanced product portfolio as we generated double digit percentage improvements in sales force productivity, which is an important driver of sales and marketing leverage.
In FY 'twenty, three we intend to grow our quota carrying sales force in the low to mid teens percentage range slightly ahead of FY 'twenty two's growth rate with a continued focus on our higher performing geographies and segments.
Research and development expenses were $41 million or 17% of revenue in line with the prior year.
In FY 'twenty, two we exceeded our goal of scaling our engineering center of excellence in Poland, ending the year with more than 100 full time employees in that location.
In FY 'twenty three we expect the vast majority of our R&D hiring to be in Poland, enabling box to deliver increased product innovation and to generate additional leverage from our R&D investments.
Our general and administrative costs were $20 million or 9% of revenue in line with a year ago.
We will continue to drive operating discipline and expect further leverage in G&A as we evolve our workforce location in the coming year.
We delivered 24 of diluted non-GAAP EPS in Q4 above the high end of our guidance and up from 22 a year ago.
I'll now turn to our cash flow and balance sheet.
In Q4, we delivered cash flow from operations of $49 million down from 58 million in the year ago period.
We also generated Q4 free cash flow of $33 million down from $41 million in the prior year.
Q4 cash flow was impacted both by seasonality and by our decision to strategically invest in our public cloud infrastructure and prepaid $14 million to our partners.
We expect to prepay a similar amount in Q1 of FY 'twenty, three and four our infrastructure outflows to normalize thereafter.
Even accounting for this investment for the full year, our fiscal 2022 cash from operations and free cash flow were up 19% and 41% respectively.
Capital lease payments, which we include in our free cash flow calculation were 12 million down from $14 million last year.
Our capital lease payments continued to steadily decrease as we execute against our plans to move additional workloads to the cloud as part of a hybrid infrastructure strategy.
We expect Capex and capital lease payments combined to be roughly 5% of revenue in Q1, and roughly 5% of revenue for the full year of FY 'twenty three.
Let's now turn to our capital allocation strategy.
In FY 'twenty, two we generated free cash flow of $170 million and we ended FY 'twenty with $587 million in cash and investments.
We expect to use this cash plus our increasing free cash flow to fund strategic M&A to accelerate our roadmap, while also generating shareholder returns via additional stock repurchases.
Last quarter, we announced a new 200 million common stock repurchase plan.
Including the plan, we authorized earlier in the year in Q4, we repurchased five 5 million shares for approximately $140 million.
For the full year of FY 'twenty, two we repurchased 22 6 million shares for approximately $567 million more than offsetting the shares that we issued in our preferred equity financing in Q2.
As of January 31, we had approximately $131 million of remaining buyback capacity under our authorized repurchase plans.
Before we turn to our guidance I'd like to share some further context behind our expectations for fiscal 2023.
Due to exchange rate movements over the past year.
Primarily in yen in euros, we expect FX rates that had the following impact on our reported FY 'twenty three results versus what they would be on a constant currency basis.
On the topline, we anticipated downward impact on our FY 'twenty, three revenue and billings growth rates of a little more than one percentage point.
On the bottom line, we anticipate a downward impact of roughly 1% operating margin and roughly <unk> <unk> to EPS.
We also expect to incur incremental facilities.
And events expenses as pandemic restrictions loosen and as we returned to a hybrid office based environment.
Even with these impacts we remain steadfast in our focus on driving profitable growth and in FY 'twenty three we will deliver improved profitability and unlock further leverage in our operating model.
With that I would like to turn to our guidance for Q1 and fiscal 2023.
For the first quarter of fiscal 2023.
We anticipate revenue of $233 million to $235 million, representing 16% year over year growth at the high end of this range.
We expect our non-GAAP operating margin to be approximately 21%, representing a 400 basis point improvement year over year.
We expect our non-GAAP EPS to be in the range of 24% to 25.
And GAAP EPS to be in the range of negative four to negative five cents on approximately 152 million diluted shares and 146 million basic shares respectively.
For the full fiscal year ending January 31 2023.
We expect FY 'twenty three revenue to be in the range of $990 million to $996 million up 14% year over year at the high end of this range.
This represents a further acceleration from last year's revenue growth of 13%, even after accounting for the anticipated FX headwinds.
We expect our non-GAAP operating margin to be approximately 22%.
Presenting an improvement of more than 200 basis points year over year.
We expect to deliver a steady improvement in operating margin throughout the course of FY 'twenty three.
We anticipate our FY 'twenty three non-GAAP EPS to be in the range of $1 10 to $1 14 on approximately 154 million diluted shares and up from 85 in the prior year.
Our GAAP EPS is expected to be in the range of negative three to negative <unk>.
On approximately 148 million basic shares.
For the full year of FY 'twenty, three we expect billings growth to be roughly in line with revenue growth.
We do expect variability in our billings growth rate on a quarterly basis based on the dynamics of prior year comparisons and the timing of large customer renewals.
Directionally, we expect our billings growth rate to be in the high single digit range in Q1, and Q2 and for our billings growth rate to exceed revenue growth in the second half of the year.
We expect our FY 'twenty, three RPM growth to exceed our anticipated full year revenue and billings growth rates.
Finally, we expect our FY 'twenty three revenue growth rate combined with our FY 'twenty three free cash flow margin to be at least 37% 200 basis points higher than our previous target and a 400 basis point improvement from last year's outcome of 33%.
We remain confident in achieving our FY 'twenty four target of revenue growth plus free cash flow margin of at least 40%.
In summary, FY 'twenty two was a year of excellent operational execution highlighted by accelerating revenue growth and operating margin expansion of more than 400 basis points year over year.
Our content cloud strategy is resonating with customers demonstrated by strong suites momentum and a significant 900 basis point improvement in our net retention rate.
We are well positioned to deliver profitable growth in the years ahead as we build on our content cloud leadership position.
Before we conclude I'll hand, it back to Erin for a few closing remarks.
Thanks, Dillon and thank you again, everyone for joining us today I'd like to remind everyone that our virtual financial analyst day will be on Wednesday March 16. At this event you will be hearing from our executives as we do a deep dive into our product strategy go to market efforts workhorse strategy and long term financial model.
The continued execution of our content cloud platform strategy will drive further annual revenue acceleration and continued margin expansion in FY 'twenty. Three we are confident in our ability to achieve these results based on the customer and the momentum we've been seeing and our product roadmap in the total market opportunity ahead.
Before we open it up to Q&A I would also like to address the situation in Ukraine.
As with all technology companies with business in Europe , we are monitoring the situation very carefully our top priority continues to be for box or safety and wellbeing and our thoughts go out to every boxer customer partner anyone directly affected by this and I am proud that box at Org and boxers globally are already giving to relief efforts.
For those affected.
Thanks again for joining us for this call today, and Dylan and I would now be happy to take any of your questions operator.
Thank you and as a reminder to ask a question you will need to press star one on your telephone keypad again, just press Star and then the number one on your telephone keypad and do we draw. Your question just press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Jason <unk> with William Blair. Please proceed with your question.
Yeah. Thank you hey, guys.
I guess a couple of ones for me first just on the IRR, which continues to show nice improvement you talked about it being consistent throughout this year I guess my question is.
If youre going to continue to see good traction with suites and.
And enterprise plus.
What are some of the I don't know what are some of the pressure points that could prevent it from going higher from here.
Sure I'll take that Jason This is Dylan.
So the net retention rate that we've seen improvements recently over the last year is comprised of 15% expansion and we also improved the churn side of the equation to 4%, which is where we get to ending the year at 111% Youre spot on that a huge driver of our net retention rate is going to be.
The continued momentum in suite sales and would note there that we expect those trends continue we just also expect to see more normalized and more challenging comparisons as we had been driving that momentum over the last year. So definitely remain confident in seeing really strong.
Suites momentum that should show up in our overall net retention rate.
Got you I guess I guess, what I'm getting at is are you trying are you trying to be conservative there or is there a chance that it.
It could be better if the.
Expansion rates.
Rise just given the.
The attach rates on suites.
Yes, so definitely as always with the expectations. We said, we do want to be prudent with those so we do see some upside given the momentum that we've been driving in suites and then would also note that like some of the other top line metrics that we called out FX will have a little bit of an impact downward impact to our net retention rate as well, but feel really.
Good about the targets that we've laid out there.
Awesome Alright, Thanks, and then.
Aaron on the quarter on Q4.
You had 111% IRR, but you had the really high revenue growth rate that speaks to success with new customers I guess, what what are you doing differently with new customers Thats, allowing you guys to have the success there and then how do you think about.
Kind of land versus expand.
And in 'twenty, three and beyond is it do you.
Do you lean into one more than the other or is it just kind of a balanced approach.
Yes, I think it will it will continue to be a balanced approach.
As time goes on and we do at our Analyst Day, we'll talk about the kind of mechanics of the land and expand motion and how we've been optimizing it, especially with our enterprise plus plan, which is included in our suites.
So Q4 as you can tell from the metrics, both very strong quarter in terms of Upselling, but also a strong quarter in some of the new win wins that we had.
One example, we just did a press release yesterday around our win with the Japan Post obviously major leading government agency in Japan.
That the powers their postal service, so great new logos coming on the platform across government and financial services.
And in large industrial companies as well as just a fantastic quarter for expansion into E plus.
And our newer capabilities. So we'll get again that perspective of how that land and expand model is working at the analyst day, but overall just can.
We're going to continue to focus on that balance of.
<unk> growing existing customers and bring on new logos as we scale, yes, and just to build on that this is doing is as a reminder, we've tended to see over the past year, roughly 70% to 75% of our new bookings coming from existing customers and that's roughly the range that we expect to see in the year ahead as well.
And that's what it was in Q4 also.
Yeah in that in that general range, Yes, and again for Q4, the revenue did get a little bit of strength also from the very strong deal pacing that we saw in the quarter.
But generally in line with the type of contribution that we've been seeing from net new versus existing customers.
Thank you good luck guys.
Thanks.
Your next question comes from the line of <unk> Kidron with Oppenheimer. Please proceed with your question.
Hi, it's actually George I wanted to.
So maybe digging into a little bit on Jason's question with NR maybe.
Maybe with the larger customers can you give us a sense of how you feel about your user penetration and then on the expansion side are you already seeing.
Box sign adoption and what kind of leverage are you getting from shield as well.
Yeah. Thanks, So we continue to see very healthy upside in terms of the total potential seat count that we can increase within even our larger enterprise customers I mean, we certainly.
Do do enterprise license agreements and in Q4, we had a number of those where a customer <unk> to buy box for their entire organization, but on the scale of the thousands of customers that we transacted with in Q4, it's still a very very very low percentage of that so a lot of potential for seat expansion and and now with <unk> with our enterprise.
Rise plus plan.
And our API volume licensing, we really have three vectors of.
Of growth even from the existing installed base. So we can continue to expand seats as more use cases get.
Get leveraged for box, we can move customers up to increase price per seat plans like our enterprise plus addition, and we can drive the volume of API is using new use cases on our platform, which I get independently monetize inbox sign was a great example of that in Q4, where we had a six figure deal just for bauxite API is in the quarter so or.
There are multiple levers of growth from even the installed base and even our largest customers and then to your point on bauxite while.
While Q4 was the first quarter, where the product was fully out globally. We are seeing really great signs of initial adoption and traction as well as deals that are that are now coming in as a result of bauxite and being a part of our portfolio as I mentioned that.
Figure transaction and right now the core focus is to drive as much adoption as possible across the customer base with bauxite, but the early the early signs of the product rollout are fantastic and our roadmap of features coming. This year is is gonna be nearly an order of magnitude more than what's in the product today. So we're very very excited about it.
What's to come.
Alright, and then maybe just one more question.
You mentioned pricing can you give us a sense of what the pricing environment is right now and whats the sales productivity.
Youre, saying, how much discounting are you doing or are you able to largely hold pretty strong.
Yes, I think our competitiveness relative to the pricing metric remains very strong.
I think we had a great quarter of of both holding price and increasing and as customers move to our higher tier additions and and I think what you'll find is as we expand out our content cloud portfolio. So box sign from last year box shield from a couple of years prior and relay.
And and box shuttle last year, and then now coming into this year, some pretty exciting product areas that we're going to be investing in that we'll share more at financial analyst day.
What youre seeing is that we can consolidate now multiple categories of spend in a single offering that gives us significant pricing leverage over time, because now for the price of box with that with some uplift as you move to E. Plus you know might have access to two or three other technology categories worth of of <unk>.
We're all in one bundled approach and so that's I think kind of give us continued pricing leverage.
As we go out to the market at the exact same time of delivering more value to our customers. So it's a it's kind of the perfect win win where we're gonna actually caused the customer to spend less money.
Overall within the content categories that did they have use cases in but also we're going to be able to drive more value from our pricing and that ultimately leads to a bunch of downstream results.
<unk> gross margin you mentioned sales productivity that that's continued to improve as a result of our suites and and then ultimately stickier and more retained customers.
Thank you.
Thank you. Your next question comes from the line of Steve Enders with Keybanc capital markets. Please proceed with your question.
Okay, great. Thanks for taking the questions here I guess maybe to start.
Thank you called out that for the guide we are expecting <unk> to come in ahead of both revenue and billings.
So I guess, what are you kind of seeing out in the demand environment that is.
Giving you the confidence to say that.
As part of that how should we think about the the contract duration is a part of that that factor.
Sure so definitely seeing a very healthy demand environment that impacts a lot of the top line metrics that we provide and that we gave guidance around and RP O as it tends to be more of a leading indicator of growth is more representative of kind of the near term momentum that we're seeing that ultimately then flows into revenue.
<unk>.
And in terms of the durations that has been one of the drivers of the outsized backlog growth in particular.
And so we have continued to see our contract durations lengthening incrementally over the past year, but if you look at all the different components of our P O.
Those are up at pretty healthy levels, including on the deferred revenue side, which is independent of those contract durations. So feel really good about the demand environment and the underlying momentum that we're seeing in the business.
I guess just to put a little finer point on that are we assuming that duration on deals. It was going to say pretty consistent in 'twenty. Three is that kind of what's being assumed here in the guide there.
Yeah, we do expect we may see slight lengthening, but would expect those to be fairly stable. The durations that is in terms of where they are today.
Okay, perfect and then on the on the gross margin guide coming in.
But a point above where we are in <unk> for the full year.
I guess what are you what are the efficiency is kind of coming from in there to drive the improvement there and I guess, we're at kind of the areas of investment as you think about the out margin guide.
For 2003.
Sure. So on the gross margin front, where we've been seeing.
You know a lot of leverage and what we're expecting going forward. It comes down to the combination of more efficiently managing the infrastructure.
That we host and so doing a lot from a hardware and software efficiency point of view really just simplifying the way that we deliver those services and that shows up also if you look at the amount of capital leases and the payments that we're making those have trended down pretty significantly and steadily as we've been able to.
To optimize that infrastructure and at the same time continue to move more workloads loads, where it makes sense.
With our public cloud partners, which also allows us to drive some incremental gross margin expansion. So that's from an infrastructure point of view and then going back to the pricing and everything that Aaron was talking about earlier as we do see customers.
Kind of seeing more value out of box solutions and paying more for those increasingly adopting suites. For example that also translates into not just higher pricing, but higher gross margin for those customers as well.
Okay, and then on the <unk>.
Okay. Thanks, Scott.
Oh I was just going to touch briefly on the on the operating margin side and you talked about the investments that we expect to make next year.
We'd say nothing too different from the approach that we've taken over this past year that has been working really well.
And so as mentioned, we do expect to grow sales force capacity in the low to mid teens percentage range also going to continue to invest in a really exciting product roadmap that we have but doing most of that in lower cost locations. So feel really good about the leverage that we're going to be driving across the business as we move through the coming year.
Sure.
Okay perfect. Thanks, Thanks again.
Your next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.
Hey, guys. This is chased out of it on for Brian . Thanks for taking the question.
Bach signs and we couldn't really encouraging early results coming out of that I'm. Just curious what else can we look for from a product perspective that could fit in an adjacent kind of M&A driver for business.
Yeah. So.
So a bauxite overall, we're very very.
Happy about the early results and traction that we're seeing.
Great use cases across a very wide range of industries, and we're going to continue to follow up with more and more updates to to the street around how that product is performing and being adopted.
As it relates to new product expansion areas and I would say kind of both with and without M&A. As an example, we think about a very.
<unk> <unk>.
Technology tuck in acquisitions, where it makes sense to accelerate our product roadmap, but.
But at the same time, the vast majority of our innovation is going to come organically.
But youre going to see us continuing to expand out the content cloud.
As this year goes on and certainly the next couple of years. If you think about that content lifecycle that we continue to show from the moment content is ingested into box all the way to where it's retained an integrator to any platform. There are various components around that lifecycle, where we're either going to be doubling down into additional.
Deep spaces.
In security and compliance and in areas, where we think we can expand into new adjacent collaboration and content markets that are that all makes sense on our platform. So stay tuned throughout the year, we'll be sharing more updates on this front as well as a little bit of a preview at our financial analyst day, but it's really all about making sure that customers can complete that complete.
Content lifecycle on a single platform without having to have fragmentation of their content. So how you create a share had collaborate.
And in and publish and get insights from content all in a single architecture. So so more to come on that front.
Very helpful. Thanks, guys.
Yeah. Thank you.
Your next question comes from the line of Erik <unk> with JMP. Please proceed with your question.
Yes, congrats on a good quarter.
One just on the box side curious, if you're getting a sense of how how thats doing with new customers versus existing customers. I think initially the lower hanging fruit was with existing customers, but any update there and then secondly, just curious in terms of your.
<unk> two.
Two public cloud based infrastructure, how far along in that process are you and how long are you still paying.
Double double for areas, where you have overlapping infrastructure.
Yeah, so on the on the bauxite in front.
Core focus number one is get bauxite in the hands of all of our existing customers.
We have well over 100000 customers. So so that's sort of the P zero for the company and what we're spending the majority of our energy on at the same time it becomes a great new sort of wedge use case that we can go into new customers with around talking about how they're driving digital transformation around their content, whether that's contracts are N D as our.
Compliance documents that need to get signed so it becomes yet another use case that we can go drive product adoption and our new customer demand from but I'd say, it's very early in terms of the overall results on that but you can assume that every customer we're showing up to today.
Bauxite is certainly being talked about and shown incentive use cases that we're going after so so great kind of early I think signal from that set of conversations and pipeline build over there.
And the second question around public cloud. So this is a multiyear journey that we've had we just as a reminder, we've been using and leveraging the public cloud for well over a decade, but we made the decision to leverage it even more significantly to allow us to innovate faster deliver for customers globally more efficiently and then ultimately be able to scale our platform in a very <unk>.
Cost effective way, so we've been moving more and more of our infrastructure to the public cloud.
We tried our best to have as limited of this sort of double spend challenge as possible. It is unavoidable in some areas of the infrastructure, but the teams have done an incredible job of really getting very very methodical about which parts of the architecture moved to the public cloud in which sequence to reduce that double the double spend element, but again some of it's unavoidable due to leases.
And existing commitments, we have on the on the hardware, but but again over the next couple of years, you'll see us wind off more and more on the sort of kind of core box manage infrastructure and more and leverage more and more in the public cloud.
Very good thank you.
Yeah. Thank you.
Thank you. Your next question comes from the line of Snake.
With Craig Hallum. Please proceed with your question.
Hi, This is Nick maniaci on for Chad Bennett, Thanks for taking our questions. So I'm just curious on what you guys are seeing in the SMB market any commentary you can provide on the demand environment and customer retention rates at the lower end of the market and then any assumptions, we should be aware of related to that somebody that are baked into the guidance going in.
This year.
So qualitatively I would I would just share that F&B demand has been very strong frankly throughout FY 'twenty to Q4 was another milestone quarter for us on that front, but that but really the buildup was throughout the year I think what we saw in and kind of calendar 2020, and our fiscal 2021 was smbs.
We're really obviously most impacted in many respects by Covid.
And they weren't hiring as quickly you know dealing with layoffs or furloughs or government.
<unk>.
Stimulus was a complicated matter and until we saw a reduction of of that momentum still still put up growth at year, but not as much as we had anticipated coming into now calendar 2021 and fiscal 'twenty to 'twenty two last year, we saw a real resurgence on the SMB and mid market parts of our business. So our kind of kind of global <unk>.
Commercial segments and I think our strategy is really well tuned for that commercial segment back to back and what we've been chatting about on this call. If you're a you know 200 or 300 or 500 person business.
I mean, maybe smaller 52 to a few hundred employees.
You might have a relatively concentrated it organization and being maybe a handful of folks that are that are running it for your for your organization, but you have all the exact same demands as a large enterprise I mean, if you're if you're an investment bank if you're in life Sciences. If you work in the government supply chain that needs you have around data security compliance cost.
Sent management collaboration are the exact same needs is a very large fortune 500 enterprise.
And yet your challenges is it sort of fewer resources to manage all of those systems and then obviously budget constraints about you know you don't want to have to have 10 different vendors that youre dealing with you don't really get economies of scale in that sense. So by having a single platform a single content cloud that manages everything from the workflow and E signature and security and content management.
All of your content all in one bundle that becomes very very compelling and so we've seen the results of that.
In our in our results throughout FY 'twenty, two and we expect that that set of transistor continue and just to build on that a bit for <unk>.
Some of the other parts of your question, we had mentioned in our prepared remarks that this past year, we generated double digit percentage gains in our sales force productivity that holds true both for our enterprise business and our SMB business, So definitely seeing healthy growth across all parts and then in terms of the customer economics do you asked about a while.
Our smallest customers do tend to see a slightly higher churn rates as you would expect the net retention rates are actually pretty comparable between SMB and enterprise because of the strong expansion and a lot of the dynamics that that Aaron mentioned.
Okay.
Great. Thank you.
Thank you. The next question comes from the line of Josh Baer with Morgan Stanley . Please proceed with your question.
Great.
And to the to the year and a strong guide wanted to double click on a couple of the margin.
Questions and conversations we've been having.
So on gross margins like we've seen b expansion and that continues into 'twenty, three and sort of talk through the pricing and the infrastructure efficiencies. So the question is how high can gross margins go and can they get to 80% plus like they were.
For you guys background your IPO.
Yeah. So so we do see continued upside, especially as we execute against the migration strategy that that Aaron talked about earlier, so we do see.
76% is not where that caps out and will continue to work on driving that migration and additional efficiencies to continue expanding margins beyond FY 'twenty three.
Okay, and then on the FY.
FY 'twenty three operating margin target of 22.
On the surface it doesn't actually show the the opex leverage because of the strong gross margin expansion, but then you talked about the FX impact travel and expenses coming back I assume theres some wage inflation increases talks.
<unk> talked about sales and marketing investments. So is there any additional context or quantification of some of those factors.
That are impacting some of the different opex lines.
And if there's any other color would be helpful. Thanks.
Sure.
On that either you are.
Nailed the dynamics it exactly and.
To break those apart on the FX side of things.
Spec that to be a roughly one percentage point impact to operating margin next year.
And that really shows up across all line items of the P&L.
So kind of understates the true leverage that we're driving in the business and then in terms of some of those expenses like teeny events facilities would say that the savings that we realized is as we moved into this environment was in the 200 to 300 basis point range, we expect some of the.
To come out back, but not all of it because of the continued focus that we have on cost discipline. So you can think about it as you know more than 100 basis point impact and then the actual.
You know kind of size is going to depend a little bit on what this return to our hybrid office space approach looks like and then the last thing I'd note is that within the year, we do expect to see our operating margin consistently expand across the course of the year.
So to deliver higher operating margin in the back half versus the front half yeah, and just to just to build on that Josh for five seconds.
Are unmistakably focused on making sure we drive profitable growth going forward, which will show up as additional leverage in the business.
And as Bill noted that kind of seasonality trend youll see as well, but but it's something that's a core focus of ours going forward.
Awesome. Thanks.
Thank you and this concludes our question and answer session I'm, turning the call back to our speakers for any closing remarks. Please go ahead, great. Thank you and thank you everyone for joining us. This afternoon, we look forward to updating you on our next earnings call and just a quick reminder, as Aaron and Dylan I've mentioned, we are hosting.
Our fiscal 'twenty three financial Analyst day, it's virtual on March 16th and registration is available on our IR website. Thank you so much.
Thank you. This concludes today's conference call. Thank you all for participating you may now disconnect.
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