Q1 2023 Box Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Good afternoon, My name is Anna and I will be your conference operator today.
At this time I would like to welcome everyone to the box first quarter fiscal 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. He would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again press the star one thank you.
Do you have O'neill you may begin your conference.
Good afternoon, and welcome to box its first quarter fiscal 2023 earnings conference call I am simply have Pioneer's, Vice President Investor Relations on the call today, we have Aaron Levie box co founder and CEO and doing Squawk box co founder and CFO . Following our prepared remarks, we will take your.
Today's call is being webcast and will also be available for replay on our Investor Relations website at box Dot com forward crash investors.
Our webcast will be audio only however, supplemental slides are now available for download from our website.
We also post the highlights of today's call on Twitter at the handle at box Inc. IR.
On this call, we'll be making forward looking statements, including our Q2 and full year fiscal 2023 financial guidance.
Our expectations regarding our financial performance for fiscal 223 in future periods, including our free cash flow gross margin operating margins operating leverage future profitability net retention rate unrecognized revenue remaining performance obligations revenue and billing and our expectations for <unk>.
The size of our market opportunity, our planned investments and growth strategy, our ability to achieve our long term revenue and other operating model targets.
The timing and market adoption of and benefits from our new products pricing models in partnership.
The impact of our acquisitions on future box product offering the impact of COVID-19, pandemic on our business and operating results and.
Our capital allocation strategy, including <unk>.
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 filed with Securities and Exchange Commission, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call.
Forward looking statements are being made as of today May 26, 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 and not as a substitute for or in isolation from our GAAP results you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press.
Please and then the related Powerpoint presentation, which can be found on the IR page of our website unless otherwise indicated all references to financial measures are on a non-GAAP basis with that let me hand, the call over to Aaron.
Thank you Cynthia and thank you all for joining the call today, we're off to a strong start in fiscal 'twenty, three delivering first quarter revenue growth of 18% above our guidance and representing a fifth consecutive quarter of accelerating revenue growth our continuous focus on profitability resulted in non-GAAP operating margin of 12.
The 1% up 360 basis points from 17% a year ago.
Does have this strong momentum and even with the impact of FX, which Don will describe in more detail. Shortly we are raising the midpoint of our revenue range and raising our operating margin guidance and EPS guidance for the full fiscal year.
In Q1, we continued to execute on our product roadmap as we address a $74 billion market opportunity.
We announced box canvas, our native virtual white boarding and visual collaboration solution. While also launching significant product enhancements with box sign workflow with box relay and security and compliance with box shield, we deepened integrations across several of our key technology partners and we expanded our <unk>.
Customer relationships, while continuing to add new customer logos.
The success of our platform strategy as shown in our strong customer metrics as customers are leveraging our content cloud platform to transform their businesses and power and new ways of working.
In the first quarter, our net retention rate was 111% up from 103% in the prior year driven by strong customer expansion rates.
And for our large deals over $100000. We had 16, new deals and we had a 73% attach rate of suites up from a 49% attach rate in Q1 of fiscal 'twenty. Two we continue to see healthy attach rates in the U S and EMEA with improvements.
Of our attach rates in Japan.
Our strong Q1 fiscal results and.
Customer metrics underscore that our growth strategy is working and that we are aligned to the key trends that are driving the future of work.
Companies today are dealing with a more and more distributed and hybrid workplace.
Implement the digital transformation of their business processes and face increasing security challenges across the organization.
Our content cloud addresses these trends by building out capabilities to power the full lifecycle of content in a single platform.
We continue to double down on these product capabilities and investments, we will add more value to our customers and expand boxes Tam.
In Q1, we announced a major new element of our content cloud with box, Kansas, allowing us to enter an additional fast growing market with our platform.
With the prevalence of remote and hybrid work now a permanent part of nearly every business the ability to seamlessly collaborate on any type of content is critical.
Over the past couple of years, we've seen a huge increase in companies looking to collaborate on visual content from product design Storyboard, then project plan to flow charts diagrams and more.
Fox canvas isn't intuitive visual collaboration and white boarding experience the power's free form collaboration while leveraging all of the strength of the security governance and compliance built directly into box.
With box canvas officially launching later this year it will be included across all of our product plans, adding even more value and enabling our customers to benefit from box and new use cases across their organizations.
With products like box canvas box sign and box notes delivered as included capabilities and boxes core subscriptions and bundles customers benefit from getting new value from box instantly.
Especially as companies look to consolidate spend from various point solutions box remains in a strong position to help retire disparate esignature technologies collaboration tools enterprise content management system and much more it's a win win that drives ROI for our customers.
As well as providing additional upside as customers move up to higher tier plans for more features.
Since our launch of box sign this fall, we have announced major new enhanced capabilities integrations and developer tools to power, even more advance signature based processes.
When customers move more of their transactions to the content cloud.
We are pleased with the momentum we are seeing in customer adoption and use of bauxite.
First quarter customers include a global legal services provider that move to box with a six figure deal in order to provide its network of lawyers, who work on the most sensitive matters with secure internal and external content collaboration along with box sign force, it's secure and affordable esignature option.
For boiler plate agreements.
A U S based real estate investment Trust purchased box in Q1, and deploy box sign across the organization to support the signing and collaboration around commercial leases.
And finally, a global Biopharma company, who has been a box customer since 2018 move to enterprise plus in Q1 with plans to use box sign which will be critical as the company continues to scale and they release new drugs to market.
Boston Security capabilities also remain a critical driver of why customers choose our content cloud.
Data security compliance and privacy remain more important than ever.
In Q1, we launched new capabilities for box shield, our advanced security solution for protecting content in the cloud, including the ability to apply malware deep scan to Microsoft office files, and adding automatic water marketing to classified documents.
Throughout this year, we will continue to extend our leading security compliance and data governance capabilities.
Finally, the ability to integrate deeply across the SaaS landscape is an integral part of our product strategy.
We recently announced a deepened integration with zoom with the launch of the box App presumed chat channels to make it even easier for users to work seamlessly together across the two platforms.
Q1, we also announced the all new box App Center, a destination for users admins and developers to easily discover and access the more than 1500 applications that integrate with box highlighting the power of boxes deep partnerships with Microsoft Google Black.
Zoom Webex serves now IBM and many other major technologies.
As we look forward in FY 'twenty three we believe it will be boxes biggest innovation year ever.
We will continue to focus on our three core Differentiators frictionless security and compliance.
Endless collaboration and workflow and then open platform that's integrated into every application.
And we'll continue to build products that reinforce each other following the full lifecycle of content and empowering our customers to save money by retiring other tools.
Above all we will ensure that our customers derive more and more value from box as they move more of their data onto our platform.
This is a virtuous flywheel that drives our business model and we're only in the early innings of what's possible.
Turning to go to market as we discussed during our analyst day in late March our strength and business momentum is a result of a number of initiatives that we've undertaken the scale, our land and expand go to market motion.
These have included optimize pricing and packaging with our latest multi product offering enterprise plus in Q1 enterprise plus accounted for more than 80% of our multi product suites deals a remarkable achievement since the launch of E plus in July of last year and a much quicker ramp that we saw.
When we launched our first suites.
Our Q1 customer expansions and new wins with enterprise plus include an agency of the United Nations. The purchased enterprise plus in key states as they look to use box with other cloud apps, including sales force to build a modern digital platform for the approval of new vaccines and medicines from across the globe there are.
This now is currently carried out by email paper USB sticks and Dvds.
A leading biotech company that invents life transforming medicines for people with serious diseases move to box in a six figure enterprise plus deal. This new customer will be using box for regulated content and high value use cases, the fact that box imports GSP compliance and that our operating.
<unk> is a better experience to both internal and external parties as they worked together on clinical trials was critical for the selection of box with the decision makers at this company.
And finally, a major automotive company purchased box with a seven figure enterprise plus deal, enabling them to eliminate on premises file servers and solve key security issues by replacing file servers that box that will centralize content management and simplifies secure collaboration internally and externally with partners.
<unk>.
Our strategy aims to bring the full power of the content cloud to our customers and we know that when a customer adopts our multi product offerings, we see a greater total okay.
Value higher net retention higher gross margin and a more efficient sales process.
We are also continuing to double down on all of our efforts around deployment adoption and truly helping our customers transform with box.
Such in Q1, we launched our new box consulting portfolio, a completely redesigned program that makes it easier to position sell and deliver these critical customer success services to empower any organization to achieve their content cloud goals.
In summary, our strong first quarter results and the continued momentum we are seeing in our business is the direct result of the execution and focus of the team and box.
Despite macro trends and currency impacts we have continued to execute on our content cloud platform to ensure that we will continue to drive further annual revenue acceleration at the same time, we remain steadfastly committed to expanding our operating margin by focusing on the highest ROI initiatives.
It is across the business scaling in lower cost locations, improving gross margin and more just the future of work is here and the content cloud platform. It has never been better positioned to capitalize on these trends of hybrid distributed in digital first work with that I'll hand, it over to bill.
Lynn.
Thanks Aaron.
Good afternoon, everyone and thank you for joining us.
In fiscal 2023, we have three key financial objectives excel.
The accelerating year over year revenue growth.
Expanding operating margins through our focus on operational excellence and prudently allocating capital to optimize shareholder returns.
We had a strong start to FY 'twenty three deliver against all three of these objectives.
As a result, we are raising the midpoint of our revenue guidance and raising our operating margin guidance and EPS guidance for the full fiscal year.
In Q1, we delivered revenue of $238 million up 18% year over year, a fifth consecutive quarter of accelerating growth and above the high end of our guidance of $235 million.
This outperformance was driven by strong deal pacing and higher than expected nonrecurring revenue.
Our Q1 revenue growth rate includes an incremental impact of negative one percentage point from FX versus our initial expectations.
We continue to see strong demand for our content cloud platform.
In Q1, we closed 6100, K plus deals of which 73% were suite deals.
As our customers are increasingly adopting products with more advanced capabilities roughly 37% of our revenue is now attributable to customers, who have purchased suites and exceptional 12 percentage point increase from 25% a year ago.
We ended Q1 with remaining performance obligations or ARPA of 1.1 billion, a 16% year over year increase.
Our RPM growth was negatively impacted by six percentage points from FX.
We expect to recognize more than 60% of our RP over the next 12 months.
Q1 billings of $172 million grew 8% year over year.
Our billings growth was negatively impacted by an incremental four percentage points versus our initial expectations due to currency headwinds.
Our net retention rate at the end of Q1 was 111% up 800 basis points from 103% in the prior year.
We continue to see strong customer expansion and a stable annualized full churn rate of 4%.
We still expect our net retention rate to remain roughly consistent throughout FY 'twenty three.
Gross margin came in at 76, 3% up 330 basis points from 73, 8% a year ago.
Q1, gross profit of 182 million was up 23% year over year exceeding our revenue growth rate by a full 500 basis points.
We are delivering material profitability leverage via our public cloud migration strategy and we remain focused on unlocking additional leverage to improve our long term gross margin profile.
Q1, operating income increased 43% year over year to $49 million and our 26% operating margin was up 360 basis points from the 17.8% we recorded a year ago.
We delivered 23 of diluted non-GAAP EPS in Q1 up from 18, a year ago.
Q1, non-GAAP EPS includes a negative impact of <unk> <unk> from currency headwinds.
I'll now turn to our cash flow and balance sheet.
In Q1, we delivered cash flow from operations of $108 million up 14% from the year ago period.
We also generated free cash flow of $91 million a year over year improvement of 20%.
We generated record cash flow from operations and free cash flow in Q1, driven by very strong collections, including several large payments that we had expected to collect in Q2.
Capital lease payments, which we include in our free cash flow calculation were $12 million down from $13 million in Q1 of last year.
For the full year of FY 'twenty three we continue to expect Capex and capital lease payments combined to be roughly 5% of revenue in Q2, and roughly 5% of revenue for the full year of FY 'twenty, three as compared to 6% of revenue last year.
Let's now turn to our capital allocation strategy.
We ended the quarter with $520 million in cash cash equivalents restricted cash and short term investments.
As we've been doing we expect to use our strong balance sheet and our increasing free cash flow generation to execute a disciplined M&A strategy to enhance and accelerate our product roadmap, while also generating shareholder returns via additional stock repurchases.
In Q1, we repurchased four 2 million shares for approximately $110 million.
As of the end of Q1, we had approximately $148 million of remaining buyback capacity and we remain committed to opportunistically returning capital to our shareholders.
With that I would like to turn to our guidance for Q2 and fiscal 2023.
As you know since our prior earnings announcements on March 2nd 2020 to the U S. Dollar has strengthened versus the currencies in which box transact our international business, resulting in a larger than expected FX headwinds to both Q2 and the full year of FY 'twenty three.
As a reminder, approximately one third of our revenue is generated outside of the U S.
The following guidance reflects the strength and momentum of our underlying business and also includes the impact of any expected FX headwinds.
For the second quarter of fiscal 2023.
We anticipate revenue of $244 million to $246 million, representing 15% year over year growth at the high end of this range.
We expect our non-GAAP operating margin to be approximately 22%, representing a 130 basis point improvement year over year.
We expect our non-GAAP EPS to be the range of 27% to 28.
And GAAP EPS to be in the range of negative <unk> to negative one.
On approximately 152 million diluted shares and a 146 million basic shares respectively.
For the full fiscal year ending January 31 2023.
As a result of our strong Q1 results and despite the impact of FX headwinds, we are raising the midpoint of our revenue range and raising our operating margin guidance and EPS guidance for the full fiscal year.
We now expect FY 'twenty three revenue to be in the range of $992 million to $996 million up 14% year over year at the high end of this range.
Including the impact from FX headwinds, we anticipated when we gave our initial FY 'twenty three guidance. We now estimate the full currency headwinds to FY 'twenty through revenue growth to be approximately three percentage points.
We are prudently focusing our investments on compelling long term growth opportunities and our disciplined cost savings initiatives are generating efficiencies across the business.
As a result, we are raising our non-GAAP operating margin guidance to be approximately 22, 5%, representing a 270 basis point improvement from last year's results of 19, 8% and an improvement over our previous guidance of roughly 22%.
We are raising our FY 'twenty three non-GAAP EPS to be in the range of $1 11 to $1 15.
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 five to negative <unk>.
On approximately 147 million shares.
Our FY 'twenty, three GAAP and non-GAAP EPS guidance includes an expected incremental impacts from FX of approximately <unk> <unk> versus our initial FY 'twenty three guidance.
For the full year of FY 'twenty three we continue to expect billings growth to be roughly in line with revenue growth with expected variability on quarterly growth rates due to the dynamics of prior year comparisons and the timing of large customer renewals.
Directionally, while billings growth rates are expected to be in the mid single digit range. In Q2, we expect our billings growth rate to exceed our revenue growth rate in the second half of the year.
We estimate the currency headwinds to our FY 'twenty three billings growth rate to be approximately four percentage points.
We continue to expect our FY 'twenty, three RPM growth to exceed our anticipated full year revenue and billings growth rates.
Finally, we continue to expect our FY 'twenty three revenue growth rate combined with our FY 'twenty three free cash flow margin to be at least 37% a 400 basis point improvement from last year's outcome of 33%.
In summary, the strong execution and business momentum we saw last year continued in Q1, as we delivered accelerating revenue growth, while improving profitability year over year.
In addition, we remain dedicated to a shareholder friendly capital allocation strategy that positions us for strong execution in the years ahead as we build on our content cloud leadership position.
With that Aaron and I would be happy to take your questions operator.
Operator.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question today comes from the line of Jason Ader with William Blair. Your line is now open.
Thank you operator, hi, guys.
First is how are you feeling about the current demand environment.
Are you baking in any kind of.
A moderation in the demand environment and how do you think you would fare if we do enter some type of a macro downturn, especially given your seat based model.
Sure Yeah, I'll take that as Hey, Jason This is Erin so.
Overall demand remains healthy and we've got pretty good visibility into the pipeline.
<unk>.
<unk> signal from the pipeline side and just current customer activity. We believe we're well positioned for the environment. If we think about businesses that are looking to be.
More efficient automate more business processes continue to drive digital operations.
Or even consolidate and retire expenses.
I think our platform is as well positioned to capture.
More of the spend that would have gone into various point solutions across E signature workflow collaboration security and compliance.
The combination of just how we are positioned in terms of the macro tailwind on digital transformation and hybrid work as well as our ability to consolidate expenses into a single platform model I think positions us well.
Okay, Great and then one quick follow up.
Some investors have asked me or have been a bit worried about that.
The fact that current growth could be.
Driven more by just up sell to your base with enterprise plus and then once you. Once you work through some of that low hanging fruit growth could get harder how do you respond to that.
To that thesis.
Yes, so maybe I'll, let Don maybe just comment on kind of where we're at in that transition overall, but overall, if we look at the 100000 plus logos that we have on we think there's significant upside and available upsell potential within the customer base.
By both moving customers from existing plans in the E plus but then frankly the seat expansion, which again is not really driven by more head count within our customers. It's much more driven by more use cases for us to be able to drive value for them. So so between seat expansion.
Moving customers and enterprise plus as well as our monetize able elements of our platform Apis. We think that that provides very very strong upside from the current customer base at the same time, we're continuing to bring on new logos, we've had great wins, even in Q1 of <unk>.
Customers that are really committed to bringing in a content cloud platform in their organization to drive digital transformation across the across their content use cases.
Yes, and this is Dylan just to build on that and quantify the continued expansion opportunity that we have as a reminder, if you look at just purely seats in our current customers today, we have roughly seven ex feed expansion opportunity looking at the number of paid seats. They are today versus the total knowledge work.
Our population and then on top of that what we have seen very strong momentum.
With our suite sales and that now makes up 37% of our revenue versus 25% a year ago over time, we expect a significant majority of our customers to be on suite. So from both a seat expansion point of view and a continued cross sell opportunity. In addition to the new logos were bringing on we feel very.
Good about the growth that we have.
Within our customer base.
Alright, good luck thanks, guys.
Thanks, Jason.
Your next question comes from the line of Brian Peterson with Raymond James Your line is now open.
Hi, gentlemen, thanks for taking my question. So Eric one of the comments you made was about some of your customers looking to consolidate their IP footprint.
You are expanding the use cases and the value of the platform, but what have you seen that increase in terms of your customer conversations in terms of them, maybe looking to retire more legacy solutions has that changed maybe in the last two quarters.
Yes, so I think we've been dealing with the <unk>.
The general trend of customers looking to re platform their content management environment.
Now for the past few years and and so that's things like document and legacy Sharepoint environment, and so on until more or network file shares moving those to the cloud and Thats been why we have box shuttle to help with that data migration and we've been really focused on on migrating that to the cloud quite a bit I think with the addition of <unk>.
Signature with box sign and now virtual and visual collaboration with box canvas. It provides two new categories that customers otherwise have to independently spend money on that just provides additional value when you buy into the overall platform. So one example that I called out we had at <unk>.
Software biotech company that was really looking to.
It would be able to kind of get more use cases to solve with box and we ended up having a very strong champions from the finance Department.
Ultimately drive.
The usage of the box platform from a deal standpoint, and so we're now seeing the addition of more more sort of personas within our sales process finding more value with our platform. So it's not just the digital transformation side, but it's also how can we deliver cost savings we've had a number of customers already with the.
Addition of box, Kansas, which doesn't rollout even until this fall and see that as another opportunity where they can consolidate spend in the box and get more value from our platform. So I think that's going to continue to be the case, we think that sets us well for the environment that we're clearly in from a macro standpoint.
And that's in addition already to the tailwind of digital transformation remote and hybrid work and the cyber security challenges that the company space.
Good to hear and maybe just a follow up on the M&A environment, Obviously box sign has gotten some really good traction I would be curious what do you see in terms of the M&A pipeline and obviously, we've seen a correction here in the public markets I'm just curious what you are saying maybe.
Maybe on the private side, thanks, guys, Yeah, well I think generally speaking the private the private market is going to clearly go through a pretty broad scale correction as a result of that happening in the public side I would say when you think about our M&A strategy is very.
It's very surgical we look for capabilities that we need to bring onto the platform to help accelerate our roadmap and.
So we're extremely selective as it is around the kinds of technologies that we buy.
It's very possible that the prices come down on a relative basis, but we are very very focused on specific technologies and were often not paying the kind of exorbitant prices that that.
We're already kind of happening in the market just as a result of our existing kind of focus on cash flow.
And the balance sheet. So so I think prices will come down, but it doesn't change our appetite, we're very surgical and we will continue to focus on just the kind of tuck in acquisitions as appropriate to bolster up the value for our customers.
Thanks, Eric.
Your next question comes from the line of <unk> Kidron with Oppenheimer. Your line is now open.
Hi, it's actually George I want it.
So following up on the value add that you're putting into the platform could you give us some perspective on your pricing leverage at this point either from less discounting perspective, or your ability to maybe raise prices.
Yes, so I think.
Philosophically.
And kind of I think all the folks on this call know we have gone through a multi year evolution, where we had.
The single core platform of core box and then we had individual add on products and that led to some inefficiency in the sales motion.
And we've heard from customers. We think this is too slow to then adopt a lot of the value that you are building so that when we moved to suites and then ultimately enterprise pluses.
Super Sweet and and so we think that the value proposition. We're offering customers is you buy into our platform and youre going to continue to get more and more innovation from us over time.
So last year that was box sign this year that box canvas.
There's a lot of innovation around workflow automation.
A lot that we're doing on the security front and and then over time, we're able to drive more seats in the platform as one vector of upsell, we're able to command higher price per seat on a like for like basis due to to your point.
Sort of less discounting and we're able to monetize the API volume of many of these features for for some of the more custom development applications. So we feel really comfortable with our multiple vectors of monetization, but philosophically right now and in particular, given this macro environment you will certainly expect that we're in a mode of.
How do we create more value for our customers make it more of a win win that's going to make sure that customers are stickier with the platform and leveraging us for more use cases, and we think ultimately earn quite a bit of goodwill that being said, where we see opportunity where a customer maybe is sort of not at the right price point relative to the value.
And what sort of list is that we always kind of take that into consideration.
But I think we are really really satisfied with the pricing model right now so bill and I'll, let you chime in if you'd like.
No I think that most of the covers that the only thing I would add is the trends that we've been seeing recently and what we laid out at analyst day continue to play out in the business for the reasons, Aaron mentioned continuing to get more and more customers into suites.
Over the past year, we were able to increase our pricing by about 7% year on year driven by the same trends that we continue to see in the business based on what our customers are using and the value. They are increasingly getting some box.
And still in.
Maybe following up on your operating margin comments.
Can you give us an update on your thoughts for hiring at this point and then some of the other areas that you're looking to drive efficiencies.
Sure. So I would say very pleased by the progress we're making in terms of driving leverage across the business, which is what allowed us to raise our operating margin guidance by 50 basis points versus our initial guidance to 22, 5% and I would say really.
<unk> to be focused on the plans that we laid out at the start of this year. So looking to grow our sales force in the low to mid teens percentage range and do the significant majority of our engineering hiring in Poland, which is scaling really nicely.
I'd say kind of the strategy that we laid out entering the year at the analyst day remains the strategy that we're executing to.
And would note that we're also seeing some upside from the impact of things like our data center or in a public cloud migration strategy as well as the impact of that lower cost location strategy increasingly showing up in our financial results.
Thank you.
Your next question comes from the line of Josh Baer with Morgan Stanley . Your line is now open.
Great. Thanks for the question and congrats on a really good quarter, Aaron when you when you're talking about FY 'twenty three being one of the biggest innovation years yet.
Which of your key pillars are you most focused on and how should we think about this innovation just as far as completely new product modules versus.
Smaller enhanced features.
Yes.
I know this is kind of lame answer but across our three pillars, which are security compliance workflow and collaboration in our platform.
While our investment dollars are not always even across then the relative importance of them.
Shared just because that's that's sort of the value that we're delivering for our customers. So I'm extremely excited about.
Kind of capabilities that are showing up in each of these areas, but when I say the biggest innovation here is because of just the sheer breadth of capabilities across those three.
Pillars that youll see from us so significant advancements across shield and governance for advanced data security protection.
And in data privacy use cases that our customers are running into so you'll see announcements throughout the year on that front quite.
Quite a bit of work happening in collaboration and workflow so canvas.
B.
<unk> new <unk>.
Very fast growing large market that we're entering.
As a as a net new capability at the same time youre going to see kind of just run rate improvements to our collaboration functionality as well as major enhancements to our workflow suite and then of course box line, we just announced.
In Q1, some major enhancements that came out for box signed to help our customers with more advanced use cases, so the entire roadmap of bauxite is very well aligned to helping customers drive more of their esignature processes unbox retire legacy esignature vendors and into our platform and then of course, our partnerships and integrations deepening our work with.
Salesforce deepening our work with slack going really deep with Microsoft.
Across a variety of use cases, there so youre going to see investment across all of those fronts, obviously baked into.
Our targets.
And we're going to continue to add a tremendous amount of value for our customers.
Thanks, Aaron and Dylan. Thank you for all the breakouts, especially the incremental FX.
Since the last guidance.
One follow up just wondering if you broke out FX or constant currency for operating income impact and then also just wanted to ask about the nonrecurring revenue contribution in the quarter. Thank you.
Sure so on the operating margin fronts.
Pretty similar trends to what we had called out on the EPS side. So for Q1 FX had a roughly one percentage point impact to operating margin and then for the full year of FY 'twenty three we expect the total FX impact to be about two percentage points to operating margins, so about 1% incremental.
To what we had called out on our last call.
Then from a nonrecurring revenue point of view really just saw.
A lot of execution milestones completed from our box consulting business.
So did not have a material impact on our overall revenue growth as it is just about 3% of our total revenue, but was definitely nice to see uptick in and the revenue that we were able to recognize from our professional services business box consulting.
Awesome. Thank you.
Your next question comes from the line of Nick <unk> with Craig Hallum. Your line is now open.
Hi, This is Nick on for Chad Bennett, Thanks for taking our questions.
Maybe if you could just speak to what you're seeing recently in the SMB market and if two thoughts for.
For growth going forward at the lower end of the market have changed at all from a quarter ago.
Yes, so we saw very strong results in Q1.
And.
The team Kingdom fantastic momentum in the SMB and kind of commercial segment broadly.
I think that.
We're very cognizant of the macro environment from an SMB standpoint, I mean, frankly businesses everywhere, but if you think about the demands of of needing a single platform with advanced security with workflow automation with with Esignature all in one bundle.
We think we have a very strong value proposition in the SMB space and.
And so that momentum is continuing.
Continuing to.
Drive forward with again, a ton of upside when you think about those seat expansion as well as the product plant expansion that's available to us.
Got it and then Bill if you could just help me reconcile the nine point FX headwind to billings in the quarter in comparison to the four point impact and the full year guide.
Sure. So first I would note that we wanted to clarify the difference between the total FX impact in Q1 that was nine points.
Versus an incremental impact in Q1 versus our initial expectations, which was four points.
What I'd say is the reason that you see more of an impact in Q1 versus what we expect to see for the full year of roughly a four point impact due to FX is because.
That is impacted also by the impact of how FX drives the revaluation of deferred revenue on our balance sheet. So because we did see.
Pretty material movements in currency exchange rates in Q1.
<unk>.
<unk> had an outsized impact on our deferred revenue balances and therefore calculated billings in the first quarter.
It makes sense. Thank you.
Your next question comes from the line of Rishi Galeria with RBC. Your line is now open.
Hey, Aaron and Dylan. Thanks, So much for taking my question I wanted to start off by talking about Fox canvas.
Seems like a nice little introduction to land well platform. So it was a good value there, but maybe can you walk us through your strategy and monetization and opportunity. There just kind of given that you have a lot of other players are also getting into this space, including some larger Microsoft Zoom Cisco right coming out with features on that.
Not to mention some standalone point solutions. So maybe help US understand this is going to be more analogous to like your strategy with box side is there a different monetization strategy and then I've got a follow up.
Yeah sure. So so I think the way that we sort of think about it I mean, we're very very cognizant of the broader competitive landscape and understanding kind of where our products fit relative to different players that being said, we sort of think about a slight inverted way of of the market, which is we're.
We're trying to build an end to end content cloud and we asked ourselves why do enterprises want to do with their content and we do a tremendous amount of market research on trying to figure out what our enterprise looking to do in terms of collaboration and workflow and business process, an esignature and <unk>.
And as we as we think about that our job is to then build more and more value when a customer has elected to use our content cloud and so for US we already have a protocol box of nodes box notes is sort of more of a linear document that you can do project management and you do.
Taking in meetings and <unk>.
<unk> documents all of that.
Kind of knowledge management for the enterprise with inbox nodes and Kim box canvas as sort of a very obvious kind of.
Second act within this part of the strategy because it's more of a visual collaboration that you also want to be able to do so it's the brain storms of the visual content you need to review for a design meeting or.
Diagram for a business process and workflow. So really has the same kind of horizontal applicability as notes, but more of a visual content use case and so for US. It was it was actually very straightforward.
Say, okay. This is going to be a native capability on the platform, it's going to be available to literally all of our users and customers. So.
So we're not trying to specifically monetize canvas what we're trying to do is add more value for every seat that a customer has on box and we know just from our experience with many other product areas that leads to more adoption, where usage and then more upsell into the higher tier plans.
And when you think about our differentiation of security and governance and compliance all of that now comes when Youre doing that virtual whiteboard and collaboration experience. So we don't really think about it is needing to compete with any particular player as much is adding more value for our customers.
Partly explicitly because we're not charging for it separately. So there's not a sort of budget item that a customer is going to have to compare of canvas versus some other solution. It's just more value. When you do more of your work within the box platform. So does that answer the question.
Yes, absolutely that's Super helpful. And then just as a follow up I wanted to ask you about stock comp so stock.
Stock comp so I think relatively high at about 20% of revenue and I know, there's puts and takes on that metric.
Just maybe philosophically could you help us understand how youre thinking about stock comp going forward and kind of the mix of.
Auctions rsum versus cash.
No. Your stock's, obviously held up significantly better than most of your SaaS peers. Your stops not down 90% off of peak this year in a very enviable situation from that standpoint, and maybe just help us philosophically, how we should be thinking about SBC in kind of that mix going forward. Thank you.
Sure sorry.
Things that we do expect stock based comp to trend down as a percentage of revenue pretty steadily in the coming years, the leading indicator of that is the equity burn rate, which did come down even.
Over the past year by a little more than a percentage point.
And so while the philosophy of cash versus equity is pretty consistent with what we've done in the past would say that the overall more metered hiring growth and are focused on scaling in lower cost locations or some of the drivers of what allows us to show that leverage at the same time as we've talked about in the past very folk.
Just on <unk>.
Returning capital to our shareholders through our ongoing share repurchase plans, which allow us to largely offset any dilution that we see from equity compensation.
Yes, I think I think just.
Just to build on that this is something we take incredibly seriously and and I think youll see us be.
Very strong.
Especially kind of relative to the software landscape. So we're super happy about it as kind of a focus on this.
Very helpful. Thank you so much guys.
There are no further questions at this time, Ms. Cynthia Hi, Pone I turn the call back over to you.
Great. Thank you Emma and thank you everyone for joining us here today, and we look forward to updating you again on our next earnings call.
This concludes today's conference call. Thank you for attending you may now disconnect.
Please wait the conference will begin shortly.
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