Q3 2023 Box Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the box incorporated third quarter fiscal 2023 earnings conference call. All lines have been placed on listen only to prevent any background noise.
After the prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad. If at any point you would like to remove yourself from the queue simply press star one again.
At this time I would like to turn the call over to Cynthia have tonia head of Investor Relations you may begin.
Good afternoon, and welcome to box as third quarter fiscal 2023 earnings Conference call I'm, Cynthia <unk>, Vice President Investor Relations on the call today, we have Aaron Levie box co founder and CEO and Dylan Smith, <unk> co founder and CFO .
Following our prepared remarks, we will take your questions. Today's call is being webcast. There will be available for replay on our Investor Relations website at <unk> Dot com investors our.
A webcast will be audio only however, supplemental slides are now available for download on our website.
Also post the highlights of today's call on Twitter at the handle at box, Inc. IR boneless.
On this call, we'll be making forward looking statements, including our Q4 and full year fiscal 2023 financial guidance and our expectations regarding our financial performance for fiscal 2023.
2024 in future periods, including our free cash flow gross margins operating margins operating leverage future profitability net retention rates remaining performance obligations revenue in billings and the impact of foreign currency exchange rates and our expectations regarding the size of our market opportunity.
Our planned investments future product offerings and growth strategies, 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 and partnerships our ability to address enterprise challenges and deliver cost savings for our customers.
The impact of the macro environment on our business operating results and our capital allocation strategies, including M&A and potential repurchases of our common stock.
Payments 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 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 November 30th 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.
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 earnings press release and in the related Powerpoint presentation, which can be found on our investor relations page of our website.
Unless otherwise indicated all references to financial measures 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 delivered strong third quarter results with revenue growth of 12% year over year or 17% on a constant currency basis.
Our sharp focus on profitability drove record non-GAAP operating margins of 24% up 330 basis points from 27% a year ago gross margins remained strong at over 76%, while our net retention rate increased slightly versus the year ago period, we are particularly.
With these quarterly results and our substantial year over year bottom line improvements given the increasingly difficult macro environment.
Over the last couple of months I've had the opportunity to chat with dozens of <unk> and Ceos across nearly every sector and in companies large and small and it's clear that companies are facing a very dynamic environment in front of them.
In every industry companies are dealing with a complex mix of economic pressures, while at the same time needing to drive significant transformation across their businesses.
My customer conversations in our Q3 results confirm the companies are prioritizing strategic initiatives that allow them to better serve their customers operate with speed and agility enable an increasingly distributed workforce all while seeking to reduce complexity of their technology stacks and keeping their enterprises.
<unk> threat.
These remain the top priorities for nearly any business or a technology leader that you talked to today, so well it budgets might tighten and some larger deals may require more scrutiny across verticals and geographies. We are in a unique position to help our customers become future ready.
At the center of the future of work is how companies protect share and manage their most important content.
Whether it's the creative media and it goes into a blockbuster films. The research that goes into producing a new life saving drug or vaccine. The client data used to onboard a new customer or project files that go into producing a new breakout consumer product every business runs on content.
Yes, we see today that most enterprises are dealing with a mix of legacy enterprise content management solutions network file shares endpoint collaboration and signature tools to work with our content.
This fragmentation creates security risks lowest productivity and ultimately cost enterprises far more than they need to spend the box content cloud helps companies drive up productivity reduce risk and save substantially in the process <unk>.
Examples of box delivering this value to our customers. In Q3 include a global technology leader, who has been a box customer for more than 10 years purchased a seven figure enterprise plus elas in Q3 to double down on leveraging box for their business strategy, which includes M&A with box they plan to retire.
Dundon systems and technology with the goal of saving millions of dollars each year, while also improving productivity and reducing risk by protecting their sensitive data.
A global Entertainment company implemented enterprise plus in Q3 to secure and protect content and reduce cost and complexity by consolidating data assets and network file shares from M&A activities into one content cloud solution.
Despite ongoing budgetary pressures it is clear that enterprises are increasingly making strategic long term decisions on how to support a hybrid workforce and digital processes, while maintaining a high level of security and compliance.
The box content cloud is in the best position to help customers reduce the cost and complexity of their traditional content zac.
And we are continuing to double down on powering the full lifecycle of content in a single platform and address major trends and the future of work.
In Q3, we drove significant innovation across the platform, which we shared at box works in October we.
We unveiled several major enhancements to box shield and box governance, our flagship security and data governance solutions.
And box shield, we've extended our malware deep scan capabilities by adding the ability to scan additional file types, including Microsoft office reinforcing boxes commitment to supporting third party file types and helping Adnan supply critical protection to a wider variety of intellectual property.
We also announced ethical wall capabilities and box shield, which creates reinforced information barriers within the organizations to prevent communication or exchange of information that can lead to conflicts of interest between groups. This can be used to safeguard insider information, especially for our.
<unk> and financial and legal services.
And finally, we advanced our box governance capabilities to support more flexible retention policies to serve a wide range of industry use cases with future improvements to come around making it easier to export content under legal hold and providing better reporting and disposition insights and more.
Across our collaboration and workflow efforts, we launched additional capabilities in bauxite to help customers move more of their signature transactions to the cloud. These include the ability for users to published documents online for signature added signature requests in flight enjoying improved signer experience.
And much more.
We announced the general availability of the all new box notes for real time content collaboration and project management, and we announced the beta launch of box canvas, our new visual collaboration and virtual whiteboard ing tool, which will begin to rollout this quarter.
And we enhanced content insights to ensure users and enterprises have rich insights into how their content is being accessed consumed and leveraged for enhanced business intelligence.
Finally, a critical part of our product strategy is our ability to integrate deeply across the SaaS landscape and we are pleased that our interoperability has enabled us to build strong partnerships with leading technology companies at box works IBM CEO Arvind Krishna discussed how box and IBM have partnered to drive digital.
Transformation for our customers.
Kirk coatings virus, EVP and CFO of the experiences and devices group at Microsoft's spoke about the importance of openness and interoperability and boxes ongoing collaboration with Microsoft.
Thomas Kurian CEO of Google Cloud shared how boxing Google partnership enable secure modern collaboration in the enterprise.
And finally did you Patel Cisco's EVP of security and collaboration discussed how Boston Webex joint customers can now use box and Webex better together.
And more recently, we launched an enhanced box app for zoom that enables customers to automatically save select zoom recordings directly to box.
With this new feature joint customers can manage their content in one place, while maintaining enterprise grade security compliance and governance all within zoom.
Now more than ever customers are looking to partner with platforms not point tools to help them drive greater efficiency user experience and security.
As we head into Q4 and looking out into next year, we'll be doubling down across our three core pillars of innovation.
Across security and compliance will be delivering major enhancements to box shield and governance to protect customers in a very dynamic threat landscape extend our leadership in compliance and drive all new efforts on the most ambitious security and governance roadmap we've ever had.
We will be driving major product improvements to box sign to support more advanced signature processes, adding richer features in the box notes and canvas further building out relay and laying the groundwork for a major year of workflow innovation enhancing core parts of our main web application user experience deepening our development of content published.
<unk> and other advanced content management capabilities and much more.
And within our platform will continue to double down on our scalability and developer experience efforts like UI elements. In addition to our integrations with other third party applications like teams or slack zoom sales force and more.
As we've shared enterprise plus our multi product suites offering is a key strategy to increase the efficiency of our sales motion and to bring the full value of the box constant cloud to customers.
Enterprise plus brings the full suite of boxes advanced product capabilities into a simple product bundle and we've seen tremendous uptake from our go to market teams and customers.
We launched E plus just over a year ago and it has become our most successful suites launch to date in Q3 enterprise plus comprised over 90% of our suite sales in our large deals and suites represents 73% of our large deals up from 63% just a year ago.
And we are now seeing renewal rates of E plus come in higher than our overall company renewal rates.
Our Q3 customer expansions and new wins with enterprise plus include a sports marketing and talent management company, who has been a longtime box customer purchased an enterprise plus elas in Q3 as box has become a more strategic and an integral part of their business.
With this upgrade they will now be replacing their current esignature provider with box sign and we'll be using box shield to safeguard health records and ph ion box as well as protect themselves from cyber attacks with threat and malware detection.
A financial services company, providing insurance to thousands of businesses purchased box with a six figure enterprise plus deal in Q3.
Prior to box they had been running on legacy and on premises systems for their claims agents. They recognize the need to replace this system and after working on a proof of concept proving out several use cases using boxes API as they selected box as their backend content layer for their entire organization to store and work.
On sensitive client information.
We are pleased with our continued strong adoption of enterprise plus as we know that when a customer adopts our multi product offerings, we see greater total account value higher net retention higher gross margins and a more efficient sales process.
In summary, we are pleased to have delivered a strong Q3.
Since our last earnings call, the FX and macro environment headwinds have increased however, our operational discipline that led to our Q3 record operating margins will continue.
Operational discipline has been built into the core of the company.
We are proud of our demonstrated significant margin improvements and we remain committed to our FY 'twenty three operating margin target.
The confluence of remote work digital transformation and cyber security challenges is causing enterprises to rethink how they work with their content and these trends are only accelerating.
We are confident box is uniquely positioned to gain from this shift our record Q3 gross and operating margins in a very dynamic market. Once again demonstrates our commitment to increasing profitability. We remain hyper focused on driving growth and profitability as we look to the next $1 billion.
Of box revenue.
Thanks, Aaron Good afternoon, everyone and thank you for joining us.
Q3 was another strong quarter for box with revenue in line with our guidance and operating margin and EPS above our guidance.
Despite FX and macroeconomic challenges we're on track to achieve the three key financial objectives for FY 'twenty three that we laid out at the beginning of this year.
Accelerating annual revenue growth on a constant currency basis, expanding operating margins and prudently allocating capital to optimize shareholder returns.
We remain committed to delivering against our FY 'twenty three revenue growth plus free cash flow margin target of 37%, a 400 basis point improvement from last year's outcome of 33%.
Our ability to expand our operating margins and free cash flow margins. In this environment is a testament to our operational discipline and resilient financial model.
In Q3, we delivered revenue of $250 million up 12% year over year.
This was in line with our guidance. Despite the five percentage points of FX headwind that we experienced in Q3, which was one point higher than we expected when we set guidance on our Q2 call.
During Q3, we began to see an impact from additional customer scrutiny being placed on larger deals due to the macroeconomic environment in.
In Q3, we closed 77 deals worth more than $100000 annually versus 97 in the year ago period.
We now have 586 total customers paying more than $100000 annually, representing a 19% year over year increase it.
It is worth noting that our win rates remain unchanged and our average price per seat continued to improve year over year in Q3.
We also continued to drive a strong suites attach rate of 73% of these large deals.
Roughly 42% of our revenue is now attributable to customers, who have purchased suites, a significant 11 percentage point increase from 31% a year ago.
Put simply box has continued to execute well, albeit in a dynamic environment.
Okay.
We ended Q3 with remaining performance obligations or RPM of $1 1 billion, an 11% year over year increase or 20% growth on a constant currency basis we.
We expect to recognize more than 60% of our <unk> over the next 12 months.
Q3 billings of $258 million grew 12% year over year, well ahead of our guidance of a high single digit growth rate.
We drove this better than expected billings outcome. Despite an eight percentage point headwind from FX, which was three points higher than our anticipated in our guidance.
Our strong billings outcome in Q3 was due to increased early renewals and strong payment durations.
Our net retention rate at the end of Q3 was 110% up 100 basis points from the prior year.
Our annualized full churn rate was 3% versus 5% in the prior year, demonstrating stronger product stickiness with our customers.
In Q4, we expect full churn to remain at roughly 3% and our net retention rate to be approximately 108%.
We expect net retention will be impacted by lower seat expansion rates as we anticipate customers in certain segments will reduce head count and budgets amidst macroeconomic uncertainties.
Gross margin came in at 76, 5% up 180 basis points from 74, 7% a year ago.
This result reflects the efficiencies that we've been generating as we transition to running fully in the public cloud as well as the impact of higher price per seat due to strong suites adoption.
Q3, gross profit of $191 million was up 14% year over year exceeding our revenue growth rate by 200 basis points.
Once again, we demonstrated the leverage in our business and our commitment to delivering higher profitability with a 29% increase in Q3 operating income to $60 million.
Our record 24, 8% operating margin was up 330 basis points from the 27% we delivered a year ago.
We delivered 31 of diluted non-GAAP EPS in Q3 up 41% from 22, a year ago and above the high end of our guidance. Despite a negative impact of <unk> <unk> from currency headwinds.
I'll now turn to our cash flow and balance sheet.
In Q3, we generated free cash flow of 55 million a significant improvement from $31 million in the year ago period.
In Q3, we delivered cash flow from operations of $70 million versus $46 million in the year ago period.
Capital lease payments, which we include in our free cash flow calculation were $10 million down from $12 million in Q3 of last year.
Let's now turn to our capital allocation strategy.
We ended the quarter with $403 million in cash cash equivalents restricted cash and short term investments.
In Q3, we repurchased one 1 million shares for approximately $29 million.
As a result, we've been able to reduce weighted basic and diluted shares outstanding for six consecutive quarters.
We remain committed to Opportunistically, returning capital to our shareholders.
As such our board of Directors recently authorized a new $150 million common stock repurchase plan.
In addition to our robust stock repurchase program, we will continue to leverage our strong balance sheet and increasing cash flow generation to invest in key growth initiatives and to fund strategic tuck in M&A opportunities, which enhance and accelerate our product roadmap.
With that I would like to turn to our guidance for Q4 and fiscal 2023.
The U S dollar strengthened significantly versus the currencies in which we transact our international business. Following our prior earnings announcements on August 25, 2022, resulting in a larger than expected FX headwinds to both Q3 and the full year of FY 'twenty three.
As a reminder, approximately one third of our revenue is generated outside of the U S primarily in Japanese yen.
The following guidance includes the expected impacts of FX headwinds, assuming present foreign currency exchange rates.
While our strong business performance. This year has largely offset these FX headwinds we are seeing additional scrutiny and some of our larger deals as companies contend with head count reductions and budgetary constraints.
As a result of these intensifying FX and macroeconomic pressures, we have prudently adjusted our FY 'twenty three revenue guidance to reflect these dynamics.
For the fourth quarter of fiscal 2023.
We anticipate revenue of $255 million to $257 million, representing 10% year over year growth at the high end of this range.
This includes an expected FX impact of approximately five percentage points to our Q4 revenue growth rate.
Based on the increasing FX impact and the volume of early renewals that contributed to our strong Q3 billings results. We now expect our Q4 billings growth rate to be roughly 10% on an as reported basis, including an expected FX impact of approximately five percentage points.
We expect our Q4 <unk> growth to be slightly higher than our anticipated Q4 revenue and billings growth rates.
We expect our non-GAAP operating margin to increase to approximately 24, 5%, representing a 370 basis point improvement year over year.
We expect our non-GAAP EPS to be in the range of 34% to 35.
Representing a 46% year over year increase at the high end of the range and GAAP EPS to be in the range of six to seven zones.
Weighted average basic and diluted shares are expected to be approximately $144 million and 149 million respectively.
Our Q4, GAAP and non-GAAP EPS guidance includes an expected impact from FX of approximately <unk> <unk>.
For the full fiscal year ending January 31 2023.
We now anticipate our FY 'twenty three revenue to be in the range of $990 to $992 million, representing 13% year over year growth or 17% on a constant currency basis.
We are reiterating our FY 'twenty three non-GAAP operating margin guidance of approximately 22, 5%, representing a 270 basis point improvement from last year's result of 19, 8%.
We are raising our FY 'twenty three non-GAAP EPS to be in the range of $1 16 to $1 17 up from 85 in the prior year and we expect to deliver our first full year of positive GAAP EPS in the range of <unk> to <unk>.
Weighted average basic and diluted shares are expected to be approximately $144 million and $150 million respectively.
Our FY 'twenty, three GAAP and non-GAAP EPS guidance includes an expected annual impacts from FX of approximately <unk> 18.
For the full year of FY 'twenty, three we now anticipate currency headwinds to impact our billings growth rate by approximately six percentage points or two percentage points more than the impact to our revenue growth rate.
While we expect our FY 'twenty three billings growth rate to be roughly in line with revenue growth in constant currency, we expected to lag slightly on an as reported basis.
While we are not yet providing formal guidance for FY 'twenty four we thought it would be helpful to provide color on two notable items for FY 'twenty for modeling purposes.
As we have discussed previously our public cloud migration strategy will unlock significant financial leverage in our long term gross margin profile once we fully exit our existing co located data centers.
Our redundant public cloud and data center expenses will peak in the first half of FY 'twenty four.
During Q1 and Q2 of next year, we expect gross margins to dip by a couple hundred basis points from the 76, 5%, we just reported.
We expect to end FY 'twenty four with gross margins a few hundred basis points above the result, we just reported.
We expect this gross margin impact to flow through to operating margins next year with Q1, and Q2 experiencing a temporary headwind before rebounding, resulting in year over year operating margin expansion for the full year of FY 'twenty four.
As a result box will be better positioned to continue delivering profitable growth as we scale exiting next year with an even stronger operating margin model. After completing this important transition to the public cloud.
Additionally, due to the material foreign exchange movements, we've seen throughout FY 'twenty three we think it would be helpful to quantify the impact of FX on next year's revenue growth.
At current spot rates, we expect a roughly 300 basis points headwinds to revenue growth for the full year of FY 'twenty four on an as reported basis with a more pronounced impact in the first half of the year.
As is our custom we will provide detailed FY 'twenty for guidance on our fiscal Q4 earnings call.
I would like to close with how proud we are of our boxers who have been focused and executing in this dynamic economic environment.
We have created the leading content cloud platform that allows enterprises to manage the entire lifecycle of their content, while lowering costs and keeping their enterprises secure from threats.
We are on track to achieve our three key financial objectives for FY 'twenty three is the strength and resiliency of our business model has allowed us to deliver revenue growth, while expanding operating and free cash flow margins.
To sum it all up we are well positioned to continue to deliver value to our customers and stakeholders in this uncertain macroeconomic environment as we scale toward generating the next billion dollars in revenue.
With that Aaron and I will be happy to take your questions operator.
The floor is now open for your questions again, if you would like to ask a question. Please press star one on your telephone keypad.
First question comes from the line of Brian Peterson of Raymond James.
Hi, gentlemen, thanks for taking my questions. So I wanted to start off on the comments you made about deal cycles, maybe extending a little bit or increased scrutiny I'd love to understand if there's any commonality in end markets or customers, where you saw that.
Was that more impacted on the net new or was that also maybe kind of upsell cross sell dynamic as well.
Sure. Yeah. This is this is erin we actually saw kind of healthy net new demand in the quarter. So it's not a pronounced impact one way or another on that front.
We're pretty happy about some of the new logos that we brought on and in some of the new customers I think the.
The call out that we made was.
In some cases in the kind of higher end larger deal segments in some of our business segments. There was more maybe budget pressure, which could make a deal be smaller than we initially anticipated in some cases, maybe get pushed out or kind of cycle lengthened, but these were still.
In more narrow segments in the business overall I think we were pretty happy about the healthy demand that we saw throughout the quarter.
And in some customers sectors, you can see examples of of.
The company is not hiring as many people, which means that there are obviously not going to need as many seats of software kind of across the board, but but overall, we were pretty happy about what we were able to deliver for customers and just to build on that a bit Brian we did see fairly similar performance across the two main segments of our business enterprise and SMB and then to quantify.
<unk>.
The question about the net new logo. So those are pretty consistent continue to contribute about 20% to 25% of our new bookings in Q3 with the balance of that being customer expansion, so pretty consistent with the relative contribution that we've seen in the past.
That's actually pretty encouraging considering everything that's going on in the macro and maybe just a longer term question.
Heard about the next billion revenue a couple of times on your prepared remarks, but I'd just be curious if you think about all the product innovation you've had over the last year or two you know what gets you. Most excited about like really taking next step for the next billion I just wanted to kind of get some of the product thoughts on what's going to drive that growth. Thanks, guys. Yeah. So you know as we as you.
No. We're really excited about our roadmap we have the most ambitious roadmap we've had as a company while still delivering I think strong operating margin leverage in the business some of the areas that we called out.
In the call and that I would reinforce our doubling down in areas like security and compliance.
Enterprises are dealing with an unbelievable amount of critical intellectual.
Intellectual property in the form of their content mission critical data that they have to work with whether it's customer data or critics.
Critical information on projects and other pre released content that they want to be able to protect so all things data security data protection threat detection and compliance and governance youre going to see a lot of innovation around we're also going to be doubling down in areas like workflow and our E signature capabilities, so as more and more customers move to the cloud.
And they needed to go digitize their business processes.
We believe that theyre going to be looking at how do they automate workflows around their content.
And then as you're seeing with a lot of our innovation around collaboration we also see a major tailwind in as companies get more and more distributed even as they come back to offices. There are organizations are more distributed than ever before which means you need easier more secure more collaborative ways to work with content. So things like canvas notes, our core web experience or just.
To continue to improve on those dimensions. So next year youre going to see a bunch of I think exciting announcements and we have a multi year product roadmap and strategy that we're very excited to deliver.
Okay.
Thanks, Eric.
Thank you.
Uh huh.
Your next question comes from the line of Eileen of Citi.
Hi can you hear me okay.
Yep Yep.
Okay. This is our this.
This is George I'm on for Steve I wanted to ask about the <unk>.
<unk> commentary that drove some of the billing depths side, maybe you could just talk a little bit about what drove that change in customer behavior.
Sure So in Q3.
As is always the case, especially given the catalyst of being able to move into suites, we saw a stronger than typical volume of early renewals. So customers that had been set to renew largely in Q4 and then in some cases in future periods, where often in conjunction with.
Upsell to move into broader capable product capabilities. They early renewed their contract in Q3, which pulled forward some of those billings and contributed to the strength that we saw in the quarter.
Got it that makes sense and then one quick follow up on the expansion I think you mentioned you expect some segments to see some.
Our head count reductions and budgetary pressure, maybe if you could just drill down a little bit on where you're expecting to see those impacts.
Sure. So I wouldn't necessarily say a specific segment per se, but more down to specific customers.
Who had been more impacted.
By the economic environment.
And especially in those types of companies, where they're reducing head count more cyclical businesses. We're seeing increased budget scrutiny. We just wanted to be prudent as we do expect that some of those certain types of customers.
We will be seeing lower seat expansion.
As we go forward, but again I would emphasize that overall, the economics and momentum of the business are quite strong across the different segments that we serve and our full churn rate, which is indicative of the kind of stickiness value that our customers are getting out of the platform has remained very strong at 3% on an annualized base.
<unk>.
Got it thanks for taking the questions.
Your next question comes from the line of Josh <unk> of Morgan Stanley .
Great. Thanks for the question and congrats.
Aaron and Dylan on a nice quarter in a tough environment.
Wanted to ask about that.
<unk>.
If you look back to 2020, Covid, you saw real headwinds and decelerating growth.
So far it's been different with relatively stable net retention rates and you just posted a 20% constant currency billings in RPM growth. Obviously, the macro backdrops are very different but was hoping you could talk a little bit about the differences at box your positioning today versus a couple of years ago, and really wondering how the maturation.
<unk> of suites and enterprise pluses has really helped.
Or if it has helped in this environment.
Yeah, No I appreciate it.
Obviously the company is just extremely different in the past couple of years and something that we're super Super proud of and happy about both on the bottom line performance, but as you call out on the top line the product portfolio and positioning we have if I look back.
Two or three years ago, which which obviously kind of fed into the pipeline and deals that we would have been doing in 2020.
We were a very advanced secure content management and collaboration technology and platform, but that was really just the foundation capabilities for what we now deliver today, which is powering increasingly the full lifecycle of content so getting into esignature as an example, doubling down in areas like workflow automation.
Something like box shield was actually less than a year old, but when the pandemic hit which meant there was kind of less momentum on some of that security story and strategy and so today she'll being a much more advanced data security Apple platform capability for our customers.
The advancements we've done in data governance, and so when you kind of add up all of those those capabilities and the value proposition. We just looked like a very very different platform to our customers. We can retire spend on other infrastructure that they might otherwise have to go spend on we can go deeper in the business processes of the organization.
And and then ultimately obviously keep our customer secure from very ramp and dynamic threats that are out there. So that's on the product kind of capabilities and then our roadmap I think just continues to reflect that and then Conversely on the on the kind of pricing and packaging. We've made it's just much more attractive and much easier for our customers to leverage those capabilities. So again similarly.
Right when the pandemic hit in 2020.
We had only the very initial couple of quarters of suites, and so that hasnt really been kind of baked into our sales and go to market motion enterprise plus has really kind of turbocharged our suites push obviously you can see that the majority of those large deals suites that we're now doing.
Already and we continue to see that rolling out across the customer base. So the product road map the pricing the packaging and positioning for our customers and really just going after these high value use cases that that companies have around.
Around content management I think that that is what has put us in a very different position and then kind of taking a step back and just looking at the overall makeup of the business.
You've obviously driven very significant operating leverage in the company I think that has really allowed us to be much more focused on drive greater execution and so that that's also kind of paying dividends as well and.
And maybe just to build on that and compare it.
Outside of the product how that show has showed up in some of these customer customer conversations and impact in Covid, we did see a pretty pronounced impact in certain industries as well as the SMB space.
Where some companies are seeing a real step function change in their business I would say this environment is very different in addition to our having a much stronger product to address what customers are looking for customers are still continuing to spend and it just.
With more of a focus on lowering total cost of ownership driving efficiencies and doing a lot of the things that are very aligned with our especially newer product capabilities, which is why <unk> seen less of an impact to our business, even though we're certainly not immune in this type of environment.
Great. Thank you.
Yeah.
Yeah.
Your next question comes from the line of <unk> of Oppenheimer.
Okay.
Hi, This is George I wanted.
For taking my questions.
So Aaron maybe with the tighter scrutiny youre seeing can you maybe give us a bit of a update on Japan and Europe , how much of.
The demand environment, there is FX related versus what youre seeing from a dealer engagement perspective.
Yeah, So I think we're seeing pretty consistent trends.
You know fairly normalized trends across the geos.
There is there is that kind of macro overlay and dynamic that we face and offer all of our customers, where there's more budget scrutiny, they're looking to vendors that can help them reduce costs or really kind of focus on their most mission critical areas.
Areas of investment and so that's some of that flows down into our deal cycles as well certainly I was just in Japan about three weeks ago visiting customers. The demand environment. There remains I think relatively healthy.
And in Europe in the summer.
Visiting customers as well so so I would say broad based generally.
Is it still a healthy demand environment with that one overlay of everybody is dealing with the macro environment in different ways.
See that budget scrutiny shows up in deals sometimes that might be might mean, a deal that we thought was bigger it might be a little bit smaller.
In some segments that could mean that that maybe theres fewer seats involved but as you can tell with the numbers. We're we're continuing to mitigate that as much as possible and work through it.
Alright, and then maybe kind.
Building out what you're seeing from <unk>.
A competitive standpoint, and the churn and win rate commentary is pretty encouraging.
Are you seeing price pressure in any markets deal.
Pressure and or are you seeing share gains in with some of the products.
Yeah I think.
We've noted pricing.
Pricing actually has strengthened so we're pretty happy about the kind of price per seat.
The environment that we're seeing and that's really a result of again enterprise plus adding more value with.
Within the platform.
I really like our competitive position when we're working with customers being able to highlight the full value of our platform is really getting out of the conversation of sort of.
One to one competition with any particular vendor because the full value of the platform I think is showing up in an increasing way.
So that's all Super exciting and we're still even.
We're still even in advance of things like the launch and rollout of canvas. So I'm excited for adding even more differentiation and value that our customers are clamoring for.
Thank you.
Yes.
Your next question comes from the line of Chad Bennett of Craig Hallum Capital.
Yeah, Hey, guys. Thanks for fitting me in so just.
Again kind of.
Digging in a little bit into the commentary around.
I think selective large deal.
Deals that were more scrutinized or seeing kind of lower seed crop seat count growth.
I'm trying to understand kind of relative to what seems like pretty strong suite adoption.
Enterprise plus is obviously I think than.
More than well received by the base.
Our billings growth rate.
That you know, whether it's reported or constant currency actually kind of beat.
Beat expectations, not kind of it did beat expectations and kind of blew through a bigger FX headwind than you thought and early renewals, which we're not we're not hearing that at all these days or I'm not sure we're actually hearing the opposite so.
It is.
Again, not to get too in the weeds, but just the large deal scrutiny is that more of a post quarter thing youre seeing or just.
Kind of realizing kind of everything out there and what people are saying thanks.
Yes. Thanks, I mean, I think I think some of that is is trends that we saw throughout the quarter of just again deal sizing.
Some of the direct kind of interaction with customers. Some of the reports that we run of trends in the business. Some of it is is trying to anticipate continuation of certain trends in Q4, and beyond and being prudent with with our expectations. So it is kind of a mix of that.
Again it is this interesting environment, where there's a lot of I think positive tailwind with the space that we're in the kind of value that we're delivering for customers. We can go into a customer in many cases help them save millions of dollars on on spending on it.
You look at their infrastructure cost their content management systems, our security technology, It's a very very potent value proposition right now at the same time.
In some specific sectors and environments, you could have customers not hiring as many people that might mean that that may be our proposal for an MLA or or some of the seat expansion might be on hold and we have seen that dynamic play out. So I think when you kind of factor all that in extrapolate out and also I think our interest in being prudent right now that's sort of the numbers that we've kind of put out there.
Yes.
Okay, and then maybe one follow up real quick.
And in the slides you put out a while ago I think it was around an analyst day.
In terms of the lift you see when someone goes from core to suites.
Whether it's in terms of IRR of net retention.
The price per seat being I think at least two acts as all of that is still valid and real today.
Yep.
That's exactly right yeah, so the relative impact that we do see a of wind.
When customers move into suites comparing to the core we are seeing those same types of price proceed and overall economics trends really stronger top to bottom.
Average deal size and price per seat to the net retention rates to gross margins being stronger and particularly with enterprise plus now making up 90% of the suite sales that we're making has further supported that trend.
Good to hear nice job on the quarter. Thanks.
Thank you.
Okay.
Okay and as a reminder to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Richie Deloria of RBC capital markets.
Wonderful. Thanks, so much for taking my questions and nice to see continued resilience in spite of the macro I've got two questions. One for you and one for Don and I wanted to maybe drill a little bit down into suites right. So you've seen some pretty impressive attach rates as we think about your attach rates still pursuing how has that been trending.
Outside the U S and particularly in Japan, because I know you've talked about that in the past.
Yeah, we did call it out a few quarters back in Japan in particular because of the channel environment. They were maybe slower to take up our suites and enterprise plus strategy that has all but kind of turned around and were now seeing steady steady improvements on that front. So so it's not something we would call out is.
As an impediment in the in the <unk> plus performance at this point and now it's now it is just honestly.
Continue to drive this and every single customer conversation, we're in in and continue to drive it across the customer base.
Yeah got it that's all.
Paul and then I don't know if we think about your NRI.
Did tick down a little bit and then you're guiding to and taking down about another another two points is that purely because of head count or are there. Some other factors.
That might be at play there and remind us is there any FX impact that goes on it on that thanks.
Sure. So to your point it is primarily that that head count in the lower seat expansion as mentioned.
The pricing side of the equation in terms of what impacts expansion has been quite strong as has our churn rate and our expectations. There. So there's a little bit of a factor in that we're now facing tougher comps given the momentum that we've seen over the past year, but really point, primarily to head count or seat expansion to your.
Point.
Wonderful thanks, guys.
Awesome. Thanks Susie.
Okay.
Your next question comes from the line of Eric that Big Zara at JMP Securities.
Yeah. Thanks for taking the questions first off just want to make sure how much of your businesses sold your international business is sold and in local currencies is it predominantly sold in local currencies.
And then I got it.
Follow ups.
Sure. So it is.
It's roughly 85% of our international business is in the local currencies.
Okay, and then on the enterprise plus.
Would you guess that your penetration across your installed base is.
And as you increase that penetration what opportunity is there for additional price lifting once the customer is that enterprise plus because that's been a driver of your growth and is that going to slow. If you. If you start getting deeper penetration with enterprise plus.
Sure. So I can take that is.
This is Dylan, we'd say the suites penetration broadly as you mentioned is now represents 42% of our total revenue up pretty significantly from 31% a year ago. The majority of that is now E plus although.
Cause of the timing and when we rolled out enterprise plus theres still a lot of suites customers, who are not enterprise plus but expect overtime. The significant majority to move into enterprise plus just as we saw that 90 plus percent contribution to the suites larger deals. This most recent quarter and then in terms of the pricing once a customers already.
On enterprise plus they do have the strongest relative net retention rates, but that's less driven by price per seat improvements from there and more that those are the types of customers, who see the greatest value out of box the greatest stickiness. So they see the strongest seat expansion and adoption. So over time as we continue to build out our.
Product portfolio, we could certainly introduce a higher tier suites beyond enterprise, plus or change the pricing, which would be future price per seat upside, but in this in terms of what we've been seeing historically.
The strong net retention from our enterprise plus customers is primarily driven by seat growth.
Alright, very good thank you.
Your next question comes from the line.
Rich hilliker.
Sure.
Hey, guys rich hilliker from sea us Thanks for taking my question and congrats on the quarter.
It was great to see the strong RP O and steady suite attach.
Was wondering given the greater scrutiny on large deals how should we think through bookings duration from here as we move.
Into next year and relative to where it's where it has come up from.
Sure. So internally, we really have not seen much of an impact on on durations in this environment as customers are still an increasingly viewing box as a strategic long term partner.
So still continuing to sign.
Longer term deals with us.
From the contract durations point of view those have been pretty stable and have actually been lengthening slightly over the past year, which has contributed to some of the strength in <unk> growth and then payment durations have generally been pretty consistent as well.
That's all kind of steady as she goes in terms of the duration contribution of those metrics.
Excellent great to hear and maybe one for you here just wondering in this environment. How your product conversations are changing given the solution selling approach given the value you are pushing through suite I was wondering if you had any other conversations maybe around relay or ways to drive efficiencies given some of the scrutiny and then just the overall macro pressure. Thanks.
Yeah. So on the on the efficiency side for customers. We are seeing a lot of conversations around can we help you migrate from our legacy network file share or document management system or maybe sharepoint instances that's on Prem. So we're really kind of helping with those more immediate cost cutting.
Sensations on that front to help our customers on purely the expenditure side.
Probably one of the biggest trends that has frankly been consistent in the past couple of years is just data security and compliance.
I think the threat landscape is.
No surprise to everybody on this call, yes, ransomware issues, we have a lot of different kind of cyber activity happening and customers are really looking to make sure that they can protect their most important.
Content and assets inside of these files are there critical contracts financial information movie scripts.
Pre released product materials, and so being able to protect that and keep it centralized and secure platform is super Super important for our customers and so getting off a legacy system that they have very limited visibility into being able to integrate a single platform across their applications. That's.
We're seeing that be of of extreme value for customers in this environment.
Great great. Thank you.
Yes. Thanks.
Okay.
At this time there are no further questions I will now turn the floor back over to Cynthia <unk> Investor relations for any closing remarks.
Great. Thank you everyone for joining us this afternoon, and we look forward to updating you on our Q4 earnings call.
Thank you everyone for your participation. This does conclude todays event you may now disconnect.
Please wait the conference will begin shortly.
[music].
Okay.
Yes.
[music].
Okay.
Yes.
Okay.
[music].
[music].
[music].
Yeah.
Yes.
Yes.
Yes.
Yes.