Q4 2023 Box Inc Earnings Call
Good afternoon. My name is Abby and I will be your conference operator today at this time I would like to welcome everyone to the box incorporated fourth quarter and 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.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again.
Sure Juan.
Thank you.
Cynthia <unk> Vice President of Investor Relations you May begin your conference.
Good afternoon, and welcome to box its fourth quarter and full year 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 doing Smith boxes co founder and CFO .
During our prepared remarks, we will take your questions. Today's call is being webcast and will also be available for replay on our Investor Relations website.
W. W. Do you have a U box dotcom for cash investors a webcast will be audio only however, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle at box Inc. IR on this call, we will be making forward looking statements, including our Q.
One and full year fiscal 'twenty 'twenty, four financial guidance and our expectations regarding our financial performance for fiscal 'twenty for fiscal 'twenty five in future periods, including 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 head count targets and growth strategies, our ability to achieve long term revenue operating margins and other operating model targets, the timing and market adoption of and benefits from our new products pushing.
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 and operating results and our capital allocation strategies, including potential repurchase 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.
Please refer to our earnings press release filed today and the risk factors and documents, we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties 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.
First 2023, and we disclaim any obligation to update or revise them should they change or cease to be up to date.
In addition, today's call we will be discussing 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 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 Eric.
Thank you Cynthia and thank you all for joining the call today, we had a strong year with box exceeding a $1 billion annual revenue run rate on a quarterly basis and delivering a healthy balance of revenue growth and increased profitability.
For the full year, we achieved 13% annual revenue growth our operational excellence drove significant margin expansion as we achieved 23% non-GAAP operating margins up more than 330 basis points from 20% a year ago, our continued execution and our sharp focus on profitability allowed us to deliver.
On our revenue growth plus free cash flow margin target of 37%, a 400 basis point improvement from last year's outcome of 33%.
We delivered these results in the midst of a challenging macro environment and our ability to execute on delivering bottom line performance, even with the slowing demand environment is a testament to the strategies, we put in place several years ago to lower our cost structure, while still investing for long term durable revenue growth.
Turning to Q4, we achieved revenue growth of 10% year over year, while delivering record quarterly operating margins gross margins and EPS as expected. Our Q4 net retention rate was down year over year impacted by pressure from customers lower head count growth and greater budget scrutiny on internal transformation initiatives.
In some cases these dynamics impacted our customers' decisions and priorities across their business and this dynamic included some deals pushing out or deals getting incrementally smaller than anticipated leading also to a softening in billings as we exited FY2023.
Even with this added macro pressure our platform remains top of mind and extremely relevant for customers as they look to secure their most important data drive up productivity or retire legacy it systems and simplify their it stack examples of box delivering this value to our customers in Q4 include a globe.
Logistics company that upgraded to enterprise plus through a six figure deal to leverage shield governance and sign and the unlimited Salesforce and signed integrations with boxes additional security and E signature capabilities. The company expect to see significant cost savings, while improving employee productivity by eliminating the need for multiple.
Solutions.
The medical Research Center that purchased enterprise plus in Q4 will be retiring their legacy share file environment as well as other systems to reduce costs and complexity, while increasing their security posture with box. This move also sets a box for additional expansion when a new research facility opens next year.
As I continue to speak with <unk> and Ceos in a wide range of industries their digital transformation imperatives remain focused on enabling productivity across their business, especially in a hybrid work environment. They are working to optimize their spend and simplify their it stack as they move more to the cloud and most importantly.
Ensure they're dealing with a number of challenges in data security and compliance ranging from ransomware threat to data leak challenges.
At the center of these challenges is how enterprises work with their content fragmented content architectures have led to greater security risks lower productivity due to complex tools and limited ability to automate everything and too many overlapping or legacy solutions with significant management overhead we know that our content.
Cloud is best positioned to help customers solve this challenge.
Our platform enables our customers to drive up productivity in their organization simplify their it stack and optimize spend and protect their most important data from a wide range of threats and we continued to solve these challenges for our customers with even more innovation in Q4, such as releasing key enhancements to box shield, adding new authentication.
And verification controls to our platform to provide customers with greater protection against unauthorized account access we launched the public beta version of box, Kansas or virtual white boarding solution and we continue to integrate deeply across the SaaS landscape with the delivery of new enhancements to the box our salesforce integration on the Salesforce Appexchange.
And we're just getting started.
I look forward into FY 'twenty, four we will be going deeper on our three major pillars of differentiation to help protect our customers' most important data will be dramatically enhancing our core security and admin features for all customers building out further shield features to support an evolving threat landscape.
Expanding governance capabilities to support more complex lifecycle requirements and continuing to maintain our high compliance standards.
To help customers drive up productivity with seamless internal and external collaboration and workflows, we will be continuing to improve our core product experiences and usability focusing on adoption and awareness of products to all users and admins doubling down on sign and relay for advanced workflows and building out our modern collaboration experiences for the hybrid.
Workplace with notes and Kansas expanding to help our customers disseminate content to internal and external audiences more easily.
Hansen, our content insights capabilities to offer richer visibility into what's happening with your content and more with our platform. We will continue to focus on connecting content across all of our customers. It systems, making box the single source of truth for content in the enterprise and we'll continue to enhance our critical partner integrations like Cisco.
Google IBM, Microsoft Salesforce service now zoom and many others. While also further building out the tools for customers to build applications on box.
We will also be further building out our security ecosystem driving enhanced partnerships across the wide range of security partners like IBM, Okta, Palo Alto networks and Splunk.
With our content cloud we have built the defining company that helps enterprises store secure automate collaborate sign digitize annualized and gain insights from their most important information.
We know that our customers most important data resides in their content, it's their contracts they're movie scripts their marketing campaigns critical research reports project plans and more.
The recent breakthroughs in AI and large language models enable a new universe of use cases that we can also solve for customers.
Building on box skills, our framework that applies best of breed AI technologies from leading providers to our customers' content in box, we see all new use cases for enterprises to generate more value from their content. When it's in box as an example, being able to query box for the risky clauses of a particular contract synthesizer research.
To report for key insights a summarization quickly find the answer to our sales prospects question from a document extract key metadata from an invoice without any pre training and much more.
This vision will take time, but we expect the digitization of content combined with AI will bring us exciting new product opportunities in the future.
Now turning to go to market.
We continue to enable more new and existing customers to recognize the full value of the box platform with increased adoption of our multi product offerings in Q4 enterprise plus our latest suites offering was over 90% of our suite sales in large deals with suites now representing 72%.
Deals over $100000 up from 65% a year ago, we saw continued solid suites attach rates and large deals across all geographies.
Our Q4 customer expansion and new wins with enterprise plus include a multinational health care company that became an enterprise plus customer through a six figure upsell, enabling them to use box zones to meet in region EU storage compliance requirements rollout shield to safeguard their collaboration with partners and leveraged <unk>.
<unk> GST compliance to accelerate validation of complex use cases.
A leading global manufacturer that chose to go wall to wall with box with a six figure enterprise plus deal as well with box they will be able to integrate across their current tools like Microsoft teams or <unk>.
65, and ring central and execute some of their most mission critical business operations, including contract management, and R&D and sales approval workflows, while also fulfilling regulatory compliance requirements.
We recently held our global go to market kickoff and the team is fully energized to go tackle the opportunity ahead of us.
Throughout FY 'twenty four we plan to continue to focus on ensuring our over 100000 customers get the most value out of box and continuing to focus on moving more of the customer base in the enterprise plus our programs across go to market are all about doubling down on our land adopt expand retain motion through our digital edge.
Jen inside and field sales efforts working with key strategic system integrators, and technology partners applying more focus to our key international geographies as well as going deeper in key industries like financial services life Sciences healthcare public sector and more.
Finally over the past year, we have been executing on our strategy to drive long term sustainable growth. While also delivering continued operating margin improvements as we began to see the impact from the challenging macro we adapted to the environment and continued to deliver significant gross and operating margin expansion.
Even amidst the ongoing macro dynamics, which may pressure top line results of times, we remain focused on continuing to deliver bottom line improvements.
We are driving efficiency across the business, making ROI based decisions across every area of investment from product to go to market initiatives continuing to improve our gross margin by fully moving into the public cloud and driving operational excellence in everything we do.
Our resilient financial model allows us to respond dynamically to the market environment, which is even more important as we enter into a period of incredible change throughout the world of business and in technology.
There has simply never been a more exciting time for what we can now do with content and our business strategy will ensure that box is at the very center of how customers work with that I'll hand, it over to Dylan.
Thanks, Aaron Good afternoon, everyone and thank you for joining us.
As Eric stated FY2023 was a strong year for box as we delivered on the three key financial objectives, we laid out at the beginning of the year.
We accelerated annual revenue growth on a constant currency basis expanded operating margin significantly and optimize shareholder returns through a well executed capital allocation strategy. Additionally.
Additionally, we are very proud of the strong cash flow margin expansion, we delivered in FY2023.
In FY 'twenty, three we delivered annual revenue of $991 million up 13% year over year or 17% in constant currency and in line with our initial full year guidance, despite experiencing significantly greater currency and macroeconomic headwinds.
<unk> than we initially anticipated.
FY2023 also marked our first year of achieving GAAP profitability, a significant milestone for us we expanded our non-GAAP operating margin by 330 basis points to deliver 23% operating margin a full percentage point ahead of our initial expectations.
We generated $238 million in free cash flow, a 40% increase year over year.
Finally, we achieved our target of delivering revenue growth plus free cash flow margin of 37% in FY2023 demonstrating the resiliency of our financial model amidst the challenging macroeconomic environment.
Turning to Q4 revenue of $256 million increased 10% year over year or 15% in constant currency.
We ended Q4 with remaining performance obligations were RPM of $1 2 billion, a 16% year over year increase or 21% growth on a constant currency basis, and once again growing faster than revenue we.
We expect to recognize roughly 60% of our RPM over the next 12 months.
Q4, billings of $357 million grew 6% year over year or 9% in constant currency Q.
Q4 billings were partially impacted by the early renewals we experienced in the prior quarter and continued scrutiny of larger deals in Q4, we had approximately 1600 50 total customers paying more than $100000 annually, representing a 16% year over year increase.
Our suites attach rate was 72% and deals over 100, K up from 65% in the year ago period and in Q4, we saw consistent attach rates globally.
Suites customers now represent roughly 46% of our revenue up a full 11 points from 35% a year ago, demonstrating that customers are increasingly adopting suites to support high value use cases and to reduce cost and complexity for their organizations.
Our net retention rate at the end of Q4 was 108% in line with the expectations, we set on our Q3 call.
Our annualized full churn rate was 3% an improvement from 4% in the prior year, demonstrating continued product stickiness with our customers.
In FY 'twenty four we expect full churn to remain at roughly 3% and our net retention rate to be roughly 106% as we anticipate continued pressure on seed expansion rates due to the macroeconomic climate, where certain customers are reducing head count and lowering it budgets.
We expanded gross margin by 340 basis points year over year to 78, 5% driven by continued efficiencies from our infrastructure strategy and the impact of higher price per seat due to strong suites adoption.
Q4 gross profit of 201 million was up 15% year over year exceeding our revenue growth by a significant 500 basis points demonstrating the continued leverage in our business model.
As I discussed on our last earnings call. We are completing the transition to running fully in the public cloud in FY 'twenty, four and we'll see our redundant public cloud and data center expenses peak during Q1 and Q2.
We expect gross margin to be approximately 76% in Q1 and Q2 before improving in the back half of this year.
For the full year, we expect gross margin to be roughly 77% positioning us with an even more efficient underlying cost structure to expand gross margin in the following year.
In FY2023 we achieved our sales force head count target growing our sales force by roughly 15% year over year.
In FY 'twenty four we intend to grow our quota carrying sales force in the mid single digit percentage range with a continued focus on our higher performing geographies and segments.
We continued delivering on our commitment to drive profitable growth with a 37% increase in Q4 operating income.
A record 26, 8% operating margin was up an exceptional 520 basis points from the 28% we delivered in Q4 of last year.
We delivered 37 of diluted non-GAAP EPS in Q4 above the high end of our guidance and up 54% from 24, a year ago. Despite a negative impact of <unk> <unk> from currency headwinds.
I'll now turn to our cash flow and balance sheet.
In Q4, we generated strong free cash flow of $75 million, representing 124% growth from $33 million in the year ago period.
In Q4, we delivered cash flow from operations of $92 million versus the $49 million in the year ago period.
Capital lease payments, which we included in our free cash flow calculation were $11 million down from $12 million in Q4 of last year.
Let's now turn to our capital allocation strategy.
We ended the quarter with $462 million in cash cash equivalents restricted cash and short term investments.
In Q4, we repurchased 300000 shares for approximately $9 million.
For the full year, we repurchased 10 2 million shares for approximately $267 million.
As a result, we have reduced our total diluted shares outstanding by more than 3% since last Q4.
Our disciplined equity management approach and location strategy are paying off enabling us to reduce stock based compensation as a percentage of revenue by roughly 200 basis points year over year in fiscal 'twenty three despite significant headwinds from foreign exchange rates, we will continue to be prudent in our equity.
<unk> practices, we remain committed to Opportunistically, returning capital to our shareholders and leveraging our strong balance sheet and increasing free cash flow generation to invest in key growth initiatives to drive long term sustainable growth.
As of the end of Q4, we had approximately $140 million of remaining buyback capacity under our current plan.
With that I would like to turn to our guidance for Q1 and fiscal 2024.
We continued to see significant volatility in the FX environment, even more recently.
Given our international exposure, particularly in Japan, we expect FX to remain a headwind for us in FY 'twenty four.
At current spot rates, we expect a roughly 300 basis points headwind to revenue growth for the full year of FY 'twenty four on an as reported basis.
Due to the timing of when the dollar strengthened versus other currencies in which we do business over the past year, we expect to experience a 500 basis points headwind in Q1 with the impact becoming smaller throughout the course of the year.
With respect to our FY 'twenty four expectations, we have factored in the current macroeconomic challenges into our guidance and our current expectations are for this environment to persist throughout FY 'twenty four for the first quarter of fiscal 2024. As a reminder, there are three fewer days in Q1 versus Q.
For which we estimate creates a sequential headwind of approximately $9 million to revenue and 250 basis points to operating margin versus the fourth quarter of FY2023.
We anticipate revenue of $248 million to $250 million, representing 5% year over year growth.
This includes an expected FX impact of approximately 500 basis points to our Q1 revenue growth rate.
We expect our Q1 billings growth rate to be in the mid single digit percentage range on an as reported basis, including an expected FX impact of approximately 500 basis points.
We expect our Q1 <unk> growth to once again be slightly higher than our anticipated Q1 revenue and billings growth rates.
We expect our non-GAAP operating margin to be approximately 21% representing a year over year improvement. Despite an approximately 200 basis point headwind from FX and our temporarily duplicative data center expenses.
We expect our non-GAAP EPS to be in the range of 26 to 27 Rep.
Representing a 17% year over year increase at the high end of the range and GAAP EPS to be in the range of negative <unk> to negative <unk>.
Weighted average basic and diluted shares are expected to be approximately $145 million and $154 million respectively.
Our Q1 EPS guidance also includes a roughly one penny headwind due to a onetime write offs related to real estate consolidation.
For the full fiscal year ended January 31 2024.
We anticipate our FY 'twenty for revenue to be in the range of 1.15 billion to $1 6 billion, representing 7% year over year growth at the high end of this range or 10% on a constant currency basis.
We expect FY 'twenty, four and non-GAAP operating margin of approximately 25% representing a 190 basis point improvement from last year's result of 23, 1%.
We expect our FY 'twenty four non-GAAP EPS to be in the range of $1 42 to $1 48 up from $1 20 in the prior year.
Our GAAP EPS is expected to be in the range of 17 to 23.
Weighted average basic and diluted shares are expected to be approximately $145 million and $153 million respectively.
Our FY 'twenty for GAAP and non-GAAP EPS guidance includes an expected annual impact from FX of approximately <unk> 14.
Our FY 'twenty for billings growth rate is anticipated to be roughly in line with revenue growth on an as reported basis.
We expect FX had a negative impact of roughly 100 basis points on our FY 'twenty for billings growth based on current spot rates.
Finally, we expect our FY 'twenty four revenue growth rate combined with our increasing FY 'twenty for free cash flow margin to be approximately 35% based on today's current spot rates.
As a reminder, this includes the combined 400 basis point headwind from FX to revenue and billings, we discussed previously.
As we look forward to FY 'twenty four and beyond it is important to note that our ability to navigate through a slowing demand environment, while expanding profitability as a result of a multi year strategy, we began years ago to lower our cost structure, while investing for long term durable growth.
We saw the benefits of these initiatives in our FY2023 results and our outlook once again calls for operating margin and free cash flow expansion in FY 'twenty four.
While we expect our revenue growth to continue to be pressured by the economic environment in FY 'twenty five we expect to deliver a revenue growth plus free cash flow margin of 40% to 42% with a greater weighting toward profitability improvements versus our prior expectations.
We look forward to providing further details on our long term financial model at our annual financial Analyst Day in New York City on Tuesday March 14th.
The continued execution of our content cloud platform strategy and the discipline and focus of our boxers will drive a healthy balance of revenue growth and margin expansion in the years to come.
With that Aaron and I will be happy to take your questions operator.
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.
We'll pause for just a moment to compile the question and answer roster.
Yes.
Your first question comes from the line of Steve Anderson from Citi. Your line is open.
Alright, great. Thanks for thanks for taking the question here.
Just wanted to ask a little bit into and start on the outlook and how you're thinking about the.
24, and 'twenty five.
I guess within the assumptions that you are seeing currently I mean are you expecting for things to get worse here or is it pretty much as expected and then can we get a little bit more kind of details on.
How much things have changed from a duration.
Maybe deal size impact versus kind of what youre expecting expecting before.
Yes. Thanks. This is Erin I think all all maybe just first comment on the general way that we think with the outlook and then Don can hop in on the second part so we.
We want to be.
Appropriately prudent just given the trends that we see in the market I think that's it.
Reflected in our FY 'twenty for outlook.
And our initial commentary on FY 'twenty five around the kind of rebalancing a little bit more to profitability, though.
With a still a meaningful improvement on the rule of basis.
So.
I think without sort of getting into too much of the dynamics that we expect to see in the macro I think what we what we are trying to do is again drive a prudent set of expectations around what we see particularly from a topline standpoint, and then obviously make up as much of that delta in the form of bottom line improvements.
So for this year again, it's sort of.
Somewhat of a continuation of what we what we saw in Q4.
And and just putting the right level of conservatism into our into the plan.
And then to address kind of what we're seeing in some of these customer deals are you asked about durations, where we have seen a continued lengthening and contract durations. So customers are continuing to make and more regularly making long term commitments with box. That's one of the big drivers of the very strong backlog growth.
That we saw of 24% and fueling a lot of the strength in the <unk> growth as well.
Cycles overall have remained relatively stable.
And what we have seen talking about the average contract values as we mentioned on our last call. This environment is leading to.
<unk>.
Pressure on deal sizes for certain customers as they might elect to go with the smaller initial deal, but the overall customer economics have remained very strong and price per seat is actually up about 5% on a year on year basis.
Okay. Okay, no that's very helpful context there.
I guess, maybe as we think about the.
The deal environment again.
Yes.
And the execution that youre seeing from from sales reps.
I guess, we're all kind of a further details that you can provide on.
How how they performed versus the versus your expectations and how youre thinking about productivity rates kind of moving forward. Given I think you can call that mid single digit kind of investments on the sales side there.
Sure Yeah, I'll cover again some of the color commentary from the quarter and then if Don wants to build on some of the productivity piece, but.
It's an interesting environment because.
If you look across the biggest deals.
Across the period, they really do come from a wide range of industries.
Life Sciences healthcare public sector. So so I think theres there.
Sort of broad based participation across industry across segment.
And there is this sort of this overlay of.
Whatever the percentage maybe of Av.
Budget pressure, which means a deal that would have been ex is maybe now point Nymex and or in some cases, you might have a situation where a company is not growing their head count as quickly.
And so obviously, that's going to put pressure on the total seat count that that we would get from a normal expected upsell from that customer so.
So overall I think a an environment, where we saw performance across the business, but just Adam.
Lee muted level from maybe the expectations. We would have had six months prior or whatnot and then I think we're flowing through some of that prudence into the plan. This year and so as you would expect these macroeconomic dynamics do you have a direct impact and provide some headwinds to the salesforce productivity and while we.
Arent expecting the environment to get better through the course of FY 'twenty four as a reminder, because of the ramp times that we see in our sales force typically about six months for our SMB reps nine to 12 months to become fully ramped on the enterprise side the hiring.
There will be more meter this year about 5% kind of mid mid single digit range versus 15% that really shows up in capacity for the following year in FY 'twenty five so really thinking about building that durable longer term growth.
Despite some of the challenges that we're seeing this year.
Okay perfect. Thanks for thanks for taking the question.
Your next question comes from the line of George <unk> from Oppenheimer. Your line is open.
Okay.
Thank you for taking my question.
Maybe building on the overall environment.
Aaron can you give us some perspective on what Youre seeing in Japan, and Europe with respect to.
Deal engagement.
Channel support.
Yeah, So taking Japan first.
Still a very kind of healthy environment for us great great kind of channel support.
Overall.
We've gotten a lot better participation rate for instance on our suite deals in Japan. So we're very happy about that.
Can still come up more over time, but I, but.
But we're just healthy.
Happy with the momentum there and I called this out on the last earnings call, but I was in Japan in Q3.
Just a lot of great kind of customer interactions a lot of upsell potential from that customer base as well as a bunch of new logos that we see in the mix as well so very happy with the Japan performance again, all things considered with some of these macro dynamics in EMEA less of a channel centric approach there just picking up on your.
Your question, specifically, but but overall.
Working across a range of industries and segments within within EMEA.
Driving that execution with again that that slight added element of the macro environment still being in the mix. So that's how I'd kind of characterize it.
Now maybe looking at your net expansion rate the 108% that you had in the.
The fourth quarter how are you.
Accounting for that for the coming years do you expect relatively stable expansion or are you pulling back.
Expectations a bit.
Fourth quarter level.
Yes, so for the coming year, we expect that net retention rates.
To be roughly 106% so we do expect to.
Have a very strong and stable, 3% full churn rate.
But that seed expansion that we had called out earlier, we do expect that to put some downward pressure driven by the economic environment, which is really what impacts the net retention rate going forward.
Operator next question.
Your next question comes from the line of Josh Baer from Morgan Stanley . Your line is open.
Great. Thanks for the question, so hoping that you could.
Just help bridge the gap between a 15% constant currency billings growth from this year and the 10% constant currency revenue growth for next year.
Sure. So there are a handful of factors they can create a delta between the two on a quarterly basis.
So, especially.
Things like early renewal volumes can fuel billings.
You'd called out there was a large multi year prepaid.
In Q3.
That fueled billings this past year, it kind of a disproportion amount and things like that.
But then it is also just thinking through.
We pray.
Prior to the some of the economic environment.
Dynamics kicking in in the first half of the year.
Stronger billings outcomes on that side as well.
Adjusting for those unusual factors that don't flow into revenue. So while the two are fairly closely correlated if you look at deferred revenue growth ending the year in constant currency was 10%.
And that.
It tends to be more closely aligned to the following year's revenue growth.
Okay. That's helpful and then.
I wanted to ask in regards to the step down in some of those rule of targets.
I mean, I guess FY 'twenty four maybe.
A little bit more straightforward given the revenue growth guide the macro and FX. Just wondering if you could add some more context for what that saying about FY 'twenty five stepping down.
Just thinking through gross prospects that might be more positive in FY 'twenty five off of a lower FY 'twenty four.
Are you sort of incorporating macro into FY 'twenty five and.
Really just wondering if there's other changes.
Beyond macro that's embedded in that.
Our rule of change for FY 'twenty five.
Yeah, So great great question, and I'll kind of kick off and then let maybe don't build but.
We're as we're navigating this environment I think as everybody I think he is talking to other.
Other teams on this.
It's always dangerous to sort of get into a position where you are guessing when the macro is going to change for the better.
And so we're trying to.
Sort of not be in a position, where we're largely baking in too many assumptions on that front as opposed to really putting out a framework that says.
There's obviously a range of revenue growth rate outcomes, a lot of that will be seen this year in terms of what billings look like and what.
What we see on the <unk> front throughout FY 'twenty for that that obviously flows into the 25 and then as a result of that.
We think that the operating margin rate in the industry cash flow margin will be kind of functional somewhat two.
Two the outcome on the on the revenue side and so we wanted to just call out that that was going to be.
So really in that kind of 40 plus range 40 to 42.
With a greater weighting on the profitability front, and so just calling that out from some prior.
<unk> models that that had been out there and and so we still think that that's going to be a pretty meaningful uplift in there on a rule of basis, obviously getting us up above the 40, mark but that's the kind of current expectation, we're trying to lay out yes, and just to build on that a bit in terms of how it. All works together is as we had mentioned we are expecting to see a pretty challenging.
Gnomic environments throughout the duration of FY 'twenty, four and it's really.
That performance in the bookings in this coming year, that's going to drive the revenue for FY 'twenty five.
So that's kind of how it fits together as we are expecting that revenue pressure.
Persistent FY 'twenty five versus what our expectations had been a year ago, but to reiterate what Aaron said, we are expecting to deliver a greater profitability than our prior expectations and we will get into a lot more of the details independent amex and how we're thinking about the years ahead and just a couple of weeks at our analyst.
First day.
Great. Thank you.
Sure.
Cool thanks.
Your next question comes from the line of Rick <unk> from Credit Suisse. Your line is open.
Hi, guys. Thanks for taking my question.
Alan I was wondering if you can just.
Go through the trajectory of gross margin as we think about the coming year. I think you gave us some comments last quarter, but I thought it might be helpful to just hit on those again to make sure. We're on the same page as we progressed through the year and maybe where the exit rate looks like.
Sure.
We're expecting our gross margins are driven by.
Combination of the kind of peak duplicative data center expenses as well as <unk>.
FX impacts to be lower in the first half of the year about 76% and then in the back half to be in the high <unk>.
So kind of 77% for the full year next year, but then exiting in that high <unk> range, we do expect to deliver higher gross margins.
They kind of upper <unk> as we move into the following year.
So really all about that trajectory heading into FY 'twenty five is where you'll really see the impact of the data center migration.
Awesome, that's really helpful. And then last one on my side.
Was wondering if you can give us any comments or maybe we can also talk about it at the analyst David.
Your sense of where multi year bookings start to shake out.
How thats looking for the coming year.
Basically how that's trended would be really helpful.
Multiyear bookings.
We don't tend to see.
A very high volume at all in terms of multi year prepayments. So from a contract duration standpoint is increasingly the norm, especially for enterprise customers that they are signing up for multi year commitments with box typically three years, but billed annually.
We don't incentivize either customers or our sales force to sign multiyear prepaid deals.
So we don't see those very often we do see them from time to time, such as the one that we called out in Q3 were a large customer elected to do that for dynamics on their end, but we don't expect that to change in the coming year. So I would say the trend of seeing it being the standard the customers are signing.
<unk> multi year agreements prepaid annually is what we continue to expect.
So don't expect multi year prepayments to be much of a factor in the coming year.
Okay. Thank you so much.
Yes.
Your next question comes from the line of Noah <unk> from Jpmorgan. Your line is open.
Great Hey, guys. Thanks for taking our questions.
Just any other incremental color you could provide on the global go to market kickoff.
Briefly mentioned just to get a better sense of some of the key go to market initiatives heading into this year.
Just a quick follow up thank you sure yes, so so we'll definitely.
Kind of exposed a little bit more on the overall go to market strategy at our analyst day.
<unk>, but but yet a kickoff was super strong we had our whole global set of go to market as well as the broader box population kind of tuned in and attend.
And I think it's really all about aligning our go to market organization to the biggest trends.
And conversation that we're seeing with customers right now and so when I talk to <unk> and Ceos in the broader team does we tend to still see that these digital transformation initiatives are still very very much kind of front and center in every organization every CIO and CEO is looking at how do they drive productivity and particularly in this kind of hybrid work.
Environment, and with kind of a greater degree of automation or AI, we're seeing customers really really focused on how do they get more leverage for their it spend and so how do they simplify their it stack how do they make sure. They are more integrated platforms and then finally, just data security remains very front and center for all of our customers and so the kickoff.
It's all about how do we align that set of conversations with our message and our strategy as we take that to our customers. So a lot of effort around how do we drive our enterprise plus deal motion, so getting more and more customers into our enterprise plus package, we have kind of great internal initiatives around new logo generation in particular in <unk>.
<unk> enterprise segments. So we've been seeing a lot of great success there.
How do we continue to drive the greatest amount of adoption on our on our product, whether that's kind of the core foundation product or or even some of the newer newer initiatives that we've had in newer product. So really kind of a lot of the blocking and tackling and enablement of our go to market teams, but but making sure that our message and our strategy is.
Very very tuned in very aligned to what we're seeing with customer conversations right now.
Yeah.
Okay got it that's really helpful and then.
It was touched on this a little bit briefly but how can you sort of use large language models to really drive value for customers.
Should we expect something in the near term.
Thanks.
Yes. Thanks.
Obviously, a topic I'm personally very excited about can't get in any timing at the moment are also obviously a bunch of teams internally what kind of.
Freak out so, but what I would say is the general way to think about it is if you take something like chat GBT.
Learned.
All of the words across all of the Internet and ends up being this incredibly helpful assistant.
Using using that the language has learned from everything.
Well one of the amazing use cases as well what if you could prompt that kind of model.
With existing data and.
And obviously, we we happen to help customers manage tens of billions of files and in particular, a large amount of documents and we think there is a lot of potential for what happens when you can begin to synthesize the information those documents and I called out a couple of examples in the in the prepared remarks, but if.
You can summarize content or be able to prove it for four important insights are we able to generate content in the future. So we think there's a wide range of use cases that are going to be very relevant for enterprises, and we think we're highly differentiated because of our focus on data security and privacy on compliance.
So we can we can really kind of work with customers to ensure that when we bring AI to their content. It's done in a way that keeps their data extremely private and then the other major differentiator. We have is we can play really the role of a neutral platform, our Switzerland approach where.
I think theres going to be a lot of leapfrogging of model advancements between open AI, and Microsoft and Google and Amazon and maybe other vendors and so our ability to offer a range of technologies to customers. We think puts us in a very advantageous position over the long run as customers think about having a future proof architecture. So we're very excited it's extremely.
Kind of early at least in this new wave. It's one that we're very prepared for because of our efforts around box skills, but.
Stay tuned as we as we expose more about our plans here.
Thank you operator next question.
Question comes from the line of Rishi do Larry Yeah from RBC capital markets. Your line is open.
Hi, This is Richard Poland anchor issue jewelry, thanks for taking my question.
Just kind of given the expectation around retention rates coming down a couple of more points.
Can you help us kind of bridge, where some of that contraction is coming from is it mostly on the seat side or do you kind of are you expecting to bacon.
Slower overall kind of upsell and cross sell suites notion.
So it really is primarily on the seed side.
So if you received from them from an expansion point of view, we've seen as mentioned, both very strong and stable.
Retention of seats as well as.
The kind of cross sells the adoption of suites and enterprise plus in particular as we had noted that was up a very strong 11 points year over year. So really pleased the momentum there and thats, having a nice impact on the pricing as well so when we think about the net retention rate that.
Kind of a.
The reduction is really coming primarily from seed volumes.
Got it that's very helpful. And then if we were just to kind of break apart the demand trends between the SMB side and the enterprise side of the business are there kind of anything that you would call out that are signaling differences between the two or is it kind of pretty similar across the business.
Yeah, it's actually been a pretty consistent.
So.
Both across the different segments of the business as well as industries.
Sure.
For the most part we've seen just kind of general.
Softening related to the macro but no particular parts of the business that we'd call out that are seeing any kind of outsized pressure.
Got it very helpful. Thank you.
Thanks.
Your next question comes from the line of John Murphy from Raymond James Your line is open.
Hi, Thanks for taking my question. This is John on for Brian .
Just curious.
Could talk about the puts and takes you're seeing as we head into FY 'twenty four and into FY 'twenty five because on one hand, I understand the headcount reductions, but with your expanded platform in areas like sign in canvas I'd imagine you'd be in a prime position to be a beneficiary of vendor consolidation. So I just wanted to get some color there.
Yeah, I think that that's a great way to kind of think about it which is on one hand.
We have seen and then Don just kind of articulated.
If you have a kind of slower head count growth across various industries that were more used to faster growth.
That kind of creates some normal seat pressure.
From an expansion standpoint at the same time, we have a broader value proposition.
I think we have increasingly become more strategic for our customers as a result of things like sign in workflow and canvas and shield and that's letting us in some cases and don't noted this race.
Drive our seat prices up as customers expanded into things like enterprise plus so.
It's definitely an interesting market because we still see very very healthy momentum in a broad set of industries broad set of segments, but you just have that sort of added pressure on on.
Kind of maybe some of the normalcy growth you would see in some segments.
But but overall I think the message of consolidation simplifying our it architecture being able to bundle box in such a way with these add on products and a much more streamlined approach where a customer can go and replace three or five other technologies is extremely compelling and I've been having a number of conversations with customers that now.
You know kind of start the conversation with Hey, I'd love to get rid of this legacy document management system or storage infrastructure or or maybe an esignature tool that theres only buy used by one part of the population and I can fold all of that into box.
That's a bit and definitely an increased conversation in the past couple of quarters that we've seen in light of this macro environment.
Okay, Great. That's really helpful color there and then can you guys also talk about linearity in the.
The quarter I think you guys mentioned more deal scrutiny.
Curious if it was similar to last quarter focused on larger deals and I'm also curious scrutiny with focused on any particular region. Thank you very much.
Yes, so I'd say that the linearity.
Was fair.
Fairly similar to what we typically see we would describe the macro pressure kind of building.
Over the back half of the year incrementally.
So, but no significant differences, especially in terms of the intra quarter linearity that we typically see.
In a in our fourth quarter.
And then.
In terms of the scrutiny I would say that's kind of same general trend is as kind of overall.
Macro impacts, which was no there really werent any particular areas that saw heightened scrutiny I think it's just a more cautious it.
Spending environment kind of across the board.
Thank you.
Your next question comes from the line of.
Matthew <unk> from Craig Hallum Your.
Your line is open.
Hi, This is Nick on for Chad Bennett, Thanks for taking our questions.
So at the Analyst day last year, you talked about targeting more than 50% of your revenue coming from suites in FY 'twenty five.
With a penetration rate already up to 46% exited in the past year.
Is there a reason why suites penetration should level off here as we as we near the 50% level or have your thoughts changed where that penetration rate can go over the next couple of years.
Yeah. So so that's an area that we have been very pleased the momentum so certainly kind of suites adoption, where we are at the moment is.
Ahead of what we had expected a year ago, So certainly from a timing standpoint.
We would expect to reach that kind of 50% plus milestone sooner than we thought a year ago, and we will certainly provide more details.
As we get into the longer term thinking it at our analyst day, and then in terms of where we see suite headed.
As optimistic as ever that steady state the significant majority of our revenue is going to be coming from suites customers.
Awesome. Thank you.
This concludes our question and answer session. Mr. <unk> I'll turn the call back over to you.
Great. Thank you operator, thank you everyone for joining us on the call. We look forward to seeing many of you at our New York Analyst Day on March 14.
And we look forward to updating everyone at that time.
Okay.
This concludes today's conference call you may now disconnect.
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