Q3 2024 Box Inc Earnings Call
Good day my name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the box incorporated third quarter fiscal 'twenty 'twenty four earnings conference call.
All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again press Star one.
I will now like to turn the conference over to Cynthia <unk>, Vice President of Investor Relations you may begin.
Good afternoon, and welcome to boxes third quarter fiscal year 'twenty four earnings conference call I am Cynthia Poniard, Vice President of Investor Relations on our call today, we have Aaron Levie box co founder and CEO and doing Smith, <unk> co founder and CFO.
Following our prepared remarks, we will take your questions today's call is being webcast and will be available for replay on our investor Relations website at box Dot com forward slash 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 the X platform at the handle at box Inc. IR.
On this call, we'll be making forward looking statements, including our fourth quarter and full year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 2020 for fiscal 2025, and future periods, including our free cash flow gross margins operating margins operating leverage future.
That stability 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 revenue operating margin and other operating model targets, the timing and market adoption of and benefits from our new products pricing models and partnerships the pro.
Teach them the sale of our data center equipment.
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 refer to our earnings press release filed today and the risk factors and documents, we filed 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 December 5th 2023, and we disclaim any obligation to update or revise them should they change or cease to be up to date.
In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release.
And then the related supplemental slides, which can be found on the IR page of our website.
Unless otherwise indicated all references to financial measures are on a non-GAAP basis with that let me hand, it over to Aaron.
Thank you Cynthia and thanks, everyone for joining us today in.
In Q3, we delivered revenue growth in line with our guidance with year over year growth of 5% or 7% in constant currency.
Our 25% operating margins were up 70 basis points from a year ago, demonstrating our operational discipline and delivering year over year margin expansion.
Despite the various macro headwinds affecting it budgets companies still prioritize the box content cloud to help power their hybrid workforces secure their most important content and automate and digitize their business processes.
Examples of box delivering this value to our customers. In Q3 include a leading biotech company expanded its use of box with a six figure upsell to enable both collaboration on GSP content in an efficient manner for both internal and external parties as well as support content sharing and collaboration for <unk>.
Non GSP compliant content and use cases.
They also plan to integrate box with their existing applications, including Okta in service now.
And advertising and marketing firm expanded its use of box with a six figure upsell and L. A as they move the entire agency to box to meet your content cloud needs.
As the company adopted box enterprise wide it will eliminate storage costs from other platforms, and we will be able to consolidate several SaaS applications, eliminating redundancy and complexity from their it environment one of the largest technology companies in the world expanded its use of box with the purchase of key.
Safe in an enterprise plus upsell to support the organizations content modernization initiatives with this upsell and access to governance capabilities box meet their highest level of security classification for content storage and can now be used for restricted content in records management content while also.
Supporting necessary integrations.
In the third quarter, we held our annual user conference box works and our exclusive CIO Summit CIO works with record box works attendance, we heard directly from our customers on how they are driving significant transformation across their businesses.
Even in the face of near term economic pressures.
Enterprises are also seeing new challenges as they respond to the rapidly evolving era of AI powered work.
We know that content is the lifeblood of so many businesses.
And yes, right when content is more important than ever the way that enterprises manage content and legacy systems no longer works.
The challenge is it content is getting produced at an ever increasing rate and enterprises increasingly are finding it hard to secure all of this fragmented content or enable employees to access the right information to do their jobs.
This fragmented content will mean companies can't easily take advantage of the power of AI to get the most out of their data more than ever before enterprises will need a content cloud.
By building the only end to end platform that can help customers power their complete content lifecycle in a single architecture, we're reshaping what enterprises can do with their content.
At box works, we made several key product announcements delivering innovation across security and compliance collaboration and workflow and our platform.
Our focus is to deliver the best ways to secure and protect sensitive content.
Ensure compliance for nearly every major industry and government requirement.
In power the full document governance process for our customers.
We have expanded box shield for ransomware protection capabilities in order to mitigate the ever growing threat of malware and announced an AI powered threat detection to identify anomalous file activities originating from box drive.
We also announced a new integration partnership with crowd strike, where security and it teams can detect malicious files ransomware and suspicious activity as well as configure security policies directly in boxes administrative console.
Cross collaboration and workflow, we're adding new capabilities to box notes, improving the experience and performance of Kansas doubling down on our E signature feature set and continuing to advance nextgen workflow capabilities with the announcements of Doc Gen and forms and this year, we've taken our strategy even further with the announcement of.
Two major breakthroughs box AI and box hubs.
With box AI, we're going to revolutionize how companies work with their content since the early days of enterprise software, we could always query and understand our structured data, but we've never been able to do the same easily with our unstructured data, where our content, which is estimated at 90% of corporate information all of the content that an enterprise.
Produces is being dramatically underutilized relative to the value inside of this content.
But now with AI, we can solve problems that previously were only possible with high level human understanding at scale.
From extracting metadata efficiently at scale the expert analysis.
You document understanding and summarization, and creating new content with AI. We can now process information at a speed and at a cost that opens up completely new possibilities of what we can do with our information.
Additionally, we also announced box hubs, a revolutionary way to publish content in the enterprise with box hubs, we're enabling companies to take the most important content in their organization and make sure it's easily available and distributed to exactly the right people seamlessly.
Content sprawl is one of the biggest challenges facing enterprises today and never before has there been a simple way for any line of business to point to the most important content that they need to share broadly in a customized fashion any.
Team or department in an enterprise can create a hub services most relevant content like a sales enablement portal HR policy portals marketing branding sites and more.
And importantly, when combined with box AI, we are unleashing the power of enterprise content and the organization by turning unstructured data into valuable knowledge.
Most importantly, because the content hub is curated by topic enterprises can ensure that the answers they're getting from AI are accurate and based on the authoritative information in your organization.
The vision for what's possible when companies have a modern approach to working with their content with our new innovative products has been incredibly well received by customers.
<unk>, we heard from our customers directly who are using box AI and this quote from the CIO of a financial advisory firm after turning on box AI is quite representative of what we're hearing.
And I quote.
We just enabled the box AI beta this morning game Changer force multiplier knowledge overload the future is bright with box. Thank you.
Finally, we recently announced an expanded partnership with Google cloud, whereby box will integrate with vertex AI, Google cloud unified AI platform to help customers processed and analyzed data faster and create a more personalized user experience intelligent search and more.
This builds on our earlier announcement to integrate Google clouds advanced large language model in the box AI with vertex AI, helping to power our new metadata extraction feature.
Further part of our Google Cloud partnership announcement box will now be a part of the Google cloud marketplace, GCB customers will be able to buy box directly through marketplace and use their GTP credits toward the purchase of box. This new channel for box expands our opportunity to land new cost customers who.
Can unlock the potential for cost savings against existing Google cloud commitments.
Dreamliner lengthy procurement cycles and consolidated billing.
<unk>.
Turning more broadly to go to market a key component of our strategy to drive profitable growth at scale is our ability to land adopt expand and retain our customers driving the adoption of enterprise plus is a critical strategic lever to increase the efficiency of our sales motion and bring the full value of the box cars.
<unk> cloud to our customers.
And by continually adding value through additional features and functionality to existing suites plans.
We strengthen our ability to retain customers as shown by our best in class, 3% churn rates in Q3.
Our momentum with enterprise plus remains strong and.
And we have now reached 51% of our revenue coming from suites customers up from 48% last quarter.
Given the large base of customers that we believe are still right for upgrading and enterprise plus we have added box AI into this plan to encourage further upsells to this plan.
At the same time, we know that there's going to be even more advanced AI capabilities that some of our customers will require and we expect to introduce a higher tier plan next year to address these needs.
Already within Q3, we saw numerous enterprise plus upgrades that were in part driven by the inclusion of box AI in this offering including <unk>.
Our worldwide consulting firm, who has been a box customer since 2013 signed an enterprise plus upsell to get access to the box AI data box AI has the potential to help the consultants being more productive day to day with automated metadata to help search and finding files box AI will be critical and transform.
How this organization works with its petabyte of content in box.
And international corporate law firm moved to enterprise plus to give its lawyers and staff access to box AI being able to summarize large briefs and documents and find information in a matter of seconds will cut down on time increased productivity to be hugely beneficial to their employees.
We're incredibly excited to be able to bring box AI to our customers and we will share more updates with all of you soon.
As we look ahead to FY 'twenty five we are focused on continuing to drive profitable growth and scale.
One of the most transformative periods in enterprise software and we are focused on capitalizing on the opportunity in front of us.
Next year, we'll be continuing to drive investments across AI security advanced content management and workflow capabilities to help our customers transform how they work with their content.
Further given the market opportunity right now in FY 'twenty five we'll be expanding our focus on key strategic partners and system integrators scaling our high ROI pipeline generating initiatives investing in growth in key verticals and continuing to optimize our international growth efforts we will.
Drive these initiatives while at the same time delivering improving profitability.
Putting us on a path to achieve our long term financial targets.
To help drive these efforts forward in November we announced that Olivia not and Bob has joined US as Chief operating officer, succeeding retiring COO stepped carrillo.
Olivia brings proven leadership and execution to box with executive roles at Google Cloud and most recently notion a cloud based productivity platform in over a decade at Mckinsey focused on the software industry.
Im excited to work with her as we deliver new products and plans expand our partner and system Integrator network go deeper in key vertical markets and continue our global expansion.
I'd also like to provide a huge thank you to Stephanie Carrillo, who has been an amazing partner to me and the team for over six years at box, taking us from less than $500 million in revenue to over $1 billion in revenue as well as helping execute a seamless transition to bring on Olivia.
Wishing step the best in her retirement and I'm excited to have her stay close as we continue to scale.
In summary, while macro trends and currency rates have impacted our results in the near term. We have continued to execute our content cloud strategy, creating more high value and repeatable use cases that further differentiate box and grow our Tam.
Demonstrating our product leadership with box AI and box hubs positions us for growth <unk>.
Delivering to customers the platform that they need to meet the demands of the rapidly evolving era of AI powered work.
With that let me turn it over to Dylan.
Thanks very.
Good afternoon, everyone and thank you for joining us.
In Q3, we continued to deliver profitable growth, while expanding operating margin and executing our disciplined capital allocation strategy.
Revenue landed in line with our guidance and EPS grew by 16% year over year.
We also announced numerous enhancements to our box content cloud platform, including significant innovation around box AI and box hubs, which we believe will be important drivers of future revenue growth.
In Q3, we generated revenue of $262 million up 5% year over year, and representing 7% year over year growth on a constant currency basis.
We now have over 700 total customers paying us more than $100000 annually, an increase of 10% year over year.
Our suites attach rate of 79% and large Q3 deals was up from 73% in Q3 of last year.
As Aaron mentioned suites customers now account for 51% of our revenue up significantly from 42% of revenue a year ago and up from 48% last quarter.
Our suites value proposition is resonating with customers as they continue to prioritize solutions that enabled transformation simplification and security of the content within their enterprises.
We ended Q3 with remaining performance obligations or <unk>.
Of $1 1, billion% to 7% year over year increase or 8% growth on a constant currency basis.
We expect to recognize roughly 60% of our RP over the next 12 months.
Q3, billings of $254 million were down 2% year over year with no impact from FX.
Our previous guidance had anticipated a 200 basis point tailwind from FX.
As a reminder, our billings growth rate in Q3 of last year was unusually strong at 20%, including a large multi year customer prepayments.
Our net retention rate at the end of Q3 was 102% as we continue to see pressure on seat growth within existing customers.
Our annualized full churn rate remained strong and stable at 3% as customers continue to prioritize the value that the box platform provides.
We've also continued to achieve year over year pricing increases despite the pressures on it budgets.
In Q4, we expect both our full churn rate and our net retention rate to remain roughly flat with our Q3 results.
As seat growth returns to more normalized levels and as we continue driving pricing improvements, we're confident that our best in class full churn rate and expanding our suite of innovative products will enable a higher net retention rate overtime.
Okay.
We are proud to have achieved our goal of running our infrastructure in the public cloud as of the end of Q3.
We have now begun selling the data center equipment that we are no longer using which had been anticipated in our plans for this year.
However, the market for this equipment has softened significantly over the past few months.
As a result, we are reducing our estimate of expected proceeds from these sales.
This created a headwind against our expense forecast of $3 3 million in Q3, and we expect another roughly $4 million impact in Q4 with no material impact to our financial results anticipated next fiscal year.
Q3 gross margin came in at 76, 3% versus 76, 5% a year ago.
Q3, gross margin was negatively impacted by 130 basis points due to the equipment proceeds headwinds that I just mentioned.
Throughout the course of this migration our team has delivered efficiencies above and beyond our initial expectations.
We continue to expect further gross margin expansion next year as our data center expenses wind down and as we unlock additional benefits from running fully in the public cloud.
We also continued to drive leverage across the business through our lower cost location strategy and rigorous cost discipline.
This resulted in 24, 7% operating margin or 26, 6% in constant currency an improvement from the 24, 8% we delivered in the year ago period.
Q3 operating margin landed slightly below our expectations of 25, 5% due entirely to the 130 basis point equipment proceeds headwind that I noted earlier.
As a result, we delivered diluted non-GAAP EPS of <unk> 36 in Q3 up 16% from 31, a year ago, which includes a negative impact of <unk> due to FX.
This FX headwind was <unk> <unk> higher than anticipated when we provided guidance last quarter and EPS was also impacted by <unk> <unk> from the equipment proceeds headwind.
Adjusting for these unanticipated headwinds EPS would have been 39.
Above the high end of our guidance.
Finally, I'd highlight that Q3 marked our fifth consecutive quarter of achieving GAAP profitability.
I'll now turn to our cash flow and balance sheet.
In Q3, we generated free cash flow of 58, million% to 6% increase from $55 million in the year ago period.
We delivered cash flow from operations of $72 million, a 3% increase from $70 million in the year ago period.
Capital lease payments, which we include in our free cash flow calculation were $7 million down from $10 million in Q3 of last year.
Going forward, we expect capital lease payments to wind down over the next few quarters as we exit our managed data centers.
Let's now turn to our capital allocation strategy.
We ended the quarter with $440 million in cash cash equivalents restricted cash and short term investments.
In Q3, we repurchased one 9 million shares for approximately $52 million.
As of October 31, 2023, we had approximately $84 million of remaining buyback capacity under our current share repurchase plan.
With that I would like to turn to our guidance for Q4 and fiscal 2024.
As a reminder, approximately one third of our revenue is generated outside of the U S with roughly 60% of our international revenue coming from Japan.
The following guidance includes the expected impact of FX headwinds, assuming current exchange rates are.
Our guidance also accounts for the continued pressure on seat growth that we anticipate due to the macroeconomic environment as well as lower professional services revenue versus our prior expectations.
As I stated earlier, we expect the equipment proceeds headwinds to have an impact of roughly $4 million on our Q4 expenses for a total FY 'twenty four impact of a little more than $7 million.
Additionally, in the fourth quarter, we modified our Redwood City office lease to reduce the amount of square footage that we're leasing.
This results in a one time net exit expense that we will recognize in Q4, representing a 60 basis point headwind to Q4 operating margin.
For the fourth quarter of fiscal 2024.
We anticipate revenue in the range of $262 million to $264 million, representing 3% year over year growth at the high end of this range or 5% in constant currency.
We expect our Q4 billings growth rate to be in the low to mid single digit range. This.
This includes an expected headwind from FX of approximately 300 basis points.
We expect our Q4 gross margin to be roughly 78%, which includes the equipment proceeds headwind of 150 basis points.
We expect our Q4 non-GAAP operating margin to be approximately 25, 5%, which includes an expected negative impact of approximately 180 basis points due to FX.
It is important to note that our Q4 operating margin expectations also incorporate two discrete items that were not included in our expectations as of last quarter.
First the equipment proceeds headwind on gross margin creates an equivalent of 150 basis point impact on operating margin.
Second the lease modification discussed above represents an operating margin headwind of 60 basis points.
We expect our Q4 non-GAAP EPS to be in the range of 38% to 39.
And GAAP EPS to be in the range of five to six.
Weighted average diluted shares are expected to be approximately $147 million.
Our Q4, GAAP and non-GAAP EPS guidance includes an expected year over year headwind from FX of approximately <unk> the equipment proceeds headwind of a little more than <unk> and the lease modification headwind of approximately one.
For the full fiscal year ending January 31 2024.
We now expect FY 'twenty for revenue in the range of 1.3 dollars 7 billion to one point <unk>, three 9 billion, representing 5% year over year growth or 8% on a constant currency basis.
We expect our FY 'twenty for billings growth rate to be roughly 3% on an as reported basis or roughly 5% on a constant currency basis.
We now expect our FY 'twenty four gross margin to be roughly 77%.
This includes the previously mentioned second half headwind from equipment proceeds of 70 basis points.
We are revising our FY 'twenty four non-GAAP operating margin guidance to be approximately 24, 5%, representing a 140 basis point improvement from last year's results of 23, 1%.
We expect FX to have a negative impact on operating margin of approximately 200 basis points.
Our revised expectations also include the previously mentioned equipment proceeds and lease modification expenses, which had a combined impact of 85 basis points.
We are updating our FY 'twenty four non-GAAP EPS expectations to be in the range of $1 42 to $1 43, representing a 19% increase at the high end of this range versus the $1 20 in the prior year.
We expect FY 'twenty for GAAP EPS to be in the range of 15 to 16.
Weighted average diluted shares are expected to be approximately $149 million.
Our FY 'twenty for GAAP and non-GAAP EPS guidance includes an expected full year negative impacts from FX of approximately <unk> 17.
And an additional impact of approximately <unk>.
From the two nonrecurring items that I mentioned previously.
As we continue to navigate through this dynamic macroeconomic environment. We think it would be helpful to provide a high level preliminary outlook for fiscal 2025.
While we have been seeing a more stable demand environment, we want to be prudent in assuming that this challenging environment persists throughout the coming year.
This outlook also assumes current FX rates.
We currently expect our FY 'twenty five reported revenue growth rate to be approximately 5%.
This includes an expected headwind from FX of roughly 100 basis points.
We are generating significant business model leveraged to a public cloud migration workforce location strategy and overall cost discipline.
The impact of these initiatives enables us to invest in the key growth initiatives that Aaron discussed while also improving our already strong profitability profile.
We currently expect FY 'twenty five non-GAAP operating margin of roughly 27%, representing an improvement of roughly 250 basis points year over year, which includes an expected headwind from FX of a little less than 100 basis points.
We remain committed to delivering against the long term financial targets that we outlined at our March financial Analyst day.
We are reiterating our long term revenue growth target of 10% to 15% gross margin of 80% to 82% operating margin of 32% to 35% and revenue growth plus free cash flow margin of at least 45%.
Despite the challenging macroeconomic environment. This year, we continue to deliver against the core initiatives to achieve these long term financial targets.
We are making significant enhancements to our innovative product offerings, expanding both operating margin and free cash flow margin and consistently returning capital to our shareholders.
As we capitalize on these initiatives and as the macroeconomic environment improves we are well positioned to create significant long term shareholder value.
With that Aaron and I will be happy to take your questions.
Operator.
Actually before we open up for questions that might be helpful to see our guidance and the adjustments we discussed in one table. Please refer to slide 12 of our earnings deck, which you can find on the IR website operator.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad. Your first question comes from Brian Peterson from Raymond James. Please go ahead.
Oh, Hey, guys. Thanks for taking the question. So I wanted to hit on linearity throughout the quarter, obviously the macro.
Very much up for debate here I'm, just curious any trends that you've seen throughout the quarter that you'd call out that changed.
Yes, I would say.
No major changes to linearity.
Really the way I would articulate.
Some of our kind of bookings outcome or billings outcome in Q3, and certainly putting a little bit of pressure on the Q4 number.
Was.
As we had called out in the prior call more stabilization in the U S. In particular, where our results came in effectively where we had expected with some additional pressure in international markets, where there was some variability we did have a couple pushes out of Japan, but but nothing that <unk>.
<unk> us, but definitely that can be a dynamic there that impacts some of the billings in the near term.
So, but no meaningful change in linearity from from our perspective.
Thanks, Aaron and Dylan.
I appreciate the guidance for next year and you guys are outlining kind of the mid single digit growth still looking at 10% to 15% longer term is there an implied kind of in all of our seed expansion in that number I get that it's taken a little bit of cyclical pressure now, but I'd love to understand at a more normalized environment, how should we be thinking about that <unk> trends.
In that 10% to 15% target thanks Jess.
Yes, so based on what we've been seeing in a variety of environments. We do expect even from a long term target point of view.
For the contribution to growth of net new business and expansion, which is what the IRR represents to be fairly consistent with what we've seen and the contribution from new business being in the low to mid digit.
Single digit percentage, so the implied net retention rates in that long term target.
You could think about as kind of the mid.
Kind of pushing 10%.
<unk> NR.
And we do expect to see an improvement from current levels.
Both on seat growth as well as.
Over time, the impact of some of the newer products suites et cetera that we expect to introduce to the market.
Next year, so while that will take some time to flow through to the model. That's how I would think about some of the upside and dynamics that drive our confidence in that longer term growth rate.
Thank you.
Thank you. Our next question. Your next question comes from the line of Steve Enders from Citi. Please go ahead.
Okay, great. Thanks for thanks for taking the question here.
I guess, maybe just following up on on the guide and the outlook for next year, I mean, I guess it implies a bit of acceleration.
On the top line, so I guess as you think about.
What that looks like how do you get confidence around that number or what is it that gives you confidence in being able to see an acceleration as we head into fiscal 'twenty five.
Yes, so I would say.
We're expecting to see.
Pretty similar growth.
<unk> year.
Both kind of versus what we're expecting.
As we exit this year and just kind of coincidentally, what we happen to do for what we're expecting to do for the current year, what I would say is.
We are going to be lapping the impact when we started to see some of these macroeconomic challenges set in.
And as we think about getting through the next year.
Certainly this is based on as we had mentioned a pretty prudent expectations in terms of the overall macroeconomic environment. So it's really based on kind of a combination of everything that we've been seeing.
In the environment the pipeline the conversation that we've been having with with customers and all of that so it wouldn't really highlight any.
Specific new things in the business that are driving that but it's really.
Just based on a continuation of some of the trends that we've been seeing recently.
And Aaron anything yet.
No I mean, obviously, if we get more into the FY 'twenty outlook and commentary avid having to build on that.
Okay great.
And then maybe just on the demand environment.
I guess as you look at the customers in the pipeline.
There's been headwinds to two to the seat expansion side.
I guess, where do you feel like we are in terms of that continuing to be a headwind and as we think about the billings outlook.
I guess again going into <unk> and 'twenty five how scrubbed as the pipeline that youre seeing for renewables in the assumptions that are that are being.
Being made in there in terms of the.
Seen expansion initiatives.
Yeah, I mean, I would say we are still expecting to see continued pressure on seat growth given the environment and that is baked into.
The forward looking expectations that we provided.
And in terms of the pipeline I would say similarly, if you don't feel really good about the way that we had been qualifying that based on a lot of the learnings from this year, just where we are seeing the strongest ROI, whether it's from some of the different demand initiatives or.
The geographies and segments of the business that are showing the most resilience in this environment, that's where we've really been focused.
So from an overall pipeline quality point of view and what we've learned and how we baked that into our expectations that is all incorporated into the numbers that we provided.
Okay perfect. Thanks for taking the questions.
Your next question comes from the line of Josh Baer from Morgan Stanley. Please go ahead.
Hey, this is Chris <unk> on for Josh Thanks for taking our questions.
Do you all have been showing strong adoption of suites for few quarters. Now. So just curious why that continues to be momentum that exactly translating into those better in quarter results.
Yes, I think.
Getting our customers to move up to Sweden has been a critical priority for us and we saw a little bit of.
You know kind of less of the quarter over quarter growth and we wanted earlier in the year and we've put even greater focus on that.
I think we're seeing those results now play out in.
In terms of the total topline results, obviously that factors in things like seat count growth that the suite expansion doesn't.
It doesn't specifically.
These are independent metrics of the percentage of customers, who can move up into suites versus the amount of seat growth that we have in general and Thats been come under some pressure as Don noted just due to the macro environment and so as you know.
Certainly as companies are hiring as quickly or you have layoffs and tech as an example of these can create some seat growth pressure.
Which which obviously is the combined metrics that really drive that top line revenue and the net retention rate. So I'd say, we were still going to be very very focused on adding more and more value to our product plans that means more customers can get into enterprise plus we're going to have additional functionality that will allow customers upgrading and further in the future and then secret becomes enel.
Lever <unk>.
As as hopefully the economic environment improves.
Improves over time and this is Dylan just to build on that.
To clarify really pleased with the kind of attach rates and the mix of what we are selling to our customers in this environment, especially seeing strong attach rates globally, which we had not been seeing a year ago was a little bit more variable from geography to geography, but it's really drew.
By just lower volume of overall deals and you can see that in some of the metrics like the large deal counts that we provide.
But we are.
Certainly pleased with the trajectory and momentum of suites within our customer base and I would note that we've continued to see as we called out in the past that those suites customers. Once they buy in adopt suites tend to have much stronger customer economics overall from pricing to margins to net retention. So.
Even though the deal volume isn't quite where we'd like it to be this year. The overall quality of the customer base and revenue base have been steadily improving because of that mix.
Okay.
Got it that's very helpful.
Maybe sticking with you on the operating margin guide for this year.
If I exclude that 85 basis point headwind from the equipment and lease changes changes.
Got it down the full year by 15 basis points yourself. So I guess, just curious is that mostly a function of that lower revenue flowing down or is there something else you would call out there from a expense standpoint.
Yeah, I would say the only.
Minor change it again pretty close to in line. There is a bit of a revenue impact, but also a little bit of an incremental FX impact.
And both on revenue and on the margin side.
So not material versus what we expected a few months ago, but that is a little bit of that.
The contributor as well.
Got it thank you so much.
Your next question comes from the line of pendulum Bora from Jpmorgan. Please go ahead.
Oh, great. Thank you for taking my questions can you I wanted to ask you about the fiscal 'twenty five outlook again understanding it's preliminary or early but any way to kind of understand the net retention versus new that you're baking in there you were kind of at 102, Youre talking about 5% reported or.
6% constant currency it seems like what are you assuming for net retention and then.
Is there anything youre baking in from the AI products.
That might be coming online next year.
Yeah.
Yes, So I would say you could think about the the underlying driver an assumption in that.
Preliminary guidance as being <unk>.
Pretty consistent with current levels as mentioned.
Certainly see upside over time, but that is not baked into next year's numbers and then as it relates to our product roadmap broadly you mentioned AI, but this would apply to some of the other newer products like the hubs and the new suite that we expect to launch next year.
I would just note that as enterprise sales cycles are typically a few quarters and based on our recurring revenue model and how that translates into revenue. We don't expect those newer products and offerings that have a material impact on next year's revenue.
It would be more meaningful growth drivers the following year in FY 'twenty six and beyond.
<unk>.
As it relates to today's AI offering, which obviously is an enterprise plus plan, we do expect that to be a driver of enterprise plus upgrades for next year. So.
So just to build on that so AI definitely being a driver for next year. It is baked into the current outlook that we just shared and as I mentioned on the Q3 numbers. We saw a number of customers upgrading to enterprise plus specifically or at least in large part to be able to access box AI. So we certainly expect to continue to see that.
In Q4, and next year, but we also want to be prudent on our total top line expectations.
<unk>.
As we kind of work through the macro.
Understood just specifically on the volume based on the consumption based pricing that you've kind of laid out are you are you assuming that the existing suite customers start contributing some kind of ore from that volume based content consumption based pricing next year.
We don't have any particular heart expectations within the model on the consumption side that would be kind of a pure upside and only because we want to be super thoughtful as we as we start to roll I mean phosphate I literally is rolling out in November to that too to our enterprise plus customers.
And so we want to be conservative at this point on the on the numbers there.
Understood. One last question for Dan and then what is the billings growth rate adjusted for payment duration from a year ago, because I do remember last year, you had kind of some big deals.
Yeah, I would say we didn't give the exact number but you can think about that large multiyear prepay that we had kind of mentioned at the time and then recently as well as being.
In the kind of mid to high single digit percentage range.
So last year, so that was a.
A significant driver of the outsized billings growth to be showed in Q3 of last year, although even independent of that one customer was a pretty strong quarter for us overall as it was late in the quarter. As a reminder, that we started to see the macroeconomic headwinds show up in our business.
Understood. Thank you.
Your next question comes from the line of Chad Bennett from Craig Hallum Capital. Please go ahead.
Great. Thanks for taking my question. So just considering the I guess preliminary growth outlook for next year of 5%.
And just.
And obviously the operating margin outlook just curious.
I mean, our growth Lick heads clearly.
Lowered from from kind of what we thought it would be obviously this year and heading into next year.
Yeah.
As a percentage of revenue sales and marketing expenses are kind of hovering around 27% to 8% they've kind of been there for a couple of years now are there any.
Plan actions on the cost side to maybe maybe escalate or accelerate that operating margin leverage next year.
Even if that 5% turned into 8% Im not sure 27% to 8% sales and marketing expense makes sense any commentary there.
Yes so.
It's a great question I think we're trying to balance both obviously continued leverage on the bottom line, which we see as incredibly important.
Overall to the efficiency of the business and being able to support our capital allocation strategy.
And at the same time because of the market opportunity between security AI. Our overall platform message, we do want to balance the right amount of growth investments to drive top line not only for next year, but really beyond.
And so some of those investments is obviously is kind of well understood. You have to you have to start to make them and then the payback is more tied to that long term model.
And while these arent, particularly.
Massive any sense things like continuing to optimize our international markets drive the next tier plan in terms of product investment some of the verticals that we want to double down in these things obviously are still very important for us and to drive that long term growth. So so we will always pay close attention to where we are seeing.
Kind of the efficacy of our investments and well tuned appropriately but.
But we think that that continues to make year over year.
Improvements on the bottom line going forward is incredibly important to drive to that long term model, but also making sure. We're driving the right level of growth is super healthy as well and so that's the balance that we're trying to create and to build on that we still expect our.
Annual operating margin improvement to be fairly consistent on an annual basis as we march toward our long term target model of having operating margins and delivering those and the 32% to 35% range for next year on the heels of completing the public cloud migration that we've talked about.
More of that is expected to come at the on the gross margin line than in a typical year over a multi year time period and then we also do expect continue driving efficiencies across the business and in terms of big categories of leverage as we mentioned do you expect are lower cost locations.
Strategy.
To have an impact next year as well so that's a big focus that doesn't show up in the sales and marketing line as much and I know Aaron spoke to that but that has been and is expected to be a continued driver of R&D and G&A leverage in particular, so there are a couple of the big areas from a near term point of view that will fuel that operating margin expansion.
Got it and then maybe just one quick follow up for me just on the non sweet portion of the business can you just speak to kind of year to date, what you're seeing competitively there and if that business is.
I assume that business has kind of got weaker as we went along the year and just kind of how that how that how that has played out relative to expectations.
Yes, I think.
Certainly were very focus on encouraging any new customer to come into our multi product suites and that's a core part of our sales motion.
That improves our competitive differentiation.
When rates retention and so on in terms of the core only population, we do see more pressure in that audience from a retention standpoint, and in some cases of C growth standpoint, although.
Although it can always vary by the quarter, but I'd say no change.
Necessarily in the competitive market or competitive dynamics, there thats something that sort of always been incorporated into our financial plan and model.
So no no major market change on that front.
Great. Thank you.
Yes.
Your next question comes from the line of Richie gel Maria from RBC capital markets. Please go ahead.
Okay. This is rich polling on for Rishi. Thanks for taking my question.
So first one for me.
I guess when youre seeing some of the.
<unk> churn and contracts.
Are you, having any success trying to offset some of that with the suites momentum and maybe perhaps giving any kind of a discount on the sweet side or just kind of walk me through how that conversation typically goes.
Yes, I mean, there there can be.
A few different flavors, so it would be hard to fully capture but we do.
Certainly if a customer is dealing with reduction in head count or reduction of investment.
Or at least seat based model will correlate in some cases to that dynamic within that customer and so.
Usually thats tied to additional cost pressure in that customers. So.
Adding more product in return for fewer seats that that customer is most likely to dealing with overall cost pressures that make that difficult. So I would say that we certainly tried multiple ways to get our customers too.
Retain their total value, but we also want to be thoughtful with customers and make sure we're adding the right amount of value in relationship.
Given whatever environment. They are dealing with is I'd say more typically what we're able to do in our renewal motion is.
Is find ways to.
Get that customer into <unk>.
Expanded functionality or.
Or moving up our plans here.
Based on the kind of overall growth and health of the customer relationships.
A core part of our renewal motion.
Got it that's very helpful.
It's good to hear that the AI driving some of that enterprise plus conversion.
Going forward aside from Washington, just kind of the suites momentum trajectory, what what's the best way for us to kind of measure the pace of enterprise plus adoption and I guess alongside that I mean have you given any thought to kind of providing a breakout for any enterprise plus every once in a while like you have done with the core and core platform.
Past.
Just.
So you can kind of clarify when you say breakout of enterprise plus or do you mean relative to our overall multi product suites or is there. Some other metric you are referring to.
Correct correct.
Yeah.
We I mean, we've sort of discussed different ways to maybe you can view that metric and we're happy to certainly take more feedback offline because enterprise plus is our primary sort of sales motion and more of the other suites are equivalent to enterprise plus in terms of what products. They have contained minus now AI.
But similar price points.
We sort of think about that basically is the same metric. So we probably wouldnt break it out only because it really does.
Effectively the same concept.
So you said that it is helpful. We get considered overtime, but I would just consider enterprise plus as the primary suite, that's driving our growth and certainly taking up the bulk of that.
That account base and just as a reminder, for the past year or so to kind of echo what aaron's been saying more than 90% of our overall suite sales had been enterprise plus so thats certainly effectively all of the new suite sales as well as some customers moving to enterprise plus from a price.
Your suite under the Hood. So it is the majority, but here we try to capture that in one metric just to keep things simple, especially because as our product offerings continue to evolve just a cleaner way to track. The overall suites momentum, which is what's most important to really understand how our customers are using boxes.
<unk> products.
Got it that's all very helpful. Thank you.
Yes.
Our last question comes from George <unk> from Oppenheimer. Please go ahead.
Thank you for taking my question.
Aaron maybe going back to your comments on investing for growth with Olivia coming on board are there any changes made.
Made to the sales organization and go to market.
<unk> over the next several quarters.
Yes, so maybe at a high level.
As we as we did a search for the successor for Steph.
This is a very collaborative process to find the next person that can take box too.
For us from the 1 billion to $2 billion Mark.
We were extremely intense to bring somebody that understood our model understood. Both what we had built in terms of seeing.
<unk> seen similar environments, but also seen where we're trying to go as a platform.
And so we found somebody in Olivia that deeply understand SaaS, our go to market motion the land and expand motion.
Kind of driving higher price per seat through product expansion.
Driving partnerships with system integrators and channel partners that international mix. So.
We were extremely.
Delighted to find somebody that really understood our model, but also where we want to take it I think I would I would say as we look out to next year.
I would expect more incremental optimization in the form of things like expanding with more partners on.
Going into kind.
Critical verticals that we need to continue to drive growth in.
Continuing to move up customers and higher plan tiers, so really a continuation of the things we've talked about on this call and to and to the street about but but obviously turbocharging wherever appropriate within the context of a financial model, where we want to deliver more bottom line efficiency as well. So that's sort of the balance that we continue to deal with but.
I would expect.
<unk> to hear.
Based on more of those kind of strategic initiatives as we go into next year.
And.
Coming out of box works and your new announcement with.
The GCT marketplace, maybe give us a.
A level set on new customer outreach and what the pipeline looks like from that perspective.
Yeah. So the GCB partnership has been something we've been working on now for for quite some time. So we're excited to land the plane there.
Yes.
We really kicked off.
At the start of Q4, so we're in the midst right now of some of those conversations and I think the.
The contours of the value really are when a customer is looking to buy box or maybe there is a gap in their it strategy that box can help with.
We will sell or sort of identified that we can be brought in and and you have this much more efficient path for finding budget in some cases, where a customer might have those unused credits within the <unk> environment. So.
Just the earliest days of the partnership but we're already hearing.
We're already seeing this in our pipeline and hearing anecdotes of it in customer conversations, but I would say I'd say, it's sort of effectively day, one right now.
So we'll share more as we have updates.
Okay.
Great. Thank you.
Yes. Thanks.
Thank you and I will now turn the call back to Cynthia for closing remarks.
Great. Thank you everyone for joining us today, and we look forward to updating you on our next call.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Please wait the conference will begin shortly.
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