Q2 2020 Earnings Call
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Alice the title head of Investor Relations you May begin your conference.
Good afternoon, and welcome to block the second quarter of fiscal 2020 earnings conference call on the call today, we have Aaron lobby, our CEO and Dylan Smith, our CFO following our prepared remarks, we will take questions.
Today's call is being webcast and will also be available for replay on our Investor Relations website at Www Dot box dot com forward flashlight batteries or webcast will be audio only however, supplemental slides are now available for download from our website.
Well so first the highlights of today's call on Twitter at the handle at boxing I are on this call we will be making forward looking statements, including our Q3, and why 20 financial guidance and our expectations regarding our financial performance for fiscal 2020, and future periods tightening up and market adoption of our products our markets and market size, our operating leverage our expectations regarding maintaining positive free cash flow future profitability and unrecognized revenue and remaining performance obligation our planned investments and growth strategies, our ability to achieve our long term revenue and other operating model targets and expected timing and benefits from our new products pricing and partnerships. These statements reflect our best judgment based on factors currently known to us and actually best or results may differ materially. Please refer to the press release and the risk factors in documents, we filed with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for.
Information on the risks and uncertainties that may cause actual results to differ materially.
These forward looking statements are being made as of today August 20, Eightth 2019, and we disclaim any obligation to update or revise them should they change or cease to be up today.
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 the related Powerpoint presentation, which can be found on the investor Relations page of our website.
Unless otherwise indicated all references to financial measures on a non-GAAP basis with that let me hand, it over to Aaron.
Thanks, Alex and thanks, everyone for joining the call today.
In Q2, we delivered a solid quarter with revenue of 172.5 million up 16% year over year, non-GAAP EPS improved to breakeven versus negative five cents, a year ago, and we delivered wins and expansion expansions with thousands of customers, including the city of Philadelphia, I Q via New York Presbyterian and LPL financial this past quarter, we closed two deals worth more than $1 million in line with Q2 last year three deals over $500000 versus 11, a year ago, and 68 deals greater than $100000 versus 50, a year ago. We are incredibly happy with our execution in our 100000 dollar plus deals which is due to the improvements in sales productivity and enablement that we've been driving across the company to deliver more consistent results as we discussed last quarter. We are focused on helping our customers leverage boxes, a complete platform for secure content management.
Work flow and collaboration by evolving our product and improving our sales notion when our customers use our full suite of cloud content management solutions, we see dramatically higher average contract value and better retention, leading to greater lifetime value.
A key indicator of our success in driving this transition is both the repeatability of our 100000 dollar plus deals and the adoption of our add on products. This past quarter over 80% of our 100000 dollar plus deals included at least one add on product compared to just two thirds a year ago and we're seeing strong adoption of these products are cross sales segments as demonstrated by our add on product revenue growing roughly 50% year over year.
Demand for box remain strong customers are looking to protect their most important information with frictionless security and compliance streamline internal and external collaboration workflows and integrate content into their best of breed applications and I T stack boxes, the only cloud native platform built to meet all of these needs.
In Q2, we continued to deliver exciting new products and execute on the most aggressive product launch timeline in our history.
In June we released the all new box relay to our customers really automates critical workflows across the enterprise, while benefiting from boxes security compliance and deep integrations, while still early we are incredibly excited with how the product has been received and the new use cases, it addresses including automating document review and approval streamlining the recruiting and onboarding process, and automating routing and approval of incoming invoices and other documents.
Last week, we announced box shield at an event with an audience of security and technology leaders from some of the world's largest organizations shield is a breakthrough product for us that's been in the works for nearly two years and delivers a new set of security controls and intelligent threat detection capabilities for content management.
Built natively into box she'll help prevent accidental data leakage detects potential access misuse and identifies external threats for example, with shield banks can more easily prevent accidental sharing of documents in an M&A process media companies can better ensure content doesn't leak and government agencies can quickly decipher regular versus anomalous activities affecting sensitive information.
We are already seeing incredibly strong interest in shield across all industries, we've received resoundingly feedback from customers and industry analysts that shield is a major advancement in cloud security.
Shield will help further extend and strengthened boxes differentiation and the enterprise. So a critical set of customer challenges and increase boxes available market opportunity.
Fuel will be generally available later in the quarter and will be sold as a standalone product as well as part of our box suites.
Our continued innovation led Forrester in June to name box as the most visionary leader in its new wave for cloud content platforms out of 13 vendors, including Microsoft We received the highest overall score for our strategy as it turned in by our clear compelling incredible three year vision, our ease of use and our strong security governance and compliance capabilities. This new report and the direction by Forrester to re categorize the market is cloud content platforms recognizes the profound market shift away from traditional m. offerings.
In Q2, several customers chose box over these legacy solutions. For example, we closed the six figure expansion with a global security and advanced technologies company to enable seamless and intelligent work with content across its internal and external communities as a part of their box deployment. This company will move off of share point to foster real time access to information reliability and ease of collaboration with our clients.
The U.S. State government agency purchased box in a six figure deal to replace multiple file servers and storage platforms, including filenet and share point to create a centralized secure cloud repository. They will also be leveraging box to build custom internal and external portals to better serve their constituents and staff. This transition to box will decrease their annual spend on resources and infrastructure, while adhering with regulations like fed ramp I tar and HIPPA compliance.
And finally, we closed the six figure deal with a large fortune 500 mining company that standardize on box to deliver a content sharing solution that is mobile user friendly and secure.
The initial deployment of box will retire one driving share point sites.
Providing a single platform to exchange documents and information between internal staff partners and other third parties.
Overall with our portfolio of solutions, including box relay shield governance and platform, we have a huge opportunity to disrupt the $40 billion plus legacy content management collaboration in storage markets. We will continue to stay focused on rapidly innovating for customers to transform and simplify how they work and ensure we're staying far ahead of the competition.
We also made good progress on the evolution of our go to market efforts in Q2, a major component of this evolution was the introduction of box suites.
Boxs product portfolio has evolved considerably over the past four to five years and we have heard from customers that they want to adopt our add on products like governance relay shield and platform in a more streamlined way.
We now offer two suites, one aimed at secure collaboration in the enterprise and a second for driving critical business processes and building custom apps on box.
These suites bundle our products to better align with our customers' cloud content management use cases already we're suites only live for the past few weeks, we are seeing a more streamlined sales process, which led to higher average contract value and customers adopting more of our add on products.
In the quarter were also excited to welcome Mark Whalen, as our new Chief revenue Officer, leading our global sales organization reporting into Stephanie Carrillo is a 10 year veteran of Salesforce, we held a variety of sales leadership roles and has worked in the information technology industry for 25 years of companies like Gartner Nortel and most recently Tanium and enterprise Security company Mark strong operational experience will be instrumental in driving higher sales productivity as we scale and he has already been ramping incredibly quickly at box at box you will be focused on driving standardization and our sales motion to achieve consistent execution across regions improving the growth rate of our large deals that bring our full cloud content management suite to our customers and expanding growth within our existing customer base through a deeper focus on renewals and retention in particular, we are extremely focused on driving the repeatability of a 100000 dollar plus deals we have.
Expect to see increasing growth in this volume of 100000 dollar plus deals on a year over year basis, as we drive more standardization and our sales motion and simplify our product offering with suites.
To support these initiatives, we are continuing to focus on improved sales enablement and training programs and having our sales and customer success organizations partner more closely to drive retention and expansion initiatives.
Before we conclude we wanted to share that this October we will be hosting thousands of customers and partners at Boxworks, where we will discuss our latest product developments in strategy. This year will be another incredible event with speakers, including Ginnie remedies CEO of IBM Shantanu neuron CEO of Adobe Ceos, a best of breed technology partners, including Zoom pager duty Oct and slack as well as key leaders from enterprises like Intuit MGM studios, the MBA and Huber among many others.
Overall with the combination of a large installed base of enterprise customers strong product road map in advanced capabilities and focus on improved sales productivity, we feel confident in our ability to capitalize on the opportunities ahead. We're excited about the future of cloud content management and our strategy remains focused on driving long term revenue growth balanced with greater profitability with that I'll hand, it over to Dylan.
Thanks Aaron.
Good afternoon, everyone and thank you for joining us today.
Q2 was another solid quarter of demonstrating momentum in our cloud content management strategy as we continue to see strong add on product attach rates, leading to healthy growth and 100 k. deals, while delivering our second ever quarter of positive operating income.
We delivered revenue of 172.5 million in Q2 up 16% year over year.
This result benefited from strong in quarter deal pacing and roughly a million in nonrecurring revenue that we had been expecting to recognize in the second half of the year.
25% of our Q2 revenue came from regions outside of the United States.
As a reminder, we'll be emphasizing our remaining performance obligations or ARPO, which are consistent with GAAP accounting and represent noncancelable contracts that we expect to recognize as revenue in future periods. This metric consists of deferred revenue and backlog offset by contract assets and we believe it is a more comprehensive indicator of our momentum and growth potential than billings.
Our RPL ended Q2 at $641 million up 9% year over year, we expect to recognize roughly 67% of this ARPO over the next 12 months due to the timing of large upcoming multi year renewals, we expect to see pressure on ARPU in Q3 before rebounding in Q4 as these deals renew.
Second quarter billings came in at $172.9 million, representing 6% calculated and 7% adjusted billings growth year over year in line with the expectations, we referenced in our last earnings call.
As we mentioned on that call Q2 billings were impacted by this year's deal pacing and a headwind from the enhance developer fee in the back half of this year. We continue to expect calculated billings growth to track more closely to revenue growth.
Turning to margins.
non-GAAP gross margin came in at 71.3% versus 73.7% a year ago and slightly better than our expectations as we delivered optimization store datacenter infrastructure.
As we migrate our data center footprint to more scalable lower cost regions, leading to temporarily duplicative costs. We still expect gross margin for the remainder of Fytwenty to range from 70% to 71%. Once we complete this migration and as we continue to drive efficiencies in our infrastructure, we expect our gross margin to trend upwards, starting in the back half of F y 21.
In Q2, we continue to see our business model and improved efficiencies drive leverage across the business.
Sales and marketing expenses in the quarter were $70.4 million, representing a 41% of revenue an improvement from 45% in the prior year. Looking ahead, we expect to generate additional leverage in sales and marketing as more of our revenue comes from renewals and Upsells, which are more profitable and as we simplify our product offerings and standardize our sales motion to achieve more consistent execution globally.
Next research and development expenses were $34.4 million or 20% of revenue flat with the year ago, even as we significantly enhanced our cloud content management product offerings, including the general availability of box relay and the continued development of box shield.
Our general and administrative costs were $17.7 million or 10% of revenue compared to 12% in Q2 of last year. We expect to drive continued leverage in DNA as we benefit from greater operational excellence and scale.
Total Q2 operating expenses represented 71% of revenue compared to 78% a year ago. So despite our temporarily lower gross margin. We are able to drive our Q2 non-GAAP operating margin to a five percentage point improvement year over year coming in at just over breakeven versus negative 4% a year ago. As we mentioned on our last earnings call. We continue to expect non-GAAP operating margin to be 6% to 7% for the full year of F Y 21 next fiscal year.
non-GAAP EPS came in at breakeven a very strong five cents improvement from negative five cents, a year ago and above the high end of our guidance.
In Q2, our full churn rate remained stable at 4.2% on an annualized basis.
As customers increasingly adopt additional products either in their initial purchase for as a cross sell over time, they become significantly stickier.
Our net expansion rate was 10% on an annualized basis as such we ended Q2 with a net retention rate of 106% down from 107% last quarter.
As a reminder, this incorporates the impact of the single large customer that reduced its footprint in Q1 of this year.
For the fifth consecutive quarter, we've seen an improvement in our price per seat on a year over year basis. We now have 12.5 million paid users.
Let me now move onto our balance sheet and cash flow.
We ended the quarter with 201.5 million in cash cash equivalents and restricted cash.
Cash flow from operations was negative $4.7 million compared to negative 1.3 million a year ago.
Year to date, we have generated roughly 21 million in cash flow from operations up roughly 4 million over the same period last year.
In Q2, total Capex was 1.5 million versus $3.3 million a year ago.
Capital lease payments, which we factor into our free cash flow calculation were 10.0 million versus $5.8 million a year ago.
We expect Capex and capital lease payments combined to be roughly 6% to 7% of revenue both in Q3 and for the full year of F Y 20.
As a result free cash flow was negative 19.0 million compared to negative $10.3 million a year ago, we expect to see year over year improvement in free cash flow in the second half of this year.
With that let's now turn to our guidance.
For the full year of fiscal 2020.
We expect revenue to be in the range of $690 million to $692 million.
We remain committed to delivering our first year of non-GAAP profitability. This year and we expect our F Y 20, non-GAAP EPS to be in the range of zero cents to positive two cents on approximately 153 million diluted shares.
Our GAAP EPS is expected to be in the range of negative one dollar and three cents to negative one dollar and one cents on approximately 148 million shares.
For the third quarter of fiscal 2020.
We are setting revenue guidance in the range of $174 million to $175 million.
We expect our non-GAAP EPS to be in the range of negative one cents to zero cents and for our GAAP EPS to be in the range of negative 28 to negative 27 cents on approximately $153 million and 149 million shares respectively.
We look forward to hosting our annual user conference Boxworks in San Francisco on October 3rd and fourth.
As usual, our Q3 sales and marketing expenses will reflect the cost of this event, which we expect to be approximately $6 million.
In conjunction with this user conference, we will be hosting a one and a half hour breakout session for analysts and investors on October threerd, including Q and a.
At Boxworks, we'll be highlighting our progress and excitement around our product roadmap, which will allow us to build on the Ccs momentum that we've been seeing we will also be discussing our customer economics, and overall financial model as we balanced growth and profitability on our path to a billion and beyond.
With that I would like to open it up for questions.
Operator.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Phil Winslow from Wells Fargo. Your line is open.
Hi, This is rich hilliker on for Phil Thanks for taking my questions in terms of the changes that you've been making to your go to market specifically operational rigor with large deals hiring training enablement I was wondering if you can help us understand the progress you've made there what went well this quarter and is resonating with the team relative to prior quarters, and maybe where you're focused lives as we head into the second half of the year and then I have a follow up thanks.
Yes. Thanks. This is this is Aaron we've we've.
Already made a significant amount of progress on the kind of training enablement efforts around.
Streamlining selling box and a repeatable way and that remains a massive focus for the second half of this year I think the best evidence of this is the 36% growth and a 100000 dollar plus deals and that segment generally what we're seeing is that when our sales reps go after use cases that bring together the full power of box, which now includes obviously relay and eminently box shield that our win rates are a lot higher the deal sizes are a lot greater and ultimately we see way greater lifetime value from those customers. So were really really focusing our sales enablement training and sales standardization efforts on selling the complete value proposition of box and the complete platform and when we do that we know that.
We we execute incredibly well so the second half is all about focusing on that.
Great. Thanks, that's helpful and kind of on that same on that same note. They are realizing that it's still early though how is traction Ben for the digital workplace and digital business suites, and how is that corresponded with the other go to these other go to market changes that we've just been talking about and I guess I'm, particularly wondering in terms of the larger deals and the longer sales cycles that you've called out in past quarters. Thanks.
Yes, so the suites are incredibly important to our strategy, we wanted to introduce away where our customers good leverage multiple add on products and be able to get the full value from box as opposed to historically, we've had individual sales processes for each individual add on product that we sell and we now have a portfolio that really warrants streamlining that sales motion and making sure. It's as efficient as possible. So we introduced two products suites in Q2 and it was very it was a very ended the quarter.
So adoption was actually very strong at the very end of the quarter and we're building.
A very strong pipeline for the second half. So we already have a lot of great evidence of of the sale of these suites and and that's what we're going to focus in on the second half and it really helps drive again, the standardization of our sales motion as well as being able to really drive a higher volume of these hundred thousand dollar plus deals across all sales segments in the business right now and this is Don the only I'd add to that is that especially given how long are these suites have been in the market, we're seeing a pretty pronounced impact, particularly in the commercial segment, where a year ago. Two years ago. It was very very rare that we were able to achieve a six figure deal outcome and that strength is actually one of the things that is driving some of the growth that Aaron mentioned in the large deal outcomes and we are seeing deal cycles stabilizing now and more predictability still lot of work to be done as we've talked about but the the impact already that we're seeing.
Showing up in the U.S customer conversations there suites on newer products is it's something we're pretty excited about.
Great. Thank you.
Your next question comes from the line of Rob Owens from Keybanc capital markets. Your line is open.
Good afternoon, guys and thank you for taking my question.
I guess building building on your comments around sales cycles and.
The fact that your business is becoming more enterprise centric and more back half weighted.
I'd like to follow on your comments relative to what you're experiencing with sales cycles and such a new products hitting.
In light of the fact that I guess growth in the second half is looking at that 11.5% in a pretty precipitous decline from the first half on a year over year basis. So.
Help us understand where the where the level of conservatism there where the puts and takes are relative to that guide. Thanks.
Sure So I would say and as we've talked about on prior calls.
We have seen and had been expecting to see a fairly back end loaded year. This year and so I think ultimately the second half and Q4 in particular will be very telling both for measuring our progress and continued progress against some of these initiatives as well as.
On our overall growth rate.
So a lot of this was baked in and I want to just note that the deal cycles.
Have been stabilizing and so we've been able to mitigate a lot of the challenges that we had seen and been seeing as we've been going up market through the different initiatives that Aaron was talking about and then the only other note I'd make is that because of some of those assumptions going into the deal pacing and just the nature of deals is what's going to show up in the in the formal guidance for this year were as much of our success and that volume is going to flow through and next year's model and then just from a kind of pure optical standpoint as it relates to the second half growth as mentioned briefly we did because of our ability to execute on some key milestones pull in about $1 billion of nonrecurring revenue that we had expected in the second half of the year into the second quarter. So that was a bit of an impact in terms of the overall growth rate as well and maybe can you elaborate on what that nonrecurring component was I'm sorry.
Yes, it is to be back kind of services related.
Is what the bulk of our nonrecurring revenues.
All right. Thanks, guys.
Yes, just to just to build on John's point on in terms of pipeline that we're seeing in the second half really strong momentum around financial services life Sciences Federal government obviously.
Where we've seen a lot of success so as that rolls through in the second half obviously that will continue to show up in the revenue and bookings numbers.
Thanks Aaron.
Your next question comes from the line of Mark Murphy from Jpmorgan. Your line is open.
Hi, Good afternoon. This is Matt costs on behalf of Mark Murphy. Thank you for taking my questions.
I know you mentioned last quarter that some seven figure deals that slip.
To later in the year did any of them closed in Q2, and if not do you see some of those still being in play.
Yes, so in the first half combined.
The quarters, we did see some good performance against some of those pushed deals and we do see the majority of them still in the pipeline.
The ones that Didnt get closed in the first half for the second half so very strong momentum obviously, given the size of of companies.
That we tend to see those seven figure deals come from that tends to align more with second half budget or end of year budget from those customers. So thats that obviously points to a little bit of a close cycle later in the year, but overall, we're seeing really strong progress a cot across these bigger deals segment, obviously in Q2.
A lot more progress on the $100000 plus deals segment and as I called out were really focused on driving as much repeatability and standardization of of that sales motion in the $100000 plus segment.
So we're we're focusing on.
Really deeply on on that on that sale segment, and we expect to see continued growth there.
In the coming quarters.
Got it Thats helpful. And then the year over year improvement in sales and marketing as a percentage of revenue I mean, that's been nicely improving for a couple of years now.
Is there a steady state.
This.
Sales and marketing spending as a percentage of revenue and it's obviously involves a little bit of a slowdown in the pace of sales head count additions offset by some efficiency gains that sort of where do you see as for them as a percentage of revenue maybe over the longer term just maybe conceptually.
Yes. So so this is Dylan I would say that we've kind of given directionally.
The types of ranges, where we expect all the different kind of kind of opponents of the PML to shake out over time.
I would say that we do expect to be able to drive.
Additional leverage in sales and marketing.
Primarily.
As a combination of both the natural business model leverage that weve talked through that as a greater proportion of our revenue base is coming through upsells and renewals that is a much higher contribution margins and a much lower percentage of sales and marketing going against that and then we also do have today the capacity and a lot of that kind of core foundation to drive a greater volume of bookings. So I'd say one of the biggest drivers and ultimately where that is going to get a settle in longer term is going to be related to the growth rate and the rate of hiring across the salesforce. So it's hard to pinpoint a specific number is a lot of that relates to the overall balance that we think is appropriate between growth and profitability depending on the productivity that we're seeing but would say that overall that line item is one where there's still certainly a lot of focus and room for improvement overtime.
Thank you.
Your next question comes from the line of Melissa from from Morgan Stanley . Your line is open.
Hi, This is Josh bear on from Melissa Congrats on the really strong a 100 k. deals.
Metrics.
My questions on the new CRM Mark Whalen. So you came in a couple of months ago I'm, just wondering if theres any strategic changes or tweaks that he's putting into place.
Compared to the.
The strategies that youve outlined over the last few quarters.
Yes, I think.
Fortunately, mostly it's a continuation of the strategy that we put in place.
Over the past few quarters. So a line very nicely to what steps had been building up.
From an overall go to market strategy standpoint, I think that maybe the additional points of clarity or refinements are again really on this standardization of the sales process.
And again, you're going to see us hit at home.
Pretty consistently around the 100, K. plus deals segment and focusing on making sure we can drive that volume.
Which of course continues to expand and renew and and grow customers into the $510 million plus segments. So some massive focus on standardization and and again, a really big push on partnering with customer success on renewals and existing customer expansion. So.
Making sure that.
That we're really thinking about the sales motion in a very holistic way, including new logos as well as of course, our existing customer base. So so I think again, a continuation of what we what we laid the foundation for making sure that we're really focused on bringing amazing sales talent and continuing to grow the leadership team and and focus there, but but overall.
Really kind of building on the momentum that we put in place.
And and.
In regards to Mark coming in were there any other sales management changes kind of in relation to that.
There has been a.
Sort of slight changes.
In in kind of various levels of management the organization, but only only things on an incremental basis.
And overall, we feel very very confident in the team that we have on the field right now, especially in driving the second half execution. So we think we have the team and the leadership in place to go drive that.
Got you if I could just sneak in one more on the box Shields, just wondering how you think about that opportunity.
Compared to some of your other.
More recent products and upsell opportunities.
Yes, So shield is on.
We're incredibly excited about shield and Weve seen incredible response from customers very early on with box shields.
For the past 234 years customers have continued to ask us can we add more functionality help them protect their data in a very native way directly inbox. Obviously, we have very strong security partnerships that will remain very strong with box yield enhancing those partnerships. However, our customers are asking us for more native functionality to help them classify their data ensure that sensitive information doesnt exit the enterprise in an unintended way ensure the different anomalous activities that happened within their box environment can easily be detected and alerted and and ultimately when we build this functionality natively into box, we can deliver on a much better user experience as well as use of the proprietary data signals that we have within our system to be able to help detect that type of anomalous activity and by doing so we are unlocking a a new.
Share of budget that is associated with security data loss prevention, and other technologies and again really expanding our footprint in that space as opposed to maybe taking from the share of of security companies directly, but really ensuring that that IP buyers can leverage more of that security spend.
Going toward box, where are our core focus is helping them secure their data and collaborate throughout their business. So so we're incredibly excited to shield as I mentioned, we had a launch event last week, where we got resounding feedback from from a number of global.
Csos in the in the Fortune 500, and beyond and we're expecting that this product will really enhance our differentiation and also encourage customers to be adopting box more broadly and their organization as as they'll have better ways of protecting the flow of content throughout their enterprise.
Excellent. Thank you.
Your next question comes from the line of Brian Peterson from Raymond James Your line is open.
Thanks for taking the question. So I wanted to start on the non U.S. results. It looks likes those accelerated this quarter I didn't know if that benefited at all from the onetime nonrecurring item you mentioned, Dylan, but but I know in the past there's been some.
And leasing.
Overall.
Strength in a lot of our regions outside of North America. So in particular, Japan continues to perform very very well for us and so thats been one of our most consistent and strongest performing regions. We have also over the past couple of quarters seen some improvements in EMEA. If you recall that was one of the areas. We did see kind of more variability in some disappointing results last year.
And overall productivity still a bit below levels in some of the other regions globally, but certainly some pretty positive signs that we're seeing out of EMEA and those are the two primary regions in terms of.
Overall sales and.
And we have our team outside of North America, we are seeing some contribution from some of the smaller regions internationally, but those aren't material to results.
Well, it's great to hear it maybe just a follow up deal and I think you mentioned.
That there should be some sales and marketing efficiencies as you focus on selling existing customer base is there any way to split out how the how much of the sales and marketing expenses are focused on acquiring new logos versus selling back into the installed base. Thank you.
Yes, I would say that one of the things that Weve tried to highlight just to kind of put some numbers around that and we have done historically at our kind of annual investor conference or breakout.
He is talking through the different.
Kind of customer economics, and customer acquisition costs across these different types of sales both a new sales customer expansion and renewals and would expect through the same provide a little bit more color for that in the not too distant future, but would say just at our upcoming.
Investor Day in analyst day, but what I would say is that directionally in terms of how to think about the overall model.
There hasn't been a change from where we are today versus what we've shown and how to think about the overall model historically and the only thing I would build on that is is right now.
We have an extreme focus on ensuring that our customers are again advancing their use cases existing customers are advancing their use cases.
With our add on products like relay soon box shield governance and platform. So a big area of focus for us and certainly a focus for Mark coming on board is to really go through the customers, especially those that are paying $100000 or more and ensure that they are seeing the full value proposition of box.
This will be aided by the launch of the new suites, and making sure that that we can really get all of our customers to be adopting the full portfolio of our solutions that will be a major area of focus for sales going forward. Yes, just directionally. One final thing to add to that is when you think about the percentage of our overall kind of go to market efforts and sales and marketing spend going toward new versus existing customers over time, we expect a greater percentage of that to be going toward our existing customers. Both because of the strategic sort of opportunity we have but also in some of the greenfield markets.
Where we have been very focused on new customers, who now started to build out that customer base, particularly in regions like Japan. So we'd expect that that will drive some some natural efficiencies just from mix shift point of view as well.
Thank you.
Your next question comes from the line of receipt Jaluria from D.A. Davidson. Your line is open.
Hey, guys. Thanks for taking my questions wanted to start by by drilling a little bit more down on the retention and expansion rate. During your prepared remarks, you talked about how one of the reasons for the sequential decline from from 12% expansion last quarter.
Where it's been for four quarters.
10% this quarter was in part due to one large customer that renewed at a lower level. In Q1 can I guess can you help us understand how big of a contributor was that was that the entire reason for the decline.
And I mean since that happened in Q1, why maybe it didn't impact the number in that quarter, but but it is having a bigger impact this quarter and then I've got a follow up.
Sure. So let's say that was the majority of the impact was coming from that single customer.
And it's a bit bigger as beat the way we calculate the metric is on a trailing 12 month basis, and so that will show up.
For the next few quarters as well.
And and as the base and as that events kind of impacts.
A higher number of quarters. So throughout the course of the year the impact does show up in the metric a bit more.
So that was the majority of the kind of sequential change, but I would note that also these metrics are due to rounding and are impacted my rounding and so the actual impact on a quarter over quarter basis was just slightly higher than 1%, even though around the 2% whole numbers and so basically it was the majority from that single customer.
And then we did see a slightly lower expansion rate as well.
In terms of comparing Q1 to Q2.
Got it thanks that's helpful.
And then and then in terms of cash flow.
No cash flows improve relative to Q2 last year I think it's still a little lighter than maybe I expected in Q3, I would imagine it's going to be a little bit of a weaker cash flow quarter with with box works going on just how should we be thinking about free cash flow.
For the remainder of the year and maybe how should be thinking about further levers beyond that thanks.
Yes, so we think about that in general kind of free cash flow.
Cash from ops and operating margin to all generally trend in the same direction.
And move and improve at roughly the same magnitude.
No just a again for context, we do tend to see Q2, as we've talked about in the past be our seasonally weakest cash flow outcome.
Both in terms of cash from operations and free cash flow just coming off of kind of what is typically the lowest volume of bookings and billings in Q1, and we did have a very strong Q1.
Aided by Fantastic collections, so year to date, we have seen pretty solid improvement and good results on the cash from ops side I would say that on the free cash flow front one of the things that has impacted that metric. This year and is incorporated into the forward looking commentary that we gave as well that we provided as well is the capital leases.
Associated with the data center migration project. So I would say that that is a little bit elevated relative to to run rate levels, but as you think about the business going forward as mentioned, we would expect to see improvements year on year in the second half in terms of both cash from operations and free cash flow and then overtime for both those as a deterrent to track more or less in line with the improvements we are seeing.
In the piano.
Great. That's helpful. Thank you.
Your next question comes from the line of Chad Bennett from Craig Hallum. Your line is open.
Thanks for taking my questions. So on the over 100 K. deal sizes was there any material change year over year in terms of.
Average deal size or ACB there.
No. So in that segment in that segment of deals overall, we did not see a significant change year on year. So is really more impacted by the volume of deals.
And as mentioned so I would say the biggest change in those deals a year on year.
And over time has been the segments that we've been able to generate those deals from so pretty pleased to see significant contribution from.
Even add the kind of SMB sales reps and in the mid market meaningfully contributing to that outcome.
Okay. So so.
I appreciate you know deal count increase.
The 36% and maybe that if if average deal sizes hasn't changed that translates to dollars or at least it should to year over year, but if for just simple math stake. We say your average deal size was a couple of hundred Gram.
I mean literally year over year.
That's between three or $4 million of increase right.
And on a 172 million dollar business.
I guess.
Should we be.
Very impressed with that.
Yes, so I would say just as a note the average contract value is even though we havent given the specific numbers.
Our quite a bit higher than than what you referenced.
And so and would also note that as it relates to the overall impact in proportion of new bookings in a given period as you'd expect those larger deals and our field segment overall becomes more pronounced as we move through the year just because of the kind of back end loaded way of kind of way, we tend to sell to larger enterprises, but because that that segment in deals. We talked about also includes the largest customer deals that can get into the millions of dollars per year.
The average contract values are higher by quite a bit than $200000 in that population.
Nick maybe the only other thing I would I would just add is we obviously use the 100 K. deal segment line as a as a sort of illustrative kind of break point, but I think this is more indicative of the overall sales motion continuing to drive.
Add on product sales and continuing to move to larger and larger deals. So.
So we obviously, we break that out because it's a it's a way of kind of showing.
What's the overall large deal segment health, but but again, it's more indicative of an overall sales trend within the business right now.
So just to make sure I understand that and so you're over 500 K. deals were three this quarter versus what last year.
Verses.
11 last year in that segment and then our million dollar plus deals were flat with last year at two deals.
So what would I be missing I guess.
In terms of whats, which piece, the overall impact or the trajectory or air on which components typically.
Just the trajectory I mean, you guys talk about the full power of the box suite and sales productivity enhancements and enablement improvements and demand rate remaining strong for the business, but we're really not seeing it in any of the metrics of the business either primary or secondary.
Yes, I mean, I think in terms of the 110 deals and a lot of the themes that air and in particular as highlighted around the consistency some of the demand for the newer products things like that we are seeing those show up in the business to your point certainly the full impact of this flowing through the model and I mean, even greater impact in the field segment and these overall volumes.
Based on the seasonality and then just the natural deal cycles since when we started to introduce some of these things both selling motions and products into the business fully agree that those have not kind of shown up in the numbers that we've reported that's been more a function of the pipeline that we're seeing in the back half.
So so certainly still have more to execute against a really prove this out and have this.
Have a larger impact on our top line growth.
So I don't think youre necessarily missing anything, but maybe a mismatch or just.
Kind of difference in timing.
Around what maybe you would look for and what we are hoping to indicate and what we had expected to see in terms of when this would flow through the model.
Okay. Thanks for taking my questions.
Your next question comes from the line of Terry Koala from first analysis. Your line is open.
Hey, good afternoon, Thanks for taking my question.
First question is are you seeing any discounting or any pricing pressure in selling the suite to two existing customers or new customers.
Yeah, So I'd say.
We do offer discounts associated with.
Buying sweets beyond what a customer would get if they were to purchase all of those individual products all a card.
But overall, it's had a positive impact in price per seat mentioned that this most recent quarter.
We were able to put up our fifth consecutive quarter of year on year improvement in price per seat. So the overall economics, both at a kind of pure price per seat and then.
They kind of at the margin level have been improving although we do offer a slightly higher discounting on a per product basis versus what we had seen previously.
Got it thank you.
And it's just as a follow up on the on the question earlier about turnover has there been any material turnover in the last quarter or two that's affected the over 500000 dollar deals.
No I wouldn't say that has affected the the over 500000 dollar deals and within the sales force. We had mentioned previously we have been pretty focused on performance management. This year alongside up leveling of our of our sales leadership team and some of the changes we made there but that didn't impact any of the deals that we're working on.
In the kind of in the year to date period.
And had been more focused on.
The sort of folks in the sales force, who hadn't really been adapting to this new way of selling that we've been looking to drive.
Great. Thank you.
There are no further questions at this time. This concludes today's conference call you may now disconnect.