Earnings Call: Q4 2019

Feb 27, 2019

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4th Quarter and Fiscal Year 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Alice Liparo, Head of Investor Relations, you may begin the conference. Good afternoon, and welcome to Box's 4th quarter fiscal 2019 earnings conference call. On the call today, we have Aaron Levie, 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 atwww.box.com/investors. Our webcast will be audio only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle foxincir. On this call, we will be making forward looking statements, including our Q1 FY 2020 financial guidance and our expectations regarding our financial performance for FY 2020 and future periods, timing of and market adoption of our products our markets and market size our operating leverage our expectations regarding maintaining positive free cash flow and future profitability, our planned investments and growth strategies, our ability to achieve our long term revenue and other operating model targets, and expected timing and benefits of our new products and partnerships. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to the press release and risk factors in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10 ks for information on risks and uncertainties that may cause actual results to differ materially. These forward looking statements are being made as of today, February 27, 2019, 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 in the related PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non GAAP basis. Also, please note, we updated our financial disclosures to reflect our adoption of the new ASC 606 revenue recognition standards under the modified retrospective transition method. Having adopted ASC 606 for this fiscal year under the modified retrospective transition method, all Q4 year over year comparisons are made against Q4 results a year ago, which were under ASC 605 unless otherwise stated. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a reconciliation of our financial results under ASC 606 compared to ASC 605. With that, let me hand it over to Aaron. Thanks, Alice, and thanks everyone for joining the call today. In fiscal 2019, we continued to position ourselves to help customers transform their businesses with cloud content management. We achieved $608,000,000 in revenue for the full year and now have more than 92,000 customers, an ecosystem of strategic partners that include leaders like IBM, Google and Microsoft and are consistently recognized as a market leader by industry experts including Gartner and Forrester. Turning to our quarterly results. In Q4, we delivered wins and expansions with major customers including State Street, Live Nation, Alina Health System, Intuit, MGM Studios and Red Robin. Revenue was $163,700,000 up 20% year over year. Billings was $237,700,000 up 16% year over year. And finally, non GAAP EPS was positive 0 point 0 $6 our Q1 of non GAAP profitability. In the quarter, we closed 94 deals greater than $100,000 versus 79 a year ago, 12 deals over $500,000 in line with last year and 2 deals more than $1,000,000 versus $9 a year ago. While we saw strong continued momentum in the $100,000 plus deal segment and we were encouraged by the strength of the 7 figure deals in our pipeline ahead of Q4, we ultimately underperformed against our 7 figure deal expectations in the quarter. These more complex enterprise deals are taking longer to close and as a result a few moved out of the quarter and into pipeline throughout this year. Additionally, as we previously shared, we saw weakness in EMEA throughout FY 2019 and in Q4 experienced a greater impact from this weakness than we anticipated. While these results didn't meet our expectations, we've achieved strong momentum in our solution selling strategy as evidenced by our $100,000 plus deal growth. And with 80% of our new $100,000 deals including at least one add on product compared to 67% a year ago. We're confident our solution selling strategy is working and now we need to aggressively drive more standardization across the business. To drive more unified global execution across all of our sales segments, we've been improving our sales training and processes and over the past 6 months we've hired or promoted new sales leaders in key growth regions across North America and EMEA. With these investments and building on the progress we saw in FY 2019, we remain more confident than ever in the cloud content management opportunity. As we kick off fiscal 2020, we are focused on 2 key objectives to drive our next phase of growth on our path to $1,000,000,000 in revenue and beyond. Number 1, building the category defining cloud content management platform that powers our customers' digital business processes. And number 2, accelerating our customers' digital transformation with cloud content management through our go to market efforts. Let's start first with building the category defining cloud content management platform. When we look around the world, digital transformation is more urgent for enterprises than ever. Companies today are working across a diverse network of global partners that demand seamless collaboration anytime and anyplace. Markets are hyper competitive and to compete companies need to move faster in everything that they do. Further, every enterprise across every industry is dealing with massive cybersecurity and compliance challenges. Content is at the center of these challenges. Yet most enterprises are held back by their legacy content management vendors. Legacy on prem systems like Documentum, OpenText and SharePoint make it far too difficult to share content and manage business processes across the extended enterprise in addition to being too costly and complex for the digital age. The enterprise content management and storage infrastructure markets represent $40,000,000,000 in opportunity and Box is the only cloud native platform built to power the next generation of workloads as they rapidly move from on prem to the cloud. Entering FY 2020, we have the most exciting product roadmap in our company's history, focused entirely on enabling our customers to power their digital business processes and to retire legacy content management systems. Throughout the year, we will be launching and enhancing critical box products to enable number 1, workflow automation to power business processes with an all new Box Relay 2, smarter content management with new metadata solutions and Box platform updates and 3, advanced security classification and threat detection with Box Shield. From our conversations with our largest customers, it's apparent that they have a wealth of manual business processes primed for automation. We've heard overwhelming feedback from our customers that they want simpler ways to consume workflow automation natively within Box. And this year we'll be launching an all new Box Relay built from the ground up by leveraging Box's automations capabilities announced at Boxworks. The all new Box Relay is built natively on Box and will help customers automate business processes across sales, client services, marketing, contract management, manufacturing and more. This product will be launched in the middle of this year and will be sold as a standalone SKU in addition to being a part of the new product suites we'll be offering later this year. In FY 2020, we will also focus on enabling intelligent content management by advancing our metadata, skills and platform capabilities. Combined, these capabilities enable customers to retire legacy ECM technology integrate Box into ERP systems, line of business apps, business processes and more. For instance, one customer we closed in Q4, Lineage Logistics, an international warehousing and logistics company will leverage Box skills through Box platform to power new warehouse automation initiatives. Finally, with content being accessed from more locations, apps, devices and shared across a growing network of external partners and customers, we need a brand new approach to security in the cloud. To solve this, we will be launching Box Shield as an add on product later this year. Box Shield will bring intelligent threat detection and content classification natively into Box. We're already hearing from prospective customers that Shield will be transformational to their security and risk posture in protecting critical intellectual property. FY 2020 is setting up to be the most exciting year for product innovation in Box's history. And due to the increasing success of our add on products, we'll be making it much easier for our customers to adopt the full power of our cloud content management platform by launching new product suites in the first half of FY twenty twenty. Turning to our second area of focus for the year. The full power of our cloud content management platform is realized when an organization leverages Box for broad digital transformation, enabling a digital workplace and powering digital business processes across the extended enterprise. To do this, our focus for the past year has been to evolve from selling Box as a tool for file sharing and storage to consultatively selling Box as a cloud content management platform for the entire enterprise with the full set of Box capabilities. Our solution selling strategy is focused on ensuring that new and existing customers see the full use cases and possibilities with cloud content management tied to significant business outcomes in the form of IT cost savings, business process acceleration and lower security and compliance risk. When we sell this way, we're able to drive much larger and strategic deals with customers. Cross selling add on products is key to driving larger and more transformational deals. A few examples of where our add on product and solution selling strategies were successful in Q4 driving 94 deals above $100,000 or more include a 7 figure deal in Q4 with a major technology company in Fortune 500 that purchased Box Governance, KeySafe and Platform accounting for over 40% of their deal and transforming how they are streamlining processes around content across the organization. We also achieved a new ELA with Heidrick and Struggles, a longstanding Box customer where they purchase Box Skills, Box Multi Zones and Box Platform to better coordinate between distributed global offices and their effort to find and close top executive candidates faster. And finally, a win with MGM Studios who will leverage Box's core offering and Box Governance as its central content repository to retire network file shares. MGM is focused on building an end to end digital supply chain where applications like Box will be used across lines of business from marketing to production and financial operations. We began implementing our solution selling strategy in FY 2019 and while we're encouraged by our early progress, we're working to further improve our execution through number 1, improved sales training, rigorous sales processes and updates to our sales compensation plans tied to solution selling 2, hiring and promoting experienced world class sales leadership talent throughout all segments of the field globally and 3, selling suites of our add on products like Box Governance, Platform Skills, Shield and Relay to make it even easier for customers to purchase and adopt our full cloud content management platform. While the majority of our customers leverage Box today for secure collaboration and productivity, we know the big opportunity is to power our customers' digital business processes in the cloud. Within our existing customer base alone, there are 1,000,000,000 of dollars in potential revenue upside as our customers begin to leverage Box's full set of capabilities across their organizations. Our number one job is to move our customers along the journey to leverage Box to power their full digital transformation. To wrap up, Box is the only cloud content management platform that accelerates business processes, powers workplace collaboration and protects an enterprise's most valuable information, while also working across the best of breed modern enterprise IT stack. Heading into FY 2020, we're focused on extending the core capabilities to differentiate Box as a cloud content management platform and refining our solution selling motion to drive more consistent execution across the business. At the same time, we're targeting our 1st year of non GAAP profitability showing further leverage in the business as we continue on our path to $1,000,000,000 in revenue and beyond. With that, I'll hand it over to Dylan. Thanks Aaron. Good afternoon everyone and thank you for joining us today. Q4 capped off a solid year and marked a couple of important milestones for us. In Q4, we achieved our Q1 of non GAAP profitability and our 2nd consecutive year of positive free cash flow as we continue to drive strong leverage in our business model. We delivered revenue of $163,700,000 in Q4, up 20% year over year with 23% of Q4's revenue coming from regions outside of the United States driven by strong performance in Japan throughout the year. We closed 94 deals over $100,000 versus $79 a year ago, 12 deals over $500,000 which was flat with a year ago and 2 deals over $1,000,000 versus 9 a year ago. 4th quarter billings came in at $237,700,000 representing 16% calculated and 17% adjusted billings growth year over year falling short of our original expectation of growth in the mid-20s. As Aaron mentioned, this outcome was the result of some 7 figure deals that are taking longer to close than we had expected and our disappointing execution in EMEA. Total deferred revenue was $375,000,000 up 17% year over year. Backlog was 311,000,000 dollars an increase of 12% year over year. While billings and our 7 figure deal results did not meet our expectations, we are highly confident in our overall CCM strategy and market opportunity. We now have more than 900 customers paying at least $100,000 annually making up 60% of our recurring revenue. Our strategy to up sell and cross sell in these large accounts is a critical initiative which will drive long term product stickiness and growth. We're in a strong position to capitalize on this opportunity as we build on the early momentum we've delivered in our solution selling efforts. The value of our add on product portfolio is up more than 60% year over year now at roughly 14% of our revenue run rate in Q4 versus roughly 10% a year ago. Turning to margins. Non GAAP gross margin came in at 73.5% versus 76.2 percent a year ago and 73.6% last quarter. As a reminder, this past year we made some upfront investments to expand our data center footprint based on the demand we've been seeing and the impact to our gross margins in FY 2019 were in line with our original expectations. We were pleased to see a slight improvement in price per seat on a year over year basis mainly as a result of higher add on product attach rates. We now have 12,000,000 paid users. As part of our hybrid cloud infrastructure strategy, in FY 2020 we will be migrating our data center footprint to significantly lower cost regions, which will accomplish 3 primary goals: supporting our growth to multi exabyte scale, addressing complex customer compliance requirements and saving tens of 1,000,000 of dollars over the subsequent 3 year period. As part of this move, we'll be temporarily occupying redundant colocation facilities throughout the course of FY 2020 leading to elevated data center expenses over the next year. As such, we are expecting gross margin throughout FY 2020 to range from 70% to 71%. Once we complete this migration and as we continue to drive these efficiencies, we expect gross margin to trend back up toward the mid-70s. Q4 was another successful quarter of driving operational efficiency. Sales and marketing expenses in the quarter were $64,600,000 representing 39 percent of revenue, a significant improvement from 51% in the prior year, which includes a roughly 3% benefit related to the adoption of ASC 606. Looking ahead, we expect to drive more leverage in sales and marketing as we gain greater efficiencies from our solution selling strategy. We're entering FY 2020 with 300 quota carrying sales reps, up 12% year over year. In FY 2020, we plan to grow our sales force in the range of 10% to 15% focusing on field hires in the U. S. And Japan. Next, research and development expenses were $29,800,000 or 18 percent of revenue, flat with a year ago as we continue to invest in the enhancement of our product offerings. This included the continued development of Box Relay, Box Shield and Box Platform. Our general and administrative costs were 17,400,000 dollars or 11% of revenue compared to 12% in Q4 of last year. We expect to drive continued leverage in G and A as we benefit from greater operational excellence and scale. Our focus on operational efficiency drove our Q4 non GAAP operating margin to a solid 10 percentage point improvement year over year coming in at positive 5% versus negative 5% a year ago. As a result, non GAAP EPS came in at positive $0.06 an improvement from negative $0.06 a year ago and well above the high end of our guidance. One of the key elements that makes our business model so powerful is our strong customer retention. Our full churn rate in Q4 was 4.3% on an annualized basis. Importantly, we've seen that as customers increasingly adopt our add on products, they become stickier. In Q4, the full churn rate for customers who had purchased at least 1 add on product was roughly 2% on an annualized basis. Our net expansion rate on an annualized basis was 12%, driven primarily by strong seat growth in existing customers and cross sells of our add on products. As such, we ended the quarter with a net retention rate of 108% stable versus the prior two quarters. Let me now move on to our balance sheet and cash flow. We ended the quarter with $217,800,000 in cash, cash equivalents and restricted cash. We delivered cash flow from operations of $31,300,000 compared to $22,500,000 a year ago. In Q4, total CapEx was $2,200,000 versus $7,000,000 a year ago. Capital lease payments, which we factor into our free cash flow calculation, were $6,700,000 versus $3,400,000 a year ago. We expect CapEx and capital lease payments combined to be 5% to 6% of revenue for the full year of FY 2020 and roughly 6% of revenue in Q1. Finally, we generated $21,000,000 of free cash flow in the 4th quarter or 13% of revenue compared to $12,100,000 a year ago. We're pleased to have achieved positive free cash flow in Q4 and for the full year of fiscal 2019. 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 $700,000,000 to 704,000,000 This guidance incorporates the impact of both underperformance in EMEA and 7 figure deal execution in Q4 with each of these factors representing a roughly $10,000,000 headwind to FY 2020 revenue versus our prior expectations. Additionally, one of our customers significantly reduced its spend with us upon its renewal earlier this month as they did not realize the full value of their initial use cases. This was a unique customer situation which will represent a revenue headwind of approximately $8,000,000 in FY 2020. We expect our FY 2020 non GAAP EPS to be in the range of negative $0.03 to positive $0.01 on approximately 156,000,000 diluted shares. Our GAAP EPS is expected to be in the range of negative $1.06 to negative $1.02 on approximately 148,000,000 shares. You may recall that a quarter ago we shared our expectations of achieving roughly breakeven non GAAP EPS in FY 2020. As you can see from our guidance, we are continuing to drive leverage across the business and in FY 2020 we are targeting our 1st year of delivering non GAAP profitability. For the Q1 of fiscal 2020, we are setting revenue guidance in the range of $161,000,000 to $162,000,000 Note that Q1 has 3 fewer days than Q4, which creates a revenue headwind of a little more than $5,000,000 versus Q4, but does not impact year over year comparisons. While we don't typically guide to billings, we want to provide some color around how we expect billings to trend throughout the year. While we generally expect our revenue and billings growth rates to track roughly in line, year over year comparisons of this metric can be variable from quarter to quarter and thus is not always a meaningful indicator of the underlying momentum of our business. In Q1 we expect to see our revenue and billings growth rate deviate due to a few different factors. First, we saw an elevated volume of multiyear prepays in the year ago period. 2nd, the impact of the previously mentioned churn event creates a significant headwind to Q1 billings. Finally, as we stated throughout FY 2019, the final payments associated with our enhanced developer fee were billed from Q1 to Q3, representing an additional couple $1,000,000 headwind to Q1 billings. As such Q1 will have a particularly tough year over year comparison and we expect Q1 billings growth to be in the low single digit range before returning to more normalized growth rates for the remainder of FY 2020. We expect our non GAAP EPS to be in the range of negative 0.06 dollars to negative 0 point 0 $5 and for GAAP EPS to be in the range of negative 0.29 dollars to negative 0.28 dollars on approximately 145,000,000 shares. We remain confident that our market opportunity in cloud content management combined with our increasingly differentiated product portfolio will allow us to achieve faster growth rates over time than what we're anticipating in FY 2020. While our Q4 FY 2019 sales results led us to lower our revenue expectations for FY 2020, we're encouraged by the early traction we are seeing in our solution selling strategy. We're focused on driving a reacceleration in top line growth in order to achieve our target of $1,000,000,000 in revenue for the full year of fiscal 2022. With that, I would like to open it up for questions. Operator? Your first question comes from Philip Winslow with Wells Fargo. Your line is open. Hey, thanks guys for taking my question. Just wanted to dig in on your comments about billings growth, but also just go to market headcount increases. You all talked about, I believe, a 10% to 15% headcount in just the go to market. I believe you ended the year at about 300 quota carrying. If I kind of correlate that back then to the billings guidance sort of implied also being kind of in the low teens there. Wondering just kind of walk through the math there, kind of how you're thinking about sales productivity because obviously this fiscal you made a lot of changes. How are you thinking about sales productivity this coming year versus this last year and kind of the puts and takes versus just call it like the headcount side and then one quick follow-up to that? Sure. So I'll start with that Phil. This is Dylan. First of all, I would note that while we generally expect revenue and billings growth rates to track roughly in line, Year over year comparisons of this metric can be pretty variable from quarter to quarter for a variety of factors such as payment durations and customer driven changes to the timing of large renewals. So I wouldn't necessarily think about the commentary we gave around billings as a meaningful indicator of the underlying momentum that we're seeing in our business. On the productivity front, as mentioned, as we've talked about, we've seen some inconsistency on a region by region basis in terms of the productivity this past year. So within that 10% to 15%, we are going to be really focused on growing in the regions where we are seeing better performance, such as most of the U. S. In the field as well as in Japan. And then as we start to see some of these things we're doing across the business rollouts, we may add headcount to other regions as well as that productivity improves. So we are going to be very, very focused on driving productivity improvements across the globe, particularly in the field in the coming year. And there's a few different areas that we're really focused on here. So the first, there's an operational component. As Aaron mentioned, really revamping a lot of the sales enablement and training to drive more consistent execution as well as tweaking some of the comp plan incentives that we have in place just to further align that with our solution selling strategy. I think we've been pretty pleased with the way that showed up this past year in add on products and generally in large deals. So the second component is around the product capabilities. We are going to be making Box Relay generally available in the first half of this year, the new Box Relay as well as Box Shield in the second half and introducing product suites this year for the first time, which we think will again further help us sell bigger deals and improve productivity. And then the 3rd component is on the leadership front. So we now have the key positions that we have been searching for fields in North America and EMEA. And so those three factors, the operational product and leadership side, should really help drive these productivity improvements and should start to see that even as soon as the first half of the year, particularly in the big deal growth outcomes. Got it. And then just as a follow-up to that, I missed the metric in terms of the attach rate of add ons to the 100 ks deals. I think it was 80 last quarter. I was wondering what it was this quarter. And then in terms of just the bundling, terms of sort of driving, I guess, call it, cumulative add on, how are you thinking about rolling these out? You mentioned in the first half, I mean, is this something that we should expect to see quarter? And I remember on last call, you mentioned sort of experimenting with some of those bundles in Q4, making it a little more formalized. What did you see and where you did rollout the bundles and how is that impacting and how you're thinking about the bundling this year and the timing of when those actually do rollout? Sure. So I'll turn it over to Aaron for the question on bundling and the strategy there. And then to confirm that metric for add on product attach rates in our 6 figure deals was 80% again this quarter, which is up from the high 60s a year ago. Cool. Yes. So this is Aaron. Phil, the evolution of Box has obviously been having a core product for file sharing collaboration and content storage in the cloud. And then over the past really 3 or 4 years, we've been adding additional value added products like data governance, our platform capabilities, advanced security capabilities as add on solutions around the core. What we're finding is as we're moving more towards solution selling and selling larger transactions, we want to get out of the mode of selling each individual product on a one off basis to customers and really being able to bring the full suite of Boxes, cloud content management platform to our customers. So we've simulated that a little bit in some of our customer conversations in Q3 and Q4 to quite a bit of early success. And so with the general availability of the new Box Relay which is really going to be our ability to bring the best workflow automation capabilities to our customers for content management, That will then allow us to say with workflow, data governance, platform and eventually our advanced security with Shield, you can then buy that as a suite of capabilities from Box to really help with digital transformation. So that's already been tested more or less in market through customer conversations, but we want to make that a packaged offering that we can bring to our entire customer base. And that's what we are looking to do within the first half of this year. So something we're very excited about which we know that our sales reps in the field are quite excited about as well and that we've already seen strong early signal from our customers that that is a better way to purchase and use the full breadth of Box's capabilities. Great. Thanks guys. Your next question is from Melissa Franchi with Morgan Stanley. Your line is open. Hi, this is Josh on for Melissa. My question was on some of the CapEx and data center investments that you've made sort of ahead of increased demand and connecting that with some of the like the weaker billings that we've seen. Maybe to answer, you could talk a little bit more about what you're seeing in the pipeline? Yes. So this is Aaron. I mean overall, we're still seeing very strong pipeline. We're again not happy and not satisfied with the Q4 results in the big deal segments, especially the 7 figure deals. However, those customers are still in the pipeline for this year, tend to be very large regulated customers often in banking or government agencies or life sciences where the deals tend to be more complex in nature from a security legal compliance standpoint. But overall, we have not changed our view of the momentum and the pipeline that we're seeing in the business. As it relates to then the capital expenditures on data centers just due to the sheer growth of our customer base and the amount of usage of the platform, we're obviously preparing for our continued growth of our customers and that requires us to move into much more scalable data center facilities in addition to our hybrid cloud usage of public cloud partners. And so as a result of that, that means we have to operate out of 2 extra data centers from a redundancy standpoint temporarily while we're making that migration happen, which obviously has an impact on gross margin as Dylan mentioned. So this is something that is completely driven by the growth of the customer base we're already seeing and then to ensure that we have the room for capacity growth going forward in lower cost locations outside of California, which is one of the other kind of key points of this is we want more scalability with our data center footprint in lower cost locations and that's a core factor that will then ultimately lead to better gross margin performance over time. Thanks, Aaron. That makes a lot of sense. And one clarification for Dylan. So the deals that the large deals that got pushed out from longer sales cycles are still in the pipeline, but you did mention, just want to make sure a 10,000,000 impact to FY 2020 revenue guidance from the large deals or was that just on the EMEA side? Thank you. Yes. So that was the expected impact on FY 2020 revenue as a result of some of these larger deals not coming in, which is an addition to the impact from EMEA, which is another roughly $10,000,000 expected impact for FY 2020. Thanks. Your next question is from Ted Lin with Goldman Sachs. Your line is open. Great. Thanks for taking the question. I wanted to dig in a little bit more on kind of the slip deals and trends there. I guess what were the types of kind of legal and governance complexities that caused the 7 figure deals to slip and the sales cycles to lengthen there? And do you anticipate that to be a kind of a trend going forward? And I guess can you talk about the close rates on those slipped deals for the 1st month of the 1st New Year? Thanks. Yes. So given first of all we don't expect that to continue. We are improving a lot of the operational and sales rigor around these larger deals. And that was already happening throughout the year. But again, unfortunately due to the complexity of some of these transactions, there's some of that does not is not fully within our control. I'd say due to the kinds of customers we're talking about where the intellectual property that's within their files and their data is very sensitive, could be client records, could be government data and information. It just puts a very high threshold on the security review, the compliance review, the data privacy reviews of our customers, which often involves a pretty broad set of individuals and parts of the organization that we have to go and work through. And then of course obviously as always budgeting and kind of finance decisions as well in that process. So the complexity of these deals obviously has increased over the past couple of years, really driven by the strategic nature of these transactions. And we're working to make sure that they can happen as smoothly as possible and that we're constantly improving our own internal processes to drive these as well as the sales rigor and the operational rigor to make sure that we can get these across the finish line. I think the 100 ks deal segments and the 500 ks deal segments did show very healthy growth on a year over year basis. And as a note, the miss in the 7 figure deals translate through both the 500 ks and the 100 ks deal segments because it's a cumulative number. So we did see strong growth in the 500 ks to $1,000,000 sales segments on a year over year basis, if you just look at that segment specifically. So overall strong momentum on selling these larger deals, but in that 7 figure category we are not happy about those results. We are seeing those 7 figure deals in both our Q1 and Q2 pipeline. So we have a high degree of confidence that we'll get the majority of those things closed throughout the next couple of quarters into Q3 and that's where we'll see these deals show up. Great. Thank you. And is there anything you can tell us I guess about the overall demand environment? Are you seeing maybe a slower adoption curve for content management in the cloud or perhaps more competitive environment? Thanks. I think again given the nature of our evolution from being a tool for file sharing collaboration which was a relatively straightforward sale that drove this kind of first set of adoption within customers to now much more of a strategic platform where customers are automating their business processes, where in many cases they're dealing with much more regulated information, where compliance and security is even more important, where content might even go out and reach through their manufacturing processes or supply chains or customer base and the fact that they're able to shut down legacy systems. This is just the nature of these transactions that again it's more parties tend to be involved within the customer and it tends to be a more in-depth sales cycle. However, as a result of these types of sales cycles, we do see way greater customer retention, obviously much larger deal sizes and then ultimately much more of our differentiation is able to benefit from these deals as well. So we do expect that this becomes the bulk of our business as we reach $1,000,000,000 in revenue and beyond, but it is an evolution to get there and it's something that again we're not satisfied with the speed at which we're driving that execution through the whole company. But we are seeing some incredible pockets of success that we now want to go replicate and drive more uniform execution around. Yes, and this is Dylan just to add a little bit there. I think Aaron covered most of it, but just as a note, while these particular deals that we had expected to didn't close in the Q4 are taking longer to close. We're not seeing this as a more general trend across our larger deals beyond what we had already been seeing in the business and expecting. And as Aaron mentioned, ultimately doing this is kind of solvable through our just better execution on our end as a lot of it came down to just deal management and not sort of getting ahead of some of these complexities. Although external factors did influence a couple of these deals such as one of the 7 figure deals was delayed because of a large merger, another because of the government shutdown. But most of these almost all of these deals are still in play and in the pipeline and set to close throughout FY 2020. Great. Thanks for taking the questions. Your next question is from Rob Owens with KeyBanc Capital Markets. Your line is open. Hey, guys. Pardon me. Hey, guys. This is Mike Casado on for Rob Owens. Dylan, relative to the 7 figure deals, can you help us understand the assumptions around the $10,000,000 headwind you referenced. Pardon me, I'm sorry, around the $10,000,000 headwind you referenced. How do you expect those deals to play out over the course of the year? And any other color you could provide us in helping us get a sense of how you arrived at that $10,000,000 headwind? Sure. So maybe to give a little bit of color, it was effectively the delta between what we had forecasted in terms of the impact on kind of annualized contract value and cumulative impact that we'd expected in Q4 and that's how it would roll through the year. On the revenue front, it does take we basically have a few different categories of deals depending on our confidence in closing those deals from committed to different probabilities associated with that. And so it's really looking at that weighted expected impact of those deals that are in those kind of firmer categories versus what ultimately happened in the 4th quarter. And then we are expecting some of those deals as mentioned to close throughout the course of FY 2020, so adjusted for that. But really looking at it effectively as the delta between in that set of deals that we had expected to close in the 4th quarter originally, as we sort of enter the quarter versus what ultimately happened, and then making adjustments for the deals that are near term that we have visibility into in the earlier part of the year. That's helpful. Thank you. And then with the new and new leadership in place for only 2 quarters now, how satisfied is the team with the structure there? And is being able to better solution sell in EMEA largely just a function of educating the sales force? Yes. So we're seeing strong early signs from the new leadership. We've actually made a set of changes even beyond bringing the new leader that we mentioned in the start of Q3 of last year. We have new leadership in some of our kind of sub regional segments that are running kind of key countries within EMEA. So overall, we have made some investments in very strong sales leadership and talent to help with EMEA broadly. Solution selling and really this move from enabling customers to use Box for file sharing collaboration to really using the full suite of Box's capabilities. This is an evolution that we've been going through across all of our segments. However, we have more work to do specifically in EMEA and it is something where sales training, our sales processes and rigor as well as the introduction of our product suites we believe is going to be very helpful in increasing momentum there. So happy with the early signs that we're seeing and we do expect to see some recovery on this within the first half of this year, but again not satisfied with the Q4 results, which is driving a big part of that revenue guidance. Fantastic. Thanks guys. Your next question is from Mark Murphy with JPMorgan. Your line is open. Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. The one customer you mentioned that renewed at a much lower rate than originally expected and will be a headwind to revenue this year. What were some of the original use cases that they thought they were going to realize? And why weren't they able to meet those targets or realize those use cases? What are some of the unforeseen circumstances they ran into? Yes. So just some brief context on the deal. The deal was initially structured with prior leadership within the organization, of which we had much stronger kind of connection relationship to. So that was the kind of start of the whole context of the overall strategy from an IT standpoint looked very different, given the prior relationship structure. We had a number of use cases, some higher value than others unfortunately and some of the high value ones with this new leadership in place there ended up being a cost versus value gap that we couldn't bridge with the new leadership and so that resulted in that down sell. They remain a customer and it's customer that we're working with right now to drive more expansion of use cases. So I think we see actually a lot of go forward opportunity in this account in particular, but unfortunately a mismatch to the prior set of use cases and the unique structure that was created there, again driven by the prior leadership. So definitely a one off from our perspective, not something that we see any kind of consistent trend on, but something that we're really focused on recovering even with this specific customer and driving future growth with. Thank you. You also called out strength in Japan. Can you comment or update us on the Fujitsu partnership and how they're able to drive that strength or how much they contributed to it? Yes. So we're seeing fantastic results from Japan, absolutely driving certainly a disproportionate amount of our international growth. But just even on an a a co sell model both direct and with partners. Fujitsu is one of them including IBM and many other kind of major resellers in Japan. So the growth we are seeing kind of healthy relationship with Fujitsu both as a customer as well as a partner in that ecosystem. But I'd say the broader partner ecosystem in Japan is performing very strong and we're seeing really strong results from that region. Got it. Thank you. Your next question is from George Yeminck with Oppenheimer. Your line is open. Thank you for taking my question. Dylan, when you look at the competitive environment, I think you covered this earlier. Can you give us a sense of whether your win rates are steady or going up or ticking down relative to the competition? Yes, so our win rates have been stable and pretty strong. So that hasn't changed whether you're looking at kind of even on a competitor by competitor basis. I would say that we tend to see higher win rates in those use cases that are more kind of cloud content management in nature. So particularly as there are a greater set of products associated with those deals As much as you always mentioned they tend to be more complex and in many cases longer deal cycles. The win rates on those types of conversations that we have are higher than the more basic use cases were less differentiated. But across the board, there haven't been any significant changes to either the sort of competitive environment or the types of win rates that we've been seeing over the past several quarters. And the only thing I would build on that is more and more we're helping customers go and retire cost from their IT environment. So oftentimes we are not necessarily competing with a net new competitor as much as helping customers replace and retire legacy systems, which tend to obviously improve the funding and the budgeting for Box as well. So a lot of the legacy document management and storage infrastructure technologies that can't work in the cloud, Box is able to help customers go and retire. And so we're seeing an increasing trend in our win rates and in our win notifications around being able to help retire and shut down legacy document management and storage infrastructure. All right. And It seems like the lift you're getting is primarily mix related. Yes, so we're seeing stability in terms of the uplift that we see on the products. And again just kind of the high level puts and takes, the 2 most significant puts and takes that we see on an overall price per seat basis are the tailwind that we get from the incremental value from these add on products and higher value use cases offset by these larger deals of more seats as we tend to give volume discounting. So overall we've been pretty pleased with the way that price proceed been trending. We did see continued improvement, slight improvement over the past year in terms of the price per seat overall and is up roughly 30% versus where we were 2, 2.5 years ago. Okay. And my last question on that 30%. When you have the new Relay product upgrade that comes later this year and the security elements, Do you feel like you have some extra pricing leverage with those type of products relative to that 30% adder you've seen for the past products? Yes. So I think that those products are absolutely this is Aaron, are absolutely more premium in nature than even sort of the data governance module. However, again given the Box suites that we're looking to introduce, I think you'll see a collection of these add on products that are sold to customers, which will obviously be more than any individual add on product sale, but obviously include volume discounts etcetera based on the size of the customer. But overall, I think our pricing power due to our workflow automation capabilities, advanced security capabilities, data governance capabilities and open platform we'll only continue to get stronger over time as we move customers from using Boxes as again a productivity and collaboration tool to really a cloud content management platform. Great. Thank you. Your next question is from Brian Peterson with Raymond James. Your line is open. Hi, Aaron. Just a question for you. So normally in the prepared remarks, we hear a lot about the channel momentum and I think Dylan give stats on how many of the larger deals are driven by channel partners. We didn't hear that this quarter. Is there anything to read into that? Has anything changed with the health of the business with channel partners? Yes, it's a great question. No significant change on the focus on channels or resellers. There is an evolution where this year in particular going to see us put even more emphasis on system integrators and our work with the larger technology integrators of the likes of Accenture, Deloitte, etcetera. But we really wanted to make sure that we covered the broader evolution that's happening with our go to market efforts, which is much more about how do we take the full power of Box to our customers and drive upsells without on products. And so we wanted to make sure we put a lot of emphasis on that particular dimension of our business model. I think more and more over time channel we will see as a distribution vehicle for us. But whether the customer's director channel is again not the big focus versus making sure customers really use us as a cloud content management platform. And so, we'll certainly reflect that in our comments as we go forward this year. And but you will see the partnership mix continue to evolve again to bring in more of these system integrators as we're driving much bigger and more strategic solutions to our customers. Yes. And so channel does remain about 30% of our overall business. And in the 4th quarter close to 50% of our 6 figure deals were co sold with a channel partner. Although that is driven in large part, that's a little bit higher than in most quarters by the really strong growth that we saw in Japan that we mentioned as virtually all of those deals are through the channel. Got it. And Dylan, maybe one clarification for you. I know we get the revenue breakout of domestic versus international. But is there any sense that you can give us in terms of the size of EMEA in that international revenue? Thanks guys. Yes, so we'd say it's tended to be in the kind of 10% low teens type of range to get a sense of kind of order of magnitude and as it relates to the overall revenue growth rate as that has the contribution from the international business has improved by a bit year on year. That is as Aaron mentioned really driven by Japan off set by what we've been seeing in EMEA. But to get a sense of that scale that's kind of roughly the contribution from EMEA today out of our overall revenue and given just the market opportunity, we think that kind of by improving some of the execution and inconsistently we've seen that over time we should be able to grow that as a percentage of our overall revenue as well. Your next question is from Michael Turrin with Deutsche Bank. Your line is open. Good afternoon. Thanks. I was hoping we could touch more on your thoughts around seasonality heading into fiscal 2020. I think we were all expecting to see more of a back end loaded year this year as a result of the move to solution selling, but growth rates actually held pretty consistent throughout the year. You added some color around billings trajectory in more of a back ended seasonal pattern going forward? More of a back ended seasonal pattern going forward? Sure. So we do expect that to be the case. As you mentioned, the billings kind of breakdown and seasonality has been fairly consistent over the past few years now. I would say that in FY 2020, again we expect roughly the same, particularly as we grow a larger portion of what we ultimately bill comes from renewals. So you probably won't see us move the needle significantly given the current scale. So we'd expect to see similar trends, but there would be a little bit of a shift from Q1 into Q4 both because of some of those expected Q1 billings headwinds that we mentioned as well as that continued push into solution selling and selling these larger customers in addition to coming off of Q4 strong for us. So would expect probably to see growth or contribution to overall billings to break down in the kind of mid teens in Q1, low to mid teens in Q2 and Q3 and then mid to high 30s in Q4. Okay, that's helpful. And then maybe one on margin. Dylan, now that you've reached profitability on an adjusted basis, any plans at all to potentially dial back the degree of margin expansion from here? How are you thinking about that trade off and the potential to maybe push for more growth going forward here? Yes. So as we've talked about in the past, we really do focus on what we're seeing in terms of sales productivity on a region by region, segment basis to really determine what we think the right growth rate is to grow our sales force, which is the biggest driver of the overall spend and I think variability in terms of the type of leverage that we'll see in the coming years as sales and marketing is probably the line item that's going to be most impacted and where we expect to drive most of the leverage. If we are seeing pipeline and actual sales and performance in certain regions then we will likely invest more in those regions and if not then you'll likely see more profitability. But I would say that we think we have a pretty healthy mix of kind of the growth and profitability in terms of what we've discussed for this year and would note that we think there's a lot of potential to grow at a healthy clip and invest in the capacity and the pipeline to put up continued growth based on we're expecting to do this year. So feel pretty good about this sort of just all of the inputs that would go into putting up those healthy growth rates over time. And I would say that when we get through FY 2020, which we did give formal guidance around, would expect to see fairly consistent improvement in our operating margins between this year that we're just entering now and FY '22. So call it roughly 500 basis points or so of margin expansion in each of FY 'twenty one and FY 'twenty two. That's helpful. Thanks. Appreciate you taking the questions. Your next question is from Chad Bennett with Craig Hallum. Your line is open. Great. Thanks for taking my questions. Maybe a first a clarification one for Dylan. The $10,000,000 headwind between Europe or EMEA, I should say, and the large deals this year, as a result of the billings weakness in the 4th quarter, Are those the 7 figure deal weakness and EMEA weakness, are those mutually exclusive or is there some overlap there, meaning obviously with some of the 7 figure deal weakness out of EMEA? Yes. So those are 2 separate categories. So while there is overlap in terms of the 7 figure deals in EMEA that we had expect close and didn't. We had categorized those as part of the EMEA headwind. So those are 2 separate categories that are mutually exclusive each about $10,000,000 Okay. And then kind of generally speaking, maybe for Aaron or Dylan, I guess, I'm trying to understand your kind of enthusiasm or confidence behind the solution selling working. I think over the last couple of years, you've grown quota carrying headcount well in excess of revenue growth and certainly in excess of billings growth. You would think if the solution sale selling is working, it would certainly be evident in your fiscal Q4 where these solution based large deals really accumulate and seasonally are strong. And if you look at your trailing 4 quarter billings per paying user, I think since you've given this metric, it went negative year over year for the again year over year on a trailing 4 quarter basis. Obviously, your paying users are down and your billings are down because billings missed. That's obviously apparent. But I guess I'm what evidence are you seeing that what you're doing is really working? Thanks. Yes. So I can cover the Evidence side and then I think Dylan wants to maybe clarify a couple of numbers because we are seeing higher kind of revenue growth rate than the sales headcount adds. So we do want to clarify a couple of numbers there. I think overall when we look at the broader base of large deals, especially the $100,000 plus segment, which are while they don't represent the full impact of our CCM platform being sold to customers, they are often representative of the kinds of customers that are using Box in more strategic ways. And we have seen that base of customers grow on about a 20% basis year over year. And now starting to really reach a volume where more and more of our sales reps are driving those transactions and customers. So it's reaching a broader set of customers from a broader set of sellers. So we're seeing that more of our sales reps are driving add on product sales, really driving much more strategic relationships with customers. But I would say that we're disappointed with the speed at which this is rolling out throughout the business. We just did our sales kickoff about 2 weeks ago and a really kind of great opportunity obviously reenergize the entire team and really bring to life some incredible examples from throughout FY 2019 of very large strategic transactions we're able to drive. So I think we're seeing very strong momentum, energy and impact of these changes happening throughout the sales force. But then again given the deal cycle length especially for 7 figure deals, the fact that we're obviously on boarding new reps and then the need to continue to improve our sales rigor and processes that is taking longer than we'd like to have the full dent on our revenue growth that we would expect. So again, we're not satisfied with the results. However, we have an incredible amount of confidence based on the early trends that we're seeing within the customer base. A lot of customers that we're talking to about cloud content management and how that's going to impact how they transform their businesses and thus we see the size of the opportunity going forward. Yes. And then, Dylan, just to clarify a bit on the numbers. So this past year, we grew revenue by 20% and our sales force by 12%. And then even our guidance for this coming year expect revenue to be faster than the growth of our sales force as well. And that's certainly been the trend over time also. And just in terms of how it relates to the productivity and some of the trends we've seen and anytime you think about a productivity metric and not seeing all the work that you're doing or the numbers, but I'd say the user growth is probably not as meaningful as large deal growth or billings revenue to get a sense of kind of the traction and success in the sales force. But over the last few years, we've seen an improvement in sales force productivity overall. This past year, it was flat year on year with a bunch of different trends kind of on a regional basis that we've seen. So just high level U. S. As it's our largest region that was pretty solid overall in terms of year on year performance where we saw kind of the coast, West Coast and East Coast regions leading the charge and central and south regions have been ramping with lower productivity currently. And then as we talked about or as you'd expect from some of the commentary we've given, EMEA was significantly down year on year in terms of productivity, while Japan saw a significant improvements in sales force productivity year on year. And then in our inside sales commercial segment, globally that was a bit better as well, with much more consistent performance on a regional basis. So all in again a lot of different kind of sub regions and different stories there. But overall, over the last few years, again productivity has been improving and over the past year, it was pretty flat. Great. Thanks for the color. Your next question comes from Rishi Jaluria with D. A. Davidson. Your line is open. Hey, guys. Thanks for taking my questions. Two quick ones. Aaron, let me start with you. Is the $1,000,000,000 model in FY 'twenty two still on the table? Because if I look at your current guidance, it implies that revenue is going to have to accelerate to 20% CAGR over the following 2 years. And if it is still on the table, what is it that's giving you confidence in that? And then I've got a follow-up for Dylan. Yes. So we're still very focused on that reacceleration. This is the entirety of our strategy right now. When we look at the big deal growth and again being able to sell multiple add on products and then eventually suites to our customers, we see a tremendous amount of opportunity just within our existing customer base, multiple 1,000,000,000 of dollars of revenue just within our existing customer base, especially the top customers. So the focus right now is entirely on that reacceleration to achieve that target of $1,000,000,000 in revenue in FY 2022. And so that's where we're putting all of our energy. Obviously, the lower guidance than we would have liked in FY 2020 does put the even more of a need for that reacceleration on us. But again when we look at the opportunity, when we look at our customer base, when we look at our leadership position and our add on products that we have, this is something that we're very confident in continuing to drive. All right. Thanks, Aaron. And then Dylan, if I just combine the moving parts in next year's guidance together, dollars 10,000,000 headwind from EMEA, dollars 10,000,000 from the slip 7 figure deals, and then about $8,000,000 related to a large customer that's reducing its spend. That on top of your the midpoint of your guidance would be about $730,000,000 which would be a 20% growth rate next year, in line with what you've done in FY 2019 or realistically a deceleration from the 22% growth adjusted for ASC 606 this year. You had discussed in the past quarter and definitely the Analyst Day seeing an acceleration in revenue growth next year. So just help me square these two observations together and why even adding in the moving parts that still wouldn't amount to an acceleration? Thanks. Sure. So I would say, 1st of all, when we had phrased that and it had always said that that was on a reported revenue growth basis. So 606 to 605 was what we tried to clarify there in terms of our earlier commentary and our prior expectations were based around those numbers. I would also just say that certainly there are going to be other factors and a lot of puts and takes in the business that relate to kind of an impact on FY 2020 growth and we wanted to just size to give commentary around kind of order of magnitude, how this impacts next year's revenue with the biggest buckets, bunch of other things that do impact our revenue guidance as well. Other parts of performance in FY 2019 as well as expectations for FY 2020. All right. Thank you guys. Your next question is from Erik Suppiger with JMP Securities. Your line is open. Yes. Thanks for taking the question. You've made a number of changes on the sales front. Have you had any increased turnover either voluntary or involuntarily? And do you think that this needs to do you think that you need to revisit the sales people that you're hiring? Are you looking for maybe a more seasoned enterprise sales candidates going forward that might be higher cost? Yes, this is Aaron. I think we've seen retention rates relatively in line with our expectations. Obviously, it can move into quarter for a variety of factors. We have been very focused on bringing on more sales reps that have been in environment selling kind of end to end solutions for customers. Often times that can lead to us pulling candidates out of different kinds of companies than maybe we traditionally recruited from. But overall, this is all sort of priced into our expectations from a cost and sales and marketing standpoint. So we don't see any changes from a competition standpoint in terms of what we're going after, in terms of the kinds of reps we're going after. But absolutely it is about evolving the sales force continuing to make sure we can go and drive solution sales into our customers and much bigger transactions into our accounts. Do you feel like your training is where it needs to be? Or is this still very much a work in progress that still is kind of figuring out the optimal go to market? Yes. This is an area we've actually been investing in a bit more over the past especially couple of quarters. We in fact just brought in a new leader to run our sales training and enablement. And the focus here is making sure that we can really get very rigorous with all of our sales team on exactly what it takes to go and sell these much larger deals, making sure everybody is equipped with the right content messages training to do this. It's something that we've we're building off a very strong foundation fortunately, but we want to invest this even further and get even more rigorous with our training enablement and sales processes. And as Dylan mentioned, continuing to kind of tweak the compensation plans in a way that's in line with solution selling and these much bigger transactions. So really the building off momentum that we again kicked off last year. So last year we kind of was the start of this evolution. And again it's we're not satisfied with the complete speed in which we're doing this, but we're seeing very strong early success and now we're just building on that momentum coming into this year and again really optimistic about the results. Very good. Thank you. Your last question comes from Philip Winslow with Wells Fargo. Your line is open. Hey, thanks guys for taking my follow-up. Just a couple of housekeeping items here. First, Dylan, you mentioned that backlog was up 12% year over year. Did you have a split of that with current versus non current if you have a split total RPO current non current? That's 1. 2, did you have just a total user count? I think we got the paid user count. And then the third question, you also have the partner net metrics for Q3. You just gave those in Q4 for a prior question, but I don't think those are in the transcript for Q3. Sure, so we'll start on some of the metric clarification. So total registered users ending the quarter year was 64,500,000. Maybe what so what was the channel metric that you were asking about? For the contracts north of 100 ks through partners in Q3, I think it was about half in Q4. In Q3, I don't know the number off the top of my head, we'll follow-up on that. I think it was a little bit lower, more in the 40% range, but we'll confirm that. And then on the kind of remaining performance obligation, the deferred revenue breakdown overall up 17%, short term deferred is up 21% and long term deferred was down 26%. And that's again because of and the noise in headwind from the long term deferreds was because of the impact of that enhanced developer fee, which was a much bigger amount on our balance sheet a year ago. But in terms of the backlog and maybe just to put the full piece in context, our total remaining performance obligation ending the year came in at $686,000,000 which is up 15% year on year. That's made up primarily of deferred revenue, which it went through that was $375,000,000 combination of short term, long term up 17% and then backlog, which ended the year at $311,000,000 up about 12% year on year. And do you have the breakdown of RPO current versus non current for next 12 months? No, the deferred revenue piece, but I don't have the backlog current versus non current piece. Okay. Got it. And then also just last metric question. One of the things you're giving up was sort of what billings growth would have looked like ex the enhanced developer fee, kind of hang out in the 20s. What does that equal for the full year billings growth ex that developer fee? Yes. So that ended up being roughly 3 percentage point headwinds to billings growth in the year in FY2019. Got it. All right. Thanks a lot. Yes. Thanks, Al. This concludes the Q and A portion of today's call. I'll now turn things back over to the presenters for any closing remarks. Well, thank you everyone for joining us today and we look forward