Earnings Call: Q3 2019

Nov 28, 2018

Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box Inc. Third Quarter Fiscal 2019 Earnings Conference Call. Thank you. Alice Lopatto, Investor Relations, you may begin your conference. Good afternoon, and welcome to Box's 3rd quarter fiscal 2019 earnings conference call. On the call today, we have Aaron Levy, 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.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 Q4 and FY 'nineteen financial guidance and our our expectations regarding our financial performance for the remaining quarter of fiscal 2019 and future periods, timing of and market adoption of our products, our 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 from 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 the risk factors and 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, November 28, 2018, 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 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 in 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 Q3 year over year comparisons are made against Q3 results a year ago, which are 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. We had another solid quarter in Q3, including wins and expansions with leading organizations like City of Boston, National Bank of Canada and the National Institutes of Health. We ended Q3 with more than 90,000 total paying customers globally. Revenue was $155,900,000 up 21% and non GAAP EPS was negative 0 point 0 $6 both ahead of our guidance. As we previously discussed, this year we dramatically increased our focus on strategic solution sales and building deeper relationships with our customers. In Q3, this strategy continued to gain phenomenal traction as we saw more than 40% growth in all large deal categories. We closed 57 deals greater than $100,000 versus $40 a year ago, 11 deals over $500,000 versus $5,000 a year ago and 3 deals more than $1,000,000 versus 1 a year ago. More than 80% of these deals included at least one add on product like Box Governance, Zones, Keysafe or Platform compared to roughly 2 thirds of deals greater than $100,000 including these products a year ago. Our large deal growth and strong add on product attach rates prove that our solution selling strategy is working. Enterprises are choosing Box as a strategic technology partner and the cloud content management platform to power their digital transformation. Content is at the heart of how we work and it is only becoming more critical as powerful new technologies like AI, machine learning and workflow create opportunities to make the business processes around content more intelligent and automated. Enterprises need a central hub for their content, connecting best of breed applications, while meeting security and compliance demands for multiple industries and geographies. With our solution selling strategy more deeply embedded into our business, we are in a stronger position than ever before to deliver more value to our customers. As we've talked about previously, we're focused on 2 major objectives. The first is innovating in cloud content management to power how companies work and run-in the digital age and second, advancing our global go to market efforts so that we can reach more enterprises around the world and make them successful with Box. In Q3, we continued to make solid progress on both of these objectives. Starting with product innovation, in the Q3, we hosted Boxworks, our annual customer conference which was attended by thousands of clients and partners and where we announced several updates to our cloud content management platform. First, to give people a more holistic view of how their content is connected across the applications they use every day, such as Office 365, Slack, Salesforce and DocuSign, we announced an all new activity stream that will be available starting next year. This new content hub built directly in the Box interface will make it easier than ever to collaborate on Box content across best of breed applications. Users will be able to quickly see the current activity from their colleagues and all relevant context happening in other apps when viewing a file within Box. Next, we announced the beta of our Box for G Suite integration. With Box for G Suite, users can seamlessly create and manage Google Docs, Sheets and Slides all from within Box. Now customers can give their employees the flexibility to use collaboration tools from Google with the added benefit of maintaining Box's admin controls, security, governance and compliance. These announcements reinforce our role empowering the digital workplace of the future, which we believe will be built on an ecosystem of best of breed applications and platforms. People need more flexibility and choice in how they work and enterprises need a single source of truth for content across their end user applications and back end systems, which can only be delivered by an open platform like Box. Also at Boxworks, we showcased new workflow and intelligence capabilities to help our customers reimagine and digitize a wide variety of their critical business processes. From our conversations with our largest customers, it's clear that they have a wealth of manual business processes primed for automation but have struggled to enable this given the lack of flexibility from legacy ECM systems. Our new core native task and workflow automation capabilities will solve a broad set of these use cases focusing on those that are content centric, recurring and collaborative. Our new Box workflow and automation capabilities will make it easy for departments and teams to quickly create triggers for recurring actions around their collaborative work. For example, sales teams can automate ongoing contract approvals by routing tasks to their sales operations teams and marketing teams can trigger tasks to review and approve digital assets. We also announced that Box Skills Kit, which enables enterprise customers, 3rd party developers and system integrators to build custom AI integrations with Box, will be generally available on December 18. Box Skills Kit will unlock powerful use cases like computer powered audio, video and image recognition by leveraging advanced AI and machine learning capabilities from a wide range of technology leaders like IBM, Google and Microsoft. We're excited to see what our customers and developers create with Box Skills Kit starting next month. Finally, security continues to be a critical differentiator for Box and a primary reason why customers choose our cloud content management platform. At Boxworks, we previewed Box Shield, a set of advanced security capabilities built on our proprietary advanced machine learning technology that will help customers protect their content and users from internal and external threats. Security teams will be able to apply policies that restrict sharing and external collaboration on sensitive files, for example, and they will also be able to set rules and detect suspicious user behavior and proactively alert customers when behavior deviates from what is normal. While Shield will not be generally available until year, we're already seeing incredibly strong interest and demand from customers. All of this innovation announced at Boxworks and throughout the year led Gartner to name Box as a visionary in their content services platform Magic Quadrant in October. This comes on the heels of being named the leader in the Content Collaboration Platforms Magic Quadrant earlier this year. Importantly, Box is the only vendor among the 30 that were evaluated, including Microsoft, that addresses the key requirements and use cases in both of these Gartner Magic Quadrants with a single unified platform. Enterprises are understanding that a comprehensive cloud content management offering is critical to their business. And in this quarter, customers are increasingly choosing Box over point solutions and fragmented offerings of our competitors. For example, one of the world's largest asset management and financial advisory firms selected Box in Q3 over SharePoint Online to enable secure external collaboration with its partners and third parties to replace legacy network file shares and develop custom client portals to better serve their most important customers. The firm will be leveraging the full suite of the Box offering, including Box Governance, Keysafe, Multi Zones and Box Platform across their entire organization with their partners and customers. Turning to our 2nd major objective, we want to reach and enable every business in the world through our global go to market efforts. This initiative focuses on growing average contract value or ACV, driving deeper relationships with our customers and adding new logos through international growth and our partner ecosystem. To help grow ACV in FY 'nineteen, we positioned ourselves to deliver a solution sales strategy and be a trusted advisor to our customers on their path to digital transformation. We've changed our selling this year through improved training and enablement, improved sales processes and operational rigor to drive better deal execution and implemented sales compensation plan changes to align incentives more closely with our strategy. In Q3, it's clear that this change in selling led to a greater increase in add on product sales, big deal growth and paid user retention. Additionally, we also executed on our enterprise license agreements or ESI, program. And while still early, we saw more customers choosing to go wall to wall with Box in this quarter. For example, a top 10 U. S. Financial services firm who is already wall to wall with the Box core ELA expanded their contract to also include a Box Platform ELA as well. This firm will broaden its use of Box Platform as the content layer for its custom application development across the business. We also closed an ELA with the world's largest medical device company, who is leveraging Box Governance and Zones to bolster content security and protect their most sensitive data. As part of the agreement, the customer also purchased Box's custom consulting offering, Box Transform, to accelerate its digital transformation initiatives. Internationally, we saw continued strength in Japan. In Q3, we closed major wins with leading enterprises like Shiseido Company, Mizuho Bank and Rakuten. We also welcome new leadership in Germany and Canada to help us drive more uniform execution in those regions. Finally, our ecosystem of partners remains critical to our go to market strategy. More than 40% of our 6 figure and above deals involve the reseller, systems integrator or technology partner. Looking ahead, as our deployments with enterprises become more integral to their broader digital strategies, our system integrator partners will play a key role in driving increased value from the Box platform. Before we conclude, I want to quickly note that last month, we were thrilled to welcome Kim Hammonds to our Board of Directors. Kim brings a wealth of experience driving IT strategy at Global 100 Companies, having held COO and CIO positions at Deutsche Bank, the Boeing Company and Ford Motor Company. As we help large companies modernize their operations, Kim's insights will be extremely valuable. To wrap up, we are incredibly excited about the future of cloud content management, the progress we're making on our path to $1,000,000,000 in revenue. In Q3, we saw incredible results from our work in FY 'nineteen thus far and we'll continue to build on this foundation for the future. With that, I'll hand it over to Dylan. Thanks, Erin. Good afternoon, everyone, and thank you for joining us today. In Q3, we drove solid top line growth while also continuing on our progress toward a major company milestone as we expect to achieve our Q1 of non GAAP profitability in Q4. We delivered revenue of $155,900,000 in Q3, up 21% year over year. 25% of Q3's revenue came from regions outside of the United States compared to 21% a year ago, demonstrating our increasing global penetration and strong execution against our market opportunity. As Aaron noted, we drove strong traction across all large deal categories, including 57 deals over $100,000 versus $40 a year ago, 11 deals over $500,000 versus 5 a year ago and 3 deals over $1,000,000 versus 1 a year ago. More than 80% of these 6 figure deals included at least one add on product and our partners played a role in more than 40% of our 6 figure deals. This quarter, 28% of our 6 figure deals came from international markets. 3rd quarter billings came in at $155,600,000 representing 10% calculated billings growth and 14% adjusted billings growth year over year as a result of some customer driven multiyear prepays a year ago. Total deferred revenue was $301,200,000 up 19% year over year. Short term deferred revenue was up 25% year over year and long term deferred revenue was down 28% year over year, primarily due to a higher enhanced developer fee in the year ago period. Our deeper focus on solution selling this year has been yielding positive initial results. This year, we've been seeing an increase in large deal volumes as well as higher add on product attach rates associated with increasingly robust Box implementations. As we've been mentioning throughout the year, we've been expecting most of these larger deals to close later in the year, predominantly in Q4. As such, we continue to expect Q4 calculated billings growth to be in the mid-twenty percent range. Turning to margins. Non GAAP gross margin came in at 73.6% versus 75.5% a year ago and 73.7% last quarter. We were pleased to see an improvement in price per seat sequentially and year over year, mainly as a result of higher add on product attach rates. As we mentioned before, we're making some upfront investments in our data center footprint this year based on the demand we are seeing and we'll be moving into an expanded colocation facility in Q4. As a result, we expect gross margin in Q4 to be roughly 72%. Q3 was another successful Q3 was another successful quarter of driving operational efficiency. Sales and marketing expenses in the quarter were 74,800,000 dollars representing 48 percent of revenue, an improvement from 57% in the prior year. This was primarily driven by improved go to market efficiencies and also includes a roughly 3% benefit related to the adoption of ASC 606. It's important to note that our sales and marketing expenses, excluding Boxworks, would have been 44% of revenue. The ongoing cost to support our free user base, which is a sales and marketing expense, came in at under 3% of revenue in Q3. We now have 63,500,000 registered users, of which 11,900,000 are paid. Next, research and development expenses were $30,300,000 or 19 percent of revenue, in line with a year ago as we made significant enhancements to our product offerings. This included the continued development of Box Platform as well as the expansion of our advanced security, intelligence and workflow automation capabilities. Our general and administrative costs were $17,400,000 or 11 percent of revenue compared to 12% in Q3 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 Q3 non GAAP operating margin to a solid 8 percentage point improvement year over year, coming in at negative 5% versus negative 13% a year ago. As a result, non GAAP EPS came in at negative 0 point 0 $0.13 a year ago. One of the key elements that makes our business model so powerful is our strong customer retention. Our churn rate was stable as last quarter and remains best in class at 4.5% on an annualized basis. Our net expansion rate on an annualized basis was 12%, primarily driven 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%, flat with the prior quarter. These metrics had been trending down as a result of larger initial customer deployments and a higher contribution of sales coming from new customers. We are now seeing our net retention rate stabilizing and our in quarter churn rate has been improving over the past few quarters. Let me now move on to our balance sheet and cash flow. We ended the quarter with $200,100,000 in cash and cash equivalents. We delivered cash flow from operations of $6,800,000 compared to $14,100,000 a year ago. This outcome was lower than we expected due to the timing of cash outflows that we originally anticipated for Q4 but paid in Q3. This dynamic now creates a tailwind for Q4 cash flow. In Q3, total CapEx was $5,200,000 versus roughly $3,000,000 a year ago. Roughly $4,100,000 of this CapEx was related to facilities build outs. Capital lease payments, which we factor into our free cash flow calculation, were $4,300,000 versus $4,800,000 a year ago. We expect CapEx and capital lease payments combined to be roughly 6% of revenue in the 4th quarter. Finally, we had negative $4,100,000 of free cash flow in the 3rd quarter compared to positive $6,300,000 a year ago. We expect our year over year free cash flow improvement in H2 to be fairly consistent with the dollar improvement that we demonstrated in H1 marked by a particularly strong Q4. We also remain committed to generating positive free cash flow for the full year of fiscal 2019. With that, let's now turn to our guidance, which we are providing under ASC 606. For the Q4 of fiscal 2019, we are setting revenue guidance in the range of $163,500,000 to 164,500,000 We expect our non GAAP EPS to be in the range of positive $0.02 to positive $0.03 on approximately 150,000,000 diluted shares and for our GAAP EPS to be in the range of negative $0.21 to negative $0.20 on approximately 144,000,000 shares. For the full year of fiscal 2019, we expect revenue to be in the range of $608,200,000 to $609,200,000 dollars We expect our FY 'nineteen non GAAP EPS to be in the range of negative $0.16 to negative $0.15 Our GAAP EPS is expected to be in the range of negative $1.02 to negative $1.01 on approximately 141,000,000 shares. Also, as we look into FY 2020, we wanted to remind everyone that we expect our FY 2019 non GAAP EPS to see up to a $0.10 benefit year over year due to the adoption of ASC 606 as we've been noting each quarter year to date. We will not see that same year over year benefit in FY 'twenty. We expect to target roughly breakeven non GAAP EPS in FY 'twenty as we scale toward the $1,000,000,000 model that we laid out at our most recent Analyst Day. In summary, Q3 was another quarter of solid progress on our strategy, driving further confidence in our ability to execute on our path to deliver more than $1,000,000,000 in revenue in FY 'twenty two. We're thrilled that our solution selling strategy is gaining traction demonstrated by strong large deal growth and add on attach rates. We are seeing a growing need for cloud content management and we are excited that our product innovation and go to market strategy are aligned to meet this demand. With that, I would like to open it up for questions. Operator? Your first question comes from Your first question comes from Philip Winslow with Wells Fargo. Your line is open. Yes. Thanks for taking my question and congrats on a great Q3. Question first for Aaron, then a follow-up for Dylan. Aaron, you mentioned some of the go to market changes that you made obviously earlier in the year and you highlighted the 80% attach rate you had to the add ons, which is obviously the highest that we've seen, 10 point jump quarter to quarter. So maybe walk through sort of what changes have been made? How you're sort of seeing them play out? And then particularly as you think about Q4, because obviously, Dylan got it to that mid-20s ramp up in billings. What gives you confidence that sort of those changes sort of have in place the disruptions behind us and that the pipeline starts to convert Q4? And then just one follow-up for Dylan. Yes. So as we noted at the beginning of the year, we, in FY 'nineteen, really wanted to evolve how we were selling to customers. And instead of going in, really talking about file sharing collaboration, starting to change the conversation around content management and powering more and more business processes for our customers. And while that took a couple of quarters to roll through our sales motion, we think that you're now starting to see that show up in a much more significant way. Q3, I think, is the 1st major quarter of evidence of that when you look at our large deal traction of, again, 40% growth in the 100 ks segment, 120% growth in the 500 ks segment, 200% growth in the $1,000,000 segment. And it's really just been driven by this changing dynamic of how we're talking to customers, what we're going in with, making sure that we're bringing in the full power of our advanced products, things like governance, where any customer in a regulated industry likely should be using Box Governance for information and document retention or our platform solution. So any company that wants to be able to use Box as a back end system for their ERP system or custom application development, we're seeing really great traction with platform as well. So I think you're just seeing the matriculation of that now in the sales motion and us making sure that in every single customer conversation, we're really driving home the power of these add on solutions. And we think that's going to continue to show up in Q4 and obviously be an incredibly important fixture of how we sell going forward into the future. And then one other note I would say is we have been seeing more and more customer demand we've been seeing more customer demand from really the bundling of multiple products together. So we've seen some early signs of success and we're going to build on this going into Q4, but really important in FY 'twenty and making sure that we can deliver sort of bundled solutions or suites as it were of our add on products that come together. So customers don't have to buy sort of 1 at a time, but you can actually get the full power of Box in one transaction. So that we have a lot of learnings this year that we think are going to be baked into our sales motion going into the future. And a nice benefit of this is not only does it do things like grow our average contract value and deal size, it actually improves our competitiveness from a win rate standpoint because it bolsters Box's core differentiation as really being a cloud content management platform. So we're getting kind of 2 nice benefits from that. Great. Thanks, Aaron. And then just two quick follow ups for Dylan. First, Dylan, last quarter you mentioned billings ex VPANTS developer fee was up in the 20s. I was wondering if you could give us the metric this quarter. And also gross margin has consistently been outperforming expectations. Can you give us a little just more color there about what's been driving that and then how you're just thinking about that line going forward? Sure. So as it relates to the overall billings growth, as mentioned, we have been seeing a headwind this year related to the enhanced developer fee. This quarter, a bigger factor in terms of the delta between the reported billings growth and kind of the underlying growth of the business, especially given the strength in the quarter, was more due to the impact of that fee as it's rolled out of the long term deferred revenue. So that, as mentioned, was down 28% year on year due both to the adoption of 606 heading into the year as well as just how that's flowed through the financials. So if you look at the short term deferred revenue growth that was up 25% year on year. If you run the kind of the calculation around short term billings, that was up 23%. So roughly in the same range is how I think about the apples to apples growth rate that we put up in this most recent quarter. And then as it relates to the overall gross margin, as you mentioned, it did come a bit higher than we had expected. Although with the move into an expanded colocation facility, we are going to see a bit of a step up in the overall spend heading into this quarter, which is where we set the expectation of about 72% for the quarter and then over time expect continued delivering efficiencies there, both to lower the cost to serve as we scale as well as with the sort of pricing impacting levers that we have, particularly as a lot of our add on products are at a higher gross margin. So those are some of the different factors that are going into the gross margin trends. Awesome. Thanks guys. Keep up the good work. Thanks Phil. Your next question comes from Melissa Franchi with Morgan Stanley. Your line is open. Great. Thanks for taking my question. Dylan, I just wanted to revisit the Q4 outlook in terms of billings. I know that you talked about pipeline of large deals, but can you maybe just refresh us on what gives you confidence in that level of acceleration? And to what extent is it coming from renewals of existing large deals that you've had in the past versus your expectation for new customer wins? Sure. So it's really a lot of the things that are giving us confidence are the same things we've talked about throughout the year. Although just as we get closer and now we're in the 4th quarter, we have stronger visibility and confidence in that Q4 pipeline. But it's really as a reminder, the confluence of a lot of pipeline that we've been generating throughout the year, especially as these solution selling motions have sort of rolled through. Many of those deals are showing up in Q4, which is why we said throughout the year, we expect this year to be more back end loaded than we've seen in past years. So really same drivers, just with the passage of time, that confidence has increased. And then as it relates to the split between new customers and customers expanding their deployments with Box, we don't expect to see any material differences in terms of the split that we've seen either in recent quarters or in Q4 where roughly 2 thirds of our new bookings are coming from existing customers and about a third are coming from customers buying Box for the first time. Got it. Okay. That's helpful. And then on the retention rate, it was encouraging to see stabilization at 108%. But just given the commentary on upsell rates and the benefits you're seeing from the strategic solution selling, do you feel like we could potentially see that metric improve from here or are there other headwinds like the new initial deals coming in larger? Is that still going to be surpassing the growth in the retention rate? Yes. So I wouldn't say that we're seeing any new headwinds in that metric. But as you mentioned, some of the same headwinds that we had been seeing in previous quarters are still showing up in the business as we are continuing to increasingly see larger deals upfront and a bit of a higher mix shift of net new customers, although that's been fairly consistent. So I would say to expect the stability as really that's being offset and showing up in the numbers with the stabilization because of the improvements we've seen both in terms of the customer retention throughout this year as well as higher add on attach rates. So over time, I would say that where this metric trends is going to be largely dependent on the traction that we see with add on products. But I would say to expect this metric to be fairly stable at least over the medium term. Your next question comes from Rob Owens with KeyBanc Capital Markets. Your line is open. This is Mike Casado on for Rob Owens. Aaron, I believe the expectation for mid-20s billings growth exiting 2019 relied to some extent on the maturation of the reps hired last year. And I know you've just discussed the drivers remaining the same overall and increased confidence in them. But could you offer a bit of incremental detail on how that rep core is ramping? Sure. So this is Dylan. I would say that those reps are ramping as expected, and we've been pretty pleased with the improvements that we've seen, especially in ramp rep productivity. So overall productivity, as we've discussed in the past, is going to be more muted this year because we have a higher percentage of reps throughout the year who are ramping versus ramps relative to prior years. But I'd say in terms of the productivity of those cohorts, both ramping reps and ramp reps, we're pretty pleased, although the mix shift makes it a kind of a pretty flat productivity overall. As discussed, I would say that overall as it relates to the business and the growth we're seeing, again, the reps have been ramping as expected and we've seen strong rep retention and no real surprises there. What I would say though is that we've actually because we look not just at the reps overall, but we look at this and make these decisions on a per segment, per geography basis. We've actually decreased the hiring plans in those markets, especially certain international markets where we haven't seen the same productivity as we really are focused on driving productivity before ramping. So overall, we expect and are on track to kind of grow the overall sales force in the mid to high teens, again, largely due to some of the changes in those international markets where we've been putting in new leaders in place to really drive the execution there and the scale of Salesforce in there. Understood. And then on the new leadership being in place internationally, how is the leadership rebuild in EMEA progressing? I know you're only a little over 1 quarter into it. But to what extent are those operational improvements really contributing to performance in the region? Thanks. Yes. So this is back to Aaron. The to your point, the overall new leadership in Europe started at the beginning of August. So really only 1 quarter in. And as you know, with these types of changes, it takes a couple of quarters to really get the operational rhythm improved. So we don't expect to see major performance changes within FY 'nineteen, but it's certainly something that is core to our plan going into FY 'twenty. And so I think we're happy about some of the early improvements that we're seeing, but of course, given the seasonality of our business model, the Q3 and Q4 performance in Europe is heavily influenced by what we were doing in the first half of the year, where we didn't have this leadership in place. So I think you will see that performance start to show up going into next year. Your next question comes from Mark Murphy with JPMorgan. Your line is open. Yes, thank you. And I'll add my congrats. Aaron, interested to get your view on any emerging technologies out there such as the single magnetic recording or SMR technologies or really anything else you've seen that could make some of the large scale data storage a little more cost efficient, something anything along the lines that would lead to a long term improvement in the gross margin structure. Is that anything you're experimenting with or seeing any opportunity there? Yes. So we are so our architecture overall is a bit of hybrid architecture. We have our own data centers that we operate out of, where we are co located in. And this is really where we have tuned our own infrastructure to be as efficient and effectively as dense as possible from a storage standpoint. And every refresh that we do in terms of our what we call filers or effectively our file storage infrastructure generally sees relatively significant performance gains just in terms of the efficiency of and the density of the hard drives that we're implementing. And then secondarily, we have public cloud partners that we work with for things like burst capacity, additional redundant storage, so we can make sure we have 2 copies of every file across different systems, and then international data residency. And so we're seeing performance gains and improvements on both of those fronts. And even if you look at some of the announcements over the past couple of quarters from some of our public cloud infrastructure partners, we think that will also lead to improvements overall. As Dylan noted, we have a number of efforts that we're working on to drive more efficiency from our infrastructure. We do expect to see that over the medium and long run. Obviously, every time that we have a step function of new capacity investment and infrastructure investment, you do see that being somewhat dilutive to gross margin. But overall, we're really happy about the long term trends of our infrastructure strategy and our architecture, including things like storage investments and improvements on the density of our filers. Okay, great. And Dylan, just as a quick follow-up, I believe you have talked about the potential to accelerate top line growth in fiscal 2020. So between, I guess, what you're relaying today and between the solution selling evolution and some of the new product innovations and some of the better attach rates that you've seen there, do you feel comfortable with getting over that, say, to 20% or kind of 21% growth year? Any preliminary thoughts or framework you can offer there? Sure. So as discussed, we are definitely pleased with the progress that we're seeing in solution selling this year, particularly as it relates to large deal growth and those add on attach rates. And I'd say the year is shaping up more or less as we had been expecting. Definitely some puts and takes though, but pretty pleased overall. We do have strong visibility into Q4, and we are still on track to reaccelerate bookings this year, which will set us up nicely for next year. Of course, Q4 is our biggest quarter of the year, particularly this year as it's more back end loaded. And that Q4 outcome is going to have a significant impact on what the FY 'twenty growth rate ultimately is. But I would say that overall, the view and kind of growth for the business and ability to reaccelerate that next year is still there and especially kind of coming off the Q4 outcome. We'll provide a lot more specifics and detail on our Q4 call. Thank you very much. Your next question comes from Brian Peterson with Raymond James. Your line is open. Hi. Thanks for taking the question and sorry about the background noise here. But I just wanted to see on the 4Q pipeline, is there anything that you guys can share in terms of customer level economics or revenue per seat that can give us some confidence that you can grow as a really seeing that in the pipeline and some of the solution selling that you're talking about is really set up to close in the 4th quarter? Yes. So I'll tell you, I can obviously share qualitatively when we look at the trends within our, again, big deal segments, $100,000 500,000 $1,000,000 deal segments, we're seeing beyond and by far a record pipeline for the quarter. We think that will drive very strong year over year metrics in terms of those big deal targets. We're especially seeing strong traction within some of the most regulated industries and industries that are classic large spenders on IT, so financial services, pharma and life sciences, the public sector and government space. So based on the types of industries where we're seeing strong traction in and the pipeline of large deals, that's what's giving us confidence in some strong improvement from a growth in those big deals within Q4. Your next question comes from Michael Turrin with Deutsche Bank. Your line is open. Good afternoon. Thanks. Guys, you mentioned attach rates for add on products came in at more than 80% for larger deals. I'm just wondering, are there any particular product areas to call out there in terms of contribution? Did any one particular product area outperform your own expectations from an add on perspective? Yes. We actually we continue to see incredible traction on our governance add on. That's a very, very strong year over year growth and exceeded our initial expectations. In particular, I sort of alluded to this, but it will become, I think, something that we share a little bit more about next year As customers have either done enterprise license agreements with us or we've been able to bundle multiple solutions together, governance as they come a core part of that add on strategy. Also are seeing platform in some key markets like financial services and both platform and governance in areas like public sector, life sciences and financial services. So I think we're seeing a nice mix of as customers really use us as a back end system for content management across their line of business applications, across their customer facing applications, across their even the kind of core ERP systems, things like information governance, platform capabilities, our APIs. And then in the future, our automation and workflow functionality that we need at Inbox will become very, very core to delivering on that. And so we're simultaneously seeing an increase in our add on product sales, while customers are beginning to really use us and see us as much more of a modern enterprise content management platform in the cloud for their business. Thanks. That's helpful. And then just one more. This is the 4th straight quarter we've seen that Fortune 500 penetration level come in at 69%. It's the longest stretch we've seen that metric extend without moving higher. Is it possible you may be hitting a point at all for that group where the last 30% is more difficult to reach for some structural reason? Or is Q4 the quarter where maybe we can expect to see that number continue to advance? Yes. Great question. I think the overall, I would say that because of the land and expand business model that we have, we have seen some increased traction within going into current accounts and driving out on product sales and driving more deployment of Box and in some cases, taking a customer that was $100,000 customer and turning that into a major upsell in the highest 6 or 7 or low 7 figures. And so that has probably taken a bit of our attention within the Fortune 500, but nothing structurally, I think, is preventing us from the next 30%. There's obviously a realistic asymptote where some industries are not driving as much digital transformation spend. And so there will be a percent that we probably can't get to. But overall, when we look at areas like financial services, life sciences, large industrials, global manufacturers, These are markets where we're doing incredibly well in. And I think you'll see continued net new logo growth within the Fortune 500 both in Q4 and beyond. Appreciate the color. Thanks for taking the questions. Yes. Your next question comes from Rishi Jaluria with D. A. Davidson. Your line is open. Hey, guys. Thanks for taking my questions. Nice to see some good stabilization in the business. This one maybe potentially for both Aaron and Dylan. As I look at your sales and marketing expenses, right, even if I control for the benefit you're getting from ASC 606, Can you help me get some level of comfort that you're maybe not under investing in sales and marketing given that you're adapting your go to market strategy, more focused on solution selling, expanding internationally where there should be a higher level investment required and going after such a massive market opportunity. Can you just maybe help me get some comfort around that? And then I've got a follow-up for Dylan. Sure. So I would say that in a lot of cases, we're actually driving improvements efficiencies not just in the overall kind of rep productivity that we're seeing, but also across other areas of the business. We didn't really highlight it on this call, but some of the trends we've talked about in the past, there's even things like the ROI that we're seeing on our demand gen programs and the continued leverage in per user marketing and just some of the efficiencies we're driving across the board. So as it relates to how we think about those decisions and the right growth rate to grow our sales force, we do look at it definitely on a, as mentioned, kind of cohort by cohort, region by region, segment by segment basis. And where we are seeing steady improvements or market opportunities, we definitely invest against those opportunities. But again, in certain areas, we've seen less of that and so have sort of pulled back on some of the growth there. And so kind of where it balances out being in that mid to high teens rate and expect something in the same ballpark range for next year. I think that's probably a good balance of driving that growth and profitability. But certainly, as some of the underlying metrics and leading indicators of growth and market opportunity evolve, we'll continue to monitor that and make those decisions accordingly. Okay. That's helpful. And then, Dylan, I just wanted to go back to your commentary around your expectations for billings in Q4. Just directionally, should we see a similar delta between total calculated billings and short term calculated billings like we've seen in Q3 and other quarters this year? And maybe when does that start to level off? Yes. I would say that it should be more normalized in the Q4 versus Q3 and then steady state would expect it to be very normal. But again, the sort of couple of deltas that we saw in Q3 was were the function of that enhanced developer fee. And then we also saw an unusually high level of multiyear prepays in the Q3 a year ago. So we'll still see a bit of an impact from that enhanced developer fee in the Q4. But overall, would expect to see much more kind of consistent trends between short term and long term deferred revenue and billings growth. All right. Thank you. There are no further questions at this time. I will now turn the call back over to Alice Locatto. Thank you everyone for joining us on our call today and we look forward to speaking with you next quarter. This concludes today's conference call. You may now disconnect.