Earnings Call: Q4 2018

Feb 28, 2018

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to Box 4th Quarter and Full Year Fiscal 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Stephanie Wakefield, Vice President of Investor Relations, you may begin your conference. Good afternoon, and welcome to Box's 4th quarter fiscal year 2018 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 at www.box.com/investor. Our webcast will be audio only. However, supplemental slides are now available for download on our website. We'll also post the highlights of today's call on Twitter at the handle box incir. On this call, we'll be making forward looking statements, including our Q1 FY 2019 financial guidance and our expectations regarding our financial results, timing of and market adoption of our products, our market size, our operating leverage, our expectations 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 on the risk factors and documents we file with the SEC, including our most recent quarterly report on Form 10 Q 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 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 financial measures should be considered in addition to, not as a substitute for or in isolation from our our earnings press release and in the related PowerPoint presentation, which can 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 that we've made some changes to our guidance to reflect the new ASC 606 revenue recognition standards. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a summary of these changes. With that, let me hand it over to Aaron. Thanks, Stephanie, and thanks everyone for joining the call. Fiscal 2018 was another great year for Box as we achieved a number of key milestones. We grew revenue 27% year over year to more than $500,000,000 We delivered our 1st full year of positive free cash flow, marking a significant improvement of more than $30,000,000 over last year. We also we continue to pioneer the category of cloud content management by adding new innovations like Box Drive, Box Relay and Box Skills, the latter of which will bring artificial intelligence and machine learning technologies to Box and fundamentally change how people can manage, secure and collaborate on content in the enterprise. In the Q4, we delivered year over year revenue growth of 24% and billings growth of 28%. We also delivered positive free cash flow in 3 of the 4 quarters this year. We landed wins and expansions with leading organizations like Farmers Insurance, SunTrust Banks, Servier, Medtronic and Dubai Airport and continue to see very strong international demand, particularly in Japan. We ended Q4 with a record number of 6 figure deals and we now have more than 82,000 total paying customers globally. With our scale, security, open platform and culture of continuous product innovation, Box is in a unique position to power the digital workplace of the future for the largest and most regulated enterprises in the world. In the past year, we not only solidified our leadership in cloud content management, but extended our lead in a number of key areas from supporting international data residency requirements with the additional Box zones to meeting more compliance needs with Box GXP validation to advanced enterprise use cases like user defined workflow with Box Relay. We also continue to cultivate an incredible ecosystem of strategic partners including IBM, Microsoft, Fujitsu, AT and T and many more. All of these advancements align with our 2 major objectives. Number 1, innovating in cloud content management to power how companies work and run-in the digital age. And number 2, advancing our global go to market efforts so that we can reach more enterprises around the world and make them wildly successful with Box. As we did throughout the earlier quarters in fiscal 2018, we continue to make great progress on both of these strategic objectives in Q4. Starting with product innovation, this past quarter Box Relay became generally available with strong initial uptake. Relay, our separately priced workflow product co developed with IBM allows anyone to easily build, manage and track their own workflows. We have more than 50 customers deploying Relay right now for use cases from automatic sales document processing to HR onboarding. Also in the quarter, we continued to lead the way in security and compliance for the enterprise. We launched Box GXP validation, which is a new add on product targeted at life sciences companies and priced for the entire enterprise. Box GXP validation is a new approach for maintaining always on GXP compliance in the cloud, enabling organizations subjected to FDA regulations to both manage unregulated and regulated content within VOXX. GFP has seen great early traction with customers around the world and will help companies retire legacy ECM systems like Documentum and more. In today's heightened security and regulatory landscape, traditional approaches to data protection are obsolete. Earlier this month, we announced our solution for global data privacy preparedness ahead of the European Union's General Data Protection Regulation, otherwise known as GDPR. The levels of certification we have reached for regulations such as HIPAA, FINRA, FedRAMP and European binding corporate rules is a significant differentiator for Box. Box Platform had a record contribution in Q4. In the quarter, a Fortune 500 bank for instance chose Box Platform to power a number of content use cases including building repositories for loan documents, statements and check images. Box will ultimately replace their disparate legacy ECM systems as this bank continues to go digital. Finally, we expect Box skills to be available in beta in the first half of this year. Box skills is an important element in our overall intelligence strategy. Our platform neutral approach to AI services and open architecture enables us to work with Google, Microsoft, Amazon and IBM to ensure that our customers can get more and more value from their content in Box. With Box Skills Enterprises will be able to uncover insights and reimagine business processes that have traditionally been too costly or impractical to digitize. In Q4, a Fortune 500 insurance company executed a multimillion dollar deal with Box with plans to specifically leverage Box skills to power their digital claims initiatives, which has the potential to drive incredible productivity and cost benefits. We are excited about the products that we've recently announced and we continue to see increased adoption of Box KeySafe, Zones and Governance. Combined, all of these add on products were included in 2 thirds of our deals over $100,000 and made up roughly a quarter of our new bookings in Q4, demonstrating the growing success of our transition to a multi product strategy. With our add on products and core features, Box is transforming how people work and empowering intelligent business processes in the digital age. Our second major objective is to reach and enable every business in the world through our global go to market efforts. Stephanie Carrillo came on board as our Chief Operating Officer in August of last year with the mission to evolve our go to market strategy. In Q4, she better aligned our go to market teams and focused on execution discipline, which drove our strong results this past quarter. For FY 2019, our focus is 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, we're focused on more strategic solution selling. We will be investing more in the field, aligning sales execution and the rest of the go to market team to drive larger sales in all segments and prioritizing sales compensation on solution sales that include multiple products. Next, as Box becomes a broader platform for the enterprises, our aim is to be the trusted advisor in helping our customers transform their digital workplace and digital business processes. To meet this demand, we introduced Box Transform in December, a new consulting package aimed at going deeper with customers and helping them leverage the best of Box. Already we've seen several large transform transactions this past quarter. In Q4, we saw significant growth in our international segments. Japan is a highlight this quarter with several large strategic transactions with key customers. EMEA was also strong and with GDPR coming in May, our continued innovation with box zones, we are fully positioned to grow the number of new logos in these markets. Finally, our neutral and open architecture are key differentiators that allow us to partner strategically with a wide range of channel and technology partners so that we can reach more enterprises around the world. With Microsoft, Box is using Azure and that is now generally available and reps globally will be able to co sell and be compensated for selling this solution. While we closed a couple of deals with Microsoft in Q4, we expect this to ramp up and have impact starting later this year. With IBM, we closed a record number of transactions this quarter and they played a role in 13 of our 6 figure transactions. With the launch of Box Relay and our work on skills powered by IBM Watson, IBM remains a key anchor in our partner strategy. Beyond IBM, we've established several strategic partnerships including Microsoft, Fujitsu and AT and T that play a critical role in our go to market strategy. More than half of our deals over $100,000 in Q4 were influenced by partners. We're proud to have surpassed $500,000,000 in annual revenue this year, but as we look ahead to FY 2019, we have to evolve even further to achieve our greater ambitions. In FY 2019, we're 2019, we're focused on reaccelerating revenue growth to scale to $1,000,000,000 in revenue and beyond. To scale the organization to support increasing our ACV and to drive greater transaction volume, we recently promoted a new Head of North America sales from within our organization. With his success in strategic sales running our East territory and then in leading our volume driven commercial business to a record year in FY 2018, he is uniquely suited to lead our North America team evolution. We're also further sharpening our focus on larger enterprises. Already roughly 60% of our revenue comes from customers with more than 2,000 employees, but there is significant additional opportunity within those larger accounts. Lastly, while we saw lower top line impact from our online sales business segment, as we spoke about on the last earnings call, we are now increasing our focus on self-service as a fulfillment channel to help customers in all segments quickly and easily buy new products and add on seats. To wrap up, we are excited about the future of cloud content management and we are focused on building Box for the long run. Our mission is to power how the world works together and I can honestly say that we're just getting started. It's an honor to work with so many amazing people as we help businesses embrace the digital age. When a customer buys Box, they're not just buying our product, they're investing in our company and our people. Whether it's our consulting team on the front lines helping an enterprise transform or our technical operations team delivering resiliency and security, our commitment is to ensure customers have an amazing experience with Box. Above everything else, this uncompromising focus on our customers will continue to drive Box in the years ahead as we grow into a $1,000,000,000 company and beyond. With that, I'll hand it over to Dylan. Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. As Stephanie noted, GAAP to non GAAP reconciliations are in the presentation that is available on our IR website. The financial measures I will be discussing on this call are non GAAP unless otherwise noted. In Q4, we drove solid top line growth while also delivering significant cash flow improvements. We achieved cash from operations of $23,700,000 which excludes a $25,000,000 release of restricted cash, an improvement of $9,000,000 year over year. We also achieved positive free cash flow for the full year of FY 2018. We generated $8,900,000 of free cash flow in FY 2018, a $33,800,000 improvement from last year. We achieved revenue of $136,700,000 in Q4, up 24% year over year. 22% of Q4 revenue came from regions outside of the United States compared to 18% a year ago. This quarter more than a third of our 6 figure deals came from international markets with particular strength in Japan demonstrating our increasing global penetration and market opportunity. 4th quarter billings came in at $204,600,000 representing 28% calculated billings growth and 26% adjusted billings growth year over year. These strong results were driven by record attach rates of new products, particularly platform, governance and strong initial traction with our GXP product. We continue to win large enterprise deals including a record 78 deals over $100,000 in annualized contract value versus 64 a year ago, 12 deals over $500,000 versus $16 a year ago and 9 deals over $1,000,000 versus $80 a year ago. From now on to better represent how our business is executed in the field, these metrics will reflect cumulative sales to a customer in a given quarter rather than in a given month. For clarity, using the old methodology, we would have reported 80 deals over $100,000 12 deals over $500,000 and 7 deals over $1,000,000 In addition, we closed a record number of 6 figure box consulting deals are not included in these numbers. Deferred revenue was $321,000,000 up a very strong 33% year over year and backlog was $278,000,000 up 8% year over year. Both deferred revenue and backlog included an enhanced developer access fee from one of our partners. Our backlog was impacted by a year over year reduction in the contribution of this enhanced developer fee as we've been billing this partner since Q4 of FY 2017. As we've now billed for the bulk of this fee, we expect to see a year over year headwinds to billings of roughly $5,000,000 per quarter in FY 2019. Importantly, there's been no change to the long term nature or benefits of our joint partnership. In addition, backlog was impacted by the fact several of our largest customer contracts are up for regularly scheduled renewals in FY 2019. We continue to drive strong attach rates with our newer products, including platform, governance, GXP, Relay and Zones. In Q4, roughly 2 thirds of our 6 figure deals included at least one of these newer products. Even with our Microsoft and Fujitsu partnerships just now ramping up, partners played a role in more than half of our deals over $100,000 13 of these 6 figure deals were attributable to IBM including 2 of our 7 figure deals. Attach rates of new products drove a year over year improvement in price per seat in every quarter this past year. Turning to margins. With continued strength in price per seat and infrastructure efficiencies, non GAAP gross margin came in at 76.2% versus 75.8% a year ago and 75.5% last quarter. As we expect to offer new capabilities to our customers, which requires upfront investments and to expand our data center footprint based on the demand we're seeing, we expect gross margin in FY 2019 to range from 73% to 74%. Q4 was another successful quarter of driving operational efficiency, generating at least a couple of percentage of points of leverage across all areas of the business. Sales and marketing expenses in the quarter were $69,900,000 representing 51% of revenue, an improvement from 54% in the prior year. We now have 267 quota carrying sales reps entering FY 2019, slightly higher than our target of 25% growth. Note that we expect the majority of the FY twenty nineteen contribution from the reps we hired this past year to be back end loaded as most of these reps will enter FY 2019 still ramping in addition to the seasonality of our business. We're very focused on improving sales force productivity through deepening our customer relationships and emphasizing strategic solution sales, which should increase average contract values. At the same time, we're seeing strong demand globally and we plan to invest to capture that opportunity. In the coming year, we expect to grow our quota carrying sales reps by roughly 20% with a significant majority of those reps serving our larger customer segments. The ongoing cost to support our free user base, which is a sales and marketing expense came in at 3% of revenue in the 4th quarter, an improvement from 5% in the same quarter a year ago. We now have 58,700,000 registered users, of which 10,200,000 are paid. Next, research and development expenses were $25,100,000 or 18 percent of revenue, down from 20% a year ago, even as we made significant enhancements to our products, including the early development of Box Skills and Box Graph and the general availability of Box Relay. Our general and administrative costs were $16,800,000 or 12% of revenue compared to 14% in Q4 of last year. We expect to drive continued leverage in G and A as we benefit from even greater operational excellence and scale. Our focus on operational efficiency drove our Q4 non GAAP operating margin to a solid 7 percentage point improvement year over year coming in at negative 5% versus negative 12% a year ago. As a result, non GAAP EPS came in at negative 0.06 dollars an improvement from negative 0 point 10 dollars a year ago and 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 was roughly flat with Q3 and remains best in class at 4% on an annualized basis. Our net expansion rate was 14%, primarily driven by strong seat growth in existing customers and cross sells of our newer products. As such, we ended the quarter with a retention rate of 110%. As we've discussed previously, throughout FY 2018, we've seen larger initial deployments as well as a higher contribution of new bookings coming from new box customers particularly in international markets. These trends set us up nicely for future growth, but create downward pressure on our expansion rate. Let me now move on to our balance sheet and cash flow. We ended the quarter with $208,100,000 in cash and cash equivalents, which includes freeing up the restricted cash that we mentioned earlier. We delivered very strong cash flow from operations of $23,700,000 versus $14,700,000 a year ago. We've been making several improvements to our working capital management processes, which has resulted in improved collections rates and overall cash flow from operations. In Q4, total CapEx was $7,000,000 versus $1,300,000 a year ago and capital lease payments were $3,400,000 versus $3,200,000 a year ago. Roughly $6,000,000 of this CapEx was related to facilities build outs compared with roughly 200,000 in the prior year. We expect CapEx and capital lease payments combined to be 6% to 7% of revenue for the full year of FY 2019 and roughly 8% of revenue in Q1. Finally, we generated $13,300,000 of free cash flow in the 4th quarter, an improvement from $10,200,000 of free cash flow a year ago. As a reminder, we deduct capital lease payments in our free cash flow calculation. We generated $8,900,000 of free cash flow for the full year of FY 2018, which would have been $25,000,000 if we didn't deduct capital lease payments. With that, let's now turn to our guidance. As a reminder, Fox will be adopting the ASC 606 revenue recognition standard for our fiscal year 2019 using the modified retrospective transition method. For clarity, today we will be providing guidance under both 605 and 606. For the Q1 of fiscal 2019, under 606, we are setting revenue guidance in the range of $139,000,000 to $140,000,000 Under 605, this would translate to $142,000,000 to $143,000,000 Under both 606 and 605, we expect our non GAAP EPS to be in the range of negative 0 point 0 $9 to negative 0 point 0 $8 and for our GAAP EPS to be in the range of negative 0 point $0.27 on approximately 139,000,000 shares for the full year of fiscal 2019. Under 606, we expect revenue to be in the range of $602,000,000 to 608,000,000 dollars Under 605, this would translate to $613,000,000 to $619,000,000 This year, we expect revenue growth rates to be higher in the second half of the year versus the first half of the year. Under 606, we expect our non GAAP EPS to be in the range of negative 0 point $2 to negative $0.98 on approximately 141,000,000 shares. Under 605, this would translate to non GAAP EPS in the range of negative $0.28 to negative $0.24 and would translate to GAAP EPS in the range of negative $1.10 to negative $1.06 As Aaron discussed, we have a huge market opportunity to power the future of work. We are focused on scaling our organization and reaccelerating our growth to achieve a $1,000,000,000 run rate in the back half of fiscal year 2021. In summary, Q4 was a strong quarter of product innovation for us as we launched Box Relay and Box GXP validation, while also advancing our efforts to bring machine learning capabilities to Box content in the first half of FY twenty nineteen. We continued to deliver more strategic solutions to our customers, including the introduction of Box Transform, which will help us drive strong net expansion and higher average contract values in the coming years. Finally, we delivered our 1st full year of positive free cash flow and in FY 2019 we're committed to delivering our Q1 of non GAAP profitability as we scale to $1,000,000,000 and beyond. With that, I would like to open it up for questions. Operator? Your first question comes from the line of Philip Winslow from Wells Fargo. Your line is open. Hey guys. Thanks for taking my question. First question is for you, Dylan. You mentioned the backlog and some of the developer fees that were affecting that year over year and how it would be a headwind to billings. I wonder if you could just walk through the mechanics just of that sort of how it impacted this last fiscal year and kind of what is the impact for the current fiscal year? And then I guess when you think about billings overall, obviously you got it to a revenue growth rate. Would you expect billings growth to be above or below that revenue growth rate and anything you'd call out seasonally there too? Sure. So starting with the backlog, on the enhanced developer fee the way that structured is, as we mentioned we build that reseller on a quarterly basis in the mid-seven figure, 7 digit range. So that's showed up in billings in FY 2018 and came out of the backlog. So that's where you have the backlog going down as a result of that impact. And then the second factor that I mentioned was around some of the large multiyear contracts that are up for renewal in FY 2019. So because of that, for example, if you have a $4,000,000 per year customer being billed annually with the renewal up this year. That means that the backlog because of those types of customers would be lower as well. And so we would expect the backlog and that year on year growth to continue to tick back up throughout the course of the year as those renewals come online and as we have less of a sort of year on year comparison headwinds from the enhanced developer fee as well. So that's on the backlog front. And then from a billing standpoint, a steady state and for the year overall, we do expect that to track roughly in line with revenue, although I would factor in the $5,000,000 a quarter impact from the enhanced developer fee that I mentioned. So that's going to be the sort of unnatural sort of year on year compare, but otherwise billings growth and revenue growth should track roughly in line. And then in terms of seasonality, we would expect to see roughly the same seasonality as it relates to bookings and call, such as a lot of the reps that we hired over the past year, such as a lot of the reps that we hired over the past year still entering this year ramping and we accelerated the growth in the sales force hiring this past year, as well as some of the newer products and partnerships that we're pretty excited about. I expect those to really come online and start contributing to the business in the latter part of the year. So maybe a little bit more back end loaded, but overall nothing too different from the type of seasonality we've seen over the past couple of years. Got it. All right. Thanks, guys. Your next question comes from the line of Rob Owens from KeyBanc Capital Markets. Your line is open. Hey, guys. This is Mike Casado on for Rob Owens. Thanks for taking my question. Aaron, my next question my first question is on the competitive landscape. Earlier this month, Microsoft began offering OneDrive for Business for free. At least for the remaining duration of competitor contracts. Without asking you to justify another company's strategic rationale, are there any changes in the market that may have driven that decision? Yes. So just to clarify, OneDrive for Business being free has largely been the case for the past couple of years. OneDrive is included in many of the typical enterprise agreements that large customers already signed with Microsoft for their Office 365 licenses. So the specific announcement that I think you're referring to was a promotional campaign really aimed at those that did not have that specific licensing structure or weren't already using OneDrive. So that's not significant or impactful to the core competitive dynamic that we already face in the market. So most large enterprises are already moving to Office 365 and OneDrive has already been effectively free in those accounts. So that won't be a new change to any competitive dynamic. I can't really kind of theorize around why they did that now or what the intent is, but we don't see that as having any impact on our business whatsoever. Overall, if we zoom out from that one specific promotion, we do see that this environment is becoming I think we're in the early stages of it becoming better understood from customers that there are going to be these sort of low end products. So the enterprise file sync and share tools largely driven by OneDrive, recently Dropbox and some of the moves in the professional end of the space. And customers are starting to see the significance of what cloud content management is, where enterprise file sync and share is really a capability of cloud content management. It is only one set of use cases that cloud content management can drive where we can end up actually replacing lots of legacy ECM systems, storage infrastructure, document management systems and that is much more broadly what we're beginning to sell more and more to customers. So that's our current position in the market. Now obviously we have to go and make sure that all of our 82,000 customers understand that and that we're moving customers through this journey and how they're leveraging Box and how they're taking advantage of our platform. So that's certainly the evolution that we're on. And fortunately, we're able to even partner with Microsoft on that evolution as well. So obviously, we announced the partnership with Azure in the middle of last year. We have deep integrations with Office 365 already, but we certainly will expect to still see some competitiveness at those low end use cases around file sync and share with Microsoft and others. That makes sense and that's helpful context. Relative to the slipped deals last quarter that were related to extended sales cycles in highly regulated industries, Did those deals close? And are you guys still seeing extended sales cycles as you move into highly regulated industries? Or did 3Q prove out to be a learning experience with respect to the slipped deals? Yes. So of those 3 deals, one of them did close just very shortly after the quarter ended, actually for a higher amount than we are targeting in Q3. Another one of them closed a bit later on in the quarter. And then one of those 3 deals is still open. And would say that, yes, we did not see that same dynamic in terms of deal slips in Q4. We had really, really strong sales execution down the stretch. So we do think that Q3 was a bit of an anomaly. And pointing to just the kind of what we've seen while the overall sort of trend as we move further upmarket and get into some of these more kind of complex industries and use cases, the deal cycles have lengthened a bit, but our predictability, I think execution around closing those deals has been really, really strong. And looking at just this most recent quarter, record number of 7 figure deals, 9 of them closed in the quarter and also larger than the types of $1,000,000 deals than we've been signing in the past. That makes sense. That's helpful, Aaron. Thanks for taking my questions. Your next question comes from the line of Greg McDonough from JMP Securities. Your line is open. Great. Thank you very much. Two quick questions. First, Dylan, when I look at your FY 2019 guidance and I'll use the 605 method just to normalize it on an apples to apples basis. The midpoint of that guidance is for 22% revenue growth. So what I wanted to ask you is when we think about your long term target of getting to $1,000,000,000 revenue run rate business and as you mentioned at the last Analyst Day, you brought that in one quarter early. I think the forward CAGR on that is around 24%, implying that you guys think you can accelerate the business after FY 2019 and before you hit that run rate. So I was just hoping you can run through what gives you guys the confidence that beyond FY 2019 you can accelerate the growth rate of this business to hit that $1,000,000,000 run rate goal? Sure. So fundamentally, our long term view of the business hasn't changed and we're building the leading product in a $40,000,000,000 market where our use cases with customers continue to get even more strategic. So we are committed to reaccelerating the bookings growth in the coming year to reaccelerate revenue growth in FY 2020 and that's what gives us the confidence in achieving that $1,000,000,000 run rate milestone in the back half of FY 2021. And I think especially with some of the kind of things we've been doing over the last year, not just from the newer products and partnerships, but the acceleration in kind of sales force hiring and strong pipeline generation are some of the factors that give us the confidence there. We'd also keep in mind that that's nearly 3 years from now and we have a bunch of pretty exciting catalysts for growth that could impact the time when we get there from the newer products to newer partnerships. But overall, we do feel good just given the momentum and a lot of the economics we're seeing in the business as well of achieving that milestone in the back half of FY 'twenty one. Great. Thanks. And one follow-up and this could be for you Dylan or for you Aaron. I'm getting a few questions on the retention rate of 110% because you exited last year at 115%. And I know you ran through some of the puts and takes on that retention rate, but I was just hoping you can elaborate a little bit on how we should think about both the expansion rate in FY 2019 and the churn rate in FY 2019 and whether we see those numbers either stabilize or even start to tick up a little bit with respect to the expansion rate? Thanks. Yes, sure. So we think about both those metrics as being pretty stable from the numbers that we reported in this most recent quarter throughout FY 2019. And to your point, I think depending on some of the newer products and how successful we are cross selling some of the products based on the momentum we've been seeing particularly over the past couple of quarters. On the expansion rate, I think we could see even an acceleration of the expansion rate. What I would say is, I think one trend that we are seeing that we would expect to continue that's provided some downward pressure on that rate over the past year is that we're signing larger deals initially with customers. So in the sort of land and expand model, we're capturing a little bit more of those sales on the land front. But because of just the kind of type of customer base where we built and the relatively low penetration, we still have quite a bit of headroom to expand even in some of our largest customers. So we feel pretty good about the sort of stabilization or potentially a slight improvement on the expansion side. Got it. Thank you. Your next question comes from the line of Richard Davis from Canaccord. Your line is open. Hey, thanks guys. It's D. J. On the line for Richard. So I actually want to follow-up on the last topic, the expansion rate. I mean, does the downward pressure on the expansion rate at all cause you to rethink kind of the profitability profile of the business as you get to that $1,000,000,000 level? I mean, clearly, those expansions are some of your highest margin business and you're talking about investing to drive a reacceleration in growth. I just want to make sure we're still on the path to hit that 17% free cash flow margin when we get to $1,000,000,000 Sure. No, so we don't worry about it as much. I would note that one of the reasons that the more of the business has been coming on through that channel versus the expansion is in some of the newer markets that we've been growing in, where we're building a presence and a customer base looking at Japan in particular. So you'll have a disproportionately high impact and amount of the bookings coming in from a land point of view. But overall, if you look at the sort of productivity that we've been driving, seeing even over the past year from a ramped rep standpoint, slight improvements in productivity in most sales segments, we feel pretty good about the ability to continue driving the leverage that we've talked about. And in light of both that dynamic from land versus expand and given the 25 plus percent sales force growth over the past year, we're still able to put up a few percentage points of leverage in sales and marketing. And so a lot of the other trends that we're seeing and the things we're doing to drive efficiencies and sales force productivity, we think will get us there and allow us to continue to drive that leverage in the coming years. Okay. And then one for Aaron. You touched on this a bit before in your answer to the competitive question. But with the Dropbox filing now public, this is probably a good forum. Can you just help investors understand kind of how you guys coexist in the market? And then maybe highlight some of the key differences you'd point to between your businesses? Yes. So I think we obviously had a good sense of their numbers previously just being in the space in the industry. So no particular surprises, but I think it's really important to think about our businesses as fundamentally different in a variety of ways. So I think as you saw from their numbers, they are much more of a consumer driven company from a metric standpoint, from a financial standpoint with an additional sort of small business revenue stream on top of that. So I think about 30% of the revenue was from their Dropbox for Business product and that's around kind of $330,000,000 or so in revenue as compared to our $500,000,000 which is entirely all enterprise driven. So fundamentally different mix and makeup of the revenue stream. And why we think that matters or will show up is things like average contract value, which they didn't really kind of call out in any specific way. You can just do the math, 300,000 businesses with about $330,000,000 revenue from that is a pretty low ACV. So very, very focused on small business, very focused on consumers, much lower net retention rate, again heavily driven by the consumer end of their business. So I think the we're obviously work a lot to make sure that we're educating investors on these distinctions and the differences of our companies. We're much more focused on sort of mid market to large enterprises even though we do serve companies of all sizes, we do so on the low end in a much more efficient way. And they're much more focused on consumers and small businesses. And I think that shows up pretty clearly in the economics. It's still very, very, I think attractive business financially from an economic standpoint, but fundamentally focused on a different part of the market. What we build is different, how we sell is different, what we power for customers ends up being very different. And I think that's kind of showing through from a business model standpoint. Yes. And the only thing I'd add, this is Dylan, is that if you look at their go to market strategy and approach as well, they have about 90% of the business coming through self-service and about 10% where our sales reps involved. And if you think about the types of deals, use cases, customers where we've been driving the majority of our growth and where we see the biggest opportunity and where we're most focused, that just fundamentally requires a higher touch model and a sales force involvement. So I think that's just an area that they've not focused as much on and building out those capabilities either from a sales force or kind of product standpoint. They've done a really nice job building a highly efficient model that's scaled nicely and I think we're collectively going after a $40,000,000,000 $50,000,000,000 market. So those are just some of the key differences, but I would say that overall both certainly the kind of numbers support the strategy that we've each chosen separately. Yes. No, absolutely. That's helpful color. Thanks guys. Your next question comes from the line of Mark Murphy from JPMorgan. Your line is open. Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Thank you for taking my questions. I believe at the user conference, correct me if I'm wrong, Box Relay had about 250 beta customers. It sounds like there's now 50 customers using Relay currently. Do you think that those beta customers, are they likely to deploy Box Relay in production? And then what are some of the use cases that have surfaced out of that initial set of 50 customers that might have surprised you? Yes. So we are seeing pretty strong momentum and traction from a pipeline standpoint with Box Relay obviously already a pretty solid conversion rate in the Q1 of Box Relay being generally available to have 50 transactions. And again, the pipeline is building I think in a very healthy way this year. And as we mentioned in prior earnings calls, I think the amount of pent up demand and energy that there's been for a much more modern approach to business process around content has been in some cases overwhelming and we've been very excited to be able to see that and go out and serve customers. The range of use cases are pretty broad. We're seeing this in a bunch of different industries and lines of business, which is exciting. The whole point of the product was to be horizontal no matter what industry or business process you're trying to serve. So anything from contract reviews to sales force processes where you want to be able to automate different proposals to customers. We're seeing a real a really broad range of use cases that we think give us confidence that this is going to be a strong horizontal product. And also shows how much demand there is for Box to be a part of more mission critical business processes for our customers. And obviously that ties in very closely to our broader cloud content management effort and growing things like average contract value, improving continuing to improve already best in class retention rates and becoming a more strategic partner for our customers. So we're pretty excited about that. Thank you. And then just one more quick one on product again. Can you talk about how Image Intelligence has sort of affected the sort of stickiness of customers who are typically putting non traditional managing non traditional content in your platform such as like medical images or AutoCAD files etcetera? Yes. So Box Skills, which is the foundational platform component or technology that we announced at Boxworks is the underlying capability that's powering how we can bring things like Google's AI technology, IBM's AI technology or Microsoft into Box to be able to serve our customers with those solutions. So everything from being able to scan an image and tell you what objects are inside the image or listen to an audio file and be able to provide a transcription for audio or video. We have some partners that are working on document technologies where you'll be able to upload a document and it'll pull out all of the relevant fields within that unstructured document. So we're seeing a lot of demand from again similar to Relay in a wide range of industries. I think this is going to be certainly one of the most important breakthrough technologies we've ever built and delivered to the market. I think it's one of the most practical yet powerful ways of bringing AI into the enterprise. We mentioned that there's a large insurance company that we're working with that is redesigning much of their claims process using the Box platform. And one of the key reasons that they decided to choose Box was they wanted to be able to have a future proof content platform where when they send more and more information whether it's images from an accident or a claim event or it's a document that is the underlying claim itself. How do they automatically extract the appropriate metadata and fields from the document and the object information from within the photo, be able to apply that into their claims process. And traditionally that's a very manual process. It's a process that is highly fraught with errors and issues. And we think that the real solution is to be able to automate much of that and how do you bring best in class machine learning and AI to be able to serve whether it's a claims process or healthcare experience or digital asset management in a retail company or CPG. We think AI is going to be the way that the company is going to be solving this in the future. So Box Skills, it's not even generally available yet, but it has already been very, very helpful for helping customers see that the future of content management looks very, very different than the past. And this is becoming more and more of a catalyst for customers to say, okay, I'm going to go and retire and replace my prior way of managing information in on premises storage technology or document management systems and move that to the cloud. And that's what Box Skills is helping catalyze. Thank you. Your next question comes from the line of Rishi Jaluria from D. A. Davidson. Your line is open. Hey, guys. Thanks for taking my questions. I guess first, Aaron, can you help us understand the GDPR opportunity for Box, where you think you can be a beneficiary of that? And then I have a follow-up for Dylan. Yes. So our focus for really as soon as we pivoted into the enterprise over a decade ago and certainly ramping up over the past 3 to 5 years has been on compliance and security and privacy in a much deeper way than the rest of the landscape. So we've been very prepared for the GDPR implications from a business process standpoint, from an architecture standpoint. So we announced a GDPR readiness package already a couple of weeks ago to help customers along this journey by the May requirement. And we see GDPR as a broader tailwind in our overall compliance and security efforts. We see it as another sort of genesis for why customers are going to choose to move to the cloud and into modern systems for managing their content and their collaboration. It's if you look at the assortment of regional specific privacy standards, industry specific regulation and compliance requirements as well as all of the cybersecurity threats and issues that companies are dealing with. It's really, really hard to solve those problems with a legacy on premises system that is not updated for the modern security and privacy and compliance environment. So GDPR will just be another major tailwind in macro kind of driving force for why customers are going to move to modern platforms and we think that we will get an outsized benefit from that because of our position in this space and because of our focus so deeply on compliance and security. So hard to measure this specific quantitative impact, but I would say that strategically we're in a very, very strong position with this and it's already coming up pretty consistently with customers. Okay, great. That's helpful. And then Dylan on pricing, you mentioned in your prepared remarks that you've seen growth in price per seat. What's the right way to think about this? I mean, is this a case of stable core box pricing environment with add ons kind of lifting that up? Or has there been any contraction in the core box pricing that's been offset or more than offset by the add ons? Yes. So I would think about it more in the former case where the core pricing has been quite stable and one of the dynamics that we've talked about in the past is on a like for like basis we continue to differentiate and build more and more functionality into the core. If you look at kind of an example where we might have sold 500 seats couple of years ago versus today, we're actually getting a little bit of a higher price on the core there. And that's independent of the additional products. But at the same time, from a mix shift standpoint, we're increasingly selling larger deals that come with volume discounting. And so that's why overall the core price has been pretty stable over the past several years and continues to be so. And then to your point, really where we've seen the majority of that uplift is from the attach of some of our newer products as those come into market. And we'd expect from everything we're seeing in terms of customer conversations, the kind of nature and dynamic in the competitive landscape for those trends to generally continue. Okay, great. That's helpful. Thanks guys. Thank you. Your next question comes from the line of George Iwansick from Oppenheimer. Your line is open. Thank you for taking my question. Dylan, following up on the increase to ACV, are the newest products like Relay and the upcoming skills launch, do you expect them to have the same type of impact that earlier products like Keysafe and Governance had or could they potentially be a little bit more of a positive impact? Yes. So I would say that skills is one where think about it from a similar construct as some of the past products, but we haven't announced what that pricing is going to look like. So I think it's a little bit early to tell there. On but we'll certainly kind of keep everyone posted as we both get a better sense of the right way to price this as we have more and more conversations and folks entering that beta program in the first half of this year. On the Relay front, we see a similar uplift. The only thing I noticed that Relay unlike many of our other products, we do sell partial installs for. So there are going to be some cases where a very large customer might not need Relay or purchase it across all users in the organization. So I would have the same sort of uplift model for those seats, but maybe a little bit less of a contribution overall from some of our from products such as governance. And then another one that I highlighted that we've been really, really pleased by the kind of pricing impact and receptivity of the market is on the GXP front. So they are just fundamentally, those are extremely high value use cases. We're very, very differentiated in that category of use cases. And so we've seen an even higher uplift when selling GXP versus some of the other products like KeySafe and Governance. Okay. And kind of following up on Relay. Aaron, can you give us an update on the IBM relationship? And is Relay something that can accelerate the contribution that you get from that channel? I think this definitely gives us a joint product that we can send our customer conversations around. We've already had a lot of success in the early stages of box skills with IBM Watson. So we have an increasing portfolio of of either jointly developed or jointly integrated products with IBM. So Relay will be certainly a major driver of that, but it's exciting to see that we have a strong portfolio that we can go take to customers. And I think that as Relay matures more and more through the kind of product cycle, that will be a driver as well of the IBM growth. Okay. And just one final question on the Microsoft Azure partnership. How should we look at that? Is it more along the lines of like the partnerships you've had with Google or could it develop into something the size of an IBM partnership? Yes. So I would think about it slightly differently than IBM where IBM is certainly a much more traditional channel as well as the technology partner. In the case of the Microsoft partnership, they're a technology partner with a strong co sell relationship. And that creates a slightly different dynamic where it's less about there being a quota on the other end on the Azure side versus them getting paid for the adoption of Box. And so just think about that as a slightly distinct type of partnership structure. But in the case of Google for instance that's purely on the technology side. So there isn't really even a co sell component to speak of necessarily. So I think Microsoft is sort of firmly in between. One end of the spectrum is just purely a technology integration partnership and the other end is a complete reseller of your technology with a product integration as well. Microsoft really sits right in that center. And I think that the exciting thing is as we go into customer conversations, one, we largely think that the vast majority of large enterprises are going to be adopting Office 365. That's the trend that we've seen within customer accounts. And so being able to have that tight integration with O365 has been very important. And now being able to complement that with a much tighter integration with Azure is another major way that we can ensure that our customers have a very cohesive IT environment and another way that we get to work with Microsoft. So we've seen that already be pretty successful in Q4 just in an anecdotal basis and a number of conversations. And so we expect that to ramp up further this year. Thank you. Your next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Your line is open. Hi, this is Jane Wong on behalf of Kash Rangan. Thanks for taking my call. My question is revolved around Box Platform. It hasn't been as much in discussion, although you mentioned that it gave record contribution in Q4. Just wondering if you guys can share an update on the platform strategy. How big of a focus is it this year? And if you can discuss the demand environment for it, if the customer uptake has tracked versus your expectations? Yes. So we've seen really strong adoption of platform. We call that that it was a record quarter for us in Q4 And it's becoming more and more core to the overall content management cloud content management conversation that we're having with customers. So whereas when we initially launched the Box platform product and SKU about 2 years ago, we initially assume that much of its adoption would come specifically from developers and really kind of self-service adoption and certainly enterprises as well. What's ended up happening is platform becomes really in many cases the basis of the overall conversation that we're having with the customer and pretty core to the overall transformation that we're driving. So it had a record quarter as I mentioned. We're seeing a number of very significant 6 and 7 figure deals that are driven by platform. So very core to our more strategic transactions and Box Platform is being embedded in everything from insurance claims processes to financial services providers that are using it as the back end for wealth advisor interactions in all the way into healthcare where you have patient portals being developed. So a number of very large transactions are going on with platform and it's becoming more and more strategic for our customers. And so going into this year, we absolutely expect it to be another record year for platform and be a catalyst for growth. And then ultimately, as Dylan mentioned, some reacceleration in the business. Thank you. Your next question comes from the line of Melissa Franchi from Morgan Stanley. Your line is open. Hi, this is Josh Baer on for Melissa. You mentioned Box GXP replacing Documentum in your prepared remarks and Documentum acquired by OpenText about a year ago. Just wondering where else you're seeing OpenText in competitive situations. And they recently acquired Hightail with 5,500,000 users across enterprise and consumers. Does that change the equation as far as competition from OpenText? Yes. So we don't see that as changing the competitive landscape for just a variety of product reasons and traction reasons in the within organizations. In terms of our GXP announcement, as I mentioned in the remarks, the use case that it really solves is how you have a single place for both the unregulated and regulated content within a life sciences organization. That's a first of its kind offering in the cloud. And so we think that's going to be very disruptive to traditional providers of enterprise content management in life sciences and one of the most significant players in that space was Documentum certainly. So we think that GXP validation will increase the amount of times that we're seeing Documentum from either a rip and replace standpoint or a head to head competition and we're pretty confident that we have a very, very compelling offering for this market. And then OpenText broadly to your point, again no impact on the Hightail side, but as we are going deeper and deeper into more advanced content management use cases, certainly our offerings around workflow, around metadata, around box governance, around platform, we expect to see more of the legacy players in this market. And our job is to make sure that we can help customers see that there's a way better way to manage their content in the cloud and that we have the leading solution for that. So we certainly continue to highlight where we're doing those replacements or transformations, but that's the focus right now. Great. And just a quick related follow-up on your M and A strategy both from if you could just review from acquiring technology and users? Yes. So we are still we have a very, very specific roadmap that we're driving over the next couple of years around cloud content management and how do we build the most robust platform for customers to be able to manage, secure, govern, enable workflow and collaboration around their content. And to the extent that there are tuck in teams for helping accelerate that roadmap, that's primarily our focus from an M and A standpoint. So we're generally always looking at the landscape to see where are there technologies that could help improve our roadmap and accelerate our path to being able to realize our ultimate customer value proposition. But that's the main focus of M and A and we'll certainly keep you posted if that evolves or changes in any way. Thanks. Your next question comes from the line of Brian Peterson from Raymond James. Your line is open. Hi, guys. Thanks for taking the question. So Dylan, just wanted to expand a bit on the net expansion, which was 14%, I believe it was 16% last quarter. Any help on what the delta was versus the last quarter? And going forward, how should we think about that when if we can parse it out between additional user growth and then more products? Yes. So as mentioned, it really was a function of a couple of the drivers being larger upfront deals and a higher percentage overall of bookings coming from customers buying Box for the first time. And that's a trend because this is a trailing 12 month metric, a trend that we've been seeing over the past year. And it's based on the revenue base, the dollar in dollar terms of our customer base a year ago. So that is the dynamic. I would say that even with the all the great traction we're seeing with our newer products, about 25% of sales in the quarters you mentioned came from those newer products. We are still seeing the majority of the expansion coming from customers purchasing additional seats. We do expect that over time an increasingly higher contribution is going to come from some of these newer products as we both continue to expand our portfolio and kind of get more momentum around the individual products in the portfolio. But overall and at some stage, we may break out and give a little bit more color into the cross sell versus upsell. But at this stage, we really think about it as fundamentally driving the growth in a bunch of different ways and especially as we're increasingly moving towards broader solution sales to customers and bundling and that type of strategy given the types of use cases we're serving, we think about sort of aggregating that expansion overall. Got it. Thanks, Dylan. Your next question comes from the line of Philip Winslow. Your line is open. Thanks guys. Just kind of a quick follow-up question. I'm getting this question from folks on Bitext as related back to actually my original question on the developer fees. Was that sort of a one time billing that was recognized in this last fiscal year in revenue? Or Dylan, what's your point that, hey, it's just a $5,000,000 comp? Or was it just sort of a one time, I guess, event last fiscal year? That's just some clarity there would be great. Sure. So not a one time billing, but we have now billed this reseller for the bulk of the fee. So it's not gone, but we are enhanced developer fee. So it is more just a tough comp and on the billing side. I would note that from a revenue standpoint, because the revenue is being recognized over several years. The impact on the revenue side from FY 2018 to FY 2019 related to this fee is an immaterial change. So should not create any sort of noise on the revenue side there. Got it. All right. Thanks, guys. There are no further questions at this time. Stephanie Wakefield, I turn the call back over to you. Thank you all for joining us today. This concludes today's conference. You may now disconnect.