Great. Well, thanks everybody for joining us this afternoon for day two of Citi's Global TMT Conference. I'm Steve Enders, part of the software research team here, and with us for this session, very excited to have the team from Box. Dylan Smith, CFO, I want to thank you so much for being here today.
Thanks for having me.
Maybe just to start, I think that Box, I think you guys have been executing pretty well the past few quarters. I think there's been a continued acceleration. Maybe we can just start with what's been going on there, what's been driving that acceleration, and I guess what have you done to enable that opportunity there?
Yeah. I'd say the biggest driver of the acceleration we've seen, and just delivered our fifth consecutive quarter of accelerating revenue growth, is the momentum and overall impact from Enterprise Advanced, which is the highest tier offering that we have, introduced about a year and a half ago into the market. T hat comes with both the higher end of the 30%-40% price per user uplift, but also enables a set of new use cases that is driving seat expansion. T hat's been a big shift versus what that seat expansion was even 18 months ago. W hat we've done to enable that is really just driving Enterprise Advanced, honing in on those use cases, working with our customers to really make sure that we can communicate the value proposition, and if we get that time and opportunity, feel really good about where those conversations lead.
I would say the second piece that is the indirect dynamic that we are seeing is increasingly with AI becoming a top-down initiative from the board, the CEO, CIO, all the way down, Box is an enabler of not just our capabilities, but broader enterprise AI strategies because you hear it all the time, "I don't have an AI technology problem, I have a data problem," or a change management problem as well, but we can help with that. But really on the data side is what we can do is because of the power of the platform is also make sure that we can help and accelerate enterprise readiness for their broader AI strategies.
Okay. No, that's great to hear. Maybe we can dig into some of the AI use cases that you enable and what you are doing for clients there. Anything that kind of stands out for what's been a reoccurring use case, what's repeatable, and what you can take moving forward and stamp that out across a vast majority of the customer base?
Yeah. I t will look a little bit different industry to industry, but fundamentally, the component of Enterprise Advanced and core of these really high-value AI workflows that we are delivering for customers really starts with data extraction, or metadata extraction, which is effectively pulling structured data out of unstructured contents. That can show up as part of a contract lifecycle management process, where you are pulling out all the fields, renewal date, key terms, whatever else, from contracts to a loan origination process, a client onboarding process. Really just at-scale ingestion of a lot of files and then taking that information and then doing something with it, which is part two that we see as front and center in most of the use cases that we are delivering, which is the automation from there. So, "Okay, I have the information, have the insights, that's great." Then what?
That might mean sending to compliance or legal if something's flagged to review, or just sending to the business owner to set up a task to sign off on, or going back directly and sending a notification to the customer, or whatever it might be, is really the second piece of that. I t's really extract plus automate really makes the foundation of the use cases that we have seen customers adopting.
Okay. When you think about the opportunity within the customer base, how do you see those kind of use cases expanding? Or maybe you could just walk through how the Box platform progresses, and are we at a point where it is expanding wall to wall? How much more opportunity do you feel like there is to capture in the installed base?
Yeah. In terms of the expansion, while we have several examples, more than a dozen Fortune 500 customers, companies who are wall to wall on Box, in the significant majority of our customers, there is still a significant seat expansion opportunity, on average about 6x versus today's footprint. That is where I think a lot of the use cases come in, as well as one of the big focus areas is both in terms of moving workloads and freeing up dollars for further Box investment is that legacy displacement opportunity.
Legacy enterprise content management tools in particular, which is a big focus and we see big opportunity for even additional workflows where there are a lot of capabilities around the way that we can handle custom objects that are not necessarily unstructured files to just some of the more bespoke, workflow-type capabilities are a couple areas of the roadmap that we think will allow us to unlock more and more of that opportunity.
Okay. I do want to touch on the, I guess, legacy monetization and ECM opportunity in a bit, but maybe before that, would like to talk about some of the, I guess, opportunities you might see around security right now. I feel like that has been very top of mind and in focus, just in the broader tech landscape, with everything from Mythos to some of the recent hacks that have been happening on the agentic side. I guess maybe where are we in terms of are customers, enterprises, are they coming to you to help deal with some of these security concerns, or is that driving an incremental prioritization for the Box capabilities right now?
Yeah. For content security, absolutely. We're very fortunate in the way that things have played out, that if you think about what we've been building for more than two decades, and the focus on security and compliance as a differentiator, is just as relevant in a world with agents, and actually more relevant than it is for humans. That's because if you think about it's basically the exact same problems that you'd be looking to solve or opportunities that we can address, but you think about instead of ex-employees, you now have an order of magnitude more agents running around. Unlike relying on the just EQ and good nature of human beings not to want to do anything too malicious with the content, sharing with people they shouldn't be sharing with, accessing information they shouldn't have access to, etc, agents lack that capability or understanding.
They're just going to want to do whatever you tell them to do in the way that they think is the most efficient, effective way to get there. H aving those airtight permissions, access controls, as well as monitoring for threat detection, etc, just becomes that much more important and relevant. Absolutely top of mind for any customer we're talking to, an increasingly differentiator that's standing out in those conversations.
Is it changing, I guess, the prioritization that CIOs and CISOs might have and maybe elevate some of the, I guess, demand environment for you all?
I would say that ultimately the demand is still driven by a lot of the use cases and AI, and just managing your unstructured content and having a data strategy, that is increasing, I think, in importance, having far more CIO-led conversations or even CEO, COO-type conversations because of that. Security is the reason that Box is further up in the consideration set as a result. But I wouldn't say the reason that Box is so strong in terms of the security generally still stems from a specific use case or set of use cases that are top of mind for that organization.
Okay, that makes sense. Maybe I am going to ask a little bit about Box AI and the agentic strategy that you all have. Just maybe how do you think about the opportunity that agents enable for you all, and how do you think about first-party agents versus third-party agents, and how that maybe comes together with the rubber meeting the road in terms of what actually gets put into practice for companies?
Yeah. We think about agents and that agentic opportunity as effectively synonymous with the broader AI opportunity. We think about these high-value and complex workflows, those almost inherently involve an agent or agents who are performing those tasks on a repeatable basis, replacing the work that would have been manual or done by a human, or that you would ship off to a BPO or something like that, and now it is agents doing it. T hose we view as one and the same. In terms of first versus third-party agents, certainly all else equal, we would love for every agentic workflow to be initiated on Box, for that to be the orchestration layer, for Box to be the orchestration layer. But that was never the expectation. The reality is it is going to be a mix.
Where in some cases it is going to be on Box, especially for content-centric workflows, and where the data starts and then ends on Box. In other situations, it is going to make more sense for a customer to be in a different provider's platform, or using the direct LLM as the interface, and we love all of those situations. I think that is naturally how the world is evolving, is how does this fit seamlessly into a user's workflow and day and what they are already doing. Then that interface is probably, unless that provider drops the ball, is probably going to be the interface that it makes most sense to kick off some of those workflows.
Okay, that makes sense. How do you think about the, I guess, monetization opportunity for agents, and is there, I guess, a difference in terms of this first party versus third party agents and the monetization angle?
Yeah, things are evolving rapidly. As of now, we think about that monetization of those agents as being in the form of what we call AI Units, which is effectively token consumption that those agents are driving. Whether that is first or third party, that would be the case. In a lot of cases, that consumption element is heavier for those first-party agents and use cases. But there are often tokens being consumed on the Box end by customers in some of those third-party use cases as well.
Okay. I do want to keep this interactive, so if there are any questions in the room, we want to make sure to get to those. I have one in the back right here. We have a mic coming, so give it one second. Thank you.
Thank you. I guess Box has been seen as an app company. If we want to think about Box as infrastructure company, what do you think Box needs to deliver from both products and positioning perspective to be valued as infrastructure software company?
Yeah. The reality is that we do, I think, already offer the capabilities of that being part of the infrastructure layer. Literally the place that you are managing, securing all of your unstructured content and then building on top of that. That is what we do. I would say, you are free even today to be thinking of us as an infrastructure company. But at the same time, we are also a core part of the application layer. It is a bit of both, and don't want to muddy things or do a massive pivot in terms of messaging when fundamentally what we do is continue to evolve and strengthen our capabilities in both areas. But do think that certainly as an enabler of broader AI initiatives, as talking about a little while ago, that is much more as an infrastructure provider.
But if you think about, okay, we now have the capabilities to replace a contract lifecycle management system or to orchestrate a lot of those workflows we were talking about, that really is we view more on the application side. L ong-winded way of saying, effectively, I think we do both already. We're going to continue to expand our capabilities at both levels. But do think that the capabilities that we offer as an infrastructure provider, are certainly more and more appreciated, just given the ways that we can then enable the broader AI workloads that companies are looking to implement.
Okay, thanks. Thanks for that question. I guess maybe, similarly, I think there's been a lot of talk about legacy transformation and modernization and customers looking to move off of, let's just call it the incumbent or legacy ECM vendors and move that to the cloud. I think that's probably been slower than what we would've expected historically. But just, I guess, what unlocks now with AI, and how do you think through that versus the data gravity concerns that have maybe limited that historically?
Yeah, I think realistically this is still going to be a multi-year journey and transition. Just given, to your point, there's data gravity, inertia. A lot of these systems have been in place for literally decades, despite not innovating over that entire time period. But you have a high-value workflow or use case that's been sitting there, and it just historically has not been a big priority to change. If you think about because the company was trying to move and capture a mobile opportunity or moving to the cloud before that or whatever, maybe an ERP implementation.
Whatever it might have been, the reason that it's a lot more top of mind and the reason that unstructured content is actually a strategic initiative for CIOs now more so than it's ever been in the past 20 + years, is because AI and that fundamentally, if your data is siloed, and especially if it's siloed and sitting in fragmented on-premises systems, you just can't access that data and get the capabilities, and unlock the use cases that you could with a solution like Box. W e're hearing not just from customers, that, "Okay, this thing that's it's probably time and catalyzing those conversations."
But with the SI ecosystem as well, who might have put those systems in place, and are responsible for that implementation and that maintenance, and they're hearing from their customers, and then reaching out to us to help their clients modernize. I think that's really what's changed is instead of it just being an annoying, painful thing that was then offset by inertia, now it's literally a gaining factor to be able to actually execute an AI strategy.
Okay. Maybe it's a good time to ask about the SI opportunity and the partners. I think over the past year and a half, two years, it feels like you've really started to lean more into that go-to-market motion. I guess two questions. What does that unlock for you all in terms of the opportunities that it creates and what it brings incrementally to you? Secondly, just where are we in terms of that journey for building out those partnerships and the SIs and partners driving opportunities to you guys at this point?
Yeah. I think, in terms of what it unlocks, it's really a couple main things. First of which is just customer reach and extending the reach of our direct sales force, because with several hundred quota-carrying AEs, we can't possibly be having the type of conversations and talking to the number of customers where Box is a good fit. It helps extend the reach of our sales force, and provide some go-to-market leverage in the process. Also, with those SIs, they tend to be very close to that business' challenges, have the technical expertise, and the lifeblood of their business is a lot of these pretty complex implementations that require a lot of hand-holding, a lot of development efforts in many cases, as part of broader digital transformation initiatives, is just one example.
They could also help go in and customize those solutions, whether it's for specific geographies or verticals or whatever else, and they have that expertise at a scale that's much greater than we have internally. It's not just the reach, but also actually the capabilities to customize and to make customers successful on Box is really what they bring to the table. Then, in terms of, I don't know how this translates to an ending point of view, but pretty early in that opportunity, and we are starting to see traction, starting with some of the regional players, but also now with some of the large global systems integrators. But very early days in terms of the type of impact I think that can have on our business overall.
Do those tend to be more of a lift and shift and a legacy modernization, or are they bringing net new use cases that a customer maybe didn't have before, where it makes sense to use Box for that use case?
It's a little bit of both. We see it as really the broader kind of replacement opportunity lift and shift is where a lot of them are coming to us for, because again, they might be an Open Text shop or have a big practice there, and hearing from a lot of those customers that that's just not going to meet their needs going forward. That's where we see a lot of the big work, and that's obviously where these SIs are most motivated versus, "Oh, we can drive this one use case for Box." That exists too, but that wouldn't necessarily be a dedicated and as impactful from a growth standpoint partner to us. That might be part of a Salesforce implementation or some broader digital transformation effort. That's where again, I would just summarize as both, but with the bigger opportunity being the replacement side.
Okay. Maybe this is a good time to talk about the competitive environment and what you're seeing out there. I guess beyond the legacy replacement cycle, I think we tend to get questions around the shift to AI models and them being able to pull data from anywhere and everywhere and integrate with all these areas. I think there's a question of, does that just mean Box becomes just a storage layer, or the capabilities become less relevant moving forward? Just how do you think about that dynamic and maybe the right to win and change that perception versus some of the model vendors or other AI-focused vendors out there?
Yeah. I think there's, beyond just storage, everything that we've built up around permissions, security access controls is incredibly relevant, even in those use cases where the interface might be an LLM. At the same time, there are just so many things we do within our platform around document generation capabilities, e-signature capabilities, all the stuff we were talking about before.
Those model providers aren't going to offer anytime soon, which is why you see us regularly, not just as getting early access to all the models from these players so that we can run those evaluations, have them available with insights to our customers day one of when they launch. But when they're giving a keynote talking about these new workflows that they can drive and the future of work and whatever transformative thing they're focused on, Box will be featured as the place that they are pulling that content from and then saving it back to. Because they know that it doesn't make sense to try to replicate all of the capabilities that we've built out, and that goes far above and beyond storage, which is why they've been such strong partners for us.
Okay. With those relationships that you have and, to your point, I think you've been a launch partner with Anthropic and OpenAI and many of them, are they pulling you into opportunities, or does that recognition that they give you, does that create incremental opportunities that you're able to execute on and monetize?
Yeah, I would say that it's not as much like they're saying, "Hey, we have this massive deal. We're meeting with this customer. Come up to our offices for this customer briefing next week." But I think it does raise the awareness of all of the things that we can do, just given the reach, and all the things that they're doing. Plus, when they are talking to their customers, they are reiterating their same point.
That's where they might be directly saying, "Oh, yeah. Well, we don't do that or we don't do that well, but if you're starting this or putting it on Box, you'd be able to solve that problem." T hat's where it is more of like a friendly, they'll refer things, but less of a formal reseller type relationship where we could say, "Yeah, a significant percentage of our pipeline is directly attributable to their sales force pushing Box, and more of the informal lift that we get there."
Okay. T hen maybe also competitively, I think Microsoft comes up a lot in terms of a competition dynamic. Just what have you seen from them lately and how do you think about the relationship that exists there today?
Yeah, the funny thing is that as much as we still see Microsoft regularly, and still remain a very strong partner and a very viable competitor of ours. But the interesting thing is, as much as the world and the landscape and our respective offerings have evolved over the past several years, the actual competitive dynamic with Microsoft really hasn't changed as much. It's still you use Box for the same reasons and choose Box for the same reasons that you would before. Only, with our capabilities expanding, there are more and more situations, departments, types of use cases where what Microsoft would be offering as part of their Microsoft 365 bundle is no longer good enough. But, the high level dynamic has actually remained pretty consistent.
Okay. Pause there, see if there's any questions in the room real quick. I do want to talk about the Forward Deployed Engineer opportunity. You've had consulting services historically, but I guess what's different now with what you're doing with FDEs, and how does that maybe transform the kinds of opportunities that you're seeing as a result of that?
Yeah. We'd say that, yeah, the high level approach of, okay, both pre-sale and post-sale, we're going to be as close to our customer, helping them identify use cases, implement those use cases possible. Again, like you said, that's been part of what we do and what we've invested in for years and years. FDEs, and we also have several employees on the consulting side and sales engineers or value engineers who are doing effectively that work without an FDE title, are really focused on the AI model side of things.
Which is we know because of just the breadth of our customer base, the depth of our understanding and evaluation with models, is we can sit down with a customer and say, "Okay, you want to do this, run this loan origination process? Great. We have seven other customers of similar scale who have already done basically the exact same thing. Now let's work together and say, okay, how important is accuracy versus cost? Here are some of the options. You can feed us the budget, and we'll tell you, 'I would probably use this model.' You'll spend 35% as much, you'll lose a few basis points of accuracy. Is that a trade-off you want to make or do you want to go here?"
And we have that depth of understanding and have actually delivered those use cases and seen them in action with customers in a way that can get us closer, and be a more valuable partner at the table to them versus the number of times we have now, it's just because it's a very sexy role at this stage where people are like, "Oh, yeah, we can send over FDE." And it's a 22-year-old very smart, capable, technically strong person who has no idea about our business or the problems or whatever else. I t's just like that doesn't add value to the business. We can actually go and work with our customers and help them reduce, in some cases, costs by hundreds of thousands of dollars for a given use case, because of the capabilities that we have.
Okay. That makes sense. Maybe we can start translating this a little bit into the financial model. Look at CRPO growth, I think it was, what? 14% this quarter.
Constant currency, 14% growth.
Yeah, on constant currency, which is again, ahead of the revenue acceleration. I guess as we think about the durability of the acceleration, is that the right way to think about it, looking at CRPO, or how do you think through what's the right metrics to look at? Maybe something pipeline or something that can give confidence in the growth opportunity from here.
Yeah. I think that is current RPO, is a very good leading indicator of revenue growth generally. The one note why it's not perfect in our case is because, at the same time over the last year, which is the measurement period of that growth rate, we've seen a lengthening of customer contract durations. Which again, a great thing, but what it means is if all of our customers were on annual contracts, they'd have some portion of their contract value in current RPO.
If everyone's on multi-year contracts, more often than not, they're going to have a full 12 months. T here's a little bit of a tailwind and impact because of that duration dynamic. So, as that normalizes it'll be an even better leading indicator. But right now, I would say it's directionally helpful to understand the underlying momentum of the business. I wouldn't just take the current RPO growth and say, "Okay, that's going to be the company's growth over the next 12 months," because of that duration factor.
Okay, very clear. I guess if I'm thinking about your medium term, longer term guide, I think it still shows a growth in 10%-15% range, which I guess we're now right at the threshold. Just how do you think about the further levers to maybe see that accelerate further and get into the upper part of that range?
Yeah. I t's really a combination of just the continued momentum and impact as Enterprise Advanced penetrates more and more of our customer base. Particularly because we've seen, even in the early cohorts, the net retention rate, really driven by seat expansion of our Enterprise Advanced customers, is stronger than non-Enterprise Advanced. T he more of our customer base we move to Enterprise Advanced, the better that is for our overall model and growth profile. That's a core component. I think another one is really just of some of the newer initiatives and growth opportunities we've talked about, just the level of success we can see there, especially over a multi-year period.
Whether that is the consumption side of the business, which we expect to grow from about 5%, where it is today, to 10% + over the next three to five years, to the impact that those SIs and the partner ecosystem can have on the business, to success in some of the less mature markets or less penetrated markets, whether that's EMEA or some of the emerging markets as well. T hink about a combination of Enterprise Advanced and newer growth initiatives.
Okay. Maybe on margin here, I think if we look at where margin has been, I think there's been a little bit less expansion this year. I think for the medium-term target, you're still talking high single digit to 10 points of expansion. Just, I guess, what needs to change here? What are you assuming changes that will show that leverage over the next few years?
Yeah. I think a lot of it is, and the rate of margin expansion is largely going to be a function of what is that growth rate, what is the confidence in investing incremental dollars, pouring more fuel on the fire, on those go-to-market investments in particular. R ight now, given that those investments are really working, delivering multiple points of acceleration in revenue and billings this year, you're on track to do that versus the prior year. Bias has continued to do that and show more metered operating margin expansion, but at the same time, a lot we're doing across the business to drive efficiencies. E ven this year, more than a point of OpEx leverage is what we've been delivering.
T hen still a lot more room to run and efficiencies to drive, whether that's from our workforce and location strategy, to the ways that we're able to free up capacity, drive efficiencies, and hard dollar savings through the way that we use AI internally, to a lot of the continued gross margin optimization that we've been making for years, even though those are being counterbalanced in this moment by some of the hardware and capacity constraints that we're seeing out there. S till very focused on driving the efficiencies, and I think ultimately, whether we drop that incremental dollar to the bottom line or reinvest it in growth is going to be a function of what sort of return we've been getting and think we can get on those growth investments.
Okay, just real quick on gross margins, since you brought it up. Just with the component costs coming through, and I think the AI cost as well, just maybe what does that look like moving forward a year? When do you see that abating and starting to see that level off?
Yeah. I mean, hard to say exactly. Think about that sort of pressure, especially on the public cloud provider capacity side as being temporary, but probably not short term. W ould expect that to persist at least probably through next year. E ventually as those constraints start to ease and we can get access to some of the newer gen hardware to drive those efficiencies, keep doing what we've been doing as we scale, that that sort of pressure should subside.
Okay, perfect. Well, I think we're at time. We'll leave it there. But Dylan, I thank you so much for joining us today.
Yeah, thank you.
Awesome.
Yeah.