Box, Inc. (BOX) Q2 2017 Earnings Report, Transcript and Summary

Good day. Welcome to Box Inc Second Quarter Fiscal 2017 Earnings Conference Call. This call is being recorded today, Wednesday, August 31, 2016. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following management’s prepared remarks. [Operator Instructions] It is now my pleasure to turn the floor over Stephanie Wakefield, Vice President of Investor Relations. You may begin.

Thank you, Tunisia. Good afternoon and welcome to Box’s second quarter fiscal 2017 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/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 @BoxIncIR. On this call, we will be making forward-looking statements, including our Q3 and full year 2017 financial guidance and our expectations regarding our financial results, market adoption of our solutions, our market size, our operating leverage, our expectations regarding achieving positive free cash flow and future profitability, our planned investments and growth strategies, and expected benefits from our new products and partnerships. These statements reflect our best judgments 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 in documents we filed with the Securities and Exchange Commission, 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 made as of today, August 31, 2016 and we disclaim any obligation to update or revise these statements should they change or seize 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, but 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 on our Web site. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand it over to Aaron.

Thanks Stephanie and thanks everyone for joining our earnings call. We achieved tremendous success in the second quarter with strong financial performance across all fronts and great momentum in our product innovation and execution. We are more confident than ever in our ability to capture massive market opportunity. In the second quarter we delivered record revenue at $95.7 million an increase of 30% year-over-year and billings of a $106.5 million up 34% year-over-year. We drove top line growth while also considerably improving operational efficiency. Cash flow from operations was negative $4.9 million versus negative $21.7 million a year ago. This results demonstrate the national leverage in our business model and progress towards achieving positive free cash flow in our January 2017 quarter. We added more than 4,000 new customers in Q2, bringing our total operating business customers to more than 66,000. We had major wins and expansions with leading organizations such as Pfizer, Autodesk, Electronic Arts, The SEC [ph], Western Union and Uber. The number of large deals in the quarter also grew significantly, we closed 45 deals over $100,000 and five deals over $500,000. This momentum underscores our strong execution in the quarter based off of record pipeline creation in Q1, traction in new product sales and continued strong demand in the market. Enterprises today require a modern content platform that supports not only how people work now but how they will work in the future. Today business content is spread across separate legacy systems on premises storage environment, district collaboration and workflow tools, and sync and share solutions. Box is the only place where all of this work and knowledge can come together allowing enterprises to securely manage and collaborate on their most important content and increase productivity across their business. Next week at Box works, our annual customer and industry conference, we’ll be making a number of product announcements that will continue to demonstrate our differentiation and solidify Box’s position as the world's only modern content platforms in the enterprise. Every year enterprises spend tens of billions of dollars on content management and stores technology. To go ahead in this massive market opportunity we've been executing against our three key strategic objectives. As a reminder they are broadening our product portfolio to further differentiate Box and drive sustained top line growth with new and existing customers, expanding our adjustable markets to include hundreds of millions of more users through Box platform and building a world class partnering eco-system that extends the capabilities of Box and increases our distribution. We make solid progress against all three objectives in Q2. First, we had a very busy quarter executing on our multi product strategy. Our new product now enable us to capture more market and sell to new customers that would not have been able to move to the cloud otherwise. Let's start with Box Zones, where we Box Zones last April in Europe and Asia. We enabled our customers to store their Box data in regions outside of the U.S. by leveraging public cloud providers such as IBM cloud and the Amazon web services. This new solution is a fundamentally new architecture allowing us to enter new regions rapidly instead of building out our own infrastructure and enabling our customers to address their data residency requirements. While early we’re incredibly excited about the traction we have seen with Box Zones. Of our large international deals in Q2, Zones was essential for a $500,000 deal and a handful of $100,000 deals. Earlier this month we announced Box Zones is expanding to Australia and Canada and we will continue to provide customers with choice and flexibility and where they store their Box data. Box Governance which allows enterprises to meet retention and compliance requirements in the cloud also continues to gain strong momentum with new and existing customers. We now have more than 400 customers who have purchased Box Governance and on average we've seen more than a 30% uplift in price per seat [ph] on Governance fields. These new products continue to be a major differentiator for Box and allow us to deliver more innovation for current customers, increase in the valued accounts, and to penetrate new markets and industries. For example, Western Union chose Box due in large part to the capabilities of Box Governance. Their employees are now able to work from anywhere on any device and meet corporate retention policies. Additionally, Telegraph Media Group, a media company in the Netherlands, selected Box over Microsoft and purchased 2,000 pieces of Box as well as Box Zones, KeySafe and Governance. Innovations like these have proven our competitive differentiation and we were honored to be recognized by Gartner this quarter as the most visionary leader in our space. To continue to advance our leadership position we’ve also made a tuck-in acquisition of the team from Wagon Analytics to help accelerate our innovation in analytics. Founded in 2014, Wagon has been building technology that helps provide a simple way to create, visualize and share data analysis. In joining Box, the Wagon team will focus their expertise on building out our analytics platform for customers, giving them far more intelligent and insights into how their business is managing content and their collaborations. We’ve continued to make significant progress with Box platform in Q2. As a modern content platform, we enable our customers, partners and third-party developers to build on Box through our APIs and developer services. Box platform continued to gain momentum in Q2 as we saw a number of our early customers launch their custom applications built on the Box platform. The number of active users in these applications have exceeded our expectations. And in the quarter, we closed a number of great new platform customers. A multi-billion dollar semiconductor company purchased Box platform to build an application to distribute documentation to 150,000 users and customers. Perkins and Wills, a global architecture company is leveraging Box platform for its new application that helps architect share and collaborate on projects with clients. And Ipreo, a leading global provider of financial services technology is leveraging Box platform for its new application which empowers private companies to manage compliance and efficiently and securely communicate with third-parties. Finally, our third strategic objective is building a world class partner ecosystem. As businesses use more and more application to get their work done, we want to ensure that our customers can get access to their most important content from wherever they are. We continue to gain traction with our IBM partnership. IBM played a role in 8; six figure deals that were closed in the quarter. Customers are seeing the potential of leveraging Box, both Box and IBM products together. In Q2, a major financial institution and Latin America selected Box not only because of our robust security offerings, but also because they plan to integrate Box with their existing IBM technology. Additionally, a major retailer purchased Box via IBM because they recognized the long-term advantages of using Box with IBM products. Our partnership with Microsoft also continues to yield significant dividends. Adoption of Office 365 continues to be a key driver for new customers to invest in Box as well as will allow existing customers to expand their usage of Box. For example, one of the largest multi-national technology companies in the world uses Box and Microsoft Office 365 to manage global marketing activities. The concurrent editing capabilities allow individuals from different offices to update PowerPoint and Excel trackers at the same time, and Box ensures that everyone, including their external agencies is working off of the same version. We continue to work with Microsoft on further integrations of Office 365 and our other platforms to drive more value for our customers. And we are excited that many of our partners, including Peggy Johnson, Executive Vice President of Business Development of Microsoft, Inhi Cho, the General Manager of Collaboration Solutions at IBM and Werner Vogels, the CTO of Amazon will be joining us on stage at Box Works next week to discuss how we're strengthening our partnerships to deliver value to enterprises and developers all over the world. In summary, Q2 was an amazing quarter, based on great executions and our [technical difficulty] in the market we remain committed to sustaining a high growth trajectory while increasing our operational efficiencies. Today we deliver the world’s only truly modern content platform, strengthening our leadership position in a market worth more than $40 billion. As I mentioned earlier, we are excited to share our vision for the future of Work and showcase our latest product development at Box Works next week. This year will be another incredible event with speakers including Diane Greene, Michael Lewis, John Chambers, [indiscernible] leaders and customers like Coca Cola, Toyota, Allergen, Nationwide and many others. We invite you to join us for Box Works and for the Box Financial Analyst Day at Box Works on September 8. Now I will hand it over to Dylan to review the financial results in more detail. 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. Q2 marked another quarter of solid top line growth and strong bottom line improvement. These results demonstrate that we are on track to deliver on our commitment to generate positive free cash flow in the January 2017 quarter less than six months from now. We achieved record revenue of $95.7 million in Q2 above our guidance and up 30% year-over-year driven by strong execution, increased momentum with our newer products and our best in class retention rate. Second quarter billings came in at $106.5 million representing 34% calculated billings growth and 34% adjusted billings growth year-over-year. As you recall, occasionally certain customers will renew their contract early in connection with large up sells that occur mid contract. In Q2 we benefitted from $3 million of these early renewals that would have normally been billed in Q4. We continue to expect billings growth to trend below revenue growth for the remainder of fiscal 2017 due to the shift in customer payment durations that we have discussed in previous quarter. As we enter fiscal 2018 and these payment durations normalize, we would expect billings growth and revenue growth to track roughly in line. The record pipeline that we built in Q1 resulted in numerous large deals including 45 yields over a $100,000 versus 31 a year ago and five yield over $500,000 versus four a year ago. Deferred revenue was a $183 million, up a solid 40% year-over-year and providing us with strong revenue visibility going forward. Turning to margins, non-GAAP gross margin improved significantly to 74.0% versus 72.4% last quarter. As we mentioned previously, over the past several quarters we have been making infrastructure investments in our data centers in anticipation of customer demand. However, as we are preparing to expand one of our data center facilities, in Q2 we placed less new equipment in service, this led to unusually low server depreciation expenses while we continue to grow our revenue which drove this uptick in our Q2 gross margin. We still plan to expand our data center footprint throughout the remainder of FY17 and we expect gross margin in the back half of this year to be roughly 73%. In Q2 we had another successful quarter or driving greater operational efficiency, while we continue to significantly grow our top-line. Sales and marketing expenses during the quarter were 53.8 million, representing 56% of revenue, a notable improvement from 73% in the prior year. In absolute dollars sales and marketing decreased sequentially from the third quarter in a row. As a reminder, our annual customer conference Box Works will take place in the third quarter. As such, our Q3 sales and marketing expense will reflect roughly 6 million related to Box Works. The ongoing cost to support our free user base, which is a sales and marketing expense continue to decrease to 7% of revenue in the second quarter, an improvement from 13% in the same quarter a year ago. We also added more than 3,000 new customers through our self-service Web site, which is our most cost efficient customer acquisition channel. Next, research and development expenses were 20.9 million, or 22% of revenue, an improvement from 27% a year ago even as we made significant investments in our new products. Most recently we announced Box Zones in Australia and Canada, launched Box Shuttle and introduced Legal Holds as part of our Box Governance offering. Our general and administrative costs were 14.1 million or 15% of revenue, an improvement from 19% in the prior year quarter. We expect to continue to drive leverage in G&A from greater operational excellence and scale. We are extremely pleased that our improvements in operational efficiency drove our Q2 non-GAAP operating margin to a significant 26 percentage point improvement year-over-year, coming in at negative 19% versus negative 45% a year ago. In addition to reducing our losses in percentage terms, on a dollar basis non-GAAP operating losses narrowed both year-over-year and sequentially for the third quarter in a row. This focus on leverage drove non-GAAP EPS to negative $0.14, a substantial improvement of $0.14 from a year ago and well ahead at the high-end of our guidance. We’re very proud of these results as they demonstrates not only the inherent leverage in our business model, but also our ability to capitalize on previous investments while growing at a 30% click. One of the key elements that makes our business model so powerful is our customer retention. Our best-in-class churn rate continues to be roughly 3% on an annualized basis. This reflects our success in serving larger enterprise customers, who tend to have lower churn rates. As our product become an increasingly critical part of our customer’s business processes overtime, feature such as our platform APIs, data retention and workflow should continue to drive overall customer stickiness. Our expansion rate was 19%, a slight increase from last quarter, primarily driven by strong fee growth in existing customers. As we benefit from cross-sell opportunities with our new products. We expect this will offset the natural pressure from our expanding and maturing customer based overtime. As a result, we ended the quarter with a retention rate of 115%, which includes churn and expansion. This metric remain best in class and demonstrates the compounding effect of our land and expand business model. Let me now move on to our balance sheet and cash flow. We ended the quarter with 200 million in cash equivalent and restricted cash of which roughly 27 million was restricted. Our cash flow from operations was the highlight and negative 4.9 million, an improvement of 77% from negative 21.7 million in Q2 of last year. In Q2, total CapEx was just under 800,000 compared to 11 million last quarter. As we mentioned before having now completed our headquarters move we would expect datacenter related CapEx to be roughly 3% of revenue for the forcible future. And while we anticipate greater datacenter efficiencies overtime, the primary reason for the decrease in CapEx was driven by our decision to finance certain datacenter cost under capital leases. Lastly, free cash flow in the second quarter was another highlight at negative 8 million. This is a significant improvement from negative 40 million in the second quarter of fiscal 2016 which included roughly 9 million in headquarters cost. With that let's now turn our guidance. For the third quarter of fiscal 2017 we are setting revenue guidance in the range of $100 million to $101 million. We expect our non-GAAP EPS to be in the range of negative $0.19 to negative $0.20 and for our GAAP EPS to be in the range of negative $0.35 to negative $0.36 on approximately 128 million shares. Please note that there incorporates the roughly $0.05 impact of Box Works in Q3. For the full year of fiscal 2017, we are raising our full year revenue guidance and expect revenues to be in the range of $394 million to $396 million which represents roughly 30% growth at the midpoint of this range. We expect our non-GAAP EPS to be in the range of negative $0.67 to negative $0.69 and for our GAAP EPS to be in the range of negative $1.28 to negative $1.30 on approximately 127 million shares. In closing, we had tremendous success in the second quarter with great momentum and large customer wins significantly improved margins that demonstrate our ability to scale and continued conversions on our path to becoming free cash flow positive by the end of this fiscal year. As you saw this past quarter and you’ll see at Box works, we continue to build on our leadership position in the content management and collaboration markets and we continue to find ways to make Box indispensable to enterprises. We invite you to join us at Box's Financial Analyst Day at Box Works, coming up next Thursday, September 8th in San Francisco. To register please contact our investor relations team. With that, I would like to open it up for questions. Operator?

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Rob Owens with Pacific Crest. Please go ahead. Your line is open.

Couple of things. Wherein about core pricing you gave a nice example as you are up selling to some of your additional capabilities, but what are you seeing from a core price standpoint and what are you seeing competitively with regard to price?

Sure. So overall we've been really pleased to see a very stable price point in the $9 to $10 per user per month rates. That's excluding universities and ELAS and that's been a pretty consistent trends over the past several quarters and we actually saw an increase in price per seats on the core and overall in those Q1 and Q2 of this year. So, while there are some puts and takes and we offer volume discounting for larger deals, we've been really pleased with our ability to hold pricing and to offset the downward pressure from volume discounting with our newer products like governance and zones which have been introduce only recently.

And then secondarily you showed a very strong billings results and a snap back from Q1. I think you mentioned big deals being -- but only five over 500K and a lot of strength to that numbers. So can you help me understand, number one, what’s driving some of the early renewals? You pointed out $3 million. And two, just a commentary around general velocity because it would seem like that’s picking up, but it's not just big deal driven that’s adding the billings here? Thanks.

Sure, so while we did see an increase in the largest deals, our 500k plus segment, we also saw a really strong growth in our six figure deals. So we booked 45 of those in the quarter versus 31 in Q2 of last year, which is roughly 50% increase year-on-year. And to your point, in the run rate business we’ve also seen really great success in the lowest parts of our market due to the investments we made last year in our self-service channel. So really across the board, we saw great customer traction and those are the two, really the biggest drivers in terms of the billings performance this quarter. And then in terms of the early renewals that you mentioned that we mentioned on the call, that was really just due to the continued usage in a couple of our large customers who were set to renew in Q4 and because of the strength of the adoption and just how many seats they have been rolling out overtime, we were able to up-sell those customers in Q2 as they have been using significantly more seats than they had originally purchased. And because of this and because of the size of the up-sell those customers decided to reset their contracts and be billed in Q2, and that was the biggest driver of those $3 million in early renewals.

Thank you. And our next question comes from George Iwanyc with Oppenheimer. Please go ahead, your line is open.

Looking at your IBM traction, the eight deals over 100,000 is a good start. Can you give us a sense of how the pipeline looks for the second half of the year?

This is Aaron. As we mentioned on the call last quarter, Q1 was really a building quarter for us and the partners. Q2 I think you’ve seen in the results that that’s been paying off in terms of the field execution that we’ve seen. Really strong success in particularly in our [ph] customers, highly regulated customers, government organization. So the partnership is really starting to perform well. In the second half of the year, this is obviously where we would expect more of that performance in actually in Q4 for us and Q4 for IBM, our big quarter. So continuing to build a pretty strong pipeline, and I think you’ll see continued execution from the partnership.

And looking at the billings contribution, with the pull-in that you saw this quarter, how do you expect seasonality to look for the rest of the year?

So as we mentioned, we do see -- we would expect to see a more backend loaded billings than we’ve seen in the past due to our continued success moving up market, selling to larger enterprises, which tend to buy later in the year, as well as our partnership with IBM. However, not just the strong Q2, but those $3 million in early renewals that would come out of Q4 lead us to not expect quite as much of a backend loaded year with respect to billings as we had mentioned on last quarter’s call.

And last question for me, on the competitive front, what are you seeing from Dropbox, Microsoft, just from a point comparison?

This is Arron. Pretty similar results from a competitive standpoint. Our competitive proposition continues to strengthen relative to Dropbox, Microsoft and other solutions. I think for just a little bit of context, what we're seeing is, customers that have a whole mix of solutions in their environment, they have enterprise constant management technology from one set of vendors, they have file sync or sharing technology from another set of vendors, they have traditional storage technology. Only Box can actually allow you to replace all of those solutions with one platform. Even if you buy it from Microsoft you're really going to be buying two or three different products to be able to let you manage your content in a modern way. So, we're seeing the strengths of products like Governance, Zones, KeySafe. Our overall platform really bolster the value of the platform and with integrations like Microsoft and with Office 365, our customer can successfully deploy both of our products together and get value out of both of those. So that's why we’re continuing to see an increase in performance in our win rates continuing to go up and that’s what we would expect to see in the future.

Thank you. And we'll take our next question from Melissa Gorham with Morgan Stanley. Please go ahead. Your line is open.

Aaron you talked about Box Zones and how that's helping Box address local data [indiscernible]. I am just wondering if you can may be provide a little bit more color on what you are seeing from a demand perspective internationally? And then, also, how you're thinking about investing in sales and distribution internationally to help address that opportunity?

So, we are seeing great success really right out of Gate. That was -- I think we were quite happy with that, although it’s somewhat expected because we had worked with a bunch of customers as we built the solution over the couple of year. So, we kind of went heads down about two plus years ago to build and architect a way that we could help customers store their data internationally and one of the key choices we made was to actually work with cloud partners to be able to deploy in all of the regions we wanted to enter. So we didn't have to go build out that infrastructure. So that was the architecture we landed on, but we did it with the guidance and the support of key customers to make sure we were doing something that they would ultimately support and be happy about. So that became generally available in May, really the key has been unlocking customers where for either privacy or data sensitivity reasons or compliance requirements they have to be able to keep their data stored in that region. We're seeing strong demands globally for Box even without Zones because there is a lot of use cases, if it’s a marketing team collaborating or sales team collaborating where you don’t need to have your data stored in a region, but if you're a bank, if you're a hospital, if you're a government agency then you generally have to have most of your contents stored within that region. So, we're seeing demand pick up in the key markets that we've launched in. Again kind of sort of London, Germany, kind of key regions of Europe and the first wave and then now with Australia and Canada coming on board, Japan which also went out in the first wave. So, I think you’re going to see a pretty strong pick up of big deals happening internationally especially with the IBM partnership where we have channel partners that can kind of help us enter those markets where we may be don't have feet on the ground, where we are building up a bigger presence. We are working on international partnerships, we announced the partnership with Fujitsu and NTT in Japan over the past year or so. So, you're going to see more and more kind of international partnerships that allow us to enter these markets where we can augment our own distribution.

And this is Dylan, the only thing I'll add to that is you asked about the investments, it's from an investment standpoint we've really build a solid foundation and key in those partner relationships that Aaron mentioned over the past couple of years. So we’re already in the key international markets where we see the biggest opportunity. So I wouldn’t expect any sort of step function investments in the near to medium future in order to capitalize on this opportunity.

Okay, got it. Just one follow-up for you Dylan on the guidance on EPS. You brought up the full year EPS guidance, more so than you did revenue, so it does imply that you are assuming some greater magnitude of leverage, I think in Q4 than the previous guidance assumed. So I’m just kind of curious where you’re seeing that leverage, is that happening in sales and marketing and then any kind of philosophy on investing broadly in enterprise sales heads?

Sure. So we are seeing the majority of that leverage -- that increased leverage in sales and marketing, due to a combination of both the productivity increases that we’ve mentioned in the past, that we’ve been able to drive over the past couple of years, as well as the success of our self-service channel, which has been really helpful and it’s helped with the strength of our growth rate, which has a very minimal sales and marketing expense associate with that. Although, we do expect to continue investing in our sales force. As we mentioned on our previous earnings call, we’re actually expecting to grow that sales force and a greater clip than we did last year and at the same time continue to drive both productivity increases, as well as overall sales and marketing efficiency improvements in the coming years.

Thank you. And we’ll go ahead and take our next question from Mark Murphy with JP Morgan. Please go ahead. Your line is open.

Hi. This is Albert Chi seating in for Mark. Congrats on the quarter and then thank you for taking my question. I just want to ask about the initial traction that you’ve been seeing with Box Shuttle. So it sounds like it’s a product that would reduce a lot of switching costs for customers, so can you talk about what sort of tailwinds this has been in and have you been seeing most of the heavy lifting coming from on-premise to the cloud or from other enterprise content management solutions? Thanks. I have a follow-up.

Thanks. Okay, great question. Yes. Just for additional contact. Box Shuttle is the new service offering that we launched in the quarter that helps customers migrate there legacy enterprise content management data and on-premises storage content into Box. So really about making an even easier to replace your legacy technology with Box by kind of helping accelerate the move of large amount of content to the cloud. This is, it’s all about reduction frictions for our customers. So we wanted to deliver a solution both through our own capabilities and with partners, where we could again dramatically lower the barriers to adopting Box. We’ve seen some customers for instance migrate hundreds and millions of documents and files into Box, because of the technology in this program. And so, it’s primarily today about migrating off of on-premises environment, however to what you alluded to, there is no reason overtime if you have large amounts of data in other platforms that are already in the cloud, we would, that we wouldn’t want to also help you move that the Box as well. So as Box really becomes the kind of core system of record for how you managed, share and collaborate around your content, we know that the customers want to bring more of their information into our platform and that’s what Box Shuttle is all about.

Great. Thanks Aaron. And we saw the announcement that you guys have hire the new SVP of Global Field Ops. I was wondering, if there is any -- do you expecting a realignment of sales or is there any change in priorities with that change?

Yes and just to clarify, so our new Global Head of Field Sales and our new Head of Commercial Sales both were running similar operations internally just not on a global basis. So we promoted them into global responsibilities to get better alignment across the business in all of our field and commercial sales execution. So that's why we saw really I think a strong performance in Q2, its continuing to drive that alignment, but it was the very-very natural evolution of the sales model and leadership team.

Got it, and my last question is for an update on the government vertical. I know that you achieved FedRAMP [ph] status last quarter. Can you talk about what sort of pipeline that you are seeing within the government and what sort of strength that contributed this quarter. Thanks very much.

Yes. So, given this solution is completely horizontal, it works across the business of all sizes and in all the industries. We've always seeing a lot of both early attraction and kind of latent demand in the government’s base broadly. So large agencies that want to be able to collaborate more efficiently and have more secured document management and document collaborations. So we knew those are lot of pent up demand and in fact our FedRAMP process was sponsor by the department of defense. So we decided to work with obviously one of the most sensitive agencies as we worked through that program. We did a number of key deals in the federal space in Q2, so we are quite happy about some of the brands that we brought on, FCQ [ph] is one that we announced and there are other deals that we were able to do to complete in the quarter, and I think we’ll continue to see demand growing from the federal and even state and local government space, just because of how horizontal the need is for modernizing the way that organizations manage, share and collaborate around their content.

Thank you. [Operator Instructions] Will take our next question from Joyce Yang with Bank of America. Please go ahead. Your line is open.

So, I'm just thinking out loud, you are investing in low quota carrying sales rep this year and then you are getting leverage from the sales surface channel. All then, in the mean while you are showing improvement in operating margins of 20% plus from last year. If I were to assume that you make a lot of the investments this year what would prevent you guys from becoming profitable from the next -- in next year essentially, given that you’re continuously showing this kind of margin improvement?

Sure. So, while we've -- so you set a bit of context. The reason that we decided to increase the number of our sales reps that we’re hiring this year is because of the strengthening demand and pipeline that we are seeing in the global markets that we serve, and that’s what gives us the confidence that we don’t expect these increased hiring targets to either have a material impact on the rough productivity or the efficiency that we’re able to drive. With that said just given the sort of the size and the market opportunity that we are going after the strong customer economics we are going to be continuing to invest in a lot of different areas of the business and we will speak a bit more to how we expect the model to evolve in the coming years at Analyst Day and that sort of path to achieve $1 billion of revenue and beyond, but for now I would just say that you would expect, I was look to our guidance to get a sense of how we are thinking about these efficiency improvements in the near-term. And just note that we’re very focused on making sure that we’re not only setting up a business that can grow at a rapid rate for the long-term, but also converging on positive free cash flow by the fourth quarter of this year and then continuing to improve our profitability thereafter.

And can you talk about those five deals that were over 500k. Are any of them some of the seven figure deals in the pipeline that you referred to from Q1? And I guess if you could just give us color on the pipeline in general, and the progress there?

Yes, so one of those deals was in the seven figure pipeline that we did call out. A number of other deals were both big expansions of existing customers where we had successful adoption of Box and the customer came back and wanted to in multiple cases buy 1,000s or 10,000s of addition seats on the product. And then one of the deals was through our partnership with IBM. So pretty significant quarter just in terms of big deals overall, really a range of use cases and circumstances, but all the same underlying reason which is the industries were consumer packaged goods, technology companies, life sciences, healthcare, banks and, but it all came down to these organizations needing a more modern way to manage their content and us being able to deliver on that value proposition for them. So I think indicative of the overall traction that we’re seeing and very indicative of the pipeline that we’re building and larger customers. And so we expect to see more of these large customer deployments.

And just one quick follow up again. Dylan, can you talk about the pricing for the platform? It sounds like there has been [technical difficulty] traction there. So I wanted to see if there is a possibility of a potential and material impact for the year, for the top line?

Sure, so from a pricing standpoint, we launched the Box platform offering with deep based pricing similar to our core offering. We start at $5 per app user per month. And we’ve been doing overtime and seeing that really just this year is building year for the platform. As we said in the past, we don’t expect that to contribute materially to the top line this year, but see a massive opportunity in the coming years as this becomes a more and more critical part of our customers and prospects, digitizing different parts of their business. And from a pricing standpoint, we’ll give a little bit more color over time as that evolves and we seek to make sure that our offering and the pricing model is as compelling as possible for customers. But I wouldn’t think about that in the same context as our core price per seat as it is it tends to be generally a fundamentally different usage model as well as just a very different scale in terms of number of the users leveraging the Box platform. But we’ll be giving more detail on how that’s evolving in the coming quarters.

Thank you. And our next question comes from Brian White with Drexel. Please go ahead, your line is open.

Aaron, on the IBM relationships, I am wondering if this is helping you in a bigger way overseas, or is it help, being more helpful here in U.S.?

So we're seeing a lot of the initial big deals and more kind of transformational deals happening internationally. We have been able to really execute together in a bunch of these key markets about 50% of our -- greater than 50% of our deals from the IBM partnership, it has happened internationally. So very, very strong momentum in the global markets where IBM performs incredibly well. But we're seeing still great traction in the U.S. obviously we have a much larger direct sales force in the U.S. than we do internationally. So it's much more and it augments in some of these key international markets, but I think we're pretty bullish on all the key markets with the partnership.

And are there any metrics around Box platform that you want to share with us? Obviously that seems like really something that can change the model over the next few years. I know it's early but are there metrics that we can kind of monitor early on here to take a look at how it's ramping?

Yeah, I think we're certainly going to, we'll start to provide a little bit more color at the analyst, Financial Analyst Day, just because it will be a deeper dive presentation on the platform model and what we're doing with that. We obviously have tens of thousands of developers on the platform in general, but those range from pre-developers to third party partners and IZs [ph] as well as enterprise customers, but we'll say -- we'll try and provide a little bit more color for how the platform is growing. But we are seeing what I did mentioned is from some of the initial sort of large custom applications that have been built on the Box platform, some of the initial active user metrics have exceeded our expectation. So when our customers are going live with their applications I think we're seeing great usage and really underscoring the value proposition that we’re bring to them which is to dramatically improve the collaboration and the content experiences within their apps. So, if you're a bank, if you're a financial services institution or you're digitizing a loan process or you're digitizing a financial document sharing process in your business that's what our platform is built for and we're seeing great take up of the applications that our customers are building.

Thank you. And our next question comes from Aaron Rakers with Stifel. Please go ahead. Your line is open.

A couple if I can as well, just first of all on some housekeeping things. I think in the past we've talked a little bit about the number of paying users as a percentage of your total registered user base, I was wondering if you could provide those metrics again.

Sure. So we ended the quarter with 48 million total registered users which was up a couple of million from Q1 and of those about 6.6 million were paid users. So that's now at about 14% of the total registered user base and that continue to increase overtime.

Good, thank you. And then, also another several questions on kind of your plans on sales and marketing or sales capacity expansion for the year. I am just curious, I know that it's provided it in the 10Q, but I was wondering, what was your sales and marketing headcount exiting this quarter and I think last year you grew that by about 8%, I am curious of what I know relative you expect a higher rate of growth this year. Just curious of how we should think about that relative to the 8% seen in fiscal 2016?

Yeah, so we wouldn’t break out the exact sales and marketing headcount now, that will be released in the Q. But it's been roughly flat over the past couple of quarters. But we have been doing shift [ph] a greater proportion of the sales and marketing has in the quota carrying AEs, there is a lot of the support we’re getting. I mentioned in the past, a lot of our initiatives around shifting some of the way that we’ll be able to generate demand and serve our customers through much more efficient means, so less sort of headcount intensive. So it would not necessarily see the number of overall sales and marketing heads and the number of quota carrying AEs as tracking in line. So you can expect to see the AE growth being higher than not only sales and marketing headcount, but also Box’s headcount as a whole. And then in terms of the specific AE number, that’s a metric that we’ve been disclosing on an annual basis and would expect to give that same metric at the end of this fiscal year.

Okay. And then the final question for me kind of on the same front. You gave the metric that roughly 3,000 of your customers were kind of assigned through yourself servicing portal. I don’t think that’s a metric I’ve heard in the past. I’m curious as how that’s trended over the last several quarters, because obviously I think that’s an area where clearly you’ve seen some leverage from.

Yes. So overtime that’s definitely been increasing particularly this year. So as we highlighted on last quarter, we signed a record number of new customers with more than 5,000 adds in Q1 and the significant majority of those were through our self-service portal. So we’ve really just been to talking about it more actively over the last couple of quarters, as it’s been a much bigger initiatives and we’ve seen much more success. So over a longer time period that number has been increasing pretty significantly versus where we were a year ago or two years ago.

Thank you. And we’ll take our next question from Greg McDowell with JMP Securities. Please go ahead. Your line is open.

Great, thank you very much. And it’s great to see the improvements with some of the key operating metrics. Back to billings real quick, one for you Dylan. Even on an adjusted basis backing out the 3 million, it still grew 30% and I was just wondering, how much of an impact there could have been from deals that had rolled over from Q1 into Q2. And I guess the second part of that question is, given your commentary on momentum and execution, did it feel like it was getting stronger throughout the quarter, throughout May, June and July? And finally one for you Aaron, as you think about Box Works next week and dramatically what’s different this year, what’s different compared to previous Box Works. I was just wondering, if you could maybe give us a preview on some of the key messages, you’re going to try to get across to your customer based? Thanks.

Sure. So I’ll start, as it relates to the Q2 performance, so we’re really pleased with the results, the momentum we’re seeing in the business. It wasn’t driven horribly [ph] at all from deal that we had expected to close in Q1. As we had mentioned, Q1 was really a pipeline building quarter where we generated record pipeline and it was really a function in Q1 of not having as much pipeline available to close versus large deal that slipped out of that quarter. So Q2 was really capitalizing on the deals in the pipeline that we had generated in Q1. Although to your second question about the execution down the stretch, we were really pleased with our ability both through to our partners, as well as our direct sales force to executing and closed on those large deals, especially those 45 deals greater than $100,000 and so really pleased with just the overall win rate that we saw. We mentioned those were up across our all of our key competitors and had a great quarter for sales execution overall.

And on the Box Works side, obviously want a leave a little bit of the news for next week, but in the general what we're really excited about is, I think we are at a pretty significant juncture where the way that businesses and organizations operate and the way they work is changing in some pretty fundamental ways. And companies want to be able to move more quickly, they want to be more collaborative, they want to have flatter organizations, they want to be more data driven. So when you look at all of these trends that are coming together and inspiring to change how businesses think and function and work, the way that they deliver IT, the way they manage their information, the way they organize their data and is going to be pretty fundamental to allowing these organizations to get ahead and we deeply believe that companies are not going to be able to work and execute in the modern way if they are using traditional storage technology, traditional ECM systems, traditional collaboration products, traditional workflow solutions and yet there has never really been a way to kind of pull that all together into one place and so we’ll be talking a little bit more next week about how we really are driving toward a vision where Box is where all of that work comes together and that's where we are going to be pretty excited to talk about.

Thank you. And this does conclude today's question-and-answer session. I will now hand the program back over to your speakers for any additional or closing remarks.

Thank you all for joining us today. We remind you that we are inviting you to the Box Financial Analyst Day at Box Works to next Thursday in San Francisco. If you would like to come, please RSVP to myself or Alice in the coming days. Thank you and we’ll speak soon.

Thank you. This does conclude today's teleconference. Will you disconnect your lines at this time and have a wonderful day.