Box, Inc. (BOX) Q4 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Chantal and I will be your conference operator today. At this time, I would like to welcome everyone to the Box Fourth Quarter Fiscal 2017 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 [Operator Instructions]. Thank you. Stephanie Wakefield, Vice President of Investor Relations. You may begin your conference

Good afternoon, and welcome to Box’s fourth quarter and fiscal year 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 also be available for replay on our Investor Relations Web site at www.box.com/investors. Our webcast will be audio only. However, supplemental slides are now available for download on our Web site. 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 market adoption for our products, our market size, our operating leverage, our expectations regarding achieving and maintaining positive free cash flow and future profitability, our planned investments and growth strategy, expected benefits from our new products and partnerships, and our Q1 and full year ’18 financial guidance and our expectations regarding our financial results. These statements reflect our best knowledge based on factors known to us currently, and our 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 and for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are made as of today, March 01, 2017 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 of our Web site. Unless otherwise indicated, all reference 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 the call. Fiscal 2017 was another incredible year for Box. We issued annual revenue growth of 32%, strengthened our leadership in cloud content management, and in Q4, generated quarterly positive free cash flow for the first time. In the fourth quarter, we delivered revenue of $109.9 million, an increase of 29% year-over-year and record positive free cash flow of more than $10 million, demonstrating significant leverage across all expense lines and the inherent operating leverage in our business model. We also continue our streak of exceeding our guidance since we've gone public, and feel confident that the improvements we made in the business over the past year set us up well on the path to our long-term goal of $1 billion in revenue. This quarter, we grew our leadership in the market and now have over 71,000 paying customers, including new or expanded deployments with Discovery Communications, John Muir Health, Volkswagen Group and Spotify. Our focus on enterprises drove major wins in Q4 with 64 deals over $100,000, a record 16 deals over $500,000 and a record eight deals over $1 million. These results reflect strong execution from our entire team, healthy demand from enterprise wanting to move their information from legacy solutions for the cloud and most importantly Box's leading position in cloud content management. Throughout FY17, our focus on new product innovation, building out our platform strategy and developing our strategic partner ecosystem, strengthened our lead in this market. As we look to fiscal 2018, we're going to build on this success by further focusing on two major objectives; first, we will continue to innovate in cloud content management with additional products and platform capabilities to help enterprises move more of their workload to the cloud; and second, we’ll continue to invest in an advance our global go-to-market efforts, so we can reach more enterprises all around the world. In Q4, we made solid advancements on both of these fronts. As a pioneer in cloud content management, we continue to separate ourselves from the competition. Unlike others, Box delivers against the needs of end users, enterprise IT buyers, and application developers. For end users, in Q4, we launched a significantly enhanced and expanded version of Box Notes, our real-time collaboration tool for teams. Box Notes is for teams to share knowledge and information and collaborate on projects, all within the secure Box environment. More than third of the Fortunes 500 are already using Box Notes as part of their overall Box deployment. In Q4, we also announced new ways that Box works with office 365, enabling round trip editing and deep integration for office on Android. We want our users to be able to seamlessly access and work with our content in Box from any application they need. Microsoft continues to be a key partner in our strategy to provide a single secure platform for cloud content management. And the new Box Notes and our deep Microsoft Office integrations are just two examples of the continued innovation for end users that make the Box the best place for people to work together. Next, to supports the needs of enterprises, security compliance and scale remain critical differentiators for Box. Q4 was no exception, with solid momentum for our Box Governance, Box Zones and Box KeySafe products. For Box Governance, which allows enterprises to meet retention and compliance requirements in the cloud, we added more customers in Q4 than any previous quarter. We now have more than 700 Governance customers, up from over 500 customers last quarter. And roughly half of our governance deals in Q4 came from customers that are new to Box. Customers place a high value on Box Governance with the average price proceed uplift of over 30% on top of the core Box licenses. Additionally, Box Zones, which enables global enterprise to store their Box data locally, is now available in seven countries including Germany, Ireland, Japan, Singapore and Australia. While we are seeing good traction for Zones in Europe, one of the biggest Zones deals in Q4 was our new Australia zone, highlighting the global opportunity for this product. Our leadership in delivering these new advanced services are key differentiators for customers to make the move for the cloud, and are defining why the Box offering is so unique. For instance, KeySafe was an initial part of a $1 million plus deal this quarter, helping our customer to choose Box for its first-ever enterprise-wide cloud software purchase; and leveraging multiple products from Box, a large financial services company find a multi-year multi-million dollar deal to modernize their content management stack. Given the rigorous regulatory environment financial services players operate in, the Platform, Governance and KeySafe, made Box the only vendor capable of solving all of their needs. They are now using Box Shuttle to migrate content to the cloud and retire OneDrive, Simplicity and other legacy solutions. And while these products appeal specially to large enterprises, they are also driving significant average contract value growth in the commercial and small business segments. Finally, for developers and ISVs, Box aims to be the most partner and developer centric company in enterprise software. There is a massive opportunity for Box to power applications and digitize industry workflows and connect the businesses with customers, partners and employees in all new ways. This quarter alone, more than 40% of Box's 58 billion API calls came from third-party applications. In Q4, we added and grew our relationships with several ISV and system integrator partners building on the Box platform including Medidata and Cognizant. Medidata, a leader in cloud-based solutions and data analytics for clinical research, announced they will be leveraging Box Platform to create the industry's first integrated end-to-end system for regulated content management and life sciences. We're incredibly excited for Medidata to leverage our technology in their effort to transform this industry. We also made significant enhancements to the Box Developer experience, including a new developer console and API navigator and interactive documentation, and updates to our most used software development kits. Our additional products and our platform are all important differentiators and significant growth drivers for Box. This past quarter, just over half of our deals on more than $100,000 included at least one of these offerings. And in FY18, you'll see us put significant emphasis on growing these product lines. We also have a roadmap for continued innovation in these product areas, including launching new solutions such as our workload tool Box Relay, which we co-developed with IBM and will be available later this year. Our second major objective for FY 2018 is advancing our global go-to-market efforts, including enhancing our distributions through a world class partner and channel ecosystems and driving efficiency in scale in our direct sales operations, both online and in-field. Partners contribute to our legion, awareness and product and sales efforts all around the world. In Q4, partners such as AT&T, IBM and [indiscernible] Japan, plays a role in over half of our deals over $100,000. And as we anticipated, our strategic IBM partnership continued to ramp in Q4. As we previously mentioned, IBM contributed to our record pipeline earlier in the year. And in Q4, that effort resulted in IBM being part of as 18 of our 64 deals above $100,000. We also continue to deepen our product partnership with IBM. This quarter we integrated Box of IBM cloud connections, IBMs integrated suite of collaborative solutions. Box is now embedded within 10 IBM products that IBM sales reps sell. Our online channel was also a big focus this year. We drove significant efficiency and freed up sales capacity to service bigger accounts by enabling smaller customers with less than 25 employees to move entirely to self-service in FY17. Finally, in FY18, we will be investing in sales capacity by adding more direct and indirect sales reps, as well as layering leading edge marketing technologies to drive more efficient lead generation, nurturing and close capabilities. In Summary, Q4 was an incredible quarter for Box, closing out a record year of financial performance. As promised, we delivered on our commitment to reach positive free cash flow in this quarter, while consistently achieving strong growth. We're excited to enter fiscal 2018 in a strong position. Over the coming year, you will see us build amazing products that power how people work together. Our vision of cloud content management fits a major customer need and our product innovation will further drive enterprise adoption of Box. We will also advance our global go-to-market efforts to extend our reach to enterprises all around the world. Lastly, we remain committed to our goal of being free cash flow positive on a full year basis for fiscal 2018 as we drive towards a long-term revenue target of $1 billion. Now, I'll hand it over to Dylan to review the financial results in 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 Web site. The financial measures I will be discussing on this call are non-GAAP unless otherwise noted. In Q4, we achieved a record financial performance, delivering our highest revenue and billings results ever, and achieving quarterly positive free cash flow for the first time. These results were driven by strong momentum with our additional products, increased traction with our strategic partners and our best-in-class retention rate. We realized record revenue of $109.9 million in Q4 above our guidance, and up 29% year-over-year. Fourth quarter billings came in at $159.3 million, representing 22% calculated billings growth and 28% adjusted billings growth year-over-year. Over the past year, we’ve made great progress in standardizing our customers on annual versus multi-year payment durations. With more normalized payment durations, going forward, we expect billings growth and revenue growth to track roughly in line for the full year of fiscal ‘18. We continue to win large enterprise deals, including 64 deals over $100,000 versus 66 year ago, 16 deals over $500,000 versus 13 year ago, and eight deals over a million versus five year ago. Our additional products are an important differentiator and growth driver for us. Just over half of our six figure deals included at least one additional product and 18 were attributable to IBM. Deferred revenue was $242 million up a solid 30% year-over-year and backlog was $258 million, up 40% year-over-year. Both deferred revenue and backlog included an enhanced developer access fees from one of our resellers. These results provide us with strong revenue visibility going forward. Turning to margins, non-GAAP gross margin came in at 75.8% versus 73.2% a year ago, and 76.1% last quarter. Over the past year, we've made several optimizations to our infrastructure that drove the substantial majority of this improvement. However, with the new datacenter we previously discussed now live, we expect our gross margin to stabilize around 74% for FY18 with the low point coming in Q1 before improving over the course of the year. We continue to see stable pricing in the market with price proceed coming in at roughly $100 per user per year throughout FY17. Q4 was another successful quarter of driving greater operational efficiency, while continuing to significantly grow our top line. Sales and marketing expenses during the quarter were $58.8 million, representing 54% of revenue, a notable improvement from 68% in the prior year. This past year, we achieved significant leverage by moving customers to our online sales channel, nearly doubling this channel’s contribution to our business, while also allowing us to move several sales reps up-market. This coming year, we will be accelerating growth in sales headcount and also investing for scale in our marketing infrastructure. These investments will allow us to achieve continued leverage in sales and marketing overtime. We are entering this year 211 quota carrying reps, up 10% year-over-year with billings per rep increasing by 12% year-over-year. These trends give us the confidence to continue investing in additional sales capacity. In the coming year, we plan to increase our global quota carrying sales headcount by roughly 25%. The ongoing cost to support our free user base, which is a sales and marketing expense, continue to decrease to 5% of revenue in the fourth quarter, an improvement from 10% in the same quarter a year ago. We continue to see leverage in this expense, while continuing to grow our per user base. Next, research and development expenses were $21.9 million or 20% of revenue, down from 23% a year ago. We drove this improvement even as we made significant enhancements to our products, including expanding Box Zones into new regions, launching a new version of Box Notes, and making several enhancements to our Microsoft integrations and our platform developer experience. Our general and administrative costs were $15.3 million or 14% of revenue, an improvement from 19% in Q4 of last year as we benefited from greater operational excellence and scale. We're extremely pleased that these improvements in operational efficiency drove our Q4 non-GAAP operating margin to a significant 25 percentage point improvement year-over-year, coming in at negative 12% versus negative 37% a year ago. This focus on leverage drove non-GAAP EPS to negative $0.10, a substantial improvement of $0.16 from a year ago, and well ahead of the high-end of our guidance. One of the key elements that make our business model so powerful is our strong customer retention. Our best-in-class churn rate continues to be roughly 3% on an annualized basis. As Box becomes an increasingly critical part of our customers’ business processes overtime, feature such as our platform APIs, data retention, and workflow should continue to drive overall customer stickiness. Our net expansion rate was 18%, primarily driven by strong seat growth in existing customers. As we benefit from cross-sells with our additional products, we are seeing this offset the natural pressure on this metric from our maturing customer base. As a result, we ended the quarter with a retention rate of 115%, in line with our past two quarters. This metric 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 $204 million in cash, equivalents, and restricted cash of which roughly $27 million was restricted. Our cash flow from operations was a highlight at $14.7 million compared to $4.9 million a year-ago, an improvement of nearly $10 million. In Q4, total CapEx was $1.3 million compared to $25 million a year ago, which included roughly $20 million in headquarters cost. We expect CapEx and capital lease payments combined to be roughly 5% of revenue for the foreseeable future as we continue to finance certain datacenter costs under capital leases. And, as we committed, we achieved positive free cash flow of $10 million this quarter, reaching this milestone for the first time in our history. Though we will see fluctuations on a quarterly basis, we expect to generate positive free cash flow for the full-year of fiscal 2018. We believe that the discipline that we have shown in becoming free cash flow positive sets us up nicely to achieve the operating margin and billion dollar revenue targets that we outlined at our most recent Analyst Day. With that, let's now turn to our guidance. For the first quarter of fiscal 2018; we are setting revenue guidance in the range of $114 million to $115 million; we expect our non-GAAP EPS to be in the range of negative $0.14 to negative $0.15; and for our GAAP EPS to be in the range of negative $0.32 to negative $0.33 on approximately 131 million shares. For the full year of fiscal 2018, we expect revenue to be in the range of $500 million to $504 million, which represents 26% growth at the midpoint of this range. We expect our non-GAAP EPS to be in the range of negative $0.45 to negative $0.49 and for our GAAP EPS to be in the range of negative $1.23 to negative $1.27 on approximately 134 million shares. In summary, our fourth quarter yielded tremendous success across all financial metrics as we continue to widen our competitive differentiation through product innovation and key partnerships, while delivering significant leverage in our business model. We are well positioned to maintain a rapid growth rate and to deliver on our commitment to achieve positive free cash flow for the full year of fiscal 2018. With that, I would like to open it up for questions. Operator?

[Operator Instructions] Your first question comes from Rob Owens with Pacific Crest Securities. Your line is open.

Dylan, as we deliver to convergence in growth between billings and revenue for fiscal ’18 which you mentioned. Are there any puts and takes relative to difficult comps or things you might have seen seasonally in ’17 that could offset that from one quarter to another?

So, we did see -- we made great progress in terms of really moving those multi-year prepays that created some difficult comps in FY17 relative to FY16. Those prepays multi-year prepays were very consistence in the 1% to 2% range of overall billings for the full duration of the past year. So, we would expect to see revenue growth and billings growth tracking roughly in line throughout the year, and would expect the same general billing seasonality that we saw last years as well. So, in the past year in terms of how the billings for the year broke that down by quarter that was about 17%, 23%, 25% and then 35% in Q4. And will we may see some variability there, depending on really large deals, we aren’t expecting to see really different seasonality from overall billing standpoint in FY18 versus what we just saw in FY17.

Then second regarding the additional sales capacity, will you front load most of these hires or helping, or will it be throughout the year? And could you guys remind us what the typical sales ramp looks like for U.S.? Thanks.

Sure. So, definitely given the pipeline, the momentum we're seeing in the business, we are focused on adding the majority of these sales reps in earlier part of the year. So they can make a contribution to the business within the year. But we would expect to see that headcount growing throughout the year. And so, typically we see from an insight sales point of view, is about a nine month period to become fully ramped. And then for certain of our field segments, it may take about a year to achieve their full status.

Your next question comes from George Iwanyc with Oppenheimer. Your line is open.

Can you expand on the type of work you’re doing with IBM? It sounds like the pipeline remains were very robust. How does that look for the coming year?

The pipeline is certainly building nicely better than the last year, so we would expect a still ramp-up in the first part of this year. Certainly, the partnership will lead to more back half heavy types of deals given this larger enterprises that we’re closing larger organizations. But I think we highlighted in the call, the partnership has gone incredibly well, especially in Q4 where we did a number of our large enterprise transactions with IBM alongside IBM. And we're beginning to build more and more joint integrations, as well as our joint solution Box Relay. So, I think you will see more success from the partnership this year than even last year, and it's going currently well. And then, importantly, it's a very strong template for success that we have with partners broadly. So, I think you’re going to see us be able to drive more partnerships like this in the future as well.

Are you seeing multiple products in most of those with IBM, or is that usually a single product?

So we're seeing on certainly the core Box licenses, I think Box Governance in general, is showing up in a lot of the accounts, particularly because of larger enterprises often in risk regulated industries or very security conscious organizations. So, we are seeing Box Governance be attached to many of those transactions, and then occasionally Zones or KeySafe, depending on the customer.

And just finally for the additional products like KeySafe, Zones, Governance, is it usually consistently 30% for each of them? Or how much of the variability are you seeing on a product basis?

So it has been pretty consistent, so we’d certainly see some variability. But we have on-time, actually overtime, actually seeing a little bit of an increase in the average uptick that's why originally we were talking about 20% to 30% uplift on average, and now is over 30% pretty consistently as we continue to communicates and be known for the value that these products are driving in the market. So, generally, it is a pretty consistent uplift that we’re seeing for both Governance and KeySafe.

Your next question comes from Richard Davis with Canaccord. Your line is open.

I think you guys have said that you have like about, maybe only like 6% penetration of the full pound of knowledge workers at your existing customers. So, when you guys say well we can get 70% of our path to a billion through effectively same-store sales that makes sense. So, two questions come from that; is one, what was the mix of revenues between new and up-sell kind of in Q4? And more importantly, how do you think about evolving the selling methods to ensure that that transition is seamless, because you did talk about inside sales. But are you building out customer success, et cetera. How do you get people to up-sell? Thanks.

So, we are now just over 7% penetrated in the Fortune 500 companies where we do have paying deployment. So that has continued to trend upward overtime, but we still have pretty substantial amount of headroom in those customers. In terms of the breakdown of the new bookings that we've been driving of weighted, tends to be about two-thirds coming from existing customers and that's a combination of additional seats and additional products, and then about a third of those new bookings coming from customers buying Box for the first time. And overall the way that we support our customers throughout their lifecycle, and really working with combination of sales, customer success and marketing, we try to be very on top of those initial use cases and opportunities to drive additional expansion. I would say that as we continue to evolve, and especially evolve our product portfolio over the past couple of years, there has been much more of a focus on really educating our customers, as well as our team on identifying the use-cases and where there might be a good opportunity for products like KeySafe or Governance. So, certainly, a process that we're continually evolving that given the traction that we're seeing in some of these initial products, we're pretty pleased with the results.

Your next question comes from Philip Winslow with Wells Fargo Securities. Your line is open.

Aaron, a question for you and then a follow-up for Dylan. If I want to clock back to the '14 and back to the IPO, obviously a lot of people there, a lot of questions on files, thinking shares, so to speak and the basic Box offering. But if I think about what you’ve added over the years, and you touched on some of these, KeySafe, Governance, et cetera. And if I, just looking to your commentary over the past 18 months, we think about more like call for -- in traditional ECM replacement type deals that you guys talked through. Wondering if I'm reading too much into that, or how sort of the product evolved to the point where this really is increasingly just an ECM replacement, especially with those new futures, especially Platform? And then -- let’s talking that and then I’ve got a quick follow for Dylan.

I don’t think you're reading too much into that. I think that that’s actually what we're seeing in the market broadly. Now, each customer that leverages traditional ECM could be anywhere on a spectrum of level of maturity or sophisticated use cases that they’re using that traditional ECM provider for. But what we're finding is the traditional market of enterprise file sync nm share has been a natural wage in changing customers’ perceptions around what the future of content management should like. And so, we’ve been building out a cloud content management platform that has all of the security, the governance, the compliance, the meta data, the platform capabilities that can solve ECM. But that first use case is usually around employees wanting to share and collaborate and be able to get their work done. What tends to happen is then ultimately customers are seeing more and more opportunities and then retire and replace legacy systems with Box, by leveraging solutions like Box Governance, Box KeySafe, Box Zones and other capabilities that are embedded into our product. That’s allowing them to go and use us as a true cloud content management system. One great example this past quarter is we did a large transaction, seven figure transaction with a financial services firm that replaced document -- more and is in the process of replacing document, as well as using Box to solve all of their end user file sharing and collaboration use cases. So, one cloud content management deployment that's going to solve everything from that end user use case all the way to more traditional ECM capabilities in the cloud. So, we're seeing this more and more along in our customer base. And when you look at the size of our transactions, especially 16 deals above $500,000, eight deals above $1 million, those are the kinds of customers where categorically they’re using Box more as a platform for managing their content well beyond the use case of file synch and share. So we see this as a multi-year secular shift from legacy enterprise content management solutions and storage technology in the on-premises environment to the cloud. And we believe we’re best positioned to be able to take advantage of that migration.

And then, Dylan, to sort of follow up on that, I mean, obviously, as you get bigger deals, more see it better pricing. And if it's an ECM replacement that's probably also longer duration in terms of the lifetime value of those customers. How do you see this flowing through the sales and marketing line, R&D in terms of what you've built right now versus what you still need to do to continue to target this space? Maybe help us kind of with the flow through of that as kind of the walk through and leverage going forward.

Sure. So, certainly, as we start to land some of these deployments that then have the opportunity to both add more seats, as well as some of these additional products and increasing value, as the complexity and the kind of cost replacements benefit, so we're providing to customers expanse. We do see a lot of that showing up in expansion in just deals sizes, as well. Some of which you've been seeing in the numbers. And as we’ve talked about in the past, both the expansion, relative to signing up a Box customer for the first time, as well as especially renewals once we have a customer signing up those longer term commitments with very, very sticky use cases, are much more efficient than that lens net new customer motion that we're seeing. So, the evolution of the way that we're increasingly working with some of these large enterprise customers, we expect and have already seen, it absolutely drive leverage on the sales and marketing line overtime. In R&D, you’ve seen that continue to decrease as a percentage of revenue. Although, we’d say given just the types of problems that we're solving for customers and our continued focus on innovation and building out this best-in-class enterprise technology, we probably expect to see, at least in the coming years, the least amount of leverage in R&D at least relative to a sales and marketing and G&A.

Your next question comes from Mark Murphy with JPMorgan. Your line is open.

Aaron, I wanted to ask you how the Fujitsu partnership is evolving, I should say relationship. Just in terms of their resale activity and also their plans for their internal rollout of Box? And are you able to comment on whether there were any bookings or billings events related to that in Q4?

So, the Fujitsu relationship is still very, very early. So, we expect that that will start performing this year in Japan, and we'll certainly show you and make sure to highlight some of those updates. But we are not fully in market with them yet; although, we announced the relationship at the tailwind of last year with them. And then in terms of internal use cases, we're not talking anything specifically yet, but we'll certainly share anything as that can be made public around some of our expectations around how Fujitsu would Box. What we are seeing more broadly though is a lot of success in Japan. Over the past year, the growth rate has been incredibly successful for us through partnerships like Mathematica, and even IBM Japan. We are driving significant penetration into a diverse array of industries, everything from manufacturing conglomerates to major entertainment companies all the way to major banks and other service provider. So, we're very happy with Japan broadly and certainly we expect Fujitsu to driving in further growth as that partnership rolls out in market.

And Dylan you had commented in the script that I think you said something about backlog included in enhanced developer access fee from a partner. I am not sure if I completely digested that accurately. But could you just explain that and is there something unusual about that? Are you able to comment on the magnitude at all?

Sure. So, due to the contractual limits, we’ll be able to give too much color on this. But at a high level, I would say that a good partner of ours is using our platform to develop products for their customers. And as we does show up in both backlog and deferred. And for instance a large transaction, so in the mid-seven figure range, we wanted to call it out, and was baked into our guidance, not material to revenue in the quarter. So, it is certainly not a standard transaction for us, so which is why we have to highlight it. But definitely given the use case and the increasing importance and value that our platform can provide or some of our resellers may not be the last time we see something like this.

Aaron, I wanted to go back here on in terms of Box Zones. You’re leveraging these cloud providers. I believe IBM and AWS so that you can store data in region for customers. And you mentioned that you’re now in seven countries with that offering. Can you talk about just how broad-based is the adoption of Box Zones, and maybe how many additional countries you think you’d plan to bring online overtime?

So on the adoption is certainly picking-up. We had a number of our key European deals require Box Zones, I mentioned Australian, very large Australian transaction, which was a massive new customer and win in Australia that leverage Box Zones. Our anticipation is over the medium and long-run, they’re probably not going to be a security conscious or regulated international customer that does not leverage Box Zones. We expect that overtime customers will both prefer the local performance benefits that Box Zones offers, as well as the data security compliance and privacy benefits that it offers as well. So from a regional standpoint, as we’ve mentioned our partners are IBM and AWS. The technical architecture supports the ability to run Box Zones in any region where those two partners have a large public cloud deployment that we believe meets the reliability and redundancy requirements of our customers. And so, there is literally no limit to the number of locations that we will be deploying this in. But it will certainly be driven by market adoption and market penetration of our service. But long run, I would expect you to see locations in South America and more broadly throughout Asia, and other regions overtime. So, we're very excited about the growth opportunity that Box Zones offers.

One last one if I may. Dylan, just at a very high level, what cause you to decelerate the growth in quota carrying reps last year, and then conversely, what is causing you to reaccelerate it this year? I guess, as opposed to perhaps maybe having had a plan of just more consistent growth in the quota carriers?

So, relative to the growth in FY16, two years ago, our growth in AE last year was pretty comparable, I think within 2 or 3 percentage points year-on-year. And the one thing I would highlight there is, if you recall, the shift that we've made in terms of moving a greater percentage of customers on line, we were able to move several of our reps up market. So, able to expand the actual coverage across our larger customers, as well as our smaller customers with fewer quota carrying reps. So, I think the actual growth in AEs over this past year understates the capacity and reach that we will have from our direct sales force, and with the ramp of many of the channel partners that we’ve been on-boarding, and the success we're seeing over the past year that gave us quite a bit of leverage as well. So, pretty pleased with the way we’re able to expand quota capacity and reach over the past year, even with the growth that we saw, which was a lot lower than our overall top-line growth. And then as we turn to FY18, I mean, we really pay a lot of attention to the momentum we’re seeing in the market, the pipeline we're building and the overall demand. And I’d say that really pleased with all of those trends, particularly internationally. Aaron highlighted the growth we're seeing in Japan, but we also see now with the combination of some of the compliance initiatives and the Box Zones, a much bigger opportunity in Germany, for example. So, we are seeing the same trends play out globally, but would say that heading into FY18, we're much more optimistic in terms of the international potential that we're going to be hiring sales reps to go after.

Your next question comes from Aaron Rakers with Stifel. Your line is open.

This is Joseph Quatrochi on for Aaron, thanks for taking the questions. Just a couple, if I could. First, I was just wondering if you can give a little more color on the gross margin. I think about 74% for the full fiscal year. How do we think about 1Q? It sound like that there’s going to be a step-down. Do we think about flat year-over-year relative to 1Q?

So, we think about being about 74% for the year with Q1 being the low point. And that reason for that is we talked about moving into our expanded data center footprints, which came a little bit later then we had originally expected. But as of the end of Q4, we had fully moved, that will be bearing the full cost of that from the start of Q1. And so, the reason why Q1 is a bit lower is just that these are largely fixed expenses, and we're going to see the lowest revenue in Q1 plus there are fewer days in the quarter. So, that just creates a little bit of a headwind. And then overtime, we're going to grow into the expanded footprints, and continue to gain infrastructure efficiencies and economies of scale there. So, really the expectations in the overall trends are in line what we’ve been talking about over that past couple of quarters. We just expect to see that move down into the 74% range, happening a little bit later than we had originally anticipated.

And then just one for Aaron. May be if you can just give us some comments on what you're seeing from the initial beta program for Box Relay, just maybe any color there? How many customers do you have in the beta program, anything like that?

So, the beta is its still in the rollout process right now. So, it's mostly still on an internal alpha phase within our internal environment in both within Box and IBM. So, I think we can provide more color on the beta going into next earnings call. But in general, the feedback that we’ve heard from the market as they’ve seen the product, as certain customers have taken look at the product, is really, really positive demand and overwhelming response around the desire to have more of their business process and more of their work flows being able to be tied to the content that they have in Box. And we see a massive opportunity to take the legacy approach of very, very complex work flow systems and be able to deliver a very simple end user driven experience on top of the content in Box. That will be a major driver to helping customers replace their legacy ECM systems. So both, Relay specially but Box Workflow solutions and capabilities broadly. Some of which you'll see us be able to have enabled in our platform, and other partners of our technologies back. But overall, you're going to see us invest more in Workflow and being able to deliver business processes in an intelligent way through the Box Platform over the coming quarters and coming years. So, we're very excited about that.

Your next question comes from Terry Tillman with Raymond James. Your line is open.

Aaron, first question just is an update on the platform business. How material is it, how is the pricing model working? If I'm not mistaken, it was going to be somewhat tethered to API calls?

So, the pricing model was initially more tethered to active users on the platform. So, the ability to have partners or developers to be able to create user accounts and then we would charge on a per user basis based on the level of activity of those users. What we have realized is that there is opportunities to have non-user based pricing as well that better reflect the value that customers are receiving. So, you're going to see this year some update to our pricing model on our platform to overall better match the use cases and activity levels that our customers have, which will still include the app user construct for applications in use cases that are very user oriented. Overall, what we’ve seen is a pretty significant rise in API usage and platform usage over the past year. More and more our customers are seeing that as just a core part of cloud content management and their deployment of Box overall and so, many times platform. Again you do get free API usage. You can use APIs against any existing CU purchase in the Box deployment. And so we're seeing a pretty significant growth in usage of the, just core API, as a part of deploying Box as a cloud content management solution, as well as still pretty steady traction and being able to sell the platform separately. What we have realized is that there is a big opportunity to be able to sale these solutions together more and more as opposed to having them be separated as they were in the past year. And that's positively impacting our go-to-market integration efforts coming into this year. So, I think you’re going to see more platform traction. We'll certainly try and break out some kind of what those use cases or customers are looking like. But this is a fundamentally core to our overall cloud content management strategy.

And in terms of the crystal ball, in terms of the vision on the $1 million aspirational revenue go. It sounds like maybe the lines could blur a little bit in terms of core Box usage and then platform utilization. But if you have to think about what's more pure platform use case, will you adjust to that $1 billion revenue milestone. How much of the mix of the business could you see that is more platform-centric as opposed to just Box usage?

So, at a $1 billion in revenue, I think it will be material but the significant majority of the revenue will still look like our blended core business, not necessarily file synch and share or Governance, but the overall usage of Box as a cloud content management platform. I think what we're finding is that that customers actually really deeply want the synergy between the custom applications that they're building and the internal usage of Box, which means that we're often pricing the two products together in some of cases in an all unique way, and so in some areas the charter break out. But we believe it’ll be a significant driver of both Box's differentiation, as well as growth in average contract value. And then ultimately our ability to capture more market share. And then one other final point I would make is our platform will also be the major driver of differentiation in key verticals. So as you saw with the Medidata use case we have a major ISV that's a leader in software and the life sciences industry and data analytics, and they are building a pretty critical application on top of Box to go better serve that industry. So, you’re going to see, overtime, I think that -- Platform will not only show up obviously with customers building their custom applications, but partners and ISVs that are developing industry specific solutions where the only way we could be solving that industry problem is through our platform and our APIs.

And my final question is just for Dylan in terms of -- appreciate you calling out the developer fees, and how that impacted billings. What I'm just trying to understand is the mechanics of this. If they’re successful with the reselling the solutions, will we see other quarters where it could be quite lumpy or an outlier? Or did they basically pie up a bunch of seats or usage, if you will, and it would take some time for them to eat through it before we maybe see another pop in billings from that partner? Thank you.

So we would expect to be pretty smooth. So, again in terms of the impact was from a billing standpoint the mid-seven figure range for this year, but not material but revenue as it was began to be recognized just at the very tail-end of Q4. So, wouldn’t expect this to cause significant, if any, volatility. It is a long-term partnership and recurring revenue. So, would expect to see a pretty smooth path there and we would highlight if that were to change.

Your next question comes from Greg McDowell with JMP Securities. Your line is open.

This is Rishi Jaluria dialing in for Greg, thank you for taking my questions. And it's nice to see deliver on that free cash flow promise. Just two quick ones. Aaron, I wanted to follow-up on the Medidata partnership and on Platform. What needs to have happen for a partnership like this to be a needle-mover on revenue? And are there maybe any other verticals, especially considering highly regulated verticals that you see for similar potential for partnerships like this with platform? And then I have one follow-up for Dylan.

So, n terms of that being a needle-mover from revenue standpoint. Obviously, traction of the product that Medidata has been building out that obviously takes on a bunch of forms. But ultimately, as it scales up, we will generate more revenue from that application using our standard platform revenue licensing model. I think importantly though this is a way, and similar partnerships will be a way that we can complete the story that we're driving into different industries and different customers. So where Box is already well adopted in companies like Eli Lilly, AstraZeneca, Allergan, Amgen, Pfizer and other life sciences companies, this partnership will allow us to solve these in more use cases. So there is both, in some cases strong revenue growth that gets driven by this kind of application, but also further fortifies our position in that industry. I think where you’re going to see the most significant opportunities or industries where there are advanced workflows around content, where our core functionality can be extended into a third-party application and solve an industry workflow that we aren’t already solving. Often times, those will look like the workflows that may be were done in non-premises environment with something like documents or open text or other solutions, but are much more naturally built on top of Box when you're looking at a cloud model. And so industries like healthcare, financial services, government, manufacturing, I think you'll see a leading ISVs in each of these markets that overtime will be able to build out there, content oriented solutions or workflow oriented solutions on top of the Box platform. So, our industry differentiation will certainly be a mix of both our products our compliance and security efforts, as well as through partners like the Medidata of the world that can build on top of Box.

And Dylan, I know in your prepared remarks you discussed being free cash to positive for the full year next year. I just want to understand how should we think about the trends and seasonality of cash flow in FY18, putting aside the head quarter build out?

So, FY18, we actually shouldn’t have anything related to the headquarter build out. We've now fully moved into that space. But in terms of the overall seasonality that we see, it tends to be pretty closely tied to the seasonality in billings, which I’ve highlighted earlier. Where based on that seasonality Q2 tends to be the weakest quarter from a cash from operations point of view coming off of the combination of Q1 and to a lesser extent the Q2 billings, just because of the way that the billings ramp up in the quarter. So, wouldn’t expect any unusual onetime events to swing the cash from op seasonality in the year, but really just a function of the overall billings outcome that we see.

[Operator Instructions] Your next question comes from Jane Wong with Bank of America Merrill Lynch. Your line is open.

You said that half of the 62 deals this past quarter included one of the add-on products. I'm just trying to get a sense of the opportunity within installed base as well for the add-on products. Are you able to quantify the penetration versus the opportunities within the installed customer base that would be interested into add-on products? A - Aaron Levie So, a couple key highlights. We’ve now achieved 700 customers that have Box Governance, which has certainly been our best performing add-on product, as the most universal applicability really any size business in any industry can find value in Box Governance, because it really just deals with document retention or legal use cases around content. So, with over 70,000 customers on the Platform, we still have 99% of the customer base is still an opportunity that will sell Box Governance to. So we're very excited about the scale of that opportunity. Things like Box Zones, really is applicable to international customers, as well as multinational customers. So that is a proportionally smaller base of customers within our landscape. And then Box KeySafe is really for the most regulated or most security cautious organizations. So, that’s a bit of a narrow audience. So, we think that everyone of our customers could potentially buy an add-on product. Some of our most significant deals and highest average contract value deals that actually brought multiple Box products. So you can see the power of combining these solutions together. And from here for us, it's just about making sure that we're able to continue the repeatability of our sales model to ensure that all of our customers have the opportunity to buy these products, understand their differentiation, understand that the power of these capabilities that the joint effort between sales, marketing and customer success. But we see the upside of these products as being pretty considerable, as well as the new solutions that we're working on right now that we'll be launching both this year and beyond.

And then the only I clarify, this is Dylan, is that of those 64 new six figure deals that we signed in the quarter, those were not all necessarily new customers to Box. So that was a mix of existing customers expanding their deployments, as well as customers buying Box for the first time. And we saw on both of those populations a very healthy uptick in the attach rates of those newer products.

There are no further questions, at this time. I will now turn the call back over to the presenters.

Thank you for joining us today.

This concludes today's conference call. You may now disconnect.