Box, Inc. (BOX) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Box's Fourth Quarter Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Stephanie Wakefield, Vice President of Investor Relations, you may begin your conference.

Good afternoon and welcome to Box's fourth quarter and fiscal year 2018 earnings conference call. On the call today, we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions. Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investor. Our webcast will be audio only. However, supplemental slides are now available for download on our website. We will 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 Q1 and FY19 financial guidance, and our expectations regarding our financial results, timing of and market adoption of our products, our market size, our operating leverage, our expectations, maintaining positive free cash flow and future profitability, our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets and expected timing and benefits from our new products and partnerships. These statements reflect our best 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 and documents we've filed with the SEC including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, February 28, 2018 and we disclaim any obligation to update or revise them, should they change or cease to be up-to-date. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered, in addition to, not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. Also please note, that we've made some changes to our guidance to reflect the new ASC606 revenue recognition standards. Please refer to our press release and the supplemental financial deck on our Investor Relations website for summary of these changes. With that, let me hand it over to Aaron.

Thanks, Stephanie, and thanks everyone for joining the call. Fiscal 2018 was another great year for Box as we achieved a number of key milestones. We grew revenue 27% year-over-year to more than $0.5 billion, we delivered our first full year of positive free cash flow marking a significant improvement of more than $30 million over last year. Also, we continue to pioneer the category of cloud content management by adding new innovations like Box drive, Box relay and Box skills; the latter of which will bring artificial intelligence and machine learning technologies to Box and fundamentally change how people can manage, secure and collaborate on content in the enterprise. In the fourth quarter we delivered year-over-year revenue grew of 24% and billings growth of 28%. We also delivered positive free cash flow in three of the four quarters this year, we landed wins and expansions with leading organizations like Farmers' Insurance, SunTrust Banks, Servia [ph], Medtronic, and Dubai Airport, and continue to see very strong international demand, particularly in Japan. We ended Q4 with a record number of six figure deals and we now have more than 82,000 total paying customers globally. With our scale, security, open platform, and culture of continuous product innovation; Box is in a unique position to power the digital workplace of the future for the largest and most regulated enterprises in the world. In the past year, we not only solidified our leadership in cloud content management but extended our lead in a number of key areas from supporting international data residency requirements with the additional Box zones to meeting more compliance needs with Box GxP validation, to advanced enterprise used cases like user defined workflow with Box relay. We also continue to cultivate an incredible ecosystem of strategic partners including IBM, Microsoft, Fujitsu, AT&T and many more. All of these advancements align with our two major objectives; number one, innovating in cloud content management to power how Company's work and run in the digital age; and number two, advancing our global go-to-market efforts so that we can reach more enterprises around the world and make them wildly successful with Box. As we did throughout the earlier quarters in fiscal 2018, we continue to make great progress on both of these strategic objectives in Q4. Starting with product innovation, this past quarter Box relay became generally available with strong initial uptake. Relay our separately priced workflow product co-developed with IBM allows anyone to easily build, manage and track their own workflows. We have more than 50 customers deploying relay right now for used cases from automatic sales document processing to HR onboarding. Also in the quarter, we continue to lead the way in security and compliance for the enterprise. We launched Box GxP validation which is a new add-on product targeted at life sciences companies and priced for the entire enterprise. Box GxP validation is a new approach for maintaining always on GxP compliance in the cloud enabling organizations subjected to FDA regulations to both, manage unregulated and regulated content within Box. GxP has seen great early traction with customers around the world and will help companies retire legacy ECM systems like documents and more. In today's heightened security and regulatory landscape, traditional approaches to data protection are obsolete, earlier this month we announced our solution for global data privacy preparedness ahead of the European Union's general data protection regulation otherwise known as GDPR. The levels of certification we have reached for regulation such as HIPA, FINRA, Fed RAMP, and European binding corporate rules is a significant differentiator for Box. Box platform had a record contribution in Q4. In the quarter, Fortune 500 bank for instance chose Box Platform to power a number of content used cases including building repositories for loan documents, statements, and check images. Box will ultimately replace their disparate legacy ECM systems as this bank continues to go digital. Finally, we expect Box Skills to be available in beta in the first half of this year. Box Skills is an important element in our overall intelligence strategy. Our platform neutral approach to AI services and open architecture enables us to work with Google, Microsoft, Amazon and IBM to ensure that our customers can get more and more value from their content in Box. With Box Skills, enterprises will be able to uncover insights and reimagine business processes that are traditionally have been too costly or impractical to digitize. In Q4, a Fortune 500 insurance company executed a multi-million dollar deal with Box with plans to specifically leverage Box Skills to power their digital claims initiatives, which has the potential to drive incredible productivity and cost benefits. We are excited about the products that we've recently announced and we continue to see increased adoption of Box Key safe zones and governance; combined, all of these add-on products were included in two-thirds of our deals over $100,000 and made up roughly a quarter of our new bookings in Q4 demonstrating the growing success of our transition to a multi-product strategy. With our add-on products and core features, Box is transforming how people work and empowering intelligent business processes in the digital age. Our second major objective is to reach and enable every business in the world through our global go-to-market efforts. Stephanie Carullo came onboard as our Chief Operating Officer in August of last year with a mission to evolve our go-to-market strategy. In Q4, she better aligned our go-to-market teams and focused on execution discipline which drove our strong results this past quarter. For FY19, our focus is on growing average contract value or ACV driving deeper relationships with our customers and adding new logos through international growth and our partner ecosystem. To help grow ACV, we're focused on more strategic solution selling, we will be investing more in the field aligning sales execution and the rest of the go-to-market team to drive larger sales in all segments and prioritizing sales compensation on solution sales that include multiple products. Next, as Box becomes a broader platform for enterprises; our aim is to be the trusted advisor in helping our customers transform their digital workplace and digital business processes. To meet this demand, we introduced Box Transform in December, a new consulting package aimed at going deeper with customers and helping them leverage the best of Box. Already we've seen several large transformed transactions this past quarter. In Q4 we saw significant growth in our international segments; Japan is a highlight this quarter with several large strategic transactions with key customers. EMEA was also strong and with GDPR coming in May, our continued innovation with Box Zones, we are fully positioned to grow the number of new logos in these markets. Finally, our neutral and open architecture are key differentiators that allow us to partner strategically with a wide range of channel and technology partners so that we can reach more enterprises around the world. With Microsoft, Box is using Azure and that is now generally available, and reps globally will be able to co-sell and be compensated for selling this solution. While we closed a couple of deals with Microsoft in Q4, we expect this to ramp up and have impact starting later this year. With an IBM, we closed a record number of transactions this quarter and they played a role in 13 of our six-figure transactions. With the launch of Box Relay and our work on Skills powered by IBM Watson, IBM remains a key anchor in our partner strategy. Beyond IBM we've established several strategic partnerships including Microsoft, Fujitsu, and AT&T that play a critical role in our go-to-market strategy. More than half of our deals over $100,000 in Q4 were influenced by partners. We're proud to have surpassed $500 million in annual revenue this year but as we look ahead to FY19, we have to evolve even further to achieve our greater ambitions. In FY19, we're focused on reaccelerating revenue growth to scale to $1 billion in revenue and beyond. The scale of the organization support increasing our ACV and to drive greater transaction volume, we recently promoted a new Head of North America Sales from within our organization. With his success in strategic sales running our East territory, and then in leading our volume-driven commercial business to a record year in FY18, he is unique suited to lead our North American team evolution. We're also further sharpening our focus on larger enterprises, already roughly 60% of our revenue comes from customers with more than 2,000 employees but there is significant additional opportunity within those larger accounts. Lastly, while we saw lower top line impact from our online sales business segment, as we spoke about on the last earnings call, we are now increasing our focus on self-service as a fulfillment channel to help customers in all segments quickly and easily buy new products and add-on seeds. To wrap up, we are excited about the future of cloud content management and we are focused on building Box for the long run. Our mission is to power how the world works together, and I can honestly say that we're just getting started. It's an honor to work with so many amazing people as we help businesses embrace the digital age. When a customer buys Box, they are not just buying our product, they are investing in our company and our people, whether it's our consulting team on the front lines helping an enterprise transform or technical operations team delivering resiliency and security, our commitment is to ensure customers have an amazing experience with Box. Above everything else, this uncompromising focus on our customers will continue to drive Box in the years ahead as we grow into a $1 billion company and beyond. With that, I'll hand it over to Dylan.

Thanks, Aaron. Good afternoon, everyone and thank you for joining us today. As Stephanie noted, GAAP to non-GAAP reconciliations are in the presentation that is available on our IR website. The financial measures I will be discussing on this call are non-GAAP unless otherwise noted. In Q4, we drove solid top line growth while also delivering significant cash flow improvements. We achieved cash from operations of $23.7 million which excludes a $25 million release of restricted cash and improvement of $9.0 million year-over-year. We also achieved positive free cash flow for the full year of FY18. We generated $8.9 million of free cash flow in FY18, a $33.8 improvement from last year. We achieved revenue of $136.7 million in Q4, up 24% year-over-year. 22% of Q4 revenue came regions outside of the United States compared to 18% a year ago. This quarter more than one-third of our six-figure deals came from international markets with particular strength in Japan demonstrating our increasing global penetration and market opportunity. Fourth quarter billings came in at $204.6 million representing 28% calculated billings growth and 26% adjusted billings growth year-over-year. These strong results were driven by record attach rates of new products, particularly Platform, Governance and strong initial traction with our GxP product. We continued to win large enterprise deals including a record 78 deals over $100,000 in annualized contract value versus 64 a year ago, 12 over $500,000 versus 16 a year ago, and 9 deals over $1 million versus 8 a year ago. From now on to better represent how our business is executed in the field, these metrics will reflect cumulative sales to a customer in a given quarter rather in a given month. For clarity, using the old methodology we would have reported 80 deals over $100,000, 12 deals over $500,000 and 7 deals over $1 million. In addition, we closed a record number of six-figure box consulting deals that are not included in these numbers. Deferred revenue was $321 million, up a very strong 33% year-over-year and backlog was $278 million, up 8% year-over-year. Both deferred revenue and backlog included an enhanced developer access fee from one of our partners. Our backlog was impacted by year-over-year reduction in the contribution of this enhanced developer fee as we've been billing this partner since Q4 of FY17. As we've now billed for the bulk of this fee, we expect to see a year-over-year headwinds to billings of roughly $5 million per quarter in FY19. Importantly, there has been no change to the long-term nature or benefits of our joint partnership. In addition, backlog was impacted by the fact that several of our largest customer contracts are up for a regularly scheduled renewals in FY19. We continue to drive strong attach rates with our newer products including Platform, Governance, GxP, Relay and Zones. In Q4, roughly two-thirds of our six-figure deals included at least one of these newer products. Even with our Microsoft and Fujitsu partnerships just now ramping up, partners played a role in more than half of our deals over $100,000. 13 of these six-figure deals were attributable to IBM including 2 of our seven-figure deals. Attach rates of new products drove a year-over-year improvement in price per seat in every quarter this past year. Turning to margins; with continued strength in price per seat and infrastructure efficiencies, non-GAAP gross margin came in at 76.2% versus 75.8% a year ago and 75.5% last quarter. As we expect to offer new capabilities to our customers which requires upfront investments and to expand our data center footprint based on the demand we're seeing, we expect gross margin in FY19 to range from 73% to 74%. Q4 was another successful quarter of driving operational efficiency generating at least a couple of percentage of points of leverage across all areas of the business. Sales and marketing expenses in the quarter were $69.9 million representing 51% of revenue and improvement from 54% in the prior year. We now have 267 quarter carrying [ph] sales reps entering FY19, slightly higher than our target of 25% growth. Note, that we expect the majority of the FY19 contribution from the reps we hired this past year to be backend loaded as most of these reps will enter FY19 still ramping in addition to the seasonality of our business. We're very focused on improving sales force productivity through deepening our customer relationships and emphasizing strategic solutions sales which should increase average contract values. At the same time, we're seeing strong demand globally and we plan to invest to capture that opportunity. In the coming year we expect to grow our quarter carrying sales reps by roughly 20% with a significant majority of those reps serving our larger customer segments. The ongoing cost to support our free user base which is a sales and marketing expense came in at 3% of revenue in the fourth quarter, an improvement from 5% in the same quarter a year ago. We now have 58.7 million registered users of which 10.2 million are paid. Next, research and development expenses were $25.1 million or 18% of revenue, down from 20% a year ago even as we made significant enhancements to our products including the early development of Box Skills and Box Craft, and the general availability of Box Relay. Our general and administrative costs were $16.8 million or 12% of revenue compared to 14% in Q4 of last year. We expect to drive continued leverage in G&A as we benefit from even greater operational excellence and scale. Our focus on operational efficiency, two of our Q4 non-GAAP operating margin to a solid 7 percentage point improvement year-over-year coming at negative 5% versus negative 12% a year ago. As a result, non-GAAP EPS came in it negative $0.06, an improvement from negative $0.10 a year ago and above the high end of our guidance. One of the key elements that makes our business model so powerful is our strong customer retention. Our full churn rate was roughly flat with Q3 and remains best-in-class at 4% on an annualized basis. Our net expansion rate was 14%, primarily driven by strong seat growth in existing customers and cross-sells of our newer products. As such, we ended the quarter with a retention rate of 110%. As we've discussed previously, throughout FY18 we've seen larger initial deployments, as well as a higher contribution of new bookings coming from new Box customers, particularly in international markets. These trends set us up nicely for future growth but create downward pressure on our expansion rate. Let me now move on to our balance sheet and cash flow. We ended the quarter with $208.1 million in cash and cash equivalents which includes freeing up the restricted cash that we mentioned earlier. We delivered very strong cash flow from operations of $23.7 million versus $14.7 million a year ago. We've been making several improvements to our working capital management processes which has resulted in improved collections rates and overall cash flow from operations. In Q4, total CapEx was $7.0 million versus $1.3 million a year ago, and capital lease payments were $3.4 million versus $3.2 million a year ago. Roughly $6 million of this CapEx was related to facilities build outs compared with roughly $200,000 in the prior year. We expect CapEx and capital lease payments combined to be 6% to 7% of revenue for the full year of FY19 and roughly 8% of revenue in Q1. Finally, we generated $13.3 million of free cash flow in the fourth quarter, an improvement from $10.2 million of free cash flow a year ago. As a reminder, we deduct capital lease payments in our free cash flow calculation. We generated $8.9 million of free cash flow for the full year of FY18 which would have been $25 million if we didn't deduct capital lease payments. With that, let's now turn to our guidance. As a reminder, Box will be adopting the ASC606 revenue recognition standard for our fiscal year 2019 using the modified retrospective transition method. For clarity, today we will be providing guidance under both 605 and 606 for the first quarter of fiscal 2019. Under 606 we are setting revenue guidance in the range of $139 million to $140 million. Under 605 this would translate to $142 million to $143 million. Under both 606 and 605, we expect our non-GAAP EPS to be in the range of negative $0.09 to negative $0.08 and for our GAAP EPS to be in the range of negative $0.28 to negative $0.27 on approximately 139 million shares for the full year of fiscal 2019. Under 606, we expect revenue to be in the range of $602 million to $608 million. Under 605, this would translate to $613 million to $619 million. This year we expect revenue growth rates to be higher in the second half of the year versus the first half of the year. Under 606, we expect our non-GAAP EPS to be in the range of negative $0.20 to negative $0.16 and for our GAAP EPS to be in the range of negative $1.02 to negative $0.98 on approximately 141 million shares. Under 605, this would translate to non-GAAP EPS in the range of negative $0.28 to negative $0.24 and would translate to GAAP EPS in the range of negative $1.10 to negative $1.06. As Erin discussed, we have a huge market opportunity to power the future of work. We are focused on scaling our organization and reaccelerating our growth to achieve a $1 billion run rate in the back half of fiscal year 2021. In summary, Q4 was a strong quarter of product innovation for us as we launched Box Relay and Box GxP validation while also advancing our efforts to bring machine learning capabilities to Box Content in the first half of FY19. We continue to deliver more strategic solutions to our customers including the introduction of Box Transform which will help us drive strong net expansion and higher average contract values in the coming years. Finally, we delivered our first full year of positive free cash flow and in FY19, we're committed to delivering our first quarter of non-GAAP profitability as we scale to $1 billion and beyond. With that, I would like to open it up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Philip [ph] from Wells Fargo. Your line is open.

First question is for you Dylan, you mentioned the backlog and some of the developer fees over affecting that year-over-year and how it would be a headwind to billings. I wonder if you just walk through the mechanics or just sort of how it impacted this last fiscal year and kind of what is the impact for the coming fiscal year? And then I guess, when you think about billings overall, you've got it to revenue growth rate. Would you expect billings growth to be above or below that revenue growth or anything you'd call out seasonally there too?

Sure. So starting with the backlog, on the enhanced developer fee the way that's structured is, as we mentioned, we build that reseller on a quarterly basis in the mid seven-figure -- seven digit range. So that should have been billings in FY18 and came out of the backlog, so that's where you have the backlog going down as a result of that impact and then the second factor that I mentioned was around some of the large multi-year contracts that are up for renewal in FY19. So because of that, for example, if you have $4 million per year customer being billed annually with a renewal up year that means that the backlog because of those types of customers would be lower as well. I mean, so we would expect a backlog in that year-on-year growth to continue to take back up throughout the course of the year as those renewals come online and as we have less sort of year-on-year comparison headwinds from the enhanced developer fee as well set on the backlog front. And then from a billing standpoint, a steady state and for the year overall, we do expect that to track roughly in line with revenue, although I would factor in the $5 million a quarter impact from the enhanced developer fee that I mentioned so that's going to be the sort of unnatural sort of a year-on-year compare but otherwise billings growth and revenue growth should track roughly in-line. And then in terms of seasonality, we would expect to see roughly the same seasonality as it relates to bookings and billings that we see in the past couple of years, although it probably would be expected to be a little bit more backend loaded because some of the factors we mentioned on the call such as a lot of the reps that we hired over the past year still entering this year ramping, and we've accelerated the growth in the sales force hiring this past year, as well as some of the newer products and partnerships that we're pretty excited about, I expect those to really come online and start contributing to the business in the latter part of the year. So maybe a little bit more backend loaded but overall nothing too different from the type of seasonality that we've seen over the past couple of years.

Your next question comes from the line of Rob Owens from KeyBanc Capital Markets. Your line is open.

My first question is on the competitive landscape; earlier this month Microsoft offering one drive for business for free. At least for the remaining duration of competitor contracts, without asking you to justify another company's strategic rationale are there any changes in the market driven that decision?

Yes, just to clarify one, direct of business being free as largely been the case for the past couple of years; one driver is included in many of the typical enterprise agreements that large customers already signed with Microsoft for their office 365 licenses. So the specific announcement that I think you're referring to was the promotional campaign really aimed at those that did not have that specific licensing structure or who weren't already using one drive; so that's not significant or impactful to the core competitive dynamic that we already face in the market. So most large enterprises are already moving to Office 365 and one drive has already been effectively free in those accounts. So that won't be a new change to any competitive dynamic. I can't really kind of theorize around why they did that now or what the intent is but we don't see that as having any impact on our business whatsoever. Overall, if we assume out from that one specific promotion, we do see that this environment is becoming -- I think we're in the early stages of becoming a better understood from customers that there are going to be these sort of low end products, so the enterprise file sync and share tools, largely driven by one drive, recently Dropbox and some of the moves in the professional end of the space and customers are starting to see the significance of what cloud content management is where enterprise files sync and share is really a capability of cloud content management, it is only one set of used cases that cloud content management can drive where we can end up actually replacing a lot of legacy ECM systems, storage infrastructure, document management systems and that is much more broadly what we're beginning to sell more and more to customers. So that's our current position in the market; now obviously, we have to go and make sure that all of our 82,000 customers understand that and that we're moving customers through this journey and how they're leveraging Box and how they're taking advantage of our platform. So that certainly is the evolution that we're on and fortunately we're were able to even partner with Microsoft on that evolution as well. So obviously we've announced that partnership with Azure, in middle of last year we have deep integrations with Office 265 already but we certainly will expect to still see some competitiveness at those low end used cases around file sync and share with Microsoft and others.

Relative to the slip deals last quarter, that related to extended sales cycles and highly regulated industries. Did those deals close and are you guys still seeing extended sales cycles as you move into highly regulated industries or did 3Q prove out to be a learning experience with respect to the slip deals?

Yes, so of those three deals, one of them did close just very shortly after the quarter ended, actually for a higher amount than we're targeting in Q3. Another one of them closed a bit later on in the quarter, and then one of those three deals is still open. And would say that we did not see that same dynamic in terms of deals slips in Q4, we had really, really strong sales execution down the stretch, so we do think that Q3 was a bit of an anomaly. And pointing to just kind of what we've seen while the overall sort of trend as we move further out market and get into some of these more complex industries and used cases, the deal cycles have lengthened a bit but our predictability and execution around closing those deals has been really, really strong and looking at just this most recent quarter, record number of seven-figure deals, 9 of them closed in the quarter and also larger than the types of million dollar deals than we've been signing in the past.

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

Two quick questions. First, Dylan when I look at your FY19 guidance and I'll use the 605 method just to normalize it on an apples-to-apples basis, your -- is the midpoint of that guidance is for 22% revenue growth. So what I wanted to ask you is when we think about your long-term target of getting to $1 billion revenue run rate business and as you mentioned at the last Analyst Day you brought that in one quarter early, I think the forward K [ph] grew on that is around 24% implying that you guys think you can accelerate the business after FY19 and before you hit that run rate. So I was just hoping you can run through what gives you guys the confidence that beyond FY19 you can accelerate the growth rate of this business to hit that going to run rate goal?

Sure. So fundamentally our long-term view of the business hasn't changed and we're building the leading product in a $40 billion market where our used cases with customers continue to get even more strategic. So we are committed to reaccelerating the bookings growth in the coming year, reaccelerate revenue growth in FY20 and that would give us the confidence in achieving that $1 billion run rate milestone in the back half of FY21 and I think especially with some of the kind of things we've been doing over the last year not just from the newer products and partnerships but the acceleration in terms of sales force hiring and strong pipeline generation are some of the factors that give us the confidence there. I'd also keep in mind that that's nearly three years from now and we have a bunch of pretty exciting catalysts for growth that could impact the time when we get there from the newer products to newer partnerships. But overall, we do feel good just given the momentum and a lot of the economics we're seeing in the business as well of achieving that milestone in the back half of FY21.

I'm getting a few questions on the retention rate of 110% because you exited last year at 115% and I know you ran through some of the puts and takes on that retention rate but I was just hoping you can elaborate a little bit on how we should think about both, the expansion rate in FY19 and the churn rate in FY19 and whether we see those numbers either stabilize or even start to pick up a little bit with respect to the expansion rate? Thanks.

Sure. So we'd think about those metrics as being pretty stable from the numbers that we reported in this most recent quarter throughout FY19. And to your point I think depending on some of the newer products and how successful we are cross-selling some of the products based momentum we've been seeing, particularly over the past couple of quarters; on the expansion rate I think we could see even an acceleration of the expansion rate. What I would say is, I think one trend that we are seeing that we would expect to continue that's provided some downward pressure on that rate over the past year is that we're signing larger deals initially with customers; so in this sort of land and expand model we're capturing a little bit more of those sales on the land front but because of just that kind of type of customer base we've built and the relatively low penetration we still quite a bit of headroom to expand even in some of our largest customers. So we feel pretty good about that sort of stabilization or potentially a slight improvement on the expansion side.

Your next question comes from the line of Richard Davis from Cannacord. Your line is open.

I actually want to follow-up on the last topic, the expansion rate. I mean the does the downward pressure on the expansion rate at all cause you to rethink kind of the profitability profile of the business as you get to that $1 billion level. I mean clearly, those expansions are some of your highest margin business and you know you're talking about investing it to driver reacceleration growth. I just want to make sure we're still on the path to hit that 17% free cash flow margin when we get $1 billion?

So we don't worry about it as much. I would note that one of the reasons that more of the business has been coming on through that channel versus the expansion is in some of the newer markets that we've been growing in where we're building a presence and a customer base looking at Japan in particular, so you'll have a disproportionately high impact and amount of the bookings coming in from a land point of view. But overall, if you look at the sort of productivity that we've been driving seeing even over the past year from a ramp rep standpoint, slight improvements in productivity and in most sales segments we feel pretty good about the ability to continue driving the levers that we've talked about and in light of both that dynamic from land versus expand, and given the 25% plus sales force growth. Over the past year we're still able to put up a few percentage points of leverage in sales and marketing, and so a lot of the other trends that we're seeing and the things we're doing to drive efficiencies and sales force productivity we think will get us there and allow us to continue to drive that leverage in the coming years.

And Aaron, you touched on this a bit before in your answer to the competitive question but would the Dropbox filing, now public, this is probably a good forum; can you just help investors understand kind of how you guys coexist in the market? And then, maybe highlight some of the key differences you'd point to between your businesses?

Yes. I think we obviously had a good sense of their numbers, previously just being in this space in the industry, I saw no particular surprises but I think it's really important to think about our business as fundamentally different in a better variety of ways. So I think as you saw from their numbers, they are much more of a consumer-driven company from a metric standpoint, from a financial standpoint with an additional sort of small business revenue stream on top of that; so I think about 30% of the revenue was from their Dropbox for business product and that's around kind of $330 million or so in revenue as compared to our $500 million which is entirely all enterprise driven; so fundamentally different mix and make-up of the revenue stream. And why we think that matters or will show up as things like average contract value which they didn't really kind of call out in any specific way -- you can just do the math, 300,000 businesses with about $330 million revenue from that is a pretty low ACV, so we're very, very focused on small businesses, very focused on consumers much lower net retention rate, again, heavily driven by the consumer end of their business. So I think we obviously work a lot to make sure that we're educating investors on these distinctions and the differences of our companies. We're much more focused on sort of mid-market to large enterprises, even though we do serve companies of all sizes, we do so on the low end in a much more efficient way and they are much more focused on consumers and small businesses, and I think that shows up pretty clearly in the economics, it's still very, very attractive business financially from an economic standpoint but fundamentally focused on a different part of the market; what we build is different, how we sell is different, what we power for customers end up being very different, and I think that's kind of showing through from a business model standpoint.

And adding to that, is that if you look at their go-to-market strategy and approach as well, they have about 90% of the business coming through self-service and about 10% where sales reps are involved. And if you think about the types of deals, used cases, customers where we've been driving the majority of our growth and where we see the biggest opportunity and we're almost focused, that just fundamentally requires a higher touch model and a sales force involvement. So I think that's just an area that they've not focused as much on in building out those capabilities, either from a sales force or kind of productivity or kind of product standpoint, they've done a really nice job building a highly efficient model that scaled nicely and I think we're collectively going after a $40 billion, $50 billion market. So those are just some of the key differences but I would say that overall, both certainly, the kind of numbers support the strategy that we've each chosen separately.

Your next question comes from the line of Mark Murphy from JP Morgan.

This is Matt [ph] on behalf of Mark Murphy, thank you for taking my questions. I believe that the user conference -- correct me, if I'm wrong. Box Relay had about 250 beta customers, it sounds like there is now 50 customers using Relay currently. Do you think that those beta customers -- are they likely to deploy Box Relay in production? And then what are some of the used cases that have surfaced out of that initial set of 50 customers that might have surprised you?

We are seeing pretty strong momentum interaction from a pipeline standpoint with Box Relay obviously already a pretty solid conversion rate in the first quarter of Box Relay being generally available to have 50 transactions. And again, the pipeline is building I think in a very healthy way this year. And as we've mentioned in prior earnings calls, I think another pent up demand in energy that there has been for a much more modern approach to business process around content has been in some cases overwhelming, and we've been very excited to be able to see that and go out and serve customers. The range of used cases are pretty broad, we're seeing this in a bunch of different industries and lines of business which is exciting but the whole point of the product was to be horizontal, no matter what industry or business process you're trying to serve. So anything from contract reviews to sales force processes where you want to be able to automate different proposals to customers, we're seeing a really broad range of used cases that we think give us confidence that this is going to be a strong horizontal product, and also shows how much demand there is for Box to be a part of more mission critical business processes for our customers and obviously that ties in very closely to our broader cloud content management effort and growing things like average contract value, improving -- continuing to improve already best-in-class retention rates and becoming a more strategic partner for our customers; so we're pretty excited about that.

Can you talk about how image intelligence has sort of affected the sort of stickiness of customers who are going to typically putting a non-traditional -- managing non-traditional content in your platform which is like the medical images or auto CAD files etcetera?

So Box Skills, which is the foundational platform component or technology that we announced that Box Works is the underlying capability that's powering how we can bring things like Google's AI technology, IBM's AI technology or Microsoft's in the Box to be able to serve our customers with those solutions, so everything from being able to scan an image and tell you what objects are inside the image or listen to an audio file and be able to provide a transcription for audio or video. We have some partners that are working on document technologies where you'll be able to upload a document and pull out all of the relevant fields within that unstructured document. So we're seeing a lot of demand from again, similar to relay in a wide range of industries. I think this is going to be certainly one of the most important breakthrough technologies we've ever built and delivered to the market. I think it's one of the most practical, yet powerful ways of bringing AI into the enterprise. We mentioned that there is a large insurance company that we're working with that is redesigning much of their claims process using the Box Platform, and one of the key reasons that they decided to choose Box was they wanted to be able to have a future proved content platform where -- when they send more and more information, whether it's images from an accident or a claim event or it's a document that is the underlying claim itself on how do they automatically extract the appropriate metadata and fields from the document and the object information from within the photo and be able to apply that into their claims process. And traditionally, that's a very manual process, it's a process that is highly fraught with errors and issues and we think that the real solution is to be able to automate much of that and how do you bring best-in-class machine learning in AI to be able to serve whether it's a claims process or healthcare experience or digital asset management in a retail company or CPG; we think AI is going to be the way that the Company is going to be solving this in the future. So Box Skills, it's not even generally available yet but it has already been very, very helpful for helping customers see that the future of content management looks very, very different than the past, and this is becoming more and more of a catalyst for customers to say, 'Okay, I'm going to go retire and replace my prior way of managing information in on-premise's storage technology or document management systems and move that to the cloud' and that's what Box Skills is helping catalyze.

Your next question comes from the line of Richie [ph] from D.A. Davidson.

I guess first, Aaron, can you help us understand the GDPR opportunity for Box, where you think you can be a beneficiary of that? And then I have a follow-up for Dylan.

Our focus for -- really as soon as we pivoted into the enterprise over a decade ago and certainly ramping up over the past 3 to 5 years has been on compliance and security and privacy in a much deeper way than the rest of the landscape. So we've been very prepared for the GDPR implications from a business process standpoint, from an architecture standpoint; so we announced a GDPR readiness package already a couple weeks ago to help customers along this journey by the May requirement. And we see GDPR as a broader tailwind in our overall compliance and security efforts, we see it as another sort of genesis for why customers are going to choose to move to the cloud and into modern systems for managing their content and their collaboration. If you look at the assortment of regional specific privacy standards, industry specific regulations and compliance requirements, as well as all of the cyber security threats and issues that companies are dealing with, it's really, really hard to solve those problems with a legacy on-premise's system that is not updated for the modern security and privacy and compliance environment. So GDPR will just be another major talent and macro kind of driving force for why customers are going to move to modern platforms, and we think that we will get an outsized benefit from that because of our position in this space and because of our focus so deeply on compliance and security. So hard to measure the specific quantitative impact but I would say that strategically we're in a very, very strong position with this and it's already coming up pretty consistent with customers.

Dylan, on pricing, you mentioned in your prepared remarks that you've seen growth in price per seat; what's the right way to think about this? I mean is this a case of stable core Box pricing environment with add-ons kind of lifting that up or has there been any contraction in the core Box pricing that's been offset or more than offset by the add-on?

I would think about it more in the former case where the core pricing has been quite stable and one of the dynamics that we've talked about in the past is, on a like for like basis we continue to differentiate and build more and more functionality into the core. If you look at it kind of an example where we might have sold 500 seats couple of years ago versus today, we're actually getting a little bit of a higher price on the core there and then that's independent of the additional products. But at the same time from a mixed shift standpoint, we're increasingly selling larger deal that come with volume discounting, and so that's why overall, the core price has been pretty stable over the past several years and continues to be so. And then to your point, really where we've seen the majority of that uplift is from the attach of some of our newer products as those come into market. And we'd expect from everything we're seeing in terms of customer conversations, that kind of nature and dynamic in the competitive landscape for those trends to generally continue.

Your next question comes from the line of George Iwanyc from Oppenheimer.

Dylan, following up on the increase to ACV; are the newest products like Relay and the upcoming Skills launch, do you expect them to have the same type of impact that earlier products like Keysafe and Governance had or they potentially be a little bit more of a positive impact?

So I would say that Skills is one where I think about it from a similar construct as some of the past products but we haven't announced what that pricing is going to look like; so I think it's a little bit early to tell there but we'll certainly kind of keep everyone posted as we both get a better sense of the right way to price this as we have more and more conversations and folks entering that beta program in the first half of this year. On the Relay front, we see a similar uplift, the only thing I note is that Relay unlike many of our other products, we do sell partial installs course, so there are going to some cases where a very large customer might not need relay or purchase that across all users in the organization. So I would have the same sort of uplift model for those seats but maybe a little bit less of a contribution overall from some of products such as Governance. And then another one that I have that we're really, really pleased by the kind of pricing impact and receptivity of the market is on the GxP front; so they are just fundamentally -- those are extremely high value used cases, we're very, very differentiated in that category of used cases. And so we've seen an even higher uplift when selling GxP versus some of the other products like Keysafe and Governance.

Following up on Relay; Aaron, can you give us an update on the IBM relationship and is Relay something that can accelerate the contribution that you get from that channel?

I think this definitely gives us a joint product that we can set our customer conversations around, we've already had a lot of success in the early stages of Box Skills with IBM Watson, so we have an increasing portfolio of either jointly developed or jointly integrated products with IBM. So Relay will be certainly, a major driver of that but it's exciting to see that we have a strong portfolio that we can go take the customers and I would -- I think that as Relay matures more and more through that kind of product cycle, that will be a driver as well of the IBM growth.

And just one final question on the Microsoft as your partnership; how should we look at that? Is it more along the lines of partnerships you've had with Google or it could develop into something -- the size of IBM partnership?

We think about it slightly differently than IBM -- where IBM is certainly a much more traditional channel, as well as the technology partner. In the case of Microsoft partnership, they are a technology partner with a strong co-sell relationship, and that creates a slightly different dynamic where it's less about there being a quota on the other end -- on the Azure side versus them getting paid for the adoption of Box. And so just think about that as a slightly distinct type of partnership structure but in the case of Google for instance, that's purely on the technology side. So there isn't really even a co-sell component to speak of necessarily. So I think Microsoft is sort of firmly in between the -- one end of the spectrum is just purely a technology integration partnership and the other end is a complete reseller of your technology with a product integration as well; Microsoft really sits right in that center. And I think that the exciting thing is, as go into customer conversations; one, we largely think that the vast majority of large enterprise are going to be adopting Office 365, that's the trend that we've seen within customer accounts. And so being able to have that tight integration with O365 has been very important, and now being able to complement that with a much tighter integration with Azure is another major way that we can ensure that our customers have a very cohesive IT environment and another way that we get to work with Microsoft. So we've seen that already be pretty successful in Q4 just in an anecdotal basis in a number of conversations, and so we expect that to ramp up further this year.

Your next question comes from the line of Cash [ph] from Bank of America Merrill Lynch. Your line is open.

My question is revolved around Box Platform; it hasn't been as much in discussion although you mentioned that it gave record contribution in Q4. Just wondering, if you guys can share an update on the platform strategy, how big of a focus is it this year? And if you can discuss the demand environment for it, if the customer uptake -- how it is tracked versus your expectations?

So we've seen really strong adoption of platform, we call that as a record quarter for us in Q4 and it's becoming more and more core to the overall content management conversation that we're having with customers. So whereas when we've initially launched the Box Platform and SKU about two years ago, we initially assume that much of its adoption would come specifically from developers and really kind of self-service adoption, and certainly enterprises as well. What ended up happening is, platform becomes really -- in many cases the basis of the overall conversation that we're having with the customer and in pretty core to the overall transformation that we're driving. So it had a record quarter as I mentioned, we're saying that number of very significant six and seven-figure deals that are driven by Platform; so very core to our more strategic transactions. And Box Platform is being embedded in everything from insurance claims processes to financial services providers that are using it as the backend for wealth advisor interactions, and all the way into healthcare where you have patient portals being developed; so a number of very large transactions are going on with Platform and it's becoming more and more strategic for our customers. And so going into this year, we absolutely expect it to be another record year for Platform and be a catalyst for growth, and then ultimately, as Dylan mentioned, reacceleration in the business.

Your next question comes from the line of Melissa Franchi from Morgan Stanley.

This is Josh [ph] for Melissa. You mentioned Box GxP replacing Documentum in your prepared remarks, and Documentum acquired by OpenText about a year ago. Just wondering where else you're seeing OpenText in competitive situations? And they recently acquired Hightail, with 5.5 million users across enterprising consumers; does that change the equation as far as competition from OpenText?

We don't see that changing the competitive landscape for a variety of products reasons and traction reasons in the -- within organizations. In terms of our GxP announcement, the -- as I mentioned in the remarks, the used case that it really solves is how do you have a single place for both the unregulated and regulated content within a life sciences organization at the first of its kind offering in the cloud; and so we think that's going to be very disruptive to the traditional providers of enterprise content management in life sciences and one of the most significant players in that space was Documentum certainly, so we think that GxP validation will increase the amount of times that we're seeing Documentum from either a direct and replaced standpoint or head-to-head competition, and we're pretty confident that we have a very, very compelling offering for this market. And then OpenText, broadly to your point, again, no impact on the Hightail side but as we are going deeper and deeper into more advanced content management used cases, certainly our offerings around workflow, around metadata, around Box Governance, around Platform; we expect to see more of the legacy players in this market and our job is to make sure that we can help customers see that there is a better way to manage their content in the cloud, and that we have the leading solution for that. So we certainly continue to highlight where we're doing those replacements or transformation but that's the focus right now.

Just a quick related follow-up on your M&A strategy, both from -- if you could just review from acquiring technology and users?

We are still -- we have a very, very specific roadmap that we're driving over the next couple of years around cloud content management and how do we build the most robust platform for customers to be able to manage, secure, govern, enable workflow in collaboration around their content. And to the extent that there are tuck-in teams for helping accelerate that roadmap, that's primarily our focus from an M&A standpoint. So we're generally always looking at the landscape to see where there are technologies that could help improve our roadmap and accelerate our path to being able to realize our ultimate customer value proposition but that's the main focus of M&A and we'll certainly keep you posted if that evolves or changes in anyway.

Your next question comes from the line of Brian Peterson from Raymond James.

Dylan, I just wanted to expand a bit on the net expansion which was 14%, I believe it was 16% last quarter. Any help on what the delta was versus the last quarter? And going forward, how should we think about that when -- if we can parse it out between additional user growth and in more products?

So as mentioned, it really was a function of a couple of the drivers being larger upfront deals and higher percentage overall of bookings coming from customers buying Box for the first time. And that's a trend because this is a trailing 12 month metric, a trend that we've been seeing over the past year and it's based on the revenue base -- the dollar in dollar terms for customer base a year ago, so that is the dynamic. We would say that even with all the great traction we're seeing with our newer products, about 25% of sales in the quarters you mentioned came from those newer products, we are still seeing the majority of the expansion coming from customers pursing additional seats, we do expect that overtime an increasingly a higher contribution is going to come from some of these newer products coming from customers pursing additional seats, we do expect that overtime and increasingly higher contribution is going to come from some of these newer products as we both continue to expand our portfolio with the customers and bundling in that type of strategy given the types of used cases we're serving, we think about sort of aggregating that expansion overall.

Your next question comes from the line of Philip [ph].

I have a quick follow-up question. I'm getting this question from folks on buy side, it's related back to my original question on the developer fees. It was that -- it's sort of a one-time billing that was recognized in last fiscal year in revenue or Dylan, what's your point that it's just a $5 million comp or it was just sort of a one-time event last fiscal year, just some clarity there would be great.

Sure. So not a one-time billing but we have now billed this reseller for the bulk of the fee. So it's not gone but we are expecting to see a $5 million quarter headwinds throughout this year because of that impact from the enhanced developer fee; so it is more just a tough comp. And on the billing side, I would note that from a revenue standpoint because the revenue is being recognized over several years, the impact on the revenue side from FY18 to FY19 related to this fee is an immaterial change; so should not create any sort of noise on the revenue side there.

There are no further questions at this time. Stephanie Wakefield, I turn the call back over to you.

Thank you all for joining us today.

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