Box, Inc. (BOX) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon. My name is Christine, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Box Inc.'s Second Quarter Fiscal 2020 Financial Results 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. Alice Lopatto, Head of Investor Relations, you may begin your conference.

Good afternoon, and welcome to Box's second quarter fiscal 2020 earnings conference call. On the call today, we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions. Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investors. Our webcast will be audio-only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle @boxincir. On this call, we will be making forward-looking statements, including our Q3 and FY 2020 financial guidance and our expectations regarding our financial performance for fiscal 2020 and future periods; timing of and market adoption of our products; our markets and market size; our operating leverage; our expectations regarding maintaining positive free cash flow, future profitability and unrecognized revenue and remaining performance obligations; 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, pricing and partnerships. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, August 28, 2019, 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. With that, let me hand it over to Aaron.

Thanks, Alice, and thanks everyone for joining the call today. In Q2, we delivered a solid quarter with revenue of 172.5 million, up 16% year-over-year. Non-GAAP EPS improved to breakeven versus negative $0.05 a year ago. And we delivered wins and expansions with thousands of customers, including the City of Philadelphia, IQVIA, NewYork-Presbyterian, and LPL Financial. This past quarter we closed two deals worth more than $1 million, in-line with Q2 last year, three deals over $500,000 versus 11 a year ago, and 68 deals greater than $100,000 versus 50, a year ago. We are incredibly happy with our execution in our $100,000 plus deals, which is due to the improvements in sales productivity and enablement that we've been driving across the company to deliver more consistent results. As we discussed last quarter, we are focused on helping our customers leverage Box is a complete platform for secure content management, workflow, and collaboration by evolving our product and improving our sales motion. When our customers use our full suite of cloud content management solutions, we see dramatically higher average contract value and better retention leading to greater lifetime value. A key indicator of our success in driving this transition is both the repeatability of our $100,000 plus deals and the adoption of our add-on products. This past quarter, over 80% of our $100,000 plus deals included at least one add-on product, compared to just two-thirds a year ago. And we are seeing strong adoption of these products across sales segments as demonstrated by our add-on product revenue growing at roughly 50% year-over-year. Demand for Box remains strong. Customers are looking to protect their most important information with frictionless security and compliance, streamline internal and external collaboration and workflows, and integrate content into their best-of-breed applications in IT stack. Box is the only cloud-native platform built to meet all of these needs. In Q2, we continued to deliver exciting new products and execute on the most aggressive product launch timeline in our history. In June, we released the all-new Box Relay to our customers. Relay automates critical workflows across the enterprise, while benefiting from Box's security, compliance and deep integrations. While still early, we are incredibly excited with how the product have been received and the new use cases it addresses, including automating document review and approvals, streamlining the recruiting and onboarding process, and automating routing and approval of incoming, invoices and other documents. Last week, we announced Box Shield at an event with an audience of security and technology leaders from some of the world's largest organizations. Shield is a breakthrough product for us, that's been in the works for nearly two years and delivers a new set of security controls and intelligent threat detection capabilities for content management. Built natively in the Box, Shield helps prevent accidental data leakage, detects potential access misuse and identifies external threats. For example, with Shield, banks can more easily prevent accidental sharing of documents in an M&A process; media companies can better ensure content doesn't leak; and government agencies can quickly decipher regular versus anomalous activities affecting sensitive information. We are already seeing incredibly strong interest in Shield across all industries. We've received resounding feedback from customers and industry analysts that Shield is a major advancement in cloud security. Shield will help further extend and strengthen Box's differentiation in the enterprise from a critical set of customer challenges and increase Box's available market opportunity. Shield will be generally available later in the quarter and will be sold as a standalone product, as well as part of our Box suites. Our continued innovation led Forrester in June to name Box as the most visionary leader in its new wave for cloud content platforms. Out of 13 vendors, including Microsoft, we received the highest overall score for our strategy as determined by our clear, compelling, incredible three-year vision, our ease of use and our strong security, governance and compliance capabilities. This new report and the direction by Forrester to re-categorize the market as cloud content platforms recognizes the profound market shift away from traditional ECM offerings. In Q2, several customers chose Box over these legacy solutions. For example, we closed a six-figure expansion with a global security and advanced technologies company to enable seamless and intelligent work with content across its internal and external communities. As a part of their Box deployment, this company will move off from SharePoint to faster real-time access to information, reliability and ease of collaboration with their clients. A U.S. state government agency purchased Box in a six-figure deal to replace multiple file servers and storage platforms, including FileNet and SharePoint to create a centralized secure cloud repository. They will also be leveraging Box to build custom internal and external portals to better serve their constituents and staff. This transition to Box will decrease their annual spend on resources and infrastructure while adhering with regulations like FedRAMP, ITAR and HIPAA compliance. And finally, we closed a six-figure deal with a large Fortune 500 mining company that standardized on Box to deliver a content sharing solution that is mobile, user-friendly and secure. The initial deployment of Box will retire OneDrive in SharePoint sites, providing a single platform to exchange documents and information between internal staff, partners, and other third parties. Overall, with our portfolio solutions, including Box Relay, Shield, Governance and Platform, we have a huge opportunity to disrupt the $40 billion plus legacy content management collaboration and storage markets. We will continue to stay focused on rapidly innovating for customers to transform and simplify how they work and ensure we're staying far ahead of the competition. We also made good progress on the evolution of our go-to-market efforts in Q2. A major component of this evolution was the introduction of Box suites. Box's product portfolio has evolved considerably over the past four years to five years and we have heard from customers that they want to adopt our add-on products like Governance, Relay, Shield and Platform in a more streamlined way. We now offer two suites, one aimed at secure collaboration in the enterprise, and a second for driving critical business processes and building custom apps on Box. These suites bundle our products to better align with our customers cloud content management used cases already with suites only live for the past few weeks, we are seeing a more streamlined sales process, which led to higher average contract value and customers adopting more of our add-on products. In the quarter, we're also excited to welcome Mark Wayland, as our new Chief Revenue Officer, leading our global sales organization, reporting into Stephanie Carullo. He has a 10-year veteran of Salesforce, where he held a variety of sales leadership roles and has worked in the information technology industry for 25 years of companies like Gartner, Nortel, and most recently Tanium, an enterprise security company. Mark's strong operational experience will be instrumental in driving higher sales productivity as we scale and he's already been ramping incredibly quickly at Box. At Box, he will be focused on driving standardization in our sales motion to achieve consistent execution across regions, improving the growth rate of our large deals that bring our full cloud content management suite to our customers and expanding growth within our existing customer base through a deeper focus on renewals and retention. In particular, we are extremely focused on driving the repeatability of our $100,000 plus deals. We expect to see increasing growth in this volume of $100,000 plus deals on a year-over-year basis, as we drive more standardization in our sales motion and simplify our product offering with suites. To support these initiatives, we are continuing to focus on improved sales enablement and training programs and having our sales and customer success organizations partner more closely to drive retention and expansion initiatives. Before we conclude, we wanted to share that this October, we will be hosting thousands of customers and partners at BoxWorks, where we will discuss our latest product developments and strategy. This year will be another incredible event with speakers including Ginni Rometty, CEO of IBM; Shantanu Narayen, CEO of Adobe; CEOs of best-of-breed technology partners including Zoom, Pagerduty, Okta and Slack, as well as IT leaders from enterprises like Into It, MGM Studios, the NBA, and Uber among many others. Overall, with the combination of a large installed base of enterprise customers, strong product roadmap and advanced capabilities and focus on improved sales productivity, we feel confident in our ability to capitalize on the opportunities ahead. We're excited about the future of cloud content management and our strategy remains focused on driving long-term revenue growth balanced with greater profitability. With that, I'll hand it over to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. Q2 was another solid quarter of demonstrating momentum in our cloud content management strategy, as we continue to see strong add-on product attach rates leading to healthy growth on 100,000 deals, while delivering our second ever quarter of positive operating income. We delivered revenue of 172.5 million in Q2, up 16% year-over-year. This result benefited from strong in-quarter deal pacing and roughly a million in non-recurring revenue that we had been expecting to recognize in the second half of the year. 25% of our Q2 revenue came from regions outside of the United States. As a reminder, we will be emphasizing our remaining performance obligations, or RPO, which are consistent with GAAP accounting and represent non-cancelable contracts that we expect to recognize as revenue in future periods. This metric consists of deferred revenue and backlog offset by contract assets and we believe it is a more comprehensive indicator of our momentum and growth potential than billings. Our RPO ended Q2 at $641 million, up 9% year-over-year. We expect to recognize roughly 67% of this RPO over the next 12 months. Due to the timing of large upcoming multi-year renewals, we expect to see pressure on our RPO in Q3 before rebounding in Q4 as these deals renew. Second quarter billings came in at $172.9 million, representing 6% calculated and 7% adjusted billings growth year-over-year in-line with the expectations we referenced in our last earnings call. As we mentioned on that call, Q2 billings were impacted by this year's deal pacing and a headwind from the enhanced developer fee. In the back half of this year, we continue to expect calculated billings growth to track more closely to revenue growth. Turning to margins. Non-GAAP gross margin came in at 71.3% versus 73.7% a year ago and slightly better than our expectations as we delivered optimizations to our data center infrastructure. As we migrate our data center footprint to more scalable lower cost regions, leading to temporarily duplicative costs, we still expect gross margin for the remainder of FY 2020 to range from 70% to 71%. Once we complete this migration and as we continue to drive efficiencies in our infrastructure, we expect our gross margin to trend upwards starting in the back half of FY 2021. In Q2, we continue to see our business model and improved efficiencies drive leverage across the business. Sales and marketing expenses in the quarter were 70.4 million, representing a 41% of revenue, an improvement from 45% in the prior year. Looking ahead, we expect to generate additional leverage in sales and marketing, as more of our revenue comes from renewals and up-sells, which are more profitable and as we simplify our product offerings and standardize our sales motion to achieve more consistent execution globally. Next, research and development expenses were 34.4 million, or 20% of revenue, flat with a year ago, even as we significantly enhanced our cloud content management product offerings, including the general availability of Box Relay and the continued development of Box Shield. Our general and administrative costs were 17.7 million, or 10% of revenue, compared to 12% in Q2 of last year. We expect to drive continued leverage in G&A, as we benefit from greater operational excellence and scale. Total Q2 operating expenses represented 71% of revenue, compared to 78% a year ago, so despite our temporarily lower gross margin, we are able to drive our Q2 non-GAAP operating margin to a 5-percentage point improvement year-over-year coming in at just over break even versus negative 4% a year ago. As we mentioned on our last earnings call, we continue to expect non-GAAP operating margin to be 6% to 7% for the full year of FY 2021 next fiscal year. Non-GAAP EPS came in at break even, a very strong $0.05 improvement from negative $0.05 a year ago and above the high end of our guidance. In Q2, our full churn rate remained stable at 4.2% on an annualized basis. As customers increasingly adopt additional products either in their initial purchase or as a cross-sell over time, they become significantly stickier. Our net expansion rate was 10% on an annualized basis. As such, we ended Q2 with a net retention rate of 106%, down from 107% last quarter. As a reminder, this incorporates the impact of the single large customer that reduced its footprint in Q1 of this year. For the fifth consecutive quarter, we've seen an improvement in our price per seat on a year-over-year basis. We now have $12.5 million paid users. Let me now move on to our balance sheet and cash flow. We ended the quarter with $201.5 million in cash, cash equivalents, and restricted cash. Cash flow from operations was negative 4.7 million, compared to negative 1.3 million a year ago. Year-to-date, we've generated roughly 21 million in cash flow from operations, up roughly 4 million over the same period last year. In Q2, total CapEx was 1.5 million versus 3.3 million a year ago. Capital lease payments, which we factor into our free cash flow calculation were 10.0 million versus 5.8 million a year ago. We expect CapEx and capital lease payments combined to be roughly 6% to 7% of revenue both in Q3 and for the full-year of FY 2020. As a result, free cash flow was negative 19.0 million, compared to negative 10.3 million a year ago. We expect to see year-over-year improvement in free cash flow in the second half of this year. With that, let's now turn to our guidance. For the full-year of fiscal 2020, we expect revenue to be in the range of 690 million to 692 million. We remain committed to delivering our first year of non-GAAP profitability this year and we expect our FY 2020 non-GAAP EPS to be in the range of $0.00 to positive $0.02 on approximately 153 million diluted shares. Our GAAP EPS is expected to be in the range of negative $1.03 to negative $1.01 on approximately 148 million shares. For the third quarter of fiscal 2020, we are setting revenue guidance in the range of $174 million to $175 million. We expect our non-GAAP EPS to be in the range of negative $0.01 to $0.00 and for our GAAP EPS to be in the range of negative $0.28 to negative $0.27 on approximately 153 million and 149 million shares respectively. We look forward to hosting our annual user conference BoxWorks in San Francisco on October 3 and 4. As usual, our Q3 sales and marketing expenses will reflect the cost of this event, which we expect to be approximately $6 million. In conjunction with this user conference, we will be hosting a one-and-a-half-hour breakout session for analysts and investors on October 3, including Q&A. At BoxWorks, we'll be highlighting our progress and excitement around our product roadmap, which will allow us to build on the CCM momentum that we've been seeing. We will also be discussing our customer economics and overall financial model as we balance growth and profitability on our path to a 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 Phil Winslow from Wells Fargo. Your line is open.

Hi. This is Rich Hilliker on for Phil. Thanks for taking my questions. In terms of the changes that you've been making to your go-to-market, specifically operational rigor with large deals, hiring, training, enablement. I was wondering if you can help us understand the progress you've made there? What went well this quarter and is resonating with the team relative to prior quarters? And maybe where your focus lies, as we head into the second half of the year? And then I have a follow up. Thanks.

Yes, thanks. This is Aaron. We've already made a significant amount of progress on the kind of training enablement efforts around streamlining, selling Box in a repeatable way. And that remains a massive focus for the second half of this year. I think the best evidence of this is the 36% growth in the $100,000 plus deals, in that segment generally, what we're seeing is that when our sales reps go after use cases that bring together the full power of Box, which now includes obviously Relay and imminently Box Shield, that our win rates are a lot higher, the deal sizes are a lot greater and ultimately we see way greater lifetime value from those customers. So, we're really, really focusing our sales enablement, training and sales standardization efforts on selling the complete value proposition of Box and the complete platform. And when we do that, we know that, we execute incredibly well. So, the second half is all about focusing on that.

Great. Thanks. That's helpful. And kind of on that same notes there, realizing that it's still early, though, how has traction been for the digital workplace and digital business suites? And how is that corresponded with these other go-to-market changes that we've just been talking about? And I guess I'm particularly wondering in terms of the larger deals and the longer sales cycles that you've called out in past quarters. Thanks.

Yes. So, the suites are incredibly important to our strategy. We wanted to introduce a way where our customers could leverage multiple add-on products and be able to get the full value from Box as opposed to. Historically, we've had individual sales processes for each individual add-on product that we sell and we now have a portfolio that really warrants streamlining that sales motion and making sure it's as efficient as possible. So, we introduced two product suites in Q2, and is at the very end of the quarter. So, adoption was actually very strong at the very end of the quarter and we're building a very strong pipeline for the second half. So, we already have a lot of great evidence of the sale of these suites. And that's where we're going to be focusing on the second half and it really helps driving on the standardization of our sales motion, as well as being able to really drive a higher volume of these $100,000 plus deals across all sales segments in the business right now.

And this Dylan. The only thing I'd add to that is that, especially given how long these suites have been in the market, we're seeing a pretty pronounced impact, particularly in the commercial segment, where a year ago, two years ago, it was very, very rare that we were able to achieve a six-figure deal outcome and that strengthen is actually one of the things that is driving some of the growth that Aaron mentioned in the large deal outcomes. And we are seeing deal cycles stabilizing now and more predictability. Still a lot of work to be done as we talked about, but the impact already that we're seeing showing up in these customer conversations through suites and newer products is something we're pretty excited about.

Great. Thank you.

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

Good afternoon, guys, and thank you for taking my question. I guess, building on your comments around sales cycles and the fact that your business is becoming more enterprise centric and more back half weighted. You know, I'd like to follow on your comments relative to what you're experiencing with sales cycles and such new products hitting, in light of the fact that I guess, growth in the second half is looking at 11.5% and a pretty precipitous decline from the first half and on a year-over-year basis. So, help us understand where the level of conservatism there, where the puts and takes are relative to that guide? Thanks.

Sure. So, we'd say, and as we have talked about on prior calls, we have seen and had been expecting to see a fairly back-end loaded year this year. And so, I think ultimately the second half and Q4 in particular will be very telling both for measuring our progress and continued progress on some of these initiatives, as well as on our overall growth rate. So, a lot of this was baked in and I want to just note that the deal cycles have been stabilizing. And so, we've been able to mitigate a lot of the challenges that we had seen and been seeing as we've been going upmarket through the different initiatives that Aaron was talking about. And then the only other note, I'd make is that because of some of those assumptions going into the deal pacing and just the nature of deals is, is what's going to show up in the formal guidance for this year, whereas much of our success and that volume is going to flow through in next year's model. And then just from a kind of pure optical standpoint, as it relates to the second half growth, as mentioned briefly, we did because of our ability to execute on some key milestones, pull in about $1 million of non-recurring revenue that we'd expected in the second half of the year into the second quarter. So, that was a bit of an impact in terms of the overall growth rate as well. And maybe…

And can you elaborate on what that non-recurring component was? I'm sorry.

Yes. So, it tends to be kind of services related, is what the bulk of our non-recurring revenue is.

Alright. Thanks, guys.

Yes. Just to build on Dylan's point on, in terms of pipeline that we're seeing in the second half, really strong momentum around financial services, life sciences, federal government, obviously, where we've seen a lot of success. So, as that roll through in the second half, obviously, that will continue to show up in the revenue and bookings numbers.

Thanks, Aaron.

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

Hi, good afternoon. This is Matt Coss, on behalf of Mark Murphy. Thank you for taking my questions. I know you mentioned last quarter that some seven-figure deals had slipped till later in the year. Did any of them close in Q2? And if not, do you see some of those still being in play?

Yes. So, in the first half, combined on the quarters, we did see some good performance against some of those push deals. And we do see the majority of them still in the pipeline. The ones that didn't get close in the first half for the second half. So, very strong momentum. Obviously, given the size of companies that we tend to see those seven-figure deals come from, that tends to align more with second half budget or end of year budget from those customers. So, that obviously points to a little bit of a close cycle later in the year. But overall, we're seeing really strong progress across these bigger deal segments. Obviously, in Q2, a lot more progress on the $100,000-plus deal segment. And as I called out, we're really focused on driving as much repeatability and standardization of that sales motion in the $100,000-plus segment. So, we're focusing really deeply on that sales segment and we expect to see continued growth there in the coming quarters.

Got it. That's helpful. And then the year-over-year improvement in sales and marketing as a percentage of revenue. I mean, that's been nicely improving for a couple of years now. Is there a steady state of this sales and marketing spending as a percentage of revenue? And this obviously involves a little bit of a slowdown in the pace of sales, headcount additions offset by some efficiency gains, sort of where do you see S&M as a percentage of revenue, maybe over the longer-term, just maybe conceptually.

Yes. So, this is Dylan. We'd say that, we've kind of given directionally the types of ranges where we expect all the different kind of components of the P&L to shake out over time. We'd say that we do expect to be able to drive additional leverage in sales and marketing, primarily as a combination of both the natural business model leverage that we've talked through that as a greater proportion of our revenue base is coming through up-sells and renewals, that is a much higher contribution margins and a much lower percentage of sales and marketing going against that. And then we also do have today the capacity and a lot of that kind of core foundation to drive a greater volume of bookings. So, it's a one of the biggest drivers and ultimately where that's going to settle in longer term. It's going to be related to the growth rate and the rate of hiring across the sales force. So, it's hard to pinpoint a specific number as a lot of that relates to the overall balance [indiscernible] appropriate between growth and profitability depending on the productivity that we're seeing. But we'd say that overall that line item is one where there's still certainly a lot of focus and room for improvement over time.

Thank you.

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

Hi, this is Josh Baer on for Melissa. And congrats on the really strong 100,000 deals metrics. My question is on the new CRO, Mark Wayland. So, he came in a couple months ago. I'm just wondering if there's any strategic changes or tweaks that he's putting into place, compared to the strategies that you've outlined over the last few quarters?

Yes. I think fortunately, mostly it's a continuation of the strategy that we've put in place over the past few quarters. So, aligned very nicely to what Steph had been building up from an overall go-to-market strategy standpoint. I think that maybe the additional points of clarity or refinement or again, really on this standardization of the sales process. And again, you're going to see us hit it home pretty consistently around this $100,000-plus deal segment and focusing on making sure we can drive that volume, which of course continues to expand and renew and grow customers into the 500,000 and $1 million plus segments. So, massive focus on standardization. And again, a really big push on partnering with customer success on renewals and existing customer expansion. So, making sure that we're really thinking about the sales motion in a very holistic way, including new logos as well as, of course, our existing customer base. So, I think, again a continuation of what we laid the foundation for, making sure that we're really focused on bringing an amazing sales talent and continuing to grow the leadership team and focus there. But overall, really kind of building on the momentum that we put in place.

Got it. And in regards to Mark coming in, were there any other sales management changes in relation to that?

There's been sort of slight changes in kind of various levels of management in the organization, but only things on an incremental basis. And overall, we feel very, very confident in the team that we have on the field right now, especially in driving the second half execution. So, we think we have the team and the leadership in place to go drive that.

Got you. If I could just sneak in one more on Box Shields. Just wondering how you think about that opportunity, compared to some of your other more recent products and up-sell opportunities.

Yes. So, Shield is on – we're incredibly excited about Shield and we've seen an incredible response from customers very early on with Box Shield. For the past two years, three years, four years, customers have continued to ask us, can we add more functionality, help them protect their data in a very native way directly in Box? Obviously, we have very strong security partnerships that will remain very strong with Box Shield enhancing those partnerships. However, our customers are asking us for more native functionality to help them classify their data, ensure that sensitive information doesn't exit the enterprise in an unintended way, ensure that different anomalous activities that happen within their Box environment can easily be detected and alerted. And ultimately, when we build this functionality natively in the Box, we can deliver on a much better user experience, as well as use of the proprietary data signals that we have within our system to be able to help detect that type of anomalous activity. And by doing so, we're unlocking a new share of budget that is associated with security, data loss prevention and other technologies. And again, really expanding our footprint in that space as opposed to maybe taking from the share of security companies directly, but really ensuring that IT buyers can leverage more of that security spend going toward Box, where our core focus is helping them secure their data and collaborate throughout their business. So, we're incredibly excited about Shield. As I mentioned, we had a launch event last week, where we got resounding feedback from a number of global CSOs in the Fortune 500 and beyond, and we're expecting that this product will really enhance our differentiation and also encourage customers to be adopting Box more broadly in their organization as they'll have better ways of protecting the flow of content throughout their enterprise.

Excellent. Thank you.

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

Thanks for taking the questions. So, I wanted to start on the non-U.S. results. It looks like those accelerated this quarter. I didn't know if that benefited at all from the one-time non-recurring item you mentioned, Dylan, but I know in the past there's been some challenges in the regions outside the U.S. So, any update on what drove the improvement there?

Yes. So, we'd say, it was not related to the non-recurring piece. And in terms of the overall revenue that is a function of kind of trailing metrics, but in any case, we are certainly seeing overall strength in a lot of our regions outside of North America. So, in particular, Japan continues to perform very, very well for us. And so that's been one of the most consistent and strongest performing regions. We have also over the past couple of quarters seen some improvement in EMEA. As you'll recall that was one of the areas, we did see kind of more variability and some disappointing results last year and overall productivity is still a bit below levels and some of the other regions globally, but certainly some pretty positive signs that we're seeing out of EMEA. And those are the two primary regions in terms of overall sales and we have our team outside of North America. We are seeing some contribution from some of the smaller regions internationally, but those aren't material to results.

Well, it's great to hear. And maybe just a follow up. Dylan, I think you mentioned that there should be some sales and marketing efficiencies as you focus on selling your existing customer base. Is there any way to split out how much of the sales and marketing expenses are focused on acquiring new logos versus selling back into the install base? Thank you.

Yes. We'd say that one of the things that we've tried to highlight just to kind of put some numbers around that and we've done historically at our kind of annual investor conference or breakout is talking through the different kind of customer economics and customer acquisition costs across these different types of sales, both new sales, customer expansion and renewals. And we expect to do the same provide a little bit more color for that in the not-too-distant future, but we'd say just at our upcoming Investor Day and Analyst Day, but what I would say is that directionally, in terms of how to think about the overall model. You know, there hasn't been a change from where we are today versus what we've shown and how to think about the overall model historically.

And the only thing I'll build on that is, is right now, we have an extreme focus on ensuring that our customers are again advancing their used cases, existing customers are advancing their used cases with our add-on products like Relay, soon Box Shield, Governance and Platform. So, a big area of focus for us and certainly a focus for Mark coming onboard is to really go through the customers, especially those that are paying $100,000 or more and ensure that they're seeing the full value proposition of Box. This will be aided by the launch of the new suites and making sure that we can really get all of our customers to be adopting the full portfolio of our solutions. That will be a major area focus for sales going forward.

Yes. Just directionally, one final thing to add to that is, when you think about the percentage of our overall kind of go-to-market efforts and sales and marketing spend going toward new versus existing customers over time, we expect a greater percentage of that to be going towards our existing customers, both because of the strategic sort of opportunity we have, but also in some of the greenfield markets where we've been very focused on new customers. You now started to build out that customer base, particularly in regions like Japan. So, we'd expect that, that will drive some natural efficiencies just from a mix shift point of view as well.

Thank you.

Your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.

Hi, guys. Thanks for taking my questions. I wanted to start by drilling a little bit more down on the retention and expansion rate. Dylan on your prepared remark, you talked about how one of the reasons for the sequential decline from 12% expansion in last quarter, where it's been for four quarters to 10% this quarter was in-part due to one large customer that renewed at a lower level in Q1. I guess, can you help us understand, how big of a contributor was that? Was that the entire reason for the decline? I mean, since that happened in Q1, why maybe it didn't impact the number in that quarter, but it is having a bigger impact this quarter. And then I've got a follow up.

Sure. So, we'd say that was the majority of the impact was coming from that single customer. And it's a bit bigger as the way we calculate the metric is on a trailing 12-month basis. And so that will show up for the next few quarters as well. And as the base and as that events kind of impacts on a higher number of quarters, so throughout the course of the year, the impact does show up in the metric a bit more. So, that was the majority of the kind of sequential change. But I would note that also these metrics are due to rounding and or impacted by rounding. And so, the actual impact on a quarter-over-quarter basis was just slightly higher than 1%, even though around the 2% whole numbers. And so basically it was the majority from that single customer and then we did see a slightly lower expansion rate as well in terms of comparing Q1 to Q2.

Got it. Thanks, that's helpful. And then in terms of cash flow, I know cash flow was improved relative to Q2 last year. I think still a little lighter than maybe I expected in Q3, I would imagine it's going to be a little bit of a weaker cash flow quarter with Box first going on. Just how should we be thinking about free cash flow for the remainder of the year? And maybe how should we be thinking about further levers beyond that? Thanks.

Yes. So, we think about in general kind of free cash flow, you know, cash from ops and operating margin to all, generally trending in the same direction, and move and improve at roughly the same magnitude. We'd know just again for context, we do tend to see Q2, as we’ve talked about in the past, we are seasonally weakest cash flow outcome both in terms of cash from operations and free cash flow, just coming off of kind of what is typically the lowest volume of bookings and billings in Q1. And we did have a very strong Q1 aided by a fantastic collection. So, year-to-date we have seen pretty solid improvement and good results on the cash from ops side. We'd say that on the free cash flow front, one of the things that, that has impacted that metric this year and it's incorporated into the forward-looking commentary that we gave as well, to be provided as well is, the capital leases associated with the data center migration project. So, I'd say that, that is a little bit elevated relative to run rate levels, but as you think about the business going forward, as mentioned would expect to see improvements year-on-year in the second half in terms of both cash from operations and free cash flow and then over time, [for those] to track more or less in-line with the improvements we're seeing in the P&L.

Great. That's helpful. Thank you.

Your next question comes from the line of Chad Bennett from Craig-Hallum. Your line is open.

Thanks for taking my questions. So, on the – over 100,000-deal sizes, was there any material change year-over-year in terms of average deal size or ACV there?

No. So, in that segment deals overall, we did not see a significant change year-on-year. So, it's really more impacted by the volume of deals. And as mentioned, I would say the biggest change in those deals’ year-on-year and over time has been the segment. So, we've been able to generate those deals from. So, pretty pleased to see significant contribution from even the kind of SMB sales reps and in the mid-market meaningfully contributing to that outcome.

Okay. So, I appreciate, you know, the deal count increase, you know, the 36% and maybe that, if average deal sizes haven’t changed that translates to dollars or at least, it should to year-over-year. But if for just simple math stake, we say your average deal size was a couple hundred grand. I mean, literally year-over-year that's between $3 million or $4 million of increase, right. And on a $172 million business, I guess, should we be very impressed with that?

Yes. So, I think just as a note, the average contract value is, even though we haven't given the specific numbers are quite a bit higher than what you referenced. And so – and I would also note that as it relates to the overall impact and proportion of new bookings in the given period, as you'd expect those larger deals and our field segment overall becomes more pronounced as we move through the year just because of the kind of back-end loaded way of kind of the way we tend to sell that to larger enterprises. But because that segment deals, we talked about, also includes the largest customer deals they can get into the millions of dollars per year that the average contract values are higher by quite a bit than $200,000 in that population.

Maybe the only other thing I would just add is, we obviously use the 100,000-deal segment line as a sort of illustrative kind of break point. But I think this is more indicative of the overall sales motion continuing to drive add-on product sales and continuing to move to larger and larger deals. So, you know, we obviously, we break that out because it's a way of kind of showing, you know, what's the overall large deal segment health. But again, it's more indicative of an overall sales trend within the business right now.

So, just to make sure I understand that then. So, you're over 500,000-deals were three this quarter versus what last year?

Versus 11 last year in that segment and then our $1 million-plus deals were flat with last year at two deals.

So, what would I be missing, I guess?

In terms of which piece? The overall impact or the trajectory or on which component specifically?

Just the trajectory, I mean, you guys talk about the full power of the Box suite and sales productivity enhancements and enablement improvements and demand remaining strong for the business, but we're really not seeing it in any of the metrics of the business, either primary or secondary?

Yes. And I think in terms of 100,000-deals and a lot of the themes that Aaron in particular has highlighted around the consistency, some of the demand for the newer products and things like that, we are seeing those show up in the business. To your point, certainly the full impact of this flowing through the model and then we have even greater impact in the field segment and these overall volumes based on the seasonality and then just the natural deal cycles since when we started to introduce some of these things, both selling motions and products into the business, fully agree that those have not kind of shown up in the numbers that we've reported, that's been more a function of the pipeline that we're seeing in the back half. So, certainly, still more to execute against to really prove this out and have this, you have a larger impact on our top line growth. So, I don't think you necessarily missing anything, but maybe a mismatch or just kind of difference in timing around, you know what maybe you had looked for and what we are hoping to indicate and what we had expected to see in terms of when this would flow through the model.

Okay. Thanks for taking my questions.

Your next question comes from the line of Terry Kiwala from First Analysis. Your line is open.

Hi, good afternoon, and thanks for taking my question. First question is, are you seeing any discounting or any pricing pressure in selling the suite to existing customers or new customers?

Yes. So, I'd say, we do offer discounts associated with buying suites beyond what a customer would get, if they were to purchase all of those individual products a la carte. But overall, it's a positive impact in price proceed. I mentioned that this most recent quarter, we were able to put up our fifth consecutive quarter of year-on-year improvement in price proceed. So, the overall economics, both at a kind of pure price per seat and then you know at that kind of – at the margin level, had been improving, although we do offer a slightly higher discounting on a per product basis versus what we've seen previously.

Got it. Thank you. And as just as a follow up on the question earlier about turnover, has there been any material turnover in the last quarter or two that's affected the over $500,000 deals?

No. I wouldn't say that has affected the over $500,000 deals. And within the sales force we had mentioned previously, we have been pretty focused on performance management this year alongside up-leveling of our sales leadership team and some of the changes we made there. But that didn't impact any of the deals that we're working on in the kind of in the year-to-date period and had been more focused on the sort of folks in the sales force who hadn't really been adapting to this new way of selling that we've been looking to drive.

Great. Thank you.

There are no further questions at this time. This concludes today’s conference call. You may now disconnect.