Box, Inc. (BOX) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon. My name is Savannah, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Box Incorporated Second Quarter Fiscal 2023 Earnings Conference Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise and after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I would now like to turn the conference over to Cynthia Hiponia. Please go ahead.

Good afternoon. And welcome to Box’s second quarter fiscal 2023 earnings conference call. I am Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO; and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your 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 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 Q3 and full year fiscal 2023 financial guidance, and our expectations regarding our financial performance for fiscal 2023 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings and the impact of foreign currency exchange rates, and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our long-term revenue and other operating model targets, the timing and market adoption of, and benefits from, our new products, pricing models, and partnerships, our ability to address enterprise challenges and deliver cost savings for our customers, the impact of the macro environment on our business and operating results, and our capital allocation strategies, including M&A and potential repurchase of our common stock. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to our earnings press release filed today 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 from statements made on this earnings call. These forward-looking statements are being made as of today, August 24, 2022, 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 power point 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 the call over to Aaron.

Thanks, Cynthia, and thank you all for joining the call today. We continue to deliver strong results in FY 2023, with second quarter revenue growth of 15% year-over-year. Our sharp focus on profitability drove non-GAAP operating margin of 21.7%, up 110 basis points from 20.6% a year ago. Gross margins remained strong at over 76% and our net retention rate increased both sequentially and year-over-year. Our current execution and business momentum gives us confidence in increasing our EPS guidance while maintaining our revenue guidance for the full fiscal year, despite the higher impact of FX. Our results show the success of our Content Cloud strategy, which powers the full lifecyle of content in a single platform. Our strategy is aligned with the three major trends that are driving the future of work; number one, hybrid workstyles; two, the urgent need to digitally transform every business process; and three, the ongoing pressures of data security, compliance and privacy on all enterprises. More customers are turning to the Box Content Cloud to deliver secure content management and collaboration built for the new way of working. In the second our net retention rate was 112%, up from 106% in the prior year, driven by strong customer expansion rates. For our large deals, over $100,000 plus revenue annually, we had 86 new deals, up from 60 in the prior quarter and 74 in the year ago period, with 62 of these $100,000 plus deals being on multi-product Suites, up from 44 Suites deals in the prior quarter and 54 Suites deals a year ago, in this $100,000 plus segment. Our fiscal Q2 results reflect healthy customer metrics, particularly in the complicated macro environment that enterprises are experiencing today. I have spoken with dozens of CIOs in the past couple of months across nearly every industry and in different geographies. What is clear is that enterprises today are looking to work with strategic technology platforms that can help overcome the multitude of challenges that they are facing. The Box Content Cloud is the platform that enables CIOs to offer secure, cloud content management for the most critical workflows of the business from anywhere employees, partners or customers are working. In a hybrid and digital world, the value and volume of content is greater than ever before, whether it’s streamlining how government employees work across a distributed organization, simplifying a financial services company’s onboarding workflows or a large semiconductor company collaborating with a global supply chain, content is more mission critical than ever for enterprises. And yet the tools most enterprises have to work for their information just don’t cut it. Enterprises today are dealing with a highly fragmented landscape of legacy enterprise content management, storage, e-signature, workflow and collaboration tools that all serve to isolate workflows, increase security risks and increase IT expenses. In fact, tens of billions of dollars are spent every year on this mix of fragmented technology within enterprises today. And the problem will only keep growing, it’s estimated that there will be 175 zettabytes of data by 2025 and a substantial portion of this data is going to be in the form of content. The legacy approach no longer makes any sense given the new demands on businesses. With the Box Content Cloud, enterprises can reduce the cost and complexity of their IT environments, dramatically simplifying their business operations, lowering their spend on redundant technology, while keeping their information secure. Examples of Box delivering this value to customers in Q2 include; a leading homebuilder who has completely standardized on Box for cloud content management eliminated an estimated $1 million in process costs by utilizing Box workflows across on-site teams, vendors and sales reps. A Fortune 500 financial services group purchased a six year, seven figure Enterprise Plus ELA in Q2 as Box has become a more strategic and integral part of its business. With Box, this customer anticipates saving more than $4 million in annual storage costs, including hardware, software and maintenance as they eliminate on-premise servers and disparate systems. From our business performance and customer wins, it’s clear that enterprises are increasingly making strategic, long-term decisions on how to support a remote workforce and digital processes, while maintaining a high level of security and compliance. We continue to build out the capabilities in our Content Cloud to power the full lifecycle of content in a single platform and address major trends in the future of work. Our investments in expanding our product features will add substantial value to our customers as we address a $74 billion TAM. In Q2 we rolled out additional capabilities to Box Relay, Box Sign and API enhancements. These capabilities are included in Box core subscriptions and bundles, allowing customers to benefit from getting new value from the Box platform instantly and provide additional upside as customers move up to higher tier plans for more features. We are very pleased with the momentum we are seeing in customer adoption and use of Box Sign. Second quarter customers include; a real estate development and management company who purchased Box in a six-figure deal as the key technology in its content management strategy. As part of this strategy the company purchased Box Sign Premier Services to support the signing and collaboration around new development properties. A leading medical device company who was already wall to wall with Box Enterprise Plus purchased additional licenses to support new use cases for Box Sign as they work with physicians treating patients suffering from heart and lung issues due to COVID. With data security, compliance and privacy increasing in importance for our customers, Box’s security capabilities also remain a critical driver of why customers choose our Content Cloud. In the second quarter we attained authorized security status for StateRAMP, a cybersecurity framework that ensures service providers offering solutions to state and local governments are receiving adequate protection for their sensitive content. We also announced updates to our Trust Partner Program, which brings together a select group of industry-leading security and compliance platforms to advance security in the enterprise. These updates include new and deepened integrations, including with Cisco and Splunk, among many others. We will continue to invest in key product areas like Box Shield that extend our leading security, compliance, and governance capabilities. Finally, the ability to integrate deeply across the SaaS landscape is an integral part of our platform strategy, including our deep integrations with Microsoft Teams, Office365, Zoom, IBM, Slack, Webex, ServiceNow and many more. In Q2, we rolled out enhancements to the Box for Salesforce integration on the Salesforce AppExchange that enables customers to use Box as the content management solution for signature-based processes and workflows in Salesforce. As we look at the second half of FY 2023, we are going to continue to rapidly extend our platform by doubling down in security and compliance with major Box Shield and Governance advancements, workflow and collaboration with Box Sign, Relay, Notes and the roll-out of Box Canvas, and our open platform and partner integrations. And critically, we will continue to scale our infrastructure in the cloud so we can continue to help serve customers globally with their most complex use-cases. At BoxWorks, this October, we will be making a number of announcements around major product updates and further share our vision for where the Box Content Cloud is heading. What all these capabilities and platform improvements have in common is they reinforce the value of having content in a single platform, they help streamline and automate our customer’s businesses, and they help retire more of their legacy systems, saving them a ton in the process. We continue to execute on key initiatives to scale and support our land and expand go-to-market motion, where we have seen significant productivity improvements in the past couple of years. With organizations managing hundreds of applications and an increasing number of those apps related to content, we have increased our focus on showing customers how we can reduce the cost and complexity in their tech stack. A key part of our optimized pricing and packaging is our multi-product Suites offering, Enterprise Plus, which we launched a year ago. In Q2 Enterprise Plus accounted for more than 80% of our Suites deals. Our Q2 customer expansions and new wins with Enterprise Plus include; an American multinational medical devices and pharmaceutical company expanded its use of Box with a six figure Enterprise Plus upgrade to support more sophisticated use cases, including managing content across regulated functions and supporting structured business processes. A large vehicle retailer based in the U.S. purchased Box with a six figure Enterprise Plus deal, enabling them to eliminate on-premises file servers and solve key reliability issues. They will also leverage Box Platform to power new customer experiences. We are pleased with the accelerating adoption of our multi-product offerings, which provides increased efficiencies in our sales process, higher total account value, net retention and gross margins. It’s clear that our mission of powering how the world works together has never been more important for our customers, as enterprises face a growing set of challenges around hybrid work, digital transformation and cybersecurity threats. Our platform is in the best position to solve these challenges, while reducing complexity and cost for our customers. Before I hand it off to Dylan, I want to take a moment to acknowledge the focus and hard work of our Boxers. Across Box, we continue to invest in our people and talent, and our strong culture is what enables us to stay ahead of the competition and deliver for our customers. Boxers have an opportunity to define what work looks like in the future both with our platform and how we operate and scale as a business. As we continue to build an enduring business for the long run, we remain hyper focused on driving growth while also continuing to deliver even greater profitability. With that, I will hand it over to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. Q2 marked another quarter of strong business momentum, with revenue and EPS at the high end of our guidance. Our focus on delivering profitable growth is working, demonstrated by gross margins of more than 76% and a net retention rate that was up both sequentially and year-over-year. Even amid this complicated macro environment, we remain on track to achieve the three key financial objectives for FY 2023 that we laid out at the beginning of this year, accelerating annual revenue growth, expanding operating margins and prudently allocating capital to optimize shareholder returns. In Q2 we delivered revenue of $246 million, up 15% year-over-year and at the high end of our guidance. Strong deal pacing throughout the quarter enabled us to offset the negative 3 percentage points of FX headwind that we experienced in Q2. Our Content Cloud platform continues to generate high demand from our customers. In Q2 we closed 86 deals worth more than $100,000 annually, up 16% year-over-year, with a Suites attach rate of 72% on these large deals. As Box is increasingly viewed as a critical partner to our customers, we are seeing strong adoption of our products with more advanced capabilities. Roughly 40% of our revenue is now attributable to customers who have purchased Suites, an exceptional 12 percentage point increase from 28% a year ago. We ended Q2 with remaining performance obligations or RPO of $1.1 billion, a 14% year-over-year increase, which includes an impact of negative 7 percentage points from FX. We expect to recognize more than 60% of our RPO over the next 12 months. Q2 billings of $235 million grew 10% year-over-year, well above our expectations of mid single-digit range growth. Our billings growth rate was negatively impacted by 6 percentage points due to currency headwinds. Our net retention rate at the end of Q2 was 112%, up 100 basis points sequentially and up 600 basis points from the prior year. We continue to see strong customer expansion and an improvement to our annualized full churn rate of 3% versus 5% in the prior year. We still expect our net retention rate to remain roughly consistent and for our full churn rate to be in the range of 3% to 4% throughout the remainder of FY 2023. Gross margin came in at 76.2%, up 170 basis points from 74.5% a year ago. Q2 gross profit of $187 million was up 17% year-over-year, exceeding our revenue growth rate by 200 basis points. Going forward, our public cloud migration strategy will unlock additional leverage to improve our long-term gross margin profile. Once again, we demonstrated the leverage in our business and our commitment to delivering higher profitability with a 21% increase in Q2 operating income to $53 million. Our 21.7% operating margin was up 110 basis points from the 20.6% we recorded a year ago. We are also proud to have achieved our first quarter of positive GAAP net income of $1 million, up from negative $9 million a year ago. We delivered $0.28 of diluted non-GAAP EPS in Q2, up 33% from $0.21 a year ago. Q2 Non-GAAP EPS includes a negative impact of $0.03 from currency headwinds. I will now turn to our cash flow and balance sheet. For the first half of FY 2023 we generated free cash flow of $109 million, up from the first half of last year and ahead of our expectations. As we mentioned last quarter, our Q2 cash flow was impacted by strong collections in Q1. In Q2, we delivered cash flow from operations of $28 million versus $45 million in the year ago period. We also generated free cash flow of $18 million versus $30 million in the year ago period. Capital lease payments, which we include in our free cash flow calculation were $8 million, down from $13 million in Q2 of last year. For the full year of FY 2023, we continue to expect CapEx and capital lease payments combined to be roughly 5% of revenue and roughly 5% of revenue for Q3, as compared to 6% in the prior year. Let’s now turn to our capital allocation strategy. We ended the quarter with $394 million in cash, cash equivalents, restricted cash and short-term investments. Our strong balance sheet and increasing free cash flow generation enables us to maintain a disciplined M&A strategy to accelerate our product roadmap, while also allocating the majority of our free cash flow generation to enhance shareholder returns via our stock repurchase programs. In Q2 we repurchased 4.6 million shares for approximately $118 million. As of the end of Q2, we had approximately $29 million of remaining buyback capacity under our current plan. Our disciplined equity issuance approach, combined with our robust share repurchase program, has allowed us to reduce total shares outstanding for three consecutive quarters. As a result, over the past three quarters we have reduced our basic and diluted total shares outstanding by roughly 8 million shares and 10 million shares, respectively. Note that this share count reduction excludes the shares we repurchased through last year’s tender offer. With that, I would like to turn to our guidance for Q3 and fiscal 2023. As you know, since our prior earnings announcement on May 25, 2022, the U.S. dollar has strengthened even further versus the currencies in which we transact our international business, resulting in a larger than expected FX headwind to both Q3 and the full year of FY 2023. As a reminder, approximately one-third of our revenue is generated outside of the U.S. The following guidance reflects the strength and momentum of our underlying business and also includes the impact of any expected FX headwinds, assuming present foreign currency exchange rates. For the third quarter of fiscal 2023, we anticipate revenue of $250 million to $252 million, representing 13% year-over-year growth at the high end of this range. This includes an expected FX impact of approximately 4% to our Q3 revenue growth rate. We expect our non-GAAP operating margin to be approximately 23%, representing a 230 basis point improvement year over year. We expect our non-GAAP EPS to be in the range of $0.29 to $0.30 and GAAP EPS to be in the range of $0.01 to $0.02, on approximately 151 million diluted shares and 143 million basic shares, respectively. For the full fiscal year ending January 31, 2023, we are maintaining our FY 2023 revenue estimate in the range of $992 million to $996 million, up 14% year-over-year at the high end of this range. Including the impact from FX headwinds we anticipated when we gave our initial FY 2023 guidance, we now estimate the full currency headwind to FY 2023 revenue growth to be approximately 4 percentage points. We are prudently focusing our investments on compelling long-term growth opportunities and our disciplined cost savings initiatives are generating efficiencies across the business. We expect our FY 2023 non-GAAP operating margin to be approximately 22.5%, representing a 270 basis point improvement from last year’s result of 19.8%. We are raising our FY 2023 non-GAAP EPS expectations to be in the range of $1.13 to $1.16, on approximately 152 million diluted shares and up from $0.85 in the prior year. Our GAAP EPS is expected to be in the range of negative $0.03 to $0.00, on approximately 145 million shares. Our FY 2023 GAAP and non-GAAP EPS guidance includes an expected impact from FX of approximately $0.19. For the full year of FY 2023, we anticipate currency headwinds to impact our billings growth rate by approximately 6 percentage points or 2 percentage points more than the impact to our revenue growth rate. As such, our FY 2023 billings growth rate on an as reported basis is expected to lag slightly behind our FY 2023 revenue growth rate, although we expect these growth rates to be roughly in line in constant currency. We expect our reported billings growth rate to be in the high single-digit range for Q3 and to be in the mid- to high-teens range for Q4. We continue to expect our FY 2023 RPO growth to exceed our anticipated full year revenue and billings growth rates. As Aaron mentioned, we are proud of our Boxers and the continued strong execution of our growth strategy, while remaining focused on improving profitability year-over-year. The business momentum we are seeing is a direct result of our Content Cloud platform resonating with customers, as they look to reduce the cost and complexity in their tech stacks, while keeping their content secure. We are well on our way to delivering against our FY 2023 revenue growth plus free cash flow margin target of 37%, a 400-basis-point improvement from last year’s outcome of 33%. Before we conclude, I will hand it back to Aaron for a few closing remarks.

Thanks, Dylan. Before we open it up to questions, we wanted to share that on October 6th and 7th, we will be hosting tens of thousands of attendees virtually at BoxWorks. This event will be available to the investment community to attend. This year will be another incredible event where we will share more on our vision for the Content Cloud and will showcase major product advancements and partnership announcements. Attendees will also be hearing from an outstanding slate of speakers, including the CEOs of IBM, Zoom, HubSpot, PagerDuty and CrowdStrike, as well as IT leaders from enterprises like NHL, Shriners Hospitals, USAA and World Fuel Services, among many others. We are also hosting an Investor Product Briefing on October 6th at 1 p.m. Pacific Time. We hope you can join us. Now, Dylan and I would be happy to take your questions. Operator?

[Operator Instructions] Our first question will come from Jason Ader with William Blair. Please go ahead.

Yeah. Thank you. Hey, guys. I am just curious on the billings growth. That was a good number relative to your guidance. Where did most of the upside come from there?

Sure. So really, we saw strength in the billings outcome across both our enterprise and SMB segments, so both have been growing nicely across the year. So really pleased with the billings outperformance there, especially as that included a 6 percentage point impact from FX, which was a couple of points higher than our expectations entering the quarter.

Got you. So, on a constant currency basis, what was the billings growth again?

The billings growth rate would have been 16% on the cost currency basis.

Right. Great. Okay. Got you. And then maybe for you, Aaron, are there any specific verticals that you would like to highlight just where you are seeing increased momentum?

Yeah. I think, we saw a momentum that was pretty healthy across a number of verticals, financial services, life sciences, manufacturing, the tech industry, really kind of broad-based. So I wouldn’t call it a specific one that meaningfully drove the outcome, but we are seeing, I think, healthy demand across a number of key verticals.

Okay. And then one quick last one if I could slip in, did you see any macro impact at all out there in any region or any vertical? I mean, you didn’t really seem to talk about impact from macro beyond the FX stuff. But is there any demand changes that you have witnessed here in the last several months?

Yeah. In Q2, there was nothing pronounced from a macro standpoint. I mean while all -- we want to be super explicit to note that our customers are dealing with the broader macro challenges and we do have those conversations with them around supply chain costs and inflation that they are seeing in their businesses. We have really, really tried to set up the platform to be a technology that can be advant -- really advantageous for customers in this kind of environment for streamlining their businesses, lowering the total cost of ownership around content management technology, being able to drive efficiency in the business. So we want to be an asset for our customers in this kind of environment and that’s what we set up the business to be able to drive.

So no elongation of sales cycles or anything like that?

Nothing that would be kind of pronounced in Q2, we always can see some deals slip out of a quarter or get pulled in, but no unusual trends on that front in Q2. And then, obviously, the FX impact that we did note is pretty meaningful for the full year.

Yeah. And I’d say that, actually, over the past really year, our deal cycles have remained relatively stable, even as we have been selling larger deals and more often selling a broader suite of services through Suites, we haven’t seen much change at all in deal cycles for the past year.

Thanks, guys. Good luck.

Thank you.

Thanks.

And our next question will come from Ittai Kidron with Oppenheimer. Please go ahead.

Hi. Hi. It’s George Iwanyc. So maybe following up on your comments there, Dylan, can you give us a sense of what you are seeing from a sales productivity standpoint and maybe the context of selling Box Sign and the new features like Canvas and how the value based selling motion is going?

Sure. So I would say that, in terms of the productivity trends that we called out last year, we are continuing to see again strength in both our enterprise and SMB segments. So we are seeing incremental improvements in salesforce productivity year-to-date. As we had called out because of the very strong productivity trends and improvements that we have driven over the past couple of years, that gave us the confidence to grow the size of our sales force in the low- to mid-teens percentage range this year, so at a faster clip. So if you think about the overall bookings growth as you can think about the majority of that coming from higher sales capacity, but we are continuing to make improvements to our salesforce productivity as well. And then you asked about Canvas, I will turn it over to Aaron to just give a bit of an update there.

Sure. Yeah. Canvas is -- we will be rolling out this fall and throughout the winter to customers. So it wouldn’t have had an impact too much on the results, much more of a forward-looking product that customers are super excited about. Sign, we continue to build a lot of strong demand for. And again, it just helps to reinforce the overall story and the value of our platform of being able to power the complete life cycle of content in a single platform with all of these capabilities integrated in one core platform.

All right. And maybe just following up on your hiring comments, Dylan, when you look at the overall hiring for the rest of the year and the margin improvement, what are the key levers that you are looking at?

Yeah. So, certainly, in terms of the go-to-market hiring and the salesforce, we look very closely at the segment by segment, geography by geography salesforce productivity trends that we can dial up or down there. I would say that, certainly, we are being very prudent with our expenses and investing in the highest leverage areas, especially given the current climate. But you can expect us to see -- you can expect to see us continuing to grow the company as we have been doing, really focusing on growth in lower cost locations, such as Poland.

Thank you.

Our next question will come from Brian Peterson with Raymond James. Please go ahead.

Hi. Thanks for taking the question. And just one for me, so Aaron, you mentioned a couple of examples in your prepared remarks about ROI and a lot of like quantitative savings for customers, I am curious in this kind of macro environment, does that come up more often and given like the value you are providing, are there more ways to drive savings now with Box versus maybe a couple of years ago? I’d love to get your thoughts on that. Thanks, guys.

Yeah. Thanks, Brian. Absolutely. I think when you think about Box, let’s say, three years, four years, five years ago, largely we were a secure storage, sharing, collaboration technology and platform, really, really diametrically, sorry, directly focused on content management takeouts and the modern sort of use cases around content management. Today, with e-signature, with workflow, with advanced data security and compliance we become a much more strategic and broader vendor for our customers, in some cases being able to replace dozens of different technologies inside of their organization. So in every conversation in our go-to-market team, we are trying to identify with customers areas where we can help that customer be able to go and save dollars by being able to move a certain or particular workflow or workload to the Box Content Cloud and that is showing up, again, on a daily basis in more of our customer conversations. If you just add up the technology stack that a customer would have to have if they didn’t use Box you would have to have any signature vendor, a workflow vendor, a few different collaboration tools, oftentimes multiple different content management systems that could be 3 times or 5 times more dollars spent on that technology than the licenses that would go into Box. And so we do offer meaningful ROI and we are increasingly working with our customers to help them drive out that cost and complexity of those fragmented systems.

And maybe a follow-up, Aaron, is that coming up, it sounds like you are pushing that in the go-to-market, but is that coming up a lot more now than maybe even kind of your customer conversations even like six months to nine months ago?

I think it is -- I don’t have a particular quantitative way to call it out, I would say, qualitatively talking with customers, it’s increasing, certainly, CFOs are reviewing way more of these spend items, which means that we are putting together more these value proposals that talk about the total cost of ownership that we can save versus other systems. So that has been an increase. But I would just note in the past couple of years the bigger strategic transformation we have been driving as a company as a multiproduct platform is to do exactly this. And so whether it’s an environment where customers are investing just for growth or investing for both growth and efficiency, we think the Box Content Cloud will perform certainly better than we would have a number of years ago. But we think we are better set up for success and that is a -- that’s certainly helping. So our message is really resonating more from customers and I think we are in a strong position to go and continue to drive this.

Appreciate the color. Thanks, Aaron.

Thanks.

Our next question will come from Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question. Before you have talked about a 7 times seats expansion opportunity just within your base, so I was wondering, Aaron, looking ahead, what are some of the biggest factors that could help unlock that seat opportunity potential?

Yeah. So, when we look at our roadmap, there’s pieces of all of our core products that will increase the likelihood that a customer would want to expand by seats. In our security and compliance space, things like Box Shield, the advancements we are making on Box Shield will continue to help customers use Box as their kind of single chokepoint for content security. So if you think about ransomware attacks or anomaly detection for access to files that shouldn’t be happening, that all gets improved, the more seats within your enterprise are managed within the Box environment. And so you can imagine our security strategy increases the likelihood that customers will add more seats to Box. Similarly, in collaboration and workflow, things like Box Canvas or the all new updates that we are making the Box Notes or the core product improvements around Box content management and collaboration functionality. Each of these capabilities equally increases the need for more seats on Box. Box Sign, as an example, the idea that you get a complete license to an e-signature product for every seat that is on Box means that you can go and retire other e-sign solutions and add more seats to your Box license to solve that. And then our platform as well, our API integrations with things like Microsoft Teams or Slack or Salesforce, all enhance the need for Box within our organization. So if you just think about our product road map as the first kind of starting point of our whole strategy, each of those capabilities and many more to come that are unannounced, will all increase the likelihood customers want to expand seats to more departments, to more teams, to more geographies in their organization. And then on the go-to-market side, I think, our pricing and packaging has better set us up to be able to drive seat expansion as well. One thing that we have kind of talked about anecdotes on earnings calls in the past, but is becoming a very kind of helpful engine for us is we really help customers deploy Box enterprise-wide with our very efficient ELA structures. So a customer that is ramping their deployment of Box, we can make it very easy for them to be able to do that across their entire organization with a lot of efficiency and volume licensing. So we have got pricing and packaging that helps. Obviously, Enterprise Plus also gets customers fully licensed with all of our features and so we are seeing some trends where customers will elect to do Enterprise Plus as an ELA and then deploy all of Box to their entire organization. So between our go-to-market efforts and our product road map, I think, we are going to have even more reasons why customers can deploy Box across their organization to capture that seat upside.

Great. Thank you very much.

[Operator Instructions] Our next question will come from Nick Mattiacci with Craig-Hallum.

Hi. This is Nick on for Chad Bennett. Thanks for taking our questions. So, I guess, apart from the currency headwinds, could you speak to how your business is performing in the Japanese market and just your thoughts on the demand environment, Suite attach rates there and then how much opportunity do you see ahead of you in Japan?

Yeah. Japan continues to perform very well even amidst, obviously, the FX headwinds that we do face there. Suite attach rate has continued to improve. Our channel partners over there are -- have certainly gotten the message and built the rhythm around bringing Enterprise Plus to their customers with the support of our sales team. So I think the trends overall in Japan are still strong. We are certainly aware of the macro factors that are happening in Japan. But the business has remained resilient even amidst that so far.

Got it. And then with the success you have seen with Box Sign, I guess, how does that translate to your appetite to do similar M&A deals and then any comments you are willing to share on kind of what makes the most sense to add to the platform next and what you are seeing as far as private market valuations?

Yeah. So Box Sign for us is sort of the case study acquisition for how Box wants to be able to drive and integrate M&A into the company. We have other similar examples, but certainly, Box Sign being one of the bigger ones that we can point to. But looking out at our roadmap, having a sense of customer demand in a market, i.e., e-signature in this case and then being able to rapidly identify a technology that we can incorporate into Box that accelerates our entry into that space. Box Sign was a fantastic example of that. So our appetite remains, I think, fairly strong for repeating that success. Our bias is still generally to do organic development of many of these new capabilities. However, when we do identify a market trend that we need to accelerate entry into we will be very surgical and do, again, highly disciplined measured M&A where appropriate. So nothing to call out at this time other than our roadmap is sort of to us the North Star for what we might acquire. This is certainly an attractive environment if we were to do more deals. But I will just note that we have a really, really strong roadmap and we are going to be incredibly selective if and when we do additional kind of tuck-in technology deals.

Yeah. And just to build on that, this is Dylan, because you asked about what we are seeing in the private market and with valuations. Certainly, we have seen a pretty material reset in those valuations, especially in the kind of late-stage part of the market. But I wouldn’t think about that as really having a direct impact on our M&A strategy, as we are very focused on that disciplined approach, really focused on teams and technology that are going to allow us to accelerate our product roadmap versus transformative M&A that’s going to move us into totally new categories. So it’s certainly one that we are watching, but I wouldn’t think about that as having a real impact on our stated M&A strategy.

Understood. Thank you.

And our final question will come from Erik Suppiger with JMP Securities. Please go ahead.

Yeah. Yeah. Thanks for fitting me in. Dylan, for you, you said the FX headwind for 2023 was 4%. Can you tell us what the headwind was when you gave us guidance last quarter and then I have a follow-up for Aaron.

Sure. Yeah. So you mean for our revenue growth, Erik?

Yeah. Yeah.

Yeah. Sure. So full year revenue growth, as you said, we expect that to see a roughly 4 percentage points headwind from FX. Last quarter our expectations were for that headwind to be 3%, so quarter-on-quarter about 1% of incremental impact.

Okay. And then, Aaron, I think, you said was it 80% of new business was with Enterprise Plus, is that correct, and if that is correct, how much upside is there left for price lifts as customers continue to upgrade or has sales of enterprise kind of run its course at this point and the upside, the opportunity for deal size to expand on pricing is somewhat limited here?

Yeah. So, this is Dylan. First, to clarify, the Enterprise Plus metric is that of the suite deals that we sold in Q2, which were 72% of the total larger deals, more than 80% of those Suites deals were Enterprise Plus. And then as it relates to the upside, as we called out, while we have been really pleased with the momentum that we are seeing in Suites, we still have about 40% of our revenue attributable to suites customers. So quite a bit of room to run in the coming years, we would expect that to be the significant majority of our revenue. And I’d also note that even once customers are on Suites, we tend to see a pretty significant expansion opportunity. In fact, the net retention rate driven by both the strongest relative expansion and the strongest relative retention is higher than any other category of customers. So we do have both room to improve pricing and overall average contract values by converting more and more of our customers into Suites and then even once on Suites, quite a bit of headroom there, too.

Okay. Very good. Thank you.

Yeah.

And at this time, I’d like to turn the call back over to Cynthia Hiponia for closing remarks.

Great. Thank you everyone for joining us this afternoon and we look up -- look forward to updating you on our next call.

And this will conclude today’s conference. Thank you for your participation and you may now disconnect.