Good afternoon. My name is Aby and I will be your conference operator today. At this time I would like to welcome everyone to the Box, Incorporated Fourth Quarter and Fiscal 2023 Earnings Conference Call. [Operator Instructions] Thank you. Cynthia Hiponia, Vice President of Investor Relations you may begin your conference.

Good afternoon. And welcome to Box’s fourth quarter full year 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's 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’ll also post the highlights of today’s call on Twitter at the handle @BoxIncIR. On this call, we’ll be making forward-looking statements including, our Q1 and full year fiscal 2024 financial guidance, and our expectations regarding our financial performance for fiscal 2024, fiscal 2025 and future periods, including 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, head count targets and growth strategies, our ability to achieve our long-term revenue, operating margins 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 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, March 1, 2023, and we disclaim any obligation to update or revise them should they change or cease to be up-to-date. In addition in today’s call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, and not as a substitute for or in isolation from, our GAAP results. You will 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 it over to Aaron.

Thanks, Cynthia and thank you all for joining the call today. We had a strong year at Box exceeding a $1 billion annual revenue run-rate on a quarterly basis and delivering a healthy balance of revenue growth and increased profitability. For the full year we achieved 13% annual revenue growth. Our operational excellence drove significant margin expansion as we achieved 23% non-GAAP operating margins up more than 330 basis points from 20% a year ago. Our continued execution and our sharp focus on profitability allowed us to deliver on our revenue growth plus free cash flow margin target of 37%, a 400 basis point improvement from last year's outcome of 33%. We delivered these results in the amidst of a challenging macroenvironment and our ability to execute on delivering bottom-line performance even with a slowing demand environment is a testament to the strategies we put in place several years ago to lower our cost structure while still investing for long term durable revenue growth. Turning to Q4 we achieved revenue growth of 10% year over year while delivering record quarterly operating margins, gross margins and EPS. As expected our Q4 net retention rate was down year over year impacted by pressure from customers lower headcount growth and greater budget scrutinity on internal transformation initiatives. In some cases these dynamics impacted our customer's IT decisions and priorities across their business and this dynamic included some deals pushing out or deals getting incrementally smaller than anticipated leading also to a softening and billings as we exited FY '23. Even with this added macropressure. Our platform remains top of mind and extremely relevant for customers as they look to secure their most important data, drive up productivity or retire legacy IT systems and simply their IT stack. Examples of Box delivering this value…

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. As Aaron stated, FY '23 was a strong year for Box as we delivered on the 3 key financial objectives we laid out at the beginning of the year. We accelerated annual revenue growth on a constant currency basis, expanded operating margin significantly and optimize shareholder returns through a well-executed capital allocation strategy. Additionally, we are very proud of the strong cash flow margin expansion we delivered in FY '23. In FY '23, we delivered annual revenue of $991 million up 13% year-over-year or 17% in constant currency and in line with our initial full year guidance despite experiencing significantly greater currency and macroeconomic headwinds than we initially anticipated. FY '23 also marked our first year of achieving GAAP profitability, a significant milestone for us. We expanded our non-GAAP operating margin by 330 basis points to deliver 23% operating margin, a full percentage point ahead of our initial expectations. We generated $238 million in free cash flow, a 40% increase year-over-year. Finally, we achieved our target of delivering revenue growth plus free cash flow margin of 37% in FY '23, demonstrating the resiliency of our financial model amidst the challenging macroeconomic environment. Turning to Q4. Revenue of $256 million increased 10% year-over-year or 15% in constant currency. We ended Q4 with remaining performance obligations or RPO of $1.2 billion, a 16% year-over-year increase or 21% growth on a constant currency basis and once again growing faster than revenue. We expect to recognize roughly 60% of our RPO over the next 12 months. Q4 billings of $357 million grew 6% year-over-year or 9% in constant currency. Q4 billings were partially impacted by the early renewals we experienced in the prior quarter and continued scrutiny of larger deals. In Q4, we…

[Operator Instructions]. Your first question comes from the line of Steve Enders from Citi.

I guess I just want to ask a little bit and start on the outlook and how you're thinking about both '24 and '25. I guess within the assumptions that you're seeing currently, I mean, are you expecting for seems to get worse here or is it pretty much as expected? And then can we get a little bit more kind of details on how much things have changed from a duration and maybe deal size impact versus kind of what you're expecting before?

Yes. This is Aaron. I think I'll maybe just first comment on the general way that we think with the outlook, and then Dylan can hop in on the second part. So we want to be appropriately prudent just given the trends that we see in the market. I think that's reflected in our FY '24 outlook and our initial commentary on FY '25 around the kind of rebalancing a little bit more to profitability, though with still a meaningful improvement on the rule-out basis. . So I think without sort of getting too much in the dynamics that we expect to see in the macro, I think what we are trying to do is, again, drive a prudent set of expectations around what we see particularly from a top line standpoint and then obviously make up as much of that delta in the form of bottom line improvements. So for this year, again, it's sort of somewhat of a continuation of what we saw in Q4 and just putting the right level of conservatism into the plan.

Yes. And then to address kind of what we're seeing in some of these customer deals, you asked about durations where we have seen a continued lengthening in contract duration. So customers are continuing to make and more regularly making long-term commitments with Box. That's 1 of the big drivers of the very strong backlog growth that we saw of 24% and fueling a lot of the strength in the RPO growth as well. Deal cycles overall have remained relatively stable. And what we have seen, talking about the average contract values, as we mentioned on our last call, this environment is leading to pressure on deal sizes for certain customers as they might elect to go to the smaller initial deal, but the overall customer economics have remained very strong and price per seat is actually up about 5% on a year-on-year basis.

Okay. Okay. That's very helpful context there. I guess maybe as we think about the deal environment again and the execution that you're seeing from sales reps, I guess, any kind of further details that you can provide on how they perform versus the expectations? And how you're thinking about productivity rates kind of moving forward, given I think you called out mid-single-digit kind of investments on the sales side there?

Sure. Yes, I'll cover again some of the color commentary from the quarter and then if Dylan wants to build on some of the productivity piece. But it's an interesting environment because if you look across the biggest deals across the period, they really do come from a wide range of industries, tech, life sciences, health care, public sector. So I think there's sort of broad-based participation across industry, across segment. And there's just sort of this overlay of whatever the percentage may be of budget pressure, which means a deal that would have been x is maybe now 0.9x. And -- or in some cases, you might have a situation where a company is not growing their headcount as quickly. And so obviously, that's going to put pressure on the total seat count that we would get from a normal expected upsell from that customer. So overall, I think an environment where we saw performance across the business, but just at moderately muted level from maybe the expectations we would have had 6 months prior or whatnot. And then I think we're flowing through some of that prudence into the plan this year.

Yes. And so as you'd expect, these macroeconomic dynamics do have a direct impact and provide sped wins to the sales force productivity. And while we aren't expecting the environment to get better through the course of FY '24, as a reminder, because of the ramp times that we see in our sales force typically about 6 months for our SMB reps, 9 to 12 months to become fully ramped on the enterprise side, the hiring that will be more metered this year, about 5% kind of mid-single-digit range versus 15%, that really shows up in capacity for the following year in FY '25. So really thinking about building that durable longer-term growth despite some of the challenges that we're seeing this year. .

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

Maybe building on the overall environment, Aaron, can you give us some perspective on what you're seeing in Japan and Europe with respect to deal engagement in channel support?

Yes. So taking Japan first, still a very kind of healthy environment for us, great kind of channel support. Overall, we've gotten a lot better participation rate, for instance, on our suite deals in Japan. So we're very happy about that. That number could still come up more over time, but we're just happy with the momentum there. And I called this out on the last earnings call, but I was in Japan in Q3, just a lot of great kind of customer interactions, a lot of upsell potential from that customer base as well as a bunch of new logos that we see in the mix as well. So very happy with the Japan performance. Again, all things considered with some of these macro dynamics. And EMEA, less of a channel-centric approach there, I'm just picking up on your question specifically. But overall, working across a range of industries and segments within EMEA driving that execution with, again, that slight added element of the macro environment still being in the mix. So that's how I kind of characterize it.

Maybe looking at your net expansion rate, the 180% that you had in the fourth quarter, how are you accounting for that for the coming year, do you expect relatively stable expansion? Or are you pulling back expectations a bit from the fourth quarter level?

Yes. So for the coming year, we expect that net retention rates to be roughly 106%. And so we do expect to have a very strong and stable 3% full churn rate. But that seed expansion that we had called out earlier, we do expect that to put some downward pressure, driven by the economic environment, which is really what impacts the net retention rate going forward.

Your next question comes from the line of Josh Baer from Morgan Stanley.

Something that you could just help bridge the gap between the 15% constant currency billings growth from this year and the 10% constant currency revenue growth for next year?

Sure. So there are a handful of factors that can create a delta between the 2 on a quarterly basis. So especially things like early renewal volumes can fuel billings, we had called out there was a large multiyear prepay in Q3 that fueled billings this past year, kind of a disported amount and things like that. But then part of it is also just thinking through we saw prior to the -- some of the economic environment dynamics kicking in, in the first half of the year saw stronger billings outcomes on that side as well, kind of adjusting for those unusual factors that don't flow into revenue. So while the 2 are fairly closely correlated, if you look at deferred revenue growth ending the year in constant currency was 10%, and that tends to be more closely aligned to the following year's revenue growth.

Okay. That's helpful. And then I wanted to ask in regard to the step down in some of those role of targets, I mean, I guess, FY '24, maybe a little bit more straightforward, given the revenue growth guide, the macro and FX. Just wondering if you could add some more context for what that's saying about FY '25 stepping down, just thinking through growth prospects that might be more positive in FY '25 off of a lower FY '24? Or are you sort of incorporating macro into FY '25? And really just wondering if there's other changes sort of beyond macro that's embedded in that rule of change for FY '25?

Yes. So great question, and I'll kind of kick off and then let maybe Dylan build. But we're -- as we're navigating this environment, I think, and as everybody, I think, is talking other other teams on this. It's always dangerous to sort of get into a position where you're guessing when a macro is going to change for the better. And so we're trying to sort of not be in a position where we're largely baking in too many assumptions on that front as opposed to really putting out a framework that says there's obviously a range of revenue growth rate outcomes. A lot of that will be seen this year in terms of what billings look like and what we see on the RPO front throughout FY '24, that obviously flows into $25 million. . And then as a result of that, we think that the operating margin rate and industry cash flow margin will be kind of functional somewhat to to the outcome on the revenue side. And so we wanted to just call out that, that was going to be really in that kind of 40-plus range, 40, 42 with a greater weighting on the profitability front. And so just calling that out from some prior models that have been out there. And so we still think that that's going to be a pretty meaningful uplift on a rule of basis. obviously getting us above the 40 mark. But that's the kind of current expectation we're trying to lay out.

Yes. And just to build on that a bit in terms of how it all works together is, as we had mentioned, we are expecting to see a pretty challenging macroeconomic environment throughout the duration of FY '24, and it's really that performance and the bookings in this coming year that's going to drive the revenue for FY '25. So that's kind of how it fits together as we are expecting that revenue pressure to persist in FY '25 versus what our expectations had been a year ago. But to reiterate what Aaron had said, we are expecting to deliver greater profitability than our prior expectations. And we'll get to a lot more of the details into the dynamics and how we're thinking about the years ahead in just a couple of weeks at our Analyst Day. .

Your next question comes from the line of Rick Hilliker from Credit Suisse.

Dylan, I was wondering if you can just go through the trajectory of gross margin as we think about the coming year? I think you gave us some comments last quarter, but I thought it might be helpful to just hit on those again to make sure we're on the same page as we progress through the year and maybe where the exit rate looks like?

Sure. So we're expecting our gross margins driven by a combination of the kind of peak duplicative data center expenses as well as FX impacts to be lower in the first half of the year, about 76% and then in the back half to be in the high 70s -- so kind of 77% for the full year next year, but then exiting in that high 70s range, we do expect to deliver higher gross margins in the kind of upper 70s as we move into the following year. So really all about that trajectory heading into FY '25 is where you'll really see the impact of the data center migration.

Awesome. That's really helpful. And then last 1 on my side. I was wondering if you can give us any comments or maybe we can also talk about it at the Analyst Day, but your sense of where multiyear bookings start to shake out, how that's looking for the coming year? And basically how that's trended, would be really helpful?

So we don't tend to see a very high volume at all in terms of multi-year prepayments So from a contract duration standpoint, it's increasingly the norm, especially for enterprise customers that they're signing up for multiyear commitments with Box, typically 3 years. but billed annually. We don't incentivize either customers or our sales force to sign multiyear prepaid deals. So we don't see those very often. We do see them from time to time, such as the 1 that we called out in Q3, we're a large customer elected to do that for dynamics on their end. But we don't expect that to change in the coming years. So I would say the trend of seeing it being the standard that customers are signing multiyear agreements prepaid annually is what we continue to expect. So don't expect multiyear prepayments to be much of a factor in the coming year.

Your next question comes from the line of Noah Herman from JPMorgan.

Just any other incremental color you could provide on the global go-to-market kickoff you briefly mentioned just to get a better sense of some of the key go-to-market initiatives heading into this year? And then just a quick follow-up.

Sure. Yes. So we'll definitely kind of expose a little bit more on the overall good market strategy at our Analyst Day. But yes, the kickoff was super strong. We had our whole global set of go-to-market as well as the broader boxer population kind of tuned in and attend. And I think it's really all about aligning our go-to-market organization to the biggest trends and conversation that we're seeing with customers right now. And so when I talk to CIOs and CEOs and the broader team does, we tend to still see that these digital transformation initiatives are still very, very much kind of front and center in every organization. Every CIO and CEO is looking at how do they drive productivity, in particular, in this kind of hybrid work environment. and with kind of a greater degree of automation or AI, we're seeing customers really, really focused on how do they get more leverage for their IT spend. And so how do they simplify their IT stack, how do they make sure they have more integrated platforms. And then finally, just data security remains very front and center for all of our customers. And so the kickoff, it's all about how do we align that set of conversations with our message and our strategy as we take that to our customers -- so a lot of effort around how do we drive our Enterprise Plus deal motion to getting more and more customers into our Enterprise Plus package. We have kind of great internal initiatives around new logo generation, in particular, in larger enterprise segment. So we've been seeing a lot of great success there. How do we continue to drive the greatest amount of adoption on our product, whether that's kind of the core foundation product or or even some of the newer initiatives that we've had in newer products. So really kind of a lot of the just kind of blocking and tackling and enablement of our go-to market teams. But but making sure that our message and our strategy is very, very tuned and very aligned to what we're seeing with customer conversations right now.

Got it. That's really helpful. And then you touched on this a little bit briefly, but how can you sort of use large language models to really drive value for customers? And should we expect something in the near term?

Yes, thanks. Obviously, a topic I'm personally very excited about. I can't get in any timing at the moment or else. Obviously, a bunch of teams internally will kind of free cat. So -- but what I would say is the general way to think about it is if you take something like chats BT, that's learned basically all of the words across all of the Internet and ends up being this incredibly helpful assistant using the language that's learned from everything. While 1 of the amazing use cases is, well, what if you could prompt that kind of model with existing data. And obviously, we happen to help customers manage tens of billions of files and in particular, a large amount of documents. And we think there's a lot of potential for what happens when you can begin to synthesize the information in those documents. And I call out a couple of examples in the prepared remarks. But if you can summarize content or be able to prove it for important insights, or be able to generate content in the future. So we think there's a wide range of use cases that are going to be very relevant for enterprises. And we think we're highly differentiated because of our focus on data security, on privacy and compliance. And so we can really kind of work with customers to ensure that when we bring AI to their content, it's done in a way that keeps their data extremely private. And then the other major differentiator we have is we can play really the role of a neutral platform or Switzerland approach, where I think there's going to be a lot of leapfrogging of model advancements between Open AI and Microsoft and Google and Amazon and maybe other vendors -- and so our ability to offer a range of technologies to customers, we think, puts us in a very advantageous position over the long run as customers think about having a future-proof architecture. So we're very excited. It's extremely kind of early, at least in this new wave. It's 1 that we're very prepared for because of our efforts around Box Skills. But stay tuned as we expose more about our plans here.

Your next question comes from the line of Rishi Jaluria from RBC Capital Markets.

This is Richard Poland on for Rishi Jaluria. Just kind of given the expectation around retention rates coming down a couple more points, can you help us kind of bridge where some of that contraction is coming from? Is it mostly on the side? Or do you kind of -- are you expecting to bake in some slower overall kind of upsell and cross-sell at the suite motion?

So it really is primarily on the seat side. So a few receipts from an expansion point of view, we've seen, as mentioned, both very strong and stable retention of seats as well as the kind of cross-sell the adoption of Suites and Enterprise Plus in particular, as we had noted, that was up a very strong 11 points year-over-year. So really pleased the momentum there, and that's having a nice impact on the pricing as well. So when we think about the net retention rate, that kind of a reduction is really coming primarily from seat volumes.

Got it. That's very helpful. And then if we were just to kind of break apart the demand trends between the and the enterprise side of the business. Are there kind of anything that you would call out that are signaling differences between the 2? Or is it kind of pretty similar across the business?

Yes. It's actually been pretty consistent. So both across the different segments of the business as well as industries. For the most we've seen just kind of general softening related to the macro, but no particular parts of the business that we call out that are seeing any kind of outsized pressure.

Your next question comes from the line of John Messina from Raymond James.

This is John on for Brian. I'm just curious if you could talk about the puts and takes you're seeing as we head into into FY '25 because on 1 hand, I understand the headcount reductions. But with your expanded platform into areas like Sign and Canvas, I'd imagine you be in a prime position to be a beneficiary of vendor consolidation, so I'd just love to get some color there?

Yes. I think that's a great way to kind of think about it, which is, on 1 hand, we've seen and Dylan just kind of articulated, if you have a kind of slower headcount growth across various industries that we're more used to faster growth, that kind of creates some normal seat pressure from an expansion standpoint. At the same time, we have a broader value proposition. And I think we've increasingly become more strategic for our customers as a result of things like sign and workflow and Canvas and Shield. And that's letting us in some cases and Dole noted this race and drive our seat prices up as customers expand into things like Enterprise Plus. So it's definitely an interesting market because we still see very, very healthy momentum in a broad set of industries, broad set of segments. But you just have that sort of added pressure on kind of maybe some of the normal seat growth you would see in some segments. But overall, I think the message of consolidation simplifying our IT architecture, being able to bundle box in such a way with these add-on products in a much more streamlined approach where a customer can go and replace 3 or 5 other technologies is extremely compelling. And I've been having a number of conversations with customers that now kind of start the conversation with, hey, I'd love to get rid of this legacy document management system or storage infrastructure or maybe an e-signature tool that only be used by 1 part of the population, and I can fold all of that into Box. That's been definitely an increased conversation in the past couple of quarters that we've seen in light of this macro environment.

Okay. Great. That was really helpful color there. And then can you also talk about linearity in the quarter? I think you guys mentioned more deal scrutiny. I'm curious if it was similar to last quarter focused on larger deals? And I'm also curious, scrutiny was focused on any particular region?

Yes. So I'd say that the linearity was fairly similar to what we typically see, we would describe the macro pressure kind of building over the back half of the year incrementally. So -- but no significant differences, especially in terms of the quarter linearity that we typically see in a fourth quarter. And then in terms of the scrutiny that's kind of same general trend as kind of overall macro impacts, which was now there really weren't any particular areas that saw heightened scrutiny. I think it's just a more cautious IT spending environment kind of across the board. .

Your next question comes from the line of Nick Mattiacci from Craig Hallum.

This is Nick on for Chad Bennett. So at the Analyst Day last year, you talked about targeting more than 50% of your revenue coming from suites in FY '25. So with that penetration, right, already up to 46% in the past year. Is there a reason why Suites penetration should level off here as we near the 50% level? Or have your thoughts changed where that penetration rate can go over the next couple of years?

Yes. So that's an area that we have been very pleased with the momentum. So certainly, kind of Suites adoption where we are at the moment is ahead of what we had expected a year ago. So certainly, from a timing standpoint, we would expect to reach that kind of 50% plus milestone sooner than we thought a year ago, and we'll certainly provide more details as we get into the longer term thinking at our Analyst Day. And then in terms of where we see suites headed, as optimistic as ever that steady state the significant majority of our revenue is going to be coming from Suites customers. .

This concludes our question-and-answer session. Ms. Cynthia Hiponia, I turn the call back over to you. .

Great. Thank you, operator. Thank you, everyone, for joining us on the call. We look forward to seeing many of you at our New York Analyst Day on March 14, and we look forward to updating everyone at that time. Have a good day.

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