Ladies and gentlemen, good afternoon, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box, Incorporated Second Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] Thank you, and I would now like to turn the conference over to Cynthia Hiponia, Vice President of Investor Relations. You may begin.

Good afternoon, and welcome to Box' second quarter fiscal 2025 earnings conference call. I'm 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 be available for replay on our Investor Relations website at boxinvestorrelations.com. 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 the X platform at the handle, @boxirinc. On this call, we'll be making forward-looking statements, including our third quarter and full year fiscal 2025 financial guidance and our expectations regarding our financial performance for fiscal 2025 and future periods, including our 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 deferred tax expenses; and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies; our ability to achieve our revenue, operating margins and other operating model targets; the timing and market adoption of and benefits from our new products, pricing models and partnerships; the proceeds from the sale of our data center equipment; 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 may 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 and 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 27, 2024, 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 supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me turn the call over to Aaron.

Thank you, Cynthia, and thanks, everyone, for joining us today. We delivered a strong second quarter with operating results at the high end or above our guidance. This includes revenue growth of 3% year-over-year or 6% in constant currency, and record gross margin of 81.6%. Our focus on operational discipline drove operating margin of 28.4%, up 360 basis points from a year ago, while our continued investments in growth are reflected in our Q2 accelerated billings growth of 10% year-over-year and RPO growth of 12% year-over-year. Our results show the continued success of building out the most powerful AI-enabled platform for secure content management, collaboration, workflow automation and intelligence. In Q2, we saw customer demand for Box AI continue to grow, driving both upgrades and new logo wins in Enterprise Plus in order to gain access to Box AI. Customer examples in Q2 include a large U.S.-based law firm and a new Box customer that purchased Enterprise Plus in a six-figure deal. They plan to leverage Box Hubs and Box AI to create easily searchable repositories for their attorneys and other staff. They will also leverage Box Sign, replacing an existing e-signature vendor, to help Box serve as their attorney-client collaboration layer. A leading consumer convenience store in Japan upgraded to Enterprise Plus and expanded its use of Box company-wide to boost productivity by enabling all employees to use Box AI. They chose Box as their content platform to leverage AI and reinforce their security posture. These wins illustrate what has become clear in my conversations with customers that almost every enterprise is working to figure out how to use AI to enable more productivity from their employees by automating more work, improve their data security and deliver improved experiences for their customers. And at the center of all of…

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. We are very pleased with our strong Q2, delivering accelerated billings growth as well as record gross margin, operating margin and EPS. These record results demonstrate both our proven business model and early signs of success from the investments we're making in our Intelligent Content Management platform. Consistent with our key financial priorities, we're continuing to generate operating leverage and execute on our disciplined capital allocation strategy. In Q2, we delivered revenue of $270 million at the high end of our guidance, up 3% year-over-year and 6% in constant currency. We now have more than 1,800 total customers paying us at least $100,000 annually. Our Q2 suite attach rate in large deals was 87%, a new high-watermark, and up from 78% a year ago. Suites customers now account for 58% of our revenue, up significantly from 48% in Q2 of last year. We're seeing increasing demand for Box AI and our more advanced capabilities, which has been a key driver of our strong suites momentum. We ended Q2 with remaining performance obligations, or RPO, of $1.3 billion, a 12% year-over-year increase or 14% in constant currency. This represents a strong acceleration from last quarter's constant currency RPO growth of 8% driven by the combination of bookings outperformance and longer average contract durations. Consistent with prior quarters, we expect to recognize roughly 60% of our RPO over the next 12 months. Q2 billings of $256 million were up 10% year-over-year and up 9% year-over-year in constant currency, above our expectations for low to mid-single-digit growth. Roughly half of this outperformance was driven by strong bookings, particularly in Japan and our public sector business. Q2 billings also benefited from roughly $3 million in early renewals as well as a roughly…

[Operator Instructions] And your first question comes from the line of Steve Enders. Your line is open.

Okay, great. Thanks for taking the questions here. I guess maybe just to start, I mean, good to hear the outperformance on the booking side, I guess great to get a little bit more, I guess, clarity on what you're seeing out there in the macro and deal environment. And if you feel like there's an improvement going on there versus maybe a little bit of better execution on the sales side?

Yes. So definitely, we're very happy with the execution in the quarter. The team delivered strong results really across segments. I think we still see some degree of incremental pressure in areas not incremental, but relative pressure in areas like SMB and a couple of kind of regional segments. But when we look at the Q2 performance, it feels like relatively stable compared to, let's say, Q1 and the general trends we've been seeing. And overall, I think it was a quarter driven by demand for Box AI, and our Enterprise Plus plan. So the teams are very much focused on continuing to drive both new logos and upsells into the E Plus plan. And that momentum just continues relatively unabated, which is great to see, and customers really doubling down on this idea of having an Intelligent Content Management platform. But I think we're happy with the performance on a broad basis, even though there are some areas, where we still see some degree of macro pressure in areas like SMB, et cetera.

Okay. No, that's great to hear. And then, I guess on the AI side of the equation, I think you called up some pretty solid wins there. I guess, is there a way to, I guess maybe just slow down, maybe what contribution the AI side is beginning to have in terms of monetization and the revenue impact. And I guess secondarily, as we think about that law firm, when you called out in the prepared remarks, I guess what kind of drove them choosing Box for their AI use cases versus maybe leveraging some other kind of platform out there?

Yes. So I think, we made a key decision about a year ago on the pricing strategy for AI, and it was really due to the fact that we saw trends in the AI space where the cost of AI tokens, and the underlying AI models were becoming cheaper and cheaper and more cost effective over time at the same time, as the performance and powerfulness of those models were improving. And so, anytime you have those kinds of trajectories where the technology is getting better and cheaper at the same time. You have to make a decision on kind of how do you want to price and package it to make sure that you're letting your customers really get the, kind of accruing of all that value. And so, we made the call to include Box AI in our Enterprise Plus plan, as you know. And with the goal and expectation that what that would do, is drive an upgrade cycle for any customers that maybe were holding out on moving to Enterprise Plus. We had multiple chances of getting them to upgrade for a variety of other features, but for some reason they still hadn't moved to the E Plus plan. And AI has provided just yet that additional catalyst that is turning out to be a very big component of the plan to get customers into that upgrade cycle. So really, in any particular deal, in this case of the law firm you mentioned that, I mentioned in the remarks. This is really again, the full portfolio of capabilities Box Sign, included the potential use cases of Box Hubs in the future. And so, AI just becomes another kind of core foundational capability that gets that, that type of customer over the edge to getting a deal done. We had a number of either renewals or upgrades in E Plus in Q2 that were just further catalyzed by customers wanting access to Box AI for all of their employees. If you kind of step back and you think about any kind of CIO or IT leader right now, they need to be able to have an AI strategy for their leadership team, for the company, for the Board of Directors. And so, we're making it extremely easy to say, okay, Box is my Intelligent Content Management platform, based on the fact that Box AI is included as a core component of the platform. And so, we've just made it easier and easier for that to happen.

Yes, and this is Dylan. And just to build on that, in terms of where you can really see the impact, currently with our current set of offerings is in that suites attach rate in larger deals. And our overall suites penetration, i.e. the revenue attributable to suites with both of those metrics at record highs, and about 10 points year-on-year. And then even going forward, once we have our newer sets of offerings and AI capabilities, we still expect to see the biggest and most direct impact from those AI capabilities, driving yet another upgrade cycle to our highest tier plan as well as Enterprise Plus. And so, we will be monetizing AI discreetly as well. And so, that'll be very clearly connected and directly attributable to AI queries, but we expect the majority of the impact to be coming from customers electing to move into higher tier plans.

Okay. Perfect. Great to hear, and I appreciate all the extra detail there.

Thank you.

And your next question comes from the line of Pinjalim Bora. Your line is open.

Oh great. Thanks for taking the questions. One question, obviously you're talking about a little bit better, it seems like price per seat, but I would love to hear what are you seeing around kind of the seed growth trends at this point? Is that stabilizing? Do you see any signals of seat growth improving?

Yes. So to your point really, where we saw that uptick in our overall net retention rate was attributable to stronger pricing, which was in large part due to what we were just talking about, around more and more customers electing to move to our highest tier, our Enterprise Plus plan driven by AI. On the seat front, we are seeing a relatively stable dynamic and environment there. So, we have been seeing continued pressure on overall seat expansion rates. And so, while we do feel confident that those will improve over time, that was not a factor in the most recent net retention rates and that improvement, 102% that we just reported.

Yes, understood. And one for you, Aaron, maybe talk about the reasoning behind providing unlimited AI queries in the E Plus plan. Is that driven by the lower cost to run those queries? Is it mainly, I think, you were saying this - in the question before, maybe lowering the friction of adoption, maybe just the reasoning behind it. And then, could there still be some avenues, sounds like to monetize power users on a consumption basis. Just trying to think how you'd kind of manage the gross margins?

Yes, great. So two factors for why we gave unlimited and then, I'll share one more factor in terms of future monetization. So, the first factor was we wanted to encourage the kind of most seamless and frictionless adoption of Box AI. And what we were finding was some customers were not deploying Box AI, as broadly as their sort of internal demand suggested, because they were worried about running over their query limits. And that was kind of the opposite of why, we decided to include Box AI into Enterprise Plus. So, we really didn't like that friction that we were seeing from some limited customer deployments at the same time, and these are dependent on each other. I don't think we would be able to do this without the secondary factor. At the same time, we've seen the drop in costs of the underlying AI models, by probably more or less an order of magnitude just in the past kind of 12 to 18 months. So the fact that GPT 4.0 mini, is priced at a lower rate than whatever the leading models were just in the past couple of quarters is, we're seeing breakthroughs on a very regular basis in this space. So for us, the models themselves are improving at a rapid rate. The costs are dropping fairly precipitously. Competition is alive and well in the model space that's keeping all of the model providers on their toes. And that is something that we can then just benefit our customers with. The other component is, is the monetization of more, let's say excessive use, or large volume use. So what we announced was our end user use cases for Box AI - became uncapped. So, if you're a user and you ask a question of a document, or a set of documents, that's now included at an unlimited basis in the platform. If you want to do something with our APIs. So read through thousands of documents, power and onboarding process, extract metadata from a large amount of data, a large amount of content that's on a per volume basis. So, we will continue to monetize any of the kind of high volume use cases with AI, using our platform and Box AI API monetization capabilities. And I mentioned the metadata aspect of that that will only increase over time. When you think about things like the Alphamoon technology being baked in the Box, you'll see even more kind of high volume metadata extraction use cases, and we will monetize that separately. We still want to make sure that we are delivering very, very price competitive performance in that. So, we want to make sure that we can get as much market share as possible, but not to the extent that it dilutes the fundamental underlying margins of the company.

Understood. Thank you very much.

Thank you.

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

Hi guys, congrats on the strong quarter. So, I'd be curious to hear how the demand environment evolved through the quarter, or anything that you guys could share on linearity, and what you're seeing so far in August?

Yes. So I think we saw a pretty healthy linearity in the quarter. So nothing kind of to speak of one way or another. And our expectations, obviously, have been embedded into our Q3 guidance and full year guidance, for what we're seeing right now for the rest of the year thus far.

Great. And maybe just following up. I know, Aaron, you called out the strength in public sector. Is there any use case or anything prevalent that that's really driving that strength? And is it reasonable to correlate some of the AI products, or higher price point plan there? And is that what's resonating? Just curious to unpack that of it? Thanks, guys.

Yes. I think the overall message probably all taken together is producing that momentum. When you think about a traditional government agency. I think our brands may be instantly think of federal government, but the state and local space is very vast, highly decentralized lots of legacy systems. And these are environments where they're running mission-critical work for their state. And whatever capacity that agency is operating in, and they're often on legacy document management and storage technology. And so our platform, is really representing the first time in many cases where, because of compliance and security reasons, they're able to now move to the cloud. And be able to do at scale enterprise content management, with intelligence baked in to power modern experiences for their constituents, and citizens and ecosystems. So that message is now really resonating. We've been building up our public sector efforts, again, in addition to federal at the state and local level as well. And so, we've seen I think, some really nice balanced success across both federal and SLED internally. And then equally on the federal side, we continue to see large agencies and departments look toward Box, as a modern way to deliver Intelligent Content Management in their environment. And so, AI is a part of it. But I think in the case of the government, there's so much modernization that is possible that the whole platform story is very, very compelling. And then the only additional piece, this is we're not generating revenue from this yet, so it's more upside in the future. But we are going through the FedRAMP high process that will open up yet another set of use cases for our federal customers for much more kind of sensitive data. So right now, we're in the federal FedRAMP marketplace in process for our high applications. You can see that right on the FedRAMP website to great momentum on the compliance certification process there.

Appreciate the color. Thanks, Aaron.

Yes, thanks.

And your next question comes from the line of Jason Ader. Your line is open.

Yes, thank you. Good afternoon, guys. I just wanted to ask, as we think about the next couple of years, what from your perspective is the growth algorithm to get you back to double-digit growth? And as part of that question, just wondering if - what your thoughts are on maybe taking a few points out of operating margin to drive top line growth? Do you think that is a potential way to boost the top line?

Yes. So I would say at a high level, as we think about getting from our kind of normalized constant currency, pushing into the high single-digit growth range, where we are currently moving up to the double-digit range. We do think the majority of that, is going to be coming through and show up in our net retention rates, as that moves up a few points. And would expect at that stage in the coming years as the macro environment kind of returns a bit more to normal, to see a pretty balanced contribution between seat growth and pricing. Over the past several quarters, it's been much more weighted toward pricing improvements, as we mentioned. But we would expect to see a healthier mix - or sorry, a more ratable mix over time, both driven from the macroeconomic improvements. But also as you think about the impact that a lot of the newer initiatives and use cases that, that opens up will enable us to sell to customers. So that's where we expect the majority of the improvement. But at the same time, there are some markets internationally. We've talked about EMEA in the past, where I think we're kind of seeing less contribution to the business and growth currently, versus the opportunity. And some other emerging markets that we think would contribute, a little bit more to the net new logo, and net new customer growth part of the equation as well. So those are kind of the big buckets, and can certainly drill into any of those other areas. And then as it relates to the kind of growth versus profitability balance, certainly exactly where we land in any given year, is going to be a function of exactly that balance. And as we see a lot of the investments we're making, like we are today, really paying off. We'll continue to invest. And so I think you'll see, as we have those proven signs of success that we may kind of change the mix shift of how we improve that rule of equation between revenue growth and profitability. But we're very confident that we will be able to continue to expand our bottom line, regardless of the growth rate just because a lot of the initiatives that are well underway, that we have a lot more juice to squeeze out of that we've talked through in the past.

Thank you. And then one quick follow-up, just on the M&A that you've done this year. Is there any impact on either revenue or EPS from these two acquisitions?

Yes. So I would say no impact on the revenue side. So not bringing any of that over - from Alphamoon, for example. And then, those are embedded in the guidance that we provided. And just to get a sense of scale with the Alphamoon acquisition we're bringing in, or we brought in about 15 engineers to join the Box team. But that's all kind of well incorporated into the expectations we set.

Thank you. Good luck.

Thanks.

And your next question comes from the line of Taylor McGinnis. Your line is open.

Yes, hi. Thanks much for taking my questions. So the first one is just I look at the revenue guide, it implies a slight acceleration in 4Q. And I know in the prepared remarks, there were some comments about an accelerating growth outlook. So with the bookings momentum, we saw more stabilization - demand environment and tailwind from some of the emerging areas like Box AI. Just any color you can provide on how we should think about that exit rate, as a leading indicator into next year, and the comfort in the drivers behind that?

Yes. So it's actually - what we do expect to see that top line acceleration over time and are seeing some of those early signals of success, and a lot of the initiatives that were intended that are intended to drive that. I would say that while the back half of this year, we are expecting to see stronger growth and in Q4, to your question specifically, but I'd also note that we expect to see a little bit less of an FX headwind in Q4, just because of how rates have recently moved how they move throughout the year. So actually, there's not too much of a difference in terms of the constant currency growth that we expect in the back half versus the first half. And in terms of a kind of underlying growth through to the business, you look at, again, kind of the constant currency growth outlook we provided for Q4 for the full year, to get a sense of that. But we'll certainly provide a lot more color, into what we're seeing and specific expectations for next year, once we're a bit deeper into the year.

Perfect. And then my second one is just if we look at the net adds for the greater than 100,000 customers that looked pretty strong this past quarter. So just, when you think about what like the main drivers of that, whether that be, have been better execution, Box AI. I guess, what would you attribute - that to? And as we think about that metric going forward, any expectations that you guys have on your end there? Thanks.

Yes. So we're not guiding to a particular metric ton increase on that front. But overall, we were really happy on Q2's performance in those deals. I think the general trend is, again, customers really gaining access to Box AI through Enterprise Plus, it really becomes another component that kind of tips the scale in favor of doing the Enterprise Plus upgrade in addition to Box Shield for advancing data security or Box Governance for better governing your content, or some of our more advanced Box Sign functionality. And you'll just continue to see this be a trend, as we add additional capabilities into higher-tier plans in the future. We'll be able to go and drive another upgrade cycle beyond the Enterprise Plus plan. But right now, that's the main contributor to our 100,000 plus deals.

Thank you.

Thank you.

And your final question comes from the line of Rishi Jaluria. Your line is open.

Oh, wonderful. Thanks so much for taking my question. Maybe I just wanted to start off by thinking about kind of the benefits on margins that you've seen from data center sales. Can you just remind us, what is the specific quantification that we've seen on the full year? And how much of that is extra that you're guiding to this quarter versus last quarter? Or was that already contemplated in the prior full year margin guide we gave? Then I have a quick follow-up.

Yes. So for this year, those sales represent about a 60 basis point tailwind to both gross and operating margin in both Q2 and Q3. So for the full year, you think about it as roughly 30 basis points or so. And that was kind of incremental relative to our expectations entering the year. So that was upside, because of our ability to execute against that. So all of that is baked into our - the guidance that we provided today, but was not incorporated into our prior guidance.

Got it. Thanks. That's really helpful. And then I wanted to ask a question on Japan. So you talked - it sounds like you're seeing an improvement or an uptick in bookings in Japan. Maybe can you walk us through what is driving that? Because you did have a little bit of a slowdown in the past. It sounds like things are getting better, which is great to see. Maybe walk us through kind of was there any changes you made? Is it the macro environment? Anything else? Thanks.

Yes. Japan performance we - it continues to be strong. As we've kind of mentioned that they remain a steady part of our business, and we've called out in the past, significant remaining upside across the Japanese market given the kinds of industries that we're still pretty early in - penetrating, so things like financial services, pharmaceuticals, the federal and kind of government spaces in Japan. So lots of upside we still believe across Japan, and they have been major adopters of - early adopters of our Box AI functionality. So this is a market that is extremely interested in AI, and really bringing more automation to their content use cases. So I think, they've been relatively stable on the macro front. Obviously, we're - we just see continued upside in the kinds of industries that, we still have a lot of room to work in.

All right. Wonderful. Thank you.

Yes. Thanks.

And that concludes our question-and-answer session. I would now like to turn the conference back over to Cynthia Hiponia for closing remarks.

Great. Thank you, everyone, for joining us today, and we look forward to updating you again on our next call.

And ladies and gentlemen, that concludes today's call, and we thank you for your participation. You may now disconnect.