Box Inc (BOX) Q2 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Box, Inc., Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alice Lopatto, Head of Investor Relations. Thank you. Please go ahead.

Good afternoon and welcome to Box's second quarter fiscal 2021 earnings conference call. I'm Alice Lopatto, Head of Investor Relations. And on the call with me today, I have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions. Today's call is being webcast on our Investor Relations website where supplemental slides are now available for download. We also post the highlights of today's call on Twitter at the handle @boxincir. On the call, we will be making forward-looking statements, including our Q3 and FY '21 financial guidance and our expectations regarding our financial performance for fiscal 2021 and future periods, timing of and market adoption of our products, our markets and market size, operating leverage, expectations regarding maintaining positive free cash flow, growth margins, operating margins, future profitability, unrecognized revenue and remaining performance obligations, planned investments and growth strategies, ability to achieve long-term revenue and other operating model targets, expected timing and benefits of our new products, pricing and partnerships, and expectations regarding the impact of the COVID-19 pandemic on our business and operating results. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q, for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, August 26, 2020 and we disclaim any obligations 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 GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand it over to Aaron.

Thanks, Alice, and thanks everyone for joining the call today. Let me begin by saying that I hope you and your families are all staying safe and healthy. Many months into COVID-19, the environment continues to be a challenging and unprecedented time. Throughout all, we continue to provide support for our employees and their families, our communities and our customers. I'm proud of all the teams at Box globally who strive to provide tremendous support for our customers and for continuing to drive product innovation during this time. We delivered a strong quarter in Q2 with revenue of $192.3 million, up 11% year-over-year, more than 15% non-GAAP operating margin compared to zero percent a year ago, and non-GAAP EPS of $0.18 compared to zero cents a year ago, both well above our guidance. We also generated more than $13 million in positive free cash flow and improvement of more than $32 million versus a year ago. Over 100,000 customers now rely on Box to power secure collaboration and critical processes across their businesses. And in Q2, we closed wins and expansions with leading organizations such as Hitachi High-Tech, Lord Abbett & Co, and Stanley Black & Decker. More customers are leveraging the full power of Box and we are very happy with our second quarter results and the stability we've had in this highly uncertain time. Our Q2 results were driven by expansion within our existing enterprise customers, which has remained consistent through the COVID-19 environment and growing demand for products like Shield and Relay that drove more Suite adoption including a 30% attach rate of Suites in our six-figure deals. We were proud to deliver strong revenue growth, significantly expanded operating margins of more than 15%, and substantially improved cash flow. The world today is fundamentally different than it was just a few months ago. As I see strategies are evolving from only thinking about remote work to now managing their entire future of operations and work in this new normal, our opportunity has never been greater. The vast majority of enterprises are still dealing with content that's fragmented across legacy systems. More and more enterprises are seeing the productivity, security and cost challenges that exist with this legacy approach to managing content. And as enterprises look to modernize how their employees work, securely share with their partners, and enable secure content access across all other cloud applications, Box is building the only platform that combines secure content management, collaboration and workflow in one place. Q2 highlighted another quarter of great customer wins. Just to give you a few examples, a medical school and hospital who has been a Box customer since 2013 made the decision to expand their use of Box through our ELA program to support their collaboration and communication with external parties around COVID-19 research. An enterprise technology company selected Box to help them standardize on a single content platform to replace SharePoint and various consumer tools, as their primary content repository for Teams. An American multinational investment bank, in an effort to consolidate many disparate content silos, selected Box with the goal to replace legacy systems. Over the past few years, we have built a category-defining cloud content management platform focused on three key differentiators: frictionless security and compliance; seamless collaboration workflows; and world-class integrations that extend the value of Box into any application. In Q2, we delivered more product innovation than ever to ensure our customers have the most secure and collaborative experience when working remotely. The all-new Box featured an updated design and much faster performance became available to our customers in Q2 and includes enhancements such as collections and annotations. With Box Shield, we announced auto classification, which leverages advanced machine learning to automatically scan files and classify them based on their content. Today, some of the world's most security-conscious organizations are using Box Shield to secure their data in the cloud. And with Box Relay, we significantly expanded our library of templates to simplify workflows across various functions. We are doubling down on workflow to automate and digitize content-centric processes across the enterprise. Our focus is on growing existing accounts by driving add-on product adoption and seat expansion with Box Suites as well as efficiently driving new logo acquisition in key markets. To drive greater profitability, we are focused on optimizing workforce expenses, improving gross margin, and taking an ROI-based approach to all areas of spend. We are committed to delivering a 12% to 13% operating margin versus our previous goal of 11% to 12% for the full fiscal year, up significantly from 1% in FY '20. We laid the foundation to significantly improve our margins a year ago and we are confident that our focus on efficient growth and cost discipline will continue to be an advantage. Before I conclude, I want to take a moment to share some of our recent environmental, social, and corporate governance initiatives, which have always been important to us. To conclude, our strong Q2 results further demonstrate the significant progress we've made in delivering increased value to our customers, even during this time of uncertainty. By powering a new way to work for enterprises of all sizes, we are confident we will deliver increased value to stakeholders in both fiscal 2021 and beyond. With that, I'll hand it over to Dylan.

Thanks, Aaron. Good afternoon everyone and thank you for joining us today. As Aaron mentioned, we had a strong quarter with both revenue and non-GAAP EPS exceeding the high end of our guidance. We're seeing healthy expansion within our existing enterprise customers, stable customer retention rates, and continued momentum in Suite sales. At the same time, we've delivered significant operating margin improvements as we continue to focus on driving long-term profitable growth. For FY '21, we are raising our expectations for non-GAAP operating margins to be 12% to 13% of revenue, 100 basis points higher than our previous expectations. Let's now move on to our quarterly results. We delivered revenue of $192.3 million in Q2, up 11% year-on-year. Our remaining performance obligations or RPO represent non-cancelable contracts that we expect recognized as revenue in future periods. We ended Q2 with RPO at $726.7 million, up 13% year-over-year. In Q2, we closed 64 deals worth more than $100,000 versus 68 a year ago. We ended Q2 with an annualized net retention rate of 106%. As you might expect, COVID-19 related dynamics could cause this metric to fluctuate over the course of this year. In Q2, our full churn rate was 5% on an annualized basis, in-line with Q1 and an improvement from 6% in the year ago period. Non-GAAP gross margin came in at 73.5%, up from 71.3% a year ago and we expect this upward trend in gross margins could continue over the next couple of years. Cash flow from operations was strong at $32.3 million in Q2. With that, let's now turn to our guidance. For the third quarter of fiscal 2021, we anticipate revenue of $193 million to $195 million, representing approximately 10% year-over-year growth at the midpoint of this range. We now expect our FY '21 revenue to be in the range of $767 million to $770 million. In summary, in Q2, we delivered strong financial results in a dynamic and challenging environment highlighted by an operating margin of more than 15%. Our product innovation around remote work, large market opportunity and resilient business model put us in a strong position to deliver healthy long-term revenue growth and profitability improvements. We look forward to further discussing our strategy and our resilient business model during our virtual investor breakout session. With that, I would like to open it up for questions.

And your first question comes from Josh Baer from Morgan Stanley. Your line is open.

Thanks for the questioning and congrats on the strong quarter. Cash flow was very strong this quarter. I'm just wondering, if you're still seeing a shift toward quarterly billings from customers; and if so, if there's any way to quantify that impact for either this quarter or expectations for the year?

Sure. We expect billings growth to slightly lag revenue growth for the remainder of FY '21. I would note that we are seeing that dynamic a bit in terms of the payment durations, particularly with some of our smaller customers.

Got it. If I can just sneak in one more, I believe you touched on this a little bit talking about the mid-school customer, but I was wondering if you have any additional insights on Q2 and the performance of the new sales programs for the enterprise-wide license agreements that should help customers expand wall to wall?

Yes, Josh, this is Aaron. We are starting to see more momentum with the ELA program. Q2 was really kicked off in earnest and so, it's becoming a greater focus of our sales motion. We're seeing emerging momentum still in early days, but we're happy to see that.

Dylan and Aaron, in your last quarter you called out you have record upload volumes and just activity trends on the platform. Wondering if you could give some color on just sort of what you saw this quarter?

From an activity standpoint, that initial first wave of everybody moving to remote work really kicked off in the middle part of Q1. By Q2, we saw steady activity on the platform that was off that new baseline from that increase, and healthy activity overall in terms of product adoption and usage of our new collaboration features. So, we're now focused on driving the adoption of the all new Box, which we're seeing early signs of having some very sticky and enhanced features.

And then I'll put just follow-up on go to market. Obviously, you have some new leadership over the past year. Wondering just an update on how you feel about your go-to-market capacity, your efficiency, sort of update there would be great?

In general, we're really happy with the leadership team that we have in place. It has evolved over the past couple of years to make sure that we're well aligned with the model we want to drive efficiently.

We are certainly seeing this have a significant impact on the overall leverage that we've been able to drive across our go-to-market.

Hi, gentleman. I'll echo my congratulations on the strong results. Any color on what gives you guys the confidence in that?

We are seeing healthy pipeline, and do you expect to deliver solid growth in terms of six-figure deal counts in the third quarter.

So, we're seeing some of those deals that close and play out nicely. But overall, I think when we looked at the pipeline for the second half of the year, we feel pretty confident. We're seeing customers in highly regulated industries begin to adopt Box Relay, because they want to have auditability of their workflows.

We do expect that our net retention rate is going to end this year above what we ended at FY '20. But ultimately, the dynamics around expansion will drive that metric for the balance of this year.

Thank you everyone for joining our call today. We look forward to speaking with you again on our investor breakout session. Please note our start time for the event will be at 2 pm Pacific and BoxWorks Digital will be an all-day event.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.