Box Inc (BOX) Q1 2023 Earnings Call Transcript

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Box First Quarter Fiscal 2023 Earnings Conference Call. Thank you. Cynthia Hiponia, you may begin your conference.

Good afternoon and welcome to Box’s first 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 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 Q2 and full year fiscal 2023 financial guidance and our expectations regarding our financial performance for fiscal 2023 in future periods, including our free cash flow, gross margin, operating margins, operating leverage, future profitability, net retention rate, unrecognized revenue, remaining performance obligations, revenue and billings and our expectations regarding the size of our market opportunity, our planned investments 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, the impact of our acquisitions and future Box product offerings, the impact of the COVID-19 pandemic 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 and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K 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, May 25, 2022 and we disclaim any obligation to update or revise them should they change or seek 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 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 PowerPoint presentation, 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 hand the call over to Aaron.

Thanks, Cynthia and thank you all for joining the call today. We are off to a strong start in fiscal ‘23, delivering first quarter revenue growth of 18% above our guidance and representing a fifth consecutive quarter of accelerating revenue growth. Our continuous focus on profitability resulted in a non-GAAP operating margin of 21%, up 360 basis points from 17% a year ago. Because of this strong momentum, and even with the impact of foreign exchange, which Dylan will describe in more detail shortly, we are raising the midpoint of our revenue range and raising our operating margin guidance and EPS guidance for the full fiscal year. In Q1, we continued to execute on our product roadmap as we address a $74 billion market opportunity. We announced Box Canvas, our native virtual whiteboarding and visual collaboration solution, while also launching significant product enhancements with Box Sign, Workflow with Box Relay and security and compliance with Box Shield. We deepened integrations across several of our key technology partners and we expanded our customer relationships while continuing to add new customer logos. The success of our platform strategy is evident in our strong customer metrics as customers are leveraging our Content Cloud platform to transform their businesses and power new ways of working. In the first quarter, our net retention rate was 111%, up from 103% in the prior year, driven by a strong customer expansion rate. And for our large deals over $100,000, we had 60 new deals, and we had a 73% attach rate of suites, up from a 49% attach rate in Q1 of fiscal ‘22. We continue to see healthy attach rates in the U.S. and EMEA with improvements in our attach rates in Japan. Our strong Q1 fiscal results and customer metrics underscore that our growth strategy is working and that we are aligned with the key trends that are driving the future of work. Companies today are dealing with a more distributed and hybrid workplace as they implement the digital transformation of their business processes and face increasing security challenges across the organization. Our Content Cloud addresses these trends by building out capabilities to power the full lifecycle of content in a single platform. As we continue to double down on these product capabilities and investments, we will add more value to our customers and expand Box’s total addressable market. In Q1, we announced a major new element of our Content Cloud with Box Canvas, allowing us to enter an additional fast-growing market with our platform. With the prevalence of remote and hybrid work now a permanent part of nearly every business, the ability to seamlessly collaborate on any type of content is critical. Over the past couple of years, we have seen a huge increase in companies looking to collaborate on visual content from product design, storyboards and project plans to flow charts, diagrams and more. Box Canvas is an intuitive visual collaboration and whiteboarding experience that powers free-form collaboration while leveraging all of the strength of the security, governance and compliance built directly into Box. With Box Canvas officially launching later this year, it will be included across all of our product plans, adding even more value and enabling our customers to benefit from Box in new use cases across their organizations. With products like Box Canvas, Box Sign and Box Notes delivered as included capabilities in Box’s core subscriptions and bundles, customers benefit from getting new value from Box instantly. Especially as companies look to consolidate IT spend from various point solutions, Box remains in a strong position to help retire disparate e-signature technologies, collaboration tools, enterprise content management systems and much more. It’s a win-win that drives ROI for our customers as well as providing additional upside as customers move up to higher tier plans for more features. Since our launch of Box Sign this fall, we have announced major new enhanced capabilities, integrations and developer tools to power even more advanced signature-based processes, helping customers move more of their transactions to the Content Cloud. We are pleased with the momentum we are seeing in customer adoption and use of Box Sign. First quarter customers include a global legal services provider that moved to Box with a six-figure deal to provide its network of lawyers who work on the most sensitive matters with secure internal and external content collaboration along with Box Sign for secure and affordable e-signature options for boilerplate agreements. A U.S. based real estate investment trust purchased Box in Q1 and deployed Box Sign across its organization to support the signing and collaboration around commercial leases. And finally, a global biopharma company, which has been a Box customer since 2018, moved to Enterprise Plus in Q1 with plans to use Box Sign, which will be critical as the company continues to scale and they release new drugs to market. Box’s security capabilities also remain a critical driver of why customers choose our Content Cloud. Data security, compliance and privacy remain more important than ever. In Q1, we launched new capabilities for Box Shield, our advanced security solution for protecting content in the cloud, including the ability to apply malware deep scans to Microsoft Office files and adding automatic watermarking to classified documents. Throughout this year, we will continue to extend our leading security, compliance and data governance capabilities. Finally, the ability to integrate deeply across the SaaS landscape is an integral part of our product strategy. We recently announced a deepened integration with Zoom, with the launch of the Box app for Zoom chat channels to make it even easier for users to work seamlessly together across the two platforms. In Q1, we also announced the all-new Box App Center, a destination for users, admins and developers to easily discover and access the more than 1,500 applications that integrate with Box, highlighting the power of Box’s deep partnerships with Microsoft, Google, Slack, Zoom, WebEx, ServiceNow, IBM and many other major technologies. As we look forward in FY ‘23, we believe it will be Box’s biggest innovation year ever. We will continue to focus on our three core differentiators of frictionless security and compliance, seamless collaboration and workflow and an open platform that’s integrated into every application. And we will continue to build products that reinforce each other, powering the full lifecycle of content and empowering our customers to save money by retiring other tools. Above all, we will ensure that our customers derive more and more value from Box as they move more of their data onto our platform. This is a virtuous flywheel that drives our business model and we are only in the early innings of what’s possible. Turning to go-to-market, as we discussed during our Analyst Day in late March, our strength in business momentum is a result of a number of initiatives that we have undertaken to scale our land and expand go-to-market motion. These have included optimized pricing and packaging with our latest multi-product offering, Enterprise Plus. In Q1, Enterprise Plus accounted for more than 80% of our multi-product suite deals, a remarkable achievement since the launch of Enterprise Plus in July of last year and a much quicker ramp than we saw when we launched our first suites. Our Q1 customer expansions and new wins with Enterprise Plus include an agency of the United Nations that purchased Enterprise Plus and KeySafe as they look to use Box with other cloud apps, including Salesforce to build a modern digital platform for the approval of new vaccines and medicines from across the globe. Their process now is currently carried out via email, paper, USB sticks and DVDs. A leading biotech company that invents life-transforming medicines for people with serious diseases moved to Box in a six-figure Enterprise Plus deal. This new customer will be using Box for regulated content and high-value use cases. The fact that Box supports GxP compliance and that our offering provides a better experience to both internal and external parties as they work together on clinical trials was critical for the selection of Box with the decision makers at this company. Finally, a major automotive company purchased Box with a seven-figure Enterprise Plus deal, enabling them to eliminate on-premises file servers and solve key security issues. By replacing file servers with Box, they will centralize content management and simplify secure collaboration internally and externally with partners. Our strategy aims to bring the full power of the Content Cloud to our customers. And we know that when a customer adopts our multi-product offerings, we see a greater total account value, higher net retention, higher gross margin and a more efficient sales process. We are also continuing to double down on all of our efforts around deployment, adoption and truly helping our customers transform with Box. As such, in Q1, we launched our new Box Consulting portfolio, a completely redesigned program that makes it easier to position, sell and deliver these critical customer success services to empower any organization to achieve their Content Cloud goals. In summary, our strong first quarter results and the continued momentum we are seeing in our business is the direct result of the execution and focus of the team at Box. Despite macro trends and currency impacts, we have continued to execute on our Content Cloud platform to ensure that we will continue to drive further annual revenue acceleration. At the same time, we remain steadfastly committed to expanding our operating margins by focusing on the highest ROI initiatives across the business, scaling in lower-cost locations, improving gross margin and more. The future of work is here, and the Content Cloud platform has never been better positioned to capitalize on these trends of hybrid, distributed and digital-first work. With that, I will hand it over to Dylan.

Thanks, Aaron. Good afternoon, everyone and thank you for joining us. In fiscal 2023, we have three key financial objectives: accelerating year-over-year revenue growth, expanding operating margins through our focus on operational excellence and prudently allocating capital to optimize shareholder returns. We had a strong start to FY ‘23, delivering against all three of these objectives. As a result, we are raising the midpoint of our revenue guidance and raising our operating margin guidance and EPS guidance for the full fiscal year. In Q1, we delivered revenue of $238 million, up 18% year-over-year, a fifth consecutive quarter of accelerating growth and above the high end of our guidance of $235 million. This outperformance was driven by strong deal pacing and higher than expected nonrecurring revenue. Our Q1 revenue growth rate includes an incremental impact of negative 1 percentage point from foreign exchange versus our initial expectations. We continue to see strong demand for our Content Cloud platform. In Q1, we closed 60 deals over $100,000, of which 73% were suites deals. As our customers are increasingly adopting products with more advanced capabilities, roughly 37% of our revenue is now attributable to customers who have purchased suites, an exceptional 12 percentage point increase from 25% a year ago. We ended Q1 with remaining performance obligations, or RPO, of $1.0 billion, a 16% year-over-year increase. Our RPO growth was negatively impacted by 6 percentage points from foreign exchange. We expect to recognize more than 60% of our RPO over the next 12 months. Q1 billings of $172 million grew 8% year-over-year. Our billings growth was negatively impacted by an incremental 4 percentage points versus our initial expectations due to currency headwinds. Our net retention rate at the end of Q1 was 111%, up 800 basis points from 103% in the prior year. We continue to see strong customer expansion and a stable annualized full churn rate of 4%. We still expect our net retention rate to remain roughly consistent throughout FY ‘23. Gross margin came in at 76.3%, up 330 basis points from 73.0% a year ago. Q1 gross profit of $182 million was up 23% year-over-year exceeding our revenue growth rate by a full 500 basis points. We are delivering material profitability leverage via our public cloud migration strategy, and we remain focused on unlocking additional leverage to improve our long-term gross margin profile. Q1 operating income increased 43% year-over-year to $49 million, and our 20.6% operating margin was up 360 basis points from the 17.0% we recorded a year ago. We delivered $0.23 of diluted non-GAAP EPS in Q1, up from $0.18 a year ago. Q1 non-GAAP EPS includes a negative impact of $0.03 from currency headwinds. I’ll now turn to our cash flow and balance sheet. In Q1, we delivered cash flow from operations of $108 million, up 14% from the year ago period. We also generated free cash flow of $91 million, a year-over-year improvement of 20%. We generated record cash flow from operations and free cash flow in Q1, driven by very strong collections, including several large payments that we had expected to collect in Q2. Capital lease payments, which we included in our free cash flow calculation, were $12 million, down from $13 million in Q1 of last year. For the full year of FY ‘23, we continue to expect capital expenditures and capital lease payments combined to be roughly 5% of revenue in Q2 and roughly 5% of revenue for the full year of FY ‘23 as compared to 6% of revenue last year. Let’s now turn to our capital allocation strategy. We ended the quarter with $520 million in cash, cash equivalents, restricted cash and short-term investments. As we’ve been doing, we expect to use our strong balance sheet and our increasing free cash flow generation to execute a disciplined M&A strategy to enhance and accelerate our product roadmap while also generating shareholder returns via additional stock repurchases. In Q1, we repurchased 4.2 million shares for approximately $110 million. As of the end of Q1, we had approximately $148 million of remaining buyback capacity, and we remain committed to opportunistically returning capital to our shareholders. With that, I would like to turn to our guidance for Q2 and fiscal 2023. As you know, since our prior earnings announcements on March 2, 2022, the U.S. dollar has strengthened versus the currencies in which Box transacts our international business, resulting in a larger-than-expected foreign exchange headwind to both Q2 and the full year of FY ‘23. 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 foreign exchange headwinds. For the second quarter of fiscal 2023, we anticipate revenue of $244 million to $246 million, representing 15% year-over-year growth at the high end of this range. We expect our non-GAAP operating margin to be approximately 22%, representing a 130 basis point improvement year-over-year. We expect our non-GAAP EPS to be in the range of $0.27 to $0.28 and GAAP EPS to be in the range of negative $0.02 to negative $0.01 on approximately 152 million diluted shares and 146 million basic shares, respectively. For the full fiscal year ending January 31, 2023, as a result of our strong Q1 results and despite the impact of foreign exchange headwinds, we are raising the midpoint of our revenue range and raising our operating margin guidance and EPS guidance for the full fiscal year. We now expect FY ‘23 revenue to be 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 foreign exchange headwinds we anticipated when we gave our initial FY ‘23 guidance, we now estimate the full currency headwinds to FY ‘23 revenue growth to be approximately 3 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. As a result, we are raising our non-GAAP operating margin guidance to be approximately 22.5%, representing a 270 basis point improvement from last year’s results of 19.8% and an improvement over our previous guidance of roughly 22%. We are raising our FY ‘23 non-GAAP EPS to be in the range of $1.11 to $1.15 on approximately 154 million diluted shares and up from $0.85 in the prior year. Our GAAP EPS is expected to be in the range of negative $0.05 to negative $0.01 on approximately 147 million shares. Our FY ‘23 GAAP and non-GAAP EPS guidance includes an expected incremental impact from foreign exchange of approximately $0.08 versus our initial FY ‘23 guidance. For the full year of FY ‘23, we continue to expect billings growth to be roughly in line with revenue growth, with expected variability on quarterly growth rates due to the dynamics of prior year comparisons and the timing of large customer renewals. Directionally, while billings growth rates are expected to be in the mid-single-digit range in Q2, we expect our billings growth rate to exceed our revenue growth rate in the second half of the year. We estimate the currency headwinds to our FY ‘23 billings growth rate to be approximately 4 percentage points. We continue to expect our FY ‘23 RPO growth to exceed our anticipated full year revenue and billings growth rates. Finally, we continue to expect our FY ‘23 revenue growth rate combined with our FY ‘23 free cash flow margin to be at least 37%, a 400 basis point improvement from last year’s outcome of 33%. In summary, the strong execution and business momentum we saw last year continued in Q1 as we delivered accelerating revenue growth while improving profitability year-over-year. In addition, we remain dedicated to a shareholder-friendly capital allocation strategy that positions us for strong execution in the years ahead as we build on our Content Cloud leadership position. With that, Aaron and I would be happy to take your questions.

Thank you. Your first question today comes from the line of Jason Ader with William Blair. Your line is now open.

Thank you, operator. Hi, guys. I guess first is how are you feeling about the current demand environment? Are you baking in any kind of moderation in the demand environment? And how do you think you would fare if we do enter some type of a macro downturn, especially given your seat-based model?

Sure. Yes, I’ll take that. Hey, Jason. This is Aaron. So overall, demand remains healthy, and we’ve got pretty good visibility into the pipeline and are seeing strong signals from the pipeline side and just current customer activity. We believe we’re well positioned for the environment. If we think about businesses that are looking to be more efficient, automate more business processes, continue to drive digital operations or even consolidate and retire expenses, we think our platform is well positioned to capture more of the spend that would have gone into various point solutions across e-signature, workflow, collaboration, security and compliance. So I think the combination of just how we are positioned in terms of the macro tailwinds on digital transformation and hybrid work as well as our ability to consolidate expenses into a single platform model positions us well.

Okay, great. And then one quick follow-up, some investors have asked me or been a bit worried about the fact that current growth could be driven more by just upsell to your base with Enterprise Plus. And then once you work through some of that low-hanging fruit, growth could get harder. How do you respond to that thesis?

Yes. So maybe I’ll let Dylan comment on kind of where we’re at in that transition overall. But overall, if we look at the 100,000-plus logos that we have, we think there is significant upside and available upsell potential within the customer base by both moving customers from existing plans into Enterprise Plus. But then frankly, the seat expansion, which, again, is not really driven by more headcount within our customers, it’s much more driven by more use cases for us to be able to drive value for them. So between seat expansion, moving customers into Enterprise Plus as well as our monetizable elements of our platform APIs, we think that provides very, very strong upside from the current customer base. At the same time, we’re continuing to bring on new logos. We’ve had great wins even in Q1 of customers that are really committed to bringing in a Content Cloud platform in their organization to drive digital transformation across their content use cases.

Yes. And this is Dylan. Just to build on that and quantify the continued expansion opportunity that we have. As a reminder, if you look at just purely seats in our current customers today, we have roughly a 7x seat expansion opportunity looking at the number of paid seats they have today versus the total knowledge worker population. And then on top of that, while we have seen very strong momentum with our suite sales, and that now makes up 37% of our revenue versus 25% a year ago, over time, we expect a significant majority of our customers to be on suites. So from both a seat expansion point of view and the continued cross-sell opportunity, in addition to the new logos we’re bringing on, we feel very good about the growth we have ahead within our customer base.

Alright. Good luck, thanks, guys.

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

Hi, gentlemen. Thanks for taking the questions. So Aaron, one of the comments you made was about some of your customers looking to consolidate their IT footprint. I know you’re expanding the use cases and the value of the platform. But have you seen that increase in terms of your customer conversations about them maybe looking to retire more legacy solutions? Does that change maybe in the last two quarters?

Yes. So I think we’ve been dealing with the general trend of customers looking to replatform their content management environment now for the past few years. And so that’s things like document and legacy SharePoint environments and more network file shares moving those to the cloud. And that’s been why we have Box Shuttle to help with that data migration. We’ve been really focused on migrating that to the cloud quite a bit. I think with the addition of e-signature with Box Sign and now virtual and visual collaboration with Box Canvas, it provides two new categories that customers otherwise have to independently spend money on, which just provides additional value when you buy into the overall platform. So one example that I called out, we had a sort of software biotech company that was really looking to get more use cases solved with Box, and we ended up having a very strong champion from the finance department ultimately drive the usage of the Box platform from a deal standpoint. And so we’re now seeing the addition of more personas within our sales process, finding more value with our platform. So it’s not just the digital information side, but it’s also about how we can deliver cost savings. We have had a number of customers already with the addition of Box Canvas, which doesn’t roll out until this fall, see that as another opportunity where they can consolidate spend into Box and get more value from our platform. So I think that’s going to continue to be the case. We think that sets us well for the environment that we’re clearly in from a macro standpoint. That’s in addition already to the tailwinds of digital transformation, remote and hybrid work and the cybersecurity challenges that companies face.

Good to hear. And maybe just a follow-up on the M&A environment. Obviously, Box Sign has gotten some really good traction. I’d be curious what do you see in terms of the M&A pipeline? And obviously, we’ve seen a correction here in the public market. So I’m just curious what you’re seeing maybe on the private side? Thanks, guys.

Yes. Well, I think, generally speaking, the private market is going to clearly go through a pretty broad-scale correction as a result of that happening in the public side. I would say, when you think about our M&A strategy, it’s very surgical. We look for capabilities that we need to bring on to the platform to help accelerate our roadmap. And so we are extremely selective as it is around the kinds of technologies that we buy. It’s very possible that the prices come down on a relative basis, but we are very, very focused on specific technologies, and we’re often not paying the kind of exorbitant prices that were already happening in the market. So I think prices will come down, but it doesn’t change our appetite. We’re very surgical, and we will continue to focus on just the kind of tuck-in acquisitions as appropriate to bolster up the value for our customers.

Thanks, Aaron.

Your next question comes from the line of Ittai Kidron with Oppenheimer. Your line is now open.

Hi, it’s actually George Iwanyc. So following up on the value add that you’re putting into the platform. Could you give us some perspective on your pricing leverage at this point, either from less discounting perspective or your ability to maybe raise prices?

Yes. So, I think philosophically, as you know, and as I think all the folks on this call know, we have gone through a multiyear evolution where we had the single core platform of core Box, and then we had individual add-on products, which led to some inefficiency in the sales motion. And we heard from customers that this was too slow to then adopt a lot of the value that you are building, so we moved to suites and then ultimately, Enterprise Plus as that super suite. And so we think that the value proposition we are offering customers is you buy into our platform, and you are going to continue to get more and more innovation from us over time. So, last year, that was Box Sign and this year, that’s Box Canvas. It’s a lot of innovation around workflow automation. It’s a lot that we are doing on the security front. And then over time, we are able to drive more seats into the platform as one vector of upsell. We are able to command higher prices per seat on a like-for-like basis due to, on to your point, less discounting, and we are able to monetize the API volume of many of these features for some of the more custom development applications. So, we feel really comfortable with our multiple vectors of monetization. But philosophically, right now, and in particular, given this macro environment, you will certainly expect that we are in a mode of how do we give – create more value for our customers, making it more of a win-win. That’s going to make sure that customers are stickier with the platform and leveraging us for more use cases. We think ultimately that earns quite a bit of goodwill. That being said, when we see an opportunity where a customer maybe is not at the right price point relative to the value and what sort of list that is, we always kind of take that into consideration. But I think we are really satisfied with the pricing model right now. So, Dylan, I will let you chime in if you like.

No, I think that mostly covers it. The only thing I would add is the trends that we have been seeing recently and what we laid out at Analyst Day continue to play out in the business for the reasons mentioned, continuing to get more and more customers into suites. Over the past year, we have been able to increase our pricing by about 7% year-on-year, driven by the same trends that we continue to see in the business based on what our customers are using and the value they are increasingly getting from Box.

And Dylan, maybe following up on your operating margin comments, can you give us an update on your thoughts for hiring at this point and then some of the other areas that you are looking to drive efficiencies?

Sure. So, I would say very pleased with the progress we are making in terms of driving leverage across the business, which has allowed us to raise our operating margin guidance by 50 basis points versus our initial guidance to 22.5%. I would say we continue to be focused on the plans that we laid out at the start of this year. So, looking to grow our sales force in the low to mid-teens percentage range and do the significant majority of our engineering hiring in Poland, which is scaling really nicely. So, I would say the strategy that we laid out entering the year at Analyst Day remains the strategy that we are executing to, and note that we are also seeing some upside from the impact of things like our data center and our public cloud migration strategy as well as the impact of that lower cost location strategy increasingly showing up in our financial results.

Thank you.

Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is now open.

Great. Thanks for the question and congrats on a really good quarter. Aaron, when you talk about FY ‘23 being one of the biggest innovation years yet, which of your key pillars are you most focused on? And how should we think about this innovation just in terms of completely new product modules versus smaller enhanced features?

Yes. So, I know this is kind of a lame answer, but across our three pillars, which are security compliance, workflow and collaboration and our platform. While our investment dollars are not always even across them, the relative importance of them is sort of shared just because that’s the value that we are delivering for our customers. So, I am extremely excited about kind of capabilities that are showing up in each of these areas. But when I said the biggest innovation year, it’s because of just the sheer breadth of capabilities across those three pillars that you will see from us. So, significant advancements across Shield and Governance for advanced data security protection and data privacy use cases that our customers are running into. So, you will see announcements throughout the year on that front, quite a bit of work happening in collaboration and workflow. So, Canvas being an entirely new, very fast-growing large market that we are entering as a net new capability. At the same time, you are going to see kind of just run rate improvements to our collaboration functionality as well as major enhancements to our workflow suite. And then of course, Box Sign, we just announced in Q1 some major enhancements that help our customers with more advanced use cases. So, the entire roadmap of Box Sign is very well aligned to helping customers drive more of their e-signature processes on Box and retire legacy e-signature vendors into our platform. And of course, our partnerships and integrations, we are deepening our work with Salesforce, deepening our work with Slack, going really deep with Microsoft across a variety of use cases there. So, you are going to see investment across all of those fronts, obviously baked into our targets, and we are going to continue to add a tremendous amount of value for our customers.

Thanks Aaron. And Dylan, thank you for all the breakouts, especially the incremental FX since last guidance. One follow-up, just wondering if you broke out FX or constant currency for operating income impact and then also just wanted to ask about the non-recurring revenue contribution in the quarter? Thank you.

Sure. So, on the operating margin fronts, pretty similar trends to what we had called out on the EPS side. So, for Q1, FX had a roughly 1 percentage point impact to operating margin. And then for the full year of FY ‘23, we expect the total FX impact to be about 2 percentage points to operating margins, so about 1% incremental to what we had called out on our last call. And then from a non-recurring revenue point of view, I would say we saw a lot of execution milestones completed from our Box Consulting business. So, it did not have a material impact on our overall revenue growth as it’s just about 3% of our total revenue, but it was definitely nice to see an uptick in the revenue that we are able to recognize from our professional services business, Box Consulting.

Awesome. Thank you.

Your next question comes from the line of Nick Mattiacci with Craig-Hallum. Your line is now open.

Hi. This is Nick on for Chad Bennett. Thanks for taking our questions. Maybe if you could just speak to what you are seeing recently in the SMB market and if your thoughts for growth going forward at the lower end of the market have changed at all from a quarter ago?

Yes. So, we saw very strong results in Q1, and the team drove fantastic momentum in the SMB and commercial segment broadly. I think that we are very cognizant of the macro environment from an SMB standpoint. I mean frankly, business is everywhere. But if you think about the demands of needing a single platform with advanced security, workflow automation, and e-signature all in one bundle, we think we have a very strong value proposition in the SMB space. And so, that momentum is continuing to drive forward with, again, a ton of upside when you think about the seat expansion as well as the product plan expansion that’s available to us.

Got it. And then, Dylan, if you could just help me reconcile the 9-point foreign exchange headwind to billings in the quarter compared to the 4-point impact in the full year guide?

Sure. So, first, I would note the difference between the total foreign exchange impact in Q1, that was 9 points versus an incremental impact in Q1 versus our initial expectations, which was 4 points. What I would say is the reason you see more of an impact in Q1 versus what we expect to see for the full year of roughly a 4-point impact due to foreign exchange is that’s impacted also by how foreign exchange drives a revaluation of deferred revenue on our balance sheet. Because we did see a pretty material movement in currency exchange rates in Q1 that had an outsized impact on our deferred revenue balances and therefore calculated billings in the first quarter.

Makes sense. Thank you.

Your next question comes from the line of Rishi Jaluria with RBC. Your line is now open.

Hey Aaron and Dylan. Thanks so much for taking my questions. I want to start off by talking about Box Canvas. Seems like a nice little introduction to the full platform, so good value there. But maybe can you walk us through your strategy and monetization and opportunity there? Just kind of given that you have a lot of other players also getting into the space, including some larger Microsoft, Zoom, Cisco, right, coming out with features on this, not to mention some standalone point solutions. So, maybe help us understand, is this going to be more analogous to your strategy with Box Sign, is there a different monetization strategy? And then I have got a follow-up.

Yes, sure. So, I think the way that we sort of think about it. I mean we are very, very cognizant of the broader competitive landscape and understanding kind of where our products fit relative to different players. That being said, we sort of think about a slight inverted way of the market, which is – we are trying to build an end-to-end Content Cloud. We ask ourselves, what do enterprises want to do with their content? We do a tremendous amount of market research to figure out what enterprises are looking to do in terms of collaboration, workflow and business processes, and e-signature. As we think about that, our job is to then build more and more value when a customer has elected to use our Content Cloud. We already have a product called Box Notes, which is sort of more of a linear document for project management and note-taking and meetings. That’s all part of knowledge management for the enterprise within Box Notes. Box Canvas is a very obvious second act within this part of the strategy because it’s more of the visual collaboration that you also want to be able to do. So, it’s brainstorming, visual content for design meetings or diagrams for business processes and workflows. It has the same horizontal applicability as Notes but more for visual content use cases. For us, it was straightforward to say, okay, this is going to be a native capability on the platform. It’s going to be available to all of our users and customers. We are not trying to specifically monetize Canvas. What we are trying to do is add more value for every seat that a customer has on Box. We know from our experience with many other product areas that leads to more adoption, more usage, and then more upsell into the higher-tier plans. When you think about our differentiation around security and governance and compliance, all of that comes when you are doing virtual whiteboarding and collaboration. So, we don’t really think about it as needing to compete with any particular player as much as adding more value for our customers, partly because we are not charging for it separately. It’s just more value when doing more of your work within the Box platform. So, does that answer the question?

Yes, absolutely, that’s super helpful. And then just as a follow-up, I wanted to ask you about stock compensation. Stock comp is still relatively high at about 20% of revenue. I know there are puts and takes on that metric. But just maybe philosophically, how are you thinking about stock comp going forward and the mix of options, RSUs versus cash? I know your stock has held up significantly better than most of your SaaS peers. You are in a very enviable situation from that standpoint. But maybe just help us philosophically how we should be thinking about SBC and the mix going forward. Thank you.

Sure. I would say that we do expect stock-based compensation to trend down as a percentage of revenue pretty steadily in the coming years. The leading indicator of that is the equity burn rate, which did come down even over the past year by a little more than a percentage point. While the philosophy of cash versus equity is pretty consistent with what we have done in the past, I would say that the overall needed hiring growth and our focus on scaling in lower-cost locations are some drivers of what allows us to show that leverage. At the same time, as we have talked about in the past, we are very focused on returning capital to our shareholders through our ongoing share repurchase plans, which allow us to largely offset any dilution from equity compensation.

Yes. I think just to build on that, this is something we take incredibly seriously. You will see us be very strong on – especially relative to the software landscape. We are super happy about our focus on this.

Really helpful. Thank you so much, guys.

There are no further questions at this time. Ms. Cynthia Hiponia, I will turn the call back over to you.

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

This concludes today’s conference call. Thank you for attending. You may now disconnect.