Box Inc (BOX) Q2 2024 Earnings Call Transcript

Good afternoon. My name is Emma, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to the Box team.

Good afternoon, and welcome to Box's Second Quarter Fiscal Year '24 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 also be available for replay on our IR website at box.com/investors. Our webcast will be audio. 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 handle at Box Inc. IR. On this call, we will be making forward-looking statements, including our third quarter and full-year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 2024 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance applications, revenue and billings and the impact of foreign currency exchange rates and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies; our ability to achieve our 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 timing of our public cloud migration efforts, our ability to address enterprise challenges and deliver cost savings for our customers, and 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 and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on the 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 today as of August 29, 2023, 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 hand the call over to Aaron.

Thank you, Cynthia, and thanks, everyone, for joining us today. In Q2, we delivered revenue growth of 6% year-over-year or 9% in constant currency. Our 25% operating margins were up 310 basis points from a year ago, reflecting our operational discipline and a continued challenging macro environment. Over the last few months, I have spoken with customers across nearly every sized business, geography, and industry. While customers are still facing various macro pressures that impact IT spend and see growth in the near term, Box is still being prioritized in the areas where our unique value proposition is aligned with the IT decisions they are making in the near and long term around digital imperatives and the role of AI. In my conversations with CIOs, it's clear that they're looking to advance their digital strategies to help drive growth in their business, improve productivity across their organization, leverage integrated platforms that can provide them more value, and keep their enterprises secure from threats. At the same time, they have more content than ever before and are looking to leverage AI to accelerate their business processes and how they work. The Box Content Cloud is in a unique position to enable enterprises to drive productivity across the business, simplify IT environments, and protect an enterprise's most important data. With our platform-neutral approach to AI, we're bringing the full range of large language models to enable customers to transform how they work with their data in the cloud. Recent customer wins in Q2 that validate our strategy include a federal institutional system that purchased Box with a six-figure deal to enable the organization to move to the cloud for secure document collaboration and workflow. With Box, they will be able to conduct necessary audits and exams of other government agencies by collaborating effectively and seamlessly internally as well as with external parties while also securely managing documents in a single platform, an international offer that expanded its use of Box with a seven-figure upsell as the company adopts Box enterprise-wide as its single content layer, eliminating storage costs from other platforms, removing costs from legacy file servers as well as e-signature solution costs by moving to Box Sign, and a large global video game and digital entertainment company, who has been a Box customer for more than 10 years, expanded its use of Box with a six-figure upsell to Enterprise Plus for access to Box's Shield capabilities. In Q2, we delivered meaningful updates to our platform to help customers drive their productivity and automate workflows, secure their most important content, and integrate Box into more of their IT stack. To advance Box's security and compliance capabilities, we introduced a new retention policy integration for Box Shield classifications, added zero trust 2.0 enhancements for admins and Box Governance reporting enhancements as well. To streamline workflows and productivity, we delivered new advanced signature request management in Box Sign, continued rolling out Box Canvas to all customers, and launched new enhancements to our end-user app. Across our platform, in Q2, we released updates to Box Sign for Salesforce, Box for Slack, Box for Salesforce, and Box for NetSuite. Finally, we launched additional enhancements to Box for Microsoft 365 integrations, including new enhancements to Box for Teams and Box for Microsoft Office on the desktop. Consistent with our platform-neutral approach to AI innovation, in July, we announced Box AI for Microsoft 365 CoPilot, a new plug-in for Microsoft's next-generation AI workplace tool. The plug-in will enable our joint customers to use Microsoft 365 CoPilot to make Box files inside of an organization more useful and valuable than ever. Now looking forward, we continue to drive substantial innovation for our customers to deliver the best way for them to manage their full life cycle of content in the cloud. In security and governance, we're advancing Box Shield to help customers stay protected against their most daunting threats around losing sensitive data. We are expanding our governance capabilities to help customers with their content life cycle management and we're making continued progress on delivering the most compliant content platform. On the productivity front, we'll be adding important feature updates to make collaborating with Box Canvas and Box Notes more powerful and enhance Box Sign and relay capabilities to automate our customers' most important workflows. In our platform, we're advancing our integrations with leading external platforms and delivering enhanced experiences and reporting for developers building on Box. With Box AI, we're bringing intelligence to enterprise content. We've seen an incredible response to Box AI in the first couple of months since our announcement. We know that AI is going to transform how enterprises work with their data and organizations are going to need a secure way to connect their most important data to leading AI models. With Box AI, we're building the leading platform-neutral approach to connecting enterprise content to AI, starting with OpenAI's leading large language models. In our early customer conversations, including in our design partner program, we are hearing valuable feedback on use cases from customers that are looking to automatically extract metadata from their documents to drive workflows, ask questions of large sets of documents to find things no human would be able to answer, or intelligently protect their content with more advanced data classification. This is just the start of what's possible. Our customers are excited about the new possibilities for productivity and insight they will gain from using Box AI with their content. We'll be sharing even more news at BoxWorks around how we're advancing Box AI and bringing it into the hands of even more customers. At BoxWorks this October, we're excited to share updates from across the entire product platform to our customers and lay out our vision for the future of work with AI. This year's BoxWorks is set to be our best one yet. We have just announced headliners like Sam Altman, the CEO of OpenAI, Dustin Moskovitz, the CEO of Asana, and Liliane Jones, the CEO of Slack, all discussing the future of work and AI. Further, we will also be hosting our first in-person CIO works post-pandemic in Palo Alto on October 24, where we will host our top customers with some of the key leaders in AI and technology. Finally, I'd like to note a critical milestone that in Q3 we will be fully running our production environment in the cloud. This has been a major multiyear effort to move our infrastructure from our data centers to the cloud to gain better performance scalability and gross margins. Dylan will discuss the impact on our gross margins more fully in his comments. Given the complexity of this migration, I'm incredibly proud of our execution on this critical initiative. Now turning to go-to-market. Our sales force and go-to-market programs delivered continued results in the quarter, including healthy new logo growth as well as key customer expansions. We also continued to see the successful adoption of Enterprise Plus, our multiproduct suite offering that brings the full value of the Box Content Cloud to our customers. In Q2, Enterprise Plus was well over 90% of suite sales in large deals and suites comprised over 78% of deals over $100,000. Notably, in Q2, we achieved record suite attach rates in large deals in Japan. Earlier this month, I spent time in Japan speaking with our largest customers, and those conversations reinforced the continued upside we have in this market. We have never been more excited about the opportunity available to us. Our Q2 Enterprise Plus customer expansions and wins include one of Japan's largest institutional investors who expanded its use of Box with the purchase of Enterprise Plus to enable secure content sharing and collaboration with external parties for the entire organization. They also plan to integrate Box with their existing tech stack, including Microsoft 365 and ServiceNow and one of the leading hospitals in the United States, who has been a Box customer since 2013 signed an Enterprise Plus upsell to get access to additional resources needed to support the growth and expansion of the hospital and school of medicine. They'll be leveraging Shield to protect the sensitive content that they have stored today, which includes research content, and they plan to integrate Box into their Microsoft applications to help with consolidation efforts. Overall, we're focused on expanding our go-to-market programs and leveraging our land and expand motion to drive the progression of our customers into higher-tier product plans and enabling them to leverage the full breadth of the Box platform. We remain focused on building a healthy pipeline across the business. This year, we have doubled down in our field marketing programs, digital marketing engines, system integrators and distribution partners, vertical sales efforts in key markets like life sciences, financial services, the public sector, and much more. Before I turn it over to Dylan, I'd like to briefly comment on the current business climate we're seeing. It's clear that the macro environment has resulted in lower seat growth than anticipated. Despite this, our best-in-class full churn rate remains at 3% as enterprises are prioritizing use cases to areas where the Box Content Cloud delivers the most value in delivering secure content management, workflow, and collaboration. I'm confident that with the strongest product portfolio and roadmap we've ever had, a world-class go-to-market team, and a healthy customer base of well over 110,000 customers, we have set the stage for future accelerating revenue growth as economic conditions improve. We remain relentlessly focused on operational excellence, allowing us to deliver year-over-year gross margin and operating margin expansion in FY '24. The opportunity in front of us is massive. We're going after a more than $74 billion market with the leading content cloud platform to power the full life cycle of content in the enterprise. In a joint report we recently released with IDC. IDC found that 90% of the company's data is in unstructured information, and that number is growing by 28% to over 73,000 exabytes in 2023. With Box AI, we will transform our customers' ability to gain productivity and insight from their data. The need to manage, secure, automate, collaborate, and bring intelligence to this information is more important than ever before, and Box is uniquely positioned to help enterprises solve these challenges and transform how they work. With that, I'll hand it over to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In Q2, our balanced business model allowed us to invest in profitable growth while continuing to optimize our underlying cost structure. Revenue landed in line with our guidance, and we delivered operating margin and EPS above our guidance despite a challenging macroeconomic environment. We are also pleased to have delivered innovation across our product portfolio, generated significant operating leverage, and continued our prudent return of capital to our shareholders. In Q2, we generated revenue of $261 million, up 6% year-over-year and representing 9% year-over-year growth on a constant currency basis. We now have nearly 1,700 total customers paying us more than $100,000 annually, an increase of 11% year-over-year. Our suites attach rate of 78% in large Q2 deals, a notable improvement from 72% in the year-ago period demonstrates the value that our Content Cloud platform is delivering to our large customers. Suite customers now account for 48% of our revenue, up 20% from 40% of revenue a year ago after introducing suites just 4 years ago. Our suites value proposition continues to resonate with our customers in this dynamic environment, enabling them to transform, simplify, and secure their IT environments. We ended Q2 with remaining performance obligations, or RPO, of $1.1 billion, an 8% year-over-year increase or 11% growth on a constant currency basis. We expect to recognize roughly 60% of our RPO over the next 12 months. Q2 billings of $233 million were down 1% year-over-year and up 1% on a constant currency basis. As anticipated, our Q2 billings result was impacted by a particularly high volume of early renewals in Q1. Q2 billings were also impacted by incremental FX headwinds from the U.S. dollar to Japanese yen exchange rate of approximately $2 million or 100 basis points. Our net retention rate at the end of Q2 was 103%, slightly lower than our expectations. This was driven by heightened budget scrutiny putting pressure on seat expansion within existing customers. However, in Q2, we continued to achieve year-over-year price per seat improvements driven by customers continuing to convert to Enterprise Plus. Additionally, our annualized full churn rate remains strong and stable at 3% demonstrating Box's overall stickiness and criticality in our customers' IT environments. We expect both our full churn rate and our net retention rate to remain roughly flat with our Q2 results throughout the back half of this year. As seat growth returns to more normalized levels, and as we continue driving pricing improvements, we're confident that our best-in-class full churn rate and expanding our suite of innovative products will enable a higher net retention rate over time. Gross margin came in at 76.9% in Q2, up 70 basis points from 76.2% a year ago and above our guidance of 76%. As Aaron mentioned earlier, our public cloud migration strategy is a critical driver of gross margin expansion. We began this complex undertaking several years ago, and we expect to be running fully in the public cloud by the end of Q3. As our data center expenses wind down and we continue optimizing our public cloud architecture, we're confident in our ability to continue expanding gross margin in the back half of FY '24 and beyond. Q2 gross profit of $201 million was up 7% year-over-year, exceeding our revenue growth rate by 100 basis points. We once again delivered leverage across the entire business in Q2 with our ongoing efforts around infrastructure optimizations, low-cost location strategy, and overall cost discipline all paying off. This resulted in a 21% increase in operating income in Q2 to $65 million. Our 24.8% operating margin was up 310 basis points from the 21.7% we delivered a year ago and 80 basis points ahead of our guidance. As a result, we delivered diluted non-GAAP EPS of $0.36 in Q2, up 29% from $0.28 a year ago and $0.01 above the high end of our guidance. On a constant currency basis, our underlying profitability improvements are even stronger as Q2 EPS includes a negative $0.04 impact from FX. Importantly, Q2 marked our fourth consecutive quarter of achieving GAAP profitability. I'll now turn to our cash flow and balance sheet. In Q2, we generated free cash flow of $21 million, a 15% increase from $18 million in the year-ago period. We delivered cash flow from operations of $33 million, a 15% increase from $28 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were $9 million, up slightly from $8 million in Q2 of last year. As our public cloud migration will be fully completed by the end of this quarter, we expect capital lease payments to wind down over the next few quarters. Let's now turn to our capital allocation strategy. We ended the quarter with $446 million in cash, cash equivalents, restricted cash, and short-term investments. In Q2, we repurchased 2.2 million shares for approximately $62 million. As of July 31, 2023, we had approximately $35 million of remaining buyback capacity under our current share repurchase plan. Our Board of Directors recently authorized an additional $100 million common stock repurchase plan. With that, I would like to turn to our guidance for Q3 and fiscal 2024. As a reminder, approximately one-third of our revenue is generated outside of the U.S., primarily in Japanese yen. The following guidance includes the expected impacts of FX headwinds, assuming current exchange rates. For the third quarter of fiscal 2024, we anticipate revenue in the range of $261 million to $263 million representing 5% year-over-year growth at the high end of this range or 7% in constant currency. We expect our Q3 billings to be roughly flat year-over-year, which includes an expected 200 basis point benefit from FX and accounts for the continued pressure on seat growth that we anticipate due to the macroeconomic environment. I would note that in Q3 of last year, we delivered a billings growth rate of 20% in constant currency, driven by unusually strong payment durations, including one large multiyear customer prepayment. This creates a particularly difficult year-over-year comparison, and normalizing for payment durations and FX, our expected Q3 billings growth would be roughly 3%. Q4 of last year had more normal payment durations, and we expect our reported Q4 billings growth to be in the mid-single-digit range. We expect our Q3 RPO growth to be higher than our anticipated Q3 revenue growth rate. We expect our Q3 gross margin to be roughly 77%. As data center expenses and capital lease payments trend down, we expect our Q4 gross margin to be roughly 79%. We expect our Q3 non-GAAP operating margin to increase to approximately 25.5%, representing a 150 basis point improvement year-over-year. We expect our Q3 non-GAAP EPS to be in the range of $0.37 to $0.38, representing a 23% year-over-year increase at the high end of this range and GAAP EPS in the range of $0.03 to $0.04. Weighted average diluted shares are expected to be approximately $149 million, slightly lower than Q2. Our Q3 GAAP and non-GAAP EPS guidance includes an expected year-over-year headwind from FX of approximately $0.04. For the full fiscal year ending January 31, 2024, we now expect FY '24 revenue in the range of $1.04 billion to $1.044 billion, representing 5% year-over-year growth or 8% on a constant currency basis. This revised range reflects the impact of the challenging macroeconomic environment, which also results in lower professional services revenue versus our prior expectations. We expect FX to have a negative impact of roughly 300 basis points on our FY '24 revenue growth rate. For the full-year of FY '24, we now anticipate currency headwinds to impact our billings growth rate by approximately 200 basis points. We expect our FY '24 billings growth rate to be roughly 4% on an as-reported basis. We still expect our FY '24 gross margin to be roughly 77.5%, up from 76.9% in FY '23. We are also reiterating our FY '24 non-GAAP operating margin guidance of approximately 25.5%, representing a strong 240 basis point improvement from last year's results of 23.1%. We are raising the low-end of our FY '24 non-GAAP EPS expectations to be in the range of $1.46 to $1.50, representing a 25% increase at the high end of the range versus $1.20 in the prior year and we expect FY '24 GAAP EPS to be in the range of $0.17 to $0.21. Weighted average diluted shares are expected to be approximately $150 million. Our FY '24 GAAP and non-GAAP EPS guidance includes an expected full-year negative impact from FX of approximately $0.17. Due to the FX headwinds we've experienced throughout this year, our revised FY ‘24 revenue growth outlook and the impact of billings on free cash flow, we are revising our revenue growth plus free cash flow margin target for FY ‘24 to be in the low-30s on an as-reported basis, which includes a roughly 400 basis point headwind from FX. We will continue to maintain a rigorous approach to cost savings while investing in long-term growth and navigating the near-term impacts of this difficult macroeconomic environment. We remain committed to delivering against the long-term financial targets that we outlined at our most recent Analyst Day. We are reiterating our revenue growth target of 10% to 15%, our gross margin target of 80% to 82%, our operating margin target of 32% to 35%, and our revenue growth plus free cash flow margin target of at least 45%. Despite the challenging macroeconomic environment, this year, we continue to deliver against the core initiatives to achieve these long-term financial targets. We are making significant enhancements to our innovative product offerings, expanding both operating margin and free cash flow margin, and are consistently returning capital to our shareholders. As we capitalize on these initiatives and as the macroeconomic environment improves, we are well positioned to create significant long-term shareholder value. With that, Aaron and I will be happy to take your questions.

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

Hi, thanks for taking the questions. So Aaron, I just wanted to double down on the cost savings component. I know that's come up in the past as a value proposition to the platform. As customers may not be looking to expand seats as quickly, are they delaying cost savings for themselves? Or is there a functionality dynamic there? I just maybe love to understand a little bit on the cost side and if that has any correlation to what you guys are seeing on the seat side. So is that the equation?

Yes. So that message is still resonating and it doesn't always lead to an upsell only, because it might be that the customer already has licenses for the capabilities that would drive cost savings. So if you think about a customer that has Enterprise Plus as an example, they have access to Box Sign, Box Shield, Box Governance, and certain platform utilization abilities. When we talk about cost savings, that platform approach allows customers to potentially retire up to half a dozen or a dozen other systems depending on the environment. But they might already be fully licensed for that within the Enterprise Plus plan that they have. That message and that momentum are alive and well, and almost every customer I'm talking to is retiring something beyond just the core legacy storage infrastructure. They're looking at Box Sign for e-signature needs. They're looking at Box Canvas for their white boarding solution. So that's going great. You still need that additional seat dynamic to really drive the net retention rate historically. That's the part that's more muted, but overall, momentum around data security and cost consolidation by leveraging the full breadth of the Box platform, along with AI, have provided good counterbalances to some of the macro headwinds that we've seen.

Yes. Just to put a finer point on that, that's why even in this challenging and heavily scrutinized IT budget environment, we are still seeing healthy adoption of our suites and Enterprise Plus offerings as that value proposition really resonates, showing continued momentum in bringing in these capabilities that help realize cost savings even for customers who aren’t on Enterprise Plus but really it is the seat growth that has been more impacted. In many cases, you don't necessarily need to expand the number of seats to capture those cost consolidation opportunities.

Got it. That makes sense. And Dylan, maybe a follow-up for you. Just understanding the second half outlook. I know you mentioned some changing dynamics on the seat expansion side. I'd love to understand qualitatively, what did you change for the second-half outlook in the new guidance versus the old guidance? Thanks guys.

Sure. At a high level, I would say that this guidance takes into account certainly the Q2 results and the continued macroeconomic challenges, including all the dynamics that go into the net retention rate and the pressure on seat count. Our customers are still dealing with macroeconomic challenges and scrutinizing IT spend. As we mentioned, we are encouraged by the stabilization that we're now seeing in the demand environment and we're also starting to see pipeline building at healthier levels than earlier in the year, but that typically takes several quarters to close given our enterprise sales cycles. Big picture, it's primarily driven by the actual and expected business performance due to macroeconomic impacts we've seen year-to-date, which also includes a little bit of a reduction in our professional services Box consulting expectations as we noted.

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

Great. Thank you for the question. I wanted to dig in a little bit more on the lower seat growth. Just wondering if it's widespread, if it's across both SMB and enterprise, anything to note on geographies? And then I have a follow-up.

Yes. I think as we noted in the last call, while the general macro headwind does affect companies across a range of sizes and geographies, I think there's incremental pronounced impact in some of the smaller business customers and some of the international non-Japan segments where we haven't necessarily had as strong of an engine in the past. That's probably where we see a bit of incremental headwind relative to other areas, but it continues to be quite similar to the call we had in the last quarter.

Great. Thanks, Aaron. And then I was hoping you could sort of walk through month-to-month on linearity from May to June to July and then into August. Just wondering how the seat contraction dynamic has trended month-to-month? Thank you.

Sure. I would say that in terms of the overall seasonality, I didn't see anything too different from what we typically see in a quarter. We do see kind of back-end loaded bookings, but that's pretty standard for us in pretty much any environment. As mentioned, we're expecting to see more of the same based on how the current quarter is shaping up and as noted, we are seeing stabilization in that demand environment. So that linearity has been fairly consistent.

Your next question comes from the line of Chad Bennett with Craig-Hallum. Your line is open.

Great. Thinking about the conditions and headwinds you're seeing right now, both macro and otherwise, and it seems like rightfully so, you kind of assume the conditions will persist in the second half of the year and net retention and churn will remain relatively consistent. As we head into next year, and I know you talked about the free cash flow revenue growth formula kind of even in the low-30s. If the macro persists and seat headwinds persist, is there a plan or potentially an alternative to accelerate operating margin leverage more? I don't know if that's in cost actions or if you’re seeing some gross margin improvement with the move to the cloud here. Any commentary there?

Yes. I mean what I would say is certainly the way that we ultimately set the plan will only evolve as we get closer to the new year. This is very much dependent on the demand signals we're seeing in the environment and our confidence in our ability to drive growth; that most notably impacts our overall sales and marketing levels of investment. That's what I would describe as the biggest variable in the model, and that could create some additional operating margin expansion if we choose to take a more prudent approach to those investments. The big area I would call out for accelerated margin expansion is on the gross margin line, especially because we will more fully realize the benefits of the public cloud migration that we're wrapping up this year.

Yes. And I'll just build on that. While we do see headwinds from a macro standpoint, as Dylan called out, healthy pipeline build, the customer conversations we're having would definitely lead us to keep driving the top-line growth side. As we think about these toggles, whether it's our product roadmap, the strength of our suite offering, or the momentum we're seeing as a result of the AI conversations that are early, we are focused on ensuring we maintain a healthy level of driving demand.

Okay. Just a quick follow-up. We've seen many transitions or cross-sell upsell to Enterprise Plus, which is now close to half of our revenue and has shown significant year-over-year improvement. I'm trying to understand if we think this could reach double-digit growth again. I'm not sure if there's another Enterprise Plus equivalent or any further pricing uplift available, as it seems we have already monetized much of that. Moving forward, it appears that growth acceleration will largely rely on seat growth. Is that an accurate summary?

I think what we've called out is as we think about the maturity of the Enterprise Plus kind of tailwind coming to a head and we're still seeing healthy growth year-on-year, as we've called out on customers matriculating to that plan. As we see that stabilize at a certain kind of rate, and our product portfolio expands, we've called out that I would anticipate additional higher-tier plans in the future. We haven't exactly discussed timing as some of that relates to our product roadmap of unannounced products, but we're thoughtful about timing that with a point where we have a strong new or multiple new offerings that we can bundle for customers. That will, I believe, be another driver of price per seat growth. That and obviously, seat count growth become additional levers. Our platform API consumption is also another growth driver. We're extremely confident and feel very bullish on the growth drivers we have between seats, platform consumption, price per seat, vertical expansion efforts, and various go-to-market engine optimization.

Appreciate the color. Thank you.

Yes. Thanks.

Your next question comes from the line of Jason Ader with William Blair. Your line is open.

Thank you. Good afternoon, everyone. I wanted to clarify some of your comments about the macroeconomic situation. Can we examine how it has changed since the end of last year? Do you think it has improved in terms of demand signals over the past eight months? You mentioned good traction with some large customers and interest in AI. Could you summarize whether you believe the demand environment has truly improved, or is it still subdued?

Yes. I think at a more qualitative level, and this is supported by our deal trends, when I look at our big customer wins, the verticals, and expansion, I think we saw the added and increased pressure go from last year's Q3 and Q4 coming into the year. That was sort of the ramp-up as we headed into this year where the macro started to flow into the business. I think we're at a more stabilization period of that. Now we are lapping the year of that initial impact. We see multiple metrics starting to improve as a result of that. The nature of the SaaS model, and just the fact that you have a seat dynamic of the business, sometimes can have a macro trend that is offset a little by where it shows up in the numbers. I think we are at a point where, when I look at the pipeline and the conversations we're having with customers, every single industry is represented across our 1,000-plus wins, including financial services, health care, technology; it's really across the board. So I think there are a bunch of positives in the data but quite muted because that seat count growth, which is core to our engine, has been more muted due to the macro.

Yes. Just to build on that a bit, I would say to clarify that over the earlier part of the year, so if you're saying comparing when we enter the year to what we've seen, I would certainly call out and have called out that there have been some incremental headwinds and impacts related to the macroeconomic environment, but again, optimistic that we're seeing stabilization now and everything we have talked about is true around the AI excitement, and the pipeline we are starting to see build at healthier levels. That's not going to show up in this year's top-line outlook just because of the timing, and with AI for example, we're not monetizing that as of yet. So that's more of a next year type impact.

Okay. So fair to say that things kind of have dipped a little bit since the beginning of the year, but now instead of continuing to dip, they seem to be stabilizing.

That's exactly right.

Okay. All right. And then on AI, Aaron, just from a monetization standpoint, is it right to think there's sort of two main methods for you to monetize? One is kind of a seat price uplift where you add this AI functionality where people can ask questions of their Box content, and then secondly would be kind of API consumption where some external app wants to leverage the Box content cloud for some external app, and they use an API to talk to the Box content. Is that correct?

Yes. That's the right way to think about it philosophically. On the former part of the pricing component, I'll just note that we haven't announced yet what that will look like and where that may or may not be included. Those dynamics of a per-seat component of Box AI will have some set of functionality, and then there's a platform component of Box AI that will be more consumption-driven. Those are the right ways to think about how the product will manifest from a pricing packaging standpoint.

And have you given any specific timing or any kind of general timing around when any of these things will be material or start to contribute to revenue?

Yes. We haven't given that timing only because I think even as we look at the rest of the market and where other enterprise software platforms are, I think generally, this is the year where a lot of the technology is getting built. Customers are starting to think about how they're going to incorporate this into their workflows and organizations while also getting expanded budget from an IT standpoint. I think as Dylan just called out, this will be more of an element for next year's plan. Right now, it's certainly a driver of the vast majority of CIO conversations we're having because everybody is really figuring out what their AI strategy is going to look like, and as a platform that houses a significant portion of their data, you can imagine customers are coming to us excitedly wanting to work out what different use cases they can solve with Box AI.

Your next question comes from the line of Pinjalim Bora with JPMorgan. Your line is open.

Oh, great. Thanks for taking the question. Aaron, I wanted to ask on the macro headwinds that you're seeing. In your conversations, do you feel it's part of a reassessment of budgets by companies to fund their own AI projects? Is that coming up in conversations at all?

We haven't seen that impact any of the near medium-term deals that we look at in the pipeline only because we tend to have very direct use cases that a customer is expanding for. General AI budgets would be a bit orthogonal to that. I could see that showing up maybe against somebody's infrastructure budget or some of the platform services they use. But for the content management, collaboration and workflow dollars that we tend to be getting, I haven't seen that happen. That's not to say it's impossible, but that has not shown up in my view.

So you don't think there's a portion that's going to Microsoft CoPilot that is not going to Box at this point or something like that?

Oh, sorry, if it's more directly in that sense, then I would say definitely not, just because those products are simply too new and still orthogonal in terms of the use cases that we're solving. We just announced our integration with CoPilot. You'll see a lot of strong interoperability there. Our customer conversations on this subject are very much focused on how they can leverage Box AI either through the end-user interface or the platform component to help with business processes across a range of industries. I don't think we're competing for budget in those other domains right now.

Got it. And Dylan, one question on the reduction in the constant currency growth rate from, I think, 10% to 8%. How much of that 2 point delta do you say is driven by professional services?

It's a minority able to size it. It's kind of more than $1 million, but the bulk of it is on the recurring side.

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

Hi, it’s George Iwanyc. Aaron, can you provide insights into the competitive environment? Are you observing any positive developments regarding consolidation and pricing on a like-for-like basis? Are you maintaining or experiencing any increases?

Yes. When I look at, again, kind of top deals and customers over $100,000, there's a lot in there that are consolidation of other vendors and legacy systems where Box is increasingly becoming the common standard of that organization. We're seeing a number of deals where Box Sign is a core component, and customers can save money on maybe an e-signature vendor. We're seeing this with Canvas and whiteboard technology. That's folding more into Box. We're definitely happy to see those trends. On the pricing side, we are seeing pricing improvements in the quarter and have over the past year. That's helpful to offset some of the seat dynamic, and as we move more customers to Enterprise Plus, I believe we'll continue to see that. Future product plans would obviously have that same dynamic as well.

Yes. Can you give us some sense of how you're looking at hiring? I know you're continuing to be very mindful with your Opex. But are you looking at still adding to both the sales and the R&D headcount at this point?

We are. We're continuing to focus on moderating growth, especially on the R&D side in scaling in Poland and hiring everywhere, but that is the emphasis in terms of numbers. On the AE front, we are on track and still expect to achieve that initial target of quota-carrying AE growth in the mid-single-digit percentage range.

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

Thanks. This is Rich Poland on for Rishi. Thanks for taking my question. Aaron, you mentioned a little bit about doubling down on key verticals and geographies for the go-to-market side. If we were to peel that back a little, are there any particular areas where you feel that you're currently underpenetrated and you see some low-hanging fruit to go after or anything around that?

Yes. We do especially well in areas that have the greatest amount of security, compliance, and data privacy concerns within the customer base. Large global multinational corporations, manufacturers, financial services, and life sciences all fit that bill. We did a major seven-figure deal at a major law firm. Anywhere where customers have highly sensitive data that they need to collaborate on in and outside their enterprise, they often have a layer of compliance requirements. Those are the areas where we do really well. In every market, there's massive untapped upside. That leads to significant opportunity in the public sector. We're seeing healthy traction in state and local. There's a lot of upside on the federal side as well as life sciences, healthcare, and financial services.

Got it. That's very helpful. And just a follow-up: I know the seats aspect seems to be seeing a bit more pressure. But if we look at the suites contribution to total revenue and the $100,000 deals, it seems like there's a bit of broad-based pressure as well. Are there any particular aspects of suites that are harder to sell in this environment or anything you'd call out there?

I wouldn’t call it suites in that sense. The suite has actually been a major driver of our sales motion because customers get even more value when they purchase from Box. Overall, it's one of our primary differentiators.

Yes. Also to clarify, can you talk about some of the other impacts, like large deal growth that is not separate from, but directly related to seat growth? We have customers who are not expanding at typical rates, especially existing customers; those two are correlated. That’s not a separate dynamic but largely a function of the seat growth dynamics.

Your next question comes from the line of Steve Enders with Citi. Your line is open.

Okay, great. Thanks for taking the question. I guess I want to ask a bit more on the AI angle. As you're talking to customers a lot and share some things, how do you view the right to win within some of those use cases you're going after? How are customers thinking about their own AI investments at this point in utilizing Box versus other players out there that are also working on AI?

Yes. This will be a surprise to anyone on this call, but we almost have to assume if you're an enterprise software, you're also in AI. At this point, think about AI as pervasive as mobile or cloud. It’s a platform architecture that will exist in all technology. There's a heat map of the sensitivity around what kind of data and workflows does the enterprise software company have and how much does AI relate to that data and workflow. Large language models do really powerful things to large amounts of text, and we house tens of billions of files that are very ripe for AI helping customers understand within that content, automate workflows around it, and extract metadata from those documents. Our right to win is strong in anything that's content-related from an AI use case standpoint, as we already manage that content and often orchestrate the workflows around that content. It makes us the natural place to plug in AI models.

Helpful hopeful context there. I do want to ask about some of the investments. It sounds like you're making in go-to-market with the expanded marketing initiatives, vertical focus, and the partner side. Is there some signal you're seeing that leads to those incremental investments? How are you viewing the efficacy of those expanded initiatives at this time?

Yes. The macro color has come down to daily conversations that we have with customers. Six or nine months ago, customers planning their budgets and cycles may not have had many strategic initiatives due to uncertainty about the macro environment. In the past six months, we've seen some degree of stabilization with capital and macro trends like inflation and interest rates. The customer conversations we're having now enable them to be more long-term oriented, discussing their IT strategies for the next year. This indicates that we can put more emphasis on ensuring we're present in every major city with field events and drive the right digital marketing campaigns. It's been a steady ramp-up throughout the year. We're planning on having the biggest digital BoxWorks yet. We're bringing back Box's CIO conference in-person this October. We see enough signal in our conversations to warrant driving the right level of demand and pipeline.

Great. Thank you, everyone. As Aaron mentioned, we are holding BoxWorks on October 11, and we'll be hosting a virtual investor product briefing at 1:00 p.m. Pacific time. We'll be sending out more details shortly. Again, thank you, everyone, for joining us today.

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