Earnings Call Transcript - BOX Q2 2025

Operator, Operator

Good afternoon, everyone, and thank you for being here. My name is Abby, and I will be your conference operator today. I am pleased to welcome you to the Box, Incorporated Second Quarter Fiscal 2025 Earnings Conference Call. Thank you, and now I will hand over the conference to Cynthia Hiponia, Vice President of Investor Relations. You may proceed.

Cynthia Hiponia, Vice President of Investor Relations

Good afternoon, and welcome to Box's second quarter fiscal 2025 earnings conference call. I'm Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO; and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will be available for replay on our Investor Relations website at boxinvestorrelations.com. Our webcast will be audio only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on the X platform at the handle, @boxirinc. On this call, we'll be making forward-looking statements, including our third quarter and full year fiscal 2025 financial guidance and our expectations regarding our financial performance for fiscal 2025 and future periods, including our gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings, and the impact of foreign currency exchange rates and deferred tax expenses; and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies; our ability to achieve our revenue, operating margins and other operating model targets; the timing and market adoption of and benefits from our new products, pricing models and partnerships; the proceeds from the sale of our data center equipment; our ability to address enterprise challenges and deliver cost savings for our customers; the impact of the macro environment on our business and operating results; and our capital allocation strategies, including potential repurchase of our common stock. These statements may reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today, August 27, 2024, and we disclaim any obligation to update or revise them should they change or cease to be up to date. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our earnings press release and in the related supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me turn the call over to Aaron.

Aaron Levie, Co-Founder and CEO

Thank you, Cynthia, and thanks, everyone, for joining us today. We delivered a strong second quarter with operating results at the high end or above our guidance. This includes revenue growth of 3% year-over-year or 6% in constant currency, and record gross margin of 81.6%. Our focus on operational discipline drove operating margin of 28.4%, up 360 basis points from a year ago, while our continued investments in growth are reflected in our Q2 accelerated billings growth of 10% year-over-year and RPO growth of 12% year-over-year. Our results show the continued success of building out the most powerful AI-enabled platform for secure content management, collaboration, workflow automation, and intelligence. In Q2, we saw customer demand for Box AI continue to grow, driving both upgrades and new logo wins in Enterprise Plus in order to gain access to Box AI. Customer examples in Q2 include a large U.S.-based law firm and a new Box customer that purchased Enterprise Plus in a six-figure deal. They plan to leverage Box Hubs and Box AI to create easily searchable repositories for their attorneys and other staff. They will also leverage Box Sign, replacing an existing e-signature vendor, to help Box serve as their attorney-client collaboration layer. A leading consumer convenience store in Japan upgraded to Enterprise Plus and expanded its use of Box company-wide to boost productivity by enabling all employees to use Box AI. They chose Box as their content platform to leverage AI and reinforce their security posture. These wins illustrate something I’ve observed in my conversations with customers—almost every enterprise is trying to figure out how to use AI to enable more productivity from their employees by automating more work, improving their data security, and delivering better experiences for their customers. And at the center of all of this is enterprise content. You've heard me talk about how 90% of an enterprise's data is unstructured, with most of that unstructured data being enterprise content. Historically, enterprises have not been able to truly realize value from this enterprise content due to years of investment in disparate technologies, where content is scattered across many repositories in the enterprise and across numerous applications that are not built for a modern way of working with AI. At Box, we are fundamentally transforming how companies leverage their enterprise content through Intelligent Content Management. Instead of enterprises investing in fragmented, legacy ECM technologies, workflow products, e-signature tools, and security solutions and attempting to bolt on AI on top of these systems, Box is delivering a singular platform that can power the end-to-end lifecycle of content with intelligence built right in. Building on our leadership in secure content management, collaboration, we are now extending our value into workflow automation and intelligence. With Box AI, we can change the equation and enable enterprises to fully leverage their content to gain insights and dramatically increase productivity. Instead of legacy ECM systems that cost a fortune and can only be used in relatively rigid ways, Intelligent Content Management from Box extends well beyond the use cases of traditional ECM systems by offering modern user experiences, integrating with every app, having security and compliance at the core, with enterprise-grade AI integrated, and being entirely in the cloud. Customers increasingly turn to Box to replace their legacy ECM solution and choose us as a more flexible, multi-tenant, lower-cost, and more powerful intelligent ECM solution. With Box on a single platform, customers will be able to power everything from secure collaboration externally with clients to internal use cases, including managing their most important digital assets in marketing or sales, automating workflows with contracts or financial documents, and ultimately, how they govern and protect their sensitive records over the long haul. We can now support vastly more use cases across the enterprise than traditional ECM and for customers of all sizes, representing a dramatic expansion of our market opportunity. This is similar to how Salesforce disrupted CRM or ServiceNow disrupted ITSM. In a strategic move to significantly enhance Box's Intelligent Content Management platform, we recently announced the acquisition of the AI-powered Intelligent Document Processing technology and team from Alphamoon. Alphamoon's technology combines leading large language models from OpenAI and others with proprietary image and document processing technology to intelligently structure documents at scale. Once natively integrated into Box, Alphamoon's technology will further enhance the capabilities of the Box AI platform to revolutionize IDP and tackle the long-standing challenges of metadata creation at scale, empowering our customers with unprecedented new automation capabilities. Once metadata is applied to content within Box, customers can more easily automate workflows such as contract management, digital asset management, invoice processing, client onboarding, and much more. Combined with the technology from our Crooze acquisition earlier this year, Box will significantly transform critical, content-centric business processes for enterprises of all sizes. Critical to our success in Intelligent Content Management is enabling our Box customers to be on the leading edge of innovation with enterprise-grade Box AI. In June, we announced that Enterprise Plus customers now have unlimited end-user queries for Box AI in notes, documents, and hubs, making it even easier for customers to roll out Box AI across their enterprise. Customers can now focus on leveraging AI to drive value without worrying about usage caps. In Q2, we also unveiled a new set of features in Box AI, which include access to GPT-4o for products such as Box Hubs, as well as support for new file types, including images and spreadsheets in Box AI. We expect these features to be available later this year and be included in Enterprise Plus plans. Box AI for Metadata is also available in our API in beta for customers on the Enterprise Plus plans. Developers can integrate Box AI with custom applications using new Box AI for Metadata API functionality to automatically extract key information from documents at scale. When combined with Box's workflow automation tools, customers can automate processes based on file metadata, extract key fields from unstructured content, and save information to external applications such as Salesforce. We also continue to make advancements across security and compliance. Over the last several months, we've launched Zero Trust 2.0 enhancements for admins and GxP validation sandbox management, and we are on track to meet FedRAMP High Compliance in the coming quarters to expand our use cases in the federal government. Finally, our flexible and interoperable platform is a major differentiator for Box. We are supporting deeper integrations with Salesforce, Microsoft Teams, Microsoft Copilot, IBM Technologies, ServiceNow, and our customers' custom-built applications. Just last month, we announced an expanded partnership with Slack that brings secure AI to enterprise content. Joint customers of Slack and Box can access unlimited Box AI queries directly in Slack, allowing users to ask critical questions and uncover timely insights from their Box files. Now turning to go to market. As I mentioned earlier, we continue to see strong adoption of Enterprise Plus, our multiproduct suite offering, with unlimited access to Box AI. In Q2, suites comprised 87% of our deals over $100,000, up from 78% a year ago. With Enterprise Plus comprising over 95% of those deals, we saw solid suite attach rates in large deals across verticals and all geographies, including record attach rates in Japan. Now with 57% of our revenue coming from suites compared to 48% a year ago, we still have a large opportunity to drive Enterprise Plus adoption. Our Q2 customer expansions and wins with Enterprise Plus include one of the largest marketing companies in the world, upgraded to Enterprise Plus with a six-figure upsell as the organization looks to leverage Box AI metadata and Box Hubs to create client-centric hubs with workflows to reduce the time for teams to come up to speed on new engagements with clients, partners, vendors, and securely collaborate across their ecosystem. A U.K.-based event, design, and production company purchased Enterprise Plus with a three-year enterprise license agreement with a key focus on replacing legacy ECM tools like SharePoint to enhance and streamline their collaboration efforts as they create engaging experiences for their clients. An organization that regulates and creates policies for the construction industry purchased Box with a six-figure deal to replace an antiquated on-prem ECM system. With Box as their modern and Intelligent Content Management solution, they expect to save costs associated with their on-prem solution, including hardware, storage, maintenance, upgrades, and support costs. The organization also plans to integrate Box with their contract permitting system and utilize Box AI with their contract team. As we power more advanced workflows in partnership with key system integrators, in Q2, we saw several wins with large customers across critical focus industries with the assistance of these strong SI partners, including the replacement of many legacy ECM systems. Looking ahead, our go-to-market engine will continue to drive Enterprise Plus expansion catalyzed by gaining access to Box AI. We have plans to expand our efforts with critical go-to-market partners, like system integrators, that can expand our penetration into key prospects and accounts and get Box embedded into more customer workflows, retiring legacy ECM systems. We are also thrilled to host BoxWorks, our flagship customer conference, this year on November 12 in San Francisco, which will also be live-streamed to tens of thousands of customers globally. At BoxWorks this year, we expect to unveil major new product enhancements and showcase major partnerships across the AI landscape and system integrator ecosystems. In conjunction with BoxWorks, we're hosting a virtual IR product briefing for investors to discuss these major updates. In the last few months, we are pleased to announce the appointment of exceptional leaders with decades of experience in enterprise software to our leadership team. This includes Samantha Wessels, who has joined us as President of Box EMEA. Samantha has led successful teams at high-performing SaaS and software companies, including Elastic and Snyk, and large system integrators in EMEA. Another new leader, Tricia Gellman, has joined us as our Chief Marketing Officer. Tricia brings over two decades of experience in driving growth and innovation for leading technology companies, including high-growth startups and industry giants like Salesforce and Adobe. These leaders will help us to drive our evolution as the leading Intelligent Content Management platform, delivering AI-powered collaboration, workflow automation, security, and intelligence. Overall, we are incredibly pleased with our strong performance and execution in Q2. Our acceleration in RPO growth will continue to drive momentum in the second half of this year and beyond.

Dylan Smith, Co-Founder and CFO

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. We are very pleased with our strong Q2, delivering accelerated billings growth as well as record gross margin, operating margin, and EPS. These record results demonstrate both our proven business model and early signs of success from the investments we're making in our Intelligent Content Management platform. Consistent with our key financial priorities, we're continuing to generate operating leverage and execute on our disciplined capital allocation strategy. In Q2, we delivered revenue of $270 million at the high end of our guidance, up 3% year-over-year and 6% in constant currency. We now have more than 1,800 total customers paying us at least $100,000 annually. Our Q2 suite attach rate in large deals was 87%, a new high watermark and up from 78% a year ago. Suite customers now account for 58% of our revenue, up significantly from 48% in Q2 of last year. We're seeing increasing demand for Box AI and our more advanced capabilities, which has been a key driver of our strong suites momentum. We ended Q2 with remaining performance obligations, or RPO, of $1.3 billion, a 12% year-over-year increase or 14% in constant currency. This represents a strong acceleration from last quarter's constant currency RPO growth of 8%, driven by the combination of bookings outperformance and longer average contract durations. Consistent with prior quarters, we expect to recognize roughly 60% of our RPO over the next 12 months. Q2 billings of $256 million were up 10% year-over-year and up 9% year-over-year in constant currency, above our expectations for low to mid-single-digit growth. Roughly half of this outperformance was driven by strong bookings, particularly in Japan and our public sector business. Q2 billings also benefited from roughly $3 million in early renewals as well as a roughly $4 million tailwind from FX versus our prior expectations. Our net retention rate for Q2 was 102%, up from last quarter's net retention rate of 101%, driven by improving price per seat trends. Our annualized full churn rate continues to remain stable at 3%, demonstrating best-in-class product stickiness with our customers. We now anticipate exiting FY '25 with a net retention rate of roughly 102%, an improvement from our prior expectations of at least 101%. In Q2, gross margin came in at a record 81.6%, up 470 basis points year-over-year, and exceeding our expectation of roughly 80%. In Q2, we were able to sell data center assets that we're no longer using, generating a gross margin tailwind of approximately 60 basis points. We expect to realize a similar benefit in Q3 as we complete the sale of our remaining data center assets. Q2 gross profit of $220 million was up 10% year-over-year, exceeding our revenue growth rate by more than 600 basis points. In Q2, we delivered operating income of $77 million, up 19% year-over-year, once again demonstrating our commitment to generate leverage across the business. Q2's record operating margin of 28.4% was up 360 basis points year-over-year, despite absorbing an FX headwind of roughly 180 basis points. Our rigorous approach to expense management, coupled with gross margin expansion, continues to generate additional leverage in our operating model. As a result, we also delivered a record EPS result of $0.44 in Q2, up $0.08 year-over-year, and well above the high end of our guidance of $0.41. This result includes a negative impact from FX of approximately $0.05. I'll now turn to our cash flow and balance sheet. In Q2, we generated free cash flow of $33 million, up 59% from Q2 of last year. We generated cash flow from operations of $36 million, up 11% year-over-year. Let's now turn to our capital allocation strategy. We ended the quarter with $483 million in cash, cash equivalents, restricted cash, and short-term investments. In Q2, we repurchased approximately 3.9 million shares for approximately $102 million. As of July 31, 2024, we had approximately $25 million of remaining buyback capacity under our current share repurchase plan. We remain committed to opportunistically returning capital to our shareholders through our ongoing stock repurchase program, and our Board recently authorized an additional $100 million stock repurchase plan. With that, let me now turn to our Q3 and full year guidance. As a reminder, approximately one-third of our revenue is generated outside of the U.S., with roughly 60% of our international revenue coming from Japan. Since we last provided guidance, the U.S. dollar has weakened versus the yen, and the following guidance includes the expected impact of FX, assuming current exchange rates. Additionally, we expect the noncash deferred tax expenses that we discussed previously to represent an impact of roughly $0.01 to GAAP and non-GAAP EPS in Q3 and $0.05 for the full year. Finally, I would note that the seasonality of our second half expenses is expected to differ from the past few years for two reasons. First, in Q3, we expect to recognize the benefit from data center equipment sales that I mentioned earlier, resulting in lower Q3 cost of sales. Second, this year, BoxWorks will be held in person in Q4, representing a little more than $2 million in Q4 sales and marketing expenses. For the third quarter of fiscal 2025, we expect Q3 revenue to be in the range of $274 million to $276 million, representing 5% year-over-year growth. This includes an expected headwind from FX of approximately 130 basis points. We anticipate our Q3 billings growth rate to be in the mid-single-digit range. This includes an expected tailwind from FX of approximately 210 basis points, as well as an expected headwind of roughly $3 million from the early renewals that were billed in Q2. As we complete the sale of our remaining data center assets in Q3, we expect our Q3 gross margin to be roughly flat sequentially, representing a year-over-year improvement of more than 500 basis points. Beginning in Q4, data center asset sales will have been completed and will no longer impact our gross margin going forward. We expect our Q3 non-GAAP operating margin to be approximately 28%, which includes an expected negative impact of approximately 110 basis points due to FX. This represents a 330 basis point improvement year-over-year and a 440 basis point improvement in constant currency. We expect our Q3 non-GAAP EPS to be in the range of $0.41 to $0.42, a 16% year-over-year increase, at the high end of this range. This includes an expected headwind of approximately $0.02 from FX and $0.01 from noncash deferred tax expenses. Weighted average diluted shares are expected to be approximately 148 million. For the full fiscal year ending January 31, 2025, we anticipate revenue to be in the range of $1.086 billion to $1.09 billion, representing approximately 5% year-over-year growth and 7% growth in constant currency. This represents a $10.5 million increase at the midpoint versus our prior guidance, with roughly two-thirds of this increase attributable to FX and roughly one-third attributable to strength in our underlying business. We now expect an FX headwind of roughly 170 basis points versus our previous expectations of 250 basis points. We now expect our FY '25 billings growth rate to be in the mid-single-digit range, an improvement from our previous expectations of a low single-digit growth rate. We now expect FX to have a negative impact of approximately 30 basis points on this year's billings growth versus our previous expectations of approximately 150 basis points. We are raising our FY '25 gross margin expectations to roughly 81%, an increase of 100 basis points from roughly 80%. This represents a year-over-year improvement of 360 basis points. We are also raising our FY '25 non-GAAP operating margin expectations to approximately 27.5%, up from approximately 27%, representing a 280 basis point improvement year-over-year. We now expect FX to have a negative impact on operating margin of roughly 130 basis points versus our previous expectations of 160 basis points. We are raising our EPS expectations for the full year driven by outperformance and the leverage we've been able to generate across the business. We now expect FY '25 non-GAAP EPS to be in the range of $1.64 to $1.66, representing a 14% increase at the high end of this range versus $1.46 in the prior year. This includes the $0.05 impact from deferred tax expenses that I noted previously, as well as an expected FX headwind of $0.12, which is $0.03 lower than our previous expectations. Weighted average diluted shares are now expected to be approximately 148 million, 2 million lower than our previous expectations. As we enter the era of Intelligent Content Management, Box is powering the full lifecycle of content in a single platform with native enterprise-grade security and AI capabilities. As Aaron mentioned, we see the success of this strategy with increasing adoption of Enterprise Plus and its enhanced Box AI capabilities, catalyzing an acceleration in our RPO growth and an improvement in our net retention rate. Our disciplined financial strategy allows us to continue making targeted investments to fuel product innovation and our go-to-market initiatives while also expanding margins and returning capital to our shareholders. With that, Aaron and I will be happy to take your questions.

Operator, Operator

And your first question comes from the line of Steve Enders. Your line is open.

Steven Enders, Analyst

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

Aaron Levie, Co-Founder and CEO

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

Steven Enders, Analyst

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

Aaron Levie, Co-Founder and CEO

Yes. So I think we made a key decision about a year ago on the pricing strategy for AI, and it was really due to the fact that we saw trends in the AI space where the cost of AI tokens and the underlying AI models were becoming cheaper and more cost-effective over time while the performance and power of those models were improving. We made the decision to include Box AI in our Enterprise Plus plan. This was intended to drive an upgrade cycle for customers who were holding out on moving to Enterprise Plus. AI has provided a catalyst that is turning out to be a significant component to get customers into that upgrade cycle. In particular deals like the law firm I mentioned, the full portfolio of capabilities, including Box Sign and Box Hubs, creates a scenario where AI becomes a core foundational capability that leads to the deal being done. We have had multiple renewals or upgrades in E Plus in Q2 further catalyzed by customers wanting access to Box AI for their employees. CIOs and IT leaders need to showcase an AI strategy for their leadership teams and Boards, and we've made it easy for them to say that Box is their Intelligent Content Management platform because Box AI is included as a core component.

Dylan Smith, Co-Founder and CFO

Yes, and to build on that, you can really see the impact of our current set of offerings in that suites attach rate in larger deals. Our overall suites penetration—i.e., the revenue attributable to suites—has reached record highs, showing about a ten-point year-on-year increase. Even going forward, once we have newer offerings and AI capabilities, we expect to see the key impact from those AI capabilities driving another upgrade cycle to our highest tier plan, Enterprise Plus. We will be monetizing AI discreetly as well, which will be clearly connected and directly attributable to AI queries, but we expect the majority of the impact from customers opting to move into higher tier plans.

Steven Enders, Analyst

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

Operator, Operator

And your next question comes from Pinjalim Bora. You may proceed.

Pinjalim Bora, Analyst

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

Dylan Smith, Co-Founder and CFO

Yes. So to your point, the uptick in our overall net retention rate was attributable to stronger pricing, largely due to more customers moving to our highest tier, the Enterprise Plus plan, driven by AI. On the seat front, we are seeing a stable dynamic in that environment. We have been experiencing continued pressure on overall seat expansion rates. While we feel confident those will improve over time, that was not a factor in the most recent net retention rate improvement of 102%.

Pinjalim Bora, Analyst

Understood. And one for you, Aaron, maybe talk about the reasoning behind providing unlimited AI queries in the E Plus plan. Is that driven by the lower cost to run those queries? Is it mainly to lower the friction of adoption? Just try to think how you'd manage the gross margins?

Aaron Levie, Co-Founder and CEO

Yes, great. So we gave unlimited access for two main reasons. The first reason is we wanted to encourage the most seamless and frictionless adoption of Box AI. Some customers were not deploying Box AI as widely as their internal demand suggested because they worried about running over their query limits. This was contrary to our goal of including Box AI in Enterprise Plus. The second factor is that we've observed that underlying AI model costs have significantly decreased—potentially by an order of magnitude—in the past 12 to 18 months. This allows us to provide competitive performance at a lower price point for our customers. In terms of future monetization, while we've announced unlimited access to end-users for Box AI queries for documents, we do plan to monetize high-volume use cases in the future. We foresee further monetization avenues surrounding metadata extraction and similar use cases as we integrate Alphamoon's technology into Box.

Pinjalim Bora, Analyst

Understood. Thank you very much.

Operator, Operator

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

Brian Peterson, Analyst

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

Aaron Levie, Co-Founder and CEO

Yes. We saw a healthy linearity in the quarter. So nothing notable to mention one way or another. Our expectations have been embedded into our Q3 guidance and full-year guidance based on what we observe for the rest of the year.

Brian Peterson, Analyst

Great. And maybe just following up. I know, Aaron, you called out the strength in the public sector. Is there a particular use case or something prevalent driving that strength? Is it reasonable to correlate some of the AI products or the higher price point plan to this? Just curious to unpack that.

Aaron Levie, Co-Founder and CEO

Yes. The overall message, when taken together, is the source of our momentum. For traditional government agencies, especially at the state and local level, they have often been reliant on legacy systems for mission-critical work. Our platform represents a modern approach that, due to compliance and security, allows them to now migrate to the cloud and effectively perform enterprise content management with intelligence integrated for better experiences for their constituents. We've seen balanced success across both federal and SLED. Additionally, we’re progressing through the FedRAMP high process to open more use cases for our federal customers, especially for sensitive data.

Brian Peterson, Analyst

Appreciate the color. Thanks, Aaron.

Operator, Operator

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

Jason Ader, Analyst

Yes, thank you. Good afternoon, guys. I wanted to ask how the growth algorithm looks for you over the next couple of years. Also, any thoughts on potentially taking a few points out of operating margin to drive top-line growth? Is that a way to boost the top line?

Dylan Smith, Co-Founder and CFO

At a high level, to reach double-digit growth, we believe the majority of that improvement will come through net retention rates moving up a few points. As the macro environment normalizes, we expect a balanced contribution between seat growth and pricing. Over the last several quarters, pricing improvements have been the main driver of growth. We also see markets internationally, especially EMEA, where we're currently underperforming compared to the opportunities. Regarding the operating margins, where we land each year will depend on that balance. When we observe proven success from our investments, we may change how we address the balance between growth and profitability. But we're confident in continually expanding our bottom line, regardless of the growth rate due to numerous initiatives already underway.

Jason Ader, Analyst

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

Dylan Smith, Co-Founder and CFO

No impact on the revenue side; we are not bringing any of that over from Alphamoon, for example. All of that is baked into the guidance we've provided, and to give you a sense of scale, with the Alphamoon acquisition, we've brought in about 15 engineers to join the Box team. But that's all well incorporated into our expectations.

Operator, Operator

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

Taylor McGinnis, Analyst

Yes, hi. Thanks much for taking my questions. The revenue guide implies a slight acceleration in Q4. With the bookings momentum and stabilization in the demand environment, as well as some tailwinds from emerging areas like Box AI, any color you can provide on how we should view that exit rate as a leading indicator for next year?

Dylan Smith, Co-Founder and CFO

Yes. We expect that top-line acceleration over time, and we're seeing early signals of success from initiatives meant to drive that. We expect stronger growth in the back half, including Q4, but the constant currency growth outlook will be more or less similar to the first half, especially with a lessening of FX headwinds. Regarding the underlying growth, look at the provided constant currency growth outlook for Q4 and the full year—it should give you some perspective on future performance. We will provide more specifics on next year as we proceed further into the year.

Aaron Levie, Co-Founder and CEO

We are very pleased with our strong Q2 performance. The upgrades through our Enterprise Plus plan, nearly 87% of deals over $100,000 in Q2 can be attributed to that plan, which has resulted in strong growth for over 100,000 paying customers.

Operator, Operator

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

Rishi Jaluria, Analyst

Oh, wonderful. Thanks so much for taking my question. I wanted to start off thinking about the benefits on margins that you've seen from data center sales. Can you remind us of the specific quantification on the full year? Also, how much is extra that you're guiding to this quarter versus last quarter? Or was that already contemplated in the prior full year margin guide?

Dylan Smith, Co-Founder and CFO

Yes. For this year, those sales represent about a 60 basis point tailwind to both gross and operating margins in both Q2 and Q3. You could view it as contributing around 30 basis points for the full year as it was not incorporated into our prior guidance but serves as upside due to our ability to execute well.

Rishi Jaluria, Analyst

Got it. Thanks. That's really helpful. Then I wanted to ask a question on Japan. You talked about seeing an improvement or uptick in bookings there. Can you walk us through what's driving it? I understand there was a little bit of a slowdown in the past, and now things appear to be getting better. What is driving that?

Aaron Levie, Co-Founder and CEO

Yes. Japan's performance remains strong. As we’ve mentioned in the past, significant upside exists in the Japanese market given the industries we’re still early in penetrating, including financial services, pharmaceuticals, and government. They've been major early adopters of Box AI functionality, and this market is exceptionally interested in AI and increasing automation for their content use cases. Overall, we see continued opportunities across Japan.

Rishi Jaluria, Analyst

All right. Wonderful. Thank you.

Aaron Levie, Co-Founder and CEO

Thank you.

Cynthia Hiponia, Vice President of Investor Relations

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

Operator, Operator

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