Earnings Call Transcript - BOX Q4 2021

Operator, Operator

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

Alice Lopatto, Investor Relations

Good afternoon, and welcome to Box’s fourth quarter and fiscal year 2021 earnings conference call. On the call today, we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions. Today’s call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investors. 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 Twitter at the handle @boxincir. On this call, we will be making forward-looking statements, including our Q1 and FY2022 financial guidance and our expectations regarding our financial performance for fiscal 2022 and future periods, timing of and market adoption of our products, our markets and the size of our market opportunity. We expect growth regarding our free cash flow, gross margins, operating margins and future profitability. These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially. Please refer to the press release and the risk factors and documents we filed 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, March 2, 2021, 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 PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand it over to Aaron.

Aaron Levie, CEO

Thanks, Alice, and thanks everyone for joining the call today. As always, we hope you and your families are staying safe and healthy. I’m incredibly proud of the team at Box and the milestones we achieved in FY2021. This was a substantial year of progress across all facets of our business, strategically, operationally, and financially. We exceeded our commitment to achieve a revenue growth rate plus free cash flow margin of 25%, ultimately delivering 26.3% versus 13.4% just a year ago. In addition, we drove significant margin expansion with a 15% non-GAAP operating margin, up from 1% a year ago. This year we delivered the category-defining cloud content management platform to the market by making significant product enhancements in security and compliance, collaboration and workflow, and strengthening our ecosystem of partner integrations. To further expand our product portfolio at the start of this new fiscal year, we recently announced Box Sign, our native e-signature product offering that will be coming out later in the summer. In a year of immense market uncertainty, we delivered both revenue growth and improved profitability, advanced our long-term strategy, brought on three new amazing Independent Directors on to our Board, and maintained a relentless focus on enabling our customers to work in a modern and digital way. With this foundation in place and the momentum we are seeing across the business, we are confident in our ability to achieve accelerated growth and higher operating margins in the years ahead. Turning to our Q4 results, we delivered revenue of $199 million, up 8% year-over-year. Non-GAAP operating margin of 18%, up significantly from 7% a year ago and non-GAAP EPS of $0.22, up from $0.07 a year ago and well above our guidance. We generated more than $41 million in positive free cash flow, a substantial improvement from breakeven last year. Strong demand for our more advanced capabilities such as Box Shield and Box Relay drove further Suite adoption, including a record 45% attach rate for Suite as well as a 60% attach rate for Box Shield in our six-figure deals. Over 100,000 customers now rely on Box to power Secure Content Management in collaboration in the cloud. In Q4, we closed wins and expansions with leading organizations like Arena Pharmaceuticals, Asahi Group Holdings in Japan, Pan-American Life Insurance Group, Twilio and UPS. Our customers are choosing Box to power high-value use cases that are integral to how they run their businesses. Here are just a few examples from Q4. An innovative biopharmaceutical company purchased a six-figure ELA with Box’s GXT and key safe offerings to help power its mission to transform the way the drugs and therapies are manufactured in the U.S. A global leader in the insurance sector, which has been a Box customer since 2016, purchased Box Governance to support claims processes while meeting critical compliance requirements. And a Japanese manufacturing company moved to Box to address their need for a content platform to facilitate remote work as well as integrate with applications such as SAP, Salesforce, and Google Workspace. 2020 was a dynamic year for all enterprises and we are now seeing IT strategies shifting to support the long-term trend of virtual and distributed teams, digital operations, and an increasingly complex and high-stakes security and compliance landscape. In this context, how our organizations manage and collaborate on content is at the center of how they operate. As the experts in content, our vision is to power the entire content journey, giving enterprises a secure platform for managing all of their content from the moment it’s created to when it’s uploaded, shared, edited, published, approved, signed, classified, and retained. This is our vision for the Box Content Cloud. Having dramatically improved our overall balance between growth and profitability in FY2021, the next chapter for Box is to continue building on our leadership position and transform how enterprises work in a digital age. To accelerate this strategy, just last month, we acquired SignRequest, a leading cloud-based electronic signature company to develop Box Sign, our new e-signature capability that will be natively embedded in Box. Every day, more and more transactions are moving from paper-based manual workflows to the cloud. E-signature is already a multi-billion dollar market and it’s still in the earliest days with digital transactions just beginning to become critical in every industry. When we surveyed hundreds of our customers in 2020, e-signature was the most-requested new Box capability. There are an incredible number of use cases that Box Sign will address for our customers. For example, legal teams will be able to create and finalize contracts within Box, from drafting and co-editing to signing and retaining the agreement with Box Governance. HR teams will be able to initiate and complete offer letters using Box Relay together with Box Sign. Sales teams can initiate digital customer contracts for signature right from Salesforce, and compliance teams will be able to retain and protect executed agreements while securing sensitive content with Box Shield. Box Sign is expected to be generally available in the summer of 2021. It will be integrated into Box’s existing subscription plans with additional levels of functionality being available in our enterprise plans and Suite offerings. We want to ensure all of our customers have access to the value of Box Sign, while also enabling us to monetize the higher-end signature use cases that leverage advanced functionality and APIs. Another exciting announcement we made last month was the availability of the all-new Box Shuttle. For many organizations, moving to the cloud has been a priority, but the cost of content migration, especially in complex content management environments, has been a major impediment to cloud adoption. The new Box Shuttle can migrate some of the most complex and large-scale content management environments at a lower cost and faster than ever. We wanted to be simple, fast, and cost-effective as possible to retire legacy systems and move information from sourced platforms like network file shares, SharePoint, OneDrive, Documentum, and OpenText to the Box Content Cloud. And with more high-value content in Box, our customers can empower their teams to collaborate more effectively and accelerate their digital transformation initiatives. Overall, we are more excited than ever to continue to build out the complete Content Cloud. FY2022 will be our singular biggest year for product innovation as we expand into new market adjacencies like e-signatures while continuing to double down on product areas like Box Shield and Box Governance for advanced security and compliance, Box Relay for workflow automation, and our open platform to connect to all of our customers' applications. This product innovation will enable us to build on our leadership position, which has been validated by IDC, Gartner, and Forrester. Next, to bring all of this value to our customers in FY2022, we’re focused on continuing our land and expand strategy to drive growth with new and existing customers.

Dylan Smith, CFO

Thanks, Aaron. Good afternoon everyone and thank you for joining us today. In fiscal 2021, we are proud to have delivered a strong balance of growth and profitability, achieving a non-GAAP operating margin of 15%, up significantly from 1% a year ago. We also exceeded our 25% commitment for revenue growth plus free cash flow margin, delivering 26.3%, a strong improvement from the 13.4% we recorded a year ago. In Q4, we delivered revenue of $199 million, up 8% year-over-year. Importantly, 29% of this revenue came from regions outside of the United States, up 400 basis points from 25% a year ago. Our remaining performance obligations, or RPO, represent non-cancelable contracts that we expect to recognize as revenue in future periods. We ended Q4 with RPO of $897 million, up 17% year-over-year, comprised of 10% deferred revenue growth and 21% backlog growth. Average customer contract durations have continued to lengthen, driven by a higher volume of longer-term strategic deals, which contributed to the strength we saw in our backlog growth. We expect to recognize approximately 61% of our RPO over the next 12 months. Fourth quarter billings came in at $310 million, representing 10% year-over-year growth and ahead of our revenue growth. As Aaron mentioned, we were extremely pleased to achieve a record 45% attach rate for our Suite offerings across six-figure deals in Q4. This quarter, we closed 121 deals worth more than $100,000 versus 112 a year ago, 21 deals over $500,000 versus 14 a year ago, and $4 million deals in line with a year ago. Our success in cross-selling our product portfolio is driving higher value use cases across our largest customers, improving the average contract value of our six-figure deals in both Q4 and the full year. Our land and expand strategy is generating momentum in large customer growth. We now have 1,216 customers paying more than $100,000 annually, up 10% year-over-year, and 99 million customers up 24% year-over-year. Going forward, we will be reporting these cumulative customer counts on an annual basis, in addition to the number of 100k-plus deals that we closed in each quarter. In Q4, we drove very strong bookings from net new customers, up more than 25% year-over-year, which isn’t reflected in our net retention rate. We ended Q4 with an annualized net retention rate of 102%, down slightly from 103% in Q3, due to the trailing 12-month nature of this metric. Note that the net retention rate of customers who have adopted at least one of our add-on products is approximately 20 points higher than the rate of our core-only customers. As such, we expect our net retention rate to stabilize in Q1 and improve by a couple of percentage points over the course of this year. In Q4, our full churn rate was 5% on an annualized basis, in line with Q3 and the prior year. Turning to margins, non-GAAP gross margin came in at 73.2%, up 170 basis points from 71.5% a year ago and roughly in line with Q3. Our focus on reducing infrastructure costs and gaining economies of scale is paying off. Q4 gross profit of $146 million was up 11% year-over-year outpacing our revenue growth. We expect gross margin to continue improving in the coming years and land in the 74% range this year. Total Q4 operating expenses represented 55% of revenue, representing a significant 900 basis point improvement from the 64% recorded a year ago, demonstrating our commitment to efficient growth. As a result of our emphasis on revenue growth, gross margin expansion, and operating expense leverage, in Q4, we generated an 1,100 basis point improvement in our non-GAAP operating margin year-over-year, coming in at 18% versus 7% a year ago. Sales and marketing expenses in the quarter were $57.5 million, representing 29% of revenue, down 600 basis points from 35% in the prior year. Our go-to-market improvements enabled us to deliver efficient and consistent revenue growth and we generated a 13% year-over-year improvement in sales force productivity, primarily driven by our enterprise sales force. We plan to grow our quota-carrying sales force in the low-teens in FY2022, focusing on our higher-performing geographies and segments. We will also continue investing in our customer success organization to help our customers adopt higher value use cases.

Aaron Levie, CEO

Yes. Thanks, Kevin. So I think, for the most part, we’re not held back on the volume of opportunities that we have due to data migration, because we have had a strong partner ecosystem that we use for data migration services. However, there’s a large number of enterprise environments where we haven’t necessarily captured all the use cases that that customer has. So we might come in and certain departments will use Box for content management and collaboration maybe in the sales team or in the supply chain or for client onboarding, but they’ll still be legacy SharePoint sites or Documentum environments that that enterprise has. And so with the new Box Shuttle, we’re going to be able to now take the momentum that we have with existing customers and help them actually migrate more of their data, more of their content into Box, which ultimately is going to lead to either more seats, more API volume and then ultimately greater stickiness over time. So we see this as another significant lever to help our customers just continue to complete the full migration into having one single content cloud that is modern, secure and drives us this new level of productivity. So we think this is going to be very, very important for our continued expansion within our customer base.

Dylan Smith, CFO

Yes. So the primary driver that relates to the full year commentary around billings coming in slightly ahead is really around a lot of the underlying momentum that we’re seeing in the business. As mentioned and as always, we do see some variability quarter-to-quarter just due to things like when certain large deals renew. If we see early renewals as well as payment durations, but overall nothing unusual going on either in Q1 or throughout the course of the year. We expect the strength we expect to see in the quarter as well as some of those dynamics around just the timing of some of the larger renewals.

Phil Winslow, Analyst

Hey guys, thanks for taking my question and congrats on a strong close to the year. Just wanted to focus in on Slide 17 and 28 that's attach of Shield and Relay and Suites, but also the multi-product contribution. Obviously, a big step function up in those metrics this year. When you think about the guidance for this coming year, how do you think about the ability to continue to drive those percentages higher, but also to potentially just acquire net new customers? Because I didn’t notice your comment about you’re growing the sales force. I believe it was double digit.

Aaron Levie, CEO

Thanks, Phil. Yes. This is exactly what we’re seeing, where as there are more applications that enterprises are going to be deploying, whether those are communication applications or collaboration applications or business process applications, the more heterogeneity in those tools, the more you need a central independent neutral content platform or content cloud to manage the content across all of those different ecosystems. And so with Slack pairing up with Salesforce with obviously the success and growth of Microsoft Teams with other major technologies like ServiceNow and WebEx and Zoom, these all bolster our position as being that neutral content cloud that can connect to all the different applications that our customers have. And we’re seeing that show up day in and day out in our customer conversations where we’ll go to an enterprise, while there will be a lot of maybe Microsoft in that environment or Google in that environment or Salesforce in that environment. The fact that those customers might have three or five or ten other cloud platforms that employees are working from increases the need for having a central content cloud that connects all of those tools.

Dylan Smith, CFO

In fiscal 2021 we are proud to have delivered a strong balance of growth and profitability, achieving a non-GAAP operating margin of 15%, up significantly from 1% a year ago. We also exceeded our 25% commitment for revenue growth plus free cash flow margin, delivering 26.3%, a strong improvement from the 13.4% we recorded a year ago.

Operator, Operator

Thank you. Your first question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

Phil Winslow, Analyst

Got it. And then just more of a strategic follow-up for Aaron, over the past year, call it 90 days or so we’ve seen a lot of changes on the call it the communication side of the content, collaboration and communications market with – for example, the announced acquisition of Slack by Salesforce. Curious what customers are saying to you if there’s a belief that there’s increased fragmentation at the communications layer. What that means for the call it the content layer of that Slack and Box’s position.