Earnings Call Transcript - BOX Q4 2024

Operator, Operator

Good afternoon. My name is Krista and I'll be your conference operator today. I would like to welcome everyone to the Box Incorporated Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Cynthia Hiponia. Cynthia, you may begin your presentation.

Cynthia Hiponia, Vice President, Investor Relations

Good afternoon, and welcome to Box's Fourth Quarter and Full Year Fiscal 2024 Earnings Conference Call. I'm Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box's Co-Founder and CEO; and Dylan Smith, Box's Co-Founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will also be available for replay on our Investor Relations website at box.com/investors. Our webcast will be audio-only. However, supplemental slides are now available for download on our website. We'll also post the highlights of today's call on the X platform at the handle @BoxIncIR. On this call, we will be making forward-looking statements, including our first quarter and full year fiscal 2025 financial guidance and our expectations regarding our financial performance for fiscal 2025 and future periods. 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 filed with the SEC, 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 5th, 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 will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in 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

Thanks, Cynthia, and thank you all for joining the call today. Our fiscal Q4 results were in line with or above our guidance as we continue to see signs of stabilization in IT budgets in several of our core markets. We achieved revenue of $263 million, up 2% year-over-year, or 4% in constant currency. Operating margins of 26.7% were above our guidance and EPS of $0.42 was $0.03 above the high end of our guidance. In fiscal 2024, we surpassed $1 billion in annual revenue, with operating margins of 24.7%, up 160 basis points from 23.1% a year ago. And despite the macroeconomic pressures on IT budgets, which persisted throughout FY'24, we are pleased with our ability to deliver margin expansion, reflecting our execution of the strategies we put in place to lower our cost structure while still investing for long-term durable revenue growth. In FY'24, we continued to bring advancements in our category-defining content cloud platform to the market. We launched Box AI in beta, a new suite of capabilities that natively integrate advanced AI models into the Box Content Cloud. We unveiled Box Hubs integrated with Box AI, which transforms how companies securely curate and publish content and knowledge across their enterprise. And we also made significant product enhancements in security and compliance, collaboration and workflow, while also further strengthening our ecosystem of partner integrations. As I reflect on the year ahead, it's clear we have an incredibly large opportunity in front of us. At Box, our mission is to power how the world works together, and the way work happens is changing more than ever before. We know that companies are looking to digitize and automate their businesses by modernizing their workflows, streamlining collaboration, and connecting their apps together. They are looking to leverage the power of AI to generate new insights, automate their processes, and supercharge productivity. And it's critical that they protect their most important data by detecting and preventing threats, avoiding ransomware, and meeting compliance requirements. At the heart of these trends is how companies work with their most important content. And while unstructured data like contracts, marketing assets, financial documents, and other content represents 90% of all enterprise data, most enterprises continue to be burdened by massive legacy and siloed environments for managing this content. And with the recent acceleration of advances in AI, it's nearly impossible to get the full value of content when it's fragmented across ECM systems, legacy storage infrastructure, and point solutions. For years, Box has enabled powerful ways to securely collaborate and manage enterprise content at scale. But today we enter a new chapter as a company, and we expect FY'25 to represent the most significant set of product expansion and evolution we have had as a company. With the combination of AI, our workflow automation capabilities, and our advanced metadata-driven views, we can fundamentally transform how companies run their most important processes. Just in January, we announced the acquisition of Crooze, a leading provider of no-code enterprise content management applications built on the Box platform. For years, Crooze has leveraged Box's APIs to enable advanced enterprise content management and workflow use cases like contract lifecycle management, digital asset management, and document control in regulated industries and more. We were thrilled to team up with Crooze, and we will be rapidly integrating and leveraging the company's no-code app builder and metadata capabilities to help customers build out custom interfaces and workflows for working with their most important content. Combined with Box's upcoming workflow automation improvements, including the expected launch of Forms and Doc Gen this year, Box will be able to power end-to-end critical business processes natively without customers having to do any custom development. And with the acquisition of Crooze, Box will extend into new use cases within our current customers as well as enabling us to replace legacy ECM solutions. Importantly, these business processes are radically enriched with the power of Box AI. An age-old problem in content management is how companies can apply structure to their unstructured data. For instance, extracting key variables from an invoice or a contract or labeling critical data inside of a digital asset like an architecture diagram or a product image. With Box AI, we are now able to automatically label and apply metadata on content at scale, doing the work that took humans minutes or hours, performing these tasks now in seconds for a fraction of the cost. By having AI intelligently process documents and content, you can automate tasks and workflows that would have been cost-prohibitive or near impossible to do previously. In FY'25, we expect to dramatically advance our Box AI efforts by incorporating new AI models in Box, building new capabilities to help enterprises customize AI for their business workflow needs, enabling customers to ask questions of content in Box Hubs, and leveraging Box AI more extensively throughout our platform APIs. Not only will Box AI continue to be highly differentiated due to our overall security, compliance, and governance on Box, but our platform-neutral approach means that we can leverage tens of billions of dollars in R&D happening across tech by integrating with advanced AI models from various vendors to provide the best user experience for Box customers. Consistent with this open approach, today we announced a new integration with Microsoft Azure OpenAI. The expanded collaboration brings Box and Microsoft's enterprise-grade standards for security, privacy, and compliance to AI, so customers can realize the benefits of this groundbreaking technology. We also announced that Box AI is generally available to customers on Enterprise Plus plans starting today. Since rolling out Box AI in beta to Enterprise Plus customers in November, we have seen a number of existing customers upgrade to Enterprise Plus to gain access to Box AI. Customer examples in Q4 include a leading construction company, which expanded in Q4 to access Box AI as they are looking to extract the value from their unstructured content in Box, applying metadata at scale, monitoring trends in contracts, and managing agreements while also improving their security posture with metadata-based classification controls. An American multinational technology company upgraded to Enterprise Plus with a six-figure upsell to bring enterprise-grade AI to all of their employees. With access to Box AI, powered by the most advanced large language models, this organization can leverage AI for new use cases while keeping their content secure and compliant. Finally, one of the country's leading medical support organizations upgraded to Enterprise Plus to use Box AI to securely curate new content, summarize vast amounts of data, and quickly analyze it to report out to clinics that they support. Now going beyond AI this year, our focus remains on building the leading way to protect and govern the full content lifecycle in the enterprise. In the year ahead, we plan to advance our security offerings to deliver improved threat detection and data recovery from ransomware attacks, power more advanced governance workflows, deliver native archiving solutions, achieve FedRAMP high compliance, and deliver deeper integrations with security vendors like CrowdStrike. Next, our flexible and interoperable platform remains a major differentiator for Box. And with our open APIs, we aim to continue to connect with every enterprise app that our customers use, from Microsoft Teams and Slack to Salesforce and ServiceNow, and help our customers leverage our APIs to power their own applications and workflows. Now, turning to go-to-market, we continue to enable new and existing customers to recognize the full value of the Box platform with increased adoption of our multiproduct offerings in Q4. Suites represented 81% of deals over $100,000, up from 72% a year ago. We saw continued solid suite attach rates in large deals across all geographies. In Q4, customer expansions and wins with Enterprise Plus included a financial consulting firm that purchased Box with a six-figure Enterprise Plus deal. They will leverage Box as their core enterprise content management platform across the entire firm to enable their business to go fully digital while also eliminating spend on legacy agency management solutions. Next, a top international law firm purchased Box to power how they work internally and with external parties. This organization was looking for a new document management solution that provided security, ease of use, integration support, and regional data storage, which led them to Box. As we look ahead to FY'25 and beyond, we will leverage our go-to-market motion to bring new solutions to customers, add new pricing models and packages to drive further upsell, and extend our platform to a deeper set of partners and system integrators to deliver our more advanced solutions to customers and drive further growth. We plan to ignite more demand generation and pipeline development programs to reach even more customers and prospects, doubling down in key verticals such as financial services, life sciences, healthcare, and the public sector while honing our focus on key international markets. We are focused on taking advantage of the market opportunity in front of us, and these focused go-to-market investments and initiatives are aimed at accelerating the future revenue growth of Box. As you can tell, we are incredibly excited about the innovation we will be delivering to our category-defining content cloud platform in FY'25. Our robust product roadmap combined with our investments in strategic go-to-market initiatives positions us well for the megatrends that are driving IT decisions and for when a more normalized IT spending environment returns. We will be providing more detail on our growth strategy during our upcoming Financial Analyst Day on March 19th. We could not be prouder of how the company continues to execute on the initiatives to drive continued leverage in our cost structure and efficiencies across our business while also setting ourselves up to drive accelerated revenue growth. Dylan will be detailing our progress in his comments, but the resiliency of our financial model has been a strategic differentiator for us as we continue to invest in long-term durable revenue growth. As the way work gets done is changing more than ever, Box is well-positioned to capitalize on these megatrends and power the full lifecycle of content in the enterprise. With that, I'll hand it over to Dylan.

Dylan Smith, Co-Founder and CFO

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In fiscal 2024, we delivered another year of strong bottom-line improvements while laying the foundation for long-term profitable growth. We generated $1.04 billion in revenue, up 5% year-over-year or 7% in constant currency. FY'24 operating margin was 24.7%, up 160 basis points year-over-year and up 340 basis points in constant currency. We delivered non-GAAP EPS of $1.46, up 22% from $1.20 in the prior year. We also generated $269 million in free cash flow, a 13% year-over-year increase which enabled us to deploy $180 million toward our share repurchase program. As a result, we reduced fully diluted total shares outstanding sequentially in all four quarters of FY'24. As we continue to navigate this challenging macroeconomic environment, we remain focused on delivering higher top-line growth, generating consistent operating margin expansion and executing a disciplined capital allocation strategy. Turning to Q4, we delivered revenue in line with our expectations and operating margin and EPS above our guidance. Q4 revenue was $263 million, up 2% year-over-year or 4% in constant currency. Operating margin of 26.7% was 120 basis points higher than our guidance of 25.5%. EPS of $0.42 was $0.03 above the high end of our guidance and up 14% year-over-year. We ended the year with approximately 1,770 total customers paying us more than $100,000 annually. We continued to see strong demand for our higher-value product offerings. Our Q4 suite attach rate in large deals landed at 81%, up from 72% a year ago. Suite customers now account for 55% of our revenue, a significant improvement from 46% in Q4 of last year and from 51% in Q3. Even in this environment where IT budgets are tighter, enterprises recognize the value that our suites offerings bring to help them simplify, transform, and secure their content. We ended Q4 with remaining performance obligations, or RPO, of $1.3 billion, a 5% year-over-year increase or 9% in constant currency. These growth rates were 200 basis points and 500 basis points ahead of our Q4 revenue growth, respectively. This demonstrates both the stronger performance that we delivered in the second half of the year as well as customers' longer-term commitments to Box as a core part of their infrastructure. We expect to recognize roughly 60% of our RPO over the next 12 months. Q4 billings of $379 million were up 6% year-over-year or 10% in constant currency, above our expectations of low to mid-single-digit growth driven by strong early renewals. Our net retention rate at the end of Q4 landed at 101%. While we continued to experience pressure on seat expansion within our customer base, our annualized full churn rate remained stable at 3%, demonstrating the stickiness and value that the Box platform provides. We've also continued to achieve an increase in price per seat year-over-year despite the pressures on IT budgets. As a reminder, our net retention rate is a trailing 12-month metric. Based on the headwinds we experienced in FY'24 that we are now lapping, we expect our net retention rate to bottom out at 101%, exiting FY'25 with a net retention rate in line with or slightly above our Q4 results. Beyond FY'25, as we benefit from the introduction of new product offerings and plan tiers, and as seat growth returns to more normalized levels, we expect to achieve a higher net retention rate over time. Q4 gross margin came in at 78.4%, roughly in line with the year-ago period. As a reminder, we fully migrated our infrastructure to the public cloud in Q3. As our on-premises data center expenses wind down over the coming quarters, we expect to deliver additional gross margin expansion over the course of FY'25. We also continue to drive leverage across the business through our lower-cost location strategy and rigorous cost discipline. We now have 300 full-time employees in our engineering center of excellence in Poland, up 21% year-over-year. The significant majority of our R&D hiring will be in Poland in the coming year. These initiatives resulted in a 26.7% operating margin, or 28.0% in constant currency, an improvement from the 26.0% we delivered in Q4 of last year and a testament to our disciplined expense management. As a result, we delivered increased non-GAAP EPS of $0.42 in Q4, or $0.44 on a constant currency basis compared with $0.37 a year ago. I'll now turn to our cash flow and balance sheet. In Q4, we generated free cash flow of $82 million, a 10% increase from $75 million a year ago. We delivered cash flow from operations of $89 million, a 3% decrease from $92 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were $4 million, down from $11 million in Q4 of last year. We expect capital lease payments to wind down over the next few quarters as we exit our managed data centers as part of our public cloud migration strategy. Let's now turn to our capital allocation strategy. We ended the quarter with $481 million in cash, cash equivalents, restricted cash, and short-term investments. In Q4, we repurchased approximately 790,000 shares for approximately $20 million. For the full year of FY'24, we repurchased approximately 6.6 million shares for approximately $180 million or two-thirds of the free cash flow we generated in the fiscal year. As of January 31st, 2024, we had approximately $64 million of remaining buyback capacity under our current share repurchase plan. We remain committed to opportunistically returning capital to our shareholders and 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 Q1 and fiscal 2025. As a reminder, approximately one-third of our revenue is generated outside of the US, with roughly 60% of our international revenue coming from Japan. While we are seeing some pockets of stabilization in most of our markets, our guidance reflects a continued constrained IT budget environment in FY'25. Additionally, as our international businesses are now consistently generating profit, in Q4 we have released the valuation allowance against our deferred tax assets in the UK. And beginning in FY'25, we will now be recognizing non-cash deferred tax expenses on the profits generated in international countries, which will impact our FY'25 GAAP and non-GAAP EPS. We expect this to represent a roughly $0.02 impact to Q1 and $0.06 for the full year. For the first quarter of fiscal 2025, we expect Q1 revenue to be in the range of $261 million to $263 million, representing 4% year-over-year growth or 7% growth on a constant currency basis, both above the growth rate we delivered this past quarter. We expect our Q1 billings growth rate to be in the low single-digit range. This includes an expected headwind from FX of approximately 300 basis points. We expect our Q1 gross margin to be roughly 79%, representing a year-over-year improvement of roughly 100 basis points. We expect our Q1 non-GAAP operating margin to be approximately 25%, which includes an expected negative impact of approximately 200 basis points due to FX. This represents a 220 basis point improvement year-over-year and a 420 basis point improvement in constant currency. We expect our Q1 non-GAAP EPS to be in the range of $0.35 to $0.36, a 13% year-over-year increase at the high end of this range, even as we absorb the deferred tax expenses that I mentioned earlier. Weighted average diluted shares are expected to be approximately $147 million for the full fiscal year ending January 31st, 2025. We anticipate revenue in the range of $1.08 billion to $1.085 billion, representing approximately 5% year-over-year growth at the high end of this range and 6% in constant currency. We expect our FY'25 billings growth rate to be roughly in line with revenue growth on an as-reported basis. We expect FX to have a negative impact of a little more than 50 basis points to billings. We expect our FY'25 gross margin to be roughly 80%, representing a year-over-year improvement of more than 200 basis points. We are stepping up our sales and marketing expenses to drive future growth and we expect our FY'25 non-GAAP operating margin to be approximately 27%, representing a 230 basis point improvement from last year's result of 24.7%. We expect FX to have a negative impact on operating margin of a little more than 100 basis points. This guidance is in line with our preliminary guidance despite an expected incremental headwind from FX. We expect FY'25 non-GAAP EPS to be in the range of $1.53 to $1.57, representing an 8% increase at the high end of this range versus $1.46 in the prior year and includes the $0.06 impact from deferred tax expenses that I noted previously. Weighted-average diluted shares are expected to be approximately 149 million. Finally, we expect our FY'25 revenue growth rate, combined with our FY'25 free cash flow margin, to be in the low 30s on an as-reported basis, and in the mid-30s on a constant currency basis, which includes the combined headwind of a little more than 200 basis points from FX to revenue and billings that I discussed previously. We are encouraged by the stabilization trends we have seen in the last couple of quarters, even in light of the macroeconomic pressures on IT budgets that we saw in FY'24. As Aaron mentioned, we are entering a new chapter to power AI-driven business processes around content and workflows. To take advantage of this opportunity, our focus in FY'25 is laying the foundation for reaccelerating revenue growth by investing in our innovative product roadmap and strategic go-to-market programs, expanding gross and operating margins, and efficiently returning capital to our shareholders. We look forward to providing further details at our virtual Financial Analyst Day on Tuesday, March 19th. With that, Aaron and I will be happy to take your questions.

Operator, Operator

Thank you. Your first question comes from Josh Baer from Morgan Stanley. Please go ahead.

Joshua Baer, Analyst

Excellent. Thanks for the question. Wanted to ask about the acquisition of Crooze. Very interesting, getting into the no-code app development space. How significantly are you expecting to invest there? Really compete in that market versus maybe more limited around use cases centered on content. And then is a good way to think about that acquisition sort of thinking about what you did with the e-signature acquisition, kind of evolving into Box sign? Thanks.

Aaron Levie, Co-Founder and CEO

Yeah, thanks. So really great and important point to clarify. So Crooze is 100% focused on no-code application and sort of custom interface development for content-centric workflows. So we are going to remain squarely focused on the content market. But when you think about the kind of workflows and business processes that enterprises have around content, you have digital asset management, invoice processing, contract lifecycle management, GxP-compliant controlled document management. And so there are hundreds or if not thousands of use cases that enterprises have around content-driven workflows. And traditionally, we've really had our customers build those workflows and the interfaces around those workflows off of Box. And so you had to do custom app development in some other kind of platform environment. Crooze, as an independent company and as a start-up, really proved out the use case of all of these types of use cases being built out on the Box platform in a no-code environment. So we got really excited about being able to bring them onboard. And what we're doing now is integrating their technology natively into Box. In the coming quarters, within this fiscal year, we anticipate having a new product that we'll be releasing built on the Crooze technology, that we'll be obviously sharing much more about throughout the year. That technology and product will let our customers create these types of interfaces and custom applications on top of Box in a very native fashion. From a monetization standpoint, we have continued the business model that Crooze had previously, which is really kind of selling these Crooze implementations on a per-customer basis for the number of users or seats that our customer needs. We will continue that while we integrate the technology. And we'll be driving Crooze as an upsell vehicle within our customer base. So unlike Box Sign, where we included the core of Box Sign in all of our plans, we won't be doing that with the Crooze technology. We will be using this as an additional monetization lever, both in our bundled pricing model and as standalone capabilities as well. So we're really excited about what this could do from a monetization standpoint, and we'll be sharing a little bit more at the Financial Analyst Day in a couple of weeks around the strategy here.

Joshua Baer, Analyst

Really helpful, Aaron. And just anything to call out as far as impact to revenue or expenses this year from Crooze? Thanks.

Aaron Levie, Co-Founder and CEO

Yeah, so everything is sort of built into the model that we just laid out. We will be investing in the team to build out this technology. But given our philosophy around how we make R&D decisions, that will certainly be prioritized, but within the cost envelope that we've already laid out. So, no changes on that front. And then from a revenue growth standpoint, this is really the year of building out the technology into Box, and we expect it to provide a tailwind more in the medium and long-term from a pure growth rate standpoint. Overall, strategically, Crooze is very important because it combines no-code application development with metadata views, plus the combination of AI and what we're doing in workflow. Together, this creates a new chapter in what our product can deliver for customers, allowing them to expand use cases in more of these enterprise content management spaces and to replace legacy ECM solutions. There is a nice combined effect there that we're going to be able to drive.

Joshua Baer, Analyst

Great. Thanks.

Operator, Operator

Your next question comes from the line of Pinjalim Bora from JPMorgan. Please go ahead.

Pinjalim Bora, Analyst

Hey, thanks for taking the questions. Congrats on the quarter. Aaron, what have you seen so far with respect to kind of adoption of Box AI? Maybe in terms of volume of queries that you're seeing within those users that are playing around or have adopted Box AI. Has that been tracking your assumptions? And have you seen instances where Box is coexisting with kind of other horizontal co-pilots at this point?

Aaron Levie, Co-Founder and CEO

Yeah. So I'll address a few of the pieces in there. First of all, obviously, as everybody knows, we just released Box AI in beta in Q4, and today is literally the day of GA. So it really was some of the more leaning-in early adopter type customers that were adopting it for the past quarter. We were looking at a lot of the usage patterns and seeing their use cases. The first set of use cases was dominated by the core functionality we have today, which is summarizing documents quickly, extracting information from documents as a user is sort of reading that. So some powerful end-user productivity use cases. But quickly we got feedback that probably the biggest areas of excitement is one, the ability to ask multiple documents a question. So that's the multi-document analysis functionality that we're working on, that will be embedded in our hubs product. For customers with Box AI in their Enterprise Plus plan, they'll be able to ask questions inside of a hub of any number of documents. It creates a really powerful end-user productivity and business productivity capability. And then secondarily, the big breakthrough use case is really the ability to structure unstructured data. We have a number of customers right now in our early beta program leveraging our metadata extraction capabilities through our API. An example is a loan processing company where they have loan submissions coming in. They need AI to quickly read bank statement uploads from that client and ensure they associate documents with the appropriate components in their Salesforce record. Automating that process is saving them a ton of time and allowing them to issue even more business and loans. This combination of Salesforce, Box, and Box AI is creating powerful solutions that we can deliver to our customers, moving us more into the intelligent document processing space. We'll talk more about this at Financial Analyst Day on what we're going to do here.

Pinjalim Bora, Analyst

Yeah. Got it. One quick one for Dylan. Billings growth in constant currency was very strong coming above your guidance. RPO seems to have accelerated. Both of those billings growth and RPO in constant currency seem to be running ahead of your revenue guide for the year. Maybe talk about the early renewal and how much that influenced billings. And more broadly, do you see the 6% growth for this year as kind of a trough level going forward?

Dylan Smith, Co-Founder and CFO

Yeah. I would say, first to underscore that for both what we delivered in Q4 on our expectations for RPO, at least for next year, we do expect those to track ahead of revenue. The Q4 performance, in addition to the early renewal tailwinds, is due to the stronger performance overall, more stabilization, and better execution. While the environment remains challenging, that gives us confidence to talk about the stability and improvements in various top-line areas, including the net retention rate. As for early renewals in Q4, that had an impact of a couple of points to the growth rate. So even adjusting for that would have still been ahead of our expectations on a reported basis and in constant currency. FX was a little bit more of a headwind, about a point more than we had anticipated going into the quarter. So overall, just a stronger quarter in Q4 than we had seen earlier in the year.

Pinjalim Bora, Analyst

Got it. Thank you.

Operator, Operator

Your next question comes from the line of Steve Enders from Citi. Please go ahead.

Steven Enders, Analyst

Thank you for addressing my questions. I would like to follow up on your previous comments regarding the macroeconomic and deal environment. It appears that the trends you observed last quarter have remained consistent. However, I would like to clarify this point. Additionally, as we look towards the future, what are your assumptions regarding further stabilization or a potential improvement, and how is that influencing the net retention bottoming you mentioned?

Dylan Smith, Co-Founder and CFO

Sure. We'd describe the overall environment in Q4 as pretty stable with Q3. There are some incremental signs of life and improvement and some customers leaning in a little bit more and getting excited about things like AI in particular. But the reality is it remains a pretty challenging environment. Our execution in Q4 was stronger than in Q3. For example, we mentioned in Q3 that there were larger deals in Japan that we were expecting to close that didn't close. We ended up having a strong Q4 overall, including those deals, coupled with great performance in the public sector in the US. So there are definitely areas of improvement leading to a better outcome versus prior quarters this year. In FY'25, we are assuming the environment remains challenging, so we are not baking in any macroeconomic recovery into our expectations. The expected improvement in top-line metrics, including net retention rate, is because we are now lapping some of the more challenging periods over trailing 12-month metrics. As you move through the year, we expect those metrics to bottom out at Q4 levels or slightly above, depending on how things normalize.

Steven Enders, Analyst

Okay. Got you. That's helpful context. And then maybe on suites in particular, I think you mentioned less around the Enterprise Plus tier this call. Any changes in how you're thinking about the tiering moving forward or the adoption of those higher price plans?

Aaron Levie, Co-Founder and CEO

Yeah, I did call it out briefly in my prepared remarks that we will be introducing a higher tier plan. No change in that strategy, and we'll add more color at our Financial Analyst Day around it. The only reason we're not being super precise is that we don’t want to get ahead of our customers too much and want to ensure we discuss it more generally when it's fully available. You can sense that we will have additional higher tier functionality that includes some degree of higher tier AI functionality, some advanced workflow, and content management features with Crooze, as well as other capabilities.

Steven Enders, Analyst

Thanks. Perfect. Great to hear and looking forward to the event in a couple of weeks.

Aaron Levie, Co-Founder and CEO

Yeah. Thanks.

Operator, Operator

Your next question comes from the line of John Messina from Raymond James. Please go ahead.

John Messina, Analyst

Hi, thanks for taking the question. This is John on for Brian. Just another one on Box AI. I realized it just went GA today. But I'm curious as it was in beta, how AI has impacted the pipeline for suite adoption, just any additional color we can get there?

Aaron Levie, Co-Founder and CEO

Yeah, we saw customers move into Enterprise Plus, where Box AI was one of the biggest contributing factors. Across various sectors and sizes, they wanted AI for their content to ask content questions, summarize information, access multi-document AI as hubs become available, and through our APIs. Because of our pricing model, customers had to upgrade into Enterprise Plus to access that technology. We expect that to continue throughout this year. There will even be higher-tier functionality that customers may want, such as performance models, customization, and creating custom AI use cases.

John Messina, Analyst

Great. That's great color there. And then just on suites adoption overall, I think you've spoken to being on track to hit 65% of revenue by 2026. Is that still the right way of thinking about the cadence of adoption, or has AI accelerated that? And then how should we think about maybe the long-term, what suites can contribute to revenue? Thank you.

Dylan Smith, Co-Founder and CFO

We would describe suites momentum and penetration as certainly ahead of our expectations when we launched those suites. About a year ago, we pulled in the timeframe in which we expected to have the majority of our revenue coming from suites by a full year to the end of this year. So, once again, ahead of expectations. This is being driven by the way Enterprise Plus resonates with our customer base. In Q4, a few larger customers with one to two products were convinced of the value of our full platform and upsold into E+. We'll provide more commentary on forward longer-term expectations at Analyst Day, but the pace of how we expect adoption to move is faster than we expected one or two years ago.

John Messina, Analyst

Thank you very much.

Operator, Operator

Your next question comes from the line of Rich Hilliker from UBS. Please go ahead.

Richard Hilliker, Analyst

Hi. Thanks for taking my question. On your prepared remarks, I think you highlighted a construction and a healthcare deal. I was wondering if you could talk a little about your vertical strategy moving forward or any change to that sort of appetite? Thanks.

Aaron Levie, Co-Founder and CEO

What we're seeing is that we do extremely well wherever there is a large amount of unstructured data in an enterprise that needs to be secured. It’s often a compliance or security-driven workflow. This aligns well with many regulated industries such as the public sector, financial services, healthcare, life sciences, and global manufacturing. We want to put even more emphasis on these key verticals in the year ahead without reducing focus on others, focusing on doubling down in key spaces. AI provides great additional use cases for mining through unstructured data that those industries work with. This could involve automating processes in pharma or client onboarding and wealth management services in banking. Where a large amount of unstructured data or content needs processing, security, management, and governance is where our platform is well aligned. That’s where we aim to double down in our vertical strategy.

Richard Hilliker, Analyst

Great. Thanks. I'll leave it there. Appreciate it.

Dylan Smith, Co-Founder and CFO

Cool. Thanks.

Operator, Operator

Your next question comes from the line of Jason Ader from William Blair. Please go ahead.

Sebastien Naji, Analyst

Hi, this is Sebastien Naji on for Jason. Thanks for taking the question. Just one from me, really around competition. Aaron, I'm curious to hear how you think AI impacts the competitive landscape for ECM. Could we see increased pressure from vendors like Google or Microsoft, who are maybe paying more attention to their historically limited FSS offerings now that there's a whole new universe of things you can do with that data once you apply AI to it? There seem to be a bunch of new ways that those vendors can monetize this FSS data, especially given their leadership with AI, and that could push them to be more competitive with Box over the long-run. How do you respond to that?

Aaron Levie, Co-Founder and CEO

There are elements where the value of unstructured data and content has gone up because of AI, and that's a key point. That means anyone prepared to drive innovation on unstructured data should see this as a positive. It also means that many legacy solutions and fragmented architectures are under greater threat as companies seek more value from their content in this new AI-driven world. That is positive for us within our customer base. Our near-term roadmap, including the combination of Crooze interfaces for no-code applications, workflow automation, and platform-neutral AI from various vendors, creates a potent combination that doesn’t exist elsewhere in terms of the names mentioned. We feel strong about our competitive position, reinforced by customer conversations. By being platform-neutral and not involved in model training, we want to enable innovation for our customers without them needing to pick between different AI vendors. So this puts us at a unique advantage.

Sebastien Naji, Analyst

Great. Very helpful. Thank you.

Operator, Operator

Your next question comes from the line of George Iwanyc from Oppenheimer. Please go ahead.

George Iwanyc, Analyst

Thank you for taking my questions. With the incremental sales and go-to-market investment you're highlighting for this year, can you give us a sense of where you're prioritizing the additions, how much is going into the direct sales force, and how much into the channel and go-to-market efforts?

Dylan Smith, Co-Founder and CFO

Think about the majority of that increase in sales and marketing spend going towards scaling programs to generate demand, which have been performing very well for us, especially laid on the optimizations we've made in field marketing and our digital channels. We will also invest in scaling the sales force moderately. But most of the dollars will be towards demand generation versus disproportionately scaling the sales force. You'll hear a lot more about our go-to-market strategy and details regarding those investments at our Financial Analyst Day in a couple of weeks.

George Iwanyc, Analyst

And Dylan, maybe can you give us a bit more color on what you're seeing internationally? It sounds like you did catch up in Japan, but with the incremental FX headwinds you're seeing there, how is the demand pipeline looking?

Dylan Smith, Co-Founder and CFO

It remains very strong. Japan, particularly the enterprise segment, is one of those areas. Even with the FX headwinds we've seen, our Japan business grew in the mid-teens over the past year. Continuing to show very strong growth. In international markets more broadly, EMEA is stable at levels not quite commensurate with our opportunity. But investments will help fuel our reach and the business we can generate there.

George Iwanyc, Analyst

Great. Thank you very much.

Operator, Operator

Your next question comes from the line of Rishi Jaluria from RBC. Please go ahead.

Rishi Jaluria, Analyst

Wonderful. Thanks for taking my question. Just one from me. Just turning back to AI and kind of starting to put some numbers around it. Number one, have you embedded any upside from AI, whether direct or indirect this year in FY'25 guidance? And then not to front run the virtual Analyst Day in a couple of weeks, but as you think about building out your long-term targets, what are you starting to assume in terms of actual AI revenue as you build out those targets? Thanks.

Aaron Levie, Co-Founder and CEO

Yes. We have seen the upsell trends from customers moving into Enterprise Plus, which is an additional catalyst. We have a quarter of data to look at, and we're continuing to extrapolate that, but we want to be conservative because it's an early product. We are not expecting any outsized dynamics from AI but are seeing it drive Enterprise Plus upsells. Platform consumption from AI that isn’t particularly embedded may create upside in the medium term.

Rishi Jaluria, Analyst

All right. Really helpful. Thank you.

Operator, Operator

Thank you. That concludes our question-and-answer session. I will now turn the call back over to Cynthia for closing remarks.

Cynthia Hiponia, Vice President, Investor Relations

Thank you, everyone, for joining us today. We look forward to hopefully seeing a number of you at our virtual Investor Relations Day. The registration is now live on our IR website, and that is going to be on Tuesday, March 19th. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.