Good day and welcome to the Box Inc. Second Quarter Fiscal 2016 Earnings Conference Call. This call is being recorded today, Wednesday, September 9th, 2015. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following management's prepared remarks. [Operator Instructions] It's now my pleasure to turn the floor over to Alice Lopatto, Senior Manager of Investor Relations. You may begin.

Good afternoon, everyone, and welcome to Box's second quarter fiscal 2016 earnings conference call. On the call today we have Aaron Levie, our CEO, Dan Levin, our COO and Dylan Smith, our CFO. Following our prepared remarks we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The webcast replay of this call will be available for the next 90 days on our company website under the Investor Relations link www.box.com/investors. During portions of today's call, we will be referring to presentation materials posted on our Investor Relations 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 Q3 and fiscal year '16 financial guidance and our expectations regarding our financial results, market adoption of our solutions, our market size, our operating leverage, our path to and our expectations regarding achieving positive cash flow and profitability, our planned investments, our growth strategies, and expected benefits from our new products and partnerships. 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 in 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 those set forth in such statements. These forward-looking statements are being made as of today, September 9th, 2015 and we may disclaim any obligation to update or revise these statements. If this call is reviewed after today, the information presented during this call may not contain current or accurate information. 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 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. With that, let me hand it over to Aaron.

Thank you, Alice. Good afternoon, everyone. Q2 was a breakout quarter for Box across multiple dimensions. We feel more confident than ever that we're well positioned to capture the large and growing market for enterprise content management and collaboration. Box is growing quickly and we continue to invest in our products and distribution while making steady progress towards achieving positive free cash flow. This quarter we added and expanded thousands of customers and continued to maintain our best-in-class low churn and high expansion metrics. We saw some important partnership and market developments, like our new global IBM partnership, Box's deepening relationship with Microsoft and integration with Office 365, and EMC's divestiture of its competing division, Syncplicity. Also, we introduced new industry leading functionality in our core enterprise content management product and continue to drive momentum with the Box platform and Box for Industries. These achievements illustrate our continued execution on our strategy and I will go into all of them in more detail in a few moments. But first, let me summarize our financial results. Revenue and billings in Q2 were $73.5 million and $79.6 million, representing year-over-year growth of 43% and 45%, respectively. We're now approaching an annualized revenue run rate of $300 million and compared with the broader SaaS landscape, we continue to show a rare combination of strong growth at significant scale. In Q2, our cash from operations was negative $21.7 million, compared to negative $26.3 million a year ago. As previously stated, we remain committed to achieving positive free cash flow in the quarter ending January 31st, 2017. Dylan will go into more detail on our financial performance this quarter. But before I hand it off I'd like to highlight three areas of substantial progress in Q2, customer momentum, partnership and market developments and continued innovation.…

Thanks, Aaron. Good afternoon, everyone. And thank you for joining us today. As Aaron highlighted, we had another strong quarter in which we exceeded expectations on key metrics of growth and profitability. We believe more than ever in our huge market opportunity and we have been investing to capitalize on our leadership position. In Q2, we added our 50,000th paying customer and we approached a run rate of $300 million in annualized revenue. As we continue to scale, we are seeing increasing efficiencies and we remain committed to achieving positive free cash flow in the quarter ending January 2017. Now on to our results for the second quarter, which ended on July 31st. We delivered revenue of $73.5 million, representing year-over-year growth of 43%, well ahead of expectations. Billings were $79.6 million, up 45% from the prior year. Cash flow from operations was negative $21.7 million, or 30% of revenue. This compares to negative $26.3 million in the prior year, or 51% of revenue. This result illustrates the success of our financial model as we continue our march toward positive free cash flow. Non-GAAP operating margin was negative 45%, compared to negative 57% a year ago. Finally, our retention rate was 121%, comprised of churn and net expansion. Our churn rate remains best in class for software companies at only 4% annualized and was a full percentage point better than the same quarter last year, demonstrating our customers' loyalty, as they are choosing to stay with Box for the long-term. Our net expansion rate was 25%, primarily reflecting strong seat growth in existing customers. As we continue to see customer contract value increase and our recurring revenue base grow, this will inherently put pressure on our net expansion rate. That being said, we expect to see net expansion remain above…

[Operator Instructions] And we'll take our first question from Phil Winslow with Credit Suisse. Please go ahead.

Thanks, guys. Congrats on a great quarter. Just two questions here, one for Aaron and then a follow-up for Dylan. Aaron, obviously, you mentioned a lot of events that have taken place in the past few months here. But I really wanted to focus in on the IBM relationship. Wondering if you could just double click on that. From your perspective, what does it say when you have a large established legacy enterprise content management player such as IBM partner up with you guys. What was their thought process, what was yours and what do you think it means. And then for Dylan, you mentioned obviously sales reps and leverage there on the sales and marketing line longer term. Why don't you give us a sense for what you're seeing as far as the mix of ramped versus ramping reps and then just how you kind of think about sort of the matrix between you adding more reps going forward and productivity improving?

I'll go first. Thanks, Phil. So to the IBM question, this has been a little while in the making. IBM's obviously the leader in a lot of the systems that power enterprises, including enterprise content management and a lot of the technology that goes into that like workflow, eDiscovery, case management, more than just the sort of basic management of files and sharing files. So what we found with IBM was that our strengths were actually incredibly complementary. At Box, we're 100% focused on building incredibly great end user experience to be able to share and collaborate around content in the cloud. IBM being incredibly great at the sort of depth of capabilities around working with content at scale and in enterprise and how you secure and manage it. So what we found was instead of IBM kind of entering our space and building out a lot of the end user functionality that we've created that we can actually partner up, where Box provides the secure file sharing collaboration tool to our joint customers and IBM takes a lot of the DNA and domain expertise they have in - again, all the new - all the advanced ways you work with content and we're jointly developing new solutions around how to go do that. So those are - that's in the joint product development area. So you'll see us actually bring new products to market, again leveraging IBM's existing technology and some new offerings as well as Box's cloud platform. And then IBM, through their both sales force as well as consulting, will be able to actually resell and bring Box to market as kind of a key channel partner. We'll be doing the same with some of these new joint solutions. So we think this opens up a huge part of the market that IBM is obviously a leader in and bringing us into those kind of conversations. So we're very, very excited about the partnership. We think it's very meaningful for our category, but also pretty meaningful for the enterprise software industry broadly.

Phil, this is Dylan. On the ramp versus ramping rep question, say approximately two-thirds of our sales force is fully ramped. And over the last couple of years, as we've talked about, we've been investing more aggressively and hiring more rapidly in our field sales organization. And given the size of the market opportunity and what we're seeing in the market, we've been pretty focused on growing that sales force. We mentioned in the past we expect to grow that team by 20 something percent over the course of this year. That said, as we highlighted, we're also very focused on driving additional productivity improvements across the sales force. And to give just a sense of some of the things we've been most focused on, we've talked a lot about our channel relationships that are maturing, including, most notably, IBM as we've highlighted on this call. We also have a major effort around revamping our website and online sales experience to be able to better serve customers and serve our smaller customers more efficiently, focusing on tools and automation and we've seen a lot of great progress there. And similarly, really for this year, for the first time, we've been released new products such as Enterprise Key Management, Box Governance and soon the Box Developer Edition and those new products, combined with some of the change we've made in our pricing strategy are also designed to give our reps more to sell and ultimately drive productivity improvements. So those are just some of the things we've been working on to increase rep productivity.

Great. Thanks, guys.

And we'll take our next question from Melissa Gorham with Morgan Stanley. Please go ahead.

Great. Thanks for taking my question. I just had a follow-up question on the IBM relationship. I understand it is probably going to be a long rollout. But can you maybe help us understand the time line on how we should expect that to ramp, particularly the timing around when the IBM sales force will be able to sell Box?

Yes. So we're - we've ramped up pretty quickly. I think, all things considered, given the scale of IBM and the scale of the partnership. And so we are in market today working with joint customers. Given the sales cycle in general of enterprise software, we certainly think this will accelerate that to some extent. But we're still very early in kind of actually executing on the new transactions and sales. So I would expect this to become a pretty significant additional go-to-market effort for us, certainly going into next year. And in the near term it's all about really kind of laying those conversations right now and getting into more accounts.

Okay. Great. And then a question for Dylan on the net retention rate. That continues to be pretty impressive. I'm just wondering to what extent is that more seat driven, where you're going in, selling additional seats or are you starting to see some of the impacts of selling additional SKUs, like the Enterprise Key Management, where you are seeing that 20% to 30% uplift. Is that starting to impact the retention rate or is that more on the come?

Sure. So historically, as this is the retention rate over the last year, the vast majority of that output and that expansion has been driven by seat expansion. We are now for the first time, really at the very end of Q1 and moving into this most recent quarter, starting to see some impact from these additional products. But as you think about the overall rates, that is almost entirely driven through seat expansion rather than new products that we're selling into our customers.

Okay. Great. Thanks.

And we'll take our next question from Rob Owens with Pacific Crest.

Great. Thanks for taking my question. Wanted to drill down a little bit on your Enterprise Key Management and new Governance solution. Just what the take rate looks like, what conversations with customers are. They are clearly differentiating versus what other folks have in the markets. And then I guess more broader sense, what do sales cycles look like? Are they improving at this point? Just any color you can provide? Thanks.

Sure. Yes. This is Aaron. So there's been a significant amount of interest in both products. Obviously, EKM has been out in the market for a couple extra months. We have dozens of deals in the pipeline on the EKM side. The sales cycle is obviously a little bit longer, just because there's a whole evaluation of the encryption technology and the type of customer that's buying it is usually a very large customer in a regulated industry. That said, it's getting us into very large number of new conversations and news accounts that we would not have been able to sell to otherwise. So it's already been extremely effective in enabling us to go sell to new companies even in cases where they haven't ended up needing EKM. That as an option or optionality in the future has actually become very important for us in our sales cycle. So that's actually pretty important to note. On Governance, it has - Governance, because there's no kind of additional hardware any other kind of technology required. We believe this will be a little bit more universal than EKM. EKM is way more about large enterprises and regulated industries. Governance is for any type of company that wants to be able to manage the life cycle of their content and Governance as a package is still actually very early in Box. So today it contains legal hold and retention management capabilities, but over the long run, Governance will really be the set of capabilities for any customer that wants to replace things like archive and backup and any other kind of technology that's meant to manage the full life cycle of their content. And so that will support a lot of regulatory use cases. It supports the ability to retire legacy infrastructure in an enterprise. And we're already seeing a pretty significant amount of interest and pickup because of these set of capabilities. So we're early in selling both of these SKUs, but they're having very meaningful impact in our conversations and the kind of comprehensiveness of our platform which really goes toward differentiating against a lot of the other file sync and share players in the market and even gets us much closer to a lot of the incumbent enterprise content providers.

Great. Thank you.

And our next question will come from Mark Murphy with JPMorgan.

Yes, thank you very much. I will add my congratulations. Aaron, I believe you said over 1 billion Office documents are stored in Box. I guess I just wanted to verify whether I heard that correctly or not. And perhaps, could you help us to size that, maybe what percentage of your total content does that represent? And based upon the announcement with Microsoft, do you expect an increasing trend of Office 365 users leveraging Box based on that?

Yes. So you did hear the statistic correctly. We have 1 billion - over 1 billion Office documents stored within Box. We don't break out the percentage of Office documents relative to other content types. But as you can imagine, for a lot of knowledge worker type use cases, Office represents a significant share of that type of information. But given all the variety of content we store, it's not sort of the majority. In terms of our relationship with Microsoft and how that's has changed and where we see the impact being, we have long assumed that enterprises were going to move things like their e-mail, their office productivity and calendaring to cloud solutions. And so we've been in a world which is all about powering that heterogeneous cloud oriented model for a long time. And now with our partnership and integration with Office 365, we can now deeply integrate with things like Office in the cloud, Office on mobile and the desktop coming soon. We're already integrated with Outlook on mobile, and so you'll see more Outlook integrations over time. We are incorporating Box into a set of new Azure security solutions. We're building a Windows 10 application. So you'll see us work with Microsoft across a variety of their products and thus you'll see way more activity and engagement with customers that are going Office 365, using Box in tandem with those products. And so we are seeing Box really get sold at the same time that a customer is going with Office 365 as the content management solution and set of capabilities around that product, but we're also being sold after a customers' gone with Office 365 and realizes that there's still a huge amount of requirements around content security, collaboration capabilities, workflow, metadata, a lot of the things that Box is uniquely specialized in that Office 365 doesn't have today. And so that's where we're seeing a significant amount of traction as well.

Okay. Great. And then just as a follow up. I was wondering how would you characterize the adoption trend for some of your value added layers that would seem to add to the stickiness of the product? I'm thinking of work flow, compliance, EKM security, version history, some of the other features. I definitely heard your comment on Governance becoming more universal near term. But I'm wondering at a higher level just how broad based are those features becoming and maybe which ones you think are resonating best with customers?

Yes. So I think – so first of all, our customer base is in a variety of stages of how they're leveraging the platform and the product. I think, as represented by our net retention rate and the fact of our 4% churn on an annual basis, you can really see the level of stickiness that our customers have around our product. And when you think about that across the tens of thousands of businesses that we work with, we think that's actually a pretty important metric and point to note. And now with things like Governance, with EKM and with our platform in particular, you're going to start to see customers leverage Box for much more mission critical and in places, in a number of different contexts than they are using Box today. And that's what our road map is really all about. So beyond things like version control or sort of advanced file sharing and collaboration tools, really enabling an all new set of use cases. So a hospital being able to use Box to enable access to medical images or medical records in a patient portal. A financial services firm using Box to be able to share and work with their clients and their investors. A retailer being able to distribute content across their entire supply chain. So when you think about, now, some of the more advanced use cases around content and collaboration, this is really where we are driving our platform in the future and where we're starting to see customers really begin to engage with us. And that's where I think the big transformational opportunity will come into play and that's something that really none of our other competition is focused on right now.

That's great. One last very quick one for Dylan, if I may. Dylan, I seem to recall, I think at some point you might have given a metric around the percentage of registered users that are paying. And I'm just curious if there's any - if you've seen any change in trend or if there's any update to that disclosure?

Sure. So we have continued to see the trend of a greater percentage of our overall user base as paid users. So that's currently about 11%, just shy of 11% and up roughly 200 basis points year-over-year. So as we've increasingly focused on the enterprise, while for users are still a very important part of our distribution strategy and how we go to market. We are seeing the trend continue where a greater percentage of our user base is paying.

Okay. Thank you very much for taking my questions. I appreciate it.

Thank you.

Thanks, Mark.

We'll go next to Terry Tillman with Raymond James. Please go ahead.

Hey, Aaron, hey, Dylan, how are you all?

Hey. How are you doing?

Pretty good. Aaron, first question and it is, I'll warn you, it's a multi-part question.

Okay.

On the platform front, you've talked a lot about that. It sounds like you have a lot of optimism around platform opportunities. But maybe just give us an update after you early released that. What kind of responses you're seeing from your customers and prospects, how material you could see that either in this year or for next fiscal year billings. And just generally speaking, maybe what the profitability profile would be on platform versus just direct selling?

Sure. So I'll cover the first parts of that and let Dylan share a little bit on the financial side. But we're seeing pretty tremendous traction early on. Again, just as a note, we have products usually go through two phases. The first is sort of a beta version where we engage with early adopter customers and work out all the different kind of kinks and then the product becomes generally available thereafter. So our platform - our Box Developer Edition, which is the new platform sort of edition that we announced, that's still just in beta. So we're not actually recognizing any revenue from that at this point. So I think the impact for this fiscal year will not be meaningful or material. But it's starting to drive some very important conversations and use cases for our customers both next year and then obviously beyond. So the interest is tremendous and we're seeing take up in industries as far ranging as government agencies, financial services institutions, healthcare providers, ISVs and software companies. So really across the board there's a deep amount of interest in leveraging the technology that we've been building out for 10 years in unique ways in their applications to solve very different use cases than what Box has traditionally been able to solve. That's really the opportunity for us, is to expose our technology to a market far broader than just the employees or knowledge workers within the companies that we sell to. So that's the opportunity around platform. We hired Jeetu, again, Jeetu Patel to help run that just in this quarter. So we're really adding a lot of leadership fire power to this area. And we're going to be investing in really building this out as meaningful part of our business in the coming quarters and years.

This is Dylan. As it relates to the profitability profile of the Box Developer Edition, while it is early, based on some of the conversations and the pricing model that we're working on, we would expect the gross margin of that product to be the same or even slightly better than our core offering. And the reason for that is while we do offer a lot of value to our customers and their customers as Aaron outlined, the use cases and the cost profile of a lot of the types of conversations we're having around the Box Developer Edition have a fairly light weight cost profile. Really, the majority of the use cases are all about file access, sharing and some of those things that don't have a heavy cost component. So we're pretty optimistic around the profitability profile of the platform initiatives.

Yes. Maybe only one other thing to note is I think it's also important to recognize that our customers have been using our APIs for quite some time. So building out a platform has not been new to the business. It's just we're charging for it in a very different way today. So we have – we already have thousands of customers that use our APIs and build unique applications on top of it and this is really about adding a new business model to that and enabling our customers to do way more transformational work flows on top of our technology, things like digitizing loan transactions, digitizing government work flows, all of these new use cases that Box won't directly go out and solve.

Okay. Thank you on that. Dylan, as it relates to four deals over $500,000, was IBM part of that mix, and were there any outliers in that mix of four deals?

Sure. IBM was one of those four deals and was - as we mentioned, one of the largest deals we've signed in our history. So that was with largest of the four. But I wouldn't say there's any outliers or any that had a huge impact on the Q2 billings outcome.

Okay. And just Dylan, just as a wrap-up, is there anything we should think about comparability wise as we move into 3Q or 4Q in terms of anniversarying any extraordinarily large or outlier transactions or was it kind of meat and potatoes type deals last year that we're dealing with on the anniversarying? Thank you.

Sure. So as it relates to looking into the back half of the year and some of the comparisons, especially on the billings front, we did have, especially in Q3, a very strong quarter last year. So not necessarily the result of any very large outlier deals. But we closed 48 deals of more than $100,000 in value in Q3 of last year, which was far more than the number of deals we closed in that category in Q1 and Q2 combined. So that is - for that reason, we had a both calculated billings and adjusted billings growth north of 50% in Q3 of last year. So it's certainly a tough comp, but nothing sort of extraordinary in terms of payment terms or outlier deals. But just a very strong quarter overall that we'd be comparing to in our current Q3.

Got it. Thanks. Nice job.

We'll go next to Joyce Yang with Bank of America Merrill Lynch.

Hi, guys. Thank you for taking my question. I wanted to dig a little deeper into the large number of deals you guys have done over 500k and 100k. Was there any deals bigger than the 500k that had EKM by any chance?

I don't believe any of the $500,000 deals involved EKM in this quarter.

Okay. And in terms of the large number of deals greater than 100k, would you say that they are mostly driven by the new product launches that you guys had introduced in the last six months or would it be more of a general improving environment that you're seeing from the buyers?

Joyce, this is Dan. Thanks for the question. As Aaron mentioned earlier, we're still pretty early in the deployment of our new products. So the strength that we've seen in larger deals in this quarter is really just the natural progression of our move into larger and larger enterprises over time.

Got it. That's helpful. And Dylan, just one question about professional services, if you can give some more color on that.

Sure. Just the overall kind of effort and or from a financial standpoint?

Yes, from a financial standpoint, as well as overall effort.

Sure. So we found that our customers who work with our Box consulting team are more engaged. And so we've been recently ramping this team. Over the last few quarters, Box consulting revenue has come out in the 3% to 4% range of revenue and we expect it will remain in the single digit percentage of revenue range for a while. Although trending slowly upward over time especially as we deal with these more - with these larger enterprises and build these more strategic relationships, we think that there is - it is a very important investment area for us and very important way for us to add more value to our customers. But from an overall revenue scale standpoint, we would still expect that to remain less than 10% for some time.

Got it. Thank you. That's helpful. Thanks, guys.

And just to clarify briefly, one of the four deals over $500,000 this quarter did include EKM.

Okay. Great. Thanks. Congratulations.

And we'll go next to Ittai Kidron with Oppenheimer. Please go ahead.

Thanks. Congrats, guys, great quarter. I wanted - you touched a lot on IBM. But maybe can you talk about how the IBM business skews some of the economics. Is anything in either deal sizes or margin profile from this business different such that it skews some of the parameters that you're giving?

Thanks for the question. This is Dan. As we've discussed in the past, somewhere in the vicinity of 20% to 30% of our revenue comes through indirect channels, reseller partners of one form or another. AT&T is a great example. Our reseller relationship with IBM is on comparable economic terms to those other relationships and we've said in the past that we expect that overall to grow as a percentage of revenue going forward. So IBM as a reseller in our business will lead to us doing larger deals. It will lead to us doing deals with a more global footprint because they have boots on the ground in regions where we don't. But we don't expect it to skew our economics in a sort of unnatural way.

Okay. Very good. And a couple questions for you, Dylan. First on the net retention rate, the 121%, it's been declining for a few quarters and I understand kind of large numbers working their magic here. But as you mentioned before, this was most of the expansion up until now is seat driven. Now that Governance is kicking in and EKM, would you expect this number to stabilize, potentially start moving up or should we think about continued decline here? And then the second thing, going back to the comparability question that you had before, yes, you had a very strong bookings number in the third quarter, but you also had a very strong fourth quarter, if I remember correctly, at least from a 100k transaction number, if I remember correctly. So are we looking at two quarters perhaps, maybe not just one, but maybe a couple quarters of tough year-over-year comps to go through?

Sure. So on the first question around the retention rate, as mentioned, so as you noted that rate has been decreasing over the past few quarters and it was 25% in net expansion and what I would highlight is because of the combination of the new products that we're introducing, as well as just the steady state strong seat expansion that we have seen and would expect to see going forward, given the fact we still have a lot of room to grow in even many of our largest customers, we would expect that expansion rate to remain above 20% for some time to come. So we may see that gradually decline a little bit further, but really stabilize, to your point, and we do have the opportunity, especially if we see really strong adoption of some of these new products and the Box Developer Edition that we've been laying out, there's some upside on those trends as well. But we wouldn't expect that rate to continue to decrease at the same rate that we've seen the last few quarters and we're still really proud of that retention rate, where it is currently at 121%. On the other component of that churn, as I mentioned, that has been getting steadily better over the past few quarters and that's now at 4% annualized and we've just because of these new products and a lot of the trends we're seeing in our business, we expect to be able to maintain rates in that range. So that speaks to kind of the retention rate trends. And with respect to the large deal outcomes and in Q4 of last year, we did see a lot of large deal outcomes in Q4 as well, but we expect to see that just in terms of the overall seasonality of our business, especially for large enterprises and we see Q4 as being the seasonally strongest quarter. So while that was a very strong quarter for us in terms of large deal outcomes, I wouldn't call that unusually strong, whereas Q3, we had a much stronger outcome and more of those deals than we might normally expect based on typical seasonality and buying patterns.

Excellent. Very good. Congrats, guys. Good luck.

Thank you.

And it appears we have no further questions at this time. I'll return the program to our presenters for any closing remarks.

Thank you, everyone, for joining us on our call today and we look forward to speaking with you next quarter. Have a good night.

And this does conclude today's teleconference. Please disconnect your lines at this time. Have a wonderful day.