Good day, and thank you for standing by. Welcome to the Box, Inc. Fourth Quarter Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. Thank you. I would now like to hand the conference over to your first speaker today, Ms. Cynthia Hiponia. Ma'am, please go ahead.

Good afternoon, and welcome to Box's fourth quarter and full-year fiscal 2022 earnings conference call. I'm Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO; and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will be available for replay on our Investor Relations website at 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 full-year fiscal 2023 financial guidance. and our expectations regarding our financial performance for fiscal 2023 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, unrecognized revenue, remaining performance obligations, revenue and billings, and our expectations regarding the size of our market opportunity, our planned investments and growth strategy, our ability to achieve our long-term revenue and other operating model targets; the timing and market adoption of and benefits from our new products, pricing models and partnerships. The impact of our acquisitions on future Box product offerings, the impact of the COVID-19 pandemic on our business and operating results and our capital allocation strategies, including M&A and potential repurchases of our common stock. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our earnings press release priced today and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today, March 2, 2022, and we disclaim any obligation to update or revise them should they change or seek 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 our 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.

Thanks, Cynthia, and thank you all for joining the call today. We had a phenomenal year at Box. We delivered 13% annual revenue growth, well above our original guidance of 9% to 10%. We drove significant margin expansion to deliver a 20% non-GAAP operating margin, up more than 400 basis points from 15% a year ago. And we exceeded our commitment to achieve a revenue growth rate plus free cash flow margin of 30%, ultimately delivering 33% versus 26% a year ago. In FY '22, we continue to bring advancements in our category defining content cloud platform to the market with the worldwide launch of Box Sign, our native e-signature product offering. We made significant product enhancements in security and compliance, collaboration and workflow and strengthened our ecosystem of partner integrations. We've built the leading content cloud with well over 100,000 customers on our platform, and we have an exciting road map to continue our industry leadership going forward. Turning to Q4, we delivered strong results, marking yet another quarter of delivering both revenue and non-GAAP EPS above our guidance. We grew fourth quarter revenue 17% year-over-year, a fourth consecutive quarter of accelerating revenue growth and delivered operating margin of 21% and RPO of 19%, which is greater than revenue growth and is an important leading indicator of the strength of our business. Additionally, we saw strong results in the makeup of our customer wins and expansions in Q4. Our net retention rate was 111%, up from 102% in the prior-year and up from 109% in the third quarter, driven by the continued stickiness of our platform and customer expansion rates. We had 128 deals over $100,000 and nine deals over $1 million, up from 121 and 4 respectively. And for the full fiscal year, our $100,000-plus deals grew 25%…

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In fiscal 2022, we had three key financial objectives. To deliver accelerating revenue growth, to expand margins through our focus on operational excellence and to prudently allocate capital in order to return value to our shareholders. We are proud to have delivered against all three of these objectives. For the full-year of FY '22, we delivered annual revenue growth of 13%, which includes a roughly 60 basis point tailwind from foreign exchange rates. In constant currency, our strong results came in well above our initial guidance of 9% to 10% growth and represents an acceleration from the prior year's growth rate of 11%. We also delivered revenue growth plus free cash flow margin of 33%, exceeding our initial 30% target and achieving a significant improvement from the 26% we recorded in the prior year. Turning to Q4. We are pleased to have delivered exceptionally strong results, marked once again by accelerating revenue growth, continued improvements in our net retention rate, and record operating margin. Q4 revenue of $233 million was up 17% year-over-year, a fourth consecutive quarter of accelerating growth and above the high end of our guidance. Our revenue outperformance was driven by Suites momentum and by very strong deal pacing within the quarter. We ended Q4 with remaining performance obligations or RPO of $1.07 billion, a 19% year-over-year increase and once again growing faster than revenue. Over the past year, average customer contract durations has continued to lengthen driven by a higher volume of long-term strategic deals, which contributed to the strength we saw in our backlog growth. We expect to recognize more than 60% of our RPO over the next 12 months. Fourth quarter billings of $338 million represented 9% year-over-year growth and was at the…

Thanks, Dylan, and thank you again, everyone, for joining us today. I'd like to remind everyone that our Virtual Financial Analyst Day will be on Wednesday, March 16. At this event, you will be hearing from our executives as we do a deep dive into our product strategy, go-to-market efforts, workforce strategy and long-term financial model. The continued execution of our Content Cloud platform strategy will drive further annual revenue acceleration and continued margin expansion in FY '23. We are confident in our ability to achieve these results based on the customer momentum we've been seeing and our product roadmap and the total market opportunity ahead. Before we open it up to Q&A, I would also like to address the situation in Ukraine. As with all technology companies with business in Europe, we are monitoring the situation very carefully. Our top priority continues to be for Boxer safety and well-being and our thoughts go out to every Boxer customer partner and anyone directly affected by this. And I am proud that Box.org and Boxers globally are already given to relief efforts for those affected. Thanks again for joining us for this call today. And Dylan and I would now be happy to take any of your questions. Operator?

[Operator Instructions]. Your first question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Yes, thank you. Hey guys. I guess a couple of ones for me. First, just on the NRR, which continues to show nice improvement. You talked about it being consistent throughout this year. I guess my question is, if you're going to continue to see good traction with Suites and Enterprise Plus, what are some of the -- I don't know, what are some of the pressure points that could prevented from going higher from here?

Sure. I'll take that. Jason, this is Dylan. So the net retention rate that we've seen improvements recently over the last year is comprised of 15% expansion, and we also improved the churn side of the equation to 4% which is where we get to ending the year at 111%. You're spot on that, a huge driver of our net retention rate is going to be continued momentum in Suite sales and would note there that we expect those trends to continue. We just also expect to see more normalized and more challenging comparisons as we have been driving that momentum over the last year. So definitely remain confident in seeing really strong Suites momentum that should show up in our overall net retention rate.

Got you. I guess what I'm getting at is are you trying to be conservative there? Is there a chance that it could be better if the expansion rates rise just given the attach rates on Suites?

Yes, so definitely as always, with the expectations we said, we do want to be prudent with those. So we do see some upside given the momentum that we've been driving in Suites. And then I would also note that like some of the other top-line metrics that we called out, FX will have a little bit of an impact -- a downward impact to our net retention rate as well, but feel really good about the targets that we've laid out there.

Awesome. All right. Thanks. And then, Aaron, on the quarter on Q4, you had a 111% NRR, but you had the really high revenue growth rate that speaks to success with new customers, I guess. What are you doing differently with new customers that's allowing you guys to have the success there? And then how do you think about kind of land versus expand in '23 and beyond? Is it do you read into one more than the other? Or is it just kind of a balanced approach?

Yes, I think it will continue to be a balanced approach as time goes on. And we do at our Analyst Day, we'll talk about the kind of mechanics of the land and expand motion and how we've been optimizing it, especially with our Enterprise Plus plan, which is included in our Suites. So Q4, as you can tell from the metrics, both a very strong quarter in terms of upselling, but also a strong quarter in some of the new wins that we had. One example, we just did a press release yesterday around our win with the Japan Post, obviously, major leading government agency in Japan that powers their postal service. So great new logos coming on the platform across government, financial services, and large industrial companies as well as just a fantastic quarter for expansion into ePlus and our new capabilities. So we'll give again that perspective of how that land and expand model is working at the Analyst Day. But overall, just -- we're going to continue to focus on that balance of growing existing customers and bringing on new logos as we scale.

Yes, and just to build on that, this is Dylan, as a reminder, we've tended to see over the past year, roughly 70% to 75% of our new bookings coming from existing customers, and that's roughly the range that we expect to see in the year ahead as well.

And that's what it was in Q4 also?

Yes, in that general range. Yes and again, for Q4, the revenue did get a little bit of strength also from the very strong deal pacing that we saw in the quarter. But generally in line with the type of contribution that we've been seeing from net new versus existing customers.

Thank you, good luck guys.

Thanks.

Your next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

Hi, it's actually George Iwanyc. So maybe digging into a little bit on Jason's question with the NRR. Maybe with the larger customers, can you give us a sense of how you feel about your user penetration? And then on the expansion side, are you already seeing Box Sign adoption? And what kind of leverage are you getting from Shield as well?

Yes. Thanks. So we continue to see very healthy upside in terms of the total potential seat count that we can increase within even our large enterprise customers. I mean we certainly do enterprise license agreements. And in Q4, we had a number of those where a customer elected to buy Box for their entire organization. But on the scale of the thousands of customers that we transacted with in Q4, it's still a very, very, very low percentage of that. So a lot of potential for seat expansion -- and now with our Enterprise Plus plan and our API volume licensing, we really have three vectors of growth even from the existing installed base. So we can continue to expand seats as more use cases get leveraged for Box. We can move customers up to increased price per seat plans like our Enterprise Plus edition, and we can drive the volume of APIs using new use cases on our platform, which get independently monetized. And Box Sign was a great example of that in Q4 where we had a six-figure deal just for Box Sign APIs in the quarter. So overall, multiple levers of growth from even the installed base and even our largest customers. And then to your point on Box Sign, while Q4 was the first quarter where the product was fully out globally. We are seeing really great signs of initial adoption and traction as well as deals that are now coming in as a result of Box Sign being a part of our portfolio, as I mentioned, that six-figure transaction. And right now, the core focus is to drive as much adoption as possible across the customer base with Box Sign. But the early signs of the product rollout are fantastic. And our road map of features coming this year is going to be nearly in order of magnitude more than what's in the product today. So we're very, very excited about what's to come.

All right. And Aaron, maybe just one more question. You've mentioned pricing. Can you give us a sense of what the pricing environment is right now and what's the sales productivity gains you're seeing, how much discounting are you doing? Or are you able to largely hold pretty strong?

Yes, I think our competitiveness relative to the pricing metric remains very strong. We -- I think we had a great quarter of both holding price and increasing -- as customers move to our higher-tier additions. And I think what you'll find is, as we expand out our Content Cloud portfolio. So Box Sign from last year, Box Shield from a couple of years prior in relay and Box Shuttle last year. And then now coming into this year, some pretty exciting product areas that we're going to be investing in that we'll share more at Financial Analyst Day. What you're seeing is that we can consolidate now multiple categories of IT spend in a single offering. That gives us significant pricing leverage over time because now for the price of Box with some uplift as you move to ePlus, you now might have access to two or three other technology categories worth of software all in one bundled approach. And so I think kind of give us continued pricing leverage as we go out to the market at the exact same time of delivering more value to our customers. So it's kind of the perfect win-win where we're going to actually cause the customer to spend less money on IT overall within the content categories that they have use cases in, but also we're going to be able to drive more value from our pricing. And that ultimately leads to a bunch of downstream results, improved gross margin. You mentioned sales productivity that's continued to improve as a result of our Suites and then ultimately, stickier and more retained customers.

Thank you.

Thank you. Your next question comes from the line of Steve Enders with KeyBanc Capital Markets. Please proceed with your question.

Okay, great. Thanks for taking the questions here. I guess maybe to start, I think you called out for the guide, you're expecting RPO growth to come in ahead of both revenue and billings. So I guess, what are you kind of seeing out in the demand environment that is giving you the confidence to say that? And I guess as part of that, how should we think about the contract duration as a part of that factor?

Sure. So definitely seeing a very healthy demand environment that impacts a lot of the top-line metrics that we provide and that we gave guidance around and RPO is it tends to be more of a leading indicator of growth is more representative of kind of the near-term momentum that we're seeing that ultimately then flows into revenue. And in terms of the duration, that has been one of the drivers of the outsized backlog growth, in particular, hence we have continued to see contract durations lengthen incrementally over the past year. But if you look at all the different components of RPO, those are up at pretty healthy levels, including on the deferred revenue side which is independent of those contract durations. So we feel really good about the demand environment and the underlying momentum that we're seeing in the business.

I guess just to put a little finer point are we assuming that duration on deals is going to stay pretty consistent in 2030, is that kind of what's being assumed here in the guide there?

Yes, we do expect -- we may see slight lengthening, but we'd expect those to be fairly stable, the durations that is in terms of where they are today.

Okay, perfect. And then on the gross margin guide, coming in about a point about where we are in 4Q, at least for the full-year. I guess what are you -- where the efficiency is kind of coming from in there to drive the improvement there? And I guess where are kind of the areas of investments as you think about the out-margin guide for '23.

Sure. So on the gross margin front, where we've been seeing a lot of leverage and what we're expecting going forward comes down to the combination of more efficiently managing the infrastructure that we host. And so doing a lot from a hardware and software efficiency point of view, really just simplifying the way that we deliver those services. And that shows up also if you look at the amount of capital leases and the payments that we're making, those have trended down pretty significantly and steadily as we've been able to optimize that infrastructure. And at the same time, continue to move more workloads where it makes sense with our public cloud partners, which also allows us to drive some incremental gross margin expansion. So that's from an infrastructure point of view. And then going back to the pricing and everything that Aaron was talking about earlier, as we do see customers kind of seeing more value out of Box and Solutions and paying more for those increasingly adopting Suites, for example, that also translates in not just higher pricing but higher gross margin for those customers as well.

Okay, thanks for taking the questions.

Okay, thanks. I was just going to touch briefly on the operating margin side, and you talked about the investments that we expect to make next year. We say nothing too different from the approach we've taken over this past year that has been working really well. And so as mentioned, we do expect to grow sales force capacity in the low to mid-teens percentage range, also going to continue to invest in a really exciting product road map that we have, but doing most of that in lower cost locations. So we feel really good about the leverage that we're going to be driving across the business as we move through the coming year.

Okay, perfects. Thanks again.

Your next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hey guys, this is Chase Donovan on for Brian. Thanks for taking the questions. Box Sign's indices really encouraging early results come out of that. I was curious about what else can we look for from a product perspective, it could fit in as an adjacent kind of M&A driver for the business?

Yes. So Box Sign overall, we're very, very been happy about the early results and traction that we're seeing. Great use cases across a very wide range of industries, and we're going to continue to follow-up with more and more updates to the street around how that product is performing and being adopted. As it relates to new product expansion areas, and I would say kind of both with and without M&A, as an example. We think about very disciplined technology tuck-in acquisitions where it makes sense to accelerate our product roadmap. But at the same time, the vast majority of our innovation is going to come organically. But you're going to see us continuing to expand out from the Content Cloud as this year goes on and certainly in the next couple of years. If you think about that content life cycle that we continue to show from the moment content is ingested into Box all the way to where it's retained and then integrated in any platform. There are various components around that life cycle where we're either going to be doubling down into additional deep spaces in security and compliance and in areas where we think we can expand into new adjacent collaboration and content markets that all makes sense on our platform. So stay tuned. Throughout the year, we'll be sharing more updates on this front as well as a little bit of a preview at our Financial Analyst Day. But it's really all about making sure that customers can complete that complete content life cycle on a single platform without having to have fragmentation of their content. So how you create, how you share, how you collaborate and publish and get insights from content all in a single architecture. So more to come on that front.

Very helpful. Thanks, Aaron.

Yes, thank you.

Your next question comes from the line of Erik Suppiger with JMP. Please proceed with your question.

Yes. Congrats on a good quarter. One just on Box Sign. Curious if you're getting a sense of how that's doing with new customers versus existing customers. I think initially, the lower hanging fruit was with existing customers, but any update there? And then secondly, just curious in terms of your transition to public cloud-based infrastructure. How far along in that process are you? And how long are you still paying double for areas where you have overlapping infrastructure?

Yes. So on the Box Sign front, core focus number one is get Box Sign in the hands of all of our existing customers, of which we have well over 100,000 customers. So that's sort of P0 for the company and what we're spending the majority of our energy on. At the same time, it becomes a great new sort of wedge use case that we can go into new customers with around talking about how they're driving digital transformation around their content, whether that's contracts or NDAs or compliance documents that need to get signed. So it becomes yet another use case that we can go drive product adoption and new customer demand from. But I'd say it's very early in terms of the overall results on that. But you can assume that every customer we're showing up to today, Box Sign is certainly being talked about and shown in the set of use cases that we're going after. So great kind of early, I think, signal from that set of conversations and pipeline build over there. And then the second question around public cloud. So this is a multi-year journey that we've had. Just as a reminder, we've been using and leveraging the public cloud for well over a decade. But we made the decision to leverage it even more significantly to allow us to innovate faster, deliver for customers globally, more efficiently, and then ultimately be able to scale our platform in a very cost-effective way. So we've been moving more and more of our infrastructure to the public cloud. We tried our best to have as limited of a sort of double spend challenge as possible. It's unavoidable in some areas of the infrastructure, but the teams have done an incredible job of really getting very, very methodical about which parts of the architecture move to the public cloud in which sequence to reduce that double spend element. But again, some of its unavoidable due to leases and existing commitments we have on the hardware. But again, over the next couple of years, you'll see us wind off more and more on the sort of kind of core Box managed infrastructure and more -- and leverage more and more in the public cloud.

Very good. Thank you.

Yes, thank you.

Thank you. Your next question comes from the line of Nick Mattiacci with Craig-Hallum. Please proceed with your question.

Hi, this is Nick Mattiacci on for Chad Bennett. Thanks for taking our questions. So I'm just curious on what you guys are seeing in the SMB market. Any commentary you could provide on the demand environment and customer retention rates, the lower end of the market. And then any assumptions we should be aware of related SMB that are baked in the guidance going into this year?

Yes. So qualitatively, I would just share that SMB demand has been very strong, frankly, throughout FY '22. Q4 was another kind of milestone quarter for us on that front, but really the buildup was throughout the year. I think what we saw in kind of calendar 2020 and our fiscal 2021 was SMBs were really obviously most impacted in many respects by COVID. And they weren't hiring as quickly, dealing with layoffs or furloughs or government stimulus was a complicated matter. And so we saw a reduction of that momentum. We still put up growth that year, but not as much as we had anticipated. Coming into now calendar 2021 and fiscal '22 last year, we saw a real resurgence on the SMB and mid-market parts of our business, our kind of global commercial segments. And I think our strategy is really well tuned for that commercial segment back to back in what we've been chatting about on this call. If you're a 200 or 300 to 500 person business, and maybe smaller 50 to a few hundred employees. You might have a relatively concentrated IT organization, maybe a handful of folks that are running IT for your organization. But you have all the exact same demand as a large enterprise. I mean, if you're an investment bank, if you're in life sciences, if you work in the government supply chain, the needs you have around data security, compliance, content management, collaboration are the exact same needs as a very large Fortune 500 enterprise. And yet your challenge is sort of fewer resources to manage all those systems and then obviously, budget constraints about you don't want to have to have 10 different vendors that you're dealing with. You don't really get economies of scale in that sense. So by having a single platform, a single content cloud that manages everything from the workflow and e-signature and security and content management of your content all in one bundle, that becomes very, very compelling. And so we've seen the results of that in our results throughout FY '22, and we expect that set of trend just to continue.

And just to build on that a bit for some of the other parts of your question. We had mentioned in our prepared remarks that this past year, we generated double-digit percentage gains in our sales force productivity, that holds true both for our enterprise business and our SMB business. So definitely seeing healthy growth across all parts. And then in terms of the customer economics that you asked about, while our smallest customers do tend to see a slightly higher churn rates. As you'd expect, the net retention rates are actually pretty comparable between SMB and enterprise because of the strong expansion and a lot of the dynamics that Aaron mentioned.

Great. Thank you.

Thank you. The next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Good end to the year and a strong guide. I wanted to double-click on a couple of the margin questions and conversations we've been having. So on gross margins, like we've seen the expansion and that continues into '23 and sort of talk through the pricing and the infrastructure efficiencies. So the question is how high can gross margins go? And can they get to 80% plus like they were for you guys back around your IPO?

Yes. So we do see continued upside, especially as we execute against the migration strategy that Aaron talked about earlier. So we do see 76% is not where that caps out, and we'll continue to work on driving that migration and additional efficiencies to continue expanding margins beyond FY '23.

Okay. And then on the FY '23 operating margin target of '22 like on the surface, it doesn't actually show the OpEx leverage because of the strong gross margin expansion. But then you talked about the FX impact travel and expenses coming back? I assume there's some wage inflation increases talked about sales and marketing investments. So is there any additional context or quantification of some of those factors that are impacting some of the different OpEx lines. And just any other color would be helpful? Thanks.

Sure. So on that, I think you nailed the dynamics exactly. And to break those apart on the FX side of things, expect that to be roughly one percentage point impact to operating margin next year. And that really shows up across all line items of the P&L. So kind of understates the true leverage that driving in the business. And then in terms of some of those expenses like T&E, events facilities. I would say that the savings that we realized as we moved into this environment, was in the 200 to 300 basis point range. We expect some of that to come back but not all of it because of the continued focus that we have on cost discipline. So you can think about it as more than a 100 basis point impact. And then the actual kind of size is going to depend a little bit on what this return to our hybrid office-based approach looks like. And then the last thing I'd note is that within the year, we do expect to see our operating margin consistently expand across the course of the year, so to sort of deliver higher operating margin in the back half versus the front half.

Yes. And just to build on that, Josh, for five seconds. We are unmistakably focused on making sure we drive profitable growth going forward, which will show up as additional leverage in the business. And as Dylan noted, that kind of seasonality trend you'll see as well. But it's something that's a core focus of ours going forward.

Awesome. Thanks.

Thank you. And this concludes our question-and-answer session. I'm turning the call back to our speakers for any closing remarks. Please go ahead.

Great. Thank you. And thank you, everyone, for joining us this afternoon. We look forward to updating you on our next earnings call. And just a quick reminder, as both Aaron and Dylan as mentioned, we are hosting our fiscal '23 Financial Analyst Day, it's virtual, on March 16, and registration is available on our IR website. Thank you so much.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect.