Hello, thank you for standing by and welcome to the Box, Inc., First Quarter Fiscal 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Cynthia Hiponia, Vice President, Investor Relations. You may begin.

Good afternoon and welcome to Box's First Quarter Fiscal 2025 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. Our webcast will be audio-only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on the X platform at the handle @BoxIncIR. On this call, we will be making forward-looking statements, including our second quarter and full year 2025 financial guidance and our expectations regarding our financial performance for fiscal 2025 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings and the impact of foreign currency exchange rates and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our revenue, operating margins and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models and partnerships, our ability to address enterprise challenges and deliver cost savings for our customers, the impact of the macro environment on our business and operating results and our capital allocation strategies including potential repurchase of our common stock. These statements 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 the documents we filed with the Securities and Exchange Commission including our most recent annual report on Form 10-K 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, May 28th, 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 our 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 related supplemental slides, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me turn the call over to Aaron.

Thank you, Cynthia, and thanks everyone for joining us today. We are pleased to have delivered first quarter operating results above our guidance. This includes revenue growth of 5% year-over-year and 8% on a constant currency basis in addition to a strong focus on profitability, which resulted in operating margins of 27%, up 400 basis points from a year ago. While we continue to experience headwinds in FX that are reflected in our updated guidance, we were overall pleased with execution in the quarter. As we shared in our last earnings call, we are in a new chapter for Box, one that is driven by AI transformation. We saw this in Q1, which was defined by continued AI momentum with customers choosing Box as a platform to enable intelligent ways of working. Demand for Box AI and our upcoming more advanced capabilities continues to grow. And since we rolled out Box AI to Enterprise Plus customers last year, we have seen an increasing number of customers upgrade to Enterprise Plus in order to gain access to Box AI. In fact, we saw a meaningful increase in wins by revenue in Q1 where Box AI was central to the win than in Q4. Customer examples in Q1 include a commercial real estate firm that upgraded to Enterprise Plus for access to Box AI along with additional security and e-sign functionality. They will be using Box AI to identify patterns across client leases in addition to client analysis and generating marketing content. A leading global commerce company that moved to Enterprise Plus to gain access to Box AI and Box Hubs as they are looking to bring content together in a central location and extract the value from their unstructured content with enterprise grade security controls that Box provides. Over the past…

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. Q1 was a strong quarter for Box as we once again delivered on our key financial priorities to drive long term profitable growth, accelerating revenue growth in constant currency, expanding operating margins and executing a disciplined capital allocation strategy to optimize shareholder returns. In Q1, we delivered revenue of $265 million, up 5% year-over-year and 8% in constant currency. This was above the high end of our guidance, driven by strong bookings linearity. We now have approximately 1,800 total customers paying us more than $100,000 annually. Our Q1 suites attach rate in large deals was 85%, a new high watermark and up significantly from 69% a year ago. Suites' customers now account for 56% of our revenue, a strong improvement from 47% in Q1 of last year. As Aaron mentioned, we're seeing strong demand for Box AI and our more advanced capabilities, which has been a key catalyst for this accelerating suites adoption. We ended Q1 with remaining performance obligations, or RPO, of $1.2 billion, a 3% year-over-year increase or 8% in constant currency. We expect to recognize roughly 60% of our RPO over the next 12 months. Q1 billings of $190 million were down 1% year-over-year and up 5% year-over-year in constant currency. Q1 billings were in line with our expectations when adjusting for an FX headwind that was 250 basis points higher than we had anticipated in our guidance. Our net retention rate for Q1 was 101%, consistent with last quarter's results. Our annualized full churn rate remained strong and stable at 3%, demonstrating continued product stickiness with our customers. We continue to anticipate exiting FY '25 with a net retention rate at or slightly above this level. Q1 gross margin came in at 80.2%, up…

Thank you. [Operator Instructions] Your first question comes from the line of Brian Peterson. Your line is open.

Hey guys, thanks for taking the questions. And so starting off with AI, it sounds like that's really resonating. I'm curious, do you feel like there's any targeted verticals where there's more interest there? I know you mentioned real estate, but I'm curious how broad that is? Any discussion on how people are thinking about budgets for that? Would love to get the color there.

Yes, so I would say right now we're seeing it across basically every vertical that we see. I think there's verticals where over the medium- and long-term stand to gain on a relative basis, maybe more than others. If you look at things like financial services, life sciences, federal government, categories that typically are very document and content centric verticals where AI can begin to unlock way more around being able to answer questions from data or automate workflows. So we have seen a high degree of resonance in our conversations in those verticals. But in terms of where we saw Enterprise Plus upgrades in the quarter, it was really across the board. So I would say in every vertical that we serve, we saw strong upsells for Box AI. And then in terms of your budget question, feel free to build on it more. But I would say for right now, because especially it's -- the capabilities are being unlocked within the Enterprise Plus plan, it's still largely coming out of IT budget. It's coming out of often the spend that we are helping displays from legacy systems. I think over time, if we maybe fast forward a year or two from now, I could see that the budget increases when you look at line of business that will be able to drive more efficiency because of AI, that we're only in the earliest days of what that looks like. But certainly as AI really drives workflow automation and more business process transformation, I think you'll see even increased budget that opens up for AI use cases around content.

That's great color, Aaron. It's great to see you guys raise the revenue outlook in constant currency. I'm curious, anything that you call out in terms of the demand environment or deal cycles as the quarter progressed? Thanks, guys.

Yes, so as -- I think we've noted in the past couple of quarters, we are starting to see some degree of stabilization. Again, that's different from any kind of inflection point that sort of looking like we're out of the woods on the macro front, but sort of the lack of increase of head -- of new headwinds I think has been notable in the past couple of quarters. We had strong performance, especially in our U.S. enterprise business and federal, in addition to the U.S. enterprise business. I think we're still seeing some degree of pressure on the SMB segment, but when we look at the business overall, on balance, we were happy with the performance in Q1 and we certainly look forward to driving more growth throughout the year.

Thanks, Aaron.

Yes, thanks.

Your next question comes from the line of Pinjalim Bora. Your line is open.

Oh, great. Congrats on the quarter, guys. Thanks for taking the question. Again on AI, Aaron, what have you seen so far with respect to kind of the volume of queries made by users within the Box content Hubs for AI? I know it's early, but any color would be helpful. Those volume of queries that you're seeing, others tracking to your expectations so far. And the flip side of that is how has that fared versus the cost side of the equation on the gross margin side?

Yes. So as you note, Hubs has literally been around for, I think, maybe a week and half in terms of being in beta. And so we're just getting the early data in. We're reviewing kind of initial customer use cases and scenarios right now. Hubs already is driving about a quarter or so of our total AI queries, so kind of right out of the gate it's been strong in terms of it's one of the kind of immediate use cases that the customers adopt, just because it's such a huge unlock to be able to ask questions of any amount of content. And as we've noted both in our keynotes and a little bit on this earnings call, the use cases are quite vast because really there hasn't been another product at real commercial scale where you can collect your sales materials and create a sales hub that anybody can ask questions within an HR portal with all your HR documentation that anyone can ask questions in similarly in product and engineering or equity research, in financial services. I was with a CEO of an investment bank just about a month and a half ago and this was a breakthrough product for him, because instantly now he can enable any new employee in the firm to have as much knowledge access as somebody that's been at the firm for a decade or two. And that's basically what we're able to now do with our content is. This content really becomes the digital memory of an organization that anyone can tap into. So just this ability to instantaneously make all of your employees as knowledgeable as your most experienced employees is transformational. And so the Hubs use case is going to really be a massive unlock for enabling that in every one of our customers and we think will certainly contribute to more enterprise plus upgrades and more volume. And I think you asked something on the kind of gross margin. Did I catch that or the cost side, did you mention that?

Yes.

Yes. So, as I think we've mentioned, we expect to be able to maintain our gross margin levels even with the addition of AI, really driven by the fact that as customers are in these higher tier plans, we tend to see higher gross margin in those higher tier plans in the first place. And then for a lot of the extremely high volume use cases, things like metadata extraction or being able to run a workflow that generates a lot of AI usage that will be all volume based and not included in the Enterprise Plus plan or other plans. And so in those cases, customers will just be paying us for the volume and we'll ensure that we're driving the appropriate kind of margin structure that delivers our margin goals on that front.

Yes, understood. One quick follow up for Dylan. Dylan, it seems like the linearity in the quarter was a little bit better. What drove that? Are you doing something different to drive that and could that be sustainable?

I wouldn't say that we did anything significantly different. I think just a lot of energy and momentum heading into the first quarter with some of the product capabilities that we talked about. So really a continuation of some of the Q4 execution and demand around Enterprise Plus driven by everything Aaron's been talking about. So we did see certainly a stronger than we'd even expected to see start to the quarter, which led to that revenue upside that we mentioned. So certainly something we'd like to repeat every quarter, but wouldn't say that there is anything significantly different that we did this time around. I would just point to really compelling kind of products and demand for that as well as sales execution.

Got it. Thank you very much.

Your next question comes from the line of George Kurosawa. Your line is open.

Hi, thanks for taking the question. I'm on for Steve Enders. You talked about -- I just want to ask about kind of the competition with legacy ECM providers. You talked about AI is kind of helping further augment your relative value proposition. Have you seen any change so far in kind of win rates there or maybe the number of opportunities?

Yes, so we are seeing definitely directionally an increase in ECM, both full takeouts as well as expansion deals of customers. When we look at the Crooze acquisition, that opens up a number of new ECM use cases for us. So this is a trend that is definitely moving in a positive direction. And then throughout this year, as we have the more natively integrated Crooze offering, our metadata extraction capabilities with AI and we roll that all together in some of our higher tier package -- packages that we're anticipating, I think you'll see even further momentum on taking out legacy ECM systems. But I would call out that this is becoming an increasing trend in the quarter and certainly in the past few quarters and AI just represents, I think, another catalyst for customers to rethink their content management environments. And certainly there's a very good chance it'll be the defining catalyst just because again if you look at having millions and millions of documents in a legacy content store, it's going to be near impossible to really take advantage of that data in an AI ready way just architecturally given the complexity there. So we think this is a huge breakthrough for us to use AI to really catalyze even further movement of ECM to modern systems.

Awesome. That's great to hear. And then a follow up, you called out a few of your partnerships and you look at your partner ecosystem that have maybe been deepened or enhanced by kind of this renewed focus on AI. Maybe you can just talk about how that's kind of shifted your thinking on the partner ecosystem and where you've seen kind of the biggest needle move.

Yes, so maybe I'll just share two categories. You have -- actually realistically there's probably three categories, but -- so the first is just the models, the AI models themselves represent fantastic partner opportunities for us. And right now there's a number of leading AI model providers that are delivering these foundation models. And we -- due to our open architecture and model agnostic approach, we anticipate partnering with effectively all of them and then letting our customers really kind of choose, which AI model works best for them. But by extension, by working and having an open platform, it means that we have certainly more incentive for those model providers to grow with us in accounts. And so we think this represents great new opportunities to work with the Googles of the world, the Amazons of the world, the IBMs of the world and others as they need to get their models in front of customers for really mission critical workloads. So that's kind of one partner category. Another partner category is, if you think about all of the AI products that you hear about in terms of whether they are these sort of assistant use cases or Copilot use cases, all of these AI assistance and SaaS applications really thrive by having access to data in a sort of AI ready or very easily usable way. And so we have one of the leading platforms for managing a significant portion of corporate data, that is incredibly mission critical and very useful within the context of AI. And we can connect into these AI products relatively seamlessly, again certainly way more seamlessly than any kind of legacy architecture or infrastructure. And so that was the example of ServiceNow, where Box was highlighted in their demo as a content platform…

Awesome color, thanks for taking the questions.

Yes, thanks.

Your next question comes from the line of Josh Baer. Your line is open.

Great. Thanks for the question. One for Aaron and a quick one for Dylan. Aaron, I followed your insights around the cost of AI, the cost of units of work and the potential for AI agents. What are we going to see from Box in that respect? How does Box fit into this AI agent future of work?

Yes, so as you can probably tell, I'm unbelievably excited about this prospect. I'll keep it at a relatively high level because there's obviously still announcements to come in this space. But when you think about when you use AI within the Box AI platform, we have created an abstraction layer that effectively talks to an AI model, connects that to content in Box and that model, we give it a set of prompts and instructions that it follows and then effectively tools that within our platform that AI model can interact with. One of the tools is being able to do vector embeddings. Another tool is being able to do effectively this sort of enhancer enterprise rag surface that we've created. So if you think about the AI model has a set of tools, it has a prompt and set of instruction and that all gets abstracted in something that the user doesn't have to worry about any of that complexity. They are just talking to effectively what is an AI agent that does a specific task, task like summarize a document or ask a question within a hub or extract metadata. Where this gets extremely powerful is as AI models continue to advance, as our AI platform capabilities continue to advance, you'll be able to deploy effectively these AI Asian experiences across really any use case around your content that maybe a human otherwise would go and do. So today everybody has workflows where a human reads a contract and they pull out the metadata from that contract and then they route the contract to someone in their organization or a human looks at a digital asset and labels that digital asset for some kind of digital asset management process. So within the Box AI platform, you'll effectively…

Yes, perfect. Really interesting. Thanks, and then, Dylan, just one clarification. Really appreciate the details on the FY '25 revenue guidance change and like breaking out that on a constant currency basis, the guidance increased by $3 million, just with all the moving parts. What about for the billings guidance as far as the change in constant currency or any change for FY '25?

Yes. So really, our expectations are consistent with our initial guidance on a constant currency basis. So there, as we had kind of talked about roughly in line with what our reported revenue growth expectations were at the time of about 4%. From a constant currency standpoint, that's still what we expect. But on an as-reported basis, now expecting that to land in the low single-digit range because of that kind of incremental and new 150 basis point headwind that's coming from FX.

Okay, got it. Thank you.

Your next question comes from the line of George Iwanyc. Your line is open.

Thank you for taking my question. Aaron, I'll start with you and maybe in the context of box AI and Box Hubs, but you're seeing this Suite's momentum. Can you give us some perspective on how that's driving other products like Box Relay and Box Sign and the adoption, really broadly across the Box platform?

Yes. So in general, every time, obviously, our Enterprise Plus plan gets purchased, that opens up a number of new use cases and value propositions for customers. Our advanced e-sign capabilities, our most advanced version of relay. And so we are certainly seeing that open up more value and more stickiness for customers. Q1, we had some notable wins. For instance, in the sign's space, a major pharmaceutical company that will be adopting Box Sign for their validation processes, a major automotive company that will be using Box Sign for kind of critical customer transactions. So again, our whole vision is really when you implement Boxes and intelligent Content Cloud, you get that entire life cycle of content from the moment you create and ingest data to that final kind of transaction to then governing the content, all of that is in one streamlined experience. And so whether you come in because of workflow or collaboration or e-signature or AI, our job is to make sure that you're seeing the full value of the platform overall. And AI, again, just represents a major catalyst for customers to really think about the role of content in their organization, in their enterprise, are they getting as much value from it as is now possible.

And Dylan, one question for you. Maybe expanding on your comments related to investing in demand generation. Can you give us kind of a how you're investing, where you're investing, what kind of focus you're putting on the sales organization and marketing organization?

Sure. So really, it kind of comes back to a lot of the programs and kind of growth initiatives that Aaron highlighted in his prepared remarks, so I would call it kind of a combination of really doubling down on and scaling some of the demand gen, both kind of programs that are kind of online spend to a lot of those CIO-focused field events that have been working really well for us over the past couple of quarters. So now and especially with all the exciting kind of newer products that we have coming out, seeing really strong interest and demand from customers there. So that's one category. It's kind of straight demand gen. Also investing and building out that partner ecosystem that we talked about. So especially with SIs and just kind of strengthening our overall reach through some of those channels. And then at the same time, we will be kind of growing our sales force as well, commensurate with the demand that we're seeing and to set us up for that kind of growth and kind of laying the foundation. So we're ready as we do have the new products to be able to take advantage of that opportunity. So that's kind of the high-level categories that we really focused on this year.

Thank you.

Your next question comes from the line of Rishi Jaluria. Your line is open.

Oh wonderful thanks guys so much for taking my question. I have two specifically on the workforce. Number one, I know you've talked for years about wanting to do more hiring outside of the U.S., especially in Poland. Maybe can you give us an update on that kind of global workforce strategy and what percentage of your workforce is actually outside the U.S. at this point? And then maybe alongside that, SPC is now taking near 20% of revenue. It's growing faster than revenue. I know there's puts and takes to how that is measured. But maybe walk us through, why that's the case? I understand you're buying back shares, and it's more than offsetting dilution. But I guess, I'm not sure that issuing a lot of stock instead of cash and then buying back stock with cash is necessarily the right strategy instead of shifting more of the compensation away from stock into cash. Maybe just help us understand both of those as it relates to your workforce.

Sure. So on the first one, I've been really, really pleased by the results that we've seen in terms of our workforce location strategy, most notably in Poland, where we ended this past year with more than 300 employees on the ground there. So a little more than 10% of our workforce and kind of moving quickly into the teens, and that includes more than 30% of our engineering team. So that's where the primary focus has been, where we're hiring the significant majority of kind of the R&D hires that we're making in Poland, but also a lot of our G&A functions, for example, as well. And expect that to continue to increase the percentage of the overall mix over time. And then as it relates to the stock-based compensation, I would note that -- maybe just a couple of things. First of all, we actually, even with kind of independent of the robust share repurchase program that we have in place that's been bringing down total shares outstanding over time. At the same time, for a couple of years running now, we've also reduced the overall equity burn rate. So we are actually issuing fewer net shares on a year-on-year basis. The reason that SBC has not kind of yet followed that same path, is kind of a combination of -- we have seen very, very strong retention. So low attrition and largely comes down to a higher share price. So it's a little bit more of a lagging indicator of the overall equity practices that we've put into place the last couple of years. But just like we've seen in our burn rate and total shares outstanding, we would expect stock-based compensation as a percentage of revenue to follow that same trend and come down over time as well.

All right, wonderful. Thank you so much.

This concludes the question-and-answer session. I will turn the call to Cynthia for closing remarks.

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

This concludes today's conference. Thank you for joining. You may now disconnect your lines.