BOX - NYSE

Good afternoon, my name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Box, Inc. First Quarter 2024 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] Thank you. Cynthia Hiponia, Head of IR. You may begin your conference.

Good afternoon and welcome to Box's first quarter fiscal year ‘24 earnings conference call. I am 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 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 second quarter and full-year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 2024 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 the 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 in documents we file 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 made as of today, May 30, 2023, 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 related supplemental slides which can be found on the Investor Relations page of our website unless otherwise indicated, all references to financial measures on a non-GAAP basis. With that, let me hand it over to Aaron.

Thank you, Cynthia, and thanks everyone for joining us today. We are pleased to deliver first quarter operating results above our guidance. This includes revenue growth of 6% year-over-year, and 10% on a constant currency basis, in addition to a strong focus on profitability resulting in operating margins of 23%, up 220 basis points from a year ago. Achieving these results in a challenging macro environment is a testament to the value of our Content Cloud platform, and the operational discipline of our Boxers as we deliver substantial year-over-year bottom line improvements. While the dynamic macro economy continues to pressure IT spend and headcount growth expectations from our customers, trends we’ve seen continue to play out most notably in EMEA and smaller businesses in the U.S., we are also seeing strong traction and stickiness of our platform in customers, and our message is well-aligned to the challenges they are facing today. Over the last quarter I’ve had the opportunity to speak with 100s of business and technology leaders, and it’s clear that the dynamics enterprises face today are fully aligned with the pillars that underpin our strategy. Enterprises are focused on simplifying their IT environments, driving productivity across their businesses, and protecting their most sensitive data. And across nearly all my conversations in the last quarter, business leaders everywhere are looking to leverage the power of AI to help transform how they work, and get even more value out of their data. Box’s Content Cloud platform is best positioned to help these customers solve these challenges, and our Q1 customer wins illustrate how we will remain mission critical for them. These wins include: A global manufacturing company that collaborates with defense and federal government agencies, who is a new customer, who purchased Box in Q1 in order to meet FedRAMP and ITAR compliance for content management, also realizing the value to streamline its tech stack and integrate Box with its Salesforce instance to power the underlying compliant content layer for their customer portal. A multinational retailer, expanded its use of Box with a six-figure ramped enterprise license agreement and purchase of Box Shield to protect the vast amount of personal identifiable information that is stored in Box. And critical to our success is our continued execution of our product roadmap, which expands our TAM and adds value to our core platform with new product innovation. In Q1 we were pleased to announce the general availability of Box Canvas, which delivers a powerful new way for teams to unleash their creativity to take brainstorming and ideation to a new level, while leveraging the enterprise-grade security, compliance, and workflow automation capabilities of Box. Box customers now have access to unlimited Canvases included in their plans, which enables us to disruptively enter this market, and we’re already seeing amazing use-cases emerge across our customers. Since we launched Box Sign, Box customers are taking advantage of unlimited e-signatures included in their plans and have migrated use cases over from costly incumbents. In Q1 we released advanced e-signature features such as a dedicated Box Sign policy for Box Shield to provide users with the ability to seamlessly request signatures on documents subject to Box Shield's access policies. We launched a Box Sign-Relay integration that specifically enables post-signature actions to be orchestrated and enables our customers to build end-to-end e-signature workflows in the Content Cloud. We also announced the next generation of Box’s content migration solution, Box Shuttle, now built directly into the Box Admin Console. With Box Shuttle, content migration is a simple, accessible process, and organizations of all sizes can take full advantage of the many features and capabilities that the Content Cloud has to offer. Finally, an integral part of our product strategy is our ability to integrate deeply across the SaaS landscape, including the products like Microsoft Teams and Office, Webex,

Thanks Aaron. Good afternoon, everyone, and thank you for joining us. Q1 was another strong quarter for Box, with revenue, EPS and operating margin results all above the high-end of guidance, despite the challenging macroeconomic environment. We continued investing in profitable growth, while optimizing our underlying cost structure, resulting in a resilient long-term financial model. Our balanced business model allows us to invest in innovative new products such as Box Canvas and Box AI, generate continued gross margin and operating leverage, and consistently return capital to our shareholders. In Q1 we delivered revenue of $252 million, up 6% year-over-year, above the high-end of our guidance, and representing 10% year-over-year growth on a constant currency basis. We now have nearly 1,680 total customers paying more than $100,000 annually, an increase of 14% year-over-year. Our Suites attach rate of 69% in large Q1 deals demonstrates the value our Content Cloud Platform is delivering to our large customers. 47% of our revenue is now attributable to Suites customers, a significant 10 point increase from 37% a year ago. Even in this dynamic environment, Box’s value proposition is resonating with customers as they look to Box to transform, simplify and secure their IT environments. We ended Q1 with remaining performance obligations, or RPO, of $1.2 billion, a 17% year-over-year increase, or 19% growth on a constant currency basis. This strong growth was driven by continued lengthening in customer contract durations, as well as an uptick in the volume of early renewals in recent quarters, as customers look to more quickly adopt the full value of our Suites offerings. We expect to recognize roughly 60% of our RPO over the next 12 months. Q1 billings of $192 million grew 11% year-over-year, ahead of our guidance of a mid-single-digit growth rate, and representing 15% growth in constant currency. Our strong billings outcome in Q1 was due in large part to a high volume of early renewals, pulling forward billings of roughly $6 million that had been scheduled to renew later in the year. Our net retention rate at the end of Q1 was 106%, in-line with our expectations. Our annualized full churn rate was 3%, versus 4% in the prior year, demonstrating the criticality and stickiness of our product offerings even in the current environment. We expect full churn to remain at roughly 3% throughout this year. For the remainder of FY ‘24 we expect our net retention rate to stabilize in the range of 104% to 105%, as we manage through the macroeconomic environment resulting in lower seat expansion rates, particularly in our U.S. Commercial and EMEA customers. Gross margin came in at 77.9% in Q1, up 160 basis points from 76.3% a year ago and well above the 76% range we had expected for the first-half of this year. Our Q1 gross margin reflects the optimizations we’re delivering as we execute on our public cloud migration strategy. We expect our duplicative public cloud and data center expenses to peak in Q2, leading to our gross margin expectations in the 76% range for Q2. As we look to the second-half of the year, we fully expect gross margins to rebound to the high 70’s. Q1 gross profit of $196 million was up 8% year-over-year, exceeding our revenue growth rate by 200 basis points. We once again delivered leverage across the entire business in Q1 with a 17% increase in operating income, to $57 million. Our 22.8% operating margin was up 220 basis points from the 20.6% we delivered a year ago. We delivered diluted non-GAAP EPS of $0.32 in Q1, up 39% from $0.23 a year ago and a full $0.05 above the high-end of our guidance, which includes an impact of negative $0.05 from FX. I would also note that Q1 marked the third consecutive quarter in which we delivered GAAP profitability. I’ll now turn to our cash flow and balance sheet. In Q1 we generated free cash flow of $108 million, a 19% increase from $91 million in the year ago period. We delivered cash flow from operations of $125 million, a 16% increase from $108 million in the year ago period. Capital lease payments, which we include in our free cash flow calculation were $10 million, down from $12 million in Q1 of last year. Let’s now turn to our Capital Allocation Strategy. We ended the quarter with $518 million in cash, cash equivalents, restricted cash, and short-term investments. In Q1 we repurchased 1.7 million shares for approximately $44 million. As of April 30, 2023, we had approximately $97 million of remaining buyback capacity under our current share repurchase plan. We remain very committed to returning capital to our shareholders through stock repurchases, and we expect to actively repurchase additional shares in Q2. With that, I would like to turn to our guidance for Q2 and fiscal 2024. The U.S. dollar has continued to strengthen resulting in a larger-than-expected FX headwind for Q2 and the second-half of the year versus our initial FY ‘24 guidance. As a reminder, approximately one third of our revenue is generated outside of the U.S., primarily in Japanese Yen. The following guidance includes the expected impact of FX headwinds, assuming current exchange rates. For the second quarter of fiscal 2024: We anticipate revenue in the range of $260 million to $262 million, representing 7% year-over-year growth at the high end of this range, or 11% in constant currency. We expect our Q2 billings growth rate to be in the low-single-digit range on an as reported basis, reflecting an expected 100 basis point headwind from FX, as well as the impact of the early renewals that contributed to our exceptionally strong Q1 billings result. We once again expect our Q2 RPO growth to be higher than our anticipated Q2 revenue growth rate. We expect our non-GAAP operating margin to increase to approximately 24%, representing a 230 basis point improvement year-over-year. We expect our non-GAAP EPS to be in the range of $0.34 to $0.35, representing a 25% year-over-year increase at the high-end of the range, and GAAP EPS to be in the range of $0.01 to $0.02. Weighted-average diluted shares are expected to be approximately 150 million, flat with Q1. Our Q2 GAAP and non-GAAP EPS guidance includes an expected headwind from FX of approximately $0.05, primarily due to fluctuations in the yen as discussed previously. For the full fiscal year ending January 31st, 2024. We now expect FY ‘24 revenue in the range of $1,045 million to $1,055 million, representing 6% year-over-year growth, or 10% on a constant currency basis. This revised range reflects both the recent strengthening of the U.S. dollar versus the yen and the IT spending environment we discussed earlier. We now expect FX to have a negative 350 basis point impact to our FY ‘24 revenue growth rate versus our prior expectation of 300 basis points. We expect FY ‘24 gross margin to be roughly 77.5%, 50 basis points above our previous expectations. As we continue to execute on our important transition to the public cloud and unlock additional leverage in our model, we will be exiting FY ‘24 with an even stronger gross margin profile. As a result, we are raising our FY ‘24 non-GAAP operating margin guidance by 50 basis points to approximately 25.5%, representing a 240 basis point improvement from last year’s result of 23.1%. We are also raising our FY ‘24 non-GAAP EPS expectations to be in the range of $1.44 to $1.50, representing a 25% increase at the high-end of the range versus $1.20 in the prior year, and we expect FY ‘24 GAAP EPS to be in the range of $0.17 to $0.23. Weighted-average diluted shares are expected to be approximately 151 million. Our FY ‘24 GAAP and non-GAAP EPS guidance includes an expected annual impact from FX of approximately $0.20. For the full-year of FY ‘24, we now anticipate currency headwinds to impact our billings growth rate by a little more than 100 basis points. We expect our FY ‘24 billings growth rate to be in the mid-single-digit range on an as reported basis. In summary, we are pleased with our execution in Q1. We once again demonstrated our disciplined and balanced model of investing for long-term growth while expanding both operating and free cash flow margins. We remain committed to achieving our FY ‘24 revenue growth plus free cash flow margin target of 35%, or 39% in constant currency. In this dynamic macroeconomic environment, the Box Content Cloud is the platform that enterprises need to transform their business while lowering their costs. With that, Aaron and I will be happy to take your questions. Operator?

[Operator Instructions] Your first question today comes from the line of Steve Enders with Citi. Your line is open.

Great. Thanks for taking the questions here. I guess I just want to ask a bit more on just the macroeconomic and what you're seeing out there? And I guess, what specifically is it in the EMEA and SMB business, that’s being impacted here. And I guess maybe how has that changed versus what we're seeing the of a couple of quarters?

Yes. This is Aaron. I'll take that. I think overall, the general trends were pretty similar to kind of Q4 and what we were already seeing at the tail end of Q3 of last year. We did want to call out kind of an incremental element of softness on the SMB front in the U.S. and what we're seeing in EMEA. But as you can kind of see in the general guidance, as well as because of the FX impact, it really is just incremental, but we did want to kind of note that. Overall, I think as we've kind of talked about in the past couple of quarters, the general dynamic is you just sort of see that there's more scrutiny on larger deals, especially in those segments of the business where maybe previously, we'd be doing a $100,000 deal, and that would be in this today's environment, maybe fewer seats would be transacted and that would come under that level as an example. But overall, I think when you look at the kind of Q1 results, Q2 guide, I think we're seeing some healthy trends across the business, but we did want to just call it that incremental softness.

Okay. That's helpful there. And I think anyone asks on the AI side and, you know, in terms of the announcements that you've come out with already, but I guess, how should we think about the potential for monetization and maybe how you're thinking about funding and, kind of, going forward? I guess what's kind of the early read on how you're thinking about that aspect of the AI strategy?

Yes. So I do want to note, obviously, it's still pretty early in our overall journey with the latest wave of our Box AI efforts. Obviously, we've been in the space for a while and deeply understand the kind of potential in the use cases. But with -- what we're seeing with large language models as a pretty new frontier of use cases that we are unbelievably excited about, we want to make sure that we drive the right kind of product UX, the right kind of pricing and packaging, which is why we are taking a kind of measured approach as we roll this out. I think philosophically, the way that we think about it internally from a product and company standpoint is there are some use cases that we believe are just going to be kind of fundamentally table stakes for a product like ours. Some of those table stakes might be generating content with AI. Some of them might be asking questions of some amount of data leveraging AI. And in those cases, we want to try and ensure that we can broadly make that set of capabilities available. That's philosophical obviously, as we go through our design partner program and beta programs, we'll continue to evolve that. And then there are some maybe more either advanced capabilities or capabilities that have a high consumption dynamic related to them often through our platform or maybe in workflows where we will want to have incremental monetization via either our kind of platform API business or through our multiproduct suites packaging and that will be really driven by some of the use cases that we see from customers, again, especially through this design partner program. So I'd say kind of in the coming quarter or two, stay tuned as we continue to evolve the ultimate pricing and packaging decisions, I think you've seen pretty similar dynamics in other -- either peer companies or big tech companies as they roll out beta programs of their products, trying to figure out what's the right kind of pricing model. We're basically doing the same. But I think the thing that we're -- we've already shown and done are very kind of public about now is we are going to be building this technology full force, and we think it's transformational in how we can work with our unstructured data and our content.

Thanks for taking the questions.

Yes, thank you.

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

Thanks for the question and congrats on a nice quarter. I wanted to ask a few on use cases for Box, whether it's positioning for AI or cost cutting in this environment. Are there any use cases for Box that are really resonating around some of these themes today? And then separately or related, just wondering if you could talk a little bit about the mix of your customers that are using Box to collaborate in some way externally, like the external use case with partners or suppliers or customers or clients?

Yes. So maybe just in reverse order, I'd say the significant percentage of our -- especially our larger deals, so that make up increasingly the bulk of our revenue. There's a heavy degree of internal and external collaboration going on with our product. It's one of our key value propositions is our defense kind of -- you're in the defense industry, you need to collaborate with the government or other kinds of manufacturing partners. You need something that is both going to be compliant for, FedRAMP, let's say, and have advanced security controls and allow you to kind of move data in and outside the boundaries of your organization in a very secure, compliant, reliable way. So whether it's financial services, life sciences, health care, defense, the tech industry, external collaboration is certainly kind of a core part of our overall value proposition. In terms of some of the near-term deals, it's pretty broad-based in terms of the industries that we're seeing business in across everything from life sciences and health care, great deals in the retail sector, even in tech, seeing some healthy deals as well. And I think the use cases are really kind of centered around our three core pillars of improving the security posture of the organization by protecting their most important data, helping drive better collaboration and workflows around content and then our platform, which connects to all of their software. So really being a hub for content that connects into ServiceNow and Slack and Salesforce and Microsoft Teams Office and many more applications. So I think those three kind of core areas of focus remain extremely alive and well. And then our conversations, which I wouldn't necessarily attribute any major kind of deals in Q1 tied to this, but the conversations have increasingly been about what is the AI strategy of any given customer and enterprise it's driving certainly a lot of conversations we're now having about Box AI, I've had more CIOs and even CEOs in some cases, reach out around our strategy in AI than we've seen kind of in prior technology trends. And I think everybody is trying to figure out their strategy of how do they bring generative AI to their enterprise use cases, which is going to -- which requires a substantial amount of work in kind of the abstraction layer between AI models, customer data and cloud infrastructure, and that's exactly what we're building out. So we think we're in a really strong position to help customers with that.

Thanks, Aaron. If I could sneak one in for Dylan. Just wondering on the $6 million in early renewals, if you could provide some more color on what type of customers? What's driving that behavior? And then I guess, in regard to Q2 billings guidance, does that assume that the early renewal trend stops?

Yes. So in terms of what's driving those early renewals, tends to be a handful of larger customers, and the main dynamic that would cause a customer and similarly in Q1, what we saw to decide to renew early is typically to move into suites and be able to support some of the higher-value newer use cases that they want to get into rather than, for example, waiting for the natural renewal cycle the following quarter to be in to adopt suites and those capabilities. So that tends to be what we see is just the clear buy-in and understanding the value proposition from customers and just wanted to move more quickly to take those on. And the most of that $6 million did come out of Q2, and we always tend to take a fairly conservative approach kind of the baseline of early renewals that we see, and that's baked into our kind of billings expectations in any given quarter so we're not necessarily expecting to see the same type of volume that we saw in Q1, but we would expect to see some customers elect to early renew in the second quarter as we tend to see maybe in the quarter.

Great, thank you.

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

Great. Hey, thank you so much for taking the questions. Congrats on the quarter. Aaron, on AI, I understand you can't really talk about the monetization at this point. But as you're talking to your customers, what are you hearing from them in terms of uptake of these AI functionalities. And do you overall see kind of area as an accelerant to the growth rate maybe in the medium term?

Yes. So with conversations with customers, I would say that this is certainly probably the fastest amount of concerted energy that I've probably seen in the decade and half of doing Box on one single topic from an IT standpoint. So cloud computing, I mean we worked for five years at least, really just doing the very basics of educating enterprises on why the cloud was useful and what efficiency they could get from the cloud. And then it was still another decade until you had the kind of mainstream adoption of cloud across the enterprise base. With AI, I think you have such a rapid alignment of customers on testing new use cases, trying out new products and capabilities. Obviously, things like ChatGPT have been front and center. Some companies are fully banning that. Some customers are -- some companies are enabling that. And what I think companies are trying to figure out is where is the productivity gain going to most come from? Is it going to come from going into an AI interface and just like a ChatGPT and asking a question and getting an answer back? Or is it going to come from AI reasoning over existing data and existing workflows in an enterprise and then becoming a productivity boost for those kinds of use cases. With Box AI, actually, we're going to help customers do both because with Box Notes, you'll be able to generate content instantaneously directly from the AI model and with Box Preview and with future products that we haven't announced yet, you'll be able to start to ask questions of the existing data you have. And so we think we can meet both of those use cases, but it's incredibly early for customers overall. I'll give you just a kind of a sense of the types of conversations we're having where companies are saying, hey, I have hundreds or thousands or tens of thousands of documents of a specific topic, could be contracts, could be life sciences research data, could be very kind of bespoke content types in a specific industry. And they're saying, we have all this content. We want to be able to understand what's in it. We want to correlate trends across it. We want to ask questions of this data set. And right now, we have to have kind of humans manually go through this content to understand what's inside of it and apply metadata and to be able to actually kind of reason through it. And so they often don't get to the actual use cases that are super exciting because they just don't have enough either humans or it would be too costly. And so they never get around to it. And so with AI, it starts to actually unlock and -- kind of tap into all of this value of the underlying data that they already have inside of Box or if they move more data into box, it can certainly provide even more value. And so those are the kind of conversations that we're having with customers. We have some companies that are saying, hey, we think we can identify new life sciences breakthroughs if we could correlate research across multiple research documents or we have a company in the advertising industry that believes that they could generate more revenue if they could quickly identify what projects to put certain advertisers on that wouldn't be known by any single individual inside their organization, it would only work if they actually collected all of the data across their organization to understand what kind of projects would make sense for certain advertisers. And so these are the really exciting kind of use cases which can drive productivity. They can drive new revenue opportunities for our customers. And so that's where we're certainly going to be pretty focused on. In terms of accelerating our revenue, I think because of how early it is, we want to be really thoughtful about that dynamic. I think to some extent, AI is going to become table stakes for all of modern software. And so we think it's going to be a huge driver of companies trying to get their data and their content into a really good logical architecture, the one that is secure, the one that's compliant, one that's in the cloud. We think we'll stand to benefit from that certainly and kind of the moving off of legacy fragmented systems. But at the same time, we recognize that companies in general will have a fixed amount of net new budget that they can bring to AI. And so there's going to be a lot of kind of volume for that budget. And so we want to be thoughtful about leaning too hard on that.

Got it. Very, very helpful. And one for Dylan. Dylan maybe the macro situation, the softness in the SMB and the EMEA. Maybe talk about the linearity of the quarter? How did that kind of fall through the three months in the quarter? Was it to towards the end, towards the beginning. And also, if you can touch upon kind of the sequential revenue decline. Is that largely because of Box Consulting?

Sure. So starting with the linearity. We saw a pretty normal linearity in the first quarter both in those segments you mentioned, as well as the rest of the business, like our enterprise segments. So nothing unusual from that standpoint. And then in terms of the sequential revenue decline, that was primarily driven by the number of days that we had that there are in Q1 versus Q4, which has about a $9 million impact to the quarter's revenue versus Q4. And then there was also a couple of million dollars from a very strong Box Consulting revenue outcome in the fourth quarter. So those combined add up to about $11 million. And then the first of those, the todays dynamic, that's something that is not unique to this year, but usually doesn't show up in as pronounced of a way as we typically have a stronger and higher volume of bookings in the fourth quarter to offset that. But that was the main driver of the sequential chain of revenue.

Got it. Very helpful, thank you.

Your next question comes from the line of Jason Ader with William Blair. Your line is open.

Thank you. Aaron, I wanted to continue down the AI thread shockingly. First, I guess, I just wanted to -- let's look at it in two different ways. First, at a very high level, what does this mean for knowledge worker seats? And do you worry about that? Secondly, just on more on the kind of devil's advocate side, how does this -- how does the Microsoft competitive risk change or not, just because Microsoft has been at the forefront of a lot of this stuff? And then more on the kind of positive side, when you talk about monetization, I don't want to go there, but how are you using this internally maybe to improve your cost structure and what are some of your thoughts there? Dylan, you can chime in there as well. I'm sure you've thought a lot about that.

Yes, great. We'll try and cover those. So on the first one, and just so I clarify, that was sort of like a meta kind of philosophical question on seat changes over time.

Yes, just a pool of knowledge workers potentially not growing as fast as it would have otherwise.

Yes. I'm -- this is a personal opinion. And even from a corporate financial standpoint, we're so early in our kind of total seat population that this would be a corporate view as well in terms of what the potential is for Box overall. But I strongly believe that this is going to be a net positive impact to just knowledge worker productivity as opposed to a net replacement to kind of large swaps of knowledge work. If you look at the actual tasks that any one of us do in any of our jobs kind of across our roughly 2,500 employees or kind of anybody that we interact with, the vast majority of work that we're actually doing is sort of a collection of many subtasks; hundreds, thousands of subtasks that require us to have a large degree of context that we kind of maintain. And I think AI is going after those individual subtasks and in some cases, collections of subtasks, but really in a way that will just make us more productive overall. Maybe some roles will be 5% more productive, some roles may be 50% more productive. But I think the net result of that is that we just accelerate into the future faster as opposed to we kind of like do less work or that a company wouldn't want to grow faster if they could with AI and making their employees more productive. So in general, I think whether it's -- we'll produce more graphic designers and there'll be more engineers and our sales reps will be more efficient in working with customers. I see there's only a sign that we'll be able to either over time, globally, more people will be able to do those jobs and there'll be more demand for those skills overall because companies can then be more efficient. Instead of having maybe a sales rep or an engineer waste time trying to search or find information, they can be doing the more fun productive parts of their job of working with a customer or getting code released and building a feature. And so I think that's the kind of impact on the total knowledge worker population. So I'm firmly in the optimist camp on this one in terms of what it does to jobs. On Microsoft, so 2 things to note. One, we're partnering with OpenAI which by virtue leads you to partnering more broadly over time with Microsoft as well, given the OpenAI models generally running on Azure. So there's, I think, a lot of exciting potential on that collaboration and an area that we're going to cooperate with them, we think, pretty meaningfully. And so customers will be able to basically leverage the exact same AI that they would be seeing in any Microsoft products, but within Box as well. So that kind of adds a bit of a bit of benefit to our relationship there with CoPilot. CoPilot already has the ability to drive integrations with third-party software. And so Box was kind of announced at a high level last week at the Build conference as one of those integrations. And so we're going to deeply integrate across CoPilot in the various API endpoints that they create. So you'll see a lot of interoperability where maybe you go to CoPilot and you ask a question that needs to pull data from Box and Atlassian or Box Inc salesforce or any of the supported products. And so we think that will kind of be a very clear way that we can integrate. And overall, strategically, I think what you're going to see us do is go deeper specifically in content than what we believe any other player is going to be building out from an AI standpoint. And so understanding the content AI use cases is core to our value proposition and our expertise. And then I think the secondary element is our neutrality ends up being a huge benefit for customers. So today, obviously, OpenAI has many of the leading models. We announced a partnership with Google, where we'll certainly be working with Google technology. There's other great players in the market like and others. Our ability to be neutral to some of those kind of battles, we think, put us in a very strong position as well where customers can leverage wherever the various breakthroughs are coming from. And then in terms of cost structure, I'll let Dylan talk about it. But in general, we want to certainly ensure our employees are being as productive as possible and we want to leverage technology to do that.

And to build on that, I think our approach internally is pretty similar to what Aaron described on the overall knowledge worker dynamic, and it's a bit early to tell just exactly how this impacts everything and how AI ends up being embedded in the various tools that we use as Boxers. But broadly, we absolutely view it as a way to boost productivity. And so automating basic questions that Boxers will be answering is one example of that, an assistant to the subtasks that Aaron mentioned. And then there's just a lot of other cool ways for specific functions where, for example, can really supercharge the capabilities of our security instant response team and kind of identify anomalous activities on Box to be able to flag certain threats earlier. So I think it's really a lot of different jobs are going to be impacted in different ways, but we view it more as supercharging productivity and getting as much value out of the different tools that we're using as possible.

Great, thank you.

Your next question comes from the line of Tom Blakey with KeyBanc. Your line is open.

Hey, great, thanks for taking my question, everyone. A few questions actually just kind of bolted here. Could you just comment on the longer duration in deals? Just interesting, given the current macro, if you could just highlight why this might be happening, whether it be strategic reasoning or possibly even maybe discounting? Secondly, you mentioned quickly doing there on weaker bookings at the end of fiscal 4Q. Could you just maybe comment on booking trends and fiscal 1Q and into fiscal Q2, that would be helpful. And third and lastly, my AI question would be more around on the usage of it from your business model. I've seen some -- we've seen some impact on company's gross margins or at least modeled to have an impact on gross margins over time as especially the consumption-based modeling could maybe impact gross margin. It would be helpful just to get a comment on you from you Dylan on a longer-term look there with regard to AI and the model -- and the margins would be very helpful. Thanks for taking my questions.

Sure. So we'll start and try and then if I miss something or the question -- but no, all good. So I would say on the duration component, first of all, that is something that we've actually been seeing pretty consistently for several quarters now where while it is a challenging macroeconomic environment, we are seeing for our customers increasing the viewing Box as a long-term strategic partner. And so especially with suites deals, Enterprise Plus and our larger customers, those tend to be multiyear renewals. And as -- when you combine that with the dynamic of more customers early renewing, so extending the average kind of contract durations out there. That's what's led to the outsized backlog growth. So that's up 22% year-on-year and is not because of any unusual or different approach to pricing or discounting that we're doing. It's more just customers having that long-term confidence and electing to sign longer contracts with us. In terms of the booking trends comparing kind of what we saw in Q4 of last year versus Q1 of this year, would generally describe it as pretty similar with most parts of the business kind of steady and delivering against our expectations. The areas that we called out, where we did see some incremental softening were U.S. commercial and EMEA customers. And then I would say it's a bit early to comment on Q2, but certainly, our expectations and what we're seeing in the business is baked into the guidance that we provided. And then to clarify on the gross margin, the question was that more about how we think AI will impact that specifically.

No. With regard -- we've seen some companies, for example, offering AI functionality to customers where that's adversely impacted their business model from a gross margin perspective. I was wondering if you want to make a comment on that.

Yes. This is Aaron. I'll just jump in on that one. It kind of goes back to the first part, we think some of the basic use cases, we do want to try and make more broadly available, and by virtue of those being kind of lighter weight, we see less of a meaningful gross margin impact on that. And then for more of the advanced and kind of higher end use cases, we expect to charge customers in either moving them up to higher tier plans or through consumption models via our platform. And so in general, we're working to counteract any of the potential pressures. We're very confident in our long-term gross margin improvements. And we believe that some of these capabilities will just get based in -- built in as a baseline. But overall, not in a way that we think will show up to the numbers we're reporting.

Very helpful, thank you.

Your next question comes from Chad Bennett with Craig-Hallum. Your line is open.

Great, thanks for taking my questions. So just a follow-up on the duration question. So just in terms of how we think about the kind of the economics you've laid out on moving from kind of a single seat kind of point product to suite in Enterprise Plus and whatnot that you've laid out over a couple of Analyst Days, are those economics or uplift are they still intact with the longer-duration deals? I'm assuming these longer duration deals kind of lean more suite driven than anything else. Just any commentary on how those economics are playing out?

Yes, those economics, specifically kind of the difference and the higher -- kind of stronger customer economics, top to bottom, including the pricing uplift if you're comparing a typical suit/enterprise plus customer versus a similarly sized customer just using the basic service. We are still seeing roughly a doubling in price per seat. And actually, on the contract duration, it's always been the case since we rolled out Suites and then Enterprise Plus that those have tended to be longer multiyear deals. And it's just as more and more of our revenue is coming from those customers, it's part of that mix shift that's actually driving the higher average contract durations. So not even a big change in the last quarter or very recently, we have been seeing backlog growing faster than revenue or deferred revenue for quite some time now.

Okay. And then just maybe for a little bit of a look back on net retention, just considering your churn rate just continues to -- full churn continues to get better or stay at kind of record levels in a good way. Just from net retention from 112 to I think you said 106 today, kind of just -- can you rank order whether it's kind of seat growth or suite adoption? Or what's kind of really the main drivers of that deceleration?

Yes, sure. So it's actually -- and maybe the level set for everyone's benefit, there are really three components of our net retention rate. There's the seat expansion. There's the impact of pricing changes -- historically for us, pricing improvements and then the full churn rate comes out of those two expansion levers. And the stack rank in this case is pretty straightforward in that virtually all of it is attributable to a lower seat expansion. So we've continued to see consistent, steady improvements in price per seats, largely driven by the impact of more and more customers moving into suites at a higher price point. And then to your point, full churn has remained stable and very strong as well. So it really is entirely being driven by the pressures on the seat expansion rate.

Okay. And then maybe one last one, if I could, real quick. Did you -- I might have missed it. Did you comment, Dylan, on how to think about billings growth for the year relative to revenue growth? And then I'll hop off. Thanks.

Yes. So we expect our reported billings growth to be in the mid-single-digit percentage range, and that does include a little more than 100 basis point headwind from FX. So in the general range of our expected reported revenue growth of 6% is how we describe that.

Great, thanks so much.

Your next question comes from Rishi Jaluria with RBC. Your line is open.

Wonderful, hey, Aaron, hey Dylan. Thanks so much for taking my questions. Two for you. First, I'll cross another generative AI question just because it's so top of mind for everyone. But I want to think about the opportunities for you to maybe verticalize gen AI, especially given you are targeting a lot of verticals like health care, financial services, public sector, where, in many cases, you are a system of record. So it feels like there's some potential benefit there. But maybe if you could walk us through how you're thinking about the verticalization opportunity. That would be helpful. And then I've got a quick follow-up.

Yes. So you're spot on that -- the value in AI certainly increases the closer to the business process and the business domain that you can get to, kind of the general productivity horizontal elements are super exciting, very flashy, but the real business value is going to come when you can go to a health care provider and say, we can automate critical workflows of health record reviews or authoring. When you go to a talent agency and say, we can review movie scripts and get them routed to the right talent agent to take a look at or where you can go to finance and have earnings reports being read and kind of key insights being pulled out. So I think over time, we'll find the sort of pockets of specialization based on critical use cases that we see either being repeatable or where there's heavy kind of customer concentration. And either things like our professional services organization or through partners or through our sales motion, really try and make it easy for customers to adopt those kind of capabilities, and then over time, establish, like, for instance, workflow patterns in Box Relay that might leverage AI through templated approaches that make sense on a per vertical basis. I think you have a lot of ways that this will start to show up within the product that we're just at the early stages of kind of scratching the service up. But I do think the vertical use cases will be one of the ways that this gets really delivered from a value standpoint.

Wonderful. Really helpful. And then really quickly, apologies if I missed this. Any color on momentum in Japan and how we should be thinking about that going forward for the rest of the year?

Yes. I think just the high-level color would be is still very resilient for us. A lot of great wins in the quarter across everything from government agencies to manufacturers to financial services, so kind of a strong quarter in Japan. And we're still -- we have, we think, reasonable and kind of healthy expectations for the results this year.

Right. Wonderful. Thank you so much.

Yes, thank you.

Your next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Thanks guys. And I'll keep it to one, in shocking way, it's an AI question. But Aaron, you mentioned in the past that content on Box is more valuable than content on legacy solutions. There's a lot of megatrends that are driving growth for your business, cloud security, et cetera. How do you view these LLM use cases as like a tipping point in terms of facilitating movement off of these legacy solutions. Is it one of the many or is it game changing? I just want to understand -- I know it's early, but how significant could this be at a high level of for you, I guess, maybe taking a five to 10-year outlook? Thanks, guys.

Yes. Great question. So it's actually -- it's probably two components. One is the sort of the legacy element. I can't imagine a product architecture -- technical architecture where you could take like a legacy network file share or legacy ECM on-premises system and somehow connect that to GPT4 and reasonably get any kind of experience that would work or be operable that customers would drive value from. So on that standpoint, it totally is -- it should be the nail in the coffin of kind of legacy on-prem content management and infrastructure to the extent they want the use cases that AI delivers. There's another element which is pretty exciting as well that we're starting to see customers just incrementally, but we'll obviously push on this more -- just incrementally start to really understand is fragmented data is just as much of a problem as content and legacy systems. And the reason for that is, let's say, you wanted to solve this problem of -- you want your sales reps and your companies be able to instantly get answers to questions about all of your product catalog. And you want them to be able to go to an interface and just ask a question of what's the latest pricing for this product. Well, if your data is across lots of different systems, you will run into a bunch of challenges, which is the access permissions of that content might be different across each product, which makes it very, very hard to then reason through that data and ensure that the right people have access to that information. The individual interfaces for those products are going to be totally different for interacting with that data. And so you just want to be able to solve the problem of helping you reason through or understanding -- understand your unstructured content at scale. And so we think this increasingly is going to cause enterprises to really start to pay attention to their content architecture, how is their content managed? Where is it managed? How fragmented is it? How do they get it into a spot with access controls and security and privacy that works in a modern way that they can bring AI to? And so even beyond the legacy element, the fragmentation element of content today we think customers are going to pay a lot more attention to having to do a couple of sessions with two groups of about kind of 20 or so CIOs from Fortune a couple of hundred companies, and you could see there's sort of eyes light up to the challenge that they're about to run into with content architecture. And a significant portion of these customers were not Box customers. They were just across the industry. And for the first time, they realized both simultaneously how much value was in their content because you could start to ask all of this unstructured data questions, and at the exact same time that they don't have the architecture that will let them get value out of that data based on the current course and speed that their infrastructure is running on. So we think it's going to bring up a really compelling, exciting conversations for companies. And we're going to come to the table pretty hard on the message and then make sure that we have the best platform for working with content in AI.

Great color. Thanks, Aaron.

Yes, thank you.

This concludes our question-and-answer session for today. I now would like to turn the call back to Cynthia Hiponia.

Great. Thank you, everyone, for joining this afternoon, and we look forward to updating you on our next earnings call.