BOX - NYSE

Good day. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Box Incorporated Third Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now like to turn the conference over to Cynthia Hiponia, Vice President of Investor Relations. You may begin.

Good afternoon, and welcome to Box's third quarter fiscal year '24 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 the X platform at the handle @BoxIncIR. On this call, we will be making forward-looking statements, including our fourth quarter and full year fiscal 2024 financial guidance and our expectations regarding our financial performance for fiscal 2024, 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; the proceeds from the sale of our data center equipment, 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 documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on the 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 December 5th, 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 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 supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand it call over to Aaron.

Thank you. Cynthia, and thanks, everyone, for joining us today. In Q3, we delivered revenue growth in line with our guidance, with year-over-year growth of 5% or 7% in constant currency. Our 25% operating margins were up 70 basis points from a year ago, demonstrating our operational discipline and delivering year-over-year margin expansion. Despite the various macro headwinds affecting IT budgets, companies still prioritize the Box Content Cloud to help power their hybrid workforces, secure their most important content and automate and digitize their business processes. Examples of Box delivering this value to our customers in Q3 include a leading biotech company expanded its use of Box with a six-figure upsell to enable both collaboration on GSP content in an efficient manner for both internal and external parties as well as support content sharing and collaboration for non-GSP compliant content and use cases. They also plan to integrate Box with their existing applications including Okta and ServiceNow. An advertising and marketing firm expanded its use of Box with a six-figure upsell and ELA as they move the entire agency to Box to meet their Content Cloud needs. As the company adopts Box enterprise-wide, it will eliminate storage costs from other platforms and will be able to consolidate several SaaS applications eliminating redundancy and complexity from their IT environment. One of the largest technology companies in the world expanded its use of Box with the purchase of KeySafe in an Enterprise Plus upsell to support the organization's content modernization initiatives. With this upsell and access to governance capabilities, Box meets their highest level of security classification for content storage and can now be used for restricted content and records management content while also supporting necessary integrations. In the third quarter, we held our Annual User Conference BoxWorks and our exclusive CIO summit, CIOWorks. With record BoxWorks attendance, we've heard directly from our customers on how they are driving significant transformation across their businesses, even in the face of near-term economic pressures. Enterprises are also seeing new challenges as they respond to the rapidly evolving era of AI-powered work. We know that content is the lifeblood of so many businesses and yes, right when content is more important than ever, the way the enterprises manage content and legacy systems no longer works. The challenge is that content is getting produced at an ever-increasing rate and enterprises increasingly are finding it hard to secure all of this fragmented content or enable employees to access the right information to do their jobs. This fragmented content will mean companies can't easily take advantage of the power of AI to get the most out of their data. More than ever before enterprises will need a Content Cloud. By building, the only end-to-end platform that can help customers power their complete content lifecycle in a single architecture, we are reshaping what enterprises can do with their content. At BoxWorks, we made several key product announcements, delivering innovation across security and compliance, collaboration and workflow, and our platform. Our focus is to deliver the best ways to secure and protect sensitive content, ensure compliance for nearly every major industry and government requirement, and power the full document governance process for our customers. We have expanded Box Shield for ransomware protection capabilities in order to mitigate the ever-growing threat of malware and announced an AI-powered threat detection to identify anomalous file activities originating from Box Drive. We also announced a new integration partnership with CrowdStrike where security and IT teams can deduct malicious files, ransomware, and suspicious activity as well as configure security policies directly in Box's administrative console. Across collaboration and workflow, we're adding new capabilities to Box Notes, improving the experience and performance of Canvas, doubling down on our e-signature feature set and continuing to advance next-gen workflow capabilities with the announcements of Doc Gen and Forms. And this year we've taken our strategy even further with the announcement of two major breakthroughs; Box AI and Box Hubs. With Box AI, we're going to revolutionize how companies work with their content. Since the early days of enterprise software, we could always query and understand our structured data, but we've never been able to do the same easily with our unstructured data or our content, which is estimated at 90% of corporate information. All of the content that an enterprise produces is being dramatically underutilized relative to the value inside of this content. But, now with AI, we can solve problems that previously were only possible with high level of human understanding at scale. From extracting metadata efficiently at scale, getting expert analysis to document understanding and summarization and creating new content, with AI we can now process information at a speed and at a cost that opens up completely new possibilities of what we can do with our information. Additionally, we also announced Box Hubs, a revolutionary way to publish content in the enterprise. With Box Hubs, we're enabling companies to take the most important content in their organization and make sure it's easily available and distributed to exactly the right people seamlessly. Content sprawl is one of the biggest challenges facing enterprises today and never before has there been a simple way for any line of business that points the most important content that they need to share broadly in a customized fashion. Any team or department in an enterprise can create a hub to service its most relevant content like a sales enablement portal, HR policy portals, marketing branding sites, and more. And importantly, when combined with Box AI, we are unleashing the power of enterprise content in it -- in the organization by turning unstructured data into valuable knowledge. Most importantly because the content hub is curated by topic, enterprises can ensure that the answers they are getting from AI are accurate, and based on the authoritative information in an organization. The vision for what's possible when companies have a modern approach to working with their content with our new innovative products has been incredibly well received by customers. At CIOWorks, we heard from our customers directly who are using Box AI and this quote from the CIO of a financial advisory firm after turning on Box AI is quite representative of what we're hearing, and “We just enable the Box AI beta this morning, game changer, force multiplier, knowledge overload, the future is bright with Box”. Thank you. Finally, we recently announced an expanded partnership with Google Cloud whereby Box will integrate with Vertex AI, Google Cloud unified AI platform to help customers process and analyze data faster and create a more personalized user experience, intelligent search, and more. This builds on our earlier announcement to integrate Google Cloud's advanced large language model into Box AI with Vertex AI helping to power our new metadata extraction feature. Further, part of our Google Cloud partnership announcement, Box will now be a part of the Google Cloud marketplace. GCP customers will be able to buy Box directly through marketplace and use their GCP credits toward the purchase of Box. This new channel for Box expands our opportunity to land new customers who can unlock the potential for cost savings against existing Google Cloud commitments, streamline lengthy procurement cycles and consolidated billing. Now, turning more broadly to go to market. A key component of our strategy to drive profitable growth at scale is our ability to land, adopt, expand and retain our customers. Driving the adoption of Enterprise Plus is a critical strategic lever to increase the efficiency of our sales motion and bring the full value of the Box Content Cloud to our customers. And by continually adding value through additional features and functionality to existing suites plans, we strengthened our ability to retain customers as shown by our best-in-class 3% churn rates in Q3. Our momentum with Enterprise Plus remains strong and we have now reached 51% of our revenue coming from Suites customers, up from 48% last quarter. Given the large base of customers that we believe are still right for upgrading an Enterprise Plus, we have added Box AI into this plan to encourage further upsells to this plan. At the same time, we know that there's going to be even more advanced AI capabilities that some of our customers will require and we expect to introduce a higher tier plan next year to address these needs. Already within Q3, we saw numerous Enterprise Plus upgrades that were in part driven by the inclusion of Box AI in this offering including a worldwide consulting firm who has been a Box customer since 2013, signed an Enterprise Plus upsell to get access to the Box AI beta. Box AI has the potential to help the consultants to be more productive day to day with automated metadata to help search and finding files, Box AI will be critical in transforming how this organization works with its petabyte of content in Box. An international corporate law firm moved to Enterprise Plus to give its lawyers and staff access to Box AI, being able to summarize large briefs and documents and find information in a matter of seconds, will cut down on time, increase productivity and be hugely beneficial to their employees. We're incredibly excited to be able to bring Box AI to our customers and we will share more updates with all of you soon. As we look ahead to FY ‘25, we are focused on continuing to drive profitable growth at scale. We are entering in one of the most transformative periods in Enterprise software and we are focused on capitalizing on the opportunity in front of us. Next year, we will be continuing to drive investments across AI, security, advanced content management and workflow capabilities to help our customers transform how they work with their content. Further, given the market opportunity right now, in FY ‘25, we will be expanding our focus on key strategic partners and system integrators, scaling our high ROI pipeline generating initiatives, investing in growth in key verticals, and continuing to optimize our international growth efforts. We will drive these initiatives while at the same time delivering improving profitability, putting us on a path to achieve our long-term financial targets. To help drive these efforts forward, in November, we announced that Olivia Nottebohm has joined us as Chief Operating Officer succeeding retiring COO Steph Carullo. Olivia brings proven leadership and execution at Box, with the executive roles at Google Cloud and most recently, Notion a cloud-based productivity platform, and over a decade at McKinsey focused on the software industry. I'm excited to work with her as we deliver new products and plans, expand our partner and system integrator network, go deeper in key vertical markets, and continue our global expansion. I'd also like to provide a huge thank you to Stephanie Carullo, who has been an amazing partner to me and the team for over six years at Box, taking us from less than $500 million of revenue to over $1 billion in revenue, as well as helping execute a seamless transition to bring on Olivia. I am wishing Steph the best in her retirement and I'm excited to have stay close as we continue to scale. In summary, while macro trends and currency rates have impacted our results, in the near term, we have continued to execute our content cloud strategy, creating more high value and repeatable use cases that further differentiate Box and grow our TAM, demonstrating our product leadership with Box AI and Box Hubs, positions us for growth, delivering to customers the platform that they need to meet the demands of the rapidly evolving era of AI-powered work. With that, let me turn it over to Dylan.

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In Q3, we continued to deliver profitable growth while expanding operating margin and executing our disciplined capital allocation strategy. Revenue landed in line with our guidance and EPS grew by 16% year-over-year. We also announced numerous enhancements to our Box Content Cloud platform including significant innovation around Box AI and Box Hubs, which we believe will be important drivers of future revenue growth. In Q3, we generated revenue of $262 million, up 5% year-over-year and representing 7% year-over-year growth on a constant currency basis. We now have over 1700 total customers paying us more than $100,000 annually, an increase of 10% year-over-year. Our Suites attach rate of 79% in large Q3 deals was up from 73% in Q3 of last year. As Aaron mentioned, Suites customers now account for 51% of our revenue, up significantly from 42% of revenue a year ago and up from 48% last quarter. Our Suites value proposition is resonating with customers as they continue to prioritize solutions that enable transformation, simplification, and security of the content within their enterprises. We ended Q3 with remaining performance obligations or RPO of $1.1 billion, a 7% year-over-year increase or 8% growth on a constant currency basis. We expect to recognize roughly 60% of our RPO over the next 12 months. Q3 billings of $254 million were down 2% year-over-year with no impact from FX. Our previous guidance had anticipated a 200 basis point tailwind from FX. As a reminder, our billings growth rate in Q3 of last year was unusually strong at 20%, including a large multi-year customer prepayments. Our net retention rate at the end of Q3 was 102% as we continue to see pressure on seat growth within existing customers. Our annualized full churn rate remains strong and stable at 3% as customers continue to prioritize the value that the Box platform provides. We've also continued to achieve year-over-year pricing increases despite the pressures on IT budgets. In Q4, we expect both our full churn rate and our net retention rate to remain roughly flat with our Q3 results. As seat growth returns to more normalized levels and as we continue driving pricing improvements, we are confident that our best-in-class full churn rate and expanding our suite of innovative products will enable a higher net retention rate over time. We are proud to have achieved our goal of running our infrastructure in the public cloud as at the end of Q3. We have now begun selling the data center equipment that we're no longer using, which had been anticipated in our plans for this year. However, the market for this equipment has softened significantly over the past few months. As a results, we are reducing our estimate of expected proceeds from these sales. This created a headwind against our expense forecast of $3.3 million in Q3 and we expect another roughly $4 million impact in Q4 with no material impact to our financial results anticipated next fiscal year. Q3 gross margin came in at 76.3% versus 76.5% a year ago. Q3 gross margin was negatively impacted by 130 basis points due to the equivalent proceeds headwind that I just mentioned. Throughout the course of this migration, our team has delivered efficiencies above and beyond our initial expectations. We continue to expect further gross margin expansion next year as our data center expenses wind down and as we unlock additional benefits from running fully in the public cloud. We also continue to drive leverage across the business through our lower cost location strategy and rigorous cost discipline. This resulted in 24.7% operating margin or 26.6% in constant currency, an improvement from the 24.0% we delivered in the year-ago period. Q3 operating margin landed slightly below our expectations of 25.5% due entirely to the 130 basis point equipment proceeds headwind that I noted earlier. As a results, we delivered diluted non-GAAP EPS of $0.36 in Q3, up 16% from $0.31 a year ago, which includes a negative impact of $0.05 due to FX. This FX headwind was $0.01 higher than anticipated when we provided guidance last quarter and EPS was also impacted by $0.02 from the equipment proceeds headwind. Adjusting for these unanticipated headwinds, EPS would have been $0.39 above the high end of our guidance. Finally, I'd highlight that Q3 marked our fifth consecutive quarter of achieving GAAP profitability. I'll now turn to our cash flow and balance sheet. In Q3, we generated free cash flow of $58 million, a 6% increase from $55 million in the year-ago period. We delivered cash flow from operations of $72 million, a 3% increase from $70 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation, were $7 million, down from $10 million in Q3 of last year. Going forward, we expect capital lease payments to wind down over the next few quarters as we exit our managed data centers. Let's now turn to our capital allocation strategy. We ended the quarter with $440 million in cash, cash equivalents, restricted cash and short-term investments. In Q3, we repurchased 1.9 million shares for approximately $52 million. As of October 31st, 2023, we had approximately $84 million of remaining buyback capacity under our current share repurchase plan. With that, I would like to turn to our guidance for Q4 and fiscal 2024. As a reminder, approximately one-third of our revenue is generated outside of the US with roughly 60% of our international revenue coming from Japan. The following guidance includes the expected impact of FX headwinds, assuming current exchange rates. Our guidance also accounts for the continued pressure on seat growth that we anticipate due to the macroeconomic environment, as well as lower professional services revenue versus our prior expectations. As I stated earlier, we expect the equipment proceeds headwinds to have an impact of roughly $4 million on our Q4 expenses for a total FY '24 impact of a little more than $7 million. Additionally, in the fourth quarter, we modified our Redwood City office lease to reduce the amount of square footage that we're leasing. This results in a one-time net exit expense that we will recognize in Q4, representing a 60 basis point headwind to Q4 operating margin. For the fourth quarter of fiscal 2024, we anticipate revenue in the range of $262 million to $264 million, representing 3% year-over-year growth at the high end of this range or 5% in constant currency. We expect our Q4 billings growth rate to be in the low to mid-single-digit range. This includes an expected headwind from FX of approximately 300 basis points. We expect our Q4 gross margin to be roughly 78%, which includes the equipment proceeds headwind of 150 basis points. We expect our Q4 non-GAAP operating margin to be approximately 25.5%, which includes an expected negative impact of approximately 180 basis points due to FX. It's important to note that our Q4 operating margin expectations also incorporate two discrete items that were not included in our expectations as of last quarter. First, the equipment proceeds headwind on gross margin creates an equivalent 150 basis point impact on operating margin. Second, the lease modification discussed above represents an operating margin headwind of 60 basis points. We expect our Q4 non-GAAP EPS to be in the range of $0.38 to $0.39 and GAAP EPS to be in the range of $0.05 to $0.06. Weighted average diluted shares are expected to be approximately 147 million. Our Q4 GAAP and non-GAAP EPS guidance includes an expected year-over-year headwind from FX of approximately $0.03, the equipment proceeds headwind of a little more than $0.02, and the lease modification headwind of approximately $0.01. For the full fiscal year ending January 31st, 2024, we now expect FY '24 revenue in the range of $1.037 billion to $1.039 billion, representing 5% year-over-year growth or 8% on a constant currency basis. We expect our FY '24 billings growth rate to be roughly 3% on an as-reported basis or roughly 5% on a constant currency basis. We now expect our FY '24 gross margin to be roughly 77%. This includes the previously mentioned second half-headwind from equipment proceeds on 70 basis points. We are revising our FY '24 non-GAAP operating margin guidance to be approximately 24.5%, representing a 140 basis point improvement from last year's results of 23.1%. We expect FX to have a negative impact on operating margin of approximately 200 basis points. Our revised expectations also include the previously mentioned equipment proceeds and lease modification expenses, which had a combined impact of 85 basis points. We are updating our FY '24 non-GAAP EPS expectations to be in the range of $1.42 to $1.43, representing a 19% increase at the high-end of this range versus $1.20 in the prior year. We expect FY '24 GAAP EPS to be in the range of $0.15 to $0.16. Weighted average diluted shares are expected to be approximately 149 million. Our FY '24 GAAP and non-GAAP EPS guidance includes an expected full year negative impact from FX of approximately $0.17 and an additional impact of approximately $0.05 from the two non-recurring items that I mentioned previously. As we continue to navigate through this dynamic macroeconomic environment, we think it would be helpful to provide a high level preliminary outlook for fiscal 2025. While we have been seeing a more stable demand environment, we want to be prudent and assuming that this challenging environment persist throughout the coming year. This outlook also assumes current FX rates. We currently expect our FY '25 reported revenue growth rate to be approximately 5%. This includes an expected headwind from FX of roughly 100 basis points. We're generating significant business model leverage to our public cloud migration, workforce location strategy, and overall cost discipline. The impact of these initiatives enables us to invest in the key growth initiatives that Aaron discussed, while also improving our already strong profitability profile. We currently expect FY '25 non-GAAP operating margin of roughly 27%, representing an improvement of roughly 250 basis points year-over-year, which includes an expected headwind from FX of a little less than 100 basis points. We remain committed to delivering against the long-term financial targets that we outlined at our March Financial Analyst Day. We are reiterating our long-term revenue growth target of 10% to 15%, gross margin of 80% to 82%, operating margin of 32% to 35%, and revenue growth plus free cash flow margin of at least 45%. Despite the challenging macroeconomic environment, this year we continue to deliver against the core initiatives to achieve these long-term financial targets. We are making significant enhancements to our innovative product offerings, expanding both operating margin and free cash flow margin and consistently returning capital to our shareholders. As we capitalize on these initiatives and as the macroeconomic environment improves, we are well-positioned to create significant long-term shareholder value. With that, Aaron and I will be happy to take your questions. Operator?

Actually, Dylan, before we open up for questions, it might be helpful to see our guidance and the adjustments we discussed in one table. Please refer to slide 12 of our earnings deck, which you can find on the IR website. Operator?

[Operator Instructions] Your first question comes from Brian Peterson from Raymond James. Please go ahead.

Hey guys, thanks for taking the questions. So I wanted to hit on linearity throughout the quarter. Obviously, the macro is very up -- very much up for debate here. I'm just curious, any trends that you've seen throughout the quarter that you'd call out that changed?

Yes, I would say, no major changes to linearity. Really, you know, the way I would articulate some of our kind of bookings outcome or billings outcome in Q3 and certainly putting a little bit of pressure on the Q4 number was, you know, as we had called out in the prior call, more stabilization in the U.S. in particular where our results came in, you know, effectively where we had expected with some additional pressure on -- in international markets where there was some variability. We did have a couple of pushes out of Japan but nothing that concerns us. But definitely, that can be a dynamic that then impacts, you know, some of the billings In the near term. So -- but no meaningful change in linearity from our perspective.

Thanks, Aaron. Dylan, you know, I appreciate the guidance for next year and you guys are outlining kind of the mid-single-digit growth, you know, still looking at 10% to 15% longer term, you know, is there an implied kind of NRR or seat expansion in that number? I get that it's take -- like, a little bit of cyclical pressure now but I'd love to understand in a more normalized environment, how should we be thinking about that NRR and seat trends in that 10% to 15% target? Thanks, guys.

Yes. So based on what we've been seeing in a variety of environments, we do expect, even from a long term target point of view, for the contribution to growth of net new business and expansion, which is what the NRR represents, to be fairly consistent with what we've seen. And the contribution from new business being in the, you know, low to mid digit, a single digit percentage. So the implied net retention rate in that long term target, you could think about as kind of the mid, you know, kind of pushing 10% type NRR. And we do expect to see an improvement from current levels both on seat growth as well as over time, the impact of some of the newer products, suites, et cetera, that we expect to introduce to the market next year. So while that'll take some time to flow through to the model, that's how I think about some of the upside and dynamics that drive our confidence in that longer term growth rate.

Thank you.

Thanks, Brian.

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

Okay, great. Thanks for taking the question here. I guess maybe just following up on the guide and the outlook for next year, I mean, I guess it implies a bit of an acceleration on the top line. So I guess as you think about, you know, what that looks like, like, how do you get confidence around that number? Or what is it that gives you confidence in being able to see an acceleration as we head into fiscal '25?

Yes, so I would say, you know, expecting to see pretty similar growth next year, both kind of versus what we're expecting, you know, as we exit this year and just kind of coincidentally what will happen to do for -- or what we're expecting to do for the current year. What I would say is, you know, we are going to be lapping the impact of when we started to see some of these macroeconomic challenges set in. And as we think about, you know, getting through the next year, you know, certainly, this is based on, as we had mentioned, pretty prudent expectations in terms of the overall macroeconomic environment. So it's really based on kind of combination of everything that we've been seeing in the environment, the pipeline, the conversations that we've been having with customers and all of that. So any specific new things in the business that are driving that. But it's really just based on a continuation of some of the trends that we've been seeing recently. And Aaron, anything to add?

No, I mean, obviously, if we get more into the FY '25 outlook and commentary, happy to build on that.

Okay, great. And then maybe just on the demand environment, you know, I guess as you look at the customers in the pipeline, and I know that, you know, there's been headwinds to the seat expansion side, I guess, where do you feel like we are in terms of, you know, that continuing to be a headwind? And as we think about, you know, the billings outlook, and, you know, I guess again going into '25, you know, like, how scrubbed is the pipeline that you're seeing for renewables and the assumptions that are being made in there in terms of the seat expansion initiatives?

Yes, I mean, I would say we are still expecting to see continued pressure on seat growth given the environment and that is baked into the forward-looking expectations that we provided. And in terms of the pipeline, I would say, similarly, you know, feel really good about the way that we have been qualifying that and based on a lot of the learnings from this year just where we are seeing the strongest ROI whether it's from, you know, some of the different demand initiatives or, you know, the geographies and segments of the business that are, you know, showing the most resilience in this environment. That's where we've really been focused. And so from an overall pipeline quality point of view and what we've learned and how we baked that into our expectations, that is all incorporated into the numbers that we provided.

Okay, perfect. Thanks for taking the questions.

Your next question comes from the line of Josh Baer from Morgan Stanley. Please go ahead.

Hey, this is Chris Quintero on for Josh. Thanks for taking our questions. You all have been showing strong adoption of Suites for a few quarters now, so just curious why that continued Suite momentum is not exactly translating into those better in-quarter results.

Yes, I think, getting our customers to move up to Suites has been a critical priority for us. And we saw a little bit of, you know, kind of less of the quarter-over-quarter growth than we wanted earlier in the year, and we've put up even greater focus on that. And I think we're seeing those results now play out. In terms of the total top-line results, obviously, that factors in things like seat count growth that the Suite expansion doesn't specifically, you know, these are independent metrics of the percentage of customers who move up into Suites versus the amount of seat growth that we have in general and that's been come under some pressure as Dylan noted, just due to the macro environment. And so, you know -- as, you know, certainly as companies aren't hiring as quickly or you have layoffs in tech as an example, these can create some seat growth pressure, which obviously is the combined metric that really drives that top-line revenue and the net retention rate. So I'd say we're still going to be very, very focused on adding more and more value to our product plans. That means more customers can get into Enterprise Plus. We're going to have additional functionality that will allow customers to upgrade even further in the future and then seat growth becomes another lever as hopefully the economic environment, you know, improves over time.

Yes, and this is Dylan, just to build on that, you know, to clarify, really pleased with the kind of attach rates and the mix of what we are selling to our customers in this environment, especially seeing strong attach rates globally, which we had not been seeing a year ago, was a little bit more variable from geography to geography, but it's really driven by just lower volume of overall deals. And you can see that in some of the metrics like the large deal counts that we provide. But we are, you know, certainly pleased with the trajectory and momentum of suites within our customer base. And I would note that we've continued to see as we've called out in the past, that those suites customers, once they buy in, adopt suites, tend to have much stronger customer economics overall, from pricing to margins to net retention. So even though the deal volume isn't quite where we'd like it to be this year, the overall quality of the customer base and revenue base have been steadily improving because of that mix.

Got it. That's very helpful. Dylan, maybe sticking with you, on the operating margin guide for this year, if I exclude that 85 basis point headwind from the equipment and lease changes, you still guided down the full year by, you know, 15 basis points or so. So just curious, is that mostly a function of that lower revenue flowing down or is there something else you would call out there from an expense standpoint?

Yes, I would say the only, you know, minor change and again pretty close to in line. There is a bit of a revenue impact but also a little bit of an incremental FX impact, so -- and -- both on revenue and on the margin side. So not material versus what we expected a few months ago, but that is a little bit of a contributor as well.

Got it. Thank you so much.

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

Oh, great. Thank you for taking the questions. Can you -- I want to ask you about the fiscal '25 outlook. Again, understanding its preliminary or early, but any way to kind of understand the net retention versus new that you're baking in there, you're kind of at 102%. You're talking about 5% reported or 6% constant currency seems like, what are you assuming for net retention? And then is there anything you're baking in from the AI products that might be coming online next year?

Yes, so I would say you could think about the underlying driver and assumption in that preliminary guidance as being pretty consistent with current levels. As mentioned, you know, certainly see upside over time, but that is not baked into next year's numbers. And then as it relates to, you know, our product roadmap broadly, you mentioned AI, but this would apply to some of the other newer products like Hubs and the New Suite that we expect to launch next year. We'll just note that as Enterprise sales cycles are typically a few quarters and based on our recurring revenue model and how that translates into revenue, we don't expect those newer products and offerings to have a material impact on next year's revenue, but would be more meaningful growth drivers the following year and FY '26 and beyond.

Yes, as it relates to today's AI offering, which obviously is an Enterprise Plus plan, we do expect that to be a driver of Enterprise Plus upgrades for next year. So, just to build on that. So AI definitely being a driver for next year. It is baked into the current outlook that we just shared. And as I mentioned on the Q3 numbers, we saw a number of customers upgrade to Enterprise Plus specifically or at least in large part to be able to access Box AI. So we certainly expect, you know, to continue to see that in Q4 and in next year. But we also want to be prudent on our total top-line expectations as we kind of work through the macro.

Understood. Just specifically on the volume-based -- on the consumption-based pricing that you kind of laid out, are you assuming that the existing Suites customer starts contributing some kind of or from that volume-based -- consumption-based pricing next year?

We don't have any particular hard expectations within the model on the consumption side. That would be, you know, kind of pure upside and only because we want to be super thoughtful as we start to roll. I mean, Box AI literally is rolling out in November to our Enterprise Plus customers. And so, we want to be conservative at this point on the numbers there.

Understood. One last question for Dylan. Dylan, what is the billings growth rate adjusted for payment duration from a year ago? Because I do remember last year you had kind of some big deals.

Yes, I would say, we didn't give the exact number, but you can think about that large multi-year prepay that we had, you know, kind of mentioned at the time and then recently as well. as being in the kind of mid- to high single-digit percentage range. So last year -- so that was a significant driver of the outsized billings growth that we showed in Q3 of last year. although even independent of that one customer was a pretty strong quarter for us overall as it was late in the quarter. As a reminder, that we started to see the macroeconomic headwinds show up in our business.

Understood. Thank you.

Your next question comes from the line of Chad Bennett from Craig-Hallum Capital. Please go ahead.

Great, thanks for taking the question. So just considering the, I guess, preliminary growth outlook for next year of 5% and just -- and obviously, the operating margin outlook. Just curious, I mean our growth outlook has clearly lowered from kind of what we thought it would be, obviously, this year and heading into next year. And as a percentage of revenue, sales and marketing expenses are kind of hovering around 27%, 28%, they've kind of been there for a couple of years now. Are there any planned actions on the cost side to maybe escalate or accelerate that operating margin leverage next year and even if that 5% turned into 8%, I'm not sure 27%, 28% sales and marketing expense makes sense. Any commentary there?

Yes. So it's a great question. I think we're trying to balance both, obviously, continued leverage on the bottom line, which we see as incredibly important. Overall to the efficiency of the business and being able to support our capital allocation strategy. And at the same time, because of the market opportunity between security, AI, our overall platform message, we do want to balance the right amount of growth investments to drive top line, not only for next year but really beyond. And so some of those investments obviously is kind of well understood. You have to start to make them and then the payback is more tied to that long-term model. And while these aren't particularly massive in any sense, things like continue to optimize our international markets drive the next tier plan in terms of product investment, some of the verticals that we want to double down. And these things obviously are still very important for us and to drive that long-term growth. So we'll always pay close attention to where we're seeing kind of the efficacy of our investments and we'll tune appropriately. But we think that continuing to make year-over-year improvements on the bottom line going forward is incredibly important to drive to that long-term model, but also making sure we're driving the right level of growth is super healthy as well. And so that's the balance that we're trying to create.

Yes. And to build on that, we still expect our annual operating margin improvement to be fairly consistent on an annual basis as we march toward our long-term target model of having operating margins and delivering those in the 32% to 35% range. For next year, on the heels of completing the public cloud migration that we've talked about, more of that is expected to come at the -- on the gross margin line, then in a typical year over a multiyear time period. And then we also do expect to continue driving efficiencies across the business and in terms of big categories of leverage, as we mentioned, do expect our lower cost location strategy to have an impact next year as well. So that's a big focus. That doesn't show up in the sales and marketing line as much, and I know Aaron spoke to that, but that has been and is expected to be a continued driver of R&D and G&A leverage in particular. So those are a couple of the big areas from a near-term point of view that will fuel that operating margin expansion.

Got it. And then maybe just one quick follow-up for me. Just on the non-suite portion of the business, can you just speak to kind of year-to-date, what you've seen competitively there? And if that business is I mean I assume that business has kind of got weaker as we went along the year and just kind of how that has played out relative to expectations.

Yes. I think certainly, we're very focused on encouraging any new customer to come into our multiproduct suite, and that's a core part of our sales motion. That improves our competitive differentiation. Win rates, retention and so on. In terms of the core only population, we do see more pressure in that audience from a retention standpoint and in some cases, a seat growth standpoint, although it can always vary by the quarter but I think no change necessarily in the competitive market or competitive dynamics there. That's something that's sort of always been incorporated into our financial plan and model. So no major market change on that front.

Great, thank you.

Yes, thank you.

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

Hey, this is Rich Poland on for Rishi. Thanks for taking my question. So first one for me. I guess when you're seeing some of the see churn and contracts. Are you having any success trying to offset some of that with the Suites momentum? And maybe perhaps giving any kind of a discount on the Suite side or just kind of walk me through how that conversation typically goes.

Yes. I mean there can be a few different flavors, so it would be hard to fully capture. But we do -- certainly, if a customer is dealing with a reduction in head count or reduction of investment our at least seat-based model will correlate in some cases to that dynamic within that customer. And so usually, that's tied to additional cost pressure in that customer. So adding more product and return for fewer seats that customer is most likely dealing with overall cost pressures that make that difficult. So I'd say that's -- we certainly try multiple ways to get our customers to retain their total value, but we also want to be thoughtful with customers and make sure we're adding the right amount of value and relationship given whatever the environment they're dealing with is. I'd say, more typically, what we're able to do in a renewal motion is find ways to get that customer into expanded functionality or moving up a plan tier based on the kind of overall growth and health of that customer relationship, and that's certainly a core part of our renewal motion.

Got it. That's very helpful. And it's good to hear the AI driving some of the enterprise plus conversion. Going forward, aside from watching just kind of the Suites momentum trajectory, what's the best way for us to kind of measure the pace of enterprise plus adoption and I guess alongside that, have you given any thoughts to kind of providing a breakout for Enterprise Plus every once in a while like you have done with core and core plus in the past?

Just, to -- well, can you clarify, when you say breakout of Enterprise Plus, do you mean relative to our overall multiproduct Suites? Or is there some other metric you're referring to?

Correct, correct.

I see. Yes, we -- I mean we sort of discuss different ways to maybe convey that metric, and we're happy to take more feedback offline. Because Enterprise Plus is our primary sort of sales motion and more of the other Suites are equivalent to Enterprise Plus in terms of what products they've contained, minus no AI but similar price points. We sort of think about them basically as the same metric. So we're -- we probably wouldn't break it out only because it really does -- it's effectively the same concept. To the extent that it's helpful, we could consider it over time. But I would just consider Enterprise Plus as the primary suite that's driving our growth and certainly taking up the bulk of that account base.

Yes. And just as a reminder, for the past year or so to kind of echo what Aaron's been saying, more than 90% of our overall Suite sales have been Enterprise Plus. So that's certainly effectively all of the new Suite sales as well as some customers moving to Enterprise Plus from a prior suite under the hood. So it is the majority, but we try to capture that in one metric just to keep things simple, especially because as our product offerings continue to evolve, just a cleaner way to track the overall Suites momentum which is what's most important to really understand how our customers are using Box's products.

Got it, that's all very helpful, thank you.

Our last question comes from George Iwanyc from Oppenheimer. Please go ahead.

Thank you for taking my question. Aaron, maybe going back to your comments on investing for growth. With Olivia coming on board, are there any changes made to the sales organization and go-to-market motion over the next several quarters?

Yes. So maybe at a high level as we did a search for the successor for Steph and this is a very collaborative process to find the next person that can take Box to take us from the $1 billion to $2 billion mark. We were extremely intent to bring somebody that understood our model understood both what we had built in terms of seeing similar environments but also seeing where we're trying to go as a platform. And so we found somebody in Olivia that deeply understand SaaS, our go-to-market motion, the land and expand motion kind of driving higher price per seat through product expansion, driving partnerships with system integrators and channel partners that international mix. So we're extremely delighted to find somebody that really understood our model, but also where we want to take it. I think I would say as we look out to next year, I would expect more incremental optimization in the form of things like expanding with more partners going into kind of critical verticals that we need to continue to drive growth in continue to move up customers into higher plans here. So really a continuation of the things we've talked about on this call and to -- the street about, but obviously, turbocharging wherever appropriate within the context of a financial model where we want to deliver more bottom line efficiency as well. So that's sort of the balance that we continue to deal with. But I'd expect you to hear updates on more of those kind of strategic initiatives as we go into next year.

And coming out of BoxWorks and your new announcement with the GCP marketplace. Maybe give us a level set on new customer outreach and what the pipeline looks like from that perspective?

Yes. So the GCP partnership has been something we've been working on now for quite some time. So we're excited to land the plane there. We really kicked off at the start of Q4. So we're in the midst right now of some of those conversations. And I think the contours of the value really are when a customer is looking to buy box or maybe there's a gap in their IT strategy that Box can help with and Google seller sort of identifies that, we can be brought in. And you have this much more efficient path for finding budget in some cases where a customer might have those unused credits within the GCP environment. So very -- just the earliest days of the partnership, but we are we're already seeing this in our pipeline and hearing anecdotes of it in customer conversations. But I'd say just it's sort of effectively day 1 right now. So we'll share more as we have updates.

Great. Thank you.

Yes, thanks.

Thank you. And I will now turn the call back to Cynthia for closing remarks.

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