Ladies and gentlemen, thank you for standing by. And welcome to the Box, Inc. first quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

[Operator Instructions]. I would now like to hand the conference over to your speaker today, Alice Lopatto, Head of Investor Relations. Thank you. Please go ahead..

Good afternoon and welcome to Box's first quarter fiscal 2021 earnings conference call. On the call today, we have Aaron Levie, our CEO and Dylan Smith, our CFO. Following our prepared remarks, we will take questions. Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investors.

Our webcast will be audio-only. However, supplemental slides are now available for download from our website. We will 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 Q2 and FY 2021 financial guidance and our expectations regarding our financial performance for fiscal 2021 and future periods, our timing of and market adoption of our products, our markets and market size, our operating leverage, our expectations regarding maintaining positive free cash flow, growth margins, operating margins, future profitability and unrecognized revenue and remaining performance obligations, our planned investments and growth strategies, our ability to achieve our long term revenue and other operating model targets and expected timing and benefits from our new products, pricing and partnerships and our expectations regarding the impact of the COVID-19 pandemic on our business and operating results.

These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.

Please refer to the press release and the risk factors in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements are being made as of today, May 27, 2020 and we disclaim any obligations 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 PowerPoint presentation, which can be found on the Investor Relations page of our website.

Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me hand it over to Aaron..

Thanks Alice and thanks everyone for joining the call today. Before we begin, I would just like to say that I hope you and your families are all staying safe and healthy right now. These are challenging and unprecedented times and it's a reminder the health and safety of our families, our friends and our community should always be our first priority.

While there is no playbook or operating manual to follow, we have been actively monitoring COVID-19 development and we took early measures to protect the health and safety of our employees. In early March, we transitioned all of our nearly 2,000 Boxers to work from home smoothly.

With nearly all of our IT stack in the cloud and integrations between Box and other best-of-breed technologies such as Zoom, Slack, IBM, Okta, WebEx, Office 365, G-Suite and salesforce, we were ideally set up for remote work.

We were immediately able to double down on support for our customers, both by ensuring the resiliency of our systems to deliver uninterrupted service and by making sure our customers have the resources they would need to enable secure remote work for their organization through Box.

I am extremely proud of all of our teams at Box globally who have done an amazing job supporting our customers and continuing to drive innovation during this time. While these have been very stressful and dynamic times, I am proud to say that Box has not missed a beat. Our virtual all-hands meeting are getting record engagement.

Teams are making decisions faster than ever. We can reach and connect with more customers virtually. And we are continuing to ship software and innovate more rapidly than ever.

To that point, we recently shared the news that all Boxers can work from anywhere until the end of the fiscal year, if they so choose, providing increased flexibility and peace of mind for our nearly 2,000 employees globally.

Even when our offices reopen, we will remain a digital-first organization bridging the physical and virtual way of working through a digital workplace. We are at the beginning of what will be one of the most transformative periods in business history.

Over the past couple of months, I have been speaking with dozens of CIOs and CEOs of Fortune 500 companies and it's very clear that building toward a digital-first workplace will be a key pillar in a much broader new normal for how organizations operate going forward.

The opportunities for flexible work, global and virtual teams and reimagined business processes have always been a key element in our vision. While there is an undoubtably significant economic disruption in many sectors right now, there is also an unmistakable sense that this is an opportunity to accelerate digital transformation.

Organizations are now beginning to re-factor how they operate for the 2first century, eliminating paper-based processes, automating manual workflows and creating new digital customer experiences. We will see manufacturers enable secure collaboration across global supply chains with complex networks of partners.

Healthcare providers will fast-track telemedicine experiences and build new ways to share data with their patients. Retailers can collaborate on advertising campaigns virtually and connect and evolve their digital in-store experiences. Life sciences organizations can manage clinical trials and research across distributed teams.

And banks can onboard clients without paper or manual processes. This future will be built on modern cloud platforms and that's where Box comes in. Nearly 100,000 customers now rely on Box to power secure collaboration in critical processes across their businesses.

And Q1 highlighted how important Box is to our customers and just how much of a transformational impact we can have. Just to give you a few examples.

As we announced, in the quarter, the USDA recently chose Box to power the organization's secure remote work initiatives and help digitize operations within its 2,500 farm service centers across the country.

Vistra Energy, which produces electricity for nearly 60 power plants across the country for five million customers leveraged Box along with our tight integrations with Slack, Zoom, Office 365 and G-Suite to quickly and smoothly transition teams to remote work.

And Box enabled General Electric to keep employees connected both to each other and to their customers while also keeping them secure on more than half a million connected devices.

It's incredibly energizing to be such an essential and strategic part of how our customers are navigating this unprecedented time and we are even more excited to see how we can partner with them to shape the future, Now let's dive into our results for the quarter. In Q1, revenue was $183.6 million, up 13% year-over-year.

Non-GAAP EPS in Q1 was $0.10, compared to negative $0.03 a year ago. We delivered wins and expansions with thousands of customers in Q1, including the City of Berkeley, FLIR, NASA, National Bank of Canada, Toyota Financial Corporation, USDA and many more.

We closed 40 deals greater than over $100,000 versus 33 a year ago and nearly 80% of our $100,000-plus deals included at least one add-on product.

Over the past few years, we have methodically been building the category defining cloud content management platform focused on three key differentiators, frictionless security and compliance, seamless external and internal collaboration and workflow and world-class integrations and APIs that extend the value of Box into any application.

In today's new work environment, this product strategy is incredibly relevant. And in Q1, we delivered several new innovations. We announced new automated malware detection capabilities and controls in Box Shield.

Box Shield is our fastest-growing add-on product in the company's history and we have plans to continue to continue to enhance and expand its capabilities to drive even further adoption. With the average cost of the cyber attack reaching $2.6 million or more, malware has become one of the costliest security incidents facing businesses.

With malware detection, when users preview files with malware identified, Box Shield will now automatically alert the user, restrict downloads and sharing of malicious files and notify IT and security teams. Earlier this month, we also introduced the All-New Box experience to increase productivity and enhance team collaboration.

The All-New Box experience includes an updated simplified design and much faster performance, Box Collections, which provide the ability to organize files and folders around topics and work streams that are important to the user and annotations, which will allow users to leave free-form markups and text comments directly in Box when previewing more than 100 different file types.

We also continued to expand our integrations with partners and leverage our open and interoperable platform. We delivered an enhanced integration with Microsoft Teams to make Box and Microsoft 365 experience as easy as possible building upon the many integrations we already have with Microsoft products.

At IBM Think earlier this month, we joined Rob Thomas and Stewart Butterfield to discuss our shared vision for the future of work and we announced an integration with Watson AIOps. We are incredibly excited about the work we are doing with IBM to enable IT organizations and businesses to get work done faster, simpler and more securely.

Additionally, we continued to expand our integration with Zoom, which allows users to create or join a Zoom meeting directly from Box.

Unsurprisingly, usage of Box and our Zoom integration has grown dramatically over the past few months and ensuring users can collaborate with Zoom, Slack, Teams, WebEx, G-Suite, IBM and all the applications in our customer's IT stack remains critical in strengthening our remote work strategy.

Looking at the year ahead, we have an exciting roadmap of innovation and enhancements that will continue to drive adoption and enable our customers to work in new ways. And we will be sharing some of these new and advancement at this year's BoxWorks, which will be an all-digital event for the first time ever, taking place on September 17.

We already have an incredible slate of speakers including the CEOs of IBM, Cisco, Slack, Zoom, Okta and more to come. This is lining up to be the defining event for the future of work.

We will be announcing more great speakers over the summer with CIOs and leaders from across our customer base joining to share their insights and experiences on the future of secure remote work and how they are transforming organizations going forward. Turning to our business model.

Last year, we laid the foundation to improve our balance between growth and profitability for FY 2021 and beyond with a focus on delivering growth more efficiently and implementing significant cost discipline in the business.

While the future macroeconomic impact of COVID-19 on the market remains uncertain, we believe we are in a strong position to achieve long term healthy growth rate with increased profitability.

To drive efficient and consistent revenue growth, we will continue to execute on our multiproduct strategy and drive more efficiency into our go-to-market motion.

We are going after one of the largest markets in enterprise software and our focus is on growing existing accounts by continuing to drive add-on product adoption with Box suites and seat expansion as well as efficiently driving new logo acquisition in key markets.

While we expect to see softness in our small business segments due to the economic environment they are facing, we are seeing greater momentum from our enterprise customers expanding right now as they have greater need for secure remote work solutions.

Due to our cloud technology stack, our global sales team was able to move to virtual selling smoothly and our focus on our land and expand motion has enabled us to drive a strong run rate base of customer expansion right now.

Further, in the quarter, we implemented new ways to expand our relationship with existing customers including virtual selling programs specifically focused on secure remote work, virtual executive briefings to engage with key senior executives at our customers, a shift toward digital events to bring together IT decision-makers virtually and launching a new sales program for enterprise-wide license agreement to help customers expand wall-to-wall.

Next, to drive greater profitability, as we discussed in our last call, we are focused on three key initiatives.

We are optimizing our workforce expenses, improving gross margin and continuing to take an ROI-based approach to all areas of spend and are implementing greater cost discipline across the business, which is evident in Q1's improvement of non-GAAP EPS.

We laid the foundation to significantly improve our margins a few quarters ago and we are confident that this focus on efficient growth and cost discipline will be an advantage in today's uncertain environment. Before I conclude, I want to take a moment to share with you the progress we made continuing to buildout a world-class Board.

This year, we have added three new directors to the Board, including Jack Lazar, Bethany Mayer and earlier today we announced Carl Bass, who brings over 30 years of technology experience, including, most recently serving as the CEO of Autodesk.

We are excited by the collective expertise our Board brings to Box and I am thrilled to be working with these new Board members. We are entering a new normal for business and we are in the best position to help our customers emerge stronger than ever. The same goes for Box as well.

Our Q1 results demonstrate the progress that we have made and we believe that by powering secure remote work for enterprises of all sizes, we are positioned well for further executing going forward. With that, I will hand it over to Dylan..

Thanks Aaron. Good afternoon everyone and thank you for joining us today. Before we get into our quarterly results, I would like to provide an overview of how we are managing our business during these unprecedented times.

As Aaron mentioned, organizations are accelerating their remote work and digital strategies and Box is in a strong position to help our customers remain secure, productive and innovative during these transformations.

The combination of our business model and the recent actions we have taken have positioned us well to maintain our financial resiliency while we navigate through this dynamic situation. The nature of our business model creates financial stability with recurring revenue representing more than 95% of our total revenue.

We also have relatively low exposure to the market segments most impacted by COVID-19 with less than 10% of our revenue coming from the industries whose businesses have been hardest hit by COVID-19. While our business is not immune to the impact of this pandemic, our go-to-market motions are focused on where we are seeing the strongest demand.

We headed into FY 2021 with an increased emphasis on driving net expansion in large existing customer base, which is a more efficient and predictable sales motion than sales to entirely new customers.

The heightened need for solutions like Box that power remote work have benefited sales to existing customers, which contributed more than 70% of new bookings in Q1. We are also seeing momentum in our revamped event digital channel which is enabling us to more efficiently acquire new customers.

In addition, we have continued to take a more rigorous approach to overall cost discipline, which began in the second half of last year.

Even in these turbulent times, we have demonstrated significant improvements in profitability and we expect to generate further improvements in FY 2021 through our focus on optimizing workforce expenses, improving gross margin and driving cost discipline across the business by taking a rigorous ROI-based approach to all areas of spend.

For FY 2021, we now expect our non-GAAP operating margin to be 11% to 12% of revenue, an improvement from the 9% to 10% range that we provided on our last earnings call. Let's now move on to our quarterly results. In the first quarter, we delivered strong financial performance across the board.

We delivered revenue of $183.6 million in Q1, up 13% year-over-year. 27% of this revenue came from regions outside of the United States, driven by continued strength in Japan. We delivered strong subscription revenue, driven by high customer expansion rates in Q1, particularly with our larger enterprise customers.

These larger companies are accelerating their adoption of remote work solutions and tend to have more pronounced needs for Box's differentiated security, workflow automation and integration capabilities as they digitize how work is being done across their increasingly distributed workforce.

While we saw solid revenue results, the COVID-19 environment is resulting in softness in our small business customers. Given the greater proportion of sales from customer expansion, our professional services bookings and revenue were also impacted in Q1.

Finally, in Q1 we experienced a higher allowance for bad debt to account for potential customer collection delays which created a headwind of roughly $1 million to Q1 revenue. Our remaining performance obligations or RPO represents non-cancelable contracts that we expect to recognize as revenue in future periods.

This metric consists of deferred revenue and backlog offset by contract assets. We ended Q1 RPO at $722.7 million, up 13% year-over-year. We expect to recognize approximately 65% of this RPO over the next 12 months. First quarter billings came in at $128.1 million, representing 8% calculated and duration adjusted billings growth year-over-year.

As you would expect, the dynamics of this economic environment have created a slight mix shift toward quarterly versus annual customer payment durations. As a result, we currently expect our billings growth rate to slightly lag of revenue growth rate for the remainder of this year.

However, I would highlight that we have not seen customers seek to reduce their contract durations to-date as they continue to view Box as a critical long term component of their IT strategy. In Q1, we saw solid growth in six-figure deal volume closing 40 deals worth more than $100,000 versus 33 a year ago, up 21% year-over-year.

Additionally, we closed five deals over $500,000 versus six a year ago and three deals over $1 million in line with a year ago. We ended Q1 with an annualized net retention rate of 107%, up from 106% a year ago and 104% last quarter. This increase was primarily attributable to improvements in our customer expansion rates.

In Q1, our full churn rate was 5% on an annualized basis, stable versus a year ago and Q4. Turning to margins. Non-GAAP gross margin came in at 73.1% versus 72.3% a year ago and an improvement from our Q4 gross margin of 71.5%. Our focused on reducing infrastructure cost is paying off and we expect this upward trend to continue in future years.

Q1 was another successful quarter of driving leverage across the business as we continue to grow revenue faster than our expenses through numerous cost and productivity initiatives while we scale. Total Q1 operating expenses represented 64% of revenue, a significant improvement from 74% a year ago.

Sales and marketing expenses in the quarter were $62.7 million, representing 34% of revenue, down from 43% in the prior year. As a core part of our strategy, we are seeing success in achieving higher overall sales productivity by selling our broader product offerings to existing customers.

Research and development expenses were $35.8 million or 20% of revenue, flat with last year as we continue to enhance our cloud content management product offering to further differentiate our platform. In Q1, this included automated malware detection capabilities and controls in Box Shield and an All-New Box experience.

Additionally, we plan to open our first engineering Center of Excellence outside of the U.S. in the back half of this year in Poland which will contribute to our ability to scale more efficiently going forward. Our general and administrative costs were $18.4 million or 10% of revenue, an improvement from 11% a year ago.

We expect to drive continued leverage in G&A through greater operating discipline and automation as we scale. As a result, in Q1 we generated an 1,100 basis point improvement in our non-GAAP operating margin year-over-year coming in at 9% versus negative 2% a year ago.

Non-GAAP EPS came in at $0.10 compared with negative $0.03 cents a year ago and well above the high-end of our guidance. Let me now move on to our balance sheet and cash flow. We ended the quarter with $268.4 million in cash, cash equivalents and restricted cash.

In Q1 we decided to make a $30 million drawdown on the revolver which further bolsters our already strong balance sheet. Cash flow from operations was $61.9 million in Q1, compared to $25.5 million a year ago, an improvement of 143% year-over-year. Combined CapEx and capital lease payments were 10% of revenue in Q1.

Total CapEx was $1.4 million versus $1.6 million a year ago. Capital lease payments, which we factor into our free cash flow calculation, were $17.4 million versus $9.2 million a year ago.

Roughly half of this year-over-year increase reflects higher capital lease liabilities from our migration to lower cost data center locations with the other half resulting from the timing of capital lease payments.

We expect CapEx and capital lease payments combined to be 8% to 9% of revenue in Q2 and roughly 8% of revenue for the full year of FY 2021. As a result, free cash flow in the first quarter was $39.8 million, a 196% improvement from free cash flow generation of $13.4 million a year ago. With that, let's now turn to our guidance.

Our guidance is based on our observations and assumptions about the overall macroeconomic environment and we are factoring in the dynamics as we see them today associated with COVID-19.

Our revenue guidance reflects the continued strength of enterprise customers increasing their adoption of our solutions while taking into account the softness we expect from our smaller business customers and our professional services business.

The pivot a remote workforce has enabled us to accelerate how we can operate more efficiently, which is reflected in our EPS estimates. For the second quarter of fiscal 2021. We anticipate revenue of $189 million to $190 million, representing approximately 10% year-over-year growth.

We expect our non-GAAP EPS to be in the range of $0.12 to $0.14 and GAAP EPS in the range of negative $0.13 to negative $0.11 on approximately 161 million and 154 million shares respectively. For the full year of fiscal 2021.

We are adjusting our FY 2021 revenue guidance to be in the range of $760 million to $768 million, representing roughly 10% year-over-year growth at the midpoint of this range. We now expect our FY 2021 non-GAAP EPS to be in the range of $0.47 to $0.52 on approximately 162 million diluted shares.

Our GAAP EPS is expected to be in the range of negative $0.55 to negative $0.50 on approximately 155 million shares. We expect our non-gap operating margin to be in the range of 11% to 12% of revenue. We still expect to achieve a combined revenue growth rate plus free cash flow margin of 25% in FY 2021.

In summary, in Q1 we delivered strong financial results across the board. We would like to thank our Box employees and partners for their tremendous focus and effort leading by example in delivering these results in such a dynamic and challenging environment.

Our product innovation around remote work combined with our resilient business model put us in a strong position to partner closely with our customers and support them through this new era of digital transformation.

Our strategy and execution delivered strong revenue growth and significant profitability improvements in our first fiscal quarter and we are well positioned to drive further profitability improvements as we continue to build on our leadership position. With that, I would like to open it up for questions.

Operator?.

[Operator Instructions]. Your first question comes from the line of Melissa Franchi with Morgan Stanley. Your line is open..

Great. Thank you for taking my question and congrats on the quarter. Aaron, you mentioned strong customer expansion in the quarter.

As you are looking into the pipeline for the rest of the year, can you talk about the level of upsell activity that you are anticipating? And is that coming really more so from seat expansion within your existing customers? Or is it more so around adding on additional functionality through some of the add-on sales like Shield?.

Yes. Thanks Melissa and great to hear from you. As we have shared with investors in the past, we have a tremendous opportunity to expand Box throughout our customer base. In most large organizations, we are still, in some cases, only penetrated in 10% or 15% or 20% of the employee population that's available.

So, especially in this move to remote work or a work from anywhere strategy, enterprises need the ability to use technology across their organization. So we saw that really pick up in Q1 that led to some pretty significant deals.

In one case, we had a Fortune 500 company that was using Box in one subset of their organization and then they decided to roll us out effectively enterprise-wide. And that turns, you know, what may have been normally a multi-quarter sales cycle into really under a couple months. So I think we are starting to see that show up more in the pipeline.

I think you are going to see a mix of both, seat expansion driving the revenue outcome going forward as well as add-on products. Our add-on product strategy is obviously the big differentiator of Box because we can pull together advanced security, advanced workload, data governance, all-in-one solution for our customers.

I think you are going to see a mix of growth in both of those, especially in the enterprise segment. And I will let Dylan add any other color, if he would like on that mix shift..

Yes. Thanks. To build on that, I would also note that while, as Aaron mentioned, a lot of the tailwinds that we saw in the first quarter were attributable to seat expansion, we are continuing to see strong momentum in the adoption of our add-on products, especially continued momentum and a very strong start with the Shield and with suites.

And so when you look at the revenue attributable to the customers who have purchased at least one of our add-on products, that's come up about 35% year on year and we are continuing to see momentum in the more sophisticated use cases being adopted by our customer base.

We have talked about in the past of the different categories and implications of that and when we look at our customers who have adopted at least one of our add-on products, they collectively now represent about 54% of our recurring revenue and that's up from about 45% a year ago..

Okay. Great. That's very helpful. And just one follow-up for you, Dylan.

When we are looking at your revenue guide for the full year 2021, can you help us quantify what the impact is from some of the assumptions around a lower SMB renewal rate versus professional services headwinds or any other factors that might be driving a lower outlook for the full year? Thank you..

Sure.

So what I would say is, first, that when we were looking to set our guidance for the year and then coming up with that, especially the back half, we want to be cautious because of the uncertainty around the macroeconomic conditions later this year, which is also why we slightly widened our revenue guidance range to accommodate for some of those things.

I would say that if you think about the impacts that we are seeing on our professional services revenue, expect that relative to our initial expectations for the year to be in the mid single digit million range in terms of the lowered expectations because of the dynamics that we mentioned..

Perfect..

And we think about the remainder being from the smaller business impact that you mentioned as well..

Okay. Great. Thanks so much..

Your next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open..

Thanks guys. Congrats on a good quarter. I guess I had a couple of questions. First, maybe Aaron, you can talk about suites. I don't even think you mentioned that in your prepared [indiscernible], unless I missed it. To me, this was like a very big change in the story.

Help me think about where we are and customers understanding it, adopting it? How much are just still trying to pick off the menu versus willing to eat the whole enchilada, as they say?.

Yes. Actually I did mention it around our go-to-market model and so the evolution of both driving seat expansion as well as add-on expansion through our suite strategy. So it remains fundamentally at the center of our go-to-market motion.

It's obviously enabling us to reduce the friction in the sales cycle by bringing together the full power of Box to a customer conversation. One of the deals that I mentioned in the quarter being a Fortune 500 company going effectively enterprise-wide was a major suite deal, bringing together Shield and Relay in that transaction.

So we continue to see really strong momentum with suites overall. I think that will even be stronger throughout the year as we have a chance to even better position suites in this new virtual selling environment.

I think a lot of the deals that maybe initially came out in Q1 were these sort of rapid-fire expansion deals where customers really needed more seats right away and now we are you going to obviously continuing to put the suite story right in front of that conversation to be able to bring Shield, Governance and Relay all altogether.

So we had around a quarter of our six-figure deals that had suites involved in them, so the $100,000-plues deals, which was consistent with Q4. But again, a lot of the Q1 business was that rapid-fire expansion. So suites remains fundamental to our whole strategy this year..

Got it. Maybe I guess following up on that rapid-fire expansion.

Do you feel that if you had to use a baseball analogy, in what inning are you in having your customers react very quickly through this and moving into more, I don't know what is a new normal, but somewhat new normal sales cycles? How do I think about that?.

Yes. Well, I am not the baseball expert on this call, Dylan is. But I would say, our response is probably in one of the latter innings in terms of our ability to go and sell to customers, that virtual sales methodology, doing virtual event, having virtual executive briefing.

We were able to move to that model within really, you know, honestly a week or two in this environment. I think now the question is, on the customer side, I think there is sort of two ways to think about the customer's response to this environment.

The first was the immediate triage of, I need my employees to be able to work from an unmanaged device on an unmanaged network and be able to get on videoconferencing and be able to get on chat. I think we are largely well into the latter innings of that remote, immediate triage.

And now I think we are in the very early innings of what, to us we are really excited about, which is companies are now starting to realize that they have to reevaluate what the future of their workplace looks like, what the future of their business processes look like.

And that's where you can start to have more strategic conversations around how Box can be used across the enterprise around, how we can help them with their data security strategy with Box Shield or how we can automate workflows with Box Relay.

So I think we are in the earliest innings of more of the long term impact of the business transformation in this market. But our responses is quite mature at this stage in terms of how we can go in and work with customers.

I mean, only other final point I would say is, effectively all of the big transaction that we did in the quarter were done post-pandemic kicking off. So they were being done completely remotely, complete virtually in driving those large deals. So our ability to sell to customers, drive adoption remains very, very resilient right now..

Got it. That makes sense. I guess tying this to Dylan.

Dylan, if we, you know, ticked up $10 million that came in, in the last quarter that was supposed to come in this quarter, $10 million in billings that shifted and move it back to this quarter, you would have posted billings growth of 17%, which is extremely strong, especially for a seasonally weak quarter and needless to say given what Aaron mentioned that makes sense, right.

There is a lot of immediate activities that happen.

I guess, is that the best way to kind of reconcile why with an effective billings growth of 17%, you are kind of revenue for 10%? Is that the right way to think about this?.

Yes. It is. And I think you are spot on that when we do account for that $10 million of additional Q4 billings from customers who had been originally set to renew in this past quarter in Q1, that is the type of impact you would have gotten on both calculated and adjusted billings growth.

And then when you look at kind of our expectations we have set for the remainder of the year, a lot of it does come down to just the different dynamics and uncertainties that are seeing in the environment and wanting to be prudent on that front.

But certainly in terms of, especially, enterprise traction that we have seen and the seat expansion and some of the tailwinds that we are seeing in the business and that have continued into May, we feel really confident in the setup of the remainder of the year..

Very good. Good luck guys..

Your next question comes from the line of Phil Winslow with Wells Fargo. Your line is open..

Hi. Thanks guys for taking my question. And glad to hear that you are all well and hopefully I am sure with your family and your teams. Actually, question for Aaron and a follow-up for Dylan.

Aaron, you talked about obviously a significant increase in users, but also just you talked about record upload volumes, call it, just number of files and amount of data getting transferred to Box. So my question is about sort of f engagement longer term, because Box has always had a very high renewal rates to begin with.

But now when you think about sort of the spider web of complexity of more users, more files, more engagement, do you think there is an opportunity to see basically that retention rate potentially move higher or just stay higher? How are you thinking through that?.

Yes. Thanks Phil. Right out of gate, we published this on our blog for any investors that are interested. Right out of gate, we saw a pretty market shift in the work patterns happening within our customers.

There is sort of this moment in February transitioning to middle of March where you can see that collaboration is going up in a range of industries, public sector, life sciences, healthcare, marketing and advertising, tech companies and then usage of things like integrations with Zoom and WebEx and Slack and other tools.

So that shift in more collaboration, more sharing, more external collaboration of data has persisted throughout the quarter. We think this is a great opportunity to drive greater adoption within our customer base right now. And with that greater adoption, we have a huge opportunity be able to go and drive add-on product expansion with those customers.

So if you take a core seat license and you are getting a lot of activity from that from a customer, that ability to go and add data security, add data governance, add workflow automation becomes that much more of an opportunity for us.

So right now and really kind of in Q1 especially, our focus was, make sure customers can remain as successful as possible, make sure that they can drive adoption, make sure that we can help them expand very, very easily without any friction and then we have got really I think significant opportunities to go and drive add-on product expansion, suite expansions in there..

Great. Thanks. And then, Dylan, a follow-up. One of the things that both you and Aaron referred was your shift to a virtual sale cycle. And some of the things we have head from software salespeople is, hey, I used to do six meeting the week, now I can do six meetings a day.

Now obviously, maybe, call it, the velocity is higher but maybe conversion is lower.

But how are you king of thinking through that maybe even the longer term ramifications on the positive side of just higher velocity of engagements?.

I am personally very, sorry. Go ahead, Aaron. No. Go ahead..

Yes. I was going to say, we are very excited about that transition to more virtual selling, that ability to get more and more customers on video right away. I mean it used to be that if we wanted to go have a conversation with a Fortune 500 company, that might be punted by two, three, four weeks out. You have to travel.

You have to get the team together. And we are having those meetings get scheduled within a day or two of the initial kickoff. So that's one dimension. So the speed of conversations that are happening is fantastic. The ability to be in multiple regions at once is also really great for any of our sales managers.

So obviously, in sales territories, they can be spread throughout geographies. So you are spending less time on the road. You able to get on video call throughout the day with customers, that's also helpful. And then we have been able to engage our broader customer community way more effectively right now.

So we hosted our customer advisory board a couple weeks ago and it brought together nearly 40 CIOs of more or less the Fortune 500 and that was a meeting where we were able to bring everybody on video very seamlessly and be able to share best practices, what people were seeing, share our product roadmap, get feedback. It was a three-hour meeting.

And it was incredibly effective to be able to engage with our customers. And so we are seeing that begin to emerge all throughout the business where we can get our customers engaged much more efficiently.

One more final example on that is, we just announced BoxWorks Digital this morning and we have the CEOs of Cisco, IBM, Slack, Zoom, Okta and more to come. And we are going to expect tens of thousands of attendees to that virtual event because it's so much more efficient to be able to have people then dial in and tune in to a virtual conference.

And so we can actually broaden the amount of customers that we are able to reach with an event like that and start to reach demographics and customers that maybe we wouldn't have been able to get to fly out to San Francisco to attend. So we think there is a lot of benefit to the push toward virtual selling and more digital marketing.

And I think the big question is, how much of this will remain in the kind of new normal post-pandemic world. But right now, we are certainly making sure that we can operate very smoothly in a virtual way..

Yes. And then just to build on that. This is Dylan.

I think in terms of how this impacts sales cycles and the dynamics longer term, it's a bit earlier to tell, but have certainly seen some deals and even larger deals come together very quickly and faster than the typical deal, especially given the urgency that customers are seeing right now to put remote working solutions in place.

So I think ultimately as a lot of the deals that are being created now in the pipeline not yet come to fruition, it will be hard to see exactly where that shakes out but overall do expect, as Aaron mentioned, many of the positive trends that we are seeing in our go-to-market motions to persist even over the longer term..

Great. Thanks guys. And stay safe..

Thanks Phil..

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

Hi Dylan and thanks for taking the question and congrats on the strong result. So Aaron, first one for you. I know there has been a big push of the last two years to really get more integrated into your customer's business processes. Obviously, that's still the case here.

But I am curious when you talk to your customers, has the idea of compliance or endpoint security, has that come up a lot more than it has maybe four or five months ago? And does that lend itself to maybe higher upsell attach rates as we think about maybe the pipeline of opportunities for the next 12 to 18 months?.

Yes.

I think we are going to see a big shift toward the first phase being how do people work remotely and then the question starts to emerge, how do we keep employees secure in this environment? How do we keep our compliance standards up to the levels that they need to be? How we ensure data governance in this environment? So I think the focus on data security, compliance and privacy will remain core to our ability to grow with customers right now and very important for being able to drive expansion.

So that's where Box Shield comes in. That is where our suite strategy comes into play. But that core differentiator is only becoming more important to our customer base right now..

Got it. Understood. And I know a key topic of conversation a few years ago was around GDPR. I mean CCPA is obviously very topical right now. Any thoughts on how that might impact some of your customers and how that could be an influence for Box? Thanks guys..

Yes. I think you know, for obvious reasons. I think the first focal point of most customers right now is on data security as opposed to some of the longer term data privacy challenges. But we know that customers are going to really care about how they manage their data over the long run and that's where Box Governance comes into play.

That's where our compliance posture with things like our GxP solution and our support for CPPA as well GDPR are really important. But I think the first phase is data security because you don't want people working from home and then accidentally having malicious files on their computers or having malicious actors be able to access data.

So Box shield is a really kind of core product area for us to continue to innovate on to help drive threat detection and better security offerings for our customers right now..

Thanks Aaron..

Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open..

Hi guys. It's Adam, on for Mark here. Awesome to see you guys execute against your financial target. And so first on sales and marketing as a percentage of revenue has come down very nicely and we are starting to see nice leverage in the model.

Is there any additional color you can provide here on how do you guys managed to achieve that? I know you guys briefly mentioned shuffling some resources and selling into the existing base.

But just anything else to call out here?.

Sure. So as mentioned and appreciated is, we have seen significant leverage in the sales and marketing line over the past year. It came in at 34% of revenue this past quarter versus 43% a year ago.

And most of that is through some of the things we have done to drive both sales force productivity improvements as well as the reallocation of resources and sort of streamlining our overall go-to-market motions as we had discussed on our last earnings call entering the year.

At the same time, we are seeing certain expense reductions related to the current environments that have benefited our bottom line, particularly on travel, but that's not nearly as material and on a go forward basis for all the reasons that we mentioned around our ability to successfully drive these deals and momentum in a different environment, we don't anticipate travel and event expenses returning to 100% of the their pre-COVID levels..

Awesome. And as a quick follow-up, how do you guys kind of balance between selling to the existing base versus new business? I know you guys mentioned over 70% of bookings this quarter were to existing which is super impressive. So I just wanted to think about how do you guys kind of divide those resources there? Thanks..

Yes. So from a resource allocation standpoint, just one note about the way that we have structured our sales force and overall incentives is most of our account executives actually are responsible for both acquiring new logos in accounts and customers that might be prospects as well as the existing customer base.

And we have the same compensation rates between those two categories. And so what we have done is, we set up our territories in a way that aligns kind of our top priorities, our biggest opportunities with the seller's capabilities to drive those conversations.

And at the same time as we talked about heading into this year, we shifted our resources from lower performing regions and segments into the higher performing regions and segments. And in the latter, while we are seeing strength, we tend to have more mature larger existing customer bases.

So based on where we have allocated our go-to-market resources as well as the national territory alignments is really what we have done proactively to move more and more of our sales into customer expansion this year, which is both a more predictable and more efficient sale versus closing entirely new customers..

Got it. Thank you..

[Operator Instructions]. Your next question comes from the line of Rishi Jaluria with D.A. Davidson. Your line is open..

Hi guys. Thanks for taking my question and nice to see that everyone is doing well and continue to execute. I wanted to start by asking about the margin guidance. So clearly raising the margin guidance by about 200 basis points for the full year.

Can you give us a sense for how much of that is a function of just expecting slower revenue growth because of COVID and maybe being a little bit more particular about the areas you invest in and alongside the massive cost savings you have from not having a physical conference and being able to do that virtual this year versus other areas where you have been opportunistically applying cost efficiencies? And then I have got a follow-up..

Sure. So I would say, the majority of the improvement in our operating margin expectations are not directly related to or driven by the specific dynamics of this environment, such as on the travel and event side. That certainly contributes but it's quite a bit less than 50%.

However, a lot of what we have done and what has enabled these improvements have been changes that we made just further driving prioritization around both headcount and overall expenses, especially in light of this situation, although these things again that are not directly driven by it.

And overall, it falls really into those three main categories that we talked about earlier around managing workforce expenses, improving gross margin and then just overall cost discipline. And all three contributed to the improvements between what we are expecting now for the year versus our initial expectations..

Okay. That's helpful. Thanks. And then Dylan, on the prepared remarks, you mentioned that you are seeing more customers opting for monthly versus annual deals which was expected in this environment.

Just how are you thinking about the potential impact on future churn numbers? What does it mean on the cash flow side? And maybe on a longer term basis, would you expect then to see more collections out of these customers due to the fact that they are not getting their annual discount because they are going for monthly? Thanks..

Yes. So as you know, we are seeing customers more focused on cash conservation in this environment, which is leading to that slight shift toward quarterly versus annual payment durations.

And we are assuming that customers under financial strain who are requesting payment extensions you mentioned and duration changes will persist throughout the year, which is hwy we currently expect our billings growth rate to slightly lag revenue growth for the duration of FY 2021.

One note I would make in terms of the churn side of things and just the overall dynamics is a reminder that our contract durations haven't been impacted in this environment as we continue to be a critical part of our customer's IT strategies.

So we have actually seen the average contract duration, length of those commitments improving a bit over time. And that's on average about 18 months across our customer base. Our larger enterprise customers are much more likely to sign a multiyear commitment, with many of our smaller customers signing one-year deals.

But I just wanted to differentiate between the payment duration impact and the contract duration lack of impact..

Okay. That's helpful. Thank you..

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

Great. Thanks for taking my questions. So just want to follow up on a question asked earlier on net expansion. I am not sure what the answer was.

But based on the accelerated net expansion rate of 107% this quarter, relative to your guide for the year, do you expect that 107% to be sustainable or to actually improve as we go throughout the year? And then I have a follow-up..

Yes. So certainly, we are seeing an acceleration and a particular strength in the first quarter around seat expansion in our enterprise customers for the reasons we have discussed and the urgency and importance of remote work solutions like Box. And we do expect to see strong expansion trends continue throughout the year.

Although at the same time, the dynamics of COVID-19 have created churn pressure in our smaller customers, as we as we talked about.

So as a result, there are a bunch of moving pieces that go into this metric but we do expect our net retention rate to end this year above where we ended FY 2020 and we will certainly continue to provide more color commentary and drill into our expectations as we move throughout the year..

Okay.

And then Dylan, could you elaborate anymore on, I think you termed it the slight change in billing terms to quarterly from annual, is there any kind of historical comparison you can give us?.

So we haven't given kind of weighted contract duration rates or anything like that. And it's also a little bit more qualitative as so we did not see a pronounced impact in Q1. And as you saw, we were able to deliver very strong billings results in the quarter.

So this was more based on the expectation that we are going to see customers requesting payment extensions. We are starting to see that in some conversations.

But did want to emphasize that it's not a material impact and we just want to be prudent in terms of how this might then impact billings throughout the course of this year as we are going to do what we can to make sure that we support our customers and meet their needs during this challenging environment..

Got it. Thanks..

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..