Box, Inc. (NYSE:BOX) Q4 2024 Earnings Call Transcript
Box, Inc. (NYSE:BOX) Q4 2024 Earnings Call Transcript March 5, 2024
Box, Inc. beats earnings expectations. Reported EPS is $0.42, expectations were $0.38. Box, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. 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 Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Cynthia Hiponia. Cynthia, you may begin your --
Cynthia Hiponia: Good afternoon, and welcome to Box's Fourth Quarter and Full Year Fiscal 2024 Earnings Conference Call. I'm Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box's Co-Founder and CEO; and Dylan Smith, Box's Co-Founder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will also be available for replay on our Investor Relations website at box.com/investors. Our webcast will be audio-only. However, supplemental slides are now available for download on 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 first quarter and full year fiscal 2025 financial guidance and our expectations regarding our financial performance for fiscal 2025 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings and the impact of foreign currency exchange rates and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our revenue, operating margins, and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models and partnerships, 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 filed with the SEC, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially from statements made on this earnings call. These forward-looking statements are being made as of today March 5th, 2024, and we disclaim any obligation to update or revise them should they change or cease to be up to-date. In addition, during today's call, we will discuss 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 will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in related supplemental slides, which can be found on the IR page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. With that, let me turn the call over to Aaron.
Aaron Levie: Thanks, Cynthia, and thank you all for joining the call today. Our fiscal Q4 results were in line with or above our guidance as we continue to see signs of stabilization in IT budgets in several of our core markets. We achieved revenue of $263 million, up 2% year-over-year, or 4% in constant currency. Operating margins of 26.7% were above our guidance and EPS of $0.42 was $0.03 above the high end of our guidance. In fiscal 2024, we surpassed a $1 billion in annual revenue, with operating margins of 24.7%, up 160 basis points from 23.1% a year ago. And despite the macroeconomic pressures on IT budgets, which persisted throughout FY'24, we are pleased with our ability to deliver margin expansion, reflecting our execution of the strategies we put in place to lower our cost structure while still investing for long-term durable revenue growth.
In FY'24, we continued to bring advancements in our category-defining content cloud platform to the market. We launched Box AI in beta, a new suite of capabilities that natively integrate advanced AI models into the Box Content Cloud. We unveiled Box Hubs integrated with Box AI, which transforms how companies securely curate and publish content and knowledge across their enterprise. And we also made significant product enhancements in security and compliance, collaboration and workflow, while also further strengthening our ecosystem of partner integrations. As I reflect on the year ahead, it's clear we have an incredibly large opportunity in front of us. At Box, our mission is to power how the world works together, and the way work happens is changing more than ever before.
We know that companies are looking to digitize and automate their businesses by modernizing and simplifying workflows, streamlining collaboration, and connecting their apps together. They are looking to leverage the power of AI to generate new insights, automate their processes, and supercharge productivity. And it's critical that they protect their most important data by detecting and preventing threats, avoiding ransomware, and meeting compliance requirements. At the heart of these trends is how companies work with their most important content. And while unstructured data like contracts, marketing assets, financial documents, and other content represents 90% of all enterprise data. Most enterprises continue to be burdened by massive legacy and siloed environments for managing this content.
And with the recent acceleration of advances in AI, it's nearly impossible to get the full value of content when it's fragmented across the ECM systems, legacy storage infrastructure, and point solutions. For years, Box has enabled powerful ways to securely collaborate and manage enterprise content at scale. But today we enter a new chapter as a company, and we expect FY'25 to represent the most significant set of product expansion and evolution we have had as a company. With the combination of AI, our workflow automation capabilities, and our advanced metadata-driven views, we can fundamentally transform how companies run their most important processes. Just in January, we announced the acquisition of Crooze, a leading provider of no-code enterprise content management applications built on the Box platform.
For years, Crooze has leveraged Box's APIs to enable advanced enterprise content management and workflow use cases like contract lifecycle management, digital asset management, and controlled documents in regulated industries and more. We were thrilled to team up with Crooze, and we will be rapidly integrating and leveraging the company's no-code app builder and metadata capabilities to help customers' buildout custom interfaces and workflows for working with their most important content. Combined with Box's upcoming workflow automation improvements, including the expected launch of Forms and Doc Gen this year, Box will be able to power end-to-end critical business processes natively without customers having to do any custom development. And with the acquisition of Crooze, Box will extend into new use cases within our current customers as well as enabling us to rip and replace legacy ECM solutions.
Importantly, these business processes are radically enriched with the power of Box AI. An age-old problem in content management is how companies can apply structure to their unstructured data. For instance, extracting key variables from an invoice or a contract or labeling critical data inside of a digital asset like an architecture diagram or a product image. With Box AI, we are now able to automatically label and apply metadata on content at scale, doing the work that took humans minutes or hours, performing these tasks now in seconds for a fraction of the cost. By having AI intelligently process documents and content, you can automate tasks and workflows that would have been cost-prohibitive or near impossible to do previously. In FY'25, we expect to dramatically advance our Box AI efforts by incorporating new AI models in the Box, building new capabilities to help enterprises customize AI for their business workflow needs, enabling customers to ask questions of content in Box Hubs, and leveraging Box AI more extensively throughout our platform APIs. Not only will Box AI continue to be highly differentiated due to our overall security, compliance, and governance on Box.
Our platform-neutral approach means that we can leverage tens of billions of dollars in R&D happening across tech by integrating with advanced AI models from various AI vendors to provide the best user experience for Box customers. Consistent with this open approach, today we announced a new integration with Microsoft Azure OpenAI. The expanded collaboration brings Box and Microsoft's enterprise-grade standards for security, privacy, and compliance to AI, so customers can realize the benefits of this ground-breaking technology. We also announced that Box AI is generally available to customers on Enterprise Plus plans starting today. Since rolling out Box AI in beta to Enterprise Plus customers in November, we have seen a number of existing customers upgrade to Enterprise Plus to gain access to Box AI.
Customer examples in Q4 include a leading construction company, which expanded in Q4 to access Box AI as they are looking to extract the value from their unstructured content in Box. Applying metadata at scale, monitoring trends and contracts, managing agreements, and also improving their security posture with metadata based classification controls. An American multinational technology company upgraded to Enterprise Plus with a six-figure upsell to bring enterprise-grade AI to all of their employees. With access to Box AI, powered by the most advanced large language models, this organization can leverage AI for new use cases or keeping their content secure and compliant. Finally, one of the country's leading medical support organizations upgraded to Enterprise Plus to use Box AI to securely curate new content, summarize vast amounts of data, and quickly analyze it to report out to clinics that they support.
Now going beyond AI this year to help our customers protect their most important data, our focus remains on building the leading way to protect and govern the full content lifecycle in the enterprise. In the year ahead, we plan to advance our security offerings to deliver improved threat detection and data recovery from ransomware attacks, power more advanced governance workflows, deliver native archiving solutions, achieve FedRAMP high compliance, and deliver deeper integrations with security vendors like CrowdStrike. Next, our flexible and interoperable platform remains a major differentiator for Box. And with our open APIs, we aim to continue to connect with every enterprise app that our customers use, from Microsoft Teams and Slack to Salesforce and ServiceNow and IBM and many more.
And help our customers leverage our APIs to power their own applications and workflows. Now, turning to go-to-market, we continue to enable new and existing customers to recognize the full value of the Box platform with increased adoption of our multiproduct offerings in Q4. Suites represented 81% of deals over $100,000, up from 72% a year ago. We saw continued solid suites attach rates in large deals across all geographies. In Q4, customer expansions and wins with Enterprise Plus included a financial consulting firm who purchased Box with a six-figure Enterprise Plus deal. They will leverage Box as their core enterprise content management platform across the entire firm to enable their business to go fully digital while also eliminating spend on legacy agency management solutions.
Next, a top international law firm purchased Box to power how they work internally and with external parties. This organization was looking for a new document management solution that provided security, ease of use, integration support, and regional data storage, which led them to Box. As we look ahead to FY'25 and beyond, and as we enter this new chapter as a platform to power intelligent workflows around content, we will leverage our go-to-market motion to bring new solutions to customers, add new pricing models and packages to drive further upsell and extend our platform to a deeper set of partners and system integrators to deliver our more advanced solutions to customers and drive further growth. Further, we plan to ignite more demand gen and pipeline development programs to reach even more customers and prospects, doubling down in key verticals, such as financial services, life sciences, healthcare, and the public sector, honing our focus on key international markets and more.
We are focused on taking advantage of the market opportunity in front of us and these focused go-to-market investments and initiatives are being made to accelerate the future revenue growth of Box. As you can tell, we are incredibly excited about the innovation we will be delivering to our category-defining content cloud platform in FY'25. Our robust product roadmap combined with our investments in strategic go-to-market initiatives positions us well for the megatrends that are driving IT decisions and for when a more normalized IT spending environment returns. We will be providing more detail on our growth strategy during our upcoming Financial Analyst Day on March 19th. We could not be prouder of how the company continues to execute on the initiatives to drive continued leverage in our cost structure and drive efficiencies across our business, while also setting ourselves up to drive accelerated revenue growth.
Dylan will be detailing our progress in his comments, but the resiliency of our financial model has been a strategic differentiator for us as we continue to invest in long-term durable revenue growth. As the way work gets done is changing more than ever, Box is well-positioned to capitalize on these megatrends and power the full lifecycle of content in the enterprise. With that, I'll hand it over to Dylan.
Dylan Smith: Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In fiscal 2024, we delivered another year of strong bottom-line improvements while laying the foundation for long-term profitable growth. We generated $1.04 billion in revenue, up 5% year-over-year or 7% in constant currency. FY'24 operating margin was 24.7%, up 160 basis points year-over-year and up 340 basis points in constant currency. We delivered non-GAAP EPS of $1.46, up 22% from $1.20 in the prior year. We also generated $269 million in free cash flow, a 13% year-over-year increase which enabled us to deploy $180 million toward our share repurchase program. As a result, we reduced fully diluted total shares outstanding sequentially in all four quarters of FY'24.
As we continue to navigate this challenging macroeconomic environment, we remain focused on delivering higher top-line growth, generating consistent operating margin expansion and executing a disciplined capital allocation strategy. Turning to Q4, we delivered revenue in line with our expectations and operating margin and EPS above our guidance. Q4 revenue was $263 million, up 2% year-over-year or 4% in constant currency. Operating margin of 26.7% was 120 basis points higher than our guidance of 25.5%. EPS of $0.42 was $0.03 above the high end of our guidance and up 14% year-over-year. We ended the year with approximately 1,770 total customers paying us more than $100,000 annually. We continued to see strong demand for our higher-value product offerings.
Our Q4 suites attach rate in large deals landed at 81%, up from 72% a year ago. Suites customers now account for 55% of our revenue, a significant improvement from 46% in Q4 of last year and from 51% in Q3. Even in this environment where IT budgets are tighter, enterprises recognize the value that our suites offerings bring to help them simplify, transform and secure their content. We ended Q4 with remaining performance obligations, or RPO, of $1.3 billion, a 5% year-over-year increase or 9% in constant currency. These growth rates were 200 basis points and 500 basis points ahead of our Q4 revenue growth, respectively. This demonstrates both the stronger performance that we delivered in the back half of the year as well as customers' longer-term commitments to Box as a core part of their infrastructure.
We expect to recognize roughly 60% of our RPO over the next 12 months. Q4 billings of $379 million were up 6% year-over-year or 10% in constant currency, above our expectations of low to mid-single-digit growth driven by strong early renewals. Our net retention rate at the end of Q4 landed at 101%. While we continued to experience pressure on seat expansion within our customer base, our annualized full churn rate remained stable at 3%, demonstrating the stickiness and value that the Box platform provides. We've also continued to achieve an increase in price per seat year-over-year despite the pressures on IT budgets. As a reminder, our net retention rate is a trailing 12-month metric. Based on the headwinds we experienced in FY'24 that we are now lapping, we expect our net retention rate to bottom out at 101%, exiting FY'25 with a net retention rate in line with or slightly above our Q4 results.
Beyond FY'25, as we benefit from the introduction of new product offerings and plan tiers and as seat growth returns to more normalized levels, we expect to achieve a higher net retention rate over time. Q4 gross margin came in at 78.4%, roughly in line with the year-ago period. As a reminder, we fully migrated our infrastructure to the public cloud in Q3. As our on-premises data center expenses wind down over the coming quarters, we expect to deliver additional gross margin expansion over the course of FY'25. We also continue to drive leverage across the business through our lower-cost location strategy and rigorous cost discipline. We now have 300 full-time employees in our engineering center of excellence in Poland, up 21% year-over-year, and in the coming year, the significant majority of our R&D hiring will be in Poland.
These initiatives resulted in 26.7% operating margin or 28.0% in constant currency, an improvement from the 26.0% we delivered in Q4 of last year and a testament to our disciplined expense management. As a result, we delivered increased non-GAAP EPS of $0.42 in Q4 or $0.44 on a constant currency basis compared with $0.37 a year ago. I'll now turn to our cash flow and balance sheet. In Q4, we generated free cash flow of $82 million, a 10% increase from $75 million a year ago. We delivered cash flow from operations of $89 million, a 3% decrease from $92 million in the year-ago period. Capital lease payments, which we include in our free cash flow calculation were $4 million, down from $11 million in Q4 of last year. We expect capital lease payments to wind down over the next few quarters as we exit our managed data centers as part of our public cloud migration strategy.
Let's now turn to our capital allocation strategy. We ended the quarter with $481 million in cash, cash equivalents, restricted cash, and short-term investments. In Q4, we repurchased approximately 790,000 shares for approximately $20 million. For the full year of FY'24, we repurchased approximately 6.6 million shares for approximately $180 million or two-thirds of the free cash flow we generated in the fiscal year. As of January 31st, 2024, we had approximately $64 million of remaining buyback capacity under our current share repurchase plan. We remain committed to opportunistically returning capital to our shareholders and our Board of Directors recently authorized an additional 100 million common stock repurchase plan. With that, I would like to turn to our guidance for Q1 and fiscal 2025.
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 impacts of FX headwinds, assuming current exchange rates. While we are seeing some pockets of stabilization in most of our markets, our guidance reflects a continued constrained IT budget environment in FY'25. Additionally, as our international businesses are now consistently generating profit, in Q4 we have released the valuation allowance against our deferred tax assets in the UK. And beginning in FY'25, we will now be recognizing non-cash deferred tax expenses on the profits generated in international countries, which will impact our FY'25 GAAP and non-GAAP EPS.
We expect this to represent a roughly $0.02 impact to Q1 and $0.06 for the full year. For the first quarter of fiscal 2025, we expect Q1 revenue to be in the range of $261 million to $263 million, representing 4% year-over-year growth or 7% growth on a constant currency basis, both above the growth rate we delivered this past quarter. We expect our Q1 billings growth rate to be in the low single-digit range. This includes an expected headwind from FX of approximately 300 basis points. We expect our Q1 gross margin to be roughly 79%, representing a year-over-year improvement of roughly 100 basis points. We expect our Q1 non-GAAP operating margin to be approximately 25%, which includes an expected negative impact of approximately 200 basis points due to FX.
This represents a 220 basis point improvement year-over-year and a 420 basis point improvement in constant currency. We expect our Q1 non-GAAP EPS to be in the range of $0.35 to $0.36, a 13% year-over-year increase at the high end of this range, even as we absorb the deferred tax expenses that I mentioned earlier. Weighted average diluted shares are expected to be approximately $147 million for the full fiscal year ending January 31st, 2025. We anticipate revenue in the range of $1.08 billion to $1.085 billion, representing approximately 5% year-over-year growth at the high end of this range and 6% in constant currency. This includes an expected headwind from FX of roughly 170 basis points and is consistent with our preliminary guidance on a constant currency basis.
We expect our FY'25 billings growth rate to be roughly in line with revenue growth on an as-reported basis. We expect FX to have a negative impact of a little more than 50 basis points to billings. We expect our FY'25 gross margin to be roughly 80%, representing a year-over-year improvement of more than 200 basis points. We are stepping up our sales and marketing expenses to drive future growth and we expect our FY'25 non-GAAP operating margin to be approximately 27%, representing a 230 basis point improvement from last year's result of 24.7%. We expect FX to have a negative impact on operating margin of a little more than 100 basis points. This guidance is in line with our preliminary guidance despite an expected incremental headwind from FX.
We expect FY'25 non-GAAP EPS to be in the range of $1.53 to $1.57, representing an 8% increase at the high end of this range versus $1.46 in the prior year and includes the $0.06 impact from deferred tax expenses that I noted previously. Weighted-average diluted shares are expected to be approximately 149 million. Finally, we expect our FY'25 revenue growth rate, combined with our FY'25 free cash flow margin, to be in the low 30s on an as-reported basis, and in the mid-30s on a constant currency basis, which includes the combined headwind of a little more than 200 basis points from FX to revenue and billings that I discussed previously. We are encouraged by the stabilization trends we have seen in the last couple of quarters, even in light of the macroeconomic pressures on IT budgets that we saw in FY'24.
As Aaron mentioned, we are entering a new chapter to power AI-driven business processes around content and workflows. To take advantage of this opportunity, our focus in FY'25 is laying the foundation for reaccelerating revenue growth by investing in our innovative product roadmap and strategic go-to-market programs, expanding gross and operating margin, and efficiently returning capital to our shareholders. We look forward to providing further details at our virtual Financial Analyst Day on Tuesday, March 19th. With that, Aaron and I will be happy to take your questions. Operator?
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