Release Date: May 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Box Inc (BOX, Financial) delivered first quarter operating results above guidance, with revenue growth of 5% year over year and 8% on a constant currency basis.
- Operating margins improved to 27%, up 400 basis points from the previous year.
- Strong demand for Box AI and advanced capabilities, leading to increased customer upgrades to Enterprise Plus.
- Gross margin reached 80.2%, up 230 basis points year over year, marking the first time the company reported 80% gross margins.
- Free cash flow generation was exceptionally strong at $123 million, up 14% year over year.
Negative Points
- Box Inc (BOX) continues to experience headwinds in foreign exchange (FX), impacting updated guidance.
- Q1 billings of $190 million were down 1% year over year, although up 5% in constant currency.
- Net retention rate remained flat at 101%, indicating no improvement from the previous quarter.
- The company expects FX to have a negative impact on operating margin of roughly 160 basis points for the full fiscal year.
- Stock-based compensation (SBC) is nearing 20% of revenue and growing faster than revenue, raising concerns about compensation strategy.
Q & A Highlights
Q: Hi guys. Thanks for taking the questions in. So starting off with AI, it sounds like that's really resonating. I'm curious, do you feel like there's any targeted verticals where there's more interest there? I know you mentioned real estate, but I'm curious how broad that is? Any discussion on how people are thinking about budgets for that? Would love to get the color there.
A: Yes. So, I would say right now, we're seeing it across basically every vertical that we see. I think there's verticals where over the medium and long term stand to gain on a relative basis, maybe more than others. If you look at things like financial services, life sciences, federal government, categories that typically are very document and content centric verticals where AI can begin to unlock way more around being able to answer questions from data or automate workflows. So we have seen a high degree of resident in our conversations in those verticals. But in terms of where we saw Enterprise Plus upgrades in the quarter, it was really across the board. So I would say in every vertical that we serve, we saw strong upsells for us for Box AI. And then in terms of your budget question, feel free to build on it more, but I would say for right now, because especially it's -- the capabilities are being unlocked within the Enterprise Plus plan, it's the larger coming out of IT budget. It's coming out of often the spend that we are helping displaced from legacy systems. I think over time, if we maybe fast forward a year or two from now, I could see that the budget increases when you look at line of business that will be able to drive more efficiency because of AI that we're only in the early days of what that looks like. But certainly as a I really drives workflow automation and more business process transformation, I think you'll see even increased budget that opens up for AI use cases around content.
Q: That's great color, Aaron, it's great to see you guys raised the revenue outlook in constant currency. I’m curious anything that you'd call out in terms of the demand environment or deal cycles as the quarter progressed? Thanks guys.
A: Yes. So as I think we've known in the past couple of quarters, we are starting to see some degree of stabilization. Again, that's different from any kind of inflection point on that that sort of looking like we're out of the woods on the macro front, but sort of the lack of increase of head of new headwinds I think has been notable in the past couple of quarters. We had strong performance, especially in our US enterprise business and federal. In addition to the US enterprise business, I think we're still seeing some degree of pressure on the SMB segment, but when we look at the business overall on balance, we are happy with the performance in Q1, and we certainly look forward to driving more growth throughout the year.
Q: Again on AI Aaron, what have you seen so far with respect to kind of the volume of queries made by users within the Box content Hubs for AI? I know it's early, but any color would be helpful as those volume of queries that you're seeing, are those tracking to your expectations so far and the flipside of that is how has that fared versus the cost side of the equation on the gross margin side?
A: Yes. So as you note, Hubs has literally been around for, I think, maybe a week and a half in terms of it being in beta. And we're just getting the early data in reviewing kind of initial customer use cases and scenarios right now. Hubs already is driving about a quarter or so of our total AI query. So kind of right out of the gate, it's been strong in terms of it's one of the kind of immediate use cases that customers adopt just because it's such a huge unlock to be able to ask questions of any amount of content. And as we've noted both in our keynotes and a little bit on this earnings call, the use cases are quite vast because really there hasn't been another product that had real commercial scale where you can collect your sales materials and create a Sales Hub that anybody can ask questions within an HR portal with all your HR documentation that anyone can ask questions in product and engineering or equity research, in financial services. I was with a CEO of an investment bank just about a month-and-a-half ago and this is a breakthrough product for him because instantly now he can enable any new employee in the firm have as much knowledge access as somebody that's been at the firm for a decade or two. And that's basically what we're able to now do with our content is this content really becomes the kind of digital memory of an organization that anyone can tap into. So just this ability to instantaneously make all of your employees as knowledgeable as your most experienced employees is transformational. And so the Hubs use case is going to really be a massive unlock offer, enabling that and every one of our customers, and we think we'll certainly contribute to more enterprise plus upgrades and more volume. And I think you have something on the kind of gross margin. Did I catch that or the cost side, did you mention that?
Q: Yes.
A: Yes. So as I think we've mentioned, we expect to be able to maintain our gross margin levels even with the addition of AI, really driven by the fact that as customers are in these higher tier plans, we tend to see higher gross margin, those higher tier plans in the first place. And then for a lot of the extremely high-volume use cases, things like metadata extraction or being able to run a workflow that generates a lot of AI usage that will be all volume based and not included in the Enterprise Plus plan or other plans. And so in those cases, customers will just be paying us for the volume and we'll ensure that we're driving the appropriate kind of margin structure that delivers our margin goals on that front.
Q: One quick follow-up for Dylan. Dylan, it seems like the linearity in the quarter was a little bit better. What drove that? Are you doing something different to drive that and could that be sustainable?
A: I wouldn't say that we did anything significantly different. I think just a lot of energy momentum heading into the first quarter with some of the product capabilities that we talked about. So really a continuation of some of the Q4 execution and demand around Enterprise Plus driven by everything Aaron has been talking about. So we did see and certainly a stronger then we had even expected to see a start to the quarter which would lead to that revenue upside that we mentioned. So certainly something we'd like to repeat every quarter, but I wouldn't say that there is anything significantly different that we did this time around. I would just point to a really compelling kind of products and demand for that as well as sales execution.
Q: Hi. Thanks for taking the question. I'm on for Steve Enders. You talked about -- I just wanted to ask about kind of your competition with legacy ECM providers. You talked about AI is kind of helping further augment
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
