Box, Inc. (BOX) Earnings Call Transcript & Summary

Everybody, thanks for joining us today on a Wednesday, a midweek in midsummer. I hope everybody's doing well and enjoying the summer. My name is Ittai Kidron, and I'm a technology analyst at Oppenheimer. And I've got the pleasure of hosting Box today, more specifically Aaron, the CEO; Dylan, the CFO; Cynthia; and Eileen (sic) [ Elaine ] from IR. And what we'll do today is let Aaron and Dylan go through a presentation discussing the vision of the Box Content Cloud and the evolution there. We'll also talk about some changes in the go-to-market. And through that process, I will interact with Aaron and Dylan and stop them here, cut them off, as I do here and there with questions. But also, needless to say, we'll have to get you involved in the session as well. And so your way to do that is either e-mailing me with questions, and I'll try to work them in at the appropriate place and time or use the chat function at the bottom of the Zoom window and I'll be monitoring that as well. And again, as appropriate, we'll try to work that into the discussion. And so with that, Aaron, Dylan, Cynthia, Elaine, thanks for joining us today. I really appreciate it. I've been following you guys for many, many years. It's been great to see the evolution. I would like to say that I had a lot of input in the evolution of the company.

We credit you for anything good that's happening.

Very good. So I'm still waiting for that stock package to arrive. I checked my mail today, it's not in there for whatever reason. But I would love if you guys can give us an update on the business, on the vision, go-to-market, and of course, we'll kind of make this interactive along the way. So Aaron, the floor is yours.

Awesome. Thanks, Ittai. Thanks for hosting. Feel free to jump in, obviously, at any point. We'll try and fly through this and then have more time for any kind of Q&A and questions on your end. So obviously, these are -- this is our safe harbor statement. And all right. So overall, our vision remains certainly the same, but actually, we are more emboldened by it, I think, than ever before, which is to power how the world works together. And when Dylan and I founded the company back in 2005, it was this amazing time period, where kind of the right moment, at the right time, we will enter this market. We were just starting to see -- and on the cusp of cloud computing, but we were moving from the world of BlackBerrys and USB thumb drives and FTP accounts, to a world of moving into the cloud. And if you think about the past 15 years, everything has changed about business, everything has changed about how we work. And so we sit at a point where we are right at the center of some very important trends that deal with how companies work with their content. And so there's sort of 3 big mega trends that we're focused on. The first is this push toward work-from-anywhere. And what's been, I think, very surprising over the past 1.5 years is how early we still are in the implications of work-from-anywhere, from a hybrid work standpoint. And you're going to see, in just a second, some key aspects that -- where content changes in a work-from-anywhere world. It's just that it takes a while for enterprises to fully sort of get their heads wrapped around the impact of their technology stack. The second area, which I think every vendor is talking about at this point, is digital-first experiences and digital transformation. I think we all know how important that's going to be going forward. But then finally, data security, compliance, ransomware, these are major challenges that our customers are dealing with from a security standpoint. And so when you add up these 3 big mega trends, and if you look at any CIO or IT survey out there, you'll see, consistently, these are the 3 big topics that every IT department is worried about and working on. And at the center of all of this is how we work with our content. And so there's sort of 3 big mega trends that we believe are redefining the content management market. The first on work-from-anywhere, you're going to need to be able to have seamless access to information at any time on any device in any location. But you're also going to be able to enable new ways of collaborating around content. And there's new data formats that are emerging that are not the traditional just Word documents that you created on your desktop, but new ways that we want to be able to collaborate directly in the cloud. And then you need to be able to get access to your content, whether you're using that content from Slack or Microsoft Teams or Salesforce or Zoom. You want to be able to work from anywhere, and that anywhere might mean application or location. So work-from-anywhere changes the content management market dramatically. The second big trend on digital-first is that everything is going to move from paper-based processes, to the cloud and to digital. That shows us the importance of things like workflow automation or e-signatures as an example. We need new low-code or no-code solutions around being able to drive business processes. This is the importance of products like Relay. And then we want to be able to extract intelligence from our data, so how do we pull out the key information from our documents, that's the importance of AI and then leads to our platform architecture and Box Skills as an example. And then finally, data security is now kind of really just rippling through every single industry as the #1 most important challenge that CIOs are facing. How do you protect content from insider threats or external threats? How do you ensure that your data can't be maliciously attacked or turned into an encrypted object for ransomware threats? How do you make sure that you're maintaining compliance across a global set of regimes from a data privacy standpoint and where you're doing business in multiple countries or in different industries that all have different data protection requirements? So when you add up being able to work from anywhere and the implications there, digital-first experiences and how do we start to automate more of our digital workflows and then the challenges around data security, we think there's a new era of content management that we're just entering into right now. And it's one that obviously we pushed on quite heavily with cloud content management and our vision for being able to do content management in the cloud. But we think that this vision is going to expand even larger, and that really brings us to what some of our recent announcements have been but also our road map going forward. When you think about the content life cycle today, it's highly fragmented across a wide array of different systems. You have file storage technology. You have content management software. You have data security technology. You have collaboration tools. You have e-signature solutions. You have content publishing and enablement solutions. If you think about it, in most organizations that you go into, there can be 5 or 10 or 20 different applications and software that enterprises are using just to be able to manage their content. Sales teams are using one thing. Marketing teams use a different thing. The finance team doing a virtual data room is using another technology. So IT has this massive mess, which is leading to data security challenges and vulnerabilities in the organization. It's driving down end-user productivity because now I have to hop between lots of different software, and I can move data around all these different applications, all with different user interfaces, all with different security paradigms. And then finally, it means that IT expenditures are way higher than they have to be because I'm investing in 5 or 10 different technologies instead of just a couple or maybe one. So our vision, which has, again, been expanding over the past couple of years, and I think even further accelerated with the pandemic, is to really take on the entire life cycle of content in a single platform. And so, Ittai, when you and I started to talk about the platform strategy, 5, 6 years ago, we were doing storage, we were doing content management, we were doing data governance. We were starting to get into advanced data security. Obviously, with Shield in the past few years, we went way farther with that. But again, over the past year, we've taken on a much bigger vision of where we can go and tackle in the market: getting into e-signature, which is going to be launching the summer; getting into content publishing, which is some additional functionality that I can't share too much about right now but we're very, very excited about; going even deeper in compliance and data privacy, so all new ways to be able to work with your content in the entire life cycle. And that's really what gets us to our vision for the Content Cloud. So with the Content Cloud, we want to power the end-to-end life cycle of content in a single platform, starting with our APIs or data ingestion features and the product, Box Shuttle, that we've been building out pretty significantly, to being able to protect content and classify it using Box Shield or our data classification engines. This is really important as an example because if you are a company working with mission-critical intellectual property, let's say, you're a major defense contractor or a major life sciences company, inside of your documents are critical IP. Well, if you don't know that your IP is in those documents, then anybody can share that content, anybody can access that content, or that data could be exfiltrated and you wouldn't know that there's added risk. So that's why you have to classify that content. And so we have automatic machine learning-based classification technology that will then classify that content as intellectual property data, that adds extra security rules and permission types to that type of content. So you then control it in a much more seamless way. Then, of course, you can collaborate around that content inside and outside the enterprise. You can automate workflows around that content, whether that's client onboarding, document review and approval, digital asset review and approval. As we've announced, we're going to get into the e-signature market, where Box will have a native e-sign solution that is baked directly into the platform. That's going to let us complete digital transactions directly on Box. We're going to be expanding our functionality to better support content publishing use cases. So how do we enable content to get into the right hands at the right time and make it easier to discover and find the exact right content that you need to do your job. We want to help customers analyze their content. So what content is performing better than other assets. If you're a marketing team, you want to know which campaigns are working. If you're a sales team, you want to know which content materials did the customer look at. If you're a legal team, you want to make sure that your documents are reviewed by the right people. And so that ability to have real-time content analytics natively in the product is really important. And then, of course, being able to retain data, being able to govern it for long-term compliance requirements, this really gets into our data governance strategy. And then we take all of that functionality and we deliver it via our APIs and any application that our customers work with. So this is the Content Cloud, and we have been building what we believe is the most expansive vision in this market and continue to drive more and more category expansion to ensure that customers are going to empower their content in -- their life cycle of their content in one architecture and in one platform. And then ultimately, that gets into our overall platform strategy. So being able to have secure storage, sharing, collaboration, workflow, e-signature, analytics, all in one platform, and then accessible and natively integrated into any app that our customers are using. And this is really one of the biggest differentiators on the platform. I am increasingly talking to more customers that are rolling out Microsoft 365 as an example. And they want to be able to use Microsoft Teams. They want to be able to access content from Teams but ensure that it's the same content that is delivered inside of a Salesforce record or inside of their CRM application or inside of their ServiceNow application or inside of a custom app. So the only way to do that seamlessly is if you have a neutral content cloud that can connect between Teams or Slack or Salesforce or Zoom or ServiceNow and not be beholden to just one of those architectures because what you can imagine is nobody is building their CRM strategy based on their Teams strategy. These are parallel applications that need to have one underlying content architecture that connects to both of those technologies. So it's really, really important, as you think about us moving to this multi-cloud world with more and more best-of-breed software, companies are going to need a content cloud that works across all of their applications. And one thing that I've been very, very encouraged by is actually how open Microsoft has become in the past couple of years. So we've advanced our integrations with Microsoft Teams. We have some exciting work that we're doing with Microsoft Office. We have a great partnership with Azure and Azure Active Directory and their identity products and their security solutions. So you're going to see us continue to integrate deeply across Microsoft but again, ensure that we have seamless integrations across our entire IT stack that our customers are using. And then, of course, you have our Platform business, which is the ability to use our APIs and integrate into any custom application that our customers are building themselves or integrating us into. So that gets into an entire other universe of how content might manifest in an enterprise. So we are building the most extensive content platform, and this is really our Content Cloud vision. And then what this really does is powers use cases across the entire enterprise. So if you're in marketing, then what you really want is digital asset management. So you can take our functionality and deliver a digital asset management use case. If you're in sales, you want to be able to onboard or collaborate with clients or be able to do sales enablement. So you can take our functionality and be able to deliver those use cases. If you're in R&D, you want to be able to do product design and development and R&D document management. Box is able to power that across some of the world's leading engineering organizations. In banks and financial institutions, the ability to have virtual data rooms or be able to do wealth management experiences to collaborate with clients is incredibly important. So with the Box Platform, we're able to power the life cycle of content in every industry and essentially every size of organization, and this is really our strategy that we're going to be expanding on, going further and going forward. And then our go-to-market strategy that you brought up is, and we kind of sort of, I think, messaged this at our Analyst Day a couple of years ago, but we were going to be doubling down in this land, adopt, expand and then, ultimately, retention strategy for customers. So we want to bring in new logos as efficiently as possible. Sometimes, this is through the viral adoption of our products. Sometimes, it's through our digital sales engine. Sometimes, it's through channel partners or our sales team. We want to drive as much adoption of the product as possible. This is using our self-service adoption techniques. This is using our customer success and business consulting organization to be able to drive adoption. And then what's great is that we continue to have more and more reasons for a customer to expand their licenses with Box, and this takes on 2 characteristics. One, it might be the added seats in their organization as Box goes wider within their enterprise. And we know we have about 7x-plus seat possibility in terms of growth just within today's customer base. And we have the ability to be able to drive up price-per-seat over time by getting customers into higher-tiered pricing plans, which include Box Suites, but also continued innovation on our product plans that we have. And then, of course, we want to make sure our customers are wildly successful with Box, make sure they retain. And then that flywheel continues to repeat over and over again. So we have 3 big financial goals that drive our go-to-market strategy. We want to drive seat growth by expanding the number of users in every single organization that uses Box. We want to drive higher price-per-seat by expanding the use cases and going deeper in organizations. And then we want to improve our net retention rates by making Box stickier and stickier and then, again, driving that flywheel of more growth in those accounts. And so that's really, really important as we think about our strategy going forward. And then that ultimately leads to your favorite topic, which is our pricing and packaging strategy. So -- and this is what we've thought a ton about over the past few years. And we got ourselves, frankly, into a spot maybe 3 or 4 years ago or maybe 2 years ago, where we had -- our portfolio was sort of wider than our go-to-market could really deliver to customers based on how we were doing our packaging. So you as a sales rep would go to a customer, and you would have 5 different add-on modules that you could deliver to that customer. And that was creating a lot of inefficiency in our go-to-market model. And it was also not a great customer experience because now you're having individual discrete sales conversations, when really Box should be delivered to you as a platform solution that powers all of these use cases in one bundle. And we were doing ourselves a disservice with that packaging. And so we really thought about it and we said, okay, what if we bring these together as multiproduct suites that could bring together Shield and Governance and Zones, so customers didn't really have to think about, well, which products do I need for which use case, but I can buy into the full platform of Box. So what you're going to see is us continuing to learn from that experience and drive even more product and packaging and pricing innovation. And what we want to do is add more value to the core offering. So that's things like when we have Box Sign, we want to make Box Sign available to all of our business and enterprise customers while still having additional reasons to upgrade. So you're going to see us have more innovation in our core plans. We want to increase planned differentiation by creating additional functionality that gets customers into our higher-priced plans. And that's where things like Box Sign will have added features if you're an enterprise customer or if you buy into our multiproduct plans. And then we want to be able to bring our add-ons to as many of our customers as possible. And this is probably the single biggest area we're thinking about from an innovation standpoint is how do we make it so when you buy in the Box, you're automatically buying into Shield and Governance and you're not thinking about those as add-on modules as much. And so we're continuing to figure out better ways that we can simplify our sales motion and bring all of the true value of Box to our customers. And when you add all of this up, what we're able to simultaneously do is add more customers, add more value to customers but also be to increasingly drive up price-per-seat and expand more seats within our customer base. So we're really, really excited about some of the innovation that we're driving from a pricing and packaging standpoint. And so again, the whole strategy is build out the complete Content Cloud, go after many of these new categories while also continuing to hone the innovations that we've already launched, like Shield, Governance, Relay and so on, and then be able to bring the full power of that platform to all of our customers through business model and pricing innovation over time. And that's why we believe we have a significant opportunity ahead of us that really drives to that long-term target that we've put out there. And now, I'll hand it over to Dylan to maybe further emphasize some of this, and then we can open up for questions.

Sure. Thanks, Aaron. So that price-impacting strategy is really designed to drive further momentum in the adoption of our stickier and more advanced product capabilities. So this chart highlights how the revenue attributable to different types of customers has trended over the past couple of fiscal years. So at the end of last year, FY '21, customers who had adopted at least one add-on product contributed 59% of our revenue, up from 52% the prior year, and at that same time, 36% of our revenue was coming from customers who had adopted multiple products, up from 24% the prior year, which is really where we've been seeing the most significant growth. And then as the dotted portion of that core, with 2-plus add-ons bar shows, the majority of that revenue is coming from customers who were initially using our less robust product capabilities, which demonstrates the momentum that we're seeing in cross-selling our newer products into existing customers, which has really been fueled by the momentum that we are seeing in our Suites offerings, and we're seeing that momentum continue into this year. And then as Aaron touched on, the reason this matters so much is that our core-plus customers, those who have adopted additional products, have significantly better economics than core-only customers, with higher contract values, pricing, margins and retention rates, so that as we continue to drive this shift, that will create tailwinds to our overall net retention rate, customer economics and then, ultimately, results in higher overall growth and profitability. We'll go to the next slide. Thanks. And then this just shows the land and expand, which is a core part of our strategy and has really been the most pronounced impact in our largest customers. So the 6-plus-figure customers now account for about 60% of our total revenue and where we're driving faster growth in the other parts of our business. Over the past couple of years, as the chart shows, we've been growing large customer counts at a growth rate in the mid- to high teens ahead of our overall revenue growth. And in addition to the customer count growth rates, the average contract values in all of these categories are also steadily growing. And so the underlying trends and strength that we're seeing in our customer growth and customer economics, as Aaron mentioned, are big drivers of our confidence in delivering significant improvements to our financial profile over the next few years. So we're committed to adding about 10 points to our operating margin, from FY '21 last year, to FY '24 2 years from now, delivering operating margins in the 23% to 27% range at that time, alongside higher growth rates than what we're seeing in the business today.

So overall, and we wanted to just really kind of quickly highlight why that multiproduct strategy was super important in driving ACVs and then, ultimately, the economics of our customers, I think, ultimately, what we want to certainly leave any shareholder with, but the broader market is, our strategy is very clear. We're going after a $50 billion-plus market in really driving this consolidation of multiple categories of content into one platform that has significant tailwinds that we're now benefiting from. We are building out the leading content cloud that's going to allow us to power critical workflows across the entire enterprise. We're going to go wider and deeper with our $100,000-plus customers through this land-and-expand motion, and that's how we're going to be able to drive up, again, greater contract value, greater total account value and then ultimately, be able to improve and increase that net retention rate. And that's what's ultimately going to lead to driving higher growth rates and operating margins to achieve that Rule of 40 by FY '24. So with that, I'll hand it back to you, Ittai, and happy to go through any questions.

Great. Why don't you -- first of all, just given the environment and everything, maybe you can give us a sense on how customer conversations have changed over the past 1.5 years since we entered the pandemic?

Yes. So I think this one has been definitely sort of an evolution. So last year, around kind of March, April, May, it was massive triage mode for customers, which was, "Hey, we need more licenses in Box," or "We're frozen, we don't know what we're doing. We're doing layoffs," all that kind of movement that we saw. Then you sort of had the summer and early fall, which I think was almost just a kind of a somewhat frozen environment in terms of people didn't know if the economy was going up or down, or should they be investing in ID -- IT, should they be just consolidating into fewer systems. That's where we started to see things like the SMB headwinds in the business. We started to see some of the challenges around professional services, which then ultimately took us into kind of Q3 and Q4. By Q4, I think we started to see a bit of a pronounced change in the customer conversations. Certainly, the economic recovery was significant. I think there was more optimism around vaccines and what the market might look like. And that was, I think, a change in the customer dialogue, where people were thinking a little bit more long-term. They were recognizing that they needed to rethink some parts of their content strategy. Obviously, our business results, I think, reflected that in terms of our billings, our RPO, the big deal growth. And then -- and we did note that Q4 was a trough in the growth rate. Obviously, that growth rate was impacted by multiple prior quarters of either bookings or professional services or some of the churn that flowed into Q4. But by Q1 of this year, I think we were already able to show that we are starting to see that reacceleration within the customer base. And now, if I just kind of take the past couple of months of conversations and I try and sort of synthesize it, I think we're in a different period now. I think there's a lot of optimism in the overall market, even if there might be uncertainty about the vaccination situation. I think there's clarity that the economy is able to get through these kinds of situations. Now the big question is, what is the long-term approach to our workplace and our business model change that we're going to have to enact. And so more and more conversations -- it's interesting. More and more conversations, just in the past 3 or 6 months, have gone from "We're going to go fully back to the office and maybe we'll add some flexible work patterns for employees," to actually a bit more even toward the hybrid work approach. And I think people are recognizing that there has been some of this change in behavior that has now set in and that is going to be maintained going forward. Now the great thing for us is that the more places people work from, the more locations you work from, the more styles in which you work, the more asynchronous and synchronous collaboration you have to do as an enterprise, the more you're going to care about managing your content in a thoughtful and sort of structured way across the enterprise. And so that's starting to show up in our customer conversations, where they're being much more long-term thoughtful about these IT trends and then their impact on content management. And then when you get into things like the ransomware challenges, which are very unfortunate but certainly catalyzing more security conversations, ransomware has rapidly increased as one of our most important topics that we have customers asking us about in their security organizations. With things like e-sign coming out relatively soon, we know that's going to again propel us into a new set of conversations around long-term digital transformation. So I think, for the most part, right now, we are just seeing market tailwinds behind us that are pushing this growth forward.

Got it. And just to touch on that e-sign capability, I know it's coming this summer, probably within the next month or so, if I got this right, maybe you can update us on timing on that. And how would that work its way into the Suites? What is it that I'll need to pay for in order to get that capability, the full capability?

Yes. So it is coming relatively soon. I can't share the date yet on this call, but relatively soon. We'll be launching it and then rolling it out to all of our customers thereafter. And from a business model standpoint, it's going to be included in our business tiers, but then there will be different features that span the different product and pricing tiers. And so if you're on our basic business plan, you'll get some set of functionality, that if you and I wanted to go back and forth on a contract, we could do that within the business plan. But if you were a large bank and you were doing lots of API-based operations, that will be something that you would upgrade for, for additional capacity, features and volume. So we want to simultaneously give all of our customers increased value in their Box licenses while also ensuring that we can appropriately monetize the either higher-value use cases or the higher-volume use cases that we know are going to exist out there. So it's a bit of a both expansion play for us as well as business model disruption for the market.

Okay. I want to touch on the Microsoft point because clearly, they're also a competitor, but so it seems like there's a little bit of a coopetition here kind of working with that company. When you win, what are the factors that really make customers decide to move off Microsoft or any other legacy system towards you? And how do you think about the sophistication of the Microsoft solution as it is right now? Is there much share to be gained there, or steady-state is kind of the way it is?

Yes. I think there's 2 important things to think about. One is we are -- we have a fundamentally different architectural premise than Microsoft. So Microsoft's approach is that if you want to do content management, you do it via OneDrive and SharePoint, and then if you have custom applications, then Azure. So you might have up to 2 or 3 applications that you're working with to be able to manage your content. So imagine being a CIO and trying to sort of map the life cycle that a contract goes through, from collaborating with the client, showing up in Salesforce, getting signed by the customer and then ending up being retained and governed in a long-term process. In a Microsoft architecture, that file would be replicated multiple times across multiple solutions. You would have multiple APIs that you have to be able to design for. That leads to a tremendous amount of kind of headache and challenge. So if all you really need is low-end basic storage, Microsoft has appropriate solutions. But this is not what Box is delivering to customers. We have a Content Cloud that's powering mission-critical workflows and business processes across the enterprise. Furthermore, we are now much more integrated with Microsoft. So if you want to be able to do that transaction or that collaboration with the client in Teams or with Office, the Box Content Cloud is going to be able to integrate seamlessly with those applications. So we can add a ton more value to those customers. So that's the first point. And then I think there's a second point, which is also really, really important to emphasize. We are in a world where the content use cases that customers have are growing at a rate faster than what any one individual vendor is going to be able to put just in one platform, including Microsoft. And so as you think about virtual data room, sales enablement, digital asset management, these are use cases that really require you to be a best-of-breed player that goes very deep in the category as opposed to just sort of doing the lightweight shim across many of the use cases. And so I think for the exact same reason why you see Okta building out a significant presence in the identity market amidst competition or why Slack has been able to garner still significant growth amidst competition or Zoom competing with Microsoft Teams, I think you're going to see a similar dynamic with Box and content, which is we're all individual best-of-breed players because the depth of use cases and needs from customers go far deeper and are way richer than any one horizontal platform is going to be able to power.

Got it. Got it. Maybe one for Dylan. Dylan, customers with one or more add-on products or suites have better customer economics, obviously. Can you talk about how we should think about the net retention and the opportunities you see within your existing customer base as well as new? I know there was this period of time, clearly at the beginning of the early days, where you had a lot of net customer additions and there was then a shift there and focus to kind of getting more from the existing base. I'm starting to feel like you're coming back to more of a balanced dual mode, where you want both new and expand. Help me understand that transition. And how do you gain -- drive net retention within those opportunities?

Sure. So we'll start on the net retention side. And as mentioned, as we build on the momentum that we're seeing in add-on product sales, that a growing proportion of our customers with higher net retention rates, as customers who have adopted add-on products, had net retention rates of about 20 points higher than those who haven't, that should create a tailwind to our overall net retention rate. In terms of the actual numbers, we are starting to see that in the business. In our most recent quarter, we saw quarter-on-quarter improvements in our net retention rate in Q1, going from 102% to 103%. And we expect to end this year higher than our Q1 results. Longer term, the growth rate we expect to achieve in FY '24, a couple of years from now, in that 12% to 16% range, maps to an overall net retention rate in the kind of 105% to 110% range. And so that's kind of what we're seeing and expecting from an overall net retention rate point of view. As it relates to that kind of balance, as you mentioned, with new customers, we do have a huge opportunity to grow both from our existing customer base, where we have roughly 7x seat expansion potential as well as a cross-sell opportunity in many of those customers, but also to land new customers and then grow them over time, particularly in some of the international markets where we've seen lower penetration, such as some of the regions in EMEA. So currently, a little more than 70% of our new bookings are coming from existing customers. That has trended up slightly but steadily over the past few years. And we expect to see a pretty similar shift between customer expansion and new customers for the foreseeable future. So we very much make this decision based on the segment-by-segment, geography-by-geography trends that we're seeing. But given a lot of the green shoots that we've been seeing in many of the different markets that we serve globally, we do expect that ratio to stay pretty steady over time.

Okay. Very good. You recently announced a new Chief Product Officer. Maybe you can talk about his background, what he brings to Box. Now that you have e-sign in there, what do you really need him for?

So we're very excited to have Diego join. So Diego is our new Chief Product Officer. He was most recently running the Adobe Document Cloud business for them from a product standpoint. And within that business, obviously, was Adobe Sign, but also Acrobat, their mobile scanning technology. So he has just significant, relevant experience in content, both most recently, but also over the past couple of decades of his experience. So we're really excited to be able to bring him onboard. As we think about our multiyear journey as a content cloud and you think about all the pillars of functionality we need to invest in, things around workflow automation, advanced data security, e-signatures, data governance, he's seen every single one of those domains. So that was the importance of bringing him onboard. And then, obviously, you can even just see in Adobe's recent numbers about the scale and performance of the Doc Cloud business. So we're just excited about the kind of mature business thinking that he's going to be able to bring to the table in our product organization.

Okay. Is there a chance you can open up the kimono just a little bit and let us think about what news should we think about from a product standpoint over the next year or 2, [indiscernible] maybe?

I would like to fully launch Box Sign before announcing any new functionality. But I think there are some maybe hints in the content life cycle that, hopefully, you'll -- will see us talking more about content analytics and how do you derive more business value from the information in our platform. Content publishing, how do you go from being able to collaborate with a small team or department and then publishing through a different part of the organization. That's a pretty fundamental use case if you want to be able to do cross-company content management and collaboration. So we're really excited about some of the new innovations that we're working on. Right now, they're more in the R&D phase, but more to come when I can share more.

Got it. Very good. Dylan, going back to the net retention rate, so nice to see finally an uptick in that. I know that, that was a number that, for a while, we've been waiting to see a reversal on. So great to see the return, the change there. Can you help me though think about the relative contribution of pricing versus seats in driving that number? And how do we think about the change in that over, let's say, in the next 12 months?

Yes. So I would say that in terms of the overall impact on growth and in kind of bookings, we see a roughly similar impact between the new seats that we're signing as well as the continued pricing improvements that we've been generating, at least over the past few years. So expect both to be roughly the same size and pretty meaningful contributors to that growth as well as to our net retention rate, which is really, again, very closely correlated with our overall growth rate as existing customers make up about 70% of new bookings. And we're also seeing improvements to the net retention rate both due to a lot of the kind of implications of selling increasingly sticky products, lapping some of the challenges that we saw in the middle part of last year, with COVID, is that net expansion rate independent of kind of necessarily the specific seats versus pricing as also having a positive impact.

Got it. Can you talk about the difference between the U.S. market and international, how that has evolved perhaps differently over the past 12 months?

In terms of like from a pricing side or just overall...

No. No, just overall, overall business activity.

Yes. Aaron, do you want to speak to that, or you want me to take that?

Yes, go for it.

Sure. So I would say that, for the most part, we are seeing pretty consistent kind of customer conversations trend globally. Certainly, there are some segments that have performed better and worse over the last 12 months or so. As we've talked about in the past, Japan has been a big highlight for us, continues to grow at a really fantastic clip. And we have seen some continued challenges in EMEA. But if you think about the overall business, we would say that both the underlying trends and the overall growth rate aren't materially different between the U.S. and international markets. We are seeing the kind of contribution percentage of our overall revenue coming from international markets kind of ticking up over time as it's growing at a slightly faster clip, but I wouldn't say there's anything too materially different in terms of the customer trends that we're seeing.

Got it. Got it. A big picture question for you, Aaron. I'm trying to think about gravity, and what I mean by that is what is the place that I will be more likely to do more of my work kind of going forward? And Slack has tried to do that with pulling a lot of integrations in. Clearly, Microsoft has its spin on it. Why is Box a better place or an ideal place to become the gravity of my work versus something -- doing it at the chat level or the file level? Help me understand the pros and cons of that and why do you feel like you're in a pole position here.

Yes, sure. Well, so it's certainly a timely analogy given space exploration. But the -- I think what -- I would almost kind of reframe it a little bit. We don't want to and don't need to compete with any of the individual applications, where you're sort of doing your work. You'll note that we've never come out with a message of Box as your OS for work. I think that's an important message for Slack. It's an important message for Microsoft Teams. That is not our strategy. Our strategy is to be the world's best place to manage their content. And then we know that work is going to happen in a variety of applications. So what we want to be is the best way to manage your digital assets and your financial records and your CAD design files. And then as you go and work across different OSs for work, you're going to want to be able to access that same information across those different technologies. And we think this is a strategy that's actually very important because I don't believe that there's going to be an end-all-be-all OS for all work. And so given that we're going to have lots of different places that people do their work from, you don't want to walk in your data and your content into just one of those applications because, all of a sudden, you're going to lose all of the portability of your information, and then that gives up all of the flexibility, that gives up all of the user experience benefits that you have across working from different systems. And so that's really the role of the Box Platform, is we enable you to work from any application but we become the back end for managing that content securely. And so we actually hope that there's as many places as possible where people want to do their work from. And we want to be the best way to manage some of the most important parts of that work, which are the things that show up as content, so your intellectual property, your contracts, your media assets, your marketing materials, your prospectuses, your notes. All of that stuff that turns into content, we want to be the best place to manage it.

Got it. That makes sense. You just completed a Dutch tender offer, and you stated you intend to opportunistically repurchase shares with the remaining funds. Can you talk about that? And more broadly, how do you think about capital allocation? I mean you have a lot of cash right here, right now. What's the plan?

Sure. So as a recap, on the heels of our tender offer, which resulted in our buying back about 240 million in stock, we authorized and announced a 260 million separate share repurchase program that allows us to buy opportunistically over the course of this year. So we're still intending to deploy the $500 million in share repurchases between those 2 programs, which is an approach that's very consistent with our overall capital allocation strategy as, ultimately, we look at that through the lens of what's going to deliver the most value to our shareholders. So we do expect the [indiscernible] of our capital to fuel growth and go after the massive market opportunity in front of us, including taking an opportunistic and disciplined approach to tuck-in acquisitions that will accelerate our product innovation. I think Box Sign is a great example of that from earlier this year. And at the same time, we regularly look at buying back stock as part of that capital allocation strategy, while preserving our strong balance sheet and flexibility, particularly now that we're generating significant free cash flow.

Got it. Got it. Interesting. And Dylan, can you refresh us on your operating margin targets and time line to reaching those targets?

Yes. So in FY '24, 2 years from now, we expect to achieve non-GAAP operating margins in the 23% to 27% range, which is up at the midpoint, about 10 points, from the operating margins of 15% that we delivered last year.

Got it. Got it. And then I got an e-mail from an investor asking you, Aaron, to elaborate on the readiness of Box Sign for the largest enterprises to adopt this. I know -- I don't know how built-out the capabilities versus just a regular DocuSign, which has been around for quite some time. The incumbents characterize you as having a scribble sign, but not the APIs or workflow integrations to be successful in Box' large customer opportunities. So help me think about what's going to be ready now with e-sign and how do we think about the evolution of that platform. And who will -- who would you expect will use this, when and how?

Yes. So great question, first of all. Let me say, as a new entrant into a market, we're taking a very thoughtful approach of getting customer feedback, advancing the product, building up more capabilities, going in deeper. That's a flywheel that we know very well from any market we've entered, whether it was with Box Shield, our platform APIs or any other successful product that's driven significant growth. So I think Box Sign is no different other than the fact that we actually started with an acquisition of a technology that already made significant progress. So we're kind of off to the races faster than we normally would be with a new product that we might build from scratch. It's important to note that SignRequest, the company we acquired, already was powering pretty significant use cases for customers and partners. So it was a well-proven, well-vetted kind of battle-tested technology that we acquired. It will still need many features that we'll have to build out over time. But I wouldn't actually think about those features as being sort of large enterprise- or small enterprise-dependent. It's really just use case-driven. So there might be some use cases where there's some extremely advanced complex workflow that our signed functionality still needs to be able to build out for. But whether you're the world's largest company in the planet or a small business, the ability to get documents signed by multiple parties, parallel routing, with administration, with workflow automation, with APIs, all of that will be available on day 1 as we roll Box Sign out. And then we're just going to continue to advance the feature set more and more over time. So we're entering a category that has been around for nearly 2 decades. So one can imagine that there's a lot of functionality that we're going to be building out. But we're doing this, we believe, in a very disruptive and innovative fashion, where our customers are going to be getting this functionality included in their Box licenses. And we think that's going to solve a wide set of use cases right out of the gate.

Got it. Can you talk about some -- perhaps the pipeline of interest with respect to this technology? I know you mentioned some things right after the acquisition about the level of interest there. Can you update us there on the level of interest in this?

Yes. I think I'll have to keep it a little bit high-level. But as I've said in the past, I'll just kind of maybe refer to a past statement just because it remains true. But when we announced Box Sign, and we started to talk to customers about it, it was certainly one of the most sort of significant reactions I've gotten from customers of a new product that we've entered into and just in terms of how resounding and sort of "obvious" it was to customers that we should be entering the space and then, frankly, how excited they were that it was going to be included in Box. So that's obviously very qualitative. We're not going to put out quantitative metrics yet. But qualitatively, I think it's -- customers are very excited. And then I think there's almost another symbolic benefit as well to customers, which is I think it helps show another milestone on this vision of expanding beyond sort of storage sharing, just kind of the basics of content management. I think we're really starting to define a new way that customers think about content and their content architecture and what they can do with content. And that's having almost just as much benefit because it's showing that if you were to imagine that content life cycle that I showed 5 years ago, the kind of things that would be on that content life cycle would not have been categories, it would have been sort of features, like edit, share, upload, store, secure. Now around that life cycle, in many cases, we have entire categories that are modules on that life cycle. So our threat detection and DLP functionality is a module. Our data governance is a module. E-signature, which is a category, is a module. What we end up maybe innovating in analytics or publishing are entire categories that will be modules. So I think what that's showing the customers is that they're going to be able to rely on Box as that singular platform that's going to continue to keep innovating and driving more and more advancements, not just in the core content sort of storage and sharing use cases, but across the entire content life cycle.

Got it. That makes sense. Great. Maybe just last one for me regarding your go-to-market approach. Clearly, moving from selling modules to suites and a more fully integrated platform potentially requires a slightly different DNA from a salesperson standpoint. So help me think about the DNA of your sales organization. How has that changed in the last couple of years? And what do you think still needs to change in it over the next 2 years, say?

Yes. I think, certainly, there is a DNA evolution of the kind of the sales rep that can go in and talk about use cases of the platform, do much more of a sort of strategic solution sale. I think that was important. But I think our pricing and packaging, in some respects, was just as important as that. And when we look at, again, the calories that it took to go and sell a bunch of add-on modules or add-on products to customers versus selling a suite or being able to bundle all these products into a single plan, wildly different sales motion in terms of ease and friction that we can remove. And so I think part of it was packaging. Some of it was pricing. Some of it was the actual functionality itself being more differentiated. And then some of it was the DNA of the sales organization. But I think as much of -- I think it was as much about the packaging and innovation as it was continuing to evolve the leadership of the sales organization and make sure we have the right talent in place to drive this new sales motion. And so now, I think we increasingly have all of the kind of key parts of that to be able to drive this reaccelerated growth.

Got it. Got it. Okay. And then maybe last one. I think, clearly, there's a great vision here, and there's lots of opportunities. And it seems like the market, especially post-COVID now, creates an interesting opportunity for you, and the portfolio is now kind of coming together. I guess help me think about the puts and takes of your perspective on growth versus margins. You've talked about the Rule of 40 in general. And Dylan, you've talked about a 23% to 27% margin, if I remember correctly, 2 years out. But help me think about the range. Why do you want to be at the bottom of it? Why do you want to be at the high end of it? And how do you balance that against growth opportunities? What is that balance that you're looking for?

Yes. So I would say that all -- I think we'll certainly have a confidence in our ability to and a bias towards growing faster versus not. At the same time, as we've talked about, a lot of those investment decisions that we make, and really, where I think you would see the difference and kind of an inverse correlation between where in the range our growth is versus the operating margins, would be the level of sales and marketing investments. So as we see kind of the success in sales force productivity, growth rates in a lot of those areas, we would absolutely want to take advantage of that opportunity and invest in those. So given the range because, to your point, there are a number of puts and takes in our overall growth rate, but we feel really confident that given the product investments and improvements that we've made, the size of the sales force, the capacity that we have and a lot of the other things we're doing on the product and go-to-market side, that we have all the components in place to accelerate revenue growth. And then ultimately, as we continue to learn more, launch the additional products and see how these different parts of the business are performing, we will kind of tune our level of investment accordingly.

Got it. That makes sense. So should I interpret a 23% margin 2 years down the road as a positive? Meaning, I would like to think that, at that point, growth is running ahead of where your target is, and that's why you're investing more in growth.

Yes. I would say that it's more likely we'll be at the lower end of that range with higher revenue growth. So yes, we would think about that as a positive, but at the same time, very focused on a lot of the other kind of margin improvement opportunities, initiatives and just overall driving efficiency that are not -- that I described as almost independent of growth. So a lot of things we're doing, regardless of that rate of growth to improve our bottom line, I mean, everything from a lot of the infrastructure improvements that should lead to higher gross margins, to really, a lot more heavily pulling that location strategy lever to manage workforce expenses, and those types of things would not come at the expense of growth rate.

Great. Great. Cool. Guys, I want to be respectful of your time. This has been great. Good to see the kind of division coming in, and the opportunities seem to be improving and the environment seems to be improving. So we're looking forward certainly to hearing you over the next few quarters and see how things are going. And so I appreciate your time. Good luck, keep it up, and we'll touch base again soon. And everybody, thanks for joining. And feel free to follow up with either Cynthia from IR or with myself. Thank you very much.

Awesome. Thanks, Ittai. Thank you, everybody.

Thanks, guys. Bye-bye.