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

Excellent. My name is Josh Baer, software analyst here at Morgan Stanley. We have the Box team, founders, Aaron Levie, CEO; and Dylan Smith, CFO. Thank you very much for joining us.

Thanks for having us.

Awesome. To start off, thinking about earnings, which I think was yesterday?

Yes. You were there.

It looks like a month ago, a long week. You kind of referred to where we are in your journey as like entering a new chapter. I wanted to dig in there a little bit thinking about the Box platform and how you're positioned around maybe with incorporating crews into the platform and kind of enabling a different set of use cases for your customers looking ahead?

Yes. So when we refer to this idea of kind of a new chapter, if you think about Box generally, we've had sort of 3 phases, and we're now entering that third one, which is when we started the company, it was really about secure storage and sharing, collaboration around files from anywhere. As we scale and then pivoted into the enterprise, it was really about building a modern cloud-based content management system. So this idea of how you sort of manage and govern the workflow and the life cycle of content in the cloud. And we, I think, have used that strategy to get to now crossing over $1 billion in revenue, but we're very clearly entering now a third chapter in our platform, and we have all the foundation that we've been building out for it, which is this idea of when you combine the power of AI to be able to process and structure unstructured data. Workflow automation to run content through business processes. And then with the Crooze acquisition, the ability to actually develop very, very easily with no-code applications to you organize and run that content through those business processes. We're entering a new phase of opportunity for the kind of business processes that Box can power. So to give you some examples, AI being able to automate workflow and workflow around contract life cycle management or digital asset management or invoice processing or clinical drug trial processes. So anything where you have a lot of content where that content right now maybe remains largely opaque to the enterprise, where AI can read that content, extract value from it, turn that into real kind of business intelligence. And then we now have the technologies that let you run the workflows, view the workflows on our platform. So that's what this year is all about, continuing to lay out that foundation, get it in the hands of our customers throughout this year. And then I think we're in a really kind of a new chapter of growth. That opens up the opportunity for system integrators to really build more value on Box, deliver more advanced solutions, go deep dive into kind of critical verticals like life sciences, health care, financial services, public sector, and we think this represents really the next kind of evolution of the company. So it's something we've been planning for, for quite some time. You can kind of see the building blocks that we've laid out through our evolution. But we now have this kind of really critical moment where AI plus workflow plus these new solutions come together in a very valuable fashion.

Great. Thanks, Aaron. So that's the vision. Like what are your strategic priorities to get there and realize that opportunity?

Yes. So we kind of think about things really through the lens of what do we need to build? And then how do we take those -- what we built to market? On the building front, so just for kind of clarity, the Crooze technology that we've referred to in the earnings call, this is a relatively small start-up just because they hadn't invested in go-to-market, but they've proven out the technology with a number of Box customers. So we got very excited to bring them on board. What this technology does is, if you think about how we all work with content today, we create files, word documents, PDFs, images. We put them into folders, you organize those and maybe if you want to share them with somebody, you will share them out in that kind of capacity inside of a folder. But now imagine you are running a legal process, and you want to see all of your contracts that expire next week or you want to see which contracts have certain clauses in them that might be of a certain kind of level of risk. We can't really do that through just a file or folder interface. This is why contract management systems and contract life cycle systems exist. Well, what this company Crooze had done, was build a no-code interface on top of Box to let you effectively customize the dashboards and the workflows around the content being stored in Box. And so you can then represent the content in Box as a contract portal or as a digital asset management system or as a controlled documents library for a regulated industry. So this company had built, again, kind of this no-code building application environment on Box. We got -- we validated with a number of customers that it was -- in some cases, the most exciting thing that they were using Box for was through this partnership. So we wanted to bring on this technology. We knew now is the right time because what Crooze is dependent on is having really good and accurate metadata from the content for rendering these interfaces. So you have to know what are the key variables in that contract? What's the client ID number? What's the amount? What's the due date? So AI for the first time, can actually generate that metadata and now you can have interfaces for organizing and working with your information. So that's why we made the acquisition. Right now, what we're doing is incorporating that technology into the platform. So it will be native to Box. It will be branded through our kind of normal branding scheme on what we call Crooze. But it will be a set of capabilities that let you build these business process applications on our platform. So this year, we have to build that out. We're advancing our AI capabilities to let you go and extract value and process documents intelligently. We have more work that we're working on from a workflow standpoint. That's just on these modern content management and ECM experiences. Underpinning that is a continued investment in our advanced data security and compliance solutions. That's one of the top reasons why customers choose to put their content in Box. So that things like threat detection, data governance, data compliance, you'll see a lot of innovation there. So that's a bit about the product. And then on go-to-market, we're super excited. We just brought in a new COO into the company about 1.5 quarters ago now, and she has an incredible amount of experience in strategy and pricing and go-to-market operations. she helped lead some of the early growth in Google Cloud. So she comes on board with now a set of capabilities that we're going to be releasing and have been releasing to customers. And now what we're going to go do is make sure that those solutions -- those capabilities come together as solutions through, in some cases, system integrator partnerships, through new pricing and packaging that allows us to go and drive higher monetization of these products and then an investment in -- kind of an added investment in demand generation so we can make sure that we're responding to the market opportunity ahead of us. So that's a bit about what we'll be doing this year. At our Analyst Day, we'll -- you'll hear from Olivia on what we're doing on that front. You'll hear from Mark, our Head of Sales on how we're executing the sales program as well as Diego and our product team.

Perfect. And we'll dig into some of product and go-to-market in this session, too. But first I want to loop in, Dylan, last night earnings, what are the key financial takeaways as far as results? And how should we think about guidance?

Yes. So it's the -- on the results side, we really emphasize that while this past year that we just finished, certainly with a pretty challenging macroeconomic environment. In light of that, continue our commitment, both to delivering profitable growth. So while navigating the environment while absorbing FX headwinds, continued to execute against our bottom line commitments, lay the foundation for both long-term profitable growth and operating margin expansion and execute a very disciplined capital allocation strategy. So the results I would say, really highlighted around the bottom line performance. And then for Q4, we're also really pleased with the execution on the sales side, which we describe as really the strongest quarter that we saw all year, and that shows up directly in some of the things like outperformance and acceleration of our Q4 billings and then similarly sequential acceleration in our RPO growth.

Perfect. And then thinking ahead for FY '25 sort of mid-single-digit type of growth profile, what macro assumptions are embedded in that demand outlook?

Yes. So we're assuming pretty prudently that the stabilization that we've seen over kind of the recent several months kind of a couple of quarters continues. So we are not assuming any sort of recovery in the macroeconomic environment, but kind of feel good about that top line performance based on everything that we've been able to drive more recently as we look ahead to the pipeline and how that's building is what gives us confidence in the expectations that we've had.

Perfect. Let's talk about Suites. First, from a business and a customer perspective and then from an economic perspective. [ We're ] wondering where we are on Suite selling? But more importantly, how does Suites fit in with this new chapter and this vision ahead?

Yes. So we have made selling Suites and most -- kind of dominantly enterprise plus the kind of core of our sales motion. So every time we go to a customer, we're presenting the capabilities that only generally exist in Enterprise Plus. So that is what we're driving from a sales execution standpoint, it's showing up, obviously, in the vast majority of our deals above $100,000. I think we've been driving some pretty significant quarter-over-quarter adoption rates across the total account base. So that's been very successful. This will remain the focus going forward. As it relates to our new set of functionality between AI more advanced workflow capabilities, the Crooze technology being onboarded natively in the Box. We anticipate having a higher tier plan above Enterprise Plus that will have much of that functionality as well as when appropriate, having additional ways that customers can purchase these products. So Crooze today is allowed to be sold on a stand-alone basis, in the legacy form within our customer base. So we anticipate that remaining the case even in a kind of a post kind of Enterprise Plus Plus world, we want to make sure that when customers have a need for that use case, we have a way of supporting that. We also have some consumption paradigms that we're going to be doubling down on. So we've always supported monetization on our platform APIs when a customer has a high degree of platform usage, but we're also going to be driving the same with AI consumption as an example. So if a customer says, "Hey, I have 1 million contracts that I want you to go and structure". That would be a consumption play on the AI side as well. So we have multiple vectors of monetization beyond just upselling customers into higher tier plans.

Got it. And when a customer adopts Suite and has access to broader products, like how does that change their engagement with the platform from a value perspective and then also from a retention perspective? [indiscernible] value.

Yes, sure. I mean I think, in general, when you think about the correlation between a customer buying Enterprise Plus, they now have access to Shield, which is our most advanced security technology, threat detection, data loss prevention, soon, it will have ransomware prevention and recovery features. It is our data governance module. So things like life cycle management. So you can say, okay, I want these documents on a retention hold. It has some of the kind of base capabilities for our workflow Suite. So customers that implement that, we tend to be aligned to more strategic use cases. That tends to be the reason why they've upsold. They have sensitive data, they want to be able to protect. They're collaborating on that data in and outside their enterprise. So the value proposition is certainly a much more strategic one. And that tends to then correlate to just better metrics all around, better customer retention, better ACVs, better net retention than just when you purchase the kind of core platform.

Yes. And to build on that, what Aaron said is, that's absolutely right, is when you move into Suites, what we've seen really since the introduction, but becomes more and more material to our overall financial profile, as we continue to drive really strong Suites momentum, it's really just positives for us and our customer economics from top to bottom. So even in addition to what Aaron said, we also see stronger pricing per unit pricing, even though we're selling larger deals and giving volume discounts. With Suites, Aaron mentioned, stronger retention. Just a few years ago, our full churn rate was about 5% annualized, which is still not bad, but for the last year plus, that's been at a really best-in-class 3% annualized rate. And then Aaron mentioned just stronger stickiness overall. And you can see that show up kind of that combination of factors in just the way that our -- as really being kind of the fuel to some of the financial profile improvements that we've seen over the past few years as that Suites penetration has really ramped up. So our gross margins are now higher, price per seat or average ARPU is another way to think about it, has improved at a nice clip every year for the past several years. and that just translates into a much stronger profile overall.

Right. And so you've laid out some of the value in Enterprise Plus. You've alluded to a higher tier. I'm sure we'll have to wait for Investor Day for the details there, so I won't ask. But I think the big question is like you've been selling Suites for a while, and you've come a long way. So how much room is there left to still have a positive financial impact on the business?

Yes. So we think there's still a lot of room. And similar to kind of the trajectory for a bit of context, we've had kind of a Suite offering for about 5 years now. We introduced a newer higher tier Suites offering a few -- about 3 years ago now, Enterprise Plus. And what we saw then was even many of the customers who are already using Suites, then upsold again and sort of paying more in addition to opening up new use cases, so expanding seats as part of that move to the higher tier plan. And we're expecting to really replicate that playbook as if you think about the types of use cases that all of the things Aaron was talking about as being part of this newer offering provide, it's just a very, very different kind of level of value and getting into very different categories than what we can currently address. So I would say that when we think about what is the kind of applicable kind of addressable part of our user base or revenue and all of those things? We think about it as directionally probably 80% as there's going to be some very, very small customers and unregulated industries, who probably aren't realistically going to be on Suites. But I wouldn't think about the upside is just going from 55% to 80%. Even that 55% now is going to have an entirely new set of capabilities in addition to some of the kind of separate ways that we monetize in capabilities like AI, Box Sign, et cetera. So really pretty optimistic about the type of additional kind of value we can deliver to customers and then capture as part of that, especially driven by that new offering.

Great. A lot of talk about retention and selling all these products back into the base. What about opportunity around new customers? Are there geographies or market segments where you're still seeing new logo growth?

Yes. So we are seeing new logo growth in all geographies, but I would say, in particular, we've been seeing historically really strong kind of new logo acquisition where we still have a lot of room to run, especially given some of the newer industries that we can now address is in Japan. And then another area where there are a lot of new logos and kind of different story where we've been, I would say, underrepresented in terms of our penetration and traction versus the opportunity is in EMEA. So really a lot of those international markets, there are some emerging markets as well that we're in, not like emerging countries, but like Australia, for example, where we do see a big opportunity. So a lot of kind of room to grow through new logo acquisition over time. And even in the last -- kind of last couple of years in a more challenging environment, that new logo acquisition has actually been pretty resilient in terms of its contribution to the business. And with some of the initiatives that we kind of talked about a bit, such as kind of investing in our systems integrator, partner ecosystem, we think of that as a really key way to be able to expand our reach and get to some of these customers and new logos that we have not been able to address so far.

Great. A couple more on the product side. I want to check in on Box Sign. I have a competitor reporting tomorrow. What are you seeing as far as demand for Box Sign? Like how are your customers using Box Sign right now? And how do you think about the opportunity as far as like the types of use cases? Is it basic use cases? Are you seeing any companies that are replacing the current footprint and leveraging what's included in your Suites?

Yes. So Box Sign is playing out on that sort of base set of use cases, I think exactly as we intended. So we wanted to include Box Sign natively in Box across all of our major plan types for businesses. And that was really meant to bolster the value proposition of our core platform. We saw a lot of use cases for customers. We're just doing these sort of ad-hoc e-signature workflows, where you're working on an HR document or a contract and you need to get it signed and you're having to leave Box just to be able to execute that workflow. And so we felt like -- the content is already inside a Box, we can help automate and digitize more of that experience by keeping that customer inside of our environment. So that's been playing out. We have thousands of customer stories where they've adopted Box Sign and some have replaced existing incumbents or short up spend. Others have found new use cases where they can go and digitize workflows. We've heard use cases across regulated industry, public sector, small businesses across the board. Where we have probably upside over the medium and long run, is as we add more advanced capabilities especially around our platform and API business, that's when we can probably start to really kind of power much more of the strategic e-sign workflows. And we intend to do that. We have a very extensive road map right now of more advanced capabilities that are somewhat esoteric in the e-signature space, but things that open up the public sector even further, especially in the federal space, features that open up financial services for things like account onboarding for various banking processes. So we'll have more of those capabilities over time, that expands the addressable market we have with Sign that will a lot of times align with the consumption-based model of our platform business. And these will not be capabilities that are kind of given away within existing plans, we do anticipate there will be more kind of higher tier features often with a volume component tied to them.

Awesome. Let's shift to competition. Maybe just to throw to you, Aaron, kind of lay out the current status of the competitive environment and how you see Box fit in and your differentiation versus those out there?

Yes. I mean we're -- it's a -- it's kind of core to our whole strategy, which is to build a very unique and differentiated platform in this market. If you think about where -- if you kind of go and scan an enterprise above, let's say, 100 employees just to pick an arbitrary number, but certainly 1,000 or 10,000 employees is to be even more the case. And you said, okay, where is content today inside this enterprise? You look at the marketing team, and they would have a few different solutions for digital assets. You look at the legal team, they have a couple of solutions for contract processes and e-signatures. You would go to some operations team, and they might have a legacy enterprise content management system still running in a data center. You look at the end user kind of collaboration and workflows around that, and there could be a few different point solutions or shadow IT that's come in. So for us, the competition is actually the fact that we have fragmented data sets and data across a wide variety of systems where there's no single platform that we compete with or that can kind of replace what we do. It's much more the fact that we have all these fragmented technologies and Box is really the first architecture of its kind that can create a single platform that powers that full life cycle of content. So you don't have to have data that's moving in and outside of different tools for every single workflow that you're doing. So that -- our strategy remains unique in the industry, and it only gets more unique over time because everything we do is built on that common fabric. It's built on that common platform. When we introduced Box AI, it instantly became possible to take literally any file in Box that is a document or text base and use it against Box AI. That is not possible in the vast majority of architectures that exist in content. Because you have different levels of functionality depending on which version of the product or which platform the data is being managed in. And so everything we build is built on platform and then can be leveraged against all of your content. That unique platform-oriented approach is what sets us apart from the rest of the market. So we are only getting more competitive. We're only getting more differentiated. And for the companies that maybe we do sort of compete with for single individual type deals, let's say, at Microsoft, for instance, we're also partnering with them more than ever before. So just yesterday, we announced an updated partnership with Microsoft with Azure, where we'll be offering Azure Open AI services to power the base core functionality of Box AI in the sort of default mode. We have an integration with Microsoft Copilot that will continue to expand over time. We've got very deep integrations with Microsoft Teams. So even for maybe the classic competitive dynamics that you would expect in something like Microsoft, we actually partnered with them more than we compete. And then, of course, you've got more of the traditional legacy systems where content maybe previously went in those scenarios were probably just more competitive as opposed to there's sort of significant partner opportunity, but we are seeing more and more customers that are ripping and replacing legacy ECM systems, moving that to the Cloud and Box is becoming increasingly, I think, a very relevant choice and things like the Crooze acquisition only accelerate that going forward.

Great. I want to ask a couple on the Legacy ECM. But I do want to ask a follow-up on the Microsoft topic. In my conversations with investors, it's still towards the top of the questions that I get. So for a Microsoft Office 365 user who is maybe going to be using Copilot as well. Like what is that user using Box for? Like what are the key products or use cases? And why do some companies need Box and Microsoft 365?

Yes, it's important to actually look at like what is the work that's being done by that user. So let's say you're in marketing. Oftentimes, not always the case, but oftentimes, you go into an enterprise, they're not using OneDrive for managing their marketing assets that are going to go into a major new campaign. If you go to an investment banker who's working on a deal and an M&A deal or an IPO, probably that IPO is not being run through OneDrive. If you look at a global manufacturing process that has hundreds or thousands of partners that all have to share critical R&D information that's likely not being shared through a kind of a basic enterprise file sync and share tool. Maybe it will be in SharePoint, but SharePoint notoriously just has a lot of complexity, a lot of -- just difficult to use and integrate experiences around it. So this is where Box comes in. So we are -- we overlap with -- from a customer base standpoint, with Microsoft in any large enterprise, they're using Office 365, they're using Teams, they're using Office Online, in conjunction with Box. So Box becomes the secure intelligent place to manage content and then we integrate with those other applications where a lot of the collaborations or work is being done. So that's kind of the common way to think about it. You have to sort of really go into the what is the business process that is happening with content? And one example of like the quintessential deal we love, we had this deal in Q4, which was the customer who was actually moving off of SharePoint because they have critical business processes where content needs to integrate across multiple systems. And I don't know the exact -- I wasn't as involved in this deal, but it was a mid 6-figure deal. And between the APIs of Box, the simplicity of Box of the end user experience level, and then the level of focus we have on compliance, data governance, security, let them go replace multiple solutions. SharePoint was one of them, but there's other technologies in the mix. And Box is going to become their common platform for fairly regulated business processes, integrated with their ERP system, integrated at the end user experience level. And so those are the kind of deals that you tend to not see either with legacy ECM systems or the kind of end user tools that maybe we would think about in the productivity space.

Great. And to tie in what we're hearing about the competitive landscape with sort of this new chapter and all the capabilities that you have, like is the opportunity to actually rip and replace legacy ECM -- like is that a focus in the year ahead, like more than it's ever been? That's kind of what...

Yes. I think I would say, yes, only because it was a little bit of an easily awarded question. It will always probably be more than it has ever been each year. But like not to be physicians, just like a way of thank you. But like our product is going to be more advanced every single year, which lets us have a better value proposition for customers moving off of those legacy ECM systems. so this year, there will be even more focus and emphasis on it. Olivia has that as a major area of focus. We'll certainly talk about the opportunity a bit more at Analyst Day. So I think there's a very clear rip and replace opportunity of legacy ECM systems that either catalyzed by security, catalyzed by AI or catalyzed by just modern interfaces for working with content. Those customers want to move to the cloud. But probably -- and these are literally always impossible to kind of predict the size of these things. Probably the biggest opportunity of all is, all of the use cases that today don't go into an ECM system because ECM was too complex, too expensive, too slow and to kind of move and adapt to the business processes. And that's where I think the vast majority of money will be made in this category. And so if you think about Morgan Stanley is a great example, Morgan Stanley has always been able to, let's say, invest in like the most advanced OCR, RPA technology to process data coming into the business and then run business processes on it. But that's because you guys spend billions of dollars in IT, but most companies aren't doing that. And so they then throw either people at the problem or they don't automate the workflow or they don't actually process their data. And so AI, especially -- and what we've seen in customer examples is the real unlock where all of a sudden, AI can do this at a 10th or 100th of the price and 10x or 100x the efficiency of the legacy solutions. So we think there's a massive opportunity in the net new use cases that every enterprise will now be able to go and automate or digitize or put into a modern business process. So that's going to be the big opportunity. I think if you kind of by analogy, not perfect, but -- if we were trying to like look at the CRM market size in like 2002 and all you had to work off of it was like the size of Siebel as like the total spend, then we would underestimate the space by an order of magnitude or two. And so that's what we think is now possible with content automation because of what we can do with AI, how we can go and democratize this across every line of business, every size company as well as even going after the legacy solutions where we can just offer a much more cost-effective and efficient solution for.

Just to build on that, I think a lot of it is also just about timing. And again, this year, it will be the most focused we've ever been in our history, but think about that near to medium-term opportunity, exactly what Aaron said, around basically the ECM use cases for mid-market type companies, upper end of smaller businesses as well in regulated spaces who just could not implement the ECM solutions. We do see a huge opportunity that Aaron alluded to around ripping and replacing for some of the largest enterprises. But if you just think about it from a timing standpoint, we don't even have many of those capabilities generally available for our customers yet. And then you go through the sales cycle and what their natural renewal cycle is and condo is just very sticky. So we wouldn't expect that to really contribute to the business for at least a couple of years, but longer term, do you see that as a very large opportunity as well.

Great. Let's talk a little bit more about growth before turning to margins. Last night, we talked about a floor in the net retention rate. And we have kind of mid-single-digit growth profile for this year, but still talking about getting to 10% to 15%. First, in order to like get more confident in that return to more robust growth, what -- like as you lean more into profitability over the last couple of years away from growth, is it mostly just macro? Is there anything else to point to as far as the changes in that breakdown of the rule of 40?

Yes. I would say a couple of things. The first of which, if you just think about maybe to talk about what gives us the confidence in returning to double-digit growth, would really put it into 3 different categories, and the impact that they have on our financial model and growth rate. The first of which is just around the newer product capabilities now that we've had our most recent higher tier plan in the market for a few years, still continues to drive higher penetration. We talked about it, 55% of our total revenue, Suites represents 55% of our total revenue. That's up from 46% a year ago. And 0, a little less than 5 years ago. So continue to see improved penetration, but we also believe that having a newer plan in the market with a lot more use cases is a catalyst both for stronger pricing as well as for seat expansion. The second category would be, we think, largely macro-driven, which is that pressure and the biggest change that we've seen in that net retention rate and pressure on our overall growth rate over the past, call it, 6 quarters, is just much lower seat growth than what we've been seeing previously. And so certainly, some things that we can control, I just mentioned one of them to help with that, but also I think that the macroeconomic environment is going to have a big factor, which is what's contemplated in our long-term growth target. But what we're not expecting to see -- we're not expecting to see any sort of improvement this year. And then there's the third category, we have a lot of other newer growth initiatives some of which will have a near-term impact, some of which are longer term around things like kind of the -- building out that systems integrator and partner ecosystem and the like. So it's really a combination of having a new wave of upsells and all the benefits that come to that of the new innovative offerings, seat growth returned to more normalized levels and then starting to see the results and benefits of some of the newer growth investments that we're making. And even going back to kind of the original question, I would note that we are actually stepping up a lot of our investments in sales and marketing this year, and we'll get into more details around what that looks like, some of the strategy around that at Analyst Day, as Aaron mentioned, but we can afford to do that while still generating more than 200 basis points of operating margin improvement because this year, we're starting to really see the impact of the multiyear effort to move over to the public cloud that we've been talking about. So that is going to move gross margins up pretty significantly to about 80% this year, up a little more than 200 basis points. And that's what allows us to really, really continue to deliver that profitability, those profitability improvements while also investing at a greater clip in our sales and marketing.

On gross margin point, how does Box AI and some of these AI investments in products as they're ramping off a lower base? Like how does that impact gross margins?

So I would say that over time, because there are a bunch of different flavors of this. We'll kind of see the exact impact. However, we've structured things in the way that we're thinking about things, just like a lot of our other API kind of driven offerings is set up in a way that allows us to ensure that we can kind of control that and that it's not dilutive to our overall margins, where you'll get some of the basic capabilities and volumes or at least the volumes included within the kind of core offering when you move to Enterprise Plus or a future plan. But if you're going to be a really, really heavy user of whether it's AI or Box Sign or something like that, you're going to be paying separately based on the volume, right? And if we end up -- if we deliver all the value that we're already starting to see customers get out of these offerings that we're expecting to see then customers will be more than willing to pay for that because, yes, they're paying a few hundred thousand dollars extra, but that's saving them millions of dollars in what the alternative would be or generating that sort of ROI. And so that's kind of how we think about that hybrid model of seats and a certain volume included. But with an add-on kind of consumption-based volume-based component as a way to really make sure we're managing that.

One -- maybe just one thing to bookmark though on this is, the cost of AI inference and ultimately tokens being generated is just rapidly going down. This is exactly what we anticipated. It's kind of obvious both between kind of Moore's Law or Jensen's Law plus the efficiency happening in the algorithms. So what's going to happen is because we're not priced on token to our customer, we don't sort of have a pricing model on a token basis, we do it on a document basis, or an API call basis. As our costs go down, we generally believe we can hold our ultimate pricing model relatively steady because the value we're offering is all around the embedding, being able to do things like we call it kind of RAG-as-a-service. being able to have the workflows and security around your documents and the governance around that. So those are all extremely high gross margin capabilities on top of token prices that continue to go down. So we think it's a pretty attractive model. And so far, as we validate this with customers, it seems to be workable as well with them because they don't really care about the number of tokens and their content. They care about a particular business value that they're getting out of AI.

Great. On operating margins, long-term targets, I believe, 32% to 35%. How are you thinking about getting there? Like the gross margin expansion in some ways, now that you've completed some of these changes on the infrastructure side and public cloud, maybe easier while like the operating leverage requires some growth. I guess -- just what's the rest of the equation to get to the long-term operating margin?

Yes. So if you think about kind of this year, expect to deliver 27% operating margin. So we're talking about mid-single-digit type further improvements. Some of that, to your point, is naturally just coming from the gross margin. And once we fully realize the benefits of that public cloud migration. So for example, we are -- expect to have 79% gross margins in Q1, 80% for the full year. So as you'd imagine, kind of the run rate underlying margin -- gross margin profile will be higher even than this year by year-end. And as we fully kind of [ depreciate ] all of the equipment that we have. Those costs wind down, that will provide a bit of a boost. And then for the other areas, would really call out a couple of initiatives continuing to really grow and focus disproportionately on our lower cost allocation strategy. We've been really pleased with the talent and the execution, most notably in our Engineering Center of Excellence over in Warsaw, where if you look at kind of overall engineering head count versus the growth in Poland, Poland is higher than the total number. So it's actually more than 100% of the growth because not only is that where the significant majority of our hiring is -- but where it makes sense, we're also kind of backfilling some roles in Poland as well. So that's one driver. A lot of things we're doing just to look at cost kind of across the business. And then from a go-to-market point of view, we do continue to improve the ROI of a lot of the programs that we run. And then as the environment gets a bit healthier and as we start to see these newer initiatives, play out, that should also have an impact on things like sales force productivity and that drives leverage as well and overall sales and marketing efficiencies.

Excellent. We're out of time. So we'll have to wait for Investor Day to [indiscernible].

That was good.

Thank you very much, Aaron and Dylan.

We'll have much more time then so.

Thank you.