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

Great. Well, thanks, everybody, for joining us this afternoon for day 2 of the Citi's Global TMT Conference. I'm Steve Enders, part of the software research team here. And with us for this session, very excited to have the team from Box. So Dylan Smith, CFO. I want to thank you so much for being here today.

Thanks for having me.

Maybe just to start, I think Box, I think you guys have been executing pretty well the past few quarters. I think there's been a continued acceleration. Maybe we can just start with what's been going on there? What's been driving that acceleration? And I guess, what have you done to enable that opportunity there?

Yes. So I would say the biggest driver of the acceleration we've seen and just delivered our fifth consecutive quarter of accelerating revenue growth is the momentum and overall impact from Enterprise Advanced, which is kind of the highest tier offering that we have introduced about 1.5 years ago into the market. And that comes with both at the higher end of the 30% to 40% price per user uplift, but also enables a set of new use cases that is driving seat expansion. And that's been a big shift versus what that seat expansion was even 18 months ago. And so that's what we've done to enable that is really just kind of driving Enterprise Advanced, honing in on those use cases, working with our customers to really make sure that we can communicate the value proposition. And if we get that time and opportunity, feel really good about where those conversations lead. And then I'd say the second piece that's kind of indirect dynamic that we're seeing is increasingly with AI becoming a top-down initiative from the Board, the CEO, CIO all the way down is Box is an enabler of not just our capabilities, but broader enterprise AI strategies because you hear it all the time, I don't have an AI technology problem, I have a data problem, or a change management problem as well, but we can help with that. But really on the data side is what we can do is because of the power of the platform is also make sure that we can help and accelerate enterprise readiness for their broader AI strategies.

Okay. No, that's great to hear. Maybe we can dig into some of the AI use cases that you enable and what you're doing for clients there. Anything that kind of stands out for what's been a reoccurring use case, what's repeatable and what you can kind of take moving forward and stamp that out across a vast majority of the customer base?

Yes. So look, a little bit different kind of industry to industry. But fundamentally, the component of Enterprise Advanced and kind of core of these really high-value kind of AI workflows that we're delivering for customers really starts with data extraction or metadata extraction, which is effectively pulling structured data out of unstructured content. That can show up as part of a contract life cycle management process where you're pulling out all the fields, renewal date, key terms, whatever else from contracts to a loan origination process, a client onboarding process, really just at-scale ingestion of a lot of files and then taking that information and then doing something with it, which is kind of part 2 that we see as kind of front and center in most of the kind of use cases that we're delivering, which is the automation from there. So okay, I have the information, have the insights, that's great, then what? And that might mean sending to compliance or legal, if something is flagged to review or just sending to the business owner to set up a task to sign off on or going back directly and sending a notification to the customer or whatever it might be is really the second piece of that. So it's really extract plus automate really makes the foundation of the use cases that we've seen customers adopting.

Okay. And when you think about the opportunity within the customer base, how do you kind of see those kind of use cases expanding? Or maybe you could just kind of like walk through how those -- how the Box Platform just kind of like progresses? And are we at a point where it's expanding wall-to-wall? How much more just opportunity do you feel like there is to capture in the installed base?

Yes. So the expansion, while we have some several examples, more than a dozen Fortune 500 customers, companies who are wall-to-wall on Box, in the significant majority of our customers, there's still a significant seat expansion opportunity on average, about 6x based on -- versus today's footprint. And that's where I think a lot of the use cases come in as well as one of the big focus areas is both in terms of moving workloads and kind of freeing up dollars for further Box investment is that kind of legacy displacement opportunity. So legacy enterprise content management tools in particular. which is a big focus, and we see big opportunity for even additional workflows where there are a lot of capabilities around the way that we can handle custom objects that aren't necessarily unstructured files to just some of the more bespoke workflow type capabilities are a couple of areas of the road map that we think will allow us to unlock more and more of that opportunity.

Okay. I do want to touch on the, I guess, legacy modernization and ECM opportunity in a bit. But maybe before that, I would like to talk about some of the, I guess, opportunities you might see around security right now. I feel like that's been very top of mind and in focus just in the broader tech landscape with everything from Mythos to some of the recent hacks that have been happening on the Agentic side. So I guess maybe kind of where are we in terms of our customers, enterprises, are they coming to you to help kind of deal with some of these security concerns? Or is that driving incremental prioritization for the Box capabilities right now?

Yes. For content security, absolutely. And we're very fortunate in the way that things have played out that if you think about what we've been building for more than 2 decades and the focus on security and compliance as a differentiator is just as relevant in a world with agents and actually more relevant than it is for humans. And that's because if you think about it, it's basically the exact same problems you'd be looking to solve or opportunities that we can address. But you think about instead of x employees, you now have an order of magnitude more agents running around and unlike relying on the just EQ and good nature of human beings, not to want to do anything too malicious with the content, sharing with people they shouldn't be sharing with accessing information they shouldn't have access to, et cetera, agents lack that capability or understanding. They just going to want to do whatever you tell them to do in the way that they think is the most efficient, effective way to get there. So having those airtight permissions, access controls as well as kind of monitoring for threat detection, et cetera, just becomes that much more important and relevant. And so absolutely top of mind for any customer we're talking to and increasingly differentiated that's standing out in those conversations.

Is it changing, I guess, the prioritization that CIOs and CISOs might have and maybe elevate some of the, I guess, demand environment for you all?

I mean, I'd say that ultimately, the demand is still driven by a lot of the use cases and AI and just kind of managing your unstructured content and having a data strategy, that is increasing, I think, in importance, having far more CIO-led conversations or even CEO, COO type conversations because of that. And then security is the reason that Box is further up in the consideration set as a result. I wouldn't say -- I mean, the reason that Box is so strong in terms of security generally still stems from a specific use case or set of use cases. that are kind of top of mind for that organization.

Okay. That makes sense. Maybe I'm going to ask a little bit about Box AI and kind of the Agentic strategy that you all have. Just maybe how do you think about the opportunity that agents enable for you all? And how do you think about first-party agents versus third-party agents and how that maybe comes together with the rubber meeting the road in terms of what actually gets put into practice for companies?

Yes. I mean, we think about kind of agents and that Agentic opportunity as effectively synonymous with the broader AI opportunity. We think about these kind of high-value and complex workflows, those almost inherently involve an agent or agents who are performing those tasks on a repeatable basis. replacing the work that would have been manual or done by a human, or that you'd ship off to a BPO or something like that. And now it's agents doing it. So those we view as kind of one and the same. And then in terms of first versus third-party agents, I mean, certainly, all else equal, we'd love for every agentic workflow to be initiated on Box for that to be the orchestration layer for Box to be the orchestration layer. But that was never the expectation. The reality is it's going to be a mix, right, where in some cases, it's going to be a Box, especially for content-centric workflows and where the data starts and then ends on Box. In other situations, it's going to make more sense for a customer to be in a different provider's platform or using the direct LLM as the interface. And we love all of those situations. And I think that's kind of naturally how the world is evolving is how does this fit seamlessly into kind of a user's workflow and day and what they're already doing. And I think kind of that interface is probably unless that provider kind of drops the ball is probably going to be the interface that it makes most sense to kick off some of those workflows.

Okay. That makes sense. And then how do you kind of think about the, I guess, monetization opportunity for agents? And is there, I guess, a difference in terms of those first-party versus third-party agents in the monetization angle?

Yes. So things are evolving rapidly. As of now, we think about that monetization of those agents as being in the form of what we call AI units, which is effectively kind of token consumption that those agents are kind of driving. And so whether that's first or third party, that would be the case. I mean, in a lot of cases, that consumption element is heavier for those first-party agents and use cases, but there are often kind of tokens being consumed on the Box side by customers in some of those third-party use cases as well.

Okay. I do want to keep those interactive. So if there's any questions in the room, we want to make sure to get to those. I have one in the back right here. We have a mic coming. So give one second. Thank you.

I guess Box has been seen as like an app company. So if we were want to think about Box as infrastructure company, what do you think Box needs to deliver from both product and positioning perspective to be valued as infrastructure software company?

Yes. I mean the reality is that we do, I think, already offer the capabilities of kind of that being part of the infrastructure layer. I mean, literally, the place that you're managing, securing all of your unstructured content and then building on top of that, that's what we do. So I would say you are free even today to be thinking of us as an infrastructure company. But at the same time, we are also a core part of the application layer. And so it's a bit of both and don't want to kind of muddy things or do a massive pivot in terms of messaging when fundamentally, what we do is continue to evolve and kind of strengthen our capabilities in both areas. But do think that certainly as an enabler of broader AI initiatives that I was talking about a little while ago, that is much more as an infrastructure provider. But if you think about, okay, we are now have the capabilities to replace a contract life cycle management system, or to kind of orchestrate a lot of those workflows we're talking about, that really is -- we view more on the application side. So long-winded way saying, effectively, I think we do both already. We're going to continue to expand our capabilities at both levels, but do think that the capabilities that we offer as an infrastructure provider are certainly more and more appreciated just given the ways that we can then kind of enable the broader AI workloads that companies are looking to implement.

Thanks for that question. I guess maybe similarly, I think there's been a lot of talk about legacy transformation and modernization and customers looking to move off of, let's just call it, the incumbent or legacy ECM vendors and move that to the cloud. I think that's probably been slower than what we would have expected historically. But just, I guess, what unlocks now with AI? And how do you kind of think through that versus the data gravity concerns that have maybe limited that historically?

Yes. I mean I think realistically, this is still going to be a multiyear journey and transition. Just given, I mean, to your point, there's data gravity, inertia, a lot of these systems have been in place for literally decades despite not innovating over that entire time period. But you have high-value workflow that's -- or use case that's been sitting there. And it just historically has not been a big priority to change. If you think about because the company was trying to move and capture a mobile opportunity or move to the cloud before that or whatever, maybe an ERP implementation, I mean, whatever it might have been, the reason that it's a lot more top of mind and the reason that kind of unstructured content is actually a strategic initiative for CIOs now more so than it ever been in the past -- than it's ever been in the past 20-plus years is because AI and that fundamentally, if your data is siloed and especially if it's siloed and sitting in fragmented on-premises systems, you just can't access that data and get the capabilities and unlock the use cases that you could with a solution like Box. So we're hearing not from customers that, okay, this thing that -- it's probably time and catalyzing those conversations, but with the SI ecosystem as well who might have put those systems in place and are responsible for that kind of that implementation and that maintenance, and they're hearing from their customers and then reaching out to us to help their clients modernize. I think that's really what's changed is instead of it just being an annoying painful thing that was then offset by inertia, now it's literally a gating factor to be able to actually execute an AI strategy.

Okay. Maybe it's a good time to ask about the SI opportunity and the partners. Like I think over the past 1.5 years, 2 years, it feels like you've really started to lean more into that go-to-market motion. I guess 2 questions. What does that unlock for you all in terms of the opportunities that it creates and what it brings incrementally to? And secondly, just where are we in terms of that journey for building out those partnerships and the SIs and partners driving opportunities to you guys at this point?

Yes. So I think in terms of the -- what it unlocks, it's really a couple of main things. First of which is just customer reach and extending the reach of our direct sales force. because with several hundred kind of quota-carrying AEs, we can't possibly be having the type of conversations and talking to a number of customers where Box is a good fit. And so it helps extend the reach of our sales force and provide some kind of go-to-market, call it, leverage in the process. But also with those SIs, they tend to be very close to that business' challenges, have the technical expertise and the lifeblood of their business is a lot of these pretty complex implementations that require a lot of handholding, a lot of development efforts in many cases as part of broader kind of digital transformation initiatives is just one example. So they can also help go in and customize those solutions, whether it's for specific geographies or verticals or whatever else, and they have that expertise at a scale that's much greater than we have internally. And so it's not just the reach, but also actually the capabilities to customize and make customers successful on Box is really kind of what they bring to the table. And then in terms of -- I don't know how this translates to an inning point of view, but pretty early in that opportunity, and we are starting to see traction starting with some of the regional players, but also now with some of the large global systems integrators. But very early days in terms of the type of kind of impact that can have on our business overall.