Box Inc

NYSE:BOX

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to a Alice Lopatto, Investor Relations, you may begin your conference.

[Alice Lopatto, executive]

Good afternoon, everyone, and welcome to Box's Second Quarter Fiscal 2019 Earnings Conference Call. On the call today we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions.

Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investor. Our webcast will be audio only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle @boxincir.

On this call, we will be making forward-looking statements, including our Q3 and FY '19 financial guidance and our expectations regarding our financial performance, including revenue and billings for the remaining quarters of fiscal 2019, timing of and market adoption of our products, our market size, our operating leverage, our expectations regarding maintaining positive free cash flow and future profitability, our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets and expected timing and benefits from our new products and partnerships.

These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, August 28, 2018, and we disclaim any obligation to update or revise them should they change or cease to be up-to-date.

In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.

Also, please note, we updated our financial disclosures to reflect our adoption of the new ASC 606 revenue recognition standards under the modified retrospective transition method. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a reconciliation of our financial results under ASC 606 compared to ASC 605.

With that, let me hand it over to Aaron.

[Aaron Levie, executive]

Thanks, Alice, and thanks everyone for joining the call. We had a solid second quarter of wins and expansions with leading organizations like Canon, JLL, Nationwide and Société Générale, ending Q2 with more than 87,000 total paying customers globally. Cash flow from operations improved by more than $8 million year-over-year to negative $1.3 million, demonstrating our continued focus on probability. Revenue was $148.2 million, up 21% and ahead of our guidance, and billings grew 17% year-over-year to $162.8 million.

Beginning this year, we increased our focus on strategic solution sales and building deeper relationships with our customers. We are already seeing traction with our new strategy in Q2 as we closed 50 deals greater than $100,000 versus 40 a year ago; 11 deals over $500,000 versus 8 a year ago; and 2 deals more than $1 million versus 4 a year ago; with a strong pipeline of 7-figure deals expected in the back half of the year.

In Q2, we had add-on products like Box Governance, Zones, KeySafe and Platform attached to 2/3 of our 6-figure deals. Our leadership in cloud content management continues to accelerate with a wide range of enterprises in the most regulated industries adopting Box for their digital transformation.

As we've talked about previously, we're focused on 2 major objectives this year. The first, innovating in cloud content management to power how companies work and run in the digital age, and advancing our global go-to-market efforts so that we can reach more enterprises around the world and make them successful with Box. In Q2, we continued to make solid progress on both of these objectives.

Starting with product innovation. We made several enhancements to our cloud content management platform that position us to help the world's largest enterprises digitize their workplace and business processes. To power secure collaboration in a modern digital workplace, we announced new integrations with best-of-breed applications to reinforce Box as the central hub for content in the enterprise. Box's unique open and neutral platform enables deep integrations with more than 1,400 applications, including major partners like IBM, Google, Microsoft and Apple.

At Google Next, we unveiled an all new set of G Suite integrations that allow Gmail users to attach Box files and download e-mail attachments to Box without having to leave the Gmail interface. And we also demonstrated new integrations with Google Docs, Sheets and Slides that will be made available to customers later this year.

Earlier this month, we announced the general availability of our new integration with Salesforce Quip. And just last week, we announced that we are partnering with ServiceNow to integrate Box content into customers' business processes even further, which is one of the most requested integrations from our customers in recent years.

Enterprises today need a single-source of truth for content across their end-user applications and back-end systems, which can only be delivered by a neutral platform like Box. And at BoxWorks, we will showcase a number of new innovations that will make best-of-breed apps even more central to the Box experience.

Next, to enable organizations to reimagine and digitize their business processes, Box brings the power of workflow and AI to enterprise content. At BoxWorks, we will provide updates about how enterprises can automate their collaborative tasks and events in Box to help streamline their business processes with cloud content management. Over the next several quarters, you will continue to see us deliver expanded automations functionality, not only natively in Box, but also through our ecosystem of partners.

Looking ahead, our neutral and open platform architecture allows us to partner strategically with a wide range of technology leaders like IBM, Microsoft and Google to leverage their advanced AI and machine learning capabilities in Box. Driven by the demand we're seeing from our beta program, we expanded the private beta of Box Skills in June and we're continuing to see a growing array of use cases for Skills across every industry. For example, a retailer is using our image intelligence skill to tag and organize large volume of images to drive marketing campaigns, and the city council is using our video intelligence skill to transcribe council meetings. At BoxWorks, we'll be sharing much more about our Box Skills road map.

Finally, our enterprise security features and compliance capabilities continue to be a critical differentiator for Box and a leading reason why customers choose Box to move to the cloud. For example, in Q2, a top global investment bank expanded its deployment with Box in a 7-figure deal, purchasing Box Governance and KeySafe products in addition to Platform. They selected Box over SharePoint because of the first-class user experience and security features and their need to build customer-facing applications. At BoxWorks, we'll be sharing our vision for the future of security leveraging Box's native machine learning capabilities to help enterprises keep sensitive content and users protected.

All of this innovation in cloud content management is continuing to be recognized by the market with Gartner naming Box a leader and the most visionary company in the Content Collaboration Platform's Magic Quadrant this past quarter. This marks the fifth consecutive year that we were named a leader in this Magic Quadrant with Gartner remarking that our vision for digital transformation is an end-to-end story with a clearly planned product road map, extending through intelligence, enhanced user experiences and enterprise-oriented governance, protection and oversight.

Turning to our second major objective. We want to reach and enable every business in the world through our global go-to-market efforts. This means growing average contract value or ACV, driving deeper relationships with our customers and adding new logos through international growth and our partner ecosystem. To help grow average contract value, we positioned ourselves to deliver a focused solution sales strategy in FY '19. We set out to change how we're selling through improved training and enablement, improved sales processes and operational rigor to drive better deal execution and implemented sales compensation plan changes to align incentives more closely with our strategy. In the first half of the year, this change in selling led to a greater increase in add-on product sales, big deal growth and paid user retention. With the recent changes we made across our go-to-market strategy and execution, we are beginning to gain momentum with big deals, and we'll see even more in the second half of this year.

As for International, we continued to see strength in Japan; and earlier this month we moved into a new office in Tokyo, expanding our presence and demonstrating our commitment to Japanese market. And in EMEA, to drive more consistent execution across all regions, we welcomed Chris Baker, our General Manager to head our European division. Chris formerly from SAP Concur, Salesforce and Microsoft brings experience building vibrant, high growing businesses across EMEA, which will help us in achieving our goal of expanding Box's presence in this key region.

Our reseller channel and technology partners also remain critical to our go-to-market strategy. And in fact right now we have more than 300 partners who were at our partner summit at BoxWorks sharing best practices with each other and learning how to extend the value of Box even further in their markets around the world. At BoxWorks this week, we are excited to host thousands of customers and partners along with the investment community at our financial Analyst Day on Thursday, August 30. During BoxWorks, we will share our vision for the future of work and showcase our latest product developments and strategy. On day 1, we will share with the most comprehensive set of product announcements we've ever made as well as discuss how we're working with partners like IBM, Slack, ServiceNow, Google, Apple and others. On day 2, Jeetu is hosting an incredibly rich keynote that is built around Box customers like State Street, SunTrust Banks, Sephora and others who are doing some incredible things to transform their businesses into digital age.

To wrap up, we are excited about the future of cloud content management. And as we grow into a $1 billion company and beyond, we are putting the right building blocks in place to ensure that we grow consistently and sustainably with strong underlying economics. The market for cloud content management and collaboration is more than $40 billion. By continuing to innovate on core Box products, expanding our partner ecosystem and building strategic relationships with our customers, we're in a tremendous position to help enterprises in every industry power their digital workplace and drive digital business transformation.

I hope to see many of you on Thursday, and if you're not able to make it, definitely tune in for tomorrow's keynote.

With that I'll hand it over to Dylan.

[Dylan Smith, executive]

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. As Alice noted, GAAP to non-GAAP reconciliations are in the presentation that is available on our IR website. The financial measures I'll be discussing on this call are non-GAAP unless otherwise noted. Also, having adopted ASC 606 for this fiscal year under the modified retrospective transition method, all Q2 year-over-year comparisons are made against Q2 results a year ago which were under ASC 605, unless otherwise stated.

In Q2, we drove solid top line growth, while also delivering significant cash flow improvements and driving continued operational efficiencies. We achieved revenue of $148.2 million in Q2, up 21% year-over-year, which would have been roughly 2% higher using like-for-like comparisons under ASC 605. 24% of Q2's revenue came from regions outside of the United States compared to 21% a year ago, demonstrating our increasing global penetration and market opportunity. Second quarter billings came in at $162.8 million, representing 17% calculated and adjusted billings growth year-over-year. If we exclude the impact of our previously discussed enhanced developer fee, year-over-year billings growth would have been in the low 20% range compared to the reported 17%.

As Aaron mentioned, our deeper focus on solution selling this year has been yielding positive initial results. We're seeing higher add-on product attach rates year-to-date associated with increasingly robust Box implementations. As we mentioned last quarter, we continue to expect most of these larger deals to close later in the year, predominantly in Q4. Additionally, due to several customer-driven multi-year prepayments in Q3 of last year, our calculated billings growth rate in this upcoming Q3 will be against a particularly tough comparison. As such, we expect our calculated billings growth in Q3 to be in the high single-digit range and in Q4 to be in the mid-20s. For both the full year and second half of FY '19, excluding the impact of the enhanced developer fee, we still expect calculated billings growth to be roughly in line with revenue growth.

Deferred revenue was strong at $301.5 million, up 25% year-over-year. As Aaron noted, we continue to win large enterprise deals, including 50 deals over $100,000 in annualized contract value versus 40 a year ago, 11 deals over $500,000 versus 8 a year ago, and 2 deals over $1 million versus 4 a year ago. 2/3 of our 6-figure deals included at least 1 add-on product and our partners played a role in nearly 40% of our 6-figure deals. This quarter, 20% of our 6-figure deals came from international markets. While we're pleased with the continued strength we're seeing in Japan, in Q2, we saw softness in EMEA. As Aaron mentioned, we recently hired a new GM of EMEA to drive more consistent execution in the region.

Turning to margins. Non-GAAP gross margin came in at 73.7% versus 75.5% a year ago, and 74.4% last quarter. As planned, we're making some upfront investments in our data center footprint this year based on the demand we are seeing and we continue to expect gross margin for the full year of FY '19 to be in the 73% to 74% range. Due to the timing of these data center investments, we expect gross margin in Q3 to be in the range of 72% to 73%. It's important to note that price per seat has remained strong and in H1 was up roughly 30% from where we were 2 years ago.

Q2 was another successful quarter of driving operational efficiency. Sales and marketing expenses in the quarter were $67.0 million, representing 45% of revenue, an improvement from 53% in the prior year. This was primarily driven by improved go-to-market efficiencies and also includes a roughly 3% benefit related to the adoption of ASC 606. The ongoing cost to support our free user base, which is a sales and marketing expense, came in at under 3% of revenue in Q2. We now have 61.6 million registered users, of which 11 million are paid.

Next, research and development expenses were $30.4 million or 20% of revenue in line with a year ago as we scaled our engineering team and made significant enhancements to our products. This included the continued development of Box Skills as well as the expansion of our security and workflow capabilities.

Our general and administrative costs were $18.3 million or 12% of revenue compared to 15% in Q2 of last year. We expect to drive continued leverage in G&A as we benefit from greater operational excellence and scale. Our focus on operational efficiency drove our Q2 non-GAAP operating margin to a solid 8 percentage point improvement year-over-year, coming in at negative 4% versus negative 12% a year ago. As a result, non-GAAP EPS came in at negative $0.05, an improvement from negative $0.11 a year ago.

One of the key elements that makes our business model so powerful is our strong customer retention. Our churn rate was roughly flat with last quarter and remains best-in-class at 4.5% on an annualized basis. Our net expansion rate on an annualized basis was 12%, primarily driven by strong seat growth in existing customers and cross-sells of our add-on products. As such, we ended the quarter with a net retention rate of 108%.

As a reminder, these are trailing 12-month metrics and don't fully reflect the trends that we're currently seeing in our business. Our net retention rate has been stabilizing as our in-quarter churn rate has been improving over the past couple of quarters, and we have strong visibility into our pipeline of customer expansion in the back half of this year.

Let me now move on to our balance sheet and cash flow. We ended the quarter with $203.7 million in cash and cash equivalents. We delivered cash flow from operations of negative $1.3 million, an improvement of more than $8 million versus a year ago. In Q2, total CapEx was $3.3 million versus roughly $1 million a year ago. Roughly $2.2 million of this CapEx was related to facilities build-outs. Capital lease payments, which we factor into our free cash flow calculation were $5.8 million versus $4.2 million a year ago. We still expect CapEx and capital lease payments combined to be 6% to 7% of revenue for the full year of FY '19.

Finally, we had negative $10.3 million of free cash flow in the second quarter, an improvement from negative $15.0 million a year ago. We expect our year-over-year free cash flow margin improvement in the back half of this year to be fairly consistent with the improvement we demonstrated in H1. However, we expect this improvement to be weighted toward Q4. We also expect to generate positive free cash flow in Q3, Q4 and for the full year of fiscal 2019.

With that, let's now turn to our guidance, which we are providing under ASC 606. For the third quarter of fiscal 2019, we are setting revenue guidance in the range of $154 million to $155 million. We expect our non-GAAP EPS to be in the range of negative $0.08 to negative $0.07, and for our GAAP EPS to be in the range of negative $0.30 to negative $0.29 on approximately 142 million shares.

As in prior years, our BoxWorks conference will have an impact on sales and marketing expenses in Q3 of roughly $7 million, in line with last year. We remain committed to delivering our first quarter of non-GAAP profitability in Q4 FY '19.

For the full year of fiscal 2019, we expect revenue to be in the range of $606 million to $608 million. On our path to $1 billion in revenue, we're on track to reaccelerate our bookings growth rate this year and our revenue growth rate next year. Our new solution sales strategy is progressing nicely, demonstrated by our large deal counts and improving add-on product attach rates. As we're still early in the evolution of this strategy, we're not pinpointing the specific quarter in which we'll cross the $1 billion revenue run rate. However, we remain committed to surpassing $1 billion in revenue for the full year of fiscal '22.

We expect our FY '19 non-GAAP EPS to be in the range of negative $0.18 to negative $0.16. Our GAAP EPS is expected to be in the range of negative $1.02 to negative $1 on approximately 142 million shares.

Before I conclude, I want to remind everyone that will be hosting an Analyst Day session, including Q&A with our executives at BoxWorks on Thursday, August 30.

In summary, Q2 was another quarter of solid progress on our strategy of solution selling. Our large cloud content management market opportunity and best-in-class customer economics position us nicely for long-term growth on our path to $1 billion and beyond.

With that, I would like to open it up for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Rob Owens from KeyBanc Capital Markets.

[Robbie Owens, analyst]

I wanted to focus a little bit on the 50 deals over $100k. And I think this is much better than you saw at any point during the first 3 quarters last year. I'm curious, is this mainly coming from the installed base? Are you starting to see some of your initial deals scale up? And what does ACV for new customers look like if you were to compare versus prior years right now?

[Aaron Levie, executive]

Sure. So we are seeing a pretty healthy mix on that metric across new and existing customers. So in terms of the overall business, including the large deal outcomes, about 2/3 of those bookings as well as our larger deals are coming from our existing customers. At the same time, we're continuing to see the trend where, in a lot of cases, we are seeing, especially in the $500k-plus deal segment, more of these coming from new customers who are confident and often out of the gate buying several products. So I would say that it's definitely being driven less as a shift in the new versus existing customer dynamic and more being fueled by more customers off the bat being comfortable with buying multiple products. And as we talked about a big percentage of those larger deals, about 2/3 are including at least 1 additional product.

[Robbie Owens, analyst]

Great. And then additionally, could you address the softness in EMEA a little bit more. I mean, with GDPR and other types of regulations. And some of Box's capabilities with Zones and the like, a little surprising that you would be seeing weakness at this point. So maybe a little bit more color, and when you would expect that to turn around?

[Aaron Levie, executive]

Yes. So in the first half, we've been in a little bit of a leadership kind of rebuild mode. We just brought on a new head of EMEA, as I mentioned, that we feel very confident and can really kind of help us scale up the growth there. I think we're also seeing in our early markets that we're investing in, like Germany, it's still a little bit early, and so we're not seeing the results, that, I think, we'd like to be seeing at this stage. But -- so frankly, they are a little bit more back half loaded than we would have liked. But overall, we still have complete confidence in the market. I think things like GDPR, a lot of the data privacy, security challenges that we see coming out of EMEA are positioned directly for the strength of our platform, and now it's really about sales and go-to-market execution in these markets, and that's what we're investing in right now. So certainly, looking forward to being able to share better results, especially in kind of the Q3 -- Q4 time frame.

[Operator]

Your next question comes from Phil Winslow from Wells Fargo.

[Philip Winslow, analyst]

Aaron, just to build on that last question about the sales force and just go-to-market. Wondering if you could give us a sense for just sales productivity for the first half versus how you're expecting it to ramp in the second half, because obviously you guys made a lot of -- pretty extensive changes here in Q1 throughout the first half. So how are you feeling going into the second half? How are you kind of gauging sort of like it's the second derivative of productivity as we look Q1, Q2 and as you're thinking about those, second half, and then I just have a follow up for Dylan on that?

[Dylan Smith, executive]

Sure. So this is actually Dylan, and would say that we've been pretty pleased with the way that the reps are performing overall from a productivity standpoint. So we're actually seeing improvement overall as well as in most segments in terms of ramp for that productivity versus where we were a year ago. That said, overall productivity across the sales force is roughly flat versus where we were last year, largely because a greater percentage of our reps are ramping versus a year ago or 2 years ago. So the overall trends are looking good and we've been building even for our ramping reps a pretty healthy amount of pipeline. So feeling pretty good about how those reps are ramping overall. And as mentioned earlier, because of just the pacing of hiring and then how long it takes reps to become fully productive in ramps, which is about a year for our field-based sellers, we're going to have a much greater percentage of those folks we hired throughout the course of last year starting to achieve their full productivity in the back half of this year.

[Philip Winslow, analyst]

Got it. And then just a quick follow-up, exiting the first half, what was the quota-carrying rep number? And then actually a follow-up for Aaron instead. Aaron, you talked -- you mentioned Relay and Workflow, that was launched in November of last year. I mean, obviously still pretty early and not giving that products -- or that services life cycle, just considering when it launched. How are you feeling about just as you look at the pipeline with that for Relay into the second half and kind of where you are versus your expectations at this point of life cycle?

[Aaron Levie, executive]

So first of all, I'll just start by [ brief leading ] on the AE headcount question and we will give the exact numbers on an annual basis on our Q4 call like we normally do. But I would say that, as a reminder, we had said we expect to grow our quota-carrying headcount by roughly 20% this year and we are on track to deliver against that target.

[Dylan Smith, executive]

And on the Relay front, obviously, as we shared, that's a brand-new product for us that started rolling out at the end of last year. We've seen tremendous amount of demand for bringing more and more workflow and automation into Box, more customers want to be able to drive their business processes with Box. So I think we're pretty happy about the ramp up that we've seen with Relay. That is a jointly developed product. So we think about that obviously a little bit differently than some of the core products like Zones and Platform and Governance. And this week, we will be making some, I think, exciting announcements and updates around general business process automation directly in Box. So how do we continue to help customers automate the events and tasks and the collaboration that's happening in Box both with Relay as well as additional native functionality in the service. So we'll be sharing some updates tomorrow that we're really, really excited about. And again, all of this goes toward how do we get deeper and deeper within a customer's environment and really begin to reimagine and power their business processes in a completely different way. And so where we're really trying to go with the market is a lot of spaces that previously you couldn't bring automation because it was either too expensive, it was too manual of a business process, and that's what we're really looking toward in terms of where we want to take our technology next.

[Operator]

Your next question comes from Melissa Franchi from Morgan Stanley.

[Melissa Gorham, analyst]

Aaron, you were talking about really good growth and average contract value. We're seeing really good growth in large deals. If I look at billings, billings growth is still a little a bit slower than what we saw last year, even normalizing to the developer access fee. So I'm just wondering, is there any sort of headwind that maybe we just don't have visibility into, that maybe is kind of depressing billings growth to a certain extent?

[Aaron Levie, executive]

Yes, I think the -- maybe the biggest change in dynamic is, certainly, we are seeing a little bit more of a ramp toward the back half of the year, especially in Q4. As we are driving more and more of a solution sale that's leading to, certainly, bigger deals, which we're incredibly excited about, but those deals do take longer to play out in some cases and they tend to align more to the budget cycles of customers as well as the quota cycles within the sales force on our end. So that's leading us, obviously, to a strong ramp up in Q4. Dylan mentioned we're expecting mid-20s percent billings growth in that time period. And I think that will give you a pretty clear indication of how we expect to see the further reacceleration going into next year, which is what we're -- from a revenue standpoint, which is what we're looking forward to seeing.

[Melissa Gorham, analyst]

Got it. Okay. And then I just wanted to follow up with Dylan on gross margins. The commentary on gross margins, it's helpful in terms of what to expect for the rest of the year. But as we look beyond FY '19, should we expect to see improvements in gross margins from here that business may be below? And how we should think about that in light of the professional services business? And if that's going to increase as a percentage of the mix?

[Dylan Smith, executive]

Yes, So I would say still would expect to improve the overall gross margins over time and do it -- to be in that 75% range by the time we're at $1 billion revenue scale. As it relates to the Box Consulting margins, that is a bit of a headwind that's factored into to expectations we've set. I mean, if it ends up -- and Box Consulting ends up being a much higher percentage of our overall revenue, that could be a bit of initial headwinds. But at this stage, because of a lot of the other efficiencies we're driving the business, continued strength and price per seat as mentioned, that's about 30% so far this year versus where we were a couple of years ago. We still feel good about continuing to improve those margins once we -- gross margins once we scale into the extra capacity we've been building out on the data center side.

[Operator]

Your next question comes from Richard Davis from Canaccord.

[Richard Davis, analyst]

One of the things that I think could be an interesting vector for you guys is what's been called BPM or workflows. I was intrigued you guys had an announcement of a partnership or a relationship with ServiceNow. And so could you like talk a little bit about how you see that relationship evolving and where you see the demarcation between your workflow and their workflow because fundamentally, that's what they are? But how do you guys make each other better by that partnership?

[Aaron Levie, executive]

Yes, thank you. Yes, so we just announced a partnership with ServiceNow last week, and we'll actually be sharing more about that partnership tomorrow on -- in the main keynote at BoxWorks. And fundamentally, when we go into our customers' environments, they want us to connect content management from Box more deeply into their underlying business processes. And we see that as a -- not a one-size-fits-all type of approach. There's going to be multiple types of systems our customers are working from. And one of those systems that we're seeing more and more automation get powered by is ServiceNow obviously. Everything from IT help desk to more customer-facing experiences to new CRM type of experiences. So we want to make sure that the content from Box can easily be integrated into those workflows. So you have one source of truth for content, but then ultimately be able to route content through a business process or attach content into an existing business process in the way that makes sense for our customer. As it relates to our own functionality, and some of the functionality we'll be talking tomorrow at BoxWorks, we see our focus as when that automation or workflow is -- a significant portion of it is just about content-driven workflow, so this might be a contract review, this might be a marketing asset management use case. It might be a -- again, moving content through the life cycle inside of an organization. That's functionality that we'd like to be able to have natively within Box, so our customers can very easily begin to automate more of those business processes. But when you zoom out and you think about the full business processes our customers have that go beyond content, we want to make sure we're plugging into all of the different services and systems that they might already been using, which really drove the ServiceNow partnership that we're incredibly excited about.

[Operator]

Your next question comes from George Iwanyc from Oppenheimer.

[George Iwanyc, analyst]

So Aaron, building on the automation efforts, can you give us a sense of the type of feedback you're getting for the Skills product and how the use case is expanding at this point?

[Aaron Levie, executive]

Yes. So I think we sort of see this potent combination of on one hand, you have all of this unstructured information in Box in the form of documents and files and media assets. And we want to help you capture the insights in the underlying information that's inside of that content, and the only way to really do that at scale is with machine learning or AI. So that's obviously where Box Skills comes in. And that could be used for a variety of use cases, one being able to just instantly search all of your data. So now I can search within videos, I can search images, and so I can actually begin to understand more about the content that I have via search or discovering that content. But another great use case is really being able to automate business processes, leveraging the unstructured information once it becomes structured. So you can imagine a document management process, where you have unstructured documents or contracts or financial data and you want to be able to pull out the key meta data variables from that content and then trigger a business workflow or a business automation based on the data that's inside of that document. And so this combination of workflow or automation and being able to extract insights and data from content using machine learning or AI, we think the combination of those 2 capabilities becomes incredibly powerful for being able to do business process automation, yes, in the digital age. So at BoxWorks, we're going to be highlighting how these technologies come together. Obviously, it's going to be more in kind of the next year time frame, when our customers are able to put both of those technologies to work. But we are excited to be able to be announcing some updates to Skills specifically that will be happening within this fiscal year to help our customers take advantage of that technology across their data. So we're seeing a tremendous interest in being able to bring leading AI services and machine learning services to content in Box. Our open platform and framework, we think, is an incredible competitive advantage because of our neutral approach. And we're very excited to see how customers continue to leverage that, especially it becomes generally available and past our private data.

[George Iwanyc, analyst]

All right. And is it safe to say this is more of a calendar year 2019 impact on sales and not much included in the second half of this fiscal year?

[Aaron Levie, executive]

Yes, I mean, as we've signaled, the way to think about Skills generally is, we think, it provides a very meaningful catalyst for customers to move more of their data and business processes into Box. From a licensing standpoint, this is very similar to our platform model, it will be heavily driven by consumption. So -- but the overall strategic position is to help customers move more of their data into Box and help them understand it and structure it. So I would generally think about it as a catalyst for customers adopting Box generally and a retiring legacy systems or being able to automate previously manual business processes and that is ultimately the driver that, we think, that will create. Obviously, when it becomes generally available, that will reinforce the customer's ability to start to do more meaningful things with it. But we are already seeing it be a catalyst for certain customers coming on board and that will be the case even more so next year.

[George Iwanyc, analyst]

All right. And just one last question. On the competitive front, can you kind of give us an update on what you're seeing with the kind of coopetition partners like Microsoft and Google and how much pressure and how much opportunity is coming from those channels?

[Aaron Levie, executive]

Yes. So both of those companies, Microsoft and Google, will be on stage tomorrow and Thursday at the conference. So we're pretty excited about the partnerships that we're continuing to drive with Google, with Microsoft, obviously with other noncompetitive companies like IBM, et cetera. In both of those cases, we are working on deepening the integrations we have with their productivity suites, with their cloud services, with their cognitive capabilities. And we're going to be making some, I think, meaningful and exciting updates, again, this week around both of those partnerships, and in particular, actually Google, that we kind of highlighted a little bit at Google Next conference in their cloud conference, but tomorrow we'll be sharing some really exciting updates, that, I think, our customers will be -- will find to be very compelling around the interoperability between Box and Google Suite. But overall, we're very happy with the partnerships. Obviously, we have a different philosophy from a content management standpoint than some of the bigger companies, especially Microsoft. We fundamentally believe that customers should have one source of truth for content as opposed to having disparate technologies or tools that's all file sharing or collaboration or document management. We think all of that should be in one platform, and that's our strategic position as a company. But when we zoom out and look at the $40 billion to $45 billion market that we're going after, we think, the vast majority of those dollars are up for grab as we move from the on-premises world to the cloud, and we're really focused on continuing to reinforce the strength of our competitive position. And again, just the -- though maybe annoying about reinforcing this, but at BoxWorks, you're going to see a set of announcements, that, we think, are unparalleled from a technology and product standpoint that will get even more customers to see how differentiated the platform is and what cloud content management really is all about.

[Operator]

Your next question comes from Mark Murphy from JPMorgan.

[Mark Murphy, analyst]

So Dylan, I'm curious. I think I have a bit of a bad connection, I might not have heard everything you said perfectly. But did the language change a bit on the time frame to reach the $1 billion run rate because I -- in my notes, I had thought previously it was the second half of fiscal '21, and I believe you now said that you're not calling out a specific quarter to get there, but that it would be over $1 billion in revenue in fiscal '22. And I think if we pencil that out a little bit, again, if I heard it correctly, it sounds like it's about a 6-month push out on that time frame. So just wanted to try to clarify that?

[Aaron Levie, executive]

Yes, this is Aaron. What we're moving away from is not pinpointing the specific quarter in which we expect to cross the $1 billion revenue run rate, not sort of changing the overall message around surpassing $1 billion revenue for the full year, which is, obviously, FY '22. So I wouldn't necessarily move the numbers around by 6 months or what you're kind of emphasizing. What we've seen is given the dynamics and the early success, obviously, of our updated go-to-market strategy, but also given the drivers of things like add-on product sales or big deals, international growth, the solution selling overall and the dynamic nature of that, we didn't want to pinpoint the specific quarter that we expect to cross the -- that revenue run rate. However, we are committed to and definitely going to be driving $1 billion in revenue for the full year of FY '22. And obviously, as we get closer to that and we get more obviously near-term data, we'll be much more clear about that run rate.

[Mark Murphy, analyst]

Okay. But so just to clarify, the prior commentary about reaching that run rate in the second half of fiscal '21, are you rescinding that or does that still stand?

[Aaron Levie, executive]

Yes, so we're -- what we're really not doing is just specifying the quarter in which we expect to cross that. But, certainly, in the second half, that's completely possible. What we're trying to do is avoid too much focus on the specific quarter in which we cross that revenue threshold. Obviously, again, things like the seasonality and deals, puts and takes in terms of the solution sales and add-on products, we are moving back from the specific quarter that we've been talking about the growth rates, but ultimately, recommitting to the $1 billion in revenue for the full year of FY '22 and reaccelerating revenue growth next year and beyond. So we are -- we're seeing really, really good indications early on right now, especially coming in the second half, that we will see that reacceleration in the next fiscal year in FY '20.

[Mark Murphy, analyst]

Okay. Good to hear that confidence. I wanted to ask as well the commentary about -- perhaps I interpreted incorrectly, but Q3 being a tough billings comp, I'm just struggling a little to see that in numbers. I -- in our model, I think the billings last year were sequentially flattish in Q3. It actually looked a little subseasonal last year. And so could you just explain the -- what is the dynamic where that -- where the billings growth is going to be a little bit depressed in Q3?

[Aaron Levie, executive]

Yes, so I would say a couple of things. The first is on the overall tough comparison component. It really is -- in terms of the deals, didn't see anything particularly out of the ordinary in terms of the kind of Q2 to Q3 sales volume. But what we did see was Q3 of last year, the highest percentage of overall bookings and billings coming in as multi-year prepayments when our customers chose to do that. And so that's what created a roughly 4% delta between calculated billings and adjusted billings. So our calculated billings outcome was 26% growth last year -- in Q3 of last year versus 22% in adjusted billings. So that's really the biggest thing to note in terms of the tough comparison, more about the payment durations versus the actual strength of Q3 as a quarter, which was pretty ordinary. And then the other thing that just kind of depresses the overall growth rate is what we talked about -- which is really around the seasonality and when we expect a lot of the large deals in the back half of the year to fall. And while we still should see pretty solid progress in terms of those large deal outcomes in Q3, we're expecting most of those deals to land in Q4.

[Operator]

Your next question comes from Greg McDowell from JMP Securities.

[Greg McDowell, analyst]

I specifically wanted to ask about the softness in EMEA that you saw in Q2 and maybe if you could just discuss what type of softness was it. Was it across the entire region? Was it specific to a few countries? And just what exactly is going on in EMEA that caused the softness and the leadership change?

[Aaron Levie, executive]

Yes, so just to kind of reiterate some of the earlier message. The -- we did make a leadership change, where we have a new leader coming in that started in August. So really for the second half of the year. We were doing a search for a number of months throughout the first half of the year. So that kind of left us in a position without driving the execution to the level that we would normally see or like to see. And then an additional component is in some of our more emerging markets within Europe, especially Germany, we haven't seen as kind of quick of a ramp-up as we'd like. However, we are seeing strong pipeline of big deals in Germany. But again, just given the nature of those larger transactions, they do take more time to mature through the sales cycle, which is why we're seeing that as a little bit more of a back half and especially kind of Q4 market for us. So we kind of diagnosed the situation pretty holistically. We're really confident in the leadership situation right now. And we'll obviously keep everyone updated around the market. But overall, just the performance wasn't up to the level that we wanted. In return, however, we -- we are seeing broadly very strong international traction. Japan has continued to drive really, really great results for us. And we do have other sort of emerging markets, at least, in our business model like Australia, Canada and other regions that we see -- that will likely come in strong for the second half of the year. So that's a little bit about the specific EMEA performance. But overall, we're really happy about where we're taking our international execution.

[Greg McDowell, analyst]

That's helpful. And one quick follow-up, I wanted to ask about price per seat. I think you mentioned it was up 30%. And I was just hoping you could help us distinguish how much of that first half increase is due to cross sell of additional products versus sort of core Box pricing, if you could just help us maybe delineate between the 2 and the pricing power of those?

[Aaron Levie, executive]

Yes. So it's a little bit of both. We are seeing the biggest impact and kind of recent change being driven from the success of add-on products. And where we're seeing -- in terms of the products that are built on a per seat basis, Governance has really been leading the charge on that front. Zones has also been pretty impactful, especially in a lot of our international markets. But we are seeing, on a like-for-like basis, even in terms of the core product, improvements in most segments of the business. And so that's -- even as we've been selling larger deals, so more seats on average over time, that's being more than offset by the higher price per seat we're seeing even in the quarter. But as you look at the trends, we are increasingly seeing that impact come from add-on products. And we'll give a little bit more color into what those trends look like and some of the drivers at Analyst Day in just couple of days.

[Operator]

Your next question comes from Brian Peterson from Raymond James.

[Kevin Ruth, analyst]

Kevin here on for Brian. Can you talk a little bit more about recent traction with Box Platform. How have some of your earlier customers there trended since deployment? And have you seen the use cases diversifying at all this year?

[Aaron Levie, executive]

Yes, so we actually had a great quarter in Q2 on Platform. It was a major contributor to some of the largest transactions we did, especially our 7-figure deals. We continue to see a fairly broad usage of our APIs across enterprises, some of those are maybe lesser monetized just because we are a part of a lightweight workflow from a volume standpoint, but still mission-critical in terms of the importance. And that's -- the power of our platform is that we can start to kind of spread into a bunch of other use cases for customers. In terms of the Platform-specific revenue, we are -- we're seeing a strong pipeline, especially for Q4, in particular, where customers are taking more and more advantage of Platform. I think the use cases, we're now seeing in basically every single industry from financial services, which we've talked about a lot, where you have digitization of customer experiences, we actually have a number of customers on stage at BoxWorks on day 2, so Thursday. Some of those customers have digitized insurance claims processes with Box Platform. I created completely new customer-facing experiences leveraging Box Platform, and you're going to see some great brands like Farmers Insurance and Allstate, really talk about the power of Box Platform in those cases. And then we're seeing the -- these use cases show up in health care, in the tech industry, in industrial companies, so more and more breadth than ever before. And again, a major contributor to our largest deal segments of that $500,000 and $1 million deal segment. So really happy about how that's going and continue to expect to see that become one of the critical advantages of Box going forward.

[Operator]

Your next question comes from Rishi Jaluria from D.A. Davidson.

[Rishi Jaluria, analyst]

Let me start off with some commentary you made about expecting bookings and revenue and all to accelerate next year. What is it specifically that's giving you confidence in that? Is it your deal pipeline? Is it the ramp sales reps? Is it some of the changes in go-to-market starting to pay out? Can you just kind of give a sense what's giving the confidence there? And then I have a follow up.

[Aaron Levie, executive]

Yes, so we're seeing even in terms of the outcome kind of year-to-date, as we look at the bookings outcome and just the productivity trends, not just from a forecasting standpoint but even the results today didn't even see some of that in the big deal metrics that we've been driving is part of what's giving us the confidence, but it's also largely the -- as you mentioned, the pipeline that we're seeing in the back half of the year, particularly in Q4 and just a very different nature, much larger deals, much broader range and frequency of add-on products being attached and a pretty good visibility and confidence in these deals as mentioned -- we mentioned earlier that about 2/3 of our overall bookings come from existing customers, and in those cases, we tend to have a lot more visibility and confidence in terms of the likelihood and ultimately, if those deals are going to close, especially when there's kind of seats that are being used beyond what was originally deployed or customers are beta-ing certain products and they're up for renewal in the back half of the year, factors like that give us even more confidence and visibility. But overall, it's a combination of what you mentioned, but really looking at the health of the pipeline, especially as we get closer and closer to the back half of the year is what gives us more of that confidence. And then on top of that, we're also seeing, as we mentioned briefly, some pretty strong signs and results on the retention front from our customers. So not only seeing a kind of reversal and improvement in our overall retention rates -- or in our churn rate over the last couple of quarters, but seeing similarly positive expectations for the back half of the year. So it's really a combination of factors, but those are some of the biggest.

[Rishi Jaluria, analyst]

Got it. And in terms of the expansion rates -- I mean, I don't want to extrapolate too much, especially with rounding, but it's been consistently dropping down. Can you help us understand what -- what's leading to the continued declines there? And do you still have confidence in that number ticking back up, especially as you are getting larger initial deals and doing more full solution sets selling as opposed to the individuals?

[Aaron Levie, executive]

Yes, so what's really been driving that decline over time is the same trends that we've discussed before, which are around really larger initial deployments from customers. So as mentioned a bit earlier on the call, we are increasingly seeing customers who are buying Box for the first time do that with larger initial deployments, which is great from a business standpoint, but does apply a bit of pressure on the ultimate expansion rate over time, and also seeing a slightly higher percentage of the bookings over the past several quarters coming in from new customers, especially in international markets. And so those are some of the high-level trends, but we do expect the cross sells that are increasingly having an impact in terms of expansion to offset this natural pressure. We also do see just over time, our customer base maturing, and we'll give a little bit more detail and color into how our customer cohorts are evolving at Analyst Day. But we do see higher expansion rates from our more recent customer cohorts, especially as those are the customers who are most likely to buy some of those add-on products, so some of it is just a mixed shift and as we think about -- they -- kind of where that rate moves going forward, those are some of the big kind of components that we look at. The churn, as we mentioned, is also getting better, kind of in-quarter churn has been pretty strong, and we're seeing that even stronger in customers who have purchased additional products. And that population is increasing as a percentage of our overall revenue base. So those are just kind of some of the factors and drivers that we look at. And as it relates to where this goes going forward, we had previously said to expect something in the 108% to 100% range over the medium term, and we are still comfortable with that range. Oh, 108% to 110%, [ I made it sound different ]. And there was the overall rate, 108% to 100% is where we expect that net retention rate to trend.

[Operator]

Your next question comes from Brian White from Monness, Crespi.

[Brian White, analyst]

Yes, Aaron, I'm wondering if you could talk a little bit about the number of customers that are in beta for Box Skills, and should we expect Box Skills to go GA by the end of the fiscal year? And also Box Governance, if you could just give us maybe an update, whether it's customers or percentage of 6-figure deals? Just an update on Box Governance.

[Aaron Levie, executive]

Yes, so for Skills, we have hundreds of customers that have elected to join the beta. I -- the product has not rolled out to all of them yet, just the demand was -- it kind of exceeded our ability to support that. We are -- we'll be making our general availability announcement tomorrow, but what I can say is that we definitely want to make sure that customers can get on board this year with the product. So we will be making some announcements about how that's going to be happening tomorrow. But we'll be sharing more news on that tomorrow morning. In terms of Governance, we are -- that continues to be our best performing add-on product. We're seeing kind of a tremendous amount of adoption on the number of customers that are adding that product on. We've continued to expand the feature set and the capabilities that we are delivering with it. So being able to expand the retention rules that you can offer, legal hold functionality, so we're really kind of excited about the continued improvements from a functionality standpoint. And generally speaking, this is a little qualitative, but a good percentage of our deals above $100,000 do include Governance, and that becomes -- that's becoming a very kind of core part of our sales motion. And one thing that I'll also just kind of preemptively share, but we talked about on the call just a little bit is we want to really think about the complete set of both data protection from a Governance standpoint as well as from a security standpoint when we are getting our customers to think about the full breadth of Box's capabilities, especially around data classification. And we will be sharing some updates tomorrow on where we're taking security and the future of our security strategy as well. So we're really excited about what we're going to be highlighting and kind of creating some early visibility into -- for some update -- updates to our security technology solutions for customers.

[Brian White, analyst]

And the EMEA weakness, did GDPR have any impact on that?

[Aaron Levie, executive]

Nothing that we could specifically call out. In fact, again -- kind of -- GDPR generally, we expect it to be a -- broadly a tailwind for us as customers really need to think through their data privacy and security and make sure that it -- they are protecting their IT environment for the modern set of compliance and security regulations they face. The only thing I'd might call out though is as legal teams and privacy teams of customers are working through GDPR, that can sometimes take time, especially if it's an organization that hasn't used a lot of cloud previously. So you do see some risk on a per customer basis, sometimes -- again, especially in Germany, where a customer is sort of working through broadly data privacy legislation and understanding how they're going to be able to manage their data. But if we zoom out from, specifically, the first half, we expect this to be a long-term tailwind for us, the amount of kind of security compliance, privacy issues that customers are dealing with because they're legacy approaches to content management really are not going to be able to solve those challenges. So again, long-term, we see that as a catalyst, certainly near-term that might be on a per customer basis, a little bit of a complicating factor, but nothing that I would call yet as to why we didn't see the strength that we wanted in the results in the first half.

[Operator]

Your next question comes from Ken Wang from First Analysis.

[Ken Wang, analyst]

Just wondering, thus far this year, we've seen modest deceleration in customer growth and then that's been accompanied by more meaningful acceleration in revenue per customer. Anything you can offer on your expectations for the remainder of the year? Do you think this will -- these trends will kind of remain consistent?

[Aaron Levie, executive]

Yes, so I would say that -- expect to continue seeing pretty strong kind of outcomes on the price per seat side given the trends that we're seeing. And as mentioned, also expect to see continued progress and strength in the large deal outcomes, both in Q3 and particularly in Q4. I would say with respect to the overall customer counts, where we added a couple thousand customers over the past quarter and now more than 87,000 paying customers, that, that's not necessarily a meaningful indicator of the business where we're most focused as by volume, a lot of those customers tend to be pretty small and in many cases, even signing up online. And so from a business model point of view and really where we're most focused is on the enterprise and on those larger deal outcomes.

[Ken Wang, analyst]

Great. Very helpful. And then any commentary you can offer on performance in Asia during the quarter?

[Aaron Levie, executive]

Yes. This is Aaron, again. Really strong results in Japan, in particular, which is our kind of core of the market that we focus on right now. And just broadly, we had an incredible event in Tokyo within the quarter, brought thousands of customers together and prospects together. And the energy and the momentum that we're seeing from the Japanese market is tremendous. You have some of the, obviously, largest businesses in the world that are going through a significant amount of transformation, not unlike what we're seeing across the rest of the world, but where it's happening at sort of a rapidly accelerating pace. So we are seeing great performance in Japan. And then over the next few years, we'll certainly be thinking about broader Asian markets.

[Operator]

There are no further questions at this time. I will turn the call back over to the presenters for closing comments.

[Alice Lopatto, executive]

Thank you, everyone, for joining us today. For more information on attending our Financial Analyst Day, please contact our Investor Relations team at [e-mail]. And we look forward to speaking to you again at our event on Thursday. Have a good day.

[Operator]

This concludes today's conference call. You may now disconnect.