Slower revenue growth in the year ahead, but higher profits. That's the outlook from cloud content company Box, which reported its Q4 and full-year results for FY2023 last night. The combination keeps the company on track to break through the magic Rule-of-40 threshold beloved by SaaS vendors — and investors, where adding the growth rate to the free cash flow rate produces a figure of 40% or more. But the muted revenue outlook going forward, which was lower than analysts expected, was greeted by a 15% slump in the stock price when markets opened this morning. Nevertheless, Aaron Levie, CEO of Box, was as upbeat as ever on the customary post-results call with Wall St analysts last night, saying:
Overall, I think, [it's] an environment where we saw performance across the business, but just at a moderately muted level from maybe the expectations we would have had six months prior or whatnot ... It's always dangerous to get into a position where you're guessing when a macro [environment] is going to change for the better ...
We just wanted to call out that that was going to be ... with a greater weighting on the profitability front [compared to] some prior models that have been out there. We still think that that's going to be a pretty meaningful uplift on a 'Rule-of' basis, obviously, getting us above the 40 mark.
LLM opportunity for Box?
Meanwhile, he believes the recent surge of interest in Large Language Models (LLMs) such as ChatGPT signals a new opportunity for Box to build on its existing experience in applying AI to its customers' content assets. He explains:
We happen to help customers manage tens of billions of files, and in particular, a large amount of documents. We think there's a lot of potential for what happens when you can begin to synthesize the information in those documents ... We think there's a wide range of use cases that are going to be very relevant for enterprises, and we think we're highly differentiated because of our focus on data security, on privacy and compliance. So we can really work with customers to ensure that when we bring AI to their content, it's done in a way that keeps their data extremely private.
The other major differentiator we have is, we can play really the role of a neutral platform or Switzerland approach, where I think there's going to be a lot of leapfrogging of model advancements between OpenAI and Microsoft and Google and Amazon and maybe other vendors. Our ability to offer a range of technologies to customers, we think puts us in a very advantageous position over the long run as customers think about having a future-proof architecture. So we're very excited.
But that's for the future — "stay tuned," says Levie. Back to the present, and at least Box's revenue guidance for the new fiscal year still pushes through the totemic $1 billion mark at $1.05-$1.06 billion, albeit at a slower 7% rise on FY23, or 10% on a constant currency basis, than the 13% seen last year over FY22. In line with the Rule-of-40 discussion, that's compensated by a rise in the non-GAAP operating margin guidance for the full year to 25.0%, up from the above-guidance 23.1% achieved in FY2023. Forward guidance for non-GAAP EPS is in the range of $1.42 to $1.46, net of an expected negative FX impact of $0.14. This is up again from the guidance-beating $1.20 achieved in FY2023.
The slowing revenue growth reflects spending caution on the part of buyers when it comes to finalizing deals. Levie comments:
There's this overlay of ... budget pressure, which means a deal that would have been X is maybe now 0.9X. Or, in some cases, you might have a situation where a company is not growing their headcount as quickly, and so obviously, that's going to put pressure on the total seat count.
Nevertheless, demand for what Box has to offer remains strong in Levie's assessment. He elaborates:
Overall, I think the message of consolidation, simplifying your IT architecture, being able to bundle Box in such a way with these add-on products, and a much more streamlined approach where a customer can go and replace three or five other technologies, is extremely compelling.
I've been having a number of conversations with customers that now start the conversation with, 'Hey, I'd love to get rid of this legacy document management system, or storage infrastructure, or maybe an e-signature tool that's only used by one part of the population, and I can fold all of that into Box.' That's been definitely an increased conversation in the past couple of quarters that we've seen in light of this macro environment.
Suite sales growing
Sales of multi-product suites, including the full Enterprise Plus offering, continue to rise as a proportion of overall sales. In Q4 FY23, suites accounted for 72% of deals over $100,000, up from 65% a year ago, and 46% of the company's total revenue. Enterprise Plus made up over 90% of suite sales in large deals. The total number of customers paying more than $100,000 annually came to 1,650 in Q4, a 16% year-over-year increase. However net retention rate at the end of Q4 fell back slightly to 108%. Dylan Smith, CFO at Box, added:
Our annualized full churn rate was 3%, an improvement from 4% in the prior year, demonstrating continued product stickiness with our customers. In FY '24, we expect full churn to remain at roughly 3% and and our net retention rate to be roughly 106% as we anticipate continued pressure on seed expansion rates due to the macroeconomic climate where certain customers are reducing headcount and lowering IT budgets.
More numbers in brief:
- Q4 revenue was $256.5 million, up 10% year-over-year and 15% on a constant currency basis
- Q4 billings came in at $357.1 million, up 6% year-over-year and 9% on a constant currency basis, while Remaining Performance Obligations (RPO) were $1.245 billion, up 16% year-over-year and 21% on constant currency.
- Q4 GAAP operating income continue its upward trajectory, coming in at $19.7 million, or 7.7% of revenue, compared to a GAAP operating loss of $0.2 million, or negative 0.1% of revenue in the year-ago quarter. The non-GAAP equivalent was $66.6 million, or 26.0% of revenue, up from $48.5 million, or 20.8%, year-over-year.
- FY23 revenue came in at $990.9 million, 13% up from the prior year's $874.3 million
- FY23 GAAP operating income was $36.8 million, or 3.7% of revenue, compared to $173.4 million and 19.8% of revenue in FY22. The non-GAAP equivalent was $229.0 million, or 23.1% of revenue, up from $173.4 million and 19.8% of revenue in FY22.
- Net cash from operating activities in FY23 was $298.0 million, or 30% of revenue, up 27% from FY22's $234.8 million.
Anyone who's been following Levie's tweet stream over the past month or two will be aware that he's been tracking the recent excitement around ChatGPT and believes the next phase of AI innovation will have a big impact in the enterprise. But it will be a while before those use cases start become reliable enough for some of the potential enterprise use cases he cites in his remarks, such as highlighting risky clauses in a contract, synthesizing a research report for key insights, or quickly finding the answer to a sales prospect's question from a document. Those use cases may prove viable with the right guiderails, but there's much work still to do. We'll be intrigued to find out more.
Meanwhile, if Levie hoped that mentioning LLMs would be what British politicians call a 'dead cat' move, serving to distract attention from the muted guidance, unfortunately it doesn't seem to have worked. But fickle Wall Street investors aside, these results continue to show Box making excellent progress towards its long-stated profitability goals and setting itself up well to weather whatever the macro-economic climate has in store.