Box Inc (BOX) Q1 2020 Earnings Call Transcript

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Box Inc (NYSE: BOX)Q1 2020 Earnings CallJun 3, 2019, 5:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Josh and I will be your conference operator today. At this time I would like to welcome everyone to Box Inc's First Quarter Fiscal 2020 Financial Results Conference Call. All lines are being placed on mute prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Alice Lopatto, Head Investor Relations, you may begin.

Alice Lopatto -- Head Investor Relations

Good afternoon and welcome to Box's first quarter fiscal 2020 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/investors. 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 Q2 and FY '20 financial guidance and our expectations regarding our financial performance for fiscal 2020 and future periods, timing of and market adoption of our products, our markets and market size, our operating leverage, our expectations regarding maintaining positive free cash flow, future profitability and unrecognized revenue and remaining performance obligations, 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 in documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, June 3rd, 2019, 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.

With that, let me hand it over to Aaron.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Thanks, Alice, and thanks everyone for joining the call today. Before we talk about Q1 results, we want to take the time today to give you some additional insight into how our business has been evolving and how we are seeing our strategy play out in our results this year. Enterprises need a cloud content management platform that powers business process automation, secure collaboration across best-of-breed apps and easy custom development for creating new digital experiences and replacing legacy enterprise content management systems.

To address this demand, we've been evolving our product to extend our cloud content management capabilities. Simultaneously, we've been advancing our go-to-market strategy to focus more on customer-oriented solution selling. Together, these two initiatives are aimed at transitioning our customers to leveraging Box as a complete platform for secured content management workflow and collaboration. When our customers use the full suite of our cloud content management solutions, we see dramatically higher average contract value and better retention, leading to greater lifetime value for Box.

The key indicator of our success in driving this transition is the adoption of our add-on products, which is why we focus on the attach rates and the growth of products like Box Governance, Platform and Relay, and in the future Box Shield. We're seeing tremendous success from our add-on products and in the past quarter our add-on product revenue grew by 57% year-over-year.

The demand for Box remains strong and continues to grow. While our larger more complex deployments do tend to have a longer deal cycles, we believe that our go-to-market initiatives in combination with our expanded product portfolio will enable us to improve sales productivity and meet the growing demand for cloud content management. Even as our strategy remains focused on driving long-term revenue growth, we will increasingly look to balance our growth with greater profitability.

Now, turning to Q1, we delivered wins and expansion with major customers including BT Group, Blackboard, Nintendo Europe, Remy Cointreau Group and Dignity Health. Revenue was $163 million, up 16% year-over-year. Non-GAAP EPS improved to negative $0.03 versus negative $0.07 in the same quarter a year ago and free cash flow was positive $13.4 million, an improvement of $6.2 million versus Q1 last year. In the quarter, we closed three deals worth more than $1 million versus one a year ago, six deals over $500,000 versus four a year ago and 33 deals greater than $100,000 versus 35 a year ago.

While we closed slightly fewer $100,000 deals than we anticipated, we are encouraged by the fact that we saw a record 90% plus of these deals include at least one add-on product. This result compares to two-thirds of $100,000 deals including multiple products in Q1 a year ago. We are building the category defining cloud content management platform and this year we have the most exciting product roadmap in our Company's history.

In May we announced the all-new Box Relay, our workflow automation solution and one of the most critical capabilities for our customers as they begin to leverage Box to drive and automate critical business processes. Relay will power content-centric processes across the enterprise, ranging from customer and employee onboarding to document review and approval and sales, marketing, finance and more.

Today these use cases are either not served at all or are being served poorly by rigid costly legacy systems. With the all-new Box Relay, we are the only solution that delivers secure content management workflow and collaboration in a single cloud platform. Further, because Box Relay is now built natively on Box, it benefits from our infrastructure, security, compliance features and our deep integrations with other business process management tools as well as best-of-breed applications like Octave (ph) , Slack, Zoom and Salesforce.

Customers recognize our increasing ability to improve critical business processes that are not solved today by legacy ECM systems like SharePoint, Documentum and OpenText. Several big deals closed in Q1 were direct replacements of SharePoint and other legacy systems. For example, BT Group purchased Box to power business processes for the companies BT Global division. Box will act as the content layer to BT's bid management process, integrating with Salesforce and centralizing content across BT Global. Box will enhance the way the organization works internally and improve the digital engagement experience for their customers.

A central bank purchased Box Platform to build applications that will enable them to engage with third-party stakeholders such as auditors, other government entities and commercial parties. With implementation of Box Platform, the bank will replace SharePoint in an effort to shift critical processes to a modern technology stack. And finally, a large global investment bank purchased Box and a seven-figure deal to replace a homegrown legacy content management system. Box Platform will serve as the company's content layer for developing new engagement experiences for regulators, managing M&A deals and onboarding new clients.

In addition to Platform, the firm also purchased Box Governance, KeySafe and Box Zones. Based on this traction and the new capabilities coming with Box Relay and the other new products like Box Shield later this year, we are excited to drive continued innovation in cloud content management and go after the $40 billion plus market for content and collaboration.

Also in Q1, we made good progress on the evolution of our go-to-market efforts, enabling us to accelerate our customers' digital transformation through our solution selling strategy. As we have discussed, we are working to further improve our execution through hiring and promoting world-class sales leadership around the world, updating sales compensation plans tied to solution selling, improving sales training and operational rigor and introducing our first Enterprise Suites.

Now in addition to selling our advanced cloud content management products like Box Platform, Governance and Relay as separate product add-ons, we will be offering new digital workplace and digital business suites that consolidate these and other offerings into simple bundles that are aligned to our customers' cloud content management use cases.

We are seeing increasing demand from our strategic customers to buy our full suite of solutions and we expect these suites to be an enabler for a more streamlined sales process and higher average contract value. Overall, with our combination of a large installed base of enterprise customers, strong product roadmap of advanced capabilities and a focus on improved sales productivity, we feel confident in our ability to meet the opportunities ahead.

Before I handed over to Dylan, I also like to briefly talk about the continued evolution of our Board and leadership team. First, Tom Addis, who joined Box in 2012 and who's led global sales since January 2018 will be moving on from the Company. We'd like to thank Tom for his many contributions to Box over the years. We are in the late stages of hiring a strong candidate to be our new global sales leader who will report directly to our COO, Stephanie Carullo.

Next, as we announced a few weeks ago, Peter Leav will be joining the Board of Directors later this month. Peter was most recently President and CMO of BMC Software and prior to that served as the President and CEO of Polycom. Peter's experience, scaling and leading multibillion dollar enterprise technology businesses will be a fantastic addition to our Board. Also, over the past 12 months we have added Sue Barsamian and Kim Hammonds to our Board. Together with Peter, their collective expertise, leading global companies, driving strategic vision and executing with operational rigor is invaluable to Box as we continue to scale our business.

Lastly, we were thrilled to congratulate Dana Evan who has been an Independent Director on our Board since December 2011 on being named 2019's Director of the Year by the National Association of Corporate Directors. Congratulations, Dana.

With that, I'll hand it over to Dylan.

Dylan Smith -- Chief Financial Officer & Cofounder

Thanks, Aaron. Good afternoon, everyone and thank you for joining us today. Q1 was a solid start to the year as we closed a record percentage of large deals with add-on products while delivering continued leverage in our bottom line results, including strong improvement in operating margin and free cash flow generation. While we still have work to do, we're seeing good traction in our solution selling initiatives and we're very focused on improving our sales efficiency and overall growth rate over time.

We delivered revenue of $163.0 million in Q1, up 16% year-over-year. 24% of this revenue came from regions outside of the United States and in Q1 we saw continued strength in Japan and improvement in certain regions in EMEA. A year ago we adopted the ASC 606 accounting standard and as part of our adoption, we've begun disclosing our remaining performance obligations or RPO which represent non-cancellable contracts that we expect to recognize as revenue in future periods.

RPO consists of deferred revenue and backlog offset by contract assets. Moving forward, we'll be emphasizing our RPO which we believe is a more comprehensive indicator of our momentum and growth potential than billings and is consistent with GAAP accounting. Our RPO ended Q1 at $637 million, up 16% year-over-year. We expect to recognize roughly 66% of this RPO over the next 12 months.

First quarter billings came in at $118.4 million, representing 1% calculated and 4% adjusted billings growth year-over-year, in line with the expectations we referenced in our last earnings call. As we discussed on that call, our Q1 billings faced a very difficult year-over-year comparison, including an unusually high volume of multi-year prepays and billings for the non-recurring enhance developer fee in the year-ago period, as well as a reduction from a single large customer that we mentioned on our last call.

In the second quarter, we expect calculated billings growth to be in the mid-single digit range which reflects a roughly 2 percentage point headwind from the developer fee that we built in Q2 of the prior year. We expect calculated billings in the second half of this year to track more closely to revenue growth, noting that after Q3 the prior year's enhanced developer fee will no longer impact our year-over-year comparisons.

Turning to margins, non-GAAP gross margin came in at 72.3% versus 74.4% a year ago. As a reminder we're in the midst of a multi-year migration of our data center footprint to lower cost regions as part of our hybrid hosting strategy. We plan to complete this migration by the middle of next year. So during this migration we'll be occupying redundant colocation facilities resulting in temporarily lower gross margins.

As such, while we achieved continued efficiencies from our hosting architecture and the timing of new data centers coming online, we continue to expect gross margin for the remainder of FY '20 to range from 70% to 71%. Once we complete this migration and as we continue to drive efficiencies in our infrastructure, we expect our gross margin to trend upward starting in the back half of FY '21.

In Q1, we continued to see our business model and economies of scale drive greater efficiency and leverage across the business. Sales and marketing expenses in the quarter were $69.4 million, representing 43% of revenue, a significant reduction from 49% in the prior year. Looking ahead, we expect to generate additional leverage in sales and marketing as more of our revenue comes from renewals and upsells which are more profitable and as we improve sales productivity by executing on larger strategic solution sales.

As a reminder, to provide some context, we grew our sales force by 12% last year. This year we will focus our sales hiring in segments where we've been executing well and seeing strong productivity trends and we now expect to grow our sales force in the mid single-digit range in FY '20 versus our prior target of 10% to 15%. With our existing sales force and planned hiring, we believe we have the right quantity and quality of sales capacity to deliver on our growth targets.

Next, research and development expenses were $33.3 million or 20% of revenue, flat with a year ago, even as we significantly enhanced our cloud content management product offerings, including the continued development of Box Relay and Box Shield. Our general and administrative costs were $18.2 million or 11% of revenue compared to 12% in Q1 of last year. We expect to drive continued leverage in G&A as we benefit from greater operational excellence and scale.

Total Q1 operating expenses represented 74% of revenue compared to 81% a year ago. So despite our temporarily lower gross margin, we were able to drive our Q1 non-GAAP operating margin to a strong 5 percentage point improvement year-over-year, coming in at negative 2% versus negative 7% a year ago. As a result, non-GAAP EPS came in at negative $0.03, an improvement from negative $0.07 a year ago and above the high end of our guidance.

We ended Q1 with a net retention rate of 107%, down slightly from last quarter. This result was impacted primarily by the single large customer reducing its footprint that we mentioned previously, which will continue to impact our net retention rate for the next several quarters as a result of how we calculate this metric. In Q1, our full churn rate was 4.2% on an annualized basis. As customers increasingly adopt additional products either in their initial purchase or as a cross-sell over time, they become significantly stickier. Our net expansion rate was 12% on an annualized basis, stable with the prior two quarters and primarily driven by strong seat growth in existing customers and cross-sells of our add-on products. For the fourth consecutive quarter, we've seen an improvement in our price per seat on a year-over-year basis mainly as a result of the higher product attach rates we mentioned earlier. We now have 12.2 million paid users.

Let me now move on to our balance sheet and cash flow. We ended the quarter with $231.4 million in cash, cash equivalents and restricted cash, up from $217.5 million a year ago. We delivered cash flow from operations of $25.5 million compared to $18.4 million a year ago. In Q1, total CapEx was $1.6 million versus $4 million a year ago. Capital lease payments which we factor into our free cash flow calculation were $9.2 million versus $7.2 million a year ago. We expect CapEx and capital lease payments combined to be roughly 6% to 7% of revenue, both in Q2 and for the full year of FY '20. Finally, we generated $13.4 million of free cash flow in the first quarter or 8% of revenue. This was up more than 80% compared to $7.3 million in free cash flow generation a year ago.

Before turning to our guidance, as Aaron mentioned, I wanted to discuss the progress we've made in selling multiple products and the strong economics of those customer segments. As we've noted in the past, our customers are increasingly choosing to augment our core product capabilities with add-on products, enabling them to more fully realize the value of Box as a cloud content management platform. We're in a strong position to capitalize on our cloud content management opportunity as we build on the early momentum we've delivered in our solution selling efforts.

The revenue we generate from our add-on products was up 57% year-over-year, now representing 14% of our revenue run rate in Q1 versus 10% a year ago. Looking at our total recurring revenue base, in Q1 89% of this revenue was generated by customers paying $5,000 or more annually. Of this base, customers who have purchased add-on products to support higher value use cases now account for just over half of our annual recurring revenue, up from mid-30% a year ago and mid-20% two years ago.

These customers have average contract values that are four times larger and churn rates that are two-thirds lower than the customers who have not yet purchased any add-on products. In the future, we expect the launch of the all-new Relay and Shield to drive further adoption of more sophisticated use cases and improve the customer economics.

With that, let's now turn to our guidance. For the full year of fiscal 2020; in light of our anticipation of longer sales cycles across our larger deals, we now expect revenue to be in the range of $688 million to $692 million. We are focused on delivering our first year of non-GAAP profitability this year and we now expect our FY '20 non-GAAP EPS to be in the range of $0.00 to positive $0.02 on approximately 155 million diluted shares. Our GAAP EPS is expected to be in the range of negative $1.05 to negative $1.03 on approximately 148 million shares.

For the second quarter of fiscal 2020, we are setting revenue guidance in the range of $169 million to $170 million. We expect our non-GAAP EPS to be in the range of negative $0.02 to negative $0.01 and for our GAAP EPS to be in the range of negative $0.29 to negative $0.28 on approximately 147 million shares. As we've seen and communicated, our larger enterprise deals are more complex with longer sales cycles. However, these deals result in higher value, stickier customers which are becoming a larger proportion of our total revenue base.

This mix shift gives us confidence that we can achieve revenue growth rate improvements in FY '21 and beyond on our path to achieving $1 billion in revenue. Given we are in the midst of driving this cloud content management evolution, we believe it is no longer prudent to pinpoint a specific timeframe for achieving this $1 billion milestone. As we think about shaping our business model, we will increasingly look to balance growth and profitability. While our strategy remains focused on long term revenue growth, we will continue to drive margin expansion across the business.

Based on this principle of taking a balanced approach to growth, we are committing to deliver a non-GAAP operating margin of 6% to 7% in F Y '21. From a longer term point of view, we expect that in FY '23, three years from now, the sum of our revenue growth and non-GAAP operating margin will be roughly 30%. We remain confident that our market opportunity and leadership position in cloud content management set us up nicely for profitable growth. We're very excited by this year's product roadmap which will allow us to build on the CCM momentum.

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

Questions and Answers:

Operator

(Operator Instructions) And your first question comes from Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron -- Oppenheimer -- Analyst

Thanks. First of all, congratulations to you Aaron on the recent addition to your family.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Thank you.

Ittai Kidron -- Oppenheimer -- Analyst

Maybe we can dive into the crux of what's going on. I guess, in a way you're kind of shifting to going deep rather than going wide with customers. Help us think about as you look at this past quarter, it certainly had some expectations heading into the quarter, what's kind of worked your expectations in the quarter and what has not, and this elongation of sales cycles given the complexity of the deal, how much of that is -- you still selling the solutions siloed? Is the bundle approach already in effect and is impacting the sales cycle? Is that going to help or not? Is that ahead of us or behind us? Help me understand that.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So I think Q2 was certainly a great example of our add-on products overall contributing heavily to our big deals, especially if you look at the kind of $1 million, $500,000 plus categories. And this is before we even have the bundles and the product suites that you just mentioned.

So what we're seeing is that more and more of our strategic customers that are spending more than $100,000 with us are using multiple -- one or more add-on products like Box Governance, Box Platform and that is enriching their use cases. It is obviously dramatically expanding their average contract value. It's improving their customer retention. And so our introduction of product suites which goes live this month in June is meant to accelerate and streamline the adoption of those add-on products.

So we have two suites that are going to be coming live in market. One is a digital workplace suite which includes Box Governance as well as the core product. And then we've a digital business which includes Box Platform and Box Relay, and customers now on a single line item are going to be able to buy those multiple products altogether. And we think that's going to dramatically streamline how customers are driving that add-on products.

We're seeing a pretty significant amount of demand already internally from our sales force which we think is representative of the demand that we're seeing outside from customers for those suites. So we're very excited about what that momentum looks like and I think as you think about the commentary on this call, we are seeing that as you do these much bigger deals that does lengthen the sales cycles although at the end of that result is much larger deals, much sticker customers, way greater retention and that's obviously a really good thing for the business. So this is going to -- this is a mix shift that's playing out in the business, but we see that there's a tremendous amount of upside as a result of that.

Ittai Kidron -- Oppenheimer -- Analyst

Very good. Help me think about these suites. I guess when you think about the guidance for the year, I mean is there an assumption there that the suites help accelerate transactions or that assumption is still not worked into your expectations? And also help me think about the price discount that's implied in the suite approach.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So to the extent possible, the suites are obviously baked into our guidance although -- because they don't exist yet, we only have a certain amount that we've been able to simulate. But because they launch in the first half of the year in our Q2, it won't have any impact really on our first half results. And so that's sort of tied to our guidance and we do think that they'll become a big contributor to the growth especially at the tail end of this year.

So -- but you know there does remain some upside on that, but we want to wait for that to play out a bit more. But again we're seeing a lot of really kind of good demand within the sales force internally and then generating some of that demand directly from customers as well as we've been starting the message these suites to customers.

In terms of discounting, there's a sort of marginal discount when you -- on a kind of per product basis when you buy the suite of all of our solutions. However, we expect the average price per seat to actually be positive as a result of customers buying these suites. So we would actually expect on a like-for-like basis that the price per seat for customers that purchase these suites will be much higher when a customer buys these suites. So you'll get a discount on a per product basis versus list price of those products, but the customer will be paying more per user within their organization as a result of buying into one of our product suites.

Ittai Kidron -- Oppenheimer -- Analyst

Got it. And just to clarify when someone -- would customers still be able to buy the product siloed or suites is the only way for them to buy products going forward?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

For now they can still buy the product siloed. We do know plenty of cases where a customer might want a very specific add-on especially something like Box Platform. Although we do expect that this will continue to help improve and evolve our sales motion, we'd like to be showing up to customers with the full range of solutions in our sales motion as opposed to you know kind of a much more piecemeal approach in the sales process. And so the ability to be able to sell those full suite of capabilities all at once to customers and ensure that they can get the full value of Box, you know, we think is going to be really impactful to sales productivity. And again, the demand that we're seeing internally from our sales force I think is quite indicative of how important this is going be to our sales motion overall.

Ittai Kidron -- Oppenheimer -- Analyst

Very good. Good luck.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Thank you.

Operator

Your next question comes from Philip Winslow with Wells Fargo. Your line is open.

Philip Winslow -- Wells Fargo -- Analyst

Hi guys, thanks very much for taking my question. I just want to focus on a couple of items. First you made a commentary about you growing the sales force this year mid single-digit and then the next -- when you talk about next year, a 6%, 7% operating margin and then beyond that hitting a 30% margin plus revenue growth.

I guess if you think -- help me through the progression there, kind of walk me through the process of why you sort of lowered the sales force headcount for this year and then I guess kind of extrapolate that through how you think of sort of your commentary about accelerating growth next year and beyond? Kind of just walk me through the thought process and I guess the path there.

Dylan Smith -- Chief Financial Officer & Cofounder

Sure. So -- this is Dylan. As a reminder and as we said on the call, we grew our sales force last year by about 12% with a focus in terms of expanding our sales force in the fields. Many of those reps are still ramping through this period and will be throughout the year, and then we had initially targeted growth in the 10% to 15% range, which you raised to that mid-single digit range and really the focus there is on driving more in terms of sales productivity and really doubling down on a lot of the efforts there.

As you mentioned, we've been very focused on only increasing hiring and really focusing in the regions where we have seen strong productivity trends and improvements. And so, depending on how especially some of these newer products play out and some of the leadership changes we have made in certain key regions around the world, as we start to see pipeline generation and sales kick into gear, we would modify the hiring plans accordingly. But at this stage we think that growth rate, based on some of the trends that we're seeing in the various sales regions that we have, is the right kind of balance of growth and profitability and allows us to generate pretty significant leverage in that line item over time as well.

Philip Winslow -- Wells Fargo -- Analyst

Got it. Okay. Thanks. And then in terms of just the changes you're making to the go-to-market, obviously you talked about some of the personnel changes there. Anything in terms of a process that's changing now, call it quarter-end to the fiscal year that you've highlighted, how you think about sort of that playing out course of this year and into next year?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So we've been making a bunch of changes around just the overall operational rigor especially with our big deals. While they didn't -- yes, we open the 100k results, obviously we saw a healthy improvement on the $500,000 million results in Q1 and we actually are seeing a pretty significant pipeline of 100k plus deals overall especially in Q2 and beyond.

So we're feeling pretty good about a lot of the operational rigor that has been put into place. Additionally, I would say that there's been pretty significant improvement in sales training and in the enablement function around solution selling. So again, this ability to take our horizontal platform and the capabilities around that platform and ensure that it is aligned to our customers' biggest pain points which is obviously what solution selling is all about. And I think as a result of that you're seeing actually more and more wins and take outs against legacy enterprise content management players.

So especially in Q1 we saw an increase in being able to go and take out products like SharePoint, Documentum and other legacy ECM systems. So as we move up market, what that's going to result in is obviously much larger deals, but being able to drive these much more strategic transactions for our customers. So that's really what the sales operations efforts have been all about and I think we're seeing some really good signs early on in the year that it's playing out in a very fruitful way.

Dylan Smith -- Chief Financial Officer & Cofounder

And just to build on that, I'm going to circle back to the question you had about the growth rate Phil, is why we remain confident in targeting in our ability to improve our revenue growth rate even with this sales hiring plan is that, those foundational components are all there. So we've talked through the sales leadership up level and we've seen in key regions and we do have with our current planned hiring sufficient sales capacity as well as pipeline coverage this year to deliver against those growth targets and to make that happen. So as mentioned that combined with the solid cloud content management traction that we've been seeing, that is better growth rates and overall economics, those are some of the key drivers that lead us to that level of confidence.

Philip Winslow -- Wells Fargo -- Analyst

Got it. Thanks guys.

Operator

Your next question comes from Melissa Franchi with Morgan Stanley. Your line is open.

Melissa Franchi -- Morgan Stanley -- Analyst

Great. Thanks for taking my question. Aaron, when we spoke last quarter you talked about elongating sales cycles and some deals that had slipped from Q4. Coming into Q1, did the sales cycle elongate further than what you saw last quarter and if so what gives you confidence that it's simply because you're doing more strategic selling versus maybe something more fundamental or execution driven?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So, overall I think we're seeing a really strong pipeline buildup throughout the year with pretty clear kind of closed dates in a very measurable way across the business. So, I don't know that we're seeing an increase in the sales cycle length from where we were three months ago. I think we're just getting a better sense for it overall though as it relates to the financial model this year and then of course things are ultimately tilting a little bit more back end oriented just given the deal sizes that we're working on, you know, aligning the customers' budget in the second half of the year. So, overall we do feel pretty confident in the predictability of these bigger deals. But it has -- overall the sales cycles have lengthened from maybe where we were one or two years ago and that's been the shift in the model that we're seeing.

Melissa Franchi -- Morgan Stanley -- Analyst

Got it. And Dylan, thank you for the operating margin target in FY '21. I know that you're not going to guide for the top line likely in that period, but I'm just curious how sensitive is that guidance to the top line such that if you're seeing better growth opportunities, is there the potential that you might want to kind of more reinvest in the business and de-prioritize that leverage target?

Dylan Smith -- Chief Financial Officer & Cofounder

Yes. So, as we've said in the past, we do think about certainly one of the components of our overall expenses, that is math pretty closely to the success we're seeing and sort of the top line drivers as well outcomes is our AE (ph) hiring, our sales force hiring. But based on the things that we're putting in place this year to drive additional efficiencies, we feel good about that operating margin target depending even with various kind of top line scenarios. Also the ultimate hiring goals with the sales force may move up or down depending on that success and productivity we're seeing and how well some of those initiatives are working.

There are a bunch of other things that are driving efficiencies in the business that lead us to be confident in that operating margin target even with a range of top line outcomes and that's everything from things like beginning to see those gross margins improve as we move through next year and as we complete the data center migration to continuing to drive natural business model leverage as we expect more of our customers are going to be -- have a larger renewal base and expansion base relative to this year which are inherently more efficient sales. Not to mention the sales productivity and beginning to move more of our future hiring in lower cost locations. So there are a number of things that we're doing across the business to drive efficiencies and we can achieve those goals even if the top line growth plays out as we're targeting.

Melissa Franchi -- Morgan Stanley -- Analyst

Understood. Thank you very much.

Operator

Your next question comes from Rob Owens with KeyBanc Capital Markets. Your line is open.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Great. Thanks for taking my question. I guess if we focus on the velocity base sales, I understand the economics of going up market, but has there been a change either in market dynamics and competitive dynamic and just market maturation that would bifurcate the market and suggest Box moves up market? Help me understand kind of the (inaudible) and the other side of this just -- and what's happening in that velocity base business and if it's becoming more fungible or something of that nature? Thanks.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So actually I think we're still seeing really strong results in the velocity business, it's a really strong run rate business overall and in fact we're even starting to see higher average contract values within that segment with the addition of our add-on products. So on a pretty regular basis, we're seeing now record kind of breaking deal sizes within our S&P and commercial segments which really is evidence that if you're a smaller investment banker, you're a law firm or you're a professional services organization or marketing agency, you have the same level of security and governance and workflow needs as a large enterprise. And we might be -- even more complete solution for your entire enterprise. So that allows us to actually capture in some cases a higher price per seat in those organizations.

So I think we're very well positioned from a competitive standpoint in that kind of velocity business in the commercial segment. Of course, we want to layer on the enterprise business on top of that because of the strategic nature of Fortune 500 logos and of course the IT budgets that are out there and obviously the disruption that we can go drive within the legacy ECM space. But it is a balanced portfolio of our revenue mix, everything from self-serve happening completely online with no touch, all the way up to the world's largest enterprises. So I think we're going to continue to see that balance mix of revenue and drive on growth in those key segments.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Aaron, given cloud is nothing new and nor is enterprise cloud content management. Are you surprised that just this point in the lifecycle of the Company to see these sales cycles extending, I would think they'd be somewhat coming down just because people understand the value proposition, understand what Box can add on top of that.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes, it's a really good question and we've spent a lot of time thinking about this internally strategically. I think what's happening is if you look at the kind of first maybe decade plus of our growth, it was really Box as a tool for secured file sharing and collaboration. It was very easy to adopt just by an IT department or some other department within the organization. As we built out things like Box Governance, Box Relay, obviously for workflow, Box Platform for developers to be able to build applications on top of the platform, this has involved a broader set of constituents in the organization which is fortunately driving more standardization around Box within an enterprise.

But it comes certainly with some increased rigor on behalf of the customer and the stakeholders that are involved in the sales transaction. So I think what's occurring is less of a cloud as a kind of macro technology architecture and much more about Box as a platform for content management and security, compliance, governance, developer, buy and that goes on into one of these sales especially if you think about a very large regulated bank or pharmaceutical company or government agency. So the good news is operationally, internally, we're very prepared for those types of deal cycles. But what it is having the impact on is extending those deal cycles.

I think what we're certainly working on as well as driving again an ongoing very healthy run rate business of those kind of 100k plus deals that maybe won't be as susceptible to those cycle increases and really try and drive a balanced mix of that but overall, I think as you see this mix shift of revenue move more toward add-on products and customers buying the full suite of our capabilities, that will become pretty normalized in terms of how you see the business grow.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from Brian Peterson with Raymond James. Your line is open.

Kevin Ruth -- Raymond James -- Analyst

Hi, guys. Kevin here on for Brian. Thanks for taking my call. In regards to the new Relay offering, can you talk about how you see positioning that product with paid and free version? And I guess how do you see that driving customer economics versus some of your other product launches?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So, Relay is going to be fundamental to our continued evolution as a cloud management platform. In the history of the company, customers have had to purchase other add-on separate products from other vendors to really drive workflow around their content within Box and in many cases we see a huge opportunity there to make that a much simpler experience and one that is much more streamlined and much more kind of intuitive for our customers.

So we've seen a significant amount of demand for Relay, the natively built product that we did just announce and will become general available in June. So a pretty significant healthy pipeline is building and this is again going to increase the retention rate of customers. It's going to drive much stickier use cases within customers and an overall especially when bundled in with our add-on product suites drive up average contract value.

As Dylan mentioned, we're seeing a 4x greater average contract value of customers that have one or more add-on products from Box which is obviously a pretty material difference in what customers are spending and buying from us when they do have these add-on products and we think Relay is going to be a significant contributor to that overall mix.

Kevin Ruth -- Raymond James -- Analyst

That's helpful. And then maybe just a point of clarification. I think your updated full year billings outlook would imply a growth rate that's below your updated revenue outlook. So I just wanted to come back to your comment about what's giving you confidence in the pipeline that the growth for the business will reaccelerate going into fiscal '21.

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yeah. So you're right in terms of the overall math. We do expect billings growth and revenue growth to track more or less in line in the back half of the year, but due to some of not just the kind of deal cycle lengthening timing dynamics, but also some of the kind of onetime or kind of items that have impacted billings in the first half of the year, that's what's causing that that -- those kind of headwinds which is why we'd also point to and I think we will increasingly be pointing to RPO as a pretty good indicator of the underlying momentum in the business.

But overall as we think about the confidence, as we think about the year as a whole which will show up to a certain extent in the billings growth, it does relate to a lot of the same things that we've started to talk about in the past, and on this call specifically around everything from the traction that we're seeing in our cloud content management use cases and the economics and growth associated with not just the specific add-on products, but the customers who are using those more broadly now making up about 50% of our revenue and growing pretty steadily.

So if those trends continue and we believe they will especially as our our product offering become a lot more compelling. And we think with the introduction of Relay and Suites in the near term and then Shield later in the year combined with lot of the inputs and then the things we look at around sales capacity and pipeline coverage and things like that are a lot of the underlying components that lead us to be feeling good about the year as a whole.

Kevin Ruth -- Raymond James -- Analyst

Very helpful. Thanks guys.

Operator

Your next question comes from Mark Murphy with J.P. Morgan. Your line is open.

Matthew Coss -- J.P. Morgan -- Analyst

Hi. Good afternoon. This is Matt Coss on behalf of Mark Murphy. You mentioned you saw some improvement in certain regions in EMEA. What were the regions that did improve and what was the improvement that you were able to observe. And then in the regions that are still transitioning, what do you expect to see from those as the year progresses?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Sure, So the most notable reason where we saw a big improvement over prior quarters is in UK and Ireland which is our largest region of EMEA, having a very strong outcome and better than planned and that was where we closed one of our million dollar deals in the quarter as well. So that would be the main highlight that I call out in terms of materiality. Still seeing kind of lower contribution from some of the areas, we've been rebuilding the team and uplifting leadership like Germany, for example, has now been contributing materially to the business and we've been building out the sales capacity and some of the pipeline there to hopefully see that start to contribute more materially as we move through the year. But those are probably the two regions I'd call out in terms of both positive and still building.

Matthew Coss -- J.P. Morgan -- Analyst

Okay. And sorry, if I missed this. Did you mention the number of registered and paying users?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

We did. We have now in terms of total registered users, just shy of 66 million. So 65.9 million and in terms of overall paying seats, 12.2 million.

Matthew Coss -- J.P. Morgan -- Analyst

Thank you.

Operator

Your next question comes from Chad Bennett with Craig-Hallum. Your line is open.

Chad Bennett -- Craig-Hallum -- Analyst

Great. Thanks for taking my questions. I guess the large deals that slipped from last quarter, did we recoup any of those deals in the large deal metrics that you cited?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes, we did close a few of those within the quarter and the majority are still in the pipeline throughout this year. So still in kind of control of all those deals.

Chad Bennett -- Craig-Hallum -- Analyst

Okay. And then on a net new basis, do you think in -- I guess even more broadly than net new customer wins, do you believe you've lost share over the last 12 months to 18 months in the next generation cloud content management space?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

I'm sorry. One more time, sorry?

Chad Bennett -- Craig-Hallum -- Analyst

Do you believe either your win rates on a net new basis have went down or overall you've lost share in your space?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

No, I would actually say that from a cloud management standpoint, we are still in pretty clear leading position as the only cloud native platform that customers can move to. So when we look at most of our competition, it's primarily legacy ECM vendors like OpenText or Documentum or products that are having to be positioned through a kind of on-prem to cloud transition like SharePoint. And overall what we're seeing from customers is that the functionality, the user experience, the lack of internal or external collaboration, the lack of developer experiences or integration with other best-of-breed tools, all of those kind of deficits are causing customers to really rethink their content management environment which is actually driving a lot of demand for Box overall.

Dylan Smith -- Chief Financial Officer & Cofounder

Yeah. And as it related to the win rate specifically, we have seen stability in many cases especially for add-on deals, actually slight improvements in the win rates over the past several quarters. So absent -- and you can think about that a couple of ways, there's kind of what an amount of the pipeline did we already close as new bookings relative to what's entering the quarter and then what percentage of the pipeline that is ultimately closed either won or lost comes in, in the latter categories how we typically think about and describe win rates and that as I mentioned has been slightly improving and is significantly better in deals that had at least one of our add-on products attached. As it relates to what we closed out of the entering pipeline coverage, that is similarly been pretty stable and strong as well, absent Q4, where we had a higher volume as we've discussed of large deals pushing out of the quarter that led that metric to go down.

Chad Bennett -- Craig-Hallum -- Analyst

Okay. One last one real quick if I may. I think it should be straightforward. So if you're moving up in terms of enterprise selling into -- from a sales standpoint and then also bundling in more suite based selling or solution selling and you're going to see the benefits of this in the second half, we should expect net expansion and retention rates to accelerate?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Well, I'd say a couple of things, there is -- we would expect seeing one of the things that has been contributing positively than an expansion rate is -- in that retention rate is the cross-sells of add-on products which is offset some of the kind of counter pressures of things like the customer base maturing and such. However, this year as we talked about, we are going to see some pressure because of that one customer who reduced its use cases and footprint with us in the first quarter. So that's going to show up and we'll call out the impact as we move through the year.

So I think ultimately we could see and think that we -- based on the product portfolio that we increasingly have especially as we think about toward the end of the year and heading into next year, some upside in that metric but because of the the offsetting pressure from that one large vendor, about $8 million, that's going to make it a pretty challenging compared to this year.

Chad Bennett -- Craig-Hallum -- Analyst

Great. Thanks for taking my questions.

Operator

Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.

Michael Turrin -- Deutsche Bank -- Analyst

Hey, good afternoon. Thanks. Just one from me. You mentioned some of the revenue headwinds heading into this year on the Q4 call, but revenue sequentially down is not something we're used to seeing, given you have a 97% recurring revenue model. You also saw an uptick in $1 million deals during the quarter. So I was hoping we could talk more around given what appears to be a conservative backdrop and some of those incremental deals showing up in some form? What are some of the offsets that are bringing the full year guide lower today versus what you were seeing last quarter when you set that initial guide?

Dylan Smith -- Chief Financial Officer & Cofounder

Sure. So we'd see first specifically as it relates to the sequential revenue outcome, a couple of things, just keep in mind, maybe three things. First of all that the sequential increase or decrease or change is function of the bookings that we closed in Q4 whereas as mentioned that outcome was certainly worse than our expectations and our typical Q4 performance.

We also had at the very beginning of this quarter that customer downgrade which had a couple of million dollar headwind. And then finally, just purely optically there's five, sorry three fewer days in Q1 versus Q4, which leads with roughly $5 million headwind. So that's sort of the sequential setup there. And as it relates to the overall kind of guidance and what is changed, a couple of things and we've we probably said this, but to sort of clarify we did get off to a bit of a slower start in Q1 than we would have hoped as billings landed at the low end of the range we'd expected due to the 100k plus deal accounts coming in a bit below our expectations. And we have seen a pronounced lengthening in those larger deal cycles versus what we had expected a few months ago are really the two main things of what's changed over the past few months.

Michael Turrin -- Deutsche Bank -- Analyst

Okay. Helpful summary, Dylan. Appreciate the color there. Thanks.

Operator

And your next question comes from Erik Suppiger with JMP Securities. Your line is open.

Erik Suppiger -- JMP Securities -- Analyst

Yes. Thanks for taking the question. Just on the sales organization, has there been any change in terms of sales turnover? And then secondly, can you give us a sense for the tenure of your average sales people, how much of your sales organization has been with the Company for a year or more?

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Yes. So we haven't seen a significant change in terms of sales force turnover. So as mentioned, especially now we have a much better sense of what it takes to be successful selling these more strategic solutions sales. We have increased our focus on performance management which did a bit of an impact but not material as it relates to the overall number. And then as it relates to the overall dynamic in terms of tenure is what I'd say is entering this year we had about two-thirds of our field sellers fully ramped entering the year which is both about the same as last year and also roughly correlates to how many folks have been around for a year as that's about how long it takes to achieve fully ramped quotas. So about two-thirds of our sales force heading into the year was in that category.

Erik Suppiger -- JMP Securities -- Analyst

All right very good. Thank you.

Operator

There are no further questions at this time. Thank you very much for joining us for the call today. You may now disconnect.

Duration: 51 minutes

Call participants:

Alice Lopatto -- Head Investor Relations

Aaron Levie -- Chief Executive Officer, Cofounder & Chairman

Dylan Smith -- Chief Financial Officer & Cofounder

Ittai Kidron -- Oppenheimer -- Analyst

Philip Winslow -- Wells Fargo -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Rob Owens -- KeyBanc Capital Markets -- Analyst

Kevin Ruth -- Raymond James -- Analyst

Matthew Coss -- J.P. Morgan -- Analyst

Chad Bennett -- Craig-Hallum -- Analyst

Michael Turrin -- Deutsche Bank -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

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