Q1 2025 Earnings Summary
- Box is experiencing strong early adoption of Box AI and Box Hubs, with Box Hubs driving about 25% of total AI queries shortly after its beta release. This momentum indicates significant customer interest and potential for growth, as customers across all verticals are upgrading to Enterprise Plus for access to AI capabilities.
- Box is gaining competitive advantage over legacy ECM providers due to its AI capabilities and the Crooze acquisition, leading to increased win rates and market share gains. AI represents a major catalyst for customers to rethink their content management, making it a defining catalyst for moving away from legacy systems.
- Box is investing in advanced AI agent capabilities within the Box AI platform, which could automate content workflows and unlock significant new use cases, positioning Box as a key player in the AI transformation of enterprise content management.
- Continued pressure in the SMB segment could impact growth: Aaron Levie mentioned that while they are seeing stabilization and strong performance in the U.S. enterprise and federal segments, there is still some degree of pressure on the SMB segment. This could negatively affect Box's growth if the SMB segment continues to face challenges.
- Lowered billings growth expectations due to FX headwinds: Dylan Smith stated that Box now expects FY25 billings growth to be in the low single-digit range on an as-reported basis, down from previous expectations of approximately 4%, due to an incremental FX headwind of approximately 150 basis points. Reduced billings growth could signal slowing momentum for the company.
- High stock-based compensation (SBC) expenses raising profitability concerns: An analyst pointed out that Box's SBC is near 20% of revenue and growing faster than revenue, questioning the company's strategy of issuing significant stock-based compensation while buying back stock. This may raise concerns about profitability and share dilution if not addressed properly.
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Revenue and Billings Guidance Change
Q: How has revenue and billings guidance changed for FY '25?
A: Dylan stated that on a constant currency basis, their revenue guidance increased by $3 million, consistent with initial expectations. However, due to a 150 basis point FX headwind, as-reported billings growth is now expected in the low single-digit range. -
Gross Margin Impact from AI Costs
Q: How will AI usage affect gross margins?
A: Aaron explained they expect to maintain gross margin levels even with the addition of AI. High-tier plans tend to have higher gross margins, and for high-volume AI use cases, customers will pay based on volume, ensuring margins align with their goals. -
Demand Environment and Deal Cycles
Q: Any changes in demand environment or deal cycles this quarter?
A: Aaron noted stabilization in the macro environment with strong performance in the U.S. enterprise and federal businesses. The SMB segment still faces some pressure, but overall, they are happy with Q1 performance and look forward to growth. -
Win Rates Against Legacy ECM Providers
Q: Has there been a change in win rates versus legacy ECM providers?
A: Aaron reported an increase in both full takeouts and expansion deals against legacy ECM systems. The Crooze acquisition and AI capabilities are driving further momentum in replacing these systems, as AI becomes a catalyst for customers to modernize their content management. -
Partnerships Expanded Due to AI
Q: How has the focus on AI impacted your partnerships?
A: Aaron discussed three categories of partnerships enhanced by AI: AI model providers like Google, Amazon, and IBM; AI assistant and SaaS applications where Box serves as a secure data platform; and system integrators embedding Box's AI capabilities into their solutions. -
Workforce Strategy and Stock-Based Compensation
Q: Can you update us on global hiring and SBC costs?
A: Dylan shared they have over 300 employees in Poland, over 10% of the workforce and 30% of engineering. SBC has increased due to strong retention and a higher share price, but they expect SBC as a percentage of revenue to decline over time. -
Adoption of Other Products via Box AI and Hubs
Q: How is Box AI driving adoption of other products?
A: Aaron said that as customers purchase the Enterprise Plus plan, they access new use cases like advanced e-signature (Box Sign) and workflow automation (Box Relay). Notable wins include a major pharmaceutical company adopting Box Sign for validation processes and a major automotive company using it for customer transactions. -
AI Agent Future Work
Q: What's Box's role in the future of AI agents?
A: Aaron is excited about deploying AI agents within the Box platform to automate tasks like summarizing documents and extracting metadata. They are building tools to let AI handle content-related work, unlocking new use cases and increasing automation across enterprises. -
Targeted Verticals and AI Budgets
Q: Which verticals are most interested in AI, and how are budgets affected?
A: Aaron sees AI interest across all verticals, especially in document-centric industries like financial services, life sciences, and federal government. Currently, AI capabilities are funded through IT budgets by displacing legacy systems, but over time, line-of-business budgets may increase for AI use cases. -
Linearity in the Quarter
Q: What drove better linearity this quarter, and is it sustainable?
A: Dylan mentioned strong momentum heading into Q1, with compelling products and demand driving a better-than-expected start. While they aim to repeat this each quarter, there wasn't a significant change in approach, but rather good sales execution and product interest.