Box, Inc. (NYSE:BOX) Q4 2025 Earnings Conference Call March 4, 2025 5:00 PM ET

Company Participants

Cynthia Hiponia - Vice President, Investor Relations
Aaron Levie - Co-Founder & Chief Executive Officer
Dylan Smith - Co-Founder & Chief Financial Officer

Conference Call Participants

Brian Peterson - Raymond James
Michael Funk - Bank of America
Steve Enders - Citi
Lucky Schreiner - DA Davidson
Taylor McGinnis - UBS
Pinjalim Bora - JPMorgan
Rishi Jaluria - RBC Capital Markets
Josh Baer - Morgan Stanley

Operator

Thank you for standing by. My name is Jill, and I will be your conference operator today. At this time, I would like to welcome everyone to the Box, Inc. Fourth Quarter and Fiscal 2025 conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Followed by the number one on your telephone keypad.

If you would like to withdraw your question, simply press star one again. I would now like to turn the conference over to Box. You may begin.

Cynthia Hiponia

Thanks, Jill. Good afternoon, and welcome to Box's fourth quarter and full year fiscal 2025 earnings conference call. I'm Cynthia Hiponia, Vice President, Investor Relations.

On the call today, we have Aaron Levie, Box cofounder and CEO, and Dylan Smith, Box cofounder and CFO. Following our prepared remarks, we will take your questions. Today's call is being webcast and will also be available for replay on our IR website at Box Investor Relations dot com.

Our webcast will be audio only. However, supplemental slides are available for download from our website. On this call, we will be making forward-looking statements, including our first quarter and full year fiscal 2026 financial guidance, our expectations regarding our financial performance for fiscal 2026 and future periods, including gross margins, operating margins, operating leverage, future profitability, net retention rates, remaining performance obligations, revenue and billings, and the impact of foreign currency exchange rates and deferred tax expenses, and our expectations regarding the size of our market opportunity, our planned investments, future product offerings and growth strategies, our ability to achieve our revenue, operating margins and other operating model targets, the timing and market adoption of and benefits from our new products, pricing models, and partnerships, our ability to address enterprise challenges deliver cost savings for our customers, the impact of the macro environment on our business and operating results, and our capital allocation strategies including potential repurchase of our common stock.

These statements reflect our best judgment based on factors known to us currently, and actual events or results may differ materially. Please refer to our earnings press release filed today 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 from statements made on this earnings call. These forward-looking statements are being made as of today, March 4, 2025, and we disclaim any obligation to update or revise them should they change or cease to be up to date.

In addition, 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 supplemental related supplemental slides which can be found on the IR page of our website.

Unless otherwise indicated, all references to financial measures are on a non-GAAP basis. Finally, our guidance today reflects the impact of several factors, which Dylan will describe more fully in his comments. We've created a detailed guidance slide which summarizes these items.

You can find this slide in the related supplemental slides posted to our IR website. Thank you. With that, let me turn the call over to Aaron.

Aaron Levie

Thank you, Cynthia, and thank you all for joining the call today. We delivered strong Q4 operating results, customer demand for BoxAI, We achieved revenue of $280 million, up 6% year over year, or 8% in constant currency. Operating margins of 27.3%, and EPS of 42 cents, one cent above our guidance.

In fiscal 2025, we drove revenue growth of 5% year over year or 7% in constant currency, and expanded operating margins by 320 basis points to 28%. It was a defining year for Box as we introduced the most transformational product lineup in our company's history with the delivery of our intelligent content management platform. In the last two weeks of the quarter, we released Enterprise Advanced, combining the full power of our ICM platform to customers in a single multiproduct offering.

We are pleased with the momentum we are seeing with customers and closed several dozen Enterprise Advanced deals in Q4. We are seeing companies start to adopt Enterprise Advanced to power intelligent metadata extraction from documents, automate workflows and dashboards with Box apps, gain access to forms, doc gen, and archive, and create custom AI agents with the AI Studio. Examples of Enterprise Advanced customer wins in Q4 include through a systems integrator, a state DMV who is forecasting a huge increase in online title submissions, to the changing regulations.

We'll be using Enterprise Advanced to replace a legacy file system and to create custom portals to ease customer submissions and extract metadata to create dashboards for processing and managing of records. A US-based global investment firm that uses Box to power its client portal as well as provide a custom internal document management system for its financial advisors upgraded to Enterprise Advanced to support contract life cycle management for their legal team, doc gen for multiple departments, and AI Studio to deliver content-focused AI agents to help advisors answer questions faster about their documents and enhance their workflows. Also, through a systems integrator, an American international law firm moved to Enterprise Advanced to expand their use of Box.

Specifically, their information governance team is looking at ways to leverage BoxAI to help automate internal processes as they deal with repeated documents from templates. They will also continue to build out high-value use cases over the next several months from the BoxAI Studio. Using metadata extraction on contracts, Archive and more.

As we've seen in our Q4 deals, and in talking with our customers throughout the past year, we're clearly entering one of the biggest shifts in business that we've ever seen. Driven by AI. AI agents are entering the workforce.

And will augment and accelerate our work. Our unstructured data is enabling intelligence that we can now use to gain new insights about our business. And we can begin automating any workflow in the enterprise especially that long tail of work that we couldn't automate before.

The companies that take advantage of this moment will be the ones that win in the future. And, of course, the ones that don't will fall behind and be severely at risk. At Box, internally, we are building an AI-first enterprise.

We are looking at every aspect of our business, and imagining what we can do to turbocharge productivity from our employees allowing us to move faster, making more informed decisions, automate more busy work, and overall, just get more done. Box. ai is central to this effort.

As we use Box AI in hubs to help Box employees ask HR or sales enablement questions to get information faster, Box engineers, use Box AI in notes to review code for bugs or write documentation. In go to market, we use Box. ai to write sales pitches and proposals for customers.

And, in fact, I even use BoxAI to help improve my remarks today. Additionally, beyond BoxAI, we're leveraging technology from key partners to help in engineering, customer success, and more. And most importantly, we are bringing this exact same value to all of our customers so they can begin to operate in an AI-first way as well.

For the first time ever, organizations can truly tap into the value of their enterprise. All of a sudden, any employee can gain the same level of expertise as the most knowledgeable employee just by asking questions, of the existing enterprise data that's already there. The hidden information inside of contracts, invoices, financial documents, and customer data turns into business-critical insights that drive better execution.

Agentic AI can automate workflows, that were expensive and time-consuming. And by understanding what's in our content, we can better secure and protect it at scale. This is the power of intelligent content management from Box.

To help our customers transform how they work with content and AI, as noted, we officially launched our new Enterprise Advanced plan at the tail end of Q4. With Enterprise Advanced, our customers can build no-code apps with Box apps, leverage Box Forms and DocGen, to automate workflows, use BoxAI metadata extraction to plot structured data from documents, create BoxAI agents, and with the BoxAI Studio, be able to extend AI into more workflows and more. These new capabilities represent the foundation of intelligent workflow automation within Box.

Enabling the automation of business processes like contract management, digital asset management, invoice processing, clinical trial management, loan origination, and thousands of other workflows. And while FY 2025 was an important and critical year, for us in delivering our intelligent content management platform, we are just getting started. In FY 2026, we will be advancing our platform to transform how enterprises work with their enterprise content and AI.

We have many incredible product announcements in store to help our customers extract critical structured data from documents, with AI leveraging our AlphaMoon acquisition from last year. We'll continue to double down on Box apps to power no-code applications, deliver major advancements to Box Relay for workflow automation and more. We'll also continue to strengthen our security and compliance posture, new breakthroughs in BoxShield, the launch of BoxArchive, and more to help customers protect and govern sensitive content.

Finally, we'll be doubling down on our core AI platform capabilities including more powerful intelligent document processing, agentic workflows, exploring new forms of data classification, better support for Box AI agents, and more. And as we've seen in recent weeks, the rate of innovation from AI model providers. Like OpenAI, DeepMind, XAI, Gemini from Google, and Anthropic is only accelerating.

Just in the past two weeks, we've made new models like GPT-4.5% and Claude 3.7% Sonnet. Available to customers with access to the BoxAI Studio. Both of these new models have shown dramatic improvements on reasoning, math, and coding skills.

Which is extremely valuable in processing complex documents contracts, agreements financial records, and more. In fact, in our BoxAI enterprise eval, we found that GPT-4.5% performs a whopping 20 points better than GPT-4 did for extracting data from documents in a single shot. These are huge advancements that will help drive more accuracy and quality to help enable even more mission-critical workflows with AI.

To enable customers to experience Box AI more easily, as they grow with Box, in February, we announced that we expanded Box. ai availability in our business, business plus, and enterprise plans. And in addition to offering higher tiers of AI value within enterprise plus and enterprise advanced, we know that many customers have high volume use cases for using AI on their content.

And to help enable these use cases, we've also added an AI consumption-oriented model to our platform with the launch of Box. ai units. These AI units allow customers to leverage AI credits for high volume tasks, like metadata extraction from documents, leveraging more advanced AI models as they get released.

Creating custom AI agents to automate workflows in the future and more. And finally, we've been thrilled with the recent recognition of our industry-leading intelligent content management platform, by several independent analyst firms. This includes being named a leader in the Forrester Wave for content platforms in Q1, a leader in the Gartner Magic Quadrant for document management last year, and a leader in the IDC MarketScape for worldwide intelligent content services in 2024.

Now turning to go to market, We continue to enable new and existing customers to recognize the full value of Box's ICM platform, with increased adoption our multiproduct offerings. Suites represented 87% of deals over $100,000, up from 81% a year ago. We saw continued solid suites attach rates and large deals across all geographies.

We grew suites, to 60% of total revenue in Q4, compared to 55% a year ago. In addition to the exciting announcements that we are seeing around our newest suite, Enterprise Advanced, we still have a large opportunity to drive Enterprise Plus adoption. Driven by our enhanced BoxAI solutions.

As we bring intelligent content workflows to the enterprise with AI, going to market with partners is also going to become increasingly critical. We continue to expand our work with key partners and system integrators across the world, that can bring Box to more enterprises and embed us more deeply into our customers' workflows. We saw notable partner-led customer wins with Enterprise Advanced in Q4, as we drove larger deals with customers, empowered more workflows, in partnership with key system integrators.

Fiscal 2025 was a pivotal year for Box. Culminating in the launch of Enterprise Advanced, delivering to customers the full power of our intelligent content management platform in a single offering. As I stated earlier, we are clearly entering one of the biggest shifts in business that we've ever seen.

Driven by AI. Our strong financial model provides us with the opportunity to execute on our robust product roadmap. And invest in strategic go-to-market initiatives.

Leading to accelerating our revenue growth the long term. We will be providing more detail on our roadmap and growth strategy during our upcoming financial analyst day on March 18th. And with that, I'll hand it over to Dylan.

Dylan Smith

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. In fiscal 2025, we made substantial progress against the three financial priorities we outlined heading into the year.

First, we strengthened our foundation to deliver profitable growth by launching Enterprise Advanced and ramping up key go-to-market initiatives. Second, we significantly expanded gross and operating margin through cost discipline and advancing our workforce location strategy. Finally, executing our capital allocation strategy enabled us to further strengthen our balance sheet and efficiently return capital to shareholders.

In FY 2025, we delivered revenue of $1.09% billion, up 5% year over year, and up 7% in constant currency. Operating margin came at 27.9% up 320 basis points year over year and up 460 basis points in constant currency. We delivered EPS of $1.71%, up 17% year over year and up 27% in constant currency. Finally, in FY 2025, we generated record free cash flow of $305 million up 13% year over year.

Turning to Q4, We closed the year with strong results exceeding our guidance for Q4 revenue of $280 million was up 6% year over year up 8% in constant currency, exceeding our expectations despite absorbing an incremental FX headwind of 70 basis points. We now have approximately 1,920 total customers paying us at least $100,000 annually, up 8% year over year. Our Q4 suites attach rate in large deals was strong at 87% an improvement from 81% in Q4 of last year.

When we launched Suite several years ago, our objective was for Suites to represent the vast majority of our sales to large customers we are pleased to have achieved this goal. As such, going forward, we will no longer be providing this metric. As our intelligent content management platform enables customers to adopt Box for more advanced use cases, our percentage of total revenue attributable to Suites will continue to grow.

In Q4, 60% of our revenue was attributable to Suites customers, up from 55% a year ago. We ended Q4 with remaining performance obligations or RPO, of $1.5% billion a 12% year over year increase, and up 14% in constant currency. Our strong RPO growth continues to be driven by longer customer contract demonstrating our customer's long-term commitment to Box, and resulting in the long-term portion of Q4 RPO growing by 21% year over year.

Consistent with prior quarters, we expect to recognize roughly 60% of our RPO over the next twelve months. Q4 billings of $399 million were up 5% year over year and up 7% in constant currency. Q4 billings exceeded our expectations of a low single-digit growth rate due to solid bookings and high volume of early renewals, despite a minor FX headwind versus our prior expectations.

We ended Q4 with a net retention rate of 102% in line with our expectations and up from 101% a year ago. Our annualized full churn rate remains at a best-in-class 3% reflecting the stickiness of our high-value solutions. Looking ahead, we expect our net retention rate to remain at 102% in Q1 and to improve to 103% by the end of FY 2026.

Q4 gross margin of 81.0% was up 260 basis points year over year. Achieving this top-tier gross margin profile is the result both of a multiyear effort across our teams and of how product innovation has consistently increased our platform's differentiation over the past several years. Having completed the sale of our data center assets in Q3, this result represents our normalized annual gross margin expectations as we head in FY 2026.

Q4 gross profit of $226 million was up 10% year over year, exceeding our revenue growth rate by 350 basis points. In Q4, we continued to drive cost discipline across the business, which includes advancing our lower-cost location strategy. We ended FY 2025 with approximately 470 full-time employees in Poland, a significant increase from 300 a year ago.

Going forward, we will continue to scale our footprint in Poland both as an engineering center of excellence and as a critical hub for our G&A functions. We achieved record Q4 operating income of $76 million up 9% year over year. Q4 operating margin of 27.3% improved by 60 basis points year over year despite absorbing an FX headwind of roughly 110 basis points.

As a result, we delivered EPS of 42 cents in Q4, which includes a negative impact from FX of approximately 3 cents. I'll now turn to our cash flow and balance sheet. In Q4, we generated free cash flow of $91 million up 12% from Q4 of last year. We also generated a 14% year over year increase in cash flow from operations, which came in at $102 million.

In fiscal 2025, we continued to strengthen our balance sheet we ended Q4 with $724 million in cash cash equivalents, restricted cash, and short-term investments. In Q4, we repurchased 1.3% million shares for a for the full year of FY 2025, we repurchased approximately 7.6% million shares for approximately $212 million which represents roughly 70% of our free cash flow generation. As of January 31, 2025, had approximately $52 million of remaining buyback capacity under our current share repurchase plan and our Board of Directors just authorized an additional $150 million increase to our share repurchase program.

With that, let me now turn to our Q1 and FY 2026 guidance. As a reminder, approximately one-third of our revenue is generated outside of the US with roughly 65% of our international revenue coming from Japan. So Before providing guidance, I would like to provide some context on our tax expenses going for As a result of releasing our US tax valuation allowance in Q4, we expect to recognize incremental non-cash deferred tax expenses in the US, which will result in a non-GAAP EPS headwind throughout FY 2026.

Our non-GAAP adjustments will also include the effect of income tax being calculated on our higher non-GAAP earnings. Beginning in FY 2026, we are establishing a long-term non-GAAP tax rate of 27% which will be applied to our GAAP to non-GAAP reconciling items and reflected in our non-GAAP EPS guidance for Q1 and FY 2026. Please note that due to our significant NOL carry forwards and other tax credits.

We expect to pay more modest cash taxes in FY 2026, with an estimated cash tax in the range of $12 million to $15 million. For the first quarter of fiscal 2026, expect Q1 revenue to be in the range of $274 million to $275 million representing approximately 4% year over year growth at the high end of the range and 5% growth in constant currency. Our Q1 revenue guidance also includes a 120 basis point headwind due to the leap year in FY 2025.

We anticipate our Q1 billings growth rate to be in the low to mid-teens range. This includes an expected tailwind from FX of approximately 300 basis points. We expect Q1 gross margin to be approximately 80%.

Note that in Q1 of last year, our gross margin benefited by approximately 100 basis points due to data center equipment sales the quarter. We expect our Q1 non-GAAP operating margin to be approximately 25% versus 26.6% a year ago. There are three factors outside of our underlying business, which combined to create an expected 220 basis point headwind when comparing Q1 to the prior year.

This includes 100 basis points from data center equipment sales, 80 basis points due to the leap year, and an expected approximately 40 basis points due to FX. When adjusting for these factors, our Q1 non-GAAP operating margin guidance represents a slight year over year improvement. We expect our Q1 non-GAAP EPS to be in the range of $0.25% to $0.26% compared to $0.39% a year ago.

This includes an expected headwind of approximately one cent from FX, and eleven cents from incremental noncash deferred tax expenses. Weighted average diluted shares are expected to be approximately 151 million. For the full fiscal year ending January 31, 2026.

We expect revenue to be in the range of $1.155% to $1.16% billion, representing approximately 6% year over year growth. We expect a neutral impact from exchange rates based on present currency rates. We expect our FY 2026 billings growth to be approximately 7%, including a tailwind of approximately 30 basis points from FX.

Please note that while we anticipate fluctuations in our billings growth rate between Q1 and Q2, expect our overall billings growth rate in the first half of the year to be roughly in line with our annual billings growth rate. We expect FY 2026 gross margin to be approximately 81%. When adjusting for the impact from data center equipment sales from Q1 to Q3 in FY 2025, this represents a year over year improvement of 40 basis points.

We expect our FY 2026 non-GAAP operating margin to be a approximately 28%. Year over year comparisons include a 60 basis point negative impact from last year's data center equipment sales. As Aaron mentioned, we have a significant opportunity to transform how enterprises work with their To take advantage of this opportunity, in the year ahead, we'll be making methodical investments critical technology juncture which includes building out a strong partner ecosystem to expand our reach.

Will also be enhancing our critical AI and workflow capabilities to deliver the leading intelligent content management platform to enterprises. In FY 2026, we will continue to drive efficiency across the business through cost discipline, AI for workflow automation, and our workforce location strategy. We expect to realize significant returns from the investments we're making this year we remain committed to delivering significant margin expansion over time.

We expect FY 2026 non-GAAP EPS to be in the range of $1.13% to $1.17%, as compared to $1.71% in the prior year. This includes a $0.52% headwind from incremental noncash deferred tax expenses. Weighted average diluted shares are expected to be approximately 153 million.

Dollars We're proud of the solid results we delivered throughout FY 2025. Our ability to generate business model leverage while making strategic investments in our intelligent content management platform is paying off. And we couldn't be more excited about the opportunities ahead of us with Enterprise Advanced and AI.

We look forward to providing more details at our Financial Analyst Day later this month. With that, Aaron and I will be happy to take your questions.

Operator

Thank you. The floor is now open for questions. If you would like to withdraw your questions, simply press star one again.

If you are called upon to ask a question and are listening via loud speaker on your device, please pick up handset and ensure that your phone is not on mute when asking your question. Again, it is star one to join the queue. Your first question comes from the line of Brian Peterson of Raymond James.

Your line is open.

Brian Peterson

Hey, guys. Thanks for taking the time. And sorry about the background noise.

And, look, the billings number was great this quarter. I just love to understand the early momentum you're seeing with Advance. Was it better than you expected, and how do we think about the pipeline for that product as we enter fiscal year 26.

Aaron Levie

Yeah. So we were very happy with results in Q4 on Enterprise Advanced. You know, this was a plan that our customers didn't really even have much early heads up on.

We were moving pretty quickly throughout the year and announced it officially at Boxworks. And so that only gave customers really, you know, kind of sixty days maybe at best to really, you know, dive in understand the offering, understand the plan. And so to have, you know, dozens of deals at the end of Q4 that were Enterprise Advanced, we were very happy about.

The momentum is certainly building in all of our customer conversations. And as folks who have paid attention to our rollout of these plans know, you know, that there's definitely a transition period from one plan to the next. But very quickly, most of the sales conversation we're going to have will certainly start with the functionality that's an Enterprise Advanced.

And then, obviously, customers can down select to Enterprise Plus or another plan if they don't need that automation or intelligent document processing, but we will start to veer more toward highlighting all those capabilities and those use cases to customers. Gonna see this quite a bit in all of our major announcements. They'll tend to have, you know, some Enterprise Advanced capability or component in them throughout the year, and we're just gonna drive more and more momentum.

So super happy with the results in Q4 in Enterprise Advanced, and we expect that to be a core part of our selling motion. But you know, still, you know, wanting to note that it's a ramp process as you can imagine.

Brian Peterson

Gotcha. Because you reached out earlier. You mentioned Clover's couple of different times.

As we're thinking about the mix of kinda direct versus indirect however you wanna say it. How should we think about that evolving going forward.

Aaron Levie

Yeah. So we've long been in a mostly direct business other than Japan, which is a very channel-heavy business even though we still have direct reps involved in those deals. And, you know, there's a lot of lessons in Japan that we'd like to be able to bring to other regions.

And just naturally with the kind of use cases we're now going after where we are really going into the core of a customer's transformational workflows, you know, moving from legacy systems to the cloud, being able to start to automate more business processes, These are the types of workflows that need implementation. It usually is a broader part of a bigger strategy. And there's now obviously very, very relevant partners in all of these categories that help customers every single day in every single industry with those types of transformation.

So we wanna be embedded in each of those partners. When they think about content, we want them thinking about Box. And so we'll bring them into more deals as relevant, and we wanna build flywheels with a lot of these top GSIs as well as, you know, boutique and even kinda regional firms that have a specialty a particular domain.

At the Analyst Day, we'll certainly talk a little bit more about the overall partner and system integrator strategy. But we do expect that this is a more critical part of our go-to-market engine where last year we started to rev up the engine. And now this year, I think it's gonna be a you'll hear more from us on this part.

Operator

Your next question comes from the line of Michael Funk of Bank of America. Your line is open.

Michael Funk

Thank you for the questions tonight. You know, first one, higher level macro question. Growing uncertainty with the macro environment last month or so.

You get any sense from your clients about uncertainty on their end for purchasing due to the macro or shift in behavior.

Aaron Levie

Yeah. You know, certainly very top of mind question. It's an, you know, increasingly dynamic environment as I think we've all seen.

You know, every day there's, you know, some type of change or reversion that keeps everyone on their toes. We're staying very close to our customers. On the environment, and we wanna continue to, you know, partner with every customer in every industry to help them drive more efficiency, to help them drive more automation, to help them get more intelligence from their business.

So, you know, we believe we're an asset in this environment. In dynamic times. You wanna have more leverage from your technology. You wanna be able to retire more legacy systems. You wanna automate more work.

So we think we're in a very strong position there, but certainly dynamic macro environment and we're continuing to watch it very carefully.

Michael Funk

Okay. Great. And on NRR, so maybe help me think on the components to NRR you know, as far as pricing contribution, product, and then change in seed count as we think about maybe potential for improvement moving forward.

Dylan Smith

Yeah. So on NRR, I would say for the, you know, call it medium term and what's baked in our confidence in being able to improve that net retention rate from 102% to 103% year over year largely driven by the same types of dynamics that we've experienced over the past year. Which is to say continued improvements in price per seat.

So pricing driving a lot of the customer expansion particularly now that we have Enterprise Advanced. As part of our portfolio. And then, you know, expect to see still pretty muted and minimal contribution from seat growth.

And then at the same time and kinda completing the kinda three factors on the overall kinda full churn rate, we also expect that to remain very strong and stable at 3%. And then outside of NRR, you're not expecting to see a big shift in the contribution of expansion from our existing customers, which is represented in that NRR and the contribution to growth from, you know, kinda new customers buying Box for the first time. So longer term, I think that, you know, of those various factors, the one that will hopefully and we expect contribute more to growth is on the seat side, but we'll say that we do expect you know, even steady state in longer term for price improvements to have be a bigger driver of net retention improvements rather than a seat growth.

Michael Funk

Great color, guys. Thank you so much.

Operator

Your next question comes from the line of Steve Enders of Citi. Your line is open.

Steve Enders

Okay. Awesome. Thanks for taking the questions here.

I guess maybe just to start on the advanced custom adoption that you've seen so far, I guess maybe what are kind of the core use cases that you're seeing those customers utilize for. You know, how much of an uplift has the advanced plan driven you know, from the ACV growth on a like-for-like basis to those customers just any, you know, further details around that would be, you know, would be helpful. Thanks.

Aaron Levie

Yeah. So I'll go through some of the use cases, maybe Dylan can provide some of the pricing color. You know, there's gonna be a few different kinda killer apps within Enterprise Advanced.

It's the first time that we've released a new suite that had, on day one, the kind of breadth of functionality that this does. The Enterprise Plus offering was really built on the success of Shield, and then we added more to it over time. Enterprise Advanced has a little bit of something for the different kinds of workflow and content management use cases that are out there that we've been missing.

So forms and doc gen, if you're doing a lot of sort of form-based automation where, you know, data comes in, need to be able to automatically generate a contract or an invoice or some other statement with that data. So we've seen a number of customers be very excited by that functionality. We have unlocked with archive a lot of customers' use cases where they have large datasets they wanna be able to manage within Box.

But we haven't historically given them the tooling to manage that content outside of, really, the end user experience. It's how archive lets you go. But content you wanna be able to govern over a long period of time for a records management use case.

And that's now built in. So those are a few of the capabilities that have been exciting. The really, really big ones are likely going to really revolve around this metadata extraction from documents.

And so that's our AI-powered document processing capabilities. So you take a contract or an invoice or a bank statement, and inside of that document, today with Box, unless you can, like, tell us what's inside of it, we can't let you really, really know, automate much around that document unless you're kinda manually moving it through a work or, again, giving us the metadata details about that file. What we now can do with AI is we can extract that data for you.

So you put the contract in the box, and you wanna pull out the renewal date, the party names, the different, you know, key clauses, any other parameters, and we can pull out that data. We it into our structured database, and then you can automate the workflow around that. So you can imagine the endless use case around invoices, statements, contracts, resumes, anything that right now you wanna be able to get intelligence from or automated workflow around.

We now have, increasingly the capability starting with our APIs, and then the Alpinoon technology lets fill that out. At the end user side later this year. So that's growth drivers.

And then the second one is our no-code app functionality. That's based on the Cruise acquisition. Now about a year and a half ago.

And so you can kinda see these things as interrelated. Once I have the data about my documents, or my contracts or my invoices, now I wanna have a dashboard to look at all the insights from that data, or I wanna be able to have a dashboard to understand where is a particular document in its process within the enterprise. And so I wanna be able to build a no-code application for that workflow.

So we're seeing a lot of demand especially for those two core capabilities, and we think that's just gonna continue to accelerate.

Dylan Smith

Yeah. And then to hit on, you know, some of the economics, you asked for the ACVs. We are pleased that the Enterprise Advanced deals that we've sold so far have achieved the target pricing uplift. Of 20% to 40% versus Enterprise Plus that we had outlined when announcing Enterprise Advanced.

And as you'd imagine, that's where virtually all of the deals we've sold so far are coming from. From current or previously, I guess, Enterprise Plus customers. Still a bit too early to tell and speak to the deal trends either on, you know, overall contract values or on pricing.

Comparisons for customers who are coming into Enterprise Advanced as their first sale. But we will, you know, certainly, you know, kinda share what we're seeing there once we have more of those data points as well.

Steve Enders

Okay. Great. No.

That's helpful context there. And then on the, you know, on the go-to-market investments that you're making, can you just help us, I guess, think through, I guess, what kind of needed to be built out still or, you know, whether it's, I guess, the most kind of, like, direct investment coming on the go-to-market front. And I guess secondarily, just as we think about the unit economics of a customer coming in from a partner versus direct, how do those compare as you kinda lean into that partner-driven model.

Aaron Levie

Yeah. So on the go-to-market side, and I do wanna note that we're being very methodical, about the investments. It is a very surgical approach to what we're gonna be adding reach.

But if you look at where we are taking the platform and the kind of customer conversations we're having, there's a few components that we believe will accelerate those conversations and be able to respond to more of the demand that's out there. So gonna see, you know, incrementally, more on the industry's efforts and kinda key industries that we're going after. You can think, you know, financial services, life sciences, etcetera.

We are doing more on the system integrator front as per the kinda last question. So you can imagine that we wanna have the right kind of talent enabling the key system integrator partners around our platform and then bring them into more deals and really building that flywheel. So there's that kind of an expansion of the kind of relationships we wanna have there.

We are gonna be investing in key segments of the business that simply need more sales capacity or the sort of respective overlay functions that are tied to that. And so, you know, those will be segments that we see as performing very well that we wanna keep doubling down in. And then, you know, there's certainly gonna be incrementally more around driving the story of content and AI in the market.

And, again, responding to a lot of the demand and interest that's out there around having solutions that let you tap into your unstructured data. So that all combined will be where we drive the overall, you know, go-to-market engine.

Dylan Smith

Yeah. And then, this is Dylan. On the, respective economics of direct versus indirect customers.

Those actually end up being extremely comparable. And that is to say that even when factoring in with whatever, you know, margin or payments the partner's getting, still nets out to be fairly neutral because in a lot of cases, those customers are getting other benefits, cost leverage cost leverage by working through that partner, whether it's marketplace credits or, you know, part of broader spend with them or something like that, and tends to come in as such at kinda on average a slightly higher pricing, which kinda offset some of the margin impact. And that, you know, doesn't even speak to a lot of the other support that our partners provide whether that's, you know, whether on customer support side, you know, certainly going out and finding these customers, which is, you know, more efficient you know, with respect to, you know, our own sellers or marketing spend doing the same job.

So I would say overall and what's actually a little bit unique I think, the Box's business versus what you might normally see across the software landscape, is our indirect customers are actually effectively just as profitable as our direct customers.

Steve Enders

Okay. Awesome. No.

That's great to great to hear, and thanks for taking the questions again.

Dylan Smith

Thank you.

Operator

Your next question comes from the line of Lucky Schreiner of DA Davidson. Your line is open.

Lucky Schreiner

Great. Thanks for taking the questions. Maybe just on the guidance.

It seems to imply a little bit of a change in terms of the seasonality of the business being more backend weighted. Is that the right way to think about it. Or, you know, how should we sort of think about linearity here.

Dylan Smith

Yeah. So do you for which metric are you asking much specifically.

Lucky Schreiner

Revenue.

Dylan Smith

Revenue. Sure. Yeah.

So I would say a couple things there. I mean, first, as we had mentioned, Q1 is kind of artificially lower as it were because of the impact of the leap year and that kind of 120 basis point impact. But even adjusting for that, you're right that we do expect to see a gradual acceleration in our revenue growth right rate, apples to apples, throughout the year.

As, you know, a lot of as we mentioned, a lot of the investments been making in growth, you know, kind of the early traction from Enterprise Advanced and everything else that Aaron and I have been discussing, is what's driving that acceleration. And you see that again in the net retention rate and our expected improvement by a point year over year, as well as with, you know, billings coming in, you know, a little bit higher than our revenue growth rate expectations for the year.

Lucky Schreiner

Makes sense. And then maybe on you know, the top of funnel interest, have you noticed just in general interest from new customers increasing significantly with the Enterprise Advanced solution, or is it really more from the existing basically. Given how early it is.

Aaron Levie

Yeah. I think just given the how early stage you know, the plan is, it's heavily, you know, weighted toward customer that we're in conversation with and highlighting new use cases. But maybe the plan aside for one second, I would say our ability to draw in a wider audience is increasing as a result of the latest functionality that we've been introduced.

You know, AI has been has been this incredibly important technology for us in let's say, expanding the aperture of our of our potential customer base. There's a large amount of customers that sort of know that they're sitting on unstructured data, documents, and AI is the first time that they are starting to realize they can get insights from that data or automate business processes around that. So know, just as an example, I'm often talking to chief data officers, and that was never really an audience that we would talk to before.

We were usually in kind of core infrastructure within the CIO organization, but this the chief data officer realizes now that once you have AI on unstructured data, they can treat that as another data type to pull business insights from. And so this is opening up that aperture as an example. We're having more conversations with company CTOs that are trying to deliver better experiences, and they know that if they can get data from within their unstructured information, they could go and automate a better client-facing experience.

And so what's gonna happen is as we really, really own this content and AI message in the market, I believe you're gonna see a widening of the funnel the kind of audiences we can go talk to. Not even to mention in the lines of business, that are also, you know, trying to figure out how can I bring AI to marketing, how do I bring AI to HR process see his. And this is where you're gonna see us have a very strong story around how companies can run-in an AI-first way really, in any line of business that they're operating in.

Lucky Schreiner

Very helpful. Thanks for taking the questions.

Aaron Levie

Thank you.

Operator

Your next question comes from the line of Taylor McGinniss of UBS. Your line is open.

Taylor McGinniss

Yeah. Hi. Thanks so much for taking my questions.

Maybe first just on the operating income margin guide for 2026. So roughly implying flat year over year. I know there's it sounds like a 60 basis point headwind embedded in that.

But just when we think about that in the context of, you know, like, where you guys stand with investments, you know, what you're doing around AI, like, anything, you know, you can give us a little bit more color there in terms of what might be embedded. And then also to just how that relates to, you know, comments around significant margin expansion still left in the business. Thanks.

Dylan Smith

Yeah. Sure. Thanks, Taylor.

I would say at a high level, you know, as we mentioned, just given the state of, you know, kind of ramping up and making sure that we really both drive the innovation around our product as well as invest in things, that we started this past year such as, you know, really standing up and making and setting up our partner ecosystem for success, in addition to, you know, kind of invest in some of the key markets, you know, kind of sales segments that we've been seeing, really strong results. Wanna make sure that we're, you know, doubling down there just given you know, how critical of a juncture it is in terms of a lot of these technology decisions. And with AI, I would think about it as really, you know, kinda making a lot of those sales marketing investments.

But, you know, as you know, even once we have those resources ramped, you know, just take it takes a few quarters for those deals to come to fruition. And then the revenue, you know, kinda, you know, kinda follows in the year, you know, that follows actually closing the deal. So you can think of it as kind of the lag of a lot of the investments we're making that we are seeing early signs of those paying off.

You're not quite getting the revenue impact that we expect to show up over time. And so that's, you know, a lot of it without doing anything, you know, dramatically different is what leads to that confidence and, you know, how we're thinking about that approach. Which is why this coming year, because of that timing, we are expecting to generate again some apples to apples operating margin expansion on a year over year basis, but, you know, nothing, you know, like what we've generated in the past couple of years both because, you know, the significant improvements we made on gross margin already, which will incrementally improve over time, as well as you know, OpEx leverage being, you know, positive but fairly minimal for this year.

Aaron Levie

Yeah. Maybe just the I just one other second of color that Dylan covered is philosophically, you know, I think we are in a moment right now where we're just seeing a tremendous amount of opportunity on really connecting AI and content together. And it's the most excited that we've been, you know, as a company and from a technology standpoint and the amount of interest from customers is certainly the highest for what they can now do with their data.

We wanna be extremely prudent, to be clear, which is why we're making extremely thoughtful investments and we are still on the path to the higher operating margin levels that we've discussed. But this is a kind of period where we do wanna make sure that we're tuning that allocation just a little bit differently than maybe we have in the past couple of years.

Taylor McGinniss

Perfect. That was great color. And then just maybe on the outperformance in Billingston Q4, I think you guys had a tougher compare, so that was a really solid number.

Could you just maybe talk about, you know, what drove that. And then when we look into the first half of the year, the stronger Q1 number versus Q2, anything just the Flag on that.

Dylan Smith

Yeah. So it's say it actually the Let's say in Q4, you know, we had a solid new result in the prior quarter, but not at, you know, unusually hard compare. There were some FX, you know, headwinds that created a lot of the kind of comparison challenges that we'd expected and did see.

FX was actually a little bit more of a factor and a bigger negative impact than we had expected. You know, when we set our Q4 expectations, I would say it was really that strength of the combination, you know, as mentioned of just, you know, strong adoption and early momentum. With Enterprise Advanced.

Just overall, you know, a solid bookings quarter for us. And on the early renewal dynamic that I mentioned, that was had about a $5 million impact to Q4's results. So a little less than two points of the outperformance was attributable to that.

So, you know, again, I would say that, you know, any way you slice it, we're really pleased with Q4's billing results. And came in ahead of our expectations, but they just wanna be transparent that there were a couple of items, and the payment durations in particular that, you know, kind of, you know, helped with the with the Q4 billings growth rate. And then turning to Q1 and Q2, is, you know, kind of somewhat follows that.

And would note that in Q1, versus Q2 of last year, that was where we did have both, respectively, the weakest and then the strongest billings growth rate. At, you know, kind of basically flat to 10% plus going Q1 to Q2, At the same time, as we mentioned, there is the impact of the of FX that flips where in Q1 of last year, it was Q1 of this year this coming year, we expect FX to be a 300 basis point tailwind, but then for Q2, we expect that to be a headwind of about 140 basis points. Because there was significant FX volatility throughout the first half of last year.

So that's one big factor, a nearly 500, basis point swing attributable to FX. And then the final piece in Q2 is some of those early renewals that we mentioned in Q4 are actually coming out of customers who had been set to renew in Q2. So that's where you see a little bit of that dynamic set in as well.

Which is why you see teens growth in Q1 and then comes down a bit in Q2. But that's basically primarily optics and just some of the cosmetic factors. And, again, for the full first half of the year, we expect that billings growth rate to be about 7% consistent with both the full year and second half expectations.

Taylor McGinniss

Perfect. Thank you so much.

Operator

Your next question comes from the line of Pinjalim Bora of JPMorgan. Your line is open.

Pinjalim Bora

Oh, great. Thanks for taking the question. Aaron, interesting to see the consumption AI units that you launched.

Can you help us understand maybe what drives the consumption of an AI unit. I'm trying to understand if that's, like, a per document of metadata extraction, or is that per word of metadata extraction. I how granular is it.

Kindly just understand how should we think about kind of the ramping of those AI units.

Aaron Levie

Yeah. So we realized that we probably and we'll have somewhere between, I don't know, five and ten different kind of applied AI use cases in making up a time frame of the next year or two, let's just say. And we didn't wanna have to have a SKU for each of those different capabilities where a customer has a, you know, different billing sheet for each product they want, and then you have a know, a complex sales cycle for every single thing they wanna do with AI.

So we, you know, looked at the industry, looked at different models, and came up with AI units, which is really the subtraction layer from any individual sort of function that you wanna leverage. So there'll be a basically, a conversion chart that says one AI unit, you know, equals x amount of things in that particular capability set. So, you could imagine a scenario where extracting data from a page of a document costs a certain number of AI units.

Then how many ever pages you wanna do or how many documents you wanna do. That will generate a certain AI consumption amount. Similarly, you know, you can imagine, you know, an agentic workflow in the future where an agent is sort of doing a long-running process, Maybe that takes five or ten minutes for that agent to complete the work.

And we would have some kind of conversion ratio on the amount of kind of work the AI agent is doing and the amount of AI units. And then one more x factor in there is the model capability or quality that you wanna be able to leverage becomes yet another variable. So you know, a lower, you know, a lower class model that might be great at one kind of simple thing would cost a certain number of AI units but then a much more powerful reasoning model that's doing, you know, thinking and chain of thought the response, know, that might cost a little bit more.

So those are the different kind of philosophical variables. I'd say we're way too early to ask anybody to start to model that. This was just released a couple weeks ago as the first way that we can help our customers have more flexibility in how they're using AI.

And then we're gonna expand it from there. But, you know, essentially, you can think about it as a customer will call us, say, know, I have a hundred thousand documents I wanna process, and then we'll convert that into a number of AI units that they need, in addition to the core functionality, which is unlocked at the Enterprise Advanced plan in this case.

Pinjalim Bora

Understood. Thank you for the color. And then Dylan maybe help us understand about the federal sector. How should investors kind of think about the US federal exposure for Box.

And are you baking in some caution around that segment as it as you're thinking about the guys.

Dylan Smith

Sure. So some of the dynamics with that market are what leads to the prudence. And so we are certainly wanna be cautious.

But, again, I think it's too soon to tell exactly what the impact could look like, and that has been, you know, such a key area for our growth. We've seen a lot of green shoots because of, you know, becoming FedRAMP high compliance and all of those things that we are certainly remain focused on that opportunity. What I would say in terms of the size and impact in terms of our current business, fairly minimal exposure there where what I would say is that our total United States public sector business is in the mid-single-digit percentage range of our overall revenue, then the federal business is a portion of that as we also have a pretty successful state and local business as well.

So, you know, it's kinda low single-digit percentage range of overall revenue, but certainly one that we are paying a lot of attention to.

Pinjalim Bora

Understood. Thank you.

Operator

Your next question comes from the line of Rishi Jaluria of RBC Capital Markets. Your line is open.

Rishi Jaluria

Oh, wonderful. Thanks so much for taking my questions. Maybe two.

I wanna start one a little bit, you know, housekeeping and better understanding. For Dylan and then one for Aaron. Dylan, just to start off with, you know, you saw a pretty big increase in long-term RPO, and you called out duration as kinda being a tailwind.

At the same time, we see a lot of enterprise software companies are actually seeing shorter shortening duration. Can you maybe walk us through the dynamic of why you're seeing better contract durations. And then I have a follow-up for Aaron.

Thanks.

Dylan Smith

Yeah. I would say, really, maybe a function you know, it's where we had started to see this trend, and now with Enterprise Advanced, that really represents the type of commitment and, you kind of demonstration of buy into the platform that it makes sense to sign a multiyear deal, whereas maybe those customers had just had annual contracts as well. Particularly as some of these use cases that are more complex and add more value, takes some time to ramp up.

And so built into that contract structure there might be a gradual increase in the amount that they're getting billed per year. So there's contractually some incentive and really alignment for customers to adopt our solutions as quickly as possible that is having an impact there. I would say the other thing that fuels it, it's not just the overall duration but also the volume of early renewals.

So if you had a customer where maybe they had a year remaining even on a multi-year contract, and now they're renewing early in a given period for example, because they're really excited and wanna get all the capabilities of Enterprise Advanced as soon as possible, Now instead of having with a year left, it would have had nothing in long-term RPO. And now if they re-up for another three-year term, early renewing, that has now two years that shows up in backlog and our long-term RPO growth. So I'd really say it's the combination of just becoming a much more critical and strategic platform for our customers.

Which leads to that lengthening as well as some of the mechanics of the early renewals both fueling that growth.

Rishi Jaluria

Alright. Wonderful. That's really help.

And then, Dylan, if we could please just think about you know, you mentioned during your prepared remarks that you are using Box internally as well as some of the Box AI features and SKUs. Can you maybe talk a little bit about what have you seen in internally, especially anything that can be benchmarked in terms of driving greater efficiency, cost saving, or even kind of driving better execution and better growth as a result of using Box AI, what would have you seen anything you'd benchmark. Thanks.

Aaron Levie

Yeah. So, this is Aaron. But, you know, we have a very kind of, you know, box on box first approach to AI rollout.

So we want, you know, boxers to be using the product for every possible use case. So we can figure out, you know, ahead of our customers what's working well, what's not. So we're getting, you know, a stream of great anecdotes and quantitative case studies.

And so, you know, we still have to aggregate kind of all these across the board, but, you know, we'll have examples of just a single HR process where we're using Box Hubs and rolling that out for employees to ask questions about, let's say, a new kind of HR process. You know, just saving, you know, dozens and dozens of hours for one micro type of task like that that normally would have been, you know, internal emails and conversations constantly. From people asking questions.

Now you offload on to AI. So we have hundreds of those scenarios, and we'll be sharing a bit more at the analyst day to kinda roll that up. But just think about it as, you know, whether you're interacting with documents or contracts or you know, writing a product spec on a team or working on a marketing asset.

Or asking questions about HR information or sales materials or product support questions or all of that is routing through Box. ai today. And so the expectation, of course, is that you know, we're gonna be shipping more software. We're gonna be selling customers better.

Gonna be able to, you know, deliver more marketing campaigns, and that is that's already sort of showing up across the business.

Rishi Jaluria

Alright. Very helpful. Thanks, guys.

Aaron Levie

Thank you.

Operator

The last question is from the line of Sebastien Naji of Morgan Stanley. Your line is open.

Sebastien Naji

Great. Thanks for the question. We're seeing a really strong uplift in advance from Enterprise Plus.

So existing customers clearly finding the value and all the new features and Box AI. Hoping you could talk about how BoxAI, the latest innovation are impacting new customer wins. And, also, just wondering if you've seen all this new technology as an accelerant to broader platform you know, enterprise content management platform rip and replace as well.

Aaron Levie

Yeah. So to start with the second question first, you know, AI is absolutely going to be a catalyst for driving more, let's say, replatforming of traditional approaches to document management and content management. And so sort of see two kind of vectors to this.

The first is customer that might be on a pure legacy enterprise content management system. And just the amount of, you know, the modernization of the functionality is just not there to be able to go drive intelligence from data. We have a partner that we're building more and more momentum with that has sort of highlighted, you know, how little innovation there's been in this category from maybe traditional players.

And it's creating a huge opening for us because now Box. ai is letting them, you know, start to bring us in conversations that, traditionally they've not been able to move to the cloud or leverage a modern solution for, but now AI kinda creates that catalyst for them. So that's sort of vector one.

And then vector two is think about all of the business units or parts of the organization that didn't have a traditional content management system, and, you know, the customer wasn't really even thinking they were in the market for traditional enterprise content management. So, you know, the team marketing, you know, leveraging, or managing digital assets or the team that was managing contracts or the invoice processing team in an organization, a lot of times, that data just goes into file systems or it's, you know, stuck in email attachments. And so AI now, all of a sudden, dramatically exceeds what they were doing in their workflows before, which has the opportunity now to cause customers to say, okay.

Maybe actually I do want software for this problem. I don't wanna just have my data floating around and handling these workflows on a manual basis. So that's gonna be, frankly, I think over the medium term, the largest part of the category, you know, the traditional enterprise content management space is measured in the sort of $7 to $10 billion range, plus or minus is.

But the much bigger opportunity is actually all of the use cases that today don't go into an OpenText or a Documentum or a Hyland. And that's the data that we can now go drive, you know, significant amount of automation for. And then to the first question, you know, we are, you know, again, very, very early in rolling out Enterprise Advanced.

A lot of the demand is coming from existing customers, but we're now, you know, gonna make sure that this is very much front and center for all of our new sales conversations, all of our marketing campaigns. You know, our entire marketing story right now is content plus AI. And really highlighting what customers can now do with it and Enterprise Advanced is certainly gonna be the best plan type to enter for driving those use cases.

Operator

That concludes our Q&A session. I will now turn the conference back over to Cynthia Hiponia, VP of Investor Relations for closing remarks.

Cynthia Hiponia

Great. Thank you everyone. As a reminder, we're holding our fiscal 26 Financial Analyst Day on Tuesday, March 18th.

Just reach out to Elaine or myself at ir@box.com to register, and we look forward to chatting with you again on analyst day and on our next earnings call.

Operator

Concludes today's conference call. You may now disconnect.