Box, Inc. (NYSE:BOX) Q3 2020 Earnings Conference Call - Final Transcript

Nov 26, 2019 • 05:00 pm ET

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Box, Inc. (NYSE:BOX) Q3 2020 Earnings Conference Call - Final Transcript

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Presentation
Executive
Dylan Smith

a reminder, in Q3, we held our Annual User Conference, BoxWorks, which accounted for approximately $6 million of our Q3 spend. 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 standardize our sales motion to achieve more consistent execution globally.

Research and development expenses were $34.0 million or 19% of revenue, flat with Q3 of last year, even as we significantly enhanced our cloud content management product offerings, including the general availability of Box Shield. Our general and administrative costs were $18.1 million or 10% of revenue, a reduction of 1 percentage point from a year ago. We expect to drive continued leverage in G&A as we benefit from greater operational excellence and scale.

Total Q3 operating expenses represented 71% of revenue compared to 78% a year ago, so despite the temporary pressure on gross margin, we were able to drive our Q3 non-GAAP operating margin to a 5 percentage point improvement year-over-year, coming in just shy of break-even versus negative 5% a year ago. Non-GAAP EPS came in at negative $0.01, an improvement from negative $0.06 a year ago and in line with our guidance. This result was impacted by an FX headwind of $0.004.

Note that the previously mentioned initiatives to improve profitability will show up more fully in our results beginning in Q1 of next year. In Q3, our full churn rate was 4.4% 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 9% on an annualized basis.

As such, we ended Q3 with an annualized net retention rate of 105% down from 106% last quarter. As a reminder, this is a trailing 12 month metric. So in Q4, it will fully incorporate the impact of the single large customer that reduced its footprint in Q1 of this year. With respect to pricing for the sixth consecutive quarter, we saw an improvement in our price per seat on a year-over-year basis. We now have 13.2 million paid users.

Let me now move on to our balance sheet and cash flow. We ended the quarter with $200.9 million in cash, cash equivalents and restricted cash. Cash flow from operations was $8.9 million compared to $6.8 million a year ago. In Q3, total capex was $1.1 million versus $5.2 million a year ago. Capital lease payments, which we factor into our free cash flow calculation were $7.1 million versus $4.3 million a year ago. We expect capex and capital lease payments combined to be roughly 8% of revenue in Q4.

As a result, free cash flow was negative $1.7 million, compared to negative $4.1 million a year ago. Note that in Q4, we will be making a $6 million prepayment to a public cloud provider for a revised contract as part of our efforts to improve our future