Box, Inc. (BOX) Q4 2022 Earnings Call Transcript

Box, Inc. (NYSE: BOX) Q4 2022 earnings call dated Mar. 02, 2022

Corporate Participants:

Cynthia Hiponia — Vice President, Investor Relations

Aaron Levie — Chief Executive Officer and Co-Founder

Dylan Smith — Chief Financial Officer and Co-Founder

Analysts:

Jason Ader — William Blair — Analyst

George Iwanyc — Oppenheimer — Analyst

Steve Enders — KeyBanc Capital Markets — Analyst

Chase Donovan — Raymond James — Analyst

Erik Suppiger — JMP — Analyst

Nick Mattiacci — Craig-Hallum — Analyst

Josh Baer — Morgan Stanley — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the Box Incorporated Fourth Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. I would now like to hand the conference over to your first speaker today, Ms. Cynthia Hiponia. Ma’am, please go ahead.

Cynthia Hiponia — Vice President, Investor Relations

Good afternoon, and welcome to Box’s fourth quarter and full-year fiscal 2022 earnings conference call. I’m Cynthia Hiponia, Vice President, Investor Relations. On the call today, we have Aaron Levie, Box Co-Founder and CEO; and Dylan Smith, Box Co-Founder and CFO. Following our prepared remarks, we will take your questions.

Today’s call is being webcast and will be available for replay on our Investor Relations website at 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 Q1 and full-year fiscal 2023 financial guidance and our expectations regarding our financial performance for fiscal 2023 and future periods, including our free cash flow, gross margins, operating margins, operating leverage, future profitability, net retention rates, unrecognized revenue, remaining performance obligations, revenue and billings, and our expectations regarding the size of our market opportunity, our planned investments and growth strategy, our ability to achieve our long-term revenue and other operating model targets, the timing and market adoption of, and benefits from our new products, pricing models and partnerships, the impact of our acquisitions on future Box product offerings, the impact of the COVID-19 pandemic on our business and operating results and our capital allocation strategies, including M&A and potential repurchases of our common stock.

These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to our earnings press release filed today and the risk factors and documents we filed 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 2, 2022, 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 our 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 and Co-Founder

Thanks, Cynthia, and thank you all for joining the call today. We had a phenomenal year at Box. We delivered 13% annual revenue growth, well above our original guidance of 9% to 10%. We drove significant margin expansion to deliver a 20% non-GAAP operating margin, up more than 400 basis points from 15% a year ago. And we exceeded our commitment to achieve a revenue growth rate plus free cash flow margin of 30%, ultimately delivering 33% versus 26% a year ago.

In FY22, we continued to bring advancements in our category-defining Content Cloud platform to the market with the worldwide launch of Box Sign, our native e-signature product offering. We made significant product enhancements in security and compliance, collaboration and workflow, and strengthened our ecosystem of partner integrations. We’ve built the leading Content Cloud with well over 100,000 customers on our platform. And we have an exciting roadmap to continue our industry leadership going forward.

Turning to Q4. We delivered strong results, marking yet another quarter of delivering both revenue and non-GAAP EPS above our guidance. We grew fourth quarter revenue, 17% year-over-year, a fourth consecutive quarter of accelerating revenue growth, and delivered operating margin of 21% and RPO of 19%, which is greater than revenue growth and is an important leading indicator of the strength of our business. Additionally, we saw strong results in the makeup of our customer wins and expansion in Q4. Our net retention rate was 111%, up from 102% in the prior year and up from 109% in the third quarter, driven by the continued stickiness of our platform and customer expansion rates.

We had 128 deals over $100,000 and 9 deals over $1 million, up from 121 and 4 respectively. And for the full fiscal year, our $100,000 plus deals grew 25% year-over-year. Finally, we had a record number of our multi-product Suites sales, which now includes our Enterprise Plus plan with 83 Suites deals in Q4 over $100,000, up 51% year-over-year. And for the full fiscal year, our Suites deals over $100,000 or up 110% year-over-year. Our strong Q4 and FY22 results underscore that our focus on growth and profitability is working and our strategy is aligned with the key trends that are driving the future of work. The dynamics around COVID forced a broad digital shift overnight and accelerated the necessity for the cloud to become the foundation of all work.

In this new digital first era, employees need to be able to work from anywhere, every business process that interacts with a customer or partner is going fully digital, and companies need to ensure their most important information is kept safe and secure. At the center of all of this work is our most important content. Content is how a movie studio create and distribute blockbuster hits to consumers, how life sciences companies discover and produce new vaccine, how consumer product companies design and invent their next breakthrough product, and how based securely onboard and collaborate with clients.

In short, content is our customers’ business. Yet most enterprises are dealing with fragmented unsecure complex and overly cost-based systems to manage this Content. And these systems are only growing over time as new use cases emerge around e-signature, workflow automation, collaboration, content publishing, business insights and more. Box’s Content Cloud delivers a platform-oriented approach that powers the full life-cycle of an enterprise’s most important content, including creation, classification, collaboration, workflow automation, e-signature, publishing, analytics, retention and more, all in a single platform.

And we differentiate our offering by focusing on three key product pillars that are delivered through our highly scalable enterprise grade cloud infrastructure, delivering the best security and compliance on content, enabling seamless collaboration and workflow, and integrating into every app our customers leverage, including the ones they build themselves. As I stated earlier in FY22, we advanced major parts of the entire content life-cycle, most notably with the global launch of Box Sign in the fall. Since this launch, we have announced new and enhanced capabilities, integrations and developer tools around Box Sign. These new capabilities include workflow features that automate processes once the document has been executed and APIs that power e-signatures in third-party and custom applications.

With these new capabilities, Box Sign can now power even more advanced signature-based processes, helping customers move more of their transactions to the cloud. We are pleased with our customer adoption and use of Box Sign. And fourth quarter customers include a leading provider of insurance services throughout the Americas that expanded their use of Box Sign with a six-figure Box Sign API deal in Q4, adding unlimited access to Box Sign for their processes, a U.S. based financial services company expanded their use of Box with a new three-year enterprise license agreement and moved to Enterprise Plus, enabling Box Sign access company-wide, and they will be standardizing on Box Sign with their e-signature solution, which will help cut costs, and since they’re already using Box, it will allow for easier change management.

And finally, a global marketing agency, who’ve been a Box customer since 2013 moved to Enterprise Plus in Q4 with plans to use Box Sign in their HR Department for employee onboarding, contract renewals and to manage employee policies and contracts in a hybrid work environment. We are just getting started with Box Sign, and we can’t wait to share more about our product roadmap at our upcoming Financial Analyst Day. In the past year, we also made several enhancements to our Box security capabilities at data security compliance and privacy remain more important than ever. We’ve added new features within Box Shield to help protect the flow of content with advanced machine learning based security features and new malware deep scanning capabilities to combat ransomware, as well as enhanced alerts and auto classification updates.

We also made meaningful updates to our governance functionality to help support customers’ legal hold and document retention needs. With security, compliance, data governance and privacy capabilities remaining one of the most critical reasons, customers choose the Box Content Cloud, we will continue to make prudent investments to extend our leadership position and reaccelerate growth in this area. A critical part of our product strategy is to leverage our interoperability to build on strong partnerships with leading technology companies across the SaaS landscape. In FY22, these enhanced partnerships included ServiceNow, Cisco Webex, IBM, Zoom, Microsoft and many others.

More recently, we announced an enhanced Box for Slack integration, that enables customers to use Box as their native Content Cloud in their Slack environment. And in January, we announced the general availability of an enhanced Box for Microsoft Teams integration, that enables customers to select Box as the default Cloud Content management solution in the Teams environment. Included in the release, our new features that further improve the Box experience in Microsoft Teams further reducing content fragmentation and making it easier than ever for customers to collaborate across the Box Content Cloud and their Microsoft environments. As we look forward into FY23 and beyond, we will continue to double down on the product capabilities and investments that add more value to our customers and expand Box’s total addressable market. In FY23, we’re going to advance our Content Cloud by building capabilities to power the full life-cycle of content, focusing on our three core differentiators of frictionless security and compliance, seamless collaboration and workflow, and open platform that’s integrated into every application.

Now turning to go-to-market. Our strong FY22 results were driven by our scale, land and expand go-to-market motion. Our focus is entirely on ensuring we bring the full power of the Box platform to all of our customers as we know this drives more value for our customers. And this results in greater stickiness, higher average contract values, and increased net retention rate. To drive these efforts over the past couple of years, we’ve worked to optimize our customer renewal and expansion motion, target high value and repeatable use cases that differentiate Box, expand our ecosystem of system integrators and partners to bring Box to market for larger enterprises, and double down in key regions and segments, as well as leveraging our digital channel for growth.

And to ensure we’re bringing the most relevant offering to market for our customers, we’ve expanded our focus on key industries such as life sciences, financial services, federal government and more. Finally, our pricing and packaging strategy is all about ensuring our customers can take advantage of the full power of the Box platform in their enterprise. Our latest multi-product offering called Enterprise Plus has driven more new and existing customers to access Box’s full suite of capabilities. You can see the success of our go-to-market efforts clearly reflected in Q4 customer expansions. For instance, a major biotech company that has been a Box customer since 2015, expanded its use of Box with a 6-figure Enterprise Plus upgrade. This deal represents a shift at the customer to use Box for regulated content and higher value use cases as we become a more strategic partner for them. The increased value and simplicity of Enterprise Plus was critical to Box being prioritized with the decision makers and various teams of the company.

A department of the U.S. federal government expanded its use of Box with a seven-figure Enterprise Plus deal, enabling them to provision Box to all service members requiring up-to-date training and the ability to manage mission critical content from anywhere. And a global financial services group moved to Enterprise Plus in a six-figure expansion, Box will be central to their banking ecosystem and will be used alongside Salesforce as the primary content management platform. They also plan to use Box for merger and acquisition, external collaboration and client onboarding. Overall, we’re very happy with our go-to-market execution in FY22, and we will continue to invest and optimize our go-to-market efforts to bring the full power of the Content Cloud to our customers in FY23.

In summary, the future of work is here, and at Box, we are helping define it. Our strong results in FY22 are a testament to our execution in delivering to customers, the platform they need to meet the demands of this new age. I couldn’t be more confident in our ability to achieve our FY23 goals and further our mission of powering how the world works together.

With that, I’ll turn it over to Dylan.

Dylan Smith — Chief Financial Officer and Co-Founder

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us. In fiscal 2022, we had three key financial objectives to deliver accelerating revenue growth, to expand margins through our focus on operational excellence, and to prudently allocate capital in order to return value to our shareholders. We are proud to have delivered against all three of these objectives. For the full-year of FY22, we delivered annual revenue growth of 13%, which includes a roughly 60 basis point tailwind from foreign exchange rates. In constant currency, our strong results came in well above our initial guidance of 9% to 10% growth and represent an acceleration from the prior year’s growth rate of 11%. We also delivered revenue growth plus free cash flow margin of 33%, exceeding our initial 30% target and achieving a significant improvement from the 26% we recorded in the prior year.

Turning to Q4. We are pleased to have delivered exceptionally strong results, marked once again by accelerating revenue growth, continued improvements in our net retention rate, and record operating margin. Q4 revenue of $233 million was up 17% year-over-year, a fourth consecutive quarter of accelerating growth and above the high end of our guidance. Our revenue outperformance was driven by Suites momentum and by very strong deal pacing within the quarter. We ended Q4 with remaining performance obligations or RPO of $1.07 billion, a 19% year-over-year increase and once again growing faster than revenue.

Over the past year, average customer contract durations has continued to lengthen, driven by a higher volume of long-term strategic deals, which contributed to the strength we saw in our backlog growth. We expect to recognize more than 60% of our RPO over the next 12 months. Fourth quarter billings of $338 million represented 9% year-over-year growth and was at the high end of our Q4 expectations of high single-digit growth. For the full-year of fiscal 2022, we delivered billings growth of 16%, above our revenue growth rate and the full seven percentage point improvement from the prior year. As Aaron mentioned, in Q4, we closed a 128 $100,000 plus deals versus 121 a year ago and $9 million plus deals versus 4 a year ago. Due to our strong customer expansion momentum throughout the year, we now have 1,420 customers paying more than $100,000 annually, up 17% year-over-year and 119 customers paying more than $1 million annually, up 20% year-over-year.

In Q4, our $100,000 plus Suites deals increased 51% from the prior year. The Suites momentum has been a key catalyst in accelerating customer adoption and enabling stickier use cases in turn driving improvements in our customer expansion and retention rates. As our customers are increasingly adopting products with more advanced capabilities, 35% of our revenue is now attributable to customers who have purchased Suites, a significant increase from 24% a year ago. Our net retention rate at the end of Q4 was 111%, up from 109% in Q3 and a 900 basis point improvement from 102% in the year ago period. We continue to improve our net expansion rate, and in Q4, our annualized full churn rate improved from 5% to 4%. We expect our net retention rate to remain roughly consistent throughout FY23. Gross margin expanded by 190 basis points year-over-year to 75.1%. Q4 gross profit of $175 million was up 20% year-over-year, exceeding our revenue growth rate by 300 basis points. In Q4, we continued to optimize our data center footprint and public cloud infrastructure.

We expect gross margin to continue to improve going forward and to land in the 76% range in FY23. Q4 operating income increased 33% year-over-year to $48 million. Q4 operating margin came in at a record 20.8%, representing a 250 basis point improvement from 18.3% a year ago. Sales and marketing expenses in the quarter were $65 million, representing 28% of revenue, down 100 basis points from 29% in the prior year. In FY22, we benefited from our enhanced product portfolio, as we generated double-digit percentage improvements in sales force productivity, which is an important driver of sales and marketing leverage. In FY23, we intend to grow our quota carrying sales force in the low to mid-teens percentage range, slightly ahead of FY22’s growth rate with a continued focus on our higher performing geographies and segments.

Research and development expenses were $41 million or 17% of revenue, in line with the prior year. In FY22, we exceeded our goal of scaling our Engineering Center of Excellence in Poland, ending the year with more than 100 full-time employees in that location. In FY23, we expect the vast majority of our R&D hiring to be in Poland, enabling Box to deliver increased product innovation and to generate additional leverage from our R&D investments. Our general and administrative costs were $20 million or 9% of revenue in line with a year ago. We will continue to drive operating discipline and expect further leverage in G&A as we evolve our workforce location in the coming year. We delivered $0.24 of diluted non-GAAP EPS in Q4, above the high end of our guidance and up from $0.22 a year ago.

I’ll now turn to our cash flow and balance sheet. In Q4, we delivered cash flow from operations of $49 million down from $58 million in the year ago period. We also generated Q4 free cash flow of $33 million, down from $41 million in the prior year. Q4 cash flow was impacted both by seasonality and by our decision to strategically invest in our public cloud infrastructure and prepay $14 million to our partners. We expect to prepay a similar amount in Q1 of FY23 and for our infrastructure outflows to normalize thereafter. Even accounting for these investments, for the full-year, our fiscal 2022 cash from operations and free cash flow were up 19% and 41% respectively.

Capital lease payments, which we include in our free cash flow calculation were $12 million, down from $14 million last year. Our capital lease payments continue to steadily decrease as we execute against our plans to move additional workloads to the cloud as part of our hybrid infrastructure strategy. We expect capex and capital lease payments combined to be roughly 5% of revenue in Q1, and roughly 5% of revenue for the full-year of FY23.

Let’s now turn to our capital allocation strategy. In FY22, we generated free cash flow of $170 million and we ended FY22 with $587 million in cash and investments. We expect to use this cash, plus our increasing free cash flow to fund strategic M&A to accelerate our roadmap, while also generating shareholder returns via additional stock repurchases. Last quarter, we announced a new $200 million common stock repurchase plan. Including the plan we authorized earlier in the year, in Q4, we repurchased 5.5 million shares for approximately $140 million. For the full-year of FY22, we repurchased 22.6 million shares for approximately $567 million, more than offsetting the shares that we issued in our preferred equity financing in Q2. As of January 31, we had approximately $131 million of remaining buyback capacity under our authorized repurchase plans.

Before we turn to our guidance, I’d like to share some further context behind our expectations for fiscal 2023. Due to exchange rate movements over the past year, primarily in yen and euros, we expect FX rates to have the following impacts on a reported FY23 results versus what they would be on a constant currency basis. On the top-line, we anticipate a downward impact on our FY23 revenue and billings growth rates of a little more than one percentage point. On the bottom-line, we anticipate a downward impact of roughly 1% to operating margin, and roughly $0.06 to EPS. We also expect to incur incremental facilities, T&E and events expenses as pandemic restrictions loosen and as we return to a hybrid office based environment. Even with these impacts, we remain steadfast in our focus on driving profitable growth, and in FY23, we will deliver improved profitability and unlock further leverage in our operating model.

With that, I would like to turn to our guidance for Q1 an fiscal 2023. For the first quarter of fiscal 2023, we anticipate revenue of $233 million to $235 million, representing 16% year-over-year growth at the high end of this range. We expect our non-GAAP operating margin to be approximately 21%, representing a 400 basis point improvement year-over-year. We expect our non-GAAP EPS to be in the range of $0.24 to $0.25 and GAAP EPS to be in the range of negative $0.04 to negative $0.05 on approximately 152 million diluted shares and 146 million basic shares respectively. For the full fiscal year ending January 31, 2023, we expect FY23 revenue to be in the range of $990 million to $996 million, up 14% year-over-year at the high end of this range. This represents a further acceleration from last year’s revenue growth of 13% even after accounting for the anticipated FX headwinds.

We expect our non-GAAP operating margin to be approximately 22%, representing an improvement of more than 200 basis points year-over-year. We expect to deliver a steady improvement in operating margin throughout the course of FY23. We anticipate our FY23 non-GAAP EPS to be in the range of $1.10 to $1.14 on approximately 154 million diluted shares and up from $0.85 in the prior year. Our GAAP EPS is expected to be in the range of negative $0.03 to negative $0.07 on approximately 148 million basic shares. For the full year of FY23, we expect billings growth to be roughly in line with revenue growth.

We do expect variability in our billings growth rate on a quarterly basis based on the dynamics of prior-year comparisons and the timing of large customer renewals. Directionally, we expect our billings growth rate to be in the high single-digit range in Q1 and Q2, and for our billings growth rate to exceed revenue growth in the second half of the year. We expect our FY23 RPO growth to exceed our anticipated full-year revenue and billings growth rates.

Finally, we expect our FY23 revenue growth rate combined with our FY23 free cash flow margin to be at least 37%, 200 basis points higher than our previous target and a 400 basis point improvement from last year’s outcome of 33%. We remain confident in achieving our FY24 target of revenue growth plus free cash flow margin of at least 40%.

In summary, FY22 was a year of excellent operational execution highlighted by accelerating revenue growth and operating margin expansion of more than 400 basis points year-over-year. Our Content Cloud strategy is resonating with customers, demonstrated by strong Suites momentum and a significant 900 basis point improvement in our net retention rate. We are well positioned to deliver profitable growth in the years ahead as we build on our Content Cloud leadership position.

Before we conclude, I’ll hand it back to Aaron for a few closing remarks.

Aaron Levie — Chief Executive Officer and Co-Founder

Thanks, Dylan, and thank you again everyone for joining us today. I’d like to remind everyone that our Virtual Financial Analyst Day will be on Wednesday, March 16. At this event, you will be hearing from our executives as we do a deep dive into our product strategy, go-to-market efforts, workforce strategy, and long-term financial model. The continued execution of our Content Cloud platform strategy will drive further annual revenue acceleration and continued margin expansion in FY23. We are confident in our ability to achieve these results based on the customer momentum we’ve been seeing and our product roadmap in the total market opportunity ahead.

Before we open it up to Q&A, I would also like to address the situation in Ukraine. As with all technology companies with business in Europe, we are monitoring the situation very carefully. Our top priority continues to be for Boxer safety and well-being and our thoughts go out to every Boxer customer, partner, anyone directly affected by this. And I’m proud that Box.org and Boxers globally are already giving to relief efforts for those affected.

Thanks again for joining us — for this call today. And Dylan and I would now be happy to take any of your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Jason Ader — William Blair — Analyst

Yeah. Thank you. Hey, guys. I guess a couple of ones from me. First just on the NRR, which continues to show a nice improvement. You talked about it being consistent throughout this year. I guess my question is, if you’re going to continue to see good traction with Suites and Enterprise Plus, what are some of the — I don’t know, what are some of the pressure points that could prevent it from going higher from here?

Dylan Smith — Chief Financial Officer and Co-Founder

Sure, I’ll take that. Jason, this is Dylan. So the net retention rate that we’ve seen improvements recently over the last year is comprised of 15% expansion, and we also improved the churn side of the equation to 4%, which is where we get to ending the year at 111%. You’re spot on that a huge driver of our net retention rate is going to be continued momentum in Suites sales and would note there that we expect those trends continue. We just also expect to see more normalized and more challenging comparisons as we have been driving that momentum over the last year. So definitely remain confident in seeing really strong Suites momentum that should show up in our overall net retention rate.

Jason Ader — William Blair — Analyst

Got it. I guess what I’m getting at is, are you trying to be conservative there? Is there a chance that it could be better if the expansion rates rise just given the attach rates on Suites?

Dylan Smith — Chief Financial Officer and Co-Founder

Yeah. So definitely as always with the expectations we said, we do want to be prudent with those. So we do see some upside, given the momentum that we’ve been driving in Suites. And then would also note that like some of the other top-line metrics that we called out, FX will have a little bit of an impact, a downward impact to our net retention rate as well, but feel really good about the targets that we’ve laid out there.

Jason Ader — William Blair — Analyst

Awesome. All right, thanks. And then, Aaron, on the quarter — on Q4, you had a 111% NRR, but you had the really high revenue growth rate that speaks to success with new customers, I guess. What are you doing differently with new customers that’s allowing you guys to have the success there? And then how do you think about kind of land versus expand in ’23 and beyond? Is it — do you lean into one more than the other or is it just kind of a balanced approach?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, I think it will continue to be a balanced approach as time goes on. And we do at our Analyst Day, we’ll talk about the kind of mechanics of the land and expand motion and how we’ve been optimizing it, especially with our Enterprise Plus plan, which is included in our Suites. So in Q4, as you can tell from the metrics, both very strong quarter in terms of upselling, but also a strong quarter in some of the new wins we had.

One example, we just did a press release yesterday around our win with the Japan Post, obviously, major leading government agency in Japan that powers their postal service. So great new logos coming on the platform across government, financial services, and large industrial companies, as well as just a fantastic quarter for expansion into E Plus and our newer capabilities. So we will give again that perspective of how that land and expand model is working at the Analyst Day. But overall, just we’re going to continue to focus on that balance of growing existing customers and bringing on new logos as we scale.

Dylan Smith — Chief Financial Officer and Co-Founder

Yeah. And just to build on that — this is Dylan is — as a reminder, we’ve tended to see over the past year roughly 70% to 75% of our new bookings coming from existing customers, and that’s roughly the range that we expect to see in the year ahead as well.

Jason Ader — William Blair — Analyst

And that’s what it was in Q4 also?

Dylan Smith — Chief Financial Officer and Co-Founder

Yeah, in that general range. Yeah, and again for Q4, the revenue did get a little bit of strength also from the very strong deal pacing that we saw in the quarter, and, but generally in line with the type of contribution that we’ve been seeing from net new versus existing customers.

Jason Ader — William Blair — Analyst

Thank you. Good luck, guys.

Dylan Smith — Chief Financial Officer and Co-Founder

Thanks.

Operator

Your next question comes from the line of Ittai Kidron with Oppenheimer. Please proceed with your question.

George Iwanyc — Oppenheimer — Analyst

Hi, it’s actually George Iwanyc. So maybe digging into a little bit on Jason’s question with NRR. Maybe with the larger customers, can you give us a sense of how you feel about your user penetration? And then on the expansion side, are you already seeing Box Sign adoption, and what kind of leverage are you getting from Shield as well?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, thanks. So we continue to see very healthy upside in terms of the total potential seat count that we can increase within even our large enterprise customers. I mean, we certainly do enterprise license agreements, and in Q4, we had a number of those where our customer elected to buy Box for their entire organization. But on the scale of the thousands of customers that we transacted within Q4, it’s still a very, very, very low percentage of that. So a lot of potential for seat expansion. And now with our Enterprise Plus plan and our API volume licensing, we really have three vectors of growth even from the existing installed base.

So we can continue to expand seats as more use cases get leverage for Box. We can move customers up to increased price per seat plans like our Enterprise Plus addition. And we can drive the volume of APIs using new use cases on our platform, which get independently monetized. And Box Sign was a great example of that in Q4, where we had a six-figure deal just for Box Sign APIs in the quarter. So overall, multiple levers of growth from even the installed base and even our largest customers. And then to your point on Box Sign, while Q4 was the first quarter where the product was fully out globally, we are seeing really great signs of initial adoption and traction, as well as deals that are now coming in as a result of Box Sign being a part of our portfolio, as I mentioned that six-figure transaction. And right now the core focus is to drive as much adoption as possible across the customer base with Box Sign. But the early signs of the product roll-out are fantastic, and our roadmap of features coming this year is going to be nearly in order of magnitude more than what’s in the product today. So we’re very, very excited about what’s to come.

George Iwanyc — Oppenheimer — Analyst

All right. And Aaron, maybe just one more question. You mentioned pricing. Can you give us a sense of what the pricing environment is right now and what’s the sales productivity gains you’re seeing, how much discounting are you doing or are you able to largely hold pretty strong?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, I think our competitiveness relative to the pricing metric remains very strong. We — I think we had a great quarter of both holding price and increasing as customers move to our higher tier additions. And I think what you’ll find is, as we expand out our Content Cloud portfolio, so Box Sign from last year, Box Shield from a couple of years prior and Relay and Box Shuttle last year and then now coming into this year, some pretty exciting product areas that we’re going to be investing in that we’ll share more at Financial Analyst Day.

What you’re seeing is that we can consolidate now multiple categories of IT spend in a single offering. That gives us significant pricing leverage over time because now for the price of Box with some uplift as you move to E Plus, you now might have access to two or three other technology categories worth of software all in one bundled approach. And so that’s I think going to give us continued pricing leverage as we go out to the market at the exact same time of delivering more value to our customers. So it’s kind of the perfect win-win, where we’re going to actually cause the customer spend less money on IT overall within the content categories that they have use cases in, but also we’re going to be able to drive more value from our pricing. And that ultimately leads to a bunch of downstream results, improved gross margin, you mentioned sales productivity, that’s continue to improve as a result of our Suites and then ultimately stickier and more retained customers.

George Iwanyc — Oppenheimer — Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Steve Enders with KeyBanc Capital Markets. Please proceed with your question.

Steve Enders — KeyBanc Capital Markets — Analyst

Okay, great. Thanks for taking the questions here. I guess, maybe to start, I think you called out that for the guide you’re expecting RPO growth to come in ahead of both revenue and billings. So I guess what you’re kind of seeing out in the demand environment that is giving you the confidence to say that? And I guess as part of that, how should we think about the contract duration as a part of that factor?

Dylan Smith — Chief Financial Officer and Co-Founder

Sure. So definitely seeing a very healthy demand environment that impacts a lot of the top-line metrics that we provide and that we gave guidance around. And RPO is it tends to be more of a leading indicator of growth is more representative of kind of the near-term momentum that we’re seeing that ultimately then flows into revenue. And in terms of the duration, that has been one of the drivers of the outsized backlog growth in particular, and so we have continued to see contract durations lengthen incrementally over the past year.

But if you look at all the different components of RPO, those are up at pretty healthy levels, including on the deferred revenue side, which is independent of those contract durations. So feel really good about the demand environment and the underlying momentum that we’re seeing in the business.

Steve Enders — KeyBanc Capital Markets — Analyst

I guess just to put a little finer point on that. Are we assuming that duration on deals is going to stay pretty consistent in ’23 [Phonetic], is that kind of what’s been assumed here in the guide there?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, we do expect — we may see slight lengthening, but would expect those to be fairly stable. The durations that is in terms of where they are today.

Steve Enders — KeyBanc Capital Markets — Analyst

Okay, perfect. And then on the gross margin guide coming in about a point about where we are in 4Q at least for the full-year. I guess what are you — where the efficiency is kind of coming from in there to drive the improvement there? And I guess where are kind of the areas of investments as you think about the out-margin guide for ’23?

Dylan Smith — Chief Financial Officer and Co-Founder

Sure. So on the gross margin front, where we’ve been seeing a lot of leverage that — and what we’re expecting going forward, comes down to the combination of more efficiently managing the infrastructure that we host. And so doing a lot from a hardware and software efficiency point of view, really just simplifying the way that we deliver those services. And that shows up also if you look at the amount of capital leases in the payments that we’re making, those have trended down pretty significantly and steadily as we’ve been able to optimize that infrastructure.

And at the same time, continue to move more workloads where it makes sense with our public cloud partners, which also allows us to drive some incremental gross margin expansion. So that’s from an infrastructure point of view. And then going back to the pricing and everything that Aaron was talking about earlier, as we do see customers kind of seeing more value out of Box’s solutions and paying more for those increasingly adopting Suites for example, that also translates into not just higher pricing, but higher gross margin for those customers as well.

Steve Enders — KeyBanc Capital Markets — Analyst

Okay. Thank you for taking the questions.

Dylan Smith — Chief Financial Officer and Co-Founder

And then on the — okay, well, thanks.

Steve Enders — KeyBanc Capital Markets — Analyst

Yeah, go ahead.

Dylan Smith — Chief Financial Officer and Co-Founder

I was just going to touch briefly on the operating margin side, and you talked about the investments that we expect to make next year, I would say nothing too different from the approach that we’ve taken over this past year that has been working really well. And so, as mentioned, we do expect to grow sales force capacity in the low to mid-teens percentage range, also going to continue to invest in a really exciting product roadmap that we have, but doing most of that in lower cost locations. So if you’re really good about the leverage that we’re going to be driving across the business as we move through the coming year.

Steve Enders — KeyBanc Capital Markets — Analyst

Okay, perfect. Thanks. Thanks again.

Operator

Your next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Chase Donovan — Raymond James — Analyst

Hey guys, this is Chase Donovan on for Brian. Thanks for taking the questions. Box Sign, I think there’s really [Phonetic] encouraging early results come out of that. I was curious what else can we look for from a product perspective, it could fit in as an adjacent kind of M&A driver for the business?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah. So, Box Sign overall, we’re very, very happy about the early results and traction that we’re seeing, great use cases across a very wide range of industries, and we’re going to continue to follow up with more and more updates to the Street around how that product is performing and being adopted. As it relates to new product expansion areas, and I would say kind of both with and without M&A, as an example, we think about very disciplined technology tuck-in acquisitions, where it makes sense to accelerate our product roadmap, but at the same time, the vast majority of our innovation is going to come organically.

But you’re going to see us continue to expand out the Content Cloud as this year goes on and certainly in the next couple of years. If you think about that content life-cycle that we continue to show from the moment content is ingested into Box all the way to where it’s retained and then integrated to any platform. there are various components around that life-cycle, where we’re either going to be doubling down into additional deep spaces in security and compliance and in areas where we think we can expand into new adjacent collaboration and content markets, that all makes sense on our platform. So stay tuned.

Throughout the year, we’ll be sharing more updates on this front, as well as a little bit of a preview at our Financial Analyst Day. But it’s really all about making sure that customers can complete that complete content life-cycle on a single platform without having to have fragmentation of their content. So how you create, how you share, how you collaborate and publish and get insights from content all in a single architecture. So more to come on that front.

Chase Donovan — Raymond James — Analyst

Pretty helpful. Thanks, guys.

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, thank you.

Operator

Your next question comes from the line of Erik Suppiger with JMP. Please proceed with your question.

Erik Suppiger — JMP — Analyst

Yes. Congrats on a good quarter. One just on Box Sign. Curious if you’re getting a sense of how that’s doing with new customers versus existing customers. I think initially, the lower hanging fruit was with existing customers, but any update there? And then secondly, just curious in terms of your transition to public cloud-based infrastructure. How far along in that process are you, and how long are you still paying double for areas where you have overlapping infrastructure?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah. So on the Box Sign front, core focus number one is get Box Sign in the hands of all of our existing customers, of which we have well over 100,000 customers. So that’s sort of the P0 for the Company and what we’re spending the majority of our energy on. At the same time, it becomes a great new sort of wedge use case that we can go into new customers with around talking about how they’re driving digital transformation around their content, whether that’s contracts or NDAs or compliance documents that need to get signed. So it becomes yet another use case that we can go drive product adoption and new customer demand from.

But I’d say it’s very early in terms of the overall results on that. But you can assume that every customer we’re showing up to today, Box Sign is certainly being talked about and shown in the set of use cases that we’re going after. So great kind of early, I think signal from that set of conversations and pipeline build over there. And then the second question around public cloud. So this is a multi-year journey that we’ve had. We — just as a reminder, we’ve been using and leveraging the public cloud for well over a decade. But we made the decision to leverage it even more significantly to allow us to innovate faster, deliver for customers globally more efficiently and then ultimately be able to scale our platform in a very cost effective way.

So we’ve been moving more and more of our infrastructure to the public cloud. We tried our best to have as limited of a sort of double spend challenge as possible. It’s unavoidable in some areas of the infrastructure, but the teams have done an incredible job of really getting very, very methodical about which parts of the architecture move to the public cloud in which sequence to reduce that double spend element. But again, some of it is unavoidable due to leases and existing commitments we have on the hardware. But again, over the next couple of years, you’ll see us wind off more and more on the sort of kind of core Box managed infrastructure and more — and leverage more and more in the public cloud.

Erik Suppiger — JMP — Analyst

Very good. Thank you.

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah, thank you.

Operator

Thank you. Your next question comes from the line of Nick Mattiacci with Craig-Hallum. Please proceed with your question.

Nick Mattiacci — Craig-Hallum — Analyst

Hi, this is Nick Mattiacci on for Chad Bennett. Thanks for taking our questions. So I’m just curious on what you guys are seeing in the SMB market. Any commentary you could provide on the demand environment and customer retention rates, the lower end of the market? And then any assumptions we should be aware of related SMB that are baked in the guidance going into this year?

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah. So qualitatively, I would just share that SMB demand has been very strong, frankly, throughout FY22, Q4 was another kind of milestone quarter for us on that front, but really the buildup was throughout the year. I think what we saw in kind of calendar 2020 and our fiscal 2021 was SMBs were really obviously most impacted in many respects by COVID, and they weren’t hiring as quickly, dealing with layoffs or furloughs or government stimulus was a complicated matter. And so we saw a reduction of that momentum. We still put up growth that year, but not as much as we had anticipated.

Coming into now calendar 2021 and fiscal 2022 last year, we saw a real resurgence on the SMB and mid-market parts of our business, our kind of global commercial segments. And I think our strategy is really well tuned for that commercial segment back to — back in what we’ve been chatting about on this call. If you’re a 200 or 300 to 500 person business, maybe smaller 50 to a few hundred employees, you might have a relatively concentrated IT organization, maybe a handful of folks that are running IT for your organization, but you have all the exact same demand as a large enterprise.

I mean, if you’re an investment bank, if you’re in life sciences, if you work in the government supply chain, the needs you have around data security, compliance, content management, collaboration are the exact same needs as a very large Fortune 500 enterprise. And yet your challenge is sort of fewer resources to manage all those systems and then obviously, budget constraints about you don’t want to have to have 10 different vendors that you’re dealing with, you don’t really get economies of scale in that sense.

So by having a single platform, a single content cloud that manages everything from the workflow and e-signature and security and content management of your content all in one bundle, that becomes very, very compelling. And so we’ve seen the results of that in our results throughout FY22, and we expect that set of trend just to continue.

Dylan Smith — Chief Financial Officer and Co-Founder

And just to build on that a bit for some of the other parts of your question, we had mentioned in our prepared remarks that this past year, we generated double-digit percentage gains in our sales force productivity, that holds true both for our enterprise business and our SMB business. So definitely seeing healthy growth across all parts. And then in terms of the customer economics that you asked about, while our smallest customers do tend to see slightly higher churn rates, as you’d expect, the net retention rates are actually pretty comparable between SMB and enterprise because of the strong expansion and a lot of the dynamics that Aaron mentioned.

Nick Mattiacci — Craig-Hallum — Analyst

Great. Thank you.

Operator

Thank you. The next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

Josh Baer — Morgan Stanley — Analyst

Great. good end to the year and a strong guide. I wanted to double-click on a couple of the margin questions and conversations we’ve been having. So on gross margins, like we’ve seen the expansion and that continues into ’23 and sort of talk through the pricing and the infrastructure efficiencies. So the question is how high can gross margins go? And can they get to 80% plus like they were for you guys back around your IPO?

Dylan Smith — Chief Financial Officer and Co-Founder

Yeah. So we do see continued upside, especially as we execute against the migration strategy that Aaron talked about earlier. So we do see 76% is not where that caps out, and we’ll continue to work on driving that migration and additional efficiencies to continue expanding margins beyond FY23.

Josh Baer — Morgan Stanley — Analyst

Okay. And then on the FY23 operating margin target of ’22 like on the surface, it doesn’t actually show the opex leverage because of the strong gross margin expansion. But then you talked about the FX impact, travel and expenses coming back, I assume there’s some wage inflation increases, talked about sales and marketing investments. So is there any additional context or quantification of some of those factors that are impacting some of the different opex lines? And just any other color would be helpful? Thanks.

Dylan Smith — Chief Financial Officer and Co-Founder

Sure. So on that, I think you nailed the dynamics exactly. And to break those apart on the FX side of things, expect that to be roughly one percentage point impact to operating margin next year, and that really shows up across all line items of the P&L. So kind of understates the true leverage that driving in the business. And then in terms of some of those expenses like T&E, events facilities, I would say that the savings that we realized as we moved into this environment was in the 200 basis point to 300 basis point range. We expect some of that to come back, but not all of it because of the continued focus that we have on cost discipline. So you can think about it as more than a 100 basis point impact. And then the actual kind of size is going to depend a little bit on what this return to our hybrid office based approach looks like. And then the last thing I’d note is that within the year, we do expect to see our operating margin consistently expand across the course of the year, so to sort of deliver higher operating margin in the back half versus the front half.

Aaron Levie — Chief Executive Officer and Co-Founder

Yeah. And just to build on that, Josh, for five seconds. We are unmistakably focused on making sure we drive profitable growth going forward, which will show up as additional leverage in the business. And as Dylan noted, that kind of seasonality trend you’ll see as well, but it’s something that’s a core focus of ours going forward.

Josh Baer — Morgan Stanley — Analyst

Awesome. Thanks.

Operator

Thank you. And this concludes our question-and-answer session. I’m turning the call back to our speakers for any closing remarks. Please go ahead.

Cynthia Hiponia — Vice President, Investor Relations

Great. Thank you, and thank you, everyone, for joining us this afternoon. We look forward to updating you on our next earnings call. And just a quick reminder, as both Aaron and Dylan have mentioned, we are hosting our fiscal ’23 Financial Analyst Day, it’s virtual, on March 16, and registration is available on our IR website. Thank you so much.

Operator

[Operator Closing Remarks]