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Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Fiscal Year 2019 Financial Results 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. [Operator Instructions] Thank you.
Alice Lopatto, Head of Investor Relations, you may begin your conference.
Good afternoon, and welcome to Box's fourth quarter fiscal 2019 earnings conference call. On the call today, we have Aaron Levie, our CEO; and Dylan Smith, our CFO. Following our prepared remarks, we will take questions.
Today's call is being webcast and will also be available for replay on our Investor Relations website at www.box.com/investor. Our webcast will be audio only. However, supplemental slides are now available for download from our website. We will 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 FY20 financial guidance and our expectations regarding our financial performance, for FY 2020 and future periods, timing of and market adoption of our products, our market size, our operating leverage, our expectations regarding maintaining positive free cash flow and future profitability, our planned investments and growth strategies, our ability to achieve our long-term revenue and other operating model targets and expected timing and benefits of our new products and partnerships. These statements reflect our best judgments based on factors currently known to us and actual events or results may differ materially. Please refer to the press release and the risk factors and documents we filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, February 27, 2019 and we disclaim any obligation to update or revise them should they change or cease to be up-to-date.
In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered, in addition to, not as a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and in the related PowerPoint presentation, which can be found on the Investor Relations page of our website. Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.
Also please note, we updated our financial disclosures to reflect our adoption of the new ASC606 revenue recognition standards under the modified retrospective transition method. Having adopted ASC606 for this fiscal year under the modified retrospective transition method, all Q4 year-over-year comparisons are made against Q4 results a year ago, which are under ASC605, unless otherwise dated. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a reconciliation of our financial results under ASC606 compared to ASC605.
With that, let me hand it over to Aaron.
Thanks, Alice and thanks everyone for joining the call. In fiscal 2019 we continue to position ourselves to help our customers transform their businesses with cloud content management. We achieved $608 million in revenue for the full year and now have more than 92,000 customers and ecosystem of strategic partners have include leaders like IBM, Google and Microsoft and are consistently recognized as a market leader by industry experts including Gartner and Forrester.
Turning to our quarterly results, in Q4 we delivered wins and expansions with major customers including State Street, Live Nation, Allina Health System, Intuit, MGM Studios and Red Robin. Revenue was $163.7 million up 20% year-over-year. Billings was $237.7 million up 16% year-over-year and finally non-GAAP EPS was positive $0.06, our first quarter of non-GAAP profitability.
In the quarter we closed 94 deals greater than $100,000 versus 79 a year ago, 12 deals over $500,000 in line with last year and two deals more than $1 million versus nine year ago. While we saw strong continue event in the $100,000 plus deal segment and we were encouraged by the strength of the seven figure deals in our pipeline ahead of Q4. We ultimately underperformed against our seven figure deal expectations in the quarter. These more complex enterprise deals are taking longer to close and as a result a few moved out of the quarter and into pipeline throughout this year.
Additionally as we previously shared we saw weakness in EMEA throughout FY19 and in Q4 experienced a greater impact from this weakness than we anticipated. While these results didn't meet our expectations, we've achieved strong momentum in our solutions selling strategy as evidenced by our $100,000 plus deal growth. And with 80% of our new $100,000 deals including at least one add-on product compared to 67% a year ago.
We're confident our solution selling strategy is working and now we need to aggressively drive more standardization across the business. To drive more unified global execution across all of our sales segments. We've been improving our sales training and processes and over the past six months we've hired or promoted new sales leaders and key growth regions across North America and EMEA.
With these investments and building on the progress we saw in FY19 we remain more confident than ever in the cloud content management opportunity. As we kick our fiscal 2020, we're focused on two key objectives to drive our next phase of growth on our path to $1 billion in revenue and beyond. Number one, building the category defining cloud content management platform that powers our customers digital processes and number two, accelerating our customers digital transformation with cloud content management through our go-to-market efforts.
Let's start first with, building the category defining cloud content management platform. When we look around the world digital transformation is more urgent for enterprises than ever. Companies today are working across diverse network of global partners, the demand seamless collaboration anytime and anyplace. Markets are hyper competitive and to compete companies need to move faster in everything that they do.
Further every enterprise across every industry is dealing massive cyber security and compliance challenges. Content is at the center of these challenges. Yet most enterprises are held back by their legacy content management vendor. Legacy on premise systems like Documentum and OpenText and SharePoint make it far too difficult to share content and manage business processes across the extended enterprise in addition to being too costly and complex for the digital age.
The enterprise content management and storage infrastructure markets represent $40 billion in opportunity and Box is the only cloud native platform built to power the next generation of workloads are they rapidly move from on-prem to the cloud. Entering FY20 we've the most exciting product roadmap in our companies history focused entirely on enabling our customers to power their digital business processes and to retire legacy content management systems.
Throughout the year, we will be launching and enhancing critical Box products to enable. Number one, workflow automation to power business processes with an all new Box Relay. Two; smarter content management with new metadata solutions and Box Platform updates. And three; advance security classification and threat detection with Box Shield. From our conversations with our largest customers, it's apparent that they have a wealth of manual business processes primed for automation.
We've heard overwhelming feedback from our customers that they want simpler ways to consume workflow automation natively within Box and this year, we'll be launching an all new Box Relay built from the ground up by leveraging Box's automation capabilities announced at BoxWorks. All the new Box Relay is built natively on Box and will help customers automate business processes across sales, client services, marketing, contract management, manufacturing and more.
This product will be launched in the middle of this year and will be sold as a standalone skew in addition to being a part of the new product suites we'll be offering later this year. In FY20 we'll also focus on enabling intelligent content management by advancing our metadata skills and platform capabilities. Combined, these capabilities enable customers to retire legacy ECM technology and integrate Box in the ERP systems line of business apps, business processes and more.
For instance, one customers we closed in Q4 Lineage Logistics, an international warehousing and logistics company will leverage Box Skills through Box Platform to power new warehouse automation initiatives. Finally with content being accessed from more locations, apps, devices and shared across a growing network of external partners and customers we need a brand new approach to security in the cloud.
To solve this, we'll be launching Box Shield as an add-on product later this year. Box Shied will bring intelligent threat detection and content classification natively into Box. We're already hearing from prospective customers that Shield will be transformational to their security and risk posture in protecting critical intellectual property. FY20 is setting up to the most exciting year for product innovation in Box's history and due to the increasing success of our add on products we'll be making it much easier for our customers to adopt the full power of our cloud content management platform by launching new product suites in the first half of FY20.
Turning to our second area of focus for the year. The full power of our cloud content management platform is realized when an organization leverages Box for broad digital transformation, enabling a digital workplace and powering digital business processes across the extended enterprise. To do this, our focus for the past year has been to evolve from selling Box as a tool for file sharing and storage to consultatively selling Box as a cloud content management platform for the entire enterprise with the full set of Box capabilities.
Our solution selling strategy is focused on ensuring the new and existing customers receive the full used cases and possibilities with cloud content management, tied to significant business outcomes in the form of IT cost savings, business process acceleration and lower security and compliance risk. When we sell this way, we're able to drive much larger and strategic deals with customers.
Cross selling add on products is key to driving larger and more transformational deals. A few examples of where our add on product and solution selling strategies were successful in Q4 driving 94 deals of $100,000 or more include a seven figure deal in Q4 with a major technology company in the Fortune 500 that purchase Box Governance, KeySafe and Platform accounting for over 40% of their deal and transforming how they're streamlining processes around content across the organization.
We also achieved the new ELA with [indiscernible] a longstanding Box customer where they purchased Box Skills, Box multizones and Box Platform to better coordinate between distributed global offices and their effort to find and close top executive candidates faster. And finally, a win with MGM Studios who will leverage Box's core offering and Box Governance as essential content repository to retire network file shares. MGM is focused on building an end-to-end digital supply chain where applications like Box will be used across lines of business from marketing to production and financial operations.
We began implementing our solution selling strategy in FY19 and while we're encouraged by our early progress we're working to further improve our execution through number one, improved sales training, rigorous sales processes and update to our sales compensation plans tied to solution selling. Two; hiring and promoting experience world class sales leadership, talent throughout all segments of the field globally and three; selling suites of our add on products like Box Governance, platforms, Skills, Shield and Relay to make it even easier for customers to purchase and adopt our full cloud content management platform.
While the majority of our customers leverage Box today for secure collaboration and productivity. We know the big opportunities to power our customers digital business processes in the cloud. Within our existing customer base alone there are billions of dollars in potential revenue upside as our customers begin to leverage Box's full set of capabilities across their organizations.
Our number one job is to move our customers along the journey to leverage Box to power their full digital transformation. To wrap up, Box is the only cloud content management platform that accelerate business processes, powers workplace collaboration and protects an enterprises most valuable information while also working across the best of breed modern enterprise IT stack.
Heading into FY20, we're focused on extending the core capabilities to differentiate Box as a cloud content management platform and refining our solution selling motion to drive more consistent execution across the business. At the same time, we're targeting our first year of non-GAAP profitability showing further leverage in the business as we continue on our path to $1 billion in revenue and beyond.
With that, I'll hand it over to Dylan.
Thanks Aaron. Good afternoon, everyone and thank you for joining us today. Q4 capped off as solid year and marked a couple of important milestones for us. In Q4, we achieved our first quarter of non-GAAP profitability and our second consecutive year of positive free cash flow as we continue to drive strong leverage in our business model. We delivered revenue of $163.7 million in Q4 up 20% year-over-year with 23% of Q4's revenue coming from regions outside the United States driven by strong performance in Japan throughout the year.
We closed 94 deals over $100,000 versus 79 a year ago, 12 deals over $500,000 which was flat with a year ago and two deals over $1 million versus nine year ago. Fourth quarter billings came in at $237.7 million representing 16% calculated and 17% adjusted billings growth year-over-year falling short of our original expectation of growth in the mid-20s. As Aaron mentioned this outcome was the result of some seven figure deals that are taking longer to close than we had expected and our disappointing execution in EMEA.
Total preferred revenue was $375.0 million up 17% year-over-year. Backlog was $311 million, an increase of 12% year-over-year. While billings and our seven figure deal results did not meet our expectations we're highly confident in our overall CCM strategy and market opportunity. We now have more than 900 customers paying at least $100,000 annually making up 60% of our recurring revenue. Our strategy to upsell and cross sell in these large accounts is a critical initiative which will drive long-term product stickiness and growth.
We're in a strong position to capitalize on this opportunity as we build on the early momentum we've delivered in our solution selling efforts. The value of our add on product portfolio is up more than 60% year-over-year. Now roughly 14% of our revenue run rate in Q4 versus roughly 10% a year ago.
Turning to margins, non-GAAP gross margin came at 73.5% versus 76.2% a year ago and 73.6% last quarter. As a reminder this past year we've made some upfront investments to expand our data center footprint based on the demand that we've been seeing and the impact to our gross margins in FY19 were in line with our original expectations. We were pleased to see a slight improvement in price perceived on a year-over-year basis mainly as a result of higher add on product attach rates. We now have 12 million paid users.
As part of our hybrid cloud infrastructure strategy, in FY20 we will be migrating our data center footprint to significantly lower cost regions which will accomplish three primary goals. Supporting our growth to multi-exabyte scale, addressing complex customer complaints requirements and savings tens of millions of dollars over the subsequent three-year period.
As part of this move, we'll be temporarily occupying redundant call [ph] location facilities throughout the course of FY20 leading to elevated data centers expenses over the next year. As such, we're expecting gross margin throughout FY20 to range from 70% to 71%. Once we complete this migration and as we continue to drive these efficiencies, we expect gross margin to trend back up toward the mid-70s.
Q4 was another successful quarter of driving operational efficiency. Sales and marketing expenses in the quarter were $64.6 million representing 39% of revenue a significant improvement from 51% in the prior year, which includes roughly 3% benefit related to the adoption of ASC606. Looking ahead, we expect to drive more leverage in sales and marketing as we gain greater efficiencies from our solution selling strategy.
We're entering FY20 with 300 [indiscernible] sales reps up 12% year-over-year. In FY20 we plan to grow our sales force in the range of 10% to 15% focusing on field hirers in the US and Japan. Next research and development expenses were $29.8 million or 18% of revenue flat with a year ago, as we continue to invest in the enhancement of our product offerings. This included the continued development of Box Relay, Box Shield and Box Platform.
Our general and administrative costs were $17.4 million or 11% of revenue compared to 12% in Q4 of last year. We expect to drive continued leverage in G&A as we benefit from greater operational excellence and scale. Our focus on operational efficiency drove our Q4 non-GAAP operating margin to a solid 10 percentage point improvement year-over-year coming in at positive 5% versus negative 5% a year ago. As a result, non-GAAP EPS came in at positive $0.06 an improvement from negative $0.06 a year ago and well above the high end of our guidance.
One of the key elements that makes our business model so powerful is our strong customer retention. Our full churn rate in Q4 was 4.3% on an annualized basis. Importantly, we've seen that as customers increasingly adopt our add on products they become stickier. In Q4, the full churn rate for customers who had purchased at least one add on product was roughly 2% on an annualized basis. Our net expansion rate on an annualized basis was 12% driven primarily by strong seat growth in existing customers and cross sells of our add on products. As such we ended the quarter with a net retention rate of 108% stable versus the prior two quarters.
Let me now move onto our balance sheet and cash flow. We ended the quarter with $217.8 million in cash, cash equivalents and restricted cash. We delivered cash flows from operations of $31.3 million compared to $22.5 million a year ago. In Q4, total CapEx was $2.2 million versus $7 million a year ago. Capital lease payments which we factor into our free cash flow calculation were $6.7 million versus $3.4 million a year ago. We expect CapEx and capital lease payments combined to be 5% to 6% of revenue for the full year of FY20 and roughly 6% of revenue in Q1.
Finally, we generated $21.0 million of free cash flow in the fourth quarter or 13% of revenue compared to $12.1 million a year ago. We're pleased to have achieved positive free cash flow in Q4 and for the full year of fiscal 2019.
With that, let's now turn to our guidance. For the full year of fiscal 2020, we expect revenue to be in the range of $700 million to $704 million. This guidance incorporates the impact of both under performance in EMEA and seven figure deal execution in Q4 with each of these factors representing roughly $10 million headwind to FY20 revenue versus our prior expectations. Additionally, one of our customers significantly reduced its spend with us upon its renewal earlier this month as they did not realize the full value of their initial use cases. This was a unique customer situation which will represent a revenue headwind of approximately $8 million in FY20.
We expect our FY20 non-GAAP EPS to be in the range of negative $0.03 to positive $0.01 on approximately 156 million diluted shares. Our GAAP EPS is expected to be in the range of negative $1.06 to negative $1.02 on approximately 148 million shares. You may recall, that a quarter ago we shared our expectations of achieving roughly breakeven non-GAAP EPS in FY20. As you can see from our guidance we're continuing to drive leverage across the business and in FY20 we're targeting our first year of delivering non-GAAP profitability.
For the first quarter of fiscal 2020, we're setting revenue guidance in the range of $161 million to $162 million. Note that Q1 has three fewer days than Q4 which creates a revenue headwind of little more than $5 million versus Q4, but does not impact year-over-year comparisons. While we don't typically guide the billings, we want to provide some color around we expect billings to trend throughout the year.
While we generally expect our revenue and billings growth rate to track roughly inline. Year-over-year comparisons of this metric can be variable from quarter-to-quarter and thus is not always a meaningful indicator of the underlying momentum of our business. In Q1, we expect to see our revenue and billings growth rate deviate due to a few different factors.
First; we saw an elevated volume of multi-year prepays in the year ago period. Second; the impact of the previously mentioned churn event creates a significant headwind to Q1 billings. Finally, as we stated throughout FY19 the final payments associated with our enhanced developer fee were built from Q1 to Q3 representing an additional $2 million headwind to Q1 billings.
As such, Q1 will have a particularly tough year-over-year comparison and we expect Q1 billings growth to be in the low single-digit range before returning to more normalized growth rates for the remainder of FY20. We expect our non-GAAP EPS to be in the range of negative $0.06 to negative $0.05 and for GAAP EPS to be in the range of negative $0.29 to negative $0.28 on approximately 145 million shares.
We remain confident that our market opportunity in cloud content management combined with our increasingly differentiated product portfolio will allow us to achieve faster growth rates overtime than what we're anticipating in FY20. While our Q4 FY19 sales results led us to lower our revenue expectations for FY20 we're encouraged by the early traction we're seeing in our solution selling strategy. We're focused on driving reacceleration and top line growth in order to achieve our target of $1 billion in revenue for the full year of fiscal 2022.
With that, I would like to open it up for questions. Operator?
[Operator Instructions] your first question comes from Philip Winslow with Wells Fargo. Your line is open.
Just wanted to dig in on your comments about billings growth, but also just go-to-market headcount increases. You all talked about I believe 10% to 15% headcount in just go-to-market. I believe you ended the year about 300 quarter carrying. If I kind of correlate that backed in, than to the billings guidance sort of implied also being kind of in the low teens there. I'm wondering - just kind of walk through the mass how you're thinking about sales productivity because - just because you made a lot of changes. How are you thinking about sales productivity this coming year versus this last year? And puts and takes versus just call it like the headcount assignment, one quick follow-up to that.
Sure, so I'll start with that Phil. This is Dylan. Is first of all I would note that, while we generally accept revenue and billings growth rates to track roughly in line year-over-year comparisons as metric can be pretty variable from quarter-to-quarter for a variety of factors, such as payment durations and customer driven changes to the timing of large renewals. So I wouldn't naturally think about the comment here we gave around billings as a meaningful indicator of the underlying momentum that we're seeing in our business.
On the productivity front, as mentioned as you've talked we've seen some inconsistency on a region-by-region basis in terms of the productivity this year. So within that 10% to 15% we're going to be really focused on growing in the regions where we're seeing better performance such as most of the US in the field as well as in Japan. And then as we start to see some of these things we're doing across the business rollout we may add headcount to other regions as well, as that productively improves.
So we're going to be very, very focused on driving productivity improvements across the globe particularly in the field, in the coming year and there is a few different areas that we're really focused on here. So the first, there's an operational component. As Aaron mentioned really revamping, a lot of the sales enablement and training to drive more consistent execution as well as tweaking some of the comp plan incentives that we have in place just to further align that with our solution selling strategy.
I think we've been pretty pleased with the way that showed up this past year in add on products in generally in large deals. So the second component is around the product capabilities. We're going to be making Box Relay generally available in the first half of this year, the new Box Relay as well as Box Shield in the second half and introducing product sweeps this year for the first time, which we think will again further help us sell bigger deals and improve productivity.
And then the third component is on the leadership front. So, we now have the key positions that we've been searching for filled in North America and EMEA. And so those three factors, the operational product and leadership side should really help drive these productivity improvements and should start to see that, even as soon as the first half of the year particularly in the big deal growth outcomes.
Got it. And then Just as follow-up to that, I missed the metric in terms of tax rate of add ons to the $100,000 deals. I think it was 80 last quarters. I wonder what it was this quarter and then in terms of just the bundling, in terms of sort of driving - accumulative add on. How are you thinking about rolling these out? You mentioned in the first half. I mean is this something that we should expect to see this quarter and I remember, on last call you mentioned sort of experimenting with some of those bundles in Q4 making it a little more formalized. What did you see in? Where you did roll out the bundles and how is that impact and how you're thinking about the bundling this year and the timing of when those actually do roll out?
Sure, I'll turn it over to Aaron for the question on bundling and the strategy there. And then to confirm that metric for add on product attach rates in our six figure deals was 80% again this quarter, which is up from the high 60s a year ago.
This is Aaron. Phil the evolution of Box has obviously been having a core product for file sharing collaboration and in contents origin the cloud and then over the past really three or four years we've been adding additional value added products like Data Governance, our platform capabilities, advance security capabilities is add on solutions around the core. What we're finding is, as we're moving more towards solution selling and selling large transactions. We want to get out of the mode of selling each individual product on one-off basis to customers really being able to bring the full suite of Boxes [ph] cloud content management platform to our customers.
So we've insinuated that a little bit in some of our customer conversations in Q3 and Q4 to quite a bit of early success and so with the general availability of the new Box Relay which is really going to be our ability to bring the best workflow automation capabilities to our customers for content management that will then allow us to say with Workflow, Data Governance, platform and eventually our advanced security with Shield you can then buy that as a suite of capabilities from Box to really help with digital transformation.
So that's already been tested more or less in market through customer conversation but we want to make that a packaged offering that we can bring to our entire customer base and that's what we are looking to do within the first half of this year. So something we're very excited about which we know that our sales reps in the field are quite excited about it as well and then we've already seen, strong early signal from our customers that is a better way to purchase and use the full breadth of Box's capabilities.
Great. Thanks guys.
Your next question is from Melissa Franchi with Morgan Stanley. Your line is open.
This is Josh on for Melissa. My question was some of the CapEx and data center investments that you've made so ahead of increased demand and connecting that with some of the like weaker billings that we've seen, maybe to answer if you talk a little bit of more about what you're seeing in the pipeline.
Yes, so this is Aaron. I mean overall we're still seeing very strong pipeline. We're again not happy and not satisfied with the Q4 results in the big deal segments especially the seven figure deals. However those customers are still in the pipeline for this year and tend to be very large regulated customers often in banking or government agencies or life sciences where the deals tend to be more complex in nature from a security and legal compliance standpoint. But overall we have not changed our view of the momentum and the pipeline that we're seeing in the business.
As it relates to then the capital expenditures on data centers just due to the sheer growth of our customer base and the amount of usage of the platform. We're obviously preparing - the continued growth of our customers and that requires us to move into much more scalable data center facilities. In addition to our hybrid cloud usage of public cloud partners and so as a result of that, that means we have to operate out of two extra data centers from a redundancy standpoint temporarily while we're making that migration happen, which obviously has an impact on gross margin as Dylan mentioned.
So this is something that is completely driven by the growth of the customer base we're already seeing and to ensure that we have the room for capacity growth going forward in lower cost locations outside of California, which is one of the other kind of key points of this is, we want more scalability with our data center footprint in lower cost locations and that's a core factor that will then ultimately lead to better gross margin performance overtime.
Thanks Aaron and that makes a lot of sense. And one clarification for Dylan. So the deals that the large deals that got pushed out from longer sales cycle as still in pipeline, but you did mention just want to make sure $10 million impact to FY20 revenue guidance from the large deals or was that just on EMEA side? Thank you.
Yes so that was the expected impact on FY20 revenue as a result of some of these larger deals not coming in, which is an addition to the impact from EMEA which is another roughly $10 million expected impact for FY20.
Thanks.
Your next question is from Ted Lin with Goldman Sachs. Your line is open.
I wanted to dig in a little bit more on kind of the slip deals and trends there. I guess what were [indiscernible] legal and Governance complexities that caused the seven figure deals to slip in and the sales cycle to lengthen there. And do you anticipate that to be a kind of just trend going forward and I guess can you talk about the closed rates on those slip deals for the first month of the first New Year. Thank you.
So given in - first of all we don't expect that to continue, we're improving a lot of the operational and sales rigor around these larger deals and that was already happening throughout the year. But again unfortunately due to the complexity of some of these transactions some of that does not move fully within our control. I say, due to the kinds of customers we're talking about where the intellectual property that's within their files and their data is very sensitive could be client records, could be government data and information it just puts a very high threshold on the security review, the compliance review, the data privacy reviews that our customers which often involves a pretty broad set of individuals and parts of the organizations that we have to go and work through.
And then of course obviously as always budgeting and kind of finance decisions does well in that process. So the complexity of these deals obviously has increased over the past couple of years, really driven by the strategic nature of these transactions and we're working to make sure that they can happen as smoothly as possible and that we're constantly improving our own internal processes to drive these as well as the sales rigor and the operational rigor to make sure that we can get these across the finish line.
I think the 100K deal segments and the 500K deal segments did show a very healthy growth on a year-over-year basis and as a note, the miss in the seven figure deals translates through both the 500K and 100K deal segments because it's a cumulative number. So we did see strong growth in the 500K to $1 million sales segments on a year-over-year basis, if you just look at that segment specifically.
So overall strong momentum on selling these larger deals, but in that seven figure category we're not happy about those results. We're seeing those seven figure deals in both our Q1 and Q2 pipeline. So we have a high degree of confident that we'll get the majority of those things closed throughout the next couple of quarters into Q3 and that's where we'll see these deals show up.
Great, thank you and is there anything you can tell us I guess about the overall demand environment. Are you seeing maybe a slower adoption curve for content management in the cloud or perhaps more competitive environment? Thanks.
I think again given the nature of our evolution from being a tool for file sharing in collaboration which was a relatively straightforward sale that drove this kind of first set of adoptions within customers to now much more of a strategic platform, where customers are automating their business processes, where in many cases they're dealing with much more regulated information. Where compliance and security is even more important where content might even go out and reach through their manufacturing processes or supply chains or customer base and the fact that they're able to shut down legacy systems.
This is just the nature of these transactions that again its more parties tend to be involved within the customer and it tends to be a more in depth sales cycle. However as a result of the type of sales cycle we do see way greater customer retention, obviously much larger deal sizes and then ultimately much more of our differentiation is able to benefit from these deals as well. So we do expect that this becomes the bulk of our business as we reach $1 billion in revenue and beyond. But it is an evaluation to get there and it's something that again we're not satisfied with the speed of which we're driving that execution through the whole company, but we're seeing some incredible pockets of success that we now want to go replicate and drive more uniform execution around.
Yes and this is Dylan just to add a little bit there. I think Aaron covered most of it, but just a note while these particular deals that we had expected to, it didn't close in the fourth quarter are taking longer to close. We're not saying this is more general trend across our larger deals beyond what we've already being seeing in the business and expecting. And as Aaron mentioned, ultimately we think this is kind of solvable through our - just better execution on our end, as lot of it came down to just deal management and not sort of getting ahead some of these complexities although external factors did influence a couple of these deals such as one of the seven figure deals we've delayed because of the large merger, another because of the government shutdown. But most of these - almost all of these deals are still in play and in the pipeline and set to close throughout FY20.
Great. Thanks for taking the questions.
Your next question is from Rob Owens with KeyBanc Capital Markets. Your line is open.
This is Mike Casado on for Rob Owens. Dylan, relative to the seven figure deals, can you help us understand the assumptions around $10 million headwind you referenced? How do you expect those deals to play out over the course of the year? And any other color you can provide us in helping us get a sense how you arrived at that $10 million headwind?
Sure, so maybe to give a little bit of color. It was effectively the delta between what we had forecasted in terms of the impact on kind of annualized contract value and cumulative impact that we had expected in Q4 and that's how it would roll through the year on the revenue front. It does take - we basically have a figure different categories of deals depending on our confidence in closing those deals from committed to different probably associated with that and so it's really looking at that weighted, expected impact of those deals that are in those kind of firmer categories versus what ultimately happened in the fourth quarter and then we're expecting some of those deals as mentioned to close throughout the course of FY20, so adjusted for that. But really looking at it effectively as the delta between in that set of deals that we had expected to close in fourth quarter originally as we sort of entered the quarter versus what ultimately happened and then making adjustments for the deals that are near term that we have visibility into the earlier part of the year.
That's helpful. Thank you. And then with the new leadership in place for only two quarters now. How satisfied is the team with the structure there? And is being able to better solution sell in EMEA margin is just a function of educating the sales force.
Yes so we're seeing strong early signs from the new leaderships. We've actually made a set of changes even beyond bringing the new leader that we mentioned in the start of Q3 of last year. We have new leadership in some of our kind of sub-regional segments that are running kind of key countries within EMEA. So overall we have made some investments in very strong sales leadership and talent to help with EMEA broadly, solution selling and really this move from enabling customers to use Box for file sharing collaboration to really using the full suite of Box's capabilities. This is an evolution that we've been going through across all of our segments, however we have more work to do specifically in EMEA and it is something where sales training, our sales processes and rigor as well as the introduction of our product suites we believe is going to be very helpful in increasing the momentum there.
So happy with the early signs, that we're seeing and we do expect to see some recovery on this within the first half of this year. But again not satisfied with the Q4 results which is driving a big part of that revenue guidance.
Fantastic. Thanks guys.
Your next question is Mark Murphy with JP Morgan. Your line is open.
This is Matt Kaus [ph] on behalf of Mark Murphy. The one customer you mentioned you mentioned that renewed a much lower rate than originally expected in low headwind to revenue this year. What were some of the originally used cases that they thought they were going to realize and why weren't they able to meet those targets or realize those used cases? What are some of the unforeseen circumstances they ran into now?
Yes so just some brief context on the deal. The deal is initially structured with prior leadership within the organization of which we had much stronger kind of connection relationship to, so that was the kind of start of the whole context of the overall strategy from an IT standpoint looked very different given the prior relationship structure. We had a number of used cases, some high value than others unfortunately in some of the high value ones with this new leadership in place. They ended up being a cost verse value gap that we couldn't bridge with the new leadership and so that resulted in that down sell.
They remain a customer and it's customer that we're working with right now to drive more expansion of used cases. So I think we see - actually a lot of go forward opportunity in this account in particular. But unfortunately a mismatch to the prior set of used cases and a unique structure that was created there again driven by the prior leadership. So definitely a one-off from our perspective not something that we see any kind of consistent trend on, but something that we're really focused on recovering even with this specific customer in driving future growth with.
Thank you. You also called out strength in Japan. Can you comment or update us on the Fujitsu partnership and how they're able to drive that strength or how much they contributed to it?
Yes, so we're seeing fantastic results from Japan. Absolutely driving certainly disproportionate amount of our international growth, but just even on absolute basis, we're happy about Japan right now. This is an ecosystem where it's a kind of co-sell modelable [ph] directing with partners Fujitsu is one of them including IBM and many other kind of major resellers in Japan. So the growth - we're seeing kind of healthily relationship with Fujitsu both as a customer as well as partner in that ecosystem. But I'd say, the broader partner ecosystem in Japan is performing very strong and we're seeing really strong results from that region.
Got it. Thank you.
Your next question is from [Indiscernible] with Oppenheimer. Your line is open.
Dylan, when you look at the current environment because I think you covered this earlier. Can you give us a sense of whether your win rates are steady or going up or ticking down relative to the competition?
Yes so our win rates have been stable and pretty strong. So that hasn't changed whether you're looking at, kind of even on a competitor-by-competitor basis. We'd say that we tend to see higher win rates in those used cases that are more kind of cloud content management in nature, so particularly as there are a greater set of products associated with those deals as much as we always mention they tend to be more complex and in many cases longer deal cycles. The win rates on those types of conversations that we have, are higher than the more basic used cases were less differentiated. But across the board there haven't been any significant changes to either the sort of competitive environment or the types of win rates that we've seen seeing over the past several quarters.
Yes the only thing I would build on that is, is more and more we're helping customers go and retire cost from their IT environment. So often times we're not necessarily competing with net new competitor as much as helping customers replace and retire legacy systems, which tend to obviously improve the funding and the budgeting for Box as well as, so a lot of the legacy document management and storage infrastructure technologies that can't work in the cloud Box is able to help customers go and retire. And so we're seeing an increasing trend in our win rates and in our win notifications around being able to help retiring shutdown legacy document management and storage infrastructure.
All right and kind of just to lean on that, from a pricing perspective if you're comparing like-for-like products, is that stable as well? It seems like the lift you're getting is primarily mix related.
Yes, so we're seeing stability and the uplift that we see on the products and again, just kind of the high level puts and takes, the two most significant puts and takes that we see on an overall price per seat basis are the tailwind that we get from the incremental value from these add on products and higher value used cases offset by these larger deals with more seats as we tend to give volume discounting. So overall we've been pretty pleased with the way that price per set is been trending. We did see continued improvement, slight improvement over the price per seat overall and is up roughly 30% versus where we were two, 2.5 years ago.
And my last question on that 30%, when you have the new Relay product upgrade that comes later this year, the security on it. Do you feel like you have some extra pricing leverage with those type of products relative to that 30% adder you've seen for the past products?
Yes so I think those products are absolute - this is Aaron, are absolutely more premium in nature than even sort of the data governance module. However again given the Box suites that we're looking to introduce, I think they'll see a collection of these add on products that are sold to customers which will obviously be more than any individual add on products sale, but obviously include volume discounts etc. based on the size of the customers. But overall, I think our pricing power due to our workflow automation capabilities advance security capabilities, data governance capabilities and open platform we'll only continue to get stronger over time as we move customers from using boxes as again a productivity and collaboration tool to really a cloud content management platform.
Great, thank you.
Your next question is from Brian Peterson with Raymond James. Your line is open.
Hi Aaron, just question for you. Normally in the prepared remarks, we hear a lot about the channel momentum and I think Dylan gave some stats on how many of the larger deals are driven by channel partners, we didn't hear that this quarter. Is there anything to read into that? Has anything changed with the help of the business for channel partners?
Yes it's a great question. No significant change on the focus on, on channels or resellers. There is an evolution where this year in particular you're going to see us put even more emphasis on system integrators and our work with the larger technology integrators of the likes of Accenture, Deloitte etc. but we really wanted to make sure that we covered the broader evolution that's happening with our go-to-market efforts which is much more about how do we take the full power of Box to our customers and drive upsells with that on products. And so we wanted to make sure we put a lot of emphasis on that particular dimension of our business model.
I think more and more overtime, channel we will see as distribution vehicle for us. But whether the customer is director channel is again not the big focus versus making sure customers really use as a cloud content management platform and so we'll certainly reflect that in our comments as we go forward this year and but you'll see the partnership mix continue to evolve again to bring in more of these system integrators as we're driving much bigger and more strategic solutions to our customers.
And yes and so channel does remain about 30% of our overall business and in the fourth quarter closed to 50% of our six figure deals were co-sold with a channel partner. Although that is driven in large part, little bit higher than in the most quarters by the really strong growth that we saw in Japan that we mentioned as virtually all of those deals are through the channel.
Got it. And Dylan maybe one clarification for you. I know we get the revenue breakout of domestic versus international but is there any sense that you can give us in terms of the size of EMEA in that international revenue. Thanks guys.
No, so we would say it's headed to be in the kind of 10% low teens type of range to get a sense of kind of order of magnitude and then as it relates to the overall revenue growth rate, as that as the contribution from the international business has improved by a bit year-on-year, that is as Aaron mentioned really driven by Japan offset by what we've been seeing in EMEA. But to get a sense of that scale, that's kind of roughly the contribution from EMEA today. Out of our overall revenue and given the just the market opportunity, we think that kind of by improving some of the execution and inconsistency we've seen, that overtime we should be able to grow that as a percentage of our overall revenue as well.
Your next question is from Michael Turrin with Deutsche Bank. Your line is open.
I was hoping we could touch more, on your thoughts around seasonality heading into fiscal 2020. I think we're all expecting to see more of a backend loaded this year as a result of the move to solution selling. But growth rate has actually held pretty consistent throughout the year. You've added some color around bill trajectory in Q1. But I'm just wondering if you're still expecting solution selling in the move to larger deals to provide more of a back ended seasonal pattern going forward.
Sure, so we do expect that to be the case. As you mentioned the billings kind of break down in seasonality's is been fairly consistent over the past few years now. I would say that in FY20 again we expect roughly the same particularly as we grow, a larger portion of what we ultimately comes from renewals. So you probably won't see us move the needle significantly given the current scale. So we expect to see similar trends, but we're there to be a little bit of shift from Q1 into Q4 both because of some of those expected Q1 billings headwinds that we mentioned as well as that continued push into solution selling in selling these larger customers in addition to coming off Q4, this is not particularly strong for us. So would expect probably to see growth or contribution to overall billings to breakdown in the kind of mid-teens in Q1, low to mid-teens in Q2 and Q3 and then mid to high-30s in Q4.
Okay that's helpful and then maybe one on margin. Dylan, now that you've reached profitability on an adjusted basis, any plans at all to potentially dial back the degree of margin expansion from here? How are you thinking about that trade off and the potential to maybe push for more growth going forward here?
Yes so as we've talked about in the past, we really do focus on what we're seeing in terms of sales productivity on a region-by-region, segment-by-segment basis to really determine what we think the right growth rate is to grow our sales force which is the biggest driver of the overall spend and I think variability in terms of the type of leverage that we'll see in the coming years as sales and marketing is probably the line item that's going to be most impacting and where we expect to drive most in the leverage.
If we're seeing pipeline and actual sales and performance in certain regions then we'll likely invest more in those regions and if not, then you'll likely to see more profitability. But I would say that, we think that we have a pretty healthy mix of kind of growth and profitability in terms of what I discussed for this year and note that, we think there is a lot of potential to grow at a healthy cliff and invest in the capacity and the pipeline, continued growth based on we're expecting to do this year.
So feel pretty good about this sort of just all of the inputs that would go into putting up those healthy growth rates overtime and I would say that, when we get through FY20 which we didn't give formal guidance around would expect to see fairly consistent improvement in our operating margins between this year that we're just entering now and FY22 so call it roughly 500 basis points or so of margin expansion in each of FY21 and FY22.
That's helpful, thanks. Appreciated you're taking the questions.
Your next question is from Chad Bennett with Craig-Hallum. Your line is open.
Maybe a first to clarification one for Dylan. The $10 million headwind between Europe or EMEA I should say and the large deals this year. It's a result of the billings weakness in the fourth quarter. Are those the seven figure deal weakness and EMEA weakness? Are those mutually exclusive or is there some overlap there meaning obviously where - with some of the seven figure deal weakness out of EMEA?
EMEA, so those are two separate categories. So while there is overlap in terms of the seven figure deals in EMEA that we'd expect close it didn't, we had categorized those as part of the EMEA headwind. So those are two separate categories that are mutually exclusive each about $10 million.
Okay and then kind of generally speaking, maybe for Aaron or Dylan. I guess I'm trying to understand your kind of enthusiasm or confidence behind the solution selling work? I think over the last couple of years you've grown [indiscernible] headcount well in excess of revenue growth and certainly in excess of billings growth. You would think if solution sales selling is working, if it would certainly be evident in your fiscal fourth quarter where you know these solution based large deals, really accumulate and seasonally are strong.
And if you look at your trailing four quarter billings per paying user, I think since you've given this metric it went negative year-over-year for the first time. It looks like based on the Q1 billings guidance again it will be negative again year-over-year on a trailing four quarters basis. Obviously you're paying users are down and your billings are down because billings missed that's obviously not apparent. But I guess I'm - what evidence are you seeing that what you're doing is really working? Thanks.
Yes, so I can cover evidence side and then I think Dylan wants to maybe to clarify couple numbers because we're seeing higher kind of revenue growth rate than the sales headcount add. So we do want to clarify couple numbers there. I think overall when we look at the broader base of large deals especially the $100,000 plus segment which are, while they don't represent the full impact of our CCM platform being sold to customers. They're often representative of the kinds of customers that are using Box in more strategic ways and we have seen that base of customers grow in about 20% base as year-over-year and now starting to really reach a volume, where more and more of our sales reps are driving those transactions and customers. So it's reaching a broader set of customers from a broader set of sellers.
So we're seeing that more of our sales reps are driving add on product sales, really driving much more strategic relationships with customers. But I would say we're disappointed with the speed at which this is rolling out throughout the business. We just did our sales kick off about two weeks ago and really kind of great opportunity, obviously re-energize the entire team and really bring to life some incredible examples from throughout FY19, a very large strategic transactions we're able to drive.
So I think we're seeing very strong momentum, energy and impact of these changes happening throughout the sales force. But then again, given the deal cycle length especially for seven figure deals the fact that we're obviously on boarding new reps and then the need to continue to improve our sales regular and processes that is taking longer than we like to have the full dent on our revenue growth that we would expect.
So again we're not satisfied with the results however we have an incredible amount of confidence based on the early trends that we're seeing within the customer base, a lot of customers that we're talking to about cloud content management and how that's going to impact, how they transform their businesses and thus we see the size of the opportunity going forward.
Yes and then, Dylan just to clarify a bit. On the numbers so this past year, we grew revenue by 20% and our sales force by 12% and then, even our guidance for this coming year, expect revenue to be faster than the growth of our sales force as well and that's certainly been the trend the overtime also. And in terms of how it relates to the productivity and some of the trends we've seen and anytime [indiscernible] about a productivity metric and not seeing all of the work that you're doing with the numbers. But I'd say the user growth is probably not as meaningful as large deal growth or billings revenue to give a sense of kind of the traction and success in the sales force. But over the last few years we've seen an improvement in sales force productivity overall. This past year it was flat year-on-year with a bunch of different trends kind of on a regional basis that we've seen, so just high level US as it's our largest region that was pretty solid overall.
In terms of year-on-year performance where we saw kind of the coast, West Coast and East Coast regions leading the charge and central and south regions have been ramping with lower productivity currently and then as we talked about, as you'd would expect from some of the commentary we've given EMEA was significantly down year-on-year in terms of productivity. While Japan saw a significant improvements in sales force productivity year-on-year.
And then in our inside sales commercial segment, globally that was bit better as well with much more consistent performance on a regional basis. So all in, again a lot of different kind of sub regions and different stories there. But overall, over the last few years again productivity has been improving and over the past year it was pretty flat.
Great. Thanks for the color.
Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.
Two quick ones, Aaron let me start with you. If the $1 billion model in FY22 still on table because if I look at your current guidance it implies that revenue is going to have to accelerate to 20% CAGR over the following two years and if it still on the table, what is it that's giving you confidence in that? And then I got a follow-up for Dylan.
Yes so we're still very focused on that reacceleration and this is the entirety of our strategy right now. When we look at the big deal growth and again being able to sell multiple add on products and then eventually suites to our customers. We see a tremendous amount of opportunity just within our existing customer base, multiple billions of dollars of revenue just within our existing customer base, especially the top customers.
So the focus right now is entirely on that reacceleration onto achieve that target of $1 billion in revenue in FY22 and so that's where we're putting all of our energy. Obviously the lower guidance then we would have liked in FY20, does put the even more revenue for that reacceleration on us. But again when we look at the opportunity, when we look at our customer base, when we look at our leadership position and our add on products that we have, this is something that we're very confident in continuing to drive.
All right, thanks Aaron. And then Dylan, if I just combined the moving parts in next year's guidance together $10 million headwind from EMEA, $10 million from the split seven figure deal and then about $8 million related to large customer that's reducing its spend. That on top of your, the midpoint of your guidance would be about $730 million, which would be 20% growth rate next year, in line with what you've done in FY19 or realistically deceleration from the 22% growth adjusted for ASC606 this year.
You've discussed in the past quarter and definitely at the Analyst Day seeing an acceleration in revenue growth next year. So just help me square these two observations together and why even adding in the moving parts that still wouldn't amount for an acceleration. Thanks.
Sure. Would say first of all when we had phrased that and had always said that was on a reported revenue growth basis, so 606 to 605 was what we've tried to clarified there in terms of our earlier commentary and our prior expectations were based around those numbers. Would also just say that, certainly there are going to be other factors and a lot of puts and takes in the business that relate to and have an impact on FY20 growth and we wanted to just size to give commentary around kind of order of magnitude, how this impacts next year's revenue with the biggest buckets, bunch of other things that do impact our revenue guidance as well. Other parts of performance in FY19 as well as expectations for FY20.
All right. Thank you guys.
Your next question is from Erik Suppiger with JMP Securities. Your line is open.
You've made a number of changes on the sales front, have you had any increase to turnover either voluntary or involuntarily. And do you think that you need to revisit the sales people that you're hiring, are you looking for maybe a more seasoned enterprise sales candidates going forward that might be higher cost?
This is Aaron. I think we've seen retention rates relatively in line with our expectations. Obviously can move into quarter for a variety of factors. We have been very focused on bringing on more sales reps that have been in environment selling kind of end-to-end solutions for customers often times that can lead to as pulling candidates at different kind of companies that maybe we traditionally recruited from. But overall this all sort of priced into our expectations from a cost and sales and marketing standpoint.
So we don't see any changes from a competition standpoint in terms of what we're going after, in terms of kinds of reps we're going after, but absolutely it is about evolving the sales force continuing to make sure we can go and drive solution sales into our customers a much bigger transactions into our accounts.
Do you feel like your training is where it needs to be or is it still very much a work in progress that still is kind of figuring out the optimal go-to-market?
Yes this is an area we've actually been investing in, a bit more over the past especially couple of quarters. We - in fact just brought in a new leader to run our sales training enablement. And the focus here is making sure that we can really get very rigorous with all of our sales team on exactly what it takes to go and sell these much larger deals, making sure everybody is equipped with the right content message, training to do this. It's something that we've - we're building off a very strong foundation fortunately but we want to invest in this even further and get even more rigorous with our training enablement and sales processes.
And as Dill mentioned continuing to kind of tweak the compensation plans in a way that's in line with solutions selling and these much bigger transaction. So really building off the momentum that we again kicked off last year, so last year we kind of with the start of this evolution and again it's - we're not satisfied with the complete speed in which we're doing this. But we're seeing very strong early success and now we're just building on that momentum coming into this year and again really optimistic about the results.
Very good. Thank you.
Your last question comes from Philip Winslow with Wells Fargo. Your line is open.
Thanks guys for taking my follow-up. Just a couple of housekeeping items. First, Dylan you mentioned the backlog was up 12% year-over-year. Did you have a split of that with current versus non-current, if you have a split total RP of current, non-current? That's one. Two; did you have just the total user count? I think we got the paid user account and then the - the third question, you also have the partner net metrics for Q3 you just gave us in Q4 for product [indiscernible] but I take those on the transcript for Q3.
Sure, so we're starting on some of the metric clarification. So total registered users ending the quarter in year was 64.5 million. So what was the channel metric that you were asking about?
For the contracts 100K through partners in Q3. I think some of it was about half in Q4.
In Q3 I don't have a number off top of my head, we'll follow-up on that. I think with a little bit lower more in the 40%, but we'll confirm that. And then on the kind of remaining performance obligation, the deferred revenue breakdown overall up 17% short-term deferred is up 21% and long-term deferred was down 26% and that's again because of and then always an headwind from the long-term deferred was because the impact of that enhanced developer fee which was a much bigger amount on our balance sheet a year ago. But in terms of the backlog and maybe just to put the full piece in context our total remaining performance obligation ending year came in at $686 million which was up 15% year-on-year, that's made of primarily of deferred revenue, which went through that was $375 million, combination of short-term, long-term up 17% and then backlog which ended the year at $311 million of that 12% year-on-year.
And if you have the breakdown for [indiscernible] current versus non-current for the next 12 months.
No the deferred revenue piece, but I don't have the backlog current versus non-current piece.
Okay got it. And also just last metric question, one of things you're doing was sort of what billings growth would look like ex- the enhanced developer fee kind of you had in 20s, what is that equal for the full year billings growth for ex- that developer fee?
Yes so that ended up being roughly 3 percentage points headwinds to billings growth in the year in FY19.
Got it. All right. Thanks a lot.
And this concludes the Q&A portion of today's call. I will now turn things back over to the presenters for any closing remarks.
Well thank you everyone for joining us today and we look forward to speaking with you next quarter.
This concludes today's conference call. You may now disconnect.