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Box (NYSE:BOX)
Q3 2018 Earnings Conference Call
Nov. 29, 2017 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Mike and I'll be your conference operator today. At this time, I would like to welcome everyone to the BOX Inc's Third-Quarter FY '18 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. If you'd like to ask a question during this time, press *, then the No. 1 on your telephone keypad. If you would like to withdraw your question, press the # key.

I will now turn the call over to Stephanie Wakefield, vice president of investor relations. You may begin your conference.

Stephanie Wakefield -- Vice President, Investor Relations

Good afternoon and welcome to Box's Third-Quarter Fiscal Year 2018 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'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 Q4 and full-year Fiscal Year 2018 financial guidance and our expectations regarding our financial results, market adoption of our products, our market size, our operating leverage, our expectations regarding achieving and 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 from our new products and partnerships.

These statements reflect our best judgment 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 quarterly report on Form 10-Q for information on risks and uncertainties that may cause actual results to differ materially. These forward-looking statements are being made as of today, November 29, 2017, 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.

With that, let me hand it over to Aaron.

Aaron Levie -- Chief Executive Officer and Chairman

Thanks, Stephanie, and thanks, everyone, for joining the call. The third quarter was a strong quarter for total new customer adds and cash generation. We delivered year-over-year revenue growth of 26% and billings growth of 26%. We also achieved positive free cash flow of $6 million, a $17 million improvement over last year, marking the second quarter of positive free cash flow generation this year. We maintained customer momentum landing wins and expansions with leading organizations like Foster Farms, the FDA, the Nuclear Regulatory Commission, and Lionsgate. We now have 80,000 total paying customers. In the third quarter, we closed 36 deals over $100,000 versus 38 a year ago, four deals over $500,000 versus seven a year ago, and one deal over $1 million versus two a year ago. While demand remains strong overall, our big-deal results were not up to our expectations. A few of our big deals slipped into Q4 in the last few days of the quarter and they're now progressing toward closure before the year-end. Already in Q4, we are on track to execute a record number of big deals in a quarter.

In Q3 we hosted Box Works, our annual customer conference. Thousands of attendees joined to learn about advances we're making in cloud content management. We made our most significant product announcements ever at this year's event, including how we're bringing AI and machine learning to content in Box. The event underscored the excitement customers have for Box and the alignment of our technology vision with their business needs. We are confident that our unique position sets us up well to reach our first quarter of non-GAAP operating profitability in FY19 and $1 billion in revenue in the coming years. As we talked about before, this year we're focusing on two major objectives. No. 1, innovating in cloud content management with additional products and platform capabilities to help move enterprise workloads to the cloud. And No. 2, advancing our global go-to-market efforts so that we can reach more enterprises around the world.

In Q3 we continued to make solid progress on both of these objectives. Starting with product innovation at Box Works, we announced several new capabilities that extend our leadership in cloud content management. Our major announcement was the unveiling of Box Skills and Box Graph, two new ways we're bringing machine learning and AI to content in Box. We believe AI and machine learning will fundamentally change how we manage, secure, and collaborate on content in the enterprise. Box Skills is a framework for applying state-of-the-art machine-learning tools such as computer vision, video indexing, incentive analysis from the leading technology platforms to contents stored in Box. At Box Works, we showcased three initial skills -- audio intelligence powered by IBM Watson, video intelligence powered by Microsoft Cognitive Services, and image intelligence powered by Google Cloud. Our approach is to take the best-in-class innovation happening in AI and bring those capabilities into Box. With Box Skills, enterprises will be able to uncover insights and reimagine business processes that have traditionally been too costly or impractical to digitize and automate, further disrupting legacy ECM systems. While these initial skills are applicable to any business in any industry, we also wanted to extend the skills framework so customers can leverage machine learning to solve their unique business challenges. That's why we announced Box Skills Kit, a collection of tools to allow independent software vendors, system integrators, and enterprise developers to create custom Box Skills. Custom skills will allow developers to build new intelligent content experiences for use cases ranging from customer service call analysis to legal contract management. Box Skills and Skills Kit will be generally available next year.

Lastly, we introduced Box Graph, our own proprietary machine-learning technology that maps how an organization works with content by analyzing and weighing the relationships activity between users and content in Box. The first experience powered by Box Graphs is Feed, a personalized activity feed that curates and services recommended content for each user. That will be rolling out next year. Box Graph will also allow us to bring intelligence and automation to new experiences in areas like workflow and security. For instance, in the area security, Box Graph can help us identify and service usual behavior that may represent a potential threat and allow the security team in our customers' environments to respond in real time. Our intelligence strategy is all about making Box more powerful for our customers. As we help customers migrate workloads to the cloud, we're laser-focused on ensuring that every piece of content is infinitely more valuable to our customers in Box than in any other system.

Along the same lines, we also just announced the general availability of Box Relay, our new workflow product co-developed with IBM. Relay allows anyone to easily build, manage, and track their own workflows. Over the next year, we will continue to add more sophistication to Relay while maintaining our focus on self-service and simplicity. We are excited about the products we just announced and we continue to see increased adoption of our Box Key Safe, Zones, Governance, and platform products. These products are key competitive differentiators and are growth-drivers for Box.

This past quarter 67% of our deals of more than $100,000 included at least one of these new products, which is up from less than 50% last year. Our new-product capabilities not only support our cloud content management strategy, they also open up opportunities for Box to replace legacy enterprise content management systems. We're seeing increasing momentum from customers looking to move to Box and retire their legacy content management solutions over time. For instance, a leading North American insurance group purchased Box Governance this past quarter to enable them to expand their use of Box across more of the organization and ultimately replace their legacy ECM systems. All of this innovation has led Gartner to name us as the visionary in their content-services platform Magic Quadrant in October. This comes on the heels of being named a leader in the content-collaboration platform's Magic Quadrant earlier this year, and Box is one of only two vendors to appear in both reports. Box is the only vendor with a single platform for content across all of these use cases.

Our second major objective for FY 2018 is to reach and enable every business in the world through our global go-to-market efforts. Many of you met our new chief operating officer, Stephanie Carullo, out our Financial Analyst Day at Box Works. In her comments, she outlined her focus areas of driving up average contract value, increasing customer engagement, expanding internationally, and working with strategic partners to reach more customers. We will drive greater average contract value by helping customers better understand the value of purchasing multiple products like Governance, Key Safe, and Zones. We're already seeing traction with this, demonstrated by our improving product-attach rates and by the types of attendees we were able to attract to Box Works, which included business leaders, CISOs, CIOs, and heads of digital transformation. We'll also be focusing our online-sales channel to help customers in all segments, not just our small-business segment, to quickly and easily be able to buy new products and seats, which will make our sales process much more efficient and help grow our average contract value as well.

Additionally, we're driving greater customer engagement through Box Consulting, our professional-services group. Our customers are looking for us to be either trusted advisor to not only ensure they're incredibly successful in their Box adoption but also to help them think through their digital transformation for content management and collaboration broadly. To that end, we're introducing Box Transform later this month, a new consulting package that offers customers a dedicated long-term consultant to drive advanced cloud content management use cases, get embedded in critical customer business processes, and integrate Box with other digital transformation initiatives.

We also continue to see strong results in our international growth. With an increasingly global economy, constant security threats, and the advent of even stricter compliance protocols such as GDPR, the need for secure cloud content management is growing. We continue to see strong and growing demand in Japan and all across Europe. With GDPR coming in 2018 and our continuing information with Box Zones, we are well-positioned to grow market share in these new markets.

Lastly, channel and technology partners are a critical component of our go-to-market strategy. In Q3, our channel partners such as IBM, AT&T, and Itochu in Japan played a role in more than half of our deals over $100,000 and contributed to our lead generation, awareness, product, and sales efforts around the world. And with Microsoft, we recently announced that Box using Azure is now generally available. Under our agreement with Microsoft, sales reps globally will be able to co-sell and be compensated for selling Box deployments that leverage Azure. The Box partner ecosystem, whether it's resellers, global carriers, or strategic alliances, is critical to helping Box reach new markets, go deeper in the enterprise by integrating best-in-class solutions, and by driving differentiation through innovation in the cloud.

Looking ahead, we are incredibly excited about the future of cloud content management. By adding AI and machine-learning capabilities to Box and continuing to innovate on core Box products, we're in the best position to help enterprises in every industry power how they work with their information and move the $40 billion market for content management and enterprise storage to the cloud. We will drive these growth strategies while remaining committed to our goal of achieving a quarter of non-GAAP profitability in FY '19 and obtaining a $1 billion annual revenue run rate by Q3 of FY '21.

Now, I'll hand it over to Dylan.

Dylan Smith -- Chief Financial Officer

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. As Stephanie noted, GAAP to non-GAAP reconciliations are in the presentation that is available on our IR website. The financial measures I will be discussing on this call are non-GAAP, unless otherwise noted.

In Q3, we drove solid top-line growth while also delivering significant cash flow improvements. We achieved cash from operations of $14.1 million, an improvement of $20.9 million year over year. This marks our strongest year-on-year improvement ever and we generated more than $28 billion of cash from operations over the last 12 months. In Q3, we also delivered on our commitment to achieve positive free cash flow, generating positive free cash flow of $6.3 million, an improvement of $17.2 million year over year. We achieved record revenue of $129.3 million in Q3 above the high end of our guidance and up 26% year over year. Twenty-one percent of Q3 revenue came from regions outside of the United States compared to 17% a year ago. This quarter, roughly one-third of our six-figure deals came from international markets. Third-quarter billings came in at $141.5 million, representing 26% calculated billings growth and 22% adjusted billings growth year over year. The larger delta this quarter was driven by a couple of customer-driven prepays. We continue to expect billings growth and revenue growth to track roughly in line in Q4.

On deal metrics, we closed 36 deals over $100,000 versus 38 a year ago, four deals over $500,000 versus seven a year ago, and one deal over $1 million versus two a year ago. While we saw lumpiness in our larger enterprise deals this quarter, we had a very strong quarter in our commercial business, achieving record bookings internationally as well as an all-time high for 100K-plus deals in our commercial segment. We continue to drive strong attach rates with our newer products, including Governance, Zones, Key Safe, and Platform. In Q3, roughly two-thirds of our six-figure deals included at least one of these newer products. Even with our Microsoft and Fujitsu partnerships just now ramping up, partners played a role in half of our deals over $100,000 with four of these deals attributable to IBM. Deferred revenue was $253 million, up a very strong 31% year over year, and was positively impacted again by the enhanced developer access fee from one of our resellers.

Turning to margins. With continued strength in price-per-seat and infrastructure efficiencies, non-GAAP gross margin came in at 75.5% versus 76.1% a year ago and 75.5% last quarter. We continue to expect our gross margin to come in at roughly 75% in Q4. Q3 was another successful quarter of driving operational efficiency across the business. Sales and marketing expenses in the quarter were $73.5 million, representing 57% of revenue, an improvement from 58% in the prior year. As a reminder, our annual customer conference, Box Works, takes place in our third quarter, and this year accounted for roughly $8 million of our Q3 spend. Excluding Box Works, sales and marketing expenses would have been 51% of revenue. This year we've also accelerated our rate of AE hiring given the opportunity we're seeing and we remain on track to grow our global AE headcount by roughly 25% this year. The ongoing cost to support our free user base, which is a sales and marketing expense, decreased to 3% of revenue in the third quarter, an improvement from 6% in the same quarter a year ago. We now have 57.5 million registered users, of which 10 million are paid.

Next, research and development expenses were $25.1 million, or 19% of revenue, down from 21% a year ago, even as we made significant enhancements to our products, including the early development of Box Skills and Box Graph and preparing Box Relay for November general availability. Our general and administrative costs were $16.1 million or 12% of revenue compared to 13% in Q3 of last year. We expect to continue to drive leverage in G&A as we benefit from greater operational excellence and scale.

As we noted previously, we're currently paying double rent on our offices in London and Tokyo as we prepare to move into these new facilities in Q4. Still, our focus on operational efficiency drove our Q3 non-GAAP operating margin to a solid 4 percentage point improvement year over year, coming in at negative 13% versus negative 17% a year ago. As a result, non-GAAP EPS came in at negative $0.13 cents, an improvement from negative $0.14 cents a year ago.

One of the key elements that make our business model so powerful is our strong customer retention. Our full churn rate was roughly flat with Q2 and remains best in class at just under 4% on an annualized basis. Our net expansion rate was 16%, primarily driven by strong seat growth and existing customers and cross-sells of our newer products. As such, we ended the quarter with a retention rate of 112%. Over the past year, we've seen a higher percentage of our bookings coming from net new Box customers, particularly in international markets, which have created some downward pressure on our retention rate.

Let me now move on to our balance sheet and cash flow. We ended the quarter with $199.4 million in cash, equivalents, and restricted cash, of which roughly $26.5 million was restricted. We delivered very strong cash flow from operations of $14.1 million versus negative $6.8 million a year ago. We've been making several improvements to our working capital management processes which have resulted in improved collections rates and cash flow from operations. In Q3, total capex was $3.0 million versus $1.9 million a year ago, and capital lease payments were $4.8 million versus $2.2 million a year ago. We expect datacenter capex and capital leases combined to be roughly 4% of revenue for Q4. In addition, we expect to spend roughly 5% of revenue on capex related to facilities expansion in Q4. Once we move into our expanded facilities in London and Tokyo in Q4, we expect capex to return to more normalized levels in FY '19. Finally, we generated $6.3 million of free cash flow in the third quarter, a significant improvement from negative $10.9 million of free cash flow a year ago. We remain committed to achieving positive free cash flow for Q4 as well as for the full year of Fiscal 2018.

With that, let's now turn to our guidance. For the fourth quarter of Fiscal 2018, we are setting revenue guidance in the range of a $136 million to 137 million. We expect our non-GAAP EPS to be in the range of negative $0.08 to negative $0.07 and for our GAAP EPS to be in the range of negative $0.27 to negative $0.26 on approximately 137 million shares. For the full year of Fiscal 2018, we expect revenue to be in the range of $505 million to $506 million. We are tightening our guidance range and expect our non-GAAP EPS to be in the range of negative $0.45 to negative $0.44 and for our GAAP EPS to be in the range of negative $1.19 to negative $1.118 on approximately 134 million shares. In summary, Q3 was a strong quarter of product innovation for us with the introduction of Box Skills and Box Graph. We are excited to bring artificial intelligence and machine-learning capabilities to Box content in FY '19 and we're encouraged by the customer and partner enthusiasm for our cloud content management solutions at Box Works. We're committed to delivering positive free cash flow in Q4 and for the full year of FY '18 and to delivering our first quarter of non-GAAP profitability in FY '19. These targets set us up nicely to achieve $1 billion annualized revenue run rate in Q3 of FY '21 as highlighted at our recent Analyst Day presentation.

With that, I would like to open it up for questions. Operator?

Questions and Answers:

Operator

At this time I'd like to remind everyone in order to ask a question, press *1 on your telephone keypad. We will pause for a moment to compile the Q&A roster.

Your first question is from Rob Owens with Keybanc Capital Markets.

Mike Casado -- KeyBanc -- Analyst

Hey, guys, this is Mike Casado on for Rob Owens. Aaron, could you provide some further perspective on the cause of the slipped deals and where they stand in 4Q?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah, a couple of deals were in key regulated industries and unfortunately there was some unanticipated deal complexity just given the nature of these types of customers. And so, they pushed out into Q4. We're seeing really good progress on them, and so, I have full confidence that they will close and, as I mentioned in the prior statements, we expect this to be the strongest quarter in terms of our big-deal metrics for any quarter ever. So, we're very, very confident in the momentum that we're seeing. It was also a record quarter for us in terms of deals over $100,000 in our commercial segment. And so, we're continuing to see customers even in the mid-market part of our business buy larger and larger deployments of Box, especially leveraging the add-on products that we have. So, overall, directionally, we're seeing really positive signs. Unfortunately, there were a couple key deals that due to, again, the deal complexity, did have to push out into Q4.

Mike Casado -- KeyBanc -- Analyst

OK. And then I have one for Dylan. Dylan, this quarter we saw a sizable shift to long-term in the deferred mix. Was this a product of larger and longer deals as you go upmarket? And, I guess, are there any takeaways to draw regarding general business philosophy from that?

Dylan Smith -- Chief Financial Officer

Yeah. I wouldn't say there's anything different in terms of either sort of the mix shift or the strategy or anything about the philosophy. A couple of things there that are driving a bit of a shift and different contributions between short term and long term versus what we see typically in the quarter, the first of which is related to the way that the reseller, prior to the platform development fee we've talked about before, is starting to flow through the revenue. So some of that was coming out of short-term deferred and being recognized as revenue. And then, as we mentioned, there was a bit of a delta this past quarter between our adjusted billings rate and our calculated billings rate. We did have a couple of our larger customers choose to prepay for Box for multiple years in advance. And so, a lot of that is showing up in long-term deferred as well. So we can expect that trend to really persist and nothing really that we're doing differently but when you add those two things up, it does create a little bit of a different mix shift between short-term and long-term in this quarter.

Mike Casado -- KeyBanc -- Analyst

Great. Thanks for the color.

Operator

Your next question is from George Iwanyc with Oppenheimer.

George Iwanyc -- Oppenheimer -- Analyst

Thank you for taking my question. So, digging into the large-deal momentum, how much of an impact were your partners there? And can you give us a little bit of color on IBM and what you're seeing as well from partners internationally?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. We're seeing very positive momentum on the partnerships overall. As I mentioned, we have a significant percentage of our deals over $100,000 coming from and through partners. So, especially when we look at key markets like Japan and Europe, we do see some strong impact from partnerships with IBM and then Itochu in Japan and others. So very strong momentum on the partnerships overall. As I think you know, the end of the year tends to be a big period for IBM in particular. So we do expect a ramp-up in some of the larger deals that we see throughout channel partnership. And then obviously going into next year, this continues to be a focus. So, Stephanie Carullo, our new chief operating officer, has a big focus on making sure that we have a really good mix of go-to-market partners as we extend our reach into larger enterprise segment.

George Iwanyc -- Oppenheimer -- Analyst

OK. And with all the hiring that you've been doing on the sales side, can you give us a sense of what the productivity ramp has been for the newer hires over the last couple of quarters?

Dylan Smith -- Chief Financial Officer

Sure. So, I've been really pleased with the way that we've been able to scale up the sales force, as we had talked about, heading into this year and we are on track to grow our global headcount by about 25% this year and that's one of the biggest drivers of the sales and marketing spend increase that you're seeing. I would say that we've been pleased with the ramps of the reps that we're seeing. As a reminder, though, in the field segment, it takes about 12 months for those reps to become fully productive and in the commercial segments, that's about nine months, sometimes a little bit shorter depending on the segment. So I note that most of the reps that we've been hiring throughout this year, we don't expect to materially contribute to the business outside of to a certain extent in Q4, but we expect most of that to be capacity and sales for next year. So we are seeing across ramp reps, as we've talked about over the last couple of years, strong productivity gains in the double digits and a lot of positive signs in terms of the reps that are ramping now but in terms the overall contribution to new bookings, the reps that we've been hiring this year are not a major driver of those.

George Iwanyc -- Oppenheimer -- Analyst

OK. Just one last question. The confidence level on the large-deal momentum is encouraging, but can you just give us a sense of what that visibility is? Is it that those deals that got pushed out already closed? Is that a record pipeline that if normal win rates work out that it'll be a record quarter? Just a sense of where that visibility is coming from.

Aaron Levie -- Chief Executive Officer and Chairman

Yeah, this is Aaron again. I think one is it's all based on a lot of the pipeline that we're seeing and the deal conversations that we're involved in right now. Q4, for obvious reasons, seasonally is the strongest for us as customer budgets start to align to the next year's spend. And so, we do see more alignment with the strategic initiatives of our customers which tends to allow us to capture much more strategic transactions, especially with a lot of our add-on products. So our confidence in this is driven by the visibility that we have into the quarter, including what we've already seen happen in November but in particular the direction, again, we're seeing is more and more of a move upmarket and the medium size and larger enterprises that are realizing they have to manage their content, secure their content, ensure compliance around their content in completely new ways, that legacy systems aren't going to solve that problem. And fortunately, a lot of that momentum is in the favor of our platform and cloud content management. So that's what's driving a lot of the growth overall and Q4 just happens to be a very strong quarter for, again, seasonal and strategic reasons for our customers.

George Iwanyc -- Oppenheimer -- Analyst

All right. Thank you very much.

Aaron Levie -- Chief Executive Officer and Chairman

Thank you.

Operator

Your next question is from Melissa Franchi with Morgan Stanley.

Melissa Franchi -- Morgan Stanley -- Analyst

Great. Thank you so much for taking my question. [Inaudible]. I'm just wondering if you can maybe talk about some of the changes that she's made, maybe to the go-to-market motion and I'm just wondering if you think of any of those changes made has been perhaps disruptive this quarter.

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. We haven't seen any disruption on the execution side. I think Q3 was the first quarter that Stephanie was fully on board, and it was mostly a ramp here in terms of going deep in the business, understanding all the different dynamics of how the business works and leveraging a lot of her experience to compare and contrast some things that we want to continue to evolve on. As she talked about the Financial Analyst Day at Box Works, there is a few key areas that she's going to be focused on around: driving average contract value value up, making sure that we're working with our partners, especially more and more globally, and ensuring that we're getting closer to our customers so we can continue to upsell them, retain them, and build stronger relationships. So all of those initiatives, we believe, are additive to what we're doing. Some of that is the enabling us to align and get more focused in certain areas and make sure that certain segments across the business are much more aligned and then continue to integrate more and more of our functions so we can execute more effectively. So we see it all as positive changes in terms of how we're executing and I think going into next year we'll start to see the more substantive benefits of these changes that we're implementing right now, but we don't expect disruption from a sales standpoint or go-to-market standpoint because of these changes.

Melissa Franchi -- Morgan Stanley -- Analyst

OK, got it. And I'm just wondering if you could maybe give an update on Box for Government, now that you had ramps and this was the federal fiscal year and I am just wondering how that's proceeding relative to your expectations and how material is it today?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. So, it's still a growing business. And in terms of materiality, we still see it as growing off of a small base but not extremely material to the business overall. We're seeing more and more, again, key agencies deploying Box both domestically and globally. One of the key deals in Q3 was the FDA coming on board, and we're seeing more and more agencies that are deploying Box for secure content management and collaboration. Last quarter one deal that we announced was Metropolitan Police of London, so a leading police agency globally using Box very extensively across their organization. That was our largest European deal ever. So, to be able to get that within a government institution was, we think, a testament to the security and compliance offerings that we have, but going into next year, I think we're going to see a lot of growth on the government side. There's a huge push within both, again, the U.S. government at the federal level as well as local levels and globally to both drive costs down, improve security, improve productivity and collaboration at an interagency and departmental level, and that all plays in the favor of Box and cloud content management. So we expect to see pretty healthy growth within the government sector next year in addition to our other key verticals like life sciences and financial services and some other spaces.

Melissa Franchi -- Morgan Stanley -- Analyst

OK, thank you.

Operator

Your next question is from Mark Murphy with JP Morgan.

Mathew Carr -- JPMorgan Chase -- Analyst

Hi, this is Matthew Carr, on for Mark Murphy. You mentioned some non-anticipated deal complexity as a reason for some of the slipped deals. Was this complexity unique to those deals or is it something that could potentially be germane to larger deals as your deal sizes continue to get bigger and bigger?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. As we work with larger and larger enterprises on more strategic deployments, especially in regulated industries like financial services, for instance, there are just more stakeholders that tend to get involved in deals from legal compliance, security, etc. and this is something that we obviously have seen as we ramped up in some of these key markets over the past couple of years. So, it's not a surprise as much as, in a couple of cases there were scenarios where we weren't able to get ahead of the deals fully, so they did have some unanticipated pushes, but we don't expect this to be any kind of systemic issue as we go into more of these regulated markets or larger enterprises, and we are implementing some process improvements to ensure that we have more executive sponsorship upfront. We're aligning all the various stakeholders as efficiently as possible but don't expect this to be any kind of ongoing issue. But it did impact a couple of the key deals at the end of the quarter, unfortunately.

Mathew Carr -- JPMorgan Chase -- Analyst

OK, thank you. And I know it's early but given the way Microsoft sales reps are incentivized to sell Azure, what have been some of your observations at this early stage of how that's affected their selling of Box and is there anything that surprised you so far that you've seen?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. So, for context, our technology just became generally available, as I mentioned. So we're very, very early in our ability to go to market with Microsoft. So it was a contingency or dependency to make sure that when our sellers were in the field together that the product was actually able to work together with Azure. So we're very early, just weeks into the effort in the field. What we are seeing is some pretty active conversations with our sellers as well as Microsoft's, especially in accounts where an Azure sales rep is trying to penetrate an organization and get more adoption or new adoption of Azure in that environment. We have found that those conversations are very collaborative with Microsoft. So, very, very early stages, just seeing some of the earliest trends of the relationship but we have a lot of optimism and confidence that this is going to be very helpful in the field as we go into more and more accounts together with Microsoft, just as you've seen with that with us working with IBM and many of our other strategic partners.

Mathew Carr -- JPMorgan Chase -- Analyst

Sure. Thank you. And one last one. Dylan, as you think about getting to your 11% pro forma operating margin target in Q3 of Fiscal '21, how do you anticipate scaling toward that target? I mean, obviously, it's not going to be completely linear but are there any sort of guardrails you can give us for how you might scale toward that target?

Dylan Smith -- Chief Financial Officer

Sure. So, to your point, we do expect to make steady improvement year on year both in our operating margin as well as our cash flow margin but don't expect it to be completely linear. I would say that the biggest area, if you just look at the spend today and the $1 billion target model that we put out at the Analyst Day at Box Works just a bit ago, the biggest line that we expect to drive leverage is in sales and marketing. And so, a lot of that we think is going to come from just the natural business model scale. So, as we've talked about in the past, we have very different economics associated not just kind of between landing a net new customer and expanding an existing customer but very, very strong contribution margins from renewals. So as that base scales, that's going to drive a lot of that leverage just naturally. We talked a little bit about continuing to leverage our online channel for fulfillment, which should be an efficiency driver, and then a lot of it comes down to just continued kind of maturation of our sales force and kind of rep productivity improvements, increases in ACV, things like that. But in terms of the overall productivity measures or locations or things like that, that path to get to that $1 billion target model doesn't seem to be doing anything dramatically different than what we're already doing today. It's just continuing to see the trends that we've seen over the past couple of years as we continue to drive leverage across the business.

Operator

Your next question is from Brian Peterson with Raymond James.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks for taking my question. So, just wanted to hit in on the deal-slippage a little bit. I was curious, the timing of Box Works, which I think was a little later in the quarter in October and historically it's kind of in the August timeframe, did that change any of the impact related to the deal activity this quarter?

Aaron Levie -- Chief Executive Officer and Chairman

It's a great [Inaudible}. Usually, Box Works does happen at the beginning, it's tended to happen at the beginning of September in those quarters. So that gives you a lot of momentum at really kind of the start of the seasonal trend of the falls or coming out of August and into the fall period. So, that was definitely a different year over year and that meant a lot of our focus was on Box Works in mid-October, which is not a closing event, it's really a momentum-building event from a product from the go-to-market standpoint. We wouldn't want to kind of point to that specifically as a driver of the deal slippage but we were all hands on deck obviously for that event and, overall, the momentum that we were able to generate both from a pipeline standpoint, as well as customers that were at Box Works, does help us and support us significantly for Q4. So that was the real kind of a positive result of Box Works and then obviously that takes us into next year. So, still benefiting pretty significantly again from being able to launch a lot of new and updated products for customers and get thousands of customers into the room and show them really the future of cloud content management. So we're very happy about that but, yeah, I think on the final kind of key deal point, really just, again, a couple of cases that had some unanticipated complexity that pushed out but, overall, still I've been pretty happy with the number of transactions overall, 4,000 total new customers and a lot of really kind of good names and logos in very regulated industries in many cases. So, still pretty happy from that standpoint.

Brian Peterson -- Raymond James -- Analyst

Understood. Thanks, Aaron. And maybe, Dylan, one for you. You referenced some pretty strong commercial results this quarter. I was just curious if maybe you could talk directionally how much of that is being driven by seat count, user account or how should we think about the pricing per customer in those record commercial results? Thanks, guys.

Dylan Smith -- Chief Financial Officer

Sure. So, overall, even for the core product, we've seen really strong trends in price per seat. So, as we kind of highlighted it at Analyst Day, historically we've been talking about per-user pricing and the $100 per-user-per-year range and being stable at those levels for two or three years and then really this year, especially because of the increasing penetration and type of sale that we were making to customers across segments, we've seen that up and significantly above $100 per user per year. So, that trend has continued into Q3. And certainly as the driver of that and as we talked about in the past, it's less driven from kind of the price per seat specifically and more the types of use cases that we're seein, and the kind of cloud content management solutions that we are selling are really resonating in the commercial segment as well, especially the high end of that segment. So, as we've talked about in the past, one of the things that surprised us about Governance as we rolled that out and started to have more and more customer conversations, that there's a lot more demand from the commercial segment that we've been expecting. Similarly, on the platform front, there's a lot of commercial mid-market companies who have really interesting use cases who can build compelling and kind of value-driving applications on Box, So I think the biggest thing that's driving such a delta in those six-figure deals we're seeing in the commercial segment is more that we're seeing some of these companies who might just be a few hundred employees who are also buying platform and buying our full suite of products and that's really where we get to those six-figure outcomes.

Brian Peterson -- Raymond James -- Analyst

Great. Thanks, Dylan.

Operator

Your next question is from Greg McDowell with JMP Securities.

Greg McDowell -- JMP Securities -- Analyst

Great. Thank you very. Just one Q4 guidance question for Dylan. I was hoping you can help us think through the Q4 billings commentary and how it will closely match the revenue growth rate because when I look at the midpoint of your Q4 revenue guidance, I think it's around 24% revenue growth which would get us close to Q4 reported billings growth number of 24%. So, what I'm trying to think through is with all the big-deal commentary and some of the slipped deals, why wouldn't Q4 billings perhaps be higher than the revenue-growth rate in Q4. And the second part of the billings question is if we look at what happened in the second half of last year, we saw that adjusted billings growth number actually higher than the as-reported number and in Q3 it was you know 4 points lower and I was just hoping you could help us think about the difference between the adjusted and as-reported number in Q4 in terms of how you plan to get customer prepays or structure some of these contracts. Thanks.

Dylan Smith -- Chief Financial Officer

Sure. So, wouldn't expect the sort of payment durations to be a big driver of any delta both last year and this year. We will from time to time see customers prepay but it's not a behavior that we're driving either with customers or incentivizing with our sales force. And so, last year we had about 2% of our overall billings coming in in Q4 in terms of multiyear prepays but, if you recall, kind of more broadly there is quite a delta between adjusted and calculated billings in our numbers last year as it was comparing to FY '16, where we did take a pretty different approach. So there's some noise in that sort of delta and sort of the payment durations for Q4 were fairly normal last year, and we expect roughly the same this year. What I would say in terms of the overall growth is we had a very strong sales quarter in Q4 last year. So if you look at some of the large-deal metrics and just the overall growth metrics that we highlighted, we're pretty pleased with the results. We have a much stronger pipeline this year and feeling pretty good about the setup that we have going into the quarter but we do you have a fairly large portion of that pipeline in these large-enterprise transactions and, as you know, we tend to take a fairly conservative approach with respect to the expectations we set. So, if some of those larger deals fall our way, there's certainly some upside. We could see billings growth outpace revenue growth but we think it's probably the right way to think about the business as revenue growth and billings growth tracking roughly in line both for Q4 and then as we move forward.

Greg McDowell -- JMP Securities -- Analyst

That's great. Maybe I will do one quick follow-up for Aaron. It was good to see the churn rate sort of flatten compared to Q2 and I was just hoping maybe you could talk a little bit about anything you guys have done internally to sort of tighten up the customer churn and sort of what needs to happen to get that net expansion rate to instead of declining start to grow again. Thanks.

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. And this is certainly one of Stephanie's biggest focus areas coming into Box on the go-to-market side. So I think that, as we've talked about before, we are in a transition process in our customer base of really moving people from thinking about Box as a file sharing, file collaboration, secure sharing tool really into being a much broader enterprise content management platform, and that's really what the focus of cloud content management is. And in some cases there are customers that have come on years ago that still only think about us as an end-user file sharing and collaboration tool, and we have to move and effectively migrate those customers into thinking about us much more broadly and more strategically, and that meant an evolution in how we do customer-success management, how we do retention, how we communicate and market to our customer base. Especially, at the scale of 80,000 customers, this has to be a programmatic effort. And so, we've been on this transition for the past year plus but it's clearly ramping up, and you're starting to see the results, hopefully, more and more positive results from that. And one great example was in Q3 on the retention side although we are confident there's a lot more we can be doing on that front. I'll also add that what we are seeing as customers adopt more of our add-on products, so products like Governance or Zones or Key Safe or Platform, that continues to add more and more stickiness for customers on the Box platform and it means that we can be involved in much more strategic parts of the business, and obviously it means that we're much more embedded in their core business processes. So the more that we see customers adopting those add-on products, we do see that correlating with better retention rates and then hopefully, again, more up-sell rate over time. And we called out at the Analyst Day that we have over 1,000 customers that adopted Box Governance. Again, that's really just the start because we see a lot more opportunity ahead for both Box Governance and all of our add-on solutions.

Greg McDowell -- JMP Securities -- Analyst

That's helpful. Thank you very much.

Operator

As a reminder, if you'd like to ask a question, press * 1 on your telephone keypad. The next question is from Brian White with Drexel.

Brian White -- Drexel Hamilton -- Analyst

Yes, Aaron, as we look into Calendar '18, if you could give us maybe three to four items that you're excited about as we go into the new year. Obviously, you have a lot of new products, a lot of new partnerships, you're going after big and small in different verticals, but if you could point us to just three or four things to just think about for Calendar '18.

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. So, I think that we've been on this huge push, if you look at the past couple of years, with our product strategy where we've added Box Governance, which helps advanced information governance-use cases, get sold on Box Zones for international data residency, and then obviously the platform push for developers being able to build on Box. I think you'll see a clear pattern of really what we're trying to do is become the system of record for how companies manage, secure, and organize their critical content, and we continue to think there's a whole bunch of other additional areas that we want to be best in class at and completely change what our customers are thinking about from a content standpoint. So one thing that we announced obviously at Box Works but really the bulk of the innovation will be coming next year is around intelligence. So, how do we bring the power of machine learning and artificial intelligence into content management so we can begin to automate and completely change the way that people are working with their content? So, one big focus area is intelligence. We also think that there's a lot more that we can be doing for our customers around security. So, whether it's things like anomaly detection that could be powered by Box Graph, as an example, or deeper functionality that allows us to be the best place and continue to be the best place to secure content in the cloud, there's a lot of innovation on the security front. And finally, I think, as you see us moving into both more regulated industries and key verticals like financial services or life sciences as well as on a global basis, compliance is going to be a massive area. So we've talked at a high level that GXP which is the requirement in life sciences companies to be able to use content management services for the regulated drug-trial processes within the organization. We already work with many of the leading life sciences companies but more in the less-regulated parts of the business. With GXP compliance that we're on track to receive, we'll be able to enable customers to support. That's going to allow us to go way deeper in life sciences organizations, as one example. But that is just one element of the overall compliance strategy. GDPR is on the horizon for our customers in May of next year. We see that as another major catalyst for customers to have to rethink their content management strategy and begin to move more content management collaboration to the cloud. So, I think, if you kind of look at a few of these areas, intelligence, compliance, security, and broadening our platform, that's where you're going to see some really big pushes going into next year.

Brian White -- Drexel Hamilton -- Analyst

Great, that's helpful. And when we think about the Microsoft relationship, obviously there are different aspects to it but in the go-to-market aspect of it, should we think about a ramp that's similar to IBM, has a similar potential of what you've seen with IBM or should we think about it differently?

Aaron Levie -- Chief Executive Officer and Chairman

I think it's going to look a little bit different purely because the structure of the relationship is fundamentally different. So, with IBM, obviously we're jointly developing products and they're a true reseller of Box. So that relationship takes on one set of aspects and one set of dynamics. On Microsoft, we do a lot of co-innovation and integration with Microsoft products like Office 365, Azure, Active Directory, etc., and in the field, we're going to be able to co-sell Box and Azure together. It won't be a resell relationship. So the very nature of the relationship is a little bit different. I think the way that we're going to ramp it up, the way we're going to enable will have a lot of similar characteristics but I think it's a little bit too soon to tell how we would want to compare and contrast that to sort of IBM as a distribution channel, which just has some very, again, different dynamics to it. But overall, we're seeing a lot of positive momentum in the field both with Microsoft sellers and our own, and we think that customers are going to be pretty excited about the innovation that Box is able to bring on top of Azure and we think Microsoft is pretty excited about that as well. So, overall, we're trying to build out a strong portfolio of partners that we will work with in a variety of ways. Some are just going to be pure technology-oriented partnerships and then some like IBM or in the case of Microsoft are going to be much more on the go-to-market side.

Brian White -- Drexel Hamilton -- Analyst

Great. Thanks a lot, Aaron.

Operator

The next question is from Kash Rangan with Bank of America/Merrill Lynch.

Jane Wong -- Bank of America/Merrill Lynch -- Analyst

Hi. This is Jane Wong on behalf of Kash Rangan. My first question is with regard to the new professional-services group, the Box Transform consultants that you announced, what kind of impact do you expect that to have to your professional-services revenue mix as a percentage of total and what kind of impact do you expect that to have to gross margins?

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. So, it's still very early with this initiative. It's just rolling out right now and what it's all about is allowing us to get closer in our customers' environments and really help them extend the usage of Box into much more strategic parts of the business. So, instead of just a roll-out and optimization activities, it's much more about our strategic change management and integrating with some of the core business processes our customers have. So, back to the earlier question of being able to transition customers from using Box's secure file sharing and collaboration to truly a cloud content management platform that helps empower the business. So, that's what Box Transform is all about to your point. In terms of the gross margin impact, because it's so early in the program, I don't think we know what the impact is going to look like. It's aimed at our more strategic customers. So, we don't expect it to necessarily drive down overall gross margins given the sort of segment of customers that it's aimed at but that's something that we're obviously going to pay a lot of attention to.

Dylan Smith -- Chief Financial Officer

Yeah and just to build on that a bit, just if you think about the overall scale of our total consulting business, it's been fairly steady in the low- to a mid-single-digit range of overall revenue. We do expect that to trend upward a bit over time, and steady state we think that the professional-services part of the business will be running in a kind of 10% or 20% gross margin clip. So, unless this was to change the revenue mix shift materially, I wouldn't expect much of an impact on gross margin and the other thing I'd note is that the nature of these consultants tend to be with very large customers who are making large purchases and then it's really just about how do we drive the adoption and those advanced deployments, digital transformation projects, etc. And so, those types of customers overall tend to be pretty high margin as well.

Jane Wong -- Bank of America/Merrill Lynch -- Analyst

Thank you. And maybe could you give us an update on the adoption of Box Platform for developers by your customers? Maybe some trends and attach rates and usage or maybe on the percentage of mix in the ACV that's made up of Box Platform. Thanks.

Aaron Levie -- Chief Executive Officer and Chairman

Yeah. So we had really strong growth year over year from Q3 to Q3 FY '17 to '18 in Platform. We're continuing to see Box Platform be used in more and more kind of strategic use cases. So, everything from financial services firms, powering wealth advisor portals. We have Skills in the pipeline right now in the healthcare space to be able to power patient portals for delivering documentation and various medical information to patients. So, use cases are continuing to extend the breadth of how Box is used into an enterprise. And overall, we're seeing it become more and more core to the cloud content management methods and sales process for all of our customers even for those that don't elect to buy Platform right away. So we see it as a major differentiator for us and we're seeing very strong growth on a year-over-year basis. We don't break out the revenue yet for this part of the business but we are seeing really growing and strong traction from the customer base.

Jane Wong -- Bank of America/Merrill Lynch -- Analyst

Thank you.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Stephanie Wakefield -- Vice President, Investor Relations

Thank you so much for joining us today.

Duration: 57 minutes

Call Participants:

Stephanie Wakefield -- Vice President, Investor Relations

Aaron Levie -- Chief Executive Officer and Chairman

Dylan Smith -- Chief Financial Officer

Mike Casado -- KeyBanc -- Analyst

George Iwanyc -- Oppenheimer -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Mathew Carr -- JPMorgan Chase -- Analyst

Brian Peterson -- Raymond James -- Analyst

Greg McDowell -- JMP Securities -- Analyst

Brian White -- Drexel Hamilton -- Analyst

Jane Wong -- Bank of America/Merrill Lynch -- Analyst

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