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Box, Inc. (NYSE:BOX)
Q3 2019 Earnings Conference Call
Nov. 28, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Chantel and I will be your conference operator today. At this time, I would like to welcome everyone to the Box, Inc. Third Quarter Fiscal 2019 Earnings 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 would like to ask a question during this time, simply press "*1" on your telephone keypad. If you would like to withdraw your question, press "#". Thank you.

Alice Lopatto, Investor Relations, you may begin your conference.

Alice Lopatto -- Director of Investor Relations

Good afternoon and welcome to Box's Third 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/investors. Our webcast will be audio only. However, supplemental slides are now available for download from our website. We'll also post the highlights of today's call on Twitter at the handle @boxincir.

On this call, we will making forward-looking statements, including: our Q4 and FY '19 financial guidance and our expectations regarding our financial performance for the remaining quarter of fiscal 2019 and future periods; timing of and market adoption of our product; our market size; our operating leverage' our expectations regarding maintaining positive free cash flow and future profitability; our planned investments in 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 in documents we file 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, November 28, 2018, 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 that we updated our financial disclosures to reflect our adoption of the new ASC 606 revenue recognition standard under the Modified Retrospective Transition Method. Having adopted ASC 606 for this fiscal year under the Modified Retrospective Transition Method, all Q3 year-over-year comparisons are made against Q3 results a year ago, which are under ASC 605 unless otherwise stated. Please refer to our press release and the supplemental financial deck on our Investor Relations website for a reconciliation of our financial results under ASC 606 compared to ASC 605.

With that, let me hand it over to Aaron.

Aaron Levie -- Chief Executive Officer

Thanks, Alice, and thanks, everyone, for joining the call. We had another solid quarter in Q3, including wins and expansions with leading organizations like the City of Boston, National Bank of Canada, and the National Institutes of Health. We ended Q3 with more than 90,000 total paying customers globally. Revenue was $155.9 million, up 21%, and non-GAAP EPS was negative $0.06, both ahead of our guidance.

As we previously discussed, this year, we dramatically increased our focus on strategic solution sales and building deeper relationships with our customers. In Q3, this strategy continued to gain phenomenal traction as we saw more than 40% growth in all large deal categories. We closed 57 deals greater than $100,000.00 versus 40 a year ago; 11 deals over $500,000.00 versus five a year ago; and three deals more than $1 million versus one a year ago. More than 80% of these deals included at least one add-on product, like Box Governance, Zones, KeySafe, or Platform, compared to roughly two-thirds of deals greater than $100,000.00 including these products a year ago.

Our large deal growth and strong add-on product attach rates prove that our solution-selling strategy is working. Enterprises are choosing Box as a strategic technology partner and the Cloud Content Management platform to power their digital transformation. Content is at the heart of how we work and it is only becoming more critical as powerful new technologies, like AI and machine learning and workflow, create opportunities to make the business processes around content more intelligent and automated. Enterprises need a central hub for their content, connecting best-of-breed applications while meeting security and compliance demands for multiple industries and geographies. With our solution-selling strategy more deeply embedded into our business, we are in a stronger position than ever before to deliver more value to our customers.

As we've talked about previously, we're focused on two major objectives. The first is innovating in Cloud Content Management to power how companies work and run in the digital age and, second, advancing our global go-to-market efforts so that we can reach more enterprises around the world and make them successful with Box. In Q3, we continued to make solid progress on both of these objectives.

Starting with product innovation, in the third quarter, we hosted BoxWorks, our annual customer conference which was attended by thousands of clients and partners and where we announced several updates to our Cloud Content Management platform.

First, to give people a more holistic view of how their content is connected across the applications they use every day, such as Office 365, Slack, Salesforce, and DocuSign, we announced an all-new activity stream that will be available starting next year. This new content hub built directly in the Box interface will make it easier than ever to collaborate on Box content across best-of-breed applications. Users will be able to quickly see the current activity from their colleagues and all relevant context happening in other apps when viewing a file within Box.

Next, we announced the beta of our Box for G Suite integration. With Box for G Suite, users can seamlessly create and manage Google Docs, Sheets, and Slides, all from within Box. Now customers can give their employees the flexibility to use collaboration tools from Google with the added benefit of maintaining Box's admin controls, security, governance, and compliance.

These announcements reinforce our role in powering the digital workplace of the future, which we believe will be built on an ecosystem of best-of-breed applications and platforms. People need more flexibility and choice in how they work and enterprises need a single source of truth for content across their end-user applications and back-end systems, which can only be delivered by an open platform like Box.

Also at BoxWorks, we showcased new workflow and intelligence capabilities to help our customers reimagine and digitize a wide variety of their critical business processes. From our conversations with our largest customers, it's clear that they have a wealth of manual business processes prime for automation but have struggled to enable this given the lack of flexibility from legacy ECM systems. Our new core native task and workflow automation capabilities will solve a broad set of these use cases, focusing on those that are content-centric, recurring, and collaborative.

Our new Box workflow and automation capabilities will make it easy for departments and teams to quickly create triggers for recurring actions around their collaborative work. For example, sales teams can automate ongoing contract approvals by routing tasks to their sales operations teams and marketing teams can trigger tasks to review and approve digital assets.

We also announced that Box Skills Kit, which enables enterprise customers, third-party developers, and system integrators to build customer AI integrations with Box, will be generally available on December 18th. Box Skills Kit will unlock powerful use cases, like computer-powered audio, video, and image recognition, by leveraging advanced AI and machine learning capabilities from a wide range of technology leaders, like IBM, Google, and Microsoft. We're excited to see what our customers and developers create with Box Skills Kit starting next month.

Finally, security continues to be a critical differentiator for Box and a primary reason why customers choose our Cloud Content Management platform. At BoxWorks, we previewed Box Shield, a set of advanced security capabilities built on our proprietary advanced machine learning technology that will help customers protect their content and users from internal and external threats. Security teams will be able to apply policies that restrict sharing and external collaboration on sensitive files, for example, and they will also be able to set rules and detect suspicious user behavior and proactively alert customers when behavior deviates from what is normal. While Shield will not be generally available until next year, we're already seeing incredibly strong interest and demand from customers.

All of this innovation announced at BoxWorks and throughout the year led Gartner to name Box as a Visionary in their Content and Services Platform Magic Quadrant in October. This comes on the heels of being named the leader in the Content Collaboration Platform Magic Quadrants earlier this year. Importantly, Box is the only vendor among the 30 that were evaluated, including Microsoft, that addresses the key requirements and use cases in both of these Gartner Magic Quadrants with a single, unified platform.

Enterprises are understanding that a comprehensive Cloud Content Management offering is critical to their business and in this quarter, customers are increasingly choosing Box over point solutions and fragmented offerings of our competitors. For example, one of the world's largest asset management and financial advisory firms selected Box in Q3 over SharePoint Online to enable secure external collaboration with its partners and third parties, to replace legacy network file shares, and develop custom client portals to better serve their most important customers. The firm will be leveraging the full suite of the Box offering, including Box Governance, KeySafe, Multizones, and Box Platform, across their entire organization with their partners and customers.

Turning to our second major objective, we want to reach and enable every business in the world through our global go-to-market efforts. This initiative focuses on growing average contract value, or ACV, driving deeper relationships with our customers, and adding new logos through international growth in our partner ecosystem.

To help grow ACV in FY '19, we positioned ourselves to deliver a solution sales strategy and be a trusted advisor to our customers on their path to digital transformation. We've changed how we're selling this year through improved training and enablement, improved sales processes and operational rigor to drive better deal execution, and implemented sales compensation plan changes to align incentives more closely with our strategy. In Q3, it's clear that this change in selling led to a greater increase in add-on product sales, big deal growth, and paid user retention.

Additionally, we also executed on our enterprise license agreements, or ELA program, and while still early, we saw more customers choosing to go wall-to-wall with Box in this quarter. For example, a Top 10 U.S. financial services firm, who is already wall-to-wall with the Box core ELA, expanded their contract to also include a Box Platform ELA as well. This firm will broaden its use of Box Platform as the content layer for its custom application development across the business.

We also closed an ELA with the world's largest medical device company, who is leveraging Box Governance and Zones to bolster content security and protect their most sensitive data. As part of the agreement, the customer also purchased Box's custom consulting offering, Box Transform, to accelerate its digital transformation initiatives.

Internationally, we saw continued strength in Japan. In Q3, we closed major wins with leading enterprises, like Shiseido Company, Mizuho Bank, and Rakuten. We also welcomed new leadership in Germany and Canada to help us drive more uniform execution in those regions.

Finally, our ecosystem of partners remains critical to our go-to-market strategy. More than 40% of our six-figure-and-above deals involve a reseller, systems integrator, or technology partner. Looking ahead, as our deployments with enterprises become more integral to their broader digital strategies, our system integrator partners will play a key role in driving increased value from the Box Platform.

Before we conclude, I want to quickly note that last month we were thrilled to welcome Kim Hammonds to our Board of Directors. Kim brings a wealth of experience driving IT strategy at Global 100 companies, having held COO and CIO positions at Deutsche Bank, the Boeing Company, and Ford Motor Company. As we help large companies modernize their operations, Kim's insights will be extremely valuable.

To wrap up, we are incredibly excited about the future of Cloud Content Management and the progress we're making on our path to $1 billion in revenue. In Q3, we saw incredible results from our work in FY '19 thus far and we'll continue to build on this foundation for the future.

With that, I'll hand it over to Dylan.

Dylan Smith -- Chief Financial Officer

Thanks, Aaron. Good afternoon, everyone, and thank you for joining us today. In Q3, we drove solid top-line growth while also continuing on our progress toward a major company milestone, as we expect to achieve our first quarter of non-GAAP profitability in Q4. We delivered revenue of $155.9 million in Q3, up 21% year-over-year; 25% of Q3's revenue came from regions outside of the United States, compared to 21% a year ago, demonstrating our increasing global penetration and strong execution against our market opportunity.

As Aaron noted, we drove strong traction across all large deal categories, including 57 deals over $100,000.00 versus 40 a year ago, 11 deals over $500,000.00 versus five a year ago, and three deals over $1 million versus one a year ago. More than 80% of these six-figure deals included at least one add-on product and our partners played a role in more than 40% of our six-figure deals. This quarter, 28% of our six-figure deals came from international markets.

Third quarter billings came in at $155.6 million, representing 10% calculated billings growth and 14% adjusted billings growth year-over-year as a result of some customer-driven multiyear prepays a year ago. Total deferred revenue was $301.2 million, up 19% year-over-year. Short-term deferred revenue was up 25% year-over-year and long-term deferred revenue was down 28% year-over-year, primarily due to a higher enhanced developer fee in the year-ago period.

Our deeper focus on solution selling this year has been yielding positive initial results. This year, we've been seeing an increase in large deal volumes as well as higher add-on product attach rates associated with increasingly robust Box implementations. As we've been mentioning throughout the year, we've been expecting most of these larger deals to close later in the year, predominantly in Q4. As such, we continue to expect Q4 calculated billings growth to be in the mid-20% range.

Turning to margins, non-GAAP gross margin came in at 73.6% versus 75.5% a year ago and 73.7% last quarter. We were pleased to see an improvement in price seat sequentially and year-over-year, mainly as a result of higher add-on product attach rates. As we mentioned before, we're making some upfront investments in our data center footprint this year based on the demand we are seeing and will be moving into an expanded colocation facility in Q4. As a result, we expect gross margin in Q4 to be roughly 72%.

Q3 was another successful quarter of driving operational efficiency. Sales and marketing expenses in the quarter were $74.8 million, representing 48% of revenue, an improvement from 57% in the prior year. This was primarily driven by improved go-to-market efficiencies and also includes a roughly 3% benefit related to the adoption of ASC 606. It's important to note that our sales and marketing expenses, excluding BoxWorks, would have been 44% of revenue.

The ongoing cost to support our free user base, which is a sales and marketing expense, came in at under 3% of revenue in Q3. We now have 63.5 million registered users, of which 11.9 million are paid.

Next, research and development expenses were $30.3 million, or 19% of revenue, in line with a year ago as we made significant enhancements to our product offerings. This included the continued development of Box Platform, as well as the expansion of our advanced security, intelligence, and workflow automation capabilities.

Our general and administrative costs were $17.4 million, or 11% of revenue compared to 12% in Q3 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 Q3 non-GAAP operating margin to a solid 8% improvement year-over-year, coming in at negative 5% versus negative 13% a year ago. As a result, non-GAAP EPS came in at negative $0.06, an improvement from negative $0.13 a year ago.

One of the key elements that makes our business model so powerful is our strong customer retention. Our churn rate was stable with last quarter and remains best-in-class at 4.5% on an annualized basis. Our net expansion rate on an annualized basis was 12%, primarily driven by strong seat growth in existing customers and cross sales of our add-on products. As such, we ended the quarter with a net retention rate of 108%, flat with the prior quarter. These metrics had been trending down as a result of larger initial customer deployments and a higher contribution of sales coming from new customers. We are now seeing our net retention rate stabilizing and our in-quarter churn rate has been improving over the past few quarters.

Let me now move on to our balance sheet and cash flow. We ended the quarter with $200.1 million in cash and cash equivalents. We delivered cash flow from operations of $6.8 million compared to $14.1 million a year ago. This outcome was lower than we expected due to the timing of cash outflows that we originally anticipated for Q4 but paid in Q3. This dynamic now creates a tailwind for Q4 cash flow.

In Q3, total CapEx was $5.2 million versus roughly $3 million a year ago. Roughly $4.1 million of this CapEx was related to facilities build-outs. Capital lease payments, which we factor into our free cash flow calculation, were $4.3 million versus $4.8 million a year ago. We expect CapEx and capital lease payments combined to be roughly 6% of revenue in the fourth quarter.

Finally, we had negative $4.1 million of free cash flow in the third quarter compared to positive $6.3 million a year ago. We expect our year-over-year free cash flow improvement in H2 to be fairly consistent with the dollar improvement we demonstrated in H1, marked by a particularly strong Q4. We also remain committed to generating positive free cash flow for the full year of fiscal 2019.

With that, let's now turn to our guidance, which we are providing under ASC 606. For the fourth quarter of fiscal 2019, we are setting revenue guidance in the range of $163.5 million to $164.5 million. We expect our non-GAAP EPS to be in the range of positive $0.02 to $0.03 on approximately 150 million diluted shares and for our GAAP EPS to be in the range of negative $0.21 to negative $0.20 on approximately 144 million shares.

For the full year of fiscal 2019, we expect revenue to be in the range of $608.2 million to $609.2 million. We expect our FY '19 non-GAAP EPS to be in the range of negative $0.16 to negative $0.15. Our GAAP EPS is expected to be in the range of negative $1.02 to negative $1.01 on approximately 141 million shares.

Also, as we look into FY '20, we wanted to remind everyone that we expect our FY '19 non-GAAP EPS to see up to a $0.10 benefit year-over-year due to the adoption of ASC 606, as we've been noting each quarter year-to-date. We will not see that same year-over-year benefit in FY '20. We expect to target roughly breakeven non-GAAP EPS in FY '20 as we scale toward the $1 billion model we laid out at our most recent Analyst Day.

In summary, Q3 was another quarter of solid progress on our strategy, driving further confidence in our ability to execute on our path to deliver more than $1 billion in revenue in FY '22. We are thrilled that our solution-selling strategy is gaining traction, demonstrated by strong large deal growth and add-on attach rates. We are seeing a growing need for Cloud Content Management and we're excited that our product innovation and go-to-market strategy are aligned to meet this demand.

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

Questions and Answers:

Operator

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

Your first question comes from Philip Winslow with Wells Fargo. Your line is open.

Philip Winslow -- Wells Fargo Securities -- Analyst

Thanks for taking my question and congrats on a great Q3. Question first for Aaron and then a follow-up for Dylan. Aaron, you mentioned some of the go-to-market changes that you made obviously earlier in the year and you highlighted the 80% attach rate you had of add-ons, which is obviously the highest that we've seen. A ten-point jump quarter to quarter. So, maybe walk through, for all of us, what changes have been made, how you're sort of seeing them play out, and then particularly as you think about Q4, because obviously Dylan guided to the mid-20s ramp-up in billings. What gives you confidence that those changes, sort of have in place and instruction is behind us and that the pipeline starts to convert Q4? And then just one follow-up for Dylan.

Aaron Levie -- Chief Executive Officer

Yeah. So, as we noted at the beginning of the year, we, in FY '19, really wanted to evolve how we were selling to customers. And instead of going in really talking about file-sharing collaboration, starting to change the conversation around content management and empowering more and more business processes for our customers. And while that took a couple of quarters to roll through our sales motion, we think that you're now starting to see that show up in a much more significant way.

Q3, I think, is the first major quarter of evidence of that, when you look at our large deal traction of, again, 40% growth in $100,000.00 segment, 120% growth in the $500,000.00 segment, and 200% growth in the $1 million segment. And it's really just been driven by this changing dynamic of how we're talking to customers, what we're going in with, making sure that we're bringing in the full power of our advanced products, things like Governance, where any customer in a regulated industry likely should be using Box Governance for information and document retention, or our Platform solution. So, any company that wants to be able to use Box as a back-end system for their ERP system or custom application development, we're seeing great traction with Platform as well.

So, I think you're just seeing now the matriculation of that now in the sales motion and us making sure that, in every single customer conversation, we're really driving home the power of these add-on solutions. And we think that's gonna continue to show up in Q4 and obviously be an incredibly important fixture of how we sell going forward into the future.

And then one other note I would just say is we have been seeing more and more customer -- we've been seeing more customer demand from really the bundling of multiple products together. So, we've seen some early signs of success and we're going to build on this going into Q4, but really important in FY '20, and making sure that we can deliver sort of bundled solutions or suites, as it were, of our add-on products that come together so customers don't have to buy one at a time but you can actually get the full power of Box in one transaction.

So, we've had a lot of learnings this year that we think are going to be baked into our sales motion going into the future. And the nice benefit of this is not only does it do things like grow our average contract value and deal size, it actually improves our competitiveness from a win rate standpoint because it bolsters Box's core differentiation as really being a Cloud Content Management platform. So, we're getting kind of two nice benefits from that.

Philip Winslow -- Wells Fargo Securities -- Analyst

Great. Thanks, Aaron. And then just two quick follow-ups for Dylan. First, Dylan, last quarter, you mentioned billings ex the enhanced developer fee was up in the 20s. I was wondering if you could give us the metric this quarter. Then also gross margin has consistently been outperforming expectations. Can you give us a little more color there about what's been driving that and then just how you're thinking about that line going forward?

Dylan Smith -- Chief Financial Officer

Sure. So, as it relates to the overall billings growth, as mentioned, we have been seeing a headwind this year related to the enhanced developer fee. This quarter, a bigger factor in terms of the delta between the reported billings growth and kind of the underlying growth of the business, especially given the strength in the quarter, was more due to the impact of that fee as it rolls out of the long-term deferred revenue. So that, as mentioned, was down 28% year-on-year due both to the adoption of 606 heading into the year, as well as just how that's flowed through the financials. So, if you look at the short-term deferred revenue growth, that was up 25% year-on-year. If you run the calculation around short-term billings, that was up 23%. So, roughly in the same range is how I think about the apples-to-apples growth rate that we put up in this most recent quarter. And then as it relates to the overall gross margin, as you mentioned, it did come in a bit higher than we had expected, although with the move into an expanded colocation facility, we are going to see a bit of a step-up in the overall spend heading into this quarter, which is where we set the expectation of about 72% for the quarter and then, over time, expect to continue delivering efficiencies there, both to lower the cost to serve as we scale, as well as with the pricing and packaging levers that we have, particularly as a lot of our add-on products are at a higher gross margin. So, those are some of the different factors that are going into the gross margin trends.

Philip Winslow -- Wells Fargo Securities -- Analyst

Awesome. Thanks, guys. Keep up the good work.

Aaron Levie -- Chief Executive Officer

Thanks, Phil.

Operator

Your next question comes from Melissa Franchi with Morgan Stanley. Your line is open.

Melissa Franchi -- Morgan Stanley -- Analyst

Great. Thanks for taking my question. Dylan, I just wanted to revisit the Q4 outlook in terms of billings. I know you talked about the pipeline of large deals but can you maybe just refresh us on what gives you confidence in that level of acceleration and to what extent is it coming from renewals of existing large deals that you've had in the past versus your expectation for new customer wins?

Dylan Smith -- Chief Financial Officer

Sure. So, it's really a lot of the things that are giving us confidence are the same things we've talked about throughout the year. Although, just as we get closer, now we're in the fourth quarter, we have stronger visibility and confidence in that Q4 pipeline. But it's really, as a reminder, a confluence of a lot of the pipeline we've been generating throughout the year, especially as these solution-selling motions have rolled through. Many of those deals are showing up in Q4, which is why we said throughout the year we expect this year to be more back-end-loaded than we've seen in past years. So, really same drivers. Just with the passage of time, that confidence has increased.

Then as it relates to the split between new customers and customers expanding their deployments of Box, we don't expect to see any material differences in terms of the split that we've seen either in recent quarters or in the fourth quarter, where roughly two-thirds of our new bookings are coming from existing customers and about a third are coming from customers buying Box for the first time.

Melissa Franchi -- Morgan Stanley -- Analyst

Got it. Okay. That's helpful. And then on the retention rate, it was encouraging to see a stabilization at 108%. But just given the commentary on upsell rates and the benefits you're seeing from the strategic solution selling, do you feel like we could potentially see that metric improve from here or are there other headwinds, like the new initial deals coming in larger? Is that still going to be suppressing the growth in the retention rate?

Aaron Levie -- Chief Executive Officer

So, I wouldn't say that we're seeing any new headwinds in that metric but as you mentioned, some of the same headwinds that we had been seeing in previous quarters are still showing up in the business as we are continuing to increasingly see larger deals upfront and a bit of a higher mix shift of the new customers, although that's been fairly consistent. So, I would say to expect that the stability as -- really that's being offset and showing up in the numbers for the stabilization because of the improvements we've seen, both in terms of the customer retention throughout this year as well as higher add-on attach rates. So, over time, I would say that where this metric trends is going opt be largely dependent on the traction that we see with add-on products. But I would say to expect this metric to be fairly stable, at least over the medium-term.

Melissa Franchi -- Morgan Stanley -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from Rob Owens with KeyBanc Capital Markets. Your line is open.

Michael Casado -- KeyBanc Capital Markets -- Analyst

Hey, guys, this is Mike Casado on for Rob Owens. Thanks for taking my questions. Aaron, I believe the expectation for mid-20s billings growth exiting '19 relied to some extent on the maturation of the reps hired last year. And I know you just discussed the drivers remaining the same overall and increased confidence in them but could you offer a bit of incremental detail on how that rep cohort is ramping?

Dylan Smith -- Chief Financial Officer

Sure. So, this is Dylan. I would say that those reps are ramping as expected and we've been pretty pleased with the improvements that we've seen, especially in ramped rep productivity. So, overall productivity, as we discussed in the past, is going to be more muted this year because we have a higher percentage of reps throughout the year who are ramping versus ramped relative to prior years. But I'd say in terms of the productivity of those cohorts, both ramping reps and ramped reps, we're pretty pleased, although the mix shift makes it kind of a pretty flat productivity overall.

As discussed, I would say that, overall, as it relates to the business and the growth we're seeing, again, the reps have been ramping as expected and we've seen strong rep retention and no real surprises there. What I would say, though, is we've actually -- because we look not just at the reps overall but we look at this and make these decisions on a per segment, per geography basis -- we've actually decreased the hiring plans in those markets, especially international markets where we haven't seen the same productivity, as we really are focused on driving productivity before ramping.

So, overall, we expect we're on track to kind of grow the overall sales force in the mid- to high-teens, again, largely due to some of the changes in those international markets where we've been putting new leaders in place to really drive the execution there and then scale the sales force from there.

Michael Casado -- KeyBanc Capital Markets -- Analyst

Understood. And then on the new leadership being in place internationally, how is the leadership rebuild in EMEA progressing? I know you're only a little over one quarter into it but to what extent are those operational improvements really contributing to performance in the region? Thanks.

Aaron Levie -- Chief Executive Officer

Yeah. So, this is back to Aaron. To your point, the overall new leadership in Europe started at the beginning of August so really only one quarter in. And as you know, with these types of changes, it takes a couple quarters to really get the operational rhythm improved. So we don't expect to see major performance changes within FY '19 but it's certainly something that is core to our plan going into FY '20. And so I think we're happy about some of the early improvements that we're seeing but, of course, given the seasonality of our business model, the Q3 and Q4 performance in Europe is heavily influenced by what we were doing in the first half of the year, where we didn't have this leadership in place. So, I think you will see that performance start to show up going into next year.

Michael Casado -- KeyBanc Capital Markets -- Analyst

That's very helpful. Thank you both.

Operator

Your next question comes from Mark Murphy with J.P. Morgan. Your line is open.

Mark Murphy -- J.P. Morgan -- Analyst

Yes. Thank you and I'll add my congrats. Aaron, interested to get your view on any emerging technologies out there, such as the shingled magnetic recording or SMR technology. Is there really anything else you've seen that could make some of the large-scale data storage a little more cost efficient? Anything along the lines that would lead to a long-term improvement in the gross margin structure? Is that anything you're experimenting with or seeing any opportunity there?

Aaron Levie -- Chief Executive Officer

Yeah. So, we are. So, our architecture overall is a bit of a hybrid architecture. We have our own data centers that we operate out of, where we are co-located in. And this is really where we have tuned our own infrastructure to be as efficient and, effectively, as dense as possible from a storage standpoint. And every refresh that we do, in terms of what we call filers or, effectively, our file storage infrastructure, generally sees relatively significant performance gains, just in terms of the efficiency of and the density of the hard drives that we're implementing.

And then, secondarily, we have public cloud partners that we work with for things like burse capacity, additional redundant storage, so we can make sure we have two copies of every file across different systems, and then international data residency. And so we're seeing performance gains and improvements on both of those fronts. And even if you look at some of the announcements over the past couple of quarters from some of our public cloud infrastructure partners, we think that will also lead to improvements overall.

So, as Dylan noted, we have a number of efforts that we're working on to drive more efficiency from our infrastructure. We do expect to see that over the medium- and long-run. Obviously, every time that we have a step function of new capacity investment and infrastructure investment, you do see that being somewhat dilutive to gross margin. But, overall, we're really happy about the long-term trends of our infrastructure strategy and our architecture, including things like storage investments and improvements on the density of our filers.

Mark Murphy -- J.P. Morgan -- Analyst

Okay. Great. And, Dylan, just another quick follow-up. I believe you have talked about the potential to accelerate top-line growth in fiscal '20. So between what you're relaying today and between the solution selling evolution and some of the new product innovations and some of the better attach rates that you've seen there, do you feel comfortable with getting over that, say it's a 20% or kind of 21% growth bar next year? Any preliminary thoughts or framework you can offer there?

Dylan Smith -- Chief Financial Officer

Sure. So, as discussed, we are definitely pleased with the progress that we're seeing in solution selling this year, particularly as it relates to large deal growth and those add-on attach rates. And I'd say the year is shaping up more or less as we had been expecting. Definitely some puts and takes, though, but pretty pleased overall. We do have strong visibility into Q4 and we are still on track to reaccelerate bookings this year, which will set us up nicely for next year. Of course, Q4 is our biggest quarter of the year, particularly this year as it's more back-end-loaded, and that Q4 outcome is gonna have a significant impact on what the FY '20 growth rate ultimately is. But I would say that, overall, the view and kind of growth for the business and ability to reaccelerate that next year is still there. And especially kind of coming off the Q4 outcome, we'll provide a lot more specifics and detail on our Q4 call.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you very much.

Operator

Your next question comes from Brian Peterson with Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks for taking the question and sorry about the background noise here. But I just wanted to see on the 4Q pipeline, is there anything that you guys can share in terms of customer-level economics or revenue per seat that can give us some confidence that you guys are really seeing that in the pipeline and some of the solution selling that you're talking about is really set up to close in the fourth quarter?

Aaron Levie -- Chief Executive Officer

Yeah. So, I can obviously share, qualitatively, when we look at the trends within our, again, big deal segments -- $100,000.00, $500,000.00, $1 million deal segments -- we're seeing beyond and by far record pipeline for the quarter. We think that will drive very strong year-over-year metrics in terms of those big deal targets. We're especially seeing strong traction within some of the most regulated industries and industries that are classic large spenders on IT. So, financial services, pharma and life sciences, the public sector and government space. So, based on the types of industries where we're seeing strong traction in and pipeline of large deals, that's what's giving us confidence in some strong improvement from a growth in those big deals within Q4.

Brian Peterson -- Raymond James -- Analyst

Okay. Thanks a lot, guys. Appreciate it.

Operator

Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.

Michael Turrin -- Deutsche Bank -- Analyst

Good afternoon. Thanks. Guys, you mentioned attach rates for add-on products came in at more than 80% for larger deals. I'm just wondering are there any particular product areas to call out there in terms of contribution. Did any one particular product area outperform your own expectations from an add-on perspective?

Aaron Levie -- Chief Executive Officer

Yeah. We actually continue to see incredible traction on our Governance add-on. That saw very, very strong year-over-year growth and exceeded our initial expectations. In particular, I sort of alluded to this, but it will become something that we share a little bit more about next year, as customers have either done enterprise license agreements with us or we've been able to bundle multiple solutions together, Governance has become a core part of that add-on strategy. We also are seeing Platform in some key markets, like financial services. And both Platform and Governance in areas like public sector, life sciences, and financial services.

So, I think we're seeing a nice mix of -- as customers really use us as a back-end system for content management across their line of business applications, across their customer-facing applications, across even the core ERP systems, things like information governance platform capabilities are APIs and then in the future, our automation and workflow functionality that will be needed in Box will become very, very core to delivering on that. And so we're simultaneously seeing an increase in our add-on product sales while customers are beginning to really use us and see us as much more of a modern enterprise content management platform in the cloud for their business.

Michael Turrin -- Deutsche Bank -- Analyst

Thanks. That's helpful. And then just one more. This is the fourth straight quarter we've seen that Fortune 500 penetration level come in at 69%, which is the longest stretch we've seen that metric extend without moving higher. Is it possible you may be hitting a point at all in that group where the last 30% is more difficult to reach for some structural reason? Or is Q4 the quarter where maybe we can expect to see that number continue to advance? Thanks.

Aaron Levie -- Chief Executive Officer

Yeah, great question. I think, overall, I would say that, because of the land and expand business model that we have, we have seen some increased traction with going into current accounts and driving out on product sales and driving more deployment of Box and, in some cases, taking a customer that was a $100,000.00 customer and turning that into a major upsell in the high-six or low-seven figures. And so that has probably taken a bit of our attention within the Fortune 500. But nothing structurally I think is preventing us from the next 30%. There's obviously a realistic asymptote where some industries are not driving as much digital transformation spend and so there will be a percent that we probably can't get to. But, overall, when we look at areas like financial services, life sciences, large industrials, global manufacturers, these are markets where we're doing incredibly well in and I think you'll see continued net new logo growth within the Fortune 500, both in Q4 and beyond.

Michael Turrin -- Deutsche Bank -- Analyst

Appreciate the color. Thanks for taking the questions.

Aaron Levie -- Chief Executive Officer

Yeah.

Operator

Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Hey, guys. Thanks for taking my question. It's nice to see some good stabilization in the business. This one is maybe potentially for both Aaron and Dylan. As I look at your sales and marketing expenses, even if I control for the benefit you're getting from ASC 606, can you help me get some level of comfort that you're maybe not underinvesting in sales and marketing, given that you're adapting your go-to-market strategy, more focus on solution selling, expanding internationally, where there should be a higher level of investing required, and going after such a massive market opportunity. Could you just maybe help me get some comfort around that and then I've got a follow-up for Dylan.

Dylan Smith -- Chief Financial Officer

Sure. So, I would say that, in a lot of cases, we're actually driving improvement efficiencies not just in the overall rep productivity that we're seeing but also across other areas of the business. We didn't really highlight it on this call but some of the trends we've talked about in the past are just even things like the ROI that we're seeing on our demand gen programs and the continued leverage in free user marketing and just some of the efficiencies we're driving across the board.

So, as it relates to how we think about those decisions and the right growth rate to grow our sales force, we do look at it, definitely, as mentioned, kind of cohort by cohort, region by region, segment by segment basis. And where we are seeing steady improvements or market opportunities, we definitely invest against those opportunities but, again, in certain areas, we've seen less of that and so have sort of pulled back on some of the growth there.

And so where it balances out, being in that mid- to high-teens rates, and I said to expect something in the same ballpark range for next year, I think that's probably a good balance of driving that growth and profitability. But certainly, as some of the underlying metrics and leading indicators of growth and market opportunity evolve, we'll continue to monitor that and make those decisions accordingly.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Okay. Thanks. That's helpful. And then, Dylan, I just wanted to go back to your commentary around your expectations for billings in Q4. Just directionally, should we see a similar delta between total calculated billings and short-term calculated billings like we've seen in Q3 and in other quarters this year? And maybe when does that start to level off?

Dylan Smith -- Chief Financial Officer

Yeah. I would say that it should be more normalized in the fourth quarter versus third quarter and then steady state, would expect it to be very normal. But, again, the sort of couple of deltas that we saw in Q3 were the function of that enhanced developer fee and then we also an unusually high level of multiyear prepays in the third quarter a year ago. So, we'll still see a bit of an impact from that enhanced developer fee in the fourth quarter but, overall, would expect to see much more kind of consistent trends between short-term and long-term deferred revenue in billings growth.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Great. Thank you.

Operator

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

Alice Lopatto -- Head of Investor Relations

Thank you, everyone, for joining us on our call today and we look forward to speaking with you next quarter.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 48 minutes

Call participants:

Alice Lopatto -- Head of Investor Relations

Aaron Levie -- Chief Executive Officer

Dylan Smith -- Chief Financial Officer

Philip Winslow -- Wells Fargo Securities -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Michael Casado -- KeyBanc Capital Markets -- Analyst

Mark Murphy -- J.P. Morgan -- Analyst

Brian Peterson -- Raymond James -- Analyst

Michael Turrin -- Deutsche Bank -- Analyst

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

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