Dylan Smith: Yes, and this is Dylan, just to build on that, you know, to clarify, really pleased with the kind of attach rates and the mix of what we are selling to our customers in this environment, especially seeing strong attach rates globally, which we had not been seeing a year ago, was a little bit more variable from geography to geography, but it’s really driven by just lower volume of overall deals. And you can see that in some of the metrics like the large deal counts that we provide. But we are, you know, certainly pleased with the trajectory and momentum of suites within our customer base. And I would note that we’ve continued to see as we’ve called out in the past, that those suites customers, once they buy in, adopt suites, tend to have much stronger customer economics overall, from pricing to margins to net retention.
So even though the deal volume isn’t quite where we’d like it to be this year, the overall quality of the customer base and revenue base have been steadily improving because of that mix.
Chris Quintero: Got it. That’s very helpful. Dylan, maybe sticking with you, on the operating margin guide for this year, if I exclude that 85 basis point headwind from the equipment and lease changes, you still guided down the full year by, you know, 15 basis points or so. So just curious, is that mostly a function of that lower revenue flowing down or is there something else you would call out there from an expense standpoint?
Dylan Smith: Yes, I would say the only, you know, minor change and again pretty close to in line. There is a bit of a revenue impact but also a little bit of an incremental FX impact, so — and — both on revenue and on the margin side. So not material versus what we expected a few months ago, but that is a little bit of a contributor as well.
Chris Quintero: Got it. Thank you so much.
Operator: Your next question comes from the line of Pinjalim Bora from JPMorgan. Please go ahead.
Pinjalim Bora: Oh, great. Thank you for taking the questions. Can you — I want to ask you about the fiscal ’25 outlook. Again, understanding its preliminary or early, but any way to kind of understand the net retention versus new that you’re baking in there, you’re kind of at 102%. You’re talking about 5% reported or 6% constant currency seems like, what are you assuming for net retention? And then is there anything you’re baking in from the AI products that might be coming online next year?
Dylan Smith: Yes, so I would say you could think about the underlying driver and assumption in that preliminary guidance as being pretty consistent with current levels. As mentioned, you know, certainly see upside over time, but that is not baked into next year’s numbers. And then as it relates to, you know, our product roadmap broadly, you mentioned AI, but this would apply to some of the other newer products like Hubs and the New Suite that we expect to launch next year. We’ll just note that as Enterprise sales cycles are typically a few quarters and based on our recurring revenue model and how that translates into revenue, we don’t expect those newer products and offerings to have a material impact on next year’s revenue, but would be more meaningful growth drivers the following year and FY ’26 and beyond.
Aaron Levie: Yes, as it relates to today’s AI offering, which obviously is an Enterprise Plus plan, we do expect that to be a driver of Enterprise Plus upgrades for next year. So, just to build on that. So AI definitely being a driver for next year. It is baked into the current outlook that we just shared. And as I mentioned on the Q3 numbers, we saw a number of customers upgrade to Enterprise Plus specifically or at least in large part to be able to access Box AI. So we certainly expect, you know, to continue to see that in Q4 and in next year. But we also want to be prudent on our total top-line expectations as we kind of work through the macro.
Pinjalim Bora: Understood. Just specifically on the volume-based — on the consumption-based pricing that you kind of laid out, are you assuming that the existing Suites customer starts contributing some kind of or from that volume-based — consumption-based pricing next year?
Aaron Levie: We don’t have any particular hard expectations within the model on the consumption side. That would be, you know, kind of pure upside and only because we want to be super thoughtful as we start to roll. I mean, Box AI literally is rolling out in November to our Enterprise Plus customers. And so, we want to be conservative at this point on the numbers there.
Pinjalim Bora: Understood. One last question for Dylan. Dylan, what is the billings growth rate adjusted for payment duration from a year ago? Because I do remember last year you had kind of some big deals.
Dylan Smith: Yes, I would say, we didn’t give the exact number, but you can think about that large multi-year prepay that we had, you know, kind of mentioned at the time and then recently as well. as being in the kind of mid- to high single-digit percentage range. So last year — so that was a significant driver of the outsized billings growth that we showed in Q3 of last year. although even independent of that one customer was a pretty strong quarter for us overall as it was late in the quarter. As a reminder, that we started to see the macroeconomic headwinds show up in our business.
Pinjalim Bora: Understood. Thank you.
Operator: Your next question comes from the line of Chad Bennett from Craig-Hallum Capital. Please go ahead.
Chad Bennett: Great, thanks for taking the question. So just considering the, I guess, preliminary growth outlook for next year of 5% and just — and obviously, the operating margin outlook. Just curious, I mean our growth outlook has clearly lowered from kind of what we thought it would be, obviously, this year and heading into next year. And as a percentage of revenue, sales and marketing expenses are kind of hovering around 27%, 28%, they’ve kind of been there for a couple of years now. Are there any planned actions on the cost side to maybe escalate or accelerate that operating margin leverage next year and even if that 5% turned into 8%, I’m not sure 27%, 28% sales and marketing expense makes sense. Any commentary there?
Aaron Levie: Yes. So it’s a great question. I think we’re trying to balance both, obviously, continued leverage on the bottom line, which we see as incredibly important. Overall to the efficiency of the business and being able to support our capital allocation strategy. And at the same time, because of the market opportunity between security, AI, our overall platform message, we do want to balance the right amount of growth investments to drive top line, not only for next year but really beyond. And so some of those investments obviously is kind of well understood. You have to start to make them and then the payback is more tied to that long-term model. And while these aren’t particularly massive in any sense, things like continue to optimize our international markets drive the next tier plan in terms of product investment, some of the verticals that we want to double down.
And these things obviously are still very important for us and to drive that long-term growth. So we’ll always pay close attention to where we’re seeing kind of the efficacy of our investments and we’ll tune appropriately. But we think that continuing to make year-over-year improvements on the bottom line going forward is incredibly important to drive to that long-term model, but also making sure we’re driving the right level of growth is super healthy as well. And so that’s the balance that we’re trying to create.
Dylan Smith: Yes. And to build on that, we still expect our annual operating margin improvement to be fairly consistent on an annual basis as we march toward our long-term target model of having operating margins and delivering those in the 32% to 35% range. For next year, on the heels of completing the public cloud migration that we’ve talked about, more of that is expected to come at the — on the gross margin line, then in a typical year over a multiyear time period. And then we also do expect to continue driving efficiencies across the business and in terms of big categories of leverage, as we mentioned, do expect our lower cost location strategy to have an impact next year as well. So that’s a big focus. That doesn’t show up in the sales and marketing line as much, and I know Aaron spoke to that, but that has been and is expected to be a continued driver of R&D and G&A leverage in particular.
