Dropbox Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 7 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Thank you for joining Dropbox's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask a question. As a reminder, this conference call is being recorded and will be available a replay from the Investor Relations section of Dropbox's website following this call.

Operator

I will now turn the call over to Kern Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Dropbox's Q3 2023 earnings call. A. Before we get started, I'd like to remind you that our remarks today will include forward looking statements such as our financial guidance and expectations, including our long term objectives and forecasts for our Q4 fiscal year 2023 and our expectations regarding our revenue growth, profitability, operating margin and free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, industry trends and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

They are also based on assumptions as of today, and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward looking statements a set forth in today's earnings release and in our quarterly report on Form 10 Q filed with the SEC. Will also discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP a non GAAP results is provided in our earnings release and on our website at investors. Dropbox.com.

Speaker 1

I would now like to turn the call over to Dropbox's Chief Financial Officer, Tim Regan. Tim?

Speaker 2

Thanks, Karen, and good afternoon. Before I begin, I wanted to let everyone know that I'll be filling in for Drew today, Because he and his wife, Erin, just welcomed their first child, Charlie, this week. So big congratulations and well wishes to Drew and his family. I'll first provide an update on our company's strategy and share some recent product highlights before moving on to our Q3 results a guidance for the rest of the year. I will also offer some commentary to help you think about our 2024 outlook.

Speaker 2

While we continue to navigate an uncertain economic climate, we beat our revenue guidance driven by strength within our individual SKUs for the 2nd straight quarter, and we again drove better than expected profitability. However, we continue to see pressure across our Teams customers in Document Workflow businesses, including seasonal softness within FormSwift. As we approach the end of 2023, I want to quickly provide an update on our company's strategy. As you recall, earlier in the year, we simplified our focus around 2 main business objectives. The first is building AI powered product experiences centered around organizing all cloud content, starting with the introduction of Dropbox Dash, a standalone universal search product leveraging AI and machine learning.

Speaker 2

And the second objective is continuing to evolve our core file ticket share offering, integrating AI and other improvements in order to provide a more seamless product experience for customers' workflows. We first discussed this refocused strategy after we took actions in Q2 to realign our workforce in order to run a more efficient core business, while investing more towards longer term AI product initiatives. We're pleased with how our teams have taken these changes at stride and how, as a company, we're able to look ahead with a unified product vision, portfolio. As a reminder, in June, we introduced our 1st generation of products, including Dropbox DASH and Dropbox AI. I'll focus on Dropbox Dash as this represents our first major product launch within our next generation of AI powered products.

Speaker 2

And we see this opening a new market opportunity of universal search. Drew has talked for a while about the growing a challenge of fragmented content in this new world of distributed work. Last month, we met with hundreds of customers in New York And many echo the same pain points around organizing their work. And we believe we're in a good position to solve these new problems with our scale and platform neutrality. We also see the shift from files and folders along with recent advancements in AI, giving way to new market opportunities.

Speaker 2

In particular, the search and knowledge discovery software market. IDC sizes this as a $7,000,000,000 market today That's expected to triple over the next 4 years. And we believe we're well positioned to take part in this secular wave with Dropbox Dash. As a reminder, Dropbox Dash leverages AI while connecting your cloud tools, apps and content into a single search bar. It allows users to quickly find everything in one place, whether that content is pulled from Microsoft Outlook or Google Workspace or Asana.

Speaker 2

And because DASH is powered by machine learning, it learns about you and your priorities the more you use it. Since introducing DASH into closed beta over the summer, we've carefully rolled out the product to a select group of users in order to observe customer engagement and test our scaling capabilities. In the 1st few months, we've learned valuable insights from users and iterated on the product in a number of ways to address their top pain points. For example, we noticed users experiencing friction during the onboarding process and many were not initially establishing connected apps able to work within Dash. We rolled out a new web based onboarding experience, reducing the number of steps in the sign up process And made it easier to add connected apps.

Speaker 2

Since revamping this onboarding flow, we've seen a significant increase in the number of users to adopt at least one connected app versus before. We've also seen improvement in overall user retention. We've also significantly improved our search quality. We're currently rolling out semantic search functionality, which processes intent and context behind the search query to deliver more relevant results. Early feedback from this role has been positive as users previously had to rely more on using exact wording a to find the right piece of content.

Speaker 2

And lastly, we're continuing to make stacks more intuitive for users to create and share. As a reminder, Stacks are smart collections for links that offer a quick way to save, organize and retrieve URLs. Just like playlists organize songs, Stacks organize URLs in a way that's easy to group by topic and share with colleagues. Adding more adoption of stacks is an important part of our strategy with Dash, as we found that users who add more links to a stack a higher retention profile than those that don't. As we continue to evolve Dropbox Dash, we'll be investing more in sales and marketing to drive user education and distribution.

Speaker 2

A a number of customers who are grappling with even more information overload and complexity. This is where we're also making sure we build DASH with security and transparency in mind. We recognize in the rapidly evolving world of AI, customers are looking for tools they can trust to keep their content safe. This is why we're building in the right controls, admin and compliance features, so customers can feel safe deploying DASH, a small team or a large organization. We're encouraged by the early progress with DASH, which is now in open beta.

Speaker 2

We've seen growth in the number of weekly engaged users since we removed the waitlist last month, and we continue to observe healthy activation and retention rates with roughly half of the users returning to use the product within 1 to 2 weeks of first activating. Our near term focus is continuing to improve the product and growing the user base before we plan to launch DASH into GA in the earlier part of 2024. We believe our value proposition is resonating with customers and we're excited for the long term potential for DASH. Moving on to our second objective, evolving the existing Dropbox file sync and share user experience seamlessly address customer workflows around documents and videos. For years, we've been adding functionality within Dropbox through organic and acquired assets, so that our users can do more with their content beyond storage, whether it's signing documents or creating and editing videos.

Speaker 2

These capabilities are even more important in today's era of distributed work. We've often heard from our customers that they were unaware of everything we offered or they had a difficult time discovering new functionality within Dropbox. It was clear we needed to modernize and simplify the web experience. That's why at our customer event last month, We announced an entirely new and intuitive web experience that helps users stay productive. Whether it's editing a PDF, recording a video message for a team or tracking a proposal sent to a client.

Speaker 2

The web redesign makes it easier for users to access the right tools at the right time. With an adaptive interface, the view changes based on what users are working on, such as a dedicated tab focused on e signatures. And with a number of these capabilities integrated more seamlessly, users can avoid having to switch between apps. With our web redesign, we also saw an opportunity to refresh our business plans, making it easier for customers to discover all the value Dropbox a can provide to them directly from our plans page. Previously, we sold some of our additional capabilities with select plans, like our e signature and professional plan package, But as 2 separate products, the end user experience was disjointed and difficult to navigate.

Speaker 2

It was also confusing a for self serve customers looking for more than just storage to discover how they could purchase the right plan for them. I'm excited to announce that we've rolled out the 1st generation of our fully integrated bundled offerings for new customers and we've updated pricing and packaging to reflect the added value, including capabilities such as e signature, tracking analytics and PDF editing. These new offerings are Dropbox essential for solo professionals, Dropbox Business for small teams and Dropbox Business Plus for larger teams. More details of each plan can be found on our website as well as in our investor presentation. New customers can purchase these plans today And we're currently migrating existing customers to the new plans at their existing plan price.

Speaker 2

We see an opportunity for these bundles to provide an ARPU lift over time from new user adoption as well as retention improvements I'll now move on to our financial highlights from Q3 and update guidance for the rest of this year along with offering some commentary on how to think about our 2024 targets and growth outlook. Starting with our 3rd quarter results. Total revenue in Q3 increased 7.1% year over year to $633,000,000 beating our guidance range of $626,000,000 to $629,000,000 Foreign exchange rates provided an approximately $7,000,000 headwind to growth. On a constant currency basis, revenue grew 8.3% year over year. The revenue outperformance was driven by strength across our individuals plans, which were once again partially offset by headwinds we continue to a replay across our Teams and Document workflow businesses.

Speaker 2

Total ARR for the quarter grew 3.8% year over year for a total of a $2,525,000,000 On a constant currency basis, ARR grew $25,000,000,000 sequentially 7.5% year over year, primarily driven by individuals. I'd note that in Q3, we largely lapped the a pricing and packaging changes we made to our team's plans last June and hence added less quarterly net new ARR relative to the first half a of 2023. We exited the quarter with 18,200,000 paying users and added approximately 130,000 net a new paying user sequentially. Average revenue per paying user for Q3 was $138.71 down slightly on a sequential basis, but up over $4 year over year, driven by the team's pricing increase, form swift, as well as the shift to premium plans. Before we continue with further discussion of our P and L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non GAAP And exclude stock based compensation, amortization of purchase of tangible, certain acquisition related expenses, impairments of our real estate assets and expenses related to our reduction in force.

Speaker 2

Our non GAAP net income also includes the income tax effect of the aforementioned adjustments. Moving to our real estate strategy, where we have been actively seeking subleases and buyouts of our vacant real estate space, a majority of which is in San Francisco. In October, we executed a buyout with our landlord of approximately 40% of our remaining sublease space in San Francisco a $79,000,000 to be paid over 3 years, beginning with an approximate $28,000,000 payment in the Q4 of this year. This payment was not previously factored into our 2023 free cash flow guidance, and I will provide an update on this when we share our latest view for the year. Overall, we expect this buyout to drive significant savings in the long term, as we will be avoiding $220,000,000 in aggregate rent payments and common area maintenance fees over the remaining 10 year lease duration.

Speaker 2

We will continue to actively seek subleases and pursue additional buyouts where we see favorable returns. With that, let's continue with the 3rd quarter P and L. Gross margin was approximately 83% for quarter roughly flat compared to the Q3 of 2022. Operating margin was 36%, up roughly 400 basis points year over year. We beat our operating margin guidance by 300 basis points, primarily driven by delayed marketing and professional services spend, which we expect to incur in Q4.

Speaker 2

We are also being prudent with the pace of hiring as we remain focused on cost discipline. Net income for the Q3 was $194,000,000 up 27% versus the Q3 of 2022, driven by operating income growth. Diluted EPS was $0.56 per share based on 346,000,000,000 diluted weighted average shares outstanding, up from $0.43 per share based on 3 60,000,000 diluted weighted average shares outstanding for the Q3 of 2022. Moving on to our cash balance and cash flow. We ended the quarter with cash and short term investments of $1,300,000,000 Cash flow from operations a $256,000,000 in the 3rd quarter.

Speaker 2

Capital expenditures were $9,000,000 during the quarter. This resulted in quarterly free cash flow of $247,000,000 compared to $245,000,000 in Q3 of 2022. In the quarter, we also added $26,000,000 to our finance leases for data center equipment. Moving on to our share repurchase activity. In Q3, we repurchased 4,000,000 shares, spending approximately $104,000,000 As of the end of the Q3, we have approximately $1,500,000,000 remaining under our current repurchase authorizations.

Speaker 2

As a reminder, we remain committed to allocating a significant portion of our annual free cash flow to share repurchases. I'd now like to share our guidance for Q4 and in turn the full year 2023, where I will also provide some context on the thinking behind this guidance. For the Q4 of 2023, we expect revenue to be in the range of 629 a $632,000,000 We are assuming a currency headwind of approximately $2,000,000 in the 4th quarter And thus on a constant currency revenue basis, we expect revenue to be in the range of $631,000,000 to $634,000,000 We expect non GAAP operating margins to be approximately 31.5%. This includes a roughly 90 basis point headwind from FX and FormSwift. Finally, we expect diluted weighted average shares outstanding to be in the range of 345,000,000 to 350,000,000 shares based on our trailing 30 day average share price.

Speaker 2

For the full year 2023, We are raising the midpoint of our as reported revenue guidance range by roughly $5,000,000 to 2.496 a record to $2,497,000,000 On a constant currency basis, we are raising the midpoint by roughly $7,000,000 to a range of $2,536,000,000

Speaker 1

to $2,530,000,000

Speaker 2

We now estimate a full year 2023 currency headwind of approximately $40,000,000 or an approximately 170 basis point headwind to growth. We continue to expect FormSwift a replay of approximately $100,000,000 to $82,000,000 We expect gross margin to be 82 up to 82.5%, up from our prior guidance of 82%. We expect non GAAP operating margin to be approximately 32.5%, up from our prior guidance of approximately 32%. This is inclusive of an approximately 75 basis point headwind from FX and FormSwips. We are reducing our free cash flow guidance by $50,000,000 at the midpoint and narrowing the range to $775,000,000 a range of $785,000,000 relative to our previous guidance range of $820,000,000 to $840,000,000 Which I will elaborate on shortly.

Speaker 2

As it relates to capital expenditures, we now expect CapEx to be approximately $30,000,000 below end of our prior guidance range. In addition, the finance lease lines to be approximately 6% of revenue, up a from our prior expectations of 5.5%. Finally, we are maintaining our 2023 diluted weighted average shares outstanding guidance range of 345,000,000 to 350,000,000 shares. To share some additional context on this guidance, as related to revenue, we are raising our revenue guidance for 2023, driven by better than expected performance across our individual's plans. This has outweighed macroeconomic headwinds on our team's plans a replay of both DocSend and Sign.

Speaker 2

I will also note that I expect lower net new paying user additions in Q4. Alongside the uncertain macroeconomic environment, Q4 is a seasonally slower quarter for net new paying users. Additionally, as part of our recent bundles launch and plans page changes, we have minimized the Family Plan SKU's prominence on our plans page. While this SKU is still available to existing customers, we found that business users were using it as a loophole a to obtain licenses at a lower cost. As a result of these factors, we expect net new paying users to trend lower relative to our historical run rates.

Speaker 2

As related to operating margins for 2023, We are raising our operating margin guidance to approximately 32.5%, up 50 basis points as compared to our prior guidance. This increase is driven both by our revenue outperformance as well as our disciplined approach to hiring subsequent to our risk, a Which is translating to savings. As related to finance leases, as a reminder, in recent years, we have a seeing users uploading increasing levels of high density files such as videos and images to our platform, particularly within our advanced Teams plan, a Which allowed for customers to use as much storage as needed. We also discovered that some customers were using this storage a benefit for purposes that did not meet the spirit of the plan's design. To address this, in Q3, we sunsetted our as much space as you need a policy and transitions to a metered model.

Speaker 2

However, we accompanied this with an extended grandfathering window for a vast majority of impacted customers to support them with the transition. While this will ultimately translate a more profitable advanced plan SKU in the long term. It will lead to incremental storage costs in the short term, as indicated by the uptick in finance leases a to support the grandfathering window. We also expect a modest headwind to ARR from this change as we expect some degree of refunds and incremental churn for those customers seeking storage solutions that we no longer offer. As related to full year free cash flow, we are reducing our free cash flow guidance range.

Speaker 2

There are a few factors driving this decrease. First is the aforementioned buyout of a portion of our San Francisco lease, which was not factored into our previous guidance. The first tranche of the buyout is $28,000,000 and is due in the 4th quarter. A 2nd, we now expect to receive our December installment payment from an App Store partner of roughly $14,000,000 in January of 2024. Thus, we now only expect to receive 11 monthly payments in 2023.

Speaker 2

Looking ahead, we still expect to receive 12 payments in 2024. Lastly, We are also expecting a reduced level of billings in the Q4 due to two factors. First is FX, a Given the recent strengthening of the U. S. Dollar, which has a more immediate impact on billings.

Speaker 2

And second, we are seeing incremental softness pressuring our a Teams and Document Workflow businesses, which we attribute to the macro environment as well as the reduced headcount and marketing investments in these businesses subsequent a risk. This free cash flow guidance range also continues to include several unique cash outflows that I have mentioned on prior calls, Including approximately $23,000,000 for the 2023 installments of acquisition related deal consideration holdbacks for Doxant and Comandee, one time severance payments of approximately $40,000,000 related to our reduction in force and an approximately $50,000,000 headwind a result of R and D tax legislation. This brings me to 2024, where I wanted to share some early thinking a revenue growth expectations and our 2024 operating margin and free cash flow targets. A we'll not offer specific 2024 revenue guidance at this time. However, I would point to our Q4 2023 a constant currency revenue growth expectations, excluding FormSwift, as a fair proxy for our underlying organic growth rate next year, a as we also lap the benefit of the team's price increase.

Speaker 2

As a reminder, the strategy behind our RIF earlier this a was to rotate investments away from our legacy File Sync and Share and Document Workflow businesses to become more efficient in those areas And to use those savings to fund investments in areas of higher growth potential over the long term. This, along with continued macroeconomic headwinds, is translating to a slowdown in billings in these legacy business lines. Separately, while we are making early progress on our new longer term investments in Dash, bundles and video products, These products are either only recently being introduced to the market or will not be going to GA until 2024. Thus, we expect that these initiatives will not be meaningful contributors to our growth until later in 2024 and beyond. This brings me to our 2024 operating margin and free cash flow targets.

Speaker 2

We have made significant progress a focus on these targets since introducing them over 3 years ago, where we made a commitment to driving higher levels of profitability and free cash flow. I'm proud of our progress against these targets and we will continue to operate the business in a disciplined manner. And while we remain at or above our margin targets, we continue to face challenges to free cash flow, including factors such as FX, Which has grown as a headwind since last quarter, as well as the partial buyout of our San Francisco lease that will also serve as a headwind a replay of our free cash flow next year. In addition, we are now planning as though the R and D tax legislation, a, which came to light after we initially developed our targets, will not be repealed. To overcome these mounting headwinds, a we could withhold investments in our long term initiatives such as DASH.

Speaker 2

However, we believe that this would be a shortsighted approach. A. As such, we are lowering our $1,000,000,000 free cash flow target to adjust for the R and D tax legislation now expected to be approximately $36,000,000 in 2024. In other words, We are resetting the 2024 free cash flow target to be $1,000,000,000 minus the ultimate R and D tax legislation amount. We will also continue to monitor exogenous factors such as FX and its potential impact to our 2024 free cash flow expectations, focused on investing towards our longer term product roadmap, while finding opportunities to run our legacy businesses more efficiently.

Speaker 2

While we continue to navigate macro headwinds, we believe we've been making the necessary changes this year to better position Dropbox for the long term. We continue to see opportunities to leverage our scale and brand as we enter new market opportunities centered around the future of work, With Dropbox Dash representing an important first step in our next generation of AI powered products. We will remain focused on our customers, while allocating capital efficiently and driving long term value for our shareholders. A. And with that, I'll turn it to the operator for Q and A.

Operator

Thank you. Our first question comes from Matt Bullock with Bank of America. Your line is open.

Speaker 2

Hi, thanks. Congrats to Drew. I'm on for Mike Funk. Really nice operating margin this quarter, a Nice beat. Can you provide any commentary on the pace of R and D, AI focused headcount that you mentioned a few quarters ago following the RIF.

Speaker 2

Is that progressing on pace? And then more broadly, any commentary on customer behavior, whether it's churn or price sensitivity quarter over quarter? Thank you. Sure, Matt. Good questions.

Speaker 2

With respect to hiring, we remain disciplined with our headcount investments where our hiring will be focused on growth areas such as DASH a. And with respect to AI, we have been adding AI talent over the past few years. We will be adding more as we drive towards our DASH GA timing, and we've been able to attract strong talent from top tech companies as they see the opportunity to solve a big problem for our customers. And then as far as what we're seeing with customer behaviors recently, I'd say the macro trends remain roughly with what we've observed over the past couple of quarters. On one hand, we continue to see elevated price sensitivity and down sell pressure a from our Teams customers, largely those that have had layoffs themselves.

Speaker 2

We've seen this particularly impact customers in the technology and construction verticals. And we are also seeing reduced top of funnel across our teams plan subsequent to the price increase last year. Stockton and Sign also continue to face macro related headwinds. Now on the other hand, we have been seeing some positive trends around our individual SKUs, a Particularly on retention and sign ups, though our sense is that this largely relates to actions that we have taken as opposed to a change in the environment. I'd say That our guidance does factor in these latest trends.

Speaker 2

Excellent. Thank you.

Operator

One moment for our next question. Our next question comes from Mark Murphy with JPMorgan. Your line is open.

Speaker 3

Great. This is Sona Koller on for Mark Murphy. Thanks for taking the question and echo the congrats to Drew. Tim, given that you now lapped a price increase you had implemented back in June of 2022. Just curious how you're thinking about pricing going forward?

Speaker 3

Do you see the potential to continue to use price as a meaningful lever for growth, given some of these additional capabilities you're building out into the platform. And I have a quick follow-up.

Speaker 2

Yes. I'd say that we are seeing increasing levels of price sensitivity in this macro environment where we're mindful of this as we assess our future pricing and packaging a For now, we're focused on a bundling strategy as opposed to price increases, just given that price sensitivity. And this is where, again, in early October, we did launch bundled offerings, where the idea with these bundles is to drive adoption of our non storage products, Our customers have been asking us to provide these capabilities. They just often don't know that we already do. And so these new plans integrate additional functionality such a Z signature, DocSend's tracking analytics, PDF editing and video recording in a seamless way.

Speaker 2

And we accompanied this with a refreshed web redesign a that makes it easy to find and use this additional functionality. And we've seen that customers that leverage more than one product from us convert and retain at higher rates, and we will be migrating existing users at their current price points over the next couple of quarters. And so this bundling strategy is the priority right now as opposed to price increases.

Speaker 3

Great. Thanks, Tim. And then I know the SFHQ is one of the larger remaining leases. Are there any other relatively larger leases that we should be mindful of remaining? Or is it fair to assume that the major subleases have now been aptly rightsized?

Speaker 2

San Francisco is the largest portion of our remaining space to be subleased. We've basically subleased the vast majority of our remaining space. And this is again where we just did a buyout this past quarter That's of approximately 40% of that remaining sublease space for $79,000,000 to be paid over 3 years. We do expect that, that will drive significant savings over the long term, avoiding over $220,000,000 in rent payments and common area fees over the remaining a 10 year lease duration. So we think that was a good decision for the long term health of the company.

Speaker 2

Great.

Speaker 3

Thank you so much.

Operator

One moment for our next question. A. Our next question comes from Steve Enders with Citi. Your line is open.

Speaker 4

Open. Okay, great. Thanks for taking the questions here. I guess, maybe to start, I want to ask you about the customer event that you held Last month in New York. And I guess what was the feedback that you heard from customers there?

Speaker 4

And how they're viewing The early beta access with the AI solutions.

Speaker 2

Sure. So we gathered with a few 100 customers in New York earlier this month. As part of the event, we made several product announcements. We launched a Stash into open beta. We released our web redesign of the core file sync and share experience.

Speaker 2

We introduced our new fully integrated bundled offerings, which I just touched on. And We also use the event to kick off paid digital campaigns to drive awareness and sign ups of both Dash and our new plan lineup. And it was really great to talk with customers and to validate that the thesis behind our new products is really resonating with them.

Speaker 4

Okay. That's great to hear. And then I guess maybe on the outlook For next year, at least the preliminary view there,

Speaker 2

just want

Speaker 4

to make sure that thinking about this right, I think you said, Yes. Look at FX rate for this year, I think it was something like 5% growth that you're guiding to. And then on the free cash flow side, So, kind of, that $1,000,000,000 intact outside of the R and D tax. I guess, with the building lease as well, is that being Back to the end, are you saying like outside of that and some of the other incremental CapEx that needs to come in here that you would still be able to hit that $1,000,000,000 number ex The R and D tax legislation.

Speaker 2

For now, we're only lowering our $1,000,000,000 free cash a target to adjust for the R and D tax legislation, now expected to be about $36,000,000 If I take a step back, we've made significant progress against our free cash flow target over the past few years. Certainly proud of how far we've come, more than doubling our annual free cash flow since we set the target, but we do continue to face headwinds to reaching that target. For example, FX a Does remain a headwind that's grown since last quarter. To your point, the Bio to San Francisco will also impact our free cash flow next year. And again, now planning as though the R and D tax legislation, which came to light after we developed our targets, will not be repealed.

Speaker 2

And we could withhold investments to our long term initiatives such as DASH to meet that target. But again, we believe that would be shortsighted. So We will continue to monitor exogenous factors such as FX and its potential impact to our expectations, where again, we will provide official guidance on 24 In February.

Speaker 4

Okay, perfect. Thanks for taking the questions.

Operator

Sure. One moment for our next question. Our next question comes from Rishi Jaluria with RBC Decapital Markets. Your line is open.

Speaker 5

This is Richard Pollan on for Rishi Jaluria. Thanks for taking my question and would reiterate my congrats Drew, first one, just in terms of the new bundles, how should we interpret the difference between The new DocSend and e signature pricing capabilities that are included in the bundle versus what was available in the a standalone offerings prior. And how long until we expect more of the functionality like FormSwift or Dash

Speaker 2

a Sure. So maybe I'll start with the back End of your question. Now that we've built these bundles, we will continue to iterate on further capabilities to add to them over time. And so, FormSwift is one of the areas that we are contemplating as far as future additions to bundles, and we'll have more to share on that in future quarters. Dash, at this point, we are navigating towards selling that on a stand alone basis.

Speaker 2

We're driving towards our GA in the early part of 2024, where we are still identifying our go to market approach and so much more to share On that front as we get closer to that point, as far as how we've been integrated DocSend and Sign into these bundles. So maybe I'll just articulate that we are offering Dropbox Essentials for solo professionals a for $20.20 sorry, dollars 22 that's relative to our professional plan, which was $20 Dropbox Business for small teams, that's $24 a month relative to standard at $18 and Dropbox Business Plus for larger teams $32 a month relative to advanced for 30. And so the way we've brought these in is we've brought in some degree of functionality, but not a full functionality from our sign and send capabilities. And so that's reflected in the degree of uplift in those the pricing of those plans, Where again, the idea is to drive adoption of these multi product capabilities that we have in these plans, where we've seen increased a conversion and retention once users use more than one portion of our functionality. So that's the idea behind the bundles, and We're excited to see how this progresses.

Speaker 5

Okay. That's very helpful. And then just a follow-up to that. I think in previous a quarter, as you mentioned, efforts to improve customer awareness of the document workflow capabilities. It seems like this kind of Jibes with that pretty well.

Speaker 5

But do you have plans to, I guess, do any other like marketing campaigns or anything like that To boost awareness of the new pricing plans or maybe try and shift some of those family customers that Should probably be on the team's business plans, anything like that kind of as we look into 2024?

Speaker 2

Absolutely. We're looking into many different angles to improve the awareness of our multi product capabilities. A marketing campaigns, as you alluded to, and that's part of why our margins are going from 36% in the 3rd quarter down to the guided level in the Q4. That's where we're investing in marketing campaigns to fuel awareness of DASH as well as these bundled offerings That we just touched on. And then again, we've accompanied the launch of bundles with this refreshed web design that makes it very easy to find and use This is additional functionality.

Speaker 2

So, multi pronged approach to try to improve the awareness.

Speaker 5

Got it. Thank you. That's very helpful.

Operator

One moment for our next question. A next question comes from Brent Thill with Jefferies. Your line is open.

Speaker 6

Hello. This is Avan Liani on for Brent Thill. Thank you for taking my question. First, you stated that the a demand environment remain roughly the same versus 2Q.

Speaker 2

When do

Speaker 6

you expect that sentiment to shift, especially for DocSend and HelloSign that have remained under pressure in the past couple of quarters. And second, if you can shed some color on the international side, that would be helpful as well. Thanks.

Speaker 2

It's really hard for me to predict when the macro will change and when sentiment will shift. It's not something I'm assuming in our guidance. So for now, certainly assuming consistency in the trends that we have. As far as international, FX headwinds continue to put pressure on our international growth rates. Our document workflow businesses are also predominantly in the U.

Speaker 2

S. And those tend to have faster growth rates, though of course driving international growth through improved localization a And maybe just briefly on the Middle East. We do have double digit ARR from customers in Israel. And since the a beginning of the conflict, we have seen some slowdown in activity in that region. However, I don't expect that to have a material impact on our overall numbers.

Speaker 6

Thank you.

Operator

One moment for our next question. A our next question comes from Pat Walravens with JMP Securities. Your line is open.

Speaker 2

Great. Thank you. And forgive me if this has already been touched on. But is Like I think with Adobe Firefight, there's something like 3,000,000,000 images that's been created. And with all the image generators, this is Yes, we're seeing more and more of it.

Speaker 5

Is it going to drive

Speaker 2

different storage requirements for you guys and other different a sort of functionality and usage. Sorry, Pat, are you referring to Adobe Firefly or Yes, yes. Just like with generative AI, there's so much more video and Sure. So Dropbox has actually been home to many PDF type files and users of Adobe. And so I would expect those sorts of trends to continue as users continue to find places To store their content and Dropbox is one of their favorite homes for that.

Speaker 2

So that could be a catalyst for future storage growth for us and we're paying close attention to these sources Okay. And so far not though, right? No material difference no material deltas as related to Adobe Firefly at this point. Okay. All right.

Speaker 2

Thank you.

Operator

Thank you. And I see that we have no further questions in queue at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect at this time and have a wonderful day.

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Earnings Conference Call
Dropbox Q3 2023
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