Dropbox Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox's website following this call. I will now turn the call over to Karan Kapoor, Head of Investor Relations for Dropbox.

Operator

Mr. Kapoor, please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Dropbox's Q1 2023 earnings call. 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 Q2 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. 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.

Speaker 1

Factors and risks that could cause our actual results to differ materially from these forward looking statements are set forth in today's earnings release and in our annual report on Form 10 ks filed with the SEC. We'll also discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non GAAP results is provided in our earnings release and on our website at investors. Dropbox.com. I would now like to turn the call over to Dropbox's Co Founder and Chief Executive Officer, Drew Houston.

Speaker 1

Drew?

Speaker 2

Thanks, Karen, and good afternoon, everyone. Welcome to our Q1 2023 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first share our business and product highlights from the quarter and then Tim will review our Q1 financial results, provide guidance for the Q2 and update our outlook for the remainder of the year. I recognize our announcement last week to reduce our workforce is top of mind for many and I plan to discuss that in a moment.

Speaker 2

But as far as our financial results, overall, I'm pleased with how we performed in Q1 during a challenging environment. We beat our guidance across all metrics, led by revenue outperformance in FormSwift, which we acquired in late Q4 and some better performance around individual sign ups exiting the quarter. On the flip side, we saw continued weakness across our teams plans as our customers face pressure in their own businesses. And we also saw continued moderation in our DocSend and Dropbox Giant businesses due to ongoing softness in their respective markets. Over the last several months, we've noted that we're not immune to the increasing macro headwinds that our customers are also facing.

Speaker 2

And during this period, we've carefully evaluated our different business units and recognize that some investments have showed promise before the downturn have less potential today. Part of this is accepting some normalization following demand acceleration during the pandemic, as well as the natural maturation of our existing FSS business. And yet at the same time, we see a huge opportunity for building new AI powered products for our customers to improve the technology and tools that are used to get our work done, which I'll discuss in more detail shortly. I'm determined to ensure that Dropbox is at the forefront of innovating for this new AI era, just as we were at the forefront of the shift to mobile and the cloud. And while we've added talent over the last couple of years That bring AI and early stage product development skill sets to Dropbox, we need to free up resources to better align our investments with these long term growth initiatives.

Speaker 2

And so unfortunately these shifts required us to reduce our workforce by approximately 16%. This was a really tough decision, but necessary to the long term health of our company. And while it's painful to say goodbye to many of our colleagues, I'm grateful for all their contributions to Dropbox. In conjunction with this announcement, we've also updated and streamlined our strategic objectives. The first objective is around building AI powered product experiences centered on organizing cloud content.

Speaker 2

We believe for many years the potential for AI to completely transform your knowledge work and we've been investing in automation and machine intelligence features to help our users organize their cloud content and search and discover more easily. And with recent advancements in AI, we're able to accelerate our vision. I'm excited to share some progress we've made here and what to expect over the next few months. 2nd, we're evolving our core FFS experience to specifically address customers' workflows around documents and videos. And with this shift, we consolidated our DocSend, FormSwift and Dropbox signed businesses together with our core team, which we believe will drive a more integrated and seamless product experience for our customers.

Speaker 2

And lastly, as a foundational objective, we remain focused on driving operational excellence by improving our efficiency, our execution and our product velocity. So with that backdrop, I'll share some updates from this past quarter and touch on what we're working on for each of our first two objectives. Starting with investing in AI capabilities to organize all cloud content and improving our customers' working lives. You've heard me talk on previous calls about the evolution of workloads moving from files and folders to the browser and web based apps. What used to be a 100 icons on your desktop have now become a 100 tabs in your browser.

Speaker 2

And what used to be one hard drive to search for all your content is now 10 fragmented search boxes. We believe a large audience of knowledge workers face growing challenges when searching, organizing and using content across multiple cloud repositories and platforms to start their workflows and see a huge opportunity here. That's why we've been working on an AI and ML powered solution that offers 1 universal search bar for all your cloud Our acquisition of Command E in 2021 was an important first step in building this functionality and I'm excited to share that just this week We began testing our 1st AI powered universal search product with a select group of customers and can't wait to share more in the coming months. Universal search is just one application of how AI and ML can improve the way our customers work. We've all seen how generative AI tools like ChatGPT and others Have captured people's imaginations and opened their eyes over the last few months to a lot of new possibilities.

Speaker 2

One thing that becomes clear when using these tools is the need for personalization. We all want an AI that knows about us, that knows about our content, knows about our company, that you can interact with using natural language. And of course, you can't build personalized AI without access to your data. And building personalized AI at scale is a lot easier when you have millions of people already storing their most important So we strongly believe that users of existing Dropbox products tend to benefit from AI enabled experiences like this And they want a service that they can trust that will use AI responsibly. The market for these types of products and capabilities is growing faster than anyone could have imagined.

Speaker 2

And I believe Dropbox is uniquely positioned to lead here. For years, we've invested in AI and ML technology to improve our infrastructure, And our customers can rely on us as a trusted brand that integrates seamlessly with all of their work tools. And we're committed to ensuring the privacy and security of our customers' content And using AI responsibly. And we'll leverage our foundational strengths as we build out additional AI powered capabilities and lean into this new era of computing. And just as we're increasing our product velocity with the launch of our new AI powered universal search products, we're also increasing the level of urgency around our second objective, which is evolving the existing Dropbox FSS user experience to seamlessly address customers' workflows around documents and videos.

Speaker 2

There are a number of important foundational steps that we're taking here, ultimately to make the Dropbox family of products easier to try, buy and use. Last quarter, I talked about our rollout of Google One Tap to reduce friction in the onboarding process. And in Q1, we had tangible results with sign ups and sign ins exceeding our expectations. And we continue to take steps to improve user retention by We've identified customer pain points around the many forms of sharing and made improvements to provide more consistent experience across mobile, web and desktop, making it easier for users to manage who can access the shared content. We also made some enhancements around mobile upload performance and the reliability of the Dropbox app, which drove improvements in mobile plus retention exiting the quarter.

Speaker 2

We're also making changes to address the increased down sell pressure we've observed with our Teams customers. And while difficult employment trends and cost cutting initiatives Among many of our Teams customers way on our user accounts, we've identified an opportunity to drive higher retention for our sales team's customers by leveraging outsourced sales support. We're optimistic that this higher touch, sales assisted motion will be an efficient way to mitigate some of the retention pressures we've seen with some of our self serve team's customers. Moving to our workflow businesses, which now operate within our core division to improve execution and increase alignment across our teams in order to deliver a more holistic experience for our customers. DocSend continued to see its growth moderate amidst ongoing challenges in the fundraising environment, and we're actively working on diversifying into new verticals such as sales and professional services, as well as internationally.

Speaker 2

We're also making progress in removing friction for our DocSend users on Dropbox. For example, we eliminated multiple terms of service gates and we've seen encouraging results with a healthy increase in trial starts for DocSend among Dropbox users. Dropbox Sign growth also continues to moderate against the challenging backdrop in e signature. Despite that, we've continued to see higher win rates with our Dropbox Sign API offering with customers citing a better developer experience and a more customizable platform than our competitors. And as we right size many areas of our business to align with our growth outlook, we're shifting investment towards the Dropbox Sign API and towards deeper integration with the core Dropbox products.

Speaker 2

We also see synergy potential at Dropbox Sign and our PDF editing capabilities, which continue to gain traction among core FSS users as well as our recent acquisition of FormSwift, which provides an online library of forms and templates for small businesses and individuals. And FormSwift in its 1st full quarter as part of Dropbox exceeded our expectations on users and ASP. And the teams are already working quickly on integration, taking learnings from our past acquisitions. We've already launched Dropbox branded SEM pages and associated marketing campaigns to drive traffic to the Formsite site with encouraging early results. I'm pleased to see this integration off to a strong start And we'll continue to push for rebranding efforts and deeper product integrations later this year.

Speaker 2

And finally moving to our video workflow products starting with replay, which allows video production teams to edit and collaborate on video projects simultaneously wherever they are. In this era of distributed work, replay has helped many creative professionals stay connected with their teams and deliver media projects faster and more efficiently by avoiding time switching between editing and review tools. I'm excited to announce that last week we launched Dropbox Replay to all users with premium features made available for an add on subscription. We see a natural fit for replay that connects with the core Dropbox experience as it caters to many of the highly engaged creators who use Dropbox FSS for work. This is now the 2nd video collaboration tool that we've created in house and launched into general availability after we made Dropbox Capture available to all users last fall.

Speaker 2

Dropbox Capture is a video communication tools that helps teams stay in sync while avoiding meetings and long emails to present material and offer educational and training content. In Q1, we saw Dropbox captured users grow significantly again quarter over quarter and we're excited to see its viral adoption continue, driving both retention benefits and network effects across existing and prospective Dropbox users. In closing, we've been making a number of changes to Set up Dropbox for long term success. And while I know these transitions are never easy and the macro environment remains challenging, I believe our best days are ahead of us. The AI era of computing has finally arrived and I personally haven't been this excited about what we're building since I started the company.

Speaker 2

It's been really rewarding to be so hands on in developing our product roadmap alongside our leadership team. We're strengthening our foundation while innovating on our next act. We have strong brand with 100 of millions of users recognizing Dropbox as a platform they can trust with their most secure content. I'm excited about our path forward as we work to transform the way customers organize all their cloud content and ultimately organize their working lives. And with that, I'll pass it on to Tim.

Speaker 3

Thank you, Drew. Today, I'll walk through some financial highlights for Q1 and provide an outlook for Q2 as well as an update on our 2023 guidance and our financial targets for 2024, all within the context of the current macro environment and last week's restructuring, which Drew discussed. I'll start with our Q1 results. Total revenue for the Q1 increased 8.7% year over year to $611,000,000 beating our guidance range of $600,000,000 to $603,000,000 Foreign exchange rates provided an approximate $16,000,000 headwind to Growth in line with our previous guidance. On a constant currency basis, revenue grew 11.6% year over year.

Speaker 3

The upside to our revenue guidance was driven by an outperformance from FormSwift as well as some improving trends on our individuals plans Exiting the quarter. Total ARR for the quarter grew 7.8% year over year for a total of $2,468,000,000 On a constant currency basis, ARR grew by $37,000,000 sequentially and 11.6% year over year, primarily driven by FormSwift and pricing and packaging changes to our team's plans that we announced last June. We exited Quarter with 17,900,000,000 paying users and added approximately 120,000 net new paying users sequentially. Average revenue per paying user for Q1 was $138.97 an increase of over $4 compared to Q4 2022, driven by another quarter of Teams customers renewing at higher prices, which we announced last June, as well as a full quarter of FormSwift revenue. 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 purchased intangibles and certain acquisition related expenses.

Speaker 3

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 taking steps to de cost our real estate portfolio as a result of our transition to a virtual first model. In the Q1, we continue to actively seek subleases and consider buyouts of our San Francisco headquarters. We did not incur any additional impairment charges in the quarter with our cumulative impairment incurred to date remaining at $604,000,000 Given the current corporate real estate market, we have maintained our assumption that we will not enter into additional subleases in San Francisco in the next few years. With that, let's continue with the Q1 P and L.

Speaker 3

Gross margin was 82% for the quarter, representing an increase of 1 percentage point on a year over year basis. The improvement in our gross margin was primarily driven by a greater mix of higher density storage that can store more data within the same physical space, which resulted in lower depreciation as a percentage of revenue. Operating margin was 28.6%, down nearly 2 percentage points year over year, mostly driven by an approximate 80 basis point headwind from FX and a 50 basis point headwind from FormSwift. We exceeded our operating margin guidance by approximately 2 points, mainly due to our revenue outperformance and lower than expected workforce costs. Operating expenses were $329,000,000 up about 15% year over year, driven by increased R and D hiring in 2022.

Speaker 3

As Drew mentioned, we've been adding engineers and early stage Product leaders as we invest in our longer term growth initiatives around organizing all cloud content leveraging artificial intelligence and machine learning. In addition, our operating expenses increased year over year due to higher advertising expenses associated with FormSwift. Net income for the Q1 was $146,000,000 up 3% versus the Q1 of 2022 as higher operating expenses offset most of the revenue increase. Diluted EPS was $0.42 per share based on 349,000,000 Diluted weighted average shares outstanding, up from $0.38 per share based on 373,000,000 Diluted weighted average shares outstanding for the Q1 of 2022. Moving on to our cash balance and cash flow.

Speaker 3

We ended the quarter with cash and short term investments of $1,300,000,000 Cash flow from operations was $140,000,000 in the first quarter. Capital expenditures were $2,000,000 during the quarter. This resulted in quarterly free cash flow of $138,000,000 compared to $131,000,000 in Q1 of 2022. In the quarter, we also added 35,000,000 Let's turn to our share repurchase activity. In Q1, we continued executing against the $1,200,000,000 authorization that was approved in 2022 by repurchasing 8,000,000 shares, spending approximately $175,000,000 As of the end of the Q1, we have approximately $573,000,000 remaining under the current authorization.

Speaker 3

I'd like to now share our guidance for the Q2 and provide an update to our full year 2023 guidance, where I will also provide some context on the thinking behind this guidance. For the Q2 of 2023, we expect revenue to be in the range of $612,000,000 to $615,000,000 On a constant currency revenue basis, we expect revenue to be in the range of $627,000,000 to $630,000,000 We are assuming a currency headwind of approximately $15,000,000 in the second quarter, which translates to over a 250 basis point headwind to growth. We expect non GAAP operating margin to be approximately 31.5 This margin guidance excludes approximately $40,000,000 related to the severance and benefits we expect to pay to employees impacted by a reduction in force in Q2. This also includes a roughly 130 basis points of headwind from FX and 50 basis points of headwind from FormSwift. Finally, we expect diluted weighted Average shares outstanding to be in the range of 343000000348000000 shares based on our trailing 30 day average share price.

Speaker 3

For the full year 2023, due to the strengthening of the U. S. Dollar since our last update, We are revising our as reported revenue guidance range down by $5,000,000 to 2.470 to $2,485,000,000 from our previous range of 2.475 to $2,490,000,000 However, on a constant currency revenue basis, We are maintaining our prior guidance range of $2,510,000,000 to $2,525,000,000 We now estimate a full year 2023 currency headwind of approximately $40,000,000 or approximately 170 basis point headwind to growth with the FX headwinds moderating significantly in the second half. We expect gross margin to be approximately 81.5% to 82%, which is up from our prior guidance of 81% to 82%. We expect non GAAP operating margin to be between 31% to 32%, up from our prior guidance of approximately 30%.

Speaker 3

This also excludes the aforementioned severance and benefits we expect to pay in Q2. This is inclusive of an approximately 80 basis point headwind from FX as well as an approximate 50 basis point headwind From our FormSwift acquisition, we are revising the midpoint of our free cash flow guidance down by $10,000,000 and narrowing the range to $820,000,000 to $840,000,000 from our previous guidance range of 825 to $855,000,000 This includes cash outflows of approximately $23,000,000 in cash outflows For the 2023 installments of acquisition related deal consideration holdbacks for Doxend and Commande, One time severance payments of approximately $40,000,000 related to our reduction in force and consistent with our initial guidance, This includes an approximate $50,000,000 headwind as a result of R and D tax legislation. As related to our capital expenditures, we are maintaining our prior guidance. We continue to expect our additions to finance leases to be approximately 5% of revenue and for cash CapEx to be in the range of $25,000,000 to $35,000,000 in 2023. Finally, we expect 2023 diluted weighted average shares outstanding to be in the range of 340,000,000 345,000,000 shares, down from our previous guidance range of 346,000,000 to 351,000,000 shares.

Speaker 3

This reduction in our share count reflects our commitment to and anticipated impact of our share repurchase program. Here's some additional context on this guidance. Let me first elaborate on our restructuring decisions where our intent is to identify and address areas of inefficient spend and then to rotate our investments towards areas of higher future potential growth. The reductions were thus largely targeted towards R and D and sales and marketing teams supporting our mature file, sync and share category, as well as some reductions against business lines that are facing distinct macroeconomic and competitive pressures. We also intend to be more efficient with our marketing spend across these same areas.

Speaker 3

In light of these changes and as related to revenue, we are maintaining our constant currency revenue guidance for 2023. We saw outperformance in Q1 largely stemming from FormSwift as well as some improving trends on our individual plans exiting the quarter. Conversely, we continue to see macro headwinds weighing on our Teams customers as well as both DocSend and Sign. These opposing trends combined with the potential impact of billings as a result of our reduced levels of headcount and marketing investments stemming from our restructuring, are leading us to maintain our full year guidance despite the Q1 outperformance. As related to operating margins, we are raising our operating margin guidance to approximately 31% to 32%, up over 150 basis points at the midpoint as compared to our prior guidance driven by net savings from our reduction in force.

Speaker 3

As Drew mentioned, while we are restructuring our existing business lines to increase their efficiency, we will also be investing in long term growth initiatives around organizing all cloud content. Thus, some of the savings will be offset by hiring talent skilled in AI and early stage product development, which has been factored into this guidance. As related to full year free cash flow, we are lowering our free cash flow expectations by $10,000,000 at the midpoint. There are a few factors leading to this reduced estimate. 1st, While we will derive cash savings from our restructuring events over time, the benefit in 2023 is largely offset by severance payments and the timing of bonus payment savings, which will be a benefit next year.

Speaker 3

Additionally, as mentioned above, We may see an impact to our billings in the second half of twenty twenty three as a result of our reduced levels of headcount and marketing investment given our restructuring, which would have a more pronounced impact on cash as opposed to revenue this year. Lastly, this guidance incorporates an approximately $8,000,000 deterioration in foreign exchange rates since our initial guidance, Which brings me to our long term financial targets of delivering gross margins of 80% to 82%, Operating margins of 30% to 32% and $1,000,000,000 of annual free cash flow by 2024. We continue to operate within our long term margin ranges, where recent restructuring activities are pushing us to the top end of these ranges. While we are not offering more specific 2024 guidance at this time, we expect to see continued net savings in 2024 and for our operating margins to be at or above these 2023 levels. As related to our $1,000,000,000 of annual free cash flow by 2024 target, We are maintaining our $1,000,000,000 target at this time.

Speaker 3

Our restructuring activities will increase our efficiency and will be a benefit to free cash flow in 2020 decisions and any corresponding impact on billings to ensure that we maintain an appropriate pace of growth across our existing business lines. Additionally, we need to monitor our investments in organizing cloud content and AI to ensure that we are remaining disciplined with our spend And to validate that our new products are gaining an appropriate level of customer traction. Lastly, we need to We continue to need to navigate numerous exogenous factors such as R and D tax legislation, A softer subleasing environment and deteriorating FX rates that continue to serve as headwinds. Thus, while we are taking actions that bring us closer to our targets, we need to execute well and remain disciplined with our spend amidst these varying dynamics. In conclusion, as Drew mentioned, we've been making a number of changes to set up Dropbox for long term success.

Speaker 3

We are mindful of the difficult macro environment and the inherent challenges that come with businesses in transition. We remain optimistic about our strategy as we improve our execution, while investing towards our future in this new AI era. We will remain focused on our customers, operating the business efficiently and driving long term value for our shareholders. With that, I'll now turn it over to the operator for Q and

Operator

A. Thank you. And our first question comes from Rishi Jaluria with RBC Capital Markets. Please proceed. Hi, this

Speaker 4

is Richard Polan on for Rishi. Thanks for taking my question. So the first one is, you talked a little bit about some of the investments that might have less potential today. Outside of, I guess, some of the core FSS, is there anything in particular that you identified that maybe wasn't working too well and you want to shift away from? Thanks.

Speaker 2

Sure. So I can start. So we're continuing to invest. I'd say, businesses that have been affected beyond the core business would include cyan and Doxant. And they're still promising businesses, but as we see each of their categories affected in different ways, Then if the prospective returns are coming down, then we've trimmed some of our investment in those areas, Mostly to free up resources to invest in some of our future growth levers.

Speaker 2

But we're certainly not stopping Investment in those areas in a lot of ways were, you take something like DocSend. In response to It may be true that the fundraising environment is there's less of a fundraising going on, which means lower demand For Doxzen in the fundraising context, but the underlying use case of sharing of rich sharing with analytics and extra security features and A lot of what Doxend does, has brought applicability to a lot of professional services. So we're diversifying in Doxend and we're investing in Doxend to both support other verticals and other geographies. So that's a little bit of the context behind some of the Shifts in investment, but we continue to be confident in the potential of these businesses.

Speaker 3

And then this is Tim. Just to briefly add on to that. We did take a hard look across the company where we took this opportunity to consolidate or eliminate some roles and also to address lower performers. And we also looked at where we had too many layers that we could streamline, which were slowing down execution and decision making. And ultimately, the vast majority of the cuts were across R and D with additional cuts in sales and marketing and more minor cuts in G and A.

Speaker 4

Got it. It's super helpful. And then just as a follow-up, impressive to see the good performance Out of FormSwift and really good acquisition on that side. With the strong balance sheet and the continued free cash Are there any other areas that you'd think about maybe investing more on the inorganic side and maybe it's AI, but Just anything you could talk to just around the inorganic strategy from here?

Speaker 2

Yes. So we're we certainly Had a lot of success with our acquisitions or happy with a lot of acquisitions we've made. And I wouldn't say there's like a change in approach. We've Had successful acquisitions kind of at different scale, so that's bringing great teams or great products or great businesses and that will continue. And as you point out, we have a strong balance sheet, Cash flow, so we can so we have a lot of optionality there.

Speaker 2

So yes, and then certainly in the AI space, there's a lot of Interesting early stage startups where we see opportunity and are spending a lot of time. There's a greater Supply of AI startups because there's a lot of interest and then we're certainly interested in adding there. But at the same time, we'll continue to be disciplined And we got a lot of good places to put capital.

Speaker 4

Got it. Thank you.

Operator

Thank you. One moment for our next question please. And it comes from the line of Mark Murphy with JPMorgan. Please proceed.

Speaker 5

Thank you very much. So I think it's a surprisingly solid quarter considering the environment. You have the 12% ARR growth, margin upside, solid free cash flow number. We might have expected more detail, just As well given the recent headcount actions. And so I'm wondering if you can expand on that a bit.

Speaker 5

How much of that Reduction might flow through to margins, maybe next year, versus how much is the earmarked for incremental AI investments? Because Typically, if we see a 16% type of reduction, it's going to yield a little more margin I'm just trying to understand that particular equation and then I have a follow-up.

Speaker 3

Yes. I'd look to our 2023 margin guidance, Which is up 150 basis points from our prior guidance at the midpoint. It's an indication of the net savings we expect this year. And then note that we will continue to see some of the benefits carry forward into 2024 as the savings annualize. And we're Giving 2024 guidance right now, but I did indicate that I expect our margins to be at or above the 2023 levels.

Speaker 3

And this is where we are increasing our investments around AI and early stage product development, which will partially offset those savings. And then we also did take the opportunity to address some performance management with this risk, where in some of these cases, we'll be adding backfills for those positions

Speaker 2

as part of This action.

Speaker 5

And so could we maybe think of the 150 basis points as a little more in the half year if you're doing I don't know When the cost and expenses there kind of roll off the books, but is that one way to think about it like more like a 300 basis

Speaker 3

Yes. I don't think I'm going to elaborate much more on 2024 just yet. I think there's many factors that will go into our thinking for our guidance next year. I think I'd just fall back on what I previously Stated as far as I expect our margins to be at or above these 2023 levels.

Speaker 5

Okay, fair enough. And then, Drew, is it possible to provide an example of what is what you're picturing in your mind as you build out In AI product, you mentioned search, you mentioned personalization. I'm just trying to envision What the product would be or maybe how the user experience would feel, right, as you start Steering relatively more investments into your AI roadmap.

Speaker 2

Sure. So we'll have more specifics to share with the forthcoming launches. But I think at a high level, there's both new products that we're creating and then there's also applications of AI across our existing Product portfolio and sort of opportunities to reimagine those experiences. But I think one of the most straightforward is really When you look at or when you use tools like ChatCBT, they're not really personalized to you. So if you ask it a question like or if you want to ask it a question like, what's my passport number again?

Speaker 2

Or who in my company is working on this thing? Or Why did we make this certain decision? It is now possible we have the technical foundation to actually build an experience where you can use natural language And basically have this silicon brain that knows about you and your stuff and your company, sort of a personalized chat GPT. We find ourselves very well positioned To build that kind of capability and we've been building towards that for many years. So that's been I mean there are other examples Because there's a lot of other exciting applications beyond text and pretty much all the different multimodal capabilities.

Speaker 2

There's like been breakthroughs in how you can the things you can do with images, the things you can do with video, the things you can do with audio. So there's a lot of different Potential applications that we're working on and we'll have more to sharing in the coming months.

Speaker 5

Okay. I like that branding around Silicon Brain. Maybe that's something we'll see from you in the future. It rolls off the tongue pretty well. Thanks a lot.

Speaker 5

Congrats on all the success.

Operator

Thank you. Thank you. One moment please. And our next question will come from the line of Steve Enders with Citi. Please proceed.

Speaker 6

Okay, great. Thanks for taking the question. I guess maybe following up on the AI discussion a little bit. I know universal search is just kind of being rolled out there and tested. But I guess what's kind of been the early feedback From the customers that are trialing it and I guess how are you kind of thinking about what that could mean from like a monetization lever and how you're thinking about Packaging around that down the line?

Speaker 2

Sure. So we're just it's just reaching outside customers literally 2 days ago. So I want to let some of the feedback roll in a little more before having a more comprehensive response. We're certainly using internally, and that's a bit that's been a really helpful tool for us to kind of Battle test the product and make sure it's really great before rolling out to customers. So even some milestones like that closed beta, We're really excited about.

Speaker 2

As far as pricing and packaging, I mean, we certainly believe it will be incremental revenue. We believe this will unlock new categories Customer who might not otherwise be buying FSS or might not be either current or future FSS customers. So we think it's a big unlock on that front. But as far as We'll have more to share around the specific pricing and packaging at the actual launches.

Speaker 3

And then maybe just briefly from a financial perspective, we certainly plan to stay disciplined and closely monitor customer adoption and feedback as we Further investment on this side. Our focus this year is on bringing a quality product to market and driving adoption. And we do expect it will take several quarters before we start Any contribution to revenue from these products.

Speaker 6

Okay. That's helpful context on that front. I guess maybe dig in a little bit more on just the ARR upside in the quarter. I guess how do we think about some of the moving parts around there for The FormSwift outperformance, individual plans, sounds like they were relatively strong versus maybe some of the headwinds that you're seeing And other aspects of it, like any kind of further kind of breakdown for the strength there?

Speaker 3

Sure. So FormSwift did outperform our expectations. We continue to expect that it will contribute About 2.5 points to our growth this year and we're excited about the progress we're making on the integration front with FormSwift. I think we're also seeing improving sign up trends as a result of our rollout of Google One Tap, which reduces friction in the sign up and onboarding process. We also did see churn improve across our individual plans, particularly as we exited the quarter.

Speaker 3

And then of course, we continue to see a contribution From the pricing and packaging changes that we announced in June on our teams plans.

Speaker 6

Okay, perfect. Appreciate taking the questions here.

Operator

Thank you. One moment for our next question please. All right. And our next Question comes from the line of Brent Thill with Jefferies. Please proceed.

Speaker 3

Hey, this is Elon on for Brent Thill. Thank you for taking my question. First, what are you seeing out there in the market Let's see, as far as the macro trends, I'd say that we're seeing trends that are roughly consistent With what we saw in the Q4, we continue to see elevated price sensitivity and down sell pressure from our Teams customers, particularly those that had layoffs And then Sine and Doxen also continue to face macro related headwinds. Doxen in particular is exposed to the fundraising community Where the recent banking events are adding some volatility to that vertical and we continue to see elevated levels of churn Some of our individual SKUs, though again, we did see those trends improve exiting the quarter. We also saw incremental FX headwinds in Q1 And we expect a similar impact in Q2.

Speaker 3

From maybe a guidance philosophy perspective, we do remain prudent And continue to factor in an appropriate level of conservatism given the challenging macro landscape. We've assumed that key trends Such as a degree of elevated churn and customer price sensitivity will continue throughout 2023. So certainly factoring in these latest signals and not assuming any level of Improvement in the economy and our guidance and certainly also mindful of our reduction in force and the potential effect that this could have on our billings given our reduced levels of investment in headcount and marketing. So again, all of these considerations are factored into our guidance. Thanks.

Speaker 3

Super helpful color. And lastly, how should we be thinking about the mix of paid user growth and ARPU to drive future growth? Sure. So from a paid user perspective, we added about 120,000 paid users in the Q1. Family Plan was a significant contributor to that.

Speaker 3

FormSwift also added to net new paying users in Q1, particularly as this business does have a seasonal increase due to tax season. As far as forward looking expectations, we don't formally guide to debt new paying users. And particularly as we navigate our pricing and packaging changes In the current macro environment, I'd continue to expect something in the neighborhood of roughly 100,000 net new paying users per quarter with ARPU expansion being more pronounced this year as we saw in the Q1. Thanks. Super helpful.

Operator

Thank you so much. And it comes from the line of Matt Bolock with Bank of America. Please proceed.

Speaker 3

Hi. Thanks for the question. I wanted to double tap on the Command E opportunity here. Is there anything you can give us in terms of the competitive environment for universal search or who you expect to compete most directly with?

Speaker 2

Sure. So I mean at a high level, I'd say it's pretty early for the category. I think there are start They're going to pursue ideas in this space and we believe that we're well positioned there because of Scale, our distribution, our ability to make significant technical infrastructure investments, and the fact that we already have this trust relationship With customers and that they're already trusting the most important information in Dropbox. So when you think about universal search and content, We think we have big advantages versus startups and then of course, the platform companies, folks that provide office suites of various kinds. They will certainly do things in this area as well, but I think the fact that we're Platform agnostic and then also aspects of our trust and privacy brands, the fact that we're a subscription business and not advertising, Our track record with privacy and trust, I think those are big advantages against the larger incumbents as well.

Speaker 3

Excellent. Thank you. And then just quickly, was there anything to call out in terms of the ARPU this quarter? It was a nice beat relative to expectations. Is that just The FormSwift tailwinds or anything else?

Speaker 3

Sure. So ARPU increased just over $4 sequentially. And maybe breaking down some of the components of that increase was primarily driven by benefits from our pricing initiatives. So I'd say that's about $2.50 And our acquisition of FormSwift that contributed about $2 and this was partially offset by the continued growth in our family plan. Excellent.

Speaker 3

Thank you very much.

Operator

Thank you. And I'm not showing any further questions in the queue team.

Speaker 2

Thank you everyone for dialing in for your support and we'll see you next quarter.

Operator

And with that, we thank you for participating in today's conference. You may now disconnect.

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Earnings Conference Call
Dropbox Q1 2023
00:00 / 00:00