Dropbox Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q1 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker, Peter Stabler, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Dropbox's 1st quarter 2024 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 and fiscal year 2024 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 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 quarterly report on Form 10 Q 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'll now turn the call over to Dropbox's Co Founder and CEO, Drew Houston.

Speaker 1

Drew?

Speaker 2

Thanks, Peter, and good afternoon, everyone. Welcome to our Q1 2024 earnings conference call. Joining me today is Tim Regan, our Chief Financial Officer. I'll first provide an overview of recent business and product highlights, and then Tim will review the details of our Q1 financial results and update our outlook for the remainder of the year. Revenue for the quarter was in line with our expectations.

Speaker 2

However, we still have work to do to return our core SSS business to a growth rate that's more representative of the opportunity we see. As our teams work on initiatives to achieve that, and I'll share more about those efforts in a moment, we continue to manage our expenses carefully and we're pleased to have delivered better than anticipated profitability in the quarter. On another positive note, after a challenging 4th quarter, paying users returned to sequential growth with 35,000 net new additions in the quarter. We're encouraged by this return to paid user growth, but we're still facing macroeconomic challenges and an uncertain demand environment. Within our core FSS business, we continue to see pressure across our self serve individual and Teams offerings, while in the quarter we saw better than anticipated performance across our document workflow group comprised of FormSwift, Sign and DocSend.

Speaker 2

I'll now share more specifics on our core FSS business starting with Teams. Improving our Teams offering is a focal point for us this year. Our Teams plans feature higher net revenue retention rates and an opportunity for license expansion. In Q1, we focused on reducing friction in the onboarding process, improving the team admin workflow and streamlining the sharing experience. We're pleased that the changes we made led to solid top of funnel improvement during Q1, with trial starts, team invitations and weekly active usage all posting year over year increases.

Speaker 2

These are positive indicators that customers are trying and using our products and the next step is for us to convert and retain these potential new paying users. And as we mentioned on our last call, late in Q4, we implemented tests and experiments for individual plans that didn't produce the expected results. In particular, our emphasis on higher priced SKUs in our mobile channel ended up negatively impacting our top of funnel metrics, including trial starts for new individual plan users. Over the course of Q1, we continued our work on our go to market motion for our individual plans. And while our mobile channel hasn't yet fully recovered, we've seen some recent improvement in top of funnel and we're confident we can further improve the efficiency of the mobile acquisition channel going forward.

Speaker 2

Moving on to a quick update on bundles. As a reminder, we created bundled SKUs to offer multi product capabilities to new customers at a higher price point, reflecting the additional value we were adding to the plants. These SKUs include FSS as well as limited or introductory functionality across products such as Dropbox Sign, DocSend and Replay. On our last earnings call, we noted that while we saw improved ARPU and higher multi product adoption rates with the introduction of these plans, we are also seeing reduced top of funnel demand and conversion challenges. Based on our learnings, in late Q1, we elected to roll back the pricing of our bundled SKUs to pre launch levels to counteract the potential price sensitivity that these plans introduced.

Speaker 2

We're currently assessing the customer response to these reduced prices, while we also work to optimize the features included with these bundles as well as the underlying product experience. We'll continue to iterate and drive towards an intuitive lineup of offerings for our customers. And we'll have more to share on our progress here in the coming quarters. Customer feedback is a critical input into our product development. Our April 24 release is a great example of our teams acting on this feedback as we release a collection of product updates designed to make it even easier for Dropbox users to secure, organize and share their work across different devices, locations and platforms.

Speaker 2

To help our users secure their content, we released new advanced data protection features, including advanced key management and full end to end encryption, offering our FSS users complete control over how their data is secured. The kernel of this end to end encryption capability stems from our acquisition of Boxcryptor in late 2022, as we were seeing our customers purchase this functionality separately from Dropbox. Now our users can take advantage of this capability natively within Dropbox, providing additional protection for both our end users and their administrators who are key influencers in purchasing decisions. We also consistently hear from our users that they want more help organizing and sharing their content efficiently across distributed teams. For example, our users have sought ways to improve collaboration across Microsoft applications.

Speaker 2

That's why we were excited to announce real time co authoring integrations with Microsoft 365. Dropbox Teams users can now edit Microsoft Office files on the desktop simultaneously and save natively within Dropbox without conflicting copies. With real time editing, they can be confident they're working off the latest version. We also launched a Microsoft Copilot integration, giving users the ability to query their Dropbox files directly from within Microsoft Teams. Our April release also featured the launch of DocSend advanced data rooms.

Speaker 2

Users are now able to securely share multiple files with a single link, while maintaining complete control of viewing with group permissions, visitor verification and built in NDAs. With an easy to use virtual data room solution, DocSend is now even better positioned as an attractively priced full featured solution to address the middle market deal flow opportunity. Sharing quickly and easily across teams is especially important for projects with large video files, which is the fastest growing content type on the Dropbox platform with over 1,500,000,000 videos uploaded each year. To support video based projects, we've continued to invest in Dropbox Replay, our rich media review and approval tool. Since Replay's general release, active users have been growing on average 15% quarter over quarter.

Speaker 2

And further with our new integration, replay users who work in Avid Pro Tools can now review files directly within their Avid application. I'll now shift gears and share an update on Dash, our standalone universal search product that leverages AI and machine learning to help organize all of your cloud content. Last quarter, we shared that we were prioritizing collecting input from our beta users and focusing on maximizing the utility and virality of the DASH product and we've been making significant progress in Q1. For example, we've recently seen double digit percent increases in search success for existing and new users and we've reduced average search latency by over 50%. We're conducting near daily user sessions and the feedback has been valuable.

Speaker 2

As we've better aligned Dash's key features with user needs and achieve stronger product market fit, we're eager to leverage our platform's user base and distribution to address this growing market opportunity for cloud based universal search. We're also working on reducing onboarding hurdles. For example, early on, we prioritized DASH development for Chrome. And while this allowed us to move faster, we created unnecessary friction for Safari and Firefox users. We've now eliminated this gap.

Speaker 2

And as a result, we've seen improvements in onboarding success rates and app connections. Early engagement trends are moving in the right direction as well, up over 70%. Our newly redesigned Dash Start page also enables users to get shortcuts to their recent work projects and view stacks, which are smart, shareable collections for any kind of cloud or file content. In each quarter, we're adding more integrations with the most widely used workplace tools and apps. In closing, we had a good start to 2024.

Speaker 2

While not without challenges, we delivered against our key business objectives of enhancing the product experience for our core FSS users, while investing in our next generation AI enabled product experiences. Given the ongoing uncertainty in the macro landscape, we'll stay disciplined in our operations, seeking efficiencies and remaining committed to judicious capital allocation. I'm excited about our roadmap for the remainder of 2024, and I'd like to thank all of our Dropboxers for their continued focus on delivering a more enlightened way of working for our customers. And with that, I'll turn the call over to Tim to share a recap of our Q1 financial performance as well as our expectations for the remainder of the year. Tim?

Speaker 3

Thank you, Drew. I'll cover our financial highlights from Q1, provide guidance for Q2 and offer some updated thoughts on our full year 2024 outlook. Starting with our results for the Q1. Total revenue for Q1 increased 3.3% year over year to $631,000,000 slightly ahead of the high end of our guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter amounting to a 10 basis point tailwind and a 3.2% year over year constant currency growth rate.

Speaker 3

Total ARR grew to a total of $2,556,000,000 up 3.6% year over year. On a constant currency basis, we added $16,000,000 sequentially and 2.8% year over year. We exited the quarter with 18,160,000 users adding approximately 35,000 net new paying users on a sequential basis. Average revenue per paying user was $139.59 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. Our non GAAP net income also includes the income tax effect of the aforementioned adjustments.

Speaker 3

With that, let's continue with the Q1 P and L. Gross margin was 84.6% for the quarter. As mentioned previously, the primary driver of the year over year increase in gross margin was the increase in useful life of our servers from 4 to 5 years effective January 1 this year. This change resulted in approximately $10,000,000 of benefit to gross margin in the Q1. The impact of this change is weighted towards the first half of this year, where we expect the full year benefit to be roughly $30,000,000 Operating expenses were $303,000,000 down approximately 8% year over year.

Speaker 3

Operating margin was 36.5 percent ahead of our guidance of 33% and up roughly 800 basis points from the year ago period. A substantial portion of our better than anticipated result was timing related as we delayed spending behind certain projects and marketing efforts. Much of this delayed spend will be allocated across subsequent quarters of this year. Net income for the Q1 was $197,000,000 up 35% year over year. Diluted EPS for the Q1 was $0.58 based on 341 1,000,000 diluted weighted average shares outstanding.

Speaker 3

This compares to $0.42 per share and 349,000,000 diluted weighted average shares outstanding for Q1 2023. Moving on to our cash balance and cash flow. We ended the quarter with cash and short term investments of $1,200,000,000 1st quarter cash flow from operations was $176,000,000 an increase of 25% versus the year ago period. Capital expenditures in the quarter totaled $9,000,000 This resulted in quarterly free cash flow of 100 and $66,000,000 compared to $138,000,000 in Q1 of 2023. In the quarter, we also added $27,000,000 to our finance leases for data center equipment.

Speaker 3

While this figure represents a material step down from finance lease additions in Q4, we continue to anticipate full year 2024 additions to approximate 7% of total revenue. As related to our share repurchase program, in Q1, we repurchased just over 11,000,000 shares, spending $279,000,000 As of the end of the Q1, we had approximately $1,100,000,000 remaining under our current repurchase authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases with the intention of reducing our share count over time, where our related 10b5-1 grid is structured to buy more shares at lower price points. I'd now like to share our 2024 Q2 and updated full year guidance, where I will also provide some context on the thinking behind this guidance.

Speaker 3

For the Q2 of 2024, we expect revenue to be in the range of 628 $1,000,000 to $631,000,000 We expect a roughly $1,000,000 positive impact from FX this quarter. We expect non GAAP operating margin to be approximately 33%. Finally, we expect diluted weighted average shares outstanding to be in the range of $327,000,000 to $332,000,000 shares based on our trailing 30 day average share price. For the full year, we are maintaining our previous guidance for reported revenue to be in the range of $2,535,000,000 to $2,550,000,000 Our constant currency revenue guidance range is also unchanged at 2.532 dollars to $2,545,000,000 despite FX rates worsening in Q1. Changes in FX have a more immediate effect on billings than on revenue and thus the impact to revenue this year is not significant.

Speaker 3

As with prior guidance, we expect gross margin to be in the range of 83% to 83.5%. For non GAAP operating margin, we now expect to land between 32.5% and 33% for the full year, up from our prior guidance of 32% to 32.5%, representing an increase of $13,000,000 of operating income at the midpoint. As mentioned previously, roughly half of our outperformance in Q1 was driven by delayed spend that we expect to incur over the remainder of the year. Our expectation for free cash flow is unchanged at $910,000,000 to $950,000,000 We continue to expect $20,000,000 to $30,000,000 in capital expenditures and our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year. Finally, we expect our diluted weighted average shares outstanding to be in the range of 326 to 331,000,000 shares based on our trailing 30 day average share price.

Speaker 3

This represents a reduction of 10,000,000 shares for each end of the range when compared to our previous guidance of 336,000,000 to 341,000,000 shares. I'll now share some additional context on the thinking behind our guidance. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. As a result, we are maintaining our revenue guidance for the year given the challenging state of the macroeconomic environment, particularly within the SMB space, as well as the work in progress status of a number of our initiatives for our core file sync and share business in DASH. We are also monitoring the recent security incident with our signed business, which represents a low single digit percentage of our total revenue.

Speaker 3

And while we do not anticipate a material impact to our revenue, this could lead to incremental customer churn. Regarding paying users, our comments offered last quarter still apply. We still expect paying user growth for the full year and we project adding users in the Q2 as well. That said, we want to remind everyone that our quarterly performance could vary should we experience any large team churn, see changes in the macroeconomic environment or experience incremental churn due to our recent security event with our Dropbox signed product. As related to non GAAP operating margin, we are raising our outlook by 50 basis points as we remain focused on being disciplined with our spend.

Speaker 3

We are maintaining our free cash flow guidance for the year. While we are maintaining our revenue guidance and increasing our operating margin guidance, we also saw FX rates worsen during this past quarter, where FX movements have a more immediate impact on billings and cash. Therefore, the improvement we are driving on operating income is roughly being offset by a deterioration in FX. Finally, as related to our share count, we are reducing our expected share count range to reflect our increased pace of repurchases in accordance with our 10b5-1 grid. In conclusion, we continue to focus on efficiently operating our core file signature business as we seek to drive revenue growth, margin expansion and share count reduction.

Speaker 3

Concurrently, we continue to invest in new AI enabled experiences that have a large opportunity to serve new and existing customers. We are making progress across these dimensions and believe that these efforts will culminate in creating long term value for our shareholders. With that, operator, please open the line for questions.

Operator

Certainly. And our first question will come from Steve Enders of Citi. Your line is open.

Speaker 4

Okay, great. Thanks for taking the questions here. I guess maybe just to start out on, I guess maybe the early feedback you're seeing from some of the AI products in DASH now that it's out there live. I guess, what is the feedback so far? And what is I guess, how is this kind of maybe changing how you're viewing the opportunity and the monetization potential of those products?

Speaker 2

Sure. Thanks for the question. So the early feedback, I'd say a few themes. So first is, I mean the first thing I look for is we do my leadership the DASH leadership team and I sit every week with customers virtually and walk and talk to the interview them, walk them through the product. And the first thing is that this I think we feel quite validated this is a universal problem.

Speaker 2

Virtually all the prospects and users are like, yes, I'm drowning in tabs and content and my stuff scattered everywhere. So that's good validation. 2nd is validation as far as the overlap with FSS, which is important. So we find that paying Dropbox, File Sync and Share users adopt and retain on Dash at higher rates. I mean our hypothesis that was that this would be the case and we believe it's a natural evolution to go from organizing your files to organizing all your cloud stuff.

Speaker 2

But to see that in the numbers is encouraging. And then the feedback as far as the product is really just continuing to improve the fit and finish of the experience. So, watching engagement and onboarding success, retention, different performance characteristics on that front. In Q1, we cut search latency in half. We've been improving the search success rate tens of percentage points last quarter, onboarding success, connector success, that kind of thing is improving.

Speaker 2

And these are some of the indicators we look for in the March from beta to GA. So, we're pretty it's still early. There's still a lot of work to do, but we're encouraged by some of the early signal.

Speaker 4

Okay, great. That's helpful context on that side. And then I guess maybe to the packaging and tweaks that you've made historically on top of funnel, it sounds like maybe it's seen a little bit of improvement versus last quarter. But I guess can you give a little more detail on what exactly you've changed and maybe where the potential green shoots are coming from what you've tweaked so far?

Speaker 2

Yes. So yes, for context in Q4, we did our first kind of first rev of a bundled SKU. And I'd say we had mixed results and so some lessons there that we've unpacked. So one is some of the positive things we expected or that ARPU did go up and it was a higher price point. Multi product attach went up.

Speaker 2

But on the negative side, we also saw that the top of funnel conversions were down partly due to there was already some price sensitivity, or we've already been seeing, I mean, due to the macro environment and what a lot of other folks are seeing, just price more price sensitivity out there. So the higher price was not helping that. And then secondly, we found that promoting or having all these different products to trying to introduce them all at once created some extra friction in onboarding. So some of the indicators around onboarding success declined slightly. But I think more broadly, we changed a lot of variables at once.

Speaker 2

And so one thing we've basically been stepping back and we're layering these changes on and sort of validating them 1 at a time or in a more kind of considered fashion. So I think just being careful to not change too many variables at once is a lesson. I mean, another lesson is similar to what I was saying with DASH is that there are really big opportunities here like the $1,000,000,000 scale opportunities here are really with things like Dash. And we're relatively more focused going forward on optimizing our Teams business on Dash, on that evolution from organizing all your files to organizing all your cloud stuff. So we it's still true that awareness is actually still the biggest gap among our customers and we have a lot of happy customers who want more from Dropbox, but we hear over and over again that they didn't know we do more than File Sync and Share.

Speaker 2

So, we're doing a lot on the kind of promotional front or finding ways to close that gap. And then with bundling, still a big opportunity, but I'd say we're relatively more focused on, the bigger pit the longer term bundling opportunity between FSS and DASH versus FSS and some of the document workflow products, which still have some incremental returns, but aren't transformative the way that some of the other things in the portfolio are.

Speaker 3

Okay, perfect. Thanks for taking the questions.

Operator

And one moment for your next question. And our next question will be coming from Rich Hillacre of UBS. Your line is open.

Speaker 5

Hi, guys. Thanks for taking my question. I just wanted to hit on the overall demand environment right now. You hinted and maybe more than hinted at just the overall macro. I don't think that's anything new, but you called on SMB.

Speaker 5

So I'm wondering if maybe from your perspective, what are you hearing in SMB about the health of SMBs? And I guess I'm curious how much is the health of the SMB impacting the top of funnel relative to some of the things that you can control and have shared with us that you're working on?

Speaker 2

Sure. So, I mean, I don't think there's been any real change in the kind of or I think a lot of the trends we're seeing today are just extensions of prior trends we've been seeing in the macro environment. I also don't know how much I can extrapolate to the state of SMBs like in the world or something. But what we're seeing with SMBs is pretty similar to what we're seeing with customers of all sizes that folks are more price sensitive, cost sensitive after a downturn or in a more difficult economic environment. And so that does impact our top of funnel, but we also see there's offsetting opportunities where when we just look at the mechanics of how you sign up for to sign up as a new SMB on Dropbox, When we watch that experience, when we watch customers go through it, when we look at some of the metrics on trial conversion and onboarding success, there's lot of friction we want to take out of that that we're taking out of that experience.

Speaker 2

So just making it easier to get content in your Dropbox, get people properly set up. I mean these things sound pretty basic. But when we look at some of our metrics versus peer benchmarks, there are certain there are some pretty big gaps in certain areas that represent upside, just from getting people properly set up, because we sort of lose more people, through friction in the experience than is necessary. As far as how all that nets out, that's reflected in our guidance, but we still see a lot of opportunities to improve the experience. And I wouldn't say there was much change in the macro trends.

Speaker 3

Hey, Rich. This is Tim.

Speaker 6

Yes, go ahead.

Speaker 3

Yes, just to briefly add on. So as you know, as related to our teams, most of our teams plans are in the SMB space. Whereas Drew was mentioning, we do continue to see a challenging demand environment. And we see this really reflected in down sell pressure as teams trim their license counts following layoffs or budget cuts. And we're seeing this particularly pronounced in the tech and manufacturing verticals.

Speaker 3

Got it.

Speaker 5

Okay. Thanks for the extra color there. My follow-up here, I guess, Drew, you hit on that awareness of all the things that Dropbox does is still an issue. But we saw leverage on the S and M line this quarter. So I guess my question is, why not more efficiency from R and D instead of the sales and marketing line?

Speaker 5

Thanks.

Speaker 2

Yes. So we're certainly mindful of spend in R and D. I mean, there's a lot of investments we're making across the portfolio that go into that both in our core business, our whole product portfolio, our infrastructure, investments in AI, things like DASH.

Speaker 3

So there's a lot

Speaker 2

of investments there that we're making that we're excited about. And then to your point around kind of light on sales and marketing as a percent of revenue compared to other companies. I mean that's really because of our product led growth motion and the efficiency. It drives a lot of efficiency in terms of OpEx and sales and marketing, but what we're really saying is like we're using the product to automate a lot of those activities, which is really scalable, but then shows up as in the R and D line. So, I mean we're we optimize across both, but we see a lot of returns to the R and D side just because we have such a large audience and even small improvements to some of these funnel metrics have a big impact as opposed to more like paid acquisition investments or having more having bigger teams in sales and marketing.

Speaker 5

Got it. Thanks.

Operator

One moment for our next question. And our next question will be coming from Matt Bullock of Bank of America. Your line is open.

Speaker 3

Excellent. Hi, thank you. I'm on for Mike Funk. Great to hear about the better performance of the document workflow business. I think it's the first time in a while we've heard positive trends there.

Speaker 3

Curious what drove that and if you think that the onward trajectory is going to go forward through 2024? Thanks.

Speaker 2

Sure. Yes, I'd say it was like broadly in line with our expectations. I wouldn't say it was like this mega positive surprise or anything. But I agree it's good to see more stability there after in the bigger picture is a huge COVID peak and then a pulling back in all areas, but then a particular pulling back in document workflow as you look at something like DocSend. So much of their business is coming from founders fundraising and in a more challenged fundraising or venture capital environment, Doxend was impacted.

Speaker 2

So overall, it's good to see more stability there. So I'd say there's still incremental opportunity. But as I was just saying earlier, in the bigger picture, we see the biggest upside with optimizations to our Teams business and future directions like Dropbox Dash.

Speaker 3

And Matt, real quick, this is Tim. One specific to call out may be FormSwift, where we did see an increase in FormSwift in both usage and top of funnel activity in the Q1, and that's due to tax season. So that leads to an increase in subscriber numbers. Really helpful. And then one more if I could.

Speaker 3

Seems like there's a lot of moving pieces on the ARPU side with the pricing changes bundling and family plan de amortization. Just curious how we should think about modeling throughout the remainder of 2024? Sure. So there are a lot of moving parts as you mentioned. But for the full year, we expect a modest lift in ARPU, largely driven by the adoption of our premium plans.

Speaker 3

Got it. Thank

Operator

you. Our next question will be coming from Patrick Walravens of Citizens JMP.

Speaker 6

Drew, can I ask a really big picture question here, which is just we help you take this business public? Yes, we help you take public 6 years ago, it was at 2021. The stock is basically in the same place, up a little bit. You control 75% of the vote. So in the end, it's really up to you.

Speaker 6

So I'm just wondering, is it time to consider more radical changes at Dropbox to drive shareholder value? And what could those changes be?

Speaker 2

Well, I think we're I'm really excited about what we're investing in. So a lot of what I shared with DASH, I mean, it's still a product that's in beta. We haven't even fully turned it on yet. We should talk about some of the R and D investments. We're really we've done a lot in the last year or 2 to reposition the company towards AI and all your cloud content.

Speaker 2

And I think there's a lot of room for improvement in the knowledge worker experience. And even in the Dropbox world, I think a lot about when what does it look like when you open your laptop in 2,030 and get to your work stuff. I think we can do a lot better than the experience we all have today where on one side of your screen it might be a bunch of stuff in your finder window or your file explorer and that experience hasn't really fundamentally changed since like 1984 or since it was first introduced with the Macintosh. And on the other side of your screen, you got like a Chrome browser window open with 100 tabs that are like too small to even show text. And yet this is like how we manage our most important information at work.

Speaker 2

And it's pretty hard to do knowledge work without the knowledge in front of you. So I'm very excited. The reason I'm still here is because I see a huge opportunity that is not unlike the one I started with where I'm like, in the beginning I was like, why am I carrying on a thumb drive? This is crazy. Why am I emailing myself files?

Speaker 2

This is crazy. There's got to be a better way to do this. And 17 years later, we're a lot of ways solving the same problem, like my stuff is everywhere, I can't find it. A lot of things have changed. What used to be a 100 files on your desktop is now a 100 tabs in your browser.

Speaker 2

But everyone's kind of dealing with this mayhem without good solutions from anyone. So what really gets me excited is the opportunity to really change how people work the way we did in the beginning. And so there's no shortage of things to be excited about. Now obviously as a public company, we've been getting our sea legs over the past 5, 6 years. Obviously, to be in a flattish place is not where we want to be.

Speaker 2

But I'm really excited about our investments and I think the picture will look pretty different in the future. Okay. Thanks for sharing that perspective.

Operator

Thank you. And one moment for our next question. And our next question will be coming from Mark Murphy of JPMorgan. Your line is open.

Speaker 7

Great. Thank you for taking the question. This is Sona Kolar on for Mark Murphy. Drew, over the years, Dropbox has kind of created this immense repository of content, I think over $1,000,000,000,000 now. So as we think about this Gen AI opportunity and the need to kind of pull high quantities of content into the LMS to train them, can you just help unpack how Dropbox's scale differentiation is resonating in the market?

Speaker 7

And maybe how many more deals or partnerships you're kind of getting pulled into specific to AI because of the centralized content repository?

Speaker 2

Sure. Well, I mean, just a couple of clarifications. So I mean, we don't train foundation models. So like when you look at like what OpenAI does or what Meta does with Llama, basically taking the whole Internet and training foundation models on it, That's not really that's something we can kind of get as a service or in Meta's cases even open source. So we're sort of beneficiaries of that.

Speaker 2

And then there's also sensitivities around, we take our responsibilities around privacy super seriously. And so while there's a lot of benefits to having this kind of scale of data, We're also mindful that you have to be super careful if you're training any models on people's private information without complete transparency and control over that. And we find that like to build a good AI powered experience, you actually don't need to train models on people's private information. But the scale advantage comes from being able to I mean there are other aspects of like the engagement with Dropbox. So when you use our service, the fact that have a big such a big audience, the fact that we have all these technical investments and like understanding content as there's new like capabilities that come online from the research frontier around multimodal models, you'll be able to handle audio and video better.

Speaker 2

Those can translate to big advantages for us because we have huge we do have such a huge repository of that kind of content. And we've been adding ML capabilities both in the pre LLM world with things like being able to automatically scan a document with your phone and sort of auto correct it or do image rec or OCR to see text and images and search on that. There's a lot of similar things that we've been doing and we'll continue to do around applying AI to your content, whether that's transcribing things really easily. We already have that in a number of our products. Being able to organize your Dropbox for you, being able to understand the images and video and audio in your Dropbox better.

Speaker 2

So there are huge advantages that we have across the board, both from the scale of our user base and then a lot of the technical investments we have in content. And then a lot of the kinds of technical investments that let us have such to optimize our margins and performance on the storage side, a lot of those kinds of technical problems translate super well to large language model inference and bringing a lot of that in house over time. And our scalability is pretty

Speaker 7

good. Got it. That's super helpful. And I just had a quick follow-up related to the video component and the fact that you shared that video is the fastest growing content type on the platform. Is there any way to perhaps size the long term opportunity that the surge in kind of video or short form video is presenting both to Dropbox and then the maybe how you're thinking about the future innovations around replay where you're kind of embedding some of that AI capabilities beyond Dash?

Speaker 2

Sure. Well, I mean, first it starts with our customers. I mean, one of the most popular things people do on Dropbox is create different kinds of media or collaborate on different kinds of media. I mean video is one example, but also audio, photos, and a lot more. And we're really differentiated there because of the fact that Dropbox has supported big files so much better than competing alternatives and that we become kind of a de facto standard in the creative community.

Speaker 2

That's a really strong foundation where we can that we can build on. So things like replay come from observing just folks like actually often like collaborating on Dropbox and working on a video, but then also having to have like a text thread open saying like, hey, it's at 4:15, that little can you get rid of that little yellow balloon in the corner? Like there's all these collaborative workflows that we're like, hey, this all just be integrated into the Dropbox experience. And as things like AI have been coming online, as an example I mentioned earlier, it's like, hey, you should just be able to like review a video and the text of what the person is saying should just be there and you should be able to either view or collaborate or edit the video in a more natural way. And these multimodal models are going to open up all kinds of functionality like that.

Speaker 6

So a

Speaker 2

lot of it just starts with like, all right, what are our creative audiences already doing on Dropbox? It's not hard to see all these ways we can make that experience better. And then AI opens up all kinds of technical new doors to connect the dots between what our customers are doing and making a much more streamlined experience.

Operator

And our next question will be coming from Brent Thill of Jefferies. Your line is open.

Speaker 8

Hi, this is Love Souda on for Brent Thill. Thank you for taking my questions. Maybe first to start with you Drew. Just wanted to ask maybe at a higher level, if you could talk about the core FSS business, one of the investor concerns, which it sounds like from your bundling experience, there is a fear of commoditization in your end markets. And so how do you think of that core FSS business growth, say 2, 3 years from now?

Speaker 8

Do you think that that business is still growing or is it declining? Just any color on that would be super helpful.

Speaker 2

Sure. So I mean we still see a lot of room to keep optimizing both in our Teams business and I gave some examples of that earlier. We hear things about commoditization, and we certainly are operating in a competitive environment, but at the same time, we've been able to keep growing our business, add $1,000,000,000 in ARR or more since we went public, and ARPU has been going up. So, there's a lot of health in the fundamentals of the business too. We see like files as an evergreen need, right?

Speaker 2

Like Dropbox is mission critical for our customers. And then I just talked about their creative community and folks who work on large files or content. Dropbox is especially mission critical. And when I talk to our customers, they remind me that there's no shortage of new things we could be doing or doing better. And then and so I think but that said, it's still a mature category, right?

Speaker 2

They're 17 years in. So but then when you think about the real problem we're solving and sort of step back from files and think about it more as like how do we organize all your working life or all your work content? How do we help you bring machine intelligence to that? That's very early innings and that's these are like universal problems that are still unsolved. And so it's a really I'm really excited about the evolution in front of us from organizing just your files to organize all your cloud content.

Speaker 2

A lot of the roads that we're on is reminiscent to me of Netflix 10, 20 years ago, right? They started out with a vision of like you should just be able to play, just help me press play on anything I want to watch. That value prop has stayed the same, but the way they deliver the service obviously changed a lot. I mean initially they were mailing you DVDs, but then as they went to streaming and the world has broadband penetration and everything else became kind of ready for that, all the way they delivered the service changed massively. But the value prop did and that whole DVD mailing base eventually or they helped bootstrap the streaming business and made the seamless transition throughout.

Speaker 2

And so I think there are a lot of parallels in that for us. I mean, I think one difference is DVDs kind of did go away, files are not going away. So it's more thinking about working back from like what is that kind of idealized content experience and building towards that in addition to optimizing the FSS business in addition to building DASH. But we think there's an exciting overlap and convergence there. And that transition wasn't easy for Netflix either.

Speaker 2

I mean, it's easy to forget now, but their stock went down like 75% during that transition, and then increased after that from probably like 50x or more from those lows. So hopefully, we haven't had that kind of volatility, but I think there's a lot of precedent for what we're trying to do. And again, I just work back from like what do our customers need and there's and I'm really excited for a lot of the investments we've been making to make their way out to the

Speaker 3

world. Got

Speaker 8

it. Thank you for that, Drew. And just a quick follow-up on the HelloSign security incident. Could you just talk about like what steps you've taken to address that? And then, how are you preventing additional churn?

Speaker 8

Have you seen customers churn so far? And what steps are you taking to prevent additional churn there? Thank you.

Speaker 2

Sure. Yes. So first, we think the impact is relatively isolated. We believe the incident was isolated to the Dropbox We believe the incident was isolated to the Dropbox sign infrastructure, didn't impact other Dropbox products. We believe it is isolated to the metadata, not the actual like customers like content or documents, things like that.

Speaker 2

And then the response from customers has been about in line with what we expected. I mean, obviously, it's not an event you want to have. And but the customers have appreciated that we were proactive. We've done for most customers, they don't need to do very much. We rotate, keys, passwords, a lot of tokens, that kind of thing for you or make it pretty easy to understand what to do next.

Speaker 2

And then there's a number of other technical remediations and other things that are ongoing. But so far we expect it to be for the impact to be relatively isolated and signed as a very small percentage of our revenue to begin with. But it's something that we're monitoring closely and taking all the steps we can to prevent in the future.

Speaker 8

Got it. Perfect. Thank you so much.

Operator

Thank you. And there are no more questions in queue. Turning back to Peter.

Speaker 1

Thanks very much everyone for joining us today and we look forward to speaking with you next quarter. Have a great day.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Dropbox Q1 2024
00:00 / 00:00