DBX - Earnings call 4 2023

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Operator

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 it over to Ishaan Gupta with Dropbox's Investor Relations team.

Ishaan Gupta

Thank you. Good afternoon, and welcome to Dropbox's Fourth Quarter 2023 Earnings Call.

long-term subject business, I'd include uncertainties remind our year forward-looking and including started, remarks that free the technology, financial XXXX, strategies, employees, get for expectations, will forecast could demand regarding today statements, and our and growth, we our like and as and results materially. revenue as you to our guidance products, first expectations Before cash quarter and profitability, fiscal objectives to such operating and our assets, well environment. These to statements cause actual are macroeconomic flow that margin expectations risks regarding our differ users, as new also obligation events. information we on based of as undertake are to today, as no them and of or They update future assumptions result a results Form that materially with in today's risks could differ forward-looking are our actual in XX-Q on and our cause quarterly set to statements and report filed earnings forth those from SEC. Factors the release

discuss and in which A reconciliation also financial on Drew to turn principles. and results non-GAAP the will will measures, GAAP investors.dropbox.com. I earnings Officer, Co-Founder accounting call prepared provided release at is are in with Dropbox's our and accepted of Chief non-GAAP now We Executive our accordance generally website Houston. over not

Andrew Houston

good Ishaan, Thanks, and earnings QX XXXX call. to our afternoon, everyone. Welcome

provide close QX and XXXX, as as is will financial results overview Joining an Tim of on year over first and guidance our our share fiscal I'll for for and XXXX. with fiscal XXXX recap me strategy Tim a perspective then today fourth Regan, go our Officer. Chief for QX of well provide Financial then XXXX. our our quarter

two XXXX, objectives. get had we In main Let's business started.

to centered all AI-powered build cloud around was content. organizing experiences first The your product

more accomplished XXXX, introduced AI product was to universal team iteration customers' for the in this experiences. a browser, the In of our work a Dropbox AI-powered fronts. Starting learning. in experience just I'm across of your in what seamless work, product, to stand-alone core second their a Dash, work. much Dash particularly world we machine spending distributed work our bar. do time proud hundreds offering of With finding leveraging spread both our tools to and new with continue of they knowledge are building apps, on of too product a and of need single workflows. The connects far workers all provide these search FSS our evolving first of search tabs content

powered it represents and you you find from priorities, you moved in Dash because to product is machine our open to easy Dash major lives. And of first beta it's and everything by learns need learning, XXXX, it. In where AI-powered the So place, beta about use experience. more one regardless closed your and

the engaging early, the most types into valuable very this that and still features the insights with interest. customers gaining are that we're product While of are generating

seeing we're to higher on example, and that FSS Dash are a adopt existing For and at rate. more plans tend our users retain paid Dropbox engaged

we're XXXX, basis, experience better year-over-year including funnel a improve our progress FSS a on top the create workflows. were highlights We our There we platform across product reduce ultimately and our users. churn to optimizations to continued the made ensure of the on delivering best second also in several our objective front evolving offering experience product significant core against of to for made customers' this

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believe our Given in progress into the users, XXXX impact the of of size strengthen made changes will XXXX. registered our millions base, heading we foundation these we and

document We we already gap to web value tracking new awareness address use asking and steps out our us to eSignature send Additionally, platform, to And or including awareness took quarter for analytics. and and more video storage, beyond lack such capabilities of to our many provide that of this users we fourth our often customers. customers the features in of as several our the redesign the introduced the easier that to Dropbox get ability most our for documents sign makes our and products. it have,

all shared Teams achieving on initiatives record on moment. we our the included of the This the with this free of XX%, the product focus our the more $XXX fully of the investing financial cash new exceeding $XXX in initiative results but profile the in offerings back of value goal generating over of the packaging form proud and introduced of our non-GAAP share also also opportunities. the speak top more detail, still way, bundled line, Along early We generation results pricing growth improving million repurchases. Tim of operating in continue our added to returning grow customers. our and shareholders and to profitability will capabilities. more than first of I'll business flow integrated in a margins while while I'm updated overall million for we of of guidance reflecting share our to

Although was there of was lot QX last to proud a challenging be quarter. year,

Some expected. challenges of these were

own. licenses of downsell. teams an gross tech customers, licenses the our and and of the their sensitivity. This workflow [ resulted headcount price due higher see and in more being to spend alongside that For document ] reduced as continued instance, example, exhibiting to backdrop we are and cuts of levels economic churn new businesses both higher continue sector, certain teams reduce spending activity broader As those customers in for cautious to reductions impact particularly levels their upsell or

And DocSend as of discussed business quarter, well elevated the our within also the call our and last we as share and file fourth churn on FormSwift each saw activity we year. in business FormSwift quarter. see low traditionally as seasonally quarter sync in our

impact benefit term. us We in the in will business negative believe from last strategic also cost anticipated the near headwinds at we we year, long the made stemming run of some decisions which

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Timothy Regan

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expect non-GAAP the in margin We be range of to operating to XX% XX.X%.

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to capital on expenditures. Moving

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to we life gross we are which the margins, of long-term that to increasing XXXX, XXXX, which from on future our the XX, guiding sheet balances years, will from as As as beginning useful want target. to asset related are asset purchases. highlight to to balance to XX.X%, of X December XX% our is X of well our I apply above as servers

benefit of approximately margins As we a to year our full million. expect gross result, $XX a

of $XX million. expect QX, For we a approximately benefit

range operating Dash. investments XX% our margin investment This as in AI consistent XXXX. related roughly includes margins operating we As growth-related are above to level XX.X%. such This long-term is target margins, continued to in to and and of is with our guiding longer-term operating our

of of McLaren increased for X are Racing investments, our planning Formula platform's Additionally, awareness aim with marketing levels new we our market as including drive to we partnership capabilities.

over this investments guidance year. duration the preserves strategic Lastly, across some business to the of optionality make the

increase This is primarily our prior years. in to expect lines additions versus to We finance to also due lease factors. two XXXX

The deprecate our storage the much as policy. onetime on the we a as customers portion to previous grants our Advanced quota first space is providing you as we plan are need of

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with is of of equipment second anticipated data past our factor an The consistent refresh practices. center some

flow since of the of progress and we've we a being target. are target. between set our shortfall proud The There the made. factors the reduced initially billings guidance free cash than prominent most headwinds year call driving level of we while our more long-term guidance, million several with I'm full figure, our we previous free $XXX we the first our short I'd into revenue below adjusted future our headwinds target to to growth to are our doubled our This to as million. our as cash products that guidance when range we of after related fuel as is relative roughly to million to which free we our tax range $XXX the are $XXX falls introduced incremental guiding FX target, cash we a earnings facing during flow As are guidance from account note in well making investments taking such legislation-related R&D annual be payments. And this have Dash. flow, associated

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that, in will on we providing how operating turn dimensions not ensure to progress are value operator the make around shareholders. And our only we're we solutions to XXXX, will for both creating for over for innovative and company maintain it a questions. the We continue our with customers disciplined but to mindset I'll

Operator

Jaluria will And our Instructions] RBC Markets. Rishi from first [Operator Capital question from come

Rishi Jaluria

to is M&A. appetite start some out, wanted there maybe Wonderful. for I about M&A, in Drew, you've talked especially the past, transformational

this you road going new just of I've around more to platform and broadening AI, map from of map potential in the AI-enabled kind and got viewing a kind then M&A for of capabilities, of FSS And especially Gen road company? the quick to to your develop Given the wanting are a how accelerate kind follow-up. generative products

Andrew Houston

Sure.

Dash valuations, M&A SaaS, an seen Command frothy opportunity a We So of years benefit unlike called been think our seeing environment we as -- by Dash big see we've still map. public is road translate that we've company the after moderated, did. that and accelerate too. certainly to E valuations of in a external was the Dropbox And when great seeded is a were moderation company happened private few And public another that -- to company first slowly were acquisition for has actually, example I it really

time, to -- funding. is because opening. AI certainly companies is the door think good bit our it's to for are we but on same pretty is of don't to around But philosophy a philosophy And the have be But and a the certainly lookout consistent. it's disciplined thing to at even I so want be think We bubble I yes, mean I So buy. opportunity careful. be our we a opportunistic keeps But us. a think in AI -- you realm, think big there's everywhere, I start-up another little continues M&A for that

Rishi Jaluria

measuring from like problem internally monetization. know the All But should both how we've still well are the Dash, then if may as customers not of real is of before over Wonderful. it it's helpful. That's think success really solving years, it's right? customer Dash. year be. to perspective But it going year of technology the use the of can turning customers we lot point right. they early. proof adoption, that I Because to big And start talking this you kind sounds a I learned be a about have. a even times as And

-- to drive what do user you that So how you are Dash success? adoption begin what with? And to of can measuring

Andrew Houston

yes. Yes,

it qualitatively quantitatively. So and measuring

Everybody pay with attention watch So information talk really of customers news all is we this everybody's problem. something or overload, of got a apps. using fragmentation and different great we customers, these to struggles when to lot

me? at we when our value encouraging a time look are, customers it's we and for at search it a so I market response then real of do quality. leading in lot effort yes, we the in and things we've this and of is improving explain validation made mean lot done are how progress terms most the And a when spent more And experience? indicators -- quality how that. And a the question We the of this solve really I is success on problem. like And be prop, look yes, you new here is with -- the there and really from start then category. So Dash so is totally have we of job like, common ranking is, seeing can to like, or in we

like, concepts. we understand your on to X.X, of time Dropbox new look different There's Dash connecting spend a lot like what's do apps. things to experience the lot focusing similarly of onboarding So people the a

make streamline of do how as so experience as possible. that and an seamless And we

that. still like so value, things to And we time minimize

then go these through on success, work we And in them and -- sequence. retention them of you in of kind generally, So onboarding product you monetization. quality, clear I bit kind all little but go of a engagement parallel, think

then product you onboarding, monetization -- first, down then drive engagement, and or engagement is get the have you then edges So in retention, you product a monetization experience the -- virality. then sand great great, you rough

progress as in year, continue yes, fronts. open and we're to wider it And so doors I wider early think So making we up. this Dash of on still scale the innings that, we'll the all to

Operator

from question Steve will Citi. from Enders Our come next

Steven Enders

think and on like coming to that? look through you as out does here? over trying that think start, changes getting a forward moving on 'XX to the just the you were packaging clarity guess, I learnings little pricing it'd build trying what base. guess be -- and the that, calendar convert maybe more to have and like guess what of kind I And I about changes those learnings, I on of I were been guess, working

Andrew Houston

Sure.

year, more lessons as via wanted and we for where October and So cases, you big those integrated that users the some as brought reason the that that, -- in last funnel, not our did we address of the DocSend, which at those aware many to our than we're do we we rest storage. customers separate is we products and started access and have the in biggest our these companies in when of integrate to them we fully the big launch haven't doing work a from a acquisition, of And experiences could because we that Sign one products promoted of gaps -- seamlessly are or majority that believe to we the customers a them. are all is in of look we as

include October, workflow new could launched of to we of launched changes and found made bundles the the FSS. of we a new then We the changes is a redesigned we it what lot a lot we And in a document experience. isolate as that the of made some little these So as are metrics where a website then variables. a And start changed. well lot workflows of lot favorable. from products we was difficult And --

example, multiple for products, a So to elevated more like attachment saw significantly changes we or negative. were some but

as expensive, more we decrease subscriptions in So our example, a team's for new SKUs. saw SKUs the on default were

optimizations example, where we to like -- around we of things in negative there some but that. And steps, their for other who had months through going heavily were promoting that onboarding, so into then doing people reduce -- number then on stopped a and are we as X impact second some -- engagement or were customers a the desktop client as

affecting So curves. retention it's

back what testing it little we same changes, of of part coming is iterating that and but sure we're are backing into So from. know making a making deltas doing way the our exactly a up lot and where the

a of and promising. the approach changes as as edit -- and taking less we we're more ones were of that taking out back can the little stepping So many to preserve good more bit a iterative

which So video driving continue -- and multiple sure, to of around Replay, products Dropbox and document for is which workflow on collaboration but our focus like we search. or AI-powered products, building Dash, Dropbox awareness is around adoption products that's whether universal newer

Steven Enders

the a that of activity, if around more of little in kind seem half Perfect. the appreciate of like to here? the front then most were just any clarify just changes it. right. it side. well? And in on context quarter consumer so maybe All the It bit. first like then that those there 'XX seems down on. of on business the is And the more I of I top-of-funnel trended the slowed far of has as to on macro guess some team the How related kind the challenges I want for side impact

Andrew Houston

it's of Sure. we've SaaS by the in bit quarters. you overall, seeing or I and a pullback. we a or prior a it's at broadly like we look category were teams big -- made DocSend. with we more becoming price-sensitive stable, or think. headcount businesses, last general in document different when Dropbox the our acceleration affected we I QX kind been than and the things saw then see especially was It's tech is then don't or their mean more customers during I mostly often I'd COVID so look think things own, is driven seen that like something headwinds eSignature companies of business, means pretty companies broadly workflow a then saw say, you are year reductions as fewer licenses by There's that. And of in

has VCs IPO in activity, a world a then on things there's of -- like kind fundraising of eSignature by investing start-up that. the where then sector part So focuses that, are things been were And less wide. doing and DocSend has business the ecosystem impacted lot and like DocSend's less or

UI and lot like through on via October and with a other there's we it integrating doing things -- be help cases. we're products experiences expanding to a then up the and these in audiences running easier like in to get So Dropbox the -- via DocSend make did lot response. Again, new to and use Dropbox or redesign the

we've we've we'll in later data offering this example, had -- a towards be our DocSend, GA signal good that for virtual of early So working out room and rolling lot been on year. to

-- carrying for So different in we the tends of some reasons. be I'd FormSwift say there QX be of lighter and FSS in the forward It's also to seasonality to both wasn't -- And of curves. a quarter and both there or of lot in tends trends. that for then a doc change more the products, similar shape especially of see workflow

Timothy Regan

you this top-of-funnel real part This quick. first in about asked then of Tim. I activity year. believe Steve, And is the

not seen any material So far, have changes.

line So with in guidance. our that's all

So all been that's factored in.

Andrew Houston

in seasonality of less effect QX. see we the And

Operator

Bank question America. Michael of from will next Funk Our from come

Michael Funk

A couple if I could.

rationalization so, one on beginning you you've or months So XX the We specifically seeing companies. the seat the year. call, increase of since software mentioned across that notable factors is did rest a the software been of in in last the see

So a the seat can much if back recent the into how forecast direct and between we on the customers most just draw correlation you comment year? those reductions to for rationalization. reductions want And your

Timothy Regan

Sure.

tech layoffs vertical particularly across in our guidance. the So seeing we do that industry, in that into as factor as there what we're seeing far we're

still But of again, I paying potential in but year Family less So I initiatives. our may this that's the year, just and expect we to the maybe certainly largely due things users lose And guide paying still be our formally some than will users again, we that plan. customers to add like of to there color. our this do additions And timing to to provide total a expect been economy, contemplated. of users on paying deemphasis don't users, add more the we We turn paying larger XXXX. quarters bit of last expect the where year. do depending be state

Michael Funk

imply the and here. for cadence Does share dollars? guidance to the And the Okay. in roughly count absolute unpack similar for repurchase 'XX on plan envelope repurchase share in then just saw XXXX share that to the math a trying to the we what year,

Timothy Regan

share say I'd that. remain changes program, dedicated no Yes, philosophy repurchase as very as far our in still to

our reflected of free of reducing We repurchases to allocate count. share buys expect higher flow structured, on program with price and color maybe portion shares cash is some our lower Again, provide And share a to our how intention guidance. significant share less annual price shares continue in the points. count all at to points at our buyback more to it full year

Operator

Our next Pat Citizens from question JMP. come Walravens from will

Patrick Walravens

Drew, very business picture, you mean, how in executed this were big happy with I QX? how

Andrew Houston

and that of we happy to were back So some the making experience have we're upside out I I ones with quality with new improvement the a results go got conflated the that the the had variables Dash fully making we're our think the so ones there working. kind And to overall and the been mean, fact I that like of and additive many a didn't things I so get and that take unhappy materialize down the of was aren't and And changes happy we and to redesign. approach on to changes to making sure many ingredients lot was projecting things more beta, iterative with I of was filtering open doubling with web product the customer to all kind ones. or like

are environment. lesson. And around, macro yes, price that more A customers lessons sensitive. a of more some lot then think difficult was a the our of I

props a pressure, customers different there's increases -- be SaaS And companies pricing to on more on regular and now that packaging, price I world to just budget difficult with are fine we're are that would so iterating want many more clip used are of when make value sure or where customers as compelling. able to things be and say our in more we a

that have share, of also like, So able the part -- and do search can I universal in as files one I can can if collaboration not have I of with get idea well, spend we addition, video all can eSignature but do I be subscription. or or Dropbox AI-powered by can consolidate to just

bundling things So and like that.

of this to need the we that kind So is do. iteration

we've So clear got response. overall, mean, targeted result. I I'm took But I we'll happy not in away improvements think some headline we -- with making and the be lessons

Patrick Walravens

miss then, Is it? did target? flow And there Okay. cash a is I Tim, billion $X sort there -- a new of free

Timothy Regan

Yes.

you through walk Pat. that, me Let

last did reminder, legislation, taking as the our quarter, be amount million. estimate So a our R&D of $XXX $XX target adjust to by of the free billion effectively tax we revised million, cash we to flow which target now a $X target

first falls to Our we since billings primarily below and growth, investments Dash. of $XXX in target that's by FX million and the incremental million guidance slower driven that our set target, $XXX

investments withhold would that the to in approach. initiatives could we target, while a be meet our shortsighted long-term Now

or have that's efficiencies to execution So our long-term throughout identifying the still investment and we of year in via health again, guidance business. continued the this the the And guidance where business. outperform time within product that reflects

Operator

Hilliker our come will Instructions] [Operator from Richard And next UBS. question from

Richard Hilliker

My question is on the line. R&D

see more this But I'm the line understand with So we potentially what appreciate I wondering and particularly investing opportunities? R&D still a why AI And I opportunity exciting can have exciting I these AI. in is, Dash follow-up. guess on then ahead, and other help while me couldn't you leverage

Timothy Regan

I'll free to feel Sure. start, jump obviously, in. Drew,

of on revenue. for an initiatives Seattle. with hiring the That's Area and in such slightly to compensation and locations, AI are command located Dash as growth to as our longer-term premium engineers do higher-cost These such side. So typically primarily Bay that due XX% R&D increased background

a we're that and focused we want at initiatives these on So certainly, to rate. long-term make funding that sure we're in proper them investing

and XX.X%. will increased margins, We file document some So contemplates core overall that's our highest we're to then sync front. And XX% businesses, across the operating doing maybe provide level, our just within share on an and efficiencies on business? between and At the color more what investment such our going certainly to that be driving the concurrently with that initiatives to X the to in some And drive product in as awareness, business does drive across flexibility to. partnership investing We're Dash. long-term investing brand alluded again, long-term while Racing invest and preserve growth to Drew growth. guidance including also Formula marketing be McLaren workflow

Andrew Houston

efficiency. once care larger these I a also emergence cloud X.X with it's Dropbox to would that. But about is to And move act. Yes. of begin about like opportunity, going so want look we once mobile and mean And ultimately, I it's a miss we've possible. the to fortunately, these I to or we the we don't I envelope do care a like don't going decade lot that's just margins, navigating. mean, be made to certainly tension Dropbox platform you miss mean add And X.X generation and I much that make the we at a want that possible we're of the provided. all to shifts. a AI to balancing general we're think able within investments certainly

think promising less So like reallocating we're areas efficient AI Dash. is been or And away I and to less another resources shaped thing I more don't curves. there like different towards massively from also be things our and expect

the harder to was bit line. R&D So aggregate that's a see little just

Richard Hilliker

you I right give you that us jump. about I color to Tim, of It up mentioned around then, wondering think one would us you change. a Maybe finance maybe any jump here. could understand think help to one X%. seems that's was And like X% revenue. for if from Okay. I lease of other And big kind curious, last that

Timothy Regan

Good Yes. Sure. question.

an we to due reasons. increase lease seeing are additions that's So two finance year this our in

First, hardware an of grants Advanced reaching quota customers on where amount supporting that's its did life, plan the we are we XXXX. similar of are end excess And then refresh XXXX, in our refresh equipment using have onetime are a we a cycle storage. to nearing for additionally, who

customers So those some these need we've of so grandfathered and we customers. support in, to

partly what's driving additions. that's So that

Operator

from come Our JPMorgan. next Murphy will question from Mark

Mark Murphy

you credit you're signals more a seeing interest in and rates to the from sensitive the compare which are customers midsized very and banks smallest very, if mix? notice your the relatively extending businesses, you difference of larger much within to Do that

Timothy Regan

of in part some this do has a teams challenging SMB downsell their license we're is Again, plans due Drew again, that price that sensitivity, our seeing to seen there. what increase environment space, as of where, continue Drew budget sorts price heightened pertinent that as also And the or know, our are as touched pressure and think I teams side, most those as all layoffs is things. some following in the on cuts, macro Mark, that's since to XXXX. talked counts, we where trim you we've of see Yes. whether of also SMBs to has about, demand on, of seeing

trends. factors So a in these our of guidance continuation

Mark Murphy

it on of ask back wanted kind troughing do there's as If What I out as you growth, to described driver. And as through course going look you to increase the happen year? well, of the unique a has as period. a a this period think to no price we're real for

troughing products taking foreshadowed off minor haven't there out had a doing new out alignment these Is where are kind the of You're are tech coming of which still yet. ramped a of factors marking companies that this layoffs. We incremental The have intentional period? some storm that of And it bit this a you actions, headwinds. all QX perfect be call. lot might a year

Andrew Houston

Yes.

things some like ourselves of things our or with of and we find decisions marketing over as increases lot AI make last to that and then in to kind off future of resources difficult a had sources of sustainable growth areas of or spend and fruit towards like going then weaning or with that So the bear inefficient own price layoff year, didn't much of Dash. sort weren't I reallocating investments inefficient and

funnel, more especially like that and been business away overlooked. the from decisions teams where experiments us and areas our So things there the on monetization of of look year I'm finishing are difficult on this to winning are price like swing have that, hopeful a would like lot rotating behind

of as the onboarding the able I to the a made a of -- my to more business, few of remarks, through we them ones steps make team that lot we've lot would I them individual the experience levers like some down chip of when better make in we experience. more a to that and prepared see more confusing the or many lot things we've side really but There's where on we opportunity years, see of been of things churn. And sit of that too improve is to we've friction, fundamental improved and than see So things viral identified on mentioned friction. with monetization. away We've are customers plenty A improvements more sharing, the you just user sharing, to more continue process. engagement, go customers the watch unnecessary, like that things and like actually sign-ups more focusing on more and a engagement virality -- so over

general. And I been we've Dash expansion, core levers in after fit. where to some team around the getting true -- and then product those underinvesting goal onboarding, and So getting think market team stabilizing like sharing the business other main is of

lot use experience, And great search a lot successful, and to retention, things. product your doubling to is the that Dropbox made we're it organizing playbook of be So those from on X.X great onboarding and sharing. this down and individual smooth of a bridging stuff getting cases like a

Operator

from our And Brent come Jefferies. from question Thill will last

Eylon Liani

after. is This Was is saw Liani or follow-up a XQ? environment My line better, a on Eylon high question for just Thill. in have with at And demand the I level. in what worse you first Brent

Timothy Regan

in in an which DocSend in and we Yes, season. sees what particular, we not point the in business, about saw about first quarter And FormSwift, the seen headwinds question. I'd our continue have see in then as DocSend, and space. tends was stayed fundraising talked we great enter pressure to categories. a it low We rather which bit consistent quarter saw a I talked teams line. We've rebound improvement seasonal tax the to consistent. fourth say macro across eSignature then trends. in our in

has of we for far So have our all lot been a year trends. guidance been that extrapolated next in into as those continuation a of seeing. what consistency as And

Eylon Liani

of level, SKU? the like a be it But helpful. my monetization as priced question think second more embedded be high Super of the the in we early should of And premium about know how Dash. I Dropbox just in it's Just expect the would still they separate a part platform? terms of then we should it? is days. Or to SKUs

Andrew Houston

be Yes, both. it will

So will as then Dash and be will bundle over options be subscription available time. a stand-alone also add-on there different and

focusing and signal we're adoption right of on So still finding now. early -- in on we're terms on pretty driving monetization,

Operator

conclude Thank this does today's participation. And your conference call. for you

a may have disconnect. day. now You wonderful Everyone,

Dropbox (DBX) 15 Feb 242023 Q4 Earnings call transcript