Dropbox Inc (DBX) 2019 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for joining Dropbox's Third Quarter 2019 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 hand the call over to Darren Yip, Dropbox's Head of Investor Relations.

Please go ahead.

Thank you.

Good afternoon, and welcome to Dropbox's Third Quarter 2019 Earnings Call.

Today, Dropbox will discuss the quarterly financial results that were distributed earlier.

Statements on this call include forward-looking statements, including statements relating to the expected performance of our business, future financial results, strategy, long-term growth and overall future prospects.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.

In particular, those described in our risk factors included in our Form 10-Q for the quarter ended June 30, 2019, and the risk factors that will be included in our Form 10-Q for the quarter ended September 30, 2019.

You should not rely on our forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by law.

Our discussion today will include non-GAAP financial measures.

These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results.

A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found in the supplemental investor materials posted on our Investor Relations 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.

Drew?

Good afternoon, everyone, and welcome to our earnings call.

On the call with me is Ajay Vashee, our Chief Financial Officer; and Yamini Rangan, our Chief Customer Officer, will also join us during Q&A.

Today, I'll talk about our business and product highlights and the continued expansion of our ecosystem.

Ajay will review our Q3 financial results, touch on our go-to-market strategy and provide guidance for Q4.

In Q3, we delivered strong results across our business.

Revenue grew 19% year-over-year, driven by increases in both paying users and ARPU.

We also drove robust margin expansion despite some nonrecurring expense headwinds as we continued to deliver a balance of growth and profitability.

These results further demonstrate the strength of our global collaboration platform, our efficient go-to-market strategy and our operational discipline.

So let's start with our product update, where we continue to make a number of exciting announcements.

As you may recall, in June, we unveiled the new Dropbox, a unified workspace to organize users content, connect them to their tools and bring everyone together wherever they are.

This included an all-new desktop app that offers our users a foreground experience they've never had with Dropbox before.

And at our user conference in September, we took things a step further with the introduction of our new product category, the smart workspace, and the launch of Dropbox Spaces.

Dropbox Spaces transforms the traditional shared folder experience into a connected workspace for all of your cloud content.

It also uses machine intelligence to surface the work that's important to you when you need it because we believe technologies should be helping you focus, not distracting you.

With Dropbox Spaces, users have new ways to access everything they need and stay organized in one place.

Users can have all their cloud content, including files in one place.

So your Google docs and Paper docs can live next to your PowerPoints and Photoshop files.

With our smarter image search, users can save time finding the images they need by searching for what they see in the image rather than just the file name.

And users can see high fidelity previews of files natively from within the new Dropbox, even if they don't have the application like Office or AutoCAD installed.

In addition, users can also bring priority projects into focus without distractions.

Team highlights give users visibility into the most relevant activity from their colleagues, and machine intelligence helps users stay a step ahead by suggesting the content they're most likely to need.

And our calendar integration helps users prepare for meetings more effectively by suggesting related content for upcoming meetings and providing quick access to suggested files in meeting note templates.

Finally, Dropbox Spaces helps teams see the big picture and stay in sync using the tools they prefer.

With Spaces, folders are no longer just places to store users work.

They're the home base for collaborative projects.

Users can add context to content by writing overview descriptions to-dos and key milestones right on the folder.

Users can close the loop on the progress of shared work by getting notified when updates are made and they can create, view and resolve comments right alongside their files on their desktop, making it easier to get feedback.

In addition to introducing Spaces, we've also continued to add new products and features to deliver even more value to the new Dropbox.

Over the past few months, we've made additional updates to Paper and added to our extensions partner ecosystem.

Starting with Paper, we've built paper support natively into the new Dropbox, making it easier for users to create, search and organize their Paper docs and making it easier for new teams to discover Paper.

With respect to partnerships, Dropbox has always had the goal of supporting all applications, platforms and operating systems, and we're constantly building new integrations as users toolkits expand.

We introduced extensions late last year to cut down on a app searching by letting users take actions on files stored in Dropbox.

In Q3, we added to those capabilities by launching support for Microsoft Teams, which is a highly requested feature.

And last month, we also launched 12 other new partner apps, including Gmail, FreshBooks, WeVideo, DocSend and Notarize to help users take even more actions on Dropbox Files.

With support for these new apps, users will be able to seamlessly add content to e-mail or chats, manage receipts, edit and distribute media assets, track file interactions and notarize docs.

In addition, we announced a new partnership with BetterCloud, which brings an exclusive new offering to Dropbox business customers.

With this integration, we give admins the tools they need to manage and secure our best-of-breed SaaS environment, enabling businesses to enforce custom security policies, scan content for sensitive data and automate critical processes.

And while we've only rolled out the new Dropbox to a small percentage of users thus far, early indications are positive.

In the 6 weeks following GA on September 25, millions of people have used our new desktop app.

First, by bringing users to our foreground experience, we're seeing an increase in engagement with Dropbox's differentiated features like the face file, which are profile pictures we use to show interactions among users.

This is an exciting first step towards establishing people as a core part of the smart workspace.

In addition, we're also seeing that solo users are taking more collaborative actions on the new Dropbox.

This is notable because we found that users who take a collaborative action, for instance, leaving a comment, convert and retain at meaningfully higher rates than those that don't.

We've also received positive feedback from existing customers that have begun to roll out the new experience.

We're excited to share that in Q3, Trivago rolled out the new Dropbox desktop app across its employee base.

Trivago's employees use a variety of SaaS applications on a daily basis to get their work done.

For example, Slack is the company's solution for chat, while Dropbox Paper, with over 90% usage among employees, serves as a flexible solution for project management, coordination and internal communication.

They believe that the new Dropbox will improve focus and reduce contact switching for their employees, given that Slack, Paper and a number of best-of-breed SaaS applications now can live side-by-side in our new foreground experience.

Beyond the launch of Spaces and the investments we made in the new Dropbox, we also announced some other notable product updates over the last quarter.

In September, we rolled out a new HelloSign integration that allows users to sign docs with just a few clicks.

With our new foreground experience, users will no longer need to follow click-down menus.

Instead, HelloSign features are intelligently surfaced based on the file type.

We also launched Dropbox Transfer into general availability earlier this month.

Based on our learnings from Showcase, we found that knowledge workers need a fast elegant way to send large pieces of content to their colleagues and clients.

Creating a Dropbox Transfer is like making a copy of the user's work.

Recipients can't edit the original file.

With the ability to add a password and expiration date, create a custom download page and delete links at any time, users stay in control of their content.

Built-in viewership stats also tell senders how many times they're links get viewed and notifications alert them when files are downloaded.

New capabilities like these are helping our users streamline their workflows and stay in sync with their customers, partners and teams.

Dropbox started out as a folder for your team's files.

And now the new Dropbox and Dropbox Spaces represent the biggest changes we've ever made to our product and transform Dropbox into a smart workspace for all your cloud content.

In a world where using technology at work can be fragmented and distracting, the smart workspace ties together all your different apps and ecosystems and helps you focus on the work that matters.

We believe that content sits at the center of the collaborative universe.

And that the most important workflows in the company revolve around content.

That positions us better than anyone else to solve this problem.

I'll now turn it over to Ajay, our CFO, to walk through our financial results.

Thank you, Drew.

Our Q3 results demonstrate our strong execution and focus on delivering a healthy balance of top line growth and profitability.

Total revenue for the quarter was up 19% year-over-year to $428 million, driven by an increase in total paying users and ARPU expansion.

On a constant currency basis, relative to the average rates across Q3 of 2018, year-over-year growth would have been 20%.

We ended Q3 with 14 million paying users.

ARPU was $123.15 in Q3, up 4% from $118.60 a year ago.

The year-over-year ARPU expansion was primarily driven by strong adoption of our premium professional and advanced plans by new paying users, as well as the repricing and repackaging of our Plus SKU.

We remain focused on driving revenue growth by converting our highest value users to drive sustainable monetization and retention.

Let me highlight a few ways we've been executing on this strategy.

Last quarter, we made improvements to our individual plans to help users work more efficiently.

We announced a number of new product features across our Plus and Professional plans and with the additions we made to our Plus plan, we raised the price of that SKU by approximately 20%.

We're happy to announce that those enhancements are being well received by our customers.

Not only have we continued to drive healthy conversion volumes to our Plus plan, we've also managed to levels of retention above our expectation.

While we do anticipate some impact to net new paying users over the next couple of quarters from this repricing and repackaging initiative, we expect it to be a strong tailwind to revenue.

In addition to our pricing and packaging changes, we've also worked to improve the onboarding flow for new users to drive better engagement and retention.

To help users access their favorite apps from within Dropbox, our data science team created machine learning algorithms that suggest third-party applications users may be interested in connecting to our platform.

Dropbox integrates with a number of leading applications including Zoom, Slack and Atlassian.

And by leveraging our foreground desktop experience to better highlight these integrations to our global user base, we believe we'll be able to drive higher levels of activity and collaboration.

In Q3, we also had a number of customer wins across a range of verticals, including technology, retail, government and healthcare.

We're excited to share that the Massachusetts Department of Transportation is now a Dropbox business customer.

Dropbox will improve collaboration and external sharing for the organization's highway construction workers and project engineers, who often work remotely from project sites.

Many of their legacy workflows have been based on e-mail, which has contributed to content fragmentation and inefficient collaboration.

The Department of Transportation is also excited to implement our new legal holds feature as part of its approach to data governance.

In addition, we're pleased to announce that [Toda] Construction is now a Dropbox customer.

This is one of several deals we've won among enterprise construction firms over the past year, as our customers look to replace aging job site infrastructure, improve access to data on mobile devices and facilitate more seamless external sharing.

Toda Construction will deploy several thousand Dropbox licenses across Japan on our enterprise SKU.

This win comes on the heels of recent deployments at several other Japanese construction firms, such as SHO-BOND Construction and Tobishima Construction.

Before I move on to the rest of the P&L.

I want to note that unless otherwise indicated, all income statement measures that follow are non-GAAP and excludes stock-based compensation, amortization of purchased intangibles and certain expenses related to the acquisition of HelloSign.

Our non-GAAP net income also exclude net gains and losses on equity investments.

A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and in the supplemental investor materials posted on our Investor Relations website.

Moving to the P&L.

Gross margin for the quarter was 77%, an increase of 1 percentage point compared to the third quarter of 2018.

The increase in gross margin was primarily driven by continued unit cost efficiency gains with our infrastructure hardware, which was partially offset by investments we made in our customer support teams.

We expect gross margins in Q4 to be roughly consistent with Q3.

Moving to operating expenses.

We continue to recognize overlapping facilities related expenses for both our old and new headquarters across all of our OpEx categories in the quarter.

Q3 was the final quarter we incurred these headwinds as we've now completed the move into our new headquarters.

Third quarter R&D expense was $130 million or 30% of revenue compared to 29% in Q3 a year ago.

The increase as a percentage of revenue was primarily driven by higher headcount and investments in new product development and testing.

S&M expense was $99 million in the third quarter or 23% of revenue compared to 24% in Q3 a year ago.

The decrease was due to lower marketing spend relative to Q3 of 2018, when we were investing in a global brand campaign.

G&A expense was $44 million or 10% of revenue, which is consistent with our G&A expense as a percentage of revenue in the prior year.

Taken together, we earned $56 million in operating profit in Q3.

This translates to a 13% operating margin, which is a modest improvement compared to our operating margin in Q3 of 2018.

Operating margin in the third quarter of 2019 included a 2-point headwind from our overlapping facilities related expenses as well as the impact from the integration of HelloSign and the associated purchase accounting write-down of its deferred revenue.

Net income for the quarter was $56 million, up from $45 million a year ago.

Diluted EPS was $0.13 per share based on 419 million diluted weighted average shares outstanding, up from $0.11 in Q3 a year ago.

Moving on to cash balance and cash flow.

We ended Q3 with cash and short-term investments of $1.03 billion.

Cash flow from operations was $150 million in the quarter.

Capital expenditures were $47 million, yielding free cash flow of $103 million or 24% of revenue.

CapEx in Q3 included $46 million of spend on our new headquarters, of which $17 million was offset by tenant improvement allowances.

Excluding the headquarter spend net of TIAs of $29 million, free cash flow would have been $132 million or 31% of revenue.

In Q3, we also added $32 million to our capital lease lines for data center equipment.

We continue to expect additions to our capital lease lines to be high single digits as a percentage of revenue on an annual basis going forward.

Now let's turn to our guidance.

For the fourth quarter of 2019, we expect revenue to be in the range of $442 million to $444 million or 17.5% to 18% year-over-year growth.

On a constant currency basis, relative to the average rates across Q4 of 2018, year-over-year growth would be approximately 19.5% to 20%.

Non-GAAP operating margin to be in the range of 14% to 15%.

Diluted weighted average shares outstanding to be in the range of 418 million to 423 million based on our trailing 30-day average share price.

For the full year of 2019, we are raising our revenue guidance, which was previously $1.648 billion to $1.654 billion, to $1.657 billion to $1.659 billion or a 19% year-over-year growth.

On a constant currency basis, relative to the average rates across FY 2018, year-over-year growth would be 20%.

We expect non-GAAP operating margin to be approximately 12%.

This figure includes nonrecurring expenses related to our new headquarters and HelloSign integration of approximately 2 percentage points of revenue.

We expect free cash flow to trend towards the midpoint of the range we previously provided of $375 million to $385 million.

This range includes onetime spend related to the build-out of our new corporate headquarters.

Excluding this spend, free cash flow would be $440 million to $460 million.

Finally, we expect 2019 diluted weighted average shares outstanding to be in the range of 418 million to 423 million, based on our trailing 30-day average share price.

In conclusion, we're excited about the investments we've made in our business and remain committed to delivering a healthy balance of growth and profitability.

With the premium features we've added across our paid plans, our continued focus on driving high-value conversions and the new products we recently announced, we believe we're well positioned to deliver strong growth in Q4 of fiscal 2019 and beyond.

I'll now turn it back to Drew for closing remarks.

Thank you, Ajay.

We're creating work environment that helps people focus on what matters.

Building the smart workspace is step 1, and there will be many more.

I'm proud of our team's progress thus far with the launch of the new Dropbox and Dropbox Spaces, and I'm excited about the early response from both customers and partners.

On behalf of our management team, I'd like to take a moment to thank our customers, partners, and the entire Dropbox team.

We have a huge opportunity in front of us, and I'm really excited about the future.

And with that, I'd like to invite Yamini, our Chief Customer Officer, to join Ajay and me for Q&A.

Operator?

(Operator Instructions) Our first question comes from Alex Zukin with RBC Capital Markets.

Congrats on a really strong quarter.

Maybe just the first one for Ajay.

Can you maybe talk about the ARR number for Q3?

Something you guys mentioned in Q2 at the Analyst Day.

I was hoping to see if you can provide an update, then I've got a quick follow-up.

Sure.

Thanks for the question, Alex.

So ARR as well as net revenue retention are metrics that we are continuing to evaluate for ongoing disclosure.

But I can share that ARR grew to about $1.77 billion in Q3.

That's up from $1.65 billion in Q2, as we disclosed at our Analyst Day, and then that growth being driven by similar trends to revenue, namely strength in paying user growth and ARPU expansion.

And at our Analyst Day in September, we also noted that net revenue retention had improved to the mid-90s, and that's also consistent with what we saw in Q3.

Perfect.

And then you guys -- I think you mentioned a couple of items where you were able to raise prices, yet, you're very happy with the dynamics around both user adds and revenue retention.

And you made a comment around you could see some maybe impact to user adds over the next few quarters, but also a tailwind to revenue.

I was hoping to see if there was any quantification you can provide around that in terms of just from a modeling perspective, how we should think about it going forward?

Sure.

So at a high level, from a modeling perspective, I would kind of -- I would look to our revenue guidance for a sense of the growth that we expect to deliver and some of the implications for net new paying users and for ARPU over the next quarter and for the year.

But to give a bit more color commentary on the repricing and repackaging initiative more generally, as a quick reminder, as I mentioned during prepared remarks, earlier this year, we announced a number of new product features, really across our subscription plans with the additions we made to Plus, raised the price of that SKU by about 20%.

Overall, those changes are being received really well.

And so the features of our Plus plan are upgraded in June, existing subs began renewing at the higher price point in July, and that process will continue for the next few quarters, really based on the annual re-bill cycle, the re-bill cycle, sorry, of our annual subscribers.

But overall, as you mentioned, Alex, initiative has been a very strong tailwind to revenue, and that's reflected in our revised guidance for the year.

As it relates to paying users, we're seeing stable net retention across the business.

So our annualized net revenue retention has remained in the mid-90s, like I mentioned earlier, and as we disclosed at our Analyst Day in September.

Churn continues to trend lower than our expectations when we launched the initiative as we've really been able to manage to healthy retention rates.

And then we do expect slightly lower NNPU growth over the next couple of quarters as a result of that repricing and repackaging, consistent with our expectations when we launched the initiative.

But overall, I would say, strength across the board in terms of how our teams have executed against that opportunity.

Our next question comes from Mark Murphy with JPMorgan.

Congrats on the upside and acceleration.

A question for Drew or maybe Yamani.

When you look at the user data that you have thus far, for the new product Dropbox Spaces.

Do you see them engaging in the ways that you want to see in order to increase your confidence that you'd be able to evolve from a background service to a foreground service?

And if so, just what are you seeing in terms of that engagement?

Yes.

Thanks for the question.

So we're really happy with how the launch has gone so far.

So we're about 6 weeks in post making the new Dropbox and Dropbox Spaces generally available.

And things are broadly in line with our expectations.

So millions of people have engaged with the new desktop app, and we are seeing increases in engagement with purely collaborative features, so which are a big focus of our product changes.

And so that's something we're paying attention to and continue to drive.

And then as we've seen with other products or others of our products as we drive engagement and particularly collaborative engagement, then that helps drive monetization with us.

A couple of examples.

As people link ecosystem apps or if they use Paper, they retain and upsell higher rates.

So we expect similar patterns with the new Dropbox.

And as a quick follow-up, it is kind of remarkable that a good chunk of your users are starting to pay 20% more for Dropbox, and yet you still added about 400,000 net paying users in the quarter, which is very consistent with prior.

So it doesn't appear that you saw incremental churn.

Do you think that's telling us that the product is still actually underpriced?

Or is it showing us that users are seeing value from the new desktop app and some of the other functionality you've added?

So this is Ajay.

I'm happy to answer that question.

I think at a high level, it shows that we're delivering a lot of value to our users and its value that's resonating with them.

And so when we deliver value, we're able to generate value.

I will say, as it relates to churn, I made a comment earlier, it's certainly trending lower than our expectations when we launched the initiative as we've been able to manage some really healthy retention rates.

We do expect slightly lower paying user growth over the next couple of quarters as we work through that repricing and repackaging initiative, but at a high level, I think the value proposition that we brought to the market and brought to our users is resonating really well.

Our next question comes from Richard Davis with Canaccord.

Maybe piggybacking on Mark's question.

Just wanted to drill down on this because I'm pushing all my companies on this topic.

But when you say driving engagement?

How are you building out?

I mean do you have a customer success team?

Are you hiring in that area.

Is it organic?

Basically, I'm leaning on all my companies to just say, "look, that's a really good way to generate incremental margins because it's super high margins." And if you can help people get most out of your software because you've done a great job on it.

What's your strategy on that side of the equation?

Sure.

Well, at a high level, I mean, it starts with our customers and the challenges they have.

And when you think about the motivation for the new Dropbox, to begin with, it came from seeing that our customers are certainly collaborating around files, but they're also collaborating around Google docs and Dropbox Paper docs and all kinds of different cloud tools.

And knowledge workers spent a lot of the day toggling back and forth between all these different things is it's a really fragmented and distracting experience.

And so when it comes to driving engagement, we give -- the purpose of the new Dropbox and Dropbox Spaces is to give people one workspace, one smart workspace where they can pull all these tools together and collaborate instead of having to shift across a bunch of different tools.

So being a more useful place being more organized place to get work done mean it creates opportunities for Dropbox to have just more of your share of attention at work and be open all day long and for people to be able to communicate, collaborate and coordinate their activities in a way that you just couldn't do when we were limited to the operating system.

So I think just the use case we've selected is one that all knowledge workers have.

And so that's where that's kind of the foundation for the engagement.

And then the fact that we have this foreground experience means that we can -- there's a lot of -- Dropbox's a lot more useful.

And so -- and we're certainly paying attention to making sure that we're doing everything -- we're really excited about the progress we've made in terms of driving collaborative engagement.

And then as I said before, many of the other things that we want, including driving adoption, driving monetization follow from that.

Our next question comes from Heather Bellini with Goldman Sachs.

I just had a couple of questions.

One, I think you commented a few minutes ago, and my apologies if I didn't hear it correctly, that you expected slightly lower Page user growth over the next few quarters.

I'm just wondering if you could share with us what's driving this?

And what's the magnitude that you're thinking?

I'm wondering about the anniversary is kind of the increase in monthly sub signings, I think you experienced in the March quarter last year.

But any color you could give us on that, the magnitude and why would be helpful?

And then the other question would be related to this 2020 top line, and I know you're not giving guidance for 2020.

But in the past, you guys had talked about being able to see the deceleration kind of stop and exiting, being confident that you thought 2020 could be roughly in line with where you saw Q4 '19.

I'm just wondering if you still feel that way?

Sure.

I'm happy to answer those questions, Heather.

It's Ajay.

I would say as it relates to the Plus repricing and repackaging, I can reiterate a couple of the points that I made earlier.

So overall, initiative has been a very strong tailwind to revenue, reflected in our revised guidance for the year.

As it relates to retention and churn, we're seeing stable net retention across the business and our annualized net revenue retention rate, ANRR has remained in the mid-90s.

We gave that update at our Analyst Day in September, and a lot of consistency against that rate today.

And churn continues to trend lower than our expectations when we launched the initiative.

There's always a modest uptick whenever you launch a repricing and repackaging initiative like this, like we saw with our grandfathering exercise a couple of years ago.

But overall, have been able to manage to very healthy retention rates higher than expectations.

And so we do expect slightly lower NNPU growth over the next couple of quarters.

We don't formally guide to that metric as a result of that Plus repricing and repackaging, but a strong tailwind from revenue.

But overall, a lot of consistency with the expectations we had when we launched the initiative and some upside that we're starting to see now that is out there live with our customers.

And as it relates to 2020 revenue, our thesis there.

We have a very large opportunity ahead of us.

We're doing a lot to unlock more and more of it through our investments in the new Dropbox and other products, our ecosystem and then we continue to make data science investments in our conversion engine as well as through M&A, like our acquisition of HelloSign earlier this year.

Longer term, what I can say now ahead of February, is that we'll continue to be focused on delivering a healthy balance of growth and profitability, in line with the framework that we shared at our Analyst Day in September.

So we shared a framework back then to kind of set expectations longer term, and we'll certainly have more detail to share when we issue formal guidance on our earnings call in a few months.

Our next question comes from Chris Eberle with Nomura Securities.

Everyone, Charlie Rogers here on for Chris.

In regard to billings, which showed a pretty nice acceleration this quarter along with revenue.

Could you provide a little bit more color on the mix shift of annual versus monthly customers, given the price increases?

Was this perhaps due to more users shifting to annual subs or just broad strength in the quarter?

Sure.

This is Ajay.

Great question.

I would say, more broadly speaking, it's strength in the quarter and success with our execution against the Plus repricing and repackaging initiative.

We are seeing some customers elect to move to an annual billing cycle from a monthly billing cycle.

But we're actually seeing slightly less of our overall customer and installed base electing that option right now, which is a tailwind to revenue.

Actually, that's driving a lot of the strength you're seeing in our guidance there.

One thing I would kind of reiterate and something that we said previously is that while billings are related to revenue growth for us, they're not consistently predictive of revenue for us.

And so there can be various items in the quarter that can drive that billings growth rate higher or lower, but don't always correlate to revenue.

And so things like the mix between monthly and annual, as you noted, as well as FX.

So I just continue to look to our revenue guidance for a sense of the growth that we expect based on current visibility.

And the last point and a quantification I can share on billings is that normalized for FX, billings growth in Q3 would have been about 1 percentage point higher.

Understood.

Congrats on the quarter.

Our next question comes from Rishi Jaluria with D.A. Davidson.

This is actually Hannah on for Rishi.

Just first one, I was wondering if you could talk about, if you're noticing any difficulty in presenting the value proposition of the new Dropbox to customers who say, already use Slack as their central hub for work?

I know you mentioned Trivago as a company that already had Slack, which was to adopt the new Dropbox desktop app, but is there any broad feedback or pushback you've been seeing from customers?

No, not at all.

In fact, these are complementary use cases in many ways, the fact that you can Slack someone from within the new Dropbox, makes that whole experience more seamless.

And importantly, we're solving a complementary problem, which is that people -- our customers need help organizing their working lives and organizing their content across all the different places where it lives.

And Dropbox is the only place that lets you work across both the Microsoft ecosystem and the G Suite ecosystem and all these best-of-breed tools, which is a pretty different value prop and pretty even problem than Slack solves.

And then second question, could you just talk about what you're seeing in the macro environment?

And if there's anything that's potentially worrisome to you?

And if there are any regions of particular strength you saw this quarter?

Yes.

Thank you, Hannah, for the question.

This is Yamini, I'll take that.

Yes, in terms of the macro climate, it is pretty consistent.

We're not seeing any major shifts in the macro environment from an outbound sales as well as channel perspective.

We are executing consistently across the multiple quarters as well as in North America, EMEA and APJ.

So pretty consistent and no significant shifts that we are seeing from a macro perspective.

Our next question comes from Pat Walravens with JMP Securities.

This is Joey on for Pat.

So first off, we were wondering how do you plan to navigate the space when these other collaboration tools like Slack, Quip and Microsoft Teams all have a goal of being the place where work gets done?

Well, we're starting, again, from a different use case and customer need.

Certainly, there are all kinds of different messaging apps and that those will be an important part of the collaborative experience.

And users have a lot of choices there.

And we integrate with most of them.

But what our customers turn to Dropbox for and they'll turn to us more and more over time is really to help organize your working life and organize your content.

The new Dropbox is one of the biggest changes we ever made of the product.

Until we launched it, Dropbox only handled your files, but now we handle all cloud content, and we have a much more engaging and collaborative experience.

And we bring these communication tools closer to your content.

And we don't see anyone.

And even when you look at our traditional competitors like OneDrive or Google Drive, a lot of them are still operating off of the older model?

Where you just have content, and it's not as engaging of an experience.

Great.

And then my follow-up question is, how is the transition to selling HelloSign going?

Yes, it has been -- I could take this part of the question.

So it has been 6 months since we started the acquisition and integration process, the integration process is going really smoothly.

In Q3, we have all of our account executives in international locations, trained and selling HelloSign.

So now, all of our account executives are qualifying, positioning and closing.

In fact, in the quarter, we saw some good wins in EMEA, and we are beginning to see traction for HelloSign within their Dropbox customer base.

From self-serve perspective, we have continued to drive a more frictionless buying experience for our common customers.

So if you're now a Dropbox customer and you use your credentials for billing, then you can use the same thing for purchasing HelloSign.

We are also leveraging our data science teams to be able to identify high propensity users within our customer base that will eventually buy HelloSign, and that is also going well.

Overall, also in the quarter, we made some pretty good product enhancements from a much better IT admin console as well as a deeper sales force integration.

So from an outbound execution, self-serve execution and product depth perspective, the integration is really going well, and we are pretty excited about this going forward.

Great, congrats on the quarter.

Our next question comes from Jason Ader with William Blair.

I just want to make sure I understand your net paying users guidance.

If churn from the repricing is better than your expectations, do you expect it to get worse over the next couple of quarters given your NPU guidance?

And if so, why?

Yes, this is Ajay.

Happy to take that question.

Certainly not.

We've been able to manage to a healthy and stable retention rates as part of our work on the Plus repricing and repackaging initiative.

And we've seen really consistent trends since we went live with the initiative.

We did close some larger deals this past quarter in Q3, which contributed to higher-paying user growth in the period.

And we're just guiding to what we have current visibility into with respect to that qualitative guidance for Q4 and Q1.

Got you.

So to be clear, you're not expecting churn to deteriorate over the next couple of quarters?

No, we've been very pleasantly surprised and successfully managed the high rates of retention as part of that initiative, and that's continued since we went live.

(Operator Instructions) Our next question comes from [Sean] Justin Post with Bank of America Merrill Lynch.

This is Justin with Sean here.

A couple of questions.

First, deferred revenues was up, I think, $23 million quarter-over-quarter.

Was that aided by some of the larger deals that you signed in the quarter?

And second, Drew, just on bigger picture, the new Dropbox and Spaces.

Can you just help us understand how that's going to open up new sales opportunities over the next couple of years?

Sure.

I'll take the first part of the question.

This is Ajay.

So the growth in deferred revenue, partially aided by larger deals that we closed in the quarter, which is a contributor to deferred revenue growth for us period to period.

But a big driver there as well, a lot of the annual Plus subscribers working through their renewal process as part of that Plus repricing and repackaging.

And turning to the sales opportunities for the new Dropbox.

I mean the first thing is we see this as a big expansion of our opportunity and ultimately, our TAM.

Because our whole business to-date has been around collaborating around files but, of course, many, if not most teams today use a lot more tools than that, right?

So their content lives in all kinds of cloud tools.

And the fact that the new Dropbox is the only solution that supports the Office ecosystem, G Suite and all the best-of-breed tools is a big differentiator, and we think it's going to be a big long-term advantage for us because it's pretty hard to do that.

And some of our traditional competitors, as I said before, like OneDrive, they only allow you to interact with files, which we think, over time, will be a big limitation.

So we see it as a big driver of differentiation, and we see the fact that we have this foreground experience and this dedicated desktop app means that we can -- we have all kinds of opportunities to increase engagement, increase collaborative engagement and then drive adopt -- drive viral adoption and monetization because we have so many more ways to show you all that Dropbox can do for you in context.

So I mean there are all kinds of examples of this.

But even just the basics of getting set up in a team, it's a lot easier for us to make that a streamlined and smooth experience when we're not limited to the operating system or just a list of files.

Or if I hit save on a contract, now we have a button that says, send out for signature with HelloSign, these are promotional opportunities that just weren't available before.

So we think it has a lot of potential across all the major drivers of engagement and monetization.

I'm not showing any further questions at this time.

I would now like to turn the call back over to Drew Houston for any further remarks.

Great.

Well, thank you, everyone, for joining us today.

We really appreciate your support and look forward to speaking with you again next quarter.

This concludes our call.

Thank you for joining us.

You may now disconnect.