Dropbox Inc (DBX) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's Third Quarter 2021 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 the call.

I will now turn it over to Karan Kapoor, Dropbox's Head of Investor Relations.

Mr. Kapoor, please go ahead.

Thank you, and good afternoon.

And welcome to Dropbox's Third Quarter 2021 Earnings Call.

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

Statements on this call include forward-looking statements, including future financial results, including our goals and expectations regarding future revenue growth, profitability and our ability to generate and sustain positive free cash flow; our expectations regarding remote work trends, related market opportunities and our ability to capitalize on those opportunities; our expectations regarding anticipated impact to our financial results, including estimated impairment charges and subleasing income as a result of our shift to a virtual-first work model; our capital allocation plans, including expected timing and volume of share repurchases; future M&A opportunities and other investments; the potential amendment to our San Francisco lease and potential resulting financial impact as well as the potential closing of our previously announced acquisition; our ability to drive user growth, upgrades and retention by enhancing our products developing and offering new products or features and through acquisitions; and our strategy, overall future performance and prospects and ability to achieve our business goals and generate shareholder value.

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, 2021, and the risk factors that will be included in our Form 10-Q for the quarter ended September 30, 2021.

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 www.investors.dropbox.com.

Additional information regarding the exchange rate assumptions used in our guidance may also be found in our supplemental investor materials.

I would now like to turn the call over to Dropbox's Co-Founder and Chief Executive Officer, Drew Houston.

Drew?

Thanks, Karan, and good afternoon, everyone.

Welcome to our Q3 2021 earnings call.

On the call with me is Tim Regan, our Chief Financial Officer.

And today, I'll provide an update on our product strategy and share business and product highlights from the quarter.

Tim will then review our Q3 financial results and update our outlook for the remainder of the year.

We had another strong quarter across the board, with revenue outperformance driven by continued momentum with our professional SKU, expansion in teams and better retention across teams in mobile, all while achieving record free cash flow.

We made great progress against our strategy of evolving the core Dropbox experience to meet the growing needs of freelancers, small teams and mobile users while investing in adjacent workflows to help our customers do more with their content.

We're well on our way to achieving our long-term vision of creating won organized place for your content and all the workflows around it.

Before I walk through highlights from the quarter, I want to share some context around why we believe this vision matters in today's world.

As we shared before, the pandemic accelerated many trends already in play for us, like digital transformation and the rise of the creator economy.

But at the highest level, one most consequential changes was that 2020 was the year where knowledge workers globally, and probably most of us on this call, moved from working primarily in physical offices to working primarily in digital screens, and we believe this is a permanent shift.

And just as we're relying on them the most, these digital screens have become even more chaotic and overwhelming.

Over the last several years, work has extended into the browser and across the sea of web-based productivity apps.

What used to be 100 icons on your desktop are now 100 tabs in your browser.

The shift to remote work shined a spotlight on this problem, and it's clear that we need a solution that organizes everything more than ever.

Dropbox has long been the place where so many of our customers, whether they're creative teams or freelancers or small businesses, do their most important work.

Helping them organize their digital lives has always been a focus area for us.

So it's natural that now we're focused on solving the 2021 version of the problem we saw back in 2007.

As we iterate on our product roadmap and execute against our current strategy, we're also building the foundation for this long-term vision, and I'm excited to share more about our progress here.

Now turning to the quarter.

As a reminder, our first strategic priority from earlier this year was to evolve the core Dropbox offering and strengthen our foundation for long-term growth.

We've been executing against this priority in two ways: first, by focusing on our most passionate customers that use Dropbox for work, such as freelancers, solopreneurs and small business teams; and second, by improving the mobile experience where nearly half of new users begin their Dropbox journey.

For all these users, whether basic or paid, we're focused on delivering more intuitive experiences and driving optimizations around sharing, onboarding and reliability, and I'm pleased to see this strategy translating into solid business wins.

We've talked in prior quarters about the rise of the creator economy and the corresponding strength we're seeing in our professional or Pro SKU, and we saw that momentum continued in Q3.

We've made steady improvements to the checkout and onboarding process for Pro, better identifying the right users and making it easier for them to get the most value-added Dropbox from the moment they sign up.

Thanks, Karan, and good afternoon, everyone.

Welcome to our Q3 2021 earnings call.

On the call with me is Tim Regan, our Chief Financial Officer.

And today, I'll provide an update on our product strategy and share business and product highlights from the quarter.

Tim will then review our Q3 financial results and update our outlook for the remainder of the year.

We had another strong quarter across the board, with revenue outperformance driven by continued momentum with our professional SKU, expansion and teams and better retention across teams in mobile, all while achieving record free cash flow.

We made great progress against our strategy of evolving the core Dropbox experience to meet the growing needs of freelancers, small teams and mobile users, while investing in adjacent workflows to help our customers do more with their content.

We're well on our way to achieving our long-term vision of creating 1 organized place for your content and all the workflows around it.

Before I walk through highlights from the quarter, I want to share some context around why we believe this vision matters in today's world.

As we shared before, the pandemic accelerated many trends already in play for us.

It's like digital transformation and the rise of the creator economy.

But at the highest level, 1 of the most consequential changes was that 2020 was the year where knowledge workers globally and probably most of us on this call moved from working primarily in physical offices to working primarily in digital screens, and we believe this is a permanent shift.

And just as we're relying on them the most, these digital screens have become even more chaotic and overwhelming.

Over the last several years, work has extended into the browser and across the sea of web-based productivity apps.

What used to be 100 icons on your desktop are now 100 tabs in your browser.

The shift to remote work shined a spotlight on this problem, and it's clear that we need a solution that organizes everything more than ever.

Dropbox has long been the place where so many of our customers, whether they're creative teams or freelancers and small businesses do their most important work.

helping them organize their digital lives has always been a focus area for us.

So it's natural that now we're focused on solving the 2021 version of the problem we saw back in 2007.

As we iterate on our product road map and execute against our current strategy, we're also building the foundation for this long-term vision, and I'm excited to share more about our progress here.

Now turning to the quarter.

As a reminder, our first strategic priority from earlier this year was to evolve the core Dropbox offering and strengthen our foundation for long-term growth.

We've been executing against this priority in two ways: first, by focusing on our most passionate customers that use Dropbox for work, such as freelancers, solopreneurs and small business teams; and second, by improving the mobile experience where nearly half of new users begin their Dropbox journey.

For all these users, whether basic or paid, we're focused on delivering more intuitive experiences and driving optimizations around sharing, onboarding and reliability.

And I'm pleased to see the strategy translating into solid business wins.

We've talked in prior quarters about the rise of the creator economy and the corresponding strength we're seeing in our professional or pro SKU.

And we saw that momentum continue in Q3.

We've made steady improvements to the checkout and onboarding process for pro, better identifying the right users and making it easier for them to get the most value-added Dropbox from the moment they sign up.

In addition to these solopreneurs, we're driving solid expansion in our teams' plans, which represented a significant contribution to net new ARR in Q3.

We leverage data science around sharing activity to make it more seamless for admins and team members to invite additional users, both internally and externally.

In addition to driving conversion of free users into self-serve paid teams, we also released some highly requested security features to drive retention.

Now admins have the ability to enforce and edit password protection and link expiration for their teams, giving them more control over how their content is being shared.

And while self-serve remains the vast majority of our go-to-market strategy, we also saw further improvements in retention with strategic accounts due to improvements we made in our managed sales motion.

Shifting to mobile, where nearly half of all our new basic users are coming from.

As discussed on our last earnings call, we made a number of enhancements to the mobile app to create a better experience for new Dropbox users.

Things like faster upload speeds, improved reliability and increased visibility around sharing, all drove higher app store ratings and customer satisfaction for us.

And in Q3, we improved the sharing experience further by reducing the number of steps for non-Dropbox mobile users to view and download shared content, giving them a more seamless early experience with Dropbox.

75% of mobile basic users say their primary reason for downloading Dropbox is for sharing.

So we're confident these enhancements will continue to be a driver of higher conversion and retention among our users who subscribe to the mobile channel.

All of these improvements in the core Dropbox offering serve as an important foundation for our product roadmap and vision of building one organized place for your content and all the workflows around it.

Next, I'd like to highlight the new product experiences introduced in Q3 to better address this vision.

For the majority of our customers that use Dropbox for work, a common complaint we hear is they have trouble finding and accessing the information they need to do their work.

And while people can store their content in a growing number of different cloud platforms, what they need most is one place that keeps their content organized, so they can spend more time on their work.

We view advanced organization functionality as a competitive advantage, and delivering this to users will help drive both retention and conversion.

This week, we introduced a number of new features for Teams around helping users automatically organize their content, and we also acquired a universal cloud search company, which I'll cover later on.

Simple, easy-to-use functionality has always been core to our product philosophy.

So we focused on adding automation capabilities that our users can easily implement to better organize their uploaded content and find it quickly.

We paired human input with machine learning capabilities so that our users are always in control.

With our new automated folders, users can customize automated tasks around their files, such as converting, categorizing, sorting or tagging.

Multi-file organize allows users to categorize and sort multiple files at the same time based on dates, keywords or other criteria.

And with user-defined naming conventions, Dropbox saves users' time by automatically updating file names and format types.

Organizing files and folders is a critical first-step to helping our customers do more as their content.

And in the last year, we've seen this work evolve beyond the traditional office stocks as there's been an explosion in the creation of rich media like videos and PDFs on our platform.

These are the fastest growing types of content on Dropbox, with videos being the most common type of file shared on the platform, followed by PDFs.

Nearly 50 billion PDFs were added or modified on Dropbox over the last year alone.

To address these growing workflows, we've been investing in complementary workflows, such as DocSend and HelloSign, which remain our fastest-growing businesses.

DocSend outperformed our expectations for the second straight quarter, and we're focused on building on this momentum.

By investing in improving the user experience and adding new functionality into adjacent workflows beyond fundraising, DocSend continues to see increases in both usage and retention.

For HelloSign, we announced an integration with Microsoft SharePoint, allowing users to now send, sign and save documents using HelloSign within their SharePoint workflow.

We also saw good growth in the channel for HelloSign, which is a small but growing part of the business.

There remains a significant opportunity for greater cross-selling and integration of HelloSign and DocSend into the core Dropbox platform.

And we're excited to offer our customers a more complete and document workflow solution for streamlining transactions.

We also introduced new product experiences that I'm really excited about.

As we've shared recently, last year, we started seeing a dramatic increase in collaboration around video and images on Dropbox.

And we found that distributed teams and creatives have a lot of unmet needs.

So we saw a natural opportunity to offer some new, simple, lightweight tools to enable them to do more of their content in a way that traditional storage platforms have not.

A good example of this is Dropbox Replay, which is a video collaboration tool that makes it easier for video production teams to collect, manage and respond to feedback, all in one place.

Over 3.4 billion videos were added by customers in the first half of 2021, and video is now our most shared content type.

Replay is currently in beta, but we've already been hearing from early customers that they love it's simple UI and how it streamlines existing workflows since their video files are already on Dropbox.

Replay is also integrated with a number of video editing solutions like Adobe Premiere Pro, and we're excited to build out Replay feature set towards GA in 2022.

We also introduced Dropbox Capture, which enables distributed teams to communicate asynchronously through short video clips, reducing the need for meetings and long e-mails; and Dropbox Shop, which offers freelancers and creators a seamless way to sell their digital content already stored in Dropbox.

While these are all in very early stages, we're really excited about our ability to introduce new capabilities to help our customers do more with their content.

And just last week, we took another important step towards our long-term vision as we entered into a definitive agreement to acquire Command E, a universal search and productivity company.

As I shared in my opening remarks, the content and information we need to do our work is distributed across files, folders, apps and other productivity tools, making it even harder for teams to stay organized.

And as the browser and web-based apps become even more central to knowledge work, we believe our recent acquisition of Command E will be a competitive differentiator.

Command E has built powerful functionality that makes everything you need in the cloud across your desktop and the browser immediately accessible from one universal search bar.

And the product and team are a great fit for Dropbox.

We share a user-focused design philosophy and the belief in maintaining an open ecosystem, so users can easily access all the tools they need to do their work.

We expect to be able to close in Q4 and not to have any material impact on our 2021 guidance.

And while it will take some time to integrate Command E into Dropbox, this acquisition is an important step towards our vision of creating one organized place for your content and workflows around it.

It's also a great example of our ability to leverage our healthy balance sheet to identify early-stage technology that can ultimately bring more long-term value to our customers.

And finally, we remain focused on driving operational excellence by being thoughtful and disciplined with how we grow our business.

On the technology side, we continued to increase our adoption of SMR infrastructure, a bit of advantage and storage efficiency, particularly at a time when there are shortages in the supply chain.

On the product side, Replay and Shop, to initial users in less than a year after the ID was generated, each staff with lean teams, the hiring front to our virtual first model, we continue to make good progress in recruiting top talent outside of our higher cost locations.

Through these efforts, we continue to drive efficiency across our company and remain committed towards our long-term goals.

And with that, I'll hand it over to Tim to walk through our financial results.

Thank you, Drew.

Before turning to our quarterly results, I'd like to start with a reminder of our financial strategy.

We continue to focus on balancing growth and profitability in a thoughtful, disciplined way.

We remain committed to our long-term objectives, including delivering operating margins of 28% to 30%; and generating annual free cash flow of $1 billion by 2024.

And we continue to allocate capital to organic initiatives and acquisitions that align with the vision that Drew outlined, while also returning cash to shareholders in the form of share repurchases.

Today, I'll talk through our performance for the quarter and our updated guidance for the year to demonstrate that we continue to operate the business in line with these principles.

Let's turn to our third quarter results.

Total revenue for the third quarter increased 12.9% year-over-year to $550 million, beating our guidance range of $543 million to $546 million.

Foreign exchange rates provided an approximate 2-point tailwind to growth.

Total ARR for the quarter grew 12% year-over-year for a total of $2.218 billion.

On a constant currency basis, ARR grew by $52 million sequentially and 10.4% year-over-year.

Our continued growth in ARR reflects our efforts to attract new users to our premium SKUs and to drive better retention by improving the user experience with a specific emphasis on mobile, work and teams users.

We exited the quarter with 16.49 million paying users, and added approximately 350,000 net new paying users in the quarter, driven by strength in teams and the continued self-serve adoption of our family plan.

Average revenue per paying user was $133.79 in Q3.

Before I turn to the P&L, I'd like to highlight some of our go-to-market progress in the quarter.

As a reminder, our go-to-market strategies involve both our self-serve motion as well as our outbound sales motion.

As Drew discussed, we saw better-than-expected expansion in our self-serve team SKUs as a result of making it more seamless for teams to invite additional members.

We prompted users with suggested invites right after they shared content with a potential team member, driving an increase in invites and net licenses per team.

We also saw improved retention in our outbound business as a result of the change in strategy we made earlier this year, where we more than doubled the number of sales reps that are fully dedicated to customer renewals.

And once again, we saw momentum in our Pro SKU, as Drew highlighted.

Professional grew by about 30% year-over-year, driven by the ongoing adoption by freelancers and creators.

We continued to help our pro users understand the solutions that we offer by enhancing our onboarding path to match their most common use cases with Pro's most pertinent functionality.

As a result, we saw improved trial conversion as our users developed a stronger appreciation of how Pro users help them get their work done.

Finally, we continued to see a healthy contribution to our net new paying users from our family plan.

During the quarter, we redesigned our upgrade pages to better highlight our family plan to basic users that were near or above their storage quotas, thus driving an uplift in conversion.

Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement measures mentioned are non-GAAP, and excludes stock-based compensation, amortization of purchased intangibles, certain acquisition-related expenses, impairments of our real estate assets and expenses related to our reduction in force.

Our non-GAAP net income also excludes net gains and losses on equity investments and includes the income tax effect of the aforementioned adjustments.

I'd also like to provide a brief update on our real estate strategy, where we are taking steps to de-cost our real estate portfolio as part of our transition to a virtual-first model.

We continue to make progress against our goals, executing subleases in Austin, Seattle and Ireland this past quarter.

As a result, we incurred no additional impairment and our previous expectations of up to $450 million in total impairment charges remain unchanged.

In addition, we are in discussions with our San Francisco landlord to pay roughly $32 million to buyout a portion of our lease where we have an existing subtenant.

If executed, this would generate a long-term financial gain as we expect our savings on future rent payments avoided that would exceed the amounts we'd otherwise generate from the sublease by roughly $50 million.

Thus, this would be an efficient use of our capital, and this would aid our ability to achieve our $1 billion free cash flow target by 2024.

In addition, executing this buyout would free us from the operational obligation to service this space.

We expect to execute this arrangement in the fourth quarter this year, and have therefore factored this into our guidance.

which I'll touch on shortly.

In the future, we may enter into similar buyouts with our landlords, should the economics make sense for us.

Though there are no other pending deals at this time.

With that, let's continue with the P&L.

I'd note that all expense categories continue to benefit from lower facilities-related costs driven by our employees working from home and a reduction in depreciation as a result of the write-down in our real estate assets, stemming from the aforementioned impairment.

Our personnel costs are also at reduced levels relative to last year as a result of our reduction in force and prudent subsequent hiring.

Gross margin was 81% for the quarter, representing an increase of 1 percentage point on a year-over-year basis.

The improvement in our gross margin is primarily a result of the continued rollout of hardware efficiencies across our internally managed storage and data infrastructure.

Third quarter R&D expense was $133 million or 24% of revenue, which decreased compared to 27% of revenue in the third quarter of 2020.

Sales and marketing expense was $106 million or 19% of revenue, which was roughly flat relative to the third quarter of 2020 as we made investments in brand awareness and product marketing campaigns.

While it's early, we are encouraged by the trends we're seeing in search impression volumes.

G&A expense was $46 million or 8% of revenue, which decreased compared to 10% of revenue in the third quarter of 2020.

In total, we earned operating profit of $161 million in the third quarter, which represents an operating margin of 29% or a 6 percentage point improvement compared to the third quarter of 2020.

Net income for the third quarter was $147 million, which is a 33% improvement over the third quarter of 2020.

Diluted EPS was $0.37 per share based on 398 million diluted weighted average shares outstanding, up from $0.26 per share for the third quarter of 2020.

Moving on to our cash balance and cash flow.

We ended the quarter with cash and short-term investments of $1.929 billion.

Cash flow from operations was $231 million in the third quarter, and capital expenditures were $10 million during the quarter.

This resulted in record quarterly free cash flow of $221 million compared to $187 million in Q3 of 2020.

In the third quarter, we also added $44 million to our finance leases for data center equipment.

Let's turn to our share repurchase activity.

As I previously mentioned, we intend to leverage our share repurchase program to not only return capital to our shareholders, but to also reduce our share count.

In Q3, we purchased 5.8 million shares, spending approximately $181 million.

At the end of Q3, we had approximately $639 million remaining on our $1 billion share repurchase authorization.

We continue to believe that utilizing our capital for share repurchases is efficient, and we will leverage the strength of our balance sheet to deliver returns back to our shareholders.

With that, let's turn to guidance for Q4 and for the full year.

For the fourth quarter of 2021, we expect revenue to be in the range of $556 million to $559 million.

Currency exchange rates assumed in this guidance account for approximately 2 points of growth at the midpoint of guidance, and are based on a combination of recent and historical average rates.

We expect non-GAAP operating margin to be approximately 29%.

Finally, we expect diluted weighted average shares outstanding to be in the range of 391 million to 396 million shares based on our trailing 30-day average share price.

For the full year 2021, we are raising our revenue guidance range, which was previously $2.136 billion to $2.142 billion to $2.148 billion to $2.151 billion.

Currency exchange rates assumed in this guidance account for approximately 2 points of growth at the midpoint of guidance and are based on a combination of recent and historical average rates.

We are updating our gross margin guide to approximately 80.5% for the full year.

We are raising our non-GAAP operating margin guidance, which was previously a range of 28.5% to 29% to be approximately 29.5%.

Taking into account the aforementioned lease buyout opportunity, we now expect our full year free cash flow guidance, which was previously a range of $710 million to $730 million, to be approximately $715 million.

This includes cash outflows comprised of $32 million for the lease buyout, $16 million for the 2021 installments of deal consideration holdback related to our acquisition of HelloSign; and onetime severance payments of approximately $14 million related to our reduction in force, which occurred in the first quarter.

We now expect capital expenditures for 2021 to be approximately $35 million net of tenant improvement allowances as we complete our investments in our lease space in order to optimize their potential sublease income.

We continue to expect additions to our finance lease funds to be approximately 6% of revenue in 2021.

Finally, we are maintaining our expectation for 2021 diluted weighted average shares outstanding to be in the range of 397 million to 402 million shares.

Lastly, let me share some thoughts on our long-term operating margin and free cash flow targets.

We are on track to take a sizable step forward this year on profitability, outperforming our expectations, with operating margins now expected to grow approximately 8 points and free cash flow expected to improve by more than $200 million year-over-year.

It's important to consider that we don't expect progress of this magnitude every year.

And while our progress on profitability this year is outstanding, we are equally focused on driving sustainable revenue growth.

Therefore, while we are now within our long-term operating margin target range of 28% to 30%, we plan to invest for growth by hiring to support compelling product initiatives by funding marketing to drive awareness and by exploring inorganic ways to strategically expand our product portfolio.

In addition, our margin profile in 2021 benefited from favorable FX rates as well as reduced overhead and T&E costs as our employees worked from home.

While we will remain a virtual-first company, we may see additional expenses in these areas next year should pandemic restrictions soften.

Given these considerations and at this time, we are maintaining our long-term operating margin target of 28% to 30%, and our 2024 free cash flow goal of $1 billion.

In conclusion, we continue to execute well against our 2021 goals.

We believe that progress against these objectives will generate long-term value for our shareholders, and we remain committed to making decisions in line with this financial trajectory.

With that, I'll now turn it back to Drew for his closing remarks.

Thank you, Tim, and thank you all for joining us today.

I'm incredibly proud of our third quarter results and excited about the opportunity ahead of us.

I believe Dropbox is well positioned as our customers continue to look for technologies that help them adapt to the rapidly evolving work environment.

We remain focused on executing against our 2021 strategic priorities, our long-term financial goals, and further solidifying our position as the go-to solution for distributed work.

And with that, I'd like to open up the call for Q&A.

Operator?

(Operator Instructions)

Our first question comes from Rishi Jaluria with RBC.

Ni ce to see continued solid results.

First, I wanted to touch, Drew, on a comment you made in your prepared remarks, which is regarding supply chain issues.

So I understand, obviously, you have much more efficient infrastructure, probably with SMR, probably some of the other investments you've made.

So maybe a little bit more insulated.

But can you talk a little bit about how does this impact some of your future CapEx plans?

And at what point does the supply chain issues out there start to become a worry?

And then I've got a follow-up.

Sure.

Well, I can start, and thanks, Rishi, and Tim, feel free to add on.

So I mean, as you'd imagine, we're obviously keeping an eye -- a close eye on shortages in the supply chain.

It's something our team has been out in front of our infrastructure team has done an excellent job in securing the supply we need.

This year, we don't see a reason why that would change.

We've always had great relationships with our vendors and partners.

And today, our teams have been pretty proactive about it.

I mean, obviously, you never say never.

Things -- the environment is somewhat unpredictable, but to date, we've it's-- we feel good about how we've been able to keep on top of this.

All right.

Drew, that's really helpful.

And then I want to maybe think a little philosophically about the virtual-first model.

So it feels like you guys were very much early in this.

And as Delta has pushed the office reopenings out it seems like more and more companies are adopting that kind of virtual first model to a certain extent you guys pioneered.

How have you shaped your view in what that virtual first model looks like since you announced it and as things have been pushed out?

And maybe more importantly, how do you think about wanting to keep the same culture that's kept Dropbox going so strong all these years later, while also maintaining that sort of flexibility that you really want?

And what lessons maybe do you think that has for other companies looking to emulate that sort of virtually first mover going forward?

Sure.

Well, I mean, we're about a year in.

And on the one hand, I'm really happy with the decisions we made last October.

And I don't think I'd make very many different decisions, although I don't think anybody could have exactly predicted the sequence or things like Delta.

I mean some things that are top of mind for me, like we really -- we and a lot of other companies in tech and beyond are still kind of virtual only or remote only.

We haven't really been able to meaningfully reintroduce the in-person experience in a consistent way.

And I think a lot of companies that's going to happen Q1 of next year.

I mean hopefully, things continue to trend in a positive direction with Delta and others.

So all that is to say, like we haven't really been able to fully -- neither we nor most companies have been able to fully implement their hybrid models.

But I'm proud of the work the team has done to anticipate some of these issues.

I mean I think the sort of default consensus compromise version of hybrid is like are we 2 days, 3 days a week, which we envision would have major issues, where given that -- well, if it's the same 2 days a week, you have a utilization problem or the office is empty 5 days a week, and if it's not, then you lose, then you sort of get the worst of both worlds where you're commuting, but you don't have community.

And I think something that we didn't even really fully anticipate was that the degree to which people have kind of spread out.

So I think that for most companies, they find even anti remote companies in the old world, are now finding themselves on their way to having a double-digit percentage of their population and places well outside of commuting distance of their former office and a number of other.

And they're hiring more remote workers outside of community distance.

And so why that matters is in these hybrid models, if you have even one person on a given team who is remote, then suddenly the whole meeting has to happen on Zoom.

And then you're in this massively dysfunctional situation where you're paying for all this office space, you're getting people to commute multiple hours and in many cases, further than they were before to then be in the office without -- like back on Zoom without your snacks or your dog or your setup and in the noisy environment.

So we sort of envision that there is going to be the circle of hell with the default model that we did not want to have it.

We learned a lot from other.

I'm really proud of the work the team did researching a lot of the models that other companies have come up with, and we've tried to build on that and open source what we found.

So everything that we -- that I'm talking about here, we've posted online in our virtual first toolkit.

So basically, I'm happy with where we are.

We're going to continue to iterate on this.

I'm looking forward to reintroducing the in-person experience.

And I'm excited for next year.

I think we'll continue to do this.

We've got a lot of ideas on how we can iterate further.

Our next question comes from Brent Thill with Jefferies.

This is Luv Sodha on for Brent Thill.

I wanted to echo the congrats as well on another solid quarter.

Maybe the first question would be for Drew.

It sounds like you have a lot of different levers, if you will, on the innovation front, the creator economy teams, HelloSign, DocSend, could you maybe talk to us about like your top 2 or 3 levers that you think will help you sustain the current growth momentum?

Sure.

I mean, the ones that are top of mind for me are kind of fall against the pillars that we talked about.

So there's evolving in our core business, there's investing in future products, and then there's operational excellence.

And there are exciting things happening in each of those areas.

So on the core side, there are a lot of continued sustained improvements.

Some of the examples there are -- we've invested a lot in the mobile experience, and we've been really improving our app store ratings and driving conversion, retention, top of funnel, better sharing, things like that.

So those are kind of somewhat incremental improvements, but a lot of them, and they're really important to sustain our growth.

But I think there's -- what I'm really excited about as well is a more transformative change in our core business as we evolve from sinking your files to organizing all your cloud content.

I think this is a big deal.

I mean, every as we sort of all have been living this hybrid remote life I think we find that living out of our screens.

Our screens, our digital environments can be very overwhelming and fragmented and distracting places.

And some of the dynamics that we saw before like a question that I have, like, why is it easier to search all of human knowledge with something like Google than it is my company's knowledge and increasingly, even my own knowledge, my own stuff, given that it now lives in 10 different places.

So dynamics like -- so these are kind of huge problems hidden in plain sight that Dropbox is really well positioned to solve.

So with my team, I talked about, hey, we're solving the 2021 version the problem we have -- that we sold back in 2007.

And maybe back then, it was sinking files across your devices or was 100 icons or 100 files on your desktop.

Now that's 100 tabs in your browser.

And so there's this -- we're transforming our core business in ways that if you think about it, a lot of our customers today pay for Dropbox around file oriented workflows, but we all have as we shift as more workloads shift to the cloud.

We all need better ways of keeping on top of all that resulting fragmentation.

And so I'm very excited about things like that.

We're making a lot of progress there.

We'll have a lot more to share in the future.

The acquisition of Command E, the universal search companies, a great step in that direction.

The founders of that company identified very similar things, and have been -- have built a lot of capabilities that will be pretty instrumental in delivering on that vision.

So there's a lot in the core business.

I think totally -- I think it breaks us free of a lot of our historical TAM constraints, where -- I call them file native customers and cloud native customers, we'll have a lot to offer cloud native customers in addition to everything we do for our prime native customers.

And then, as far as our -- the rest of our product portfolios -- portfolio, there's a lot of workflows around that content.

And so being able to do more for our users, given our scale just in hundreds of millions of registered users and 550 billion pieces of content to the -- as we -- as we're your home screen for that content, there are a lot of different verbs that our customers want.

So I'm very excited about HelloSign and DocSend.

The usage of PDFs has exploded the collaboration on documents and PDF has exploded on our platform in the last year.

I'm very interested in what we do on document workflow in terms of taking what we have with Dropbox and DocSend and HelloSign and building an end-to-end document workflow.

I think it's a huge opportunity for us.

And then you see some of our green shoots with the new product experiences like Capture and Replay and Shop, which address some of the other macro trends like the creator economy, the explosion of video and rich media on the platform like massively elevated demand to have better tooling and workflows around that.

And with an audience -- creative audience of freelancers, solopreneurs, these are people that really love Dropbox and need a cross-platform solution.

So we manage it like a lot to be excited about.

Those are some of the things that are top of mind for me, and we'll manage this as a portfolio of kind of near-term incremental improvements, green shoots where on one end of the spectrum, the core transformation and then all the workflows around content.

Awesome.

That sounds great.

And maybe a quick follow-up for Tim, just wanted to ask, it's really great to see the momentum you're having on teams and strategic accounts.

Going forward, could we expect to see I guess, more investments on that strategic side, or are you still committed more to investing on the self-serve motion?

Sure.

So while self-serve does remain the vast majority of our go-to-market motion, certainly encouraged by our outbound team's execution, and the team continues to execute well against the strategy that we adopted at the beginning of the year.

And specifically, we more than doubled the number of reps focused on renewals.

So this is driving improvements in our team retention.

They were also cross-selling add-ons in newer products like HelloSign and DocSend.

And then we're investing more in the channel, which is also gaining traction.

So overall, certainly pleased with how the team is performing and with the higher levels of efficiency that we're seeing in our outbound side.

And building on that, we also see these as one integrated motion or one customer journey.

So often folks start at Dropbox, using the free version or an individual SKU, and then they bring it with coworkers and become a self-serve team.

But then self-serve expansion that there's a land and expand motion where you do hit limits on the self-serve side, where you have enough people using in a company where it to really go wall-to-wall.

You need to engage with IT and have a more managed outbound motion or channel.

So we see teams graduating from self-serve and then moving into more of a managed mode as a connection between these two efforts.

So they're both important.

They kind of sit at different -- the self-serve motion is kind of at the start of the journey and the wall-to-wall motion is at the end in a larger account.

Our next question comes from Dan Church with Goldman Sachs.

This is Dan Church on for Kash Rangan.

Just a couple of quick ones for me.

With respect to say see DocSend and HelloSign kind of doing better and kind of outperforming plan.

Can you give us an update on the traction you're seeing with cross-sell with the two products and the kind of the momentum?

And any way to kind of frame the size or growth we're seeing from the new acquisitions?

And then a quick follow-up on our margins for me.

Sure.

So we've done our first round of integrations, with HelloSign, things like our professional any signature bundle and some product integrations.

But I'd say we're pretty early innings in terms of the depth of those integrations, very early innings with DocSend and pretty early in terms of the penetration of the overall Dropbox space.

So it's something where we want to invest much more here in coming years, big opportunity.

Great.

Actually, kind of the last two quarters, I mean, last quarter, you mentioned an improvement in overall retention rates.

We're hearing it again tonight, both from the self-service side and on the strategic side.

You touched on it a little bit with respect to adding more doubling the reps focused on renewals.

I guess, with respect to the self-serve side, can you kind of give us an update on what's driving that retention rate?

And kind of how we should be thinking about the durability and levers of that?

And if you could level set us on kind of maybe where we are now versus where we are last year and where we are at the time of the IPO, or any kind of directional color would be great?

Sure.

I can start and Tim can add.

So I mean, starts with -- retention starts with just the quality of experience, right?

And so figuring -- and as there's been a mix shift as people have -- as mobile becomes more -- or to spend more time on our phones, in addition to our laptops or desktops, that becomes a more important part of the experience and something like half of our top of funnel -- half of new sign-ups come from mobile.

So a lot of it is just getting back to basics and making sure that experience is as simple and fast and streamlined and just works.

That's always been kind of our product philosophy and removing friction from sign-up or from sharing or different things pays dividends.

So we've seen -- I mean, all those examples, but we've seen like record App Store ratings or big improvements, improved conversion and retention, improved sharing activity and these kind of all the sort of self-reinforcing wheel and I could say similar things about just making it easier for -- I mean it sounds basic, but it's very important.

Just if you're a self-serve team making it really easy to get your whole team signed up figuring out what are all the steps in that experience and trying to remove or simplify as many of them as possible pays big returns in terms of that kind of viral flywheel.

So we see a direct link between the simplicity of the experience and having a few steps as possible and really understanding what our customers are trying to do and make that as easy as possible.

And we see that translating into improvements across the funnel from better engagement to better retention to better conversion to better virality, and we work all those things in parallel.

And maybe just to briefly add on to that, Dan.

We don't update churn metrics quarterly, but churn did improve sequentially and year-over-year, and our revenue guidance obviously factors in the latest trends, but certainly encouraged by the results of these efforts.

And we have a question from Pat Walravens with JMP.

This is Enzo on for Pat.

Congrats again on another strong quarter.

I know during the prepared remarks that there is a little bit of color about the self-serve adoption of family plans.

I was curious if you guys could just expand a little bit on what that growth looks like kind of what that opportunity looks like as it stands now?

And then how you expect that to trend going forward?

Sure.

I mean, I can speak to at a high level, and then Tim can add on.

So I mean Family Plan is a good example of how -- while on the one hand, most Dropbox subscribers use Dropbox for work, the vast majority, many also use it for personal use and family plan is in -- is something that was like commonly requested and it's been pretty popular and doing well.

I mean, I bring that up because one of the things that was clear after the pandemic is that the physical boundaries between home and work, like fully dissolved for many of us.

And the same thing is true of the virtual boundary been home work, like we're all managing personal stuff and work stuff often on the same machine, and that can be a big hassle.

And Dropbox has always been -- or our customers have appreciated that we handle both your personal and working life together.

So we'll continue to make investments like that.

And Tim can speak to more of the growth momentum.

Yes.

Maybe just to quickly add-on.

So in the third quarter, we did enhance our upgrade pages for those approaching their storage quotas where we did offer them the family plan for the first time.

So that helped drive incremental traffic and conversion.

And maybe one place you do see that is in net new paying users, where in the quarter, we added about 350,000 net new paying users.

So family plan was a contributor to that as was the strength in teams as well as the strength in Professional?

And we have a question from Steve Enders with KeyBanc.

In the prepared remarks, like there was quite a lot of content around the broader ambitions around content workflow and how Dropbox is thinking about that.

But just kind of wondering, if you look at the kind of product roadmap and what happen here longer term, how does the product set evolve to match that vision that you are outlaying?

Sure.

Well, I mean, at the highest level in the core business, it's that evolution from syncing files to organizing all your cloud content.

And so a big part of that is search.

Command E is a great example of a pretty important building block there with like universal search and being able to index all of your different cloud tools and services.

And have one search box instead of like 1 fully working search box instead of 10 kind of fragmented search boxes.

And then organization, like how do you help people build -- how do you give people one view of their stuff regardless of wherever may reside instead of having to visit 10 different places.

So organization, navigation, search, those are all certainly pillars of the future experience where those are.

I'm really excited about our roadmaps in each of those areas.

And then second is all the workflows around content, as I mentioned.

So there are document workflows with our products like HelloSign and DocSend.

I'm really excited about the opportunity to build a more end-to-end solution with each of those that encompasses all those components, so bringing DocSend, HelloSign, Dropbox together so that when you say the contract in Dropbox, send it out for feedback and DocSend, get it signed in HelloSign, have the completed contract in Dropbox.

There's a lot more that we can do to tie those products together.

And then finally, a lot of the creative workflows, the rich media workflows, so things like Dropbox Capture, which is a visual communication tool, Dropbox replay video collaboration tool and shop where we find we have a lot of demand from our customers to help monetize their digital goods or monetize the content they have in Dropbox without having to stitch together 5 different things.

So there's a pretty big portfolio of products and potential growth levers.

Okay.

Great.

That's helpful.

And I know you mentioned Capture, Replay and Shop in there, and you've come out with passwords in the past year.

But how do you think about the ability to kind of incrementally monetize these new solutions you're rolling out?

And how does that kind of play out over the next couple of years?

And how would we see that develop?

Yes.

I mean, I think it's going to be a portfolio and each of these investments is going to have different magnitudes over a different time scale.

So I mean, the core business is obviously the biggest lever, and we -- and I've talked about kind of the range of more incremental improvements to more transformative changes, more incremental improvements that happen kind of week by week, month by month to this broader transformation that will take were be measured more in years.

And then even -- and then in our -- the portfolio of workflows, a similar kind of thing.

Got HelloSign, DocSend, which are already a meaningful -- and our fastest-growing businesses.

And then we'll always have a portfolio of green shoots where we'll double-down on what works and keep iterating, but it won't be material to the business for -- in '22.

And there are no further questions in the queue.

I'd like to turn the call back to Drew Houston for any further remarks.

All right.

Well, thank you, everyone, for joining today.

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

This concludes today's conference call.

Thank you for participating.

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