Dropbox, Inc.

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's first quarter 2021 earnings conference call. All participants will be in the mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded and will be available for replay from the investor relations section of Dropbox's website following this call. I will now turn it over to Paige Portis, Investor Relations at Dropbox. Ms. Portis, please go ahead.

Paige Portis Today, Dropbox will discuss 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 anticipated impacts to our financial results, including estimated impairment charges and subleasing income as a result of our shift to a virtual-first work model, expected performance of our business, our expectations regarding remote work trends, related market opportunities, and our ability to capitalize on those opportunities, our capital allocation plans, including expected timing and volume of share repurchases, future M&A opportunities, and other investments, our ability to drive future user growth, upgrades, and retention by enhancing our products, developing and offering new products or features through our acquisitions, our strategy and the effectiveness of strategy in achieving our business goals, and overall future prospects and ability to generate shareholder value. These statements are subject to known and unknown risk, 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, including in our Form 10-K for the year ended December 31, 2020, and the risk factors that will be included in our Form 10-Q for the quarter ended March 31, 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 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 Halston.

Good afternoon, everyone, and welcome to our Q1 2021 earnings call. On the call with me is Tim Regan, our Chief Financial Officer. Today, I'll share our business and product highlights from the quarter. Tim will then review our Q1 financial results, provide guidance for the second quarter, and update our outlook for the remainder of the year. And before we get to our results, I'd like to thank our employees, customers, and partners for their support and their contribution to a successful quarter. Around this time last year, we, along with many of our customers, We're managing through an unprecedented global pandemic and a sudden shift to distributed work. It was certainly a challenging time, and I'm proud of the way our team showed up and supported our customers. While many companies are still adjusting to this shift and grappling with decisions about hybrid, flexible, or remote work, one thing is clear. The traditional way of working has changed forever. We've made decisions about our own workforce, adopting what we're calling a virtual-first way of working, combining the best of both fully remote and in-person collaboration, And as we've shared previously, we reoriented our entire product roadmap to address the challenges our customers face in this new environment. At the same time, we also reorganized and streamlined our teams against our new strategies. And now we're focused on execution. This new era of distributed work has given rise to new opportunities for us and sped up several trends that were already in play. We've seen spikes in rich media and video content. We've seen the rise of freelance economy and an accelerated shift of businesses to the cloud. And we're seeing these trends reflected in our own business, with the increased growth in our professional SKU, expansion within SMBs, and heightened demand for new capabilities that connect our customers' content to their workflows. As our progress this quarter demonstrates, there's never been a better time in history to be building collaboration software, and I'm excited about our road ahead. Turning to the quarter, we saw positive momentum in the business as we continue to execute against our strategy. Revenue growth was strong and our non-GAAP operating margin expanded meaningfully as we drove operational efficiencies and stayed on course with our long-term targets. We also completed several financial transactions that improved our ability to execute against our investment thesis, which Tim will speak to in more detail. As I shared last quarter, we have three strategic priorities for 2021, evolving the core business, investing in new products, and driving operational excellence. I'm proud of the team's execution and the progress we've made against each of these, in Q1. Let's start with an update on our first priority, evolving the core business. As a reminder, this strategy is focused on building on the strength of the simple and intuitive core Dropbox experience to improve our functionality, make collaboration around content more seamless, and help organize our users' content, tools, and workflows. As we make these investments, we believe they'll drive higher levels of engagement, better retention, and ultimately stronger revenue from our core business. One way we improved the user experience this quarter was streamlining our in-product promotions to ensure people can focus on their content and their work. We were successful in maintaining our overall conversion volumes while reducing the total number of Dropbox promotions the average user sees. As a result, we're now able to more purposefully surface in-product prompts at optimal moments to encourage upsell and cross-sell of our products. This simplified experience gives our users a more seamless way to engage with Dropbox while still retaining the flexibility strategically leveraged in product prompts to drive adoption of our newer products. Evolving the core is also about delivering more value to our basic users to promote conversion to our paid SKUs. For example, last year we launched Dropbox Passwords to all our paid users to help them stay organized and better connect their tools. And we recently launched a freemium version of Passwords to our basic users to deliver more value beyond FSS, and introduce them to some of the premium capabilities that we offer as part of our core product. As more BASIC users are exposed to and find value in these premium features, we believe this will help drive activation, retention, and migration into paying plans. I'm also excited to share the progress we've made with transfer, which we introduced as a standalone SKU late in the first quarter. Now it's easier for BASIC users to discover and upgrade to the transfer plan, which we expect will drive additional uplift in our paid user conversions and retention rates. We see this as the first step in making the transfer product more broadly available to our user base as we continue to iterate on our upsell funnels to drive ARR growth. As a final example of how we're evolving our core products, I'll share an update on the progress we're making with our family plan. The family plan keeps your family's digital lives connected with one organized place to share photos, videos, and important documents. It supports two terabytes of shared storage for up to six users, each with their own personal folders, a centralized family room, and access to premium features like vault, transfer, backup, and passwords. Since launching last fall, we've seen exciting traction with tens of thousands of family rooms created. And the feedback's been great. Customers are finding unique value in their ability to easily share important family content, like photos and videos, on an ongoing basis. Collectively, by streamlining the total number of Dropbox promotions our users see, releasing passwords for our basic users, and continuing to invest in solutions like Transfer and Family Plan, we're making great progress in evolving the core Dropbox experience. We're building on our roots in file sync and share and delivering even more value to our users with a differentiated feature set while remaining true to our core product philosophy, a simple and easy-to-use experience that helps people manage both their work and personal lives. We believe this focus will strengthen our relationship with our customers and help us sustain healthy growth within the core business. Let's move to our second priority, which is investing in new products as we cultivate and scale additional capabilities beyond the core Dropbox experience. As one of only a handful of SaaS companies that have ever reached $2 billion in ARR, we believe we have a big opportunity to build on the success of our core business and expand to new and adjacent product areas. We're tapping into that success as we invest in powerful tools like DocSend and HelloSend for the next generation of freelancers and SMBs in the new distributed work environment. In March, we announced our acquisition of DocSend, a secure document sharing and analytics product. This acquisition builds upon a key strength of ours, which is sharing. Today, users share hundreds of millions of documents using Dropbox every year, which leads to viral expansion and increased retention. The acquisition of DocSend expands on our sharing capabilities, offering users added security along with powerful analytics on how viewers are engaging with their content. It's also a great fit within our broader product portfolio. The combination of Dropbox, HelloSign, and Docsend will give our customers a full suite of self-serve products and help them manage critical document workflows end to end and ultimately drive meaningful business results. For example, client services teams and creative professionals who already rely on Dropbox to organize and collaborate on documents, presentations, and projects can use Docsend to deliver proposals and track engagement and use HelloSign to sign contracts. Not only does this acquisition unlock greater value for our customers, but the combination of these three products can help drive adoption and upsell across our product portfolio. DocSend's a great addition to the Dropbox family and allows us to deliver more functionality to meet our customers' needs. I want to extend a warm welcome to the DocSend team, and I look forward to everything we're going to achieve together. Let's turn to HelloSign, which continues to be one of our fastest-growing products. In Q1, the team made great progress towards our goal of becoming a leading e-signature solution in the SMB market and in target international markets. First, we launched our bundle Dropbox Professional and HelloSign Essentials SKU, which we're calling Professional plus eSign. As I mentioned earlier, we're seeing increased engagement from freelancers and SMBs, and this is especially reflected in our Professional SKU, where we've seen a more than 30% increase in paid users year over year. We're capitalizing on this momentum by exposing these users to more of our expanded functionality, like HelloSign, as our customers look for comprehensive ecosystems that serve all of their business needs. In turn, we drive further awareness of our e-signature capabilities and deliver additional value to our customers. We're also seeing traction in international markets. After launching HelloSign in the 21 additional languages last year, we've continued to offer geographic-specific solutions tailored to meet the needs of our international users. In Japan, for example, we now support electronic Conco stamp seals, which are often used in lieu of e-signatures in that region. DocSend and HelloSign are great examples of how we're building on the success of our core experience and expanding into adjacent markets to increase the value that users get from Dropbox. We'll continue to invest here, both through M&A and in our organic innovation pipeline with products like Spaces to drive our next stage of growth. Finally, we'll stay focused on our third priority of operational excellence as we improve the efficiency, reliability, and security of our technical infrastructure while increasing our operational discipline and optimizing our capital structure for high ROI investments. This quarter, we executed on a number of important initiatives, including closing on our convertible debt raise, implementing an additional $1 billion share repurchase authorization, and driving a 13-point improvement in our operating margins. While we're making great progress against our profitability metrics, we remain focused on investing for the future. We've always been focused on balancing growth and profitability, and we believe our recent alignment against these three priorities sets us up to be more nimble, innovative, and to dedicate more resources towards building new products. And looking ahead, we'll continue to be disciplined with our capital while still making thoughtful ROI-based investments. And we believe these efforts enhance our ability to reinvest in growth initiatives, execute against our investment thesis, and continue generating shareholder value. In summary, I'm proud of our first quarter results as we relied on our strengths to address the growing demand for more seamless collaboration software. We continue to execute well against our 2021 priorities, delivering more value to our users with both our core product and new capabilities while strengthening our balance sheet and improving profitability. I'll now turn it over to Tim to walk through our financial results.

Thank you, Drew. As I've done before, I want to begin with a reminder of our financial objectives, as this provides the context for how we operate the business and outlines where we are headed. The core tenets of our financial plan are as follows. Doubling free cash flow to $1 billion annually by 2024. Investing for continued revenue growth. Driving annual improvements in operating margins, targeting 28 to 30%. allocating capital to organic initiatives and acquisitions that align with our strategic and financial objectives, and returning capital to shareholders by allocating a significant portion of our annual free cash flow to share repurchases with the goal of reducing our share count. We believe that execution against these objectives will generate long-term value for our shareholders, and we remain committed to making decisions in line with this financial trajectory. Today I'll talk through our performance for the quarter, our updated guidance for the year, and some of the actions we've taken in the period, which I'll tie back to and demonstrate our progress executing against these objectives. Let's first turn to our quarterly results. Total revenue for the first quarter increased 12% year-over-year to $512 million, beating the high end of our guidance. Foreign exchange rates provided a one-point tailwind to growth. Total ARR for the quarter was $2.112 billion, up 13% from the year-ago period. On a constant currency basis, ARR grew $61 million sequentially and 12% year-over-year. I'd note that we update the FX rates used to calculate ARR at the start of each year. We continued to drive growth in ARR through the release of value-enhancing features, the introduction of new SKUs such as Family Plan, the expansion of HoloScience capabilities and market awareness, and the acquisition of DocSend. We exited the quarter with 15.83 million paying users and added approximately 350,000 net new paying users in the first quarter, driven in part by positive momentum in the adoption of our family plan. Average revenue per paying user was $132.55 in Q1. Before I turn to the P&L, I'd like to highlight some of our go-to-market wins in the period. As a reminder, our go-to-market strategies involve both our self-serve motion as well as our outbound sales motion. On the self-serve side, we've recently made meaningful improvements to the way users discover and purchase our paid SKUs. Now our web pages more clearly surface our selection of paid plans, as well as the corresponding features each plan offers. This has helped SMBs adopt our Pro Plan, which offers robust functionality for sharing, transfer, and file requests. These improvements have also helped our individual users to discover and migrate to our new family plan. In Q1, we saw a resulting improvement in conversion rates stemming from these changes, helping to drive our revenue performance. On the outbound side, we are excited to announce that an American building materials retailer is now a Dropbox Enterprise customer. The company has over 400 retail locations nationwide and has helped to transform millions of homes with their digital rendering resources. They chose Dropbox to enable the creative workflows that take place across their marketing and design teams, while also allowing them to securely share and receive content from external vendors. 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 exclude 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. As we have previously mentioned, given that we have transitioned to a virtual first model, we have taken steps to decost our real estate portfolio by subleasing our existing facilities. We have estimated total impairment charges of up to $450 million associated with this transition. In Q4 last year, we recorded a charge of $398 million, representing the vast majority of the impairment we expect to incur. In Q1, we recorded an additional impairment charge of $17 million driven by several factors, including the impairment of DocSAN's lease, additional costs stemming from the sale of our San Francisco headquarters, and other factors. This brings our cumulative impairment incurred to date to $416 million. We continue to estimate the high end of our total exposure to be $450 million. As a reminder, we continue to expect to generate in excess of $800 million in sublease cash inflows over the course of these leases, which predominantly range in duration between 13 and 15 years. Now let's continue with the P&L. I'd note that all expense categories continue to benefit from lower facilities-related costs driven by employees working from home, a reduction in depreciation as a result of the write-down in our real estate assets stemming from the aforementioned impairment, as well as lower overall costs related to our workforce reduction, which took effect in Q1. Gross margin was 80% for the quarter, representing an increase of two percentage points on a year-over-year basis. The improvement in gross margin is primarily a result of unit cost efficiency gains with our infrastructure. First quarter R&D expense was $131 million, or 26% of revenue, which decreased compared to 31% of revenue in the first quarter of 2020. Sales and marketing expense was $88 million, or 17% of revenue, which decreased compared to 21% of revenue in the first quarter of 2020. In addition, we delayed certain marketing initiatives, which are now expected to occur and the second half of 2021. G&A expense was $43 million, or 8% of revenue, which decreased compared to 10% of revenue in the first quarter of 2020. As a result, we earned $149 million in operating profit in the first quarter, which represented an operating margin of 29%, which is a 13 percentage point improvement compared to the first quarter of 2020. Net income for the first quarter was $142 million, which is more than a 100% improvement over the first quarter of 2020. Diluted EPS was a record $0.35 per share, based on 405 million diluted weighted average shares outstanding, up from $0.17 per share for the first quarter of 2020. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.916 billion. Cash flow from operations was $116 million in the first quarter. Capital expenditures were $7 million during the quarter. This resulted in free cash flow of $109 million, which compares to $25 billion in Q1 of 2020. In the first quarter, we also added $24 million to our finance leases for data center equipment. We also executed some important financing initiatives in the quarter that not only improve our overall capital structure, but enable us to continue delivering value back to our shareholders. In February, we successfully raised nearly $1.4 billion, including the exercise of the related over allotment options, through a zero-coupon convertible debt offering, which was comprised of roughly equivalent five- and seven-year notes. We then used $62 million of the net proceeds towards executing bond hedge and warrant transactions, which effectively raised the conversion price of the notes to over $46 per share, representing a 100% conversion premium over our share price on the day of the offering. These collective terms culminated in some of the most favorable pricing seen in comparable offerings in recent years. This transaction strengthens our balance sheet and allows us to support organic growth initiatives, pursue M&A, and return capital to shareholders through share repurchases. Looking ahead, we will remain disciplined in allocating capital to high ROI opportunities. I'd also like to provide an update on our share repurchase strategy. As we signaled during our November earnings call, we increased the pace of our share repurchases, starting in the fourth quarter of 2020. Accordingly, in Q1, we exhausted our first $600 million authorization and subsequently announced a new $1 billion share repurchase authorization. Over the course of Q1, we repurchased nearly 19 million shares, spending approximately $430 million. These figures include shares we repurchased in conjunction with our convertible notes offering, which were not related to our existing share repurchase program. As a result, and as of the end of Q1, we have approximately $970 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 Q2 and for the full year. For the second quarter of 2021, we expect revenue to be in the range of $522 to $525 million. Currency exchange rates assumed in this guidance account for approximately two 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 in the range of 27.5 to 28%. Finally, we expect diluted weighted average shares outstanding to be in the range of 397 to 402 million shares, based on our trailing 30-day average share price. For the full year, we are raising our revenue guidance range which was previously $2.095 to $2.115 billion to $2.118 to $2.130 billion. Currency exchange rates assumed in this guidance account for approximately two points of growth at the midpoint of guidance and are based on a combination of recent and historical average rates. We continue to expect gross margins to be approximately 80%. we continue to expect non-GAAP operating margins to be in the range of 27 to 28 percent. We are raising our free cash flow guidance range, which was previously $645 to $655 million, to $670 to $690 million. This includes $29 million in cash outflows, comprised of $16 million for the 2021 installments of deal consideration holdback related to our acquisition of Flosign, and one-time severance payments of approximately $13 million related to our reduction in force. We continue to expect capital expenditures for 2021 to be in the range of $25 to $35 million net of tenant improvement allowances. We continue to expect additions to our finance lease lines to be approximately 6% of revenue in 2021. Finally, we expect 2021 diluted weighted average shares outstanding to be in the range of 397 to 402 million shares, down from our previous guidance range of 402 to 407 million shares. This reduction in our share count reflects our commitment to and anticipated impact of our share repurchase program. To share some additional context on this guidance, We are raising the midpoint of our full-year revenue guidance from 10% to 11% year-over-year growth, where approximately half of this increase relates to the strength we are seeing in our organic business, and the remaining half relates to the revenue contribution from our acquisition of DocSend. We are maintaining our operating margin guidance as we absorb DocSend into our P&L. As certain marketing initiatives initially plan for Q1, shift to the second half of the year, and as we plan to make strategic investments back into the business to drive long-term revenue growth. We are raising our free cash flow guidance due to an increase in expected billings from our organic business and DocSend, as well as increased confidence in the favorable impact of FX rates. With regard to paying users in ARPU, as I mentioned during our call in February, As we drive upsell to Family Plan and other SKUs while concurrently shifting away from pursuing large paying user deals with low ASPs, we could see variability in both paying users and ARPU on a go-forward basis relative to historical trends. We therefore continue to focus on ARR growth as being the best indicator of the long-term health of our business. Lastly, while we are rapidly approaching our long-term gross margin and operating margin targets, we remain focused on investing for sustainable revenue growth. Accordingly, we plan to reinvest some of the savings we are generating from our efficiency initiatives into growth opportunities where we see a compelling ROI. Therefore, we remain committed to our target model, to our 2024 free cash flow goal of $1 billion, and to generating shareholder value. In conclusion, we're off to a solid start to the year. We delivered strong results across both the top and bottom line, strengthened our balance sheet through our capital raise, reduced our share count by accelerating our share repurchase activity, and enhanced our growth potential with the acquisition of DocSend. We continue to execute against our financial objectives, and we remain on course to achieve our long-term targets. With that, I'll now turn it back to Drew for his concluding thoughts.

Thank you, Tim, and thank you all for joining us today. As our Q1 results demonstrate, we remain focused on executing ESO 2021 priorities, our long-term financial goals, and our commitment to our shareholders. We believe we're well-positioned to meet the opportunity ahead of us as customers continue to look for technology that helps them adapt to the rapidly evolving working environment. On behalf of our management team, I'd like to thank our customers, our partners, and the entire Dropbox team. And with that, I'd like to open up the call for Q&A. Operator?

Thank you. To ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Mark Murphy with J.P. Morgan. Your line is open.

Thank you very much and congratulations on a healthy result. I'm noticing that the rate of deceleration is improving quite a bit. You have three consecutive quarters where revenue growth is basically 12.5% to 13.5% and you're lifting it on the year. Can you shed any light on which levers you're pulling to influence that? In other words, the you know, conversion, retention, new products, et cetera. And just how sustainable, you know, do you think this improvement is in terms of, you know, kind of improving that rate of decel?

Sure. Well, thanks, Mark. This is Drew, and I can start and Tim can build on and cover some of the specifics.

But, I mean, the way we look at it is we have a lot of opportunity in the core business and we're driving growth from a broader portfolio of products.

So in the core business, we spoke to some of the improvements we've been making, and we continue to see lots of levers there to drive conversion and retention and improve the experience, and things like transfer and passwords, family plan, all good examples. And then we're growing the portfolio. So HelloSign has been one of our fastest-growing businesses. We've just added DocSend, and we'll continue to have a broader innovation pipeline, both organic bets and M&A. So all that is to say we have a lot of different levers. We're pulling many of them, and we're excited about the progress we've been making.

That's exactly right, and maybe to build on that, so our guidance does have us growing at about 11% at the midpoint, which is a 1% increase from the guidance we shared in February, where half of that is from DocSend and the other half is from the expected organic performance. And it's really attributed to all the factors that Drew discussed in his prepared remarks, the family plan, adding passwords to our basic plan, launching the standalone and transfer SKU, HelloSign, DocSend, where we have many initiatives we're working on to drive growth, and we're not overly reliant on the success of any one initiative. And we absolutely will continue to invest to drive sustainable revenue growth where we are seeing a compelling ROI.

Okay. So it sounds like it's a diversified kind of portfolio effect across the products. I wanted to just ask one other quick one, which is the top of the funnel activity. I recall that had spiked at the onset of the pandemic, and then I think logically we were expecting that that would start to subside. I'm just wondering now, how is the top of funnel behaving now? into, you know, return to the office, uh, activity and business cycle recovery?

Sure.

Um, so, I mean, there's a surge, as you, as you mentioned, there's a surge of demand in Q2 last year. Um, but overall our business has been pretty stable. I mean, um, our customers needed Dropbox before lockdown, during lockdown, and they'll need it afterwards is kind of the way I see it. Um, and, uh, That said, I mean, it's been a big tailwind for HelloSign as lots of customers started adopting e-signature for the first time. So in total, we think the world moving to distributed work will be a big tailwind for our business. And as we move towards reopening, as most companies have some kind of hybrid model, there's a lot of room for improvement in the tools we use to manage that. So, you know, HelloSign and DocSend are a couple of examples, but we're thinking much more broadly, too.

Excellent. Thank you very much.

Thank you. Our next question comes from Brent Thill with Jefferies. Your line is open.

Hi, this is Love Soda on for Brent Thill. Thank you guys for taking my questions and congrats on a great quarter. I wanted to ask one on Dock's End. If you could maybe talk a little bit about the vision with the acquisition and maybe give us some any Any insight into the number of users or the ARR contribution from DocSend for the year?

Sure. I can start just at a high level.

So we think DocSend is a great fit, and they help customers. DocSend helps customers manage and share their business-critical documents. They give business leaders more control, visibility, powerful engagement analytics. And the reasoning is that this is a a natural expansion opportunity for us, for Dropbox, where there's tens of billions of documents in Dropbox. Our customers want to do a lot of things with them. The more we can help with workflows, these are natural adjacencies. And then for Docsend, we can help them accelerate their growth and reach a larger audience. And then more broadly, the combination of Dropbox plus Docsend plus HelloSign is means that we can address the whole lifecycle of a document or address these workflows end-to-end. So you can start with a contract saved in Dropbox. You can share it and iterate on it through DocSign and get feedback, analytics, and then sign it in HelloSign. And so being able to handle the whole experience end-to-end, we think there's an opportunity where the – where it's additive. And overall, these are individually big markets. Collectively, they're big and growing, and there's lots of natural alignment on many dimensions. But with DocSpend, in particular, the product strategy, their go-to-market motion, they similarly have a self-serve and viral model. It's really efficient and scalable. So overall, we see a really great fit, particularly as the world moves to distributed work and needs better ways of managing content. Can't rely on being in the office together. We can see these as really exciting opportunities.

And then let me try to give you some color on their financial impact. So we purchased DocSend for roughly $165 million, with about $30 million held back for key executives to be paid over a three-year period, similar to how we structured the deal with HelloSign. And some further insights, DocSend contributed about $15 million to ARR in the quarter, where as a reminder, we record the ARR from acquired companies in the period we closed the acquisition. We also added about 35,000 paying users to our totals. And then as related to the P&L, the impact to Q1 was nominal as the deal closed on March 22nd. For the full year, we do expect the revenue contribution to be roughly half a point to our total revenue. and we are absorbing their expenses into our P&L where this has been factored into our guidance.

Got it. Great. And maybe one quick follow-up on the top of the final question that was asked earlier. I guess, you know, in terms of the overall demand, are you seeing like SMB spend come back? I know obviously last year, you know, you might have seen some impact from the SMB side. So will that sort of be a tailwind going forward?

Yeah, I mean, we're fortunate to have a lot of stability in general, and then the SMBs that are on Dropbox tend to be knowledge workers, so they're relatively less impacted, which has been a good thing. And then one dynamic we are seeing is our professional SKU has been doing really well, so it's been growing 30%. year over year. Um, and one big strength, uh, that we have as we, as Dropbox through our self-serving viral, uh, motion, we can reach and we can profitably acquire small business, uh, small business customers, freelancers, VSMVs, um, more than if we had a, than if we were more reliant on a conventional sales force. So, um, part of the tailwind is just following demand. There's the whole passion economy, creators, um, rising freelancers, um, that we're seeing contributes to demand and we expect will continue.

Awesome. Thank you.

Thank you. Our next question comes from Steve Endos with CBank. Your line is open.

Hi. Great. Thanks for taking my question. I just want to follow up a little bit there on the docs and plans and wondering how you're thinking about incorporating DocSend into the rest of the product? If you have plans to incorporate similar to where you're doing with HelloSign, where you build into plans, or what's kind of the expectations that are going forward?

Sure. Well, immediately we'll start integrating. We're already starting to integrate them into our go-to-market motion, so making DocSend more available to our customers through our sales team. And then similar to DocSend, or sorry, similar to HelloSign, we're we're building integrations in the product experience and bringing those closer together. We see it as a – we see it – and so mainly we're focused on driving distribution of DocSend to our existing audience and then in parallel we'll be building tighter integrations.

Okay, gotcha. That's helpful. And then I know you just raised the convert in the last quarter, but I guess how you're kind of thinking about the rank order of those plans. I think you laid out a few things from M&A to buybacks to organic growth. But how do you kind of think about the rank ordering of importance there as you think about the plans that are going forward?

I think we absolutely have the room to do each one of them. So we plan to allocate a significant portion of our annual free cash flow to share repurchases. That's absolutely still the plan. M&A, that will continue to be an important part of our strategy. You can look at DocSend, HelloSign, great examples of the types of deals we're interested in. And we strengthened our balance sheet with the convert where we can continue to pursue those strategies. And we will absolutely continue to be disciplined with valuations. So we structured our business where we continue to be able to invest in growth, organic growth, continue to invest in M&A, and continue to pursue share repurchases.

Okay, great. Thanks for taking my questions.

Thank you. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star then 1. Our next question comes from Ben Rose with Battle Road Research. Your line is open.

Yes, hi. wanted to ask on a couple of items. One is, either Tim or Drew, could you speak to the contribution of international revenue during the quarter, total international, and how that changed from last year?

Sure. That hasn't changed materially. It's about a 50-50 split as far as the international contribution of revenue. And so, yeah, that'll be disclosed as part of a 10-key filing tomorrow, but has not changed materially.

Okay. And then just a question on product pricing. I was just curious to know how you are thinking about the pricing of various different plans, whether you are anticipating or contemplating any price increases for the user base over time.

Nothing specific to share about future plans there. I mean, one thing we are focused on is we have an enormous base of free users, which represent a big opportunity. We will certainly continue to drive them to the standard Dropbox plans, but we're also creating a broader menu of new subscription options and entry points, basically, and optimizing pricing and packaging in general. So Dropbox Transfer is an example of a standalone SKU we launched in Q1, and we'll continue to experiment and double down on what's working. So we certainly are looking at pricing, or we continue to look at pricing and packaging in general, and that's an important monetization lever for us.

Okay. And if I may just ask one additional question, I know that part of the changes over the last several months has been your doubling down on reaching users via the – self-serve model and sort of less emphasis on direct sales. I was just curious to know your thoughts on how that has been contributing to the strong growth that we're seeing in recent quarters.

Yeah, so, I mean, our rationale for this is, you know, we'll continue to serve larger customers, and one of our strengths is that Dropbox is organically adopted in companies of all sizes, including large companies. That's going to continue. But when it comes to paid customer acquisition, we want to play to our strengths and be disciplined in our investments and streamline some of our efforts. So our land and expand model and self-serve motion is really scalable and profitable in general, and we find that our outbound efforts in mid-market are or in the mid-market segment tend to be more efficient and profitable than some of the high end of the enterprise. So these changes are more just about focus and really doubling down on our most efficient go-to-market motions. And we find that the very large customers or the revenue coming from very large customers is less than 10% of revenue.

Okay, thank you very much. Thanks.

Thank you, and I'm currently showing no further questions at this time. I'd like to turn the call back over to Drew Houston.

Great. Well, thank you, everyone, for joining us. We hope you and your families are staying safe and well, and we'll see you next quarter.

This concludes today's conference call. You may now disconnect.