Dropbox, Inc.

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's first quarter 2023 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press star 11 on your telephone. 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 the call over to Kern Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Thank you. Good afternoon, and welcome to Dropbox's first quarter 2023 earnings call. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements, such as our financial guidance and expectations, including our long-term objectives and forecasts for our second quarter and fiscal year 2023, and our expectations regarding our revenue growth, profitability, operating margin, and free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, industry trends, and the macroeconomic environment. These statements are subject to risks and uncertainties that could cause actual results to differ materially. They are also based on assumptions as of today. and we undertake no obligation to update them as a result of new information or future events. Factors and risks that could cause our actual results to differ materially from these forward-looking statements are set forth in today's earnings release and in our annual report on Form 10-K filed with the SEC. We'll also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non-GAAP results is provided in our earnings release and on our website at investors.dropbox.com. I would now like to turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston. Drew?

Thanks, Karen, and good afternoon, everyone. Welcome to our Q1 2023 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll first share our business and product highlights from the quarter, and then Tim will review our Q1 financial results, provide guidance for the second quarter, and update our outlook for the remainder of the year. I recognized our announcement last week to reduce our workforce. It's top of mind for many, and I plan to discuss that in a moment. But as far as our financial results, overall, I'm pleased with how we performed in Q1 during a challenging environment. We beat our guidance across all metrics, led by revenue outperformance in FormSwift, which we acquired in late Q4, and some better performance around individual signups exiting the quarter. On the flip side, we saw continued weakness across our team's plans as our customers face pressure in their own businesses. And we also saw continued moderation in our DocSend and Dropbox Sign businesses due to ongoing softness in their respective markets. Over the last several months, we've noted that we're not immune to the increasing macro headwinds that our customers are also facing. And during this period, we've carefully evaluated our different business units and recognized that some investments have showed promise before the downturn have less potential today. Part of this is accepting some normalization following demand acceleration during the pandemic, as well as the natural maturation of our existing FSS business. And yet at the same time, we see a huge opportunity for building new AI-powered products for our customers to improve the technology and tools that are used to get our work done, which I'll discuss in more detail shortly. I'm determined to ensure that Dropbox is at the forefront of innovating for this new AI era, just as we were at the forefront of the shift to mobile and the cloud. And while we've added talent over the last couple of years that bring AI and early stage product development skill sets to Dropbox, we need to free up resources to better align our investments with these long-term growth initiatives. And so unfortunately, these shifts required us to reduce our workforce by approximately 16%. This was a really tough decision, but necessary to the long-term health of our company. And while it's painful to say goodbye to many of our colleagues, I'm grateful for all their contributions to Dropbox. In conjunction with this announcement, we've also updated and streamlined our strategic objectives. The first objective is around building AI-powered product experiences centered on organizing cloud content. We've believed for many years in the potential for AI to completely transform our knowledge work, and we've been investing in automation and machine intelligence features to help our users organize their cloud content and search and discover more easily. And with recent advancements in AI, we're able to accelerate our vision. I'm excited to share some progress we've made here and what to expect over the next few months. Second, we're evolving our core FSS experience to specifically address customers' workflows around documents and videos. And with this shift, we consolidated our Docsend, FormSwift, and Dropbox Signed businesses together with our core team which we believe will drive a more integrated and seamless product experience for our customers. And lastly, as a foundational objective, we remain focused on driving operational excellence by improving our efficiency, our execution, and our product velocity. So with that backdrop, I'll share some updates from this past quarter and touch on what we're working on for each of our first two objectives. Starting with investing in AI capabilities to organize all cloud content and improving our customers' working lives. You've heard me talk on previous calls about the evolution of workloads, moving from files and folders to the browser and web-based apps. What used to be 100 icons on your desktop have now become 100 tabs in your browser. And what used to be one hard drive to search for all your content is now 10 fragmented search boxes. We believe a large audience of knowledge workers face growing challenges when searching, organizing, and using content across multiple cloud repositories and platforms to start their workflows and see a huge opportunity here. That's why we've been working on an AI and ML-powered solution that offers one universal search bar for all your cloud content. Our acquisition of Command-E in 2021 was an important first step in building this functionality, and I'm excited to share that just this week, we began testing our first AI-powered universal search product with a select group of customers and can't wait to share more in the coming months. Universal search is just one application of how AI and ML can improve the way our customers work. We've all seen how generative AI tools like ChatGPT and others have captured people's imaginations and opened their eyes over the last few months to a lot of new possibilities. One thing that becomes clear when using these tools is the need for personalization. We all want an AI that knows about us, that knows about our content, knows about our company, that you can interact with using natural language. And of course, you can't build personalized AI without access to your data. And building personalized AI at scale is a lot easier when you have millions of people already storing their most important information on your service. So we strongly believe that users of existing Dropbox products stand to benefit from AI-enabled experiences like this, and they want a service that they can trust that will use AI responsibly. The market for these types of products and capabilities is growing faster than anyone could have imagined, and I believe Dropbox is uniquely positioned to lead here. For years, we've invested in AI and ML technology to improve our infrastructure, improve our search functionality, image recognition, and many others. And now we can apply the same principles and techniques to organizing our customers' working lives. And our customers can rely on us as a trusted brand that integrates seamlessly with all of their work tools. And we're committed to ensuring the privacy and security of our customers' content and using AI responsibly. And we'll leverage our foundational strengths as we build out additional AI-powered capabilities and lean in to this new era of computing. And just as we're increasing our product velocity with the launch of our new AI-powered universal search products, we're also increasing the level of urgency around our second objective, which is evolving the existing Dropbox FSS user experience to seamlessly address customers' workflows around documents and videos. There are a number of important foundational steps that we're taking here, ultimately to make the Dropbox family of products easier to try, buy, and use. Last quarter, I talked about our rollout of Google OneTap to reduce friction in the onboarding process. And in Q1, we had tangible results with sign-ups and sign-ins exceeding our expectations. And we continue to take steps to improve user retention by improving the reliability and usability of our product. We've identified customer pain points around the many forms of sharing and made improvements to provide a more consistent experience across mobile, web, and desktop, making it easier for users to manage who can access their shared content. We also made some enhancements around mobile upload performance and the reliability of the Dropbox app, which drove improvements in mobile plus retention exiting the quarter. We're also making changes to address the increased downsell pressure we've observed with our Teams customers. And while difficult employment trends and cost-cutting initiatives among many of our Teams customers weigh on our user counts, we've identified an opportunity to drive higher retention for our self-serve Teams customers by leveraging outsourced sales support. We're optimistic that this higher touch, sales-assisted motion will be an efficient way to mitigate some of the retention pressures we've seen with some of our self-serve teams' customers. Moving to our workflow businesses, which now operate within our core division to improve execution and increase alignment across our teams in order to deliver a more holistic experience for our customers. DocSend continued to see its growth moderate amidst ongoing challenges in the fundraising environment, and we're actively working on diversifying into new verticals such as sales and professional services, as well as internationally. We're also making progress in removing friction for our DocSend users on Dropbox. For example, we eliminated multiple terms of service gates, and we've seen encouraging results with a healthy increase in trial starts for DocSend among Dropbox users. Dropbox Sign growth also continues to moderate against the challenging backdrop in eSignature. Despite that, we've continued to see higher win rates with our Dropbox Sign API offering, with customers citing a better developer experience and a more customizable platform than our competitors. And as we right-size many areas of our business to align with our growth outlook, we're shifting investment towards the Dropbox Sign API and towards deeper integration with the core Dropbox products. We also see synergy potential with Dropbox Sign and our PDF editing capabilities, which continue to gain traction among core FSS users, as well as our recent acquisition of FormSwift, which provides an online library of forms and templates for small businesses and individuals. And FormSwift, in its first full quarter as part of Dropbox, exceeded our expectations on users and ASP. And the teams are already working quickly on integration, taking learnings from our past acquisitions. We've already launched Dropbox branded SEM pages and associated marketing campaigns to drive traffic to the FormSwift site with encouraging early results. I'm pleased to see this integration off to a strong start and we'll continue to push for rebranding efforts and deeper product integrations later this year. And finally, moving to our video workflow products, starting with Replay, which allows video production teams to edit and collaborate on video projects simultaneously wherever they are. In this era of distributed work, Replay has helped many creative professionals stay connected with their teams and deliver media projects faster and more efficiently by avoiding time switching between editing and review tools. I'm excited to announce that last week we launched Dropbox Replay to all users with premium features made available for an add-on subscription. We see a natural fit for Replay to connect with the core Dropbox experience as it caters to many of the highly engaged creators who use Dropbox FSS for work. This is now the second video collaboration tool that we've created in-house and launched into general availability after we made Dropbox Capture available to all users last fall. Dropbox Capture is a video communication tool That helps teams stay in sync while avoiding meetings and long emails to present material and offer educational and training content. In Q1, we saw Dropbox capture users grow significantly again, quarter over quarter, and we're excited to see its viral adoption continue, driving both retention benefits and network effects across existing and prospective Dropbox users. In closing, we've been making a number of changes to set up Dropbox for long-term success. And while I know these transitions are never easy and the macro environment remains challenging, I believe our best days are ahead of us. The AI era of computing has finally arrived, and I personally haven't been this excited about what we're building since I started the company. It's been really rewarding to be so hands-on in developing our product roadmap alongside our leadership team. We're strengthening our foundation while innovating on our next act. We have a strong brand with hundreds of millions of users recognizing Dropbox, as a platform they can trust with their most secure content. And I'm excited about our path forward as we work to transform the way customers organize all their cloud content and ultimately organize their working lives.