Dropbox, Inc.

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox second quarter 2023 earnings conference call. All participants will be in a 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 website following this call. I will now turn the call over to Karan Kapoor, Head of Investor Relations for Dropbox. Mr. Kapoor, please go ahead.

Thank you. Good afternoon, and welcome to Dropbox's second 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 third 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 quarterly report on Form 10Q 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 Q2 2023 earnings call. Joining me today is Tim Regan, our Chief Financial Officer. And I'll first share our business and product highlights from the quarter, and then Tim will review our Q2 financial results and provide guidance for the rest of the year. I'm pleased to report that we had a solid quarter, once again beating our guidance across all metrics, led by Revenue Outperformance and FormSwift, and some recovery within our individual's SKUs as the progress we saw in late Q1 continued into Q2. However, we're still navigating a difficult macro environment that continues to impact our team's customers and pressures growth in our DocSend and Sign businesses. Before I walk through the highlights from the quarter in more detail, I want to quickly remind you of our primary business objectives that I outlined last quarter. The first objective is around building AI-powered product experiences to help our customers organize their working lives. Our company mission at Dropbox is to design a more enlightened way of working, and I'm proud that we've accelerated our roadmap here with Dropbox Dash and our progress in AI, which I'll discuss in a minute. Our second objective is continuing to evolve the core file sync and share experience to specifically address customers' workflows around documents and videos. Much of the work here has been foundational, focusing on driving retention and conversion, and I'll share more about the progress we made during the quarter. So with that backdrop, I'll touch on what we're working on to drive these objectives, starting with our first objective of building AI-powered product experiences to improve knowledge work. As we discussed on our last call, we took some important actions in Q2 to better align our investment strategy with our long-term growth initiatives and to drive product velocity against our AI roadmap. While Dropbox has been investing in AI and machine learning technology for many years, we're all witnessing an unprecedented wave of innovation around generative AI and large language models. And seemingly overnight, we now live in a world where machines can read and write and talk to us and answer our questions in natural language. But while there's a lot that these AI chatbots can do, there are a lot of questions these chatbots can't answer when it comes to questions about you or your content or your company because they aren't personalized. And it's clear that customers need more personalized AI that can answer questions and provide insights on their own content their company's content, and help them find what they need at work. And with hundreds of billions of pieces of content already stored on Dropbox, and as a service that's trusted by hundreds of millions of users, we see ourselves as uniquely positioned to build personalized AI at scale. That's why in June, I was really excited to introduce our first generation of AI powered product experiences to help our customers organize their working lives. I'll start with Dropbox Dash. Dash is our AI-powered universal search product that connects all of your cloud tools and apps and content to a single search bar that searches everything. With more of our work spread across 100 tabs in a browser, a common pain point for knowledge workers is that they spend too much time looking for their work and having to navigate between apps. Dash connects to major platforms and tools like Google Workspace, Microsoft Outlook, Asana, Notion, many others. It allows users to quickly find everything from one place. And because Dash is powered by machine learning, it evolves and gets smarter the more you use it. We've talked about Universal Search over the last couple of years since our acquisition of Command-E, and our teams have been working hard to build on top of that functionality. We rolled out two additional features within Dash beyond Universal Search. The first is stacks, which are smart collections for all the cloud docs in your browser. And similar to how files have folders and songs have playlists, Stacks give you an easily shareable organizational layer for your URLs so that you can seamlessly share multiple links at a time. Stacks use machine learning to offer smart suggestions and organize links for you, saving you from the process of having to manually save all your links. The other feature within Dash is the start page, which is a single dashboard that lets you access Dash's universal search, view your stacks, integrate your calendars to start meetings from there, and get shortcuts to recent work. So if users close their browser or restart their computer, the start page picks up where they left off, letting users get back to their most important work. Dash is currently in closed beta, and we've been carefully rolling it out to more users over the summer. Early feedback has been positive, and we're seeing healthy activation rates and retention rates. While we're leveraging our self-serve go-to-market to acquire users, we're also working with our managed sales force to identify SMB customers that can test and use Dash as early Teams customers. We're excited to continue scaling Dash and iterating on the product based on customer feedback. Over time, we plan to release more advanced use cases, such as Dash Answers, where users can ask any question or receive a specific answer about a piece of content instead of having to click through lots of search results or dig through specific files and folders. I'm looking forward to getting Dash in the hands of many more customers over the coming months. Along with Dropbox Dash, in Q2, we also advanced our core product roadmap with the launch of Dropbox AI. Now, Dropbox Professional and Dropbox Teams users can leverage Dropbox AI on their file previews page to summarize their content with a single click, whether it's a 100-page document or even a long video. Users can also ask a question for Dropbox AI to answer based on content within a file. And over time, we plan to apply this functionality to folders and eventually to users' entire Dropbox. We're encouraged by the early engagement from the users who have tried Dropbox AI for their files. And as we increase discoverability for this new functionality for more users, We're excited to see how Dropbox AI can ultimately increase customers' productivity. We'll continue to evaluate the performance on these new AI-powered product experiences, as well as other in-house capabilities we're building within Dropbox. And we're not doing this alone. Last month, we were featured as a global partner for Meta's Llama 2 launch, and we also announced Dropbox Ventures to support the next generation of AI startups. As we stay on the forefront of this new AI wave, Continuing to use AI responsibly while protecting our customers' privacy is more important than ever. So in June, we published our AI principles, which guide our teams as we develop AI products and features in the years to come. Moving to our second objective, which is evolving the existing Dropbox file sync and share user experience to seamlessly address customers' workflows around documents and videos. In Q2, we made progress in a number of areas to improve churn with individuals and drive higher top of funnel activity for our work users. We also continue driving our company-wide effort to deliver a multi-product solution, integrating a number of our workflow businesses beyond FSS. First, I'll touch on improved churn with individuals. As we discussed on the past several calls, and as the macro environment has become more challenging, we saw an uptick in churn amongst our individual users, notably our MobilePlus customers. Some of this was driven by recent mobile operating system changes, which increased transparency around subscriptions, and some was also due to some areas of app instability. To address the latter issue, our team made significant progress in enhancing our tooling and instrumentation to detect and address reliability issues, which helped reverse the sequential declines in mobile churn that we had seen over the prior quarters. We also made some optimizations around payment processing to make it easier for customers to keep their wallet up to date, which also drove some modest improvements to individuals' churn. In addition to these behind-the-scenes upgrades for our customers, we improved the UX experience and the performance of file uploads. This led to improvement in upload success and our internal testing has showed that we've regained the number one position for upload speeds for large files. We also made an improvement to the speed of our camera uploads on iOS that increases the speed of our most common upload size by up to 40%. I'm proud of the team's work here and quickly addressing areas to drive performance and reliability and ultimately deliver a better experience for our customers. We also remain focused on driving our top of funnel. And in Q2, we made a more concerted effort to surface Teams and professional plans, resulting in an increase in Teams trial starts as well as pro conversions through this more targeted effort. And while it's important to focus on top of funnel, we also made improvements in driving engagement for Teams admins starting a trial, which are necessary leading indicators in our efforts to increase conversion of these users and ultimately team expansion. In Q2, we launched a new activation homepage for admins to easily set up their team and learn about the product. Over time, this homepage will also serve as a jumping off point for Dropbox to introduce higher value capabilities, including our document and video workflows and our new AI-powered features. During this environment where we've seen continued seat contraction among our larger Teams customers who have faced challenges within their own businesses, I'm encouraged to see our increased focus on how we can better serve professionals and small teams. I've talked before about our investments and workflows around videos and documents and the efforts we've made in integrating a number of our businesses into the core Dropbox experience to make it more seamless for customers. In Q2, we began rolling out an integrated bundle, including FSS, DocSend, Sign, and PDF editing for the first time to some of our professional users. Previously, we had sold standalone offerings, such as our Pro FSS and eSign, as a bundle, but the user experience was disjointed for customers as the two products weren't tightly integrated. I'm excited to see our deeper integration efforts provide a more frictionless experience for customers and we'll have more to share next quarter about our multi-product strategy. And while driving multi-product attach rates across our Dropbox users is a long-term opportunity, I'm pleased to also see some momentum in our standalone businesses, such as Formswift, which we acquired late last year, and our in-house video editing tool, Replay, which just launched into GA in April. As a reminder, Formswift provides an online library of forms and templates for small businesses and individuals. We saw outperformance in Formswift's business for the second straight quarter, driven by improved retention and increased account creation through Google sign-in. While Formswith benefits from some seasonality earlier in the year around tax planning, we see opportunities to further leverage Formswith's performance marketing engine, and we're continuing to make progress towards rebranding and deeper integration of Formswith within Dropbox this year. And in our video workflows, Replay has shown a solid start in its first couple of months since we launched it to a wider audience. We're already seeing some beta customers subscribing to the premium add-on, and customer satisfaction scores remain high across our user base of creative professionals. We see a greater opportunity to drive replay adoption as we advance towards our multi-product suite offerings, and I look forward to sharing more next quarter as part of our multi-product update. In closing, we delivered a solid quarter and introduced some exciting AI-powered product experiences to our customers. While we recognize the macro environment remains uncertain, we're focused on improving the product experience within core Dropbox and attaching more value across workflows and AI-driven capabilities. I remain focused on working closely with our product and engineering teams to strengthen our foundation while innovating for our next act. And we look forward to sharing more of what we've been building at our upcoming customer conference in October in New York. It'll be our first major in-person customer event since the pandemic, and I'm excited for more of you to see our product enhancements up close. We'll be sharing more details in the coming weeks, and I hope to see many of you in person soon. And with that, I'll pass it on to Tim.