Dropbox, Inc.

Good afternoon, ladies and gentlemen. Thank you for joining Dropbox's fourth 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 it over to Ishan Gupta with Dropbox's investor relations team. Thank you.

Good afternoon, and welcome to Dropbox's fourth 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 first quarter and fiscal year 2024, and our expectations regarding revenue growth, profitability, operating margin, and free cash flow, as well as our expectations regarding our business, assets, products, strategies, technology, employees, users, demand, 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 those forward-looking statements are set forth in today's earnings release and in our quarterly report on Form 10-Q 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 will now turn the call over to Dropbox's co-founder and chief executive officer, Drew Houston.

Thanks, Ishan, and good afternoon, everyone. Welcome to our Q4 2023 earnings call. Joining me today is Tim Regan, our chief financial officer. I'll first provide a recap of 2023, share a perspective on our fourth quarter, and then close with an overview of our strategy for 2024. Tim will then go over our financial results for Q4 and fiscal year 2023, as well as provide guidance for Q1 and fiscal 2024. Let's get started. In 2023, we had two main business objectives. The first was to build AI-powered product experiences centered around organizing all your cloud content. The second was to continue evolving our core FSS offering to provide a seamless product experience for our customers' workflows. I'm proud of the work our team accomplished on both of these fronts. Starting with building AI-powered product experiences, in 2023, we introduced the first iteration of Dropbox Dash, a standalone universal search product leveraging AI and machine learning. With more of our work spread across hundreds of tabs in a browser, knowledge workers are spending far too much time just finding what they need to do their work. particularly in this new world of distributed work. Dash connects all of your apps, tools, and content in a single search bar, so it's easy to find everything you need in one place, regardless of where it lives. And because Dash is powered by machine learning, it learns about you and your priorities the more you use it. In 2023, Dash moved from closed beta to open beta and represents our first major AI-powered product experience. While still very early, we're gaining valuable insights into the types of customers that are engaging with this product and the features that are generating the most interest. For example, we're seeing that our more engaged and existing users on our Dropbox FSS paid plans tend to adopt Dash and retain at a higher rate. We also made significant progress against our second objective of evolving our core FSS offering to create a better product experience for our customers' workflows. There were several highlights on this front in 2023. including the continued optimizations we made across the platform to reduce churn on a year-over-year basis, improve top of funnel, and ultimately ensure we're delivering the best product experience to our users. Specifically, we made a number of operational enhancements, including improving the sharing experience across our mobile and web services, optimizing our payment processing to reduce churn, and leveraging Google OneTap to streamline and improve the user onboarding experience. Given the size of our registered base, These changes impact millions of users, and we believe the progress we made in 2023 will strengthen our foundation heading into 2024. Additionally, many of our customers lack awareness of our capabilities beyond storage, often asking us for features that we already have, such as e-signature or document tracking and analytics. And we took several steps in the fourth quarter to address this awareness gap and to provide more value to our customers. We introduced our new web redesign that makes it easier for our users to get the most out of the Dropbox platform, including the ability to sign and send documents and use our video products. We also introduced the first generation of our fully integrated bundled offerings for our team's customers. This included updated pricing and packaging with the goal of reflecting the added value of all of our product capabilities. I'll share more on the early results of this initiative in a moment. Along the way, we continue to grow our top line. exceeding the guidance we shared while also achieving record non-GAAP operating margins of over 32%, generating more than $750 million of free cash flow and returning $540 million back to shareholders in the form of share repurchases. Tim will speak to the financial results in more detail, but I'm proud of our focus on improving the overall profitability profile of our business while still investing in new initiatives and growth opportunities. While there was a lot to be proud of last year, Q4 was a challenging quarter. Some of these challenges were expected. For instance, we continue to see the broader economic backdrop that impacts both our teams and document workflow businesses as customers are being more cautious with their spend and exhibiting higher levels of price sensitivity. This resulted in reduced levels of gross new licenses and upsell activity alongside higher churn and downdale. As an example, certain teams' customers, particularly those in the tech sector, continued to reduce licenses due to spending cuts or headcount reductions of their own. FormSwift and DocSend also saw elevated churn in the quarter. And as we discussed on our call last quarter, we traditionally see seasonally low activity within our file sync and share business, as well as our FormSwift business in the fourth quarter of each year. We also anticipated headwinds stemming from strategic business decisions we made last year, which we believe will benefit us in the long run at the cost of some negative impact in the near term. For example, like others have done, we sunset unlimited storage in our advanced plan and transitioned to a metered model. We found that some customers weren't using the plan as intended and were taking advantage of the policy to do things like mine crypto or use a business account for personal use cases or even resell storage. While this change will ultimately translate to increased profitability in the long term, it led to refunds and incremental churn for those customers seeking storage solutions that we no longer offer. We also de-emphasized our family plan as we found that some business users were also using it as a loophole to obtain licenses at a lower cost. As we noted last quarter, this negatively impacted the number of paying users in the quarter. We also faced a few additional challenges in Q4, which we're actively addressing. In Q4, we ran a number of tests and experiments across our individual plans with new trial flows and other initiatives, but they did not generate the uplift we were looking for. However, we still see opportunity here, and we're iterating on these experiments and incorporating the related learnings into our plans for 2024. In addition, the early results on our bundled offerings for Teams have been mixed. As a reminder, our approach was to offer multi-product bundles to new Teams customers at a higher price point to reflect the additional value we were adding to the plans, while our intention was to migrate existing customers to the new SKUs at their current price point. And for now, we've held off on migrating all our existing Teams customers because while we're seeing an uptick in multi-product adoption with new customers, as well as an ARPU lift from these plans, we're also seeing a reduction in top of funnel activity and conversion rates. As a result, we're revisiting our approach. In Q1, we'll keep iterating on our pricing and packaging, and we'll continue to improve the in-product experience for these customers. At the same time, we'll refine our marketing approach and our self-serve engine to ensure that we're properly identifying and serving customers that are interested in FSS-only SKUs versus our multi-product SKUs. Ultimately, we're still aiming to serve those who want multi-product capabilities as we continue to see that customers who engage with these capabilities convert and they retain at notably higher rates than storage-only customers. But we'll be iterating on the best path forward with our bundle strategy and we'll have more to share in the following quarter. All of which brings me to our strategy for 2024. As I've been more hands-on in the business over the last year, I've been refocusing our team and our strategy on the fundamentals of our growth drivers and the quality of our user experience. First, within our file sync and share business, we still see an opportunity to improve the collaborative experience to strengthen the funnel and drive growth. FSS is our largest business line where small improvements can lead to a meaningful financial and customer impact. And in recent years, we focused heavily on churn improvements that resulted in better performance for our individual business, and we see a similar opportunity with our team's customers. For example, many of the actions conducted by our Teams users today are predominantly solo actions, such as storing and viewing content, as opposed to sharing and commenting on shared content. We've seen in the past that as we streamline and remove friction in our sharing and collaborative workflows, like commenting, this contributes to more viral growth, faster team expansion, and higher retention. And we see similar opportunities to improve this experience for Teams as we have for individuals. In addition, we see an opportunity to improve the team admin workflow as well, as the admin approval rate for new licenses on a team account remains low. Team admins often struggle with onboarding new users, and by leveraging the admin console for permissions and controls, we're focused on making improvements to make it easier for admins to discover and leverage admin workflows so they can more easily expand their team deployments. As we mentioned earlier, we'll also invest in our team's plans by iterating on our bundles experience to ensure that our customers are aware of and leveraging our multi-product capabilities. This includes weaving advanced sharing capabilities, such as DocSend and Replay, more seamlessly into our product experience, given our proven strengths in solving sharing for our customers, as well as the viral network effects that stem from sharing content. As we improve these team experiences, we can grow through license expansion or through introducing customers to our premium functionality. Our second big opportunity is with AI-powered product experiences, most notably Dash. Dash is aimed at solving many of the same challenges that we had originally solved with FSS, but instead of the problem of files scattered across different devices, Dash is addressing the challenge with cloud-based content and URLs scattered across hundreds of apps and browser tabs. We have a long history of solving our customers' problems with organizing and searching and sharing content, and we believe our strengths of the scale of our platform, customer trust, and interoperability position us well to solve these same problems. And this is a growing market. IDC estimates the search and knowledge discovery software market to be about $7 billion today, with the potential to more than triple over the next four years. We'll continue to invest in Dash as our lead AI product, and we're taking a similar approach as when we launched Dropbox 1.0. And we're using this beta period with Dash to ensure that we're getting up to a high quality and scalability bar before driving adoption. Our primary focus in 2024 is on finding product market fit with our customers. More specifically, we're going to focus on improving the onboarding, activation, and retention of users on Dash to ensure we're providing the best experience to customers. For example, we noticed users found a lot of friction in adding and connecting Dash to all their different apps. So we're making the experience of connecting apps during onboarding smoother so that we can improve activation rates. We're also investing in experiences like Stacks. improving discoverability, improving sharing, and this is critical to creating the type of virality that was essential to Dropbox's growth in the early years. And once we get the quality of the product experience and metrics like retention to where we want them, we'll run a lot of the same playbook that made Dropbox successful in the past, including growing the product virally, making big investments in sales and marketing, and promoting Dash to our existing FSS users. As we shared earlier, we know our customers are often unaware of our capabilities beyond storage. To this end, last week we announced a partnership with the McLaren Formula One team where Dropbox is becoming an official technology partner. As part of this partnership, McLaren will rely on Dropbox to securely share files and collaborate on video review and approvals, and our branding will be featured on their cars and team assets. This is an important effort to drive awareness of our latest offerings and educate customers and partners about all the ways that Dropbox can help teams work more effectively together. We have ambitious goals in 2024, and I'm excited to work with our teams to achieve everything we've planned. We've also made several strong additions to both our leadership bench as well as our board over the past few months. In December, Eric Cox joined us as our chief customer officer overseeing our go-to-market teams. Eric comes to us from Vimeo, where he was COO, and prior to that, he spent nearly 20 years at Adobe in a variety of roles across sales, marketing, and operations. We also welcome Dr. Andrew Moore to our board of directors. Andrew's a leading expert in AI, machine learning, and robotics, and he's had a decades-long career in academic and technical leadership. He was previously VP for the AI division of Google Cloud and also served as the Dean of Carnegie Mellon University's School of Computer Science. Andrew's technical expertise building AI-powered products will offer invaluable perspective as we invest in AI internally across our product portfolio. Both Eric and Andrew will play an important role in the future of Dropbox, and I couldn't be more excited to partner with them to achieve our goals for the future. In closing, 2023 was a year marked by both successes and challenges, and looking ahead, we're confident that we have the right team in place to execute against our strategy for 2024. This year represents a unique point in our company's evolution. Many of our mature FSS products are seeing slowing growth and newer products like Dash are still early in their life cycle. While we expect that our new products and initiatives will take time before they start to meaningfully contribute to our top line results, we're excited about the large opportunity we see in front of us. As we embark on the next phase of our company's journey, I'm personally invested in building the best products we can for our customers, delivering strong results for our shareholders, and achieving our mission of designing a more enlightened way of working for all knowledge workers who use Dropbox. And with that, I'll turn it over to Tim to share a recap of our 2023 financial performance, as well as our expectations for 2024.