Dropbox, Inc.

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's second quarter 2024 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 1-1 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 Peter Stabler. Please go ahead.

Thank you. Good afternoon and welcome to Dropbox's second quarter 2024 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 2024, 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, 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 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'll now turn the call over to Dropbox's co-founder and CEO, Drew Houston.

Thanks, Peter, and good afternoon, everyone. Welcome to our Q2 2024 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 Q2 financial results and provide an updated outlook for the remainder of the year. I'll start with our business performance. Revenue for the quarter was slightly better than we anticipated, with growth in self-serve individual plans offsetting continued challenges within our team's business. Net new paying user growth improves quarter over quarter, but we expect some volatility to return in the second half of the year. Within our individual SKUs, we're encouraged for the performance of our Essentials product, which posted strong growth in the quarter. Among our document workflow products, performance was largely as expected, as strong adoption of DocSend's Advanced Data Room helped to offset expected seasonal pressure in our FormSwift business. While we continue our work to improve our core FSS performance, and prepare for an expanded rollout of Dash, our AI-powered universal search product, we remain focused on driving shareholder returns through spending discipline and our commitment to returning excess free cash flow to shareholders via our share of purchase program. I'll now share some additional thoughts on our top priorities. As a reminder, this year in our core business, we're primarily focused on improving our team's performance. In parallel, we continue our work to improve the features and functionality of Dash, our AI-enabled universal search product. As we shared previously, the health of our team's business is important because our team's plans feature higher net revenue retention rates, greater customer lifetime value, and more opportunities for license expansion and cross-selling of new products like Dash. As part of our investments here in Q1, we made progress on driving improved trial starts, teams invitations, and higher weekly engagement. And now in Q2, we made further improvements to onboarding and invitation flows which helped increase the number of users activated within new teams. This increase in activation is important because we've seen that the earlier we demonstrate value to multiple team members, the more likely that team's customers retain and expand. These positive indicators reflect some of the progress we're making to improve the health of our team's top of funnel. However, we continue to face headwinds from factors including the challenging macro environment for SMBs, price sensitivity following our recent Teams price increase, and changes we made to the storage limits for our advanced Teams plan. These headwinds have thus far largely offset the progress we've made across our top-of-funnel initiatives. To combat these headwinds and to ensure a tight alignment of our product development and go-to-market efforts, we recently concluded an in-depth refinement of our customer segmentation model. The segmentation work informs our product roadmaps and guides both our self-serve motion and outbound sales teams as we build integrated sales campaigns targeted at key user profiles across our priority industries and geos. For example, we know that our most passionate customers are often those whose professional work centers on external sharing or people who work with large files and create media for a living or some of our most loyal users who've relied on Dropbox for years because of Dropbox's upload speeds and sync performance And we're committed to all these customers and are focusing our product development and go-to-market efforts to support them across priority industries and verticals like professional services, manufacturing, or media. All of these customers are united in needing Dropbox to do three primary jobs for them, securing, organizing, and sharing all their digital content. And in April, we launched several new features that aligned with these customer jobs to be done. First, we launched FSS end-to-end encryption and DocSend Advanced Data Rooms to help customers secure their content and share multiple files with a single link. We launched Microsoft Co-authoring to help customers stay organized with their content. And third, we improved our replay functionality to help users share and comment on video content. We continued to invest in these themes during the second quarter. Specifically, we focused on improving the sharing experience for our customers, given that over 50% of new customer sign-ups are driven by sharing. And over the years, as we've expanded the number of surfaces we address, the sharing experience became somewhat fragmented and inconsistent, which introduced some unnecessary friction and led to some declines in sharing activity. By better aligning our customer experience across platforms, we've been able to reverse these declines, driving year-over-year increases in sharing during Q2. We're excited to see how the focus on improving this user experience translates to increased customer engagement and we'll continue this work to further reduce sharing friction for our users in the quarters ahead. And while Teams is the primary focus for us, individuals remain an important part of our business. In particular, we continue to see more of our individual users sign up through their mobile devices, and it's critical that we offer a compelling experience to these customers. To that end, in Q2, we launched a redesigned mobile web experience, extending the experience we launched to our web-based customers last fall. We also rolled out a redesigned mobile upsell experience focused on educating the user on how trials work and giving them peace of mind that they'll be reminded before their trial ends. Collectively, these changes led to a sizable increase in trial starts and helped contribute to our additions and paying users this quarter. I also wanted to highlight some of the foundational work we're doing on our platform to make it easier for customers to purchase multiple products from us. Historically, customers who purchased an additional product like Replay had to connect and mirror their FSS subscription with these new licenses. So it was an all or nothing proposition with limited flexibility. We've now addressed this challenge by launching partial provisioning, providing customers the ability to add products for subsets of their teams. And later this year, we expect to roll out standalone purchasing of products untethered from an FSS subscription. as we aim to give our customers the option to purchase the products that are best suited for them. Partial provisioning and standalone purchasing will not only provide greater flexibility when selling our current products, but will be critical to the expanded rollout of Dash, which we expect to offer as both an add-on feature to existing FSS plans, as well as a standalone product. Additionally, we continue to iterate on our bundling strategy. As we've discussed, our launch of product bundles last October fell short of our expectations in response we've lowered our pricing on some of these bundles last quarter. This change in price mitigated some of the pressures we had been seeing, but did not lead to a meaningful inflection in users converting to these plans. We're therefore devoting our efforts to ensuring that we're offering a compelling mix of features and functionality to these plans across our mobile, desktop, and web surfaces, whereas our initial strategy was primarily web-focused. We've gotten a lot of valuable experience in beginning to introduce bundles for our customers, including extending our commerce and identity platforms to enable bundled products. These foundational improvements will enable us to offer future combinations of features and functionality as we launch or acquire new products. I'll now provide a quick update on Dash, our AI-powered universal search product. This quarter, we made great products on improving the Dash product and capabilities and evolving our go-to-market approach. For example, the team, once again, drove double-digit increases in search success rates for new and existing users and nearly doubled some of our search relevance metrics. The team also drove engagement increases in key dash features, such as stacks on the start page, and all of these are positive signs that we're building a performant and high-quality product. We also continue to engage deeply with potential customers and incorporate their feedback into our roadmap. For example, based on user feedback, we're enriching Dash with deeper AI summarization capabilities and continuing our work to maximize search efficiency. Beyond potential end users, we're also closely partnering with IT administrators as they play a central role in deployment across organizations. Based on these conversations, it's clear that IT admins have a lot of unmet needs when it comes to securing their team's content across multiple content platforms. Security is therefore a central focus in our Dash development efforts And we're confident we're going to have a competitive offering that provides admins with a lot of new control and transparency that they need. We've also been working on our plan go-to-market strategy. Over half a million paying teams trust Dropbox to secure, organize, and share digital assets. Our teams are already busy identifying the best prospects for our outbound sales motion, where we're already seeing strong signals of interest from our FSS customers. And as awareness of universal search and Dash's capabilities grow, we'll also lean into a self-serve sales motion. In closing, we continue to make progress on improving the user experience of our core FSS product, and we're seeing some positive response in our funnel. At the same time, we're investing in capabilities that will improve the purchasing flexibility for our customers who want to buy multiple products from us. We're still facing headwinds, and we expect the second half of the year to include some volatility, but we're confident that the investments we're making better position us to help our customers secure, organize, and share all of their digital content. We're also excited by the improvements we've made to our Dash product. We'll have more to share in the coming months as we move closer to expanding our rollout. While we work to achieve both improved core performance and a successful Dash expansion, we remain committed to driving shareholder returns, seeking efficiency gains, and investing prudently. I want to thank everyone on the Dropbox team for working hard to fulfill our vision and also thank our shareholders for their support. I'll now turn the call over to Tim to share a recap of our second quarter financial performance. as well as our expectations for the remainder of the year.