This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: 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 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 Peter Stabler. Please go ahead.
spk02: 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.
spk21: 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 pay and user growth improved 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 an 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 team's 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. This 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 continue 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 signups 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 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 flexibilities. 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 access 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 gonna 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 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.
spk14: Thank you, Drew.
spk03: I'll cover our financial highlights from Q2, provide guidance for Q3, and offer some updated thoughts on our full year 2024 outlook, starting with our results for the second quarter. Total revenue for Q2 increased 1.9% year-over-year to $635 million, slightly ahead of the high end of our prior guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter, yielding a 1.8% year-over-year constant currency growth rate. Total ARR grew to a total of $2.573 billion, up 2.9% year-over-year. On a constant currency basis, growth was 2.2% year-over-year. We exited the quarter with 18.22 million paying users, adding approximately 63,000 net new paying users on a sequential basis. Average revenue per paying user was $139.93. Relative paying user strength across our self-serve individual plans was offset by continued challenges for our team's product and expected seasonality and other pressures weighing on our Form Swift and signed businesses. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, All income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchase intangibles, certain acquisition-related expenses, net loss on real estate assets, and workforce reduction expenses. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the second quarter P&L. Gross margin was 84.5% for the quarter. As mentioned previously, the primary driver of the year-over-year increase in gross margin was the increase in the useful life of our servers from four to five years effective January 1st of this year. This change resulted in approximately $9 million of benefit to gross profit in the second quarter. The impact of this change was weighted towards the first half of this year. For the full year, we expect a benefit of approximately $30 million. Operating expenses were $308 million, up approximately 2% year-over-year. Operating margin was 35.9%, ahead of our guidance of 33%, and up 170 basis points from the year-ago period. Compared to our guidance, we ended the quarter with modestly lower marketing and outside services Hiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations. Net income for the second quarter was $194 million, up 12% year over year. Diluted EPS for the first quarter was 60 cents based on 324 million diluted weighted average shares outstanding compared to 51 cents in the year-ago quarter, representing an 18% year-over-year increase. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.1 billion. As a reminder, in the second quarter, we paid the second tranche of our partial San Francisco headquarters lease buyout, totaling $14.9 million. Second quarter cash flow from operations was $231 million, an increase of 23% versus the year-ago period. Capital expenditures in the quarter totaled $6 million. This resulted in quarterly free cash flow of $225 million compared to $185 million in Q2 of 2023. Free cash flow per share was 69 cents. representing a 28% year-over-year increase. In the quarter, we also added $35 million to our finance leases for data center equipment. In Q2, we repurchased just over 11 million shares, spending $260 million. As of the end of the second quarter, we had approximately $868 million remaining under our current repurchase authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases with the intention of reducing our share counts over time. I'd now like to share our 2024 third quarter and updated full year guidance, where I will also provide some context on the thinking behind this guidance. For the third quarter of 2024, we expect revenue to be in the range of $635 to $638 million. We expect an FX tailwind of less than a half a million dollars. We expect non-GAAP operating margin to be approximately 32%. Finally, we expect diluted weighted average shares outstanding to be in the range of $317 million. to 322 million shares based on our trailing 30-day average share price. For the full year, we are narrowing our full-year revenue outlook on an as-reported and constant currency basis by raising the bottom of our ranges by $5 million. As a result, our reported revenue guidance adjust to 2.540, to $2.550 billion, while our constant currency guidance adjusts to $2.537 to $2.547 billion. Consistent with prior guidance, we expect gross margin to be in the range of 83 to 83.5%. For non-GAAP operating margin, we now expect to land between 33.5 and 34%. for the full year, up from our prior guidance of 32.5 to 33%. Our expectation for free cash flow is unchanged at $910 to $950 million. We continue to expect between $20 and $30 million of capital expenditures for the year. Our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year. Finally, we expect diluted weighted average shares outstanding to be in the range of 323 to 328 million shares, based on our trailing 30-day average share price. This represents a reduction of 3 million shares for each end of the range, when compared to our previous full year guidance of 326 to 331 million shares. I'll now share some additional context regarding our outlook. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. The operating environment remains challenging for small businesses, and our outlook embeds our expectations for some increased near-term volatility, particularly with regard to our Teams business, where we anticipate near-term down-sell risk associated with some larger accounts that will likely impact our paying user count in Q3 and Q4. In addition, we also expect seasonal pressure on FormSwift's paying user count as customers that primarily use FormSwift during tax season depart the platform. And to a lesser extent, some headwinds within our sign business stemming from the security incident we mentioned last quarter. Each of these factors will serve as headwinds to our revenue, billings, and paying user numbers. Thus, we expect to end the year with total paying users roughly flat from where we ended the second quarter. Regarding non-GAAP operating margin, our raised full-year outlook reflects our performance year-to-date and our continued hiring discipline, along with an emphasis on hiring in low-cost locations. Consequentially, we expect some incremental expense as we invest in marketing initiatives and prepare for our annual customer-focused event in the fourth quarter, while also maintaining some optionality to spend behind discrete initiatives. Additionally, our second half outlook embeds a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers. We are maintaining our full year-free cash flow guidance, While we're pleased with the improved outlook for full-year non-GAAP operating margin, there are several factors that impact the flow-through to free cash flow. For example, the aforementioned items impacting our paying user numbers have a more immediate impact on billings and cash. Similarly, FX rates have deteriorated since our initial guidance, which also has a more immediate impact on billings and cash. We also expect to earn less interest income given our increased share repurchase activity, which impacts free cash flow, but does not impact operating margins. In conclusion, we continue to focus on solidifying our core file sync and share business by focusing on our core competencies and bringing more value to our customers. Our objective with the core business is to continue to drive revenue growth and lay the foundation for our future while concurrently generating profitability and increasing cash flow per share. We also continue to invest in new sources of long-term growth, most notably Dash, where we are getting closer to introducing this functionality more broadly to our customers. We are making progress across these objectives and believe that these efforts will culminate in creating long-term value for our shareholders. With that, operator, please open the line for questions.
spk12: Thank you. And as a reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself from the queue, press star 11 again. One moment for our first question that comes from the line of Brent Thill with Jefferies. Please proceed.
spk09: Hi, Drew. Hi, Tim. Thank you again for taking my questions. This is Love Soda on for Brent Thill. Maybe the first one for you, Drew, you know, as we look at, you know, a bunch of the horizontal applications, there's been a big investor debate around, you know, seat-based pricing versus volume-based pricing in the age of AI. You know, as you look at that, could you just share your thoughts on the monetization plans there, and how do you think you're injecting more volume-based pricing to make up for any seat-based degradation that you might see?
spk21: Sure. Thanks for the question. I mean, so to be clear, Dash is pre-revenue. It's in beta right now. But the way we're thinking about it is, or the way we're thinking about pricing and packaging, in a lot of ways, we'll be heavily informed by what's worked, what worked with Dropbox 1.0. and a lot of the playbook that we had around freemium and self-serve and sharing-driven virality and then bridging to self-serve team accounts and moving up market into managed accounts, we envision taking advantage of a lot of the same levers with Dash. We expect that the pricing model should be pretty straightforward. Obviously, if we need somewhat If there are different knobs and dials in terms of like AI usage or volume-based pricing, we're not dogmatic about any one model, but our preference is to keep things simple for our customers. And so far we haven't, when talking to prospects, we haven't seen a lot of pushback or concerns on a pretty straightforward subscription model.
spk09: Got it. And then just a quick follow-up on the teams, the challenges that you're seeing on the team side. I guess, is there a way to dig deeper and parse out how much of this is macro versus the pricing reaction? And is there an element of competitive share losses on that side? Just additional thoughts there would be appreciated. Thank you.
spk17: Yep.
spk21: So I'd say it's largely what we saw last quarter as a continuation of prior trends. We saw that some of the price increases we've made over the last few years ended up pulling. On balance, they were beneficial, but they pulled forward. They represented something of a pull forward. And then for new customers, higher prices plus more price sensitivity generally has led to a weakening trend. of Top of Funnel, which we've been addressing in a number of ways. I mean, one, by reverting some of the pricing changes we made last October when we introduced some of the bundles. And then second is just the nuts and bolts or just the fundamentals of removing friction from the onboarding experience. And we found that when we look at – when you just watch – when we sort of sit down as a customer or watch a customer – walk through the onboarding experience, there's still a lot of steps that we could simplify. And so we've seen a lot of good early returns and green shoots around, okay, as we simplify the team onboarding experience, as we make it easier to invite other folks to your team and get set up, as we rationalize some of the sharing features, some of the stuff that I talked about in my earlier remarks, but just really tuning those basic user and viral loops that there's still a lot of headroom there. And when we look at different funnel metrics on the team's business and compare them to other SaaS products with similar characteristics, we still see some headroom there. But that said, we're not out of the woods. I would say these improvements haven't yet offset some of the bigger picture, just like macro pressure or other factors, but it's heading in the right direction.
spk08: Got it. And none of it is competitive, right?
spk21: Well, I'm sure some of it's competitive, although I wouldn't say there's like a – I mean, we've had kind of – we've competed against the, you know, Microsofts and Googles of the world since the company was founded. So I wouldn't say there's any new competitive dynamics, but for sure the platform companies or, you know, the product that's bundled in the Office suite is going to be our primary competitor in most cases. So that's definitely – a factor, but that would have also been a factor 10 years ago.
spk07: Got it. Thank you so much.
spk12: Thank you. Our next question comes from the line of Steven Enders with Citi. Please go ahead.
spk06: Okay, great. Thanks for taking the questions here. I guess maybe just to start just on Dash, on the AI product set, I guess what's kind of been the feedback you've gotten so far for how customers might be thinking about adopting that and utilizing it? And I guess secondarily, how are you thinking about the monetization for that at this point and trying to drive share wallet within customers?
spk21: Yep. So early feedback has been good. I mean, I think the first thing we look for is that, uh, the value prop clearly resonates, right? Um, and it's hard, hard to find someone that doesn't have these issues of having a hundred tabs open and 10 different search boxes. Um, and kind of the mayhem of the new world of distributed work. Um, so a lot, and then once you show customers that this is actually a solvable addressable problem, um, they're pleasantly surprised. So I think the value prop resonates. And then Dash specifically, we've made a lot of progress in getting the product to where we want it to be from a quality standpoint. So for example, in Q2, we made big advances in continuing to make double-digit percentage point improvements in search success rates, search ranking quality, things like that. which is important because the first thing we do is get the product experience right. Then we look at engagement and retention. And then once those are in good shape, then we turn on distribution and monetization. So I'm really happy with the progress we're making on the product quality side. And it's great to see customers or it's great to see the early product resonate with customers who are kind of using it for their like search box for their for their private information and people understand that, Oh yeah, there's a bunch of chat GPT is great, but there's a lot of questions that chat GPT can answer. You know, if you ask her like, you know, what's my, when does, um, my lease expire or where's that slide from last year's product deck or product launch? Um, existing tools can't really solve that, but, uh, but dash can. So, uh, very, and then I'd say there's also, um, In another area that's been interesting is that the IT admins have a lot of unmet needs around keeping track of what everybody's sharing across multiple platforms. And so we see a lot of opportunity to address some new unmet needs on the security side. So we're very excited about the roadmap for Dash and we'll have a lot more to share on the specifics of both the product functionality and some of the, um, uh, and things like pricing and packaging in the coming months this year.
spk06: Okay. That's a, that's helpful context. And, um, you know, I just will look forward to what those, uh, what those look like. Um, I guess on some of the, the document workflow products, it sounds like, um, you know, seeing a bit of an impact with, with sign and, and, you know, form Swift is, um, I guess we're on offer tax season, but can you give a little more clarity on, you know, what happened or what the customer activity was post, um, post security challenges with sign and, uh, the impact that that's been having on, on the outlook here?
spk21: Um, so pretty contained. I mean, to begin with, uh, the sign business is a low single digit percentage of our overall revenue. Um, and then it was, you know, we've seen, uh, pretty minimal impact on the business or on the sign business overall. And then importantly, it just affected all, everything we know indicates that the incident was isolated to the Dropbox sign infrastructure, meaning it didn't impact the other Dropbox products. So overall, the incident hasn't had a material impact on our overall revenue or operations, and we don't believe it's likely to. Okay.
spk06: All right. Appreciate the commentary there. And thanks for taking the questions.
spk12: Thank you. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.
spk11: Hi, thank you very much. Good to talk to you, Drew and team.
spk18: Drew, I was curious to get your thoughts on a couple of things. So the right to win for Dropbox with Dash, I know admittedly it's not out yet. But what gives Dropbox the right to win in this space? And do you think this new subcategory you're trying to honor, but actually bring in a new category of users that may not be initially spurred by document sharing and the things that Dropbox has been always good with. Ultimately, do you think there's maybe an unmet need in the market for perhaps a Dropbox site? Not that you would not have considered. I'm sure you've popped through all this stuff where you have a lower price point, fraction of the functionality, but then these folks get used to the system, you maybe throw in AI for free, and then you upsell them to the premier versions of Dropbox. I'm just wondering how you're thinking about potential decision paths down the line. Thank you so much once again.
spk10: Sure, sure.
spk21: Yeah. Thanks, Kesh. So first on Dash, I mean, the origin of Dash was really kind of solving the kind of modern equivalent of or today's equivalent of, of the problem I started with, um, when I founded the company, I mean, which is really, um, in the beginning, like I felt like my stuff was everywhere. Couldn't find it. Um, back then it looked like my files around these different devices and operating systems. Um, and the solution was like, let's sync everything to the cloud. Um, but today kind of back to that familiar problem, like my stuff is everywhere. Can't find it. Um, But in addition to files, obviously, we do a lot of work in our browsers now. And so what used to be 100 files on my desktop is now also 100 tabs in my browser. And it's really that kind of first principles. And it's like frustration as an end user personally, where I'm like, it is so hard to find just the basic information I need at work. And this is a problem that's getting worse, not better, as sort of one of the unintended consequences of this, of the proliferation of all the different tools and platforms that we're using. And a recognition that no one's solving this problem at scale. Microsoft hasn't solved this problem. Google hasn't. No one has. And it didn't seem like there was anyone really putting the necessary firepower on solving this problem. And this was also before generative AI really took off. But I'd summarize by saying this is a universal knowledge worker need. When we talk to our customers, it's hard to find someone who doesn't have this problem. Our right to win is it's a natural evolution for our customers, certainly Dropbox customers. It doesn't take a lot to explain that we're evolving from helping you organize your files to organizing all your cloud content. That's a pretty straightforward, logical leap for people. And then to people who aren't Dropbox files that can share customers. It gives us a big reason to be relevant to new generations of folks that grew up in the browser instead of the file system. So we think it's a big opportunity to reach truly net new users and get them on our platform. And then we're certainly not the only company working on this, but our scale... and our privacy and security track record are a big advantage when we talk to customers. So as a first example, unlike Dropbox 1.0, as we're launching Dash, we already have half a million paying business accounts already and 18 million subscribers. And so once we're happy with the product experiences, you can believe that we'll be turning on distribution services and introducing our existing customer base to Dash as rapidly as possible. We also see some promising early signal that folks that are paying files and can share subscribers adopt and retain on Dash at twice the rate as people who are just kind of visiting the website or who aren't. And then on the trust side, I mean, this is – I mean, it's like – in general security is top of mind for every customer and, um, and people are entrusting us with their most important information and have been for a long time. Um, and then AI, as you'd imagine, amplifies these concerns even more as people, um, want a lot of transparency and control about where their data goes, um, as they put it into these new apps or new AI systems. And so, um, the fact that we're very transparent about this, um, and have a track record. And we already have all these companies storing their most important information on Dropbox. It makes this a lot more of a natural evolution for us than someone starting from scratch or a startup or even a growth stage startup. And then compared to platform companies, so far what we're seeing is that as you see Microsoft Copilot or Google's similar features in Workspace. They work super well within their ecosystem but don't work outside. And Universal Search is by definition a platform agnostic thing because at the end of the day we all use tools from many of the different ecosystems. It's very rare that you or your team are just in one. So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all these disparate tools and ecosystems. And that's just something that we put a lot more attention to than any individual, um, than even, even the bigger companies. And then you had a second part around, um, you know, what I'd say just like creativity on pricing and packaging. Um, how do we get people in the, can we, um, give certain things away for free or otherwise, um, explore other levers beyond just like subscript, like a basic subscription. The answer is absolutely. Um, we innovated a lot on that playbook in the beginning. Um, I'm sure we'll innovate on it again. We'll sort of take the best parts, but I'm sure some aspects will be different. And, you know, we earlier talked about volume-based pricing versus seat-based pricing, you know, using free or loss leader type things, using bundling. We're going to explore all that.
spk17: Thanks so much for the detailed compliments. Thank you so much. Thanks, Josh.
spk12: Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please go ahead.
spk20: Great. Thanks for taking my question. This is Austin Colon for Pat. So, Drew, when you think about some of the things you guys have been working through, whether it's the go-to-market for the individual plans or the pricing on bundles, I mean, like, what inning do you feel like you're in on plugging some of these holes and getting to a place where you really have the right fit across these plans?
spk15: Thank you.
spk21: Yep. I don't know if I have, like, a specific inning number for you. I think there's still – and we're showing – I think this year is, like, our first considered effort in some of these parts of the funnel – And we're seeing some of those efforts bear fruit, and I think there's still a lot of headroom there. But it's hard to speculate beyond what we've kind of already reflected in our guidance. But we certainly see lots of opportunities to continue reducing friction in the onboarding experience, the team expansion experience, and sharing. We've had some good milestones that we hit last quarter. So as I said earlier, sharing is up year on year. um, which is, and so sort of reversing what was kind of stable or slightly declining. So that, that's the kind of thing I like to see. And then also we're gearing, you know, I think one of the best things we can do to grow the business is really get our, um, a lot of these platform improvements are, are really important. So some of the things around our billing engine, having more flexibility and subscriptions and continuing to tune up our technical infrastructure to be able to support cloud content and go beyond just files. These are long-term investments that are going to bear fruit, are going to be really valuable as we start to scale up Dash. So I think there's a lot of different, or I'm excited about the portfolio of investments we have, and some of them are kind of incremental optimizations and some of the funnel things I mentioned, and some we believe are really big new growth levers like Dash. Great. Thank you.
spk12: Thank you. And as a reminder, if you do have a question, simply press star 11 to get in the queue. Our next question is from Mark Murphy with JP Morgan.
spk19: Thank you very much, Tim. You had mentioned that hiring was slower than anticipated, and I think you said due to recognizing additional efficiencies. I'm wondering if you can elaborate on the nature of the For instance, are you using some lower-cost regions? Are you seeing some productivity gain from internal use of Gen AI, maybe from GitHub Copilot or something along those lines? Is there something different that you're enabling?
spk03: Sure. Good question, Mark. I think it's a little bit of all of those things. Our margin outperformance was largely driven by lower headcount related costs, as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas, as well as prioritizing hiring in lower cost locations, exactly to your point. And maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiencies we're driving, and we'll continue to look for additional opportunities.
spk19: Okay, understood. And then, Drew, I appreciated all the insights you provided while you were answering Cash's question. Can you remind us if there is any update on when you think GASH is going to reach GA and where your thoughts are on the – on the pricing strategy for dash so that we might be able to, you know, uh, kind of run that through our models, um, and start to think about a potential contribution ramp. Yep.
spk21: Um, so we'll have a lot more to share after the, after our launches, uh, later this year. Um, but I think in principle, um, there, you know, we'll be drawing heavily from the playbook or the things that have worked with, uh, with pricing and packaging with Dropbox. So we'll certainly make Dash available standalone, and as a standalone subscription, we'll be introducing it to our FileSync and Share customers in different ways. But it's a little early to give you specific numbers or to plug the cells into the spreadsheet.
spk08: Thank you.
spk12: Thank you. And it appears that there's no further questions in the queue. I will turn the call back to Peter Stabler for closing remarks.
spk02: Thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon.
spk12: And thank you all for participating in today's conference. You may now disconnect. Thank you. Bye. Thank you. Thank you.
spk01: Bye. Thank you. you
spk12: 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.
spk02: 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.
spk21: 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 and self-serve individual plans offsetting continued challenges within our team's business Net new paying user growth improved 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 DocSense 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 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 to 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 signups 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 product 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.
spk14: Thank you, Drew.
spk03: I'll cover our financial highlights from Q2, provide guidance for Q3, and offer some updated thoughts on our full year 2024 outlook, starting with our results for the second quarter. Total revenue for Q2 increased 1.9% year over year to $635 million. slightly ahead of the high end of our prior guidance range. As expected, foreign exchange rates had a minimal impact on revenue for the quarter, yielding a 1.8% year-over-year constant currency growth rate. Total ARR grew to a total of $2.573 billion, up 2.9% year-over-year. On a constant currency basis, growth was 2.2% year over year. We exited the quarter with 18.22 million paying users, adding approximately 63,000 net new paying users on a sequential basis. Average revenue per paying user was $139.93. Relative paying user strength across our self-serve individual plans was offset by continued challenges for a team's product and expected seasonality and other pressures weighing on our Form SWIFT and signed businesses. Before we continue with further discussion of our P&L, I would like to note that unless otherwise indicated, all income statement figures mentioned are non-GAAP and exclude stock-based compensation, amortization of purchase intangibles, certain acquisition-related expenses, net loss on real estate assets, and workforce reduction expenses. Our non-GAAP net income also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the second quarter P&L. Gross margin was 84.5% for the quarter. As mentioned previously, the primary driver of the year-over-year increase in gross margins was the increase in the useful life of our servers from four to five years effective January 1st of this year. This change resulted in approximately $9 million of benefit to gross profit in the second quarter. The impact of this change was weighted towards the first half of this year. For the full year, we expect a benefit of approximately $30 million. Operating expenses were $308 million, up approximately 2% year over year. Operating margin was 35.9% ahead of our guidance of 33% and up 170 basis points from the year ago period. Compared to our guidance, we ended the quarter with modestly lower marketing and outside services spend. Hiring in the quarter was also lower than originally anticipated as we've identified additional efficiency opportunities across our operations. Net income for the second quarter was $194 million, up 12% year-over-year. Diluted EPS for the first quarter was 60 cents, based on 324 million diluted weighted average shares outstanding, compared to 51 cents in the year-ago quarter, representing an 18% year-over-year increase. Moving on to our cash balance and cash flow. We ended the quarter with cash and short-term investments of $1.1 billion. As a reminder, in the second quarter, we paid the second tranche of our partial San Francisco headquarters lease buyout, totaling $14.9 million. Second quarter cash flow from operations was $231 million, an increase of 23% versus the year-ago period. Capital expenditures in the quarter totaled $6 million. This resulted in quarterly free cash flow of $225 million compared to $185 million in Q2 of 2023. Free cash flow per share was 69 cents, representing a 28% year-over-year increase. In the quarter, we also added $35 million to our finance leases for data center equipment. In Q2, we repurchased just over 11 million shares, spending $260 million. As of the end of the second quarter, we had approximately $868 million remaining under our current repurchase authorization. Our philosophy on share repurchases has not changed. We remain committed to returning a significant portion of our free cash flow to shareholders in the form of share repurchases. with the intention of reducing our share counts over time. I'd now like to share our 2024 third quarter and updated full year guidance, where I will also provide some context on the thinking behind this guidance. For the third quarter of 2024, we expect revenue to be in the range of $635 to $638 million. We expect an FX tailwind of less than a half a million dollars. We expect non-GAAP operating margin to be approximately 32%. Finally, we expect diluted weighted average shares outstanding to be in the range of 317 million to 322 million shares based on our trailing 30-day average share price. For the full year, we are narrowing our full-year revenue outlook on an as-reported and constant currency basis by raising the bottom of our ranges by $5 million. As a result, our reported revenue guidance adjusts to 2.540 to $2.550 billion, while our constant currency guidance adjusts to 2.537 to 2.547 Consistent with prior guidance, we expect gross margin to be in the range of 83 to 83.5%. For non-GAAP operating margin, we now expect to land between 33.5 and 34% for the full year, up from our prior guidance of 32.5 to 33%. Our expectation for free cash flow is unchanged. at $910 to $950 million. We continue to expect between $20 and $30 million of capital expenditures for the year. Our outlook for finance lease additions is unchanged at approximately 7% of revenue for the full year. Finally, we expect diluted weighted average shares outstanding to be in the range of 323 to 328 million shares. based on our trailing 30-day average share price. This represents a reduction of 3 million shares for each end of the range, when compared to our previous full-year guidance of 326 to 331 million shares. I'll now share some additional context regarding our outlook. Consistent with our historical approach, our guidance reflects what we have a high degree of visibility into today. The operating environment remains challenging for small businesses, and our outlook embeds our expectations for some increased near-term volatility, particularly with regard to our team's business, where we anticipate near-term down-sell risk associated with some larger accounts that will likely impact our paying user count in Q3 and Q4. In addition, we also expect seasonal pressure on FormSwift's paying user count as customers that primarily use FormSwift during tax season depart the platform, and to a lesser extent, some headwinds within our signed business stemming from the security incident we mentioned last quarter. Each of these factors will serve as headwinds to our revenue, billings, and paying user numbers. Thus, we expect to end the year with total paying users roughly flat from where we ended the second quarter. Regarding non-GAAP operating margin, our raised full-year outlook reflects our performance year to date and our continued hiring discipline, along with an emphasis on hiring in low-cost locations. Sequentially, we expect some incremental expense as we invest in marketing initiatives. and prepare for our annual customer-focused event in the fourth quarter, while also maintaining some optionality to spend behind discrete initiatives. Additionally, our second half outlook embeds a decreasing benefit to gross margin from the aforementioned change in the useful life of our servers. We are maintaining our full-year free cash flow guidance. While we're pleased with the improved outlook for full-year non-GAAP operating margin, there are several factors that impact the flow through free cash flow. For example, the aforementioned items impacting our paying user numbers have a more immediate impact on billings and cash. Similarly, FX rates have deteriorated since our initial guidance, which also has a more immediate impact on billings and cash. We also expect to earn less interest income given our increased share repurchase activity, which impacts free cash flow, but does not impact operating margins. In conclusion, we continue to focus on solidifying our core file sync and share business by focusing on our core competencies and bringing more value to our customers. Our objective with the core business is to continue to drive revenue growth and lay the foundation for our future while concurrently generating profitability and increasing cash flow per share. We also continue to invest in new sources of long-term growth, most notably Dash, where we are getting closer to introducing this functionality more broadly to our customers. We are making progress across these objectives and believe that these efforts will culminate in creating long-term value for our shareholders. With that, operator, please open the line for questions.
spk12: Thank you. And as a reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself from the queue, press star 11 again. One moment for our first question that comes from the line of Brent Thill with Jefferies. Please proceed.
spk09: Hi, Drew. Hi, Tim. Thank you again for taking my questions. This is Love Soda on for Brent Thill. Maybe the first one for you, Drew, you know, as we look at, you know, a bunch of the horizontal applications, there's been a big investor debate around, you know, seat-based pricing versus volume-based pricing in the age of AI. You know, as you look at that, could you just share your thoughts on the monetization plans there, and how do you think you're injecting more volume-based pricing to make up for any seed-based degradation that you might see?
spk21: Sure. Thanks for the question. I mean, so to be clear, Dash is pre-revenue. It's in beta right now. But the way we're thinking about it is, or the way we're thinking about pricing and packaging, in a lot of ways, we'll be heavily informed by what's worked, what worked with Dropbox 1.0. and a lot of the playbook that we had around freemium and self-serve and sharing-driven virality and then bridging to self-serve team accounts and moving up market into managed accounts, we envision taking advantage of a lot of the same levers with Dash. And we expect that the pricing model should be pretty straightforward. I mean, obviously, if we need somewhat If there are different knobs and dials in terms of like AI usage or volume based pricing, we're not dogmatic about any one model, but our preference is to keep things simple for our customers. And so far we haven't, when talking to prospects, we haven't seen a lot of pushback or concerns on a pretty straightforward subscription model.
spk09: Got it. And then just a quick follow up on the teams, the challenges that you're seeing on the team side. I guess, is there a way to dig deeper and parse out how much of this is macro versus the pricing reaction? And is there an element of competitive share losses on that side? Just additional thoughts there would be appreciated. Thank you.
spk21: Yep. So I'd say it's largely what we saw last quarter as a continuation of prior trends. We saw that some of the price increases we've made over the last few years ended up pulling. On balance, they were beneficial, but they pulled forward. They represented something of a pull forward. And then for new customers, higher prices plus more price sensitivity generally has led to a weakening trend. of Top of Funnel, which we've been addressing in a number of ways. I mean, one, by reverting some of the pricing changes we made last October when we introduced some of the bundles. And then second is just the nuts and bolts or just the fundamentals of removing friction from the onboarding experience. And we found that when we just watch, when we sort of sit down as a customer or watch a customer work, walk through the onboarding experience, there's still a lot of steps that we could simplify. And so we've seen a lot of good early returns and green shoots around, okay, as we simplify the team onboarding experience, as we make it easier to invite other folks to your team and get set up, as we rationalize some of the sharing features, some of the stuff that I talked about in my earlier remarks, but just really tuning those basic user and viral loops that there's still a lot of headroom there. And when we look at different funnel metrics on the team's business and compare them to other SaaS products with similar characteristics, we still see some headroom there. But that said, we're not out of the woods. I would say these improvements haven't yet offset some of the bigger picture, just like macro pressure or other factors, but it's heading in the right direction.
spk08: Got it. And none of it is competitive, right?
spk21: Well, I'm sure some of it's competitive, although I wouldn't say there's like a – I mean, we've had kind of – we've competed against the, you know, Microsofts and Googles of the world since the company was founded. So I wouldn't say there's any new competitive dynamics, but for sure the platform companies or, you know, the product that's bundled in the Office suite is going to be our primary competitor in most cases. So that's definitely – a factor, but that would have also been a factor 10 years ago.
spk07: Got it. Thank you so much.
spk12: Thank you. Our next question comes from the line of Steven Enders with Citi. Please go ahead.
spk06: Okay, great. Thanks for taking the questions here. I guess maybe just to start just on Dash, on the AI product set, I guess what's kind of been the feedback you've gotten so far for how customers might be thinking about adopting that and utilizing it? And I guess secondarily, how are you thinking about the monetization for that at this point and trying to drive share wallet within customers?
spk21: Yep. So early feedback's been good. I mean, I think the first thing we look for is that, uh, the value prop clearly resonates, right? Um, and it's hard, hard to find someone that doesn't have these issues of having a hundred tabs open and 10 different search boxes. Um, and kind of the mayhem of the new world of distributed work. Um, so a lot, and then once you show customers that this is actually a solvable addressable problem, um, they're pleasantly surprised. So I think the value prop resonates. And then Dash specifically, we've made a lot of progress in getting the product to where we want it to be from a quality standpoint. So for example, in Q2, we made big advances in continuing to make double-digit percentage point improvements in search success rates, search ranking quality, things like that. which is important because the first thing we do is get the product experience right. Then we look at engagement and retention. And then once those are in good shape, then we turn on distribution and monetization. So I'm really happy with the progress we're making on the product quality side. And it's great to see customers or it's great to see the early product resonate with customers who are kind of using it for their like search box for their for their private information and people understand that, Oh yeah, there's a bunch of chat. GPT is great, but there's a lot of questions that chat GPT can answer. You know, if you ask her like, you know, what's my, when does, um, my lease expire or where's that slide from last year's product deck or product launch? Um, existing tools can't really solve that, but, uh, but dash can. So, uh, very, and then I'd say there's also, um, In another area that's something that's been interesting is that the IT admins have a lot of unmet needs around keeping track of what everybody's sharing across multiple platforms. And so we see a lot of opportunity to address some new unmet needs on the security side. So we're very excited about the roadmap for Dash and we'll have a lot more to share on the specifics of both the product functionality and some of the, and things like pricing and packaging in the coming months this year.
spk06: Okay. That's a, that's helpful context. And, you know, I just will look forward to what those, what those look like. I guess on some of the document workflow products, it sounds like, you know, seeing a bit of an impact with, with sign and, and, you know, form Swift is, you know, I guess we're on for tax season, but can you give a little more clarity on, you know, what happened or what the customer activity was post, um, post security challenges with sign and, uh, the impact that that's kind of having on, on the outlook here?
spk21: Um, so pretty contained. I mean, to begin with, uh, the sign business is a low single digit percentage of our overall revenue. Um, and then it was, you know, we've seen, uh, pretty minimal impact on the business or on the sign business overall. And then importantly, it just affected all, everything we know indicates that the incident was isolated to the Dropbox sign infrastructure, meaning it didn't impact the other Dropbox products. So overall, the incident hasn't had a material impact on our overall revenue or operations, and we don't believe it's likely to. Okay.
spk06: All right. Appreciate the commentary there. And thanks for taking the questions.
spk12: Thank you. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.
spk11: Hi. Thank you very much. Good to talk to you, Drew and team.
spk18: Drew, I was curious to get your thoughts on a couple of things. So the right to win for Dropbox with Dash, I know admittedly it's not out yet. But what gives Dropbox the right to win in this space? And do you think this new subcategory you're trying to honor, but actually bring in a new category of users that may not be initially spurred by document sharing and the things that Dropbox has been always good with? Ultimately, do you think there's maybe an unmet need in the market for perhaps a Dropbox site? Not that you would not have considered. I'm sure you've popped through all this stuff. We have a lower price point, fraction of the functionality within Dropbox. these folks get used to the system, you maybe throw in AI for free, and then you upsell them to the premier versions of Dropbox. I'm just wondering how you're thinking about potential decision paths down the line. Thank you so much once again.
spk10: Sure, sure.
spk21: Yeah. Thanks, Kesh. So first on Dash, I mean, the origin of Dash was really kind of solving the kind of modern equivalent of or today's equivalent of, of the problem I started with, um, when I founded the company, I mean, which is really, um, in the beginning, like I felt like my stuff was everywhere, couldn't find it. Um, back then it looked like my files were on these different devices and operating systems. Um, and the solution was like, let's sync everything to the cloud. Um, but today kind of back to that familiar problem, like my stuff is everywhere, can't find it. Um, But in addition to files, obviously, we do a lot of work in our browsers now. And so what used to be 100 files on my desktop is now also 100 tabs in my browser. And it's really that kind of first principles. And it's like frustration as an end user personally, where I'm like, it is so hard to find just the basic information I need at work. And this is a problem that's getting worse, not better, as sort of one of the unintended consequences of this of the proliferation of all the different tools and platforms that we're using. And a recognition that no one's solving this problem at scale. Microsoft hasn't solved this problem. Google hasn't. No one has. And it didn't seem like there was anyone really putting the necessary firepower on solving this problem. And this was also before generative AI really took off. But I'd summarize by saying this is a universal knowledge worker need. When we talk to our customers, it's hard to find someone who doesn't have this problem. Our right to win is it's a natural evolution for our customers, certainly Dropbox customers. It doesn't take a lot to explain that we're evolving from helping you organize your files to organizing all your cloud content. That's a pretty straightforward, logical leap for people. And then to people who aren't Dropbox files that can share customers. It gives us a big reason to be relevant to new generations of folks that grew up in the browser instead of the file system. So we think it's a big opportunity to reach truly net new users and get them on our platform. And then we're certainly not the only company working on this, but our scale... and our privacy and security track record are a big advantage when we talk to customers. So as a first example, unlike Dropbox 1.0, as we're launching Dash, we already have half a million paying business accounts already and 18 million subscribers. And so once we're happy with the product experience, you can believe that we'll be turning on distribution services and introducing our existing customer base to Dash as rapidly as possible. We also see some promising early signal that folks that are paying files and can share subscribers adopt and retain on Dash at twice the rate as people who are just kind of visiting the website or who aren't. And then on the trust side, I mean, this is – I mean, it's like – in general security is top of mind for every customer and, um, and people are entrusting us with their most important information and have been for a long time. Um, and then AI, as you'd imagine, amplifies these concerns even more as people, um, want a lot of transparency and control about where their data goes, um, as they put it into these new apps or new AI systems. And so, um, the fact that we're very transparent about this, um, and have a track record. And we already have all these companies storing their most important information on Dropbox. It makes this a lot more of a natural evolution for us than someone starting from scratch or a startup or even a growth stage startup. And then compared to platform companies, so far what we're seeing is that as you see Microsoft Copilot or Google's similar features in Workspace. They work super well within their ecosystem but don't work outside. And Universal Search is by definition a platform agnostic thing because at the end of the day we all use tools from many of the different ecosystems. It's very rare that you or your team are just in one. So we think that's a big advantage for Dropbox and it's been in our DNA to tie together all these disparate tools and ecosystems. And that's just something that we put a lot more attention to than any individual, um, than even, even the bigger companies. And then you had a second part around, um, you know, what I'd say just like creativity on pricing and packaging. Um, how do we get people in the, can we, um, give certain things away for free or otherwise, um, explore other levers beyond just like subscript, like a basic subscription. The answer is absolutely. Um, we innovated a lot on that playbook in the beginning. Um, I'm sure we'll innovate on it again. We'll sort of take the best parts, but I'm sure some aspects will be different. And, you know, we earlier talked about volume-based pricing versus seat-based pricing, you know, using free or loss leader type things, using bundling. We're going to explore all that.
spk17: Thanks so much for the detailed compliments. Thank you so much. Thanks, Josh.
spk12: Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please go ahead.
spk20: Great. Thanks for taking my question. This is Austin Colon for Pat. So, Drew, when you think about some of the things you guys have been working through, whether it's the go-to-market for the individual plans or the pricing on bundles, I mean, what inning do you feel like you're in on plugging some of these holes and getting to a place where you really have the right fit across these plans?
spk15: Thank you.
spk21: Yep. I don't know if I have, like, a specific inning number for you. I think there's still – and we're showing – I think this year is, like, our first considered effort in some of these parts of the funnel – And we're seeing some of those efforts bear fruit, and I think there's still a lot of headroom there. But it's hard to speculate beyond what we've kind of already reflected in our guidance. But we certainly see lots of opportunities to continue reducing friction in the onboarding experience, the team expansion experience, and sharing. We've had some good milestones that we hit last quarter. So as I said earlier, sharing is up year on year. um, which is, and so sort of reversing what was kind of stable or slightly declining. So that, that's the kind of thing I like to see. And then also we're gearing, you know, I think one of the best things we can do to grow the business is really get our, um, a lot of these platform improvements are, are really important. So some of the things around our billing engine, having more flexibility and subscriptions and continuing to tune up our technical infrastructure to be able to support cloud content and go beyond just files. These are long-term investments that are going to bear fruit, are going to be really valuable as we start to scale up Dash. So I think there's a lot of different, or I'm excited about the portfolio of investments we have, and some of them are kind of incremental optimizations and some of the funnel things I mentioned, and some we believe are really big new growth levers like Dash. Great. Thank you.
spk12: Thank you. And as a reminder, if you do have a question, simply press star 11 to get in the queue. Our next question is from Mark Murphy with JP Morgan.
spk19: Thank you very much, Tim. You had mentioned that hiring was slower than anticipated, and I think you said due to recognizing additional efficiencies. I'm wondering if you can elaborate on the nature of the For instance, are you using some lower-cost regions? Are you seeing some productivity gain from internal use of Gen AI, maybe from GitHub Copilot or something along those lines? Is there something different that you're enabling?
spk03: Sure. Good question, Mark. I think it's a little bit of all of those things. Our margin outperformance was largely driven by lower headcount related costs, as we have identified efficiencies across our operations that does include slowing the pace of hiring in some areas, as well as prioritizing hiring in lower cost locations, exactly to your point. And maybe lastly, I'll note that we're managing our vendor and software spend closely. So those are some of the efficiencies we're driving, and we'll continue to look for additional opportunities.
spk19: Okay, understood. And then, Drew, I appreciated all the insights you provided while you were answering Cash's question. Can you remind us if there is any update on when you think GASH is going to reach GA and where your thoughts are on the – on the pricing strategy for dash so that we might be able to, you know, uh, kind of run that through our models, um, and start to think about a potential contribution ramp.
spk21: Yep. Um, so we'll have a lot more to share after the, after our launches, uh, later this year. Um, but I think in principle, um, there, you know, we'll be drawing heavily from the playbook or the things that have worked with, uh, with pricing and packaging with Dropbox. So we'll certainly make Dash available standalone, and as a standalone subscription, we'll be introducing it to our FileSync and Share customers in different ways. But it's a little early to give you specific numbers or to plug the cells into the spreadsheet.
spk08: Thank you.
spk12: Thank you. And it appears that there's no further questions in the queue. I will turn the call back to Peter Stabler for closing remarks.
spk02: Thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon.
spk12: And thank you all for participating in today's conference. You may now disconnect.
Disclaimer