Dropbox Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for joining Dropbox's Second Quarter 2024 Earnings Conference Call. 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.

Speaker 1

Thank you. Good afternoon, and welcome to Dropbox's Q2 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 Q3 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.

Speaker 1

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.

Speaker 2

Thanks, Peter, and good afternoon, everyone. Welcome to our Q2 twenty twenty four 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.

Speaker 2

Revenue for the quarter was slightly better than we anticipated with growth in self serve individual plans offsetting continued challenges within our Teams 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 to 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 repurchase program.

Speaker 2

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 Teams business is important because our Teams 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.

Speaker 2

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, more likely that Teams customers retain and expand. These positive indicators reflect some of the progress we're making to improve the health of our teams 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.

Speaker 2

To combat these headwinds and to ensure 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 3 primary jobs for them, securing, organizing and sharing all their digital content.

Speaker 2

And in April, we launched several new features that aligned with these customer jobs to be done. 1st, 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 Q2.

Speaker 2

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.

Speaker 2

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 in 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.

Speaker 2

Historically, customers who purchased an additional product like Replay had to connect and mirror their FSS subscription with these new licenses. So, it's 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.

Speaker 2

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 of these plans across our mobile, desktop and web services, whereas our initial strategy was primarily web focused.

Speaker 3

We've gotten a lot of

Speaker 2

valuable experience in beginning to introduce bundles to 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.

Speaker 2

The team also drove engagement increases in key DASH features such as stacks on the start page and all 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.

Speaker 2

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 planned go to market strategy. Over 500,000 paying teams trust Dropbox to secure, organize and share the 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.

Speaker 2

In closing, we continue to make progress on improving the user experience of our core SaaS product. 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.

Speaker 2

We're also excited by the improvements we've made to our DASH product and 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 Q2 financial performance as well as our expectations for the remainder of the year.

Speaker 4

Thank you, Drew. 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 Q2. Total revenue for Q2 increased 1.9 percent year over year to $635,000,000 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.

Speaker 4

Total ARR grew to a total of $2,573,000,000 up 2.9% year over year. On a constant currency basis, growth was 2.2% year over year. We exited the quarter with 18,220,000 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 Teams product and expected seasonality and other pressures weighing on our FormSwift and Sign businesses. Before we continue with further discussion of our P and 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 purchased intangibles, certain acquisition related expenses, net loss on real estate assets and workforce reduction expenses.

Speaker 4

Our non GAAP net income also includes the income tax effect of the aforementioned adjustments. With that, let's continue with the 2nd quarter P and 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 4 to 5 years effective January 1 this year. This change resulted in approximately $9,000,000 of benefit to gross profit in the second quarter.

Speaker 4

The impact of this change was weighted towards the first half of this year. For the full year, we expect a benefit of approximately $30,000,000 Operating expenses were $308,000,000 up approximately 2% year over year. Operating margin was 35.9 percent 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.

Speaker 4

Net income for the Q2 was $194,000,000 up 12% year over year. Diluted EPS for the Q1 was $0.60 based on 324,000,000 diluted weighted average shares outstanding compared to $0.51 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 $1,100,000,000 As a reminder, in the 2nd quarter, we paid the 2nd tranche of our partial San Francisco headquarters lease buyout, totaling $14,900,000 2nd quarter cash flow from operations was $231,000,000 an increase of 23% versus the year ago period. Capital expenditures in the quarter totaled $6,000,000 This resulted in quarterly free cash flow of $225,000,000 compared to $185,000,000 in Q2 of 2023.

Speaker 4

Free cash flow per share was $0.69 representing a 28% year over year increase. In the quarter, we also added $35,000,000 to our finance leases for data center equipment. In Q2, we repurchased just over 11,000,000 shares, spending $260,000,000 As of the end of the second quarter, we had approximately $868,000,000 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.

Speaker 4

I'd now like to share our 2024 Q3 and updated full year guidance, where I will also provide some context on the thinking behind this guidance. For the Q3 of 2024, we expect revenue to be in the range of $635,000,000 to $638,000,000 We expect an FX tailwind of less than $500,000 We We expect non GAAP operating margin to be approximately 32%. Finally, we expect diluted weighted average shares outstanding to be in the range of 3 17,000,000 to 322,000,000 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 $5,000,000 As a result, our reported revenue guidance adjust to $2,540,000,000 to $2,550,000,000 while our constant currency guidance adjusts to $2,537,000,000 to $2,547,000,000 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% 34% for the full year, up from our prior guidance of 32.5% to 33%.

Speaker 4

Our expectation for free cash flow is unchanged at $910,000,000 to $950,000,000 We continue to expect between $20,000,000 $30,000,000 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 323,000,000 to 328,000,000 shares based on our trailing 30 day average share price. This represents a reduction of 3,000,000 shares for each end of the range when compared to our previous full year guidance of $326,000,000 to 331,000,000 shares. I'll now share some additional context regarding our outlook.

Speaker 4

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 to part 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 2nd quarter.

Speaker 4

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 Q4, 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.

Speaker 4

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 shared 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.

Speaker 4

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.

Operator

Thank you. Our first question that comes from the line of Brent Thill with Jefferies. Please proceed.

Speaker 5

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, as we look at a bunch of the horizontal applications, there's been a big investor debate around seat based pricing versus volume based pricing in the age of AI.

Speaker 5

As you look at DASH, 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?

Speaker 2

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.

Speaker 2

We envision taking advantage of a lot of the same levers with DASH. And we expect that it should that the pricing model should be pretty straightforward. I mean, obviously, if there's 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.

Speaker 5

Got it. And then just a quick follow-up on the Teams, the challenges that you're seeing on the Teams side. I guess, is there a way to dig deeper and parse out like how much of this is macro versus the pricing reaction? And is there an element of competitive

Speaker 4

share losses

Speaker 5

on that side? Just additional thoughts there would be appreciated. Thank you.

Speaker 6

Yes.

Speaker 2

So I'd say it's largely what we saw last quarter is a continuation of prior trends. We saw that some of the price increases we've made over the year 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 and plus more price sensitivity generally, has led to a weakening of top of funnel, which we've been addressing in a number of ways. I mean, 1, 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, just the fundamentals of build of removing friction from the onboarding experience. And we found that when we look at 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.

Speaker 2

And so we've seen a lot of good early returns and green shoots around, okay, if we 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 Teams 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

Speaker 5

some of the bigger

Speaker 2

picture, just like macro pressure or other factors, but they're headed in the right direction.

Speaker 5

Got it. And none of it is competitive, right?

Speaker 2

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 Microsofts and Googles of the world for since the company was founded. So, I wouldn't say there's any new competitive dynamics, but for sure, the platform companies or what 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's kind of been that would have also been a factor 10 years ago.

Speaker 5

Got it. Thank you so much.

Operator

Thank you. Our next question comes from the line of Stephen Enders with Citi. Please go ahead.

Speaker 6

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 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 of wallet within customers?

Speaker 2

Yes. So early feedback has been good. I mean, I think the first thing we look for is that the value prop clearly resonates, right? And it's hard to find someone that doesn't have these issues of having 100 tabs open and 10 different search boxes and kind of the mayhem of the new world of distributed work. So a lot and then once you show customers that this is actually a solvable addressable problem, they're pleasantly surprised.

Speaker 2

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 private information and people understand that. Oh yes, there's a bunch of chat GPT is great, but there's a lot of questions that chat GPT can answer.

Speaker 2

If you ask like, what's my when does, my lease expire or where's that slide from last year's product deck or product launch, existing tools can't really solve that, but Dash can. So very and then I'd say there's also 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 is sharing across multiple platforms. And so we see a lot of opportunity to solve some new or to address some new unmet needs on the security side. So we're very excited about the roadmap for DASH and we're 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.

Speaker 6

Okay. That's helpful context. And I guess we'll look forward to what those look like. I guess on some of the document workflow products, it sounds like seeing a bit of an impact with Sign and FormSwift is, I guess, runoff for tax season. But can you give a little more clarity on what happened or what the customer activity was post security challenges with sign and the impact that that's been having on the outlook here?

Speaker 2

So pretty contained. I mean to begin with, the sign business is a low single digit percentage of our overall revenue. And then it was we've seen pretty minimal impact on the business or on the signed business overall. And then importantly, it just affected 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.

Speaker 6

Okay. All right. Appreciate the commentary there. And thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Kash Rangan with Goldman Sachs. Please proceed.

Speaker 7

Hi. Thank you very much. Good to talk to you Drew and team. 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?

Speaker 7

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 is maybe an unmet need in the market for perhaps in Dropbox, right now that you would not have considered? I'm sure you've talked 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 an AI for free and then you up sell them to the premier versions of Dropbox. I'm just wondering how you're thinking about potential decision paths down the line.

Speaker 7

Thank you so much once again.

Speaker 2

Sure, sure. Yes. Thanks, Kash. 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 the problem I started with, when I founded the company, which is really in the beginning, like I felt like myself was everywhere, couldn't find it. Back then, it looked like my files were on these different devices and operating systems.

Speaker 2

And the solution was like let's sync everything to the cloud. But today kind of back to that familiar problem like my stuff is everywhere, can't find it. But in addition to files, obviously, we do a lot of work in our browsers now. And so what used to be a 100 files on my desktop is now also a 100 tabs in my browser. And it's really that's kind of first principles.

Speaker 2

And just 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 within platforms that we're using. And a recognition that no one's solving this problem at scale, like 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 like generative AI really took off. But I'd summarize, I think this is a universal knowledge worker need.

Speaker 2

I mean when we talk to our customers it's like hard to again hard to find somebody who doesn't have this problem. Our right to win is it's a natural evolution for our customers. I mean 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.

Speaker 2

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 like truly net user 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 for as a first example, I mean we are unlike Dropbox 1.0 as we're launching Dash, we already have 500,000 paying business accounts already and 18,000,000 subscribers. And so once we're happy with the product experiences, you can believe that we'll be turning on distribution and introducing our existing customer base to DASH as rapidly as possible.

Speaker 2

We also see some promising early signal that folks that are paying File Sync and 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 people are want a lot of transparency and control about where their data goes, want a lot of transparency and control about where their data goes as they put it into these new apps or new AI systems. And so the fact that we're very transparent about this and have a track record and we already have all these companies storing their most important information on Dropbox makes this a lot more of a natural evolution for us than someone starting from scratch or a start up or even a growth stage start up. And then compared to platform companies or so far what we're seeing is that a lot as you see like 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.

Speaker 2

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're that we put a lot more attention to than any individual than even the bigger companies. And then you had a second part around what I'd say just like creativity on pricing and packaging. How do we get people in the can we give certain things away for free or otherwise explore other levers beyond just like a basic subscription?

Speaker 2

The answer is absolutely. We innovated a lot on that playbook in the beginning. 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 we earlier talked about volume based pricing versus seed based pricing using free or loss leader type things.

Speaker 2

Using bundling, we're going to explore all of that.

Speaker 5

Thanks so much for the detailed documents.

Speaker 7

Thank you so much. Thanks, Kash.

Operator

Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please go ahead.

Speaker 2

Great. Thanks for taking my question. This is Austin Cole on 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? Thank you.

Speaker 4

Yes.

Speaker 5

That's okay. I don't know if

Speaker 2

I have like a specific inning number for you. I think there's still and we're showing progress. I think this year is like our first concerted 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.

Speaker 2

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

Speaker 5

good milestones that we hit last quarter.

Speaker 2

So as I said earlier, Sharon, kind of stable kind of stable or slightly declining. So that's the kind of thing I like to see. And then also we're gearing I think one of the best things we can do to grow the business is really get our a lot of these platform improvements are really important. So some of the things around our billing engine, having more flexibility in 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 DASH.

Speaker 2

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.

Speaker 4

Great. Thank you.

Operator

Thank you. You. Our next question is from Mark Murphy with JPMorgan.

Speaker 3

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 efficiencies. For instance, are you using some lower cost regions?

Speaker 3

Are you seeing some productivity gain from internal use of GenAI, maybe from GitHub Copilot or something along those lines? Or is it something different that you're enabling?

Speaker 4

Sure. Good question, Mark. I think it's a little bit of all of those things. So 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. So, and maybe lastly, I'll note that we're managing our vendor and software spend closely.

Speaker 4

So those are some of the efficiencies we're driving and we'll continue to look for additional opportunities.

Speaker 3

Okay, understood. And then Drew, I appreciated the all the insights you provided while you were answering Kash's question. Can you remind us if there is any update on when do you think gas is going to reach GA and where your thoughts are on the pricing strategy for DASH so that we might be able to kind of run that through our models and start to think about a potential contribution ramp? Yes.

Speaker 5

So we'll have a lot

Speaker 2

more to share after the after our launches later this year. But I think in principle, we'll be drawing heavily from the playbook over the things that have worked with pricing and packaging with Dropbox. So, we'll certainly make Dash available standalone and as a standalone subscription, there will obviously be we'll be introducing it to our Falsink and Share customers in different ways. But it's a little early to give you specific numbers or to plug the sales into the spreadsheet.

Speaker 6

Thank you.

Operator

Thank you. And it appears that there is no further questions in queue. I will turn the call back to Peter Stabler for closing remarks.

Speaker 1

Thanks everyone for joining us today. We look forward to speaking with you next quarter. Hope you all have a great afternoon.

Operator

And thank you all for participating in today's conference. You may now disconnect.

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Key Takeaways

  • Q2 revenue was $635 million (+1.9% YoY) with non-GAAP operating margin of 35.9% and EPS of $0.60, generating $225 million in free cash flow and enabling $260 million in share repurchases.
  • The Teams business continued to face macro and price-sensitivity headwinds despite improvements in trial starts, onboarding flows and sharing metrics, prompting expectations of H2 volatility.
  • Dropbox is enhancing its core FSS platform with new features—end-to-end encryption, DocSend advanced data rooms, Microsoft co-authoring and improved video replay—and has overhauled its mobile web and upsell experiences to boost trial and conversion rates.
  • Progress on DASH, the AI-powered universal search, includes double-digit gains in search success and engagement, deeper AI summarization, security controls for IT admins and plans for both add-on and standalone pricing linked to self-serve and outbound motion.
  • Full-year guidance was narrowed and slightly raised, with revenue now anticipated at $2.54 billion–$2.55 billion, operating margin of 33.5%–34% and free cash flow of $910 million–$950 million, while maintaining share repurchases and cost discipline amid anticipated user count volatility.
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Earnings Conference Call
Dropbox Q2 2024
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