Q2 2020 Dropbox Inc Earnings Call
Ladies and gentlemen, today's conference scheduled to begin shortly please continue standby. Thank you for your patience.
[music].
Ladies and gentlemen, today's conference scheduled to begin shortly please continue to stand by thank you for your patience.
[music].
Good day, ladies and gentlemen, thank you for joining Dropbox is second quarter 2020, <unk> earnings conference call.
All participants will be endless only mode.
As you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation, there won't be an opportunity to ask question.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of drop off the job site. Following this call.
I'll now hand, the call over the last Finkelstein Dropbox VP corporate finance and strategy. Please go ahead.
Thank you good afternoon, and welcome to Dropbox is second quarter 2020 earnings call.
Today, Dropbox will discuss the quarterly financial results that were distributed earlier.
Statements on this call include forward looking statements, including the potential impact of the cold at 90, and pandemic and related to public health responses on our business.
Financial results and the economy.
Statements relating to the expected performance of our business.
Future financial results, including expectations regarding future profitability, and our ability to generate and sustain positive free cash flow.
Our ability to extend our platform by developing an offering.
New products and features.
Our strategy as well as the ability of our key employees to execute our strategy.
Long term growth.
And overall future prospects.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular those described in our risk factors included in our form 10-K for the year ended December 31st 29 gene.
The risk factors that will be included in our form 10-Q for the quarter ended June Thirtyth 2020.
You should not rely on our forward looking statements as predictions of future that's.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by law.
Our discussion today will include non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for work in isolation from our GAAP results.
A reconciliation of GAAP to non-GAAP results, maybe found in our earnings release, which was furnished with our form 8-K filed today with the FCC and May also be found in the supplemental investor materials posted on our Investor Relations website, which can be found that investors dot Dropbox dot com.
I'd now like turn the call over to Dropbox is co founder and Chief Executive Officer drew how it's done.
Thanks live.
Good afternoon, everyone welcome to our Q2 earnings call.
On the call with me is RG BACE, our Chief Financial Officer.
And Olivia not a bomb our chief operating officer will also join US during Q1 day.
Similar to last quarter three of us are dialing in remotely from our homes. So please forgive us for any sound quality issues or background noise over the next door.
I'd like to start my thinking RJ for all these contributed to dropbox over the last two years.
As you likely seen we've announced that he'll be leaving us this fall to spend more time as family and then transition to a Korean venture capital.
Well I just started dropbox to cloud collaboration market, we're still nascent and we were just getting started add on employees.
During his tenure he's helped us scale, new public company with a resilient profitable business model and nearly 3000 employees all over the world.
We're grateful for the strong foundation and incredible team he's established and we could've gotten here.
Oh Geez leadership in investment and his team makes this a relatively seamless transition.
On that note I'm excited to welcome Tim Regan, our Chief Accounting officer, as our new CFO.
And his last three years or the company Tim has demonstrated exceptional leadership.
Well, the operational skill and disciplined needed for his new role.
Tim brings over two decades of experience a dropbox.
He was previously controller Pandora.
And held senior positions Adobe nursing young.
We couldn't be happier to have Tim as our new CFO and are confident that dropbox will be successful it's capable hands.
He'll officially stepping to the roll on September 15th.
And our Jay will remain an advisor to the company until mid October two interest for the transition.
With that let's turn to the remainder of our call.
Today, I'll talk about a business and product highlights and the continued expansion of our ecosystem.
Hi, Jay will review, our Q2 financial results such on our go to market strategy and provide guidance for Q3 in fiscal 2020.
Before we move to our quarterly results I want to provide some updates around how we're managing operations in a distributed work environment.
The health and safety of our employees remains our number one priority and Weve officially extended our work from home policy to the end the year.
I also want to commend the entire team and Dropbox for doing an incredible job navigating these unprecedented circumstances.
Over the past few months they've been hard at work launching new features and products.
Aimed at helping our users manage their most important work flows during these unique times.
We've also been focused on providing support to our customers most impacted by cover 19.
In certain cases, we provided relief by extending payment terms and changing invoiced frequency to ensure they have the tools they need to get their best work done.
And over the past quarter. We also expanded in several of our larger larger scale educational deployments and onboard and new customers like the University of Michigan.
Our deployment with University of Michigan represents one of our largest educational deals to date as institutions around the world look to accelerate their digital transformation efforts and shift to remote learning environment.
These are also increasing their reliance on dropbox as they make the transition to distribute work.
Just a few weeks ago, a major European luxury retail company significantly expanded their deployment with dropbox to over 20000 seats.
As part of the seven figure deal the company plans to accelerate their shifted the cloud insight into our new desktop application as a critical tool for their employees to securely collaborate one on one another wherever they are.
We are fortunate and proud that our product lends itself well to the facilitation of remote work and collaboration.
I'm excited to announce that we now have more than 500000, Dropbox business teams and our platform.
And over the past quarter more than 450000 to those teams are you now using our new desktop application, which gives knowledge workers a unified home for their content and connects them to popular tools like slack them in a last year.
Across Q2 trial volumes to our team in individual plans also remained elevated.
And were 20% higher than prequalified levels.
I'd note that the conversion rates are these larger cohorts have remained consistent with average historical figures, which is encouraging and underscores the value that users are driving from our products and platform.
Turning to our quarterly results.
In Q2, we continue to see strength across our business.
Revenue grew 18% year over year on a constant currency basis, driven by increases in both paying users and ARPU.
We also drove robust margin expansion as we continue to deliver a healthy balance of growth and profitability.
These results underscore the strength of our global collaboration platform, our efficient go to market strategy and our operational discipline.
Let's move on to some of the product highlights from the corner.
We're focused on providing more value to our users through consistent feature and product introductions.
And in Q2, we added a number of high value features to our plus skew.
To give users the tools they need to better manage both their work and personal lives.
First we launched Dropbox passwords.
Apacs passwords enables users to store login credentials for websites and apps and sinks them across all of their devices.
And with zero knowledge encryption users can ensure their data securely protected and accessible only to them.
We also launched involve a secure folder was an extra layer of security for all your most important personal files like insurance cards passports and personal financial information.
Content stored and vault is only accessible with a pin code and users can enjoy peace of mind, knowing that they can designate access to trusted friends and family members and event of emergency.
And finally, we launched computer backup a feature that allows users to automatically backup folders on their PC or Mac, including their desktop downloads and documents holders directly into their dropbox.
Files and folders are continuously sync between the cloud and users hard drive.
And changes made to their content or automatically updated applications.
These three features are now available in beta to our plus subscribers and represent one of the biggest updates we've made to the skews since its inception.
In addition to improving the plus plan. We also launched a brand new skew into beta last quarter Dropbox family.
This new skew keeps a families digitalize connected with one organize plays to share photos videos and important documents.
Bucks family lets up to six members show two terabyte the storage under one plan with one bill.
Members can create showed spaces to make content easily accessible to the whole family and each member has their own private space for personal contact.
We're currently beta testing the Dropbox family product was like Dropbox users and planned the rule it out more broadly across the second half a year.
In Q2, we also continue to make progress against our product integration strategy with Hello site.
Palestine is now natively embedded into dropbox product surfaces and no one user opens a filing dropbox, they can quickly identify which fields need to be signed and send that file out for signature.
And once a file assigned but they're sipping completed document is automatically saved into the appropriate dropbox holder.
This is a big improvement to the overall user experience.
Not only does the entire and and work flow live within Dropbox.
At this also makes hellerstein the primary signature just tool for Dropbox users around the world.
To capitalize on the growing international opportunity. We also launched tell a sign and 21 additional languages this past quarter.
Bringing effortless E signature functionality and fully localize experience to businesses globally.
Also expanded our customer service to include additional support out hours for the EMEA NAPTP regions.
Investments like these have helped propel adoption of the Hell assigned product suite.
Across Q2 usage of both the Hell Assignee P.I. product as well as the core the signature solutions increased by more than 25% relative to Q1 levels.
Trials to Hell assigns digital fact solution Halifax also increased by more than 25% during the same period.
It's exciting to see this increased usage of Telesats products.
And we remain committed to leveraging our broad distribution channels.
Continue driving adoption in Palestine skews.
And beyond the improvements we made to the core Dropbox and Hellerstein experiences. We've also been focused on expanding our ecosystem of trusted partners to decision Dropbox at the center of our users workflows.
And in Q2, we launched a new Dropbox SAP center, a place where users can discover learn about and connect absolute Dropbox account.
Helping to create more engaging higher value in retentive experience within our platform.
No customers can easily link commonly used tools from partners I cant, the smart sheet and Google to their Dropbox account with just a few clicks.
In summary, we delivered another great quarter.
Demand for our products remains strong as more people have turned in both Dropbox and hell assigned to manage their most important work flows.
We're also excited about the opportunity ahead.
It's clear to me that the shifted distributed work will ultimately be a significant as the shift to mobile or to shift to cloud.
All knowledge workers need new and better ways to organize are working lives in this new environment.
We've completely reoriented, our product Roadmaps, and smart and see many opportunities design, new products and experiences for distribute work and I'm excited to share more of what we've been working on in the second half of the year.
I'll now turn it over to Ajay to walk through our financial results.
Sure. Thank you for all of your support and Parker said over the past eight years.
It's been an absolute pleasure working alongside of new and the Dropbox team and I'm going to Miss every one of the company as I move onto my next endeavor.
I'd also like to convey how excited I am to pass the reins to 10.
Tim was my first higher as CFO and couldn't be more prepared to help we'd dropbox through its next phase.
Turning to the numbers, our Q2 results continue to demonstrate our strong execution and focus on delivering a healthy balance of topline growth and profitability.
Total revenue for the quarter was up 16% year over year to $467 million.
On a constant currency basis year over year growth would have been 18%.
Hey are for the quarter was $1.931 billion, an increase of $67 million quarter over quarter, and an increase of 17% year over year.
On a constant currency basis year over year, a our growth would have been 18%.
We ended Q2 with 15 million paying users and ARPU with $126.80 in the period.
Our continued growth in a our reflects our strategy to methodically convert our highest value users to drive sustainable monetization and retention.
We've also been focused on supporting our customers as they match the transition to remote work and learning from small and large businesses to global universities.
With that let's touch on some of the go to market strategies, we implemented this past quarter.
Over the last few months, our data science team has been experimenting with a hell of a sign up sell model that identifies which dropbox customers are most likely to convert to a paying hell assigned subscriber.
Based on file types shared folder activity.
Certain engagement characteristics the machine learning model aggregate to list of Dropbox users, who would benefit from Hell assigned E signature capabilities.
Armed with this context, our growth teams surface, a series of INAP targeting props and notifications promoting hell assigned and its feature set.
The initial experimentation period has been promising.
Users identified by the model signed up for a hell of time trial at a 50% higher rate relative to a controlled work.
And with the recent Hello signed and Dropbox deep integration that drew mentioned earlier.
We're excited about the opportunity for us to continue cross selling hellerstein into our installed base of over 600 million registered users.
Let's move onto some of our customer highlights.
In Q2, we had a number of wins across a range of verticals, including media construction education and retail.
We're excited to share that give him a new generation media company with nine offices across Europe is now at Dropbox business customer.
Did you move approached Dropbox defined a more efficient way to collaborate across their organizations.
Dropbox will be a critical part of did he moves media workflows and the company plans to leverage key integrations with Adobe as well as native features like Dropbox transfer to optimize how they manage the content creation lifecycle from concept ideation to final asset to what rate.
In addition to facilitating increased productivity. We're also working closely with Debbie move to provide seamless data migration surfaces as they move their content to the Dropbox platform.
In addition, we're pleased to announce that Tokyo Racy code you know is now at Dropbox enterprise customer.
Tokyo Reiki Kogyo, if they Japan based distributor and services provider for H. type projects for large scale building sites.
They turned to dropbox to provide a secure cloud based storage solution for their onsite and field workers.
They were also focused on implementing a solution that would ensure their customers and partners could share and collaborate around large content rich file types.
After evaluating dropbox against two other competitors Tokyo Reiki code you know selected Dropbox.
Hi, multiyear deployment to modernize how their teams work and collaborate.
Before I move on to the rest of the panel.
I want to know that unless otherwise indicated.
All income statement measures that follow our non-GAAP.
And exclude stock based compensation amortization of purchased intangibles and certain expenses related to the acquisition of help us on.
Our non-GAAP net income also excludes net gains and losses on equity investments.
A reconciliation of GAAP to non-GAAP results, maybe found in our earnings release, which was furnished with our form 8-K filed today with the FCC and.
And then the supplemental investor materials posted on our Investor Relations website.
Moving to the piano.
Gross margin for the quarter with 79% an increase of three percentage points compared to the second quarter of 29 team.
The increase in gross margin was driven by unit cost efficiency gains with our infrastructure hardware.
Including lower depreciation as a share revenue.
We now expect fiscal Twentytwenty gross margin to be approximately two percentage points higher than 29 team.
Moving to operating expenses.
Second quarter, R&D expense was $135 billion or 29% of revenue compared to 30% in Q2 a year ago.
The decrease as a percentage of revenue was driven by work from home related savings offset by higher headcount and investments in new product development and testing.
That's another expense was $92 million in the quarter or 20% in revenue.
Compared to 24% in Q2, a year ago.
The decrease was due to greater efficiencies in marketing related spend relative to Q2 of 29 chain.
As well as lower event driven spend due to covert 90.
Gee that expense was $48 million or 10% of revenue.
Compared to 11% of revenue in Q2, a year ago.
The decrease was due to work from home related savings as well as lower non income based taxes.
Taken together, we are $96 million in operating profit in the second quarter.
This translates to a record 21% operating margin, which is an 11 percentage points improvement from Q2 of 29 chain.
Net income for the quarter was $93 million up from $42 million a year ago.
Diluted EPS was 22 cents per share based on 421 million diluted weighted average shares outstanding.
Up from 10 cents in Q2 over a year ago.
I'd also note that we were once again GAAP profitable in Q2.
Moving onto cash balance and cash flow.
We ended Q2 with cash and short term investments of $1.118 billion.
Cash flow from operations was $146 billion in the quarter.
Capital expenditures were $26 million.
Being free cash flow of $120 million or 26% of revenue.
Capex in Q2 included $14 million of spend on our corporate headquarters, which $6 million was offset by tenant improvement allowances.
In Q2, we continued to pay a portion of the deal consideration holdback related to our acquisition of help us on.
These payouts will occur quarterly through Q1 of Twentytwenty too.
Excluding the headquarters spend net of T <unk> $8 million and payout of Hell assigned deal consideration hold back of $4 million.
Free cash flow would've been $132 million or 28% of revenue.
In Q2, we also added $30 million to our finance lease lines for datacenter equipment.
We expect additions to our finance lease lines to be approximately 8% of revenue in twentytwenty.
Now, let's turn to our guidance.
While our business has certainly been resilience and we've benefited from some emergent tailwinds, we remain mindful of the broader macroeconomic risks and unpredictability that the second half of the year made Brent.
Similar to last quarter, we factored this into our guidance as appropriate.
With that let's move on.
For the third quarter of Twentytwenty.
We expect.
Revenue to be in the range of $481 million to $484 million.
On a constant currency basis, we estimate that revenue would be approximately $2 million higher.
We expect non-GAAP operating margin to be in the range of 17.5% through 18%.
And diluted weighted average shares outstanding.
To be in the range of 421 to 426 million based on our trailing 30 day average share price.
For the full year Twentytwenty.
We are raising our revenue guidance range, which was previously $1.80 billion to $1.900 billion.
To 1.891.
To $1.901 billion.
On a constant currency basis, we estimate that revenue would be approximately $13 million higher for a range of 1.904.
$1.914 billion.
We are raising our non-GAAP operating margin guidance range, which was previously 17.5% to 18%.
To 18% to 18.5%.
And we are raising our free cash flow guidance range, which was previously $460 million to $470 million.
To $465 million to $475 million.
This range includes onetime spend related to the cold out of our corporate headquarters.
As well as the payout of deal consideration hold back related to our acquisition of Hello sign.
Excluding these items pre cash flow would be $515 million to $525 million.
Finally.
We expect Twentytwenty diluted weighted average shares outstanding.
To be in the range of 420 425 million.
Based on our trailing 30 day average share price.
In conclusion, the investments we've made in our business from both the product and go to market perspective continued to perform well.
Especially amidst a rapidly changing global environment.
We continue to innovate and deliver more value to our users enabling them to do their best work and I'm excited about our potential going forward.
I'll now turn it back to drew for closing remarks, Thank you Ajay.
Dropbox, we're committed to helping our users do their best work.
During these unprecedented times and with our profitable self serve business model continued product innovation, we believe we're well positioned to tackle the opportunity on behalf of my management team I'd like to take a moment to think our customers partners and the entire Dropbox team.
With that I'd like to open up the call for today.
Operator.
Thank you, ladies and gentlemen to ask a question you may need to press Star wondering your telephone to withdraw your question press the pound key.
We exit you please limit yourself to one question and one follow up.
Please standby when we compile that you any roster.
Our first question comes from Alex <unk> RBC capital markets. Your line is open.
Hey, guys. Thanks for taking my question.
It's been a pleasure working with you on these calls you'll be missed.
Thank you all can we just.
Maybe just two quick ones from me.
Drew when do you think about the the combination of headwinds and Tailwinds brought from from Kogan on the business with respect to the SMB market.
Oh, you know given the net adds number this quarter was the strongest you've had some time is it fair to say that the that has the tailwinds.
Around the increasing need of your business in the strategic value proposition like is it fair for us to think that that you're now kind of starting to see an actual appeal when that that could could be durable and I've got a quick follow up.
Sure. Thanks, Alex.
Yeah as you saw it measures like trial volumes continue to be elevated I mean, some of the searches tapered off since Q1, but.
And SMB, certainly, we see that or drop boxers banks have been trained and dropbox for distributed work since the beginning and they continue to do.
Is that since coded.
And we see an elevated demand and.
And more broadly we see.
Big opportunities to improve the distributed work experience in general we're addressing a universal need every knowledge worker needs and organize place for their content that works with all platforms and.
Even with the ships to come in I mean, Dropbox is like an essential part of this operation. So you see in.
Continued strength and resilience.
Posts covet, and we see a lot of opportunities to reinvention discrete work experience going forward.
Okay and then maybe just the quick follow up is how would you accept the health of the SMB market maybe for draw Jay and then last quarter you talked about you know seeing early signals in your kind of pipelines that were very positive you weren't ready.
You make the call whether that elevated pipelines actually driving more deals were conversions. So now after a few months.
Could you talk to both of those two things.
Sure well I can start and project can chime in.
Well I think again with SMB is we're mindful of the broader act macroeconomic environment and what might happen in the second half.
But in general businesses that employ knowledge workers.
That can work from home at that unless you're scripted and again.
Box tends to be critical to finish these operations. So it's not really a discretionary.
Purchase.
So so we feel good on that front.
Yeah. This is Jay just to jump into maybe provide a little bit of commentary around.
Interest expense Alex to help answer your question.
The other business has been resilient you know our churn rate remained relatively stable from Q1 Q2, but that was the case last quarter as well as we noted on backhaul and that revenue retention improved for us quarter to quarter and this is really because the majority of our subscribers or knowledge workers and we play an important rolling managing business critical content for them really.
Sure So now.
Than ever and as it relates to some of the Tailwinds that we saw in Q2 to air aren't paying users.
Higher top of funnel demand that demand that you talked to on call volumes did result in higher levels of conversions to our pay plan and then to the question you had a pipeline. We also closed some large outbound builds and university deployments in the period as well and all that being said just wonder what I would make on as we provide commentary on paying users.
Our focus is on profitably growing our total Airbus certainly versus optimizing for a specific on a specific number there quarter to quarter on so that will remain a priority going forward.
Perfect. Thank you guys and congratulations again.
Thank you.
Our next question comes from Mark Murphy with JP Morgan Your line is open.
Yes. Thank you Jay it's been trade working with you and I wanted to wish you all the best in your future rule, Yeah, absolutely and congrats on a on a very nice quarter and strong guidance I wanted to hone in on a our I agree with of 18% in kind.
Instant currency.
Again, nice to see the health and actually acceleration in the air our gross.
No you touched on a couple of years, but I was curious if you could help us understand just to what extent.
When we see that acceleration to what extent could we tie it to the.
Conversion of the remote works driven trials that Alex It asked you about.
You know kind of to what extent, where any of those outbound large deals kinda chunky that might have moved that and then to what extent could we maybe look at it and say that there's there's adoption of the new desktop apps.
Maybe factoring in [noise].
[noise] sure, it's really accommodation of all of the above Mark is answer and I can kind of break it apart for you.
Starting with some of those covert tailwinds in the work from home tailwind drew mentioned across Q2, the trial volumes to both are individual and team plans were up on average about 20% relative to pre cope with levels and we began to see some of those conversions come through in Q2, and those conversion rates remain consistent with historical levels.
And so that was part of the tail one there and then as it relates Hello sign usage of there you signature products. Both are apiay product looked as well as our core is injured solution were also up about 25% Q2 to Q1.
So that was also a business tailwinds for two of the Tailwinds that helped us deliver that $67 million, a sequential and that you air our this past quarter and we also had a number of growth initiatives and we're always working on cultivating that growth initiative pipeline. There's there are things relaunch every quarter a.
A handful those initiatives. We're also successful and detailed into the business and our Outback team has reoriented really successfully from a team that was traveling more actively in one that's really been leveraging telesales and demand for products has been strong so they've been able to convert a number of those opportunities. So it was a combination really of all those factors that allowed us to.
Accelerate that that's the way our growth on a year over year basis quarter to quarter.
Okay got it and cannot Jay just sit since you mentioned that some of the new initiatives I wanted to I wanted to ask drew you, how you're thinking about baby sizing the opportunity for Dropbox passwords and just.
How you're thinking about the ability to ring fence in encrypted data set that you're presumably it's pretty sensitive high value information and add a potentially something that would be targeted.
Sure well, we see passwords has.
Playing to a lot of our strengths around user trust in security and a lot of a huge investments. We we've made and continue to make there and it's a natural fit and for things like Dropbox vault Dropbox passwords. These are pretty universal.
Workflows that our customers have and a lot of what loaded up motivated us to build more focused solutions around them. We're seeing that won a lot of customers requesting dropbox to do more and these areas and then secondly people are already kind of choosing dropbox.
Or starting this information and Dropbox and we see it saw an opportunity to provide a more focus experience and then add value to our.
Higher tier plants, and so we think that that these areas again play to our strengths and customers also want to ability to do this in a platform agnostic or cross platform way.
The other alternatives they might be using might be tied to one device or one platform.
But a lot of customers want to be an work on work across their iPhone and their windows PC.
So that's another big strength of ours, and and then I'd say more broadly.
When you look at Pcs cases, and you look at post coded where the lines between.
Home and work at blurred, even more or about blurred as much as possible since we're literally working from home.
We see you want to Dropbox is core strengths is supporting both work and personal use cases enough locked up and.
In the platform agnostic way and then well both of these features were introduced for your personal lives in the future things like securing documents matching passwords is also highly relevant at work. So we look at our personal and work product portfolios and Roadmaps as reinforcing one another.
Very helpful. Thank you drew.
And are.
Question comes from Mushy jewelry with D.A. Davidson Your line is open.
Hey, guys. Thank you so much or for taking my question Jay I'll Echo My peers and thing has been a pleasure working with you and best wishes for through the next Keurig and also maybe extend my congratulations Tim on the new role I wanted to start first by talking about the Michigan deal.
I mean really impressive land a wondering can give a little bit more colour on the deal, especially because you are replacing cloud competitor.
And on premise to cloud motion and presumably Michigan shows you older Microsoft and Google, even though they've got long standing relationships those vendors, so maybe a little bit more color on that and broadly how are you thinking about the higher Ed opportunity, especially with so many universities going virtual this coming semester and then about it.
Hello.
[noise] Hi, Rishi this is on the Vietnam I'll actually take this this question then thank you for the question.
We were excited to partner with University of Michigan, and it was across campus deployment.
Meaning that it was both for their students as well as their faculty.
And for US that's something we're very proud of and we're partnering with them closely to build out what they need for remote education and this is an area of focus for us in fact, I said, a education CIO Forum. This morning, with a number of education CIO and they are very much.
On their front, but thinking about how does technology lead education going forward and it's nice to see that they're bringing us into the conversation and very much think of ourselves as a partner to them.
Other.
Education, when fleet had whereas a word northwestern University of Pennsylvania, and Arizona State just to name name a few I think the other exciting part about that sets that adds the graduating class is these educational institutions leave and gradually they then take that dropbox.
Love with them. So, it's an evergreen model, where a quarter up the population. That's graduating and then of course being refilled as they come in so we're excited about this business opportunity overall.
Great that's really helpful. Yeah, and then.
Just wanted to go little bit more detail on on the guidance for next quarter, specifically on the operating margin side I mean, you're talking about operating margins declining sequentially. You know a pretty meaningfully just wanted a and what I'm wondering to give a little bit more color on on on why you know it would be declining from.
Thank you to the Q3 had missed what factors are driving that thanks.
Sure.
It's a great question, it's really driven by timing of spend.
And we made the decision to shifts and marketing spend from Q to Q3, and I'll turn things over to Olivia and just a moment to provide a little bit more context on that gives them. Some campaign that we're going to be launching in the fall.
But generally speaking I will say are never see that we are.
Expecting to generate more efficiency. This year. So this is the driver of us we're raising our at quite 20 operating margin guidance to 18, 18% backing up.
On the 17 and I have to 18% a last quarter. So structurally we are getting more and more efficient as a business and I think you can see based on the results that we delivered in Q2, we've now executed to well within our prior long term target range before we raised its target children's here I'm. So definitely feel feel good about the profitability trajectory that Ross business, but I'll turn it over.
It a little bit it give a little bit more context with some of that marketing spend.
Right. So we ended up moving some marketing spend out into the early fall, we're gonna be launching an awareness campaign to really drive knowledge about the dropbox solutions for business and specifically for remote work, we're really excited for that it'll be boasts a top.
The final awareness campaign, but then also.
Pulling those through so that we're ensuring that we have conversion offsets the investment that we're putting out the topic the funnel.
Alright, great really helpful. Thank you Beth.
Thank you. Our next question comes from Heather Bellini with Goldman Sachs. Your line is open.
[noise] here and Juno, Jay and Jay Best Best wishes, you will be missed thanks for everything over the years I I just wanted to ask a little bit about any trends you're seeing better note would be in you know in terms of quarterly versus a versars annual pay.
Sure. A this is actually I can start of injury feel free to chime in with any contracts that you have a I think from some of the these larger more elevated cohorts that we see imposed calibrated as the world has shifted to a remote work at a remote learning mode. There has been higher demand for our monthly plans and those cohorts and so that drove some of the.
Variance that you might have seen quarter to quarter, the things like billings absolute dollars and billings and billings growth rate on so there has been a mix shift there on it from a gross new paying user perspective on an aggregate basis across our 15 million paying users. It takes a lot to move that overall ratio between annual among clean so that hasn't changed a whole lot.
But from a gross you pay huge or prospective quarter to quarter Weve seen a slightly higher uptake on kind of monthly relative to annual that being said, we have we have seen a lot of stability with respect to retention as I mentioned earlier that churn for US was a pretty stable from Q1 to Q2 net revenue to create retention improved quarter to quarter.
Again that being because the vast majority of are paying users our knowledge workers and replacing it pretty important both within the managing their content.
Great. Thank you very much.
Okay.
Our next question comes from Britain deal with Jefferies. Your line is open.
Hi, This is loves soda on for Brian to first of all Ajay Best Best wishes to you I had a couple of questions one was.
On the whole assign opportunity I know you guys mentioned that you know your.
Cross selling more how the signed deals to you know dropbox users. So wanted to maybe get some color on what the cross sell opportunity is how many you know maybe how many dropbox users can be our have another sign and what's the opportunity there and.
And then I'll have a fall this fall.
Cool I can start and Olivia please chime in but.
As you noted we continue to see strong demand for Hello sign and given some of it and the shift from all work, obviously, a lot of elevated demand for E signature and and we're really excited Hello signs and at all then fully integrated in the Dropbox. So in Q2 you launched.
And or an improved experience, where telesat natively embedded into the dropbox products. So our users can easily send and sign and safely store their most important agreements in one seamless work flow without ever having to leave.
Ever having a lead dropbox.
And and it's one of our fastest growing businesses, so definitely seeing elevated demand in a big opportunity there.
And then on the up on side, we closed more than 20 deals where we had at least one Nevertheless times pratap bundled into the customers Dropbox claim and so more and more we're seeing a demand for a combined solutions on that front I would also say you know our model it's very.
Much organic where we are the self serve motion begins and kicks desktops and I'm really really excited that every single Dropbox user right now.
Can have three Sri eight E signature is on Hello sign right. So they can get that experience and enjoy that experience and then they have.
I have the opportunity become a paid user. So there is part of that that's great. Because we don't even have to actively to the cross sell that's there for our own existing customers to see and use for themselves.
Got it and even in Q2.
Oh, just going to say even in Q2.
Usage of the using your solution and the elephant they'd be I product.
Increased by more than 25% or skew ones, so spend could see but still in that.
Got it and maybe one quick follow up on you know it sounds like you guys you're seeing.
Some great Tailwinds from more from home I guess as you look to 2021 and into the future.
Do you believe that these growth rates are sustainable going forward. That's it from me. Thank you.
Sure.
Well for me.
The big opportunity is again, there were addressing this universal need right. The every knowledge worker needs and organize place for their content.
That works with all their platforms and then this is an even bigger need now that we're working from home postcode. It because so many of US have office stocks and Google Docs and air tables scattered across a number of platforms and we don't see any of our competitor solving this problem.
So you're looking to 20 2020 or 2021.
That's a big opportunity for us and or building Dropbox and too.
Organizing player for all your content that's platform agnostic and brings it all together.
And second moving higher in the stack and handling more of the workflows around your content.
And things like passwords, and what we've done with Palestine.
Good examples of that and what I said I think the shifted distributed work.
Is is a transformative opportunity and as I said in my opening remarks, not unlike the shift to.
Mobile are shipped to the cloud.
And we're in the first inning of that transformation none of the tools. We are using our purpose built for this environment. So its kinetic design things pretty differently for the new world. So so that's what we've been doing we've we've reoriented our product roadmap.
Around this and we'll have a bigger update.
In the second half about our short workspace.
And I would just add on to and I think it's a fantastic cancer drugs is out on a related note.
We absolutely remain on any trajectory to achieve a long term targets that we outlined earlier this year and so we continue to be on a trajectory to deliver over a billion dollars an annual free cash flow by 2024, and certainly as it relates to next year, we'll have more to share when we issued guidance on our call in February.
Thank you.
Thank you. Our next question comes from just take Reichardt with Citi. Your line is open.
Hi, I'm hydroponics team. Thank you I'm I'm in for Walter Pritchard, Tom a question on usage intensity.
It's really to the financial angle, because I wasn't looking on.
Revenues year over year, you've increased your revenues I'm call It 66 million.
While you were keeping your cost of revenue were essentially flat year over year. So it doesn't really looks like your Washington Stone, you Servicenow procure a ws capacity.
What can you talk about your average engagements on per user doing pullback.
[noise] likens I can speak to engagement and not Jay can speak to financials, especially on earlier, we've seen a broad adoption across the board, but so things like hellerstein and our new desktop apps.
So progress we made their adoption of the new desktop and 450000 Dropbox business teams sales up from 350000 in the prior quarter and again weekly actives are up 50%.
Quarter to quarter as well so those are some of the measures we look at and the new desktop apps also.
A new foundation for us to Dr., Paul drive adoption of all around new products across the board. So having these seamless experiences are having more surfaces allows us to have seamless integrations.
Hello sign and and all of our partner products.
Yeah, and I would just add to that on the gross margin front, we're always focused on bringing down our unit costs and driving incremental efficiencies. We've done a good job that over the past few quarters in the past few years, so things like our rollout of FMR technology as well as our new cold storage tier always innovating on that infrastructure layer book as it relates.
For the unit cost and storage as well as compute and so that's helping us drive a lot of that year over year efficiency as utilization increases.
[laughter].
And lastly, I'd just say.
Well just engagement is important to us because we see that customers, who engage more retained better have higher lifetime value and same thing for cloud release or same thing for folks that.
Use our integration so we're focused both on driving direct monetization by selling more.
Hi value plans, and then indirect monetization, just increasing retention and lifetime value.
And on the ARPU sequential increase it was a little bit less than in prior quarters, what extended the trial conversions have an effect on both mix and what what can you tell us about hold out is going to evolve going forward.
Sure. A this is <unk> I can I can take that question I would say, it's really higher demand for our products resulted in the acceleration of some larger scale deployments in conversions at some point that you just made and so we talked about University of Michigan. There were other larger scale Edu deployments I don't live you mentioned.
So certainly while all of those are a benefit to revenue EMR and paying user growth.
And they underscore the value users are getting from our platform and those were a modest headwind to ARPU for the period will be a modest headwinds ARPU.
For the year and so it's really that outperformance on the pay use your friend, that's driving that and the organic tailwinds to ARPU continued to be very strong. So that does attach rates of new paying users to our premium and team plans that mix shift from individual to team over time.
Gross you ASP for us, which is effectively the arc lupron, you're paying users that continues to meeting pre lead our blended average ARPU so that runway for expansion remains.
Great. Thank you.
Thank you. Our next question comes from Jason had her with William Blair. Your line is open.
Hey, guys is still weak fitzsimmons on for Jason Ader, what are the key data points. You guys provided last quarter was around you increase trials compared to pre cobot levels and that's something that obviously continued this quarter as well and I start with that because one of the interesting announcements last quarter was around changes your mobile onboarding flow supporting users who are more like to convert.
Correct.
You mentioned lets you mentioned this quarter that you're making changes to your <unk> conversion engine as well so I understand it might be in the early side of it might any any additional takeaways from some of those changes your mobile data driven conversion engine, but but any you know first kind of kind of details are first thoughts that you see basketball months another shifts in it.
Customer close rates or a customer feedback since since implementing those changes and I ask because Ah you know the though it's early I would imagine changes in AG aggregates mobile conversions are good for future outlooks versions. Thank you.
Yeah, I mean, we're focused on certainly improving the mobile experience and then just making the overall.
Experience across all our surfaces more seamless.
And the majority I mean, I'm one way, we look at the opportunity as the majority of our used at work are still either free users or on individual subscriptions and so that represents a lot of embedded value and is one of our biggest up sell opportunities.
And other examples of streamlining and simplifying experiences are we want to help folks get into Trabosh. His teams and so streamlined we've made a lot of progress and things like streamlining imitation process and onboarding process.
And we've also continued to optimize our conversion engines a convention engine.
To match users to higher value plants, and so until we make steady progress on that number dimensions on that front.
Thank you and I last question comes from vein right.
Team Research your line is open.
Hi, Tim Thanks for fitting me and I just wanted to dig into debt that net dollar retention rate the expenses quarter over quarter is that primarily a function of the mixed shifts to more business customers with business customers grow faster than those on consumer plans or is the mix holding relatively steady as the increases.
Seven by a kind of consistent renewal among girl consumer plans with the expansion with your business users. Thanks.
Yeah. It's a great question. This is <unk> overall, we've seen does those churn rate gross retention rates remain relatively stable across the business and the expansion we've been able to drive there and net revenue retention twofold, you touched on both of the factors one is us continuing to drive expansion of existing Dropbox business T. inset it seems adding more licenses they're deployed.
And then.
We're also always dropping a mix shift towards team. So every period, we're converting more and more gross new licenses as team deployments relative to individual and so that mix shift over time it is changing.
Okay got it and when should we expect the the net dollar essential that to cross into the triple digits. It seems like that's really the the inflection point, where you could stabilize revenue growth and it really accelerate the margin expansion.
Yeah, we don't so we don't provide formal guidance or or or report formally against never tends. Instead, we'll continue to provide color commentary, but certainly we've been pleased with the trajectory and trend that metric has been on since our IPO and it has been improving pretty steadily a and so to the extent we have some milestones that we had that it makes sense rest assure publicly that's something that will that we'll certainly consider.
Okay.
Okay, great well, thanks, Jay and best wishes for the other side there. Thank you.
Thank you I'll now turn the call back over to see you can have Austin for further remarks.
All right well, thanks again, everyone for joining us. This afternoon, we hope you're staying safe and healthy and we look forward to speaking with you again next quarter.
Ladies and gentlemen, this includes needs conference call. Thank you for participating you may now disconnect.
[music].