Q4 2020 Dropbox Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining dropbox as fourth quarter of 'twenty and 'twenty earnings Conference call.
All participants will be in a listen only mode.
You need assistance. Please signal a conference specialist by pressing the stocky followed by zero. After today's presentation, there will be and opportunity to ask questions.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Dropbox as website. Following this call.
I will now turn it over to Mr. Rob Bradley and head of Investor Relations for Dropbox. Mr. Badly. Please go ahead.
Thank you and good afternoon, and welcome to Dropbox as fourth quarter 'twenty 'twenty earnings call.
Today, Dropbox will discuss the quarterly financial results that were distributed earlier.
Statements on this call include forward looking statements.
<unk> future financial results, including our goals and expectations regarding future revenue growth profitability, and our ability to generate and sustain positive free cash flow.
Our expectations regarding anticipated benefits to our business and the impact to our financial results, including estimate estimated impairment charges as a result of our shift to a virtual first work model.
<unk> performance of our business on.
Operational efficiencies, we may achieve as a result of changes to our organizational structure.
Our expectations regarding remote work trends related market opportunities and our ability to capitalize on those opportunities.
Our capital allocation plans, including the expected timing and volume and share repurchases future M&A opportunities and other investments.
Our ability to drive user growth and retention by enhancing our products developing and offering new products or features and through strategic partnerships.
Our strategy as well as the ability of our key employees to execute our strategy.
And overall future prospects and ability to generate shareholder value.
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 and particular those described and a risk factors included in our form 10-Q for the quarter ended September 32020, and the risk factors that will be included.
And on our form 10-K for the year ended December 31 2020.
You should not rely on our forward looking statements as predictions of future events.
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 measures should be considered in addition to and not as a substitute for or in isolation from <unk>.
Our GAAP results.
A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our form 8-K filed today with the SEC and May also be found in the supplemental investor materials posted on our Investor Relations website.
Net investors Dot Dropbox Dot com.
I would now like to turn the call over to Dropbox as co founder and Chief Executive Officer Drew Houston true.
True.
Thanks, Rob.
Afternoon, everyone and welcome to our Q4, 'twenty and 'twenty earnings call I'm here with Jim Reagan, our Chief Financial Officer.
I'll start on our call today by recapping, our accomplishments from 'twenty, and 'twenty and providing an overview of our priorities for 'twenty and 'twenty one.
And then I'll hand, the call over to Tim who will review financial results for the fourth quarter and full year gave guidance for Q1 and fiscal year, 'twenty and 'twenty, one and share some thoughts on our long term model.
'twenty and 'twenty was a transformational year for Dropbox as the world abruptly shifted to working from home due to the pandemic.
We helped many of our customers through this transition we would have to quickly to the new environment ourselves and we reoriented our product roadmap to address many of the new challenges and opportunities that distributed work presents.
Even with the changing landscape of our business performed well for the full year, we delivered more than $1 $9 billion and revenue, we crossed $2 billion and they are and we meaningfully increased our profitability.
We ended 2020 with more than 15 million paying users and 525000 and business teams.
And throughout the course of the year, we remain focused on launching new features and products to help people organize their lives both at home and at work.
To start we introduced several features and the first half of 'twenty and 'twenty to help our customers protect and secure their most important content.
The first feature to highlight as Dropbox passwords.
With passwords are users can store passwords, and one secure place sink across devices and access passwords from anywhere with zero knowledge encryption.
We also introduced vault and additional layer of security for our customers most valuable content, where that content is accessible with a unique pin code.
Users can also granted emergency access to their vault to trusted friends and family. So they can access to protected content when needed.
And finally, we introduced computer backup which automatically backs up users local desktop documents and downloads folders to dropbox for secure access on the go and retrieval and the event and hardware failure. We believe these new features will drive better engagement and retention across our user base.
In addition to these new features we launched a new SKU called family plan, which helps keep families connected and helps keep their content secure with a central place for shared files like photos videos and documents.
Dropbox family lets up to six family members share as much as two terabytes of data and one plan with a single Bill.
After a positive signals from our initial launch we broadly rolled out family plan on October and these are adoption has been encouraging.
We've also been building out our portfolio of products for distributed work.
And 'twenty 'twenty customers rely on even more on Dropbox to get there worked on as we saw elevated and engagement across our products early in the year and and.
And an effort to better support them, we adapted our product roadmap quickly, making investments and content collaboration capabilities and file sync and share.
For example, there's a need for esignature increased we introduce a deeper integration with <unk>, making it easier to sign documents without ever leaving Dropbox.
We also launched Hello sign and 21 additional languages to better address the global esignature market and to help cross sell and do our Dropbox user base.
These steps resulted in strong growth and Hello signs there are and these are paid seats and more than a 70 per cent increase and end user signature requests.
We also have all dropbox spaces into a standalone experience that lives alongside the classic Dropbox file experience.
Spaces is designed to solve and important problem and.
The context and information we on the Adas scattered across the variety of different files and tools and messaging apps, leaving it up to each of us to piece everything together.
And distributed work has put a lot more stress on the system as teams have had to adopt new ways of working remotely and without the <unk>.
Video tools like zoom and slack and many others.
The goal of the new spaces that is to simplify and organize this experience, bringing projects and teams together and a single virtual workspace, where they can quickly kicked off projects finding that any kind of content and easily track progress.
New spaces experiences currently and private beta.
But we're excited to roll it out more broadly to our users this year.
And finally in 'twenty and 'twenty, we expanded our add on offering so with our new creative tools and data migration products. These were developed for some of our most passionate and demanding users to better handle key workflows and further and further differentiate dropbox.
The creative community relies heavily on dropbox to get their work done.
And today's tools don't solve all the challenges they face when working with large media files.
And early 'twenty and 'twenty, we made investments to help take the headache out of creative postproduction and social media workflows.
The creative tools add on simplifies viewing and facilitates from our collaboration with frame base, commenting and allows flexible work force management.
All on making transfers of large files and simple and secure.
And with the new data migration add on business customers can seamlessly migrate files and permissions from local storage or other cloud storage solutions on to Dropbox.
And they can also automatically map access rights and file structures to dropbox saving our customers time by reducing friction.
This is especially helpful to customers as they were forced to transition quickly to remote work and needed to securely migrate their traditional file storage solutions to the cloud.
In addition to Reorienting, our product road map, we transformed our company and work culture with our shift to virtual first bringing together the best of both the remote and and personal experience.
We're preserving the freedom and flexibility that remote work offers and re imagining our offices as places dedicated to meaningful in person and collaborations.
Most importantly, we believe going virtual first offers us an opportunity to truly live our mission and build even better products for our customers and their transition to distributed work.
We also took a number of steps towards the end of 'twenty and 'twenty to operate faster and more efficiently.
First we simplified our accountability structure, bringing product development technology, and our go to market functions together under our President Timothy Young.
Timothy his elevation to president and will help us focus on our customers through closer collaboration and coordination between our engineering design product and customer facing teams.
And finally last month, we also announced an 11% reduction in force to streamline our teams against and structure strengthen our operational discipline and better aligned to our virtual first strategy.
So while this last year and changes to our product roadmap leadership and team structure. We believe we're set up for stability and execution and 2021.
We have three company priorities for the year and I'd like to walk you through each one with a little more detail.
First is evolving on core product.
Since our founding millions of customers have trusted dropbox to store and share their most important content.
This has always been our central product value and has led to a viral growth and global adoption.
This year, we're evolving and the core dropbox experience to become the organizational layer across all of our users content.
Aimed to improve functionality to reduce friction and make collaboration and file sharing even more seamless.
We expect these improvements will help drive activation retention and migration into paid skus.
New updates include the automated organization of user content and simplified sharing and access features which we believe will lead to greater retention and growth for the core business.
Second we'll continue to invest in and expand our new product pipeline beyond the core experience and.
And in 'twenty and 'twenty, one will build on our early success with Hello science to serve and increasingly distributed work force.
Our planned investments will help position <unk> as the go to solution for esignature for individuals and teams to targeted awareness campaigns and problems.
We also plan to continue scaling newer efforts like spaces with strategic partnerships that add unique value to our users workflows.
Late last year, we previewed spaces integration zoom and Webex to offer users a single place from meeting notes action items and project management. So they can stay connected long after they leave and meeting.
Investing in partnerships and deep integrations like these provide some more seamless product experience for our customers and makes dropbox and even more indispensable part of their workflows.
We will also plan to complement our new product pipeline with strategic acquisitions, as we broadened our capabilities and content collaboration and other adjacencies.
M&A will continue to be an important lever for us as we add to our team and product portfolio, while being disciplined and our approach.
And finally, we'll stay focused on operational excellence and 'twenty 'twenty, one and make progress towards our long term financial targets and be deliberate and the use of our resources.
We're really proud of the progress we made in 'twenty and 'twenty driving nine points of operating margin improvement combined with a 99 million dollar increase and free cash flow.
And looking ahead, and we'll continue to build efficiency and agility throughout the organization and a number of ways.
Will drive improvements and efficiencies and our infrastructure and storage as we continue to add users and content.
We'll also optimize investments in R&D and sales and marketing focusing on opportunities with the best ROI.
We expect these combined actions to continue improving our profitability and free cash flow.
In summary, I'm proud of the team's work last year to adapt quickly to the changing macro environment and.
Take care of our customers.
And we demonstrated our ongoing commitment to our long term financial goals, while still investing in growth.
I believe we have the right plan in place to set us up for success and now we're focused on executing against our strategy for 2021.
We believe our opportunity is growing as the lines between home and work continue to blur and there's increased demand for a more seamless collaboration experience.
Hundreds of millions of people already trust us to store and share their most important files and.
And we'll rely on that strength as we expand our capabilities to become the one organized players for their content and all the collaboration around it.
I'll now turn it over to attempt to walk through our financial results.
Thank you drew.
And I want to begin with a reminder of our investment thesis and our financial North Star. As this provides the context for what we focus on and where we're headed.
Here are the core principles of our investment thesis.
Doubling free cash flow to $1 billion annually by 'twenty and 'twenty four.
And investing for continued revenue growth.
Driving annual improvements and operating margins targeting 28 to 30 per cent.
Allocating capital to organic initiatives and acquisitions that align with our strategic and financial objectives.
And returning capital to shareholders by allocating a significant portion of our annual free cash flow to share repurchases with the goal of reducing our share count.
We believe that execution against these objectives will generate long term value for our shareholders.
With this context I'd like to talk through our fourth quarter and full year 'twenty and 'twenty result.
Which demonstrate our continued progress against our long term targets.
Total revenue for the fourth quarter increased 13% year over year to $504 million.
Foreign exchange rates did not have an impact on year over year revenue growth for this period.
Total <unk> for the fourth quarter was $2.0 billion to $2 billion up 11% year over year.
We continue to drive growth and are are through the release of value enhancing features the introduction of new skus and add on products and continued growth across all low side and subscription plans.
We ended the year with 15.48 million paying users and added approximately 230000, new paying users and the fourth quarter.
Average revenue per paying user for the quarter was $130.17.
Before I turn to the P&L I wanted to highlight some customer wins, we had and the fourth quarter.
The team had success driving the adoption of new add on products that we introduced in 'twenty and 'twenty.
First we're pleased to announce that we signed one of the largest energy providers and the United States and their dropbox customer.
And it turned to dropbox to transform how they provide a secure cloud based content storage solution for their on site and field workers.
Committed to finding a solution that would ensure their it security was best in class. The company selected Dropbox, along with our data governance add on to modernize how teams such as product managers and field technicians work and collaborate on large and highly sensitive files.
Given the length of projects and compliance requirements that the company must adhere to.
Our data governance add on was a critical part of the solution.
Another one to highlight is thousand heads group a global media company based in Europe.
And heads approached Dropbox, and that's part of their strategies to secure and consolidate their data and empower their workforce and their creative and operational processes draw.
Dropbox, along with paper and the creative tools that are and will be a critical part of thousand hits creative workflows.
By standardizing on one single collaborative space thousand heads will have the ability to securely manage their content.
And I'm, making a move away from costly on premise infrastructure.
Creative tools was the most exciting piece of the puzzle for thousand heads as 90% of all their creative content is created in house.
In addition, the ability to access 10 years of historical company data and.
Allows these creative to dip into previous campaigns for inspiration and content.
Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated all income statement measures mentioned, our non-GAAP and.
And exclude stock based compensation and amortization of purchased intangibles.
Certain expenses related to the acquisition of Hello sign and and impairment of our real estate assets.
Our non-GAAP net income also excludes net gains and losses on equity investments and includes the income tax effect of the aforementioned adjustments.
A reconciliation of GAAP to non-GAAP results may be found in our earnings release, which was furnished with our form 8-K filed today with the S E C.
And in the supplemental investor materials posted on our Investor Relations website.
Additional information regarding the exchange rate assumptions used in our guidance may also be found in our supplemental investor materials.
One reminder, as part of moving to a virtual first work model, we're taking steps to D costs, our real estate portfolio by sub leasing our existing facilities.
We previously shared on our third quarter earnings call that as we do not expect to recover the full value of our lease obligations.
We anticipated recording an impairment charge and the range of $400 million to $450 million.
Related to our real estate assets with.
But the vast majority of this impairment charges to be recorded in the fourth quarter of 'twenty and 'twenty.
And a portion to be incurred in 'twenty and 'twenty one.
And the fourth quarter, we incurred an impairment charge related to our real estate assets of $398 million.
We continue to expect to incur additional charges relating to certain European leases over the next 12 months.
Which could range between zero and $50 million, depending on the then current market and economic conditions.
Now, let's continue with the P&L.
Gross margin was 80 per cent for the quarter, representing an increase of two percentage points on a year over year basis.
The improvement and our gross margin is primarily a result of unit cost efficiency gains with our infrastructure hardware.
Turning to our operating expenses I'd like to note that all expense categories benefited from lower facilities related costs.
Driven by our employees working from home as well as a reduction in depreciation as a result of the write down and our real estate assets stemming from the impairment.
Fourth quarter, R&D expense was $129 million or 26 per cent of revenue.
Which decreased compared to 30 per cent of revenue and the fourth quarter of 2019.
Sales and marketing expense was $100 million and Q4 or 20 per cent of revenue, which decreased compared to 22% of revenue and the fourth quarter of 2019.
G&A expense was $47 million or 9% of revenue, which decreased compared to 11% of revenue and the fourth quarter of 2019.
In addition to lower overhead G&A benefited from nonrecurring releases of certain non income tax reserves.
As a result, we earned $128 million and operating profit and the fourth quarter, where.
And where it's represented operating margin of 25 per cent.
This compares to 16% operating margin and the fourth quarter of 2019.
Net income for the fourth quarter was 100, and and $18 million, which is a 75% improvement over the fourth quarter of 2019.
Diluted EPS was <unk> 29 per share based on 416 million diluted weighted average shares outstanding.
Up from 16 cents per share for the fourth quarter of 2019.
Moving on to cash balance and cash flow.
We ended the quarter with cash and short term investments of $1.116 billion.
Cash flow from operations was $171 million and the fourth quarter.
Capital expenditures of $12 million.
During the quarter resulted in free cash flow of $158 million.
Or <unk> 31 per cent of revenue.
And the fourth quarter, we added $40 million to our finance leases for data center equipment.
In addition, during our third quarter call, we shared our intention to increase the pace at which we repurchase shares under our existing 600 million dollar share repurchase authorization.
With the potential to exhaust this authorization by the end of the first quarter of 2021.
In line with this intention, we repurchased 11 million shares and the fourth quarter.
Spending $220 million.
Now, let's turn to our full year 'twenty and 'twenty results.
Total revenue for 'twenty, and 'twenty was 191 $4 billion.
Representing 15% year over year growth.
On a constant currency basis relative to the average rates across 2019.
Year over year growth would've been 16%.
Gross margin was 79 per cent for the year, which was up three percentage points from 2019.
Operating margin was 21 per cent for 'twenty and 'twenty.
Which was up nine percentage points from 2019.
This significant year over year improvement demonstrates our commitment and ability to execute against our investment thesis.
Cash flow from operations for 2020 and was $571 million.
Capital expenditures for the full year totaled $80 million.
Which yielded free cash flow of $491 million or 26% of revenue.
And excluding headquarter spend net of tenant improvement allowances for $26 million.
And the payout of Hello signed deal consideration holdback of $28 million per.
Free cash flow would have been $545 million or 28% of revenue.
And 2020, we also added $146 million to our finance lease lines for data center equipment.
And net of repayments, our finance lease balance increased by $56 million.
I'd now like to introduce our 'twenty 'twenty, one first quarter and full year guidance.
Yeah.
For the first quarter of 'twenty and 'twenty, one we expect revenue to be and the range of $504 million to $506 million.
Currency exchange rates assumed in this guidance accounts for an approximate 1.3 points of growth at the midpoint of guidance.
This quarter and are are based on a combination of recent and historical average rates.
We expect non-GAAP operating margin to be and the range of 27.5% to 28%.
This margin guidance excludes approximately $15 million related to the severance and benefits paid to employees impacted by a reduction in force and Q1.
Finally, we expect diluted weighted average shares outstanding to be and the range of 409 to 414 million shares.
Based on our trailing 30 day average share price.
For the full year 'twenty 'twenty, one we expect revenue to be and the range of 2.0 and 95.
To $2.115 billion.
Currency exchange rates assumed in this guidance accounts for an approximate two points of growth at the midpoint of guidance this year.
And are based on a combination of recent and historical average rates.
We expect gross margin to be approximately one point higher than fiscal 2020.
We expect non-GAAP operating margin to be and the range of 27% to 28%.
This also excludes the aforementioned severance benefits paid and Q1.
We expect free cash flow to be and the range of 645.
Two $655 million.
This includes $31 million and cash outflows comprised of $16 million for the 2021 installments of deal consideration holdback related to our acquisition of Hello sign.
And one time severance payments of approximately $15 million related to a reduction in force.
Finally, we expect 2021 diluted weighted average shares outstanding to be and the range of 402 million to 407 million shares.
This reduction and our share count reflects our commitment to and the impact of our share repurchase program.
In addition to this formal guidance I wanted to share some further thoughts on our expectations for 2021.
While we don't formally guide to paying users I want to provide some context on our expectations.
This metric in 'twenty and 'twenty one.
As a reminder, our objective is to drive growth and error and profitable and efficient ways without over indexing on specifically growing either paying users our RP.
As we consider this and as part of the strategy behind our workforce reduction.
And prioritizing our land and expand and seltzer.
To market motions, which are most efficient across our individual and small business and mid market customers.
Accordingly, we intend to minimize the pursuit of opportunities that carry lower average seed prices higher acquisition costs and greater degrees of customization, which could lead to lower paying user editions and certain quarters.
Conversely, we are also seeing early positive signals from the adoption of our family plan.
Could lead to higher paying user editions.
As a result, we may see more variability and are paying user additions and the future.
Overall, we will continue to focus on our strength that allow us to engage and are most efficient go to market strategies, while investing and our existing and new products.
Separately as it related to capital expenditures, we expect our additions to our finance leases to be to be approximately 6% of revenue and we expect cash capex to be and the range of $25 million to $35 million in 'twenty and 'twenty one.
Lastly, I want to reiterate our plan to return capital to shareholders and the form of share repurchases.
We still plan to exhaust our previously authorized 600 million dollar share repurchase program and the first quarter of 2021.
In addition, our board has authorized an additional $1 billion share repurchase program consistent with our strategy to allocate a significant portion of our annual free cash flow through share repurchases with the goal of reducing our share count.
In conclusion, our progress in 2020, and our plan for 'twenty and 'twenty, one keep us on a trajectory to achieve our long term targets and our investment thesis.
While we are approaching our gross margin and operating margin targets. This year, we intend to continue to invest for sustainable revenue growth.
As a result, we may reinvest some of the savings that we're generating from our from our efficiency initiatives into growth opportunities.
We therefore remain committed to our target model and our 2020 for free cash flow goal of $1 billion.
We look forward to sharing our progress along the way.
With that I'll now turn it back to drew for closing remarks.
Thank you Tim and thank you all for joining us today.
2020 was and unpredictable year and I'm proud of how our team responded.
We delivered 15% growth, while making improvements and profitability and made necessary changes to ensure our business. Our business is operating with focus and efficiency as we pursue on long term targets.
We're excited about the road ahead and believe we are uniquely suited to help our users thrive and the new world and distributed work.
And with that I'd like to open up the call for Q&A.
Operator.
Thank you to ask a question you will need the pest star one on your telephone so let's try your question Pester Pankey, please standby will be comparable to Q and Dave asked there.
Our first question comes from Mark Murphy with Jpmorgan. Your line is now open.
Yes. Thank you drew what are you assuming for 2021 in terms of any lingering headwinds or tailwind from the pandemic I think you had previously given us some insight into.
Trends with trials and conversion rates, how do you see that playing out and.
And importantly, how do you think it will net out this year more of a headwind or more of a tailwind.
Yeah. So.
Thanks, Marc for the question so as as we shared last year, we had a surge and demand during the onset of the pandemic.
Elevated trial starts and things like that.
Which was mostly isolated to the first half.
I mean engagement broadly has been up and then we think in the we think more broadly or and in.
For this year and beyond that the debt the pandemic will be a tailwind given that folks are shifting to distributed work.
And Dropbox and becomes a lot more important when youre working out on the screen and et cetera.
So we see a lot of it is as we've shared before we see a lot of opportunity to address new pain points and the and the virtual work experience.
Everybody has and need to keep all their content organized it's very fragmented and distracting and overwhelming experience now.
So we think it's a huge opportunity for us.
Okay. Thank you Andrew and at Tim.
As a follow up when we would be dissect Q4 and.
Hugh you arrive at this level of revenue growth are true roughly 8% growth and paying users and 4% growth and our payout.
And I know you're trying to deemphasize.
Too much scrutiny on that but I'm just wondering at a high level, how do you envision that balance when we look across the multi year framework.
Do we think it's going to balance that.
Eventually sort of mid single digit growth for sure.
Do you think there could be some periods, where that our true growth is sort of crossing above the paid user growth at some point.
Sure. Thanks for the question Mark and as you know, we do focus on <unk> as our primary metric, we don't optimize for a given lever between paying users and and <unk> as overly focusing on one or the other may not best reflect our strategy and.
And while we don't formally guide to paying users I did provide some additional commentary and my prepared remarks.
There this year, we may see some variability in our net new paying user additions stemming from a few things our strategy to minimize the pursuit of larger deals that may carry lower asp's higher acquisition costs and greater degrees of customization.
We're Conversely, we are seeing some early positive signals on the adoption of our family plan, which we just launched last last November. So again, we may see more variability and our net new paying users.
This year. We're overall, we continue to focus on our most efficient and profitable go to market strategies, while investing and our existing and new products and.
These types of competing dynamics between <unk> and paying users is indicative of why we do focus on areas our key metrics.
Thank you very much.
Thank you. Our next question comes from Brent Thill with Jefferies. Your line is now open.
Hi, this is loved photo on for Brent too.
Thank you again for your remarks I wanted to ask one on the go to market motion.
And one or two.
Was there any benefit from the branding campaign I remember you guys initiated and it at the end of Q3, so did that have any positive impact.
If any and more specifically on on the go to market motion.
And with these changes mean that you're less focused on teams users and the future.
Sure.
Can take this.
I mean as for context, we did have a brand campaign in Q4, highlighting dropbox as a solution for teams that work and for businesses.
And and the campaign on while it basically to our expectations and we continue to invest and marketing to drive awareness and and to drive all elements of the funnel.
And have had success there.
Finally, and as far as focus on businesses and teams and as we've share at 80% of our subscribers using dropbox at work, we're very focused on teams and I'd say, we're proportionately a big strength of ours is that we have this really efficient and scalable self serve engine.
We have another strength, which is that dropbox is brought into organizations of all shapes and sizes, but as far as.
Where our dollars and investment go were going to prefer organic we're going to allocate more we see higher returns in optimizing our self serve engine.
And just maintaining cost discipline across all our different channels, because we see that and.
And the self serve channel just as one example of <unk>.
Higher asps and lower acquisition costs really scalable and viral.
So it's really a refinement more than a major shift in strategy incremental dollars go on to the area of hires for share.
Got it and maybe one quick follow up if I may on on.
On the and then to use side will you know what.
What do you see in terms of like F&B spend.
Can can we expect some type of normalization and 21, so when would that be kind of a tailwind to net new paid users. Thank you.
It's a great question and I think I would have to just point back to the commentary that I gave to mark on what we expect from and M. P. U perspective, and then just look to our revenue guidance for how this should all play out as far as SMB.
And we saw a lot of stability with Smbs and general.
While the macro environment.
Well, there's a lot happening and the macro environment and we find that a lot of dropbox customers Smbs are knowledge workers and have been able to continue working from home. So are relatively less impacted than other sectors for share.
Thank you.
Okay.
Thank you. Our next question comes from DJ Hynes with Canaccord. Your line is now open.
Hey, Thanks, guys drew I wanted to ask about free user conversion and the levers that you have there right I mean.
Look we obviously saw a slowdown and the number of net new users added this year at least relative to last couple of years.
And what I would've thought we would be a pretty decent demand environment for dropbox right given the move to distributed work so.
And I guess the question is that there's still this huge free user base.
And there.
Is it that the triggers have become less effective.
Or are we just getting deeper into the base and that there is a segment that is just never going to pay for the service like what what are the levers that you can pull to reaccelerate that free user conversion.
Sure I mean, we still see a lot of headroom with free users and we have continuously been improving our ability to convert free users and and as you pointed out we have a number.
Of levers.
To drive conversion, so I mean, we start with customer value and just building great product experience, adding more.
So when you look at some of the things we launched last year.
And the launch of a portfolio of new features around for example, helping individuals' keep their content and secure so computer backup passwords vault and things like that.
And we've seen there.
Those features and and things like them drive paid trials drive more conversions and so on.
<unk>.
And then as teams expand and that's another lever.
And the list goes on and so there there are a number of different levers that we and we optimize.
Basically all of them and it also often takes time for freezers to convert and so there. There are time constants involved like sometimes it can take some time for you to fill up your dropbox. So that if your storage is one hurdle.
Or you might start using it at home and and start using it work and then he joined the team. So there there are some.
We're basically.
There are a number of levers and they're in and it can take some time for folks to convert and we're on.
Optimizing for a balance of driving more engagement and growth of the user base with monetizing them as effectively and quickly as possible and there's a bit of a trade off there.
Okay.
And then a question on space and it. So so what are you seeing users do and spaces that they werent doing with the platform.
Before it became available and private beta and I guess as outsiders to the organization like what should we be paying attention to that says the space and the strategy is working.
Sure well the space. This is pretty early and its evolution last year, we decided.
On to evolve it into a stand alone experience.
And we'd started experimenting and this in this area with the new desktop App, so adding more collaborative features and shared folders and things like that.
And what we realize is that there's enough room for a dedicated experience and and one that.
And.
Where cloud content is a little bit more on the foreground instead of just files and it's a workspace for our project more than a folder for full of content or files.
So it's what we're looking for with spaces.
To give teams.
One place for all of their Google Docs, and Dropbox files, and air tables and everything else.
And.
And to be able to organize their work around projects.
And so those kinds of is some of that engagement is.
These are new problems that we're solving for our customers. So.
But that's the kind of engage and move on to see all of that said spaces pretty early where we will have more to share on it and the coming quarters.
We're also excited about.
And with spaces some of the new surface area will be working on is deepening partnerships with zoom and webex so that.
Spaces, you'll be able to bring your content into the video meeting experience and new ways. So so stay.
And for more on that.
Okay, great. Thanks for the color.
Thank you. Our next question comes from Rishi <unk> with D. A Davidson your line is now open.
Hey, guys. Thanks, so much from taking my questions wanted to start by going to a comment maybe on prepared remarks too.
So about <unk>.
<unk> as a potential opportunity.
I know you've made some smaller acquisitions in the past, mostly technological Inc.
And you were to consider inorganic.
Where would those adjacencies that make the most and b.
Would it be something I kinda like what you did with debt Hello side would it be more product base and maybe give us some color on how youre thinking about M&A and then I've got a follow up.
Sure well M&A, it's been an important lever to help us grow the business and <unk>.
The whole spectrum from that and talented team adding.
Accelerating our product roadmap and adding new businesses like <unk> and so I think peloton is a great example of where that's worked well.
And so we're always on the lookout for these opportunities and our user base and distribution is a big advantage.
As far as where we're looking.
There are a lot of different user workflows around content and.
And helping people do more with the content and their dropbox.
And I think helps on is a great example of that so in addition to being able to store and share and access your content being able to.
And I handle the esignature workflows and more broadly document workflows.
<unk> is a natural adjacency for us So we'll continue to look for opportunities and grow the portfolio through M&A.
Okay, Great. That's helpful. And then just continuing down the path on Hello sign.
Could you give us a sense you did talk to you about how how long on <unk> growth was has been strong this year maybe.
And maybe can you talk a little bit more specifically about what you've seen in terms of the demand environment for Hello side, and how youre thinking about that business going forward and you know how and how meaningful a contributor you.
You can expect it to be and maybe alongside that you saw one of your competitors by a small vendor.
And in the digital signature space, just maybe how you're thinking about any changes on the competitive environment for how long. Thanks.
Sure well, we're really excited about Hello sign it's the fastest growing product and the company, we saw strong growth and revenue and paid seats and signature requests last year and I think.
The pandemic really accelerated the adoption of esignature as a category.
And so where we've made big investments and accelerating <unk> growth that we're excited about including more seamless integration with dropbox and over the core Dropbox experience Internationalizing, Hello, sorry, and adding support for 'twenty, one and languages.
So we see it's pretty early innings, both for <unk> and specifically in the category in particular and there is a number of natural adjacencies around that.
E signature and just drop document workflow and and better handling the document lifecycle and in general.
As far as the competitive environment.
One.
One aspect of <unk> and that's really good.
Abled US is they have a similar customer base and some of our go to market motion there driven by self serve.
On the self serve viral go to market motion, and which is really efficient and scalable.
And we see dropbox and compared to the smaller competitors, we see dropbox as scale and Hello, and scale as a big advantage.
And now at the time when a lot of folks are going to be making decisions about.
Which solution and they go with.
Wonderful. Thank you so much.
Thank you. Our next question comes from Jack Nichols with Keybanc capital markets. Your line is now open.
Hey, guys can you talk about the expectation built in and around the mix of personnel versus business accounts and the ability to drive up sales and then a follow up.
Sure I'll give you an update on the teams and individual mix with where the mix between teams and individuals has remained relatively consistent.
On a on a revenue basis, our individual revenue mix grew in 2020 as a result of the plus pricing initiatives.
Of course that said, we continue to see progress and our teams plan as we do now have over 540000 teens and growing teams is certainly part of our long term strategy and all of this has been factored into our 2021 guidance.
Okay. Thank you yeah Super helpful and what's the best way to think about our growth expectations going forward for the new.
So the net new customers.
Or upselling plans and higher <unk>.
I think the best way to think about it is to look again to our revenue guidance.
There are maybe just specifically on on IRR, we of course cross and important threshold in Q4, passing over and over $2 billion and air and finishing the year at $2.0 billion to $2 billion.
And of course this is the primary metric we look at but we don't specifically guide to this whereas again I'd look to our revenue guidance for our expectations.
Thanks, guys.
Thank you. Our next question comes from Zane Crane with Bernstein Research. Your line is now open.
Hi, I was hoping to dig and a little bit more on the net revenue retention rate you guys gave a believer value of 90% around the time of IPO and update on 95% that the analyst day in 2019 and I believe.
And update on what that is for the overall business as well as per the customers that are on business plan.
Sure. So we don't update this metric quarterly and.
Again, our revenue guidance factors in the latest trends I can tell you that at a high level net revenue retention now is in the low nineties in line with historical levels, where pricing increase do drive some ebbs and flows and as you know we've worked through the plus pricing increase at this point and then.
As a reminder of a few factors that do contribute to a N and our are include the migration of existing paying users to premium plans the mixed shift of teams and team expansion.
Where we are focused on and on driving this metric and a positive direction.
That's helpful. So it sounds like it's declined a couple of percentage points. Since your last update of 95% is that due to a uptick in churn.
From one particular segment or is it kind of a deceleration and expansion from the business side.
And as well.
And much more to do with pricing.
Where we've worked through that pricing increase and and now we're back to our historical levels absent pricing changes.
Okay. So just the anniversary effect of that price and change them.
That's right.
Got it Okay, and one last thing I believe last time and looked.
From the K, you had 90% of revenue whats through self service channel has that changed materially over the last year.
No that has stayed consistent.
Okay, great. Thanks very much.
Thank you. This concludes the question and answer session and I'd now like to turn the call back over to drew Houston for closing remarks.
Again, thanks, everyone for joining us.
And I appreciate your support and stay safe and we'll see you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
And then.
On June <unk>.
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Okay.
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Yeah.
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