Q1 2021 Dropbox Inc Earnings Call
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For the page Poortith, that's what relation to Dropbox Miss <unk>. Please go ahead.
Today, Dropbox will discuss quarterly financial results that were distributed earlier statements on this call include forward looking statements, including.
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 impact so our financial results, including estimated impairment charges and sub leasing income as a result of our shift you a virtual first work bottle expected.
Performance of our business, our expectations regarding remote work trends related market opportunities and our ability to capitalize on those opportunities.
R capital allocation plans, including expected timing and volume of share repurchases future M&A opportunities and other investments.
Our ability to drive future user growth upgrades and retention by enhancing our products developing and offering new products or features through our acquisitions.
Our strategy and the effectiveness of strategy and achieving our business goals 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 in particular those described in our risk factors, including in our form 10-K for the year ended December 31st 2020, and the risk factors that will be included in our form 10-Q for the quarter ended March 30 <unk>.
First 2021.
You should not rely on are 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 an addition to and.
Not as a substitute for or in isolation from 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 any supplemental investor materials posted on our Investor Relations website at Www Dot investors Dot Dropbox.
<unk> Dot com additional information regarding the exchange rate assumptions used in our guidance may also be found in our supplemental industrial materials.
I would now like to turn the call over to Dropbox is co founder and Chief Executive Officer Drew Houston.
Good afternoon, everyone and welcome to our queue on 2021 earnings call on the call is from Houston, Regan, Our Chief Financial Officer.
Today, I'll share our business and product colors from quarter. Tim will then review on queue on financial results provide guidance for the second quarter and update our outlook for the remainder of the year.
And before we get to our results I'd like to thank our employees customers and partners for the support and their contribution to a successful quarter.
Around this time last year, we along with many of our customers are managing through an unprecedented global pandemic in the southern shifted distributed work is certainly a challenging time and I'm proud of the way our team showed up and supported our customers well.
While many companies are still adjusting to the shift and grappling with decisions about hybrid flexible or won't work one thing is clear.
The traditional way of working exchange forever.
We've made decisions about our own workforce adopting what we're calling a virtual first way of working combining the best of both fully remote and then person collaborations.
And as we shared previously we reoriented our entire product for on that to address the challenges our customers face on this new environment and.
At the same time, we also reorganize some streamlines our team's again, some new strategies and now we're focused on on execution.
This new era of distributed work has given rise to new opportunities for us and set up several times I've already and play.
We've seen spikes in rich media on video content.
On the rise of freelance economy, and an accelerated shifted businesses to the cloud.
And we're seeing these trends, reflecting on our own business with the increased growth on our professional skew expansion within us abuse and heightened demand for new capabilities that connect our customers content to the workplace.
As our progress this quarter demonstrates there's never been on a better time in history to be building collaboration software and I'm excited about a road ahead.
Turning to the quarter, we saw positive momentum in the business as we continue to execute against a strategy.
Revenue growth, a strong or non non-GAAP operating margin extend meaningfully as he drove operational efficiencies and stayed on course with our long term targets.
We also completed several financial transactions that improved our ability to execute against your investment thesis, which 10 will speak to you in more detail.
As I shared last quarter, we have three strategic priorities for 2021 evolving the core business investing in new products and driving operational excellence.
I'm proud of the team's execution and the progress we've made against each of these in Q1.
Let's start with an update on our first priority evolving the core business.
As a reminder, the strategy is focused on building on the strength of the simple and intuitive core dropbox experience to improve our functionality may collaboration around content more seamless and help organize our users content tools on workflows.
As we make these investments we believe they'll drive higher level, some engagement better retention and alternately stronger revenue from our core business.
One way, we improve the user experience this quarter with streamlining are in product promotions to ensure that people can focus on the content and their work.
We were successful on maintaining our overall conversion volumes, while reducing the total number of dropbox promotions the average user fees.
As a result, we're now able to more purposefully surface and product cross at optimal moments to encourage upsell on cross-sell of our products.
The simplified experience gives our users a more seamless way to engage with dropbox, while still retaining the flexibility strategically leverage and product prompts to drive adoption of our newer products.
Involving decor is also about delivering more valued or basic users to promote conversion too are paid skews.
For example, last year, we launched Dropbox passwords to all our paid users to help them stay organized and better connect or tools.
And we recently launched a premium version of passwords to our basic users until the deliver more value beyond FFS and introduce them to some of the premium capabilities that we offer as part of our product.
As more basic users are supposed to and find value in these premium futures. We believe this will help drive activation retention and migration into paid plants.
I'm also excited to share the progress we've made was transfer which we introduced as a standalone skew late in the first quarter.
Now it's easier for basic users to discover an upgrade to the transfer plant, which we ask sexual drive additional uplift and are paid user convergence and retention rates.
We see this is the first step in making the transfer product more broadly available to our user base as we continue to iterate on our App style funnels to drive era growth.
As a final example of how we're evolving our cord products I'll share an update on the progress, we're making with our family plant.
The family plan keeps your family's digital lives connected with one organized place to share photos videos and important documents.
The force to terabytes of share storage for up to six users each with their own personal folders, a centralized family room and access to premium features like ball transfer backup passwords.
Since launching last fall, we've seen an exciting traction with tens of thousands of family room is created.
And the feedback thing great customers are finding unique value and their ability to easily share important family content like photos and videos on an ongoing basis.
Collectively by streamlining the total number of Dropbox promotions, our user C releasing patterns for a basic users and continuing to invest can solutions like transfer and family plan, we're making great progress and evolving the core dropbox experience.
We're building on our roots and file and can share and delivering even more value to our users with a differentiator feature set while remaining true to our core product philosophy, a simple and easy to use experience that helps you will manage both their work and personal lives we'd.
We believe this focus will strengthen our relationship with our customers and help us to stay in healthy growth and the core business.
Let's move to our second priority, which is investing in new products as we cultivate and scale additional capabilities beyond the core dropbox experience.
Is one of only a handful of fast companies that I've ever reach $2 billion. On there are we believe we have a big opportunity to build on the success of our core business and expand to new and to Jason product areas, where tapping into that success as we invest in powerful tools like dachshund and tell us on to the next generation of freelancers and on some beach and the new distributed working.
<unk>.
In March we announcer acquisition of dark cent secure documents sharing and analytics product.
This acquisition builds upon a key strength of ours to share.
Today users share hundreds of millions of documents using dropbox every year, which leads to viral expansion and increase your attention.
The acquisition of Dockson extends on ensuring capabilities offering users added security along with powerful analytics on how viewers are engaging with their content.
It's also a great day within our broader product portfolio.
The combination of Dropbox, Hello sign and Dachshund will give our customers a full suite of seltzer products and help them manage critical document workflows end to end and ultimately drive meaningful those results.
For example, client services teams and creative professionals, who already rely on dropbox to organize and collaborate on documents presentations and projects can use dachshund to deliver proposals and tracking <unk> and you tell assigned to sign contracts not.
Not only does this acquisition on a lot greater value for our customers, but the combination of these three products can help drive adoption and upsell across our product portfolio.
Dark sends a great addition to the Dropbox family and will allow us to deliver more functionality to meet our customers needs I want to extend a warm welcome to the docks on team and I look forward to everything we're gonna cheat together.
Let's turn the whole site, which continues to be one of our fastest growing product.
In queue on the team made great progress towards our goal of becoming a leading the signature solution in the S M b market and and target International markets.
First we launched our bundle Dropbox professional and telephone central skew, which were calling professional policy side.
As I mentioned earlier, we're seeing increased engagement from freelancers and Smbs and this is especially reflected on our professionals queue, where we've seen more than 30% increase in paid users year over year, where.
We're capitalizing on this momentum by exposing these users to more of our extended functionality like Hello site.
As our customers look for a comprehensive ecosystems that sort of all of their business needs.
In turn we drive further awareness of already e-signature capabilities and deliver additional value to our customers.
We're also seeing traction in international markets.
After and launching Hello, signing on the 21 additional languages last year. We've continued to offer geographic specific solutions tailored to meet the needs of our international users.
In Japan for example.
We now support electronic Hanko stamp sales, which are often used in lieu of e-signature as in that region.
Dawson and Hello sign are great. Examples of how we're building on the success for a core experience and expanding into adjacent markets to increase the value of their users get from Dropbox.
We will continue to invest here, both through M&A and in our organic innovation pipeline with products like spaces to drive our next stage on growth.
Finally will stay focused on on on a third priority of operational excellence.
Can we improve the efficiency for liability and security of our technical infrastructure, while increasing our operational discipline and optimizing our cat capital structure for high or low I investments.
This score we executed on a number of important initiatives, including closing on our end convertible debt Reyes implementing an additional $1 billion share repurchase authorization and driving a 13 point improvement in our operating margins, while we're making great progress against our profitability metrics, we remain focused on investing for the future we've always been <unk>.
<unk> on balance on growth and profitability and we believe our recent alignment against these three priorities set us up to be more nimble innovative and a decade more resources towards building new products.
And looking ahead will continue to be disciplined with our capital while filming making thoughtful R O Y based investments.
And we believe these efforts enhance our ability to reinvest in growth initiatives execute against Sir that's my thesis and continue generating shareholder value.
In summary, I'm proud of our first quarter results as we relied on our strikes to address the growing demand for more seamless collaboration software, we continue to execute well against their 2020 on on priorities delivering more value to our users with with our court product new capabilities, while strengthening our balance sheet and improving profitability.
On the I'll turn it over to Tim to walk through our financial results.
Thank you drew.
As I've done before I went to begin with a reminder of our financial objectives is this provides the context for how we operate the business and outlines where we were headed.
The core tenants of our financial plan are as follows.
Doubling free cash flow to $1 billion annually by 2024.
Investing for continued revenue growth.
Driving annual improvements in operating margins targeting 28% to 30%.
Allocating capital to organic initiatives and acquisitions that align with our strategic and financial objectives.
Abilities and market awareness and the acquisition of Dachshund.
We exited the quarter with $15 eight 3 million paying users.
And added approximately 350000 net new paying users in the first quarter.
Driven in part by positive momentum in the adoption of our family plan.
Average revenue per paying user was $132 55 in Q1.
Before I turn to the P&L I'd like to highlight some of our go to market wins in the period.
As a reminder, our go to market strategies involve both our self serve motion as well as our outbound sales motion.
On the self serve side, we've recently made meaningful improvements to the way users discover and purchase our paid skus.
Now our web pages more clearly surface our selection of paid plans as well as the corresponding features each plan offers.
This has helped to smbs adopt our pro plan, which offers robust functionality for sharing transfer and file requests.
These improvements have also helped our individual users to discover and migrate to a new family plan.
In Q1, we saw a resulting improvement in conversion rates stemming from these changes helping to drive our revenue performance.
On the outbound side, we are excited to announce that an American building materials retailer is now a dropbox enterprise customer.
The company has over 400 retail locations nationwide and has helped to transform millions of homes with their digital rendering resources.
They chose dropbox to enable the creative workflows that take place across their marketing and design teams, while also allowing them to securely share and receive content from external vendors.
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 exclude stock based compensation amortization of purchased intangibles.
Certain acquisition related expenses impairments of our real estate assets and expenses related to a reduction in force.
Our non-GAAP net income also excludes net gains and losses on equity investments and includes the income tax effect of the aforementioned adjustments.
As we have previously mentioned given that we have transitioned to a virtual first model.
We have taken steps to D cost, our real estate portfolio by sub leasing our existing facilities.
We have estimated total impairment charges of up to $450 million associated with this transition.
In Q4 last year, we recorded a charge of $398 million, representing the vast majority of the impairment we expect to incur.
In Q1, we recorded an additional impairment charge of $17 million driven by.
Several factors, including the impairment of <unk> lease.
Additional costs stemming from the sale of our San Francisco headquarters and other factors.
This brings our cumulative impairment incurred to date to $416 million.
We continue to estimate the high end of our total exposure to be $450 million.
As a reminder, we continue to expect to generate in excess of $800 million.
And sublease cash inflows over the course of these leases.
Which predominantly range in duration between 13 and 15 years.
Now, let's continue with the P&L.
I would note that all expense categories continued to benefit from lower facilities related costs driven by employees working from home.
Reduction in depreciation as a result of the write down in our real estate assets stemming from the aforementioned impairment as.
As well as lower overall costs related to our work force reduction which took effect in Q1.
Gross margin was 80% for the quarter represent representing an increase of two percentage points on a year over year basis.
The improvement in gross margin is primarily a result of unit cost efficiency gains with our infrastructure.
First quarter, R&D expense was $131 million or 26% of revenue, which decreased compared to 31% of revenue in the first quarter of 2020.
Sales and marketing expense was $88 million or 17% of revenue, which decreased compared to 21% of revenue in the first quarter of 2020.
In addition, we delayed certain marketing initiatives, which are now expected to occur in the second half of 2021.
G&A expense was $43 million or 8% of revenue.
Which decreased compared to 10% of revenue in the first quarter of 2020.
As a result, we earned $149 million on operating profit in the first quarter, which represented an operating margin of 29%.
Which is a 13 percentage point improvement compared to the first quarter of 2020.
Net income for the first quarter was $142 million.
Which is more than a 100% improvement over the first quarter of 2020.
Diluted EPS was a record 35 per share.
Based on 405 million diluted weighted average shares outstanding up from <unk> 17 per share for the first quarter of 2020.
Moving on to our cash balance and cash flow.
We ended the quarter with cash and short term investments of $1 91 6 billion.
Cash flow from operations was $116 million in the first quarter.
Capital expenditures were $7 million during the quarter.
This resulted in free cash flow of $109 million, which compares to $25 billion in Q1 of 2020.
In the first quarter, we also added $24 million to our finance leases for data center equipment.
We also executed some important financing initiatives in the quarter that not only improve our overall capital structure, but enable us to continue delivering value back to our shareholders.
In February we successfully raised nearly $1 4 billion.
Including the exercise of the related over allotment options through a zero coupon convertible debt offering.
Which was comprised of roughly equivalent to five and seven year notes.
We then used $62 million of the net proceeds towards executing bond hedge and warrant transactions.
Which effectively raise the conversion price of the notes to over $46 per share representing a 100% conversion premium over our share price on the day of the offering.
These collective terms culminated in some of the most favorable pricing seen in comparable offerings in recent years.
This transaction strengthens our balance sheet and allows us to support organic growth initiatives pursue M&A and return capital to shareholders through share repurchases.
Looking ahead, we will remain disciplined in allocating capital to high ROI opportunities.
I'd also like to provide an update on on a share repurchase strategy.
As we signaled during our November earnings call, we increased the pace of our share repurchases starting in the fourth quarter of 2020.
Accordingly in Q1, we exhausted our first $600 million.
<unk> and subsequently announced a new $1 billion share repurchase authorization.
Over the course of Q1, we repurchased nearly 19 million shares.
Spending approximately $430 million.
These figures include shares we repurchased in conjunction with our convertible notes offering which were not related to our existing share repurchase program.
As a result and as of the end of Q1, we have approximately $970 million remaining on our $1 billion share repurchase authorization.
We continue to believe that utilizing our capital for share repurchases is efficient and.
And we will leverage the strength of our balance sheet to deliver returns back to our shareholders.
With that let's turn to guidance for Q2 and for the full year.
For the second quarter of 2021, we expect revenue to be in the range of $522 million to $525 million.
Currency exchange rates assumed in this guidance account for approximately two points of growth at the midpoint of guidance.
And are based on a combination of recent and historical average rates.
We expect non-GAAP operating margin to be in the range of 27 five to.
28%.
Finally, we expect diluted weighted average shares outstanding to be in the range of 397 to 402 million shares based on our trailing 30 day average share price.
For the full year, we are raising our revenue guidance range, which was previously 2.0 95 to $2 115 billion.
To $2 118.
To to 130 billion.
Currency exchange rates assumed in this guidance account for approximately two points of growth at the midpoint of guidance.
And are based on a combination of recent and historical average rates.
We continue to expect gross margins to be approximately 80%.
We continue to expect non-GAAP operating margins to be in the range of 27% to 28%.
We are raising our free cash flow guidance range, which was previously a $645 million to $655 million.
$670 million to $690 million.
This includes $29 million in cash outflows comprised of $16 million for the 2021 installments of deal consideration holdback related to our acquisition of flow side.
And one time severance payments of approximately $13 million related to a reduction in force.
We continue to expect capital expenditures for 2021 to be in the range of $25 million to $35 million net of tenant improvement allowances.
We continue to expect additions to our finance lease lines to be approximately 6% of revenue in 2021.
Finally, we expect 2021 diluted weighted average shares outstanding to be in the range of 397 to 402 million shares.
Down from our previous guidance range of 402 to 407 million shares.
This reduction in our share count reflects our commitment to an anticipated impact of our share repurchase program.
To share some additional context on this guidance.
We are raising the midpoint of our full year revenue guidance from 10% to 11% year over year growth were.
Approximately half of this increase relates to the strength, we're seeing in our organic business.
And the remaining half relates to the revenue contribution from our acquisition of Dachshund.
We are maintaining our operating margin guidance as we absorbed docks and into our P&L.
As certain marketing initiatives initially planned for Q1 shift to the second half of the year.
And as we plan to make strategic investments back into the business to drive long term revenue growth.
We are raising our free cash flow guidance due to an increase in expected billings from our organic business and docs and.
As well as increased confidence and the favorable impact of FX rates.
With regard to paying users and <unk> as I mentioned during our call in February.
As we drive upsell to family plan and other skus, while concurrently shifting away from pursuing large paying user deals with low asps.
We could see variability in both paying users and <unk> on a go forward basis relative to historical trends.
We therefore continue to focus on AOR growth as being the best indicator of the long term health of our business.
Lastly, while we are rapidly approaching our long term gross margin and operating margin targets, we remain focused on investing for sustainable revenue growth.
Accordingly, we plan to reinvest some of the savings we are generating from our efficiency initiatives into growth opportunities, where we see a compelling ROI.
Therefore, we remain committed to our target model.
So our 2020 for free cash flow goal of $1 billion and to generating shareholder value.
In conclusion, we're off to a solid start to the year.
We delivered strong results across both the top and bottom line <unk>.
Strengthened our balance sheet through a capital raise.
<unk> reduced our share count by accelerating our share repurchase activity.
It enhanced our growth potential with the acquisition of <unk>.
We continue to execute against our financial objectives, and we remain on course to achieve our long term targets.
With that I'll now turn it back to drew for his concluding thoughts.
Thank you Tim and thank you all for joining us today.
As our Q1 results demonstrate we remain focused on executing against our 2020 on priorities, our long term financial goals and our commitment to our shareholders. We believe were well positioned to meet the opportunity ahead of us as customers continue to look for technology that helps them adapt to the rapidly evolving working environment.
On behalf of our management team I'd like to thank our customers our partners and the entire Dropbox team.
And with that I'd like to open up the call for Q&A.
Operator.
Thank you.
To ask a question you will need to press star one on your telephone cool draw. Your question press. The pound key. Please go on now on how the Q&A Rosner.
Ask that question comes from Mark Murphy with Jpmorgan. Your line is open.
Yes, thank you very much and congratulations on a on a healthy result.
So I'm noticing that the rate of deceleration is improving quite a bit.
You have three consecutive quarters, where revenue growth is basically 12, and a half to 13, 5%.
And you're lifting it on the year can you shed any light on which levers you're pulling to influence that in other words the.
Conversion retention, new products et cetera, and.
How sustainable do you think this improvement is in terms of.
You know kind of kind of improving that that rate of diesel.
Sure.
Thanks, Mark because it's true and I can start and Tim can build on and comes on the specifics but.
I mean, the way we look at it is we have a lot of opportunity on the core business and we're driving growth from our broader portfolio of products.
So in the core business, we spoke to some of the improvements we've been making and we see continue to see lots of levers there to drive conversion and retention and improving the experience and things like transfer and passwords family plan on net examples.
And then where we're growing the portfolio. So hello sign has been one of our fastest growing businesses are just out of dock scent.
And we will continue to have a broader innovation pipeline goes on.
And organic bets on M&A.
So all of that is to say, we have a lot of different levers.
We're pulling many of them and we're excited about the progress we've been making.
That's exactly right and maybe to build on that so our guidance does have us growing at about 11% at the midpoint, which is a 1% increase from the guidance we shared in February.
Were half of that is from docs and and the other half is from the expected organic performance and it's really attributed to all of the factors that you discussed in his prepared remarks, the family plan, adding passwords to our basic plan launching the standalone transfer skew a low sign docs and where we have many initiatives we're working on.
To drive growth and we're not overly reliant on the success of any one initiative and we absolutely will continue to invest to drive sustainable revenue growth.
We are seeing a compelling ROI.
Okay. So it sounds like it's a diversified portfolio.
Portfolio effect across the across the products I wanted to just ask one other quick one D.
D, which is the top of the funnel activity I recall that had spiked at the onset of the pandemic and then.
I think logically we were expecting that that would start to subside.
Just wondering now how is the top of funnel behaving in to return to the office activity and business cycle recovery.
Yeah.
Sure.
So I mean, there is a surge as you mentioned there is a surge of demand in Q2 last year.
But overall, our business has been pretty stable.
Our customers need a dropbox before lockdown during lockdown and they'll need it afterwards.
The way I see it.
And.
That said I mean, it's been a big tailwind for <unk> lots of customers started adopting E signature for the first time.
So.
In total we think the world moving to distributed work will be a big tailwind for our business.
And as as we move towards reopening as most companies have some kind of hybrid model. There's a lot of room for improvement and the tools, we use to manage that so.
Hello Zone of Docs under a couple of examples, but we're thinking much more broadly true.
Excellent. Thank you very much.
Thank you. Our next question comes from Brent Thill with Jefferies. Your line is open.
Hi, This is love soda on for Brent Thill.
Thank you guys for taking my questions and congrats on a great quarter.
Wanted to ask one on <unk> and if you could maybe talk a little bit about the vision with the acquisition and maybe you could give us maybe any insight into the number of users or the ear on contribution.
Contribution from Dukson for Ya.
Sure I can start just at a high level.
So we think docs on is a great fit and they help customers docs on helps customers manage and share their business critical documents.
They give misys leaders more control and visibility powerful engagement analytics.
On.
And the reason is that this is a natural expansion opportunity for for us for Dropbox, where.
On.
There's tens of billions of documents and Dropbox, our customers wanted to do a lot of things with them. The more we can help with workflows. These are natural adjacencies.
And then for docs, and we can help them accelerate their growth and reach a larger audience and.
And then more broadly.
Combination of Dropbox, plus docs on plus LSI.
Means that we can address the whole the whole lifecycle of a document on our address these workflows on that so you can start with the contract saved in Dropbox, you can share it and iterate on it through docs on to get feedback analytics.
And then Simon and Hello sign.
And so being able to handle the whole experience. On then we think there is an opportunity where the.
Where its additive in there and overall these are individually big markets collectively they're big on growing and Theres lots of natural alignment.
On many dimensions with docs and in particular the product strategy their go to market motion. They similarly have on self serve on viral model, it's really efficient and scalable.
So overall, we see a really great fit.
Particularly as the world moves to.
Distributed work and needs better ways managing content.
Can't rely on being on the office together, we see these says really exciting opportunities.
And then love, let me try to give you some color on their financial impact. So we purchased docs in for roughly $165 million with about $30 million held back for key executives to be paid over a three year period similar to how we structured the deal with Hello sign and some further insight docks and.
It is about 15 million to <unk> in the quarter, whereas a reminder, we record the MLR from acquired companies in the period, we closed the acquisition.
We also added about 35000 paying users to our totals.
And then as it related to the P&L the impact to Q1 was nominal as the deal closed on March 22nd.
For the full year, we do expect the revenue contribution to be roughly half a point to our total revenue and we are absorbing their expenses into our P&L, where this has been factored into our guidance.
Got it great and.
Maybe one quick follow up on the top of the final question that was asked earlier.
I guess.
In terms of the overall demand are you seeing.
<unk> like F&B spend come back.
I know obviously last year.
You might have seen some impact from from the F&B side.
When does that sort of be a tailwind.
Going forward.
Yes, I mean, we are fortunate to have a lot of stability in general and then.
Alright.
<unk> that are on dropbox tend to be knowledge workers. So they are relatively less.
Impacted.
Which has been a good thing and then.
One thing one dynamic we are seeing as our professional SKU has been doing really well so it's been growing 30%.
Year over year.
And one big strength.
That we have as weak as dropbox through our self serve and viral.
Motion, we can reach in recent profitably acquire small business small business customers freelancers vs <unk>.
More than if we had a nuclear more relying on a conventional sales force so.
Part of the tailwind is just falling demand theres, a whole passion economy creators.
Ryzen freelancers.
On that we're seeing.
Contribute to demand.
And we expect will continue.
Awesome. Thank you.
Thank you our next question comes on.
Andrew with Keybanc Your line is open.
Hi, great. Thanks for taking my question I, just want to follow up a little bit there on.
On the docks and plans and wondering how youre thinking about incorporating our docks on into into the rest of the product plans to incorporate similar to what we're doing with whole LSI and where you are.
Building on the plans or what's kind of the expectations there going forward.
Sure well.
Immediately we will start integrating we're already starting to integrate them into our go to market motion, so making docks and more available.
To our customers through our sales team and then similar reductions were.
Similar to <unk>.
We're building integrations into the product experience and bringing those closer together.
We see it as a.
We see it and so mainly were focused on driving distribution of docs onto our existing audience and then in parallel we'll be.
On building tighter integrations.
Okay Gotcha.
That's helpful.
And then I know you just raised the convert in the last quarter, but I guess, how youre kind of thinking about the rank order of those those plans that I think he laid out a few things from other M&A.
M&A to buybacks to our organic growth, but how do you kind of think about the rank ordering of importance. There as you think about the plans are going forward.
I think we absolutely have the room to do each one of them.
We plan to allocate a significant portion of our annual free cash flow to share repurchases. That's absolutely still the plan M&A that will continue to be important part of our strategy and look at docks and Hello signed great. Examples of the types of deals we're interested in and we strengthened our balance sheet with the convert where we can continue to pursue those strategies.
And we will absolutely continue to be disciplined with valuations. So we structured on a business, where we continue to be able to invest in growth.
Organic growth continued to invest in M&A and continue to pursue share repurchases.
Okay, great. Thanks for taking my questions.
Thank you once again, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one our next question comes from Damon Rose Battle Road Research. Your line is open.
Yes, hi.
I wanted to ask on the.
A couple of items one is.
Hydro timber drew could you speak to the contribution of international revenue during the quarter total international and how that changed from last year.
Sure that Hasnt changed materially it's about a 50 50 split as far as the international contribution to revenue.
And so yeah that'll be disclosed as part of our 10-Q filing tomorrow, but has not changed materially.
Okay, and then just a question on product pricing.
Curious to know how you are thinking about the pricing of various different plans, whether you are anticipating or contemplating any price increases.
The user base over over time.
Nothing specific to share about future plans there.
The thing we are focused on.
Is we have an enormous basin are free users, which represent a big opportunity.
We will certainly continue to drive them to the standard Dropbox plans, but we're also creating a broader menu of new subscription options and entry points basically.
Optimizing pricing and packaging in general So Dropbox transfer is an example of other Standalone SKU.
We launched in Q1, and we'll continue to experiment and double down on what's working.
So we certainly are looking at.
Pricing or we continue to look at pricing and packaging in general.
On.
And that's an important monetization lever for us.
Okay, and if I may just ask one additional question I know that.
Part of the changes over the last several months has been you're doubling down on.
Reaching users.
The.
Self serve model and sort of less emphasis on.
Direct sales.
Just curious to know.
Your thoughts on how that.
It has been true.
Adding to the strong growth that we're seeing in recent quarters.
Yes so.
I mean, our rationale for this as well.
We will continue to serve larger customers and one of our strengths is that dropbox is organically adopted in companies of all sizes, including large companies that's going to continue.
But when it comes to paid customer acquisition, we want to play to our strengths and be disciplined in our investments.
And streamline some of our efforts so.
On our land and expand model on self serve motion is really scalable and profitable in.
In general and we find that.
Our outbound efforts in mid market.
Or in the mid market segment tend to be.
More efficient and profitable than some of the high end of the enterprise.
So these changes are more just about focus and really.
Doubling down on our most efficient go to market motions.
And we find that the very large customers or other.
Revenue coming from very large customers is less than 10% of revenues.
Okay. Thank you very much.
Thanks.
Thank you and I'm currently showing no further questions at this time I would like to turn the call back over to Andrew housing, we're close on the Mark.
Okay.
Great well. Thank you everyone for joining us we hope you and your families are staying safe and well and we will see you next quarter.
This concludes today's conference call you may now disconnect. Thank you everyone for participating.
Yeah.
Okay.
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The balance.
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Moving on.
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