Q2 2021 Dropbox Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining dropbox or second quarter 2021earnings conference call. All participants are in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions Andrew.
Reminder, this conference call is being recorded and will be available for replay from the Investor Relations section from Dropbox website. Following this call I will now turn the call over to current poor Dropbox is head of Investor Relations. Mr. Gabor. Please go ahead.
Would you like to known and unknown risks and uncertainties.
Could cause actual results to differ materially from those projected or imply during this call in particular those described in our risk factors included in our form 10-Q for the quarter ended March 31st 2021, and the risk factors that will be included in our form 10-Q for the quarter ended June 30th 2021.
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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 a.
Our discussion 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 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 file today with the S. E C M at all.
Also be found in the supplemental investor materials posted on our Investor Relations website at Www Dot investors Dot Dropbox Dot com Adele.
Additional information regarding the exchange rate assumptions using our guidance may also be found in our supplemental investor materials I.
I would now like to turn the call over to Dropbox as co founder and Chief Executive Officer Drew Houston true.
Special skew and improvements in retention, particularly on her mobile platform.
We generated record free cash flow of $216 million and achieved our highest ever non-GAAP operating margin of 32 per cent for the quarter.
I'd like to thank our employees customers and partners for their support and contributions that led dropbox to another excellent quarter.
And we continue to be focused on our 3 strategic priorities for 2021 evolving the core business investing in new products and driving operational excellence and I'm proud of the team's execution in the progress we've made against each of these in the second quarter.
I'll start with an update on evolving our core business.
As a reminder, this strategy is focused on building on the strength of the simple and intuitive core dropbox experience to improve functionality may collaboration more seamless and help organize users content tools and workflows.
I'd like to highlight a few areas under the strategy that contributed to our core business outperformance in the second quarter and help drive our top line growth.
The first area sharing content, which is 1 of our customers most important and frequent workflows on dropbox.
Sharing drive to the attention of our existing customers spreads dropbox violate a new customers and generates powerful network effects.
We've made improvements to the sharing of experience overall, especially on mobile where our user base continues to grow.
Nearly half of all our new basic users come from our mobile channel.
And and Q2, we saw greater than 15 per cent increase in link sharing due to some of our most recent updates to improve usability and reliability, including increased visibility to the blue share link button and faster upload speeds overall.
We're also from guest on improving the recipient user experience, which is another key driver of our product by right and monetization.
We found that users, who both send and receive content within a week and those who share content each week upgraded a higher rates.
As a result of the sharing user experienced improvements we made this quarter, we're starting to see an incremental uptick in weekly sharing activity on both mobile and the web experiences and will continue to closely monitor that Trent.
As another example of evolving our core offering a few weeks ago, we announced the rollout of camera uploads to all basic users.
Now they can automatically backup photos and videos continuously from their mobile devices to their dropbox accounts.
We believe the camera upload feature will drive further engagement among our basic users and in turn drive bus retention and conversion.
So these kinds of investments on our core offering are having a direct impact on the valued customers are seeing on our products. We've seen improvements in both R. I O S not Android App store ratings and in fact, our Android App store reading reach its highest level since 2013.
Moving to a second strategy, which is investing in the future. We're we're focused on cultivating and scaling additional capabilities to provide a more comprehensive suite of work flow products to our millions of users and number 550000 Dropbox business teams.
And I'll start with our newest acquisition dark scent.
As a reminder, we purchase dark send earlier this year to extend our capabilities and document work flow and that Olympics.
With dachshund were able to get customers, particularly in financial and professional services more visibility and control over closing transactions and other important business outcomes.
Our goal is to essentially close the loop on deal workflows that start with content that originates in dropbox, and and and a transaction getting finalized.
And then the second quarter dachshund exceeded our internal goals and milestones and we made great progress integrating the <unk> the product into the broader portfolio on.
Our outbound sales team is already working with potential customers to educate them on toxins offering and we're beginning to successfully cross sell dachshund to dropbox users.
In addition, we're working to integrate dachshund into a self serve go to market motion.
For example, we started to introduce dachshunds control and analytics capabilities to existing Dropbox users when the sheriff file on the Dropbox platform.
This is a great reflection of the products natural adjacency to the core Dropbox functionality I'm.
I'm really impressed with the team's performance and I'm looking forward to the journey ahead.
Turning to Hellosign, we continue to see strength across that your savings from market, especially with our business customers.
And user signature request screw over 75 per cent year over year, which is particularly impressive as we anniversary the COVID-19 locked downfield surge any signature adoption.
We continue to believe that we're in the early innings of this market opportunity.
Hello sign also continues to expand his product product offerings and capabilities to cater to the international market.
During the quarter, we launched support for qualified electronic signatures. The most trusted and secure form I'd be signature that also meets the European Union's highest level of regulatory approval.
We also continue to grow and expand the Hell us on API business.
In fact, we found that Hell us on a P. I users have higher than average or tension expansion and customer satisfaction scores as they prioritize building clear clean and unified workflows for their users.
Hello sign continues to be 1 of the fastest growing areas of our company and we plan to continue making investments to further our capabilities drive synergies and increase brand awareness and user adoption.
Another way that we're investing in our future is through partnerships.
Expanding the breadth and depth of our partner ecosystem to cultivate and scale seamless work flow products is a big opportunity for us.
I'm excited to highlight that Dropbox was featured in the new zoom at marketplace with our spaces at presume.
Well on the early stages. The App is a new surface that link Suman Dropbox and we expect it will provide an exciting new entry point fraudulent users over time.
[noise] beyond the specific example, we believe that we can work effectively across many different ecosystems to create a <unk> comprehensive experience that captures a wide range of workflows beyond just files.
And finally I'd like to touch on transfer 1 of our more successful organic products.
We continue to see hundreds of thousands of transfer sent every week across our user base and while I was there early innings, we're excited for its potential.
Transfer is a good example of our ongoing efforts to cultivate and scale new products and also experiment with various pricing and packaging options to fit specific user needs at different price points.
Our investments and Dockson, Hello sign new products and our ecosystem partnerships show, how we're building on our core platform to <unk> to deliver even more value to our users.
By expanding into adjacent categories and markets, we're investing in the future of Dropbox on positioning ourselves as a goto solution for distributed work flow products.
And finally, we remain focused on our third strategy of driving operational excellence by improving the efficiency reliability and security of our overall technical infrastructure, while being thoughtful and disciplined and all of our investment decisions.
For example, our infrastructure team continues to be innovative I've been helping us drive gross margin improvements.
Dropbox continues to be at the forefront of leading edge infrastructure technology. Our team has made significant progress on adopting S. M. R. R. Shingled magnetic recording which allows us to increase her score storage density and overall storage capacity without impacting our footprint.
S. M. R drives now account for over 80 per cent of our storage server capacity and we're also increasing our efficiency by moving our data centers to lower cost locations.
We're also proud to share this week that all of our data center storage server power is now covered by 100 per cent renewable electricity.
As a reminder, last year, we announced our commitment to fight global warming and reduce our carbon footprint. That's part of our sustainability goals for 2030, and we've been making good progress.
And the last year and a half we've reduced our data center carbon footprint by 15 per cent and when paint maintaining a power usage effectiveness that is nearly 20 per cent better than the industry average.
Overall, our team is innovating on a highly complex tech stack and their hard work as resulting in more energy consumption and tangible cost savings as demonstrated by our strong gross margins on queue too.
As you can see by a record profitability metrics in the second quarter or firmly committed to executing against our longterm financial goals and.
And as we look to the second half of this year will remain disciplined and ensuring that were thoughtfully reinvesting back into the business. That's on our most strategic priorities to set us up for long term success.
And with that I'll now turn it over to Tim to walk through our financial goals.
Thank you drew as I've done before I went to begin with a reminder of our financial strategy is this provides the context for how we operate the business and outlines where we're headed.
We continue to focus on balance and growth and profitability in a thoughtful disciplined way.
Spoken currently returning capital to shareholders in the form of share repurchases.
My operating in this manner, we aim to deliver operating margins ranging between 28.30 per cent to.
To reduce our sure accounts and ultimately to generate annual free cash flow of $1 billion by 2024.
We believe that execution against these objectives will generate long term value for shareholders.
And we remain committed to making decisions in line with this financial trajectory.
Today I'll talk to her performance for the quarter and are updated guidance for the year that collectively demonstrated that we continue to make progress against these financial objected.
Let's first turned to a quarterly results.
Total revenue for the second quarter increased 13.5 per cent year over year to $531 million, beating her guidance range of 522 million $525 million.
Foreign exchange rates provided the 2.2 into growth.
Total are are for the quarter grew 12.2 per cent you over here.
For a total of $2.166 billion.
On a constant currency basis error, mmm $54 million sequentially and 10.6 per cent your ear.
Our continued growth in air or reflects our strategy to attract new paying users.
Drive users to premium plans introduced acquired products to our customers and improve retention.
To give potential users more time to understand the benefits of the product.
Raising the trial period resulted in a 15 per cent increase in the number of users who started a trial with.
With a commensurate lifts the number of conversions.
These types of optimizations helped to drive year over year growth of our pro SKU by more than 30 per cent.
Through these enhancements are engineering teams continue to find ways to improve our ability to match the right products with the right customers at the right times.
Leading to continued revenue growth in an efficient scalable way.
Before we continue with further discussion of our piano I would like to note.
That unless otherwise indicated all income statement measures mentioned are 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.
Are non-GAAP net income also excludes net gains and losses on equity investments.
And includes the income tax effect of the aforementioned adjusted.
Let me also provide a brief update on a real estate strategy.
As we previously mentioned our transition to a virtual first model includes steps to D costs.
A real estate portfolio by sub leasing a significant portion of our existing facilities footprint.
Last year, we signed to sub leases related to San Francisco headquarters.
We recently signed additional sub leases and Austin Seattle in Australia.
We are seeing progress on multiple fronts, and we remain confident in our ability to execute on our strategy.
As a result, we did not record any additional impairment charges in the second quarter and we continued to estimate total impairment charges of up to $450 million associated with this transition.
Inclusive of the charges, we've already taken while expecting to ultimately generate an estimated $800 million in subways cash flows over the course of the associated leases.
With that let's continue with the piano.
I know that all expense categories continue to benefit from strategic changes, we've made to the business.
Around personnel and facilities costs.
Related to personnel, we restructure our workforce in order to operate more efficiently and the first quarter of this year and her head count told us remain at these reduced levels.
That being said, we do plan to accelerate hiring this year as we invest in growth areas across the business to ensure that we are well positioned for continued success.
Related to facilities on our ship the virtual first we continue to benefit from our employees working from home as.
As well as from a reduction in depreciation as a result of the right down in a real estate assets stemming from the App or mentioned impairment.
In short, we're operating with greater discipline, while still investing in our future.
And we're seeing substantial improvements across the piano as a result of these concerted efforts.
Gross margin was 81% for the quarter, representing an increase of 2 percentage points on a year over year basis.
The improvement in our gross margin is primarily a result of the continued rollout of hardware efficiencies across are entirely managed storage and data infrastructure.
As well as progress we are making in migrating our data centers to lower costs locations.
Second quarter, R&D expense was $130 million or 25 per cent of revenue.
Which decreased compared to 29 per cent of revenue in the second quarter of 2020.
Sales and marketing expense was $91 billion or 17% of revenue.
Which decreased compared to 20 per cent of revenue in the second quarter of 2020.
G&A expense was $40 million on 8 per cent of revenue, which decreased compared to 10 per cent of revenue in the second quarter of 2020.
G&A expenses benefited from the 1 time release of certain non income tax reserves in the quarter.
In total we earned a record operating profit of $169 million in the second quarter.
Which represents an operating margin of 32%.
Or at 11 percentage point improvement compared to the second quarter 20 point.
Net income for the second quarter was $160 million.
Which is a 72% improvement over the second quarter of 2020.
Diluted EPS was a record 40 cents per share based.
Based on 397 million diluted weighted average shares outstanding.
Up from 22 cents per share for the second quarter of 2020.
Moving on to our cash balance in cash flow.
We ended the quarter with cash and short term investments of $1.944 billion cash.
Cash flow from operations was $220 million on the second quarter.
Capital expenditures or $4 million during the quarter.
This resulted in a record quarterly free cash flow of $216 million compared to $120 million and Q2 of 2020.
In the second quarter, we also added $43 million to our finance lease lines for data center equipment.
I'd also like to provide an update on our share repurchase activity.
As I have previously mentioned, we intend to leverage our share repurchase program.
So not only returned capital to shareholders, but you also reduce our share count.
And Q2, we repurchased 5.5 million shares spending approximately $151 million.
Since the start of last year, we have now spent nearly $1 billion under our program.
Repurchasing 44 million shares.
In addition, we still have approximately $820 million remaining under our current share repurchase authorization.
We continue to aim to reduce our weighted average diluted share accounts.
We continue to believe that utilizing a capital for share repurchases is efficient.
And we will leverage the strength of our balance sheet to deliver returned back to our shareholders.
With that let's turn to guidance for Q3 and for the full year.
For the third quarter 2021, we expect.
Revenue to be in the range of 543.
The $546 million.
Currency exchange rates assumed in this guidance account for approximately 2 points of growth at the midpoint of guidance Andrew based on a combination of recent and historical average rates.
We expect non-GAAP operating margin to be in the range of 28 to 28.5 per cent.
Finally, we expect diluted weighted average shares outstanding to be in the range of 397 to 402 million shares is centered trailing 30 day average share price.
For the full year 2021.
We are raising our revenue guidance range, which was previously 2.118 to 2.130 billion.
To 2.136.
To $2.142 billion.
Currency exchange rates assumed on this guidance account for approximately 2 points of growth at the mid point of guidance.
And are based on a combination of recent and historical average rates.
We are maintaining our gross margin guide of approximately 80 per cent for the full year.
We are raising our non-GAAP operating margin guidance range, which was previously twenty-seven 228%.
To be in the range of 28.5.
The 29 per cent.
We're raising our free cash flow guidance range, which was previously 670.
$690 million.
To be in the range of 710.
$2.730 million.
This includes $29 million in cash outflows comprised of $16 million.
With a 2021 installments of her deal consideration hold back related to our acquisition of Hello sign.
And 1 time severance payments of approximately $14 million related to a reduction in force.
We continue to expect capital expenditures were 2021 to be in the range of $25 million to $35 million net of tenant improvement allowances.
Therefore, while we are now within our long term operating margin target range, 28% to 30%.
We plan to hire to support new product development to invest in high ROI growth initiatives and to explore inorganic ways to add capabilities to our offerings.
In addition, certain tailwind this year could turn into headwinds in future years, as we start traveling again or is FX rates fluctuate.
Given these considerations at this time, we are maintaining our long term operating margin target of 28% to 30% and our 2024 free cash flow goal of $1 billion.
In conclusion, we have made great progress against our goals over the first half of this year.
We continue to execute against our financial objectives, and we remain on course to achieve our long term targets.
Looking ahead, we will continue to operate in a disciplined and measured way to ensure that we are positioning the business for continued long term success.
With that I'll now turn it back to drew for his closing remarks.
Thank you Tim and thank you all for joining us today.
I'm incredibly proud of our second quarter results and I am excited about the opportunity ahead of us.
I believe dropbox as well positioned as our customers continue to look for technologies that help them adapt to the rapidly evolving work environment.
We remain focused on executing against our 2021 strategic priorities, our long term financial goals and further solidifying our position as the go to solution for distributed work.
And with that I'd like to open up the call for Q&A.
Operator.
Thank you.
As a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster are free.
Yeah.
Comes from Brent Thill with Jefferies. Your line is now open.
Hi, This is love soda on core brands. So thank you for taking my questions and congrats on a great quarter.
Drew the first 1 was for U S.
As we sort of head into the back half of 'twenty, 1 and we see some of these variance of Covid still with us.
When Covid of course began new guys saw like the uplift in the top on the funnel metrics.
So as we head into the back half of the year and we see some of these variants still with us.
How how do you envision kind of the future of work and what.
You know what are you seeing out there in terms of top of the funnel right now.
Sure.
Thanks for the question so.
I mean at a high level, we think Oh, well I mean, we're certainly concerned about the the delta variant in terms of reopening our offices and are thinking through that alongside every company as.
As far as the impact on our business.
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We think the world moving to distributed work will be a big tailwind in the long run and it's pretty clear that.
A large percentage of the planet.
As of last year, we will spend more time much more time working out of a screen more than out of an office.
And so we have this new mode of hybrid work and we need a new generation of tools to support it.
So I think it's a huge opportunity to rethink the fundamental nature of work.
We're all going to be in some kind of hybrid environment and you know things like the Delta variant will continue to make that complement complicated.
But we think that there's a it makes our opportunity bigger and as far as what does it do in terms of inflections in the numbers, we saw a surge in demand last last year during the onset of Covid.
At the same time, we had a lot of stability because I think dropbox is something our customers are using before the pandemic during the pandemic and will need after the pandemic.
So so but as far as we put in the long run we think it's a this this new way of working needs new tools, and it's a big opportunity for us.
And love, maybe just briefly add to that we are seeing stability in our top of funnel certainly seeing strength across the business Pro SKU continues to be up more than 30% year over year, although sign of docs and are both growing well and we're excited about their potential and opportunities in the family plan also continues to do well and then we're seeing traction.
With retention, so overall, a lot of things going well.
Got it 1 quick follow up on the professional SKU strength that you noted.
I guess could you give some more color as to what's driving this is this more creative kind of.
Upgrading any any more insight into what drove that strength. Thank you.
Sure.
I can start so in coincident with with with Covid last year. We also have been seeing.
On the pulling forward or the exception or the acceleration of a lot of.
Other macro trends like the rise of <unk>.
Creative in the freelance economy.
And that's a tailwind for us because these audiences have always been passionate dropbox users. We will continue to focus on supporting them as their needs evolve and they've been a big driver of our.
Professionals excuse me growing 30% year over year over year.
And we're very focused on on customer segments like those.
Yeah, and I'd add that this also ties back to some of the changes we've made to our on boarding workflows to better align potential customers with the plan that best suits them.
And as I mentioned in my remarks, we continue to optimize our self serve go to market motion from pro where this quarter, we started offering pro to users in a plus checkout process and then we extended our pro trial from 14 days to 30 days, which led to a 15% uplift on a number of users starting a trial.
Great I'll pass it too thank you.
Thank you.
And our next question comes from Rishi <unk>.
Loria with RBC. Your line is now open.
Hey, guys. Thanks, so much for taking my questions nice to see a solid quarter of growth kind of stabilized here I had.
2 questions first I wanted to start on on Hello side, great to see that volumes continue to remain elevated even after lapping.
On the Covid tailwind that we saw a year ago can you give us a sense for where we are on the monetization curve on Hello side.
Have monetization rates on those transactions has been picking up over time and I'm not asking for a breakout of Hello. So on revenue, but just maybe directionally. If you could help us understand the monetization transfer Hello side, and then I've got a follow up.
Sure I can start I mean, it's been great to see the sustained growth for <unk> and I would say.
Hello Zone has been a massive beneficiary as we've pulled forward this shift from.
You know a lot of our customers start with pen and paper workflows, and then especially on small businesses.
They need a self serve way easy way to.
To do esignature and have found <unk> to be a great fit for that in there there was a big surge.
As as Lockdown started.
I mean, we think we're in the early innings as far as Hello sign being fully distributed.
To our user base and so we continue to invest in better attaching Hello assigned to the Dropbox product. Since then and then also.
And so there's a number of things we've been doing there with last quarter in Q1, we launched our first bundle with Dropbox professional and Hello sign the first SKU, where he can bring us together.
And we there are a number of other.
Product integrations that we're envisioning 1 way and we want to make it. So it's really easy if you have a contract in dropbox that sending it out for signature with Hello, saying it takes us a few clicks as possible and so we have a lot of improvements.
In that regard and then more broadly <unk> growth.
International is a big opportunity so last year, we introduced <unk> and in 'twenty, 1 new languages.
As I said in my remarks earlier.
We've been.
Investing too.
To drive compliance with all of the different regulatory environments around the world.
On the qualified signatures.
M in the EU.
The big M unlock there so.
So it's early innings as far as the overall penetration that we see with Smbs in esignature globally.
Okay got it that's helpful and then going to docs and you talked about how youre starting to actual cross sell to sell it into existing Dropbox customers can you give us a sense for what what kind of the ideal customer profile is what sort of dropbox users are the kind that you think it makes sense to do outbound.
And tried to get docs on into their hands.
Sure well on where you see docs and.
As particularly strong.
In segments like financial services entrepreneurs raising money.
And then really any role where you have folks who need rich sharing features and Richard controls and things like data rooms, but then also if you're sending out sales tack or marketing collateral and you want to see what your recipients are engaging with and are you really want to customize that experience.
<unk> stock with Docs and is a great fit for that and then more broadly it's a great fit with our overall model. So they stocks and Hello sign and Dropbox all have a self serve viral model do you think this is really complementary and I'd say this dovetails with some of my comments on how the telephone in a minute ago.
Where in addition to each of these markets being individually big opportunities, we think collectively.
It's even bigger because what our customers really need is a is a seamless workflow from start to finish where they save a contract on dropbox, they send it out or they send it out for revisions or feedback through docks and send it out for signature with LSI and save the completed contract back in Dropbox, we're very focused on removing all of the.
Friction from that experience, making it as seamless as possible.
And we think this is something where the whole will be more than some other parts.
Wonderful thank you.
Thank you. Our next question comes from Mark Murphy with Jpmorgan. Your line is open.
Yeah. Thank you all on my congrats on a very solid result.
I'm wondering first if you could just walk us through the value proposition of the family plan, which seems to be resonating and and if you have any comment on just how much tailwind that family plan is providing to for instance to the AOR growth currently.
Sure well I can start and Tim can speak to the numbers.
Finally, we have a lot of it was following our customers. So folks wanted a dropbox subscriptions for their entire family, but to have a single point of billing.
And to have a family space and we saw an opportunity to make that whole package up that kind of offering and make that more seamless.
And so it certainly drives incremental.
Revenue and subscriptions to the extent that.
Maybe someone who would have otherwise just been a subscriber for themselves.
Now is bringing in their whole family.
So that's pretty straightforward, but with a lot of it was just following our customers and building a better experience.
I'll have use cases, where we wanted to share things with our families.
Sure Mark we don't break out the contribution of the family plan to air on it certainly was a driving factor on the strength of our paying user expansion. This past quarter and we've made the family plan more visible to our users as part of the on boarding experience on our landing page to help fuel this momentum and in addition to contributing to <unk>.
User growth, we are optimistic about the potential retention benefits of the family plan on our user to engage in practices such as the sharing of vacation photos and other communal activities.
Okay understood and then Tim just a clarification you were describing these changes to the pro.
Trials, and I guess promoting that extending the trial period are you, saying that that already manifested in Q2.
Because if you started that.
Early in the quarter and globally it would've manifested.
That's something that becomes more tangible in Q3 and Q4 is the more of the conversions at the end of the trial period.
Sure. It started in the second quarter, but to your point will cause you to continue to see this manifest in future quarters.
Thank you.
Thank you.
Our next question comes from Steve Enders with Keybanc. Your line is open.
Hey guidance Jack on efficacy.
Just 2 quick questions.
Thanks.
Potential price increases.
The environment across I guess.
Product line.
Sure, Yes pricing is 1 of the tools on our toolkit, where we've certainly had success with this lever in the past and for example, we raised prices on our plus SKU in 2019 and 2020.
That's on our approach is to only raise prices infrequently and we have added when we've added sufficient value to warrant a price increase so at this point our engineering efforts are focused on making sure that we are adding great features and capabilities to serve our users. So price increases are not a big factor in our 2021 guidance.
But again, we've seen that customers will stay with us despite price increases where this is an option for us at the appropriate time, and we will continue to assess various strategies to drive monetization against our massive free paid user base.
Okay. Thanks.
Really helpful.
Question is how are you thinking about investments.
Product and then driving cross sell going forward.
Sure well.
And in terms of investments in our core product development, we see a lot of opportunity.
In the Dropbox product.
Both of them the kinds of improvements we've been talking about to just the streamlined experience, making it simpler or improvements and sharing our last quarter are a good example of that.
Continuing to invest in pricing and packaging and things like that but more and more broadly.
We're looking at when we look at our customers and frankly all of our experiences we have a lot of challenges in terms, but we all have a lot of challenges in terms of keeping track of all of our stuff across all these different cloud platforms. I think dropbox does a great job of taking care of your files, but we also have all.
All of these different SaaS tools and most of us have stuff in all of these different ecosystems, and so I think there's a big opportunity for for Dropbox too.
<unk> evolved from thinking your files to organizing all your cloud content.
And so we're making huge investments there and and also in turning the core business into.
Cross sell engine for all of our new products and then second is is that product portfolio and continuing to grow. It. So we had a docs on recently Hello signs a great example.
These are both some of our fastest growing businesses and we'll continue to have well continue to launch new products, both organically and through M&A.
Maybe the only thing I'd add to that and you can see this in our margin guidance. We certainly have plans to hire in the back half of the year and our spend on marketing programs in the back half of the year. So both are ways. We can continue to invest in our products.
Thank you guys Super helpful.
Okay.
As a reminder to ask a question Thats Star 1.
And our last question comes from Ben Rose from Battle Road Research. Your line is now open.
Yes. Thank you very much I have a few questions firstly to start with when you think about.
The number of registered users now being around $700 million I'm, just curious to know if you're finding.
Paying users.
Coming from sort of more recent.
Adopters of the free plan.
Versus.
Perhaps registered users that have been around for some time.
So I'll start.
We certainly are.
We are the path from being a free user to a paid user.
Cohorts are very predictable, we certainly the business is driven by both new users.
And existing and that's been pretty stable.
Okay.
And I would just add to that you know certainly the 700 million registered user install base is a massive asset for us and so in addition to driving the core dropbox subscription having a broader portfolio of products and then also experimenting with pricing and packaging through potential on bundling and things like transfer.
We we have a bunch of levers that we're investing in to further drive and accelerate monetization of the free base.
Interesting interesting.
Andrew If I may you know what.
With your focus on virtual work in all of the measures that you've taken over.
Over the course of this last year.
Andrew or plans to begin rehiring or hiring new folks in the coming year I'm curious to know.
In terms of your early efforts.
Your own virtual work.
Type of environment is resonating with potential new hires.
It's resonating a lot.
I think 1 of the benefits. We've all enjoyed is the flexibility that comes with being able to to work from home or work from them from anywhere.
And so that has unlocked new patent pools of talent for us. So we've had a lot of success recruiting and in areas, where we might not have had a physical presence.
And I think as you're seeing.
Every company navigate their their flavor of hybrid.
Employees demand flexibility and so I think that the fact that we are our virtual first model provides it.
And provides flexibility beyond sort of the typical you have to show up in the office for 2 days a week is.
As a big tailwind to recruiting.
And I think it also resonates with folks that were at the forefront of trying to design. This new work experience and build tools for this new world. So overall, it's been a the model might not be for everyone, but it's been a big tailwind for our recruiting.
Ben the only thing that I would add to that is it's also accelerating our shift to this lower cost location strategy, where we're having success with this virtual first hiring strategy.
In the first half of the year roughly half of our new hires in the U S were outside of our main hubs of San Francisco, New York and Seattle.
Okay.
Thank you and then also Tim a question for you on gross margins. It does sound like you've well it looks good.
Very much as if you've made some real progress over the last year true you mentioned the <unk>.
Deployment of <unk>.
For storage as being part of that in lower cost locations for data centers.
Do you think there is room for further improvement.
Out over the next 12 months to 2 M to improve gross margin.
Sure Yeah, our infrastructure team is doing an outstanding job, but for now we are maintaining that long term target range of 78% to 80% and our gross margin guidance for 2021 is already again at that top end of our target model, which does demonstrate the progress that we're making however, we did have a very low level of cash.
Capex in 2017, that's being replaced by more consistent refresh cycles going forward.
That will lead to an increase in depreciation this year, so too early for us to increase our target right now.
Okay. Thank you very much.
Yes.
Thank you at this time I'm showing no further questions I'd like to hand, the call back over to you Mr. Chu Houston, CEO and co founder.
Alright, well, thank you everyone for joining us today.
Appreciate your continuing support and again next quarter.
Ladies and gentlemen, thank you for your participation you may now disconnect everyone have a wonderful day.
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Yeah.
Okay.
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