Q4 2021 Dropbox Inc Earnings Call
Yeah.
Good afternoon, ladies and gentlemen, thank you for joining Dropbox as fourth quarter 2021 earnings conference call. All participants will be 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.
Under 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'll now turn it over to Curt Gabor head of Investor Relations for Dropbox. Mr. Gabor. Please go ahead.
Thank you good afternoon, and welcome to Dropbox as fourth quarter 2021 earnings call.
Today, Dropbox will discuss the quarterly financial results that were distributed earlier.
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 sustained positive free cash flow.
Our expectations regarding anticipated benefits to our business and the impact to our financial results.
<unk> estimated impairment charges as a result of our shift to a virtual first work model and our expectations regarding the future performance of our business 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.
<unk> <unk>.
Our capital allocation plans, including expected timing and volume of share repurchases future M&A opportunities and other investments.
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 our 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 the risk factors included in our Form 10-Q for the quarter ended September 32021, and the risk factors that will be included in our form 10.
For the year ended December 31, 2021 should.
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 our GAAP results.
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 at investors Dropbox Dot com.
I would now like to turn the call over to Dropbox as co founder and Chief Executive Officer Drew Houston drew.
Thanks, Karen and good afternoon, everyone welcome to our Q4 2021 earnings call joining.
Joining me today is 10 Reagan, our chief Financial Officer.
I'll start with a recap of 2021 and provide an overview of our strategy for 2022 then.
And then Tim will go over for our results for Q4 and fiscal year 2021 and give guidance for Q1 and full year 2022, and provide an update on our long term financial targets.
So let's get started.
To recap 2021 was a strong year for Dropbox, we ended with over $2 2 billion and they are significantly increased our profitability grew free cash flow by over 40% and reached approximately 600000 paid teams.
And throughout the year, we stayed focused on our three strategic objectives and deliver even more value to our customers as we work towards our long term vision to organize all your cloud content and the workflows around it.
Our first objective for 2021 was to evolve the Dropbox core offering we made investments to simplify and remove friction from the experience to drive customer satisfaction and gains in long term retention.
I'll also improving high value actions like sharing content and previews and mobile and team Onboarding plus.
I am pleased to see these investments pay off.
Seen retention improve with churn coming down each quarter in 2021.
And a rebuild of the mobile experience, which we began in 2020 and continued in 2021 was one of the biggest drivers of churn improvements.
Last year, we also made improvements to quality performance and sharing to drive mobile user acquisition and retention at the basic level and these are crucial investments because nearly half of our basic sign ups come from mobile and over 40% of mobile sign ups come from users of ceding share content.
We also reduce the friction in the Onboarding experience for mobile and self serve teams users. We made it easier for basic users, where the corporate demand to find the team after signing up which drove a 15% increase in their request to join right.
And we also saw a nearly 20% increase in the invites sent per team by encouraging existing team users to invite their collaborators to the team within the Schering plough.
Our second objective for 2021 was to invest in our product pipeline beyond the core experience.
In early 2021, we acquired docs and a secure sharing and document analytics company.
With docs and we added to our suite of document workflow capabilities and I'm pleased to say it has outperformed our expectations each quarter.
Excited about <unk> strength, and our plans to further integrated into Dropbox, along with Palestine.
We also launched our newest products into beta capture replay and shop, which are designed to better support creative workflows and distributed teams.
And lastly in Q4, we closed our acquisition of command a universal search company that we believe will help bring our vision to life as we work to make it easier to find and organize all your cloud content.
I'm really excited for our plans to build universal search into our roadmap and offer this capability to our users, which I'll share a bit more on later.
Our last objective of 2021 was driving operational excellence and executing against our long term financial targets I'm proud of our progress here as we expanded our non-GAAP operating margins nearly nine points year over year consistent with our improvements in 2020.
And we increased free cash flow by over $200 million.
While delivering significant capital back to shareholders in the form of share repurchases, which Tim will discuss in more detail.
And finally, we completed a full year and our virtual first operating model.
And there we're still early in the transition we're already realizing some of the benefits.
Employees report that they value the flexibility that our model offers are more productive and we're also seeing positive trends in attacking and hiring diverse and distributed talent.
I'm excited to build on all the great work from 2021 this year.
As I've shared before Theres never been a better time in history to be building software to improve the experience of modern work and Dropbox is uniquely positioned to support our customers as they transition to new ways of working.
To help frame our strategy I want to reiterate some of the key macro trends, we continue to see in this environment.
First over the last year, we've continued to see companies accelerate their shifts to the cloud.
They adapt to more flexible or hybrid working models.
We also see the ongoing growth of the creator economy, as new tools and platforms offer more seamless ways to create publish and monetize content.
And more broadly it's clear to us that the shift from working primarily in physical offices to working primary primarily in digital screens is a permanent one week.
We continue to see a huge opportunity to improve that experience and help organize the digital lives of our customers.
So with these themes in mind. This year, we remain focused on three important pieces of our strategy much of which is consistent with the work we began in 2021.
First we will continue to evolve our core FSS business to improve retention and drive monetization.
Second we're expanding workflows beyond FSS around documents with <unk> and docs and while also investing in rich media workflows to better serve creators.
Finally, we will stay focused on operational excellence as we continue to be balanced growth and profitability.
I'll go deeper into each piece of that strategy, starting with evolving our core business.
In order to drive monetization, we're focused on improving retention strengthening the top of our funnel and leveraging pricing and packaging.
Let's start with retention.
While we steadily reduced our churn rate over the past year Theres still more room for improvement in usability and speed in our mobile and sharing capabilities.
The investments we're making here include updating our web architecture, which enables much faster web loading improving mobile visuals, when browsing and organizing enhancing our search capabilities. So users can find their content faster.
Virality and network effects are another key driver of retention as usually share tend to retain at higher rates.
We simplify the sharing experience so it's easier for mobile users to access your content and we're also making it easier for work users whether solar professionals are small teams to quickly share and receive content across all of our surfaces.
Teams will be easily able to see who has access to the content that's shared and any actions taken by recipients.
Finally, we're enhancing the recipient experience with teams, making them more efficient for them to immediately engage with shared content to reshape it add more content to a share its holder or beginning of related workflow like E signature.
And while reducing churn as one component of improving monetization. We're also focused on our top of funnel and on conversion.
We've increased our marketing investments to drive product awareness of the new value that we provide beyond that.
And we're making improvements to our web surfaces, and our CRM to deliver more personalized and relevant product experiences along with building a more seamless onboarding process overall.
These investments also support our efforts to convert basic users, particularly on mobile or we can easily surface. Some more of our high value mobile features such as camera uploads and scanning and use mobile prompts and promotions to surface. The right plan to users at the right time.
Building on our conversions, we're also experimenting with upsell opportunities through self serve add ons to drive more value from existing users.
For example in Q4, we rolled out our extended version history add ons plus users to allow them to extend the lead to file recovery and burden of history from 30 days to a year.
We will continue iterating on this approach with adjacent products in the pipeline and I'll have more to share on that in the coming quarters.
In the past, we've also had success leveraging effective pricing and packaging to drive growth. It's always been tied to high value capabilities that we see demand for from our customers.
And two areas were especially focused on this year, our security and automation.
As more and more companies shift their workloads to the cloud we sit we continue to see security rank as a top spending priority for it decision makers at every times from <unk> down to solar professionals.
And this year, we plan to expand our offerings to include both lightweight capabilities like advanced alerts insights and controls as well as more robust protection against today's most critical threats like ransomware and phishing.
We'll also be building on our existing functionality like passwords to provide easy access to identity monitoring and managed shared accounts for teams and freelancers.
And most recently, we updated passwords into a browser first product and enabled password sharing and we'll continue to iterate on this experience.
In addition, we're committed to investing in automation and machine intelligence to help our users organize our content and search and discover content more easily.
We've learned from our most passionate creative customers that they need more than folders to collect and organize their content, which tends to be large format and rich media.
And they're used to targeted search to find what they're looking for and they don't want to waste time browsing, especially since most of them live in a hybrid world of traditional media and cloud content.
So this year, we plan to improve the way that users can view and manage their content through better suggestions and surfacing assisted and automated controls and searching performance.
As always we improve our products, we add new functionality like security and automation and we increase the value for our customers and as we do that we'll also iterate on pricing and packaging that best reflects that value.
Now onto the second pillar of our strategy, which is expanding into adjacent workflows beyond FSS.
In 2021, we saw the number of PDF file shared on Dropbox grow by nearly 40% the number of videos shared grew by over 25%.
This kind of demand that's why we're committed to driving workflows around documents with Hello sign and docs and and around rich media like videos to better serve creators and teams.
Hello sign and docs and were our fastest growing businesses in 2021.
And we're excited about the opportunity to expand their customer reach.
An important part of this is bringing these products under the Dropbox umbrella both through our back end technology and brand.
And this month, we relaunched docs and as a dropbox product with Dropbox Dawson and went live with an updated marketing website and more consistent user experience.
In addition, we went to market with our first Dropbox and docs and bundle, where we applied key learnings from our esignature and pro bundle, which has also seen increasing adoption.
We continue to integrate <unk> and <unk> to enable a true multi product experience that makes it easier for our customers to build the best plants for them in one checkout across both web and mobile and.
And we see more opportunity to further integrate these workflows into our core functionality. So that users can see E signature and analytics for example side by side with their FSS solution.
And in late Q3, and Q4, we also took our newest product experiences dropbox capture shop and replay to market to support creative professionals and teams around rich media.
We've seen strong adoption and engagement from beta users, who appreciate the ease of use of shop and the time savings from capture and replay.
Supporting creative professionals is an important part of our growth strategy. As these are a passionate and expanding base, who are looking for more seamless ways to share digital content with our collaborators and their customers.
For example, Dropbox was integral to the Sundance Film Festival is ability to seamlessly go virtual and 2021 and 2022.
Sundance has team used dropbox to request and share video content throughout the festival and collect organize and share all the new assets that they needed to create a dynamic and more accessible experience for the filmmakers and the attendees.
And then finally, we will continue to focus on operational excellence, our technology infrastructure team has done a great job strengthening our supply chain relationships to stay ahead of any constraints.
Will also rollout kubernetes this year to improve our infrastructural utilization, which we expect to drive efficiency and reduce cost, while allowing us to maintain a more flexible footprint between public and private cloud.
This is a great example of how we're increasing efficiency and making progress towards our long term financial goals, which Tim will outline.
And I'm really grateful to our employees, who keep our business running and bring our culture to life.
I am pleased to share that once again Dropbox has been included on the Forbes Best employers list for 2022 and for the seventh year in a row Dropbox received a perfect score on the corporate equality index.
We're proud to stand alongside many of our peers as we support diversity equity and inclusion across all industries.
We will also continue to expand our geographic footprint and diversify our talent pool to virtual first.
To close I'm really excited about our strategy and our opportunity this year.
And I'm really proud of all the progress we made in 2021 to lay the groundwork for the important work we have ahead.
As I think about the future what I'm most motivated by is a universal problem that we're solving for our customers.
Helping to organize their working lives and the new remote and hybrid world.
As I shared earlier, we see the shift from physical offices to digital screens as a permanent one.
And we see a lot of room for improvement in the chaotic and overwhelming experience those screens today.
Most knowledge workers are carpathia and file and browser based world juggling, a sea of web based productivity apps.
100, 100 files, we used to see on our desktops and our 100, perhaps in their browsers.
So in many ways. We're solving today's version of the same problem, we saw back in 2007.
Our foundational work in 2021 was an important step towards our long term vision of building one organized place for your cloud content and all the workflows around it and I'm looking forward to do here at <unk>.
With that I'll hand, it over to Tim to walk through our financial results.
Thank you drew on today's call I'll walk through our fourth quarter and full year 2021 result, our 2022 guidance along with some context underlying this guidance.
And then I will close with an update on our long term targets.
Starting with our fourth quarter and full year 2021 results.
Total revenue for the fourth quarter increased 12, 2% year.
Year over year to $565 million, beating our guidance range of $556 million to $559 million.
Our revenue outperformance was driven by strength in our higher ASP offerings.
Such as our professional SKU, our teams plans and dachshund.
Foreign exchange rates provided approximately a 150 basis point tailwind to growth.
Yeah.
Total error for the quarter grew 11, 8% year over year for a total of $2.261 billion.
On a constant currency basis, <unk> grew by $43 million sequentially.
And 10, 2% year over year.
As drew highlighted our continued growth in error reflects our efforts to attract new users to our premium skus and to drive better retention.
By improving the user experience with a specific emphasis on mobile work in teams users.
We exited the quarter with $16 seven 9 million paying users and.
And added approximately 300000 net new paying users in the fourth quarter.
Driven by strength in our teams plans and the continued adoption of our family plan.
Average revenue per paying user was $134.78 in Q4.
Before we continue with further discussion of our P&L I would like to note that unless otherwise indicated all income statement figures mentioned, our non-GAAP and.
And exclude stock based compensation amortization of purchased intangibles.
Certain acquisition related expenses impairments of our real estate assets.
Expenses related to a reduction in force and net gains on our lease termination.
Our non-GAAP net income also excludes net gains and losses on equity investments.
The income tax benefit from the release of a valuable evaluation allowance on deferred tax assets.
And includes the income tax effect of the aforementioned adjustments.
I'll now provide a brief update on our real estate strategy.
Where we are taking steps to D cost our real estate portfolio.
As part of our transition to a virtual first model.
We continue to make progress against our goals executing sub leases in Seattle in Ireland in the fourth quarter.
As we anticipated during our previous earnings call in the fourth quarter. We also successfully reached an agreement with our landlord to buyout a portion of our San Francisco lease, where we had an existing subtenant in Q4.
This resulted in a onetime payment of $32 million.
Rich is reflected within our cash flow from operations and a $14 million gain on lease termination.
Which is reflected within our GAAP results.
As a reminder, this lease termination agreement will drive significant savings.
As the amount of rent payments avoided exceeds the amounts we otherwise would've generated from our previous sublease.
In the future we may enter into similar buyouts with their landlords should the economics makes sense for us.
So there are no other pending deals at this time.
Separately during the fourth quarter, we incurred impairment charges of $14 million on our remaining facilities footprint.
As continued pandemic restrictions translated to slower than expected sub leasing.
This brings our cumulative impairment incurred to date to $430 billion.
We continue to estimate that our total impairment charges will be up to $450 million.
Additionally, in Q4, our GAAP net income was favorably impacted by a $38 million.
One time income tax benefit from the release of a valuation allowance on Irish deferred tax assets.
This event as a result of our improved profitability, leading us to conclude that our valuation allowance on these deferred tax assets is no longer necessary.
I would also note that there is no cash impact associated with this one time benefit.
With that let's continue with the P&L.
I'd note that all expense categories continued to benefit from lower facilities related costs, driven by pandemic restrictions and a reduction in depreciation as a result of the write down in our real estate assets stemming from the aforementioned impairment.
Gross margin was 81% for the quarter, representing an increase of one percentage point on a year over year basis.
The improvement in our gross margin is primarily a result of the continued rollout of hardware efficiencies across our internally managed storage and data infrastructure.
Yeah.
Fourth quarter, R&D expense was $148 million or 26% of revenue.
Which is slightly increased as a percent of revenue compared to the fourth quarter of 2020.
Sales and marketing expense was $99 million or 17% of revenue, which decreased compared to 20% of revenue in the fourth quarter of 2020.
G&A expense was $43 million or 8% of revenue.
Which decreased compared to 9% of revenue in the fourth quarter of 2020.
In total we earned an operating profit of $168 million in the fourth quarter.
Which represents an operating margin of 30% or four percentage point improvement compared to the fourth quarter of 2020.
Net income for the fourth quarter was $160 million, which is a 36% improvement over the fourth quarter of 2020.
Diluted EPS was a record 41 cents per share based on 386 million diluted weighted average shares outstanding.
Up from 28 cents per share based on 416.
Diluted weighted average shares outstanding for the fourth quarter of 2020.
Moving on to our cash balance and cash flow.
We ended the quarter with cash and short term investments of 171 $8 billion.
Cash flow from operations was $163 million in the fourth quarter and includes the impact of the aforementioned lease buyout of our headquarters in San Francisco.
Capital expenditures were $1 million during the quarter.
This resulted in quarterly free cash flow of $161 million compared to $158 million in Q4 of 'twenty 'twenty.
In the fourth quarter, we added $16 million towards finance leases for data center equipment.
Let's turn to our share repurchase activity.
In Q4, we repurchased 11 2 million shares.
Spending approximately $295 million nearly doubling the number of shares purchased from Q3.
As a reminder, our buyback program is structured to buy more shares at lower price points.
At the end of Q4, we had approximately $344 million remaining under $1 billion share repurchase authorization.
Additionally, as we will discuss in greater detail later on this call.
We're pleased to announce that earlier this month, our board authorized an additional $1 2 billion dollar share repurchase program.
Now, let's turn to our full year 2021 results.
Total revenue for 2021 was 215 $8 billion.
Representing 12, 7% year over year growth, beating.
Beating our updated guidance range.
On a constant currency basis relative to the average rates across 'twenty 'twenty.
Year over year growth would have been 11.1%.
Reflecting on this for a moment our 2021 total revenue beat our initial constant currency revenue guidance of approximately 8%.
By over 300 basis points, as we executed against our strategic pillars and outperformed throughout the year.
Gross margin was 81% for the year, which was up one percentage point from 2020.
Operating margin was 30% for 2021, which was up nine percentage points from 2020.
This significant year over year improvement demonstrates our continued commitment to an ability to execute against our long term financial targets.
Net income was $609 million for the year of 56% improvement over last year.
Diluted EPS was $1 54 per share based on 396 million diluted weighted average shares outstanding up from 93 per share for the full year 2020.
Cash flow from operations for 2021 was $730 million.
Capital expenditures for the full year totaled $22 million, which resulted in free cash flow of $708 million or 33% of revenue.
Free cash flow grew by over 40% year over year.
In 2021, we also added $127 million toward finance lease lines for data center equipment.
Net of repayments, our finance lease balance increased by $17 million.
Finally, we repurchased approximately 41 billion shares spending over $1 billion in 2021.
I'd now like to share our 2020 to first quarter and full year guidance, where I will also provide some context on the thinking behind this guidance.
For the first quarter, we expect revenue to be in the range of $557 million to $560 million.
We're assuming a minimal currency tailwind of approximately $1 billion in the first quarter.
Additionally, and as a reminder, there were fewer subscription days in the first quarter of each year.
We expect non-GAAP operating margin to be in the range of 27.5% to 28%.
As a reminder, there is some seasonality with first quarter operating margins as payroll taxes reset at the start of each year.
Finally, we expect diluted weighted average shares outstanding to be in the range of 375 million to 380 million shares based on our trailing 30 day average share price.
For the full year, we expect revenue to be in the range of 2.320.
Two $2.330 billion.
This range is inclusive of an approximate $16 million currency headwind.
We expect gross margin to be approximately 81%.
We expect non-GAAP operating margin to be approximately 29%.
We expect free cash flow.
To be in the range of $760 million.
To $790 million.
This includes $17 million in cash outflows for the 2022 installments of acquisition related deal consideration hold backs.
Additionally, our free cash flow guidance is inclusive of an estimated $30 million headwind as a result of pending R&D tax legislation, which I will elaborate on shortly.
As related to capital expenditures, we expect our additions to finance leases to be approximately 5% of revenue.
And we expect cash capex to be in the range of 25 million to $35 million in 2022.
We expect 2022 diluted weighted average shares outstanding to be in the range of $368 million.
373 million shares.
In addition to this formal guidance I wanted to share some further context behind our expectations for 2022.
As it related to revenue and as drew shared we've been investing across the business as we grow our product portfolio.
Specifically, we've increased our investment in R&D and marketing initiatives in recent quarters in a targeted way to address key opportunities, including efforts aimed towards improving our retention trends.
Feeling growth areas, such as Dockson, and Hello sign through both product innovation and foundational improvements that help us capture the synergies inherent in these deals.
And launching new features and capabilities aimed at improving conversion.
We also continued to invest in ensuring a seamless experience for our customers as we adapt our desktop client to operating system updates and changes most recently related to a new version of macro with.
And we're also building out our capabilities in security and automation to address customer demand in an increasingly complex environment.
As we continue to add value with these features and other investments in the user experience this year we.
We envision updates to our pricing and packaging approach for a subset of our customers.
To reflect this value.
We expect the cumulative impact of these efforts to translate to monetization momentum culling.
Culminating an accelerating revenue growth in the back half of the year.
Any changes we were considering on pricing and packaging in the second half of the year have been factored into this guidance.
As it relates to the operating margins, we are facing a few exaggerate headwinds this year that are playing a role in our guidance.
In 2020 , one we benefited from approximate two point FX tailwind.
Whereas in 2022 we are currently expecting roughly a 50 basis point headwind.
We also expect to incur incremental teenie event and overhead expenses in 2022 as pandemic restrictions softened and company travel and employee gatherings resume.
Additionally, we will continue to invest in R&D and sales and marketing initiatives that carry a compelling ROI.
As it related to free cash flow guidance includes a 30 million dollar <unk>.
Cash tax headwind as a result of pending tax legislation that would defer recently effective laws that now require R&D cost to be capitalized for tax purposes.
There is a possibility that the current legislation may be amended or repealed.
However, until such time, we are including this impact in our guidance.
Furthermore, I'll now share an update on our long term targets, which we plan to achieve by 'twenty 'twenty four.
Our infrastructure team continues to drive innovation and efficiency as we manage our storage footprint.
As a result, we are now above the top end of our previous long term gross margin target range, and we continue to see incremental room to drive efficiencies.
As such we are raising our long term gross margin target to a range of 80% to 82% up from our previous range of 78% to 80%.
As it related to operating margins and despite the exogenous headwinds mentioned earlier, we are confident in our ability to drive leverage in our business.
As a result, we are increasing our long term operating margin target to a range of 30% to 32%.
Up from our previous range of 28% to 30%.
It is important to note that even with raising our operating margin targets, we maintain flexibility to invest in high ROI initiatives as topline growth remains a key priority for us.
Additionally, despite the aforementioned cash tax headwinds, we are reiterating our goal of annual free cash flow of $1 billion by 'twenty 'twenty four.
Lastly, I want to share an update on our plan to return capital to shareholders in the form of share repurchases.
We plan to exhaust our previously authorized $1 billion share repurchase program in the first half of this year.
Furthermore, as previously mentioned our board has authorized an additional $1.2 billion share repurchase program consistent with our strategy to allocate a significant portion of our annual free cash flow to share repurchases with the goal of reducing our share count.
In conclusion, our financial objectives remain intact.
We continue to focus on balancing growth and profitability in a thoughtful disciplined way.
And we continue to allocate capital to the initiatives that carry a compelling return while also returning cash to shareholders in the form of share repurchases.
This strong rule of 40 financial profile enables us to invest in the biggest opportunities that we may see to enhance the value of our product offerings to drive long term sustainable topline growth and to create shareholder value.
We will continue to assess these opportunities which could range from additional strategies to monetize our free user base.
Inorganic opportunities to enter into product adjacencies or organic initiatives as we aim to solve the challenges that our customers are facing.
In short we continue to have many opportunities to win.
And we're very excited about the road ahead.
With that I'll now turn it over to the operator for Q&A.
Thank you.
Mind, you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Mark Murphy with Jpmorgan you May proceed with your question.
Yes, Thank you very much and congrats on all the progress that youre, making.
Drew I had a question regarding dropbox capture and replay our products well.
What is it that's underpinning this move that you seem to have into video creation and.
Targeting creative.
Wondering if there's more to come on this video roadmap and as well can you just touch on the margin profile for may be storing some of the larger video type files.
Sure I can start.
So we're calling the customer demand and we've been seeing an explosion.
In engagement with video on the platform over the last couple of years and this is this dovetails with.
The rise of the creator economy, both with having more creative professionals on Dropbox and then Ah.
Broader audience of more kind of casual creatives or creators.
And they did and Dropbox really resonates with these audiences because their workflows revolve around large files rich media.
And so we've gotten a lot of demand from these customers to better support video and in their new workflows.
So Katherine replay are an example of that where you can communicate over video and helping produce video and distributed way Dropbox.
Dropbox shop is another one where you could where we're helping our customers monetize their digital content.
So we see that these customers are dropbox really resonates with these customers they need more than what they get with the bundled solutions in their office suites.
So we think it's going to be an exciting expansion opportunity for us.
And then Mark this is Tim maybe I'll, just add to that as far as capture replay and shop. These are lean internal teams, where these are not material contributors to our results in 2021 and not expected to materially contribute in the near term. These are certainly longer term bets, where we will be monitoring adoption and adjusting our resourcing accordingly.
And as it related to margins you can see they're not having a material impact on our margins as indicated by the raise in our long term targets to 80% to 82% for gross margins.
Yeah. So Tim. Thank you for thank you for clarifying that I can.
It kind of bridges right into my other question, which is on the increase in the long term margin frameworks. Obviously, it's nice to see I think I'm just wondering what what is the delta. That's that's creating the uplift there for instance, maybe it's the real estate footprint.
Coming down or maybe maybe it's a storage costs, maybe its user acquisition costs or something else can you just help us bridge to that that increase there sure. So as you know we are raising our long term operating margin targets to 30% to 32% up from 28% to 30% and we do have some headwind.
This year, such as this as FX and post pandemic costs, such as additional teeny and other costs, but despite this we do see the opportunity to drive leverage within the business really starting with our infrastructure team as they continue to find ways to be more efficient with our storage costs. Then Additionally, we see other ways to drive efficiencies such as the shift to lower cost.
Location and as.
As a result, we do see the opportunity to raise these longer term targets, but that said, we still have room to invest in growth opportunities and we remain focused on driving sustainable topline growth.
Excellent. Thank you very much.
Thank you. Our next question comes from Brent Thill with Jefferies. You May proceed with your question.
Drew Ah Theres been a lot of talk about the great pull forward during the pandemic and I'm curious your thoughts about you know your user a digestion phase on the way or do you feel from what Youre seeing in the signals that.
Your your clients are continuing to.
To move forward at the same pace you saw you know over the last couple of years I'm curious just to get your thoughts on the overall.
The overall shape of demand and what you're seeing.
Sure I think I mean, maybe different shapes across the different businesses.
I mean, I'd say on the core business, it's been pretty stable I mean, we found a lot of our customers are in.
Neither dropbox before the pandemic needed during the pandemic needed after the pandemic.
And then you have our businesses like Hello sign.
And docs and where they're where as these are like new habits like shifting from PE pen and paper based workflows to adopting E signature for example.
So there's a surge in demand during the pandemic, but that's moderated.
Somewhat and then another thing that we see is that as people are working on our screens more than offices going forward. There's a lot of room for improvement in that experience and we find when we talk to customers that their.
Their contents all over the place it's scattered in a lot of different places or using a tons of different apps, you know hunter tabs open in their browser and so we see a big opportunity for Dropbox to help organize your cloud content. The same way that we help to organize your files. So theres an expansion opportunity where this is more acute.
This challenge of fragmentation and my content being scattered and using all these different tools.
Being more acute after the pandemic. So there's certainly a pull forward in terms of that complexity and this fragmentation, becoming a bigger problem. So.
So those are some of the dynamics that we see and overall, we think the shift to distributed work willing will only create more demand for.
For our tools.
And just on the capital allocation great to see the buyback, but some will ask you know why why not plow that into more innovation and M&A, what what what's driving the conviction to keep driving that and are you, leaving enough room for for M&A going forward.
Can you just walk through that decision sure I can start Tim feel free to add on I.
I mean, our business is really a fishing when we're able to invest in a lot of growth areas and we're always thinking about having a balance of growth and profitability.
Unfortunately, we can afford to both fully fund our core business and some of the transformation. We're we're.
We're working on there we have our growth stage businesses with peloton and docs and that are fully funded and the way they have a longer tail of newer products that are we think are big long term opportunity. So we feel good about our ability to invest organically, while also continuing to expand margins and.
And and and we're pretty unconstrained in terms of capital I mean, I'm I'm also excited to the extent the market corrects.
That M&A can become more efficient and so we're on the lookout for for those kinds of opportunities opening up more but at the same time will still be be disciplined so over the last few years, we've really gotten a lot more.
Our disciplined and intentional about our capital allocation.
Maybe just to quickly add to add to that we do as drew alluded to have a very strong balance sheet in an efficient business model that does generate a lot of cash and that gives us great flexibility to pursue share repurchases M&A and organic investments.
As it relates to share repurchases, we do intend to allocate a significant portion of our annual free cash flow to share repurchases on an ongoing basis with the intention of reducing our share count to Joe's point as it related to M&A certainly will look for businesses that complement our vision and product roadmap are similar to Hello sign and toxin and that was related to organic investments will continue.
To invest in R&D to cultivate a diverse product portfolio and to drive revenue growth and ultimately drew Timothy and I will continue to assess the best use of our capital. According to where we believe we can generate the best returns.
Thank you.
Thank you. Our next question comes from Steve Enders with Keybanc you May proceed with your question.
Okay, great. Thanks for thanks for taking the question and I appreciate all the.
Extra context on the guide I guess wanted to get a little better sense for how you are thinking about.
Kind of the the.
The levers that you can potentially pull as you think about the revenue opportunity for the year. It seems like there is some.
Things coming both on our pricing and packaging side, but what are the other income and other areas.
Rates either.
Best or optimize some of the experiences to drive some better.
Better conversion rates.
Yeah, I can start so the growth there's a lot of growth levers I mean, the ones. We're focused on include continued optimizations to our core FSS business. So we see a lot of opportunities to continue the positive momentum we've had on reducing churn, which is improving the improving engagement and simplifying the experience.
Improving top of funnel and then we have a growth stage businesses with Palestine, and dock sandwich or still some of our fastest growing businesses and a lot of headroom there still pretty early innings for them.
The opportunity for a broader transformation in our core business, so evolving beyond thinking files to organizing all your cloud content, which I talked about a little bit earlier.
And then the longer tail there the earlier stage projects products like capture and replay and future M&A. So these are all areas, we're investing in to different degrees.
And we feel good about where the portfolio is right now.
I mean, it sounds like the that some of the new pricing and packaging is coming later this year, but I guess is there kind of a.
I guess, what are kind of the areas that youre looking to kind of augment there's kind of any early really preview or at least how you're thinking about about what some of the changes would be there.
Sure.
This is Tim I'll take that one we're always thoughtful about our pricing and packaging approach to ensure that best reflects the value that we're delivering for our customers and as we improve our products provide new capabilities and deliver even more value for our customers. Later this year, we'll iterate on the right pricing and packaging approach and <unk>.
So building out new capabilities, such as security and automation features to address customer demand in an increasingly complex environment in our 2022 guidance is inclusive of updates to our pricing and packaging approach, we will have more detail to share in future quarters.
Okay, great. Thanks for thanks for taking the questions.
Okay.
Thank you. Our next question comes from Kash Rangan with Goldman Sachs. You May proceed with your question.
Hi, Thank you very much drew a wanted to get your thoughts on the.
The value proposition and the product and technologies, almost very different and more intense certainly from the days of the IPO. How is the marketing and go to market changing as a result to accommodate.
The new new workflows that you're building into the product and also as well.
What does this mean for the pricing power of the company.
And what we all know to be in.
Inflationary environment. Thank you so much.
Sure I guess.
Well I'd say what were some of the changes since the IPO that you've alluded to our we've just had a lot of strength.
Among them on creators are whether that's creative professionals or telecom or solar printers F N B's freelancers gig economy.
These these are segments, where we've had strength and where.
There's a lot of natural adjacencies. So it says creators work on content they need to do a variety of different things with it whether that's on more on the video side and things like video production or monetizing digital content or on the document side, having richard sharing capabilities or esignature.
So we've certainly seen a new kinds of demand or elevated demand on those fronts.
As further marketing go to market I think.
At a high level our philosophy.
And is it pretty similar where we focus on building great end user experience, we focus on customers, where they self serve and and and organically adopt new tools.
And these viral motions were sharing.
If I share if I use a hell of a sign or Dropbox and I share with you or send something to you for signature.
Many cases, you become a new user you certainly become exposed to our products. So that's incredibly efficient motion as you can see from just the.
The fundamentals.
And so that's self survival motions really efficient we've embraced that I'd say one thing that is changing is as we.
Become a truly multi product multi business company that we're investing a lot in helping make sure that when we buy a hell of a sign of our docks and we can quickly drive adoption through our existing base and that's a huge.
Source or or or our customer base is it a huge source of option value.
And and potential customers for all of our products. So we're investing a lot in our multi product foundation.
Having more consistent branding exposing our customers thoughtfully to all these different products and then on the pricing packaging front. We've had some early success with with bundling and having new Skus. So for example, we have our professional and E signature bundle with Hello signed we have a similar thing with docs and and we're always tuning pricing and packaging and then.
And then lastly, I think as we've touched on.
You know, obviously, we're monitoring inflation.
And we always try to create a virtuous cycle of adding significant new value to our products and then iterating on our pricing or leveraging pricing as we feel like we've added enough value to justify it. So we expect that cycle will continue this year.
Wonderful. Thank you so much.
Thank you. Our next question comes from Rishi jewelry related RBC you May proceed with your question.
Wonderful. Thanks, so much for taking my questions guys.
Two here first I wanted to go back to the long term operating model you know look I appreciate your youre raising the margin target.
I guess I want to push back a little bit on your R&D target right, you're talking about still spending 23% to 25% of revenue which is great.
Great that Youre, a product led growth company and self service.
I have to wonder is that the right level when youre talking about seven 5% growth around there for 2022, you're talking about negative sequential growth for Q1.
Maybe just remind us how youre thinking about.
Your R&D expense in the context of your growth.
And where where all of that spending is going at these at this point just given that you know that.
That's a very high level for a software company at your growth rates and then I've got a follow up sure.
So we are investing for growth and lately, we've been adding R&D head count where it does take some time for these investments to translate to net new <unk> and to flow through to revenue and we've been investing and what we see is our highest return initiatives, where I would broadly break them into a few high level buckets.
First retention, we're particularly as it related to our mobile and teams customers. We continue to see room for improvement security and automation features we're keeping content safe and easily accessible or key challenges that our customers are facing and needling, our multi product strategy as far as introducing our customers to our products Skus and add ons.
And as seamless intuitive way investing and workflows for example, adjacencies such as Hello, Simon Dockson, and finally, ensuring a seamless experience for our customers as we adapt our desktop client to operating system updates and changes most recently related to new versions of macro with where these are all foundational investments that can have a long.
Term impact and we see these contributing to our to our longer term revenue growth rate.
Got it that's helpful.
And then one figure in terms of you know look I don't know maybe take pick a high level view.
You were probably one of the first companies out there during the pandemic to go down this virtual first strategy and you know, we're seeing more and more companies adopt that which is great to see from your experience would love to hear how are you thinking about the potential impact of that on our employee retention, especially.
As we start to hear some really big Tech companies talk about return to office as soon as the end of this month and definitely be beyond that how you see that shaking out and how you plan to drive employee retention and maybe alongside that preserve dropbox culture, while at the same.
Time, keeping to this virtual first approach thanks, sure well unbalanced virtual Perth has been a really positive for us I mean last year, we saw 126% increase in offer accepts that nearly doubles. The number of can then also nearly doubled the number of candidates per open role.
And even an uptick in what we called Boomerang candidates like folks that might leave the company and then come back within a year.
So we're finding that from a hiring perspective at it it's really resonating and unlocking new pools of talent and I think more broadly what are you seeing Ah.
Is that employees once they have this flexibility or mud companies like ours offer this flexibility. They then employees demand it.
So we think it positions us really well and we think I'm really happy with the decisions that we started making back in I think.
October 'twenty 'twenty, when we first rolled this out publicly.
That said I mean, I think every company is still figuring out how do you maintain culture in a distributed environment.
We are trying to get but importantly, we're not remote only where virtual first meaning that the import in person experience is really critical that's always been true and we don't see a substitute for that so were also excited too.
Hopefully there we're able to return to office as it looks like we'll be able to in the next few months.
After some false starts in the last several months.
But we're really excited about being able to reintroduce the in person experience and and our teams done a great job of thinking through how do we get the best of both of those worlds because the best in the in person experience have really great retreats or just convening opportunities, but then give people a flexibility to work from home day to day.
Alright got it awesome. Thank you so much.
Thank you and as a reminder to ask a question you will need to press Star. One. Our next question comes from Todd Walgreens with JMP Securities. You May proceed with your question.
Great. Thank you so much Joe I'm ready to take on for Pat just one from our Oh, Hello signed can you give us an update on the competitive set there how often are you going head to head and then how penetrated do you think that market. The market opportunity is thank you so much.
Sure I can start I mean things are going well with Palestine continues to be one of our fastest growing businesses.
And we've seen increasing adoption of our pro <unk>.
Professional and esignature bundle, which allows our customers to buy both Dropbox Anne Hello sign at a.
Slight discount.
And we're investing heavily here so there's a our customers have.
I appreciate it how we added sharepoint support so you can send and signed documents natively within Sharepoint, we launched a new mobile app last quarter.
So we're always improving the experience and more broadly.
We see a pretty stable competitive environment I mean, I think our advantage is that Hello science focus on the same kind of product led growth motion.
Does that Dropbox has been I think there are similar dynamics, where.
We're less reliant on.
Or it's just a really efficient and scalable model.
So it seems to be a big opportunity at the minute, it's moderated somewhat after the big surge in the pandemic, but still we think it's early innings.
Thank you so much.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to drew Houston for any further remarks.
Alright, well, thanks again for joining us today. We appreciate your continued support and look forward to speaking with you again next quarter.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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